UNITED STATES – SUBSIDIES ON UPLAND COTTON
Document: Report of the Panel
Date: 8 September 2004
Document codes: WT/DS267/R
Complainant: Brazil
Respondent: U.S.
Third parties: Argentina, Australia, Benin, Canada, Chad, China, Taiwan, EU, India, New Zealand, Pakistan, Paraguay, Venezuela, Japan, Thailand
Dispute stage: Mutually Agreed Solution
Agreements cited: Art. 3, 5, 6  Subsidies and Countervailing Measures (SCM)Art. 3.3, 7.1, 8, 9.1, 10.1  AgricultureArt. III:4, XVI  GATT 1994

UNITED STATES – SUBSIDIES ON UPLAND COTTON

Report of the Panel

I. INTRODUCTION
1.1 On 27 September 2002, the Government of Brazil requested consultations with the
Government of the United States pursuant to Articles 4.1, 7.1 and 30 of the Agreement on Subsidies
and Countervailing Measures (" SCM Agreement" ), Article 19 of the Agreement on Agriculture ,
Article XXII of the GATT 1994 and Article 4 of the Understanding on Rules and Procedures
Governing the Settlement of Disputes ("DSU") concerning certain subsidies provided to United States
producers, users and exporters of upland cotton 2 as well as legislation, regulations, statutory
instruments and amendments thereto providing such subsidies. The United States and Brazil held
consultations on 3, 4 and 19 December 2002 and on 17 January 2003, but failed to settle the dispute.
1.2 On 6 February 2003, Brazil requested the establishment of a panel 3 pursuant to Article 6 of
the DSU, Article XXIII:2 of the GATT 1994, Article 19 of the Agreement on Agriculture and Articles
4.4, 7.4 and 30 of the SCM Agreement. At its meeting on 18 March 2003, the Dispute Settlement
Body (the "DSB") established a Panel in accordance with Article 6 of the DSU to examine the matter
referred to the DSB by Brazil in document 4 At that meeting, the parties to the dispute
also agreed that the Panel should have standard te rms of reference. The terms of reference are,
therefore, the following:
"To examine, in the light of the relevant provisions of the covered agreements cited
by Brazil in document , the matter referred to the DSB by Brazil in that
document and to make such findings as will assist the DSB in making the
recommendations or in giving the rulings provided for in those agreements".
1.3 In its request for establishment of a panel, Brazil requested that the DSB initiate the
procedures provided in Annex V of the SCM Agreement pursuant to paragraph 2 of that Annex. At its
meetings on 18 and 31 March, 15 April and 19 May 2003, the DSB discussed this request.
5
1.4 On 9 May 2003 6, Brazil requested the Director-General to determine the composition of the
Panel, pursuant to paragraph 7 of Article 8 of the DSU. This paragraph provides:
"If there is no agreement on the panelists within 20 days after the date of the
establishment of a Panel, at the request of either party, the Director-General, in
consultation with the Chairman of the DSB and the Chairman of the relevant Council
or Committee, shall determine the com position of the panel by appointing the
panelists whom the Director-General consid ers most appropriate in accordance with
any relevant special or additional rules or procedures of the covered agreement or
covered agreements which are at issue in th e dispute, after consulting with the parties
to the dispute. The Chairman of th e DSB shall inform the Members of the
composition of the panel thus formed no later than 10 days after the date the
Chairman receives such a request".
1.5 On 19 May 2003, the Director-General accordingly composed the Panel as follows:

2 Footnote 1 of the request for consultations (WT/DS267/1, G/L/571, G/SCM/D49/1, G/AG/GEN/54),
which directly follows the phrase "The measures that are the subject of this request are prohibited and actionable
subsidies provided to US producers, users and/or export ers of upland cotton" reads "[e]xcept with respect to
export credit guarantee programs as explained below [in that same document]."
3 WT/DS267/7.
4 WT/DS267/15.
5 See the minutes of those meetings in documents WT/DSB/M/145, item 2(a), M/146, item 1(a),
M/147, item 6(a) and M/150, item 5(a).
6 52 days after the establishment of the Panel (i.e. 18 March).

Chairman: Mr. Dariusz Rosati
Members: Mr. Mario Matus
 Mr. Daniel Moulis
1.6 Argentina, Australia, Benin, Canada, Chad, China, the European Communities, India,
New Zealand, Pakistan, Paraguay, Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu
(hereafter referred to as "Chinese Taipei") and Ven ezuela reserved their rights to participate in the
Panel proceedings as third parties.
1.7 The Panel met with the parties on 22-24 July 2003, at a resumed session of the first
substantive meeting on 7-9 October 2003 and at a second substantive meeting on 2, 3 December 2003.
It met with the third parties on 24 July 2003 and 8 October 2003.
7
1.8 The Panel submitted its interim report to the parties on 26 April 2004. The Panel submitted
its final report to the parties on 18 June 2004.
II. FACTUAL ASPECTS
2.1 This dispute concerns various United Stat es domestic support measures and other United
States measures which Brazil alleges are export s ubsidies. Brazil alleges that the measures are
inconsistent with certain United States obligations under the Agreement on Agriculture , the SCM
Agreement and the GATT 1994.
2.2 The measures as identified in Brazil's request for the establishment of a panel are alleged
prohibited and actionable subsidies provided to Un ited States producers, users and/or exporters of
upland cotton8, as well as legislation, regulations and statutory instruments and amendments thereto
providing such subsidies (includi ng export credit guarantees), grants, and any other assistance to
United States producers, users and exporters of uplan d cotton. They include measures referred to as
marketing loan programme payments (including marketing loan gains and loan deficiency payments
(LDPs)), user marketing (step 2) payments, pr oduction flexibility contract payments, market loss
assistance payments, direct payments, counter-c yclical payments, crop insurance payments,
cottonseed payments and export credit guarantee programmes, which are described below.9
III. PARTIES' REQUESTS FOR FINDINGS AND RECOMMENDATIONS
A. BRAZIL
3.1 Brazil requests that the Panel make the following findings:
(i) concerning Article 13 of the Agreement on Agriculture:
- Article 13 of the Agreement on Agriculture is in the nature of an affirmative
defence;
- Article 13(b)(ii) of the Agreement on Agriculture does not exempt US
domestic support measures, including ma rketing loan/LDP payments, crop
insurance payments, production flexib ility contract payments, direct

7 See, infra, Section VII:A of this report for procedural aspects of the Panel proceedings.
8 Brazil's request for establishment of a panel contains the following footnote: "The term 'upland
cotton' means raw upland cotton as well as the primary processed forms of such cotton including upland cotton
lint and cottonseed. The focus of Brazil’s claims relate to upland cotton with the exception of the US export
credit guarantee programs as explained below [in that same document]."
9 Description of these measures can be found in Section VII:C of the report.

payments, market loss assistance payments, counter-cyclical payments,
cottonseed payments, and Step 2 payments made in MY 1999-2002 to upland
cotton from actions based on Articles 5 and 6 of the SCM Agreement and
Article XVI:1 of the GATT 1994;
- Article 13(c)(ii) of the Agreement on Agriculture does not exempt Step 2
"export" payments, GSM 102, GSM 103 and SCGP export credit guarantees
and ETI Act subsidies from actions based on Article 3 of the SCM Agreement
and Article XVI of the GATT 1994;
(ii) concerning Step 2 "export" payments:
- Section 1207(a) of the FSRI Act of 2002 mandates Step 2 export payments in
violation of Articles 3.3 and 8 of the Agreement on Agriculture;
- Section 1207(a) of the FSRI Act of 2002 mandates Step 2 export payments in
violation of Articles 3.1(a) and 3.2 of the SCM Agreement;
(iii) concerning export credit guarantee programmes:
- GSM 102, GSM 103 and SCGP constitute export subsidies within the
meaning of the Agreement on Agriculture that violate Article 10.1 of the
Agreement on Agriculture by circumventing and threatening to circumvent
the US export subsidy commitments. Th e three programmes, therefore, also
violate Article 8 of the Agreement on Agriculture;
- GSM 102, GSM 103 and SCGP are prohibited export subsidies within the
meaning of item (j) of the Illustrative List of Export Subsidies, and within the
meaning of Articles 3.1(a) and 3.2 of the SCM Agreement;
(iv) concerning the FSC Repeal and Extrate rritorial Income Act of 2000 ("ETI
Act"):
- the ETI Act is inconsistent with Articles 10.1 and 8 of the Agreement on
Agriculture;
- the ETI Act is inconsistent with Articles 3.1(a) and 3.2 of the SCM
Agreement;
(v) concerning Step 2 "domestic" payments:
- Section 1207(a) of the FSRI Act of 2002 mandates the payment of Step 2
"domestic" payments in violation of Articles 3.1(b) and 3.2 of the SCM
Agreement;
- Section 1207(a) of the FSRI Act of 2002 mandates the payment of Step 2
"domestic" payments in violation of Article III:4 of the GATT 1994

(vi) concerning present serious prejudice to the interests of Brazil:
- the US subsidies provided during MY 1999-2002 caused and continue to
cause serious prejudice to the interests of Brazil by suppressing upland cotton
prices in the US, world and Brazilian ma rkets for upland cotton in violation
of Articles 5(c) and 6.3(c) of the SCM Agreement;

- the US subsidies provided during MY 1999-2001 caused and continue to
cause serious prejudice to the interests of Brazil by increasing the US share of
the upland cotton world market in violation of Articles 5(c) and 6.3(d) of the
SCM Agreement;
- the US subsidies provided during MY 1999-2002 caused and continue to
cause serious prejudice to the interests of Brazil by resulting in the United
States having a more than equitable share of world exports of upland cotton
in violation of Articles XVI:1 and XVI:3 of the GATT 1994;
(vii) concerning threat of serious prejudice to the interests of Brazil:
- the US subsidies mandated to be provided in MY 2003-2007 threaten to
cause serious prejudice to the interests of Brazil by suppressing upland cotton
prices to an extent that is significant in the US, world and Brazilian markets
in violation of Articles 5(c) and 6.3(c) of the SCM Agreement;
- the US subsidies mandated to be provided during MY 2002-2007 threaten to
cause serious prejudice to the interests of Brazil by increasing the US share of
the upland cotton world market in violati on of Article 5(c) and 6.3(d) of the
SCM Agreement;
- the US subsidies mandated to be provided during MY 2003-2007 to cause
serious prejudice to the interests of Brazil by resulting in the United States
having a more than equitable share of world exports of upland cotton in
violation of Articles XVI:1 and 3 of the GATT 1994;
(viii) concerning selected provisions of the FSRI Act of 2002 and the ARP Act of
2000:
- the following sections of the FSRI Act of 2002 and the referenced regulations
thereto violate, as such , Articles 5(c), 6.3(c), 6.3(d) of the SCM Agreement
and Articles XVI: 1 and 3 of the GATT 1994 to the extent that they relate to
upland cotton:
- direct payments: section 1103(a)-(d)(1) and 7 CFR 1412.502;
- counter-cyclical payments: sections 1104(a)-(f)(1), and 7 CFR 1412.503;
- marketing loan payments: secti ons 1201(a)-(b), 1202(a)(6), 1202(b)(6),
1204(b), 1205(a)(1), 1205(b), 1205(c)(1), 1608, and 7 USC. 7286 (Section
166 of the FAIR Act of 1996 as amended), and 7 CFR 1427.22;
- Step 2 Payments: section 1207(a), and 7 CFR 1427.105(a), 7 CFR 1427.107,
and 7 CFR 1427.108(d); and
- crop insurance payments: ARP Act of 2000: sections 508(a)(8), 508(b)(1),
508(b)(2)(A)(ii), 508(b)(3), 508(c)(1)(A), 508(e), 508(k) and 516.
3.2 Brazil requests that the Panel make the follo wing recommendations in light of the above
findings:
- recommend to the United States, pursuant to Article 4.7 of the SCM
Agreement, to withdraw Step 2 "export" payments, GSM 102, GSM 103 and

SCGP export credit guarantees, and subsidies under the ETI Act without
delay;
- recommend to the United States, pursuant to Article 4.7 of the SCM
Agreement, that it withdraw Step 2 "domestic" payments without delay;
- recommend to the United States, pursuant to Article 19.1 of the DSU, that it
bring the measures found by the Panel to be inconsistent with the Agreement
on Agriculture or the GATT 1994 into conformity with the Agreement on
Agriculture and the GATT 1994;
- recommend to the United States pursuant to Article 7.8 of the SCM
Agreement to remove the adverse effects caused to the interest of Brazil by
virtue of the serious prejudice to the interests of Brazil or to withdraw the
subsidies;
- recommend to the United States pursuant to Article 7.8 of the SCM
Agreement to withdraw the subsidies threatening to cause serious prejudice to
the interests of Brazil or remove the threat of serious prejudice to the interests
of Brazil; and
- recommend to the United States pursuant to Article 19.1 of the DSU that it
bring its measures providing subsidies to producers, users and exporters of
upland cotton in conformity with Articles XVI:1 and 3 of the GATT 1994.
3.3 Brazil further asks the Panel to reject all of the United States' requests for preliminary rulings.
B. U
NITED STATES
3.4 The United States requests that the Panel make the following preliminary rulings:
- export credit guarantee measures rela ting to eligible US agricultural
commodities other than upland cotton were not the subject of consultations
and are therefore not within the Panel's terms of reference;
- Brazil failed to provide a statement of available evidence with respect to
export credit guarantees for commodities other than upland cotton as required
by Articles 4.2 and 7.2 of the SCM Agreement;
- production flexibility contract payments and market loss assistance payments
had terminated prior to Brazil's re quest for consultations and panel
establishment, and are therefore not within the Panel's terms of reference;
- measures under the Agricultural Assistance Act of 2003, including
cottonseed payments under that Act, did not exist at the time of Brazil's
Panel request, and are therefore not within the Panel's terms of reference;
- cottonseed payments made for the 1999 and 2000 crops were not identified in
Brazil's consultation or panel request, a nd are therefore not within the Panel's
terms of reference; and
- Brazil's challenge to storage payments and interest subsidy were not included
in Brazil's consultation or panel requ est, and are therefore not within the
Panel's terms of reference.

3.5 The United States submits that:
- Article 13 of the Agreement on Agriculture (the "Peace Clause") is part of the
balance of rights and obligations of Members and is not an affirmative
defence;
- pursuant to Article 13(a)(ii) of the Agreement on Agriculture, direct payments
under the FSRI Act of 2002 and expi red production flexibility contract
payments under the 1996 FAIR Act (to the extent within the Panel’s terms of
reference) "conform fully to the provisi ons of Annex 2 to [the Agriculture]
Agreement" and are "exempt from actions based on Article XVI of the GATT
1994 and Part III of the Subsidies Agreement";
- pursuant to Article 13(b)(ii) of the Agreement on Agriculture , US domestic
support measures that conform fully to the provisions of Article 6 of the
Agreement on Agriculture , including the marketing loan programme
(including marketing loan gains and loan deficiency payments), user
marketing (step 2) payments, direct payments, counter-cyclical payments,
and crop insurance payments, for marke ting year 2002, as well as payments
made during each of marketing years 1999-2001, "do not grant support to a
specific commodity in excess of that decided during the 1992 marketing
year" and are "exempt from actions based on paragraph 1 of Article XVI of
GATT 1994 and Articles 5 and 6 of the Subsidies Agreement";
- Brazil may not bring or maintain any action against such measures "based
on" the provisions specified in the respective Peace Clause provisions;
- Section 1207(a) of the FSRI Act of 2002 does not mandate Step 2 payments
that are inconsistent with Articles 3.3 and 8 of the Agreement on Agriculture,
Articles 3.1(a), 3.1(b), and 3.2 of the SCM Agreement, and Article III:4 of the
GATT 1994;
- US export credit guarantee programmes (GSM 102, GSM 103 and SCGP) for
upland cotton and the export credit guarantee programmes for all eligible
agricultural commodities (to the extent within the Panel’s terms of reference),
are not export subsidies within the meaning of the Agreement on Agriculture,
are not inconsistent with Articles 10.1 and 8 of the Agreement on Agriculture,
and are not a prohibited export subsidy w ithin the meaning of item (j) of the
Illustrative List of Export Subsidies or within the meaning of Articles 3.1(a)
and 3.2 of the SCM Agreement; and
- Brazil has failed to make a prima facie case that the ETI Act is inconsistent
with Articles 10.1 and 8 of the Agreement on Agriculture and inconsistent
with Articles 3.1(a) and 3.2 of the SCM Agreement.
3.6 The United States submits that, in the even t the Panel were to find that Brazil has
demonstrated that the US measures do not satisfy the conditions of Article 13 of the Agreement on
Agriculture:
- crop insurance payments are not specific within the meaning of Article 2 of
the
SCM Agreement and are not subject to the provisions of Part III of the
SCM Agreement;

- US direct payments, expired production flexibility contract payments,
counter-cyclical payments, and expire d market loss assistance payments are
no more than minimally trade- or production-distorting and Brazil's claims
under Articles 5(c) and 6.3 of the SCM Agreement and Article XVI of the
GATT 1994 fail; and
- with respect to measures properly within the Panel's terms of reference, those
measures are fully consistent with the United States' WTO obligations.
IV. ARGUMENTS OF THE PARTIES
4.1 The arguments of the parties as submitted, or as summarized in their executive summaries as
submitted to the Panel, are attached as Annexes (see Table of Annexes, page ix ff).
4.2 The parties' answers to questions from the Panel, their comments on each other's answers, and
other documents submitted at the request of each other are also attached as Annexes.
V. ARGUMENTS OF THE THIRD PARTIES
5.1 The arguments of those third parties which have made submissions to the Panel are attached
to this Report as Annexes. Third parties' responses to the Panel's questions are also attached as
Annexes.
VI. INTERIM REVIEW
6.1 On 26 April 2004, the Panel submitted its interi m report to the parties. On 17 May 2004,
Brazil and the United States submitted written request s for review of precise aspects of the interim
report. On 3 June 2004, Brazil and the Unite d States submitted written comments on each other's
request for interim review.
6.2 The Panel has modified aspects of its findings in light of the parties' comments where it
considered appropriate, as explained below.
10 Moreover, the Panel has made certain technical
corrections and revisions as well as other modifications, as described in paragraph 6.59 below.
A. CONFIDENTIALITY OF THE PANEL'S INTERIM REPORT
6.3 The United States requests that the Panel note in its final report that Brazil had breached the
obligation of confidentiality of the Panel's interim report and to note any information that the Panel
obtained with respect to those breaches.
6.4 Brazil replies that it "regrets the unfounded U.S. accusation that it has breached the
confidentiality of the Panel's Interim Report" and provides certain details to support its view that
certain press reports which ostens ibly attributed content to, for example, "Brazilian diplomats"
"speaking on condition of anonymity" could not have and, in fact, had not, obtained information from
any Brazilian source. Brazil states that the ostensible sources cited in such press reports could just as
easily have been United States officials or other persons not connected with Brazil.
6.5 The Panel notes that, when we transmitted our interim report to the parties, we clearly
indicated that it was confidential. Indeed, pursuant to Article 18.2 of the DSU, all panel proceedings
remain confidential until the Panel Report is circ ulated to WTO Members. Over and above the
binding treaty obligation of confidentiality in the DSU, the confidentiality of our Panel proceedings

10 Unless otherwise indicated, references to paragraph numbers and footnote numbers in this Section
are those shown in the final report.

was reflected in our working procedures adopted pursuant to Article 12.1 of the DSU. Therefore, we
are profoundly concerned to observe that the confidentiality has not been respected and that aspects of
the Panel's interim report were disclosed, as evid enced in various press reports brought to our
attention by the parties. We consider this lack of respect for confidentiality unacceptable.
B. S
ECTION VII:B - PRELIMINARY RULINGS
6.6 The United States requests review of paragraph 7.61 because, in its view, the mere fact that
Brazil submitted written questions dur ing consultations does not show that certain measures were the
subject of actual consultations; a nd paragraph 7.179 because storage a nd interest may be waived in
some instances but not all a nd because these waivers are not unique among covered commodities to
upland cotton.
6.7 Brazil asks the Panel to reject both the Unite d States' requests. With respect to
paragraph 7.61 in its view, the fact that questions were posed proves that consultations were held,
despite the fact that the United St ates refused to answer them. Otherwise, a Member could block
dispute settlement procedures simply by refusi ng to engage during the consultation process.
Paragraph 7.179 does not indicate that these waiv ers are unique, among covered commodities, to
upland cotton.
6.8 The Panel declines to modify paragraph 7.61 in vi ew of the considerations set out in
paragraph 7.67. The Panel consider ed that paragraph 7.179 of the in terim report was consistent with
the United States' concerns on interi m review but has modified it in the final report for the avoidance
of doubt.
C. SECTION VII:C - PRELIMINARY ISSUES
6.9 The United States requests review of paragraph 7.202 to reflect the fact that some CCC
programmes are not administered by the FSA; paragr aph 7.209 so as not to imply that user marketing
(Step 2) payments were made in 1990; footnote 294 to paragraph 7.213 so as not to suggest that the
FACT Act of 1990 set a target price of "72.9 cents per pound"; paragraphs 7.215 and 7.222 so as to
clarify further that planting flexibility lim itations and exceptions only applied to acreage
corresponding in amount to base acres; paragraph 7.216 to note the timing of the enactment of MLA
payments each year; footnote 306 to paragraph 7.2 17 to add a reference to base acres and to alter the
amount of MLA payments; paragraphs 7.218, 7.223 and 7.225 to clarif y the definition of "producer";
paragraph 7.218 to clarify the cove rage of peanuts; paragraph 7.225 to avoid mixing disparate rates
calculated according to current and historical production; footnote 456 to paragraph 7.334 and
paragraph 7.336 in relation to the ma ndatory/discretionary distinction; to strike a footnote to
paragraph 7.227 which discussed the meaning of "e xempt from actions" in relation to non-violation
nullification and impairment claims, because it wa s unnecessary for the purposes of this dispute;
paragraph 7.349 for clarity; and to make certain other technical revisions.
6.10 Brazil agrees with the United States' requests with respect to paragraph 7.202; footnote 306
to paragraph 7.217 to add a reference to base acres ; and paragraph 7.218 a nd footnote 310 relating to
peanuts. Brazil does not object to the United States ' request with respect to former footnote 394 to
paragraph 7.277 and paragra ph 7.349. Brazil agrees that ame ndments could be made but suggests
alternative language in paragraphs 7.209, 7.215, former footnote 303 to paragraph 7.219 (including
cross-references to the factual findings in the Atta chment to Section VII:D) and paragraph 7.225.
Brazil asks the Panel to reject the United Stat es' requests with respect to footnote 294 to
paragraph 7.213 as it is factually correct; paragr aph 7.216 as the change is unnecessary but, if it is
amended, Brazil suggests alternative language that the timing of enactment of MLA payments did not
diminish their impact on supporting production of up land cotton; footnote 306 to paragraph 7.217
because the amounts are correct; paragraphs 7.218 and 7.223 with respect to the definition of
"producer" as that is the term used in the legislati on and is already explained in the interim report but

Brazil also suggests alternative language in paragr aph 7.218; paragraph 7.222 as, in its view, the
amendment would only complicate the sentence wit hout adding clarity; and paragraph 7.225, fifth
sentence because CCP payments should not be seen in isolation and the loan rate is qualified by the
words "where applicable".
6.11 The Panel takes note of the parties' comments and has modified paragraphs 7.202, 7.209,
7.215 (and added a footnote), 7.222, 7.225; modifi ed footnote 294 to paragraph 7.213 for clarity;
modified paragraphs 7.212 (and added a footnote), 7.213 (and modified a footnote), 7.218 (and
modified one footnote and added another), 7.219 (deleted a footnote), 7.223 (and added a footnote)
and 7.224 to clarify the meaning of "producer" by quoting the applicable definitions and then using
the defined term, which is the approach followed in th e relevant legislation, and to cross-reference the
factual findings in the Attachment to Section V II:D; and modified paragraph 7.217 and footnote 306
to clarify and correct the MLA payment amounts. The Panel has deleted former footnote 394 from
paragraph 7.277, having satisfied itself th at nothing in Article 13(b)(iii) of the Agreement on
Agriculture is inconsistent with its findings in that para graph. The Panel takes note of the parties'
comments and declines to modify paragraph 7.216 as it is sufficiently detailed. The Panel further
takes note of the parties' comments on footnote 45 6 to paragraph 7.334 a nd paragraph 7.336 in
relation to the mandatory/discretionary distinction. The Panel declines to modify footnote 456 as it is
logically accurate, and has made certain modifi cations to paragraphs 7.335 and 7.336, including
inserting footnotes for greater clarity. The Panel has also deleted a footnote from paragraph 7.211 and
made certain other technical revisions as suggested by the parties, including footnote 453 to paragraph
7.331.

D. SECTION VII:D - DOMESTIC SUPPORT MEASURES AND ARTICLE 13 OF THE AGREEMENT ON
AGRICULTURE
1. General
6.12 Brazil requests review of footnote 469 to paragraph 7.345 to correct the date on which it
submitted that the peace clause expired; paragraph 7. 450 to correct a reference to the target price in
the first line; paragraphs 7.453-7. 456 for consistency with the inclus ion of crop insurance payments
in the peace clause tabulation; paragraphs 7.561- 7.567 to cross-reference the calculation of CCP
payments; paragraph 7.566 to clarify that the pr oducers in question are upland cotton producers; and
paragraph 7.594 for clarity. It also suggests technical revisions to paragraphs 7.640 and footnote 595.
6.13 In response, the United States agrees that paragraph 7.450 should be corrected but suggests
an alternative term. The United States does not ag ree to refer in paragraph 7.566 to "'upland cotton'
producers" because the evidence cited does not necessarily mean that any policy holders is a producer,
and it suggests alternative language.
6.14 The United States requests review of paragraph 7.386 for consistency; paragraph 7.387 to be
deleted since it is not necessary to resolve the matter before the Panel; paragraph 7.403 to reflect
additional arguments presented by the United Stat es; footnote 579 to pa ragraph 7.437 because the
meaning of "crop year" or "crop" could vary depe nding on the context; paragraph 7.446 with regard
to the role of the OBRA Act of 1990; paragraph 7.48 8 with respect to the relevance of the quotation;
paragraph 7.517 to distingui sh between types of covered losses and separate plans of insurance;
paragraph 7.562 with respect to the authorizing st atutes for MLA payments and the term "successor"
programmes; paragraph 7.574 and footnote 740 to reflect Brazil's explanation of its 14/16ths
methodology and for clarity; footnote 748 to paragr aph 7.577 to correspond to the contents of the
Attachment; paragraph 7.600 to treat A.R.P. and fl ex acres in the same way; and paragraphs 7.602
and 7.603 to reflect the way in which CCP payments are calculated; and certain technical revisions.
6.15 In response, Brazil agrees to the United States' requested amendment of paragraph 7.562 with
respect to the authorizing statutes for MLA payments. Brazil does not object to the clarification of

former paragraph 7.490 or to the deletion of th e footnote to Brazil's Annex IV methodologies, but
suggests that the Panel make additional findings on those methodologies, including that Brazil's use of
them was appropriate. Brazil agrees that ame ndments could be made but suggests alternative
language in paragraphs 7.386, 7.446 and 7. 513. Brazil strongly disagrees with the deletion of
paragraph 7.387 as it may be of relevance on appeal. Brazil asks the Panel to reject the following
United States' requests: with r espect to paragraph 7.403 as the additional arguments contradict a
USDA statement submitted by Brazil referred to in the preceding paragraph and because the lack of
base updates during the term of the FSRI Act of 2002 is already mentioned; with respect to the
footnote to paragraph 7.437 because the United States did not dispute that the upland cotton crop year
and upland cotton marketing year are identical in response to a question from the Panel and both
parties had used these terms interchangeably in s ubmissions; with respect to paragraph 7.517 because
the Panel's description is factually correct and the United States has not proved its assertion that these
coverage for the relevant types of losses were ever offered to other crops; paragraph 7.562 because
these programmes are "successors" in the ordinary se nse of that word; and paragraph 7.574 because
the reasoning for Brazil's 14/16ths methodology in its response to Panel Question No. 60 is narrowly
limited. Brazil stated that it developed that methodology as a proxy amount and made the reasonable
assumption that each acre of upland cotton planted would receive support equi valent to the support
that an upland cotton base acre would receive sin ce the United States had "misrepresented" the fact
that it did not have data on the amount of contr act payments made to current producers of upland
cotton; footnote 740 to paragraph 7.574 because it is necessary to understand the relationship of the
14/16ths ratio to payments; paragraph 7.602 because deficiency payments were also calculated in
respect of base acreage; paragraph 7.603 because, on the facts, it is accurate to state that upland
cotton producers receive CCP payments and unnecessar y to make the change requested by the United
States. Brazil asks the Panel to reject the United States' request with respect to the A.R.P. in
paragraph 7.600 but proposes a different amendment to reflect programme non-participation rates in
order to show that the percentage of upland cott on acreage ineligible for support from the marketing
loan programme was 11.8 per cent, which is much higher than the 7.5 per cent found by the Panel.
6.16 The Panel takes note of the parties' comments and has made modifications to footnote 469 to
paragraph 7.345, as suggested by Braz il, to correct the date on which it submitted that the peace
clause expired (i.e. 31 December 2003); paragra ph 7.349; paragraphs 7. 386, 7.403 (and added a
footnote), footnote 579 to paragraph 7.437, paragraph 7.446, paragra ph 7.450 consistently with the
language of preceding paragraphs; paragraphs 7.453 (and modified , deleted and added footnotes),
7.456, 7.490 (former paragraph), 7.504, 7.513 (and added a footnote), 7.516, 7.561, 7.562, 7.574 (and
added additional footnotes) and f ootnote 740; paragraph 7.579 by m oving footnote 748 to the correct
position; paragraph 7.584; paragraph 7.602, alth ough the Panel declines to state that deficiency
payments were calculated in respect of current production because they were also calculated in
respect of base acreage; and paragraph 7.603 for greater clarity although the Panel uses the term
"producer" which appears in the legislation and descr iption of measures. The Panel has also amended
paragraphs 7.593 and 7.594 to clar ify the separate issues dealt with in each and to remove
unnecessary references to "marketing" years. The Panel has also made certain technical revisions, as
suggested by the parties, including revision to pa ragraph 7.380, footnote 508 to paragraph 7.384,
footnote 522 to paragraph 7.395, footnote 595 to pa ragraph 7.447, footnote 664 to paragraph 7.512
and paragraph 7.642, as well as editing the terminol ogy in paragraphs 7.385 to 7.387 and 7.413 for
consistency and adding a footnote to paragraph 7.518 and editing foot note 515 to paragraph 7.386,
paragraphs 7.399, 7.481, 7.498 and 7.559(ix), foot note 727 to paragraph 7. 565 and paragraph 7.570
for clarity and accuracy.
 The Panel takes note of the parties' comments and declines to modify
paragraph 7.387 since it refers to an argument raised by a third party and silence could be
misconstrued as implying a view on that argument; paragraph 7.600 as requested by the United States
for the reasons already given in footnote 779, ei ghth sentence, and paragraph 7.600 as requested by
Brazil because, in order to be consistent with the United States' approach, decisions by producers on
participation should not be taken into account a nd also because Brazil's proposed amendment is not
strictly limited to responding to the United States' request for review as required by paragraph 16 of
the Panel's Working Procedures.

2. Section VII:D.5(g) - Brazil's requests that the Panel draw adverse inferences
6.17 The United States requests that the Panel review para graph 7.621 because the FSA does not
track total expenditures on a farm-specific basis w ith respect to planted acres for payments calculated
with respect to base acres; and paragraph 7.631(ii) because "the United States preliminarily advised
Brazil and the Panel at the second meeting that th e release of planted acreage information is
confidential information that cannot be released under U.S. domestic law" and Brazil did not suggest
substitute farm numbers in Exhibit BRA-369.
6.18 Brazil strongly opposes the United States' request s with respect to paragraphs 7.621 and
7.631(ii) as the Panel's analysis accurately reflects the United States' conduct in this dispute and its
description reflects the actual sequence of events. Brazil agrees only that the reference to Exhibit
BRA-369 should be deleted.
6.19 The Panel takes note of the parties' comments and has modified paragraph 7.621 for accuracy
to state that the FSA tracks both total expenditures and planting information on a farm-specific basis.
The Panel has modified paragraph 7.631(ii) (and mo dified and added additional footnotes) to remove
the statement that substitute farm identifiers ha d been suggested by Brazil prior to the second
substantive meeting and to set out the facts surrounding Brazil's approach to the format of data at the
second substantive meeting, which the United States alleged was responsible fo r its later inability to
provide the requested data.
3. Factual findings
6.20 The United States requests that the Panel delete its f actual findings in paragraphs 7.583, the
final sentence of paragraph 7. 600 and paragraphs 7.634-7.647 because these findings are not
necessary to resolve the matter before the Panel.
6.21 Brazil strongly disagrees with the United States' requests. In Brazil's view, these factual
findings are important, or may be important. The United States has already indicated that it would
appeal the Panel's report. In the event that the Appellate Body should modify the Panel's
interpretation, these factual findings may be highly relevant for the Appellate Body to "complete the
analysis". If so, then these findings may significan tly assist the parties in resolving their dispute.
Without them, the Appellate Body might be pr evented from completing the analysis, which is
immensely frustrating for complaining parties w ho have gone to great expense to develop the
evidence necessary to establish their claims.
6.22 The Panel takes note of the parties' comments and declines to delete these factual findings.
The Panel's function is to assist the DSB in discharging its responsibilities under the DSU and covered
agreements including, specifically, to make an objective assessment of the facts of the case.
11 The
Panel makes the factual findings in this report in or der to carry out that function. Certain of these
factual findings, notably in the Attachment to Section VII:D, provide support for findings in
Section VII:G. The Panel has added a sentence to th at effect in paragraph 7.6314. Certain other
factual findings are not necessary to resolve the matt er according to the Panel' s legal interpretations,
but we observe that the aim of the WTO dispute settle ment system is to secure a positive solution to a
dispute.
12 In this dispute, the Panel is the sole tribunal of fact 13 and these additional factual findings
may ultimately be essential in order to secure a positive solution to it. In this regard, we note that the
United States indicates in its request for review that it intends to appeal the Panel's final report.14

11 Article 11 of the DSU.
12 Article 3.7 of the DSU.
13 Article 17.6 of the DSU.
14 United States' request for interim review, paragraph 2.

E. S
ECTION VII:E - EXPORT SUBSIDIES
1. Overview of parties' export subsidy claims and arguments under the Agreement on
Agriculture, the SCM Agreement and the GATT 1994
6.23 The Panel has made the technical clarification suggested by Brazil in paragraph 7.651(iii).
2. Relationship between the export subsidy provisions of the Agreement on Agriculture and
the SCM Agreement and the GATT 1994
6.24 The United States requests that the Panel modify paragraph 7.657 to clarify that Article 21.1
of the Agreement on Agriculture is not limited in its application only in the event of a conflict. Brazil
opposes this request, asserting that the rights a nd obligations arising from Annex 1A apply
cumulatively, unless there is a conflict. The Panel has modified paragraph 7.657 in light of the
parties' comments, noting that the last sentence commences with the proposition "[i]n the event of a
conflict...".
3. Section 1207(a) of the FSRI Act of 2002: user marketing (Step 2) payments to exporters
6.25 In connection with our treatment of the par ties' comments on the mandatory/discretionary
distinction, outlined above in paragraph 6.11, we have modified paragraphs 7.742, 7.746 and 7.747.
6.26 The Panel has made the technical corrections identified by the United States in footnotes 894
and 912, and has supplemented footnote 895 in light of paragraph 6.45 infra.
4. Export credit guarantee programmes
(a) Brazil
6.27 Brazil submits that, in paragraph 7.842, we should place quotation marks around the term
"subsidy" - in the sentence beginning "[a]ccor ding to the United States government, a positive net
present value means that the United States government is extending a subsidy..." - to clarify that the
term is not used there within the meaning of Article 1.1 of the SCM Agreement, but rather in the sense
of the United States Federal Credit Reform Act of 1 990. The latter defines the term "subsidy" with
reference to cost and relates to cost to the United States government. The United States expresses no
view on this request. Noting that the surrounding paragraph deals with the United States net present
value methodology under the FCR Act, and that the sentence begins with the phrase "according to the
United States government", the Panel has inserted quotation marks around the term "subsidy" in the
sentence concerned in paragraph 7.842 and has also inserted a footnote.
6.28 Brazil requests that we incorporate our finding in paragraph 7.843 about the consistently
positive numbers in the United States budge t guaranteed loan subsidy line into
Section VII:E.5(d)(i)iii.g. relating to the structur e, design and operation of the programmes. The
United States does not agree with this suggestion. Th e United States submits that this did not
coincide with the analytical approach or conclusi ons of the Panel. According to the United States,
such incorporation would "conflate the conceptual distinction" which the Panel made between past
performance of the programmes and structure ope ration and design of the programmes. The Panel
has inserted footnote 1052. This does not conflate the conceptual distinction we have drawn in our
analysis. Our examination of the past performance of the programme and our findings relating to the
structure, operation and design of the measure are mutually reinforcing. As we have already indicated
(for example, in paragraphs 7.808 and 7.867), our findings on the United States export credit
guarantee programmes are based upon the evidence as a whole.

6.29 Brazil requests that we insert, in footnote 1011, a reference to the percentage of rescheduled
guarantees (1992-2003) that remain outstanding. 15 T h e United States submits that it would be
inappropriate to include the percentage share Brazil proposes as it is derived from figures not
constituting part of the discussion in the footnote and accompanying text. In light of the record
evidence indicating that approximately $1.6 billion of defaulted guarantees have been re-scheduled
1992-2003 (Column F of Exhibit US-147), and that approximately $1.5 billion in principal on
rescheduled debt remained outstanding as of 30 November 2003, while $205 million in principal may
have been collected on reschedulings (Column F of Exhibit US-148) and some interest has been
collected on reschedulings (Column M in Exhibits US-128 and US-147), the Panel does not believe
that it is necessary to make the additional percentage finding requested by Brazil.
6.30 Brazil requests, in respect of paragraph 7.858 and footnote 1033, that we note that CCC
authority to extend export credit guarantees is not limited by the budget appropriations process. The
United States believes that Brazil's suggestion would distort otherwise fuller and more precise
statements of the Panel. The Panel has included a reference to 2 USC 661c(c)(2) in footnote 1033.
6.31 Brazil requests the Panel to make certain additiona l "factual" findings regarding the parties'
evidence and argumentation relating to Brazil's allegation that the CCC export credit guarantee
programmes at issue constitute prohibited export subs idies under the elements of Articles 1 and 3.1(a)
of the SCM Agreement. Brazil asserts that, in the event one of the parties appeals and the Appellate
Body reverses the Panel's conclusion on item (j), it might not have the necessary facts at its disposal
to "complete the analysis" with respect to Br azil's claims under Articles 1 and 3.1(a) of the SCM
Agreement. In the United States' view, the Panel has already made findings on the claims cited by
Brazil, in paragraphs 7.946-7.948. According to the United States, Brazil improperly requests us to
make unnecessary and unsupported additional factual findings with respect to its SCM Agreement
claims, and to reverse the applicable burden of proof . The United States asserts that Article 10.3 of
the Agreement on Agriculture applies only in respect of claims of export subsidies in excess of
applicable reduction commitment levels under the Agreement on Agriculture , and does not apply to
export subsidy claims or factual findings under the SCM Agreement. The Panel declines to make the
additional findings requested by Brazil. We are of the view that Brazil's allegation invoking the
elements of Articles 1 and 3.1(a) of the SCM Agreement is not a separate claim, but merely another
argument, on a different factual basis, as to how the United States export credit guarantee programmes
would meet the definition of an expor t subsidy in Article 3.1(a) of the SCM Agreement. Given our
finding in paragraphs 7.946-7.948, we do not believe that it is necessary to address Brazil's additional
arguments about how the Article 3.1(a) definitiona l elements would be fulfilled on another factual
basis in order to resolve this dispute. For greater clarity, we have inserted footnote 1125.
6.32 Brazil requests that, in paragraph 7.875 and footnote 1056, we make reference to
Exhibit BRA-298, which contains a list of all agri cultural products that are eligible for CCC export
credit guarantees. The United States submits that we should reject Brazil's request, noting that
Brazil's own description of Exhibit BRA-298 is that it identifies "all agricultural products that are
eligible for CCC export credit guarantees", and that eligibilit y is not the relevant test under the Panel's
approach. The Panel declines to make the addition requested by Brazil. Our finding in the paragraph
concerned relate to exports of upland cott on and other unscheduled agricultural products supported
under the programme, and not to all products eligible for such support. We recall that we have
already referred to Exhibit BRA-298 in footnote 851, in describing the products subject to Brazil's
claim. In the interests of comprehensiveness, we have, however, also inserted a reference to Exhibit
BRA-299 in footnote 851.
6.33 Brazil requests that the Panel review its statement, in paragraph 7.880, relating to the time
period of the United States' actual circumvention of export subsidy commitments for rice. The

15 Brazil refers to its 18 February 2004 comments on United States 11 February 2004 responses, para.
38.

United States' view is that we should reject Brazil's re quest. According to the United States, Brazil
prepared and presented the data in Exhibit BRA- 300 solely as a comment in response to a Panel
question which was oriented to the issue of "threaten [ing] to lead to circumvention". Having satisfied
ourselves of the record, including the United States' statement in footnote 150 of its further rebuttal
submission that "[t]he only commodity with respect to which the United States did not provide
['uncontroverted' evidence that the respective qua ntities of exports under the export credit guarantee
programmes did not exceed the applicable quan titative reduction commitment] is rice", the Panel has
made certain modifications to paragraph 7.880 and footnote 1060 in light of these comments. We
also refer to paragraph 6.34 in respect of our treatme nt of "threatening to lead to circumvention" in
respect of rice and to unscheduled products supported under the programmes.
6.34 In respect of paragraphs 7.882-7.896, Brazil requests that the Panel address Brazil's "separate
claims" that the CCC export credit guarantee programme s, with respect to rice and to unscheduled
agricultural products supported under the programmes, threaten to lead to circumvention of the United
States export subsidy commitments. The United States' view is that we should reject this request.
The Panel declines to make any additional findings in this respect. We have, however, inserted
footnote 1061 for greater clarity.
6.35 We have also made the clarifications and/or modifications suggested by the parties in
paragraphs 7.793, 7.821, 7.895, 7.896, 7.940 a nd 7.1305 and footnotes 1028, 1047, 1067, and have
inserted footnote 1080.
(b) United States
6.36 In light of the United States ' request, with which Brazil does not disagree, the Panel has
made modifications in paragraph 7. 803 to more accurately reflect the United States' argument and to
clarify that even if an export credit guarantee progr amme for agricultural products meets the elements
of item (j) it would not be a "pr ohibited" export subsidy under the SCM Agreement as long as
agricultural export subsidies during the implementation period were within reduction commitments.
6.37 The United States requests that we clarify that our reference in pa ragraph 7.875 (and
paragraph 8.1(d)(ii)) to Exhibit BRA-73 as relevant record evidence refers to those unscheduled
products that are within the scope of the Agreement on Agriculture and our terms of reference. Brazil
requests us to conclude that GSM 102, GSM 103 and SCGP also constitute prohibited export
subsidies within the meaning of item (j) and Article 3.1(a) of the SCM Agreement, for all products not
covered by the Agreement on Agriculture. Recalling that: interim review is not the time to raise new
arguments; our terms of reference include export credit guarantees to facilitate the export of United
States upland cotton and other eligible agricultural commodities as addressed in document
WT/DS267/7 (see also
supra, paras. 7.69 and 7.103); Article 2 and Annex I of the Agreement on
Agriculture set out the product coverage of that agreem ent; the core distinction between "scheduled"
and "unscheduled" products is rooted in the scheduled commitments under the Agreement on
Agriculture; and the scope of the products within our term s of reference does not materially affect the
programme-wide analytical approach that we have taken, and the evidence we have considered, under
item (j), the Panel has made the clarifications requested by th e United States. This would, of course,
affect the cross-reference in paragraph 8.1(d)(ii).
F. SECTION VII:F - IMPORT SUBSTITUTION SUBSIDY
6.38 The United States suggests that the Panel should om it paragraphs 7.1046-7.1052 as the
parties agree that Article 13 of the Agreement on Agriculture would not be applicable to the import
substitution subsidies at issue and the Panel need not reach further issues concerning the relationship
between Article 13 of the Agreement on Agriculture and Article 3.1(b) of the SCM Agreement. Brazil
disagrees with the United States' re quest. According to Brazil, although both parties agreed that
Article 13 of the Agreement on Agriculture does not exempt actions under Article 3.1(b) of the SCM

Agreement, Articles 13(b) and (c) of the Agreement on Agriculture may still provide context for
interpreting Article 3.1(b) of the SCM Agreement and Article 6.3 of the Agreement on Agriculture .
Brazil submits that the Panel correctly explains th e relevance of the omission of any reference to
Article 3 of the SCM Agreement in Article 13(b)(ii) and the importa nce of its inclusion in paragraph
13(c)(ii) of the Agreement on Agriculture. The Panel declines to make the deletion requested by the
United States. As we have noted, we endorse the shared view of the parties that Article 13 of the
Agreement on Agriculture does not affect a claim under Article 3.1(b) of the SCM Agreement. We
believe that our examination of the terms of Articles 13(b) and (c) of the Agreement on Agriculture
provide relevant context and support for our examination.
6.39 The United States requests that we delete footnote 1217 to paragraph 7.1074, as the
examples therein are not necessary to resolve the dispute. Brazil disagrees with the United States'
request. The Panel declines to make the deletion requested by the United States. We believe that the
considerations in this footnote support our examination.
6.40 The United States requests that the Panel strike the second sentence of paragraph 7.1085 as it
was not aware of any record evidence relating to the "ease of use" of domestic cotton. Brazil submits
that the second sentence is not n ecessary for the Panel's conclusions in the first and third sentences of
paragraph 7.1085, but it provides a useful comparison . According to Brazil, evidence suggesting that
United States upland cotton is easier to use than imported cotton is reflected in the extremely low
import figures for upland cotton into the United States as shown in Exhibit BRA-4, and by the fact
that there are far smaller freight and delivery ch arges for United States mill owners to use United
States upland cotton, and because domestic users are pa id under the user marketing (Step 2) subsidy.
The Panel points out that the sentence actually addr esses the issue of ease of meeting the conditions
of eligibility for the subsidy, as opposed to ease of use of domestic cotton. The rationale behind the
sentence is that use of domestically produced cotton does not merely improve the chances of
obtaining the subsidy. Rather, as we note in th e following sentence, use of such cotton is a pre-
condition for receipt of the payments. The Panel therefore declines to make any modification.
6.41 With reference to the United States request s relating to the mandatory/discretionary
distinction, the Panel has made certain modificati ons to paragraphs 7.1089, 7.1094 and 7.1096. The
Panel has also made requested modifications to the description of the United States' argument in
paragraph 7.1024, as well as modifications, in light of the parties' comments, in paragraphs 7.1148
and 7.1150. We have also made requested technical revisions in footnote 1234.
G. SECTION VII:G - ACTIONABLE SUBSIDIES: CLAIMS OF "PRESENT" SERIOUS PREJUDICE
(a) Brazil
6.42 Brazil requests modifications in respect of footnote 1323 concerning the participation of
certain experts as members of its delegation, and suggested that we insert a reference in
paragraph 7.1248 to certain expert testimony and statements. The Panel has made modifications to
footnotes 1323 and 1343, and has inserted footnote 1361 to paragraph 7.1245.
6.43 Brazil requests that we refer to Exhibit BRA-302 in support of figures we cite in
paragraph 7.1283 relating to United States' share of world exports, and include the level in MY 2002.
Brazil also requests that we include figures relati ng to United States' share of world exports in
footnote 1534 or in paragraph 7.1283 so that, in the event of an appeal, the Appellate Body could
draw a legal conclusion on the existence of a "consis tent trend" within the meaning of Article 6.3(d)
of the SCM Agreement and could complete the analysis, if necessary. The United States' view is that
such a finding would appear to be irrelevant in lig ht of the Panel's interpretation of "world market
share" in Article 6.3(d), and that the data in Exhibit BRA-302 has been revised as evidenced in
Exhibits US-119 and -120 and thus Brazil's requested findings overstate the United States' share of
world exports. In light of the parties' comments, our role as the sole tribunal of fact and the fact that

these additional factual findings may ultimately be essential in order to secure a positive solution to
this dispute, the Panel has modified paragraph 7.1283, including through the insertion of footnote
referencing Exhibit BRA-302 and ot her relevant record evidence. The Panel has inserted cross-
references in footnote 1534. The Panel has made further consequent modifications in its report.
6.44 Brazil requests that we add references to Exhibits BRA-224, -275 and -276 in footnote 1400
as further USDA studies addressing the effect of the marketing loan programme. The United States
submits that we should reject Brazil's request. Recalling that the footnote concerned includes the term
"e.g." and is therefore not intended to be exhaustive of relevant record evidence, the Panel declines to
insert the additional references requested by Brazil in footnote 1400. However, the Panel has ensured
that these studies are referred to in footnote 1329. The considerations set out in paragraph 7.1215
therefore apply.
6.45 Brazil requests that we include, either in the main body of the text or in a footnote, the total
amount of user marketing (Step 2) paymen ts to domestic users and exporters. The Panel has
supplemented footnote 895 and cross-referenced this in footnote 1408.
6.46 Brazil requests that we refer to specific evidence in support of our finding in
paragraph 7.1313. The United States indicates that this is not necessary as, in its view, the Panel has
indicated the evidence that it considered in making this finding. The Panel has inserted footnote
1428.
6.47 Brazil requests the insertion of further cross-references in Section VII.G.3(k). The United
States does not believe this would add any clarity to the Panel's analysis. In light of the existing
cross-references in Section VII.G.3(k), for example in footnotes 1455 and 1458, the Panel does not
believe it is necessary to insert the further cross-references to Section VII:G.3(j)(iii)ii and iii.
6.48 Brazil submits that it would be useful and appropriate for the Panel to make specific findings,
in paragraph 7.1415, that it has relied on evidence produced by Benin and Chad. The United States
does not agree with Brazil that the Panel should alte r its detailed analysis a nd conclusions relating to
"other Members". Recalling paragraphs 7.54 and footnote 1323, and underlining the constructive role
the participation of experts have played in these proceedings, the Panel does not find it necessary to
add such a specific reference in the paragraph concerned.
(b) United States
6.49 We have made modifications in paragraphs 7.1148 and 7.1150 in light of the requests of the
United States, and comments by Brazil. The United States requests that we delete footnote 1276 and
modify paragraph 7.1150 concerning the specificity of crop insurance subsidies, particularly in
respect of our discussion of livestock. Brazil opposes this request for deletion. In light of the parties'
comments, the Panel has modified paragraphs 7.1138, 7.114 8 and 7.1152 and footnote 1276 for
clarity and accuracy.
6.50 The United States requests certain modifications to th e first sentence of paragraph 7.1168
concerning our characterization of the aim of a countervailing duty investigation. Brazil has no
objection to these changes. The Panel has made the requested changes.
6.51 The Panel has declined to modify the descripti on of the A-Index in paragraph 7.1264 as
suggested by the United States, and opposed by Brazil, but the Panel has added to footnote 1374 for
accuracy.
6.52 The United States requests that we delete footnote 1374. Brazil requests that the Panel
retain the footnote. The Panel has retained the footnote. The Pane l derives contextual guidance from
the now-lapsed Article 6.1(a) of the SCM Agreement. The last sentence of the footnote refers to our

view that while a rate of subsidization may, wher e available, constitute relevant evidence in a given
case, in the particular facts and circumstances of this case, it is not necessary to establish with any
precision a rate of subsidization in order to resolve the dispute.
6.53 The United States requests clarifications in the third sentence of paragraph 7.1360 relating to
the United States share in world production and exports. Brazil suggests that we reject the United
States request and make a technical modification. In light of the parties' comments, the Panel has
made certain modifications in the paragraph concerned.
6.54 The United States requests that we delete the term "evidentiary" in paragraph 7.1415.
Although the United States generally agrees that thir d party submissions can help provide additional
context and support in panel proceedings, the United States submits that the term "evidentiary" could
be read as going further than this to imply that third parties can help sustaining Brazil's burden of
proof. Brazil asserts that the United States' argument that evidence provided by third parties cannot
provide "evidentiary support" c onflicts with Article 10 of the DSU. According to Brazil, while a
third party cannot alleviate a complainant's burden to present a prima facie case of inconsistency of a
measure, the evidence presented by a third party can nevertheless provide "evi dentiary" support that
can be relied upon by the Panel. The Panel has retained the term "evidentiary" in the paragraph
concerned. Neither party suggests that eviden ce provided by a third party may alleviate the
complainant's burden to establish a prima facie case . We agree entirely. Information supplied by
third parties in support of their allegations may cons titute evidence, in terms of additional context and
support, that we may take into account in conducting an objective assessment of the matter before us.
6.55 The United States requests modifications and/or deleti ons of paragraphs 7.1425, 7.1451,
7.1452 and 7.1453. Brazil opposes these requested modifications, asserting that the United States is
trying to introduce a new argument at the interim review stage. Having reviewed the record, the
Panel has declined to make the precise deletions and m odifications requested by the United States.
The Panel has, however, made certain modifications , including to paragraphs 7.1425 (also added a
footnote), 7.1451 and 7.1453 and has modified foot notes 1519 and 1527 in light of the parties'
comments.
6.56 The Panel has also made certain technical and other revisions in respect of suggestions by
Brazil in paragraphs 7.1107, 7.12 29, 7.1305 (also added a footnote and made a related revision in
paragraph 7.214) and footnotes 1185, 1327, 1336, 1375 and 1409, and certain suggestions by the
United States in paragraphs 7.1305, 7.1307, 7. 1447, 7.1449, 7.1501, footnote 1417 to paragraph
7.1305, footnote 1544 to paragraph 7.1477 and f ootnote 1561 to paragraph 7.1502. We have also
made certain modifications in footnote 1410.
H. SECTION VII:H - ACTIONABLE SUBSIDIES: CLAIMS OF "THREAT OF" SERIOUS PREJUDICE
6.57 The Panel has modified paragraph 7.1480 and footnote 1544 in light of the parties'
comments.
I. SECTION VIII - CONCLUSIONS AND RECOMMENDATIONS
6.58 Brazil suggested that the language of paragraph 8.3( c) mirror that of paragraph 8.3(b). The
United States does not object to this, but also wishes to avoid any mistaken impression that the six
month period referred to for withdrawal is "required by" Article 4.7. In light of the parties' comments,
the Panel has modified paragraph 8.3(c). We have , however, retained certain language, as the
measures subject to paragraph 8.3(b) are also s ubject to the recommendation in paragraph 8.3(a).
This is not the case for the measure subject to the recommendation in paragraph 8.3(c).

J.
OTHER
6.59 As stated in paragraph 6.2 above, the Panel has also made technical corrections and revisions,
as well as other modifications, including the followi ng: paragraphs 7.54 (bullet 5), 7.178, 7.260,
7.261, 7.274, 7.285, 7.330, 7.337(ix), 7.338, 7.340, 7.351, 7.357, 7.365-7.370, 7.375, 7.376, 7.379,
7.387, 7.388, 7.390, 7.392, 7.396, 7.397, 7.412, 7.413, 7.417, 7.418, 7.422, 7.424, 7.436, 7.443, 7.446,
7.447, 7.448, 7.460, 7.464, 7.476 (by adding a footnote), 7.479, 7.480, 7.481, 7.495 (by adding a
footnote), 7.499 (by adding a footnote), 7.515, 7.520, 7.526 (by modifying the footnote), 7.528 (by
deleting a footnote), 7.551, 7.554 (also added tw o footnotes), 7.559 (by inserting a new paragraph
consistent with paragraph 7.286), 7.584, 7.586, 7.606 (for clarity with paragraph 7.607), 7.628(iii) and
(iv) (by adding a footnote to each, respectively), 7.633 (by adding a footnote) , 7.636 (also modified a
footnote), 7.637, 7.646, 7.665, 7.689, 7.695, 7.704, 7.707, 7.708, 7.713 (by adding a footnote), 7.736,
7.754, 7.826, 7.864 (by quoting an excerpt from an Exhibit), 7.866 (by adding a footnote), 7.883,
7.947 (also added a footnote), 7.1004, 7.1007 (b y inserting a new paragra ph), 7.1011 (also added a
footnote), 7.1014, 7.1037 (also added a footnote), 7.1039, 7.1097, 7.1140, 7.1142, 7.1155 (by moving
the paragraph), 7.1161, 7.1165, 7.1192, 7.1200, 7. 1213, 7.1222 (by deleting a footnote), 7.1281 (also
added a footnote), 7.1282, 7.1284 (also modified a footnote and deleted another), 7.1285, 7.1307,
7.1311, 7.1314, 7.1332, 7.1351 (by adding a footnote to bullet 5), 7.1360, 7.1361, 7.1449, 7.1458,
7.1459 (by inserting a new paragraph and a footnot e), 7.1460, 7.1469 (by inserting a new paragraph
and five footnotes), 7.1478, 7.1484, 8.1 and foot notes 43, 44, 63, 197, 261, 383, 427, 442, 477, 522,
523, 850, 937, 999, 1011, 1056, 1060, 1076, 1215, 1234, 1294, 1330, 1334, 1337, 1338, 1401, 1456,
1414, 1465, 1496, 1510, 1534 and 1544.
VII. FINDINGS
A. P
ROCEDURAL MATTERS
1. Organization of the Panel's Procedures
7.1 On 21 May 2003, prior to the Panel's adoption of its working procedures, the United States
sent a communication to the Panel in which it "propo se[d] that the Panel organize its procedures to
deal with the threshold Peace Clause issue at the outset of this dispute". It stated, inter alia , as
follows:
"We would suggest that the Panel first r eceive written submissions from both parties
on the applicability of the Peace Clause, to be followed by a meeting of the Panel
with the parties on this issue, and then rebuttal submissions. The Panel would then
make findings on whether any US measure is in breach of the Peace Clause. If the
Panel agrees that Brazil has failed to establish that the US measures are inconsistent
with the Peace Clause, then that would dispose of those claims. If the Panel finds that
the US measures are inconsistent with the Peace Clause, then Brazil could have
recourse to the Annex V procedures with r espect to its Subsidies Agreement claims
on these measures. In either event, briefing and meetings of the Panel with the parties
could then proceed on any claims not disposed of by the Peace Clause findings.
This procedure would satisfy the legal re quirement that certain claims not be
maintained while the Peace Clause is appli cable and provide the Panel with a fair and
orderly means of addressing the issues in this dispute. The United States notes that
the Panel has broad discretion to determin e its working procedures under Article 12.1
of the Understanding on Rules and Procedures Governing the Settlement of Disputes
("DSU"), and, under DSU Article 12.2, the Panel is charged w ith establishing panel
procedures with "sufficient flexibility so as to ensure high-quality panel reports."
Because in this dispute Brazil has made claims under 17 different provisions of the
WTO Multilateral Agreements with respect to numerous US programs under at least

12 US statutes, we believe the Panel's consideration of the critical Peace Clause issue
would be aided by briefing and argumentation focused on this threshold issue."
16
7.2 On 23 May 2003, after the Panel asked Brazil to communicate its views, if any, on the United
States' letter17, Brazil sent a communication opposing the United States' proposal. It stated, inter alia,
as follows:
"The United States has singled out AoA [Agreement on Agriculture] Article 13 as a
"special" provision which allegedly requires special and unprecedented procedural
treatment. Yet DSU Appendix 2, the closed list of "special and additional" rules and
procedures that trump the normal rules of dispute settlement, does not include Article
13 or any other AoA provision, nor does it include the cross-references to the AoA in
Articles 3.1 and 7.1 of the Agreement on Subsidies and Countervailing Measures
(ASCM). There is no support in the DSU, in the Agreement on Agriculture, or
elsewhere in the WTO Agreement for the pr oposition that a separate "mini-trial" on
peace clause issues is required before any claim can be made against subsidies under
the Agreement on Agriculture. Acceptan ce of this proposition would invent a
substantial new obstacle to future claims by any government against agricultural
subsidy programs, altering the rights of Brazil and many other Members, in
contradiction to Article 3.2 of the DSU.
The US notion that two rounds of submi ssions and a special meeting are required
before the parties perform any further work on the case is unprecedented. As the
Panel is aware, the concept of preliminary objections is not new. [ ... ]
The threshold issues posed by AoA Article 13 are no more or less significant than
other threshold issues in many WTO Agreements."
18
7.3 On 28 May 2003, after having heard the views of the parties in the organizational meeting,
the Panel adopted its timetable and working pro cedures in accordance with Article 12.1 of the
Understanding on Rules and Procedures Governing the Settlement of Disputes (the "DSU").19 At the
same time, the Panel indicated that it intended to make a ruling on certain issues on 20 June 2003,
prior to the submission by the parties of their first written submissions. The Panel requested the
parties and invited third parties to address the issues related to the proposed ruling. More specifically,
the communication relating to the proposed ruling stated as follows:
"As indicated in the attached 20 timetable, prior to the submission by the parties of
their first written submissions, the Panel requests the parties to address, in their initial
briefs to the Panel (to be submitted on 5 June 2003), the following:
• whether Article 13 of the Agreement on Agriculture precludes the Panel from
considering Brazil's claims under the Agreement on Subsidies and
Countervailing Measures in these proceedings in the absence of a prior
conclusion by the Panel that certain conditions of Article 13 remain
unfulfilled. In particular, the Panel invites the parties to explain their
interpretation of the words 'exempt from actions' as used in Article 13 of the
Agreement on Agriculture , as well as bringing to the Panel's attention any
other relevant provisions of the covere d agreements and any other relevant

16 Excerpt from the United States' letter dated 21 May 2003. See Annex K item 1 for full
communication.
17 Communication from the Panel dated 21 May 2003. (see Annex L-1 item 1).
18 Excerpt from Brazil's letter dated 23 May 2003. See Annex K item 2 for full communication.
19 See Annex M.
20 Attachment omitted. See Annex M item 2 for the evolution of the timetable of this dispute.

considerations which the parties c onsider should guide the Panel's
consideration of this issue. For greater clarity, the Panel invites the parties,
during this initial stage of the proceedings, to focus on matters of legal
interpretation, rather than upon the su bmission of any factual evidence that
might be associated with the substantive elements of Article13.
As also indicated in the attached timetable, the Panel will invite the parties to submit
any written comments on each other's comme nts on this issue (i.e. on 13 June 2003

The Panel intends to rule on these issues on 20 June 2003 , prior to the parties'
submission of their first written submissions.
As has been indicated, the Panel recognizes th at it may need to revisit certain aspects
of its timetable and working procedures in light of developments during the course of
the Panel procedures, including the nature of the Panel's ruling that is scheduled for
20 June 2003. In particular, in the event th at the Panel were to rule that Article 13
precludes the Panel from considering certain claims raised by Brazil prior to a
conclusion that certain conditions of Article 13 remain unfulfilled, we may decide to
adjust the timetable to permit the parties to make further submission(s) after the
second substantive meeting and to schedul e further substantive meeting(s), as
necessary, with the parties. Related ame ndments to the working procedures may also
be made, if necessary.
With respect to the participation of third parties in these Panel proceedings, we have
carefully considered the parties' comments at this morning's organizational meeting.
In exercise of our discretion to manage these Panel proceedings, we continue to
believe that it would be appropriate in this case for the third parties to have access to
the parties' initial written comments (and any written comments the parties may make
on each others' comments) as well as to have the ability to submit any written
comments they themselves may have on the i ssue that we have identified above. The
Panel considers that such third party partic ipation in this initial stage of the Panel
proceedings is appropriate for the following reasons.
The Panel is aware of the provisions of Article 10.3 of the DSU, which states that
third parties shall receive the submissions of the parties to the dispute to the first
meeting of the Panel. We would also observe that the factual circumstance that
presents itself here is not itself specifically addressed by the DSU. In our view, the
legal issue that the Panel has asked the pa rties to address in their initial briefs will
necessarily have ramifications for the remainder of the Panel proceedings, including
the scope of the first substantive meeting, at which third parties will participate.
We therefore invite the parties to serve also on the third parties their initial briefs and
any responding comments. The Panel will also invite third parties to submit any
written comments they might have concerning the initial phase of these proceedings.
The deadline for any third party comments is 10 June 2003
. The parties' comments to
be submitted on 13 June may, of course, also address comments made by third
parties.
"21
7.4 On 5 June 2003, in line with the schedule set out in paragraph 7.3 supra, the parties submitted
their initial briefs on this question.22 On 10 June 2003, the following six third parties submitted initial

21 Excerpt from the communication from the Panel dated 28 May 2003. (See Annex L-1 item 3 for the
full communication). A corresponding communication was sent to the third parties. (See also Annex L-2
item 1.)
22 See Annex A items 1 and 2.

briefs: Argentina, Australia, European Co mmunities, India, New Zealand and Paraguay. 23 O n 1 3
June 2003, the parties submitted further comments.24
7.5 On 20 June 2003, after carefully considering all these initial briefs, the Panel issued the
following communication to the parties and third parties:
"Article 13(a)(ii) of the Agreement on Agriculture states that domestic support
measures that conform fully to the provisions of Annex 2 of the Agreement on
Agriculture shall be exempt from actions based on Article XVI of GATT 1994 and
Part III of the Agreement on Subsidies and Countervailing Measures (the " SCM
Agreement"). Article 13(b)(ii) of the Agreement on Agriculture states that domestic
support measures that conform fully to certain conditions shall be "exempt from
actions based on paragraph 1 of Article XVI of GATT 1994 or Articles 5 and 6 of the
Subsidies Agreement, provided that such measures do not grant support to a specific
commodity in excess of that decided during the 1992 marketing year." Articles 5 and
6 of the SCM Agreement are each qualified by the proviso that "[t]his Article does not
apply to subsidies maintained on agricultural products as provided in Article 13 of the
Agreement on Agriculture." Article 13(c)(ii) of the Agreement on Agriculture
provides that export subsidies that conform fully to the provisions of Part V of that
Agreement, as reflected in each Member's Schedule, shall be 'exempt from actions
based on Article XVI of GATT 1994 or Articles 3, 5 and 6 of the Subsidies
Agreement'. Article 3.1 of the SCM Agreement, which prohibits export subsidies, is
qualified by the proviso: "Except as provided in the Agreement on Agriculture ...".
These provisions of Article 13 afford a conditional exemption from certain
obligations relating to certain actionable and prohibited subsidies under the
provisions of the SCM Agreement and Article XVI of the GATT 1994 . This
conditionality requires, inter alia , a comparison of facts with the applicable
exemption requirements.
Briefly, Brazil asserts that the Panel can si multaneously consider all of the arguments
and evidence on the substance of its claims under the SCM and Agriculture
Agreements, while the United States asserts that the Panel is precluded from
examining the SCM claims concerning prohi bited and actionable subsidies in the
absence of a prior ruling that th e conditions of Article 13 of the Agreement on
Agriculture are not satisfied, and, even if not, the Panel should exercise its discretion
to order its proceedings in this way. All of the six third parties that made submissions
support the view that the Panel is not pr ecluded from simultaneously considering all
of the arguments and evidence on the s ubstance of Brazil's claims under the SCM and
Agriculture Agreements , or, putting this another way, that conclusions on the
applicability of the Article 13 exempti ons do not have to be made before
consideration of SCM claims in relation to the measures concerned.
We are faced with two questions:
• first
, whether we are required to defer any examination of certain of Brazil's
claims based on Articles 3, 5 and 6 of the SCM Agreement and Article XVI
of the GATT 1994 until after making a ruling or expressing views on the issue
of fulfilment of Agreement on Agriculture Article 13 conditions; and
• second , if not, then how we should exercise our discretion to best structure
our examination of the matter before us.

23 See Annex A items 3-8.
24 See Annex A items 9 and 10.

These questions concern the manner in which we should or must treat the claims of
Brazil based on Articles 3, 5 and 6 of the SCM Agreement and Article XVI of the
GATT 1994 having regard to the provisions of Article 13 of the Agreement on
Agriculture.
We therefore look first to the dispute se ttlement procedures governing disputes under
the SCM Agreement. Article 30 of the SCM Agreement states: "The provisions of
Articles XXII and XXIII of GATT 1994 as elaborated and applied by the Dispute
Settlement Understanding shall apply to consultations and the settlement of disputes
under this Agreement, except as otherwise specifically provided herein."
We thus turn next to the Understanding on Rules and Procedures Governing the
Settlement of Disputes (the "DSU") and to the terms of the SCM Agreement itself (in
order to see whether or not there is anything otherwise specifically provided therein).
Article 1.1 of the DSU is entitled "Coverage and Application". It states that "[t]he
rules and procedures of this Understanding shall apply to disputes brought pursuant to
the consultation and dispute settlement pr ovisions of the agreements listed in
Appendix 1 to this Understa nding (referred to in this Understanding as the "covered
agreements")."
As the Appellate Body has observed, "[a]rticle 1.1 of the DSU establishes an
integrated dispute settlement system which a pplies to all of the agreements listed in
Appendix 1 to the DSU (the "covered agreements"). The DSU is a coherent system
of rules and procedures for dispute settlement which applies to "disputes brought
pursuant to the consultation and disput e settlement provisions of" the covered
agreements."
25 The SCM Agreement and the GATT 1994 are Multilateral Agreements
on Trade in Goods in Annex 1A of the WTO Agreement and are therefore "covered
agreements" listed in Appendix 1 of the DSU. The general DSU rules and procedures
do not set forth any specific distinct way to deal with claims under the SCM
Agreement and the GATT 1994 having regard to the provisions of Article 13 of the
Agreement on Agriculture.
Article 1.2 of the DSU provides, in relevant part, that the rules and procedures of the
DSU shall apply subject to such special or additional rules and procedures on dispute
settlement contained in the covered agreemen ts as are identified in Appendix 2 to the
DSU.
We therefore examine whether Appendix 2 to the DSU identifies any special or
additional dispute settlement rules or procedures relating to the SCM Agreement or to
Article XVI of the GATT 1994.
Appendix 2 of the DSU does not identify Article XVI of the GATT 1994 as a special
or additional rule. It does identify Articles 4.2-4.12 and Articles 7.2-7.10 of the SCM
Agreement as "special or additional rules and procedures". These provisions contain
special procedures and remedies for dis putes involving prohibited and actionable
subsidies governed by the SCM Agreement . However, none of these provisions
purports to confer any sort of precedence or priority for considering SCM remedies in
a dispute involving claims under the Agreement on Agriculture . Furthermore,
Article 7.1 of the SCM Agreement, which is not identified as a special or additional
rule or procedure in Appendix 2 of the DSU, indicates that it applies: "Except as

25 Original footnote : Appellate Body Report, Guatemala – Anti-Dumping Investigation Regarding
Portland Cement from Mexico (" Guatemala – Cement I "), WT/DS60/AB/R, adopted 25 November 1998,
DSR 1998:IX, 3767, para. 64.

provided in Article 13 of the Agreement on Agriculture...". This clearly indicates to
us that this provision must be read in the light of the provisions of Article 13 of the
Agreement on Agriculture . Moreover, as noted in para. 5 above, the substantive
provisions to which these remedial articles are linked – Articles 3, 5 and 6 – stipulate
either that they apply "except as provided in the Agreement on Agriculture" (Article 3
relating to prohibited subsidies), or that they do "not apply to subsidies maintained on
agricultural products as provided in Article 13 of the Agreement on Agriculture"
(Articles 5 and 6.9 of the SCM Agreement, entitled "Adverse Effects" and "Serious
Prejudice", respectively).
The cited provisions of the SCM Agreement refer, as just indicated, to the Agreement
on Agriculture , and some specify more precisely Article 13 of the Agreement on
Agriculture. We therefore examine the rules a pplicable to dispute settlement under
the Agreement on Agriculture , which is also a Multilateral Agreement on Trade in
Goods in Annex 1A of the WTO Agreement and is, therefore, a "covered agreement"
listed in Appendix 1 of the DSU. Article 19 of the Agreement on Agriculture is
entitled "Consultation and Dispute Settlement". It states that the provisions of
Articles XXII and XXIII of GATT 1994, as elaborated and applied by the DSU, shall
apply to consultations and the settlement of disputes under that Agreement.
Appendix 2 to the DSU does not identify any special or additional dispute settlement
rules or procedures relating to Article 13 of the Agreement on Agriculture.
Consequently, consistent with our consideration of the relevant provisions, there is no
special dispute settlement requirement foreseen in the covered agreements in respect
of a panel's consideration of the fulfilment of Article 13 conditions. The issue of
fulfilment of the conditions of Article 13 of the Agreement on Agriculture is to be
resolved using generally applicable DSU rules and procedures. The fact that certain
very specific provisions are included in Appendix 2 of the DSU as special or
additional rules indicates that, when the drafters intended to make a particular
provision applicable as a special or additio nal dispute settlement rule, they did so
explicitly. Therefore, their failure to include a reference to any provision of the
Agreement on Agriculture in the text of Appendix 2 demonstrates that they did not
intend to make any provision of that Ag reement a special or additional dispute
settlement rule. It is not necessary for us to look for any further interpretive guidance
on this issue.
We next turn to the issue of how we should structure our procedures to consider the
matter before us. As we have concluded above, this issue is subject to the DSU but
not otherwise affected by the covered agreem ents. In this regard, within the overall
parameters set by the DSU of prompt and efficient dispute resolution
26, we must
exercise our discretion as to how best to organize our procedures. Our discretion
must be guided by the instructions given to us by the DSU. Pursuant to Article 12.1
of the DSU, "[p]anels shall follow the Working Procedures in Appendix 3 unless the
panel decides otherwise after consulting the parties to the dispute". Moreover, Article
12.2 provides: "Panel procedures should provi de sufficient flexibility so as to ensure
high-quality panel reports, while not unduly delaying the panel process."

26 Original footnote: Article 3.3 of the DSU provides: "The prompt settlement of situations in which a
Member considers that any benefits accr uing to it directly or indirectly u nder the covered agreements are being
impaired by measures taken by another Member is essential to the effective functioning of the WTO and the
maintenance of a proper balance between the rights and obligations of Members."

Article 11 of the DSU, entitled "Function of Panels" provides that the function of
panels is to assist the DSB in discharging its responsibilities under the DSU and the
covered agreements. Accordingly, a pane l should make an objective assessment of
the matter before it, including an objectiv e assessment of the facts of the case and the
applicability of and conformity with the re levant covered agreements, and make such
other findings as will assist the DSB in making the recommendations or in giving the
rulings provided for in the covered agreemen ts. Article 11 contemplates that a panel
must make an "objective assessment of the fa cts of the case and the applicability of
and conformity with the relevant covered agreements." It does not require that a
panel must conduct its proceedings in an y particular way, provided that its
requirements are fulfilled. It is within our discretion to manage our procedures so as
to best fulfil the requirements of Article 11.
Given the potential complexity of the clai ms before us, the conditional nature of
certain of these claims and the volume of evidence which may be introduced by the
parties in support of their claims and arguments, and in order to organize our
proceedings in an orderly, effective and efficient manner which serves to facilitate an
objective assessment of the matter before us, and optimizes use of our resources, we
have adopted the following modifications to our procedures (as indicated in the
attached
27 timetable):
• The Panel intends to express its views on whether measures raised in this
dispute satisfy the conditions in Article 13 of the Agreement on Agriculture ,
to the extent that it is able to do so, by 1 September 2003, 28 and will defer its
consideration of claims under Articles 3, 5 and 6 of the SCM Agreement and
Article XVI of the GATT 1994 as those provisions are referred to in Article
13 of the Agreement on Agriculture until after it has expressed those views.
The Panel's views may be expressed in the form of rulings which could affect
the Panel's further consideration of this dispute.
• In order that third parties may particip ate effectively at the first meeting at
which the claims under Articles 3, 5 and 6 of the SCM Agreement and
Article XVI of the GATT 1994 as referred to in Article 13 of the Agreement
on Agriculture are examined (as necessary), the Panel intends to divide its
first meeting into two sessions, each of which will include a third party
session.
• Accordingly, for the purposes of the fi rst session of the first substantive
meeting on 22-24 July 2003, the Panel does not require the parties to address
claims under Articles 3, 5 and 6 of the SCM Agreement and Article XVI of
the GATT 1994 as referred to in Article 13 of the Agreement on Agriculture .
Having said this, the Panel notes that this does not preclude the parties from
addressing such matters in their first submissions.
• All other claims of Brazil in relation to measures which Brazil maintains do
not involve a consideration of Article 13 of the Agreement on Agriculture
should also be addressed in first submissions, in order for the other party and
third parties to have an opportunity to express their views on any such claims.

27 Attachment omitted. See Annex M item 2 for the evolution of the timetable of this dispute.
28 This date was changed to 5 September by the communication from the Panel dated 30 July 2003.
(See Annex L-1 item 6 and L-2 item 3 for full communication. See Annex M item 2 for the evolution of the
timetable of this dispute.)

• For the purposes of allowing the Panel to express its views on the exemption
conditions of Article 13 of the Agreement on Agriculture by 1 September
2003, in relation to those measures which may be affected by Article 13, full
and complete submissions on factual and legal issues related to Article 13 in
this dispute will need to be provided, at the latest, in the parties' rebuttal
submissions (to be submitted on 22 August 2003).
We recognize that we may need to revisit certain aspects of our timetable and
working procedures in light of devel opments during the course of the Panel
procedures. Related amendments to the working procedures may also be made, if
necessary. We have been mindful of due process considerations in revising our
timetable and will continue to ensure that the parties have reasonable time to prepare
for any subsequent stages of the dispute, as appropriate."29
7.6 On 27 August 2003, the United States sent a lett er requesting that the Panel's views of
5 September be presented in an "interim form". It stated, inter alia, as follows:
"The United States notes that the Panel intends to express its views on the issue of the
Peace Clause by September 5, 2003. No prior panel nor the Appellate Body has
made findings on the Peace Clause. The s ubmissions and material provided to the
Panel to date have demonstrated that the issues involved in the Panel's findings on the
Peace Clause are fact-intensive, complex and sensitive.
While prior panels have made preliminary rulings on procedural issues, no prior panel
has been confronted with the situation presen ted in this dispute. Here, the Panel will
be making substantive findings on key provisi ons of the covered agreements. In this
connection, the United States takes note of the Panel's observation that the fairness of
panel proceedings may require ensuring that the parties receive sufficient opportunity
to comment on new material. The United St ates also takes note of the provisions of
paragraph 2 of Article 15 of the Understanding on Rules and Procedures Governing
the Settlement of Disputes in which Members have agreed that parties should have an
opportunity to comment on a panel's findings before they are final.
In this dispute, the Panel's findings on the Peace Clause are presumably intended to
be dispositive of substantive claims and argum ents of the parties for the remainder of
the panel proceedings. Because of the s ubstantive nature of those findings, the
Panel's findings on September 5 will need to provide the factual basis and basic
rationale underlying the findings. Both parties have a significant interest in those
findings, in terms not just of the ultimate conclusion reached, but also in terms of the
factual findings, rationale underlying th ose findings, and an understanding of the
scope of those findings. Accordingly, in keeping with Article 15.2 of the DSU, and
in order to be fair to both parties, the United States respectfully requests that the
Panel provide Brazil and the United States with the Panel's September 5 Peace Clause
findings in an interim form and provide the parties an opportunity to comment on the
Panel's findings. The United States suggests that, in keeping with the practice in
other panel proceedings and this Panel's timetable for the interim review in this
dispute, two weeks should be sufficient time to comment."
30

29 Excerpt from the 20 June 2003 communication from the Panel. (See Annex L-1 item 4 for full
communication.)
30 Excerpt from the United States' letter dated 27 August 2003, footnotes omitted. (See Annex K item
15 for full communication.)

7.7 On 28 August 2003, Brazil sent a letter opposing the United States' request. It argued,
inter alia, as follows:
"The US letter argues that the Panel must set forth its complete and full reasoning and
factual findings in its 5 September decisi on. Brazil notes that paragraph 20 of the
Panel's 20 June Decision stated that it would 'express its views on whether measures
raised in this dispute satisfy the cond itions in Article 13 of the Agreement on
Agriculture' and would 'express its views in the form of ruling...'. Brazil does not and
would not presume or suggest what form the Panel's "ruling" will or should take.
However, it is within the Panel's discretion, as with many previous panels, to provide
the basic rulings on the preliminary issue and then to further elaborate such rulings in
the final determination.
As the United States recognizes, there will be an opportunity for the parties to
comment on the interim report that the Pa nel will issue following the second meeting
of the Panel with the Parties. Brazil believ es that its procedural rights will be fully
protected by the existing procedural safeguards provided by the interim review
process. The United States has provided no legitimate reasons why its rights would
not also be protected. Both parties will have an equal opportunity to comment on any
decision by the Panel regarding the peace clause at that time.
In sum, Brazil requests that the Panel rej ect the United States request to establish an
interim review process to the Panel's 5 September ruling."
31
7.8 On 29 August 2003, the United States and Brazil each sent a further letter 32 reiterating their
positions.
7.9 On 5 September 2003, in line with the estab lished schedule, the Panel sent the following
communication to the parties and third parties:
"[ ... ]
4. The Panel takes note of the correspondence from the parties dated 27, 28 and
29 August 2003 and declines to make finding s at this stage as to whether measures
raised in this dispute satisfy the conditions in Article 13 of the Agreement on
Agriculture, for the reasons given in its communication dated 20 June 2003. The
Panel's findings on that issue will be in cluded in its interim report, on which the
parties will have the right to comment in accordance with Article 15.2 of the DSU.
5. The Panel has now had the opportunity to consider the parties' and third
parties' evidence and arguments to date . At this stage, the Panel cannot conclude its
assessment of the matter before it on the basis that the measures raised in this dispute
satisfy the conditions in Article 13 of the Agreement on Agriculture. The expression
by the Panel of this view is without prejudice to the Panel's eventual findings, and is
subject to paragraph 6 below. In this c ontext, the Panel is of the view that
consideration, as appropriate, of Brazil's claims under Articles 3, 5 and 6 of the SCM
Agreement and Article XVI of the GATT 1994, as those provisions are referred to in
Article 13 of the Agreement on Agriculture , is warranted in order for the Panel
properly to discharge its responsibilities under the DSU and the relevant covered
agreements. Therefore, the Panel will consider those claims at a second session of
the first substantive meeting.

31 Excerpt from Brazil's letter dated 28 August 2003. (See Annex K item 16 for full communication.)
32 See Annex K items 18 and 19.

6. The Panel also wishes to inform the parties that, on the basis of the evidence
and arguments presented to date, it is una ble to form any view on whether the ETI
Act satisfies the relevant provisions of the Agreement on Agriculture.
7. Regarding the Panel's procedures:
(a) the Panel invites the parties to address in further submissions, due on 9 and
23 September respectively, the claims referred to in paragraph 5 above;
(b) the Panel also invites the parties to address further the issue whether the
export credit guarantee programs at issue constitute export subsidies for the
purposes of the Agreement on Agriculture;
(c) the Panel confirms that items (o), (p) and (q) of its timetable will be
necessary, and confirms the following dates:
 Further submissions of the thir d parties: 29 September 2003;
 First substantive meeting with the parties 7, 8 and (as
(resumed second session): necessary)
9 October 2003;
Third party session: 8 October 2003;
(d) the Panel invites the third parties to address in their further submissions the
claims referred to in paragraph 5 above;
(e) the Panel intends to postpone the second substantive meeting; and
(f) the Panel invites the parties to comment on the attached
33 draft further revised
timetable. Such comments should be submitted no later than close of
business on Tuesday, 9 September 2003."34
7.10 On 12 and 18 September 2003, after havi ng received comments from the parties 35, the Panel
issued further communications revising its timetable.36
2. Rights of third parties in the proceedings
7.11 On 31 July 2003, the European Commun ities sent a communication to the Panel 37 in which it
requested: (a) to have sight of the oral statements of the main parties at the first substantive meeting,
(b) that the Panel ask the parties to provide third parties with copies of their oral statements and
responses to the Panel's questions, and (c) that the Panel confirm that it would make the 5 September
2003 views of the Panel available to the third parties.

33 Attachment omitted. See Annex M item 2 for the evolution of the timetable of this dispute.
34 Excerpt from the communication from the Panel dated 5 September 2003. Footnote omitted. (See
Annex L-1 item 11 for full communication.)
35 United States' letters dated 9, 11, 16 and 17 September 2003 (See Annex K items 20, 22, 24 and 26)
and Brazil's letters dated 9, 10, 16 and 17 September 2003. (See Annex K items 19, 21, 23 and 25.)
36 See Annex L-1 items 12 and 13. See Annex M item 2 for the evolution of the timetable.
37 See Annex K item 6.

7.12 On 1 August 2003, Brazil and the United States each communicated their views on this
issue
38 to the Panel, and the European Comm unities commented on these communications on
4 August 2003.39
7.13 On 5 August 2003, the Panel issued a communication to the parties and third parties in which:
(i) it informed them that it would communicate its 5 September 2003 views to
third parties, as well as to the parties to the dispute, in order to enable them
to participate, as necessary and appr opriate, in any second session of the
first substantive meeting in a full and meaningful fashion; and
(ii) it denied both the European Communities' requests for additional third party
rights. Nonetheless, in view of the phased nature of the first meeting, the
Panel directed the parties to the dispute to make best efforts to ensure that
their submissions to any second session of the first meeting were
understandable either on their own or in conjunction with the submissions to
the first session of the meeting. In particular, such submissions should not
refer to any document to which the third parties did not have access without,
at the very least, a summary, explanation or description of the contents of
that document (or a citation indicating where that document may be found
on the public record).
40
3. Results of econometric model(s) used by Brazil and related communications
7.14 On 9 September 2003, in its further submissi on, Brazil submitted a quantitative simulation in
conjunction with its initial "serious prejudice" arguments under Articles 5(c) and 6.3 of the SCM
Agreement.41 On 7 October 2003, during the resumed session of the first substantive meeting, the
United States requested Brazil to provide inform ation relating to the underlying econometric model
(the "FAPRI42 model"), as well as any modifications made thereto by Dr. Sumner 43, for the purposes
of this dispute. The United States asserted that:
"[T]he report provided by Brazil as Annex I to its further submission does not provide
the model itself, including detailed specificati ons of the equations used therein. As a
result, Brazil is essentially asking the Panel and the United States to accept Dr.
Sumner's results on faith alone. Dr. Glauber
44 has pointed out why Dr. Sumner's
approach is inappropriate for a retrospective analysis of the effect of US subsidies.
Even were Dr. Sumner's approach appropriate, however, Brazil has failed to this point
to provide sufficient evidence to allow the Pa nel to fully understand and evaluate that
model. Thus, quite apart from the flaws identified by Dr. Glauber, Brazil's reliance

38 See Annex K items 7 and 8.
39 See Annex K item 9.
40 Communication from the Panel dated 5 August 2003. See Annex L-1 item 7.
41 "A Quantitative Simulation Analysis of the Impacts of US Cotton Subsidies on Cotton Prices and
Quantities" by Professor Daniel Sumner , reproduced in Annex I to Brazil's further submission of 9 September
2003.
42 "FAPRI" is an acronym for the Food and Agricultural Policy Research Institute.
43 Dr. Daniel Sumner is an expert economist with the Brazilian delegation. See also infra, Section
VII:G, footnote 1323 , relating to the involvement of experts as members of party and third party delegations in
these Panel proceedings
44 Dr. Joseph Glauber is the Deputy Chief Economist, Office of the Chief Economist of the USDA. Dr.
Glauber participated in the resumed session of the firs t substantive meeting and the second substantive meeting
with the Panel as a member of the United States delegation. See also infra, Section VII:G, footnote 1323 ,
relating to the involvement of experts as members of party and third party delegations in these Panel
proceedings

on Dr. Sumner's inadequately explained results, evident throughout Brazil's latest
submission, further demonstrates that Brazil has not established a prima facie case
that US subsidies have the effects complained of."45
7.15 On 14 October 2003, in response to a request by Brazil to provide a precise description of the
information sought, the United States identified the information it requested.46
7.16 On 5 November 2003 47, Brazil indicated that it would provide the written information
requested by the United States "ear ly in the week of 10 November", and that it understood that the
"electronic version" of the model was available for use by the United States Government upon
coordination with FAPRI staff. On 11 November 2003
48, the United States expressed disappointment
that Brazil claimed not to be able to provide an el ectronic version of the model and indicated that the
"the offer by FAPRI to run simulations at the United States request for a fee is not an acceptable
substitute". The United States also requested an extens ion of the timetable in light of Brazil's delay in
providing the requested written info rmation. On 12 November 2003 49, Brazil submitted certain
written information about the model50 and asked the Panel to reject the request of the United States for
an extension of the timetable. The United Stat es sent a further letter, dated 13 November 2003 51,
reiterating its position.
7.17 On 14 November 2003, the Panel issued the following communication to the parties:
"The Panel takes note of the United Stat es' written request of 14 October 2003 for
certain information relating to the quantita tive simulation model used by Dr. Sumner
in his analysis presented in Annex I to Brazil's 9 September 2003 further written
submission. The Panel also takes note of th e parties' related communications dated 5,
11, 12 and 13 November 2003, and the submissions by Brazil on 12 and 13
November 2003.
The Panel confirms the dates in its existing timetable, subject to the following.
The Panel does not require the parties' 18 N ovember further rebuttal submissions, nor
their oral statements during the second Panel meeting, to address the methodology,
equations or parameters underlying the quantitative modelling simulation in Annex I

45 United States' oral statement at the resumed sessi on of the first substantive meeting, para. 56.
(Emphasis in original)
46 United States' letter dated 14 October 2003 (See Annex K item 31). The attachment to the letter
reads as follows:
"Please provide the following information relating to the model used by Dr. Sumner in his analysis
presented in Annex I to Brazil's further submission:

(a) Electronic copies of the actual models used for the baseline and each of the seven scenarios
described in Annex I.

(b) Printed copies of the exact equation specifica tions used for the baseline and for each of the
seven scenarios described in Annex I, including all parameter estimates. (If no such printed
copies currently exist, please develop and provide.)

(c) Documentation of all adaptations to the original FAPRI modeling system made or used by
Dr. Sumner for his analysis presented in Annex I. (If no such documentation currently exists,
please develop and provide.)"
47 See Annex K item 32.
48 See Annex K item 33.
49 See Annex K item 34.
50 Exhibits BRA-313, -314.
51 See Annex K item 35.

to Brazil's further written submission which are directly linked to the information
requested by the United States on 14 October 2003 and the submissions by Brazil on
12-13 November 2003. Having said this, the parties are not precluded from doing so.
Mindful of the requirements of Article 12.4 of the Understanding on Rules and
Procedures Governing the Settlement of Disputes and in keeping with its duty to
conduct an objective assessment of the matter before it, the Panel invites the United
States to submit, on 22 December, in conjunc tion with its responses to any questions
following the second Panel meeting, any comments that it may have on Brazil's
submissions of 12-13 November 2003. Brazil may submit any comments on any
such US comments by 12 January 2004, and the United States may submit any further
comments by 19 January 2004. If necessary, at the discretion of the Panel, a further
Panel meeting with the parties may be held to address this specific material.
This decision is without prejudice to the relevance and significance which the Panel
may ascribe to the quantitative simulati on model and related evidence and
argumentation in its report.
Finally, the Panel wishes to ask the United States to respond, by 22 December, to the
following:
Is the Panel correct in understanding that the US government (including the United
States Department of Agriculture) does not have a license or any other form of
permission (standing or otherwise; free of ch arge or otherwise) to run, electronically,
the FAPRI/CARD model and/or Professor Sumner's adaptations thereto?"
52
7.18 On 8 December 2003, after having heard the view s of both parties at the second substantive
meeting, the Panel communicated the following to the parties:
"1. The Panel has been advised by Brazil that, to the best of Brazil's knowledge
and belief, all of the information used by FAPRI to generate the various results
presented in Brazil's submissions concerning the effects of the subsidies, and their
removal, has been provided to the US in an electronic format. Conceptually speaking,
the information is in two parts: (a) the model used as the basis for generating the
results ('the FAPRI model'), and (b) adaptations to the model and other specific pieces
of information which affect the calcul ations made by the model ('the Brazil
information'). FAPRI has possession of the FAPRI model and the Brazil information.
Brazil only has possession of the Brazil information. Brazil instructed FAPRI as to
the use of the Brazil information that FAPRI then used to generate the various results
presented by Brazil to the Panel.
2. We say that the US has all of the information (ie both the FAPRI model and
Brazil's information) 'to the best of Br azil's knowledge and be lief' because Brazil
itself has never had access to all of the data comprising the FAPRI model, which is
voluminous. FAPRI considers the model to be its own work product. At the request
of Brazil, FAPRI has made all of the in formation available to the US. Why it has
done this in the case of the US, but not Braz il, relates to the relationship (commercial
or otherwise) between FAPRI (which recei ves US funding for its work) and the US
Government. FAPRI has provided all of the information to the US on the express
stipulation that the model not be provid ed to the Panel or Brazil ("the FAPRI
stipulation").

52 Communication from the Panel dated 14 November 2003, reproduced in full.

3. At para 74 of its Opening Statement at the Second Panel Meeting, the US
asks this of the Panel:
'[W]hether it intends the United States to comment on this new
model, documentation, and results by the original 22 December
deadline to file comments on the methodology underlying the Annex
I model.'
4. During the Second Panel Meeting, Brazil advised the Panel that it had no
objection, then, to the US looking at the information provided to it by FAPRI,
notwithstanding the FAPRI stipulation.
53 The Panel acknowledges this, but also notes
that it would be open to Brazil to reconsid er its position depending on anything that
the US may wish to present to the Panel about the FAPRI model.
5. The Panel's view in these circumstan ces is that the US should comment on
the FAPRI model, if it believes that it needs to do so in the interests of presenting its
case to the Panel, by 22 December. The FAPRI stipulation does not, in the Panel's
view, affect the Panel's ability to make an objective assessment of the matter before it
in the terms of Article 11 of the DSU. The Panel will assess the reliability and
relevance of the FAPRI model on the basi s of the evidence presented to it by the
parties.
6. Brazil will be given until 12 January 2004 , to comment on the above US
comments."54
7.19 On 22 December 2003, in line with the above timetable, the United States submitted
"Comments of the United States of Amer ica concerning Brazil's Econometric Model" 55. On
20 January 2004 56, Brazil submitted "Brazil's Comments on the 22 December US Comments
Concerning Brazil's Econometric Model". 57 On 28 January 2004, the United States submitted further
views on this issue 58 as "Comments of the United States of America on Comments by Brazil on US
Comments Concerning Brazil's Econometric Model".59
4. Requests for information under Article 13.1 of the DSU
7.20 In its further rebuttal submission submitted on 18 November 2003, Brazil, in response to the
assertion of the United States that it had not provided precise calculations of the amount of contract
payments to current producers of upland cotton, observed, after explaining Brazil's methodology, that
the Panel had the discretion to request the United States, pursuant to Article 13.1 of the DSU, to

53 The "FAPRI stipulation" refers to the fact that Dr. Babcock of FAPRI stated in his e-mail to
Dr. Glauber of the USDA that: "I am sending you this ma terial with the understanding that it is for use by the
United States and should not be shared with Brazil or other parties." (Brazil submitted a copy of this e-mail in
Exhibit BRA-346.)
54 Second attachment to the communication from the Panel dated 8 December 2003. See Annex L-1
item 18 for full communication.
55 See Annex I item 9.
56 The original deadline of 12 Janua ry 2004 was extended, at the requ est of Brazil, to 20 January 2004
by the Panel's communication dated 24 December 2003. (See Annex L-1 item 20.)
57 See Annex I item 12.
58 The Panel's communication dated 8 December 2003 provided that "[t]he parties may submit any
further comments on each other's comments by 19 January". This deadline was extended, at the request of
Brazil, to 28 January 2004 by the Panel's communication dated 24 December 2003. (See Annex L-1 item 20 for
full communication)
59 See Annex I item 16.

produce information on contract payments made in respect of base acreage in the 1999-2002
marketing years.
60
7.21 On 2 December 2003, during the second substantive meeting, Brazil requested that the United
States submit information that would permit the cal culation of the precise amount of these contract
payments made to current producers of upland cotton. 61 More specifically, it requested farm-specific
planting and base acreage data to determine the amount of upland cotton planted on contract base
acreage during the 1999-2002 marketing years. Brazil to ok note of information that the United States
Department of Agriculture's (USDA) Kansas C ity Administrative Office had provided under the
Freedom of Information Act ("FOIA") to a pr ivate citizen assisting the Brazilian delegation
concerning another programme crop, (i.e. rice) 62, and sought information in a similar format,
according to standard USDA practice.63
7.22 On 8 December 2003, the Panel communicated to the parties that the United States would be
given until 18 December to respond to Brazil's re quest and Brazil would be given until 12 January
2004 to comment on the United States' response.64
7.23 On 18 December 2003 65, the United States informed the Panel that the release of planted
acreage information associated with a particular farm, county, and state number was confidential
information that could not be released under United St ates domestic law, in particular the Privacy Act
of 1974. This was consistent with the position of the United States in Freedom of Information Act
appeals that had considered this issue. 66 Nevertheless, the United States provided, for all programme
crops and for each marketing year: (1) planted acr eage data aggregated for all cotton farms; and (2)
farm-level planted acreage data without any fi elds that could identify the particular farm. 67 T h e
United States further advised the Panel that the USDA had released the information concerning rice in
error and asked that Brazil and its agents return all copies of the erroneous rice release.
7.24 On 22 December 2003, in its responses to th e Panel's questions following the second
substantive meeting, Brazil submitted that the Un ited States had confirmed that it had collected
complete planted acreage, contract base acreage, contract yields, and payment data that would allow it
to calculate with relative precision the amount of direct and counter-cyclical payments made to
current producers of upland cotton in the 2002 marketing year. Brazil also indicated that it could not
calculate direct payment and counter-cyclical pa yment figures because the United States had refused
to provide farm-specific identifying numbers, thus rendering any matching of farm-level information
on contract payments with information on farm-specific plantings impossible.
68
7.25 On 12 January 2004, the Panel made certain observations to the parties on the material
submitted by the United States concerning the Privacy Act of 1974 and made the following request:
"Pursuant to Article 13 of the DSU, the Panel requests the United States to provide
the same data that it agreed to provide in its letters dated 18 and 22 December 2003

60 Brazil's further rebuttal submission , para. 48.
61 Exhibit BRA-369.
62 Exhibit BRA-368.
63 Brazil referred to documents in FOIA cases 03-117, 03-302, 03-103 and 03-082, attached to a
statement by Mr. Christopher Campbell of the "Environmental Working Group" (EWG), reproduced in Exhibit
BRA-316. See also infra, Section VII:G, footnote 1323, relating to the involvement of experts as members of
party and third party delegations in these Panel proceedings.
64 See Annex L-1 item 18 for full communication.
65 See Annex K item 37.
66 The United States submitted Exhibits US-103 through US-107 in support of its arguments.
67 The delivery was made, at the request of Brazil, to the Embassy of Brazil in Washington D.C. The
CD-ROM with the data was delivered to the Panel on 23 December 2003.
68 See Brazil's response to Panel Question No. 196. (See Annex I item 7.)

but in a format which permits matching of farm-specific information on contract
payments with farm-specific information on plantings. The Panel considers it both
necessary and appropriate to seek this inform ation in a suitable format in order to
undertake its mandate to assist the DSB in discharging its responsibilities under the
DSU and the covered agreemen ts. Disclosure is sought to permit an assessment of
the total expenditures of PFC, MLA, CCP a nd direct payments by the US Federal
Government to upland cotton producers in the relevant marketing years.
The United States may again designate the data as confidential in accordance with
paragraph 3 of the Panel's wo rking procedures. Disclosure can be limited to Brazil's
delegation, the Panel and Secretariat staff assisting the Panel. The United States may
also protect the identity of individual producers by, for example, using substitute farm
numbers which still permit data-matching.
A refusal by the United States to provide the information as requested without an
adequate explanation may lead to adverse inferences being drawn.
The Panel reminds Brazil that it may not di sclose the above information outside its
delegation in this proceeding if it is designated by the United States as confidential."69
7.26 The Panel also posed the following additional question to Brazil:
"Please submit a detailed explanation of the method by which one could calculate
total expenditures to producers of upland co tton under the four relevant programmes
on the basis of the data which it seeks."70
7.27 On 20 January 2004 71, the United States noted that it had previously provided data that
permitted calculation of "total e xpenditures" for all decoupled paym ents made to "farms planting
upland cotton" with respect to historical base acr es (whether upland cotton base acres or otherwise).
Thus, the data already provided by the United States to Brazil and the Panel would permit an
assessment of total expenditures of decoupled paymen ts to "farms planting upland cotton". It also
informed the Panel that it was not possible to pr otect the identity of individual producers while
providing the requested data in a format that permitted data-matching because it had already provided,
by farm number, farm-specific contract information. Even in the absence of farm numbers, disclosing
the farm-specific plantings would allow each farm's confidential plantings to be connected to the
USDA farm numbers through the farm-by-farm files previously provided. It submitted that it had
provided the original data with Farm Service Agency (FSA) farm numbers as a result of Brazil's
refusal to consider any alternative that would respect the privacy interests of United States' producers.
The United States responded to certain of the Pa nel's observations on confidentiality under its
domestic law and submitted that there was no basis for an 'inference' of any kind, adverse or
otherwise, because the United States did not have the authority to provide the farm-specific planting
information in the format requested and, further, it had provided both farm-specific and aggregated
contract data that would permit the Panel to make the assessment it identified, i.e. an assessment of
total expenditures of decoupled payments to farms planting upland cotton. The United States also
recalled that panels must take care not to use the information gathered under this authority to relieve a
complaining party from its burden of establishing a prima facie case of WTO inconsistency based on
specific legal claims asserted by it, such that th e Panel could not relieve Brazil of its burden of

69 Excerpt from the communication from the Panel dated 12 January 2004. (See Annex L-1 item 21 for
full text).
70 Panel Question No. 258 posed in a communication from the Panel dated 12 January 2004. (See
Annex L-1 item 21).
71 See Annex K item 42.

advancing and establishing claims and arguments re lating to the key issue in the serious prejudice
claim of the value of decoupled payments benefiting upland cotton.
7.28 On 28 January 2004, Brazil submitted certain documents in accordance with the Panel's
timetable for "any further comments on each other's comments". One of the documents submitted by
Brazil was entitled "Brazil's Comments and Requests Re garding Data Provided by the United States
on 18/19 December 2003 and the US Refusal to Provide Non-Scrambled Data on 20 January 2004".
72.
In it, Brazil submitted that the United States had re fused to provide the information concerning the
amount of contract payments made to current producers of upland cotton, that there were no
legitimate confidentiality concerns that would prev ent the United States from producing the data and,
even if there were, confidentiality procedures under Article 13.1 of the DSU and/or the Panel's
working procedures could have addressed these concer ns. Brazil asked the Panel to draw adverse
inferences (listed in Section 6 of that document) and conclude that the withheld information would
have been adverse to the United States' defence in this case. Furthermore, Brazil asked the Panel to
use the best information available, including the ad verse inferences, to find that the figures Brazil had
estimated under its so-called 14/16
ths methodology were supported by the evidence on the record.73
7.29 On 28 January 2004 74, the United States submitted revised data on a new CD-ROM 75 to
correct for errors it had detected in the data submitted in December.76
7.30 On 30 January 2004, the United States requested that the Panel give it an opportunity to
comment on Brazil's comments of 28 January 2004. 77 On 2 February 2004, Brazil replied, outlining
the limits within which it deemed appropriate for the Panel to grant such opportunity. 78 O n
3 February 2004, the United States replied, refuting Brazil's arguments.79
7.31 On 3 February 2004, after carefully reviewing these letters and the data, the Panel informed
the parties as follows:
"The Panel has noted the US letter da ted 30 January, Brazil's response dated
2 February, and a further letter from the US dated 3 February 2004. Keeping in
mind the dictates of due process and relevant provisions of the covered agreements --
including Article 12.2 of the DSU which requires Panel procedures to provide
sufficient flexibility so as to ensure hi gh-quality panel reports while not unduly
delaying the panel process -- the Panel is of the view that the above revisions to
the timetable [omitted] provide the United States and Brazil sufficient opportunity to
comment on each other's comments. Accord ingly, the US is free to submit its
comments on Brazil's above mentioned submission by 11 February (but no later).
This is without prejudice to any definitive view of the Panel on the characterization of
any of the above communications by the par ties and, in particular, of the document
submitted by Brazil entitled 'Brazil's Co mments and Requests Regarding Data

72 See Annex I item 15.
73 See paragraphs 107 and 108 of "Brazil's 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
2004". (See Annex I item 15.)
74 See Annex K item 43.
75 The content of this CD-ROM is described in Exhibit US-145.
76 See supra, footnote 67.
77 See Annex K item 44.
78 See Annex K item 45.
79 See Annex K item 46.

Provided by the United States on 18/19 December 2003 and the US Refusal to
Provide Non-scrambled Data on 20 January 2004'."
80
7.32 In the same communication, the Panel also made a supplementary request pursuant to
Article 13 of the DSU for the United States to provide:
(i) such of the information requested on 12 January 2004 in the format
requested, as regards payment recipi ents who did not have interests
protected under the Privacy Act of 1974, if any; and
(ii) planting information for farms enrolled in each of the PFC, MLA, DP and
CCP payments programmes for each of the 1999, 2000, 2001 and 2002
marketing years, grouped into three broad categories, according to whether
they had greater or less upland cotton base acreage than upland cotton
planted acreage or upland cotton planted acreage but no upland cotton base
acreage. The category for farms which overplanted their upland cotton base
acres was divided into three sub-categories according to their base acreage
for all covered commodities.
81
7.33 Also in the same communication, the Panel advised the parties as follows:
"The Panel considers it both necessary and a ppropriate to seek this information to
undertake its mandate to assist the DSB in discharging its responsibilities under the
DSU and the covered agreements. However, the Panel reserves its views as to the
extent to which any methodology might be appropriate to determine support provided
to upland cotton in the circumstances of this case.
A refusal by the United States to provide the information as requested without an
adequate explanation may lead to adverse inferences being drawn."
7.34 Also in the same communication, the Panel posed additional questi ons to both parties,
including several questions to the United States related to the Privacy Act of 1974.
7.35 On 11 February 2004, the United States responded to the Panel's questions
82, explaining
inter alia that the USDA was obligated under United St ates domestic law to protect farm-specific
planting data. It also submitted comments 83 on the comments of Brazil 84 to the United States' data
submitted on 18 and 19 December 2003.
7.36 On 11 February 2004, the United States also requested a time extension to respond to the
supplementary request for information due to its very extensive nature and sought specific
clarification of item (b) of the Panel's request. 85 It also requested an opportunity to comment on any
reply which the Panel might permit Brazil to file to the United States comments filed on that day.
7.37 On 13 February 2004, Brazil responded, asking the Panel to reject the requests of the United
States.86 On 16 February 2004, the United States reiterated its position.87

80 Excerpt from the communication from the Panel dated 3 February 2004 (See Annex L-1 item 22 for
full communication.)
81 The full text of the supplementary request is set out in Annex L-1 item 22.
82 See Annex I item 18.
83 See Annex I item 19.
84 See supra, paragraph 7.28.
85 This Panel's request is reproduced as (ii) in paragraph 7.32 supra.
86 See Annex K item 48.

7.38 On 16 February 2004, the Panel provided clar ification of its supplementary requests for
information, as requested by the United States
88, and indicated that it would consider at a later stage
the United States' request for an opportunity to comment. 89 It also granted the United States an
extension of time until 3 March 2004 to submit all remaining data as requested.90
7.39 On 18 February 2004, Brazil submitted a comm unication entitled "Brazil's Comments on US
11 February 2004 Comments on Brazil's 28 Janua ry 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 2004". 91 It provided extensive comments on the Privacy Act of 1974
and argued that WTO Members' domestic laws do not provide a basis for not complying with
obligations to cooperate in a WTO dispute settlement proceeding and to provide, if requested by a
Panel under Article 13 of the DSU, any information, if necessary using special confidentiality
procedures.
7.40 On 3 March 2004, the United States submitted
92 the data requested by the Panel on 3
February 2004, as well as its comments93 on Brazil's 18 February 2004 comments.
7.41 On 10 March 2004, Brazil submitted its comments to the data submitted by the United States
on 3 March 2004. 94 In this comment, Brazil stated, inter alia, that the data provided by the United
States on 3 March 2004 was the best information availa ble before the Panel, and that Brazil no longer
considered that relying on its "14/16ths methodology" would be appropriate.
7.42 On 15 March 2004, the United States submitted its comments on Brazil's comments,
reiterating its criticism of the various calculation methodologies recently advanced by Brazil, and
noting Brazil's statement in its last submission that it "no longer considers that relying on its 14/16 ths
methodology would be appropriate", observed that this meant that the only methodology that Brazil
had brought forward from August 20 03 until January 2004 to allegedl y demonstrate a breach of the
Peace Clause was irrelevant to this dispute.

87 See Annex K item 49.
88 See supra, paragraph 7.36.
89 The Panel, after reviewing Brazil's submission subsequently submitted on 18 February 2004,
granted, by the communication dated 20 February 2004, the United States until 25 February 2004 to comment
on this Brazil's submission. (See Annex L-1 item 24.) On 23 February, the United States sent a letter requesting
an extension of this deadline, and on 24 February, the Panel issued a communication to inform parties that the
deadline would be extended until 3 March 2004. (See Annex K item 50 for the letter and Annex L-1 item 25 for
the communication from the Panel.)
90 The Panel's communication dated 16 February 2004 is set out in Annex L-1 item 23 in full.
91 See Annex I item 22.
92 By a document entitled "Response of the United States of America to the Panel's February 3, 2004
Data Request, as Clarified on February 16, 2004" (S ee Annex I item 24), submitted together with a CD-ROM.
The United States designated the data submitted as confid ential pursuant to paragraph 3 of the Panel's working
procedures. (Paragraph 31 of the document.)
93 Entitled "Comments of the United States of America on the February 18, 2004, Comments of
Brazil". (See Annex I item 23)
94 Brazil requested (in a letter dated 13 February 2004) that in the event the Panel would allow the
extension of the deadline for the United States to submit the data requested by the Panel, Brazil should be given
the opportunity to comment on the data. The Panel granted this opportunity in its communication dated 4 March
2004. (See Annex K item 48 for Brazil's letter and Annex L-1 item 26 for the communication from the Panel.)

5. Other procedural issues
(a) Timing of the service of documents
7.43 On 14 July 2003, Brazil sent a letter 95 complaining about the late timing of delivery of
documents by the United States. On 14 Augus t 2003, Brazil sent another letter stating, inter alia, as
follows:
"As it had already done on two previous occasions, the US did not deliver its answers
to the Panel's questions following the first substantive meeting with the parties by the
time established in paragraphs 17(b) and (d) of the "Working Procedures". Brazil
recalls that the deadline for submitting the parties' answers to the Panel was expressly
confirmed by the Panel on its communication dated 30 July 2003 informing about the
extension of the deadline for the submission of the parties' responses.
As a matter of fact, the electronic version of the US answers, which was due on
11 August, 5:30 pm, was delivered around 11:30 pm, more than 6 hours after the
deadline, more than 6 hours after Brazil deliv ered both its electronic version and hard
copies to the Secretariat and the US. Brazil further notes that no hard copy of the US
answers was made available either to the Secretariat or to Brazil by the deadline. [ ... ]
Brazil respectfully asks the Panel to take note of this new delay and to encourage,
again, the US to respect the deadlines, with a view to ensuring procedural fairness in
these proceedings."
96
7.44 On 19 August 2003, the Panel informed the parties as follows in its communication:
"The Panel has received a communica tion from Brazil dated 14 August 2003 in
which Brazil draws attention to the timing and format of service of the United States'
responses to the Panel's questions, in light of paragraphs 17(b) and (d) of our
Working Procedures, and in which it raises issues of procedural fairness.
The Panel has taken note of the matters raised in the communication from Brazil and
draws them to the United States' attention. The Panel recalls that, at its meeting with
the parties on 22 July 2003, it also drew th e attention of the United States to these
issues as raised by Brazil in connection with the filing of the United States' first
written submission and comments on Brazil's initial brief."
97
7.45 On 2 October 2003, Brazil sent another letter 98 complaining about the timing of the United
States' delivery of documents. 99 On 13 October 2003, after having heard the views of parties at the
resumed session of the first substantive meeting, the Panel communicated the following to the parties:
"The Panel takes note of Brazil's request in its letter dated 2 October 2003 regarding
the late receipt of submissions, and the US response in its letter dated 6 October 2003.
In accordance with paragraph 17(b) of the Panel's working procedures, the Panel sets
the following time for the provision of submissions by the parties: 11:59 pm, Geneva
time on the dates concerned. This time refers to receipt of submissions by the other

95 See Annex K item 3.
96 Excerpt from Brazil's letter dated 14 August 2003. (See Annex K item 10 for full communication.)
97 Excerpt from the communication from the Panel dated 19 August 2003. (See Annex L-1 item 8 for
full communication.)
98 See Annex K item 29.
99 The United States sent a letter on 6 October 2003 responding to Brazil's letter. (See Annex K
item 30.)

party and the Secretariat and not to commencement of transmission. For greater
clarity, this time for receipt of submissions also refers to the time of completion of
receipt of any Exhibits and service of all Exhibits (if necessary, electronically) to the
other party and to the Secretariat as envisag ed in paragraphs 17(a)-(d) of the Panel's
working procedures. All other provisions of the Working Procedures remain
unchanged. The Panel confirms the dates in the revised timetable, as revised in its
communication of 18 September 2003.
The Panel has set this time in light of the repeated service of submissions by the
United States after 5.30 p.m. and in order to ensure due process and secure a balance
between the two parties. The Panel stresses its expectation that the parties will
respect all of the rules and procedures set out in the DSU and in the working
procedures, including the new time set by the Panel above for the dates
in question."
100 101
7.46 On 23 December 2003, Brazil sent another letter on this issue.102
(b) Other extensions of deadlines
7.47 On 29 July 2003, the United States sent a communication to the Panel requesting an extension
of the deadline to respond to the questions posed by the Panel 103, citing the number and complexity of
the questions. After reviewing Brazil's comment 104 on this request, the Panel notified, in its
communication dated 30 July 2003 105, certain modifications to its timetable.
7.48 On 14 August 2003, Brazil sent a written communi cation to the Panel requesting that it be
provided additional time to comment on certain res ponses to the Panel's questions submitted by the
United States on 11 August, on grounds that the United States did not provide complete answers or
documentation that would have allowed Brazil the o pportunity to comment and rebut in its rebuttal
submission which was due on 22 August 2003.
7.49 In a communication dated 19 August 2003, the Panel notified the parties as follows:
"[W]hen each party receives the other part y's rebuttal submission, it is invited,
without delay, to draw the Panel's attention to any specific material on which it has
not had an opportunity to comment and to show cause why it needs such an
opportunity. Upon a showing of good cause, the Panel will permit that party to
comment in writing by 27 August 2003. The Panel is willing to grant such
permission on Saturday, 23 August 2003, if necessary."
106

100 Excerpt from the communication from the Panel dated 13 October 2003. (See Annex L-1 item 15
for full communication.)
101 The Panel notes that the United States' submissions due on 22 December 2003, 28 January 2004, 18
February 2004 and 3 March 2004 were received after the deadline of 23:59, regarding both the paper version
and the electronic version.
102 See Annex K item 40.
103 Posed on 25 July 2003. This was the first of the series of questions subsequently posed by the Panel.
104 Letter dated 29 July 2003. (See Annex K item 5.)
105 See Annex L-1 item 6 and L-2 item 3.
106 Excerpt from the communication from the Panel dated 19 August 2003. (See Annex L-1 item 8 for
full communication.)

7.50 On 23 August 2003, in response to this communication by the Panel, Brazil identified specific
issues on which it deemed that additional time for comment was necessary. 107 On the same day, the
Panel permitted Brazil to comment on such new material by 27 August 2003.108
7.51 On 25 August 2003, the Panel received a comm unication from the United States in which it
also identified specific issues on which it deemed additional tim e for comment necessary. 109 On the
same day, in conjunction with transmitting additional question 67 bis, the Panel permitted the United
States to comment on new material by 27 August 2003.110
7.52 On 23 September 2003, the United States sent a lett er to the Panel requesting extension of the
deadline for submitting its further submissions as we ll as extension of other related deadlines. After
hearing Brazil's views 111, the Panel, on 24 September 2003, notifie d the parties and third parties of
certain modifications to its timetable.112
7.53 On 23 December 2003, in relation to additio nal questions posed by the Panel on
23 December113, Brazil requested an extension of certain deadlines including the deadline for
responses to the specific Panel's questions. 114 After reviewing the United States response 115 to this
request, the Panel notified the parties of further modifications to its timetable.116
6. Least-developed country Members
7.54 Benin and Chad, two least-developed country Me mbers, are involved in these proceedings as
third parties. In accordance with Article 24.1 of the DSU, particular consideration was given to the
special situation of these two Members. In this respect, the Panel notes:
• Benin provided a detailed writte n submission and presented an oral statement at the
first session of the first meeting of the Pa nel. It provided written responses to the
Panel's questions following that session;

• Benin and Chad made a detailed joint writte n submission, and presented separate oral
statements, at the resumed session of the first meeting of the Panel. They provided
joint written responses to the Panel's questions following that session
117;

• in their joint submission, Benin and Chad extensively explained the situation of the
cotton sector in their respective countries;

• Benin, which has a permanent mission in Geneva, was represented by a delegation
headed by its Ambassador, wh ich included a research fellow 118 of the International

107 See Annex K item 12.
108 Panel's communication dated 23 August 2003. (See Annex L-1 item 9.)
109 The United States sent a communication to the Panel on 20 August 2003 foreshadowing that it
would make such request. Brazil sent a communication on 25 August 2003 requesting the Panel to reject the
United States' request. (See Annex K items 11 and 14.)
110 By the Panel's communication dated 25 August 2003. (See Annex L-1 item 10.)
111 Letter dated 23 September 2003. (See Annex K item 28.)
112 Communication from the Panel dated 24 September 2003. (See Annex L-1 item 14.)
113 Communication from the Panel dated 23 December 2003. (See Annex L-1 item 19.)
114 Letter dated 23 December 2003. (See Annex K item 40.)
115 Letter dated 23 December 2003. (See Annex K item 41.)
116 Communication from the Panel dated 24 December 2003. (See Annex L-1 item 20. )
117 The further submission submitted on 3 October 2003, and responses to certain of the Panel's
Questions, submitted on 27 October 2003. ( See Annex E item 4 and Annex J item 14.)
118 Mr. Nicholas Minot. See also infra, Section VII:G, footnote 1501 and footnote 1323, relating to the
involvement of experts as members of party and third party delegations in these Panel proceedings.

Food Policy Research Institute, who presente d the results of a study entitled "Effect
of falling cotton prices on rural poverty in Benin"
119;

• Chad, which does not have a permanent miss ion in Geneva, was represented at the
resumed session of the first substantive meeting by a delegation headed by its
Brussels-based Ambassador, who presented a detailed statement by the Chairman of
the Société Cotonnière du Tchad ("Cotontchad") and the Association Cotonnière
Africaine, Mr. Ibrahim Malloum;

• Benin and Chad had legal advisers from a private law firm;

• the parties and other third parties referred to the special situation of Benin and Chad
in various places 120; and

• the Panel referred to the arguments of Beni n and Chad at paragraphs 7.267, 7.990,
7.1211, 7.1233 and 7.1400 of this report.

B. P
RELIMINARY RULINGS
1. Export credit guarantees for agricultural commodities other than upland cotton
(a) Terms of reference
7.55 The United States requests the Panel to rule that ex port credit guarantee measures relating to
eligible United States agricultural commodities (other than upland cott on) are not within its terms of
reference because this "measure" was not the subject of Brazil's request for consultations.121
7.56 The Panel notes that the United States did not address export credit guarantee measures
relating to agricultural commodities other than upland cotton in terms of substance in its first written
submission.
7.57 Brazil asks the Panel to reject the United States' request, submitting that both its request for
consultations and the accompanying statement of av ailable evidence, as well as the questions it posed
to the United States during consultations, revealed that they covered export credit guarantee measures
relating to all eligible United States agricultural commodities.122
7.58 New Zealand also considers that the Panel should re ject the United Stat es' request because
Brazil had had little choice but to look at a broader commodity coverage in relation to export credits
as the information specific to upland cotton alone was not available.123

119 Brazil also submitted a report by Mr. Nicholas Minot and Ms. Lisa Daniels as Exhibit BRA–244.
120 For example, Brazil has explained the situation in Benin and/or Chad in its further submission dated
9 September 2003 (executive summary included as Annex E item 1) at paragraph 1; in its answers dated 27
October 2003 to questions from the Panel at paragraphs 61, 121, 159 (see Annex I item 5); in Exhibit BRA-294,
and in its further rebuttal submission dated 18 November 2003 (executive summary included as Annex G item
1) at paragraph 87. Numerous exhibits also pertain to the cotton sectors in Benin and/or Chad, in particular,
Exhibit BRA-15, an OXFAM briefing paper, Exhibits BRA-264 through BRA-268 and BRA-294. The United
States referred to the submission of Benin in its respon se dated 11 August 2003 to the Panel's Questions at
paragraph 26 (see Annex I item 2).
121 United States' first written submission, para. 206. For the record, we note that the United States
raised this issue at both meetings of the DSB at wh ich Brazil's request for establishment of a panel was
considered. See the minutes of the DSB meetings in WT/DSB/M/143, para. 27 and WT/DSB/M/145, para. 24.
122 Brazil's oral statement at the first session of the first substantive meeting, para. 94.
123 New Zealand's written submission to the first session of the first substantive meeting, para. 5.02.

7.59 The Panel was established with standard terms of reference 124 that are set out in Brazil's
request for establishment of a panel. That request st ates that "the measures that are the subject of this
request" include:
"Export subsidies, exporter assistance, e xport credit guarantees, export and market
access enhancement to facilitate the export of US upland cotton, and other eligible
agricultural commodities as addressed here in, provided under the Agricultural Trade
Act of 1978, as amended, and other measure s such as the GSM-102, GSM-103, and
SCGP programs, and the Step 1 and Step 2 certificate programs, among others;"125
7.60 It is agreed that this document specifically me ntions other eligible agricultural commodities.
However, Article 6.2 of the DSU provides that a request for establishment of a panel:
"… shall indicate whether consultations were held, identify the specific measures at
issue and provide a brief summary of the le gal basis of the complaint sufficient to
present the problem clearly. …"
7.61 The United States accepts that consultations we re held in respect of export credit guarantee
measures for upland cotton, but contends that co nsultations were not held for other eligible
agricultural commodities. The United States acknowledges that Brazil posed questions in
consultations which extended beyond upland cotton. 126 The Panel notes that during the consultations
Brazil submitted 21 questions in writing to th e United States regarding export credit guarantee
measures, seeking information on the total volume an d value of exports of United States agricultural
goods guaranteed by these programmes, the same in formation for exports of United States upland
cotton only, the total costs of the programmes and the legal basis for the programmes, among other
issues.127 This shows that the actual consultations did include expor t credit guarantee measures
relating to all eligible agricultural commodities.
7.62 The United States takes the view that the consultations could only cover upland cotton
because the other products were not include d in Brazil's request for consultations. 128 Assuming
arguendo that the scope of the written request for consulta tions is determinative, rather than the scope
of the actual consultations, the Panel notes that Brazil's request included the following paragraph:
"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")."
7.63 Footnote 1 to this paragraph read "Except with respect to export credit guarantee programs as
explained below." This should have indicated to the careful reader that the s ubject of the request for
consultations, with respect to export credit guarantee measures only, was different from those
"provided to US producers, users and/or exporters of upland cotton". Looking below, there were two
references to export credit guarantee measures, which read as follows:
"Export subsidies, exporter assistance, e xport credit guarantees, export and market
access enhancement to facilitate the expor t of US upland cotton provided under the
Agricultural Trade Act of 1978, as amended, and other measures such as the

124 Document WT/DS267/15.
125 Document WT/DS267/7.
126 United States' first written submission, para. 198.
127 Exhibit BRA-101. The United States confirmed that these questions were posed to it during
consultations and that it immediately objected to them – see its response to Panel Question No. 8.
128 United States' first written submission, para. 198.

GSM-102, GSM-103, and SCGP programs, and the Step 1 and Step 2 certificate
programs, among others;" (on page 2); and
"Regarding export credit guarantees, export and market access enhancement provided
under the Agricultural Trade Act of 1978, as amended, and other measures such as
the GSM-102, GSM-103, and SCGP programs, Brazil is of the view that these
programs, as applied and as such, violate Articles 3.3, 8, 9.1, and 10.1 of the
Agreement on Agriculture and are prohibited export subsidies under Article 3.1(a)
and item (j) of the Illustrative List of Export Subsidies included as Annex I to the
SCM Agreement. Subsidies provided under these programs are also actionable
subsidies for the purpose of Brazil's claims under Article 6.3 of the SCM
Agreement." (on page 4).
129
7.64 The second of these paragraphs referred to th e three export credit guarantee programmes at
issue "as applied and as such" and made no specific reference to upland cotton, yet almost every other
substantive paragraph and tiret of the request made such a specific reference. Therefore, a plain
reading of that paragraph includes all eligible agricultural commodities.
130 Any uncertainty on the
part of the United States should have been dispe lled by the questions which Brazil posed during the
consultations.131
7.65 Therefore, the Panel concludes that export cr edit guarantee measures relating to all eligible
agricultural commodities were included in Brazil's re quest for consultations, based on its reading of
the text of the request itself. Accordingly, the Panel rejects the United States' contention that they
were not so included and that export credit guara ntee measures relating to eligible agricultural
commodities other than upland cotton are not properly before the Panel.
7.66 The Panel asked the United States whether it had suffered any actual prejudice as a result of
the alleged omission of products other than upla nd cotton from the request for consultations. The
United States replied that the issue of prejudice wa s not relevant to the question whether a measure
not consulted upon may be the subject of panel pr oceedings. Nevertheless, it submitted that it had
suffered an inability to prepare, respond and consu lt with respect to alle gations on measures never
presented in accordance with the DSU. If export credit guarantees with respect to other eligible
commodities were included in the dispute, it would suffer prejudice of having to prepare and defend
its actions in a severely compressed time frame without the benefit of any consultations whatsoever.
132
7.67 We note the fact that the United States declin ed to respond to the questions posed by Brazil
during consultations concerning ex port credit guarantees relating to e ligible commodities other than
upland cotton. On a plain reading of the request for consultations, export credit guarantee measures
were challenged by Brazil in relation to all elig ible agricultural commodities. If a Member is
uncertain as to the scope of the measures referred to by another Member in a request for consultations,
and chooses not to seek clarification, it cannot rely on its own uncertainty as a jurisdictional bar to a
Panel finding on the measures. Members have an obligation under Article 3.10 of the DSU to engage
in WTO dispute settlement procedures in good faith in an effort to resolve the dispute.

129 Document WT/DS267/1.
130 The United States does not disagree that the request for establishment of a panel can be understood
to indicate that Brazil's claim related to products othe r than upland cotton, although it submits that Brazil was
not entitled to add the words "other eligible agricultural commodities" to its request for establishment of a panel
to broaden the scope of the challenged measures. See the United States' response to Panel Question No. 11.
131 The title "" was added by the Secretariat when it
circulated a copy of the request for consultations to Members. The title did not appear in the original
communication sent from the Permanent Mission of Brazil to the Permanent Mission of the United States and is
therefore not a legally relevant consideration here.
132 United States' response to Panel Question No. 10.

7.68 Given the Panel's finding on the scope of the tw o requests, it is not strictly necessary to
examine the relationship between them. However, the Panel takes note of the United States' concern
that the request for establishment of a panel incl uded the words "and other eligible agricultural
commodities as addressed herein" which did not appear in the request for consultations. There is no
requirement in the DSU that the language in the request fo r establishment of a panel should be a
duplicate of the request for consultations. Rather, the difference in language between Article 4.4,
which requires a request for consultations to identif y the measures at issue, and Article 6.2, which
requires a request for establishment of a panel to id entify the "specific" measures at issue, suggests
that the measures will be identified in sharper focus in the latter request. 133 Indeed, one of the
purposes of consultations is that each party should gain a better understanding of the other's position,
which may often lead to differences between the two requests.
7.69 Therefore, the Panel rules that export credit guarantees to facilitate the export of United States
upland cotton, and other eligible agricultural commodities as addressed in document WT/DS267/7,
are within its terms of reference.134
(b) Statement of available evidence
7.70 The United States also requests the Panel to rule that Brazil could not advance claims under
either Article 4 or Article 7 of the SCM Agreement with respect to export credit guarantee measures
on eligible agricultural commodities other than upland cotton because it did not include a statement of
available evidence with respect to such export credit guarantees in accordance with Articles 4.2 and
7.2 of that Agreement.135
7.71 In its first written submission, the United States argued that the statement of evidence
attached to Brazil's request for consultations provid ed further proof that the request for consultations
did not extend beyond export credit guarantees for upland cotton. 136 After the Panel's 25 July 2003
communication relating to its intended ruling that ex port credit guarantee measures in respect of other
eligible agricultural commodities were within its terms of reference, the United States foreshadowed a
request for a preliminary ruling in its responses to Panel questions following the first session of the
first Panel meeting. 137 The United States first clearly requested a ruling on the adequacy of Brazil's
statement of available evidence with respect to export credit guarantees on eligible agricultural
commodities other than upland cotton in its 30 September 2003 further submission.138
7.72 Brazil asks the Panel to reject the United States' re quest. Brazil asserts that the United States'
request is not new and is untimely, groundless and "mooted by" the Panel's communication of
25 July 2003 indicating that the Panel intended to rule that export credit guarantees to facilitate the
export of United States upland cotton and other e ligible agricultural comm odities are within the
Panel's terms of reference.
139
7.73 The Panel first recalls that the United States ha s made allegations of inadequacy in Brazil's
statement of available evidence under both Articles 4.2 and 7.2 of the SCM Agreement.

133 We note that the Panel in Canada – Wheat Exports and Grain Imports was also of this view: see
para. 15 of the preliminary ruling set out at para. 6.10 of that Panel Report (circulated to Members, currently on
appeal).
134 The Panel communicated to the parties and third parties in a letter dated 25 July 2003 that it
intended to make this ruling in this report, in order to assist them in deciding what argumentation and evidence
to submit in their answers to questions and rebuttals.
135 United States' further written submission, para. 9.
136 United States' first written submission, para. 197.
137 United States' response to Panel Question No. 3, footnote 3.
138 United States' further written submission, paras. 9 ff.
139 Brazil's oral statement at the resumed session of the first substantive meeting, paras. 73-78.

7.74 Article 4.2 of the SCM Agreement , in Part II of that Agreement, deals with requests for
consultations relating to alleged prohibited subsidies. With respect to such alleged prohibited
subsidies, it requires that: "A request for consu ltations ... shall include a statement of available
evidence with regard to the existence and nature of the subsidy in question."
7.75 With respect to the United States' reque st pertaining to Article 4.2 of the SCM Agreement ,
during the course of the Panel proceedings, Brazil clarif ied that its export subsidy claims under Part II
of the SCM Agreement included export credit guarantees under the GSM 102, GSM 103 and SCGP
programmes as they relate to upland cotton and other e ligible agricultural commodities. It is clear to
us that our terms of reference include Brazil's prohibited subsidies claims under Article 3 of the SCM
Agreement in relation to cotton and other eligible agricultural commodities.
140 I t i s t h e r e f o r e
appropriate for us to address here the United States' allegations of inadequacy in Brazil's statement of
available evidence under Article 4.2 of the SCM Agreement.
7.76 By contrast, Article 7.2 of the SCM Agreement , in Part III of that Agreement, deals with
requests for consultations relating to alleged actionable subsidies. With respect to such alleged
actionable subsidies, it requires that: "A request for consultations ... shall include a statement of
available evidence with regard to (a) the existence and nature of the subsidy in question, and (b) the
injury caused to the domestic industry, or the nullif ication or impairment, or serious prejudice caused
to the interests of the Member requesting consultations." (footnote omitted)
7.77 In our 3 November 2003 communication, we indicat ed an intention to rule that Brazil had
provided a statement of available evidence with respect to export credit guarantee measures relating to
eligible United States agricultural commodities othe r than upland cotton under Article 7.2 of the SCM
Agreement.141 As we indicated there, our intention at that time was to assist the parties in deciding
what evidence and argumentation to submit in the c ourse of the Panel proceedings. In light of the
particular circumstances of this dispute and, more specifically, the long-standing issue of the product
scope of Brazil's claims pertaining to United States export credit guarantee measures, we made it clear
that neither party should consider it was justified in withholding any relevant evidence from the Panel
for any reason.
7.78 In relation to the United States' allegations of inadequacy under Article 7.2 of the SCM
Agreement, it is now clear that Brazil's allegations of "serious prejudice" under Part III of the SCM
Agreement are in respect of export credit guarantees under only one of the United States export credit
guarantee programmes – GSM 102 – and only as that programme applies to upland cotton.
142 In light
of Brazil's limitation of the product scope of its actio nable subsidy claims to upland cotton, and of our
exercise of judicial economy in respect of that claim 143, it is no longer necessary for us to make nor

140 We recall our ruling supra, para. 7.69.
141 See Annex L to this report.
142 It is clear that Brazil's actionable subsidy clai ms relating to export credit guarantees under the
GSM 102 programme do not relate to agricultural products other than upland cotton from, inter alia, Brazil's
statement that "the only CCC export credit guarantee program that significantly contributed to the upland
cotton-related serious prejudice suffered by Brazil wa s the GSM-102 program...". See Brazil's response to
Panel Question No. 139(a), para. 77. Moreover, Brazil stated:

"[e]ven if the United States were to make 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 Agr eement on Agriculture, or on its prohibited subsidy
claims under the SCM Agreement, or on its actionable subsidy claims with respect to upland cotton."
See Brazil's 22 August comments on United States' response to Panel Question No. 3, para. 5.

143 See infra, Section VII:G.

substantiate that intended ruling in respect of the ad equacy of Brazil's statement of available evidence
under Article 7.2 of the SCM Agreement.144
7.79 Accordingly, we limit our examination here to whether Brazil included a statement of
available evidence with respect to export credit gua rantees on other eligible agricultural products in
accordance with the requirement pertaining to its export subsidy allegations in Article 4.2 of the SCM
Agreement.
7.80 As we have already mentioned, in respect of claims concerning alleged prohibited subsidies,
Article 4.2 of the SCM Agreement provides:
"A request for consultations under paragraph 1 shall include a statement of available
evidence with regard to the existence and nature of the subsidy in question."
7.81 Appendix 2 of the DSU identifies this provision as a "special or additional rule or procedure".
In respect of such special or additional rules, Article 1.2 of the DSU provides:
"The rules and procedures of this Understanding shall apply subject to such special or
additional rules and procedures on disput e settlement contained in the covered
agreements as are identified in Appendix 2 to this Understanding. To the extent that
there is a difference between the rules a nd procedures of this Understanding and the
special or additional rules and procedures set forth in Appendix 2, the special or
additional rules and procedures in Appendix 2 shall prevail."
7.82 To the extent that there is a difference between the rules and procedures of the DSU and the
special or additional rules, the latter will prevail. A request for consultations relating to prohibited
subsidies must therefore satisfy the requirements in Article 4.2 of the SCM Agreement as well as the
standard requirements set out in Article 4.4 of the DSU.145
7.83 Brazil's "statement of available evidence" anne xed to its request for consultations contains
multiple references to alleged United States prohibited (and actionable) subsidies to upland cotton. It
also contains two points specifically referring to United States export credit guarantee programmes.
These read:
"US export credit guarantee programs have caused serious prejudice to Brazilian
upland cotton producers by providing below-ma rket financing benefits for the export
of competing US upland cotton;
US export credit guarantee programs, since their origin in 1980 and up the present,
provide premium rates that are inadequate to cover the long-term operating costs and
losses of the programs; in particular there we re losses caused by large-scale defaults
totalling billions of dollars that have not been reflected in increased premiums to
cover such losses [...]"

144 The evidence properly before the Panel is a sepa rate issue from the adequacy of the statement of
available evidence. Thus, this does not affect the ev idence which we may take into account when examining
Brazil's actionable subsidy claims relating to the export credit guarantee measures at issue.
145 See for example, Appellate Body Report, US – FSC, paras. 159-161 . Article 4.4 of the DSU
provides:

"All such requests for consultations shall be notified to the DSB and the relevant Councils and
Committees by the Member which requests consultations. Any request for consultations shall be
submitted in writing and shall give the reasons for th e request, including identification of the measures
at issue and an indication of the legal basis for the complaint."

7.84 The first of these paragraphs -- which refers to "serious prejudice" -- is textually limited to
upland cotton. The second -- which refers to United States' export credit guarantee "programmes" and
contains language reflecting certain elements set out in item (j) of the Illustrative List of Export
Subsidies in Annex I of the SCM Agreement
146 -- is not so limited. The United States contends that
this non-limitation "does nothing to expand" the scope of the statement of available evidence.147
7.85 We disagree. Particularly when this pa ragraph is read in light of footnote 1 148 of the request
for consultations, a careful reader should have been al erted to the fact that this paragraph referred to
alleged subsidies arising from export credit guarantees under the challenged programmes, without any
limitation to upland cotton or any other particular product or products. Brazil referred to the three
export credit guarantee programmes by name – GSM 102, GSM 103 and SCGP – elsewhere in its
consultation request, thereby clarifying the pa rticular United States export credit guarantee
programmes at issue.
7.86 We read Brazil's statement of available evidence, insofar as Brazil's export subsidy claims are
concerned, to refer to each of the three challe nged United States export subsidy programmes as they
relate to upland cotton and other eligible agricultural products.
7.87 It is not entirely clear to us th at the United States challenges the adequacy of the statement of
available evidence in terms of evidence with respect to the "existence" or "nature" of these alleged
subsidies with respect to any product other than upland cotton. However, to the extent that the United
States makes this challenge, we see nothing in the text of Article 4.2 of the SCM Agreement that
would necessarily require Brazil to identify specifically or explicitly the products for which the
programmes were provided, the amounts provided, or indicate that they existed beyond upland cotton,
as the United States contends. 149 This would have fallen within the scope of the export credit
guarantee "programmes" already identified by Brazil.
7.88 Article 4.2, by its terms, requires that the complaining party include an expression in words of
the facts available at the time of the consultation request concerning the "existence" and "nature" of
the subsidy in question. It would be illogical to exp ect that this was meant to refer to the universe of
all "available" evidence. Rather, this must be take n to refer to evidence available to the complaining

146 Brazil's statement of available evidence alleges th at the US export credit guarantee programmes at
issue "provide premium rates that are inadequate to cover the long-term operating costs and losses of the
programs; in particular there were losses caused by large- scale defaults totalling billions of dollars that have not
been reflected in increased premiums to cover such lo sses." Item (j) similarly focuses on a comparison of
premium rates of export credit guarantee programmes and long-term operating costs and losses in order to
discern whether the former are inadequate to cover the la tter. Item (j) reads as follows: "The provision by
governments (or special institutions controlled by governments) of export credit guarantee or insurance
programmes, of insurance or guarant ee programmes against increases in th e cost of exported products or of
exchange risk programmes, at premium rates which are inadequate to cover the long-term operating costs and
losses of the programmes." While it may not be appropriate to limit a statement of available evidence to the text
of the relevant legal provisions, we note that Brazil refers elsewhere in its statement to evidence on which it
relies. The similarity of the language used by Brazil in its statement of available evidence and the language in
item (j) provides an insight into aspects of the alleged prohibited export subsidy forming the subject of Brazil's
statement of available evidence.
147 United States' further written submission, para. 11.
148 As already indicated, Brazil's request for consultations states:

"The measures that are the subject of this 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 theret o providing such subsidies (including export credits), grants, and
any other assistance to the US producers, users and exporters of upland cotton ('US upland cotton
industry')."
1Except with respect to export credit guarantee programs as explained below. [original footnote].
149 United States' further written submission, para. 11.

Member. This evidence available to the co mplaining Member goes towards identifying the
"existence" and "nature" of the subsidy in question, including available evid ence of the character of
the measure as a "subsidy".150
7.89 Brazil's statement of available evidence indicat es Brazil's view that the character of the
alleged subsidy lay in the provi sion of export credit guarantees unde r programmes "at premium rates
that are inadequate to cover the long-term operati ng costs and losses of the programs; in particular
there were losses caused by large-scale defaults to talling billions of dollars that have not been
reflected in increased premiums to cover such losses."
7.90 Brazil therefore had evidence available to it at that time which led it to conclude that the
United States was providing a prohibited export subsid y of this nature and character under the three
identified export subsidy programmes, without any limitation to a particular product or products.
7.91 In this context, we note that Brazil's "statement of available evidence" indicates that:
"2. The evidence set out below is evid ence available to Brazil at this time
regarding the existence and nature of those subsidies, and the adverse effects caused
by them to the interests of Brazil. It reflects the presently available evidence
regarding the claims reflected in Brazil's request for consultations and is supported by
documents that are described and set out in United States Department of Agriculture
(USDA) and non-governmental internet loca tions set out in paragraph 4 below.
Brazil reserves the right to supplement or alter this list in the future, as required."151
7.92 We further note that, among the various websites and documents that Brazil identifies in order
to substantiate its statement that United St ates export credit guarantee programmes are run at
"premium rates that are inadequate to cove r the long-term operating costs and losses of the
programmes" is a website maintained by the United States "Congressional Budget Office", concerning
"Current Budget Projection". That website cont ains CBO projections for United States government
mandatory and discretionary spending. In a table entitled "CBO's Baseline Projections of Mandatory
Spending, Including Offsetting Receipts", there is an entry for the "Commodity Credit Corporation" –
the entity administering the United States' e xport credit guarantee programmes – accompanied by
certain data pertaining to spending and offsetting receipts.
7.93 Neither this entry, nor the related data, c ontain any indication of limitation of Brazil's
allegations concerning the export credit guarantee programmes to any specific product, such as, for
example, upland cotton. This budgetary projection evidence could reasonably be taken as evidence
available to Brazil that led it to conclude that the United States' export credit guarantee programmes
are run at "premium rates that are inadequate to cover the long-term operating costs and losses of the
programmes."
7.94 The United States further contends that the statement did not contain all of the evidence
available to Brazil at the time of the request for consultations, and that Brazil deliberately withheld
certain evidence that was available to it.152
7.95 While objective confirmation by a panel of the to tality of evidence available to Brazil at the
time that it made its consultation re quest would be difficult, Brazil has submitted to us that its request
for consultations and statement of available ev idence submitted on 27 September 2002 "offer[ed] the
quite limited information it knew at the time a bout the CCC export credit guarantee programs. It

150 See Appellate Body Report, US – FSC, paras. 159-161.
151 WT/DS267/1, p.5, para. 2. The electronic version of the document contains hyperlinks to the
identified websites.
152 United States' further written submission, paras. 11-12.

sought to use the consultation process to gather info rmation that was readily available to the United
States."
153
7.96 It is clear to us that Article 4.2 of the SCM Agreement requires a complaining Member to
include more information about its case in its requ est for consultations than is otherwise required
under the DSU.
7.97 As we have already mentioned, by virtue of Article 1.2 of the DSU, to the extent that there is
a difference between Article 4.2 of the SCM Agreement and the rules and procedures in the DSU,
Article 4.2 would prevail. 154 Article 4.4 of the DSU requires that: "Any request for consultations
shall be submitted in writing and sha ll give the reasons for the request, including identification of the
measures at issue and an indication of the legal basis for the complaint." Thus, Article 4.4 of the DSU
merely requires "identification" of the measures at issue and an "indication" of the legal basis for the
complaint. This is a different requirement to that of Article 4.2 of the SCM Agreement.
7.98 This additional requirement in Article 4.2 of the SCM Agreement serves to provide a
responding Member with a better understanding of the matter in dispute and serves as the basis for
consultations. The statement of available evidence informs the responding Member of facts at the
disposal of the complaining Member at the time it requests consultations about the prohibited subsidy
it alleges is being granted or maintained.
155
7.99 However, Article 4.2 does not require disclosure of all facts and evidence upon which the
complaining Member will ultimately rely in th e course of the dispute settlement proceedings. 156
Article 4.3 explicitly states that one of the purposes of consultations shall be to "clarify the facts of the
situation". This implies that additional f acts and evidence will be developed during the
consultations.157 This is consistent with the view that a central purpose of consultation in general,
and of consultations under Article 4 of the SCM Agreement in particular, is to clarify and develop the
facts of the situation.
7.100 The statement of available evidence directs atte ntion to the measures concerned. It is the
starting point for consultations, and for the emerge nce of more evidence concerning the measures by
reason of the clarification of the "situation". If the dispute proceeds to th e panel stage, additional
evidence may well come to light by reason of the parties' participation in the panel procedures,
including in response to the panel's questions and requests for information.
7.101 It is therefore credible that Brazil's statement of available evidence indicated the evidence that
was available to Brazil at the time that led it to conclude that the United States was providing a
prohibited subsidy. As we have observed in paragraph 7.92 above, at least one of the website links
cited in the "statement of available evidence" cont ained evidence that would reasonably be relevant to
substantiate such an allegation.158

153 Brazil's oral statement at the resumed session of the first substantive meeting, para. 78.
154 See supra, paragraph 7.81.
155 See Panel Report, Australia – Automotive Leather II, para. 9.29.
156 We find support for this proposition in Panel Report, Australia – Automotive Leather II,
paras. 9.27-9.29.
157 Indeed, consultations may play a significant role in developing the facts in a dispute settlement
proceeding. For example, the Appellate Body has observed that "[...] the claims that are made and the facts that
are established during consultations do much to shape the substance and the scope of the subsequent panel
proceedings." See Appellate Body Report, India – Patents (US), para. 94.
158 We refer to the particular circumstances of this case. We do not mean to imply that mere reference
in a complaining Member's statement of available evidence to a list of websites would invariably be appropriate
or sufficient for the purposes of Article 4.2 of the SCM Agreement. It is clear to us, how ever, that there is no

7.102 The United States has not demonstrated that Braz il actually had at its disposal any additional
evidence that it failed to include in its statement of available evidence. Even if this had been
established (and this might arguably not have been di fficult, in light of the large volume of evidence
that was subsequently submitted), it is not the Pane l's view that the statement of available evidence
must be absolutely comprehensive and exhaustive of the entire universe of all available evidence. To
rule otherwise would go well beyond the purpose of consultations, to whic h such a statement is
directed, and create a jurisdictional obstacle which would run counter to an underlying rationale of the
procedural rules of WTO dispute settlement, which are designed to promote, not the development of
litigation techniques, but the fair, prompt and effective resolution of trade disputes.159
7.103 For all of these reasons, assuming arguendo that the United States' request was timely 160, the
Panel rules that Brazil provided a statement of av ailable evidence with respect to export credit
guarantee measures relating to upland cotton and elig ible United States agricultural products other
than upland cotton, as required by Article 4.2 of the SCM Agreement.161
2. PFC and MLA payments
(a) Expired programmes
7.104 The United States requests the Panel to rule that pr oduction flexibility contract ("PFC")
payments and market loss assistance ("MLA") payments are not within its terms of reference because
they expired prior to Brazil's request for consu ltations. Consultations under Article 4.2 of the DSU
cannot cover expired measures, and measures not th e subject of consultations cannot fall within a
panel's terms of reference.162 The United States did not address these payments in terms of substance
in its first written submission.
7.105 Brazil asks the Panel to reject the United States' request, submitting that a panel is required to
examine the effects flowing from expired measures in order to conduct an objective assessment of a
serious prejudice claim. Otherwise, the actionable subsidies provisions of the SCM Agreement would
be redundant, as a Member could easily tailor its measures in a fashion which effectively
circumvented these disciplines.163
7.106 New Zealand considers that these measures should be within the scope of the Panel's
consideration, particularly when the programmes in question in fact continue in a slightly different
form, and given that serious prejudice claims may necessitate consideration of trends over a number
of years.
164
7.107 The parties agree that PFC and MLA payments were made under legislation that no longer
exists. PFC payments constituted a progra mme under the FAIR Act of 1996 which no longer

requirement under Article 4.2 of the SCM Agreement for a complaining Member to establish a prima facie case
in its statement of available evidence.
159 Article 3.10 of the DSU. See Appellate Body Report, US – FSC, para. 166.
160 In light of our ruling, it is not necessary for us to address the issue of timeliness here.
161 The Panel communicated to the parties on 3 November 2003 that it intended to make this ruling in
this report, in order to assist them in deciding what argumentation and evidence to submit in their further
rebuttal submissions.
This ruling is, of course, without prejudice to the issue of whether or not a panel would be required to
dismiss claims under Article 3 of the SCM Agreement because the complaining Member did not include a
sufficient statement of available evidence in its request for consultations within the meaning of Article 4.2 of the
SCM Agreement.
162 United States' first written submission, para. 211.
163 Brazil's oral statement at the first session of the first substantive meeting, para. 144; its response to
Panel Question No. 15 and its closing statement at the first session of the first substantive meeting, para. 4.
164 New Zealand's written submission to the first session of the first substantive meeting, para. 5.01.

authorizes payments.
165 MLA payments were made under four separate annual Acts in 1998, 1999,
2000 and 2001, discussed below. The authorizing legisl ation allocated these payments to a particular
crop year (in the case of PFC payments) or fiscal year (in the case of MLA payments). All those
measures and years of allocation expired prior to th e date of Brazil's request for establishment of a
panel. This is a different situation from that confronting some previous panels, where measures
expired during their proceedings.
7.108 The Panel notes that Brazil pursues claims only in respect of the subsidies and domestic
support provided under the expired programmes and authorizing legislation, in other words, the
payments themselves.
166 Brazil does not seek any relief in respect of the PFC and MLA programmes
or authorizing legislation "as such". Therefore, the Panel only considers whether the payments are
within its terms of reference.
7.109 Brazil does not seek any recommendation that PFC and MLA payments be brought into
conformity with the Agreement on Agriculture or the GATT 1994 but only requests findings that those
made during the 1999-2001 marketing years are not exempted from actions by Article 13 and that
they caused and continue to cause serious prejudice to the interests of Brazil in violation of
Articles 5(c) and 6.3(c) and (d) of the SCM Agreement and Articles XVI:1 and XVI:3 of the
GATT 1994.167
7.110 PFC and MLA payments had already been made at the date of the establishment of the Panel.
In that sense, they had not expired, but simply occurred in the past, which will be true of most
subsidies challenged in a claim of actual serious pr ejudice. We agree with the following statement of
the Panel in Indonesia – Autos:
"We note that at any given moment in time some payments of subsidies have
occurred in the past while others have yet to occur in the future. If we were to
consider that past subsidies were not relevant to our serious prejudice analysis as they
were "expired measures" while future me asures could not yet have caused actual
serious prejudice, it is hard to imagine any situation where a panel would be able to
determine the existence of actual serious prejudice."168
7.111 However, to the extent that the payments constituted programmes "as applied", Brazil is
challenging expired measures and the Panel will therefore consider the preliminary objection further.
7.112 The United States argues that for this reason these measures do not fall within the Panel's
terms of reference. It cites Article 4.2 of the DSU which provides:
"2. Each Member undertakes to accord symp athetic consideration to and afford
adequate opportunity for consultation regard ing any representations made by another
Member concerning measures affecting the operation of any covered agreement taken
within the territory of the former."(footnote omitted)
7.113 The United States argues that measures that are no longer in effect at the time of consultations
cannot be "affecting the operation of any covered agreement" at that time within the meaning of
Article 4.2 of the DSU and therefore cannot be "measures at is sue" within the meaning of Article 6.2
of the DSU.169 Brazil argues that Article 4.2 has no temporal connotation.170

165 Nevertheless, the PFC programme was basically continued with modifications in the FSRI Act of
2002, as discussed in Section VII:D of this report.
166 See Brazil's first written submission, para. 352 and Brazil's further written submission, para. 471.
167 See Brazil's further written submission, para. 471 and its response to Panel Question No. 250.
168 See the Panel Report, Indonesia – Autos, para. 14.206.
169 See United States' response to Panel Question No. 15.

7.114 Article 4.2 of the DSU was applicable to Brazil's request for consultations in this dispute. The
rules and procedures in the DSU are applicable to disputes under a ll the covered agreements, subject
to any special rules and procedures listed in Appendix 2. 171 There are no special rules concerning
requests for consultations that would prevail over Article 4.2 in this dispute.
7.115 Article 4.2 of the DSU contains the word "affecting" which, in the English and French
versions, is a participle that refers not to the stat us of measures but rather to the way in which they
relate to a covered agreement. This is consis tent with the Spanish version which does not use a
participle but rather a subjunctive verb in the phrase " medidas que afecten " which simply indicates
measures of the type which may affect the operation of any covered agreement.
7.116 This is consistent with Article 3.3 of the DSU which states that:
"The prompt settlement of situations in wh ich a Member considers that any benefits
accruing to it directly or indirectly under the covered agreements are being impaired
by measures taken by another Member is essential to the effective functioning of the
WTO and the maintenance of a proper balan ce between the rights and obligations of
Members."
7.117 This provision is phrased in the present tense in all three authentic texts. It refers to situations
in which a Member "considers" (present tense) th at any benefits accruing to that Member under the
covered agreements "are being impaired", (pr esent continuous tense) by measures "taken" (past
participle) by another Member. This provisi on focuses on the present nature of the alleged
impairment of benefits but does not address whet her or not measures themselves must still be in
effect.
7.118 In light of the above, the Panel does not consid er that Article 4.2 supports an interpretation
that a request for consultations cannot concern meas ures that have expired, or payments made under
programmes that are no longer in effect, where the Member requesting consulta tions represents that
benefits accruing to it directly or indirectly under the covered agreements are being impaired by those
measures.
7.119 Brazil's request for consultations alleges that the use of the measures specified in the request
"causes adverse effects, i.e. serious prejudice" to its interests. We note the present tense of this
allegation. The request concerns the way in which measures were affecting the operation of a covered
agreement at the time of consultations, and it st ates that Brazil had reason to believe that these
subsidies were resulting in serious prejudice at that time. As such, it satisfies the requirements of
Article 4.2 of the DSU.
7.120 The United States also distinguishes between non-recurring subsidies and recurring subsidies
and the period of time for which they are allocated to production, in support of an argument that
recurring subsidies may not be actionabl e subsidies after they have expired.
172 Given our view that
expired measures may be the subject of a request for consultations, it is not necessary for us to address
this argument here. However, the Panel notes that the text of Part III of the SCM Agreement does not
indicate that requests for consultations are to be gove rned in the way in which subsidies are expensed.
Rather, the conformity of expired recurring subsidi es to the provisions of Part III is an issue of
substance and remedies and does not go to the scope of the terms of reference.
7.121 In any event, the Panel's terms of reference refer to Brazil's request for establishment of a
panel, not its request for consultations. Article 6.2 of the DSU provides that a request for

170 Brazil's oral statement at the first session of the first substantive meeting, para. 142.
171 Article 1.1 and 1.2 of the DSU.
172 See United States' response to Panel Question No. 15.

establishment of a panel should identify the "speci fic measures at issue" and does not address the
issue of the status of the measures at all.
7.122 For all of the above reasons, the Panel does not be lieve that Article 4.2, and hence Article 6.2,
of the DSU excludes expired measures from the potential scope of a request for establishment of a
panel.
(b) Identification as specific measures
7.123 The United States also notes that the request for esta blishment of a panel did not identify
MLA payments by name and submits that it "raises concerns under Article 6.2 of the DSU".
173 The
United States mentioned this in a footnote in its first written submission, and did not formally indicate
that it was raising an objection. Objections should be clearly raised. Howe ver, for the record, the
Panel wishes to explain its approach to this issue.
7.124 The request for establishment of a panel identif ied the pieces of legislation under which the
MLA payments were authorized in the marketing years 1999-2001 in the following paragraph:
"Subsidies provided under the Agricultural Assistance Act of 2003; Subsidies
provided under the Agriculture, Rural De velopment, Food and Drug Administration
and Related Agencies Appropriation Act of 2002 (November 2001), the Crop Year
2001 Agricultural Economic Assistance Act (August 2001), the Agriculture, Rural
Development, Food and Drug Administrati on, and Related Agencies Appropriations
Act of 2001 (October 2000), the Agriculture , Rural Development, Food and Drug
Administration, and Related Agencies Appropriations Act of 2000 (October 1999),
and the Rural Development, Food and Drug Administration, and Related Agencies
Appropriations Act of 1999 (October 1998);"174
7.125 Brazil submits that the four Agriculture, Ru ral Development, Food and Drug Administration
and Related Agencies Appropriation Acts in this list authorized MLA payments.175 The United States
indicated that these are the names and dates of the relevant legislation. 176 Elsewhere, the United
States indicated that the last market loss assistance payment was authorized under Public Law 107-25,
which is the third Act in the above list. 177 The Panel also notes that th e Agricultural Risk Protection

173 United States first written submission, para. 210, f ootnote 190. There is no dispute that the request
for establishment of a panel identified PFC payments by name and by authorizing statute. It read, relevantly, as
follows: "Subsidies and domestic support provided under the Federal Agricultural Improvement and Reform Act
(FAIR Act) of 1996, and programs under the FAIR Act or amendments thereto relating to marketing loans, loan
deficiency payments, commodity certificates, production flexibility contract payments , conservation payments,
Step 2 certificate programme payments , export credit guarantees, crop in surance, and any other FAIR Act
provisions providing direct or indirect support to the US upland cotton industry; [emphasis added]" (document
WT/DS267/7, page 2).
174 This paragraph also appeared in the request for consultations, minus the phrase "Subsidies provided
under the Agricultural Assistance Act of 2003;".
175 See Brazil's first written submission para. 60, foot note 129. The United States, in its first written
submission, para. 209, footnote 188, agrees with the title s of the relevant legislation, and para. 210, footnote
190, it agrees that they were set out in the request for establishment of a panel. Compare Exhibit BRA-105,
Annex 2, footnote16, which lists all five Acts in this paragraph besides the Agricultural Assistance Act of 2003.
176 United States' first written submission, para. 209, footnote 188. In para. 210, footnote 190, the
United States indicates that the MLA payments were authorized within these pieces of appropriations
legislation.
177 See section 1 of the law which is reproduced in Exhibit BRA-138. See United States' response to
Panel Question No. 15. The title of this Public Law is discussed below in paragraph 7.142.

7.130 Brazil responds that the issue of the amount of these payments is part of the broader legal
question of the amount of support to upland cotton under Article 13(b)(ii) of the Agreement on
Agriculture. It also argues that its request for establishm ent of a panel fully complied with Article 6.2
of the DSU because it identified by name the specific laws providing the contract payments, the
specific types of payments, the class of recipients and the specific time period when those payments
were made. Brazil argues that there is no requireme nt to identify sub-categories of payments on non-
upland cotton base acreage and on upland cotton base acreage. It submits that the United States'
argument is untimely.
183
7.131 The Panel notes that this issue relates to PFC, MLA, DP and CCP payments, which are
described in Section VII:C of this report, and to the methodology for allocating those payments as
support to specific commodities, which is discussed in Section VII:D of this report. The relevant
paragraphs in Brazil's request for establishment of a panel read as follows:
"The measures that are the subject of th is request are prohibited and actionable
subsidies provided to US producers, users a nd/or exporters of upland cotton [original
footnote omitted], as well as legislation, re gulations and statutory instruments and
amendments thereto providing such subs idies (including export credit guarantees),
grants, and any other assistance to the US producers, users and exporters of upland
cotton ("US upland cotton industry"). The measures include the following:

"Subsidies and domestic support provided under the Farm Security and Rural
Investment Act of 2002 (FSRIA), incl uding the regulations, administrative
procedures and other measures implementing FSR IA related to marketing loans, loan
deficiency payments (LDPs), commodity certificates, direct payments, counter-
cyclical payments, conservation payments (to the extent they exceed the costs of
complying with such programs), Step 2 certificate programme payments, export
credit guarantees, crop insurance, and any other provisions of FSRIA that provide
direct or indirect support to the US upland cotton industry;"

"Subsidies and domestic support provide d under the Federal Agricultural
Improvement and Reform Act (FAIR Act) of 1996, and programs under the FAIR
Act or amendments thereto relating to mark eting loans, loan deficiency payments,
commodity certificates, production flexibility contract payments, conservation
payments, Step 2 certificate programme payments, export credit guarantees, crop
insurance, and any other FAIR Act provisions providing direct or indirect support to
the US upland cotton industry;"

"Subsidies provided under the Agricultural Assistance Act of 2003; Subsidies
provided under the Agriculture, Rural De velopment, Food and Drug Administration
and Related Agencies Appropriation Act of 2002 (November 2001), the Crop Year
2001 Agricultural Economic Assistance Act (August 2001), the Agriculture, Rural
Development, Food and Drug Administrati on, and Related Agencies Appropriations
Act of 2001 (October 2000), the Agriculture , Rural Development, Food and Drug
Administration, and Related Agencies Appropriations Act of 2000 (October 1999),

183 Brazil's 28 January 2004 comments, paras. 18 and 19; 18 February 2004 comments, paras. 80-82.

and the Rural Development, Food and Drug Administration, and Related Agencies
Appropriations Act of 1999 (October 1998);"
7.132 These paragraphs contain no reference to paym ents on upland cotton base acres and there is
nothing that would imply such a limitation. They specifically identify the four types of payments at
issue, three of them by name.
184 The chapeau refers to "subsidies provided to US producers, users
and/or exporters of upland cotton" and, together with the paragraphs quoted above, clearly covers
payments under these programmes to recipients with current United States upland cotton production,
whether or not they hold upland cotton base acreage. Therefore, the Panel rules that PFC, MLA, DP
and CCP payments to upland cotton producers with respect to non-upland cotton base acres are within
the terms of reference of the Panel.
7.133 The United States also refers to Brazil's subm issions to the Panel. These do not alter the
Panel's terms of reference and, in any event, the passages to which the United States refers do not
support the inference which it asks the Panel to dr aw concerning Brazil's ow n understanding of the
scope of the terms of reference. Brazil's first written submission referred to USDA data showing the
amount of payments, which showed how Brazil calculated the amount of payments, not which
payments it considered were within the Panel's terms of reference. In fact, at that stage, neither Brazil
nor the Panel knew that the USDA data tabulated a ll payments with respect to upland cotton base
acres. Brazil's response to Panel question No. 41 ex pressly indicated that the measures at issue could
include those with a link to present upland cotton acreage or production, and not merely upland cotton
base acreage. Brazil's response to Panel question No . 44 included payments with a link to one of
those parameters: present upland cotton prices. Braz il's request for relief referred to sections of the
FSRI Act of 2002 relating to DP and CCP payments "to the extent that they relate to upland cotton".
Sections of that Act authorizing DP and CCP pa yments to recipients with present upland cotton
acreage or production, and not merely upland cotton base acreage, relate to upland cotton and are
therefore within the terms of Brazil's request for relief.
7.134 The United States submits that these payments were raised at the very end of this proceeding
which deprives it of fundamental rights of due process.
185 However, the extent to which PFC, MLA,
DP and CCP payments are relevant support to upland cotton has been a central issue in this dispute
since the parties' first written submissions in J une and July 2003. Brazil's first written submission
expressly presented the following argument:
"Thus, the phrase "such measures ... grant support" requires identifying all such forms
of support, and if need be, allocating th e portion of support (by measures that are
provided to more than one commodity) to the individual commodity under
consideration."186
7.135 Brazil referred to the "portion of upland cotton (...) payments that actually benefits acres
planted to upland cotton" on 11 August 2003 in its r esponse to Panel question No. 67 after the first
session of the first substantive meeting. The Unite d States submitted that Brazil had failed to bring
forward evidence that the recipients of these paym ents were upland cotton producers at the resumed
session of the first substantive meeting on 7 Octobe r 2003. Both parties addressed payments on non-
upland cotton base acreage in their responses to Panel question No. 125(8) on 27 October 2003.
Brazil requested information on all programme crop base during the second substantive meeting on

184 The Panel considers that this paragraph identifies MLA payments for the reasons given in paras.
7.124-7.128 above.
185 See the United States' oral statem ent at the second subs tantive meeting, para. 31; its response to
Panel Question No. 256; its 28 Janu ary 2004 comments on Brazil's response to Panel Question No. 204 and its
11 February 2004 comments, paras. 48-50.
186 Brazil's first written submission, para. 135.

2 December 2003.
187 Since that meeting, the United States has addressed the issue of allocation of
these payments on four occasions in its response to Panel question No. 256 on 22 December 2003, its
comment on Brazil's response to Panel question No. 204 on 28 January 2004, its comment on Brazil's
comments on United States data on 11 February 2004 and its comment on Brazil's comments on
United States data on 15 March 2004.
7.136 These facts show that this matter was not raised at the very end of the proceedings and that
the United States has in fact responded to it. Ther efore, the Panel consider s that the United States'
rights of due process have been respected.
4. Cottonseed payments
(a) Public Laws 106-224 and 107-25
7.137 The United States submits that cottonseed payments for the 2000 crop of cottonseed are not
within the Panel's terms of reference because they were not identified as measures at issue in the
request for consultations or the request for establishment of a panel.188
7.138 Brazil argues that these measures were the subject of consultations and that they were
identified in the request for establishment of a panel.189
7.139 The parties agree that cottonseed payments fo r the 2000 crop were made under Public Laws
106-224 and 107-25. 190 The Panel notes that Brazil's request for establishment defines "upland
cotton" in the first footnote to include upland cotton cottonseed as follows:
"The term 'upland cotton' means raw up land cotton as well as the primary processed
forms of such cotton including upland cotton lint and cottonseed."191
7.140 The short title as enacted of Public Law 106-224 is the Agricultural Risk Protection Act of
2000.192 Both the request for consultations and the request for establishment of a panel refer to:
"Subsidies and domestic support provided unde r the Agricultural Risk Protection Act
of 2000 and any other measures that provide subsidies relating to crop, disaster or
other types of insurance to the US upland cotton industry;"
7.141 The short title as enacted of Public Law 107- 25 is, according to the United States, the
Emergency Agricultural Assistance Act, but the short title as introduced into the United States
Congress was the Crop Year 2001 Agricultural Economic Assistance Act (August 2001). 193 Both the
request for consultations and the request for establishment of a panel refer to:
"Subsidies provided under … the Crop Year 2001 Agricultural Economic Assistance
Act (August 2001) …;"

187 See Exhibit BRA-369, dated 2 December 2003 and revised 3 December 2003, submitted with
Brazil's oral statement at the second substantive meeting.
189 Brazil's oral statement at the resumed session of the first substantive meeting, para. 79.
190 Brazil's response to Panel Question No. 17 and United States' rebuttal submission, para. 107.
191 Upland cotton accounts for approximately 97 per cent of United States cotton production: see
USDA Economic Research Service, Briefing Room – Cotton, and background paper dated July 2001
reproduced in Exhibits BRA-13 and BRA-46, respectively. It does not include extra long staple ("ELS") cotton.
192 Public Law 106-224 is reproduced in Exhibit BRA-137. The short title as enacted appears on the
cover page and in the first margin.
193 Public Law 107-25 is reproduced in Exhibit BRA -138. No short title appears in it. The United
States indicated the short title in its response to Panel Question No. 17.

7.142 The short title as introduced of Public Law 107-25 is listed on the United States Library of
Congress legislative database as a title of that Act, wh ilst the title indicated by the United States to the
Panel is not. In response to a question posed by the Panel, the United States at first agreed that Public
Law 107-25 "arguably may be found in Brazil's cons ultation and panel requests" because it identified
the Crop Year 2001 Agricultural Economic Assistan ce Act (August 2001) as a title of that Act. 194
That title cannot refer to any other Act. In these circumstances, the short title as introduced is
sufficiently precise and has in fact identified th e measure to the respondent for the purposes of both
Articles 4.4 and 6.2 of the DSU.
7.143 Further, the cottonseed payments authorized by Public Law 107-25 we re provided under the
Agricultural Risk Protection Act of 2000, which is named in Brazil's request for establishment of a
panel. Section 6 of Public Law 107-25 provided as follows:
"The Secretary shall use $84,700,000 of funds of the Commodity Credit Corporation
to provide supplemental assistance under section 204(e) of the Agricultural Risk
Protection Act of 2000 (Public Law 106-224; 7 U.S.C. 1421 note) to producers and
first-handlers of the 2000 crop of cottonseed that previously received assistance under
such section."
195
7.144 Therefore, the Panel rules that the cotton seed payments under both Public Law 106-224 and
Public Law 107-25 are within its terms of reference.196
(b) Public Law 106-113
7.145 The United States submits that the cottonseed payments for the 1999 crop are not within the
Panel's terms of reference because they were not identified as measure at issue in the request for
consultations or the request for establishment of a pane l. It is agreed that cottonseed payments for the
1999 crop were made under Public Law 106-113. 197 Brazil admits that it did not explicitly identify
this law in its request for establishment of a panel. 198 There are dozens of short titles of this law,
which was a consolidated appropriations Act. Neither the request for consultations nor the request for
establishment of a panel refer to this Public Law by any of these titles or its number.
7.146 Brazil initially submitted in error that payments for the 1999 crop were made under Public
Law 106-224.199 Later, it left open the possibility that some payments for the 1999 crop were made
under this law, in addition to those under Public Law 106-113. 200 However, section 204(e) of Public
Law 106-224, which Brazil cites as the rele vant provision, only referred to the 2000 crop. 201 The text
of the implementing regulations which Brazil provided indicated that that law only applied to the

194 United States' response to Panel Question No. 17.
195 Public Law 107-25 is reproduced in Exhibit BRA-138.
196 The Panel communicated to the parties in a letter dated 3 November 2003 that it intended to make
this ruling in this report, in order to assist them in deciding what argumentation and evidence to submit in their
further rebuttal submissions.
197 Brazil's response to Panel Question No. 17 and United States' rebuttal submission, para. 107. Public
Law 106-113 is reproduced in Exhibit BRA-136. Section 104 of Appendix E of that law granted the Secretary
of Agriculture the discretion to make cottonseed payments for the 1999 crop from unused funds made available
under section 802 of Title VIII of Public Law 106-78 (the short title of which was the Agriculture, Rural
Development, Food and Drug Administration and Related Agencies Appropriations Act 2000) which is
identified in both the request for consultations and the re quest for establishment of a panel, and section 1111 of
Division A of Public Law 105-277, which was not identified in either. These two laws may have provided the
source of funding but they did not provide the legal basis of the appropriation for the 1999 cottonseed payment
program. They therefore did not identify the cottonseed payments for the 1999 crop as measures at issue.
198 See Brazil's response to Panel Question No. 123.
199 Brazil's first written submission, para. 106, footnote 274.
200 See Brazil's response to Panel Question No. 123.
201 Section 204 is reproduced in Exhibit BRA-137.

2000 crop.
202 There is no evidence before the Panel th at any cottonseed payments for the 1999 crop
were made under Public Law 106-224.
7.147 After the United States requested a preliminary ruling regarding Public Law 106-113, Brazil
submitted that all forms of cottonseed payments from the marketing years 1999-2007 are covered by
the following passages of its request for establishment of a panel:203
"Domestic support subsidies provided to the US upland cotton industry during
marketing years 1999-2001;
Domestic support subsidies that are mandated to be provided to the US upland cotton
industry during marketing years 2002-2007;
All subsidies or support measures benefiting upland cotton that have trade-distorting
effects or effects on production by the US upland cotton industry,
Export subsidies, domestic support, and ot her subsidies provided under regulations,
administrative procedures, administrative practices and any other present measures or
future measures implementing or amending any of the measures listed above, that
provide for or facilitate the payment of dom estic support, export subsidies, and other
subsidies for the production, use and/or export of US upland cotton and upland cotton
products."
7.148 We recall that Article 6.2 of the DSU provides that a request for establishment of a panel:
"… shall indicate whether consultations were held, identify the specific measures at
issue and provide a brief summary of the le gal basis of the complaint sufficient to
present the problem clearly. …"
7.149 None of the passages cited by Brazil specifically mentions cottonseed payments or any
instrument under which cottonseed payments were authorized or made. These descriptions of
subsidies and measures are so vague that they do no t give notice to the respondent that any specific
cottonseed measures are at issue. The cottonseed payments that are within the Panel's terms of
reference were made under legislation which Brazil chose to name in its request for establishment of a
panel. That legislation does not include the legislation authorizing the payments for the 1999 crop.
7.150 The last passage cited refers to "future measures implementing or amending any of the
measures listed above" which included the two P ublic Laws appropriating funds for cottonseed
payments for the 2000 crop, discussed above. P ublic Law 106-113 does not fall within this
description because it was prior legislation. Nor can payments under Public Law 106-113 be
considered part of a single programme identified by the references to Public Laws 106-224 and 107-
25, for the reasons given in paragraphs 7.163 to 7.167 below. Therefore, the quoted passages do not
satisfy the requirements of Article 6.2 in relation to cottonseed payments.
7.151 In fact, Brazil posed questions to the United States during consultations concerning support
for cottonseed production and exports, and specifica lly raised a "Cottonseed Payment Program", a
"Recourse Seed Cotton Loan Program" and "any ex port enhancement programmes to encourage the
export of cottonseed products".
204 Brazil indicated that the United States provided answers

202 The regulations are reproduced in Exhibit BRA-32
203 Brazil's oral statement at the resumed session of the first substantive meeting, para. 79, quoting
passages from its request for the establishment of a panel.
204 See Exhibit BRA-101, questions 14.1-14.5. The United States confirmed that the document in which
these questions were posed was sent to it during consultations – see its response to Panel Question No. 8.

concerning cottonseed payments in the marketing years 1999 and 2000. 205 The fact that Brazil then
chose, in its request for establishment of a panel, only to name the Public Laws appropriating funds
for cottonseed payments for the 2000 and 2002 crops, in the absence of a reference to "cottonseed
payments", indicated, if anything, that it was not challenging the cottonseed payments for the 1999
crop.
7.152 For the above reasons, the Panel rules that the cottonseed payments under section 104 of
Public Law 106-113 are not within its terms of reference.206
7.153 In the Panel's view, this is an issue which goes to its jurisdiction and which does not depend
on whether a party requests a preliminary ruling in a timely manner. The Panel is not empowered to
make a finding in relation to this measure. Howeve r, the Panel notes for th e record that the United
States respected the Panel's working procedures in raising its objection. These procedures provide
relevantly as follows:
"12. A party shall submit any request for pr eliminary ruling not later than its first
submission to the Panel. … Exceptions to this procedure will be granted upon a
showing of good cause."
7.154 The United States' request for this preliminary ruling was made later than its first submission
to the Panel. Brazil mentioned cottonseed payments for the 1999 crop for the first time in these
proceedings in its first written submission.207 It mentioned Public Law 106-113 for the first time in its
answers to the Panel's questions after the first session of the first substantive meeting, when it also
provided a copy of the relevant section of the law.
208 The United States first raised this issue in its
written answers to the Panel's questions at the same time, when it noted that the legislation
authorizing cottonseed payments for the 1999 crop w as not found in the request for consultations or
the request for establishment of a panel. 209 The United States formally submitted that the payments
did not form part of the Panel's terms of reference in its rebuttal submission. It explained that it
became aware of this difficulty "in the course of preparing its answer to Question No. 17 from the
Panel and reviewing Brazil's answers to Questions Nos. 17 and 19". 210 It reiterated its request in its
further submission.211 For these reasons, the Panel finds that the United States has shown good cause
for not submitting its request for preliminary ruling earlier.
(c) Agricultural Assistance Act of 2003
7.155 The United States requests the Panel to rule that any measure under the Agricultural
Assistance Act of 2003, including those portions of the Act that provide "a one-time cottonseed
payment", is not within its terms of reference because the measure was not consulted upon and was
not enacted until after Brazil presented its request for establishment of a panel. 212 The United States
requested this preliminary ruling in its first written submission in accordance with paragraph 12 of the

205 See Brazil's first written submission, para. 106, footnote 272.
206 The Panel communicated to the parties in a letter dated 3 November 2003 that it intended to make
this ruling in this report, in order to assist them in deciding what argumentation and evidence to submit in their
further rebuttal submissions. At that time, the Panel indicated that this was without prejudice to the relevance, if
any, of the cottonseed payments for the 1999 crop to the conditions set out in Article 13(b) of the Agreement on
Agriculture.
207 Brazil's first written submission, para. 106. It had posed questions during consultations regarding
cottonseed production and exports during the marketing years 1992-2002.
208 See Brazil's response to Panel Question No. 17 and Exhibit BRA-136.
209 See United States' response to Panel Question No. 17.
210 See United States' rebuttal submission, para. 108.
211 See United States' further written submission, para. 8.
212 United States' first written submission, paras. 212 -217, its rebuttal submission, para. 106 and its
further written submission, para. 8.

Panel's working procedures. It did not address meas ures under this Act in terms of substance in its
first written submission.
7.156 Brazil submits that the request should be rejected because the Agricultural Assistance Act of
2003 was enacted prior to the establishment of the Panel.
213
7.157 The Panel notes that this piece of legislation has been raised in these proceedings only in
relation to cottonseed payments of $50 million to assist producers and first handlers for the 2002 crop.
The Agricultural Assistance Act of 2003 is the short title as enacted of Title II of Public Law 108-7.214
The parties agree that it was not enacted until 20 February 2003. 215 Brazil submitted its request for
establishment of a panel (document WT/DS267/7) on 6 February 2003, which was considered by the
DSB for the first time on 19 February 2003 216 and on the basis of which the DSB established the
Panel on 18 March 2003. On the date of establishmen t, the DSB decided that the Panel's terms of
reference were the following:
"To examine, in the light of the relevant provisions of the covered agreements cited
by Brazil in document WT/DS267/7, the matter referred to the DSB by Brazil in that
document and to make such findings as will assist the DSB in making the
recommendations or in giving the rulings provided for in those agreements".217
7.158 The "matter" referred to the DSB by Brazil in document WT/DS267/7 consisted of the
measures and claims set out in that document 218 which was dated 6 February 2003. On that date, the
Agricultural Assistance Act of 2003 did not exist, ha d never existed and might not subsequently have
ever come into existence. Brazil anticipated adoptio n of that Act in its panel request and its claim in
respect of that Act was entirely speculative. Theref ore, Brazil could not refer it to the DSB at that
time and it does not form part of the Panel's terms of reference.219
7.159 We believe that this is consistent with the principle set out in Article 3.3 of the DSU which
provides that:
"The prompt settlement of situations in wh ich a Member considers that any benefits
accruing to it directly or indirectly under the covered agreements are being impaired
by measures taken by another Member is essential to the effective functioning of the
WTO and the maintenance of a proper balan ce between the rights and obligations of
Members."
7.160 In this case, the Agricultural Assistance Act of 2003 could not possibly have been impairing
any benefits at the date of Brazil's referral of its complaint to the DSB because it did not yet exist.220

213 Brazil's oral statement at the first session of the first substantive meeting, para. 145.
214 The Act is reproduced in Exhibit BRA-135.
215 United States' first written submission, para. 212; Brazil's oral statement at the first session of the
first substantive meeting, para. 148.
216 See the minutes of the DSB meeting in document WT/DSB/M/143, paras. 22-25.
217 Document WT/DS267/15; See the minutes of the DSB meeting in document WT/DSB/M/145,
para. 22.
218 See Appellate Body Report, Guatemala – Cement I , para. 72, and the Panel Report, Australia –
Automotive Leather II (Article 21.5 – US), para. 6.4.
219 In our communication dated 25 July 2003, the Panel asked the parties not to exclude consideration
of the Agricultural Assistance Act of 2003 in responding to the Panel's written questions and in rebuttal
submissions.
220 We note that the Panel in Australia – Automotive Leather II (Article 21.5 – US) , at paras. 6.4-6.5,
declined to conclude that a measure specifically identified in the request for establishment was not within its

7.161 Brazil argues that the Agricultural Assistance Act of 2003 essentially continues a supposed
"Cottonseed Payment Program that existed since at least MY 1999" by authorizing funding of
$50 million for the 2002 crop. It argues that all asp ects of the existing programme remained intact
and that there was an "existing unfunded" programme at the time the Agricultural Assistance Act of
2003 was enacted. 221
7.162 The Panel notes that the cottonseed payments for each year were ad hoc appropriations, each
with a separate legal basis, which did not follow a single model. 222 The scope of each appropriation
was distinct and limited to a single year's crop of cottonseed. The frequency of the appropriations was
irregular, with one for each of the 1999 and 2002 cr ops, two for the 2000 crop and none for the 2001
crop. The value of the funds available to each programme varied widely: $79 million for the 1999
crop,223 $100 million for the 2000 crop, a further $84.7 million for the 2000 crop and $50 million for
the 2002 crop.
7.163 The Panel's terms of refere nce include Public Laws 106- 224 and 107-25, which each
appropriated a specific amount of money for the 2000 crop of cottonseed only. Under the regulation
implementing the cottonseed payments appropriated by both those laws , payments were available to
first handlers of cottonseed who had applied to part icipate in the "Cottonseed Payment Program" in
accordance with section 204(e) of Public Law 106-224. Payments were made in accordance with
regulations dated 2 November 2000. The payment ra te (dollars per ton) was calculated by dividing
the total available funds by the total payment quantity of 2000 crop cottonseed. 224 No cottonseed
payments were made for the 2001 crop.
7.164 The Agricultural Assistance Act of 2003 contains a single provision regarding cottonseed,
which reads, in its entirety, as follows:
"Sec. 206. COTTONSEED
The Secretary shall use $50,000,000 of f unds of the Commodity Credit Corporation
to provide assistance to producers and first-handlers of the 2002 crop of cottonseed."
7.165 Section 206 did not amend or modify any existing or previous programme. Unlike Public
Law 107-25, it did not provide for assistance under an earlier law, it did not define the recipients as
those who had previously received assistance and it was not implemented by an existing regulation.
225
7.166 Section 206 was implemented by means of new regulations dated 25 April 2003,226 the text of
which was modelled on the regulations for the 1999 and 2000 crops. 227 Each set of regulations
required the submission of fresh applications by firs t handlers, so that eligibility in one year did not

terms of reference "in the absence of any compelling reason". We believe that the speculative inclusion of a
something which had not yet been adopted is such a compelling reason.
221 Brazil's oral statement at the first session of the first substantive meeting, paras. 146 and 148 and its
response to Panel Question No. 17.
222 The Agricultural Assistance Act of 2003 was a title within Public Law 108-7 which made
consolidated appropriations for fiscal year 2002, most of them unrelated to agriculture. Cottonseed payments
for the 2000 crop were made under Public Laws devoted solely to agriculture and the cottonseed payments for
the 1999 crop were made under a consolidated appropriations Act, discussed above.
223 United States' and Brazil's respective responses to Panel Question No. 17.
224 See 7 CFR 1427.1100(a) and 1427.1109, reproduced in Exhibit BRA-32.
225 See section 6 of Public Law 107-25, reproduced in Exhibit BRA-138.
226 See the 2002 regulation from 68 FR 20331 et seq., reproduced in Exhibits BRA-139 and US-14.
227 See the 2000 regulation from 65 FR 65722 et seq., reproduced in Exhibits BRA-32 and US-15. See
the 1999 regulation from 65 FR 36563 et seq., reproduced in Exhibit US-16. The background notes in the
supplementary information published with the 2002 regula tion expressly state that "This rule follows the model
set by those preceding programs", i.e. for the 1999 and 2000 crops of cottonseed.

carry over to the next. The formula for calculati ng the payment rate was basically the same in each
regulation, being the quotient of the funds availa ble (which varied in each year) divided by the
eligible quantity of cottonseed (which varied in e ach year). The administration had a discretion to
adjust the payment rate in 1999 and 2002, but not in 2000. In contrast, Public Law 107-25, which
appropriated a second payment for the 2000 crop, was expressed as supplemental assistance under
Public Law 106-224.
7.167 This evidence discloses the existence of separ ate and legally distinct cottonseed payment
programmes for crops in different years rather th an a single cottonseed payment programme. There
was not in fact any programme in effect at the time of Brazil's request for establishment of a panel.
At that time, for the 2002 crop of cottonseed, there was no applicable statute, no applicable regulation,
no eligible quantity of cottonseed nor any availabl e funds. As a result, the payments under section
206 of the Agricultural Assistance Act of 2003 we re entirely separate measures which Brazil could
not refer to the DSB on 6 February 2003, a date prior to its adoption.
7.168 The Panel also notes that the Agricultural Assistance Act of 2003 was not specifically the
subject of consultations, nor could it have been, si nce it did not yet exist at the time consultations
were held. It was not named in Brazil' s request for consultations. Brazil argues
228 that the
authorization of funds for the "Cottonseed Paym ent Program", including under the Agricultural
Assistance Act of 2003, was covered in its request for consultations by the following paragraph:
"Export subsidies, domestic support, and ot her subsidies provided under regulations,
administrative procedures, administrative practices and any other present measures,
amendments thereto, or future measur es implementing any of the measures listed
above, that provide for or facilitate th e payment of domestic support, export
subsidies, and other subsidies for the pr oduction, use and/or export of US upland
cotton and upland cotton products."
7.169 It highlights the following words in that paragraph:
"… other subsidies provided under regulati ons … amendments thereto, of future
measures implementing any of the measures listed above …"
7.170 However, for the reasons already given, the Panel does not consider that the Agricultural
Assistance Act of 2003 is an amendment, or a measure implementing any of the measures within the
Panel's terms of reference. It appropriated funds to a separate programme - "the 2002-Crop
Cottonseed Payment Program"
229 - in respect of which the complainant did not request consultations
and with regard to which the parties did not actually consult.
7.171 Therefore, for all of the above reasons, the Pa nel rules that the cottonseed payments under the
Agricultural Assistance Act of 2003 are not within its terms of reference. 230 No ruling is required in
relation to other provisions of that Act since none have been raised in the parties' substantive
submissions to the Panel.

228 Brazil's oral statement at the first session of the first substantive meeting, para. 146.
229 See title of Subpart F of 7 CFR 1427 published at 68 FR 20331 et seq. (25 April 2003), reproduced
in Exhibit BRA-139.
230 The Panel communicated to the pa rties in a letter dated 8 December 2003 that it intended to make
this ruling in this report, in order to assist them in deciding what argumentation and evidence to submit in their
answers to questions. At that time, the Panel indicated that this was without prejudice to the relevance, if any,
of the cottonseed payments for the 2002 crop to the conditions set out in Article 13(b) of the Agreement on
Agriculture.

5. Storage payments and interest subsidies
7.172 The United States, in response to a question posed by the Panel at the first session of the first
substantive meeting, prepared AM S calculations which included a line that read "Other payments",
followed by a number and the source "USDA estimate of storage payments and interest subsidy". 231
Brazil then referred to these other payments in its comments on the United States' responses 232 and
included them in its further submission.233
7.173 The United States requests the Panel to rule that "other payments", as referred to in Brazil's
further submission, are not within its terms of refere nce because they did not ap pear in the request for
consultations or the request for establishment of a panel.234 The United States submits that these other
payments are storage payments and interest subs idies estimated by the United States Department of
Agriculture.
7.174 Brazil submits that these other payments are covere d by the same passages of its request for
establishment of a panel quoted in full at paragraph 7.147 of this report. Brazil submits that they
encompass, but apparently are not limited to, storage payments and interest subsidies.235
7.175 The Panel notes that none of the passages in the request for establishment of a panel cited by
Brazil specifically mention storage payments or in terest subsidies or any measures under which such
payments and subsidies were authorized or made . These descriptions of subsidies and measures are
so vague that they do not give notice to the responde nt that any specific storage payments or interest
subsidies are at issue. They therefore do not satisfy the requirements of Article 6.2 of the DSU.
7.176 Brazil submits that these payments were cove red by the reference in the questions posed
during consultations to "any other support to or government funding for the US upland cotton
industry."
7.177 The Panel notes that, even if this were correct , this would not bring them within the Panel's
terms of reference if they were not covered by the request for establishment of a panel.
7.178 Brazil also submits that these other payments are part of the operation of the marketing loan
programme.236 The United States agrees that interest subsidies and storage payments are support
provided in connection with the marketing loan programme.237
7.179 The Panel notes that the United States government's Commodity Credit Corporation pays
storage charges and waives interest upon forfeit of warehouse-stored upland cotton under loan. It also
wavies storage and interest charges on redemption of upland cotton under loan where the repayment
amount is low enough in order to implement its ob ligation to permit producers to repay a marketing
loan at the repayment rate. 238 Were these charges not borne by the United States government, they
could reduce the guaranteed revenue to the producer below the loan rate.239 The waiver of storage and

231 United States' response to Panel Question No. 67, para. 129.
232 Brazil's 22 August comments on United States' responses to Panel Questions Nos. 54, 57 and 60.
233 Brazil's further written submission, para. 7.
234 United States' further written submission, para. 7.
235 Brazil's oral statement at the resumed session of the first substantive meeting, paras. 80-81.
236 Brazil's oral statement at the resumed session of the first substantive meeting, para. 80.
237 United States' 27 August 2003 comments, para. 13, and its response to Panel Question No. 192.
238 FAIR Act of 1996, section 134(b) and FSRI Act of 2002, section 1204(b), reproduced in Exhibits
BRA-28 and BRA-29, respectively.
239 See United States' 27 August 2003 comments, para. 13; United States' response to Panel Question
No. 192(b); USDA Fact Sheet: Upland Cotton, January 2003, page 2; and USDA Farm Services Agency
"Background Information: Non-Recourse Marketing Assistance Loans and Loan Deficiency Payments", March
1998, reproduced in Exhibits BRA-4 and BRA-50, respectively.

interest charges is provided for in th e marketing loan programme regulations.
240 Therefore, the
waiver of these storage and interest charges formed part of the conditions of the marketing loan
programme.
7.180 The request for establishment of a panel refers to:
"Subsidies and domestic support provide d under the Federal Agricultural
Improvement and Reform Act (FAIR Act) of 1996, and programs under the FAIR
Act or amendments thereto relating to marketing loans …" and
"Subsidies and domestic support provided under the Farm Security and Rural
Investment Act of 2002 (FSRIA), incl uding the regulations, administrative
procedures and other measures implementing FSRIA related to marketing loans …".
7.181 The storage payments and interest subsidies fa ll squarely within the descriptions set out in
these paragraphs of the request for establishment of th e Panel. The reference to the specific name of
the programme and the name of the statutes under wh ich it existed and exists at all relevant times,
provide the level of specificity that was required to notify the United States that Brazil put these
payments in issue. The reference to the impl ementing regulations and administrative procedures
under the FSRI Act of 2002 confirmed this. The request therefore satisfied the requirements of
Article 6.2 of the DSU in relation to these storage payments a nd interest subsidies and the Panel rules
that storage and interest payments that implement the marketing loan programme are within its terms
of reference.241
6. Payments made after the establishment of the Panel
7.182 The United States submits that measures taken after the Panel was established cannot be
within the Panel's terms of reference and, to the extent that Brazil challenges payments, as opposed to
legal instruments "as such", those made after the date of establishment of the Panel are outside the
Panel's terms of reference. 242 The United States raised this i ssue in passing in its response to a
question from the Panel concerning the calculation of AMS, and later explained its views in response
to questioning by the Panel.243
7.183 Brazil submits that these payments are identified in its request for establishment of a panel
and are within the Panel's terms of reference. 244 It recalls that the panel in Indonesia – Autos did not
find that only non-expired subsidies paid up until the date of establishment of the panel should be
considered for the purposes of assessing serious prejudice. It notes that the statutes and regulations
set out in the terms of reference have not change d and mandated payments bot h before and after the
date of establishment of the Panel.
245

240 7 CFR 1427.13 and 1427.19, (1 January 2000 ed ition), first published at 61 FR 37601 on 18 July
1996, and (1 January 2003 edition), first published at 67 FR 64459 on 18 October 2002, reproduced in Exhibits
US-117 and US-118, respectively.
241 In our communications dated 3 November and 8 December 2003, the Panel asked the parties not to
exclude consideration of these other payments in thei r further rebuttal submissions, to respond to its written
questions relevant to these payments and not to exclude consideration of these paym ents in their answers to
other questions.
242 United States' responses to Panel Questions No. 67, paras. 129, and 194.
243 United States' response to Panel Question No. 194.
244 Brazil's response to Panel Question No. 194. Braz il has also argued that the cottonseed payments
made in June 2003 is "before the Pa nel" because an objective assessment of support to upland cotton in the
marketing year 2002 requires the tabulation of all suppor t to upland cotton. See Brazil's oral statement at the
first session of the first substantive meeting, para. 151 and its response to Panel Question No. 17.
245 Brazil's 28 January 2004 comments on the United States' response to Panel Question No. 194.

7.184 The Panel was established on 18 March 2003, a date during the term of the FSRI Act of 2002,
which provides authority for the marketing loan, us er marketing (step 2), counter-cyclical payments
and direct payments programmes during the 2002 through 2007 crop years. 246 P a y m e n t s w e r e
authorized and continued to be authorized under these programmes, as well as the crop insurance and
export credit guarantee programmes at issue, before and after the date of establishment of the Panel.
7.185 The date on which the Panel was established fe ll during the 2002 marketing year for upland
cotton in the United States, which bega n on 1 August 2002 and ended on 31 July 2003. 247 Therefore,
payments made during the complete 2002 marketing y ear include those made during the period of 4½
months immediately following the date of establishment of the Panel.248
7.186 Brazil's request for establishment of a pane l specifically identifies these current domestic
support and export credit guarantees in the following paragraphs:
"Subsidies and domestic support provided under the Farm Security and Rural
Investment Act of 2002 (FSRIA), incl uding the regulations, administrative
procedures and other measures implementing FSR IA related to marketing loans, loan
deficiency payments (LDPs), commodity certificates, direct payments, counter-
cyclical payments, conservation payments (to the extent they exceed the costs of
complying with such programs), Step 2 certificate programme payments, export
credit guarantees, crop insurance, and any other provisions of FSRIA that provide
direct or indirect support to the US upland cotton industry;
Subsidies and domestic support provided unde r the Agricultural Risk Protection Act
of 2000 and any other measures that provide subsidies relating to crop, disaster or
other types of insurance to the US upland cotton industry;
Export subsidies, exporter assistance, e xport credit guarantees, export and market
access enhancement to facilitate the export of US upland cotton, and other eligible
agricultural commodities as addressed here in, provided under the Agricultural Trade
Act of 1978, as amended, and other measure s such as the GSM-102, GSM-103, and
SCGP programs, and the Step 1 and Step 2 certificate programs, among others;"
7.187 The programmes and legislation identified in th ese paragraphs include payments made before
the date of establishment of the Panel, and those ma de subsequently. All such payments were and are
made under the same legislative and regulatory prov isions which entered into effect prior to the
consultations and have remained in place throughout this Panel proceeding. Therefore, the Panel
rules that payments under programmes and legislati on within the Panel's terms of reference, made
after the date on which the Panel was established, as addressed in document WT/DS267/7, are within
its terms of reference.
7.188 Certain other considerations support this finding. Brazil's request for establishment of a panel
specifically identifies the fact that some of the me asures at issue were provided in the past, some in
the current marketing year, and others will be pr ovided in the future, in the paragraphs which
immediately preceded those quoted above, as follows:
"Domestic support subsidies provided to the US upland cotton industry during
marketing years 1999-2001 [original footnote omitted];

246 Sections 1108, 1201(a)(1) and 1207(a)(1) of the FSRI Act of 2002, reproduced in Exhibit BRA-29.
The crop year is the same as the marketing year.
247 See the definition in 7 CFR 1412.103 (1 January 2003 edition), reproduced in Exhibit BRA-35.
248 This does not include the cottonseed payments for the 2002 crop, which were not made until 5 June
2003: see Exhibit BRA-129, cited in the United States' re buttal submission, para. 106, footnote 132. The Panel
has ruled that these payments are not within its terms of reference in paragraph 7.171.

Domestic support subsidies that are mandated to be provided to the US upland cotton
industry during marketing years 2002-2007;
Export subsidies provided to the US upla nd cotton industry during marketing years
1999-2001;
Export subsides that are mandated to be provided to the US upland cotton industry
during marketing years 2002-2007;
Subsidies provided contingent upon the use of US over imported upland cotton in
marketing years 1999-2001 and that are ma ndated to be provided to the US upland
cotton industry during marketing years 2002-2007;"
7.189 The second, fourth and fifth of these paragra phs expressly put the respondent on notice that
Brazil put subsequent payments in issue. Alt hough these paragraphs are not sufficiently specific to
identify subsequent payments under any programme or provision of legislation not itself specifically
identified in accordance with Article 6.2 of the DSU, neither party has put any such payments in issue.
7.190 In each of the same paragraphs Brazil asserts that the alleged subsidies at issue provided
during marketing years 2002-2007 were mandated to be provided as at the date of establishment of
the Panel. Therefore, on its face, th e request does not assert speculative claims.
249 The question
whether the subsidies are indeed ma ndated to be provided is one of substance which the Panel will
consider together with the claims.250
7.191 Furthermore, the claims in the present disput e raise the issue of serious prejudice to the
interests of another Member, which includes a threat of serious prejudice. 251 Part III of the SCM
Agreement and Article XVI of GATT 1994 expressly provides Members with a right to take action
against serious prejudice which may not yet have occurred. There is nothing in the text which
indicates that this right is limited to a window of subsidies provided in the past but which cause
serious prejudice in the future. The object and purpose of Part III of the SCM Agreement, which can
be summed up in the basic obligation that "no Member should cause, through the use of any subsidy
… adverse effects to the interests of other Members",
252 confirm this view. If a Member were unable
to bring an action against subsidies until they were actually paid, this would undermine the object of
preventing adverse effects to its interests. This a pproach is consistent with the approach of certain
previous WTO and GATT panels.253
7.192 The evidence properly before the Panel is a se parate issue from the measures within its terms
of reference. It is agreed that the Panel ma y look at evidence subsequent to the date of its
establishment.254 Payments made after that date under le gislative instruments that are within the
Panel's terms of reference form an essential part of the facts of this case for two reasons.

249 The United States argues that payments after the date of establishment of the panel under the
marketing loan, user marketing (step 2), counter-cyclical and direct payments programmes are not mandatory at
least in the sense that recipients must comply with programme conditions and payment is subject to the
availability of funds. The Secretary of Agriculture also has authority to adjust payments to comply with AMS
commitments. See United States' responses to Panel Questions Nos. 253 and 254.
250 The issue is discussed in later Sections of this repo rt. This view is consistent with the view of the
Appellate Body expressed in a different context, in Appellate Body Report, US – Corrosion-Resistant Steel
Sunset Review, para. 89.
251 Article 5(c), footnote 13 of the SCM Agreement and the request for establishment of a panel, page 4.
252 Article 5 of the SCM Agreement.
253 See the following Panel Reports: Indonesia – Autos , para. 14.206, Australia – Automotive
Leather II, paras. 9.37-9.42 and US – Superfund, paras. 5.2.1.-5.2.2.
254 See United States' response to Panel Question No. 247.

7.193 First, the 2002 marketing year is the only comple te marketing year that has elapsed to date in
which counter-cyclical payments and direct paymen ts have been authorized, and the only complete
marketing year that has elapsed to date in whic h the marketing loan and user marketing (Step 2)
programmes "as such" have been authorized under the FSRI Act of 2002. Evidence of payments
throughout the 2002 marketing year is ther efore essential to assess those programmes under
Article 13(b)(ii) of the Agreement on Agriculture , which the parties agree calls for a marketing year-
on-marketing year comparison with support decide d during the 1992 marketing year. Second, Brazil
makes claims under Article 5 of the SCM Agreement and Article XVI of the GATT 1994 regarding
subsidies which threaten serious prejudice, which necessarily involves a projection regarding events
that lay in the future at the time of establishment of the Panel. Data relating to the most recent past is
usually the best gauge of future events 255, and events which took place after the establishment of the
Panel provide a more solid basis for projections about the future. Our duty to make an objective
assessment of the matter before us under Article 11 of the DSU actually requires us to examine recent
data, including that which relates to the period after the date of establishment of the Panel.
256
7. Summary of preliminary rulings
7.194 The Panel rules that the following measures, as addressed in document WT/DS267/7, are
within its terms of reference:
(i) export credit guarantees to facilitate the export of United States upland
cotton, and other eligible agricultural commodities;
(ii) production flexibility contract payments and market loss assistance
payments;
(iii) production flexibility contract payments, market loss assistance payments,
direct payments and counter-cyclical payments to upland cotton producers
with respect to non-upland cotton base acres;
(iv) cottonseed payments under both Pub lic Law 106-224 and Public Law 107-
25 (for the 2000 crop);
(v) storage payments and interest subsidie s that implement the marketing loan
programme; and
(vi) payments under programmes and provisi ons within the Panel's terms of
reference made after the date on which the Panel was established.
7.195 The Panel rules that the following measures, as addressed in document WT/DS267/7, are not
within its terms of reference:
(i) cottonseed payments under Public Law 106-113 (for the 1999 crop); and
(ii) cottonseed payments under the Agricultural Assistance Act of 2003 and
implementing regulations (for the 2002 crop).

255 See, for example, Appellate Body Report, US – Lamb , para. 137, in relation to a threat of serious
injury analysis under the Agreement on Safeguards.
256 We note that Brazil has argued that payments made under the Agricultural Assistance Act of 2003
are "before the Panel" because an objective assessment of support to upland cotton in marketing year 2002
requires the tabulation of all support to upland cotton. Se e Brazil's oral statement at th e first session of the first
substantive meeting, para. 151 and its response to Panel Question No. 17.

7.196 The Panel also rules that, in its request for consultations in document WT/DS267/1, Brazil
provided a statement of available evidence with respect to export credit guarantees under the GSM
102, GSM 103 and SCGP programmes relating to up land cotton and eligible agricultural commodities
other than upland cotton, as required by Article 4.2 of the SCM Agreement.
C. P
RELIMINARY ISSUES
1. Products at issue
7.197 This dispute principally concerns alleged Un ited States subsidies in respect of "upland
cotton"257 (Gossypium hirsutum). This is defined in relevant United States legislation as:
"Planted and stub cotton that is produced from other than pure strain varieties of the
Barbadense species, any hybrid thereof, or any other variety of cotton in which one or
more of these varieties predominate."258
7.198 In relation to Brazil's claims that United States export credit guarantee measures constitute
export subsidies under the Agreement on Agriculture and the SCM Agreement, the dispute concerns
upland cotton and other eligible agricultural products as well.259
7.199 Upland cotton, and the other agricultural produc ts eligible under the export credit guarantee
programmes at issue, are products covered by the Agreement on Agriculture.260

257 Brazil's request for the establishment of a pane l (document WT/DS267/7) and the parties respective
responses to Panel Question No. 1.
258 Definition for marketing loan programme in 7 CFR 1427.3 (1 January 2003 edition), reproduced in
Exhibit BRA-36 and also in 7 CFR 1413.3 (1 January 1993 edition), reproduced in Exhibit US-3. Upland
cotton harvested from a field has cotton lint and cottonseed. Ginning involves separating cotton lint from
cottonseed. See, for example, Exhibit BRA-12, USDA, ERS, "Cotton: Background for 1995 Farm
Legislation", p. 1; and Exhibit BRA-32, 7 CFR 1427.1102 (1 January 2002 edition), pertaining to the cottonseed
payment programme, discussed infra, paras. 7.233 ff. Certain of the United States measures at issue expressly
require, as a condition of eligibility, that upland cotton be "baled" and/or "ginned" (see e.g. Exhibit BRA-36, 7
CFR 1427.5(b)(11) in respect of marketing loan prog ramme and loan deficiency payments; and Exhibit BRA-
37, 7 CFR 1427.103(b) in respect of user marketing (Step 2) payments, referring to "baled" upland cotton "lint";
"loose"; semi-processed and reginned (processed) motes). The definition of upland cotton for the PFC
programme also included brown lint cotton in 7 CFR 1412. 103 (1 January 2002 edition), reproduced in Exhibit
BRA-31. Unless otherwise indicated, references in this report to "upland cotton" ordinarily refer to upland
cotton lint.
Upland cotton accounts for approximately 97 per cent of United States cott on production: see USDA
Economic Research Service, Briefing Room – Cotton, and background paper dated July 2001, reproduced in
Exhibits BRA-13 and BRA-46, respectively. It does not include extra long staple ("ELS") cotton. The parties
confirmed in response to Panel Question No. 1 that the information submitted -- at least up to that point --
related to upland cotton.
259 See the preliminary rulings in Section VII:B supra. The three export subsidy programmes at issue
are briefly described in this Section, infra, paras. 7.236 ff. Our export subsidy findings are contained infra in
Section VII:E. In response to Panel Question No. 1, the United States indicated that the CCC does not maintain
data to distinguish transactions involving different types of cotton, but indicated that "[...] the United States has
no reason to believe that types of cotton other than upland cotton constitute a material percentage of such
transactions".
260 Article 2 and Annex 1 of the Agreement on Agriculture . In particular, the Panel notes that the
Agreement covers products under Harmonized System Headings 52.01 to 52.03 (raw cotton, waste and cotton
carded and combed). The other agricultural commodities eligible under the export credit guarantee programmes
are considered in Section VII:E of this report.

2. Measures at issue
(a) General overview
7.200 The Agricultural Act of 1949 261 and the Agricultural Adjustment Act of 1938262 make up the
major part of what is known as the "permanent la w" that provides for United States commodity price
and farm income support. The United States Congress regularly enacts omnibus farm bills that expire
after four, five or six years which amend and suspend many provisions of the Agricultural Act of 1949
in order to effect temporary changes in the le vels and design of commodity programmes. If
temporary legislation were to expire before new legislation was enact ed, the law would revert back to
the provisions of the permanent law.263
7.201 The last three farms bills have been the F ood, Agriculture, Conservation and Trade Act of
1990 (the "FACT Act of 1990"), the Federal Agricu ltural Improvement and Reform Act of 1996 (the
"FAIR Act of 1996") and the Farm Security and Rural Investment Act of 2002 (the "FSRI Act of
2002").264 The FAIR Act of 1996 repealed some provisions of the Agricultural Act of 1949,
suspended the application of other provisions through 2002 and authorized payments under
programmes for the 1996 through 2002 crops of specified agricultural commodities, including upland
cotton. The FSRI Act of 2002, which entered into law on 13 May 2002, suspends the vast majority of
the provisions of the permanent law and author izes payments under programmes for the 2002 through
2007 crop years for specified agricultural commodities, including upland cotton. Additionally,
Congress provides ad hoc emergency and supplementary assistance under separate legislation.
265
7.202 The United States federal commodity programmes are administered by the Secretary of the
United States Department of Agriculture (referred to in this report as the "Secretary" or the "USDA").
The Commodity Credit Corporation Charter Act of 1948, which also forms part of the permanent law,
provides the Secretary with broad authority to implement commodity programmes to support prices
through loans, purchases, payments and other operations. 266 The Commodity Credit Corporation
("CCC"), which has no staff, is essentially a financ ing institution for USDA's farm price and income
support commodity programmes and support to agricultural exports. 267 It is authorized to buy, sell,
lend, make payments and engage in other ac tivities for the purpose of increasing production,
stabilizing prices, assuring adequate supplies, and f acilitating the efficient marketing of agricultural
commodities. The majority of the programmes f unded through CCC are administered by employees
of the Farm Service Agency ("FSA").268
7.203 The Federal Crop Insurance Act is Title V of the Agricultural Adjustment Act of 1938 which
grants the Secretary authority to provide crop insurance and reinsurance.269 Congress amends this title

261 Public Law 81-439.
262 Public Law 75-430.
263 See USDA: "Provisions of the Agricultural Improvement and Reform Act of 1996, Appendix III:
Major Agricultural and Trade Legislation 1933-1996" an d Congressional Research Service: "Farm Commodity
Programs: A Short Primer", reproduced in Exhibits BRA-24 and BRA-255, respectively.
264 Public Laws 101-624, 104-127 and 107-171, respectively.
265 See Congressional Research Service: "Farm Commodity Programs: A Short Primer", reproduced in
Exhibit BRA-255.
266 See Congressional Research Service: "Farm Commodity Programs: A Short Primer", reproduced in
Exhibit BRA-255.
267 See Congressional Research Service report for Congress "What is a Farm Bill?" dated 5 May 2001,
an extract of which is reproduced in Exhibit BRA-416. The CCC is the entity responsible for providing the
three types of export credit guarantee programmes at i ssue in this dispute – see 7 USC 5622, reproduced in
Exhibit BRA-141.
268 See Congressional Research Service: "Farm Commodity Programs: A Short Primer", reproduced in
Exhibit BRA-255.
269 See USDA: "Provisions of the Agricultural Improvement and Reform Act of 1996, Appendix III:
Major Agricultural and Trade Legislation 1933-1996", reproduced in Exhibit BRA-24.

from time to time. Two major amendments have been the Federal Crop Insurance Reform Act of
1994 and the Agricultural Risk Protection Act of 2000 (the "ARP Act of 2000").
270 Federal crop
insurance is administered by the Federal Crop Insu rance Corporation ("FCIC"), which is an agency
within the USDA, supervised by the Risk Management Agency, which is an independent office within
the USDA.
(b) Marketing loan programme payments
7.204 Marketing loan programme payments for upl and cotton began in 1986 and have continued
under successive legislation, including the FAIR Act of 1996 271 and the FSRI Act of 2002. 272 The
marketing loan programme is intended to minimize potential loan forfeitures by providing interim
financing to eligible producers on their eligible production and facilitate the orderly distribution of
eligible commodities throughout the year.273 Accordingly, rather than selling the crop at harvest when
prices tend to be at their lowest, the proceeds of th e interim loan enable producers to pay off their
expenses when they become due, while storing their pledged harvested crop as collateral and repaying
the loan when market conditions are potentially more favourable.
7.205 Under the FAIR Act of 1996, marketing assistan ce loans for upland cotton were provided to
producers for upland cotton harvested on a farm c ontaining eligible cropland covered by a production
flexibility contract (see below). The loans for upl and cotton were made on conditions prescribed by
the Secretary for a term of ten months. The legisl ation provided that the loan rate for upland cotton
was determined by the Secretary for each year's crop at a rate that was no less than the smaller of 85
per cent of the five year Olympic average 274 of county spot market prices 275, or 90 per cent of the
Northern Europe-based average price but which s hould be not less than 50 cents per pound and not
more than 51.92 cents per pound. 276 The loan rates for the 1999, 2000, 2001 and 2002 crops of
upland cotton were each determined at 51.92 cents per pound. 277 The loans were non-recourse, so a
producer had the option to deliver to the CCC the qua ntity of a commodity pledged as collateral for
the loan as payment in full when the loan was due to be repaid.
7.206 Under the FSRI Act of 2002, marketing assistance loans continue to be provided, but certain
features of the programme have been changed. In particular, loans are provided to producers for any
upland cotton produced on a farm, the term of a marketing assistance loan for upland cotton is now
nine months and the loan rate for upland cotton is fixed by the Act itself at 52 cents per pound for the
2002 through 2007 crop years.
7.207 The repayment rate for marketing loans is th e lower of the adjusted world market price 278 and
the loan rate plus interest. When the adjusted world market price is lower than the loan rate, the
producer repays at less than the loan rate and the di fference is referred to as a "marketing loan gain".

270 Public Law 103-354, Title I, and Public Law 106-224, respectively.
271 FAIR Act of 1996, Title I, Subtitle C (sections 131-135), reproduced in Exhibits BRA-28 and US-
22.
272 FSRI Act of 2002, Title I, Subtitle B (sections 1201-1205), reproduced in Exhibits BRA-29 and US-
1, implemented under 7 CFR 1427, Subpart A, reproduced in Exhibit BRA-36.
273 USDA Fact Sheet, June 2003, "Nonrecourse marketing assistance loan and loan deficiency payment
program".
274 An "Olympic average" is a 5-year average ex cluding the highest and lowest values. See USDA
Economic Research Service side-by-side comparison of 1996 and 2002 farm bills' commodity programs,
reproduced in Exhibit BRA-27.
275 The price at which a physical co mmodity (e.g., upland cotton) for immediate delivery is selling at a
given time and county.
276 FAIR Act of 1996, section 132(c), reproduced in Exhibit BRA-28.
277 Table 19 in Agricultural Outlook, published by USDA, May 2002, p. 50, (May 2002) reproduced in
Exhibit BRA-142 and (November 2003), reproduced in Exhibit BRA-394.
278 That is, adjusted to United States quality and location as determined by the Secretary.

Alternatively, a producer may forego a marketing loan and receive a "loan deficiency payment" in the
amount of the difference between the lower adju sted world market price and the loan rate. 279
Additionally, in October 1999, the FAIR Act of 1996 was amended to include provisions for the
issuance of "commodity certificates", available to producers, including upland cotton producers, to
use in acquiring 1998 through 2002 crop collate ral pledged to CCC for a commodity loan. 280
Marketing loan gains, loan deficiency paymen ts and commodity certificate exchange gains are
collectively referred to below as "marketing loan programme payments".
7.208 When loans are repaid, the CCC charges interest at a rate 1 per cent higher than the rate it
pays the Treasury. The CCC forgives interest and pays storage charges for the loan period when
upland cotton under loan is forfeited, and also on redemption of upland cotton under loan where the
repayment amount is too low to satisfy the loan amount and those charges.281
(c) User marketing (Step 2) payments
7.209 The upland cotton user marketing certificate or "Step 2" programme is a special marketing
loan provision for upland cotton. The progra mme has been authorized since 1990 under successive
legislation, including the FAIR Act of 1996 282 and the FSRI Act of 2002. 283 It provides for the
issuance of marketing certificates or cash payments (collectively referred to below as "user marketing
(Step 2) payments") 284 to eligible domestic users and e xporters of eligible upland cotton 285 when
certain market conditions exist such that United States cotton pricing benchmarks are exceeded.
7.210 Under the FAIR Act of 1996, the Secretary issued user marketing (Step 2) payments to
domestic users and exporters of upland cotton fo r documented purchases by domestic users and sales
for export by exporters made in a week following a consecutive four-week period when the lowest
price quotation for United States cotton delivered to Northern Europe exceeded the Northern Europe
price quotation by more than 1.25 cents per pound, and the adjusted world price did not exceed 130
per cent of the marketing loan rate for upland cotton. Payments were made in certificates or cash to
domestic users or exporters at a rate per pound equal to the difference between the two price
quotations during the fourth week of the period, minus the 1.25 cents per pound threshold.
286

279 All the eligibility requirements for Market Assistance loans for upland cotton apply to LDPs, except
the cotton does not have to be ginned or stored in a warehouse and LDPs are paid after the cotton is ginned.
280 See USDA Fact Sheet "Commod ity Certificates" July 2000; and regulations at 7 CFR 1401 and
1427.22 (1 January 2003 edition), reproduced in Ex hibits BRA-52, BRA-34 and BRA-36, respectively.
Payment limitations under the marketing loan payment programme are explained in the Report of the
Commission on the Application of Payment Limitations for Agriculture, August 2003, reproduced in Exhibit
BRA-276.
281 See 7 CFR 1427.13 and 7 CFR 1427.19(e), reproduc ed in Exhibit BRA-36. See also 7 CFR 1405,
cited in the United States' response to Panel Question No. 192(b); and see USDA f act sheet: Upland Cotton (1
January 2003 edition), page 2, reproduced in Exhibit BRA-4.
282 Section 136 of the FAIR Act of 1996, reproduced in Exhibits BRA-28 and US-22.
283 Section 1207 of the FSRI Act of 2002, reproduced in Exhibits BRA-29 and US-1, implemented
under 7 CFR 1427, Subpart C, reproduced in Exhibit BRA-37.
284 For the purposes of this dispute, on the basis of the views of the parties, we make no distinction
between user marketing (Step 2) cash payments and mark eting certificates. See Brazi l's and the United States'
respective responses to Panel Question No. 110 (a).
285 "Eligible upland cotton" is defined as: "domesti cally produced baled upland cotton which bale is
opened by an eligible domestic user ... or exported by an eligible exporter" during a certain period. It can be
"baled lint", loose, certain semi-processed motes and re -ginned (processed) motes. It cannot be cotton for
which a user marketing (Step 2) payment has been made available; imported cotton; raw (unprocessed) motes or
textile mill wastes. See 7 CFR 1427.103(a),(b) and (c), reproduced in Exhibit BRA-37.
286 Section 136(a) of the FAIR Act of 1996 reproduced in Exhibits BRA-28 and US-22.
Section 136(a)(5) limited total expenditures under this programme to $701 million, but was later repealed.

7.211 Under the FSRI Act of 2002, Step 2 payments con tinue to be paid, but certain features of the
programme have been changed. In particular, application of the 1.25 cents per pound threshold has
been delayed until 1 August 2006 (i.e. for the 2002 through 2005 marketing years). Consequently,
Step 2 payments are issued following a consecutiv e four-week period when the lowest price quotation
for United States cotton delivered to Northern Euro pe exceeded the Northern Europe price quotation
by any amount and the adjusted world price did not exceed 134 per cent (not 130 per cent, as under
the FAIR Act of 1996) of the marketing loan rate. Payments are made at a rate per pound equal to the
difference between the two price quotations during the fourth week of the period, with no reduction
for the threshold.
287
(d) Production flexibility contract payments
7.212 Production flexibility contract ("PFC") paymen ts were only made under the FAIR Act of
1996.288 The last payment was made not later than 30 September 2002. 289 The programme provided
support to producers (as defined) 290 based on historical acreage and yields for seven commodities,
including upland cotton (referred to in this report as "covered commodities" 291). Its stated purpose
was to support farming certainty and flexibility while ensuring continued compliance with farm
conservation and wetland protection requirements.292
7.213 An eligible producer could enter into a PFC for the 1996 through 2002 crops during a one-
time enrolment period that ended on 1 August 1996. 293 Cropland was eligible for coverage under a
PFC if at least a portion of it had been enrolled in the deficiency payments programme under the
previous farm bill for at least one of the 1991 through 1995 crops.294
7.214 PFC payments did not depend on then-current prices of commodities. The FAIR Act of 1996
appropriated a budgetary amount to the programme for each fiscal year from 1996 through 2002 and
allocated a certain percentage of that amount to each of the seven commodities. 295 The allocation for
a commodity was distributed among the PFC contr acts according to the acreage and yield for the
particular commodity which each PFC contract c overed. That acreage was not the amount of acres
currently planted to that commodity (referred to in this report as "planted acres"). Rather, it was the
average of the plantings of each commodity in the 1993 through 1995 marketing years according to

287 Section 1207(a) of the FSRI Act of 2002, reproduced in Exhibits BRA-29 and US-1, and 7 CFR
1427.107 (1 January 2003 edition), reproduced in Exhibit BRA-37.
288 FAIR Act of 1996, Title I, Subtitle B (sections 111-118), reproduced in Exhibits BRA-28 and US-
22, and 7 CFR 1412.101-1412.501 (1 January 2002 edition), reproduced in Exhibit BRA-31.
289 Section 112(d)(1) of the FAIR Act of 1996, reproduced in Exhibit BRA-28.
290 "Producer" was defined as "an owner, operator, land lord, tenant, or sharecropp er that shares in the
risk of producing a crop and is entitled to share in the crop available for marketing from the farm, or would have
shared had the crop been produced." See section 102(12) of the FAIR Act of 1996 and 7 CFR 1412.202
(1 January 2002 edition), reproduced in Exhibits BRA-28 and US-22, and BRA-31, respectively.
291 The FAIR Act of 1996 used the term "contract commodity".
292 Section 101(b)(1) of the FAIR Act of 1996, reproduced in Exhibit BRA-28.
293 Acreage returning from conservation reserve was allowed to enrol subsequently.
294 Under the FACT Act of 1990, "deficiency payments" were direct payments made to producers who
participated in an annual programme for certain commodities, including upland cotton. The crop-specific
payment rate for a particular crop year was based on th e difference between an established target price and the
higher of the loan rate for that commodity or the national average mark et price for the commodity during a
specified time period. During the marketing years 1990 to 1996, the target price for upland cotton was 72.9
cents per pound. Payment was conditional upon planting upland cotton for harvest – see the United States'
rebuttal submission, para. 112, and USDA Economic Research Service: Agricultural Outlook Supplement, April
1996, "Glossary of Agriculture Policy Terms" at p. 5, reproduced in Exhibit BRA-25.
295 The amount appropriated for each fiscal year ranged between $5.8 billion to $4.008 billion. The
amount of this allocated to upland cotton in each fiscal year was 11.63 per cent; see section 113(a) and (b) of the
FAIR Act of 1996, reproduced in Exhibit BRA-31.

the method of calculation that would have app lied to the 1996 crop under the previous farm bill 296
(referred to in this report as "base acres" 297). The payment rate for the 1999, 2000 and 2001 crops
were set for each of the seven covered commoditi es. The payment rates for upland cotton were 7.88
cents, 7.33 cents and 5.99 cents, per pound, respectively. 298 PFC payments were made on 85 per cent
of the base acreage for each co mmodity multiplied by the corresponding payment rate multiplied by
the applicable payment yield, which was the yield established for the 1995 crop.299
7.215 Producers were permitted to plant any commodity or crop on base acres, subject to certain
limitations and exceptions concerning the planting of fruits and vegetables. 300 PFC payments were
either eliminated or reduced if producers plan ted fruits and vegetables on base acres, unless they
satisfied a special eligibility criterion. Additionall y, producers had to use the land for an agricultural
or related activity and not for a non-agricultural comme rcial or industrial use and comply with certain
conservation requirements. 301 Otherwise, PFC payments were not affected by what was planted on
base acreage nor by whether anything was produced on it at all.302
(e) Market loss assistance payments
7.216 Market loss assistance ("MLA") payments were made under four separate pieces of
legislation, one each for the years 1998 through 2001. 303 T h e y w e r e ad hoc emergency and
supplementary assistance provided to producers in order to make up for losses sustained as a result of
recent low commodity prices.
304
7.217 The 1998 MLA payments were intended essentially as a 50 per cent additional PFC
payment.305 The 1998, 1999 and 2001 Acts each appr opriated a dollar amount to assistance which
was divided among PFC payment recipients propor tionately to their respective previous PFC
payment.306 The 2000 Act provided for payments at the same contract payment rates as the 1999
Act.307 MLA payments were only made to recipients enrolled in the PFC programmes.

296 Under the FACT Act of 1990, base acres were calculated according to a rolling average of the
previous three crop years for upland cotton. See the United States' corr ected response to Panel Question No.
216 in its 28 January 2004 comments on Brazil's responses.
297 The FAIR Act of 1996 used the term "contract acreage".
298 See USDA Economic Research Service Agricultural Outlook (online data as of November 2003)
reproduced in Exhibit BRA-394, also May 2002 edition, p. 50, reproduced in Exhibit BRA-142, and USDA
Farm Service Agency Fact Sheet Upland Cotton – Summary of 2000 Commodity Loan and Payment Program
June 2001 edition, p.1, reproduced in Exhibit BRA-45.
299 Section 114(d) of the FAIR Act of 1996, reproduced in Exhibit BRA-28.
300 The limitations and exceptions are set out in detail in Section VII:D of this report.
301 Section 111(a) of the FAIR Act of 1996. An agricultural use refers to cropland planted to a crop,
used for haying or grazing, idled for weather-related reasons or natural disasters, or diverted from crop
production to an approved cultural practice that prevents erosion or other degradation.
302 The Panel makes certain factual findings on the relationship between farms with upland cotton base
acres and upland cotton planted acres in the 1999 through 2002 marketing years in the Attachment to
Section VII:D of this report.
303 Market loss assistance payments were provided pursuant to the following Acts: the Agriculture,
Rural Development, Food and Drug Administration and Related Agencies Appropriation Act of 1999 for the
1998 crop; the Agriculture, Rural Development, Food and Drug Administration and Related Agencies
Appropriation Act of 2000 for the 1999 crop; the Agriculture Risk Protection Act of 2000 for the 2000 crop;
and the Crop Year 2001 Ag riculture Economic Assistance Act for th e 2001 crop, reproduced in Exhibit BRA-
138, as discussed in Section VII:B of this report.
304See United States' rebuttal submission, para. 100 and USDA Economic Research Service: "Cotton:
Background and Issues for Farm Legislation", July 2001 at page 9, reproduced in Exhibit BRA-46.
305 See United States' rebuttal submission, para. 99.
306 The budgetary outlays for MLA payments (in respect of wheat, feed grains, rice and upland cotton
base acres) in 1998, 1999 and 2001 were $2.857 billion, $5.544 billion and $4.622 billion, respectively. See

(f) Direct payments
7.218 The direct payments ("DP") programme was established under the FSRI Act of 2002.
308 It
provides support to producers (as defined) 309 based on historical acreage and yields for nine
commodities, which are those that were covere d by the PFC programme, including upland cotton,
plus soybeans and other oilseeds (referred to in the legislation and this report as "covered
commodities").310 There are special provisions for peanuts (also referred to in this report as a
"covered commodity").311
7.219 An eligible producer must enter into an annual agreement in order to receive payments for a
crop year. DP payments are made to producers on farms for which payment yields and base acres are
established for each of the 2002 through 2007 crop years of each covered commodity.
7.220 DP payments do not depend on current prices of commodities. The FSRI Act of 2002 sets
fixed payment rates on a per unit basis for the 2002 through 2007 crop years. The payment rate for
upland cotton is 6.67 cents per pound. Payments ar e not made in respect of planted acres. DP
payments are made on 85 per cent of the b ase acreage for each commodity multiplied by the
applicable payment yield, which was the yield established for the 1995 crop (if there was one). Under
the implementing regulations, the amount of a PFC payment received for the 2002 crop was deducted
from the DP payment made in the 2002 crop year.
312
7.221 Owners had a one-time opportunity to elect the method for calculation of their base acreage.
An owner could elect to have base acreage for a ll covered commodities calculated on the basis of the
four-year average of planted acreage during the 1998 through 2001 crop years plus acreage the
producers were prevented from planting by natural di sasters during the same period. Failing such an
election, an owner's base acreage in the DP pr ogramme is the same as under the PFC programme for
the 2002 payment (i.e. the three year average of the 1993 through 1995 marketing years for upland
cotton and rice), plus the four-year average of planted acreage for eligible oilseeds during the 1998
through 2001 crop years.
313
7.222 Producers are permitted to plant any commodity or crop on base acres, subject to certain
limitations concerning the plan ting of fruits and vegetables. 314 DP payments are either eliminated or
reduced if producers plant these crops on base acres, unless they are destroyed before harvest, subject
to certain exceptions. Additionally, producers must use the land for an agricultural or conserving use
and not for a non-agricultural commercial or indus trial use and abide by conservation compliance

USDA Economic Research Service Features: "The 2002 Farm Bill: Title I – Commodity Programs" , printed
16 September 2002, page 2, reproduced in Exhibit BRA-27.
307 The resulting budgetary outlay in 2000 was $5.465 billion.
308 FSRI Act of 2002, Title I, Subtitle A, reproduced in Exhibits BRA-29 and US-1, implemented by 7
CFR 1412, reproduced in Exhibit BRA-35.
309 "Producer" is defined as "an owner, operator, landlord, tenant, or sharecropper that shares in the risk
of producing a crop and is entitled to share in the crop available for marketing from the farm, or would have
shared had the crop been produced." See section 1001(12) of the FSRI Act of 2002 and 7 CFR 1412.402
(1 January 2003 edition), reproduced in Exhibits BRA-29 and US-1, and BRA-35, respectively.
310 The term "other oilseed" includes sunflower seed , rapeseed, canola, safflower, flaxseed, mustard
seed, and any other oilseed designated by the United States Secretary of Agriculture. A direct payment of $36
per ton is available to peanut producers on eligible ba se period (1998-2001) peanut production: see section
1301 of the FSRI Act of 2002. The parties agree that the direct payments programme covers peanuts: see
Brazil's first written submission, para. 49, footnote 110 and the United States' rebuttal submission, para. 57,
footnote 46.
311 FSRI Act of 2002, Title I, Subtitle C, reproduced in Exhibit US-1.
312 See 7 CFR Chapter. XIV (1 January 2003 edition) 1412.502(f), reproduced in Exhibit BRA-35.
313 Generally, oilseed base acres can not exceed th e difference between total acreage for covered crops
for the crop year and the sum of base acreage under the PFC programme for the 2002 payment.
314 The limitations are set out in detail in Section VII:D of this report.

requirements.315 Otherwise, DP payments are not affect ed by what is produ ced on base acreage nor
by whether anything is produced on it at all.316
(g) Counter-cyclical payments
7.223 The counter-cyclical payments ("CCP") programme was also established by the FSRI Act of
2002.317 It provides support to producers (as defined) 318 based on historical acreage and yields for the
same commodities as DP payments, including upland cotton.
7.224 An eligible producer must enter into an annual agreement in order to receive payments for a
crop year. The eligibility requirements and planting flexibility requirements are the same as for the
DP programme. CCP payments, like DP paymen ts, are made to producers on farms for which
payment yields and base acres are established for each of the 2002 through 2007 crop years of each
covered commodity.
7.225 CCP payments depend on the current prices of commodities. They are provided to producers
with base acres and yields for a covered commodity for each of the 2002 through 2007 crop years
whenever the effective price falls below the target price, which is fixed by the Act at 72.4 cents per
pound for upland cotton.
319 The effective price for a commodity is the sum of the DP payment rate
(see above), plus the higher of the national average fa rm price for the marketing year or the loan rate
(see above). The difference between the effective pri ce and the target price is the CCP payment rate.
Consequently, the CCP payment rate, DP payment rate and, where applicable, the loan rate, are equal
to the difference between the market price and 72.4 cents per pound.
7.226 CCP payments are made on 85 per cent of the base acreage for each commodity multiplied by
the corresponding payment rate multiplied by the applicable payment yield. 320 An owner who elected
to have his or her base acreage calculated on the ba sis of the four-year average of planted acreage
during the 1998 through 2001 crops, had a one-time opportunity partially to "update" CCP payment
yields for CCP payments for all covered commodities, using one of two methods which both included
the farm's average yields for the 1998 through 2001 crop years.
321
(h) Crop insurance payments
7.227 The United States government offers annual crop yield or revenue insurance coverage to
producers of upland cotton and other crops for losses due to natural disasters and market fluctuations
and offers reinsurance to provide rs of such insurance under the Federal Crop Insurance Act
322, as
amended by other legislation, including the ARP Act of 2000. A stated objective of this legislation is

315 Section 1105(a)(1) of the FSRI Act of 2002.
316 The Panel makes certain factual findings on the relationship between farms with upland cotton base
acres and upland cotton planted acres in the 1999 through 2002 marketing years in the Attachment to
Section VII:D of this report.
317 FSRI Act of 2002, Title I, Subtitle A, reproduced in Exhibits BRA-29 and US-1, implemented by
7 CFR 1412, reproduced in Exhibit BRA-35.
318 See supra, footnote 309.
319 Target prices are fixed for MY 2002-03 and then raised to fixed levels for MY 2004-07 except for
soybeans, rice, upland cotton and peanuts, which remain at the MY 2002-03 levels throughout the term of the
FSRI Act of 2002.
320 Section 1104(e) of the FSRI Act of 2002.
321 Section 1102(e) of the FSRI Act of 2002.
322 Sections 501 through 522, and Section 523, of the Federal Crop Insurance Act , as amended, in
7 USC 1501 et seq., are reproduced in Exhibits BRA-30 and BRA-336, respectively.

to promote the national welfare by improving the ec onomic stability of agriculture through a sound
system of crop insurance.
323
7.228 In general, the Federal Crop Insurance Cor poration ("FCIC") may insure, or provide
reinsurance for insurers of, producers of agri cultural commodities grown in the United States under
one or more plans of insurance determined to be adapted to the agricultural commodity concerned.
To qualify for coverage under a plan of insurance, the losses of the insured commodity must be due to
drought, flood, or other natural disaster as determined by the Secretary. 324 There are also "special
provisions for cotton and rice" whereby, beginning with the 2001 crop, the FCIC "shall offer plans of
insurance, including prevented pl anting coverage and replanting c overage, ... that cover losses of
upland cotton ...resulting from failure of irrigatio n water supplies due to drought and saltwater
intrusion".
325
7.229 There are also specific provisions on catastrophi c risk protection and additional coverage. In
particular, FCIC crop insurance plans include bot h protection against losses resulting from low crop
yields and protection against low revenue, whether it results from low yields or low crop prices.
Coverage levels range from catastrophic risk covera ge (50 per cent of yield, indemnified at 55 per
cent of expected price for the 1999 and subsequent crop years) for which the producer pays none of
the premium,326 to additional or "buy-up" coverage, which provides a highe r level of coverage (up to
75, or in some cases 85 per cent of expected yiel d or revenue) for which the producer pays a portion
of the premium. The FCIC pays the balance of the premium. 327 It also reinsures the insurance
provider, thereby covering underwriting costs, and defrays some of its administrative costs.
7.230 The Federal Crop Insurance Act defines the "agricultural commodities" to which it applies.328
These are predominantly crops (as opposed to livestock) . The legislation also provides for "livestock
pilot programmes".329 These pilot programmes, such as the Adjusted Gross Revenue programme 330
and the "AGR-Lite" programme 331 provide for payment by the FCIC of a percentage of premium and

323 Section 502 of the Federal Crop Insurance Act , as amended, in 7 USC 1501 et seq., reproduced in
Exhibits BRA-30. Federal crop insurance is explained in USDA: "U.S. Crop Insurance: Premiums, Subsidies
and Participation" in Agricultural Outlook, December 2001, and USDA: "Briefing Room: Farm and Commodity
Policy: Crop Yield and Revenue Insurance", reproduced in Exhibits BRA-58 and BRA-59, respectively.
324 Section 508(a)(1) of the Federal Crop Insurance Act , as amended, in 7 USC 1501 et seq. ,
reproduced in Exhibit BRA-30.
325 Section 508(a)(8) of the Federal Crop Insurance Act , as amended, in 7 USC 1501 et seq.,
reproduced Exhibit BRA-30.
326 Section 508(e)(2)(A) of the Federal Crop Insurance Act , as amended, in 7 USC 1501 et seq.,
reproduced Exhibit BRA-30. An administrative fee, up to a maximum of $100, is payable per crop per county,
which can be waived for limited-resource farmers: see section 508(b)(5)A and E.
327 The formula for the amount of such premium paid by the FCIC is set out in section 508(e)(2)(B)-(G)
of the Federal Crop Insurance Act, as amended, in 7 USC 1501 et seq., reproduced Exhibit BRA-30.
328 Section 518 of the Federal Crop Insurance Act , as amended, in 7 USC 1501 et seq., reproduced in
Exhibit BRA-30.
329 Exhibit BRA-336 contains section 523 of the Federal Crop Insurance Act . Entitled "Pilot
Programs", this section envisages that pilot programs may provide insurance protection against losses involving,
inter alia, livestock poisoning and disease. The livestock elig ible for livestock pilot programmes are defined as
including, but not being limited to, cattle, sheep, swine, goats and poultry (Section 523(b)).
330 Exhibit BRA-272 contains a USDA fact sheet description of the AGR pilot programme for
MY 2003. It indicates that AGR "complements other Federal crop insurance plans". When a producer
purchases both AGR and other crop insurance plans, the AGR premium will be reduced. A producer must "earn
no more than 35 per cent of expected allowable income from animals and animal products".
331 This programme is described as "a streamlined whole-farm revenue protection package that can be
used as a stand-alone coverage or in addition to other individual crop insurance policies (except A.G.R.)".
Initially available in Pennsylvania, AGR-Lite has been expanded to 11 northeastern states: see USDA RMA
fact sheets, Adjusted Gross Revenue – Lite (AGR-Lite ), February 2003, reproduced in Exhibit BRA-338 and

administrative fee 332 in respect of certain policies for some types of livestock production in certain
limited areas of the United States.
7.231 Producers generally apply for FCIC crop insuran ce policies prior to planting but usually pay
their share of the premiums after harvest. 333 The policies are sold through government-approved
private insurance providers.334 The price paid by the producer is the total premium minus the amount
paid by the FCIC. The portion of the premium paid by the FCIC depends on the level of coverage and
the features of the relevant plan but is the sa me for all crops covered by a particular plan. 335
Emergency premium discounts additionally reduced produ cer costs of buy-up coverage, at rates of 30
per cent and 25 per cent in 1999 and 2000, respectively. 336 The ARP Act of 2000 increased the
portion of the premium337 paid by the FCIC commencing in the 2001 crop year.
7.232 Over 90 per cent of cotton area covered by fede ral crop insurance in the 2002 crop year is
insured at coverage levels of 70 per cent or less of expected yield or revenue for which the FCIC pays
a portion of the premium.338
(i) Cottonseed payments
7.233 Cottonseed payments are ad hoc emergency and supplementary assistance provided to first
handlers339 and producers of cottonseed. 340 The payments within the Pa nel's terms of reference were
made under the ARP Act of 2000 in order to offset low commodity prices. Payments were available
only for cottonseed produced and ginned in the United States.341
7.234 The ARP Act of 2000 and a later Act 342 each appropriated a specific amount of money for the
2000 crop of cottonseed. 343 The payment rate (dollars per ton) was calculated by dividing the total
available funds by the total payment quantity of 200 0 crop cottonseed of first handlers who applied to
participate.344

November 2003 available on the USDA Risk Management website: see also United States' response to Panel
Question No. 133.
332 These are to be determined by the amount of funds made available and the number of participants.
333 USDA Economic Research Service: Briefing Room, farm and commodity policy – crop yield and
revenue insurance, reproduced in Exhibit BRA-59.
334 USDA Economic Research Service: Briefing Room, farm and commodity policy – crop yield and
revenue insurance, reproduced in Exhibit BRA-59.
335 USDA Economic Research Service: Briefing Room, farm and commodity policy – crop yield and
revenue insurance, reproduced in Exhibit BRA-59.
336 See Exhibit BRA-61.
337 See Exhibits BRA-59 and BRA-61.
338 See United States' oral statement at the resumed se ssion of the first substantive meeting, para. 46,
United States' response to Panel Question No. 136, and Exhibit BRA-61.
339 A first-time handler of cottonseed is a gin, which means a person that removes cotton seed from
cotton lint. See 7 CFR 1427.1102 (1 January 2002 edition), reproduced in Exhibit BRA-32.
340 The implementing regulations of cottonseed payments define cottonseed as, "the seed from any
variety of upland cotton and extra long staple cotton (ELS) produced in the United States." Approximately 97
per cent of the annual United States cotton crop is from upland cotton: see USDA Economic Research Service
Briefing Room Cotton document, reproduced in Exhibit BRA-13.
341 7 CFR 1427.1100 (b) (1 January 2002 edition), reproduced in Exhibit BRA-32.
342 The Agricultural Risk Protection Act of 2000, Public Law 106-224, section 204(e), reproduced in
Exhibit BRA-137, and the Crop Year 2001 Agricultural Economic Assistance Act , Public Law 107-25,
reproduced in Exhibit BRA-138.
343 $100 million and $84.7 million, respectively.
344 See 7 CFR 1427.1100(a) and 1427.1109, reproduced in Exhibit BRA-32.

7.235 Payments were made to first-time handlers be cause they usually retained proceeds from the
sale of cottonseed. However, it was a condition that they shared any payment received with producers
to the extent that the revenue from the sale of the cottonseed was shared with the producer.
(j) Export credit guarantee measures
(i) Overview
7.236 The USDA administers export credit guarant ee programmes for commercial financing of
United States agricultural commodities
345 through the CCC. 346 The CCC operates three export credit
guarantee programmes: General Sales Manager 102 ("GSM 102"), General Sales Manager 103
("GSM 103") and the Supplier Credit Guarantee Programme ("SCGP").347
7.237 According to the stated "purpose of the progr am", the CCC may use export credit guarantees
authorized under the statute to "increase exports of agricultural commodities"; "to compete against
foreign agricultural exports"; "to assist countries in meeting their food and fiber needs..."; and "for
such other purposes as the Secretary determines appropriate ...".348
7.238 Pursuant to the statute, the CCC may: guara ntee the repayment of credit made available to
finance commercial export sales of agricultural co mmodities on credit terms that do not exceed three
years (under the GSM 102 programme); issue guarant ees for the repayment of credit made available
for a period of not more than 180 days by a Un ited States exporter to a buyer in another country
(under the SCGP programme); and guarantee the re payment of credit made available by financial
institutions in the United States to finance co mmercial export sales of ag ricultural commodities on
credit terms of between 3 and 10 years (under the GSM 103 programme) "in a manner that will
directly benefit United States agricultural producers." We examine additional details of each of the
three programmes below.
7.239 The CCC "shall make available" for each relevant fiscal year "not less than $5,500,000,000 in
credit guarantees" under the three export credit guarantee programmes.349
7.240 Export credit guarantees "shall contain such term s and conditions as the [CCC] determines to
be necessary."350

345 We recall that our terms of refe rence include upland cotton and othe r eligible agricultural products
under the three challenged export cr edit guarantee programmes. See supra, Section VII:B. According to
Exhibits BRA-141, -366, 7 USC 5622(h), the CCC "shall finance or guarantee under this section only United
States agricultural commodities". 7 USC 5622(k) sets out percentages of the total amount of export credit
guarantees issued for certain fiscal years that promote the export of processed or high-value agricultural
products, with the balance issued to promote the ex port of bulk or raw agricultural commodities. This
percentage requirement applies to the extent that a reduction in the total amount of guarantees issued is not
required to meet it.
Exhibit BRA-73 contains an excerpt from the USDA website (www.fas.usda.gov/excreds/...) which
offers a summary of activity under the challenged export credit guarantee programmes, indicating the
allocations and applications received by country and commodity, MY 1999-MY 2003.
346 The CCC is a wholly owned government corporation within the USDA. The CCC has no
employees and carries out the majority of its progra mmes through the personnel and facilities of the Farm
Service Agency. See, for example, Commodity Credit Corporation's Financial Statements for Fiscal Year 2002
(Exhibit BRA-158). Brazil's does not challenge the CCC Facility Guarantee programme in this dispute – see
Brazil's 11 August responses to the questions posed by the Panel, footnote 206.
347 These programmes were established by 7 USC 5622. Exhibits BRA-141 and BRA-366.
348 7 USC 5622(d), reproduced in Exhibits BRA-141, BRA-366.
349 7 USC 5641(b)(1), reproduced in Exhibit BRA-297. The CCC retains discretion as to allocation
between short and intermediate terms.
350 7 USC 5622(g), reproduced in Exhibits BRA-141, BRA-366.

7.241 The statute also sets out certain restrictions on the use of credit guarantees. In general, "the
CCC shall not make credit guarantees available in c onnection with sales of agricultural commodities
to any country that the Secretary determines cannot adequately service the debt associated with such
sale."351 All countries eligible for any of the CCC export credit guarantee programmes are
categorized according to risk. A country's risk premium has no impact on the premiums payable
under the programmes.352
(ii) General Sales Manager 102 ("GSM 102")
7.242 Under the GSM 102 export credit guarantee programme, the CCC is authorized to guarantee
the repayment of credit made available to finance commercial export sales of agricultural
commodities from privately owned stocks on credit terms between 90 days and three years. The CCC
generally covers 98 per cent of the principal and a portion of the interest. The CCC selects
agricultural commodities and products according to market potential. The CCC does not provide
financing, but rather guarantees payments due fro m foreign banks. To secure such a payment
guarantee, once a firm export sale exists, the United States exporter must apply prior to the date of
exportation. The exporter pays a fee calculated on the dollar amount guaranteed, based on a schedule
of rates applicable to different credit periods. Ther e is a statutory cap on the fee charged of 1 per cent
of the guaranteed dollar value of the transaction. 353 In terms of financing, the CCC-approved foreign
bank issues an irrevocable letter of credit in favour of the United States exporter, ordinarily advised or
confirmed by the financial institution in the United States which agrees to extend credit to the foreign
bank. If the foreign bank fails to make any paym ent as agreed, the exporter is required to submit a
notice of default to the CCC. The CCC pays a valid claim for loss.354
(iii) General Sales Manager 103 ("GSM 103")
7.243 The GSM 103 programme operates in a similar fashion to GSM 102. The main differences
between the two programmes include: export cr edit guarantees under GSM 103 are "intermediate
term credit guarantees" issued for terms from three to 10 years 355; there are additional statutory
required determinations to be made when the CCC issues guarantees 356; and there is no statutory cap
on the origination fees that may be charged by th e CCC in connection with an export credit guarantee
transaction.
(iv) Supplier Credit Guarantee Programme ("SCGP")
7.244 Under the SCGP, the CCC is authorized to i ssue guarantees for the repayment of credit made
available for a period not exceeding 180 days by a United States exporter to a purchaser of United
States agricultural commodities in a foreign countr y. These direct credits must be secured by

351 7 USC 5622(f), reproduced in Exhibits BRA-141, BRA-366.
352 See United States' response to Panel Question No. 86.
353 See United States' response to Panel Question No. 84, where the United States indicates that
section 211(b)(2) of the Agricultural Trade Act of 1978, 7 USC 5641(b)(2) limits the fee of transactions under
the GSM 102 programme, except for those transactions under the CCC Facility Guarantee programme.
354 FAS Online Fact Sheet: CCC Export Credit Guarantee Programmes, reproduced in Exhibit BRA-71.
355 7 USC 5641(b), reproduced in Exhibit BRA-141.
356 7 USC 5622(c), reproduced in Exhibits BRA-141, BRA-366, provides as follows: "The [CCC] shall
not guarantee [...] the repayment of credit made ava ilable to finance an export sale unless the Secretary
determines such sale will: (1) develop, expand or maintain the importing country as a foreign market, on a long-
term basis, for the commercial sale and export of Un ited States agricultural commodities, without displacing
normal commercial sales; (2) improve the capability of the importing country to purchase and use, on a long-
term basis, United States agricultural commodities; or (3) otherwise promote the export of United States
agricultural commodities." ("The reference to ...'on a long-term basis' shall not apply in the case of
determinations with respect to sales to the independent states of the former Soviet Union.") 7 USC 5622(f)(2)
sets out additional criteria for determinations to be made relating to GSM 103.

promissory notes signed by the importers. The CCC does not provide financing, but rather guarantees
payment due from the importer. Typically, the CCC guarantees a portion (65 per cent) of the value of
the exports (principal only; the guarantee does not cover interest). The exporter negotiates terms of
export credit sales with the importer. Once a firm export sale exists, the United States exporter must
apply for a payment guarantee prior to the date of exportation. The exporter pays a fee for the
guarantee calculated on the guaranteed portion of the value of the export sales. There is a statutory
cap on the fee charged of 1 per cent of the guaranteed dollar value of the transaction.
357 The importer
must issue a dollar-denominated promissory note in favour of the United States exporter in the form
specified in the applicable country or regional programme announcement. The United States exporter
may negotiate an arrangement to be paid, in full or in part, by assigning the right to proceeds that may
become payable under the CCC's guarantee to a United States financial institution. If the foreign
bank fails to make any payment, the exporter or assi gnee is required to submit a notice of default to
the CCC. The CCC pays a valid claim for loss.
(k) Export subsidies under the ETI Act of 2000
7.245 The request for establishment of the Panel incl udes export subsidies provided to exporters of
United States upland cotton under the " FSC Repeal and Extraterritorial Income Exclusion Act of
2000" (referred to in this report as the "ETI Act of 2000").358
7.246 Brazil refers the Panel to the findings in the pa nel and Appellate Body reports in an earlier
dispute359 and to a page on the website of the European Commission. 360 Brazil asserts that the ETI
Act of 2000 sets out conditions for the non-taxation of a portion of extraterritorial income that would
otherwise be taxed. It outlines the reasoning of the panel and Appellate Body in that earlier dispute
and recalls that the Appellate Body noted that in order to obtain a subsidy under the ETI Act of 2000,
property produced in the United States must be sold, leased or rented for direct use, consumption or
disposition "outside the United States". 361 Brazil also refers us to the panel's finding in that earlier
dispute that the ETI Act of 2000 created a legal en titlement for recipients to receive export subsidies
with respect to both scheduled and unscheduled agricultural products, as the United States must
provide the tax exclusion upon fulfilment by the taxpa yer of the conditions stipulated in the ETI Act
of 2000.362
7.247 Brazil asserts that exporters in the Unite d States exported United States upland cotton
benefiting from the ETI tax breaks, but it is not in a position to quantify the amount of the subsidy
provided to upland cotton, although it posed this question to the United States during consultations.363
7.248 Brazil requests this Panel to make factual fi ndings regarding the ETI Act of 2000 based on
this evidence.364 It does not submit a copy of the ETI Act of 2000, or the relevant sections of it.
7.249 The panel report in that dispute, which established the facts in that dispute, cites the short title
set out in our terms of reference 365 but the Appellate Body report sets out a short title that we cannot

357 See United States' response to Panel Question No. 85, where the United States indicates that section
211(b)(2) of the Agricultural Trade Act of 1978, 7 USC 5641(b)(2) limits the fee of transactions to this level.
358 Brazil's first written submission , para. 315, refers to the " FSC Repeal and Extraterritorial Income
Act of 2000 (the 'ETI Act')" and its response to Panel Question No. 19 refers to the " FSC Repeal and
Extraterritorial Exclusion Act of 2000 (Public Law 106-519)".
359 Panel Report, US – FSC (Article 21.5 – EC) , WT/DS108/RW, as modified by the Appellate Body
Report in US – FSC (Article 21.5 – EC), WT/DS108/AB/RW.
360 See Brazil's oral statement at the first session of the first substantive meeting , para. 137.
361 Brazil's first written submission, para. 322.
362 Brazil's first written submission, para. 325.
363 Brazil's first written submission, para. 330.
364 See Brazil's oral statement at the first session of the first substantive meeting, para. 139.
365 Panel Report, US – FSC (Article 21.5 – EC), para. 2.1, footnote 14.

identify.366 However, the Public Law number in the sec ond footnote of the Appellate Body report
matches the one given to this Panel by Brazil. 367 Therefore, we are satisfied that the earlier dispute in
fact concerned the same law at issue in the present dispute.
(l) Legislative and regulatory provisions
7.250 Brazil challenges certain legislation and regul ations under which the above subsidies are
currently provided. This challenge relates to th is legislation and these regulations "as such".
Specifically, the measures are:
(i) Marketing loan/Loan deficiency provisions
• Sections 1201(a)-(b), 1202(a)(6), 1202( b)(6), 1204(b), 1205(a)(1), 1205(b),
1205(c)(1), 1608 of the FSRI Act of 2002 368 and 7 USC 7286 (Section 166 of the
FAIR Act of 1996 as amended) and 7 CFR 1427.22 369 to the extent that these
provisions relate to upland cotton.

(ii) User marketing (Step 2) provisions
• Section 1207(a) of the FSRI Act of 2002 370 and 7 CFR 1427.103, 7 CFR
1427.104(a)(1) and (2), 7 CFR 1427.105(a) and 7 CFR 1427.108(d).371

(iii) Direct payments provisions
• Section 1103(a)-(d)(1) of the FSRI Act of 2002
372 and 7 CFR 1412.502.373

(iv) Counter-cyclical payments provisions
• Section 1104(a)-(f)(1) of the FSRI Act of 2002374 and 7 CFR 1412.503.375

(v) Crop insurance provisions
• Sections 508(a)(8), 508(b)(1), 508(b)(2)(A )(ii), 508(b)(3), 508(e) and 508(k) and 516
of "the ARP Act of 2000".376

(vi) Export credit guarantee provisions
• 7 USC 5622, 377 in particular, 7 USC 5622(a)(1) and (b), and 7 CFR 1493 378 which
established and maintain the GSM 102, GSM 103 and SCGP programmes.

366 Appellate Body Report, US – FSC (Article 21.5 – EC), para. 1.
367 See Brazil's response to Panel Question No. 19.
368 The provisions of the FSRI Act of 2002 are reproduced in Exhibits BRA-29 and US-1.
369 7 CFR 1427.1-1427.25 (1 January 2003 edition) are reproduced in Exhibit BRA-36.
370 Section 1207(a) of the FSRI Act of 2002 is reproduced in Exhibits BRA-29 and US-1.
371 7 CFR 1427.100-1427.108 (1 January 2003 edition) are reproduced in Exhibit BRA-37.
372 Section 1103 of the FSRI Act of 2002 is reproduced in Exhibits BRA-29 and US-1.
373 7 CFR 1412 is reproduced in Exhibit BRA-35.
374 Section 1103 of the FSRI Act of 2002 is reproduced in Exhibits BRA-29 and US-1.
375 7 CFR 1412 is reproduced in Exhibit BRA-35.
376 The ARP Act of 2000 amended the Federal Crop Insurance Act which is reproduced in Exhibit
BRA-30 as amended through Public Law 107-136, 24 January 2002. See Brazil's first written submission,
footnotes 178 and 184.
377 7 USC 5622 is reproduced in Exhibit BRA-141.
378 7 CFR 1493 is reproduced in Exhibit BRA-38.

(vii) ETI Act of 2000
• ETI Act of 2000, in particular, Section 3, which Brazil asserts inserted new
Sections 114, 941, 942 and 943 in the United States Internal Revenue Code.

3. Claims
7.251 Brazil claims that the measures at issue are in consistent with the obligations of the
United States under the following provisions:
• the export subsidy provisions of Articles 3.3, 8, 9.1 and 10.1 of the Agreement on
Agriculture;

• the prohibited subsidies provisions of Ar ticles 3.1(a) and (b) and 3.2 of the SCM
Agreement;

• the actionable subsidies provisions of Articles 5(c) and 6.3(c) and (d) of the SCM
Agreement;

• the subsidies provisions of paragraphs 1 and 3 of Article XVI of the GATT 1994; and

• the national treatment provision of Article III:4 of the GATT 1994.

7.252 Brazil submits that the domestic support measure s and alleged export subsidies at issue are
not exempt from actions based on Article 13(b)(ii) and 13(c)(ii), respectively, of the Agreement on
Agriculture.
7.253 Brazil also claimed in its request for estab lishment of a panel that the measures were
inconsistent with the obligations of the Un ited States under the domestic support provisions of
Article 7.1 of the Agreement on Agriculture ; and with the obligations of the United States under the
actionable subsidies provisions of Articles 5(a) and 6.3(b) of the SCM Agreement. Brazil did not
pursue these claims in its submissions and the Un ited States did not respond to them. The Panel
considers these claims abandoned and makes no other findings in relation to them.
4. Order of analysis
7.254 The claims in this dispute are made under the SCM Agreement, the Agreement on Agriculture
and the GATT 1994 . The SCM Agreement prohibits certain subsidies and creates obligations with
respect to so-called "actionable subsidies".
379 T h e Agreement on Agriculture contains domestic
support and export subsidy disciplines for certain products at issue in this dispute. Article XVI of the
GATT 1994 also contains obligations with respect to subsidies, and Article III:4 of the GATT 1994
contains obligations with respect to laws, regula tions and requirements affecting the internal sale,
offering for sale, purchase, transportation, distribution and use of imported products.
7.255 An appropriate order of analysis of the clai ms requires careful consideration due to the
interlocking nature of the SCM Agreement and the Agreement on Agriculture, the relationship
between the SCM Agreement and Article XVI of the GATT 1994, and the relationship between the
SCM Agreement and the Agreement on Agriculture , and Article III:4 of the GATT 1994. T h e
respective texts of the covered agreements expressl y provide for a general order of precedence among
them. The general interpretative note to Annex 1A of the WTO Agreement provides that:

379 Article 1.2 of the SCM Agreement.

"In the event of conflict between a provision of the General Agreement on Tariffs and
Trade 1994 and a provision of another agre ement in Annex 1A to the Agreement
Establishing the World Trade Organizati on (referred to in the agreements in
Annex 1A as the "WTO Agreement"), th e provision of the other agreement shall
prevail to the extent of the conflict."
7.256 This note only applies "[i]n the event of conflict". It does not exclude the GATT 1994 from
the scope of application of the agreements set out in Annex 1A, including the SCM Agreement and the
Agreement on Agriculture , in any other circumstances. Similarly, Article 21.1 of the Agreement on
Agriculture provides that:
"1. The provisions of GATT 1994 and of ot her Multilateral Trade Agreements in
Annex 1A to the WTO Agreement shall a pply subject to the provisions of this
Agreement."
7.257 This paragraph expressly provides for the application of the GATT 1994 and the SCM
Agreement. It does not exclude their application, although it indicates that the Agreement on
Agriculture takes precedence.
7.258 The specific provisions of the covered agreements raised in the claims contain consistent
references to each other. With respect to prohibited subsidies, Article 3 of the SCM Agreement
provides that certain subsidies are prohibited "[e]xcept as provided in the Agreement on Agriculture".
7.259 With respect to actionable subsidies, Articles 5 and 6.9 of the SCM Agreement both provide
as follows:
"This Article does not apply to subsidies maintained on agricultural products as
provided in Article 13 of the Agreement on Agriculture."
Article 7.1 of the SCM Agreement also begins with the phrase "[e]xcept as provided in Article 13 of
the Agreement on Agriculture".

7.260 Article 13 of the Agreement on Agriculture applies, during the implementation period,
"notwithstanding the provisions of GATT 1994 an d the Agreement on Subsidies and Countervailing
Measures". In the Panel's view, this refers to the provisions of Articles II and XVI of the GATT 1994
and Parts II, III and V of the SCM Agreement that are specifically listed in the subparagraphs of
Article 13.
380 I t p r o v i d e s , inter alia , that domestic support measures and export subsidies for
agricultural products that fulfil certain conditions shall be "exempt from actions" based on various
provisions of Article XVI of the GATT 1994 and the SCM Agreement381, and based on non-violation
nullification or impairment of the benefits accrui ng from tariff concessions, and it also limits their
exposure to countervailing duties. 382 Most of the conditions are set out in the three paragraph
chapeaux of Article 13 and cross-reference complian ce with particular substantive provisions of the
Agreement on Agriculture and commitments in Part IV of each Member's Schedule, although there is
an additional condition in subparagraphs (b)(ii) and (b)(iii) that is not an obligation.
7.261 This web of cross-references discloses a scheme according to which an analysis of the same
measures under the Agreement on Agriculture , the SCM Agreement and Article XVI of the GATT
1994 concerning export subsidies for agricultural produc ts and, at least during the implementation

380 For the reasons given in paragraphs 7.315 to 7.319, the Panel does not consider that it also refers to
Articles XXII and XXIII of the GATT 1994, as elaborated and applied by the DSU.
381 Subparagraphs (a)(ii), (a)(iii), (b)(i), (b)(ii), (b)(iii) and (c)(ii) of Article 13.
382 An additional cross -reference is found in Article 10 of the SCM Agreement which subjects
countervailing duties investigations to the provisions of both the SCM Agreement and the Agreement on
Agriculture.

period for the purposes of Article 13, allegedly acti onable subsidies for agricultural products, should
be examined first under the Agreement on Agriculture. The implementation period for the purposes
of Article 13 had not yet expired on the date of establishment of the Panel.
383 Therefore, the Panel
will follow this order of analysis with respect to the alleged export subsidi es and actionable subsidies
in issue.384
7.262 The Panel's approach is consistent with the following statement of the Appellate Body in
Canada – Dairy (Article 21.5 – New Zealand and US) , which specifically addressed the order of
analysis of the WTO-consistency of an export subsidy for agricultural products:
"The relationship between the Agreement on Agriculture and the SCM Agreement
is defined, in part, by Article 3.1 of the SCM Agreement, which states that certain
subsidies are "prohibited" "[e]xcept as pr ovided in the Agreement on Agriculture".
This clause, therefore, indicates that the WTO-consistency of an export subsidy for
agricultural products has to be examined, in the first place, under the
 Agreement on Agriculture."
385
7.263 The Panel takes note that a previous panel and the Appellate Body did not follow this order of
analysis in US – FSC, a dispute which did not primarily concern agricultural products .386 Instead, that
panel and the Appellate Body first examined the cons istency of export subsidies with Article 3.1(a) of
the SCM Agreement , and then proceeded to examine the c onsistency of subsidies under the same
provisions for agricultural products wi th Article 3.3 and Part V of the Agreement on Agriculture .
Nevertheless, for the reasons given above, the Pane l chooses to follow the order of analysis explained
in Canada – Dairy (Article 21.5 – New Zealand and US).
7.264 The Panel's order of analysis does not preclude it from looking to the SCM Agreement for
contextual guidance in its interpretation of the Agreement on Agriculture, for example, with respect to
the meaning of the terms "subsidy" and "export subsidies".
5. Burden of proof
(a) Main arguments of the parties
7.265 Brazil requests that the Panel make a finding that Article 13 of the Agreement on Agriculture
is in the nature of an affirmative defence. It s ubmits that in light of the relevant WTO jurisprudence
on the burden of proof, Article 13 of the Agreement on Agriculture is in the nature of an affirmative
defence and, as such, the United States bears the burden of proving that its measures are in conformity
with Article 13 for the following reasons: (1) Arti cle 13 does not alter the scope of other provisions
providing positive obligations for Members; (2) Artic le 13 provides no positive obligations in itself;
and (3) Article 13 does not alter the legal nature of Members' measures, but simply allows Members
to maintain those measures exempt from actions if they comply with the conditions that it sets out.387
7.266 The United States argues that Article 13 forms part of the balance of rights and obligations of
Members and is not an affirma tive defence but a threshold pro cedural hurdle that Brazil must
overcome. The United States claims that the use of the word "notwithstanding" in the introductory
paragraph of Article 13 means that conforming m easures are exempt from action "in spite of and
without regard to or prevention by" the obligations contained in the GATT 1994 or the SCM

383 For the reasons given in paragraphs 7.340 to 7.345.
384 It does not affect the Panel's examination of measures under Article 3.1(b) of the SCM Agreement,
for the reasons given in Section VII:F of this report.
385 Appellate Body Report, Canada – Dairy (Article 21.5 – New Zealand and US), para. 123.
386 Appellate Body Report, US – FSC , sections V, VI and IX, applied in its Report in US –
 FSC (Article 21.5 – EC), paras. 187-196.
387 Brazil's first written submission, para. 117.

Agreement. The United States argues that Article 21.1 of the Agreement on Agriculture further
clarifies that the obligations under the SCM Agreement and the GATT 1994 only apply "subject to" the
provisions of the Agreement on Agriculture , including Article 13. 388 The United States submits that
the burden is on Brazil to show that the conditions exis t that would allow it to bring its action, that is,
that the United States measures do not conform to Article 13. 389 It also asserts that Brazil's approach
would produce bizarre results.390
(b) Main arguments of the third parties
7.267 Argentina391, Australia392, Benin393, China394 and India395 agree with Brazil that Article 13
is in the nature of an affirmative defence and th at the United States bears the burden of proving that
the measures at issue fully conform with the applicable conditions of Article 13 of the Agreement on
Agriculture.
7.268 The European Communities agrees with the United States that Article 13 is not an
affirmative defence and that Brazil bears the burden of proving that the measures at issue are not in
conformity with the conditions set out in Article 13.
396
7.269 Chinese Taipei submits that it is inappropriate to labe l Article 13 as an "affirmative defence"
or "exception" purely in order to determine whic h of the two parties bears the burden of proof.
Article 13 contains a right to exemption from ac tions conditional upon conf ormity with a positive
obligation of full conformity with the Agreement on Agriculture. It is for Brazil to prove a breach of
this positive obligation by demonstrating non-conformity.397
(c) Evaluation by the Panel
7.270 The Panel will apply the usual rule regarding the burden of proof in WTO proceedings, unless
the text of the covered agreements indicates otherwis e. Accordingly, the initial burden of proof rests
upon the party, whether complaining or defending, w ho asserts the affirmative of a particular claim or
defence. If that party adduces evidence sufficient to raise a presumption that what it asserts is correct,
the burden then shifts to the other party, who will fail unless it adduces sufficient evidence to rebut
that presumption.398 In the Panel's view, asserting the affirm ative of a claim requires the complainant
first to show that a measure falls within the scope of a positive obligation, that is, that the obligation is
applicable to the measure, and then to show that the measure is inconsistent with that obligation.399

388 United States' first written submission, paras. 38-39.
389 United States' first written submission, para. 41.
390 The United States provides an example of this with respect to Article 6 of the Agreement on
Agriculture. According to the United States, Brazil would bear the burden of proof if it only claimed a violation
under Article 6, which it emphasizes is also a requirement found in Article 13. Consequently, the United States
submits that there is no basis for concluding that the burden of proving a violation of Article 6 would be
reversed merely because a Member were to clai m a violation of one of the provision of the SCM Agreement
found in Article 13 in addition to Article 6. See the United States first written submission, para. 44.
391 Argentina's written submission to the first session of the first substantive meeting, paras. 43-46.
392 Australia's written submission to the first session of the first substantive meeting, paras. 5-15.
393 Benin's written submission to the first session of the first substantive meeting, paras. 21-36.
394 China's written submission to the first session of the first substantive meeting, paras. 3-9.
395 India's oral statement at the first session of the first substantive meeting, para. 8.
396 European Communities' written submission to the fi rst session of the first substantive meeting,
paras. 8-14.
397 Chinese Taipei's written submission to the first session of the first substantive meeting, para. 8.
398 See Appellate Body Report, US – Wool Shirts and Blouses , p. 14, quoted in Brazil's first written
submission at para. 111.
399 This was the approach of the Appellate Body in Brazil – Aircraft , paras. 139-141 and US – FSC

7.271 This situation is to be contrasted with at le ast one other example. As regards agricultural
export subsidies, the text of Article 10.3 of the Agreement on Agriculture articulates a special rule that
alters the usual rule on burden of proof in certa in disputes under Articles 3, 8, 9, and 10 of the
Agreement on Agriculture.
400
7.272 We recall that, pursuant to Article 3 of the Agreement on Agriculture, a Member is entitled to
grant export subsidies within the limits of th e reduction commitment specified in its Schedule. Where
a Member claims that another Member has ac ted inconsistently with Article 3.3 of the Agreement
on Agriculture by granting export subsidies in excess of a quantity commitment level, there are two
separate parts to the claim. First, the responding Member must have exported an agricultural product
in quantities exceeding its quantity commitment leve l. If the quantities exported do not reach the
quantity commitment level, there can be no viola tion of that commitment, under Article 3.3.
However, merely exporting a product in quantities that exceed the quantity commitment level is not
inconsistent with the commitment. The commitment is an undertaking to limit the quantity of exports
that may be subsidized and not a commitment to restrict the volume or quantity of exports as such.
The second part of the claim is, therefore, that the responding Member must have granted export
subsidies with respect to quantities exceeding the quantity commitment level. There is, in other
words, a quantitative aspect and an export subsidization aspect to the claim.
7.273 Article 10.3 of the Agreement on Agriculture allocates to different parties the burden of proof
with respect to the two parts of such a claim. Where a Member exports an agricultural product in
quantities that exceed its quantity commitment level, that Member will be treated as if it has granted
WTO-inconsistent export subsidies, for the excess quantities, unless the Member presents adequate
evidence to "establish" the contrary. This reversal of the usual rule obliges the responding Member to
bear the consequences of any doubts concerning the evidence of export subsidization. With respect to
the export subsidization part of the claim, the co mplaining Member, therefore, is relieved of its
burden, under the usual rule, to establish a prima facie case of export subsidization of the excess
quantity, provided that this Member has established the quantitative part of the claim.401
7.274 Turning to Article 13 of the Agreement on Agriculture , we note that its text does not contain
any special rule on the burden of proof. Therefore, the usual rule applies. Article 13 contains positive
obligations only to show due restraint in initia ting countervailing duties investigations; these are not
relevant in this dispute. 402 Otherwise, it sets out conditions according to which certain domestic
support measures and export subsidies for agricultur al products benefit from certain protection,
including in relation to Article XVI of the GATT 1994 and the SCM Agreement. Measures that do not
satisfy those conditions are not necessarily inconsistent with Article XVI of the GATT 1994 or the
SCM Agreement . Members have a choice throughout the implementation period whether or not to
satisfy the additional condition set forth in Article 13(b)(ii) and (iii) and benefit from the protection
that it provides, or whether to comply w ith the obligations in Article XVI of the GATT 1994 and the
SCM Agreement , or both . The additional condition is not an obligation. Although the other

400 Article 10.3 provides:

"Any Member which claims that any quantity exported in excess of a reduction commitment level is
not subsidized must establish that no export subsidy, whether listed in Article 9 or not, has been
granted in respect of the quantity of exports in question."

We find support for our approach in the Appellate Body Report, Canada – Dairy (Article 21.5 –
New Zealand and US II), paras. 69-71, 73-75. Contrary to the Un ited States' assertion, in its further rebuttal
submission at para. 191, we do not believe that our observation (in our 20 June 2003 communication, set out in
Annex L) that no provisions of the Agreement on Agriculture are identified as special or additional rules and
procedures in Appendix 2 to the DSU, is at variance with our articulation and application of this burden of
proof, which flows from the text of Article 10.3 itself and related provisions.
401 See Appellate Body Report, Canada – Dairy (Article 21.5 – New Zealand and US II), paras. 70-75.
402 Subparagraphs (b)(i) and (c)(i) of Article 13.

conditions in Article 13 of the Agreement on Agriculture stipulate compliance with other provisions
of that agreement, many of which set out positiv e obligations, they are only obligations for the
purposes of claims under those other provisions of the Agreement on Agriculture . They do not arise
as positive obligations under Article 13.
7.275 The obligation with respect to actionable s ubsidies is found in Articles 5 and 6 of the SCM
Agreement, both of which provide, in identical terms, that:
"This Article does not apply to subsidies maintained on agricultural products as
provided in Article 13 of the Agreement on Agriculture."403
7.276 This language shows that, during the implemen tation period for the purposes of Article 13,
the obligation regarding actionable subsidies simp ly does not apply to su bsidies for agricultural
products that satisfy the conditions set forth in Article 13 of the Agreement on Agriculture . The
obligation is not applicable and, hence, such subsidies are not actionable subsidies. Satisfaction of the
conditions in Article 13 is therefore a question of th e scope of the obligation and the initial burden is
on the complainant to adduce ev idence sufficient to raise a presumption that domestic support
measures do not satisfy those conditions.
7.277 The obligations with respect to prohibited subsidies are found in Part II of the SCM
Agreement. Article 3.1 provides that certain subsidi es are prohibited "[e]xcept as provided in the
Agreement on Agriculture". In the Panel's view, th e mere use of the word "except" does not indicate
that subsidies covered by this introductory phrase (i.e. export subsidies provided for in the Agreement
on Agriculture ) necessarily fall within the scope of th e basic obligation in Article 3.1 of the SCM
Agreement because, read in context, the introductory ph rase of Article 3.1 forms part of the scheme
referred to above in paragraph 7.261. The introductory phrase refers to the Agreement on Agriculture
as a whole which includes Article 13(c). The parallel st ructure of paragraphs (b) and (c) of Article 13
indicates that the drafters intended them to operate in the same way. Accordingly, given that the
conditions in Article 13(b) clearly affect the scope of obligations in Part III (Articles 5 and 6) of the
SCM Agreement, it appears to us that those in Article 13(c) are also intended to affect the scope of
relevant obligations in Article 3.1 of the SCM Agreement.
7.278 The Panel notes that the wording of the reference to the Agreement on Agriculture found in
Article 3.1 of the SCM Agreement differs from those found in Articles 5 and 6.9. However, this
difference appears to be due to the fact that both agreements contain export subsidy disciplines, but
only the SCM Agreement contains actionable subsidies obligations.
7.279 The Panel also notes that Article 13 uses the words "notwithstanding" and "exempt". The
ordinary meaning of "notwithstanding" is "in spite of, without regard to or prevention by".
404 The
ordinary meaning of exempt is "[n]ot exposed or subject to something unpleasant or inconvenient; not
liable to a charge, tax, etc. (Foll. by from)"405 The mere use of these wo rds does not indicate whether
the measures provided for in that article fall within or without the scope of the relevant obligations in
the listed provisions, any more than merely characterizing a provision as an exception. 406 Read in
context, these words do not indicate that domestic s upport measures provided for in paragraph (b) fall
within the scope of the obligations in Articles 5 and 6 of the SCM Agreement in light of the clear
wording of the last sentence of Article 5 and Article 6. 9. Therefore, there is no basis to conclude that

403 Article 5, last sentence, and Article 6.9 of the SCM Agreement.
404 The New Shorter Oxford English Dictionary , (1993). This definition was also quoted by the
Appellate Body in EC – Tariff Preferences at para. 90, in its interpretation of the Enabling Clause.
405 The New Shorter Oxford English Dictionary , (1993). The meaning of "exempt" in the phrase
"exempt from actions" is discussed in greater detail below.
406 See the Appellate Body Reports in EC – Hormones, para. 104, and EC – Sardines, para. 275, which
commented on this issue.

the use of those words indicates that export subsid ies provided for in paragraph (c) fall within the
scope of the obligations in Article 3.1 of the SCM Agreement either.
7.280 The position under Article XVI of the GATT 1994 is no different. If the obligations found in
Article XVI dealing with "Subsidies in General" (Part A - Article XVI:1) and "Export Subsidies"
(Part B - Articles XVI:2-5) are now subsumed within, or elaborated and applied by, the SCM
Agreement and the Agreement on Agriculture , and no longer have indepe ndent application, the
limitation on the scope of the prohibited a nd actionable subsidies obligations in the SCM Agreement
applies to the interpretation of Article XVI as well. Alternatively, if Article XVI continues to have
independent application, the scope of such appli cation during the implementation period is defined by
the texts of Article XVI itself, the SCM Agreement , and the Agriculture Agreement , including the
terms of Article 13 of the Agreement on Agriculture.
407
7.281 This interpretation is supported by the content of Article 13 of the Agreement on Agriculture.
The principal conditions that it sets forth are simply conformity with Article 6 and Part V of that same
agreement. There is no dispute that a complainant bears the burden of proving claims of violation of
domestic support commitments under Article 6 or vi olation or circumvention of export competition
commitments under Part V (subject to the special provi sion in Article 10.3) irrespective of the Panel's
order of analysis. In the Panel's view, the inserti on of Article 13 was not in tended to require a panel
confronted with claims of serious prejudice as well as violations of the Agreement on Agriculture to
assess twice the conformity of measures with Article 6 and Part V, allocating the burden of proof once
to the complainant and once to the respondent acco rding to whether it was assessing conformity for
the purposes of the Agreement on Agriculture or the SCM Agreement and Article XVI of the GATT
1994. Rather, as part of a scheme, it was intended to ensure that if a complaint was ever filed during
the implementation period, the Panel w ould first analyse the measures under the Agreement on
Agriculture. If the measures satisfied the conditions set forth in Article 13, the Panel would not
proceed to find any inconsistency with the SCM Agreement or Article XVI of the GATT 1994 , as
referred to in Article 13 of the Agreement on Agriculture.
7.282 The Panel notes that Brazil cites the Appellate Body report in US – FSC (Article 21.5 - EC) .
In that case, the Appellate Body interpreted the fifth sentence of footnote 59 of the SCM Agreement as
an affirmative defence because it did not alter th e scope of an obligation and was therefore an
exception.408 This is precisely the appro ach that the Panel has adopted in its interpretation of
Article 13 of the Agreement on Agriculture. Articles 3.1, 5 and 6.9 of the SCM Agreement do alter the
scope of the prohibited and acti onable subsidies obligations by reference to the conditions in
Article 13. Consequently, neither those conditions nor Article 13 are an affirmative defence.
7.283 Similarly, Brazil cites the Appellate Body report in Brazil – Aircraft. In that case, the
Appellate Body considered the provisions of Articles 3.1(a), 27.2(b) and 27.4 of the SCM Agreement.
It upheld the Panel's finding that certain provisions in Article 27.4 were "positive obligations" and not
an affirmative defence, because if a developi ng country Member complied with them during a
transitional period, the export subsidy prohibition in Article 3.1(a) simply did not apply. 409 Whilst we
do not consider that the conditions in Article 13 of the Agreement on Agriculture are positive
obligations as such for the purposes of the claims purs ued in this dispute, they do partly define the
scope of positive obligations. If domestic support measures and export subsidies comply with these
conditions during the implementation period, the obl igations in Articles 3.1(a), 5 and 6 of the SCM
Agreement simply do not apply. Therefore, in the Pane l's view, those conditions as referred to in
Article 13 are not an affirmative defence.

407 We refer to our findings on Article XVI:3 of the GATT 1994 in Section VII:E and on Article XVI:1
of the GATT 1994 in Section VII:G of this report.
408 See the Appellate Body Report, US – FSC (Article 21.5 – EC), paras. 131 and 132.
409 See the Appellate Body Report, Brazil – Aircraft, paras. 134 – 141.

7.284 Article 13 of the Agreement on Agriculture was drafted later than the basic obligations in
Parts II and III of the SCM Agreement, which may contribute to a perception that it should also be
analysed later and is somehow an affirmative de fence. However, this is a matter of drafting
chronology. The results of the Uruguay Round are a single undertaking simultaneously agreed in the
Final Act, and the order in which a Panel should analyse them and allocate the burden of proof is
dictated by a proper interpretation of the texts of the covered agreements and not by the order in
which they were negotiated.
7.285 For these reasons, the Panel declines to make a fi nding that Article 13 is in the nature of an
affirmative defence. Rather, the Panel finds that the conditions in Article 13, for a limited time, partly
define the scope of the obligations in Article XVI of the GATT 1994 and Articles 3, 5 and 6 of the
SCM Agreement, among other things . According to the usual rule regarding the burden of proof, the
complainant, Brazil, bears the initial burden to show that the measures at issue fall within the scope of
the obligations with which it alleges that the meas ures are inconsistent. That includes the burden to
show that they do not satisfy the conditions in Article 13 of the Agreement on Agriculture.
7.286 In the present dispute, the Panel is of the vi ew that Brazil has succeeded in discharging the
burden to show that certain measures at issu e do not satisfy the conditions in Article 13 410, for the
reasons given in Sections VII:D and E of this report.
6. "Exempt from actions"
(a) Main arguments of the parties
7.287 Immediately following the composition of the Panel, the United States submitted a letter
dated 21 May 2003 in which it asserted that Brazil may not maintain its action based on its claims of
adverse effects and serious prejudice under the SCM Agreement and Article XVI of the GATT 1994
unless the Panel had found that United States suppor t measures for upland cotton do not conform to
Article 13 of the Agreement on Agriculture. Brazil replied in a letter dated 23 May 2003 in which it
disagreed.411
7.288 The United States requested the Panel to organize its pr ocedures to determine first whether
Brazil was permitted to maintain any actions based on the provisions exempted by Article 13 of the
Agreement on Agriculture . If the Panel allowed Brazil to pro ceed with its substantive claims under
the SCM Agreement and the GATT 1994 , and only concluded later that the measures at issue
conformed to Article 13 of the Agreement on Agriculture , the measures at issue would already have
been subject to actions based on those claims, wh ich would contradict the ordinary meaning of
"exempt from actions". It asserted that the normal rules of the DSU allow the Panel to first determine
the conformity of United States measures with Article 13.412
7.289 Brazil asserted that the phrase "exempt from actions" means that a complainant cannot
receive authorization from the DSB to obtain a remedy against another Member's measures that would
otherwise be subject to the disciplines of certain provisions of the SCM Agreement and the GATT
1994 if the measures comply with Article 13 of the Agreement on Agriculture. According to Brazil, a
WTO panel is not a "court" where lawsuits are initia ted by filing the appropriate papers. Rather, the
word "action" means joint action by WTO Members. DSU panel proceedings only begin when
Members take collective actions to establish a panel. Brazil argued that providing special proceedings

410 With the exception of the ETI Act of 2000 and export subsidies granted under it, for the reasons
given in Section VII:E of this report.
411 These letters are contained in Annex K to this report.
412 See United States' initial brief, para. 3, and its comments on initial briefs, para. 5.

for determining compliance with Article 13 would e ffectively add Article 13 to the closed list of
special and additional rules and procedures in Appendix 2 to the DSU.
413
(b) Main arguments of the third parties
7.290 Argentina414, Australia415, India416, New Zealand417 and Paraguay418 generally agreed with
Brazil that the Panel was not preclude d from considering claims under the SCM Agreement and
Article XVI of the GATT 1994 until it first determined whether United States measures conformed
with Article 13 of the Agreement on Agriculture.
7.291 The European Communities was of the view that the issue of whether a measure falls within
Article 13 is a question which a panel must deci de before it determines whether the measure
potentially violates provisions of the SCM Agreement and the GATT 1994, but this does not imply that
a panel is precluded from hearing evidence and arguments relating to provisions of the SCM
Agreement and the GATT 1994 until after it has decided on the applicability of Article 13 of the
Agreement on Agriculture.419
(c) Evaluation by the Panel
7.292 The Panel is satisfied that it had authority to deal with the claims raised under the SCM
Agreement and Article XVI of the GATT 1994.420 It communicated to the parties on 20 June 2003 its
views that it was not required to defer any exam ination of certain of Brazil's claims based on
Articles 3, 5 and 6 of the SCM Agreement and Article XVI of the GATT 1994 until after making a
ruling or expressing views on the issue of fulfilment of the conditions in Article 13 of the Agreement
on Agriculture .421 The Panel concluded at that time that there is no special dispute settlement
requirement foreseen in the covered agreements in r espect of a panel's consideration of the fulfilment
of Article 13 conditions. The issue of fulfilm ent of the conditions of Article 13 of the Agreement on
Agriculture is to be resolved using generally applicable DSU rules and procedures. It was not
necessary for the Panel to look for any further interpretive guidance on this issue.
7.293 Further, in accordance with the Panel's ordering of its procedures, after the parties and third
parties presented evidence and submissions fo cused on the conditions in Article 13 of the Agreement
on Agriculture, but before they presented evidence and s ubmissions focused on the claims under the
SCM Agreement and Article XVI of the GATT 1994, the Panel issued a communication to the parties
and third parties which stated, inter alia, as follows:
"4. The Panel takes note of the correspondence from the parties dated 27, 28 and
29 August 2003 and declines to make finding s at this stage as to whether measures
raised in this dispute satisfy the conditions in Article 13 of the Agreement on
Agriculture, for the reasons given in its co mmunication dated 20 June 2003. The
Panel's findings on that issue will be in cluded in its interim report, on which the
parties will have the right to comment in accordance with Article 15.2 of the DSU.

413 See Brazil's initial brief, para. 9, and its comments on initial briefs, paras. 2-4 and 18-19.
414 See Argentina's initial brief, para. 16.
415 See Australia's initial brief, para. 8.
416 See India's initial brief, para. 8.
417 See New Zealand's initial brief, p. 2.
418 See Paraguay's initial brief, p. 1.
419 See the European Communities' initial brief, para. 7
420 A panel's duty to deal with such issues in order to satisfy itself that it has authority to proceed was
discussed by the Appellate Body in Mexico – Corn Syrup (21.5 – US), para. 36, US – 1916 Act, para. 54 and US
– Carbon Steel, para. 123.
421 The Panel's communication dated 20 June 2003 is set out in full in Section VII:A of this report.

5. The Panel has now had the opportunity to consider the parties' and third
parties' evidence and arguments to date . At this stage, the Panel cannot conclude its
assessment of the matter before it on the basis that the measures raised in this dispute
satisfy the conditions in Article 13 of the Agreement on Agriculture. The expression
by the Panel of this view is without prejudice to the Panel's eventual findings, and is
subject to paragraph 6 below. In this c ontext, the Panel is of the view that
consideration, as appropriate, of Brazil's claims under Articles 3, 5 and 6 of the SCM
Agreement and Article XVI of the GATT 1994, as those provisions are referred to in
Article 13 of the Agreement on Agriculture , is warranted in order for the Panel
properly to discharge its responsibilities under the DSU and the relevant covered
agreements. Therefore, the Panel will consider those claims at a second session of
the first substantive meeting."
7.294 The United States submits that:
"As a responding party cannot prevent panel establishment from occurring, it will
inevitably be forced to argue to a panel that the panel's procedures should be
structured so that the party's challenged me asures are not subject, from that point on,
to actions based on provisions specified in the Peace Clause. Thus, given the
automaticity in DSU rules relating to c onsultations and panel establishment, the
Panel's organization of its procedures provides the first opportunity to arrest Brazil's
taking of 'legal steps to establish a claim' …"
422
7.295 In the Panel's view, this argument impli es that there was an oversight in the DSU rules and
procedures, as a result of which a panel must orga nize its procedures to enforce the conditions in
Article 13 as a second-best option. However, the ab sence of any reference to any applicable special
dispute settlement rule in Appendix 2 to the DSU indicates that a panel is under no obligation to
organize its procedures in this way, but is only prevented from making a finding that measures that
comply with the conditions set out in Article 13 of the Agreement on Agriculture are inconsistent with
the relevant provisions that it lists.
7.296 The United States' argument would also seemin gly require a Panel to make a definitive
finding on Article 13 before it could go on. This could mean that a separate panel on Article 13
would be necessary every time, before a Member could bring any action based on the listed provisions
of the SCM Agreement , or at least require a panel to conduct basically two consecutive panel
proceedings from first submissions to interim or ev en final report, where measures did not satisfy the
conditions set out in Article 13. Nowher e is such a procedure required in the DSU or the relevant
special rules and procedures. Rather, Article 12.1 and 12.2 provide that:
"1. Panels shall follow the Working Pr ocedures in Appendix 3 unless the panel
decides otherwise after consulting the parties to the dispute.
2. Panel procedures should provide sufficient flexibility so as to ensure high-
quality panel reports, while not unduly delaying the panel process."
7.297 The United States requested a separate inte rim report devoted to Article 13 of the Agreement
on Agriculture:
"In this dispute, the Panel's findings on th e Peace Clause are presumably intended to
be dispositive of substantive claims and argum ents of the parties for the remainder of
the panel proceedings. Because of the s ubstantive nature of those findings, the
Panel's findings on September 5 will need to provide the factual basis and basic

422 United States' comments on parties' initial briefs, para. 37.

rationale underlying the findings. Both parties have a significant interest in those
findings, in terms not just of the ultimate conclusion reached, but also in terms of the
factual findings, rationale underlying th ose findings, and an understanding of the
scope of those findings. Accordingly, in keeping with Article 15.2 of the DSU, and
in order to be fair to both parties, the United States respectfully requests that the
Panel provide Brazil and the United States with the Panel's September 5 Peace Clause
findings in an interim form and provide the parties an opportunity to comment on the
Panel's findings. The United States suggests that, in keeping with the practice in
other panel proceedings and this Panel's timetable for the interim review in this
dispute, two weeks should be sufficient time to comment."
423
7.298 The Panel's expression of views on 5 Septembe r 2004 was not "dispositive of substantive
claims and arguments", on which the United States' request was premised. In any event, Article 15.2
of the DSU only envisages one interim report in respect of the entire matter before a panel. It appears
to us that this is because multiple interim re port procedures would unduly delay the panel process
without benefiting the quality of the final panel report. We therefore rejected this suggestion.
7.299 The Panel also notes for the record that the United States submitted detailed argument on
interpretation and fulfilment of th e conditions in Article 13 of the Agreement on Agriculture after the
Panel's communication to the parties of 5 September 2003.424
7.300 In the present case, the Panel has, in fact, orga nized its proceedings to phase examination of
different issues. This was due to the potential co mplexity of the claims, the conditional nature of
certain of these claims and the volume of evidence which we expected would be introduced by the
parties in support of their claims and arguments, and in order to organize our proceedings in an
orderly, effective and efficient manner. This serve d to facilitate an objective assessment of the matter
before us, and optimized use of our resources. Th e order of our procedures was not due to lack of
jurisdiction or authority to hear all claims at once.
7.301 The conditionality of Article 13 was therefore one of the Panel's prime considerations. In that
context, we now set out our views on the meaning and implications of the phrase "exempt from
actions" as it is used in Article 13.
7.302 Brazil submits that the word "actions" refers to "multilateral actions taken collectively by
Members" and that therefore:
"The phrase 'exempt from actions' in Article 13 means that if all the conditions of
Article 13(b)(ii) and 13(c)(ii) are fulfilled … a complaining Member cannot receive
authorization from the DSB to obtain a re medy against another Member's domestic
and export support measures that otherwise would be subject to the disciplines of
certain provisions of the SCM Agreement or Article XVI of GATT 1994."425
7.303 The United States argues that the phrase "exempt from actions" means "not exposed or
subject to" a "legal process or suit" or the "taking of the legal steps to estab lish a claim" such as a
formal complaint or any formal proceedings, including an adjudication of the claim. It requests that
the Panel find that measures that conform to Article 13 are exempt from any action, including

423 Letter from the United States to the Panel dated 27 August 2003.
424 See United States' 28 January 2004 comments on Brazil's response to Panel Question No. 258, its
11 February 2004 comments, its 3 March 2004 comments and its 15 March 2004 comments, concerning the
interpretation of Article 13(b)(ii). The Panel takes note that para. 1 of the 3 March 2004 comments stated that it
was odd to "advance new arguments concerning the applicab ility of the peace clause at this late stage in the
proceedings, long after the time wh en the peace clause portion of the dispute was supposed to have been
concluded."

consultations and panel proceedings, based on the listed provisions of the SCM Agreement and
Article XVI of the GATT 1994.426
7.304 The Panel disagrees with Brazil's interpretation of the word "actions" because it does not take
account of the fact that individual Members can take certain actions based on the relevant provisions
of Article XVI of the GATT 1994 and the SCM Agreement, including requests for consultations and
establishment of a panel, prior to a multilateral findi ng that the conditions of Article 13 are fulfilled.
It is based on specific uses of the word "action" in the Englis h and French versions of the DSU,
without taking account of other uses of that word in those versions of the DSU which refer to an
action by an individual Member.427
7.305 Further, "multilateral actions taken collectively by Members" include decisions by the DSB to
establish panels, which are taken prior to any Pa nel assessment as to whether the conditions in
Article 13 are fulfilled, and from which certain dis putes could only be exempted with the consent of
all Members in the DSB, including the complainant party. They also include decisions by the DSB to
adopt reports in which panels c onclude that certain measures are not inconsistent with the conditions
in Article 13 of the Agreement on Agriculture, from which there is no exemption.
7.306 The Panel agrees with the United States' defi nition of the words "exempt from actions" but
not with the conclusions that the United States requ ested the Panel to arrive at as a result of that
definition. The Panel does not consider that the possibility earlier in the dispute that the measures at
issue were "exempt from actions" by virtue of Article 13 of the Agreement on Agriculture has affected
its authority to examine the claims raised under the SCM Agreement and Article XVI of the
GATT 1994 in these proceedings in accordance with its discretion to organize its own procedures.
7.307 Turning to the meaning of the phrase "exempt fro m actions", the adjective "exempt" can be
defined as follows:
"Not exposed or subject to something unpl easant or inconvenient; not liable to a
charge, tax, etc. (Foll. by from)"428
7.308 The English and French versions of the text of Article 13(b)(ii) and (iii) use the word
"actions". There are various definitions of the word "action", including the generic senses of:
"The process or condition of acting or doing ; the exertion of energy or influence;
working, agency, operation; … A thing done, a deed, an act";
and the more specific judicial senses of:

"1. The taking of legal steps to establish a claim or obtain remedy; the right to
institute a legal process. b A legal process or suit".429
7.309 Article 13 uses the word in a judicial sense, because it qualifies the "actions" as those based
on listed treaty provisions 430 and non-violation nullification or impa irment of the benefits of tariff

426 See United States' initial brief, paras. 2 and 12, and its comments on initial briefs, para. 5.
427 See Brazil's comments on initial briefs, para. 15. See Articles 3.7, 3.8 and 4.5 of the DSU.
428 The New Shorter Oxford English Dictionary, (1993).
429 The New Shorter Oxford English Dictionary, (1993). See also the de finition of "proceeding" in
Article 17.10 of the DSU discussed by the Appellate Body in Brazil – Aircraft: "In a general sense, the form and
manner of conducting juridical business before a court or judicial officer. Regular and orderly progress in form
of law, including all possible steps in an action from its commencement to the execution of judgment ." See
Appellate Body Report, Brazil – Aircraft, para. 121.
430 Variously Article XVI of GATT 1994, paragraph 1 of Article XVI of GATT 1994, Part III of the
SCM Agreement, Articles 5 and 6 of the SCM Agreement and Articles 3, 5 and 6 of the SCM Agreement.

concessions accruing to another Member under Article II of the GATT 1994 , in the sense of
paragraph 1(b) of Article XXIII of the GATT 1994, which is itself a "right to institute a legal process"
(collectively referred to below as the "listed provisions"). The only difference between the two
possible judicial senses is that the sum of the "legal steps" to establish a particular claim or obtain a
particular remedy in a given case is "a legal process or suit", and both can be called an "action" in
English or French.
7.310 The Spanish version of the text uses the word "medidas". This word is used in many places in
the covered agreements where the English version uses the word "measures" and the French version
uses the word " mesures". It refers to dispositions taken by a Member which, in the context of
Article 13(b)(ii), are the legal steps to establish a particular claim or obtain a particular remedy. There
seems to be no practical difference in this sense betw een the legal steps to establish a particular claim
or obtain a particular remedy, in the plural, and a lawsuit.
431
7.311 Accordingly, the ordinary meaning of the phr ase "exempt from actions" is "not exposed or
subject to the taking of steps to establish claims or obtain remedies" based on the listed provisions.
However, the ordinary meaning of the terms used in the text must be read in context and in the light of
the agreement's object and purpose.432
7.312 The context within Article 13 itself shows that the drafters did not use the term "exempt from
actions" in every subparagraph of Article 13, notab ly, in subparagraph (a)(i), which uses the term
"non-actionable subsidies". Yet a ll subparagraphs of Article 13 share the same purpose of setting out
protection for certain agricultural measures from particular consequences outside the Agreement on
Agriculture, which are generally actions of various ki nds. The range of actions differs in each
subparagraph of Article 13. The actions to whic h the term "non-actionable subsidies" normally
applied were limited to those based on Parts III and V of the SCM Agreement433, and subparagraph
(a)(i) limits their scope even further to countervailing duties (i.e. Part V of the SCM Agreement). In
contrast, the phrase "exempt from actions" itself is not limited to any particular actions.
Subparagraphs (a)(ii), (a)(iii), (b)(ii), (b)(iii) and (c )(ii) apply it to provisions beyond those based on
Parts III and V of the SCM Agreement to which the term "non-actionable subsidies" cannot apply. In
these subparagraphs, the relevant actions include those based on provisions in Part III of the SCM
Agreement, but also variously non-violation nullificati on or impairment of the benefits of tariff
concessions, actions based on paragraphs of Article XVI of the GATT 1994 and actions based on
Article 3 of the SCM Agreement as well. This may explain why the different terms "non-actionable
subsidies" and "exempt from actions" are used.
7.313 The class of "non-actionable subsidies", which we re not exposed to certain types of actions,
was governed by Part IV of the SCM Agreement, comprising Articles 8 and 9 of the SCM Agreement.
These have now lapsed. 434 Part IV did not exclude any measures from multilateral evaluation but in
fact provided a multilateral procedure to evaluate th e consistency of a programme with the conditions
and criteria to be considered non-actionable. 435 Failing a notification under that procedure, it was

431 The Spanish version of Article 25.11 of the SCM Agreement also uses "medidas" where the English
version uses "actions" and the French version uses "decisions" with respect to countervailing duties. The
Spanish version of Article 4.5 of the DSU uses the word "medidas" where the English and French versions use
"action" in the sense of legal steps, or a lawsuit, taken by a Member to establish a claim or obtain a remedy
under the WTO dispute settlement procedures.
432 In accordance with the general rule of interpretation in Article 31(1) of the Vienna Convention on
the Law of Treaties.
433 Footnote 35 to the SCM Agreement.
434 By virtue of the operation of Article 31 of the SCM Agreement.
435 Article 8.1 of the Agreement identified certain subs idies that "shall be considered non-actionable".
Article 8.2 set out conditions and criteria identifying su bsidies that "shall be non-actionable". Article 8.3
provided that a subsidy for which the provisions of paragraph 8.2 were invoked "shall be notified in advance" to
the SCM Committee. Any such notification "shall be suffic iently precise to enable other Members to evaluate

expressly provided that Parts III or V of the SCM Agreement "may be invoked". 436 If Parts III or V
were invoked, there was no requirement to reach pr eliminary findings on whether a measure satisfied
the conditions and criteria to be considered non-act ionable first, although that would naturally have
been a question to be addressed by a panel or a Member's authorities in the course of their
examination or investigation.
7.314 Measures that are "exempt from actions" by virt ue of Article 13 are not exposed to certain
types of actions based on particular provisions. However, unlike Part IV of the SCM Agreement, none
of those provisions creates a special multilateral procedure for evaluation of whether the measures
satisfy the conditions set out in Article 13. Rather, all of them are subject to the rules and procedures
of the DSU, although some437 are also subject to certain special and additional rules and procedures in
Appendix 2 to the DSU. If any of these provisions are invoked, there is no requirement to reach
preliminary findings on whether a measure satisfies th e conditions set out in Article 13 first, although
that is a question to be addressed by a panel in accordance with a proper order of analysis and in
accordance with the organization of its own procedures.
7.315 Further relevant context is found in the proce dures that apply to disputes arising under the
Agreement on Agriculture. Article 19 provides that the applicab le procedures are those set out in the
DSU:
"The provisions of Articles XXII and XXIII of GATT 1994, as elaborated and
applied by the Dispute Settlement Understanding, shall apply to consultations and the
settlement of disputes under this Agreement."
7.316 Neither this article, nor the DSU, contain any exception for cons ultations and disputes arising
in relation to Article 13. The list of special and additional rules or procedures in Appendix 2 to the
DSU does not include Article 13 or any other provision of the Agreement on Agriculture.
7.317 The first step in bringing an action under the DSU rules and procedures is a request for
consultations, which is a unilate ral step taken by an individual Member, as is a request for
establishment of a panel. There is no multilatera l mechanism to prevent a Member making these
requests on the basis that the measure s at issue do, in fact, satisfy the conditions in Article 13 of the
Agreement on Agriculture. Once a request is received, the DSU rules and procedures apply. Nothing
in the DSU or the relevant special and additional rul es and procedures prevents a dispute proceeding
in the usual way where a Member alleges non-complia nce with the conditions in Article 13 of the
Agreement on Agriculture . In fact, the only way to obtain a multilateral finding that measures do or
do not satisfy the conditions in Article 13 and theref ore are or are not exempt from actions is for the
complainant to take further legal steps in an attemp t to establish its claims and the right to relief. A
panel can only make findings as to whether measures ar e consistent with the listed provisions of the

the consistency of the programme with the conditions and criteria" in Article 8.2. Under Article 8.4, upon
request of a Member, the Secretariat wa s to review the notification and could request additional information. It
was to report its findings to the SCM Committee, and the Committee was to review such findings (or, absent a
request for such findings, the notification itself) with a view to determining whether the conditions and criteria
for "non-actionability" in Article 8.2 were met. Purs uant to Article 8.5, identified in Appendix 2 of the DSU as
a special or additional rule or procedure, upon reques t of a Member, the determination by the Committee, or
failure by the Committee to make a determination, as well as the violation of the conditions set out in a notified
programme, "shall be submitted to binding arbitration." The SCM Committee adopted a format for notifications
under Article 8.3 on 22 February 1995 (documents PC/IPL/11; G/SCM/14), and adopted a format for updates of
Article 8.3 notifications on 23 October 1997 (document G/SCM/13). The SCM Committee also adopted
procedures for arbitration under Article 8.5 on 2 June 1998 (document G/SCM/19). No Member availed itself
of these notifications or procedures.
436 Footnote 35 to the SCM Agreement.
437 Those based on Articles 3, 5 and 6 or "Part III" of the SCM Agreement.

SCM Agreement and Article XVI of the GATT 1994 where a complainant has taken certain actions
based on those provisions.
7.318 The object and purpose of WTO dispute settlement procedures are to provide security and
predictability to the multilateral trading system.
438 A cornerstone of the DSU is the prompt settlement
of situations in which a Member considers that its benefits under the cove red agreements are being
impaired,439 which is given effect inter alia through a Member's comprehensive right to bring dispute
settlement actions.440 This is not conditional upon whether the complaining Member is correct in its
views. Therefore, the Panel would need a clear injunction in the treaty text to depart from the
objective of prompt settlement by deferring jurisdiction to examine any claims pending a final
conclusion on Article 13 and we see none.
441
7.319 Further, the conditions in Article 13 help defi ne the scope of substantive obligations and
rights to relief, and most of the conditions themselves refer to compliance with substantive obligations
under the Agreement on Agriculture. The DSU provides a multilateral procedure to settle disputes
arising under the covered agreements and it is most unlikely that the negotiators intended to provide
only for unilateral determinations by Members as to whether their own measures satisfy conditions
such as those set forth in Article 13.
7.320 Accordingly, the Panel considers that the ordina ry meaning of the terms read in their context
and in light of the object and purpose of the treat y, indicates that "exempt from actions" means that
dispute settlement actions based on the listed provisions shall not be invoked with respect to measures
that satisfy the conditions in Article 13. Ho wever, that does not preclude multilateral dispute
settlement based on the listed pr ovisions where a Member considers that benefits accruing under
covered agreements are being impaired by a measure taken by another Member that does not satisfy
the relevant conditions set forth in Article 13. Th e issue of whether a measure satisfies the relevant
conditions is an issue of substance in a dispute.
7.321 The meaning of the phrase "exempt from actions " as used in Article 13 is confirmed by the
drafting history of the Agreement on Agriculture .442 The basic form of what is now Article 13
emerged from the first US/EC Blair House Agreement of November 1992 443, which was inserted in

438 Article 3.2 of the DSU.
439 Article 3.3 of the DSU.
440 Articles 4.2 and 6.1 of the DSU. However, that righ t is subject to Articles 3.7, 3.10 and 24.1 of the
DSU.
441 This is consistent with the views of the Appellate Body in US – Corrosion-Resistant Steel Sunset
Review, regarding allegedly mandatory measures, that:

"[...] As long as a Member respects the principles set forth in Articles 3.7 and 3.10 of the DSU,
namely, to exercise their 'judgement as to whether action under these procedures would be fruitful' and
to engage in dispute settlement in good faith, then that Member is entitled to request a panel to examine
measures that the Member considers nullify or impair its benefits. We do not think that panels are
obliged, as a preliminary jurisdictional matter, to examine whether the challenged measure is
mandatory. This issue is relevant, if at all, only as part of the panel's assessment of whether the
measure is, as such, inconsistent with particular obligations. [...]" (para. 89)

Similarly, the Panel considers that it is not obliged, as a preliminary jurisdictional matter, to examine
whether challenged measures satisfy the conditions set out in Article 13 of the Agreement on Agriculture. This
issue is relevant as part of the Panel's assessment of whether those measures are inconsistent with the
obligations in Articles 3, 5 and 6 of the SCM Agreement and Article XVI of the GATT 1994.
442 The Panel has recourse to supplementary means of interpretation in accordance with Article 32 of
the Vienna Convention on the Law of Treaties in order to confirm the meaning resulting from the application of
the general rule of treaty interpretation in Article 31 of that convention.
443 See the draft article which formed part of the first US/EC Blair House agreement, dated
20 November 1992, reproduced in Exhibit EC-1.

the agriculture text of the draft Final Act of Dece mber 1991. It included the exemptions from actions,
more or less in their current form. There is no e xplanation outside the text itself as to why those two
Members' negotiators chose this form of words. The first footnote of the draft article, which became
Article 13, provided that:
"The provisions of this Article replace those in Article 7:3, Article 12 and
Article 18:2 of the Text on Agriculture of this Draft Final Act."
7.322 Articles 7:3, 12 and 18:2 of the agriculture text of the draft Final Act444 read as follows:
"Article 7 – General Disciplines on Domestic Support
3. The domestic subsidies listed in An nex 2 to this Agreement shall be
considered as non-actionable for the purposes of countervailing measures, but not
otherwise, provided that such subsidies are in conformity with the general and
specific criteria relating thereto as prescribed in that Annex."
"Article 12 – Serious Prejudice
Where reduction commitments on domestic support and export subsidies are being
applied in conformity with the terms of th is Agreement, the presumption will be that
they do not cause serious prejudice in th e sense of Article XVI:1 of the General
Agreement."
"Article 18 – Consultation and Conciliation
2. On the basis of the commitments undertaken in the framework of this
Agreement, Members will exercise due rest raint in the application of their rights
under the General Agreement in relation to products included in the reform
programme."
7.323 Draft Article 18:2 had been included in the list of special or additional rules and procedures in
the draft DSU text, which became Appendix 2 to the DSU.
445 This reference was then placed in
square brackets 446 and the final version of Appendix 2 of the DSU contains no reference to any
provision of the Agreement on Agriculture. Given that draft Article 18:2 was the predecessor of parts
of the final Article 13, this is an indication that the omission of Article 13 from the final list of special
or additional rules or procedures was deliberate and that the negotiators did not intend it to operate as
a special dispute settlement procedure.447
7.324 Draft Article 7:3 provided for an exclusion fro m certain types of actions, without using the
phrase "exempt from actions". It provided that green box measures should be "non-actionable" for the
purposes of countervailing measures, which was retained in paragraph (a)(i) of the final Article 13.
At the same time as the drafters modified the content of draft Article 7:3, they replaced draft
Article 12 with a raft of provisions, choosing the phrase "exempt from actions" in five of them. These
were the predecessors of subparagraphs (a)(ii), (a)(iii), (b)(ii), (b)(iii) and (c)(ii) in the final Article 13.
Whilst three of these provisions referre d to provisions in Part III of the SCM Agreement, all five
extended beyond these to actions based on other typ es of complaints and provisions as well, in
particular, non-violation nullification or impairment of the benefits of tariff concessions, Article XVI

444 Extracted from document MTN.TNC/W/FA, dated 20 December 1991, reproduced in Exhibits
US-29 and EC-2.
445 See the extract of the draft text of the DSU, dated 15 June 1992, reproduced in Exhibit BRA-1.
446 See the extract of the draft text of the DSU, dated 15 November 1993, reproduced in Exhibit
BRA-2.
447 Draft Article 18:1 was later revised to become the final Article 19 in the Agreement on Agriculture.

of the GATT 1994 or its paragraph 1, and Article 3 of the SCM Agreement. In these circumstances,
the record discloses that the drafters chose a phr ase with a meaning similar to "non-actionable" but
which was not limited in its application to Part III or V of the SCM Agreement.
448
7.325 Accordingly, the Panel considers that the drafting history confirms the ordinary meaning of
the terms read in their context and in light of th eir object and purpose, as set out in paragraph 7.320
above.
7.326 The Panel has a mandate to examine the matter re ferred to the DSB by the complainant. The
Panel has a duty under Article 11 of the DSU to make an objective assessment of the facts of the case
and the applicability of and conformity of the measur es at issue with the relevant covered agreements.
The Panel makes that assessment in accordance with the dispute se ttlement rules and procedures of
the DSU, subject to the applicable special or a dditional rules and procedures in the covered
agreements listed in Appendix 2 to the DSU. In conducting its examination of the applicability of,
and conformity with the provisions of Articles 3, 5 and 6 of the SCM Agreement and paragraphs 1 and
3 of Article XVI of the GATT 1994, the Panel's order of analysis is indicated by the relevant covered
agreements, as discussed above. If the Panel were to conclude that measures did satisfy the
conditions in Article 13, it could not find that they were inconsistent with the obligations set out in the
listed provisions and need not continue its examination in order to provide a solution to the dispute.
7.327 This interpretation is confirmed in respect of actionable subsidies by the last sentence of
Article 5 and Article 6.9 of the SCM Agreement which clarify that each of those articles "does not
apply" to subsidies maintained on agricultural products as provided in Article 13. This clarifies that
the conditions in Article 13 partially define the sc ope of those substantive obligations. Emphasis of
that point may have been considered important due to the unusual nature of the exemption from
actions in Article 13 and its key role in the successful conclusion of the Uruguay Round.449
7.328 Article 7.1 of the SCM Agreement, which is the first provision in the article on remedies for
actionable subsidies, applies "[e]xcept as provided in Article 13 of the Agreement on Agriculture". In
the Panel's view, this indicates that the remedi es for actionable subsidies are not available for
domestic support measures that conform to the conditi ons in paragraphs (a) and (b) of Article 13.
Although that phrase is located in Article 7.1, which refers to requests for consultations only, it cannot
refer only to that merely procedural step, for the ab ove reasons. This is confirmed by the fact that
Article 7.1 is singled out as the only part of that article not listed as a special and additional rule and
procedure in Appendix 2 of the DSU, which indicates that the normal dispute settlement rules are
intended to apply.
7.329 The Panel also notes that the Appellate Body pa raphrased the English version of Article 13 in
EC – Bananas III in terms of bringing (and preven ting) dispute settlement actions. 450 However, in

448 The drafters chose to use the phrase "exempt from the imposition of countervailing duties" in
paragraph (b)(i) in a context in which neither the term "non-actionable" nor "exempt from actions" was
appropriate. The obligation to show due restraint in initiating any countervailing duty investigations found in
the final Article 13(b)(i) and (c)(i), and the title of the article, can be traced to draft Article 18:2. The final
Article 13(b)(ii) and (c)(ii), as well as the last sentence of Article 5, and Article 6.9 of the SCM Agreement, can
be contrasted with the "presumption" in draft Article 12.
449 Note that the draft texts of Article 6 of the SCM Agreement did not include any reference to the
predecessors of Article 13 of the Agreement on Agriculture: see draft texts reproduced in Exhibit BRA-372.
450 The relevant passage in that report reads as follows:

"[...] In addition, Article 13 of the Agreement on Agriculture provides that, during the implementation
period for that agreement, Members may not bring dispute settlement actions under either Article XVI
of the GATT 1994 or Part III of the Agreement on Subsidies and Countervailing Measures for
domestic support measures or export subsidy measures that conform fully with the provisions of the
Agreement on Agriculture. With these examples in mind, we believe it is significant that Article 13 of

doing so, the Appellate Body was not commenti ng on the manner in which a panel must go about
deciding whether an action was prevented, and the fact that a panel can only decide whether measures
satisfy the conditions in Article 13 after a proceeding has been brought.
7. Mandatory or discretionary distinction
7.330 A number of Brazil's claims relating to export subsidies under the Agreement on Agriculture,
as well as the prohibited and actionable subsidy provisions of the SCM Agreement and Article XVI of
the GATT 1994, rely on the allegedly "mandatory" nature of certain of the United States measures in
dispute.451
7.331 In addition, the FSRI Act of 2002 contains a so-called "circuit-breaker" provision, in
section 1601(e) which, the United States submits, c ould result in certain payments not being made. 452
That section provides that if:
"the Secretary determines that e xpenditures under [subtitles A through E 453 of the
FSRI Act of 2002] that are subject to th e total allowable domestic support levels
under the Uruguay Round Agreements ... will exceed such allowable levels for any
applicable reporting period, the Secretary sh all, to the maximum extent practicable,
make adjustments in the amount of such expenditures during that period to ensure
that such expenditures do not exceed such allowable levels."
7.332 Brazil's allegations of the mandatory nature of certain measures, as well as the United States'
rebuttal of such allegations in respect of certain measures, are therefore relevant to our examination of
numerous claims.
7.333 WTO panels have developed a relatively consistent approach to the so-called
"mandatory/discretionary distinction" whereby a WTO Member's law as such can be challenged
before a WTO panel if the law ma ndates WTO-inconsistent behaviour . WTO panels have generally
found that a law is WTO-inconsistent if they find that it mandates WTO-inconsistent behaviour.454 If,
on the other hand, the law provides the executi ve branch of a Member's government with
discretionary authority to act in a WTO-consistent manner, then WTO panels have generally found
that the law is not WTO-inconsistent.455

the Agreement on Agriculture does not, by its terms, prevent dispute settlement actions relating to the
consistency of market access concessions for agri cultural products with Ar ticle XIII of the GATT
1994." (Appellate Body Report, EC – Bananas III, para. 157).

451 We recall Brazil's claims as set out in its Panel request reproduced in Annex N of this report, our
preliminary ruling concerning payments made after the date of establishment of the Panel in Section VII:B, our
description of the measures at issue in Section VII:C, and Brazil's clarifications in its submissions described in
subsequent Sections of this report . We have summarized these above in the descriptive part of this report.
452 United States' oral statement at the second substantive meeting, para. 82.
453 Under Title I of the FSRI Act of 2002, entitled "Commodity Programs", Subtitles A through E deal
with direct and counter-cyclical payments for cove red commodities, marketing assistance loans and loan
deficiency payments for loan commodities and specific programme payments for peanuts, sugar and dairy.
454 For example, the panel in US – Section 301 Trade Act , recognized the "classical test in the pre-
existing jurisprudence that only legislation mandating a WTO inconsistency or precluding WTO consistency,
could, as such, violate WTO provisions" (at para. 7.54 of that Panel Report). See also Panel Report, US – Steel
Plate
 , para. 7.88.
455 See, for example, Panel Report, US – Export Restraints, para. 8.131.

7.334 This test has been generally applied by GATT/WTO panels
456, although the Appellate Body
has never pronounced generally upon the con tinuing relevance or significance of the
mandatory/discretionary distinction nor specifically ruled that it was determinative in consideration of
whether a legal instrument was inconsis tent with relevant WTO obligations. 457 The Appellate Body
has not, however, precluded the possibility that a Member could violate its WTO obligations by
enacting legislation granting discretion to its authorities to act in violation of its WTO obligation 458,
and sees no reason for concluding that, in princi ple, non-mandatory measure s cannot be challenged
"as such" in WTO dispute settlement. 459 Furthermore, panels are not obliged, as a preliminary
jurisdictional matter, to examine whether a challenged measure is mandatory. This issue is relevant,
if at all, only as part of the panel's assessment of whether the measure is, as such, inconsistent with
particular obligations.460
7.335 Recalling that the import of the "mandatory/discretionary distinction" will vary from case to
case, as well as from measure to measure, in our examination of the matter before us, we do not apply
this analytical tool mechanistically.
461 It is our duty properly to characterize each of the measures
challenged in these proceedings, as appropriate.462
7.336 In the course of our examination of each of the claims and measures concerned, we therefore
make an objective assessment of the particular Un ited States legal and regulatory provisions forming
the basis of Brazil's claims, in the first instance, on the basis of the text of those provisions and, as
appropriate, determine the extent to which they are of binding normative nature and operation. In this
respect, we recall the reproach of the Appellate Body in US – Corrosion-Resistant Steel Sunset
Review that the panel in that case "... did not consider the extent to which the specific provisions of
the Sunset Policy Bulletin are normative in nature, nor the extent to which the USDOC itself treats
these provisions as binding."463
D. DOMESTIC SUPPORT MEASURES AND ARTICLE 13 OF THE AGREEMENT ON AGRICULTURE
1. Measures at issue
7.337 This section of our report deals with domes tic support measures. These are the following
measures, as described in Section VII:C of this report:
(i) marketing loan programme payments;

456 In application of this distinction, there were gene rally two issues to be considered in a case where a
WTO Member's law was being challenged before a panel: first, whether the Member's law mandates a certain
course of action; and second, whether that course of ac tion is inconsistent with the WTO provision cited by the
complainant. Previous WTO panels followed different sequences in approaching these two issues. However,
the sequence in which these two issues are considered w ill not change the ultimate conclusion of the panel.
(See, e.g. Panel Report, US – Corrosion-Resistant Steel Sunset Review ) That is because whatever sequence a
panel follows, in order to conclude that certain aspect s of a WTO Member's law are inconsistent with the WTO
provisions, the panel had to conclude that both elements were present.
457 In US – Corrosion-Resistant Steel Sunset Review , the Appellate Body addresses the distinction, but
also indicates its view that the Appellate Body had not, as yet, been required to pronounce generally upon the
continuing relevance or significance of the mandatory/d iscretionary distinction. The Appellate Body then
stated: "Nor do we consider that this appeal calls fo r us to undertake a comprehensive examination of this
distinction." See Appellate Body Report, US – Corrosion-Resistant Steel Sunset Review, para. 93.
458 See Appellate Body Report, US – Countervailing Measures on Certain EC Products , para. 159 and
note 334.
459 Appellate Body Report, US – Corrosion-Resistant Steel Sunset Review, para. 88.
460 Appellate Body Report, US – Corrosion-Resistant Steel Sunset Review, para. 89.
461 Appellate Body Report, US – Corrosion-Resistant Steel Sunset Review, para. 93.
462 We note that the United States has not contested, before us, that the relevant measures are measures.
463 Appellate Body Report, US – Corrosion-Resistant Steel Sunset Review, para. 99.

(ii) user marketing (Step 2) payments paid to domestic users464;
(iii) production flexibility contract payments;
(iv) market loss assistance payments;
(v) direct payments;
(vi) counter-cyclical payments;
(vii) crop insurance payments;
(viii) cottonseed payments465; and
(ix) current legislative and regulatory pr ovisions providing for the payment of
measures (i), (ii), (v), (vi) and (vii), above.466
2. Applicability of Article 13 of the Agreement on Agriculture
7.338 Brazil requests a finding that Article 13(b)(ii) of the Agreement on Agriculture does not
exempt these United States domestic support measu res made in marketing years 1999-2002 to upland
cotton from actions based on Articles 5 and 6 of the SCM Agreement and Article XVI:1 of the GATT
1994.467
7.339 The United States requests a finding that, pursuant to Article 13(b)(ii) of the Agreement on
Agriculture, its domestic support measures are "exemp t from actions based on paragraph 1 of
Article XVI of the GATT 1994 and Articles 5 and 6 of the Subsidies Agreement" and that Brazil may
not bring or maintain any action against such measures "based on" those provisions.
7.340 The Panel will first consider whether Article 13 is applicable in this dispute.
7.341 Domestic support measures on agricultural products are the subject of paragraphs (a) and (b)
of Article 13 and are considered here in Section VII: D of this report. Paragraph (c) of Article 13 only
deals with export subsidies, which we will consider in Section VII:E.
7.342 Article 13 is a temporary provision applying onl y "[d]uring the implementation period". The
implementation period is defined in Article 1(f) as follows:
"(f) 'implementation period' means the six-year period commencing in the year
1995, except that, for the purposes of Article 13, it means the nine-year period
commencing in 1995;"

464 In Section VII:E of this report, user marketing (Step 2) payments to exporters are found to be export
subsidies. That being the case, the United States accepts that they no longer constitute domestic support and do
not form part of an analysis under Article 13(b). See the United States' response to Panel Question No. 45.
465 In Section VII:B of this report, cottonseed paym ents for the 2000 crop only were ruled within the
Panel's terms of reference, and they therefore are the only cottonseed payments described in Section VII:C of
this report. Nevertheless, cottonseed payments for the 1999 and 2002 crops are relevant to the assessment of
whether domestic support measures satisfy the conditions in Article 13(b), for the reasons given in paragraphs
7.533 and following, and are considered in this Section VII:D as well.
466 In this Section of our report, the Panel will c onsider the current progra mmes "as applied" and "as
such" together. Therefore, references to marketing loan programme, user marketing (step 2), direct, counter-
cyclical and crop insurance "payments" include the le gislative and regulatory provisions authorizing those
payments, unless otherwise indicated.
467 Brazil does not pursue a claim that domestic support measures are inconsistent with the obligations
of the United States under the Agreement on Agriculture.

7.343 Brazil requested consultations regarding this matter on 27 September 2002 and the Panel was
established on 18 March 2003, which were clearly da tes during the implementation period for the
purposes of Article 13. The Panel's terms of reference are as follows:
"To examine, in the light of the relevant provisions of the covered agreements cited
by Brazil in document WT/DS267/7, the matter referred to the DSB by Brazil in that
document and to make such findings as will assist the DSB in making the
recommendations or in giving the rulings provided for in those agreements."
468
7.344 The Panel's function is explained in Article 11 of the DSU, which provides, relevantly, as
follows:
"The function of panels is to assist th e DSB in discharging its responsibilities under
this Understanding and the covered agreements. Accord ingly, a panel should make
an objective assessment of the matter before it, including an objective assessment of
the facts of the case and the applicability of and conformity with the relevant covered
agreements, and make such other findings as will assist the DSB in making the
recommendations or in giving the rulings pr ovided for in the covered agreements.
Panels should consult regularly with the parties to the dispute and give them adequate
opportunity to develop a mutually satisfactory solution." (emphasis added)
7.345 In this dispute, the terms of the "relevant covered agreements" may have changed during the
Panel proceeding, depending on whether Article 13 has expired. 469 However, it is not in dispute that
the Panel's mandate in its terms of reference to examine the matter before it "in the light of the
relevant provisions of the cove red agreements" refers to the re levant provisions of the covered
agreements as at the date on which those terms of reference were set, which was the date of its
establishment.470 The Panel's duty is to assess the applicab ility of and conformity with the relevant
covered agreements as of that date. Br azil does not request us to do otherwise. 471 Article 13 is
therefore applicable in this dispute.472
3. Structure of Article 13 of the Agreement on Agriculture
7.346 Article 13 sets out certain conditions in the chapeaux of paragraphs (a) and (b) and an
additional condition in the proviso in subparagraphs (ii) and (iii) of paragraph (b).
7.347 Paragraph (a) covers domestic support measures that conform fully to the provisions of
Annex 2 of the Agreement on Agriculture , that is, so-called "green box" measures, which are not
subject to reduction commitments. Paragraph (b) covers domestic support measures that conform

468 See document WT/DS267/15.
469 The parties do not agree as to whether the impl ementation period for the purposes of Article 13
expired during these proceedings. Brazil submits that the implementation period for Article 13 ended on 31
December 2003. The United States refers to the definition of "year" for the purposes of Article 1(f), which is
found in Article 1(i), and submits that the end of the 20 03 calendar year is not releva nt to this dispute because
US commitments with respect to cotton are specified by marketing year. The European Communities also refers
to Article 1(f) and (i) and asserts that it is still an "ope n question" whether Article 13(b)(ii) and (c)(ii) will cease
to apply by the end of the 2003 calendar year or at a subsequent date during 2004. For the reasons given in
paragraph 7.345, the Panel does not need to form its own view as to whether Article 13 expired during these
proceedings.
470 See Brazil's and the United States' respective responses to Panel Question No. 124 and the responses
of China, the European Communities and New Zealand to Panel third party Question No. 50. See also the
United States' 3 March 2004 comments, footnote 1. The Panel takes note that Argentina and Australia did not
agree with this view in their responses to that question.
471 See Brazil's request for relief in the factual and arguments section of this report.
472 This implies no view as to whether a panel may apply provisions in a covered agreement that were
not in force as at the date of consultations.

fully to the provisions of Article 6, which covers domestic support subject to reduction commitments,
and domestic support not subject to reduction commitmen ts in terms of the criteria set out in that
article. The chapeau of paragraph (b) confirms that these are so-called "amber box", "blue box",
"de minimis" and "S&D box" domestic support measures.
7.348 Paragraph (b) does not cover domestic support me asures not subject to reduction in terms of
the criteria in Annex 2 and maintained in conf ormity therewith in accordance with Article 7.1. 473
These are measures that satisfy paragraph (a). The parties agree that these measures are excluded
from paragraph (b). 474 We will therefore refer to measures covered by paragraph (b) as "non-green
box measures".
7.349 Measures that do not conform fully to the provisions of Annex 2 of the Agreement on
Agriculture do not satisfy paragraph (a) . Therefore, they are subject to reduction commitments,
unless they are exempt on the basis of other criteria set forth in Article 6. In either case, they must
conform fully to the provisions of Article 6 and, hence, are subject to paragraph (b).
7.350 The conditions that apply to green box measures are set out in the chapeau of paragraph (a).
The conditions that apply to non-green box measures are set out in the chapeau of paragraph (b),
subject to an additional condition in the proviso in subparagraphs (ii) and (iii) that "such measures do
not grant support to a specific commodity in excess of that decided in the 1992 marketing year". Each
of these two groups of conditions provides exempt ions from actions based on certain provisions,
including paragraph 1 of Article XVI of the GATT 1994 and Articles 5 and 6 of the SCM
Agreement475, under which Brazil has brought claims in the present dispute. Domestic support
measures that satisfy either of the groups of conditions fall outside the scope of the obligations in
these provisions of Article XVI of the GATT 1994 and Part III of the SCM Agreement.476
7.351 Therefore, in order to succeed in its claims under the relevant provisions of those agreements,
Brazil must first show that the domestic support measures that it challenges satisfy neither group of
conditions. That is, it must first show that the measures are not green box, and that they do not satisfy
at least one of the conditions in the chapeau of pa ragraph (b) or the additional condition in the proviso
in subparagraph (b)(ii). If they do not satis fy the additional condition in the proviso in
subparagraph (b)(ii), they are not exempt from actions , whether or not they satisfy the conditions in
the chapeau of paragraph (b).
7.352 This is what Brazil sets out to show. It cl aims, firstly, that none of the domestic support
measures satisfy the conditions set out in paragraph (a) and, secondly, that the sum of them does not
satisfy the additional condition in the proviso in su bparagraph (b)(ii). It does not claim that measures
fail to satisfy the conditions in th e chapeau of paragraph (b). The United States responds that certain
of its domestic support measures satisfy the conditions set out in paragraph (a) and that the remainder
satisfy the additional condition in the proviso in subparagraph (b)(ii).
7.353 Therefore, the logical order in which to consider conformity of the domestic support measures
with Article 13 begins with paragraph (a), whic h will dictate which domestic support measures, if
any, are excluded from the sum to be compared under subparagraph (b)(ii).

473 Article 6.1 of the Agreement on Agriculture.
474 Brazil's first written submission, para. 129 and the United States' first written submission, para. 49.
475 Those which satisfy the conditions in paragraph (a) fall outside the whole of Article XVI of the
GATT 1994 and Part III of the SCM Agreement.
476 For the reasons given in Section VII:C of this report.

4. Paragraph (a) of Article 13
(a) Introduction
7.354 Paragraph (a) of Article 13 of the Agreement on Agriculture applies to domestic support
measures that conform fully to the provisions of Annex 2 to that agreement.
7.355 Brazil claims that PFC payments and DP payments fail to satisfy these conditions
477 because:
(i) PFC payments and DP payments are in consistent with pa ragraph 6(b) of
Annex 2 because the amount of such pa yments is related to the type of
production that is undertaken by United States upland cotton producers after
the base period
478;
(ii) DP payments do not conform to the prov isions of paragraph 6(a) and (b) of
Annex 2 because of the updating of the base periods for the DP
programme479; and
(iii) PFC and DP payments are inconsistent with the fundamental requirement in
paragraph 1 of Annex 2 that they ha ve no, or at most minimal, trade-
distorting effects or effects on production.480
7.356 The United States responds that these measures fully conform to the provisions of
Annex 2.481 It agrees that marketing loan programme payments, user marketing (Step 2) payments to
domestic users, market loss assistance ("MLA") payments, crop insurance payments and cottonseed
payments are non-green box measures. It does not a ssert that counter-cyclical ("CCP") payments are
green box because they are granted due to low prevailing market prices. 482 It has notified all these
types of payments as non-green box domestic s upport to the WTO Committee on Agriculture (except
CCP payments which began in the 2002 marketing y ear and have not yet been the subject of a
notification).483
7.357 The parties therefore only disagree as to whether PFC and DP payments conform fully to the
provisions of Annex 2 and, hence, satisfy the conditions in paragraph (a) of Article 13. The Panel will
therefore turn to these measures, wh ich have been described in Section VII:C of this report. The
Panel will consider them in terms of the featur es which allegedly do not conform fully to the
provisions of Annex 2: namely, planting flex ibility requirements and updating of base periods,
followed by the fundamental requirement in paragraph 1 of Annex 2.

477 Brazil claimed in its request for the establishment of a panel that United States domestic support
measures were inconsistent with the United States' obligations under Article 7.1 of the Agreement on
Agriculture but has not pursued that as a separate claim in these proceedings, as explained in paragraph 7.253 of
this report. Therefore, the Panel only considers whethe r measures conform fully to the provisions of Annex 2
for the purposes of its assessment under Article 13 of the Agreement on Agriculture.
478 See Brazil's first written submission, paras. 153 and 174 and its response to Panel Question No. 19.
479 See Brazil's first written submission, para. 176.
480 See Brazil's first written submission, paras. 163 and 183. Brazil agrees that these payments meet the
first basic criterion in paragraph 1(a) of Annex 2 and does not allege that they are inconsistent with the second
basic criterion in paragraph 1(b): see its response to Panel Question No. 30.
481 See United States' first written submission, para. 55 (regarding DP payments) and rebuttal
482 See United States' rebuttal submission, para. 102.
483 See documents G/AG/N/USA/43 (MY 1999 notification) and G/AG/N/USA/51 (MY 2000 and MY
2001 notifications). The United States notified all user marketing (Step 2) payments as domestic support, but
see supra,footnote 464.

(b) Planting flexibility limitations
(i) Main arguments of the parties
7.358 Brazil claims that PFC and DP payments and the provisions of the FSRI Act of 2002 and
implementing regulations providing for the DP progra mme are inconsistent with paragraph 6(b) of
Annex 2.484 It submits that the PFC and DP programmes limited and limit the type of production that
can receive payments and reduce and even eliminat e all payments under those programmes if certain
types of production, namely fruits, vegetables (and wild rice in the case of the DP programme), are
produced on base acreage. It argu es that the effect of the restriction is to funnel production on base
acreage to particular types of crops.485
7.359 Brazil submits that the Europ ean Communities' argument (su mmarized below), in essence, is
that trade distortions for products that traditionally have been subsidized should be permitted in order
to prevent trade distortion in markets for non-subsid ized products. In Brazil's view, this does not
avoid distortions but maintains them, contrary to the object and purpose of the Agreement on
Agriculture.486
7.360 The United States responds that PFC and DP payments are decoupled from production
because there is no requirement that the farmer enga ge in any production to receive payment or that
the base acreage be used for production. 487 It argues that, under Brazil's analysis, a requirement that a
payment recipient produce nothing at all in the current year would be inconsistent with paragraph 6(b)
even though it would ensure that such payments met the "fundamental requirement" of paragraph 1 of
Annex 2.488 It also argues that, under Brazil's analysis, the reduction or elimination of payments to
producers of illegal crops, such as opium poppy, un approved biotech varieties or environmentally
damaging production, would be inconsistent with paragraph 6(b).
(ii) Main arguments of the third parties
7.361 Argentina agrees with Brazil.489 Australia argues that the exclusion of fruits and vegetables
(other than lentils, mung beans, and dry peas) fro m the planting flexibility otherwise available in
respect of the contract acreage for which PFC paym ents could be made, rela ted, or connected, PFC
payments to the type of production undertaken by the producer in any year after the base period,
contrary to the requirements of paragraph 6(a) of Annex 2. Fruits, vegeta bles (other than lentils,
mung beans and dry peas) and wild rice are genera lly prohibited from being planted on base acreage
on which DP payments are made unless the commodity, if planted, is destroyed before harvest except
that trees and other perennial plants are prohibited. This relates, or connects, DP payments to the type
of production undertaken by the producer, contrary to paragraph 6(a) of Annex 2.490
7.362 Canada argues that the amount of PFC payments a nd DP payments are based on the type of
commodity produced after the base period. Canada submits that the United States has not addressed
in its submission the evidence of implementing legisl ation and regulations rega rding either measure.
Its argument that payment recipients are not require d to engage in any partic ular type or volume of
production (or any current agricultural production at all) to receive payments fails to address the
evidence indicating that the amount of the paymen t may change based on whether base acreage is
used for current production of fruits, vegetables or wild rice. For both measures, the evidence

484 Brazil's first written submission, para. 198.
485 Brazil's oral statement at the first session of the first substantive meeting, para. 66.
486 Brazil's rebuttal submission, paras. 8-9.
487 United States' first written submission, paras. 55-57.
488 United States' oral statement at the first session of the first substantive meeting, para. 19; United
States' closing statement at the first session of the first substantive meeting, para. 20.
489 Argentina's written submission to first session of the first substantive meeting, para. 56.
490 Australia's written submission to the first session of the first substantive meeting, paras. 41, 44-45.

indicates that the amount of the payment is based on the type of production: payments are full, nil or
some amount in between where base acres are u sed for current fruit, vegetable or wild rice
production.
491
7.363 The European Communities submits that an examination of the conformity of a decoupled
scheme with the criteria set out in Annex 2 must i nvolve an examination of the scheme as a whole.
In that light, the European Communities is not conv inced that where, as part of a scheme where no
production is required to receive pa yments, and that the production of any type of crop is permitted,
reducing payments where certain crops are produced can be such as to make the scheme, when taken
as a whole, related to a type of production. C onsequently, the reduction of payment linked to the
production of fruit and vegetables must be seen as part of a scheme which permits a farmer to grow
any type of crop, or even not to produce at all. Such a scheme, taken as a whole, meets the criteria that
payments are not related to a type of production. To find otherwise would not permit a WTO Member
wishing to introduce decoupled payments to take account of important elements of internal
competition, in an historical perspective, and a void those farmers receiving decoupled payments from
enjoying both the decoupled payments and a priv ileged position vis-à-vis farmers who are not entitled
to such payments. Moreover, the European Commun ities asserts that such a finding would require a
Member to increase its subsidy pr ogrammes in order to prevent internal distortions of competition,
running directly contrary to the process of reform instituted by the Agreement on Agriculture.492
(iii) Evaluation by the Panel
7.364 The Panel begins by noting that paragraph 6 of Annex 2 of the Agreement on Agriculture lists
specific criteria according to which certain dom estic support, which it describes as "[d]ecoupled
income support", may qualify as green box support. It reads as follows:
"Decoupled income support
(a) Eligibility for such payments shall be determined by clearly-defined criteria
such as income, status as a producer or landowner, factor use or production level in a
defined and fixed base period.
(b) The amount of such payments in any given year shall not be related to, or
based on, the type or volume of production (including livestock units) undertaken by
the producer in any year after the base period.
(c) The amount of such 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.
(d) The amount of such payments in any given year shall not be related to, or
based on, the factors of production employed in any year after the base period.
(e) No production shall be required in order to receive such payments."
7.365 Paragraph 6 is a list of five criteria that descr ibe decoupled income support. The first four
criteria, including paragraph 6(b), focus on the dist inction between the base period and the time after
the base period, providing that income support may be coupled to factors that occurred during the
base period, but not after it.

491 Canada's written submission to the first session of the first substantive meeting, para. 23.
492 European Communities' response to Panel third party Question No. 5.

7.366 The text of paragraph 6(b) refers to the rela tionship between the amount of decoupled income
support payments, on the one hand, and the type of production undertaken by the producer (among
other things) after the base period on the other. The ordinary meaning of the word "related" is
"[h]aving relation; having mutual relation; connected. (Foll. by to, with.)".493 This is a very general
notion. In the text, it can be contrasted with th e words "based on". The ordinary meaning of "base"
as used in this context is "found, build, or construct (up)on a given base, build up around a base
(chiefly fig.)".494 This is a more specific notion, whic h denotes that one element in some way
precedes or shapes the other. In contrast, "relat ed to" denotes a mere connection between the amount
of such payments and the type of production after the base period. This word is not limited to a
connection that is positive or negative, or absolute or partial. It appears to include all types of
relationship between the amount of such payments and the type of production after the base period,
whether the amount increases or decreases and whether the difference in the amount is proportional to
the volume of production or not.
7.367 Read in context, we note that paragraph 6(a) mandates requirements, whilst paragraphs 6(b),
(c) and (d) prohibit certain programme requirement s relating to the years after the base period.
Paragraphs 6(a), (c) and (d) do not disti nguish between positive and negative programme
requirements, in the sense of requirements concerning what the payment recipient must, or must not,
do. In particular, they do not distinguish betw een requirements that channel income support toward,
or away from, certain production in the years afte r the base period. This does not suggest that
paragraph 6(b) should be interpreted to prohibit only positive requirements to produce, or to engage in
certain types of production, but rather confirms the ordinary meaning of its terms, which also prohibit
negative requirements not to engage in certain types of production.
7.368 Paragraph 6(e) does not concern a negative requirement. It only prohibits a positive
requirement, i.e. a requirement of production. However, it must be presumed that each of the criteria
in paragraph 6 has meaning and effect.
495 If paragraph 6(b) could be satisfied by ensuring that no
production was required to receive payments, paragraph 6(e) would be redundant. The drafters would
have had no reason to include it in the list of criteria. 496 This confirms that paragraph 6(b) must be
interpreted to require more than that one prohibition.
7.369 There are certain similarities between paragraph 6 and the subsequent paragraphs of Annex 2,
all of which set out criteria according to whic h certain domestic support measures may qualify as
green box support. Paragraph 11(b) is in identical te rms to paragraph 6(b) except for the addition of
the phrase "other than as provided for under criterion (e) below". Criterion (e) in paragraph 11
provides as follows:
"(e) The payments shall not mandate or in any way designate the agricultural
products to be produced by the recipients except to require them not to produce a
particular product."
7.370 Paragraph 11(b) therefore provides, in effect, that the amount of certain payments shall not be
related to the type of production undertaken by the producer after the base period except that the
payments may require recipients not to produce a particular product. Paragraph 6(b) does not set forth
such an exception. There is nothing in the context that would explain why it was necessary to express
the exception in paragraph 11(e) if it was already implicit in paragraph 11( b), which is otherwise

493 The New Shorter Oxford English Dictionary, (1993).
494 The New Shorter Oxford English Dictionary, (1993).
495 This accords with the principle of effective treaty interpretation. See the discussion in the Appellate
Body Report in US – Gasoline, page. 23.
496 The context also includes paragraph 5 which provides that any existing or new type of direct
payment other than those specified in paragraphs 6 through 13, shall conform to criteria (b) through (e) in
paragraph 6 (in addition to the general criteria set out in paragraph 1), which emphasizes the importance of these
four criteria in the scheme of Annex 2.

identical to paragraph 6(b). This confirms that, if the drafters of Annex 2 had intended to permit such
a negative requirement in decoupled income s upport exempt from reduction commitments, they
would have done so expressly.
7.371 The object and purpose of Annex 2 is to set out the terms on which certain domestic support
measures can be exempt from reduction commitments. The first sentence of paragraph 1 provides
that "domestic support measures for which exem ption from the reduction commitment is claimed
shall meet the fundamental requirement that they ha ve no or at most minimal trade-distorting effects
or effects on production". Brazil submits that the ch apeau of paragraph 1 of Annex 2 forms part of
the context for interpreting paragraph 6(b).
497 The United States submits that the purpose of the
criteria in Annex 2 is to determine compliance wi th that fundamental requirement. Therefore, on
either view, that fundamental requirement should be taken into account in interpreting the criterion in
paragraph 6(b).
7.372 The United States argues that the interpretation of paragraph 6(b) s hould permit decoupled
income support that requires recipi ents to engage in production of no crops at all "because such a
measure necessarily can have no trade-distorting effects or effects on production". 498 In the Panel's
view, paragraph 6(b) permits such a condition becau se it only prohibits the amount of payments being
related to the type or volume of production undertaken by the "producer", which by definition
excludes those who are required not to produce anything.499
7.373 The United States also argues that the interp retation of paragraph 6(b) should permit
decoupled income support that prohibits recipients from producing illegal crops, such as opium poppy
or unapproved biotech varieties, or enga ging in environmentally damaging production. 500 This is not
an issue before this Panel and it is not incumbent upon the Panel to decide it.
7.374 There are no other facts or arguments on the record of this dispute which require the Panel to
consider its interpretation of para graph 6(b) further. The Panel will therefore apply that criterion to
PFC and DP payments in accordance with the ordi nary meaning of the terms it uses, as explained
above.
7.375 The parties agree that PFC and DP payment recipi ents had, and have, flexibility in what they
choose to produce on their base acres an d in whether they produce anything on their base acres at all.
It is agreed that that flexibility was not, and is not, unlimited. 501 The parties disagree as to whether
the limitations on that flexibility affect the conformity of the measures at issue to the provisions of
Annex 2 of the Agreement on Agriculture.
7.376 The planting flexibility provisions applicable to PFC payments were found in section 118 of
the FAIR Act of 1996, subsection (a) of which provided as follows:
"Subject to subsection (b), any commodity or crop may be planted on contract
acreage on a farm."
7.377 Subsection (b)(1) provided the following limitations:

497 Brazil's first written submission, para. 179.
499 The Panel also notes that paragraphs 9 and 10 of Annex 2 deal with producer and resource
retirement programmes.
501 See Brazil's first written submission, paras. 159-161 and 174; the United States' oral statement at the
first session of the first substantive meeting, para. 19. The Panel also notes the Un ited States' correction to its
response to Panel Question No. 26, that payments are made regardless of whether upland cotton is produced, but
not regardless of what is currently produced.

"The planting of fruits and vegetables (oth er than lentils, mung beans, and dry
peas)502 shall be prohibited on contract acreage."
7.378 Subsection (b)(2) provided exceptions to these limita tions. The first related to regions with a
history of double-cropping of contract commodities (s uch as upland cotton) with fruits or vegetables.
In these regions, double-cropping was permitted. Th e other two exceptions related to farms with a
history of planting fruits or vegetables on contract acreage and producers with an established planting
history of a specific fruit or vegetable. It was provided that payments in respect of these farms and to
these producers "shall be reduced by an acre for each acre planted to the fruit or vegetable".
503
7.379 The planting flexibility provisions that form part of the DP programme, under which DP
payments are made, are found in section 1106 of the FSRI Act of 2002, subsection (a) of which
provides as follows:504
"Subject to subsection (b), any commodity or crop may be planted on base acres on a
farm."
7.380 Subsections (b)(1), (2) and (3) provide the following limitations:
"(1) The planting of an agricultural comm odity specified in paragraph (3) shall be
prohibited on base acres unless the commodity , if planted, is destroyed before
harvest.
(2) The planting of an agricultural commod ity specified in paragraph (3) that is
produced on a tree or other perennial plant shall be prohibited on base acres.
(3) Paragraphs (1) and (2) apply to the following agricultural commodities:
 (A) Fruits.
 (B) Vegetables (other than lentils, mung beans and dry peas).
 (C) Wild rice."
7.381 Subsection (c) provides exceptions to these limitations related to historical double-cropping in
almost identical terms to those which applied to PF C payments. Subsection (d) created a special rule
which allowed fruits, vegetables (other than lentils , mung beans and dry peas) and wild rice to be
planted on excess base acres for the 2002 crop year only due to the overlap between PFC and DP
payments that year, but provided that DP payments for the 2002 crop year "shall be reduced by an
acre for each acre of the excess base acres planted to such an agricultural commodity."
505
7.382 Regulations implemented and implement the planting flexibility provisions, providing
inter alia, a non-exhaustive list of over 191 fruit and ve getable crops subject to the limitations. 506

502 Wild rice was added to the list of restricted cr ops pursuant to the Agriculture, Rural Development,
Food and Drug Administration, and Related Agencies Appropriations Act, 2000. [Footnote not in original]
503 Section 118(b)(2)(B) and (C)(ii), reproduced in full in Exhibits BRA-28 and US-22; and 7 CFR
1412.206(e) (1 January 2002 edition) , reproduced in Exhibit BRA-31 and explained in USDA Fact Sheet,
reproduced in Exhibit BRA-4.
504 These conditions also form part of the CCP programme.
505 Section 1106 of the FSRI Act of 2002 is reproduced in full in Exhibits BRA-29 and US-1. 7 CFR
1412.407(d)(3)(ii) (1 January 2003 edition) is reproduced in Exhibit BRA-35.
506 See 7 CFR 1412.206(f) (1 January 2002 edition) and 7 CFR 1412.407(h) (1 January 2003 edition),
reproduced in Exhibits BRA-31 and BRA-35, respectively. There was a special rule for wild rice for PFC

Non-compliance with contract requirements results in termination of the contract and the recipient
must refund payments with interest, but in cases of violations of the planting flexibility limitations
which are not serious enough to warrant termination, payments may be made in an amount reduced by
the sum of the "per-acre market value of the fruits , vegetables (and wild rice)" "times the number of
acres in violation" plus the payments.
507 This is equivalent to a zero payment for those acres and a net
refund of the market value of the fruits, vegetables and wild rice.
7.383 There is little doubt that in general the "amount" of PFC and DP payments is not "related to,
or based on, the type or volume of production ... unde rtaken by the producer in any year after the base
period". However, although there is no programme requirement to produce any particular product,
where a producer in fact undertakes certain rest ricted types of production, such as fruits and
vegetables, on some or all acres enrolled in the prog ramme in a year after the base period, the amount
of the payment which that producer receives may be reduced. Where the farm or the producer meets
certain special eligibility criteria, which essentia lly depend on a history of planting fruits or
vegetables, there is a reduction in the amount of the payment, unless the region satisfies the special
eligibility criteria, in which case there is no reduction. Where neither the farm nor the producer meets
the special eligibility criteria, and the producer undert akes certain restricted types of production, such
as fruits and vegetables, on some or all acres enro lled in the programme in a year after the base
period, payments are revoked or there is a reduc tion in the amount of the payment by way of a
penalty. It is with respect to these requirements, under which payments are eliminated or reduced,
that Brazil claims that PFC and DP payments are not in conformity with the criterion in
paragraph 6(b) of Annex 2 of the Agreement on Agriculture because the amount of such payments in
any given year is related to, or based on, th e type and volume of production undertaken by the
producer in a year after the base period, and that therefore PFC and DP payments do not qualify for
exemption from reduction commitments as decoupled income support.
7.384 It is clear that the planting flexibility limitations at issue provide for the "amount" of PFC and
DP "payments" to be reduced or eliminated by re ference to the planting of fruit and vegetables (and
wild rice) on base acres. Those producers who did not and do not plant fruit and vegetables (or wild
rice) on their base acres did not and do not have the amount of their payments reduced. Those
producers who did and do plant fruit and vegetables (and wild rice) on their base acres, whether in
accordance with special eligibilit y criteria (with one exception)
508 or not, did and do have the amount
of their payments reduced.
7.385 It is also clear that the harvesting of fruit, ve getables and wild rice are "types" of production.
The permitted crops, which are a very large but not unlimited group, are also "types" of production.
The planting flexibility limitations at issue, although they refer to "planting", do in fact apply to types
of "production". In the case of PFC payments, th ey applied to planting, which necessarily included
prohibited crops that were harvested and those that were destroyed before harvest. This is not in
dispute. In the case of DP payments, the limitati ons apply to the harvesting of these crops, as those
prohibited crops destroyed before harvest are speci fically excluded from the limitations. In the case
of both PFC and DP payments, the limitations refer to the planting of prohibited crops during the term
of a contract, which is after the base period. Ther efore, on a plain reading, the amount of all PFC and
DP payments were and are related to the type of production undertaken by the producer after the base
period.

payments in fiscal years 1998 through 2002, according to which "for each contract acre on which a producer
plants wild rice, 1 acre will not be used in determining the contract payment".
507 See 7 CFR 1412.401 (1 January 2002 edition) and 7 CFR 1412.601 (1 January 2003 edition),
reproduced in Exhibits BRA-31 and BRA-35, respectively.
508 Other than the exception for regions with a history of double cropping: Section 118(b)(2)(A) of the
FAIR Act of 1996 and Section 1106(c)(1) of the FSRI Act of 2002.

7.386 The Panel does not need to decide for the purpo ses of this dispute the extent to which the
interpretation of paragraph 6(b) re quires a consideration of the trade-distorting effects or effects on
production of a measure, in light of the fundamental requirement in paragraph 1. Firstly, the Panel
notes that the planting flexibility limitations provide a monetary incentive for payment recipients not
to produce the prohibited crops. US DA data presented by Brazil shows that the planting flexibility
limitations in this dispute cover a wide range of types of production
509 which represent approximately
22 per cent of farm income from crops in the seventeen states of the United States producing upland
cotton, peaking at over 70 per cent in California, a major upland cotton producing state.
510 T h e
United States has not suggested that these farms are covered by the special eligibility criterion which
would permit them to plant fruits and vegetabl es without penalty. These limitations therefore
significantly constrain production choices available to PFC and DP payment recipients and effectively
eliminate a significant proportion of them. Whils t these programmes permit recipients to produce
nothing, this alone does not remove the significant c onstraint that the planting flexibility limitations
have in certain regions on the choices of t hose PFC and DP payment recipients who do produce
something, which the evidence shows is the overwhelming majority.511
7.387 Secondly, the Panel asked the United States to indicate the reason for the planting flexibility
limitations and to comment on the suggestion by th e European Communities that these limitations are
designed to avoid unfair competition.512 The United States informed the Panel of when the limitations
were introduced and in what connection but declined to indicate the reason for them or to comment on
the European Communities' suggestion. Therefore, there is no eviden ce before this Panel that these
particular planting flexibility limitations in these particular programmes actually promote fair
competition or reduce production- or trade-distorting effects in the markets for fruits and vegetables,
or the markets for the commodities covered by the programmes or any other market. This does not
imply any view as to whether such evidence is relevant to the interpretation of paragraph 6(b).
7.388 For the above reasons, the Panel concludes that PFC payments, DP payments, and the
legislative and regulatory provisions that provide for the planting flexibility limitations in the DP
programme, do not fully conform with paragraph 6(b) of Annex 2 of the Agreement on Agriculture.

509 The limitations cover over 191 crops: see 7 CFR 1412.206(f) (1 January 2002 edition) and 7 CFR
1412.407(h) (1 January 2003 edition), reproduced in Exhibits BRA-31 and BRA-35, respectively..
510 This is a five year average 1997-2001. See USDA Economic Research Service "U.S. and state farm
income database, farm cash receipts 1997-2001", reproduced in Exhibit BRA-107, and Brazil's oral statement at
the first session of the first substantive meeting, para. 66. This average includes high proportions of farm
income in Florida, New Mexico and Virginia which only account for a small amount of upland cotton
production, as well as high proportions in Arizona, California and Georgia, which account for a large amount of
upland cotton production. National statistics also show that the amount of acreage planted to crops prohibited
under the PFC and DP programmes is large: see USDA Fruits and Tree Nuts Yearbook, October 2003, Table
A-2, and USDA Vegetables and Melons Yearbook, July 2003, Table 3, reproduced in Exhibits BRA-422 and
BRA-423.
511 See USDA data supplied in December 2003 in Exhibits US-111 and US -112 and corrected in
January 2004 as described in Exhibit US-145. See al so the testimony before the United States House of
Representatives Committee on Agriculture in 2001 by Mr. Robert McLendon, then Chairman of the National
Cotton Council's Executive Committee that "I don't think we have a lot of farmers getting their payment and not
working the land" set out in Exhibit BRA-41, at page 17; and the statement of Dr. Sumner at pages 11 and 12 in
Exhibit BRA-342.
512 The Panel asked the United States to comment on this suggestion by the European Communities. In
its response, the United States informed the Panel that these limitations on planting flexibility came into play
with the "flex acre" concept of the FACT Act of 1990 and have continued to apply only to base acres under the
1996 and 2002 legislation. See the United States' response to Panel Question No. 217.

(c) Updating of base acres
(i) Main arguments of the parties
7.389 Brazil claims that the DP payments and provisions of the FSRI Act of 2002 and
implementing regulations that provide for the DP pr ogramme are inconsistent with paragraphs 6(a)
and (b) of Annex 2 because they permitted updating of base acres from the PFC programme. It argues
that successive decoupled income support programme s with the same structure, design and eligibility
criteria must have a fixed and uncha nging base period to be consistent with paragraph 6(a). It argues
that the updating of base periods captures additional payment acreage for a particular crop and links
increased recent volumes of production with the amount of current payments which is inconsistent
with paragraph 6(b). It argues that the object and purpose of paragraph 6 is to ensure that Members
do not permit payments to increase over time in a manner linked to increases in production over
time.
513
7.390 The United States responds that DP payments are ma de to persons on farms for which
payment yields and base acres are established, whic h are "defined" in the Act and "fixed" for the
duration of the legislation – that is, marketing years 2002-2007. 514 The United States does not agree
that once a particular type of direct payment unde r Annex 2 has been made, all subsequent measures
providing direct payments must be made with respect to the same base period. There is no textual
requirement that all domestic support measures for which exemption from the reduction commitments
is claimed utilize the same "defined and fixed period". 515 Although it is irrelevant, PFC and DP
payments are not in fact essentially the same.516
(ii) Main arguments of the third parties
7.391 Australia agrees with Brazil. 517 Canada submits that the Panel should find that the
applicable base period for DP and PFC payments is the same because the structure and payment
parameters of the two programmes are essentially the same. 518 New Zealand submits that the DP
programme is the successor to the PFC programme a nd to permit an updating of the fixed base period
by changing the name of the programme would rende r the provisions of paragraphs 6(a) and (b) of
Annex 2 a nullity.519
7.392 The European Communities takes note of the United States' explanation that the updating of
the base period was necessary in order to bring supp ort for oilseeds production into the DP scheme
and saw nothing in paragraph 6 of Annex 2 that prevented different base periods where eligibility was
based on previous eligibility for production dist orting subsidies. However, the European
Communities is concerned that continued updating of reference periods in respect of the same existing
decoupled support, creating an expectation that prod uction of certain crops would be rewarded with a
greater entitlement to supposedly decoupled paymen ts, tended to undermine the decoupled nature of
such payments.520

513 Brazil's first written submission, paras. 176-180 and response to Panel Question No. 19.
514 United States' first written submission, para. 67; United States' response to Panel Question No. 24.
515 United States' rebuttal submission, paras. 30-35.
516 The United States does not assert that PFC and DP payments are anything but decoupled income
support subject to all the requirements in paragraph 6.
517 Australia's written submission to the first session of the first substantive meeting, paras. 46-48.
518 Canada oral statement at the first session of the first substantive meeting, para. 5.
519 New Zealand written submission to the first session of the first substantive meeting, para. 2.26.
520 European Communities' oral statement at the first session of the first substantive meeting, para. 32.

(iii) Evaluation by the Panel
7.393 The Panel has already found that DP paymen ts fail to conform to the provisions of
paragraph 6 of Annex 2 due to the planting flexibilit y limitations. It is therefore unnecessary for the
purposes of this dispute to make findings on their c onformity with paragraph 6 due to the updating.
Therefore, the Panel makes only the following factual findings which aid in understanding the
comparison of support under Article 13(b) and later Sections of this report.
7.394 Under the DP programme, owners had to establish base acres and programme yields for all
commodities covered by the programme before enrolli ng. "Base acres" are the quantity of acreage on
which payments are calculated. 521 They are calculated as an average of plantings in certain previous
years, not plantings in the years when payments are made. The alternativ e methods of calculating
base acres for the DP programme are found in secti on 1101(a) of the FSRI Ac t of 2002, which gave
owners a one-time opportunity to elect a method of calculation of base acres.
7.395 This provision essentially gave owners three options for calculation of base acres. One option
was to choose base acres equal to those that would have been used to calculate the 2002 PFC payment
for the commodities covered by both programmes. This was calculated for upland cotton from the
three-year average of acreage plante d during the 1993 through 1995 crop years. 522 Another was to
add oilseeds to base acres used for the PFC payment, using one of three possible methods. The other
option was to calculate base acres from the four-year average of acreage planted during the 1998
through 2001 crop years. The USDA described this option as "updating" all base acres.523
7.396 The majority of farms with upland cotton base acres did not choose to update all base acres.
However, those which did update caused the tota l upland cotton base acreage to increase in the 2002
marketing year from 15,933,377.9 acres under the PFC programme to 18,558,304.2 acres under the
DP programme, an increase of 16.4 per cent. 524 This increase was based on planting that occurred
during 1998-2001, which was after the base peri od 1993-1995. The updating necessarily increased
the total amount of payments on upland cotton base acreage over the previous year, because the DP
payment rate for upland cotton is not lower than the PFC payment rate for the previous year (it is in
fact slightly higher). At the same time, upland co tton planted acreage in the 2002 crop year declined
over the 2001 crop year by 1.09 million acres.
525 Therefore, the overall updating of base acres was
not linked to an overall increase in production of up land cotton. However, individual updating by
certain recipients was linked to increases in plan tings of upland cotton in 1998-2001 over 1993-1995.
For those recipients, the amount of payments is related to the type or volume of production
undertaken by the producer in 1998-2001.

521 They were called "contract acreage" in the PFC programme. "Payment acres" are equal to 85 per
cent of a recipient's base acres in both the PFC and DP programmes.
522 Section 102(4) of the FAIR Act of 1996. See 7 CFR 1412.103 (1 January 2002 edition) for the
definition of "eligible acreage" and 7 CFR 1413.7 (1 Ja nuary 1993 edition) relating to deficiency payments,
reproduced in Exhibit BRA-26. For covered commodities other than upland cotton and rice, base acreage was
generally calculated as the average of acres planted during the previous five years.
523 USDA side by side comparison of PFC and DP pa yments in Economic Research Service Features:
"The 2002 Farm Bill: Title I – Commodity Programs", printed 16 September 2002, reproduced in Exhibit BRA-
27; USDA Agriculture Information Bulletin Number 778, Economic Research Service electronic report: "The
2002 Farm Act – Provisions and Implications for Commodity Markets" by Paul C. Westcott, C. Edwin Young
and J. Michael Price, Nove mber 2002, at page 7; USDA Direct payment and CCP enrolment report dated 19
June 2003; USDA "Cotton Briefing room: Farm Commodity Policy, Updating Base Acres and Payment
Yields", USDA Farm Services Agency Newsroom "Ven eman reminds farmers to complete DCP sign-up by
June 2" dated 29 May 2003; and extract from USDA "2002 Direct and Counter-Cyclical Program Final
Enrolment Report (DCP-01)", November 2002 titled "Upland cotton base and yield updating by state and
region, marketing year 2002", reproduced in Exhibits BRA-27, BRA-42, BRA-44, BRA-110, BRA-321 and US-
94, respectively.
524 Exhibits US-111 and US-112 and United States' further rebuttal submission para. 82.
525 Exhibits US-111 and US-112.

7.397 It is clear to the Panel that the DP progra mme is the successor to the PFC programme. The
two programmes were established by successive farm bills, the latter of which provided that DP
payments in the 2002 marketing year should be adjusted to take account of the PFC payments for the
same fiscal year.
526 Base acreage used for the 2002 PFC paym ent can be used to calculate base
acreage for the DP programme. This relationshi p is confirmed by the USDA Economic Research
Service as follows:
"While the 2002 Farm Act introduces some new policies to the array of agricultural
commodity programs, in many ways, it ex tends provisions of the 1996 Farm Act and
the ad hoc emergency spending bills of 1998-2001. For example, the 2002 Act
continues marketing assistance loans, which ex isted under previous U.S. farm law;
direct payments replace production flexibility contract payments of the 1996 Farm
Act; and counter-cyclical payments are in tended to institutionalize the market loss
assistance payments of the past several years."527 [emphasis added]
7.398 The fact that they are "successor" programmes do es not tell us whether they are or are not the
same income support programme for which the base period has been changed. The Panel notes that
the PFC and DP programmes share certain structural elements:528
(i) eligible recipients are the same529;
(ii) the payment formula is the same, namely 85 per cent of the recipient's base
acres, multiplied by payment yields multiplied by the payment rate for each
commodity
530;
(iii) payments are made by reference to historical acreage and historical yields,
not current production531;
(iv) base acres for the same commodities can be the same, at the owner's
election532;

526 Section 1107 of the FSRI Act of 2002. Adjustment to avoid double payments in itself may only
indicate that the recipients are the same, and not that tw o programmes are structurally similar. For instance,
there was a similar provision to adjust PFC payments in the 1996 marketing year to take account of deficiency
payments for the same year, although deficiency payments allowed no planting flexibility – see section 114(e)
of the FAIR Act of 1996.
527 USDA Agriculture Information Bulletin Number 778, Economic Research Service electronic report:
"The 2002 Farm Act – Provisions and Implications for Commodity Markets" by Pa ul C. Westcott, C . Edwin
Young and J. Michael Price, November 2002, page iv, reproduced in Exhibit BRA-42. See also the description
of direct payments at page 4.
528 Brazil also drew attention to the USDA side by side comparison of PFC and DP payments: USDA
Economic Research Service Features: "The 2002 Farm Bill: Title I – Commodity Programs" , printed
16 September 2002, reproduced in Exhibit BRA-27. The Panel considers that comparison useful in that its
contents reveals the structural similarities between the programmes, not because of the choice of format.
529 Section 102(12) of the FAIR Act of 1996, 7 CFR 718.2 (1 January 2002 edition) and
Section 1001(12) of the FSRI Act of 2002 and 7 CFR 1412.202 and 1412.402, reproduced in Exhibits BRA-28,
BRA-31, BRA-29 and BRA-35, respectively. The Un ited States emphasized that "the 1996 Act and
implementing regulations under both Acts contained identical language" – see its rebuttal submission para. 37.
530 See 7 CFR 1412.103 (1 January 2002 edition) and 7 CFR 1412.502(e), reproduced in Exhibits
BRA-31 and BRA-35, respectively.
531 Section 114(a) of the FAIR Act of 1996 and Section 1103(b) of the FSRI Act of 2002.
532 Section 1101(a)(B)(i) of the FSRI Act of 2002, wh ich refers to the "contract acreage (as defined in
Section 102 of the [FAIR Act of 1996] used by the S ecretary to calculate the fi scal year 2002 payment
authorized under section 114 of such Act for the cove red commodities on the farm". See Exhibits BRA-29 and
US-1.

(v) payment yields for commodities covered by both programmes are the
same533;
(vi) payment rates are fixed for each commodity and unaffected by current
market prices534;
(vii) land use requirements are basically the same535;
(viii) planting flexibility and planting flexibility limitations are the same536; and
(ix) payment limitations are the same.537
7.399 The two programmes also have certain differences:
(i) commodity coverage differs. The DP programme includes all commodities
covered by the PFC programme plus soybeans, other oilseeds and
peanuts538;
(ii) the method of calculating payment rates differs. The DP payment rates are
set out in the legislation and fixed on a per unit basis for the entire life of the
Act. PFC payment rates are derived fr om the share of funds allocated to
each contract commodity according to percentages specified in the Act;
(iii) the term of contract differs. DP contracts are annual but PFC contracts ran
for up to the entire life of the Act. Payments are annual under both; and
(iv) actual payment rates differ. DP payment rates for upland cotton are higher
than PFC payment rates for 2001 and 2002, but lower than the average PFC
rates throughout the life of the PFC programme.
7.400 The United States explained that the reason for allowing producers to calculate base acres for
all covered commodities using the 1 998-2001 average was due to the fact that oilseeds had not been
covered by the PFC programme. Some mechanism was required to bring acreage previously devoted
to oilseeds within the scope of the DP programme.
539
7.401 The Panel observes that such a mechanism is found in section 1101(a)(1)(B), which permitted
a recipient to calculate base acres by reference to the base period of the 1993 through 1995 crop years,
adding acreage for oilseeds under one of three differe nt options. Section 1101(a)(1)(A), on the other
hand, permitted a recipient to update base acres for all covered commodities, and not just bring

533 See 7 CFR 1412.103 (1 January 2002 edition) a nd 7 CFR 1412.301 and 1412.302 (1 January 2003
edition), reproduced in Exhibits BRA-31 and BRA-35, respectively.
534 See 7 CFR 1412.103 (1 January 2002 edition); 7 CFR 1412.502(d) (1 January 2003 edition), and
Table 19 of USDA Agricultural Outlook (November 2003), reproduced in Exhibits BRA-31, BRA-35 and BRA-
394, respectively.
535 Section 111(a) of the FAIR Act of 1996 and section 1105(a) of the FSRI Act of 2002.
536 See 7 CFR 1412.206 (1 January 2002 edition) and 7 CFR 1412.407 (1 January 2003 edition),
reproduced in Exhibits BRA-31 and BRA-35, respectively.
537 There was and remains a limitation of $40,000 per person per crop year. The three entity rule has
been retained according to which an individual can receive a full payment directly and up to a half payment
from two additional entities: see section 115 of the FAIR Act of 1996 and section 1603 of the FSRI Act of
2002; see also the USDA side by side Comparison of PFC and DP payments at page 12, reproduced in Exhibit
BRA-27.
538 Section 102(5) of the FAIR Act of 1996 and sections 1001(4) and 1103 of the FSRI Act of 2002.
Payments are calculated differently with respect to peanuts, as described in Section VII:C of this report.
539 United States' first written submission, para. 60.

acreage previously devoted to oilseeds within th e scope of the DP programme. The United States
explained that compelling all recipients to use the 1998-2001 average would have penalized those
who had chosen not to produce during the PFC programme.
540 However, this explanation assumes
that it was appropriate to use the 1998-2001 average fo r all covered commodities, which is what is in
dispute.541 The United States could have chosen a se parate means to provide support to oilseed
producers, instead of incorporating them into this measure and permitting owne rs to update their base
period, but it did not.
7.402 Brazil argues that the possibility of updating encourages producers to plant more acreage to
commodities covered by a programme in the expecta tion that they would be able to update base
acreage in the successor programme. 542 It submits that the option of updating base acres in 2002 for
all covered commodities "will send a strong signal to producers to use their 'freedom to farm' to
protect their 'future base' by at a minimum maintain ing existing levels of production and if possible,
increase production and yields of program crops." 543 It cites evidence from USDA economists that
"[t]hese base acreage and payment yield updates may influence current production choices if farmers
expect that future legislation will again allow them to update these program parameters for their
farms."544
7.403 The United States responds to this argument in relation to its arguments that DP payments
comply with the fundamental requirement in paragr aph 1. It submits that Brazil's argument rests
entirely on theoretical statements and that it does not evaluate the extent of any hypothesized
production effect.545 It submits that Brazil's argument ignores the opportunity costs of planting cotton
instead of a crop with a more favourable expected retu rn in the current year and notes that there is no
statutory authority for any future base updating.546
7.404 The Panel notes that Brazil expresses its argument as a hypothetical: the effect on current
production choices depends on "if" fa rmers expect future updating. However, since the time when
base acres for deficiency payments were established by a rolling average of previous years' plantings
under the FACT Act of 1990, there has been only one opportunity to update base acres. Brazil
asserts that:
"The 2002 update and individual defi ciency payment updates during 1985-1995
established the principle that acreage and yield base updates are a part of the farm
policy in the United States. Even though no updates are explicitly provided for
during the lifespan of the 2002 FSRI Act, farmers may reasonably expect future

540 United States' first written submission, para. 60.
541 Brazil drew attention to the comments of an ad visor to the Board of the United States National
Cotton Council, that: "The new bill also provides the ability to update base acreage and payment yields based
on recent history, specifically the years 1998-2001. Th is will bring a producer's payment production more in
line with recent production patterns. The updating will be of particular benefit to growers in the southeast,
where recent plantings have exceeded the base esta blished under the 1996 Act." Robert McLendon: "The Six
Year World Outlook for Cotton and Peanuts: Implications for Production and Prices", presentation at the
Fourth Annual Symposium on the Future of American Agriculture, University of Georgia College of
Agricultural and Environmental Sciences, reproduced in Exhibit BRA-111.
542 Brazil's first written submission, paras. 179 and 180.
543 Brazil's first written submission, para. 185.
544 USDA The 2002 Farm Act, Provisions and Implications for Commodity Markets reproduced in
Exhibit BRA-42 at page 19, cited in Brazil's first written submission, paras. 186 and 187.
546 United States' oral statement at the second substantive meeting, paras. 59-66 and response to Panel
Question No. 216.

updates, either as a part of ad hoc legisla tion or as a part of the regularly scheduled
new law in 2007."547
7.405 The Panel notes that updating was not permitted throughout the term of the FAIR Act of
1996, and is not permitted th roughout the term of the FSRI Act of 2002. It has been permitted only
once since 1996. There is no evidence before the Pa nel as to what the United States Congress intends
to do in future farm bills. There is no evidence, only speculation, as to whether producers will expect
to be able to update their base acres under future farm bills.
(d) The "fundamental requirement"
(i) Main arguments of the parties
7.406 Brazil claims that PFC and DP payments provided to upland cotton producers are
inconsistent with "the fundamental requirement that they have no, or at most minimal, trade-distorting
effects or effects on production" pur suant to paragraph 1 of Annex 2. 548 In Brazil's view, measures
that do not comply with that fundamental requireme nt are actionable independently of any failure to
comply with the basic or policy-specific criteria in Annex 2. An interpretation of 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. 549 Brazil presents economic evidence concerning the alleged
production effects of these payments.
7.407 However, Brazil submits that any domestic s upport measures that do not comply with one of
the basic or policy-specific criteria in Annex 2 are to be presumed to violate the fundamental
requirement. It argues that this conclusion holds regardless of any finding on the character of the
fundamental requirement as a stand-alone obligation. 550 Brazil does not challenge PFC and DP
payments under either of the basic criteria in paragra phs 1(a) and (b) of Annex 2. It accepts that they
comply with the basic criterion that they are provided through a publicly-funded government
programme not involving transfers from consumers, and does not allege that they "have the effect of
providing price support to producers."
551
7.408 The United States responds that compliance with the f undamental requirement that domestic
support measures for which exemption from reduction co mmitments is cl aimed have no, or at most
minimal, trade-distorting effects or effects on production will be demonstrated by conforming to the
basic and policy-specific criteria in Annex 2. M easures that conform to the two basic criteria in
paragraph 1 plus the applicable policy-specific cr iteria and conditions in pa ragraphs 6 through 13 of
Annex 2 will be deemed to meet the fundamental requirement.
552 In the United States' view, the
fundamental requirement does not merely set out in hortatory terms the objective of Annex 2. 553 The
United States argues that Brazil has not made a pr ima facie case with respect to the fundamental
requirement because its evidence is hypothetical and does not address whether the production effects

547 Brazil's response to Panel Question No. 216. It also cited an article by two ABARE economists
"2002 U.S. Farm Bill: An Australian Perspective on its Impact", reproduced in Exhibit BRA-81.
548 Brazil's first written submission, paras. 163-165.
549 Brazil's response to Panel Question No. 27.
550 Brazil's response to Panel Question No. 27.
551 Brazil's response to Panel Question No. 30. The United States submits that the DP programme
satisfies both basic criteria, relying on section 1103 of the FSRI Act of 2002 and the fact that DP payments are
not made to support any "applied administered price" in the sense of paragraph 8 of Annex 3 of the Agreement
on Agriculture. See the United States' first written submission, paras. 64-66.
552 United States' first written submission, para. 50; United States' oral statement at the first session of
553 United States' response to Panel Question No. 29.

of these payments are more than minimal. It su bmits economic evidence in support of its view that
these payments in fact do satisfy the fundamental requirement.
554
(ii) Main arguments of the third parties
7.409 Argentina555 and Australia556 submit, in effect, that measur es must satisfy the fundamental
requirement in paragraph 1 in addition to the criteri a in Annex 2 in order to be exempt from reduction
commitments.
7.410 The European Communities submits that the first sentence of paragraph 1 of Annex 2 does
not set out an independent obligation but simply signals the objective of Annex 2.557
7.411 New Zealand submits that the fundamental requirement and the other criteria in Annex 2 are
to be strictly applied to measures in order to obtain exemption from reduction commitments.558
(iii) Evaluation by the Panel
7.412 The Panel does not decide whether the fundamental requirement in paragraph 1 of Annex 2 is
a freestanding obligation or not. In Brazil's view , any domestic support measures that do not comply
with one of the basic or policy-specific criteria in Annex 2 are to be presumed to violate the
fundamental requirement. In the United States' vi ew, a measure that does not satisfy the basic and
policy-specific criteria in Annex 2 may not conform to the provisions of Annex 2 even if it satisfies
the fundamental requirement. Therefore, in light of the Panel's finding that the measures do not
satisfy a criterion in paragraph 6, it is unnecessary to continue for the purposes of paragraph (a) of
Article 13. The Panel makes certain findings on the e ffects of these measures in Section VII:G of this
report.
(e) Conclusion regarding paragraph (a) of Article 13
7.413 In light of the above findings, the Panel conc ludes that PFC payments, DP payments, and the
legislative and regulatory provisions which establis h and maintain the DP programme, do not fully
conform with paragraph 6( b) of Annex 2 of the Agreement on Agriculture . They are not green box
measures.
7.414 Consequently, the Panel concludes that these measures do not comply with the condition in
paragraph (a) of Article 13 of the Agreement on Agriculture and are therefore non-green box measures
covered by paragraph (b) of Article 13.
5. Paragraph (b) of Article 13
(a) Condition at issue
7.415 Brazil asserts that the United States domestic support measures at issue do not satisfy the
conditions in paragraph (b) of Article 13 of the Agreement on Agriculture for the single reason that
they do not comply with the proviso in subparagraph (ii), i.e. because they "grant support to a specific

554 United States' rebuttal submission, paras. 60-64. The United States also submits that, on Brazil's
reading, if a measure does not co nform to the criteria in Annex 2, it still could meet the fundamental
requirement of paragraph 1. However, see Brazil's response to Panel Question No. 27 referred to supra at
footnote 550.
555 Argentina's response to Panel third party Question No. 9.
556 Australia's written submission to the first session of the first substantive meeting, paras. 31-32.
557 European Communities' written submission to the fi rst session of the first substantive meeting,
para. 15.
558 New Zealand's response to Panel third party Question No. 11

commodity in excess of that decided in the 1992 ma rketing year". It does not pursue any claim that
the domestic support measures do not comply with the conditions set out in the chapeau of
paragraph (b).
7.416 The United States responds that its domestic support m easures satisfy all the conditions in
paragraph (b), including the proviso in subparagraph (ii).
7.417 The Panel begins by noting that Article 13(b)(ii) provides as follows:
"During the implementation period, notw ithstanding the provisions of GATT 1994
and the Agreement on Subsidies and Counter vailing Measures (referred to in this
Article as the "Subsidies Agreement"):
(…)
(b) domestic support measures that confor m fully to the provisions of Article 6
of this Agreement including direct payments that conform to the
requirements 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, shall be:
 (…)
 (ii) exempt from actions based on paragraph 1 of Article XVI of GATT
1994 or Articles 5 and 6 of the Subsidies Agreement, provided that
such measures do not grant support to a specific commodity in excess
of that decided during the 1992 marketing year ; …" [emphasis
added]
 (…)
7.418 The task of the Panel is therefore to assess whether the United States domestic support
measures grant support to a specific commodity in ex cess of that decided in the 1992 marketing year.
This calls for a comparison. The two quantities to be compared are the extent to which "such
measures (…) grant support to a specific commod ity" and "that decided during the 1992 marketing
year". We will refer to the first half of this comparison as "implementation period support" because
the relevant time at which such measures grant s upport is contemporaneous with the applicability of
Article 13.
559 Whether implementation period support is annual support, or some other period of
support, is a matter we may consider later. We w ill refer to the second half of the comparison as the
"MY 1992 benchmark".
7.419 The words "in excess of" link the two halves of the comparison grammatically. They indicate
that a mathematical comparison has to be made. An excess of implementation period support over the
MY 1992 benchmark will show that the domestic su pport measures at issue are inconsistent with the
additional condition in Article 13(b)(ii). There is no requirement to quantify the excess, but the
decisive question is whether there is any excess. Th us, it would not be strictly necessary for the Panel
to make a precise calculation of the amount of the excess if it is clear that, on the basis of the proper
evidentiary standard, there is an excess of some degree.
7.420 The notion of "support" links the two halves of the comparison semantically. Implementation
period support refers to "support" to a specifi c commodity expressly and the MY 1992 benchmark
refers to "'that' decided", whic h refers to "support to a specific commodity". Disciplines on "support"

559 Discussed below in paragraph 7.529.

are one of the three pillars of the Agreement on Agriculture, which uses the word "support"
interchangeably with "domestic support".
560 Neither are defined terms, although Articles 3.2, 6.1, 6.3,
7.1 and 7.2(a) clarify their meaning somewhat by referring to "support in favour of domestic
producers" or "domestic support in favour of agricultural producers". The subject of the proviso in
subparagraph (b)(ii) is "such measures" that conform fully to the provisions of Article 6.
7.421 Annex 3 sets out at great length a methodology for measuring the support granted by those
measures which are calculated or can be calcula ted in an Aggregate Measurement of Support
("AMS"). Paragraph 1 of Annex 3 lists the following types of support:
"market price support, non-exempt direct payments, or any other subsidy not
exempted from the reduction commitment ('other non-exempt policies')"
7.422 The residual type of support in this list refers to any "other" subsidy and paragraph 2 refers to
"subsidies" under paragraph 1. We can also note that the first two types of support in the list are price
and income support, which are terms used in paragraph 1 of Article XVI of the GATT 1994 to
illustrate the word "subsidy".
561 It is clear from all these references that all relevant types of support
for the purposes of the Agreement on Agriculture are subsidies.
7.423 An important feature of the Agreement on Agriculture is that it defines in detail the domestic
support measures exempt from reduction commitments, rather than those which are subject to
reduction commitments. It is therefore inappropriate to attempt to give an exhaustive definition of
"support". It is also unnecessary to do so due to the detailed methodology for measuring support
contained in the text. In any event, for the purposes of this dispute, the parties agree that all of the
measures in issue provide "support" in some form.562
(b) MY 1992 benchmark
(i) Interpretation
i Main arguments of the parties
7.424 Brazil argues that the phrase "decided during the 1992 marketing year" refers to some sort of
a decision made by a Member between 1 August 1992 a nd 31 July 1993, but not before and not after.
Brazil is aware of no specific legislation or regul ation enacted or decided by the United States during
the 1992 marketing year with respect to upland cotton. The only decision that could be said to have
been made during that year was to provide the appropriations and continued funding for upland cotton
pursuant to the FACT Act of 1990.
563 It argues that the interpretation of Article 13(b)(ii) must permit
an "apples-to-apples" or "support-to-support" comparis on. The word "decided" is neutral, requires no
particular type of decision, and must not detract from the meaning of the term "grant" which is the
operative verb for implementation period support. The MY 1992 benchmark must include some
aspect of "grant" because it is "that" decided in MY 1992, which refers back to "support" and which is
connected to the verb "grant".564
7.425 The United States responds that the key term in this phrase is "decided" which stands in
contrast to other provisions in the Agreement on Agriculture that use the term "provided". This
suggests that the use of the term "decided" was deliberate so as to make the condition in

560 See the preamble, the definitions of AMS, EMS and Total AMS in Article 1, the methods of
calculation of AMS and EMS in Annexes 2 and 3 and Articles 3, 6, 7, 18 and 20.
561 The text of Article XVI:1 of the GATT 1994 is set out in Section VII:G of this report.
562 However, they have sharply differing views on whether they grant "support to a specific
commodity" within the meaning of Article 13(b)(ii).
563 Brazil's first written submission, paras. 139 and 141.
564 Brazil's oral statement at the first session of the first substantive meeting, para. 31.

Article 13(b)(ii) not dependent on the support act ually provided during the 1992 marketing year. 565
United States domestic support measures did not deci de on an outlay or expenditure amount in favour
of upland cotton, but determined a level of inco me support. The United States government ensured
that upland cotton farmers would receive 72.9 cents per pound of upland cotton.566
7.426 Brazil argues that a rate of support methodolo gy would allow Members to make huge
increases in payments when market prices are falling, as long as they comply with Total AMS
reduction commitments. In any event, the 1990 defi ciency payments programme rate of support of
72.9 cents per pound must be adjusted downwards fo r upland cotton not eligible to receive that
support, the cost to producers of the requirement to idle part of their base acreage, and other
programmes in effect in 1992.567
7.427 The United States responded that – even allowing for the adjustments proposed by Brazil –
the product-specific support granted in marketing years 1999 through 2002 was lower than the rate of
support decided in the 1992 marketing year. In any event, the fact that some upland cotton was not
eligible to receive the rate of support was due to producer decisions not to participate in the
programme, not a decision of the United States government. Land idling and flex acre requirements
were decisions taken by the United States government but they affected eligibility and not the rate of
support.
568 If these requirements were factored into the rate of support, it would produce a guaranteed
producer revenue of 67.7625 cents per pound.569
ii Main arguments of the third parties
7.428 Argentina considers that the support "decided" refers to a legislative or administrative
decision by a Member on the domestic support to be granted during the implementation period in
terms of budgetary outlays. If no "decision" was ta ken in terms of budgetary outlays during the 1992
marketing year, the only support that can have been "decided" during that marketing year is the
support granted during that year.
570
7.429 Australia considers that "decided" means the le vel of non-green box domestic support by a
Member in the course of the 1992 marketing year to be provided to the benefit of a specific
agricultural commodity in the future. Australia clearly understood in the resumed Uruguay Round
agriculture negotiations in 1993 that the words "decided during the 1992 marketing year" had been
chosen to incorporate in the text of Article 13(b)( ii) and (iii) the sense of expectations of "conditions
of price competition" as interpreted and applied in the EEC – Oilseeds dispute. Budgetary outlay
figures put forward by Brazil and the rate of payment put forward by the United States would both
properly form a part of that assessment, but not the whole.
571
7.430 China does not agree with the United States' rate of support approach because it would
prevent any measure involving year end accounting for the calculation of expenditures ever exceeding
that decided during the 1992 marketing year. The dr afters may have chosen "decided" rather than
"granted" to exclude expenditures that cannot be preci sely allocated to a specific marketing year or to
include certain support payments granted by an administration in 1992 but which did not reach the

565 United States' first written submission, paras. 82-87.
566 United States' first written submission, para. 94.
567 Brazil's oral statement at the first session of the first substantive meeting, paras. 33 and 36, and
Exhibits BRA-103 and BRA-105.
568 United States' rebuttal submission, paras. 121-124.
570 Argentina's response to Panel third party Question No. 21.
571 Australia's written submission to the first session of the first substantive meeting, paras. 24-26 and
its oral statement at the first session of the first substantive meeting, paras. 6-13.

beneficiaries until later. However, the core in tention was to choose the 1992 marketing year to
establish a benchmark support level.
572
7.431 The European Communities does not agree with Brazil's budgetary outlays approach
because the word "decided" stands out in contrast to "grant" in the same sentence. This is intended to
set a benchmark made up of an amount of support a dopted by some form of decision (be it political,
legislative or administrative) in which support fo r a specific product is decided and allocated for
future years. This text was negotiated in Nove mber 1992 when the negotiators could not yet have
known the support that would be granted in the w hole 1992 marketing year. They used the term
"decided" rather than "granted" to refer to d ecisions taken during 1992 in respect of support which
Members intended to grant – not that actually granted. The Panel should use a level of support readily
comparable with the support currently granted whic h may well be the support decided for a particular
marketing year. It is not possible that a Member providing subsidies could no t have made a relevant
decision in the 1992 marketing year since, at the very least, it would have decided, on the basis of its
subsidy programmes and the amount of eligible prod uction and/or estimated production, to set aside a
specific amount of budgetary appropriations for future years. However, if a Member decided not to
provide support to a specific commodity, the level of support for purposes of the comparison would
be zero.
573 AMS-like criteria should be used to meas ure the support decided because it takes into
account the reference to AMS as the annual level of "support" yet would also measure the support
"decided" rather than granted. AMS-like criteri a could be used because it often is possible to
establish, for certain measures, a gap between the applied administered price and the internal or
external fixed reference price and establish, on th e basis of information available to the decision
makers, the amount of production which was eligible, or which was estimated. For other measures, it
may also be possible to use appropriation or budgetary decisions.574
7.432 New Zealand does not agree with an approach that focuses solely on a guaranteed price per
pound. The comparison must take into account the to tality of payments to upland cotton producers in
order to reflect the true nature of the support that is being granted, which the United States' rate of
support approach ignores. A rate per pound alone ignores the actual levels of domestic support
represented by budgetary outlays that must be grante d in order to maintain those rates and the other
payments received. The clear overarching intention of the negotiators of the Agreement on
Agriculture was that such distortions would be reduced , consistent with the long term objective of
correcting and preventing restrictions and distortions in world agriculture markets.575
iii Evaluation by the Panel
7.433 The Panel notes that the proviso in subparagraph (ii) of paragraph (b) reads as follows:
"provided that such measures do not grant support to a specific commodity in excess
of that decided during the 1992 marketing year"
7.434 The MY 1992 benchmark is expressed as "that decided during the 1992 marketing year". The
words "that decided" refer back to the phrase "s upport to a specific commodity" which is discussed in
relation to implementation period support below. 576 The words "that decided" therefore mean "that
[support to a specific commodity] decided". This o ccurrence of the verb "dec ided" with the direct
object "support" is unique in the WTO Agreement. It is not defined and is a curious usage of the verb

572 China's response to Panel third party Question No. 21.
573 European Communities' oral statement at the first session of the first substantive meeting, paras. 16,
19-20 and its responses to Panel third party Questions Nos. 21 and 27.
574 European Communities' response to Panel third party Question No. 22.
575 New Zealand's written submission to the first session of the first substantive meeting, paras. 2.06-
2.09 and its oral statement at the first session of the first substantive meeting, para. 6.
576 See the Panel's findings in paragraphs 7.494 and following.

"decide" which rarely takes a direct object such as "support" without a preposition such as "on". The
word "decide" can be defined as follows:
"Come to a determination or resolution that, to do, whether."577
7.435 In its context, the use of the verb "decided" stands in contrast to the use of the verb "grant" in
relation to the same noun "support" in the same proviso. Yet despite the contrast, the proviso calls for
a comparison which necessarily requires the two halves of the comparison to be expressed in the same
units of measurement.
7.436 A difference between the support that a governme nt decides and the support that its measures
grant is that one is expressed in terms of prior dete rminations of levels of support and the other in
terms of subsequent support provided. (The word "grant" in the English version of the text also has
connotations that "provided" does not). Decisions on support are often expressed in terms of
appropriations of specific amounts of money, whic h may exceed the amount subsequently granted.
Decisions on support can also be expressed in term s of payments of specific amounts, which are
identical to the amount granted. Decisions on s upport are often expressed in terms of rates or
methods to calculate payments, so that the amount s outlaid are not known until later. Decisions on
price and income support also include eligibility cr iteria for production or producers, which are not
captured separately in the notion of support granted. In the Panel's view, all of these decisions would
delimit "that [support to a specific commodity] decided".
7.437 Another difference between the choice of the ve rbs "decided" and "grant" is that, where the
benchmark is established by reference to a specific period of time, the relevant acts were the decisions
on support, and not the grant of support, during that period of time. The text spells out that the
relevant time for the establishment of the benchmar k was "during the 1992 marketing year". This is
one of only two domestic suppor t benchmarks or base periods referred to in the Agreement on
Agriculture. Both were periods during the negotiations, the other being "the years 1986 to 1988" for
the purposes of calculation of the AMS. 578 Although the "marketing year" varies, it is a very specific
period of time for a specific commodity and Member. The parties agree that the marketing year for
upland cotton in the United States begins on 1 August, and that the 1992 marketing year ran from
1 August 1992 to 31 July 1993.579
7.438 The period "during the 1992 marketing year" is a very specific limitation on the establishment
of the benchmark which the Panel is obliged to appl y. The Panel must examine what decisions were
made by the United States during the 1992 marketing year concerning support for upland cotton, and
at no other time. The time at which support was granted as a result of those decisions is not addressed
in the text. Decisions taken during the 1992 marketi ng year could have related to support granted in
the same marketing year or in a later marketing year or in several marketing years. The text does not
preclude any of these possibilities.
7.439 Brazil submitted that this portion of Article 13 first appeared in the Uruguay Round text
following the second US/EC Blair House agreement of December 1993, and that it was drafted to
provide a safe harbour for the European Communi ty's Common Agricultural Policy ("CAP") reform

577 The New Shorter Oxford English Dictionary (1993). The parties agree th at it means "determine".
The United States adds that it can mean "pronounce".
578 See paragraphs 9 and 11 of Annex 3.
579 Brazil's first written submission, para. 139 and United States' response to Panel Question No. 69.
See 7 CFR 1413.3 (1 January 1993 edition), reproduced in Exhibits BRA-26 and US-3, for the definition of
"marketing year". USDA information provided in the Exhibits often refers to "crop year" for upland cotton
which the United States delegation advised the Panel orally during the first session of the first substantive
meeting was the same as the marketing year for uplan d cotton. The United States also used these terms
interchangeably in its reponse to Panel Question No. 125(6).

"decided during the 1992 marketing year".
580 The United States is not aware of any written
negotiating history that would shed light on why this proviso was added to Article 13(b)(ii). 581 The
European Communities also subm itted that Article 13(b) was ne gotiated in November 1992 and
designed to protect support which Memb ers had "decided during 1992" to grant 582 and submitted
copies of two EC regulations reforming the CAP a dopted during 1992 which lowered target prices for
cereals commencing in the 1993/94 marketing year a nd offset loss of income through direct aid per
hectare for arable farmers.583
7.440 The Panel notes that the text of subparagraph ( ii) as it is currently drafted appeared in the
Uruguay Round text following the first US/EC Blair House agreement of November 1992. 584 It was
therefore negotiated during the 1992 marketing year itself, at which time some decisions may already
have been taken by individual Members concerning support, and at which time they may not have
known the value of the support that they would grant during that marketing year. This does not alter
the Panel's interpretation in this dispute.
7.441 The proviso in subparagraph (ii) itself does not "protect support" but rather sets forth an
additional condition besides those in the chapeau of paragraph (b) with which measures must comply
in order to benefit from the exemptions from actions . However, within that additional condition, in
choosing to define the benchmark as support "decide d" rather than, say, "granted" during the 1992
marketing year, the drafters may well have intende d to protect certain decisions which had already
been taken or were proposed to be taken during that marketing year. However, that intention is not
clear from the wording of the provision, nor the negotiating history provided to the Panel.
7.442 The two EC regulations submitted to the Panel show that they were both "done" on 30 June
1992. This appears to mean that the decisions to adopt those regulations were taken on that day,
although they entered into force the following day. Both define the marketing year for the relevant
products as beginning on 1 July and ending on 30 June of the following year
585 so that, for those
products and the European Communities, the 1992 mark eting year did not begin until 1 July 1992.
Therefore, on their own terms, neither regulation appears to have been decided "during the 1992
marketing year" and, as such, they do not assist the Panel in its interpretation in this particular dispute.
7.443 The Panel also takes note of Australia's proposed interpretation of Article 13(b)(ii) and (iii)
which reads elements of actions based on non-violation nullification and impairment into the
conditions of Article 13. This in terpretation is based on the premise that the additional condition in
those subparagraphs should be capable of applica tion in a non-violation complaint. In the Panel's
view, that premise is false be cause Article 13 sets out conditions which provide exemption from
certain types of actions and does not set out cond itions which must be applied in the actions from
which it provides exemption.
7.444 In any event, however the MY 1992 benchmar k is defined, an essential feature of the
additional condition in Article 13(b)( ii) and (iii) is that it sets forth the only condition in Article 13 of
the Agreement on Agriculture as finally agreed that links the exemptions from actions for domestic
support to specific commodities. It effectively replaced proposed product-specific and sector-wide

580 See Brazil's first written submission, para . 140 citing Terence P. Stewart (editor): The GATT
Uruguay Round: A Negotiating History, Vol. IV, pp.24-25, reproduced in Exhibit BRA-75.
581 See United States' response to Panel Question No. 50.
582 See European Communities' response to Panel third Party Question No. 21.
583 See European Communities' response to Panel th ird party Question No. 24 and Exhibits EC-3 and
EC-4.
584 See the draft Article which formed part of that agreement in Exhibit EC-1.
585 Council Regulation (EEC) No. 1765/92 establishing a support system for producers of certain arable
crops, Article 1, and Council Regulation (EEC) No. 1766/92 on the common organization of the market in
cereals, Article 2, reproduced in Exhibits EC-4 and EC-3, respectively.

AMS reduction commitments in the draft agriculture text as the benchmark for the purposes of this
condition.586
(ii) Relevant decisions
i Main arguments of the parties
7.445 Brazil and the United States both submitted that a variety of decisions, mentioned below,
was taken by the United States concerning its domestic support for upland cotton during the 1992
marketing year. 587 Both parties' arguments also referre d to levels of support during the 1992
marketing year itself, although they measured such support differently.
ii Evaluation by the Panel
7.446 The Panel observes that no statute deciding domestic support for upland cotton was enacted
by the United States during the 1992 marketing year . The legislative basi s for the then-current
marketing loan, deficiency payments and user ma rketing (Step 2) programme s was the FACT Act of
1990.
588 That Act provided a formula to calculate the marketing loan rate subject to a minimum of not
less than 50 cents per pound. 589 The Act set a target price for de ficiency payments for upland cotton
of "not less than" 72.9 cents per pound and also set forth conditions for the user marketing (Step 2)
payments.590 The OBRA Act of 1990 played a role in establishing the elements which are
incorporated into the FACT Act of 1990 provisions implemented by the United States. 591 The next
major piece of legislation determining programme structures was the FAIR Act of 1996. 592 Brazil has
drawn the Panel's attention to the OBRA Act of 1993593, which was amending legislation, but this was
enacted in August 1993, not during the 1992 marke ting year for upland cotton and is therefore
irrelevant.
7.447 Regulations relevant to dom estic support for upland cotton were published during the 1992
marketing year. The United States relied on the Se cretary of Agriculture's determination of the 1992
loan rate but this was decided during the 1991 marketing year and is therefore irrelevant. 594 T h e

586 This section of the drafting history is discussed at paragraphs 7.495 and following. Total AMS
commitments replaced the proposed product-specific and sector-wide commitments for the purposes of
compliance with the domestic support disciplines of the Agreement on Agriculture and the chapeau of paragraph
 b) of Article 13.
587 Brazil's and the United States' respective responses to Panel Question No. 54.
588 Public Law 101-624, enacted on 28 November 1990 - see Section VII:C of this report.
589 7 USC 1444-2(a)(3), (1992 Supplement dated 4 January 1993), reproduced in Exhibit US-5, and
explained in USDA Economic Research Service: "Cotton: Background for 1995 Farm Legislation", April 1995,
reproduced in Exhibit BRA-12.
590 7 USC 1444-2(c)(1)(B)(ii) (1992 Supplement dated 4 January 1993), reproduced in Exhibit US-5.
591 Omnibus Budget Reconciliation Act of 1990, Public Law 101-508 enacted on 5 November 1990
and explained in USDA Economic Research Service: "Cotton: Background for 1995 Farm Legislation", April
1995, pages 15-17, and "Provisions of the Agricultural Improvement and Reform Act of 1996, Appendix III:
Major Agricultural and Trade Legislation, 1933-96", pages 133-134, reproduced in Exhibits BRA-12 and
BRA-24.
592 Federal Agriculture Improvement and Reform Act of 1996, Public Law 104-127. This Act amended
the Agricultural Act of 1949. Title I, the Agricultural Ma rket Transition Act, is reproduced in Exhibits BRA-28
and US-22.
593 See the statement of Dr. Sumner, para. 7, in Exhibit BRA-105, referring to the Omnibus Budget
Reconciliation Act of 1993, Public Law 103-66. The Bill for this Act was not passed by the House of
Representatives until 5 August 1993 and was not signed by the President of the United States until 10 August
1993. This law amended the Agriculture Act of 1949 and the FACT Act of 1990, inter alia , replacing the
deficiency payments 50/92 programme option with the 50/85 programme option.
594 United States' first written submission, para. 101, citing 57 FR 14326 published on 20 April 1992
(during the 1991 marketing year), reproduced in Exhibit US-2. The loan rate had already been announced on

United States also mentioned regulations publis hed on 24 March 1993, which determined the price
support rate (i.e. the loan rate) with respect to the 1993 crop of upland cotton at 52.35 cents per pound
and the Acreage Reduction Program percentage ("A.R.P."
595) for the 1993 crop of upland cotton at 7.5
per cent (down from 10 per cent for the 1992 crop). It also provided that a Paid Land Diversion
Program would not be implemented for the 1993 crop of upland cotton.
596 The final rates had been
announced on 2 November 1992, after publication of a proposed rule on 29 September 1992 .
Therefore, these decisions on the marketing loan ra te and A.R.P. for the 1993 crop of upland cotton
were taken during the 1992 marketing year. The regulations classified the impact of these two
decisions in monetary terms as follows:
"This rule has been reviewed under USDA procedures established in accordance with
Executive Order 12291 and provisions of Departmental Regulation 1512-1 and has
been classified as "major". It has been determined that an annual effect on the
economy of $100 million or more may result from implementing of the provisions of
this final rule."
597
7.448 Brazil drew the Panel's attention to a range of other operational decisions including
implementation of the 50/92 programme option, decisi ons on the deficiency payment rate (20.3 cents
per pound),598 determination of the upland cotton acreage b ase, a weekly adjusted world price for the
marketing loan programme, the weekly Step 2 payment rate and decisions on individual crop
insurance policies.599 These operational decisions affected pa yments but they only produced some of
the parameters in payment calculations. Other essenti al parameters in those calculations, such as the
loan rate and target price for the 1992 crop, were not decided during the 1992 marketing year but
earlier, as required by legislation. Therefore, these operational decisions do not represent support
decided during the 1992 marketing year. Two deci sions on the loan rate and A.R.P. were taken
during the 1992 marketing year but they related to the 1993 crop, as required by legislation. They did
not affect any payments affected by the operationa l decisions taken during the 1992 marketing year .
Therefore, taken together, these decisions do not add up to support decided.600
7.449 The Panel sees no evidence of any other policy decision that could be relevant to the
MY 1992 benchmark. The United States Congress set the minimum target price and loan rates in
1990 for the 1991 through 1995 marketing years and delegated authority to the Secretary of
Agriculture to set and announce the actual loan rate for each marketing year. The loan rate for the
1992 crop of upland cotton was publishe d in regulations on 20 April 1992.
601 The final rate had been
announced on 31 October 1991 following publication of a proposed rule on 13 September 1991. 602
That was not a decision taken during the 1992 marketing year.
7.450 The United States argues that the Secretary of Agri culture decided to maintain the target price
and loan level during the 1992 marketing year for the 1992 crop and that these decisions were

31 October 1991. The FACT Act mandated the Secretary to decide the marketing loan rate applicable for each
of the 1991 to 1995 crops and the permanent law provided that the loan level for the 1992 crop of upland cotton
be determined in accordance with a specific formula and announced not later than 1 November 1991.
595 The A.R.P. is explained below at footnote 774. It has nothing to do with the ARP Act of 2000.
596 Published at 58 Federal Register 15755 and reproduced in Exhibit US-146. See the United States'
responses to Panel Questions No. 54 (at footnote 63) and 214.
597 Exhibit US-146 see supra,footnote 596.
598 Exhibit BRA-4.
599 Brazil's response to Panel third party Question No. 54 and 22 August comments on the United
States' response to Panel Question No. 54.
600 This is so regardless of whether a rate of support is an appropriate measurement of support.
601 The Regulation was published on 20 April 1992 at 57 Federal Register 14326 and is reproduced in
Exhibit US-2. It established a loan rate of 52.35 cents per pound.
602 See United States' response to Panel Question No. 54.

reflected in the 1992 Supplement to the United States Code, 603 the 1 January 1993 edition of the Code
of Federal Regulations 604 and a USDA fact sheet published in September 1993. 605 However, the
legislation prohibited any change to the loan rate during the 1992 marketing year after it was
announced in the preceding calendar year.606 It is less clear to what extent the Secretary had authority
to change the target price but, in any event, the 1992 Supplement to the United States Code and the
1 January 1993 edition of the CFR published the target prices for all five years covered by the FACT
Act of 1990, including the 1991 marketing year which had completely elapsed. 607 This indicates that
no decision had been taken to change the target price in 1992 and suggests that these publications
simply reprinted or reformatted the decision regardi ng the target price enacted in legislation in 1990.
The USDA fact sheet simply reported what had alr eady been decided. The United States argued that
the Secretary did not exercise his discretion to alter the effective price in the 24 March 1993
regulations. That is an accurate statement. In f act, those regulations do not mention the target price,
or deficiency payments, at all. Therefore, in the Panel's view, the evidence does not show that any
decision was taken during the 1992 marketing year with respect to target prices, or with respect to the
loan rate for the 1992 crop of upland cotton. There is no justification for interpreting the MY 1992
benchmark as the target price of 72.9 cents per pound.
7.451 In view of this evidence, the MY 1992 benchmar k might be thought to be the loan rate of
52.35 cents per pound, subject to reduction of the A.R.P of 7.5 per cent. Neither of the parties
submitted that the Panel should treat this as the MY 1992 benchmark. Although it is dictated by the
apparently deliberate choice of an unusual word in this context, i.e. "decided" to contrast with
"granted", rather than, say, "provided", it appears to lead to an absurd resu lt. It reflects only the
timing of certain discrete decisions but not the to tal level of support decided for upland cotton over
time. This is all the more curious given that the fi nal decisions on the loan rate and the A.R.P. were
taken only three weeks before the wording of the co ndition in Article 13(b)(ii) was negotiated. Brazil
suggested that the condition was negotiated w ith the European Communities' domestic support
measures in mind, but it is unnecessary for the Panel to take a view on that suggestion for the
purposes of this dispute.
7.452 The only other decisions on support for upland cotton in the United States during the 1992
marketing year were decisions to make particul ar payments under programmes to support upland
cotton. Each of those was a "determination" of a r ecipient's entitlement to a pa yment, in a particular
amount, according to the programme and payment conditions, and hence a "decision" on "support"
taken "during the 1992 marketing year". Those dete rminations involved consideration by the United
States government of its obligations or authority to make payments, and matters such as eligibility
criteria, compliance with acreage conditions, releva nt rates and prices, and volume of upland cotton
harvested and used, as set out in the applicable laws and regulations. There is no evidence that
payments determined by these decisions involved s ubstantial delays from the time these decisions
were taken such that they were made in a differe nt marketing year from that in which the payments
were made. The sum of these decisions represents an amount of support that can be compared
meaningfully with implementation period support an d which can be measured according to the same
methodology. In the Panel's view, this is the correct measure of the MY 1992 benchmark in this
dispute.
7.453 Brazil submits that there were four types of support to upland cotton in the 1992 marketing
year: deficiency payments, marketing loan progra mme payments, user marketing (Step 2) payments

603 Reproduced in Exhibit US-5.
604 Reproduced in Exhibit US-3.
605 Reproduced in Exhibit US-17.
606 7 USC §1444-2(a)(3) (1992 Supplement) (4 January 1993), reproduced in Exhibit US-5.
607 7 USC §1444-2(c)(1)(B)(ii) (1992 Supplement) (4 January 1993), reproduced in Exhibit US-5 and
7 CFR §1413.104(a), reproduced in Exhibit US-3.

and crop insurance payments.
608 The United States accepts that deficiency payments, marketing loan
programme payments and user marketing (Step 2) payments are relevant for the purposes of the
comparison under Article 13(b)(ii).609 Its objection to the inclusion of crop insurance payments is that
they are non-product-specific.610 However, the evidence shows that upland cotton was an agricultural
commodity for which the Federal Crop Insurance Corporation Act was authorized to offer crop
insurance in that year.611 All four types of payments granted support specifically to upland cotton.
7.454 The United States argues that this ignores how it decided support for upland cotton during the
1992 marketing year, which was in terms of a rate of support. No amount of outlays was "decided"
during the 1992 marketing year since outlays or expend itures that are needed to provide this level of
income support were neither known nor completed un til after the marketing year ended and market
prices reported.612
7.455 The Panel agrees that the United States did not adopt a discrete decision on the dollar amount
of total outlays or expenditures that it would ma ke for upland cotton during the 1992 marketing year.
However, in the first place, the text of Article 13(b)(ii) does not require such a decision. The form of
the decision or decisions by which support was deci ded is not addressed, which permits a comparison
of a series of operational decisions (which are, re levantly, decisions) that determined the support; and
secondly, the text of Article 13(b)(ii) does indicate that the relevant decision or decisions are those
taken "during the 1992 marketing year". The target price for upland cotton was not such a decision,
as it was taken during 1990, which prohibits the Panel from basing its comparison on that decision.
7.456 In summary, therefore, the Panel will include in the MY 1992 benchmark decisions made
during the 1992 marketing year to make the following payments:
(i) deficiency payments;
(ii) marketing loan programme payments;
(iii) user marketing (Step 2) payments to domestic users
613; and
(iv) crop insurance payments.
(c) Implementation period support
(i) Interpretation
i Main arguments of the parties
7.457 Brazil submits that the measures relevant to the implementation period support are all those
which it has challenged. It submits that they in fact deliver support to upland cotton. These are the

608 Brazil's first written submission, paras. 143-144.
609 See the United States' first written submission, para s. 100-104, confirming that the first three types
of payments constitute product-specific support to cotton. At para. 102 of that submission, the United States
submits that deficiency payments ensured cotton farms would realize income support of 72.4 cents per pound
through the following legislation: 7 CFR 1413 (1 January 1993 edition), 7 CFR 1413.6 (1991 edition) and 7
U.S.C. 1444-2 (1992 supplement), reproduced in Exhibi ts US-3, US-4 and US-5, re spectively. See also the
United States' rebuttal, paras. 110, 111 and table.
610 See the United States' rebuttal submission, paras. 93-98.
611 See FCIC "Crop Year Statistics" reproduced in Exhibit BRA-57.
612 United States' first written submission, paras. 93-94; United States' oral statement at the first session
of the first substantive meeting, paras. 10-11.
613 A meaningful comparison requires the exclusion of user marketing (Step 2) payments to exporters
from the MY 1992 benchmark support, as they are also excluded from the implementation period support.

marketing loan programme payments, user mark eting (Step 2) payments to domestic users 614, PFC,
MLA, DP and CCP payments, crop insurance payments and cottonseed payments.
7.458 Brazil submits that the ordinary meaning of Artic le 13(b)(ii) read in its context, requires the
Panel to tabulate any non-green box domestic support paym ents that are linked in some manner to the
production of upland cotton, and that there is nothi ng in the text of Article 13(b)(ii) limiting the
support that must be tabulated to only that provided to a single commodity.615
7.459 The United States responds that the measures relevant to the implementation period support
are only those which deliver product-specific support to upland cotton, namely benefits under the
marketing loan programme, user marketing (Step 2) pa yments and, to the extent that they are within
the Panel's terms of reference, cottonseed payments. It submits that "[t]he measures to be included in
the calculation are identified by the phrase "support to a specific commodity".616
7.460 The United States argued that the phrase "gra nt support to a specific commodity" means
"product-specific support", which it argued was de fined as "support provided for an agricultural
product in favour of the producers of the basic agri cultural product", one of the components of the
definition of AMS in Article 1(a) of the Agreement on Agriculture.617
7.461 Brazil disagreed with the United States' interpretation of "product -specific" in light of the
components of the definition of AMS in Article 1(a) of the Agreement on Agriculture . It submitted
that support provided "in favour of agricultural prod ucers in general" was "non-product-specific" and
that all other domestic support, including support provided for only a limited number of agricultural
commodities, must be deemed "product-specific".618
7.462 The United States agreed that non-product-specific support is support in favour of
agricultural producers in general but argued that the "precise definition" of product-specific support in
Article 1(f) ensures that non-product-specific suppo rt is the residual category of support, covering
those measures that do not fall within the phrase "support provided for an agricultural product in
favour of the producers of the basic agricultural product" in Article 1(a). It also argued that recipients
of decoupled payments are "producers in general" because they ar e free, with limited exceptions, to
plant any commodity and are free, without exception, to undertake other agricultural activities. 619
7.463 The United States argued that the allocation to one commodity of a share of any non-product-
specific support has no basis in the Agreement on Agriculture and would erase the fundamental
distinction between product-specific and non-product-specific support. 620 These categories are
sui generis and may not be rendered inutile by the application of SCM Agreement concepts of subsidy,
benefit and subsidized product which are not used in, nor directly applicable to, Article 13 of the
Agreement on Agriculture. Brazil's approach treats a payment cal culated with respect to base acreage
historically planted to one crop as support to that crop and any other programme crop at the same time
which is not support "to a specific commodity" but support to multiple commodities. 621 It factors in
producer decisions about what to plant and how to spend decoupled payments, which would rob
Members of their ability to comply with the conditions in Article 13(b).622

614 See supra, footnote 464.
616 United States' 3 March 2004 comments, para. 14, second bullet.
617 United States' first written submission, paras. 77-78 and its rebuttal submission, para. 73
618 Brazil's rebuttal submission, para. 21 and its response to Panel Question No. 38.
619 United States' rebuttal submission, para. 83, comments on Brazil's response to Panel Question
No. 258 and its 11 February 2004 comments, paras. 7-14.
620 United States' rebuttal submission, paras. 76 and 79.
621 United States' comments on Brazil's response to Panel Question No. 258.
622 United States' closing statement at second substantive meeting, para. 25.

ii Main arguments of the third parties
7.464 Argentina argues that the relevant support under Article 13(b)(ii) is made up of payments for
a specific commodity (including the revenue foregone under Article 1(c) of the Agreement on
Agriculture), whether those payments are classified as product-specific or non-[product] specific, as
well as other forms of domestic support in monetary terms as set forth in Annex 3.
623
7.465 Australia agrees with Brazil that support "to a speci fic commodity" is support granted to an
individual agricultural commodity covered by Annex 1 of the Agreement on Agriculture , such as
upland cotton, whether through product specific or non-product-specific support. Had the negotiators
intended that "support to a specific commodity" in the context of Article 13(b)(ii) and (iii) mean
product-specific AMS only, they would have said so in the text. The portions of the direct payment
and counter-cyclical payment programmes that be nefit upland cotton should be included in the
calculation of "support to a specific commodity" within the meaning of Article 13(b)(ii).624
7.466 Canada submits that "specific commodity" means a commodity that is clearly and explicitly
defined. Article 13(b)(ii) requires an examination of all support that is not exempt under Annex 2 and
that benefits a "precise", "exact" or "defined" commodity, which may be provided either through
product-specific or non-product-specific support programm es. Deletion of the word "specific" would
imply an examination of support benefiting a potent ially broader product class, a result that is not
supported by the text of Article 13(b)(ii).625
7.467 China argues that where support measures are gene rally available to a number of products
including upland cotton, the term "specific commod ity" requires breaking up and attributing general
budgetary outlay to each specific product for comparis on under the proviso. For the purpose of this
case, only the portion of outlay that was used for upland cotton is relevant for that comparison.
Outlays broken up for other products covered by th e same programme is not at issue before this
Panel.626
7.468 The European Communities agrees with the United States' approach that the correct
comparison is between product-specific support d ecided in the 1992 marketing year and product-
specific support currently granted. It argues that support which is provided to a number of crops
cannot at the same time be considered "support to a specific commodity". Such support is support to
several commodities or support to more than one commodity. There is no reason that the support
granted should not be calculated on the basis of th e AMS methodology set out in Annex 3. Indeed,
Article 1(a) of the Agreement on Agriculture refers to AMS as the annual level of support.627
7.469 New Zealand disagrees with the United States' argum ent that "support granted to a specific
commodity" should be read as meaning "product-spec ific support". Members listed in detail domestic
support measures potentially exempt in the chapea u to Article 13(b) and they used the phrase
"product-specific" at least five times elsewhere in the Agreement. Had they intended to exclude non-
product-specific support or limit Article 13(b)(ii) to "product specific" support, they would have said
so. There is no basis on which support to a speci fic commodity should be excluded simply because
other commodities may receive similar support, si nce support provided throu gh generally available
programmes is still support received for the indivi dual products. Brazil proposes an approach in
relation to domestic support which is no more than what the United States has done in relation to
export credit guarantees – where it allocates export cr edit administrative costs to the specific product

623 Argentina's response to Panel third party Question No. 21.
624 Australia's written submission to the first session of the first substantive meeting, para. 23 and its
oral statement at the first session of the first substantive meeting, paras. 21-25.
625 Canada's response to Panel third party Question No. 17.
626 China's response to Panel third party Question No. 14.
627 European Communities' oral statement at the first session of the first substantive meeting, paras. 21,
24 and its response to Panel third party Question No. 22.

of upland cotton. The same arguments can be ma de with respect to the payments under the crop
insurance programmes.628
iii Evaluation by the Panel
7.470 The Panel begins its analysis by noting that the parties agree that the chapeau of paragraph (b)
refers to all non-green box domestic support measu res that comply with the obligations in the
Agreement on Agriculture. The chapeau of paragraph (b) and subparagraph (ii) form part of a single
sentence. The chapeau is incomprehensible wit hout the subparagraphs, and subparagraph (ii) is
incomprehensible without the chapeau. The words in subparagraph (ii) "exempt from actions based
on paragraph 1 of Article XVI of GATT 1994 or Artic les 5 and 6 of the Subsidies Agreement" are a
predicate of the subject in the chapeau. The pr oviso "provided that su ch measures do not grant
support to a specific commodity in excess of th at decided during the 1992 marketing year" is a
subordinate clause of the same sentence. It is not a stand-alone provision even though it creates an
additional condition.
7.471 The subject of the proviso is "such measures", not "measures", which refers back to those
measures which are the subject of paragraph (b), that is, all non-green box domestic support measures
that conform fully to the provisions of Article 6 of the Agreement on Agriculture .
629 These are
product-specific domestic support, non-product- specific domestic support, both including de minimis
support, plus blue box and S&D box support. All such measures are relevant to the condition in the
proviso and can potentially be taken into account in assessing implementation period support. An
interpretation which excluded any of these cat egories of support from the assessment of
implementation period support, woul d be inconsistent with the wording and grammar of the sentence
in paragraph (b) of Article 13, including the proviso.630
7.472 The subject of the proviso "such measures" therefore indicates which are the relevant
measures. The verb and object in th e proviso refer to what those measures do: namely, grant support
to a specific commodity. All of such measures must be included in the calculation of support for the
purposes of the proviso to the extent that each one grants support to a specific commodity. This will
exclude such measures that only grant support to other specific commodities not at issue as well as
such measures that do not grant support to any specific commodity.
7.473 The Panel must interpret the phrase "grant suppor t to a specific commodity" as it is used in
subparagraph (ii). We begin by noting that the term "product-specific support" is not used.631
7.474 This use of the verb "grant" with "support " is unique in the English version of the Agreement
on Agriculture which, except for this provision, only uses the verb "provide" with domestic support.632
However, the same distinction is not made in th e French and Spanish versions which generally use
"accorder" and "otorgar", respectively, with domestic support. The word "grant" can be defined as
follows:

628 New Zealand's written submission to the first session of the first substantive meeting,
paras. 2.21-2.26.
629 Brazil has not claimed that these measures do not conform fully to those provisions. The Panel
makes no findings in respect of those provisions.
630 But see footnote 629.
631 That term does not, in fact , appear anywhere in the Agreement on Agriculture , although the term
"product-specific domestic support" is used in Article 6. 4(a)(i), and the term "produ ct-specific" is used in
paragraph 2(b) of Annex 2, paragraph 1 of Annex 3 and paragraphs 2 and 3 of Annex 4.
632 The English version also uses "grant" in relation to export subsidies in Articles 9.2(ii) and 10.3.

"To bestow or confer (a possession, right, et c.) by a formal act. Said of a sovereign or
supreme authority, a court of justice, a representative assembly, etc. Also, in Law, to
transfer (property) from oneself to another person, especially by deed."
633
7.475 This definition was also cited by the Appellate Body in Brazil – Aircraft in a different context
in relation to the phrase the "level of export subsid ies granted" in a certain year in footnote 55 to
Article 27.4 of the SCM Agreement . The Appellate Body interprete d "grant" to mean "something
actually provided":
"(…) To us, the word 'granted' used in this context means "something actually
provided". Thus, to determine the amount of export subsidies 'granted' in a particular
year, we believe that the actual amounts provided by a government, and not just
those authorized or appropriated in its budget for that year, is the proper measure.
A government does not always spend the entire amount appropriated in its annual
budget for a designated purpose. Therefore, in this case, to determine the level of
export subsidies for the purposes of Article 27. 4, we believe that the proper reference
is to actual expenditures by a government, and not to budgetary appropriations."
634
7.476 This interpretation is consiste nt with our earlier observation that the word "decided" is
contrasted with "granted" in Article 13(b)(ii) of the Agreement on Agriculture635. "Decided" refers to
what the government determines, but "grant" refers to what its measures provide.
7.477 The direct object of the verb "grant" is "s upport", which we have discussed at paragraphs
7.420 to 7.423 above.
7.478 The indirect object of "grant" is "a specific commodity" which is not a defined term and is
used nowhere else in the Agreement on Agriculture . This is significant b ecause the same agreement
does define the similar term "basic agricultural product" in Article 1(b) which it uses in the definitions
of AMS, EMS and Total AMS in Article 1(a), (d) and (h), respectively, and in numerous places in the
respective methodologies for calculation of AMS and EMS in Annexes 3 and 4, as well as in the
provision on calculation of de minimis "product-specific domestic support" in Article 6.4(a)(i). It is
especially significant since those provisions are all used in the calculation of support to determine
whether domestic support measures conform fully to the provisions of Article 6, which is the principal
condition set out in the chapeau of paragraph (b) of Article 13. In the Panel's view, the choice of a
different term in all three authentic versions of the text in relation to the same measures in the proviso
in subparagraph (b)(ii) indicates that it is not appr opriate to calculate an AMS on a product-specific
basis for the purposes of the additional condition in Article 13(b)(ii). Rather, a bespoke measurement
is required.
7.479 The Panel will interpret the words "a specific commodity" in the usual way.
636 The ordinary
meaning of a "commodity" can be defined as follows:
"A thing of use or value; spec. a thing that is an object of trade, esp. a raw material or
agricultural crop."637
7.480 The word "commodity" must be read in the context of Article 2 of the Agreement on
Agriculture which provides that the agreement applies to the products listed in Annex 1 to the

633 The New Shorter Oxford English Dictionary, (1993).
634 Appellate Body Report, Brazil – Aircraft, para. 148.
635 We noted this contrast at paragraph 7.435 of this report.
636 The Panel will apply the general rule of interpretation set out in Article 31 of the Vienna Convention
on the Law of Treaties and, if appropriate, have recourse to the supplementary means of interpretation set out in
Article 32 .
637 The New Shorter Oxford English Dictionary, (1993).

Agreement. The product coverage of the Agreemen t is narrower than this dictionary definition,
because it covers only agricultural products and not all things of use or value nor all things that are the
object of trade nor all raw materials. The product coverage of the Agreemen t is broader than an
agricultural crop because it covers products such as livestock, meat, dairy products and wool. All
products within the coverage of the Agreement are covered by the chapeau of paragraph (b) and there
is no reason to assume that support to any of them is excluded from the scope of the condition in
subparagraph (ii). Therefore, we will treat the wo rd "commodity", in this context, as basically
synonymous with one of the "agricultural products" defined in Article 2 and Annex 1 but it cannot be
assumed that any provision which refers to "agricultural products", as defined, necessarily applies to a
commodity within the meaning of Article 13(b)(ii).
7.481 The word "specific" qualifies "commodity". Th e ordinary meaning of "specific" in this
context can be defined as "clearly or exp licitly defined; precise, exact; definite". 638 It indicates that
the commodity to which support is granted should be clearly or explicitly defined. The question is
where? There is no reduction commitment per commodity nor any notification obligation under
Article 13(b)(ii). In this dispute, the commodity at issue with respect to domestic support is "upland
cotton" which is clearly and explicitly defined in th e Panel's terms of reference. However, the place
in which commodities will always be defined is in the measures themselves under which the support
is granted. In the Panel's view, that is the pl ace where a commodity must be specified for it to be
relevant to the additional condition in Article 13(b )(ii). Therefore, the additional condition requires a
comparison of support granted by all measures covered by paragraph (b) of Article 13, i.e. non-green
box measures, that clearly or explicitly define a commodity as one to which they bestow or confer
support.
7.482 Another definition of "specific" is "specially or peculiarly pertaining to a particular thing or
person, or a class of these; peculiar ( to)". This definition is appropriate in a different context, such as
"job-specific" or "product-specific" where the word "s pecific" together with the other term such as
"job" or "product" qualifies another noun. Howeve r, in the context of Article 13(b)(ii) it is
inappropriate because here it alone qualifies "commodity".
7.483 There is no reason to assume that the relevant measures may specify only one commodity.
The measures may clearly and explicitly define vari ous commodities. The subject of the proviso is
"such measures" which includes all non-green box me asures, including any which specify more than
one commodity. A key feature of the additional conditi on in subparagraphs (b)(ii) and (iii) is that it
relates support to individual commodities, whic h distinguishes it notably from the reduction
commitments expressed in terms of Total AMS th at are cross-referenced in the chapeau of
paragraph (b). There is no reason to identify measures that deliver support to only one commodity for
the purpose of Article 13(b)(ii) or (iii). If a measure specifies more than one commodity, it would be
appropriate to measure the amount of support granted to each of them in accordance with the terms of
the measure itself.
7.484 Support granted in accordance with a volume of current production should be measured in
that way. Measures which grant support in acco rdance with other parameters, such as volume of
historical production, may not be subject to paragraph (b) of Article 13 at all. If they conform fully to
the provisions of Annex 2, they are exempt from reduction commitments and are protected by
paragraph (a) of Article 13. If they do not so conform, they are covered by paragraph (b) of
Article 13. In the Panel's view, where these measures identify and allocate support based on an
express linkage to specific commodities, they pr ovide support to those commodities within the
meaning of subparagraph (b)(ii), read in its context a nd in the light of its object and purpose. Where,
for example, these measures specify commodities in the eligibility cr iteria and payment rates, they
constitute support to the commodities speci fied in that way. This applies a fortiori where the
payments are determined according to, or are re lated to, current market prices of the specific

638 The New Shorter Oxford English Dictionary, (1993).

commodities. Support granted in this way s hould be measured in the same way as the actual
payments are determined.
7.485 The United States argues that "support" in th e phrase "support to a specific commodity" in
Article 13(b)(ii) and in the term "product-specific sup port" in Article 1(a) refers to support to a crop,
not a farmer, so that programmes that do not oblig e a farmer to grow a particular crop cannot be
"support" in this sense.
639
7.486 The Panel notes that its interpretation refers to the domestic support measures which specify
commodities to which support is provided. In any ev ent, all "support" referre d to in Article 6.1 and
6.3 and included in Article 1(a), is provided in favour of "producers". 640 Even support provided "for"
an agricultural product is provided "in favour of" the producers of the basic agricultural product. All
such support is covered by paragraph (b) of Article 13 and, hence, subpa ragraph (ii). It is clear that
"support" in this context, although granted "to" a specific commodity, is also provided "in favour of"
producers.
7.487 The Panel's interpretation enables WTO Memb ers to ensure that their domestic support
measures satisfy this additional condition, since the Members are responsible for what their measures
clearly and explicitly define, and how much they gran t. Were this not so, and the proviso focused on
where support was spent due to reasons beyond th e control of the government, such as producer
decisions on what to produce within a prog ramme, it would introduce a major element of
unpredictability into Article 13, and render it extremel y difficult to ensure compliance. It is not clear
how Members providing support would ever be able to ensure that their domestic support measures
satisfied this additional condition. The additional condition would become an impenetrable barrier for
other Members who wished to challenge suppo rt provided by a Member who, unlike the
United States, did not maintain detailed records about payment recipients. This would undermine the
security and predictability of the multilateral trading system, which would be at odds with the
function of the WTO dispute settlement system as set out in Article 3.2 of the DSU.
7.488 This consideration is manifest in the domestic support disciplines of the Agreement on
Agriculture. Domestic support is often provided in a way de pendent on market prices, either in the
form of market price support or direct payments dependent on a price gap. Market prices of
agricultural products are generally beyond the control of a government. The Agreement on
Agriculture provides a methodology to measure domestic s upport which filters out the fluctuations in
market prices, by using the gap between a fixed exte rnal reference price and the applied administered
price multiplied by the quantity of production eligible to receive the applied administered price ("price
gap methodology").
641 It does not filter out changes in the volume of eligible production. This
confirms that a prime consideration of the drafters was to ensure that Members had some means of
ensuring compliance with their commitments despite factors beyond their control.
7.489 The Panel also notes that in Canada – Dairy (Article 21.5 – New Zealand and US II), the
Appellate Body considered that an examination of conformity with another provision of the
Agreement on Agriculture should reflect the fact th at the provision was an international obligation
imposed on Members. It considered that the data on producers' actions that was relevant in that
dispute should be treated in a way that could be used to assess a Member's compliance with that
obligation.
 642

640 Articles 3.2 and 7.2(a) of the Agreement on Agriculture also refer to domestic support "in favour of
domestic producers" and "in favour of agricultural producers" respectively.
641 Paragraphs 8 and 10 of Annex 3 to the Agreement on Agriculture.
642 Appellate Body report in Canada – Dairy (Article 21.5 – New Zealand and US II), para. 96,
concerning Article 9.1(c) of the Agreement on Agriculture . We do not consider it material that the provision
under consideration referred to "payments [...] financed by virtue of governmental action".

7.490 The United States submits that the phrase " do not grant support to a specific commodity"
means "do not grant product-specific support" although it admits that "[i]t is not possible to determine
exactly why the drafters of Article 13(b)(ii) did not use the term "product-specific support". 643 At the
same time, the United States submits that the fact that the drafters did not use the term "AMS" when it
was readily available and a key concept, indicates that they did not intend the Article 13(b)(ii)
comparison to require the use of product-specific AMS.644
7.491 The Panel notes that its interpretation of "support to a specific commodity" bears some
similarity to product-specific domestic support. However, the phrase "support to a specific
commodity" is unique to Article 13(b). The phrase "product-specific domestic support" (not
"product-specific support") appears in the de minimis provision in Article 6.4(a)(i) and the phrase
"support … provided for an agricultural product in fa vour of the producers of the basic agricultural
product" appears in the definition of AMS in Articl e 1(a). Both those concepts are relevant to
Article 13(b) but the class of measures which is cove red by paragraph (b) is broader than either of
them. The choice of a different phrase in Article 13(b )(ii) and (iii) indicates that the other two are not
pertinent to the additional condition in the proviso.645
7.492 The object and purpose of the additional conditio n in subparagraphs (ii) and (iii) are to
provide an additional condition linking the domest ic support commitments and disciplines of the
Agreement on Agriculture, on the one hand, to the actionable subsidies obligation in Articles 5 and 6
of the SCM Agreement and Article XVI:1 of the GATT 1994 and non-violation complaints arising
from tariff concessions, on the other hand. Our in terpretation of the phrase "support to a specific
commodity" is consistent with that object and purpose. Nothing indicates that the purpose of the
additional condition is to focus on product-specific domestic support.
7.493 The treatment of domestic support measures in pa ragraph (b) of Article 13 can be contrasted
with that of export subsidies in paragraph (c). Bo th paragraphs (b) and (c) link commitments in the
Agreement on Agriculture with the SCM Agreement , both set out conditions that are substantive
obligations of the Agreement on Agriculture , yet paragraph (c) contai ns no additional condition
applicable to export subsidies analogous to that applicable to domestic support measures under the
proviso in subparagraphs (ii) and ( iii) of paragraph (b). Export su bsidies are subject to commitments
in respect of individual products - there are speci fic commitments in respect of scheduled products
and, effectively, zero commitments for unscheduled products. An additiona l condition in terms of
individual products is therefore unnecessary in Ar ticle 13(c) since the substantive obligations
themselves are expressed in terms of specific products and not in the aggregate.
7.494 The Panel therefore considers that the phrase "grant support to a specific commodity", as used
in Article 13(b)(ii):
(i) means all non-green box support measures that clearly or explicitly define a
commodity as one to which they bestow or confer support; and
(ii) does not mean "grant product-specific domestic support".
7.495 This interpretation is confirmed by the drafting history. 646 The text of subparagraphs (ii) and
(iii) of paragraph (b) appeared in the Uruguay Round text following the first US/EC Blair House
agreement of November 1992. 647 During 1990 and 1991 the agriculture negotiators considered

643 See United States' response to Panel Question No. 37.
644 United States' first written submission, paras. 86-87.
645 The term "product-specific subsidy" is also used in paragraph 3 of Annex 4.
646 The Panel has recourse to supplementary means of interpretation in accordance with Article 32 of
the Vienna Convention on the Law of Treaties in order to confirm the meaning resulting from the application of
the general rule of treaty interpretation in Article 31 of that convention.
647 See the draft Article which formed part of that agreement in Exhibit EC-1.

expressing reduction commitments in terms of AMS "per product" or "per commodity" with a sector-
wide AMS for non-product-specific support.
648 The agriculture text in the draft final Act of December
1991 had provided domestic support reduction commitm ents in just these terms. Draft Article 6.1
provided in fine:
"These [domestic support] commitments are expressed in terms of Aggregate
Measurements of Support and of equivalent commitments."
7.496 Draft Article 6:3 provided that:
"A participant shall be considered to be in compliance with its domestic support
reduction commitments in any year where the sector-wide and product-specific AMS
values for support, or the equivalent commitments, do not exceed the corresponding
annual commitment levels specified in the Schedule of domestic support
commitments of the participant concerned."
 649
7.497 In contrast, the Agreement on Agriculture as finally agreed substituted Total AMS
commitments for the product-specific commit ments. It provides in Article 6.1 in fine and in
Article 6.3 as follows:
"The commitments are expressed in terms of Total Aggregate Measurement of
Support and "Annual and Final Bound Commitment Levels."; and
"A Member shall be considered to be in compliance with its domestic support
reduction commitments in any year in wh ich its domestic support in favour of
agricultural producers expressed in terms of Current Total AMS does not exceed the
corresponding annual or final bound commitmen t level specified in Part IV of the
Member's Schedule."
7.498 Draft Article 6:4 had provided for de minimis exclusions from domestic support commitments
in the case of both "product-specific support" and the "sector-wide AMS". 650 Article 6.4 as finally
agreed provides for de minimis exclusions from Current AMS , to be calculated according to whether
support is "product-specific domestic support" or "non-product-specific domestic support".
7.499 Draft Article 12 had provided that:
"Where reduction commitments on domestic support and export subsidies are being
applied in conformity with the terms of th is Agreement, the presumption will be that
they do not cause serious prejudice in th e sense of Article XVI:1 of the General
Agreement." 651
7.500 This was replaced by Article 13 in the Agreement on Agriculture as finally agreed. The
presumption was replaced with the exemptions from actions, among other things, discussed above in
Section VII:C. The conditions still include the re duction commitments – now expressed in terms of
Total AMS – in the chapeau of paragraph (b), but they also include an additional condition regarding
"support to a specific commodity" in subparagraphs (ii) and (iii).

648 See Negotiating Group on Agriculture documents "Framework Agreement on Agriculture Reform
Programme", Draft Text by the Chairman, document MTN.GNG/NG5/W/170, dated 11 July 1990, para. 5,
reproduced in Exhibit US-25; "Options in the Agriculture Negotiations", Note by the Chairman, document
MTN.GNG/AG/W/1 dated 24 June 1991, para. 17, reproduced in Exhibit US-26; and an addendum in document
MTN.GNG/AG/W/1/Add.1 dated 2 August 1991, reproduced in Exhibit US-27.
649 Document MTN.TNC/W/FA, page L.7, reproduced in Exhibit US-29.
650 Document MTN.TNC/W/FA, page L.7, reproduced in Exhibit US-29.
651 Document MTN.TNC/W/FA, page L.9, reproduced in Exhibit US-29.

7.501 The drafting history shows three things: (1) the additional condition referring to "support to a
specific commodity" ensures that there is s till a domestic support condition (although not an
obligation) in the Agreement on Agriculture652 which is defined on an individual product basis despite
the disappearance of per product domestic support commitm ents from the draft text; (2) the drafters
had not limited the proposed presumption in serious prejudice cases to product-specific support but
had envisaged that the presumption could appl y to non-product-specific support depending on
whether it complied with the proposed sector-wide re duction commitment, which was later removed;
and (3) the drafters chose to retain the term "pr oduct-specific" when they revised draft Article 6:4,
where it now appears in context with "non-product-sp ecific", but they chose not to use it when they
replaced draft Article 6:3 and inserted the additional condition in Article 13(b)(ii) and (iii). This
supports the Panel's interpretation to the extent that the drafters did not intend to exclude from this
condition any support that was granted to a speci fic commodity, irrespective of whether it was
"product-specific" domestic support or not.
7.502 The Panel's interpretation maintains the di stinction between green box and non-green box
domestic support which is fundamental to Article 13. It also maintains the identity between the
subject of the chapeau of paragraph (b) and subp aragraph (b)(ii). It respects the wording of the
proviso by comparing support that is granted to a specific commodity with the benchmark relevant to
that specific commodity and excluding all other support, which either grants support to other specific
commodities or does not grant support to any specific commodity. Brazil acknowledges this
implicitly in that it does not challenge very wide ly available support, such as infrastructure and
irrigation subsidies, some of which, presumably, deliver support to upland cotton either directly or
indirectly.
653
7.503 The Panel is not required to interpret the difference between the terms "product-specific
domestic support" and "non-product-specific domestic support" used in Article 6.4(a) nor the
difference between the phrases "support ... provided for an agricultural product in favour of the
producers of the basic agricultural product" and "n on-product-specific support provided in favour of
agricultural producers in general" used in Article 1( a). Those differences are not relevant to the sole
condition that Brazil alleges that the United States' non-green box domestic support measures do not
satisfy. It suffices for us to observe that, to th e extent that non-product-specific domestic support can
specify commodities to which support is in some wa y delivered (a question which we do not decide),
an interpretation of Article 13(b)(ii) that ex cluded all non-product-specific domestic support would
create a novel and potentially large category of sup port which did not fall within Article 13(a), nor
fully within Article 13(b), which would be subject to the chapeau of Article 13(b) but not the
additional condition in the proviso. This would ig nore the subject of the proviso which is "such
measures" without any basis in the text or contex t nor any justification in the object and purpose of
the provision. This would be some unknown kind of "pale amber", non-product-specific box which
the drafters clearly did not intend to create.
7.504 The Panel notes that the four types of support with planting flexibility, namely PFC, MLA,
DP and CCP payments, have, in turn, followed de ficiency payments under the FACT Act of 1990.
The parties agree that deficiency payments form part of the MY 1992 benchmark. The replacement of
deficiency payments, which were product-specific, with these other types of support is the principal
difference between the support delivered to upla nd cotton during the implementation period under the
1996 and 2002 farm bills, and the period immedi ately prior to that under the 1990 farm bill.
654 If
implementation period support were limited to product-specific support, the comparison under
Article 13(b)(ii) would primarily be a comparison of deficiency payments, which were tied to the
production of specific commodities, and the later me asures, which are principally tied to production

652 Besides the de minimis provision in Article 6.4(a)(i) which is relevant to calculation of Current
Total AMS.
653 See Brazil's response to Panel Question No. 41 and the United States' rebuttal submission, para. 79.
654 The United States agrees with this view: see its 11 February 2004 comments, paras. 15-16.

of those specific commodities in a base period. The text of Article 13 and the architecture of the
Agreement on Agriculture make clear that such a shift should only be determinative where the change
in method of delivery is a shift to green box support or to support that is not granted to a specific
commodity. Therefore, the Panel's interpretation do es not "rob" Members of their ability to shift to
decoupled payments and still comply with the Article 13. Decoupled payments that conform fully to
the provisions of Annex 2 automatically comply with the conditions in Article 13(a), and others that
conform fully with Article 6 and the additional c ondition in Article 13(b)(ii), also comply with
Article 13.
7.505 The Panel's interpretation does not "erase the distinction" between product-specific and non-
product-specific support. That distinction remains essential to the calculation of Total AMS for the
purposes of reduction commitments, which is germane to the chapeau of paragraph (b) of Article 13,
but not the additional condition in subparagraph (ii). No reason has been advanced in these
proceedings that would explain why the drafters would have distinguished between product-specific
and non-product-specific domestic support when th ey determined the additional condition under
which measures which could be exempt from certain typ es of actions. In fact, in a prior draft of the
Agreement on Agriculture which did distinguish between the two methods of delivery, they expressly
proposed parallel conditions under which both would be exempt from such actions.
7.506 The United States acknowledges the "simple fact " that non-product-specific support delivers
support to various agricultural commodities.
655 Without accepting that these programmes are non-
product-specific, from the Panel's perspective, the only question is how to include only the amount of
support that the programmes at issue grant to any specific one of those ag ricultural commodities.
Such an allocation is not required for the cal culation of AMS or Total AMS because non-product-
specific support is calculated separately from product-specific support. However, that is relevant only
to the reduction commitments which are referred to in the chapeau of paragraph (b) of Article 13, not
the additional condition in subparagraphs (ii) and (iii). There is no reason to assume that an allocation
of support delivered by a single measure to more than one agricultural commodity cannot be called
for under the Agreement on Agriculture. Indeed, allocation of the exte nt to which a measure delivers
support to a particular product is not alien to th e Agreement, since support measures directed at
agricultural processors are included in measurements of support only to the extent that such measures
benefit the producers of the basic agricultural product.656
(ii) Relevant measures
i Main arguments of the parties
7.507 Brazil claims that all of the measures at issue are relevant and should be included as measures
which grant support to the specific commodity of upland cotton.
7.508 The United States accepts that marketing loan programme payments, user marketing (Step 2)
payments and cottonseed payments are product-sp ecific support. It does not accept that PFC, MLA,
DP, CCP and crop insurance payments grant support to a specific commodity.
ii Evaluation by the Panel
7.509 The Panel recalls its finding at paragraph 7.494 and will examine each of the domestic
support measures at issue in turn to determine whether they clearly and explicitly define upland cotton
as a commodity to which they bestow or confer support.

656 Paragraph 7 of Annex 3 and paragraph 4 of Annex 4 of the Agreement on Agriculture. The Panel
agrees with the United States that this does not suggest any methodology that would allocate non-product-
specific support as "support to a specific commodity" - see the United States' 3 March 2004 comments, para. 13.

7.510 Under the marketing loan programme, producers on a farm are eligible for a marketing
assistance loan for any quantity of a "loan commodity" produced on the farm657 and the Secretary may
make loan deficiency payments ("LDPs") availa ble to producers on a farm eligible to obtain a
marketing assistance loan with respect to a "loan commodity". 658 Upland cotton is defined
specifically as a "loan commodity". 659 The current legislation specifi es a loan rate of "in the case of
upland cotton, $0.52 per pound" and the former legisl ation specified a formula to establish "the loan
rate for a marketing assistance loan (...) for upl and cotton", which was published in a regulation
annually.660 There is a special provision in the repayment rate for upland cotton and rice 661 and a
special provision on the adjustment of the prevailing world market price for upland cotton.662
7.511 User marketing (Step 2) payments are made under a provision titled "Special marketing loan
provisions for upland cotton". They are available only to domestic users and exporters of "upland
cotton" and are contingent upon certain price quotations for upland cotton.663
7.512 Cottonseed payments were made to assist producers and first handlers of the 2000 crop of
"cottonseed".664 Cottonseed is a part of harvested raw cotton. The evidence shows that approximately
97 per cent of the annual United States cotton crop is from upland cotton.665
7.513 PFC payments were made in respect of cropland covered by a contract. Eligible cropland had
to satisfy very specific eligibility criteria, in that it had to be land that, for at least one of the 1991
through 1995 crops, was enrolled in the acreage re duction programme authorized for a crop of seven
contract commodities or was considered planted or subject to a conservation reserve contract. 666
Upland cotton was specified as one of those contract commodities. 667 The legislation made
allocations for specific commodities from the amounts appropriated to PFC contracts, including the
following:
"(b) ALLOCATION. - The amount made available for a fiscal year under
subsection (a) shall be allocated as follows:

(6) for upland cotton, 11.63 per cent"
668
7.514 The legislation provided a formula to determine the payment rate for upland cotton and each
other contract commodity, which was published in regulations. The rate depended on the acreage
enrolled as upland cotton base and the yield which was also specific to upland cotton.669

657 Sections 1201-1204 of the FSRI Act of 2002, and sections 131-134 of the FAIR Act, respectively.
658 Section 1205 of the FSRI Act of 2002 and section 135 of the FAIR Act of 1996, respectively.
659 Section 1001(8) of the FSRI Act of 2002 and section 102(5) and (10) of the FAIR Act of 1996,
respectively.
660 Section 1202 of the FSRI Act and section 132(c) of the FAIR Act of 1996, respectively.
661 Section 1204(b) of the FSRI Act of 2002 and section 134(b) of the FAIR Act of 1996, respectively.
662 Section 1204(e) of the FSRI Act of 2002 and section 134(e) of the FAIR Act of 1996, respectively.
663 Section 1207 of the FSRI Act of 2002 and section 136 of the FAIR Act of 1996, respectively.
664 Section 204(e) of the ARP Act of 2000, section 6 of Public Law 107-25, and 7 CFR 1427.1100
(1 January 2002 edition), reproduced in Exhibits BRA-137, BRA-138 and BRA-32, respectively.
665 USDA Economic Research Service Briefing Room Cotton document, reproduced in Exhibit
BRA-13.
666 Section 111(d) of the FAIR Act of 1996.
667 Section 102(5) of the FAIR Act of 1996.
668 Section 113(b)(6) of the FAIR Act of 1996.
669 Section 114 of the FAIR Act of 1996.

7.515 MLA payments were intended as additional PFC payments to respond to low prevailing
prices of commodities, including upland cotton. Th ey were paid proportionally in accordance with
entitlements to PFC payments.
670
7.516 DP and CCP payments are available in respect of acreage planted on a farm which has to
satisfy very specific eligibility criteria, which begi n with the criterion that it was planted to one of
nine covered commodities for the 1998 through 2001 crop years. 671 Upland cotton is one of the
covered commodities672 The legislation provides for a DP payment rate as follows: "upland cotton,
$0.0667 per pound".673 The legislation provides that CCP paym ents are paid when the effective price
for the covered commodity is less than th e target price for the covered commodity 674 and provides for
a target price in the 2002 and 2003 crop years, as well as subsequent crop years as follows: "upland
cotton, $0.7240 per pound".675
7.517 With respect to crop insurance payments, the Federal Crop Insurance Corporation ("FCIC") is
authorized to offer insurance or reinsurance for insurers of, produ cers of "agricultural commodities"
grown in the United States under one or more plans determined by the FCIC to be adapted to the
agricultural commodity concerned. 676 "Cotton" is specified as an "agricultural commodity". 677 The
major plan type (actual production history) is available for approximately 100 agricultural
commodities, and specifies upland cotton as one of them. 678 The other four plan types (group risk,
crop revenue coverage, income pr otection and revenue assurance) are available only for a limited
number of eight commodities or less and they each specify upland cotton as one of them. The
proportion of the premium borne by the FCIC is set out in each plan. USDA maintains separate
accounts for the amount of premium payments borne by the FCIC for each crop, including one that is
specific to cotton.
679 Certain sample policy provisions specify cotton crops. 680 The legislation
contains "Special Provisions for Cotton and Rice" wh ich require the FCIC to offer plans of insurance
that cover losses of upland cotton, ELS cotton an d rice resulting from failure of irrigation water
supplies due to drought or saltwater intrusion.681
7.518 In view of the above, the Panel finds that Brazil has made a prima facie case that each of
these measures clearly and explicitly specifies upl and cotton or, in the case of crop insurance

670 See Brazil's first written submission, paras. 60-6 1, and its rebuttal submission, para. 29 and the
United States' rebuttal submission, paras. 99-101 and its response to Panel Question No. 43.
671 Section 1101 of the FSRI Act of 2002, which contains other eligibility criteria, notably with respect
to oilseed acreage.
672 Section 1001(4) of the FSRI Act of 2002.
673 Section 1103(b)(6) of the FSRI Act of 2002.
674 Section 1104(b) of the FSRI Act of 2002.
675 Section 1104(c)(1)(F) and (2)(F) of the FSRI Act of 2002.
676 Section 508 of the FCIC Act.
677 Section 518 of the FCIC Act.
678 See USDA Risk Management Agency lists of cr ops covered under the 2002 and 2003 crop years
crop insurance programmes, reproduced in Exhibits BRA-62 and BRA-57, respectively; Brazil's rebuttal
submission, para. 55, and United States' 27 August 2003 comments, footnote 48.
679 Examples for the 1992 and 1999 through 2003 marketing years are reproduced in Exhibit BRA-57.
See also Brazil's oral statement at th e first session of the first substantiv e meeting, para. 63 and its rebuttal
submission, paras. 50 and 53. The United States also supplied data presented by year and plan type showing the
amount and percentage of upland cotton acreage coverage, premiums paid by upland cotton producers and
insurance indemnity payments to upland cotton producers; see Exhibits US-65, US-66 and US-67, respectively.
680 See "Income Protection – Cotton Crop Provisions" USDA FCIC, 2000-321 and "Cotton Crop
Provisions" USDA FCIC, 99-021, reproduced in Exhibits BRA-174 and BRA-175.
681 Section 508(a)(8) of the Federal Crop Insurance Act, 7 USC 1508(a)(8), inserted by section 162 of
the Agricultural Risk Protection Act of 2000 applicable since the 2001 crops.

payments and cottonseed payments, cotton 682, as a commodity to which they grant support within the
meaning of Article 13(b)(ii).
7.519 The United States argues that the four types of support with planting flexibility do not grant
support to upland cotton because they are not pro duct-specific support and because they contain no
requirement to produce.
7.520 The Panel does not consider that the United States has rebutted Brazil's case for two reasons:
(1) the "product-specific" criterion is not based in the text of Article 13; and, therefore, (2) the result
of the United States' argument would be that these types of support – which total several billion
dollars for specific covered commodities – are not in fact support to any commodity.
(iii) Payments under expired programmes
i Main arguments of the parties
7.521 The parties agree that PFC and MLA payments , as well as cottonseed payments for the 2000
crop, were made under expired programmes.683
7.522 The United States argues that the present tense phrasing of "do not grant support" rather than
the past tense ("did not grant") or the future te nse ("will not grant"), indicates that determining
whether measures currently in effect are exempt from actions depends upon the support which they
currently grant.684
7.523 Brazil replies that the United States' interpreta tion would create a sweeping limitation on the
right of WTO Members to challenge any domestic support payments not "currently" provided. It calls
this a "statute of limitations" approach under whic h a subsidizing Member would be absolved of any
responsibility for serious prejudice caused by dome stic support provided during the prior marketing
year, so long as the measures have not been challe nged prior to the 1 August marketing year deadline
for upland cotton. It argues that Article 13(b)(ii) does not address the time when domestic support
measures can no longer be subject to challenge durin g the implementation period, just as Article 1.1
of the SCM Agreement does not address the time at which a "finan cial contribution" and/or "benefit"
must be shown to exist.685
ii Main arguments of the third parties
7.524 Argentina emphasizes that in the Spanish text of Ar ticle 13(b)(ii) the present tense of the
subjunctive mode is used, indicating the conditio nal or possible nature and expressing syntactic
subordination. According to Argentina, the Spanish text coincides with the ve rbal tense used in the
French version in which the present subjunctive is also used. Consequently, Argentina disagrees with
the United States' contention that the present tense cr iterion in Article 13(b)(ii) implies that the only
support the Panel may consider is current support.686
7.525 China argues that Article 13 (b) cannot be limited to a comparison only of measures currently
in effect. Although China recognizes that it is indeed written in the present tense, the sentence is led
by the key word "provided" in a strong limitation and demanding style. According to China, the

682 Upland cotton accounts for approximately 97 per cent of United States cotton production: see
USDA Economic Research Service, Briefing Room – Cotton, and background paper dated July 2001
reproduced in Exhibits BRA-13 and BRA-46, respectively. It does not include extra long staple ("ELS") cotton.
683 See the preliminary ruling in this regard in Section VII:B of this report.
684 United States' first written submission, paras. 79 and 90.
685 Brazil's oral statement at the first session of the first substantive meeting, paras. 40-44, citing the
Appellate Body Report , US – Lead and Bismuth II.
686 Argentina's response to Panel third party Question No. 26.

intention of such tense is to ensure that support le vels beyond those in 1992 are not to be protected by
the Peace Clause.
687
7.526 The European Communities considers that the present tense of the phrase "do not grant
support" makes it clear that the comparison for the pu rpose of Article 13(b) must be between the level
of support decided in the 1992 marketing year and that granted by virtue of the measures being
challenged, which would typically mean the most recent marketing year.688
7.527 Paraguay submits that the Spanish text expresses the conditionality of Article 13(b)(ii) in
even clearer terms than the E nglish text through the words " a condición de que no otorguen ".
Although Paraguay considers that both texts indicat e the present tense, the Spanish version of the
sentence stresses conditionality, which must be given considerable weight in order to arrive at a
correct interpretation. Paraguay is of the view that it is the Panel's task to consider the period it deems
suitable for determining the effects of this type of measure on world trade.689
iii Evaluation by the Panel
7.528 The Panel considers the proper interpretation of the tense of this phrase to be quite
straightforward. Article 13(b) is made up of two clauses. The principal clause is "domestic support
measures … shall be exempt from actions based on ( ...)". The subordinate clause is "provided that
such measures do not grant support in excess of that decided during the 1992 marketing year." The
principal clause is in the future tense, and the subor dinate is in the present simple tense to express an
open condition which also relates to the future.
690 The future time (as of the time of its signature on
15 April 1994) to which the clauses relate is stat ed at the beginning of Article 13: "During the
implementation period", i.e. the nine-year period commencing in 1995. The meaning of the present
simple tense can be illustrated by the sentence: "T he meeting will begin at 10 o'clock provided that
the parties are not late." The verb "are", although in the present, does not refe r to lateness at the time
of speaking, but to lateness in the future, i.e. at 10 o'clock. It does not matter whether the parties are
late now; it only matters if they are late at 10 o'clock. This is clearer in the Spanish version of
Article 13(b) in which the principal clause is in th e future indicative and the subordinate clause is in
the present subjunctive which indicates that the verb "grant" expresses a condition. The French
version also uses the future indicative and present subjunctive for the same reason.
7.529 Consequently, the tense of the proviso "provided that such measures do not grant …" does not
limit the scope of Article 13(b) to measures which are currently in effect. It refers to any domestic
support measures covered by paragraph (b) which are or have been in force during the implementation
period of nine years commencing in 1995. Theref ore, the Panel finds that these payments under
expired measures can be taken into account in the examination of consistency of the United States
domestic support measures with Article 13(b)(ii).
7.530 The Panel notes that Brazil's claims regard ing expired programmes only concern payments
made under them, in order to seek relief from their allegedly present effects under the SCM

687 China's response to Panel third party Question No. 12.
688 European Communities' oral statement at the first session of the first substantive meeting, para. 13.
This is also relevant to the reference period, considered at para. 7.591 below. In response to a question from the
Panel as to whether there was any difference in the Span ish text which might aid the Panel in interpreting these
words, the European Communities noted only that "both the French and Spanish text also use the present tense".
See European Communities' response to Panel third party Question No. 26.
689 Paraguay's response to Panel third party Question No. 26.
690 See John Eastwood: Oxford Guide to English Grammar, Oxford University Press, 1994, sections 77,
257 and 259.

Agreement. Brazil does not make claims regarding any expired legislation per se (unlike its claims
regarding current measures).691
(iv) Measures outside the Panel's terms of reference
i Main arguments of the parties
7.531 Brazil submits that support outside the Panel's term s of reference should be included in the
calculation of implementation period support if it w as made in respect of the 2002 marketing year.
Specifically, it refers to the cottonseed payments fo r the 2002 crop, which the Panel has ruled are not
within its terms of reference.692
7.532 The United States maintains that cottonseed payments are not within the scope of this
dispute.693
ii Evaluation by the Panel
7.533 Cottonseed payments for the 1999 and 2002 crops ar e outside the Panel's terms of reference,
for the reasons given in Section VII:B of this repor t. The Panel notes that subparagraphs (b)(ii) and
(iii) of Article 13 provide cond itional exemptions from certain ac tions. Those actions involve
recourse to dispute settlement procedures based on the listed provisions, as discussed in Section VII:C
of this report. Measures outside a panel's terms of re ference in those procedures may not be the
subject of claims under Articles 5 and 6 of the SCM Agreement and Article XVI:1 of the GATT 1994,
considered in Section VII:G of this report. Howe ver, measures outside the terms of reference may be
relevant as evidence.
7.534 The purpose of the Panel's examination as to whether measures satisfy the conditions in
Article 13 is not to determine whether or not they are consistent with obligations in the SCM
Agreement or Article XVI of the GATT 1994 . A finding that measures do or do not satisfy the
conditions in Article 13 does not lead to any recomm endation or relief. Rather, it determines whether
or not measures benefit from particular exemptions from actions. This is a matter of evidence, not
terms of reference.
7.535 The treaty text requires the Panel to include in the comparison under subparagraph (b)(ii) of
Article 13 all those measures put in evidence wh ich fall within the terms of the chapeau of
paragraph (b) and which grant support to a specific commodity, in this case, upland cotton, either in
the reference period or within the MY 1992 benchm ark. That is the appropriate comparison. A
complaining party is not required to request the est ablishment of a panel in respect of any and all
domestic support measures other than those in respect of which it seeks relief.
7.536 In the present dispute, cottonseed payments for the 1999 and 2002 cr ops constitute non-green
box domestic support granted specifically to upland cotton in the period under review. The Panel will
therefore include them in the comparison of s upport under Article 13(b)(ii). Where the Panel finds
that all such domestic support measures, including these cottonseed payments, do not satisfy the
additional condition in that provision, then it must find that they are not exempt from actions.
However, the Panel may only continue to examin e those measures which are within its terms of
reference for conformity with Articles 5 and 6 of the SCM Agreement and Article XVI:1 of the GATT
1994.

691 Brazil's response to Panel Question No. 19.
692 Brazil's response to Panel Question No. 17.
693 United States' rebuttal submission, paras. 106-110.

(v) Summary of implementation period support
7.537 In summary, the Panel will include the followi ng in its measurement of implementation
period support:
694
(i) marketing loan programme payments (including interest and storage
payments where appropriate);
(ii) user marketing (Step 2) payments made to domestic users;695
(iii) PFC, MLA, DP and CCP payments;
(iv) crop insurance payments; and
(v) cottonseed payments for the 1999, 2000 and 2002 crops.
7.538 The Panel can only include payments made in the 1999 through 2002 marketing years
because these are the only years for which the parties have provided evidence.
(d) Measurement of support
(i) Methodology
i Main arguments of the parties
7.539 Brazil tabulates both implementation period support and the MY 1992 benchmark in terms of
actual expenditures for support to upland cotton in each marketing year. 696 At the Panel's request, it
also presented this information on a per pound basis. 697 Brazil submits that budgetary expenditures
are the most natural measure of support, which are straightforward to apply and allow a ready and
accurate comparison.
698
7.540 Brazil does not consider that an AMS calculation is appropriate because Article 13(b)(ii) does
not use the term "AMS", "product-specific" or "non -product-specific". However, the best approach
besides using actual expenditures is to apply an AMS-like methodology using rules in Annex 3 of the
Agreement on Agriculture to all "support provided to a specific commodity" in the sense of
Article 13(b)(ii). Price-gap methodology is a ppropriate only for deficiency payments whilst
budgetary outlays are appropriate for all other suppor t because that was the approach that the United
States used to calculate its AMS reduction commitments and make its domestic support notifications
with respect to upland cotton. 699 Any rate of support methodology should be based on budgetary
expenditures.700
7.541 Brazil also drew attention to the United States' 1994 Statement of Administrative Action
submitted to the United States Congress with the proposed Uruguay Round Ag reements Act, which
stated as follows:

694 This is without prejudice to their specificity within the meaning of Article 2 of the SCM Agreement,
considered in Section VII:G of this report.
695 The Panel excludes user marketing (Step 2) payments to exporters, as mentioned in supra,footnote
464.
696 Brazil's first written submission, paras. 143 and 146.
697 Brazil's response to Panel Question No. 60.
698 Brazil's response to Panel Question No. 59.
699 Brazil's rebuttal submission, para. 87 and its 27 August comments on United States' rebuttal
submission, paras. 10-15.

"Under Article 13(b)(ii) and (iii), govern ments may not initiate adverse effects,
serious prejudice or non-violation nullifi cation and impairment challenges in the
WTO in respect of this type of domest ic support measure unless the AMS for the
particular commodity exceeds the level decided in the 1992 marketing year. (For
example, direct payments decided upon in 1992 as part of the EU's Common
Agricultural Policy would be covered by th is exemption.) Accordingly, even though
rules applying to reduction commitments do not require a WTO member to reduce
support for any particular product and ma y even permit a government to increase
support for a particular product, a WTO member will not be protected by the peace
clause if its support for the product is a bove that decided during the 1992 marketing
year."
701
7.542 The United States compares implementation period suppor t and the MY 1992 benchmark in
terms of a rate of support. It submits that th e rate of product-specific support for upland cotton
decided during the 1992 marketing year (72.9 cents per pound) is greater than the rate of product-
specific support that challenged United States non- green box measures currently grant to upland
cotton (52 cents per pound).702 The rate of support methodology permits an ex ante comparison of the
support because the rate is known at the outset (or even in advance) of the relevant crop year in which
payments are made and thereby permits a rapid challenge.703
7.543 The United States does not consider that Artic le 13(b)(ii) calls for an AMS calculation
because "support" does not mean "AMS", which is one particular way of measuring support. Had
Members intended the comparison to require the use of product-specific AMS, calculated in total
monetary value terms, they could have used that term in Article 13(b)(ii). 704 Nor does it permit an
ex ante calculation which means that a Member cannot know with certainty whether support exceeds
that decided in the 1992 marketing year. However, within the context of an AMS calculation, it
submits that a price gap calculation provides an appropriate methodology because it eliminates the
effect of changes in prevailing market prices on the calculation of support and thereby reflects
changes in the level of support decided by a Member.
705
7.544 The United States does not consider that the Agreement on Agriculture permits measurement
of support in terms of an AMS-like methodology us ing rules in Annex 3. Annex 3 specifically
provides that non-product-specific support must be kept separate from product-specific support for
purposes of AMS calculation, and therefore they must be kept separate for purposes of the Article 13
analysis.706
ii Main arguments of the third parties
7.545 Argentina considers that implementation period support must be linked to budgetary
outlays.707
7.546 Australia considers that the term "support" in Article 13(b)(ii) was not intended to have the
same meaning as "AMS". It does not agree that the interpretation of "grant support" should be limited
to either budgetary outlays or a rate of support. The same proviso is used in subparagraph (iii) of

701 Statement of Administrative Action, H.R. 5110, H.R. Doc. 316, Volume 1, 103d Congress, 2nd
Session, 656 (1994), quoting from page 67, reproduced in Exhibit BRA-102. The SAA "represents an
authoritative expression by the Administration concerning its views regarding the interpretation and application
of the Uruguay Round agreements". (SAA, p. 656).
702 United States' first written submission, para. 76.
703 United States' response to Panel Question No. 33.
704 United States' first written submission, para. 86.
705 United States' rebuttal submission, paras. 116 to 118, and its 27 August 2003 comments, paras. 5-9.
706 United States' comments on Brazil's response to Panel Question No. 258.
707 Argentina's response to Panel third party Question No. 23.

Article 13(b) so it must be interpreted in a manner capable of application in a non-violation complaint,
which requires the application of a conditions of price competition test.
708
7.547 China considers that budgetary outlays as exemplif ied by the AMS calculation method is the
approach adopted by the drafters.709
7.548 The European Communities considers that implementation period support should be
calculated on the basis of the AMS methodology set out in Annex 3 to the Agreement on Agriculture,
which is not necessarily in terms of budgetary outlays. The MY 1992 benchmark should be
calculated using "AMS-like criteria" on the basis of information available to the decision makers,
such as eligible production, production estimates or budgetary acts.710
7.549 New Zealand considers that there is nothing to suggest that budgetary outlays should not be a
component of the calculation of "support" under Article 13(b)(ii).711
iii Evaluation by the Panel
7.550 The Panel observes that the Agreement on Agriculture does not state in Article 13(b)(ii) how
to measure support. However, elsewhere the Ag reement provides in great detail methodologies to
measure support, namely the AMS and, where the ca lculation of a particular component of AMS is
not practicable, the EMS. The AMS methodology has a striking degree of overlap with
Article 13(b)(ii), notably: (1) the definition of AMS in Article 1(a) indicates that it measures
"support" that is "provided", which is synonymou s with the extent to which measures "grant"
"support";
712 (2) the AMS measures support during the implementation period (and later); (3) the
purpose of Total AMS is to measure support provided against a fixed benchmark level; (4) the AMS
measures domestic support subject to reduction co mmitments, which is one of the relevant
components of support covered by paragraph (b) of Article 13 and, therefore, "such measures" which
are the subject of subparagraph (b)(ii); and (5) the AMS does not measure green box support, which is
also excluded from paragraph (b) of Article 13.
7.551 However, there are two reasons dictated by the treaty text why an AMS per se cannot be an
appropriate measurement under Article 13(b)(ii). These are: (1) Blue box support is excluded from a
Current Total AMS calculation, de minimis support, although measured in terms of an AMS, may be
excluded from Current Total AMS under Article 6. 4, as may S&D box support under Article 6.2, yet
all are covered by paragraph (b) of Article 13 and, hence, subject to subparagraph (b)(ii); and (2)
Non-product-specific support is excluded from an AMS calculated on a product-specific basis for a
basic agricultural product but it is covered by para graph (b) of Article 13 and, hence, subject to
subparagraph (b)(ii).
7.552 Nevertheless, the drafters of the Agreement on Agriculture evidently considered that the AMS
reflected basic principles of the measurement of support. In the Panel's view, AMS methodology can
be used to measure both the MY 1992 benc hmark and implementati on period support under
Article 13(b)(ii), subject to two modifications dictated by the treaty text: (1) the AMS methodology
should be applied to the corpus of implementation period support measures subject to Article 13(b), to
the extent relevant, and not just to support subj ect to reduction commitments; and (2) it is not
appropriate to calculate an AMS on a product-specifi c basis for a basic agricultural product and total
non-product-specific support separately. Therefore, the Panel will apply the principles of AMS

708 Australia's response to Panel third party Question No. 28. The Panel has dealt with this argument in
paragraph 7.443 above.
709 China's response to Panel third party Question Nos. 22 and 23.
710 European Communities' response to Panel third party Question Nos. 22 and 23.
711 New Zealand's response to Panel third party Question No. 22.
712 The French and Spanish versions use the same term in Articles 1(a), 1(d) and 13(b)(ii) and (iii). We
will simply refer to the AMS as it is not argued that the EMS is appropriate in the circumstances of this case.

methodology to measure the MY 1992 benchmark a nd implementation period support, subject to
these two modifications, for the purposes of Article 13(b)(ii).
7.553 It is not disputed that all of the types of measures which the Panel includes in its measurement
of support must be included in the calculation of Current Total AMS, except that the United States
excludes PFC and DP payments as green box support and includes user marketing (Step 2) payments
to exporters as domestic support. The Panel in cludes the former as non-green box and excludes the
latter as export subsidies for the reasons set out in this Section VII:D, and Section VII:E, respectively.
7.554 The AMS expresses support in monetary terms. 713 It measures subsidies, including both
budgetary outlays and revenue foregone by governments or their agents 714. Non-exempt direct
payments dependent on a price gap can be measure d in terms of a "price gap methodology", which
filters out the effect of fluctuations in mark et prices, or in terms of budgetary outlays. 715 Non-exempt
direct payments based on factors other than price must be measured in terms of budgetary outlays. 716
Where calculation of the market price support and other components of AMS is not practicable, an
EMS shall be calculated, which also involves mu ltiplying prices by quantities of eligible production
or budgetary outlays.
717 There is no reason why these basic principles of measurement of support
under the Agreement on Agriculture would be inappropriate to me asure implementation period
support under Article 13(b)(ii).
7.555 Therefore, the AMS provides a choice between a methodology based on budgetary outlays
only, or a price gap combined with budgetary out lays. Brazil submits that the Panel should use
budgetary outlays, making an AMS-like calculation of all relevant support. The Panel notes that this
methodology is consistent with the United States' notifications of all its domestic support for the
purposes of its AMS reduction commitments, including all those measures at issue, with the exception
of deficiency payments which were not granted during the reference period. 718 The United States
submitted that, if the Panel made an AMS calcu lation, it should use a price gap methodology.
Ultimately, this Panel does not need to decide if one of these methodologies is less appropriate than
the other because, for the purposes of Article 13(b)( ii), it is only necessary to assess whether there is
or is not an "excess" of support over that decided in the 1992 marketing year. It is not necessary to
calculate the value of the excess and, in this dispute, both methodologies lead to the same result.
7.556 The United States argues that its budgetary outlays for domestic support are not known ahead
of time which creates a problem for a Member who wishes to claim that implementation period
support, measured in terms of budgetary outlays, is in excess of the MY 1992 benchmark. In contrast,
rates of support are set out in United States do mestic support legislati on and regulations, which

713 Article 1(a) and paragraphs 1 and 6 of Annex 3 of the Agreement on Agriculture.
714 Paragraph 2 of Annex 3 of the Agreement on Agriculture.
715 Paragraph 10 of Annex 3 of the Agreement on Agriculture provides as follows:

"10. Non-exempt direct payments : non-exempt direct payments which are dependent on a price
gap shall be calculated either using the gap between the fixed reference price and the applied
administered price multiplied by the quantity of production eligible to receive the administered price,
or using budgetary outlays."
716 Paragraph 12 of Annex 3 of the Agreement on Agriculture.
717 There is no allegation that any of the measures at issue constitute market price support.
718 In the supporting material relating to agricultural commitments in its Schedule, the United States
calculated deficiency payments using price gap methodology and all other relevant support using budgetary
outlays – see document G/AG/AGST/USA, reproduced in Exhibit BRA-191. In its notifications to the
Committee on Agriculture, the United States notified only deficiency payments for the 1995 marketing year as
"blue box" support using price gap methodology and all other support relevant to this dispute for the 1999-2001
marketing years using budgetary outlays – see document G/AG/N/USA/10 and G/AG/N/USA/43, reproduced in
Exhibits BRA-150 and BRA-47, respectively and G/AG/N/USA/51 for the 2000 and 2001 marketing years.

permits a Member to mount a rapid challenge and pe rhaps obtain panel findings before a crop year is
over.
719
7.557 The Panel notes that this is precisely the situation that applies to the assessment of compliance
with all domestic support commitments under the Agreement on Agriculture and, for that matter,
actionable subsidies obligations and non-violation complaints based on tariff concessions. There is no
reason to assume that the situation was intended to be different with respect to the additional
condition under Article 13(b)(ii) and (iii), particularly given that the text indicates that
implementation period support must be measured in terms of support that measures "grant", rather
than what was budgeted or estimated.
7.558 The United States argues that support under Article 13(b)(ii) should be measured in terms of a
rate of support expressed in cents per pound. This rate represents the level of support guaranteed by
the government to producers. When market pri ces exceed the guaranteed rate, the government makes
no payments. When market prices fall below the guaranteed rate, payments by the government
increase to maintain the gap between the prices and the guaranteed rate.
7.559 The Panel makes the following observations on the United States' rate of support
methodology:
(a) With respect to the MY 1992 benchmark:
(i) the target price for deficiency paymen ts was not in fact decided during the
1992 marketing year, for the reasons given above.
(b) With respect to implementation period support:
(i) a rate of support does not appear to capture the actual amounts granted or
provided by a government, rather than those authorized or appropriated in
its budget for that year;
(ii) a rate of support expressed in cents pe r pound is not expressed in monetary
terms, but in a combination of monetary and quantitative terms;
(iii) a rate of support is neither a budgetary outlay nor measured in terms of a
price gap;
(iv) the rate of support for marketing loan programme payments does not
include support provided under the other domestic support at issue, namely,
user marketing (step 2) payments, PFC, MLA, DP and CCP payments and
cottonseed payments;
(v) the rate of support for CCP payments takes into account DP payments, and
is only applicable under the FSRI Act of 2002. There was no rate of support
under the FAIR Act of 1996 for PFC and MLA payments. The rate of
support methodology is therefore unworkable for the 1999 through 2001
marketing years;
(vi) a second rate of support can be used to measure user marketing (step 2)
payments, but a comparison of the combination of two rates of support
across different years to determine whether one combination is in excess of

719 United States' response to Panel Question No. 33.

the other is only possible if they both trend in the same direction, or one
remains constant; and
(vii) no rate of support includes cottonseed payments, or crop insurance
payments, which can only be measured in terms of budgetary outlays, either
in total monetary value terms or on a per unit of production basis.
7.560 Consequently, the rate of support approach proposed by the United States does not represent
the MY 1992 benchmark and is incapable of measur ing the implementation period support. It is
therefore an inappropriate measurement methodolog y for the comparison under Article 13(b)(ii) in
this dispute.
(ii) Payments dependent on a price gap
7.561 The AMS permits either the use of a price gap methodology or budgetary outlays for non-
exempt direct payments dependent on a price gap.
720 Three types of support relevant to the
comparison fall into this category: (1) marketing loan programme payments, which form part of both
the MY 1992 benchmark and the implementation pe riod support, are dependent on the difference
between the loan rate and the adjusted world price; (2) deficiency payments, which form part of the
MY 1992 benchmark only, were also dependent on a price gap; a nd (3) CCP payments, which form
part of the implementation period support only, are dependent on a price gap but are also calculated in
respect of base acreage Therefore, the amount of CCP payments is calculated below at paragraph
7.582.
7.562 Marketing loan programme payments form pa rt of the measurement of support in the
benchmark and every year under review. There is no practical impediment to using either price gap
methodology or budgetary outlays to measure them. The difference is that the use of a price gap
filters out the effect of changes in market prices up to the loan rate on the calculation of this one
component of support. However, other compone nts of support have changed since the MY 1992
benchmark and within the implemen tation period so that they effectively involve a comparison of
payments under different programmes. Deficien cy payments were followed by PFC and MLA
payments under the 1996–2001 farm legislation an d DP and CCP payments under the FSRI Act of
2002. Of these later programmes, only CCP payments are dependent on a price gap, but the parties
have not suggested an appropriate methodology to calculate this support in terms of a price gap, so the
Panel considers it appropriate to use a methodology based on budgetary outlays to measure them. As
a result, the use of a price gap to measure defici ency payments, whilst possible, may not produce an
appropriate comparison with later measures, all of which are measured in terms of budgetary outlays.
The use of budgetary outlays for all but deficiency pa yments is also consistent with the United States'
notifications of its support to the WTO Committee on Agriculture for the purpose of domestic support
reduction commitments. 721 Therefore, the Panel for these reasons as well as those set out above,
considers it appropriate to use a methodology b ased on budgetary outlays for these two payments
which are dependent on a price gap. This does not imply any view as to whether price gap
methodology is inappropriate.
7.563 The parties agree on the amount of budgetary outlays for both marketing loan programme
payments722 and deficiency payments, 723 although the United States does not accept that this is the

720 Paragraph 10 of Annex 3 of the Agreement on Agriculture.
721 The Panel notes that although the notifications were made with respect to reduction commitments,
not Article 13(b)(ii), they also used AMS methodology. None of the adjustments to AMS methodology dictated
by the text of Article 13(b)(ii) affect the appropriateness of using either price gap or budgetary outlays..
722 Brazil's and the United States' respective respon ses to Panel Question No. 67, citing USDA and
other sources including, Exhibits BRA-4, BRA-55 and BRA-76. Updated information on the 2002 marketing
year is set out in the United States' response to Panel Question No. 196.

appropriate methodology. Marke ting loan programme payments cal culated using budgetary outlays
include storage payments and interest subsidies, whic h the Panel ruled within its terms of reference in
Section VII:B of this report. Accordingly, mark eting loan programme payments were valued as
follows: MY 1992: $866 million; MY 1999: $1,761 million; MY 2000: $636 million; MY 2001:
$2,609 million; and MY 2002: $897.8 million. Defi ciency payments for MY 1992 were valued at
$1,017.4 million.
7.564 The parties agree on the amount of $867 million for deficiency payments calculated using
price gap methodology consistent with the United States' notifications.
724 They include basic
deficiency payments of approximately $832 million plus 50/92 payments of $35 million calculated as
follows. The target price was 72.9 cents per pound and the fixed reference price for 1986-88 was 57.9
cents per pound, giving a price gap of 15 cents per pound. Production eligible for basic deficiency
payments was 5,544 million pounds (9.226 million acr es times the average programme yield of 601
pounds per acre). Production eligible for 50/92 payments was 254 million pounds (404 000 acres
times the average programme yield of 50/92 programme participants of 628 pounds per acre).725
7.565 The United States calculated an amount for mark eting loan programme payments using price
gap methodology. 726 This does not include storage payments and interest subsidies, in accordance
with paragraphs 8 and 10 of A nnex 3. It entered a zero figure for all crop years under review but
indicated that the price gap was always negative because the average adjust ed world price for 1986-
1988 was 53.65 cents per pound and thereby higher than the loan rate for each of the years in the
reference period.
727
7.566 Brazil objected to the use of price gap methodology for marketing loan programme payments
on the grounds that the United States has used and notified marketing loan programme payments (to
the WTO Committee on Agriculture) through a budge tary outlays methodology and that price gap
methodology would transform millions of dollars of payments to negative values.728
7.567 For the reasons given below, it is unnecessary for the purposes of this dispute for the Panel to
decide whether the price gap methodology is inappropriate.
(iii) Measures directed at agricultural processors
7.568 The AMS methodology provides that measures dir ected at agricultural processors shall be
included only to the extent that such measures benefit the producers of the basic agricultural
products.729 Two types of support at issue in this dispute are directed wholly or partly at processors:
user marketing (step 2) payments made to domestic users; and cottonseed payments which are made

723 USDA Fact Sheet for Upland Cotton, January 2003, reproduced in Exhibit BRA-4, referred to in
Brazil's first written submission, para. 144. Up to date figures for the 2002 marketing year are found in the
United States' response to Panel Question No. 196 and Exhibit BRA-373.
724 Brazil's and the United States' respective responses to Panel Question No. 198. In its response, and
its 27 August 2003 comments, the United States also suggested an alternative approach, but it is based on
eligible "acreage", rather than eligible "production".
725 See the United States' calculations including an ad justment factor as per its notification in the
United States rebuttal submission, para. 115, footnote 144, revised in its 27 August 2003 comments at para. 8,
footnote 14. See Exhibit US-39 entitled "USDA announces Final Compliance Figures for 1992 Acreage
Reduction Programme".
726 United States' rebuttal submission, para. 115 and footnotes 144 and 148.
727 See the United States' rebuttal submission, para. 116, footnote148. The Panel has calculated that,
using negative values, the marketing loan programme payments would be: MY 1992: $-84 million; MY 1999:
$-133 million; MY 2000: $-136million; MY 2001: $-162million and MY 2002: $-130million.
728 Brazil's 27 August comments, para. 10 and Brazil's 28 January 2004 comments on United States'
response to Panel Question No. 208.
729 Paragraph 7 of Annex 3.

to first handlers of the cottonseed crop, who are gi nners, and are obliged to share the payments with
producers to the extent that the revenue from the sale of the cottonseed was shared with the producer.
7.569 The United States agrees that user marketing (step 2) payments are support in favour of
agricultural producers730 and that cottonseed payments are "product-specific" support for cotton. 731 It
is possible that some part of these payments does not actually benefit producers, but it is unnecessary
for the purposes of this dispute to quantify the pr ecise amounts since the values of these payments do
not alter the potential for an excess over the MY 1992 benchmark, as explained below. The United
States' included the full amount of user marketing (s tep 2) payments (together with user marketing
(step 2) payments to exporters ) and the full amount of cottonseed payments in its calculations. 732
This is also consistent with its notifications of the full amounts to the WTO Committee on
Agriculture, for the purposes of its reduction commitments.733
7.570 The parties agree on the calculation of payments to user marketing (step 2) payments to
domestic users.734 The Panel notes that this data is gathered in terms of fiscal years, not marketing
years, which differ by two months for upland cotton. Nothing indicates that this materially affects the
result of the Panel's comparison. Accordingly, u ser marketing (Step 2) payments to domestic users
are as follows: MY 1992: $102.7 million; MY 1999: $165.8 million; MY 2000: $260 million;
MY 2001: $144.8 million; and MY 2002: $72.4 million.
7.571 The parties also agree on the calculation of cottonseed payments 735, although they do not
agree on whether they are within the Panel's terms of reference nor on whether any outside the Panel's
terms of reference should be incl uded in the measurement of support. 736 Accordingly, cottonseed
payments are as follows: MY 1999: $79 million; MY 2000: $184.7 million; and MY 2002:
$50 million.
(iv) Payments calculated in respect of base acreage
7.572 PFC, MLA, DP and CCP payments are calculated with respect to a recipient's "base acres".
The acreage actually planted to upland cotton or any other crop in the years in which payments are
made is referred to as "planted acres".737
7.573 Brazil initially submitted that implementation pe riod support included all payments under
these four programmes as indicated in a USDA fact sheet summary of the 2002 Commodity Loan and

730 United States' response to Panel Question No. 108.
731 United States' response to Panel Question No. 67 and its rebuttal submission , para. 109.
732 United States' response to Panel Question No. 67.
733 See, for example, documents G/AG/N/USA/10 and 43, reproduced in Exhibits BRA-150 and
BRA-47, respectively and G/AG/N/USA/51.
734 United States' response to Panel Question No. 104 and Brazil's rebuttal submission, para. 73,
footnote 172. The amounts of user marketing (Step 2) payments to exporters are also set out in the United
States' response to Panel Question No. 104.
735 The authorizing statutes are reproduced in Exhibits BRA-135, BRA-136, BRA-137 and BRA-138,
respectively. All but the statute authorizing cottonsee d payments for the 1999 cr op appropriated a specific
amount. The amount of payments for each crop, including the 1999 crop, is agreed: see Brazil's and the United
States' respective responses to Panel Question No. 17. See also Brazil's first written submission, para. 106.
736 The Panel ruled in Section VII:B that only those cottonseed payments for respect of the 2000 crop
are within its terms of reference, and in paragraph 7.53 6 of this Section VII:D that all cottonseed payments for
the 1999, 2000 and 2002 crops must be included in its measurement of support for the purposes of Article 13 of
the Agreement on Agriculture . Without prejudice to whether they were relevant, the United States, as well as
Brazil, included the cottonseed paymen ts for each crop in the calculation of support granted in the same
marketing year: see, for example, their respective resp onses to Panel Question No. 67. See also, United States'
rebuttal submission, para. 106 and USDA News Release: "USDA issues $ 50 million in Payments for 2002 Crop
Cottonseed Program", reproduced in Exhibit BRA-129,
737 See the description of measures in Section VII:C of this report.

Payment Program. The payments listed in that fact sheet represent all payments on upland cotton
base acreage.
738
7.574 Brazil then adjusted these calculations by dividing the total annual upland cotton planted
acreage by total upland cotton base acreage in e ach programme. It explained in notes to its
calculations that this adjustment was necessary because only the portion of upland cotton payments
under the programmes that actually benefits acres plan ted to upland cotton can be considered support
to upland cotton.739 It called this methodology the "14/16ths methodology". 740 It considered that this
was a "reasonable proxy" since actual data collect ed by the United States concerning the amount of
payments to upland cotton producers was not ava ilable and cited various factors to support an
assumption that these revised figures were appropriate. 741 It set out a detailed summary of the
evidence available at that time which, it argued, sugg ested that the amount of payments could best be
calculated by finding that United States upland cotton producers received those payments using
upland cotton base acreage.742
7.575 Brazil also cited data generated by the Envi ronmental Working Group ("EWG") to support its
assumption, which had matched recipients of marketing loan programme payments (who must harvest
some quantity of upland cotton to be eligible for payment) to recipients of PFC, MLA, DP and CCP
payments.743 The EWG database is publicly available on the internet and shows dollar amounts of
payments received by individuals and corporations calculated in respect of base acreage for each crop
under these programmes.
7.576 The United States submits that it would be erroneous to attribute to upland cotton or upland
cotton producers all payments calculated accordi ng to upland cotton base acreage due to the
production flexibility which allows reci pients not to produce upland cotton. 744 It disputes Brazil's
14/16ths methodology and submitted that Brazil ha d provided no evidence to support its assumptions
that every acre of upland cotton was planted by a holder of upland cotton base acreage, and that no
such base acreage holder planted more up land cotton than his or her base acres.
745 The United States
declined to suggest an alternative approach to pa yments made in respect of base acreage because the
issue of what payments may be attributed to upland cotton production was fundamentally part of
Brazil's burden to present evidence substantiating th e amount of the subsidy that it is challenging. 746
It also identified alleged shortcomings in the EWG data.747

738 Brazil's first written submission, para. 148, citing USDA fact sheet, reproduced in Exhibit BRA-4.
739 Brazil's responses to Panel Question No. 60, notes 2-5 to table.
740 This name reflects the fact that, according to da ta available to Brazil at that time, in the 2002
marketing year, total upland cotton planted acreage was over 14 million acres and total upland cotton base
acreage was over 16 million acres. The actual proportions of planted acres to base acres are 88.7 per cent, 94.3
per cent, 95.1 per cent and 84.98 per cent in each of the 1999 through 2002 marketing years (under the PFC and
MLA programmes), and 73 per cent in the 2002 marketing year (under the DP and CCP programmes). See
Brazil's response to Panel Question No. 67, notes to table in para. 97 and footnote 58 to its further rebuttal
submission.
741 The factors included the geographical spread of crops and relative costs of production of different
covered commodities: see Brazil's response to Panel Question No. 125(2)(a), (2)(c), (3) and (8).
742 Brazil's closing statement at the resumed session of the first substantive meeting, para. 8, and
Annex 1.
743 Brazil's 28 January 2004 comment on United States' response to Panel Question No. 205. See also
statement of Christopher Campbell of EWG and EWG Dtabae table of results, reproduced in Exhibits BRA-316
and BRA-317, respectively.
744 United States' response to Panel Question No. 67bis and United States' further submission, para. 75
745 United States' response to Panel Question No. 125(e).
746 United States' response to Panel Question No. 125(e).
747 United States' response to Panel Questions Nos. 195 and 205.

7.577 After obtaining the planting data by category, Brazil submitted that the Panel should apply
Brazil's methodology to this data 748, and that it no longer relied on its 14/16ths methodology. 749 It
also submitted calculations based on two versi ons of the methodology in Annex IV of the SCM
Agreement.
7.578 After providing the planting data, the United States indicated that for the marketing years
before 2002 the data was based on crop reports that were not generally required. The United States
argued that Brazil's methodology is invented and lacks any basis in any WTO agreement or in
economic logic. Brazil's methodology inappropri ately conflates product-specific and non-product-
specific support. SCM Agreement concepts of subsidy, benefit and subsidized product are not used in
nor are directly applicable to Article 13. Howeve r, internal inconsistencies in the methodology have
implications for both the serious prejudice claim and for the interpretation of Article 13 since, on
Brazil's approach, it is necessary to identify the subs idy benefit in order to determine the "support to"
upland cotton. There is no basis for attributing only part of a payment to some crops rather than
across all production on a farm.
750 The United States submits that the Panel should not have to adopt
a reasonable methodology to allocate support under Ar ticle 13 because the drafters would not have
left the methodology undefined, and because Arti cle 13 itself provides a methodology to calculate
support to a specific commodity, namely product-specific support. 751 The United States rejected
Brazil's calculations based on Annex IV of the SCM Agreement because, in its view, Brazil's version
was inconsistent with Annex IV a nd Brazil's calculations of the Unites States' version did not reflect
the United States' interpretation of Annex IV.752
7.579 The Panel recalls its finding that all non-green box support measures that clearly or explicitly
define a commodity as one to which they bestow or confer support must be included in the calculation
of implementation period support. In this case, the relevant commodity is upland cotton. The Panel's
task is not to measure only product-specific support.
7.580 The Panel calculates these payments, like other s upport directed at producers, as specified in
the domestic support measures themselves. The m easures provide for payments to recipients who
have enrolled cropland in the programme on the basis of upland cotton production, at a rate specific to
upland cotton, according to a yield specific to upland cotton. This methodology is used by USDA and
was the original approach submitted by Brazil. It includes all payments calculated with respect to
upland cotton base acres.
7.581 The Panel will measure these payments in accordance with the principles of AMS
methodology set out in Annex 3 to the Agreement on Agriculture . PFC, MLA and DP payments are
non-exempt direct payments based on factors other than price. The Panel therefore uses budgetary
outlays to measure them in accordance with paragr aph 12 of Annex 3. For the reasons given in
paragraph 7.562 above, the Panel will use budgetary outlays to measure CCP payments as well.
7.582 The parties agree on the total amount of payments calculated in respect of upland cotton base
acreage, although they do not agree that all such payments are support to upland cotton. 753 The total
amounts are as follows:

748 Set out in the Attachment at the end of this Section.
750 United States' comments on Brazil's response to Question No. 258, its 11 February 2004 comments
on US data, generally and its 3 March 2004 comments, paras. 37-44.
752 United States' 15 March 2004 comments, paras. 30-36 and its 3 March 2004 comments,
paras. 45-56.
753 USDA Fact Sheet on Upland Cotton, reproduced in Exhibit BRA-4 and the United States' response
to Panel Question No. 196 for the 2002 marketing year.

Table 1: Payments calculated in respect of upland cotton base acreage

$ million MY1999 MY2000 MY2001 MY2002
PFC payments 616 574.9 473.5 436
MLA payments 613 612 654
DP payments 181
CCP payments 1309

7.583 The Panel notes that the evidence in this dispute shows a strongly positive relationship
between recipients who currently plant upland cotto n and those whose payments are calculated with
respect to upland cotton base acres and whose paymen ts are therefore calculated at the upland cotton-
specific payment rate. 754 The Panel makes certain factual findi ngs with respect to that relationship
and also with respect to Brazil's allocation of an amount of the total payments under these
programmes to upland cotton in the Attachment to Section VII:D.
(v) Payments calculated with respect to insurance
7.584 Brazil submitted official Federal Crop Insuran ce Corporation ("FCIC") calculations of the
amounts of crop insurance payments borne by the FCIC with respect to insurance offered relating to
upland cotton.755 The United States does not agree that they are relevant but does not contest their
accuracy.756 The Panel will therefore rely on the FCIC calculations. Accordingly, the amounts are as
follows: MY 1992: $26.6 million; MY 1999: $169.6 million; MY 2000: $161.7 million; MY
2001: $262.9 million; and MY 2002: $194.1 million.
(e) Comparison of support
(i) Reference period
i Main arguments of the parties
7.585 Brazil challenges domestic support payments for the production and use of upland cotton,
which were and continue to be made between the 1999 marketing year to the present and those
scheduled to be made from the present through th e 2007 marketing year pursuant to the statutes and
regulations listed in its request for establishment of a panel. It also challenges legal instruments under
which these payments are made "as such". 757
7.586 Brazil submits that if measures fail to meet one of the relevant conditions in Article 13 in any
year – be it the current year or an earlier year during the implementation period – those measures can
no longer be considered to "fully conform" or to not "grant support" "in excess of" the MY 1992
benchmark. Consequently, those measures are not exempt from actions.
758
7.587 The United States is of the view that failure by a Memb er to comply in a given year with
either the chapeau of Article 13(b) or the proviso in subparagraph (ii) of Ar ticle 13(b) would only lift

754 This does not imply any view on whether such an allocation of support is appropriate under the
Agreement on Agriculture.
755 See FCIC Summary of Business Report as of 16 June 2003, reproduced in Exhibit BRA-57 and
referred to in Brazil's response to Pane l Question No. 67, footnote 8, and with respect to the 2002 crop year, as
of 8 December 2003, reproduced in Exhibit BRA-374.
756 The United States does contest the value of crop insurance net indemnities with respect to upland
cotton in the 2002 marketing year. See Brazil's response to Panel Question No. 196, footnote 13 and the United
States' 28 January 2004 comments on Panel Question No. 196, para. 20, footnote 9.
757 Brazil's response to Panel Question No. 19.
758 Brazil's response to Panel Question No. 35.

the exemption from action for those measures for the year of that breach. Measures, i.e. subsidies, 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). Because the fundamental commitment under Article 6 is to
limit domestic support as measured by the Current Total AMS to a Member's final bound
commitment level, and that commitment is judged on a year-by-year basis, 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.
759
7.588 The United States goes on to argue that if the Pea ce Clause is breached in any particular year,
a Member could bring an action against such measure, i.e. subsidy, but only for the year 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 meas ures grant is in excess of that decided 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 subsid ies for the year in which the Peace Clause were
breached would not be exempt from actions.
760
ii Main arguments of the third parties
7.589 Argentina contends that excess support granted during any one of the years of the period of
implementation suffices to cancel the protection provided by the Peace Clause. A year-on-year
comparison cannot be inferred from Article 13 or from its context. Otherwise, at the beginning of
each marketing year the Member that had exceeded th e level of support in the previous year would be
covered by the Peace Clause once again and their measures would be exempt from any claims. 761 In
Argentina's view, the failure by a Member to comp ly in a given year with either the chapeau of
Article 13(b) or the proviso in subparagraph (ii) of Article 13(b) results in the loss of the protection
granted by the Peace Clause.762
7.590 China is of the view that a Member's failure to comply in a given year with the chapeau of
Article 13(b) will not impact its entitlement to benefit in an earlier or a later year from exemption
from actions. The chapeau requires that domestic support measures conform fully to provisions of
Article 6. Articles 6.1 and 6.3 in turn provide that all non-green box domestic support measures of a
Member are considered to be in compliance with Article 6 if the Member's "Current Total AMS does
not exceed the corresponding annual or final bound comm itment level specified in Part IV of the
Member's Schedule". The word "exceed" requi res a comparison. The words "current",
"corresponding" and "annual" indicate that the comp arison is to be made on an annual basis between
the level of support actually provided in a given year and the annual bound commitment level in the
same year as indicated in the Member's Schedule. A Member's actual level of support varies from
year to year, so does a Member's annual bound commi tment level. Therefore, a factual comparison
between the two in a given year shall not have any bearing on a comparison of different support levels
in an earlier or later year.
763
7.591 The European Communities agrees with the United States th at Brazil's argument that any
breach of the 1992 level during the nine-year im plementation period removes the protection of
Article 13 is incorrect. The present tense of the phrase "do not grant support" makes this clear. The
comparison for the purpose of Article 13(b) must be between the level of support decided in the 1992
marketing year and that granted by virtue of th e measures being challenged. This would typically
mean the most recent marketing year.
764 The European Communities considers that Article 13(b)

759 United States' response to Panel Question No. 35.
760 United States' response to Panel Question No. 35.
761 Argentina's response to Panel third party Question No. 12.
762 Argentina's response to Panel third party Question No. 13.
763 China's response to Panel third party Question No. 13.
764 European Communities' oral statement at the first session of the first substantive meeting, para. 13.

permits, but does not require, a year-on-year comp arison, because support is generally expressed in
annual amounts. In order to benefit from the protect ion of Article 13, a measure must conform to the
provisions of Article 6 and must not "grant suppor t" in excess of that decided in during the 1992
marketing year. The European Communities consider s that the Panel has some discretion in choosing
a specific period, although it is clear it must be as close as possible to the time of the dispute.
However, since the Panel must consider the support granted it must choose a period for which data is
complete. Given Article 1(i) of the Agreement on Agriculture , the period chosen may well be based
on the calendar, financial or marketing year of the Member complained against.
765
7.592 New Zealand argues that Article 13(b)(ii) and (iii) require a comparison with 1992 of any
year in which injury, nullification or impairment or serious prejudice is alleged to have occurred. 766
New Zealand is of the view that the nature of non- compliance at issue may be such that it does impact
on a Member's entitlement to benefit in an earli er or later year from the exemption from action
provided by Article 13(b) on a case-by-case basis.767
iii Evaluation by the Panel
7.593 The Panel notes that there is nothing in the text of the Agreement on Agriculture or any other
covered agreement that indicates the length of the reference period for the comparison under
Article 13(b)(ii). However, in this dispute, the decisions on support taken during the 1992 marketing
year related to one year only. Therefore, a meaningful comparison of the implementation period
support requires it to be compared by year as well.
7.594 It is not necessary for the purposes of this dispute to decide how many years during the
implementation period must show an excess over th e MY 1992 benchmark for measures not to be
exempt from actions because the comparison in each y ear for which there is evidence shows the same
result. The Panel has already found that the chapeau of paragraph (b ) and subparagraph (ii) share the
same subject.
768 It suffices for the purposes of this dispute for the Panel to add that, in view of that
finding, measures which grant support during the implementation period in excess of the MY 1992
benchmark fail to satisfy Article 13(b), and it is not simply that amount of support in excess of the
MY 1992 benchmark which is exposed to actions under Articles 5 and 6 of the SCM Agreement and
paragraph 1 of Article XVI of the GATT 1994. Neither party has suggested otherwise. This does not
imply any view as to whether the grant of support in any one year in excess of the MY 1992
benchmark would result in that Member's implementation period support for other years failing to
comply with Article 13(b).
7.595 In any case, the issue of which measures do or do not satisfy the conditions of Article 13 and
which are or are not exempt from actions concerns the actions, not the substance of the allegations
raised in connection with those actions. Therefore, if a measure is not exempt from actions based on
Articles 5 and 6 of the SCM Agreement and paragraph 1 of Article XVI of the GATT 1994, there is no
bar to a claim that the measure th reatens to cause serious prejudice at some future time. It is not
necessary to prove that the measures are not exempt at that future time.
(ii) Table showing comparison
769
7.596 In light of the foregoing analysis and meas urement of support for each of the 1992, 1999,
2000, 2001 and 2002 marketing years, the Panel tabulates the MY 1992 benchmark and
implementation period support using budgetary outlays to permit a comparison as follows:

765 European Communities' response to Panel third party Question No. 12.
766 New Zealand's response to Panel third party Question No. 12.
767 New Zealand's response to Panel third party Question No. 13.
768 See paragraph 7.471 above.
769 See Brazil's and the United States' respective responses to Panel Question No. 67.

Table 2: Comparison of support in accordance with Article 13(b)(ii)

$ million MY1992 MY1999 MY2000 MY2001 MY2002
Marketing loan programme 866 1761 636 2609 897.8
User marketing (step 2) 102.7 165.8 260 144.8 72.4
Deficiency payments 1017.4 0 0 0 0
PFC payments 0 616 574.9 473.5 436
MLA payments 0 613 612 654 0
DP payments 0 0 0 0 181
CCP payments 0 0 0 0 1309
Crop insurance payments 26.6 169.6 161.7 262.9 194.1
Cottonseed payments 0 79 184.7 0 50
TOTAL 2012.7 3404.4 2429.3 4144.2 3140.3

7.597 The comparison shows that implementation period support exceeds the MY 1992 benchmark
in every year under review. Implementation pe riod support also exceeds the MY 1992 benchmark in
every year under review where (1) the marketing lo an programme payments and deficiency payments
are both calculated using a price gap; and (2) wh ere the marketing loan programme payments are
calculated using a price gap but deficiency payments are calculated using budgetary outlays in order
to provide a more appropriate comparison with the measures which succeeded them. This is the case
whether marketing loan programme payments: (a) are shown as zero; or (b) are calculated using
negative values.
770
7.598 Therefore, taking into account all the evidence above, the Panel considers that Brazil has
discharged its burden to show that the United Stat es domestic support measures at issue grant support
to a specific commodity in excess of that decided during the 1992 marketing year.
(iii) Rate of support771
7.599 The Panel has observed that a rate of support methodology is unable to measure
implementation period support.772 The Panel has also found that the rate of support of 72.9 cents per
pound was not in fact decided during the 1992 marke ting year and therefore cannot constitute the MY
1992 benchmark.773 The United States has not submitted that any other rate of support constituted the
MY 1992 benchmark. Therefore, this methodology is inappropriate for the comparison under
Article 13(b)(ii).
7.600 The only rate of support that appears to have been decided during the 1992 marketing year
was the rate of 52.35 cents per pound for the mark eting loan programme, subject to the Acreage
Reduction Percentage ("A.R.P.") of 7.5 per cent. 774 Neither party submitted that this was an

770 See calculations under the "measurement of support", above.
771 United States' rebuttal submission, paras. 121-126.
772 See paragraph 7.560 above.
773 See paragraph 7.449 above.
774 The A.R.P. programme obliged farmers to idle a set portion of their base acreage of upland cotton
and other specific commodities as a condition of eligib ility for marketing loans and deficiency payments. The
goal was to reduce supplies, thereby raising market prices. It reduced the amount of production and hence the
amount of support guaranteed to upland cotton producers by the loan rate, and reduced the amount of acres
eligible for deficiency payments. A.R.P. can be cont rasted with set-aside programmes which based reductions
on current year plantings and did not require farmers to reduce their plantings of specific crops. The programme
was not reauthorized in the FAIR Act of 1996. See USDA Economic Research Service "Commodity Program
Entitlements: Deficiency Payments" (May 1993), reproduced in Exhibit BRA-417 and statement of
Dr. Sumner, para. 8 in Exhibit BRA-105.

appropriate rate of support to measure the MY 1992 benchmark. However, in order to pursue the rate
of support approach to its logical conclusion, the Pa nel finds that the loan rate in each of the 1999-
2002 marketing years was 51.92 cents per pound
775, and under the FSRI Act of 2002 in the 2002
marketing year was 52 cents per pound 776 (and the target price for CCP payments in the 2002
marketing year was 72.4 cents per pound). None of th ese rates were subject to an A.R.P. or any other
land idling requirements. Therefore, these rates of 51.92 and 52 cents per pound, free of reductions,
granted support in excess of 52.35 cents per pound subject to an A.R.P. reduction of 7.5 per cent.
7.601 Further, the target price for deficiency pa yments of 72.9 cents per pound, which was not
decided during the 1992 marketing year, did not re present "support decided" either. First, support
guaranteed by this target price was subject to an A.R.P. of 10 per cent for the 1992 crop, which
reduced the amount of acres eligible for paymen ts, as well as "normal flex acres" conditions,
according to which deficiency payments were not paid for 15 per cent of base acreage. 777 These were
decisions by the United States government 778 creating mandatory conditions that reduced the
guaranteed revenue to producers delivered by the targ et price. The target price adjusted for A.R.P.
and normal flex acres, according to United States cal culations, produces a rate of support decided of
67.7625 cents per pound. 779 Second, this adjusted target pr ice does not capture user marketing
(step 2) payments, which the United States accepts are part of the MY 1992 benchmark. 780 Prior to
the 2002 marketing year, these payments were tri ggered when a certain quote exceeded another by

775 The range of 50 cents to 51.92 cents per pound was established by s.132(c)(2) of the FAIR Act of
1996. See USDA Agricultural Outlook, November 2003, reproduced in BRA-394.
776 Section 1202(a)(6) of the FSRI Act of 2002.
777 The Omnibus Budget Reconciliation Act of 1990 "made 15 per cent of each program crop acreage
base ineligible for deficiency payments. This change was intended to reduce program spending and to increase
producers' planting flexibility." - see USDA Economic Research Service "Commodity Program Entitlements:
Deficiency Payments" (May 1993), reproduced in Exhibit BRA-417. See al so the statement of Dr. Sumner,
paras. 10 and 12, in Exhibit BRA-105.
778 There were also eligibility crite ria that reduced the amount of upland cotton receiving the support
which the United States argues should not be taken into account because they were decisions by producers, not
the United States government. However, it also argues that the A.R.P. and norm al flex acres should be
disregarded because adjusting the rate of support for these would assume unrealistically that producers would
have produced on 100 per cent of base acres. Paradox ically, those are decisions by producers not the United
States government and, on the United States' approach, such decisions should not be taken into account in using
the rate of support as the benchmark. See the United States' rebuttal submission, para. 126.
779 Maximum deficiency payments rate (20.55 cents per pound) reduced by 10 per cent A.R.P. and 15
per cent normal flex acres, yields an adjusted maximum deficiency pa yment rate of 15.4125 cents per pound.
This rate, plus the marketing loan rate of 52.35 cents per pound, gives guaranteed producer revenue of 67.7625
cents per pound. If the maximum deficiency payment rate were reduced by 10 per cent A.R.P. only, it would
yield an adjusted maximum deficiency payment rate of 18.495 cents per pound. This rate, plus the marketing
loan rate, gives guaranteed producer revenue of 70.845 cents per pound. See the United States' rebuttal
submission, para. 126, and "Calculating the Per-Unit Rate of Support" by Dr. Glauber, reproduced in Exhibit
US-24. The Panel takes note of Dr. Glauber's observation that in 1992 producers could plant other crops on
their flex acres (Exhibit US-24, p.1). This did not affect the mandatory idling of ten per cent of programme
base. Further, the extent to which producers chose to exercise that flexibility was not a decision of the United
States government which, consistent with the United St ates' approach, should not be taken into account in
calculating the rate of support decided for upland cotton producers. The Panel also takes note of Dr. Glauber's
statement that "[i]f a significant proportion of the aba ndoned area were declared as idled acreage for program
reporting purposes, this would imply that the amount of upland cotton eligible for marketing loans in 1992 was
close to 100 per cent" (Exhibit US-24, p.2). This is sp eculation that, in the six to eight week period between
survey estimates and programme reports, almost 2 million ab andoned acres were reported as idled. There is no
evidence before the Panel that this possibility was anything but remote.
780 The United States submits that it also decided to provide support in the form of user marketing
(Step 2) payments in 1992 under the FACT Act of 1990: see United States' first written submission, para. 104.

more than 1.25 cents per pound, and payments were made equal to the difference between the two
quotes minus the 1.25 per cents per pound threshold.781
7.602 The corresponding rates of support during the implementation period exceed both the
adjusted target price and the user marketing (ste p 2) support. No meaningful comparison with
implementation period support is possible for th e 1999, 2000 and 2001 marketing years because there
was no target price in those years. However, in the 2002 marketing year, there was a target price for
CCP payments of 72.4 cents per pound, but not subject to A.R.P. or any set aside requirements. This
exceeds the adjusted target price for deficiency payments of 67.76 25 cents per pound. In the 2002
marketing year, user marketing (step 2) payments c onditions have remained basically constant but are
not subject to the 1.25 cents per pound threshold. This exceeds support guaranteed under the user
marketing (step 2) programme in the 1992 marketi ng year. Therefore, implementation period support
in the 2002 marketing year exceeds the MY 1992 be nchmark even on the approach proposed by the
United States. In the alternative, to the extent that differences between the programmes in the 1992
and 2002 marketing years prevent a meaningful co mparison, the approach proposed by the United
States is unworkable in all years under review.
7.603 The United States commented that the CCP target price ceases to be paid when the farm price
rises about 65.73 cents per pound. 782 It is true that CCP payments cease to be paid at that price
because DP payments make up the difference to 72 .4 cents per pound, but the guaranteed level of
support to producers with upland cotton base acr es remains 72.4 cents per pound, calculated with
respect to base acres and yields.
7.604 Brazil argued that the rate of support in the MY 1992 benchmark should be adjusted for the
limitation that deficiency payments were made onl y on 85 per cent of base acres. However, this is
also a programme feature of PFC, MLA, DP and CC P payments, and does not affect the comparison
in terms of a rate of support.783
7.605 Brazil argued that the Panel should also take in to account changed eligibility requirements.
Marketing loan programme payments in the 1996 to 2002 marketing years were only available to
cropland enrolled in the PFC programme (estimated by Brazil at 97 per cent 784) but that restriction
was removed in the FSRI Act of 2002 so that from the 2002 marketing year 100 per cent of United
States production of upland cotton was eligible to receive marketing loan benefits.
785 Brazil also
argued that the Panel should take into account opt ional land idling features, including optional flex
acres and the 50/92 option. 786 In light of our findings, it is not necessary to decide whether these
decisions on participation by producers and exerci se of options are properly part of the MY 1992
benchmark support.787

781 See the description of measures in Section VII:C of this report. The importance of this change is
illustrated by the fact that during MY 2001, Step 2 paymen ts were zero during 15 weeks but, after the abolition
of the threshold, in MY 2002 they were zero during only fi ve weeks. See the weekly step 2 certificate values in
Exhibits BRA-350.
782 United States' further rebuttal submission, para. 91.
783 See statement of Dr. Sumner, para. 17, in Exhibit BRA-105.
784 See Brazil's oral statement at the first session of the first substantive meeting, statement of Dr.
Sumner, Annex 2, p.4.
785 Section 1201(b) of the FSRI Act of 2002, reproduced in Exhibits BRA-29 and US-1.
786 See 7 CFR 1427.4(a)(3) and 7 CFR 1413 (1992 edition), reproduced in Exhibit US-3. Brazil's
estimate of eligible production is set out in Brazil's oral statement at the first session of the first substantive
meeting, statement of Dr. Sumner, Annex 2, p.3.
787 See statement of Dr. Sumner, pages 2-7, in An nex 2 to Exhibit BRA-105. See also Brazil's oral
statement at the first session of the first substantive meeting, para. 36, in Exhibit BRA-103 and Brazil's
22 August comments on United States' response to Panel Question No. 57.

7.606 The United States argued that the adjusted rate of support approach would not allow it to
know ex ante what its obligations are under Article 13(b)(ii) . This may not be factually accurate as
the United States support decided during the 1992 marketing year for upland cotton was decided and
provided before the entry into force of the Agreement on Agriculture: the deficiency payments target
price, marketing loan rate, user marketing (ste p 2) payments formula and mandatory land idling
requirements for 1992 and 1993 were all decided befo re the end of the Uruguay Round. In any event,
the drafters chose to require Members to sche dule precise AMS reduction commitments but did not
choose to specify the MY 1992 benchmark, either in Members' schedules, notifications to the WTO
Committee on Agriculture or in any negotiating docum ent which has been submitted to the Panel.
There is no reason to find that they considered ex ante precision critical to the interpretation of the
additional condition in Article 13(b )(ii). This is not at all unusua l. Members have differing views
about the interpretation of many obligations in the covered agreements which can be resolved through
consultations and resort to the WTO dispute settlement system.
7.607 For these reasons, the Panel considers that, even accepting the United States' rate of support
approach to the comparison under Article 13(b)( ii), United States domestic support measures grant
support to a specific commodity in excess of that decided during the 1992 marketing year. In light of
this, and the Panel's rejection of the United States' interpretation of Article 13(b)(ii), the United States
has not presented sufficient evid ence and arguments to show th at its domestic support measures
satisfy the conditions in Article 13(b). This is w ithout prejudice to the Panel's view that Brazil bears
the initial burden of proving that they do not sa tisfy those conditions, for the reasons set out in
Section VII:C of this report.
(f) Conclusion regarding Article 13(b)
7.608 In light of the above findings, the Panel c oncludes that the United States domestic support
measures listed in paragraph 7.1107 grant support to a specific commodity in excess of that decided
during the 1992 marketing year and that, therefore, they are not exempt from actions based on
paragraph 1 of Article XVI of the GATT 1994 or Articles 5 and 6 of the SCM Agreement.
(g) Brazil's requests that the Panel draw adverse inferences
7.609 The procedural record of the Panel's requests for information pursuant to Article 13.1 of the
DSU is set out in Section VII:A of this report. The Panel indicated in its request for information dated
12 January 2004 and again in its supplementary re quest dated 3 February 2004 that a refusal to
provide the information as requested without an adeq uate explanation may lead to adverse inferences
being drawn. The United States provided the inform ation requested in response to the supplementary
request for information on 3 March 2004.
7.610 On 28 January 2004, Brazil requested the Panel to draw the following adverse inferences:
(1) that its methodology
788 for allocating PFC, MLA, DP and CCP payments to current producers of
upland cotton for the 1999 through 2002 marketi ng years using United States-controlled data would
have resulted in higher payments than those estimated by Brazil's 14/16 th methodology; (2) that the
application of the United States methodology for allocating PFC, MLA, DP and CCP payments to
current producers of upland cotton for the 1999 through 2002 marketing years using United States-
controlled data would have resulted in higher payments than those estimated by Brazil's 14/16
th
methodology; and (3) that the information would have been detrimental to the United States

788 See Brazil's response to Panel Question No. 258. See Brazil's earlier comments on this issue in its
response to Panel Question, No. 125 (5) and further rebuttal submission, para. 49 and footnote 57.

arguments that PFC, MLA, DP and CCP payments ar e not support to cotton within the meaning of
Article 13(b)(ii), or alternatively, "non-product-specific support".789
7.611 Brazil argues that in light of th e Appellate Body's findings in Canada – Aircraft and US –
Wheat Gluten regarding the legal basis for drawing adverse inferences , the following facts support the
Panel drawing the three aforementioned adverse in ferences: (1) the United States was aware of: (a)
Brazil's latest estimates of its 14/16ths methodology 790; (b) the results of the EWG database
tabulations; and (c) it had access to all farm-specifi c data; (2) the United States was fully capable of
calculating the amount of payments allocable to cu rrent United States producers of upland cotton; (3)
the consistent misleading information provided by the United States concerning its possession of data
regarding acreage and payment information for c ontract payments; and (4) the refusal of the
United States to provide information regarding alle ged "decoupled" contract payments paid to current
upland cotton producers. 791 Brazil also approvingly cites Argentina – Textiles and Apparel , where it
asserts that the Panel used the b est information available when th e complainant refused to provide
documents within its exclusive control. 792 According to Brazil, appl ying these concepts to the
allocation issues involved in the Peace Clause portion of this dispute indicates that the Panel has more
than sufficient evidence in the r ecord to support a reasonable estimate of the amount of contract
payment support provided to upland cotton in the 1999-2002 marketing years.793
7.612 Brazil further submits that the Panel should bear in mind that if a Member can easily block a
panel's request for information without any con sequences, then it will effectively undermine and
circumvent WTO disciplines. Brazil also argues that any adverse inferences drawn by the Panel
become part of the evidence on which the Panel must make an objective assessment of the facts
pursuant to Article 11 of the DSU.794
7.613 The United States responds that there is no basis for an "inference" of any kind, adverse or
otherwise, regarding its non-disclos ure of farm-specific planting information in the format requested
by the Panel because the United States did not have authority to provide that data as requested and
because it had provided data that would permit the Panel to assess "total" payments to farms planting
upland cotton, which the United States interpreted to include payments in respect of non-upland
cotton base acres as well.795
7.614 The United States submits that under Article 11 of the DSU the Panel cannot make claims for
a party, nor develop evidence for a party. The Appellate Body explained in Japan – Agricultural
Products II that it is for the complaining party to bri ng forward sufficient evidence and arguments to
carry its burden of establishing a prima facie case.796
7.615 On 13 February 2004, Brazil submitted that if the United States provided the data requested
in the Panel's supplementary request pursuant to Article 13.1 of the DSU, most of its comments on

789 Brazil's 28 January 2004 comments and requests regarding data provided by the United States on
18/19 December 2003, paras. 57 and 108.
790 Brazil stated after receiving the data submitted by the United States on 3 March 2004 that it would
no longer be appropriate to rely on its 14/16ths methodology in view of that data. See Brazil's 10 March 2004
comments, para. 3.
791 Brazil's 28 January 2004 comments and requests regarding data provided by the United States on
18/19 December 2003, paras. 58-64.
792 Brazil's 28 January 2004 comments to the United States' response to Panel Question No. 256,
para. 234.
793 Brazil's 28 January 2004 comments to the United States' response to Panel Question No. 256,
794 Brazil's 28 January 2004 comments and requests regarding data provided by the United States on
18/19 December 2003, paras. 65-66.
795 United States' letter to the Panel dated 20 January 2004, p.3.
796 United States' response to Panel Question No. 256.

28 January 2004 would be rendered moot. The purpose of those comments was to demonstrate the
inadequacy of the United States' data production, to request the drawing of adverse inferences and, in
the absence of the actual data, to supply the inadequate summary data.
797
7.616 On 3 March 2004, the United States provided data in response to the Panel's supplementary
request.
7.617 On 10 March 2004, Brazil argued that the data produced by the United States was
incomplete, for certain specific reasons. It request ed the Panel to rely on the calculations which
Brazil made based on that data, as any shortcomi ng in these results stemmed from the United States'
refusal to produce farm-specific data as requested. The "refusal" of the United States to produce
complete data would permit the Panel to draw the a dverse inferences that this information would have
shown even higher payments being allocated to upland cotton.798
7.618 The United States submits that the information which it provided was not incomplete but
complied with the terms of the Panel's supplementa ry request for information, by including farms
with no upland cotton planted acres and not includi ng contract yield and pa yment units information
and payments to producers (not farms) with upland cotton plantings. 799 It notes that Brazil considers
the data which the United States provided as "the b est information available before the Panel", and
that Brazil had also stated that the United Stat es had produced "complete summary base and complete
summary planted data covering all crops for which data was requested by the Panel and all farms
covered by the Panel's request". Therefore, a ccording to the United States, Brazil has implicitly
conceded that there is no basis to draw adverse inferences.800
7.619 The Panel recalls that after the first session of the first substantive meeting, we asked the
United States in writing to state the annual amount granted by the United States government in each
of the 1999 through 2002 marketing years to Unite d States upland cotton producers under each of the
PFC, MLA, DP and CCP programmes ("Question 67 bis").801
7.620 The United States stated that it consulted w ith the USDA, including personnel from the Farm
Services Agency, in preparing its response to the Panel's question. 802 It provided a lengthy written
response in which it stated that "[t]he United St ates does not maintain and cannot calculate this
information".803 The United States explained that it tracked total expenditures with respect to base
acres but that it is not possible to derive from th ese payments whether the payment is being received
by an upland cotton producer.804
7.621 The USDA Farm Services Agency maintains detailed information tracked by individual farms
under these programmes, including payment, base acres and planting information. Planting
information is not publicly available. The Unite d States did not mention that the Farm Services
Agency tracks planting information, as well as total e xpenditures, on a farm-specific basis. It did not
mention that its earlier response was dependent upon a definition of "producer" that excludes a person
who plants but does not harvest.
7.622 At the resumed session of the first substantive meeting, the Panel orally asked the United
States whether it also had information available on production or planted acreage. The head of the
United States delegation sought and received clarifica tion that the Panel referred to how much of the

797 Brazil's letter dated 13 February 2004, page 5.
798 Brazil's 10 March 2004 comments, para. 10, footnote 14.
799 United States' 15 March 2004 comments, paras. 17-20.
801 See the United States' response to Panel Question No. 67 bis.
802 See the United States' response to Panel Question No. 195.
803 Panel Question No. 67 bis and the United States' response.
804 See the United States' response to Panel Question No. 67 bis.

payment was received by the recipient who also produces cotton. He then replied that this
information was not available. The next day, the head of the United States delegation modified his
response and informed the Panel orally that th ere was a mandatory reporting requirement under
section 1105(c) of the FSRI Act of 2002, which generally requires recipients to report the uses of the
cropland. He did not mention detailed planting information maintained in respect of previous years.
7.623 At the resumed session of the first substantive meeting, the Panel asked the United States in
writing whether the acreage report requirement pursu ant to the FSRI Act of 2002 indicates or assists
in determining the number or proportion of acres of upland cotton planted on upland cotton base acres
and whether a similar reporting requirement exis ted for upland cotton during the 1996 through 2002
marketing years.
805 The United States replied that the acreage reports filed under the FSRI Act of
2002 indicate what crops are planted on a farm but do not indicate the quantity of base acres on the
farm because the acreage reports are filed after the planting season but before harvest and do not
contain information on the quantity of production on each farm. The United States provided a statistic
"based on a very preliminary review of a sampling of marketing year 2002 acreage reports" which
showed that approximately 47 per cent of indivi dual farms with upland cotton base had ceased to
plant upland cotton.
806 It also indicated to the Panel that acreage reports for the period of the 1996
Act were incomplete.807
7.624 At the second substantive meeting, Brazil pres ented evidence that the USDA Farm Services
Agency maintains detailed planting information trac ked by individual farms. This information had
been obtained in a Freedom of Information Act re quest by a private citizen assisting the Brazilian
delegation from a USDA Farm Services Agency office in Kansas City.808
7.625 After the second substantive meeting, the Pane l asked the United States whether it wished to
modify its response to Question 67 bis.809 The United States declined, saying that its original
response remained accurate because Question 67 bis had inquired about annual amounts granted to
upland cotton producers. It confirmed that the re levant payments are not tracked by whether the
recipient produces upland cotton and indicated that the United States does not collect production data
based on actual harvesting figures reported by farmers.810
7.626 Later, in January 2004, the Panel requested information pursuant to Article 13.1 of the DSU
in order to permit an assessment of the total e xpenditures under the relevant programmes to upland
cotton "producers". The United States noted that it had previously provided data that permits
calculation of total expenditures to farms "planting" upland cotton.811
7.627 The Panel asked the United States how this reply could be reconciled with the United States'
earlier view that requests for information on pr oduction did not relate to information on planting. 812
The United States replied that it maintained some planting information but it did not maintain
information on individual farm production. Its answer to Question 67 bis had concerned production

805 Panel Question No. 125(5).
806 Data which the United States provided to the Panel later upon request showed that the volume of
acreage on those farms was approximately 26 per cent: see table A-1 in the Attachment at the end of Section
VII:D.
807 Brazil submitted evidence of discussions with a US DA Farm Services Agency official that the vast
majority of farms filed acreage reports under the FAIR Act of 1996: see Exhibit BRA-318. See also data on
comprehensiveness of acreage reports for another covered commodity (rice) in Exhibit BRA-368.
808 Annexed to Exhibit BRA-368. See also Exhibit BRA-369.
809 Panel Question No. 195.
810 United States' response to Panel Question No. 195.
811 United States' letter to the Panel dated 20 January 2004.
812 Panel Question No. 260.

whilst its statement in January 2004 concerne d planting. The United States emphasized the
distinction that must be made between planting information and production information.
813
7.628 The Panel notes that the first occasion on whic h the United States explained the particular
definition of the word "producer" that it had been using in responding to the Panel's questions was in
December 2003. It was important to know this definition in view of the following:
(i) the relevant legislation does not define "producer" in this way, but rather
defines it to include a person who plants but does not harvest (see the FAIR
Act of 1996 and the FSRI Act of 2002 and regulations thereunder);814
(ii) the Panel prefaced its oral questions by referring to production information
in terms of planting information so that it was quite clear that, if the
response was predicated on a difference between the two terms, this should
have been explicitly drawn to the Panel's attention;
(iii) the United States does not use its particul ar definition consistently in these
proceedings, since it asserts that it provided information on total
expenditures to "upland cotton producers" by providing information on total
expenditures to "farms that plant upland cotton"
815; and
(iv) abandonment rate information is availa ble which could be applied to farm-
specific planting information to derive average harvesting information.816
7.629 The United States submits that "it was the United States itself at the second session of the first
panel meeting that brought to the Panel's and Brazil' s attention the planting reporting requirement that
was introduced by Section 1105 of [the FSRI Act of 2002]"817
7.630 The Panel takes note that the United States first informed the Panel of the existence of Section
1105(c) of the FSRI Act of 2002 in response to an oral question from the Panel which specifically
asked whether it gathered any production or planted acreage information. The Panel takes note that
the United States' initial response at the meeting was negative, that its corrected response the
following day related to only one year under review and that it only mentioned planting information
in respect of the 1999, 2000 and 2001 marketing ye ars later when asked specifically in writing about
those marketing years.
818
7.631 The Panel's requests for information under Article 13.1 of the DSU and the surrounding
circumstances are set out in Section VII:A of th is report. The Panel makes the following factual
findings:
(i) the United States provided much data in December 2003 (which it corrected
in January 2004) in response to Brazil's request for information. Brazil
sought this information to overcome th e United States' objection that Brazil
had provided no evidence to support its assumptions that every acre of
upland cotton was planted by a holde r of upland cotton base acreage, and

813 United States' 28 January 2004 comments on Br azil's response to Panel Question No. 195 and
United States' response to Panel Question No. 260.
814 Exhibits US-22, US-1, BRA-28, BRA-29, BRA-31 and BRA-35.
815 See also the United States' letter dated 20 January 2004 in which it refers to the privacy interests in
planting information as privacy interests of United States "producers".
816 See the United States' response to Panel Question No. 209.
817 United States' 28 January 2004 comments on Brazil's response to Question No. 196, paras. 15-18,
and the United States' 11 February 2004 comments, para. 66.
818 Panel Question No. 125(5) and the United States' response.

that no such base acreage holder plante d more upland cotton than his or her
base acres.819 The United States did not supply the part of the data that was
within its exclusive control in a format that permitted Brazil to attempt to
rebut the United States' objection;
(ii) the United States did not provide further data in January 2004 in response to
the Panel's initial request pursuant to Article 13.1 of the DSU because it
considered that this was not permitted under the Privacy Act of 1974. In its
view, it was not possible to supply th e data even with substitute farm
identifiers because it could potentially be linked to the data it supplied in
December 2003 with actual farm identifiers.
820. The Panel notes that the
deletion of farm identifiers had been discussed at the second substantive
meeting prior to supply of all data when the United States raised possible
confidentiality concerns. At that time, Brazil indicated orally that it did not
understand what the possible confidentiality issues would be because the
FSA had used actual farm identifiers when it released planting information
for rice.
821 Brazil also indicated that if the United States found that there
was some kind of confidentiality prob lem that it would let Brazil know.
The United States only asserted that conf identiality concerns prevented it
releasing planting data with FSA farm numbers, and that the rice release had
been an error, at the time it supplied the other data with actual farm
identifiers
822 shortly after which, Brazil indicated that the United States
could have used substitute farm numbers823; and
(iii) the United States provided extensive a nd detailed data in response to the
Panel's supplementary request for info rmation pursuant to Article 13.1 of
the DSU, which sought the same informa tion in a format which would
overcome aggregation problems and pe rmit Brazil to attempt to rebut the
United States' objection.
7.632 The Panel does not consider it necessary for the purposes of this dispute to rule on Brazil's
request to draw adverse inferences, nor to express an y view on the parties' respective interpretations
of the Privacy Act of 1974, in light of the findings that the Panel has been able to make in this
Section VII:D, including the Attachment.
7.633 The Panel wishes to point out that it has used its powers under Article 13 of the DSU to
evaluate Brazil's arguments. The support delivered to upland cotton by these four types of payments
is a central issue in this dispute. Brazil presen ted USDA data in its first written submission which
measured support in accordance with payment formul ae in the measures themselves. The Panel has
relied on that data. Brazil later proposed a methodol ogy using the then-available data which relied on
a particular assumption. Data that could prove or disprove that assumption was in the control of the
United States but not available to Brazil or to the Panel. Brazil had already explained the problems
caused by the aggregation of data. 824 At the Panel's request, Brazil explained the methodology which
it would apply to the unavailable data, which showed the Panel that it was both necessary and
appropriate to use its powers under Article 13 of the DSU to access the data in a suitable format that
would permit Brazil to run its methodology. At that stage, it was not clear to the Panel what the data

819 See supra at paragraph 7.576.
820 It added in a footnote that, moreover, this data might be separately obtained - see United States'
letter dated 20 January 2004, footnote 5.
821 Exhibits BRA-368 and BRA-369.
822 United States' letter dated 18 December 2003.
823 Brazil's response to Panel Question No. 196, dated 22 December 2003.
824 See the second statement of Christopher Campbell of EWG, paras. 3 and 4, reproduced in Exhibit
BRA-368.

would show, nor what the results of Brazil's me thodology would be. This was an information-
gathering exercise on the Panel's part, in order for it to carry out its function. Any suggestion that a
panel "makes the complainant's case", when it merely exercises its powers under the DSU, is entirely
inaccurate. The DSU contains extensive provisions about the ef fective way for panels to gather facts
and information, and how to assess those facts (i ncluding by way of commissioning advisory
reports)
825. It is a central feature of any system of redress, be that judicial, arbitral or otherwise, that
evidence be obtained and analysed, and that the pa rties have equal opportunities to present their cases
by using or contradicting that evidence, including by presenting their own evidence.
6. Attachment to Section VII:D
7.634 The Panel has found in paragraph 7.580 and followi ng that it is appropriate to include in its
measurement of support all payments calculated wi th respect to upland cotton base acreage for the
purposes of Article 13(b)(ii) of the Agreement on Agriculture. Without prejudice to those findings, in
accordance with the Panel's function under Article 11 of the DSU to make an objective assessment of
the facts of the case, the Panel sets out in this Attachment certain additional findings of fact
concerning the relationship between base acreage a nd upland cotton plantings and Brazil's allocation
of an amount of payments calculated with respect to base acreage to upland cotton.826 Certain of these
factual findings provide support for findings in Section VII:G of this report.
(a) Relationship between base acreage and upland cotton plantings
7.635 The PFC, MLA, DP and CCP programmes permit planting flexibility and do not require
production.827 Eligibility for these payments depends on production of specific covered commodities
in a base period, not the year of the payment. Payments are calculated with respect to these "base
acres", at a rate specific to each covered commodity, as described in Section VII:C of this report.
Recipients who hold upland cotton base acres, in r espect of which payments are calculated at the
upland cotton rate, could have since ceased produc tion of upland cotton. Recipients who hold other
base acres, in respect of which payments are ca lculated at the rate for other specific covered
commodities, could have since commenced production of upland cotton.
7.636 The evidence on the record shows where upland cotton production is taking place within the
PFC, MLA, DP and CCP programmes. At the request of Brazil, and later at the request of the Panel
under Article 13 of the DSU, the United States provided a large amount of data concerning the
planting of upland cotton under these programmes. The data provided
828 shows that a very large
proportion of farms with upland cotton base acres continue to plant 829 upland cotton in the year of
payment. The data provided also shows that th e overwhelming majority of farms enrolled in the
programmes which plant upland cotton also hold upl and cotton base. The total data, expressed in
terms of acreage (which is the basis on which payments are calculated in respect of upland cotton) and
percentages of total base acreage and total planted acreage, respectively, are as follows:

825 Article 13.1 and 13.2 and Appendix 4 to the DSU.
826 See paragraph 7.580 of this Section .
827 The present tense includes the past tense in respect of the PFC and MLA programmes and
payments.
828 Calculated based on USDA data submitted by the United States on 28 January and 3 March 2004.
Note that the 1999-2001 data is based on crop reports that were not mandatory, which may lead to some
undercounting.
829 The data refers to planting which necessarily in cludes those farms which harvest. See USDA data
on total of planted and harvested upland cotton acres in the United States' response to Panel Question No. 209.
See also the definition of "producer" in the FAIR Act of 1996 and the FSRI Act of 2002 which includes a
person who plants but does not harvest.

Table A-1: Upland cotton base acres830

 MY1999 MY2000 MY2001 MY2002
On farms with upland cotton planted acres 12,581,725 12,625,169 12,386,499 13,818,215
On farms without upland cotton planted acres 3,835,298 3,684,411 3,860,809 4,740,089
Total upland cotton base acres 16,417,0 23 16,309,580 16,2 47,309 18,558,304

 % of upland cotton base acres
on farms with upland cotton planted acres 76.6% 77.4% 76.2% 74.4%

Table A-2: Upland cotton planted acres831

 MY1999 MY2000 MY2001 MY2002
On farms with upland cotton base acres 13540383 1417047 8 14118952 13022669
On farms without upland cotton base
acres 1032581 1217550 1344982 518837
Total upland cotton planted acres 14572964 15388028 15463935 13541506

% of upland cotton planted acres on
farms with upland cotton base acres 92.9% 92.0% 91.3% 96.1%

7.637 These figures show a strongly positive relationshi p between those recipients who hold upland
cotton base acres and those who continue to plant upland cotton, despite their entitlement to plant
other crops, which is indicative of the relationshi p between payments calculated with respect to
upland cotton base acreage and recipients who plant upland cotton. These figures also show that
upland cotton production within these four programme s is almost exclusively taking place on farms
which hold upland cotton base acres.
(b) Brazil's allocation of payments calculated with respect to base acreage to upland cotton
7.638 Brazil recognizes that recipients who hold upland cotton base acres and continue to plant
upland cotton (that is, they have not recently ceased or commenced production of upland cotton) may
have increased or decreased their acreage planted to upland cotton since they established their base
acres. In other words, they may have "overpla nted" or "underplanted" their upland cotton base. 832
This means that there is not a one-to-one rela tionship between upland cotton base acres and upland
cotton planted acres on individual farms shown in the top line of tables A-1 and A-2.
7.639 The data supplied to the Panel shows the following:

830 Calculated based on USDA data supplied by the United States on 28 January 2004 at the request of
Brazil, described in Exhibit US-145.
831 Calculated based on USDA data supplied by the United States on 28 January 2004 at the request of
Brazil, described in Exhibit US-145. This data shows all upland cotton planted acres within these programmes.
The table shown on page 10 of Brazil's 10 March 2004 comments show base acreage that could be included in a
proportion of total planted acreage, or a "cotton to cotton" calculation.
832 These aggregation problems are explained in the second statement of Christopher Campbell of
EWG, paras. 3 and 4, reproduced in Exhibit BRA-368.

Table A-3: Upland cotton acreage of recipients who underplanted their upland cotton base
833

Marketing
year
Upland cotton
base acreage
Upland cotton
planted acreage
Difference

1999 10,346,685 4,548,886 5,797,799
2000 9,919,461 4,386,073 5,533,388
2001 9,869,516 4,146,352 5,723,164
2002 13,135,588 5,997,438 7,138,150

Table A-4: Upland cotton acreage of recipients who overplanted their upland cotton base834

Marketing
year
Upland cotton
 base acreage
Upland cotton
 planted acreage
Excess

1999 6,070,338 8,991,496 2,921,158
2000 6,390,118 9,784,405 3,394,287
2001 6,377,793 9,972,600 3,594,807
2002 5,422,716 13,135,588 7,712,872

7.640 Brazil proposes an allocation of payments calcula ted with respect to base acreage made to
recipients who plant upland cotton. It allocates pa yments according to the shifts from base acres (in
respect of which payments are ca lculated) to planted acres (in r espect of which recipients produce
covered commodities). It applies the following steps:
(i) it excludes payments calculated in r espect of upland cotton base acreage on
farms without upland cotton planted acres, which are shown on the second
line of table A-1;
(ii) it reduces payments for those who un derplant their upland cotton base
proportional to the drop in upland cotton planted acreage to upland cotton
base acreage, as shown in the final column of table A-3;
(iii) it increases payments for those who ove rplant their upland cotton base
proportional to the increase in upland cotton planted acreage to upland
cotton base acreage, as shown in the final column of table A-4, by allocating
certain payments from other covered commodities for which they
underplanted their base (not shown in the table);
(iv) it includes payments calculated in respect of other covered commodity base
acreage on farms without upland cotton base acres, which are shown on the
second line of table A-2.
7.641 Brazil first applied a methodology which it labelled "cotton to cotton" to the data provided by
the United States. This methodology allocates for each planted acre of upland cotton, those payments
associated with one upland cotton base acre – if available on the same farm. This includes the lower
of upland cotton base acres and upland cotton planted acres on each farm. Brazil calculated payments
with respect to the "cotton to cotton" acres usi ng the upland cotton payment rate specified in the
legislation and regulations and average yields. The results were as follows:

833 Calculated based on USDA data supplied by the United States on 3 March 2004 at the request of the
Panel.
834 Calculated based on USDA data supplied by the United States on 3 March 2004 at the request of the
Panel.

Table A-5: Cotton to cotton methodology835

$ million MY1999 MY2000 MY2001 MY2002
PFC payments 434.9 411.7 329.5
MLA payments 432.8 438.3 452.3
DP payments 391.8
CCP payments 864.9

7.642 Brazil then made a calculation of "excess acres" , which refers to the number of upland cotton
planted acres in excess of upland cotton base acres on a farm. These acres are made up of the increase
in paragraph (iii) over each farm's upland cotton base and all acres in paragraph (iv), where the farm
had no upland cotton base. It pooled the payments for other contract commodities on each farm and
allocated them according to their share of the tota l acres for each overplanted covered commodity. It
added the results of its calculations of excess acres to the results of the cotton to cotton methodology.
The results were as follows:
Table A-6: Brazil's allocation of payments to upland cotton836

$ million MY1999 MY2000 MY2001 MY2002
PFC payments 501.4 478.9 385.7
MLA payments 499.0 509.8 529.4
DP payments 421.3
CCP payments 869.4

7.643 The United States objects to the allocation of support, particularly from other commodity
base to upland cotton where the r ecipient has increased or begun production of upland cotton. It
argues that the allocation of payments for base acres to planted acres is arbitrary, leading to situations
in which a particular crop could be subsidized at di fferent rates; that a particular crop could receive a
greater subsidy than another crop that accounts for mo re acreage on the farm; and that a recipient may
grow crops without base acreage and engage in other types of production. It also argues that Brazil's
methodology unfairly allocates excess payments to upland cotton, which biases its results upwards.837
7.644 The Panel agrees with the United States that base acres are not physical acres, and that money
is fungible and that under these programmes it ca n subsidize whatever the recipient chooses to
produce.838 Differences in the "rate of subsidization" of a particular crop on different acres on the
same farm, or on different farms, do not arise unde r the cotton to cotton methodology. They arise
notionally under Brazil's allocation methodology but are irrelevant because the methodology
calculates a total amount of support for a particul ar crop, not a rate of subsidization. The
methodology of calculating payment amounts according to rates per acres, at different rates for
different crops, is set out in the programmes' own co nditions. A particular crop could receive a larger
payment than another crop that accounts for more acreage on the farm due to the difference among the

835 See Brazil's 10 March 2004 comments, paras 12-15. Details of the calculations are reproduced in
Exhibit Bra-433.
836 See Brazil's 10 March 2004 comments, para. 19. Details of the calculations are reproduced in
Exhibit Bra-433, and the methodology is discussed in Brazil's response to Panel Question No. 258.
837 United States' comments on Brazil's response to Panel Question No. 258, its 11 February 2004
comments, paras. 37-43 and 3 March 2004 comments, paras. 37-44. The United States also argues that the
allocation of payments calculated according to base acreage across planted acrea ge does not account for
producers who have switched into or out of upland cotton from/to other programmes.
838 United States' comments on Brazil's response to Panel Question No. 258.

payment rates in the programmes' own conditions. This result could occur even if the recipient's
planted and base acres for each covered commodity were identical.
839
7.645 The Panel notes that the inclusion of excess acres in the calculation of support is the corollary
of excluding payments made on upland cotton b ase where the recipient decreased production of
upland cotton, to which the United States has not objected. Both imply that switches in planting
decisions by recipients alter the allocation of s upport per commodity. Brazil's allocation of payment
rates for so-called "excess acres" is a formula for the allocation of payments to account for the fact
that payment recipients, to a greater or lesser degree, have shifted plantings of crops since the base
period. The result is simply a proportion in mone tary terms of the total payment for each commodity
which the recipient actually chooses to produce.
7.646 Therefore, as a factual matter, the Panel finds the above allocation of support delivered under
these programmes to one covered commodity appropriate, because it combines elements of the way in
which the payments are calculated with the volum e of upland cotton which recipients plant.
Adjustments to payments for those who underplanted their upland cotton base could be appropriate, to
account for the fact that upland cotton has one of the highest payment rates in the programme, but no
specific adjustments were proposed in this dispute. Adjustments to payments for some planted acres
that were later abandoned could also be appropriate.
840
7.647 The factual findings in this Attachment do not imply any view as to whether evidence as to
how domestic support measures which specify comm odities in terms of eligibility criteria and
payment rates actually deliver support to a particul ar commodity is a relevant consideration under
Article 13(b)(ii) and (iii) of the Agreement on Agriculture.
E. EXPORT SUBSIDIES
1. Measures at issue
7.648 This Section of our report deals with alleged export subsidies. These are the following
measures, as described in Section VII:C:
(i) Section 1207(a) of the FSRI Act of 2002 providing for user marketing (Step
2) payments to exporters;841
(ii) export credit guarantees under the GSM 102, GSM 103 and SCGP
programmes; and
(iii) the ETI Act of 2000.
2. Overview of the parties' export subsidy claims and arguments under the Agreement on
Agriculture, the SCM Agreement and the GATT 1994
7.649 Briefly, Brazil claims that the United States is in breach of its export subsidy obligations
under the Agreement on Agriculture and the SCM Agreement, as follows:

839 For instance, the PFC payment rates per acre fo r upland cotton and wheat in the 2001 crop year
were $36.26 and $16.35, respectively. As a result, a recipient who planted 200 acres of wheat on wheat base
received a smaller payment than a recipient who planted 100 acres of upland cotton on upland cotton base. This
is the case in every year under review: see data in Exhibits BRA-142 and BRA-394. Conversion for wheat into
pounds at the standard moisture content of 60 lbs per bushel.
840 Average cotton yields calculated in pounds per planted acres 1997-2002 are set out in Exhibit
BRA-323.
841 We address user marketing (Step 2) payments to domestic users under section 1207(a) of the FSRI
Act of 2002 infra, Section VII:F.

(i) user marketing (Step 2) payments to exporters under Section 1207(a) of the
FSRI Act of 2002 are per se export subsidies listed in Article 9.1(a) of the
Agreement on Agriculture , or, alternatively, under Article 10, and are
inconsistent with Articles 3.3 and/or 8 of the Agreement on Agriculture, as
well as with Articles 3.1 and 3.2 of the SCM Agreement;
(ii) the GSM 102, GSM 103 and SCGP export credit guarantee programmes in
respect of exports of eligible agri cultural commodities are export subsidies
inconsistent with Articles 8 and 10.1 of the Agreement on Agriculture, as
well as with Articles 3.1 and 3.2 of the SCM Agreement; and
(iii) the ETI Act of 2000 is inconsistent with Articles 8 and 10.1 of the
Agreement on Agriculture, as well as with Articles 3.1 and 3.2 of the SCM
Agreement.
7.650 Brazil contends that none of the United Stat es' alleged export subsidies are exempt from
actions based on Article 3 of the SCM Agreement , within the meaning of Article 13(c)(ii) of the
Agreement on Agriculture , because they do not conform fully to the export subsidy provisions in
Part V of the Agreement on Agriculture.
7.651 Again briefly, the United States maintains that the challenged measures are consistent with its
export subsidy obligations under the Agreement on Agriculture and the SCM Agreement as follows:
(i) user marketing (Step 2) payments unde r section 1207(a) of the FSRI Act of
2002 are not contingent upon export pe rformance and thus do not constitute
export subsidies for the purposes of the Agreement on Agriculture or
Articles 3.1 and 3.2 of the SCM Agreement as they are available to exporters
and domestic users;
(ii) Article 10.2 of the Agreement on Agriculture indicates that export credit
guarantee programmes are outside the scope of the export subsidy
disciplines of the Agreement on Agriculture (and the SCM Agreement), and,
in any event, the United States expor t credit guarantee programmes at issue
do not constitute export subsidies for the purposes of the Agreement on
Agriculture (or the SCM Agreement);
(iii) Brazil has not established a prima facie case of inconsistency of the ETI Act
of 2000 with Articles 8 and 10.1 of the Agreement on Agriculture (or
Articles 3.1 and 3.2 of the
SCM Agreement).
7.652 The United States submits that, as the measures described as (i) and (ii) in para. 7.648
conform fully to the provisions of Part V of the Agreement on Agriculture , they are exempt from
actions based on Article 3 of the SCM Agreement within the meaning of Article 13(c)(ii) of the
Agreement on Agriculture.
7.653 Brazil also makes claims with respect to certain of these measures under Articles XVI:1 and
XVI:3 of the GATT 1994. The United States asks us to reject these claims.

3. Relationship between the export subsidy provisions in the Agreement on Agriculture and
the SCM Agreement and the GATT 1994
7.654 We have set out, above, the order of analysis among the various agreements at issue that we
will apply in our examination of Brazil's export subsidy claims in this dispute.
842 Now we briefly
outline our understanding of the general relationship among the e xport subsidy provisions of the
Agreement on Agriculture, the SCM Agreement and the GATT 1994.
7.655 We first look generally at the relevant obligations in the thr ee agreements in question. The
Agreement on Agriculture and the SCM Agreement are both multilateral agreements on trade in goods
contained in Annex 1A of the WTO Agreement. The Agreement on Agriculture contains general rules
and specific disciplines governing the provision by a Member of export subsidies in respect of
agricultural products, including certain export subs idy reduction commitments specified in a limited
number of Members' schedules. 843 Except as provided in the Agreement on Agriculture , the SCM
Agreement844 generally845 prohibits granting or maintaining export subsidies in respect of any product.
The respective texts of each of these agreements can, as necessary and appropriate, provide guidance
in the interpretation of the provisions in that and the other agreements.
7.656 Article XVI of the GATT 1994 also refers to certain types of subsidies which may affect
exports of the subsidizing Member. Article XVI:1 of the GATT 1994 appears in Section A of that
Article, which is entitled "Subsidies in general". Article XVI:1 speaks to the situation where any
Member "grants or maintains any subsidy ... which ope rates directly or indirectly to increase exports
of any product from, or to reduce imports of any pr oduct into, its territory" and refers to "any case in
which it is determined that serious prejudice to th e interests of any other Member is caused or
threatened by any such subsidization". Article XVI:3 of the GATT 1994 appears in Section B of that
Article, which is entitled "Additional provisions on expor t subsidies". It states that Members "should
seek to avoid the use of subsidies on the export of primary products". If, however, a Member grants
directly or indirectly "any form of subsidy wh ich operates to increase the export of any primary
product from its territory, such subsidy shall not be applied in a manner which results in that Member
having more than an equitable share of world export trade in the product [...]".
7.657 With respect to the general relationship between these export subsidy disciplines and
obligations inter alia in these three covered agreements, Article 21.1 of the Agreement on Agriculture
stipulates: "The provisions of GATT 1994 and of other Multilateral Trade Agreements in Annex 1A
of the WTO Agreement shall apply subject to the provisions of [the Agreement on Agriculture ]."
Accordingly, the provisions of the SCM Agreement and the GATT 1994 apply subject to the
provisions of the Agreement on Agriculture . In the event of a conflict between the provisions of the
Agreement on Agriculture and a provision of the GATT 1994 or another covered agreement pertaining
to multilateral trade in goods in Annex 1A of the WTO Agreement, the rights and obligations in the
Agreement on Agriculture would prevail to the extent of that conflict.
7.658 We therefore next turn, in more detail, to th e export subsidy obligations contained in the
Agreement on Agriculture. Article 8 of the Agreement on Agriculture provides:
"Each Member undertakes not to provide export subsidies otherwise than in
conformity with this Agreement and with the commitments as specified in that
Member's Schedule."

842 Supra, Section VII:C.
843 25 Members, counting EC-15 as one (TN/AG/S/8).
844 The product coverage of the Agreement on Agriculture is limited to agricultural products (in
accordance with Article 2 and Annex I of that agreement). The product coverage of the SCM Agreement is
broader, encompassing all industrial and agricultural goods.
845 Article 27 of the SCM Agreement contains certain special and differential treatment provisions.

7.659 The qualified prohibition in Article 8 of the Agreement on Agriculture is supported by the
more specific prohibitions in respect of "scheduled " and "non-scheduled" products in Article 3.3 of
the Agreement on Agriculture. This provides, in part:846
 "... a Member shall not provide export subsid ies listed in paragraph 1 of Article 9 in
respect of the agricultural products or groups of products specified in Section II of
Part IV of its Schedule in excess of the budgetary outlay and quantity commitment
levels specified therein and shall not pr ovide such subsidies in respect of any
agricultural product not specified in that Section of its Schedule."
7.660 Part V of the Agreement on Agriculture , together with Article 3.3 thereof, provide the
principal specific export subsidy obligations pertaini ng to agricultural products. For the purposes of
this dispute, its key provisions consist of Artic le 8 ("Export Competition Commitments"); Article 9
("Export Subsidy Commitments"); and Article 10 (" Prevention of Circumvention of Export Subsidy
Commitments").847
7.661 Article 1(e) of the Agreement on Agriculture contains a definition of "export subsidies" for
the purposes of the Agreement on Agriculture. It states:
"'export subsidies' refers to subsidies co ntingent upon export performance, including
the export subsidies listed in Article 9 of [the Agreement on Agriculture]."
7.662 Article 9 of the Agreement on Agriculture is entitled "Export Subsidy Commitments".
Article 9.1 lists specific types of export subsidi es which are subject to reduction commitments under
the Agreement on Agriculture . In most cases, such export subsidy reduction commitments include
commitments in respect of both budgetary outlays and export quantities. These commitments are
made an integral part of the GATT 1994 under the provisions of Article 3.1 of the Agreement on
Agriculture and are recorded in Section II of Part IV of a Member's schedule.
7.663 Article 10 of the Agreement on Agriculture is entitled "Prevention of circumvention of export
subsidy commitments". Article 10.1 of the Agreement on Agriculture provides that "[e]xport
subsidies not listed in paragraph 1 of Article 9 shall not be applied in a manner which results in, or
which threatens to lead to, circumvention of export subsidy commitments."
7.664 In general terms, these export subsidy provisions of the Agreement on Agriculture permit a
limited number of Members to use export subsidies, as defined in that Agreement, within the limits of
the budgetary outlay and/or quantitative commitment s specified in Section II of Part IV of its
Schedule and only with respect to the agricultural products described therein.
7.665 However, the provision of any export subsidy listed in Article 9.1 of the Agreement on
Agriculture in respect of unscheduled products or in excess of scheduled reduction commitment levels
is formally prohibited under Articles 3.3 and 8 of the Agreement on Agriculture . The use of other
export subsidies in excess of commitment levels, in respect of scheduled or non-scheduled products,
is subject to the anti-circumvention provisions of Article 10.1.
7.666 Upland cotton falls within th e product coverage of the Agreement on Agriculture .848 T h e
United States has no "scheduled" comm itment with respect to upland cotton. 849 Any export subsidy

846 The provisions to which this prohibition is speci fically subject comprised temporary exceptions that
are no longer operative.
847 Article 11 of the Agreement on Agriculture (entitled "Incorporated products" and relating to
commitments on subsidies on agricultural products contingent upon their incorporation in exported products)
was not directly invoked in this dispute.
848 As provided in Article 2 of the Agreement on Agriculture, the product coverage of that Agreement
appears in Annex I to that Agreement supra, Section VII:C.

listed in Article 9.1(a) of the Agreement on Agriculture in respect of upland cotton (or any other
unscheduled product) is therefore prohibited.
7.667 If a particular product within the coverage of th e Agreement is not the subject of a scheduled
commitment, then, pursuant to Article 10.1 of the Agreement on Agriculture , export subsidies
shall not be applied in respect of that product in a manner which results in, or which threatens to lead
to, circumvention of a Member's commitment under Ar ticle 3.3 not to provid e listed export subsidies
in respect of such an unscheduled product.
850
7.668 Of particular relevance in this dispute, Article 10.2 of the Agreement on Agriculture provides
that:
"Members undertake 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 conformity
therewith."
7.669 A question arises as to whether or not the United States export credit guarantee programmes
at issue in this dispute are subject to the export subsidy disciplines of the Agreement on Agriculture
(and the SCM Agreement) at all.
851
7.670 The SCM Agreement also contains export subsidy disciplines pertaining to trade in goods.
Article 1 of that agreement defines a "subsidy" fo r the purposes of that agreement. Export subsidy
disciplines can be found in Articles 3 and 4 of the SCM Agreement . Subject to the provisions on
special and differential treatment in Article 27 of the SCM Agreement (and related Annex VII), and to
other considerations set out in the text of Article 3.1 of the SCM Agreement (which defers to the
Agreement on Agriculture), the latter contains a prohibition on e xport subsidies, except as provided in
the Agreement on Agriculture. Article 3.1(a) of the SCM Agreement provides:

849 The United States has scheduled export subsidy reduction commitments in respect of the following
thirteen commodities: wheat, coarse grains, rice, vegetable oils, butter and butter oil, skim milk powder, cheese,
other milk products, bovine meat, pigmeat, poultry meat, live dairy cattle, eggs. See "Schedule XX of the
United States of America, Part IV, Section II, entitled Export Subsidies: Budgetary Outlays and Quantitative
Reduction Commitments", reproduced in Exhibit BRA-83 and Exhibit US-13, respectively.
850 We note that, with regard to the circumvention of the Article 3.3 prohibition on the use of subsidies
listed in Article 9.1 in respect of unscheduled products , the Appellate Body stated: "Members would certainly
have 'found a way round', a way to 'evade', this prohib ition if they could transfer, through tax exemptions, the
very same economic resources that they are prohibited from providing in other forms under Articles 3.3 and 9.1.
Thus, with respect to the prohibition against providing subsidies listed in Article 9.1 on unscheduled
agricultural products, we believe that the FSC measure involves the application of export subsidies, not listed in
Article 9.1, in a manner that, at the very least, ' threatens to lead to circumvention' of that 'export subsidy
commitment' in Article 3.3." Appellate Body Report, US – FSC , para. 150.

851 We address this issue infra, in particular, in paras. 7.897 ff. We recall that our examination of
Brazil's export subsidy claims related to export credit guarantees granted under the GSM 102, GSM 103 and
SCGP programmes is not limited to upland cotton. "Expor t credit guarantees ... to facilitate the export of US
upland cotton, and other eligible agricultural commodities" as addressed in Brazil's panel request, are within the
Panel's terms of reference. Such "eligible agricultu ral commodities" under the United States programmes
include both scheduled and unscheduled agricultural products. See our description of the measure in supra,
Section VII:C. We also refe r to our ruling on this issue supra, Section VII:B. Exhibit BRA-73 contains an
excerpt from the USDA website (www.f as.usda.gov/excreds/...) which offers a summary of activity under the
challenged export credit guarantee prog rammes, indicating the allocations an d applications received by country
and commodity, 1999-2003. See also Exhibits US-12 and US-41 and Exhibit BRA-299. Exhibit BRA-298
contains a FASonline Press Release dated 24 September 2002: "USDA Amends Commodity Eligibility Under
Credit Guarantee Programs", listing eligible standard products and high value agricultural products for GSM
102 and SCGP, available at www.fas.usda.gov/.

"3.1 Except as provided in th e Agreement on Agriculture, the following subsidies,
within the meaning of Article 1, shall be prohibited:
(a) subsidies contingent, in law or in fact, whether solely or as one of several
other conditions, upon export performance, including those illustrated in Annex I,"
(emphasis added, footnotes omitted)
7.671 Pursuant to Article 3.2 of the SCM Agreement: "A Member shall neither grant nor maintain
subsidies referred to in paragraph 1 [of Article 3]."
7.672 The text of Article 3.1(a) of the SCM Agreement indicates that the obligation it contains (and
consequently the related obligation in Article 3.2 of that agreement) applies except as provided in the
Agreement on Agriculture.
7.673 As we have already indicated, we therefore believe that it is appropriate to examine an alleged
export subsidy in respect of an agricultural product first under the Agreement on Agriculture before, if
and as appropriate, turning to any exam ination of the same measure under the SCM Agreement.
Furthermore, for the reasons already stated, we beli eve it is also appropriate to examine an alleged
export subsidy in respect of an agricultural product first under the Agreement on Agriculture before, if
and as appropriate, turning to any examination of the same measure under Article XVI of the GATT
1994.852
7.674 This approach is borne out by the provisions of Article 13(c)(ii) of the Agreement on
Agriculture. We recall (once again) that this provision reads:
"(c) export subsidies that conform fully to the provisions of Part V of this
Agreement, as reflected in each Member's Schedule, shall be: ...
(ii) exempt from actions based on Article XVI of GATT 1994 or Articles 3, 5
and 6 of the Subsidies Agreement."
7.675 The conditions set out in the ch apeau of Article 13(c) of the Agreement on Agriculture refer
to compliance with particular substa ntive provisions in Part V of the Agreement on Agriculture
(which includes Articles 8 through 11, as well as, by re ference, Article 3.3, of that Agreement) and
export subsidy reduction commitments in each Member's Schedule.
7.676 As these two issues – i.e. substantive compliance with the provisions of Part V and fulfilment
of Article 13(c) of the Agreement on Agriculture – are squarely before us with respect to at least
certain of Brazil's claims 853, we conduct a two-pronged enquiry in examining the merits of Brazil's
export subsidy claims under the Agreement on Agriculture , before proceeding, as appropriate, to
Brazil's claims under Articles 3.1(a) and 3.2 of the SCM Agreement and/or Article XVI of the GATT
1994.
7.677 Our examination of the export subsidy claims of Brazil under the Agreement on Agriculture
will, in the first instance, determine the merits of Brazil's claims under the export subsidy provisions
of the Agreement on Agriculture . Where substantive compliance with the provisions of Part V and
fulfilment of Article 13(c) of the Agreement on Agriculture are both squarely before us, these findings
will also be determinative for the purposes of the examination of consistenc y with Part V of the

852 This applies a fortiori during the implementation period for reasons set out in supra, Section VII:C,
"Order of analysis".
853 That is, Brazil's claims relating to user mark eting (Step 2) export pa yments and export credit
guarantees under the GSM 102, GSM 103 and SCGP programmes.

Agreement on Agriculture called for under Article 13(c)(ii) of the Agreement on Agriculture .
854
Should we find a violation of the export subsidy provisions in Part V of the Agreement on
Agriculture, we may then conduct an examination, as n ecessary and appropriate for the resolution of
this dispute, under Articles 3.1(a) and 3.2 of the SCM Agreement and/or Article XVI of the GATT
1994.
4. Section 1207(a) of the FSRI Act of 2002: user marketing (Step 2) payments to exporters
(a) Main arguments of the parties
7.678 Brazil asserts that since the United States did not schedule any export subsidy commitments
for upland cotton under the Agreement on Agriculture , it may not provide any export subsidies for
upland cotton.
7.679 Brazil challenges section 1207(a) of the FSRI Ac t of 2002 mandating user marketing (Step 2)
payments to exporters of upland cotton as a per se export subsidy listed in Ar ticle 9.1(a), and defined
in Article 1(e), of the Agreement on Agriculture , which is in violation of Articles 3.3 and 8 of the
Agreement on Agriculture.855 In the alternative, Brazil claims that section 1207(a) of the FSRI Act of
2002 mandating payments to exporters is an export subsidy, not listed in Article 9.1, which is applied
in such a manner as to circumvent (or threaten to circumvent) the United States' export subsidy
commitments within the meaning of Article 10.1 of the Agreement on Agriculture.
7.680 According to Brazil, as section 1207(a) of the FSRI Act of 2002 mandating payments to
exporters does not conform fully to the provisions of Part V of the Agreement on Agriculture, it is not
exempt from actions based on Article 3 of the SCM Agreement within the meaning of Article 13(c)(ii)
of the Agreement on Agriculture . For the same reasons as it constitutes an "export subsidy"
"contingent upon export" within the meaning of the Agreement on Agriculture , the measure also
constitutes a prohibited export subsidy in violation of Articles 3.1(a) and 3.2 of the SCM Agreement.
7.681 Brazil states that user marketing (Step 2) paym ents to exporters under section 1207(a) of the
FSRI Act of 2002 are export-contingent because, when certain market conditions prevail, the United
States Secretary of Agriculture mu st make such payments to eligible exporters upon proof of the
export of United States upland cotton. The existen ce of another factual situation in which user
marketing (Step 2) payments are available, to domestic users, does not dissolve this export
contingency.
7.682 Brazil asserts that the Appellate Body has indi cated that context for interpretation of an
"export subsidy" under the Agreement on Agriculture is found in the SCM Agreement. Step 2 export
payments involve a subsidy within the meaning of Article 1 of the SCM Agreement. Step 2 export
payments are also export contingent within the meaning of Article 3.1(a) of the SCM Agreement
because exporters are only eligible to receive Step 2 export payments if they produce evidence that
they have exported an amount of United States upland cotton.856 The United States' position is flawed
because Members could avoid the disciplines of Articles 3.1(a) and (b) of the SCM Agreement by
structuring a subsidy in such a way as to have both a " de jure export contingency" element and a " de
jure local content contingency" element.857
7.683 Brazil further asserts that the text of section 1207(a) clearly indicates that the user marketing
(Step 2) programme is mandatory in that it does not provide the United States Secretary of

854 Supra, Section VII:C, "Exempt from actions" and Section VII:A and Panel communication of
20 June 2003.
855 Brazil's first written submission, paras. 237-238.
856 Executive summary of Brazil's first written submission, para. 32.
857 Brazil's oral statement at the first session of the first substantive meeting, paras. 74-76.

Agriculture with the discretion to apply it in a WT O-consistent manner. The fact that payments are
dependent upon market price conditions does not alter their mandatory nature.858
7.684 The United States does not contest that user marketing (Step 2) payments are "subsidies" in
favour of United States agricultural producers. 859 However, the United States argues that
section 1207(a) of the FSRI Act of 2002 – providing for payments to exporters and domestic users –
is not an export subsidy listed in Article 9.1(a) of the Agreement on Agriculture and, in the alternative,
not an export subsidy in circumvention of its obligation not to confer an export subsidy with respect to
upland cotton contrary to Article 10.1. The United States submits that, in accordance with
Article 1(e) of the Agreement on Agriculture, to constitute an "export subsidy" for the purposes of the
Agreement, the subsidy must first be "contingent on export performance". The benefits of the user
marketing (Step 2) programme under section 1207(a) of the FSRI Act of 2002 are not contingent on
export performance as they are also available to domestic users. Looking at the programme as a
whole, user marketing (Step 2) payments unde r section 1207(a) of the FSRI Act of 2002 may be
obtained without exporting.
7.685 The United States asserts that user marketing (Step 2) payments are made to eligible users of
upland cotton. The Secretary of Agriculture is au thorized to issue marketing certificates or cash
payments to domestic users and exporters of upland cotton for documented purchases by domestic
users and sales for export by exporters. The programme is indifferent to whether recipients of the
benefit of this programme are parties that open bales for the processing of manufacturing raw cotton
into cotton products in the United States or exporters. The United States stresses that all upland
cotton produced in the United States is eligible fo r the Step 2 payment without regard to how such
cotton is used, and all actual users of such cotton ar e eligible for the payment. Moreover, the form
and rate of payment are identical. The only continge ncy is use. Eligible domestic users and exporters
comprise the universe of eligible users. Parties in the cotton market who do not use cotton are the only
parties not eligible for the payment. The United St ates reports the benefits conferred under the user
marketing (Step 2) programme as product-specific amber box domestic support.
860
7.686 According to the United States, subject to the av ailability of funds (that is, the availability of
CCC861 borrowing authority), user marketing (Step 2) pa yments must be made to all those who meet
the conditions for eligibility. 862 The United States generally invokes the adjustment authority
"circuitbreaker" provision in section 1601(e) in the FSRI Act of 2002, which authorizes the Secretary
to adjust support to the maximum extent practic able to comply with the United States' Uruguay
Round domestic support commitments.
7.687 The United States submits that, as the measure conf orms fully to the provisions of Part V of
the Agreement on Agriculture , it is exempt from actions based on Article 3 of the SCM Agreement
within the meaning of Article 13(c)(ii) of the Agreement on Agriculture . For the same reasons as it
does not constitute an "export subsidy" "continge nt upon export" within the meaning of the
Agreement on Agriculture , the measure also does not constitu te a prohibited export subsidy in
violation of Articles 3.1(a) and 3.2 of the SCM Agreement.
(b) Main arguments of third parties
7.688 Argentina submits that user marketing (Step 2) payments to exporters under section 1207(a)
of the FSRI Act of 2002 are export subsidies in vi olation of the United States commitments under

858 Brazil's response to Panel Question No. 257(b).
859 United States' response to Panel Question No. 108. The United States, however, argues that user
marketing (Step 2) payments to exporters and domestic users constitute domestic support for the purposes of the
United States obligations under the domestic support provisions of the Agreement on Agriculture.
860 Executive summary of the United States' first written submission, para. 25.
861 "CCC" is the Commodity Credit Corporation. See description of the measure, supra, Section VII:C.
862 United States' response to Panel Question No. 109.

Articles 3.3 and 8 of the Agreement on Agriculture, not exempt from actions based on Article 3 of the
SCM Agreement within the meaning of Article 13(b)(ii) of the SCM Agreement and in violation of
Articles 3.1(a) and 3.2 of the SCM Agreement. User marketing (Step 2) payments establish the right
of exporters to receive a subsidy for shipments made in connection with foreign sale operations, while
establishing an obligation upon the CCC to grant that subsidy once the particular requirements are
satisfied.
863
7.689 Australia observes that the United States has not sp ecified any reduction commitments in its
Schedule for upland cotton. Australia argues that user marketing (Step 2) payments to exporters under
both the FAIR Act of 1996 and the FSRI Act of 2002 are export subsidies listed in Article 9.1(a) of
the Agreement on Agriculture in violation of the United States commitments under Articles 3.3 and 8
of the Agreement on Agriculture , not exempt from actions based on Article 3 of the SCM Agreement
within the meaning of Article 13(c)(ii) of the Agreement on Agriculture and in violation of
Articles 3.1(a) and 3.2 of the SCM Agreement. User marketing (Step 2) payments are available only
to exporters (export payments) or to domestic users (domestic payments). Section 1207(a)(1)
"identifies the two situations which must be di fferent since the very same property cannot be"
exported or used within a Member. 864 In each of the distinct factual situations of export or domestic
use, such payments are contingent upon export performance or contingent upon the use of domestic
over imported goods respectively.865
7.690 New Zealand agrees with Brazil that user marketing (Step 2) payments to exporters violate
per se Articles 3.3 and 8 of the Agreement on Agriculture866, as they are either within the description
set out in Article 9.1(a) of the Agreement on Agriculture, or "at the very least", threaten circumvention
of subsidy reduction commitments within the meaning of Article 10.1. The fact that payments may
also be made to domestic users of upland cotton does not "dissolve" the export contingency of the
payments that are made to exporters. Payments to eligible exporters of upland cotton are dependent
on proof of export being provided and are therefore contingent on export performance.867
7.691 New Zealand also supports Brazil's conclusion that the Step 2 export payments meet the
requirements of a "subsidy" under Article 1. 1(a)(1)(i) and Article 1.1(a)2(ii) of the SCM Agreement
and are contingent upon export within the meaning of Article 3.1(a) of the SCM Agreement .
Accordingly if the Panel finds, as New Zealand believes it should, that Step 2 export payments
constitute per se prohibited subsidies under Articles 3.1(a) and 3.2 of the SCM Agreement, the Panel
is required to recommend under Article 4.7 of the SCM Agreement that the United States withdraw the
programme without delay. New Zealand therefore s upports Brazil's request that the Panel make such
an express recommendation.
868
(c) Evaluation by the Panel
(i) Claims under the Agreement on Agriculture
7.692 Brazil claims that section 1207(a) of the FSRI Act of 2002 mandating user marketing (Step 2)
payments to exporters is a per se export subsidy within the meaning of Article 9.1(a) of the
Agreement on Agriculture . The United States disagrees, asserting that section 1207(a) of the FSRI
Act of 2002, as a whole, provides for payments to both exporters and domestic users.

863 Argentina's response to Panel third party Question No. 38.
864 Australia's written submission to the first session of the first substantive meeting, paras. 52-54.
865 Australia's response to Panel third party Question Nos. 38 and 39.
866 New Zealand's written submission to the first session of the first substantive meeting, paras. 3.03-
3.04.
867 New Zealand's written submission to the first session of the first substantive meeting, paras. 3.05-
3.08.
868 New Zealand's written submission to the first session of the first substantive meeting, paras. 3.10-
3.11.

7.693 We recall that Article 3.2 of the DSU recognizes that interpretative issues arising in WTO
dispute settlement are to be resolved through the a pplication of customary rules of interpretation of
public international law. It is well settled that the principles codified in Articles 31 and 32 of
the Vienna Convention on the Law of Treaties (the "Vienna Convention") are such customary rules.869
Thus, the task of interpreting a treaty provision must begin with its specific terms.
7.694 We naturally begin our examination of Brazil's claim with the text of the relevant treaty
provision. Article 9 of the Agreement on Agriculture is entitled "Export Subsidy Commitments".
Article 9.1(a) reads:
"1. The following export subsidies are subject to reduction commitments under
this Agreement:
(a) the provision by governments or their agencies of direct subsidies, including
payments-in-kind, to a firm, to an industry, to producers of an agricultural product, to
a cooperative or other association of such producers, or to a marketing board,
contingent on export performance; ..."
7.695 We do not understand the United States to disagree that section 1207(a) of the FSRI Act of
2002 -- the legislative provision governing the user marketing (Step 2) payments to exporters and
domestic users -- provides for payments that constitu te "the provision by governments ... of direct
subsidies ... to a firm, to an industry, to producers of an agricultural product, to a cooperative or other
association of such producers, or to a marketing board ...".
 870
7.696 Nor, in our view, could the United States properly do so. User marketing (Step 2) payments
to exporters under section 1207(a) of the FSRI Act of 2002 are granted by the CCC of the United
States Department of Agriculture, which is a Unite d States government agency. The payments take
the form of cash grants (or commodity certificates) 871 for which no consideration is received by the
government. The recipients of the export payments are expressly defined in the text of the
implementing regulations of the measure as "eligible exporters", which includes "...a producer or a
cooperative marketing association" (both terms which appear in the text of Article 9.1(a) of the
Agreement on Agriculture).
7.697 Rather, the key issue before us is whether th e measure provides for subsidies "contingent on
export performance" within the meaning of Article 9.1(a) of the Agreement on Agriculture.
7.698 Article 1(e) of the Agreement on Agriculture states that the term "export subsidies" "refers to
subsidies contingent upon export performance, including the export subsidies listed in Article 9 of this
Agreement".
7.699 However, the Agreement on Agriculture does not contain any further textual or contextual
elaboration of that term. The term "continge nt upon export performance" also appears in
Article 3.1(a) of the SCM Agreement. That provision reads:

869 Article 31(1) of the Vienna Convention provides in relevant part that: "A treaty shall be interpreted
in good faith in accordance with the ordinary meaning to be given to the terms of the treat y in their context and
in the light of its object and purpose."
870 The United States' submits that user marketin g (Step 2) payments are support in favour of
agricultural producers. See United States' response to Panel Question No. 108.
871 The parties concur that there is no need to draw any distinction between cash payments and
"commodity certificates" in terms of whether a "subsidy" exists. Brazil makes no material distinction in its
allegations, while the United States' c oncurred with this proposition in its response to Panel Question No. 110.
We therefore do not make any such distinction in our analysis.

"Except as provided in the Agreement on Agri culture, the following subsidies, within
the meaning of Article 1, shall be prohibited:
(a) subsidies contingent, in law or in fact
4, whether solely or as one of several
other conditions, upon export performance, including those illustrated in Annex I5 ..."
Agriculture differently from the same term in the SCM Agreement for the purposes of this dispute.
The two Agreements use precisely the same words to define "export subsidies". We therefore believe
that it is appropriate for us to seek cont extual guidance in that provision of the SCM Agreement for
our interpretation of the term "con tingent upon export performance" in the Agreement on Agriculture
in the particular circumstances of this dispute.872
7.701 The meaning of "contingent" is "conditional" or "dependent for its existence upon". 873 The
grant of the subsidy must be conditional or dependent upon export performance. Article 3.1(a) further
provides that such export contingency may be the sole condition governing the grant of a prohibited
subsidy or it may be "one of several other conditions".874
7.702 Brazil is making a claim of "per se" contingency, challenging section 1207(a) of the FSRI Act
of 2002 "as such".875 We understand Brazil's per se claim to be conceptually analogous to a claim of
"de jure" export contingency within the meaning of Article 3.1(a) of the SCM Agreement. Such de
jure export contingency is demonstrated on the basi s of the words of the relevant legislation,
regulation or other legal instrument. 876 A subsidy is also properly held to be de jure export
contingent where the condition to export can be derived by necessary implication from the words
actually used in the measure. 877

872 See, for example, Appellate Body Report, US – FSC , para. 141: "We see no reason, and none has
been pointed out to us, to read the requirement of 'contingent upon export performance' in the Agreement on
Agriculture differently from the same requirement imposed by the SCM Agreement. The two Agreements use
precisely the same words to define 'export subsidies'. Although there are differences between the export subsidy
disciplines established under the two Agreements, thos e differences do not, in our view, affect the common
substantive requirement relating to export contingency. Therefore, we think it appropriate to apply the
interpretation of export contingency that we have adopted under the SCM Agreement to the interpretation of
export contingency under the Agreement on Agriculture ." See also US – FSC (Article 21.5 – EC) , para. 192.
See also infra, note 917.
873 Appellate Body Report, Canada – Aircraft, para. 166.
874 See Appellate Body Report, US – FSC (Article 21.5 – EC), para. 111.
875 See e.g., Brazil's first written submission, para. 245.
876 Appellate Body Report, Canada – Aircraft, para. 167.
877 Appellate Body Report, Canada – Autos, cited with approval in Appellate Body Report, US – FSC
(Article 21.5 – EC), para. 112. This approach stands in contrast to a " de facto" inquiry, in which a panel would
examine the "total configuration of the facts constituting and surrounding the grant of the subsidy."

7.703 We will therefore examine whether export c ontingency is apparent from the words of
section 1207(a) of the FSRI Act of 2002 (and related legal and regulatory instruments) 878, or can be
derived by necessary implication from the words actually used therein.
7.704 Section 1207(a) of the FSRI Act of 2002 govern s user marketing (Step 2) payments. The text
of section 1207(a) provides that during the period beginning on the date of the enactment of the FSRI
Act of 2002 through 31 July 2008, "... the Secretary shall issue marketing certificates or cash
payments, at the option of the recipient, to domes tic users and exporters for documented purchases by
domestic users and sales for export by exporters..." where certain market conditions prevail.879
7.705 Implementing regulations "set forth the term s and conditions under which CCC shall make
payments ... to eligible domestic users and exporters of upland co tton who entered into an Upland
Cotton Domestic User/Exporter Agreement with CCC to participate in the upland cotton user
marketing certificate program under Section 1207." 880 Eligible upland cotton is domestically
produced baled upland cotton which bale is opened by an eligible domestic user or exported by an
eligible exporter, between certain time periods and under certain market conditions. 881 "Eligible
domestic users and exporters" are defined as follows:
"(1) A person regularly engaged in the business of opening bales of eligible upland
cotton for the purpose of manufacturing such cotton into cotton products in the
United States (domestic user), who has en tered into an agreement with CCC to
participate in the upland cotton user marketing certificate program; or
(2) A person, including a producer or a cooperative marketing association ...
regularly engaged in selling eligible up land cotton for exportation from the United
States (exporter), who has entered into an agreement with CCC to participate in the
upland cotton user marketing certificate programme."
882
7.706 Eligible upland cotton will be considered:
"(1) Consumed by the domestic user on the date the bale is ope ned for consumption;
and
(2) Exported by the exporter on the date CCC determines is the date on which the
cotton is shipped through 31 July 2008."883
7.707 Applications for payment884 must contain the documentation required by the provisions of the
Upland Cotton Domestic User/Exporter Agreement and the instructions that the CCC issues.
7.708 The United States asserts that the user marketing (Step 2) payment programme must be
assessed globally, as the relevant United States law and regulations do not separate the programme
into domestic users and exporters. The United States asserts that there is but one Step 2 statute and
one Step 2 rule set out in the regulations for all upland cotton users. The statute and rule identify

878 Exhibit BRA-37 contains 7 CFR 1427.100 et seq., which are the regulations setting forth the terms
and conditions under which the CCC shall make user mark eting (Step 2) payments under section 1207 of the
FSRI Act of 2002.
879 Section 1207(a) of the FSRI Act of 2002, reproduced in Exhibits BRA-29 and US-1, and 7 CFR
1427.100-1427.108 (1 January 2003 edition), reproduced in Exhibit BRA-37.
880 See 7 CFR 1427.100(a), reproduced in Exhibit BRA-37.
881 See 7 CFR 1427.103(a), reproduced in Exhibit BRA-37.
882 See 7 CFR 1427.104(a), reproduced in Exhibit BRA-37.
883 See 7 CFR 1427.108(c), reproduced in Exhibit BRA-37.
884 There are separate reporting forms for exporters an d domestic users. Eligible domestic users must
submit form CCC-1045UP-1. Eligible exporters must submit form CCC-1045UP-2.

"domestic users" and "exporters" as the universe of bona fide users of upland cotton and thus potential
recipients for Step 2 payments. According to th e United States, the only distinction drawn between
these recipients is the proof of use: domestic users are paid when they open a bale, and exporters are
paid when they export. For the United States, as it is not necessary to export in order to receive a
Step 2 payment, the Step 2 payments to exporters are not contingent upon exportation.
7.709 We agree that user marketing (Step 2) pa yments are governed by a single legislative
provision: Section 1207(a) of the FSRI Act of 2002. We also agree that th ere is a single set of
regulations pertaining to the Step 2 programme: 7 CFR. 1427.100 ff. We further agree that, pursuant
to the legislation and regulations, the form
885 and rate of payment 886 to domestic users and exporters
are identical; and the fund from which payments are ma de is a unified fund available to both eligible
domestic users and exporters. We acknowledge that, as the United States argues, upland cotton does
not have to be exported in orde r to trigger eligibility for a user marketing (Step 2) payment under
section 1207(a) as domestic users are also eligible (i.e. for a payment to a domestic user).887
7.710 However, we disagree with the United States that this measure involves only one factual
situation, which is use of upland cotton during a particular period of time.888
7.711 We recall that at least two prior WTO disputes have addressed claims under Article 3.1(a) of
the SCM Agreement pertaining to alleged export subsidies i nvolving a distinct set of circumstances
and discrete segments of recipients: Canada - Aircraft and US – FSC (Article 21.5 – EC). Brazil
cites the Appellate Body reports in these disputes in support of its arguments that the user marketing
(Step 2) payments to exporters are export-continge nt. The United States contends that neither report
is relevant as they speak to different factual s ituations. For its part, the United States invokes the
panel report in Canada – Dairy , which concluded that where a subsidy was available either
exclusively for the domestic market or in connec tion with exportation but also with the domestic
market, "access to milk under such other classes is not ‘contingent on export performance.'"
7.712 We recall the essence of these three prior reports cited by the parties to discern any relevance
they may have for the instant dispute.
7.713 First, in its report in US – FSC (Article 21.5 – EC), the Appellate Body stated:
"We recall that the ETI measure grants a tax exemption 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 contin gent 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 th at 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.
 Conversely, the export contingency arising in these
circumstances has no bearing on whether there is an export contingent subsidy in the

885 In this respect, we refer to 7 CFR 1427.106, which makes no distinction between exporters and
domestic users in terms of the form of payment: "Payments under this subpart shall be made available in the
form of commodity certificates [...] or in cash, at the option of the program participant."
886 7 CFR 1427.107 outlines the payment rate for purposes of calculating payments, and does not
differentiate between the rate applicable to domes tic users and exporters. The Upland Cotton Domestic
User/Exporter Agreement in Exhibit US -21, Section A-4 prescribes that the general payment rate shall be in
accordance with the regulations found in 7 CFR 1427. While there are slight differences between the provisions
governing the reporting for the purposes of payment rate to domestic users, on the one hand, and exporters, on
the other, we understand that these do not affect the amount actually paid.
887 United States' oral statement at the first session of the first substantive meeting, paras. 25-26.
888 United States' response to Panel Question No. 99.

second set of circumstances. Where a United States taxpayer is simultaneously
producing property within and outside the United States, for direct use 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 the property produced within the
United States, and exported from there, is export contingent within the meaning 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."
889
(footnote omitted)
7.714 The facts and conditions relating to the grant of the subsidy before us are, to some extent,
distinguishable from those addressed by the panel and Appellate Body in US – FSC (Article 21.5 –
EC). In that dispute, the subsidy programme dea lt with products produced within and outside the
United States. There, the export-contingency of the subsidy vis-à-vis products produced within the
United States was not vitiated by the fact that th e subsidy could also be obtained in a second set of
circumstances, irrespective of whet her the subsidy in this second set of circumstances (in respect of
property produced outside the United States) was also export contingent. By contrast, here, the two
"situations" in the user marketing (Step 2) programme both involve production within the United
States, whether for domestic use or for export. That is, the eligible product (upland cotton) is the
same and its locus of production (i.e. within the United States) is identical for all user marketing
(Step 2) user payments under section 1207(a) of the FSRI Act of 2002.890
7.715 Second, in Canada – Aircraft, the Appellate Body stated that,
"[T]he 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 e nough to show that one or some of TPC's
contributions do constitute subsidies "contingent ... in fact … upon export
performance".891
7.716 The facts and conditions relating to the grant of the subsidy before us are, to some extent,
distinguishable from those addressed by the panel and Appellate Body in Canada - Aircraft, in terms
of the eligible product itself. In that dispute, the subsidy in question was available to multiple
industry sectors. There, the export-contingency of the subsidy vis-à-vis regional aircraft was not
vitiated by the fact that payments in some othe r industry sectors may not have been contingent upon
export performance. By contrast, here, the subs idy programme under section 1207(a) deals with one
eligible product – upland cotton – and not with any other product or industry sector. The eligible
product is notionally all United States upland cotton, subject to its eligible "use".
7.717 Third, in Canada – Dairy, the panel stated:
"The United States also makes claims under milk classes other than Classes 5(d) and
(e). In this regard, we note that milk unde r such other classes is also available (often
exclusively) to processors which produce for the domestic market. Accordingly,
access to milk under such other classes is not "contingent on export performance".
We therefore find that such other milk classes do not involve an export subsidy under
Article 9.1(a)."892

889 Appellate Body Report, US – FSC (Article 21.5 – EC), para. 119.
890 We recall that 7 CFR 1427.103(a) and (c), reproduced in Exhibit BRA-37, provide that "[...] eligible
upland cotton is domestically produced baled upland cotton" which "must not be" "imported cotton" (emphasis
added).
891 Appellate Body Report, Canada – Aircraft, para. 179.
892 Panel Report, Canada – Dairy, para. 7.41. The Panel reached a similar view under Article 10.1 of
the Agreement on Agriculture.

7.718 The facts and conditions relating to the grant of the subsidy before us are also distinguishable
from those addressed by the panel in Canada – Dairy, in light of the express terms of the text of the
measure. In that case, there was no explicit cond ition limiting a discrete segment of the payments of
the subsidies concerned to exporters, nor wa s there a subsidy expressly combining the two
contingency components before us: that is, use of domestic products and exportation.
7.719 We thus recognize that the facts and conditions surrounding the grant of the subsidy before us
are, to some extent, distinguishable from those addressed in those previous disputes.
7.720 We nevertheless firmly believe that the legal principles in US – FSC (Article 21.5 – EC) and
Canada - Aircraft are relevant and illuminating here. We understand these prior reports to stand for
the proposition that export contingency in respect of a discrete segment of payments in one set of
circumstances may not be vitiated by the existence of other discrete segments of payments which may
not be conditioned upon exportation.
7.721 On this basis, even if we examine the legi slative and regulatory framework governing user
marketing (Step 2) payments gl obally, we cannot accept the United States' argument that we should
treat all user marketing (Step 2) payments as a single situation and all recipients as a single class of
eligible "users" who constitute the entire uni verse of potential purchasers of upland cotton from
producers.
893
7.722 Rather, we must discern the actual nature of the measure from its text. The text of the
measure itself explicitly identifies, on its face, two distinct factual situations involving two distinct
types of eligible recipients: one in which the paym ent is made to eligible exporters, and another in
which the payment is made to eligible domestic users.
7.723 The universe of potential recipients of user marketing (Step 2) payments are "eligible
domestic users" and "eligible exporters". Contrary to the United States' assertion, this is not a single
class of eligible "users" who constitute the en tire universe of potential purchasers of upland cotton
from producers.
7.724 A bale of United States domestically produced upland cotton must either be exported to
trigger receipt of a user marketing (Step 2) export payment, or purchased for domestic use to trigger
receipt of a user marketing (Step 2) domestic paym ent. The two situations must be distinct as the
same bale of cotton cannot be exported and also sold to a domestic user.894
7.725 We consider it determinative that the text of the single legal provision at issue explicitly
identifies the two distinct situations in which user marketing (Step 2) payments are made. The text
does not identify a single monolithic situation in wh ich payments are made to a single class of
recipients. On the contrary, the text of the me asure itself compels us to examine separately the
conditions pertaining to the grant of the subsidy in these two distinct factual situations addressed by
the measure that involve two distinct sets, or discrete segments, of eligible recipients.895 We do not

893 United States' oral statement at the first session of the first substantive meeting, para. 25.
894 We find support for this approach in Appellate Body Report, US – FSC (Article 21.5 – EC) ,
para. 115. See also the text of the measure itself, reproduced in Exhibit BRA-37, 7 CFR 1427.103(c)(1), where
the definition of eligible upland cotton indicates that it must not be, inter alia, "[c]otton for which a payment,
under the provisions of this subpart, has been made available".
895 Segregated data is available indicating the amount of payments going to domestic users and
exporters under the programme and its FAIR Act predecessor. Brazil initially submitted such data by fiscal year
and use (Exhibit BRA-69). In response to Panel Question No. 104, the United States subsequently submitted
USDA data. The USDA data, which we have no reason to believe is not factually accurate, shows that in 1991-
1993 and 1997-2001, domestic user payments were greater than expo rt payments. Export payments exceeded
domestic user payments in 1994-1996 and 2002. In 1996, there were no domestic payments: only export
payments were made. The amounts indicated for export payments, on a fiscal year basis, are as follows: 1991:

see this as any kind of artificial bifurcation in our an alysis of the measure before us. We see this as
being at the heart of the de jure export contingency at issue.896
7.726 This textual distinction is not the only distinc tion between the two distinct factual situations,
involving two distinct sets, or discrete segments, of eligible recipients.
7.727 We note further that a distinction is drawn in the measure itself between domestic users and
exporters in terms of the proof needed to be eligible for the subsidy: domestic users are eligible upon
proof of opening a bale, and expor ters are eligible upon proof of export. Documentation to be
submitted is also different. There are separat e regulatory sub-sections and separate conditions
pertaining to fulfilment of either of the two situati ons in which a user marketing (Step 2) subsidy can
be granted.897
7.728 Furthermore, the relative proximity of the recipi ent of the user marketing (Step 2) payment to
the producer may also differ depending upon whether the transaction involves exportation or domestic
use.898 The recipients of domestic payments are necessarily not producers; they are domestic users.
By contrast, the recipients of export payments may include producers.899

$17,259; 1992: $30,852,107; 1993: $89,095,640; 1994: $178,266,742; 1995: $75,200,203; 1996: $34,798,579;
1997: $2,875,936; 1998: $158,924,004; 1999: $113,521,476; 2000: $185,273,956; 2001: $90,903,021; 2002:
$105,415,152. See United States' response to Panel Question No. 104. We also refer to Section VII:D supra in
relation to data pertaining to user marketing (Step 2) payments to domestic users, as well as to unsegregated data
available, for crop years 19 91-2001, in Exhibit BRA-4, as follows ($ million): 1991: $140.3; 1992: $206.7;
1993: $198.9; 1994: $90.5; 1995: 34.1; 1996: 3.3; 1997: $390.2; 1998: $307.5; 1999: $421.6; 2000: $236.1;
2001: $196.3. For fiscal year 2002, the record indicates, in United States response to Panel Question 196, an
amount of $415,379, 000; We note that we are conducting a de jure examination of the text of the measure, on
its face, and that it is therefore not strictly necessary to consider actual conditions surrounding the operation of
the measure. See, for example, supra, footnote 877. If, however, the Appellate Body were called upon to
review this matter and disagreed with our export contingency analysis here under Article 9.1(a) and, in the
alternative, Article 10.1 of the Agreement on Agriculture, then such data might be relevant for determination of
the level of domestic support examined in Section VII:D, supra.
896 Even if Brazil's claim was not solely one of de jure inconsistency, it seems to us that it would only
be necessary for us to consider any de facto inconsistency where de jure inconsistency was not apparent on the
face of the measure itself.
897 Brazil's oral statement at the first session of the first substantive meeting, paras. 71-73.
898 Export-contingent subsidies need not be made solely to producers of the product concerned. To the
extent a subsidy made to a purchaser of the product enables that purchaser to obtain that product on more
favourable terms than would otherwise be available in the marketplace, this will, at a minimum, represent a
prima facie case that the payments confer a benefit on the producers of that product as well, as it lowers the cost
of the product to their purchasers and thus makes their product more attractive relative to competing products.
The Panel in Canada – Aircraft Credits and Guarantees examined whether or not a benefit was conferred on the
producer by virtue of a benefit being conferred on the customer purchasing the product (para. 7.229 and note
187 of that Panel Report), and endorsed the following statement by the Brazil – Aircraft (Article 21.5—Canada
II) Panel: "We note that PROEX III payments are made in support of export credits extended to the purchaser,
and not to the producer, of Brazilian regional aircraft. In our view, however, to the extent Canada can establish
that PROEX III payments allow the purchasers of a product to obtain export credits on terms more favourable
than those available to them in the market, this will, at a minimum, represent a prima facie case that the
payments confer a benefit on the producers of that product as well, as it lowers the cost of the product to their
purchasers and thus makes their product more attractive relative to competing products." See Panel Report,
Brazil – Aircraft (Article 21.5 – Canada II), para. 5.28, footnote 42) (emphasis in original).
899 In connection with Panel Question No. 249 observing that 7 CFR 1427.104(a)(2) includes "a
producer" within the definition of "eligible exporter", the United States indicated that producers would only
receive the payments in their capacity as manufacturers, th at this would only occur with very large producers, if
at all, and that such payments would be "highly isolated". See United States' 28 January 2004 comments on
Brazil's response to Panel Question No. 249.

7.729 Moreover, an export sale transaction is sufficien t for the purposes of section 1207(a). Thus,
an eligible exporter having completed an export sale transaction (and having submitted proof of
exportation) may receive a "user marketing (Step 2) payment". While the United States asserts that
exportation is deemed to be a "use" for the purposes of the programme, an eligible exporter need not
open a bale of upland cotton to trigger receipt of a pa yment. Thus, at the very least, an exporter is not
a "user" in the same sense as a domestic "user".
7.730 By contrast, it is not true that any completed domestic transaction concerning the sale of
upland cotton by a domestic cotton producer qualifies as a use.
900 The eligible domestic user criteria
exclude all individuals or firms that do not pu rchase the bale to open it, such as domestic cotton
brokers or resellers.901 902 This is a fundamental distinction made in the text of the measure itself and
confirmed to us by the United States in these proceedings.903 This fundamental distinction also aligns
with the text of the two prohibitions in Article 3.1 of the SCM Agreement itself. Article 3.1(b) of the
SCM Agreement refers to contingency upon the "use" of domestic over imported goods. Article 3.1(a)
refers to contingency upon "export performance", which is not expressly referred to in the text of the
treaty as any kind of "use".
7.731 The United States insists that because it is not necessary to export in or der to receive a user
marketing (Step 2) payment (i.e. because user mark eting (Step 2) payments are also available to
domestic users), the user marketing (Step 2) pa yments to eligible e xporters cannot be export
contingent.
7.732 However, this argument does not properly char acterize the measure before us. We are not
dealing here, for example, with a subsidy that is paid to a producer irrespective of whether the
producer sells domestically or for export. Rather, this measure involves payment to two distinct sets
of recipients (exporters or domestic users) in two distinct factual situations (export or domestic use).
7.733 As we have seen, these factual situations are dis tinct in terms of the identified recipients, the
proximity of such recipients to the producer, the documentation required to tr igger eligibility and the
distinction between eligibility on the basis of any export transaction as opposed to the requirement of
domestic use (not simply any domestic sale). Each of these two factual situations, in our view, falls
squarely into each of the two prohibitions set out in Articles 3.1(a) and (b) of the SCM Agreement.904
7.734 It is undeniable that a condition of the rece ipt of user marketing (Step 2) payments to
exporters under section 1207(a) of the FSRI Act of 2002 will always and inevitably be proof of
exportation. The only way to receive such a paym ent is through exportation. Export performance is,
therefore, a condition of receipt for this discrete segment of eligible recipients.
7.735 Every user marketing (Step 2) payment to an eligible exporter is contingent upon export.
7.736 Here, it is not the case that the subsidy is i ndiscriminately and generally available to all
producers and/or processors of upland cotton, irresp ective of whether a domestic or export transaction
is involved. Nor does the measure generally targ et all upland cotton production or processing while

900 United States' response to Panel Question No. 96.
901 United States' 28 January comments on Brazil's response to Panel Question No. 249. We also
understand that a producer simply bundling a bale to break it, without involving a transaction with a domestic
user, would not be eligible for the payment. We note that Exhibit US-21 (Upland Cotton Domestic
User/Exporter Agreement, Section B1) indicates: in th e event that the cotton is not used for the specified
purpose (by a domestic user as a person regularly engaged in manufacturing eligible upland cotton into cotton
products in the United States) "the payment received shall be returned immediately and with interest".
902 Brazil's response to Panel Question No. 101.
903 United States' response to Panel Question Nos. 96 and 105.
904 We also refer to our finding in Section VII:F that the user marketing (Step 2) payment to domestic
users is a prohibited Article 3.1(b) subsidy.

merely incidentally and randomly happ ening to benefit the occasional exporter. 905 Rather, the
measure specifically and explicitly targets eligible exporters – persons who are "regularly engaged" in
exporting upland cotton – as a defined class of recipi ent for a defined, discrete, segment of the
payments for a single eligible product. No one else is eligible to receive such payments. The only
way to receive such payments is to be an elig ible exporter exporting elig ible (i.e. domestically
produced) upland cotton. This United States upla nd cotton must be exported outside the United
States, traversing the United States border. The measure at issue is, therefore contingent, or
conditional upon, exportation.
7.737 We recall again the United States' insistence that user marketing (Step 2) payments to eligible
exporters cannot be export-contingent because user marketing (Step 2) payments to domestic users are
also available.
7.738 We again observe that section 1207(a) grants u ser marketing (Step 2) payments, under certain
market conditions, in two distinct factual situations: (a) where a bale of United States upland cotton is
exported by an eligible exporter; and (b) where a bale of United St ates upland cotton is opened by an
eligible domestic user. Our conclusion that the user marketing (Step 2) measure grants subsidies that
are export-contingent in the first situation is not affected by the fact that the subsidy can also be
obtained in the second situation, which we have also found to constitute a prohibited subsidy (albeit of
a different kind, that is, contingent upon use of domestic over imported goods within the meaning of
Article 3.1(b) of the SCM Agreement).906
7.739 The fact that the subsidies granted in the second situation may not be export contingent does
not dissolve the export contingency arising in the fi rst situation. The subsidy granted to eligible
exporters upon proof of exportation is export contingent, irrespective of the fact that the subsidy given
to domestic users is not (although it is a prohibited subsidy of another kind).907
7.740 We do not view it as necessary for an entire subs idy programme to be export-contingent in
order to find export contingency: we have found that, under section 1207(a), a distinct and explicitly
identified and targeted segment of the subsidi es will inevitably be export-contingent. Where a
programme makes some payments contingent upon export of products, the fact that other, also
prohibited, payments under the programme are made to domestic users contingent upon the use of
domestic over imported goods cannot eliminate the export contingency of the programme.
7.741 Most importantly, here, we do not believe that it is possible for a Member to design two
prohibited subsidy components – an export subsidy and an impor t substitution subsidy 908 – and,
merely through joining them in a single legal provision, somehow render one, or both, of them

905 Contrary to the United States' assertion (United States' 28 January 2004 comments on Brazil's
response to Panel Question No. 249), this is not a situation analogous to the Ad Note to Article III of the GATT
1994, which basically describes when a measure imposed at a Member's border may be considered nevertheless
an "internal" tax or charge. According to that provision: "Any internal tax or other internal charge, or any law,
regulation or requirement of the kind referred to in [Ar ticle III:1] which applies to an imported product and to
the like domestic product and is collected or enforced in the case of the imported product at the time or point of
importation is nevertheless to be regarded as an internal tax or other internal charge, or a law, regulation or
requirement of the kind referred to in [Article III:1], and is accordingly subject to the provisions of Article III."
906 Section 1207(a) envisages certa in conditions that would exclud e potential recipients that are
common to both domestic user and exporter payments. For example, in the case of both domestic users and
exporters, an "eligible" user cannot include individuals or 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. The United States characterizes this provision as an anti-fraud provision.
907 We find support for our interpretation in Appellate Body Report , US – FSC (Article 21.5 – EC) ,
para. 119.
908 We also refer to our finding infra, Section VII:F, that user marketing (Step 2) payments to domestic
users are a prohibited import substitution subsidy within the meaning of Article 3.1(b) of the SCM Agreement.

"unprohibited". It is simply inconceivable to us that two prohibited subsidies could somehow become
permitted because they are provided for in the sam e legal provision. Two wrongs cannot make a
right.
7.742 Finally, we consider whether the measure is mandatory.
909
7.743 Turning once more to the text of the relevant legal provision, pursuant to section 1207(a)(1)
of the FSRI Act of 2002, "the Secretary shall issue marketing certificates or cash payments, at the
option of the recipient, to domestic users and exporters" (emphasis added).910
7.744 The United States does not disagree that, subject to the availability of funds (that is, the
availability of CCC borrowing authority), user marketing (Step 2) payments must be made to all those
who meet the conditions for eligibility.911
7.745 We are of the view that section 1207(a)(1) of the FSRI Act of 2002 mandates the granting of
subsidies in that the United States authorities have no discretion not to allow it if exporters fulfil
certain conditions. This is not a situation in whic h the United States executive enjoys a discretion to
somehow grant user marketing (Step 2) payments to exporters in a WTO-consistent manner. Every
user marketing (Step 2) payment to an exporter constitutes a prohibited export subsidy.
7.746 The fact that the actual payment of subsidies is triggered only if certain market
conditions prevail does not impact upon our analysis of the normative nature and operation of the
measure within the United States legal system. Th e operation of the world upland cotton market, and
the underlying determinative prices for the level of user marketing (Step 2) payments to upland
cotton, are not exclusively within the control of the United States government. When certain market
conditions exist, the Secretary of Agriculture h as no discretion: the payments are automatically
triggered.
7.747 We recall that, pursuant to section 1601(e) of the FSRI Act of 2002, the United States
Secretary of Agriculture is authori zed to adjust support to the maxi mum extent practicable to comply
with total allowable domestic support levels under the Uruguay Round Agreements. This authority
applies to certain aspects of the user marketing (Step 2) programme.
912 However, this authority
pertains exclusively to the level of United States domestic support commitments under the Agreement
on Agriculture 913, an issue distinct from the constituent qualitative elements and conditionality of
subsidies governed by the SCM Agreement, and from compliance with the agricultural export subsidy
obligations in Part V of the Agreement on Agriculture . The level of domestic support is not legally
relevant to whether or not the United States grants export-contingent subsidies. Therefore, this
provision is not legally determinative for whethe r the measure is of binding normative nature and
operation within the United States domestic legal system, and has no strict relevance to our finding
that the user marketing (Step 2) payments to e xporters under section 1207(a) of the FSRI Act of 2002
are prohibited export subsidies within the meaning of Article 3.1(a) of the SCM Agreement, or export
subsidies under Articles 9.1(a) and 1(e) of the Agreement on Agriculture.

909 See supra, para. 7.336 of Section VII:C.
910 Section 1207(a)(1) of the FSRI Act of 2002, reproduced in Exhibit BRA-29.
911 United States' response to Panel Question No. 109.
912 Section 1601(e) pertains to expenditures under subtitles A through E of the FSRI Act of 2002.
Section 1207(a) is in Subtitle B of th at Act. Levels of domestic suppor t expenditures under section 1207(a) are
therefore covered by the provision.
913 United States' response to Panel Question No. 253. In response to Panel Question No. 253(b), the
United States confirmed that "section 1601(e) applies to the Aggregate Measure of Support commitments under
the Uruguay Round Agreement on Agriculture."

7.748 We therefore find that section 1207(a) of the FSRI Act of 2002 providing for user marketing
(Step 2) payments to exporters constitutes a subs idy "contingent on export performance" within the
meaning of Article 9.1(a) of the Agreement on Agriculture.
7.749 As we have already stated, the United St ates has no scheduled export subsidy reduction
commitments for upland cotton. 914 User marketing (Step 2) pa yments to exporters under section
1207(a) of the FSRI Act of 2002 are an export subsidy listed in Article 9.1 of the Agreement on
Agriculture. In providing such subsidies, the United States has acted inconsistently with its obligation
under Article 3.3 of the Agreement on Agriculture to "not provide subsidies in respect of any
agricultural product not specified in ... its Schedul e". The United States has furthermore acted
inconsistently with its obligation in Article 8 of the Agreement on Agriculture "not to provide export
subsidies otherwise than in conformity with [the Agreement on Agriculture ] and with the
commitments as specified in [its] Schedule".
7.750 In light of this finding, we do not examine Brazil's alternative claim of violation of
Article 10.1 of the Agreement on Agriculture.
7.751 Having examined the WTO-consistency of the e xport subsidies for agricultural products, in
the first place, under the Agreement on Agriculture, we observe that, as articulated in Article 13(c)(ii)
of the Agreement on Agriculture, to the extent that the export subsidy at issue does not conform fully
to the provisions of Part V of the Agreement on Agriculture , it is not exempt from actions based on
Articles 3.1(a) and 3.2 of the SCM Agreement. We, therefore, now examine Brazil's claims based on
Articles 3.1(a) and 3.2 of the SCM Agreement.
(ii) Claims under Article 3.1(a) (and 3.2) of the SCM Agreement
7.752 Pursuant to Article 3.1(a) of the SCM Agreement:
"Except as provided in the Agreement on Agri culture, the following subsidies, within
the meaning of Article 1, shall be prohibited:
(a) subsidies contingent, in law or in fact, whether solely or as one of several
other conditions, upon export performance, in cluding those illustrated in Annex I ..."
(footnotes omitted)
7.753 The United States does not contest that user ma rketing (Step 2) payments to exporters under
section 1207(a) of the FSRI Act of 2002 are "subsid ies" within the meaning of Article 1 of the SCM
Agreement.915 Nor, for the reasons we have already st ated, could the United States properly do so. 916
The only question before the Panel is whether such payments are "contingent … upon export
performance" within the meaning of Article 3.1(a) of the SCM Agreement.
7.754 We recall our earlier finding that user marke ting (Step 2) payments to exporters under
section 1207(a) of the FSRI Act of 2002 constitute a subsidy "contingent upon export performance"
within the meaning of Article 9.1(a) of the Agreement on Agriculture. Although there are differences
between the export subsidy disciplines established u nder the two Agreements, we do not believe that
those differences affect our examination of the subs tantive requirement relating to export-contingency
here.917 We are not aware of any reason, and none has b een brought to our attention in this dispute,

914 Supra, para. 7.666.
915 United States' response to Panel Question No.108.
916 We recall our examination supra, para. 7.696
917 We find support for our approach in Appellate Body Report, US – FSC . We are aware that the
Appellate Body conducted an exam ination of export subsidies th ere under Article 10.1 of the Agreement on
Agriculture. As the definition of "export subsidies" contained in Article 1(e) includes export subsidies listed in
Article 9, we see a parallel, in the particular circumstances in this dispute, relating to the requirement of export

why it would not be appropriate to apply directly the interpretation of export contingency that we
have adopted under Article 9.1(a) of the Agreement on Agriculture – which, in any event, referred
for contextual guidance to the export contingency condition in the SCM Agreement – to the
interpretation of export contingency under the SCM Agreement in this factual situation.
7.755 In so doing, we must, once again, underline the unreasonableness of the view of the WTO-
consistency of the user marketing (Step 2) payments advocated by the United States in this dispute.
7.756 Acceptance of the United States' argument w ould be to accept the proposition that a
government could elect to bestow export-contingent subsidies simply by combining them with other,
equally egregious, but different, prohibited subsidies. Members could thereby avoid the disciplines of
both Articles 3.1(a) and (b) of the SCM Agreement by structuring a subsidy in such a way to have
both a "de jure export contingency" element and a " de jure local content contingency" element. This
would reduce the fundamental prohibitions in Articles 3.1(a) and (b) of the SCM Agreement to
"redundancy and inutility".
918
7.757 As we have already stated919, we do not believe that it is possible for a Member to design two
prohibited subsidy components and, merely thro ugh joining them in a single legal provision,
somehow render one, or both, of them "unprohibited". It is simply inconceivable to us that two
prohibited subsidies could somehow become permi tted because they are prov ided for in the same
legal provision. Two wrongs cannot make a right.
7.758 Furthermore, the interpretation advanced by the United States would be irreconcilable with
the object and purpose of the SCM Agreement , given that it would give a licence to Member
governments to evade any effective disciplines on e xport subsidies by combining export-contingent
subsidies with subsidies contingent on the use of domestic over imported goods in a single legislative
provision and programme. This would subvert th e most stringent subsidy disciplines in the SCM
Agreement.920
7.759 We recall our earlier finding that the measure is mandatory in nature. 921 We see no reason
why that finding, made in the context of our examination under Article 9.1(a) of the Agreement on
Agriculture, cannot also be applicable to our analysis under Article 3.1(a) of the SCM Agreement in
this factual situation.
7.760 For these reasons, we find that section 1207(a) of the FSRI Act of 2002 providing for user
marketing (Step 2) payments to exporters is inconsistent with Article 3.1(a) of the SCM Agreement.
7.761 Article 3.2 of the SCM Agreement provides: "A Member shall neither grant nor maintain
subsidies referred to in paragraph 1" of Article 3. To the extent that section 1207(a) of the FSRI Act

contingency in Article 9.1(a) of the Agreement on Agriculture . See also Appellate Body Report, Canada –
Aircraft, paras. 162-180.
918 It is well established that an interpreter is not free to adopt a reading that would reduce whole
clauses of a treaty to redundancy or inutility . See, for example, Appellate Body Report, Brazil – Aircraft, para.
179 and footnote 110, and Panel Report, US – FSC (Article 21.5 – EC).
919 Supra, para. 7.741.
920 See Panel Report, US – FSC (Article 21.5 – EC) . As that panel also observed, the panel in Canada
– Aircraft noted that "[…] the object and purpose of th e SCM Agreement could more appropriately be
summarised as the establishment of multilateral disciplines on the premise that some forms of government
intervention distort international trade, [or] have the pot ential to distort [international] trade." See Panel Report,
Canada – Aircraft, para. 9.119. We also find support for our view of the object and purpose of the SCM
Agreement in Appellate Body Report, Canada – Aircraft, para. 157, where the Appellate Body referred to "the
trade-distorting potential of a 'financial contribution'".
921 Supra, para. 7.748.

of 2002 providing for user marketing (Step 2) payments to exporters is inconsistent with
Article 3.1(a), it is, consequently, also inconsistent with Article 3.2 of the SCM Agreement.
5. Export credit guarantee programmes
(a) Measures at issue
7.762 Brazil challenges export credit guarantees under three United States export credit guarantee
programmes: GSM 102, GSM 103, and the Supplie r Credit Guarantee Programme ("SCGP") under
Articles 10.1 and 8 of the Agreement on Agriculture. These measures are described in Section VII:C,
supra.
7.763 Brazil challenges these programmes both "as such" and "as applied". Because of the
analytical approach we adopt below in our examination under the Agreement on Agriculture , for the
reasons we indicate 922, based on the contextual guidance ava ilable under item (j) of the Illustrative
List of Export Subsidies in Annex I to the SCM Agreement , we do not view this distinction as a
determinative one here. Item (j ) refers to the provision by gove rnments of export credit guarantee
"programmes". We adopt a programme-wide analys is under item (j) and examine whether or not the
premiums charged under the export credit guarantee programmes at issue are inadequate to cover
long-term operating costs and losses. 923 We then transpose this c ontextual guidance to make a
finding, with respect to the scheduled and unsche duled products at issue, under Articles 10.1 (and 8)
of the Agreement on Agriculture.924
7.764 We recall that our examination here is not lim ited to upland cotton as our terms of reference
include "export credit guarantees ... to facilitate the export of US upland cotton, and other eligible
agricultural commodities" as addressed in Brazil's panel request.925
(b) Main arguments of the parties
7.765 Brazil argues that three United States export credit guarantee programmes – GSM 102, GSM
103 and SCGP – violate Articles 10.1 and 8 of the Agreement on Agriculture and are therefore not
exempt, under Article 13(c)(ii) of the Agreement on Agriculture, from actions based on Articles 3.1(a)
and 3.2 of the SCM Agreement. Brazil alleges that the programmes also violate the latter provisions.
7.766 Brazil contends that GSM 102, GSM 103 and SCGP result in, or threaten to lead to,
circumvention of the United States' export subsidy commitments within the meaning of Article 10.1
of the Agreement on Agriculture . According to Brazil, GSM 102, GSM 103 and SCGP, insofar as
they are available for unscheduled products, violate Articles 10.1 and 8 of the Agreement on

922 Infra, paras. 7.802 ff.
923 Infra, paras. 7.804 ff.
924 Infra, paras. 7.870 ff.
925 Supra, Section VII:C. We recall that, in our 5 September 2003 communication, we, "invited the
parties to address further the issue whether the export credit guarantee programs at issue constitute export
subsidies for the purposes of the Agreement on Agriculture ." We also indicated our intention to rule that the
programmes as they relate to upland cotton, and all other eligible agricultural commodities, are within our terms
of reference and that the Brazil's statement of ava ilable evidence is adequate in this respect. See s upra, Section
VII:A and Annex L-1.11. Exhibit BRA-73 contains an excerpt from the USDA website
(www.fas.usda.gov/excreds/...) which offers a summary of activity under the challenged export credit guarantee
programmes, indicating the allocations and applicatio ns received by country an d commodity, 1999-2003.
Exhibit BRA-299 contains a summary of activity of GSM 102, GSM 103 and SCGP for FY 2003. Exhibit US-
12 indicates eligible US commodities (and high-value commodities) under the GSM 102 and SCGP
programmes. See also Exhibit US-41. Exhibit BRA-298 contains a FASonline Press Release dated 24
September 2002: "USDA Amends Commodity Eligibility Under Credit Guarantee Programs", listing eligible
standard products and high value agricultural products for GSM 102 and SCGP, available at www.fas.usda.gov/.

Agriculture because they make export subsidies available for unscheduled products. With respect to
scheduled products, GSM 102, GSM 103 and SCGP also threaten to lead to circumvention of the
United States export subsidy reduction commitments.
7.767 Brazil asserts that item (j) of the Illustrative List of Export Subsidies in Annex I of the SCM
Agreement and Articles 1 and 3 of the SCM Agreement provide contextual guidance for the
interpretation of the terms "export s ubsidies" under Article 10.1 of the Agreement on Agriculture .
The United States export credit guarantee programmes are export subsidies within the meaning of
Article 10 Agreement on Agriculture as they are provided at premium rates which are inadequate to
cover the long term operating costs and losses of the programmes as set out in item (j) and are
therefore export subsidies within the meaning of Article 3.1 of the SCM Agreement . According to
Brazil, they also constitute financial contributi ons conferring a benefit, within the meaning of
Article 1 of the SCM Agreement , as there are no commercially comparable instruments in the
marketplace. They are contingent on export under Article 3.1(a) of the SCM Agreement.
7.768 Brazil disagrees with an a contrario interpretation of item (j): even if an export credit
guarantee programme is not an export subsidy w ithin the meaning of item (j) (with adequate
premiums for the purposes of item (j)), it could still constitute an export subsidy by virtue of the
definitional elements contained in Articles 1 and 3 of the SCM Agreement.
7.769 Brazil argues that Article 10.2 of the Agreement on Agriculture does not serve to exempt
export credit guarantees from the provisions on pr evention of circumvention of export subsidy
disciplines in Article 10.1 of the Agreement on Agriculture , nor from the prohibition on export
subsidies in Article 3.1(a) of the SCM Agreement. Brazil argues that Article 10.2 indicates Members'
commitment to undertake the development of furt her disciplines on export credit guarantees, but does
not imply that no disciplines currently exist.
7.770 For the United States , analysis of export credit guarantees under the Agreement on
Agriculture "begins and ends" with Article 10.2 of the Agreement on Agriculture. The United States
asserts that Article 10.2 of the Agreement on Agriculture "reflects the deferral of disciplines on export
credit guarantee programs contemplated by WTO Members"
926 and that export credit guarantee
programmes are not export subsidies under the Agreement on Agriculture and are not subject to the
export subsidy disciplines of that Agreement. Invoking Article 21.1 of the Agreement on Agriculture
and the introductory language in Article 3 of the SCM Agreement, the United States also asserts that
Article 10.2 of the Agreement on Agriculture is an "explicit exception" from the subsidy disciplines
under the SCM Agreement.927
7.771 While it does not concede that any WTO disci plines exist on agricultural export credit
guarantees, it submits that even if the SCM Agreement were relevant to United States export credit
guarantees, "the only appropriate mode of analysis" is an examination under item (j) of the Illustrative
List of Export Subsidies in Annex I of the SCM Agreement.928 The United States also states, however,
that Article 1 of the SCM Agreement would provide relevant context in determining whether a subsidy
exists in order to determine the applicability of Ar ticle 10.1 to a particular measure not described in
Article 9.1.929
7.772 The United States argues that its export credit guarantee programmes "do not run afoul of the
criteria of item (j)" of Annex I of the SCM Agreement and that, therefore, "…they are not a prohibited
export subsidy under Article 3.1(a) of the Subsidies Agreement." 930 The United States thus asks the

926 United States' first written submission, para. 160.
927 Executive summary of the United States' first written submission, paras. 35-37.
928 United States' response to Panel Question No. 75.
929 United States' response to Panel Question No. 74.
930 United States' first written submission, para. 183.

Panel to interpret item (j) a contrario: to the extent premiums cover long-term operating costs and
losses, then export credit guarantees are not export subsidies for purposes of item (j) and they must be
automatically deemed not to confer export subsidies for the purposes of Article 10.1 of the Agreement
on Agriculture or Article 3.1 of the SCM Agreement.
7.773 The United States argues that Articles 1 and 3 of the SCM Agreement are not relevant.
Nevertheless, as an additional line of defence, the United States argues that, even if its export credit
guarantee programmes are export contingent financial contributions within the meaning of Articles 1
and 3, they do not confer a "benefit" in the mark etplace, as identical instrume nts are available in the
form of "forfaiting" (and private "insurance").
7.774 The United States submits that it is not permitte d to provide export subsidies in respect of
unscheduled products, but that it is in comp liance with its scheduled quantitative reduction
commitments with respect to 12 out of the 13 scheduled commodities. 931 In the United States view,
under a "mandatory/discretionary" analysis, the re levant question would be whether the provisions
establishing the export credit guarantee programmes mandate a breach of any WTO obligation. In the
United States view, they do not, in view of the va rious discretionary elements in the operation of the
programmes that restrict the actual issuance of guarantees.
(c) Main arguments of the third parties
7.775 In Argentina's view, the United States' interpretation of Article 10.2 of the Agreement on
Agriculture is entirely at odds with the context of that provision and the object and purpose of
Article 10, since it would contribute to the circumvention of export subsidy commitments by
excluding an entire category of export subsidies from the general disciplines in that area. Article 1(e)
clearly defines export subsidies without excluding those that are not listed in Article 9.1 of the
Agreement on Agriculture . At the same time, Article 13(c)(ii) stipulates that in order to be exempt
from actions based on Article 3 of the SCM Agreement, export subsidies must conform fully to the
provisions of Part V of the Agreement on Agriculture, and not to a particular article. Thus, the lack of
disciplines specifically developed for export credit guarantees does not necessarily imply the absence
or shortage of criteria that would make it possible to establish whether these instruments "conform
fully to the provisions of Part V of this Agreement" as stipulated in the chapeau of Article 13(c).932
7.776 According to Argentina, the rele vance of Articles 1 and 3 of the SCM Agreement is
unquestionable when it comes to evaluating the consistency of the export credit guarantees with WTO
rules.933 Argentina does not agree with an a contrario interpretation, either with respect to the first
paragraph of item (k) or item (j) of the Illustra tive List of Export Subsidies in Annex I of the SCM
Agreement, because unlike the final sentence of the second paragraph of item (k), the text of item (j)
does not explicitly recognize that the measure will not be an export subsidy. Argentina submits that
an a contrario interpretation that circumvents the test of Article of 3.1(a) of the SCM Agreement is not
possible.934
7.777 Canada asserts that the United States argument that Article 10.2 of the Agreement on
Agriculture exempts export credit practices from subsidy disciplines under the Agreement is
untenable. Article 10.2 sets out an intention on the part of Members to undertake further work
regarding these measures – the simple fact of agreeing to do so, however, does not amount to a

931 United States' rebuttal submission, para. 183 and data in footnote 220.
932 Argentina's response to Panel third party Question No. 37 (b).
933 Argentina's response to Panel third party Question No. 30. Argentina argues that the Appellate
Body in US – FSC and Canada – Dairy has turned to the SCM Agreement for context since the Agreement on
Agriculture does not contain its own definition of a subsidy. According to Argentina, the Appellate Body has
also established (in US – FSC ) that export subsidies under Article 3.1(a) of the SCM Agreement constitute
export subsidies under the Agreement on Agriculture.
934 Argentina's response to Panel third party Question No. 30.

permission to use those measures to confer export subsidies without consequence and without limit.
The United States interpretation of Article 10.2 ignores the context provided by Article 10.1 and
contradicts the stated object and purpose of Article 10 as a whole: "Prevention of Circumvention of
Export Subsidy Commitments". For the United Stat es to meet the requirements of Article 10.3, it
must demonstrate the absence of subsidiza tion as understood under Article 1(e) of the Agreement on
Agriculture.
935
7.778 Canada is of the view that United States export credit guarantee programmes may provide
"subsidies contingent upon export perf ormance" under Article 1(e) of the Agreement on Agriculture
that are "not listed in paragraph 1 of Article 9", pursuant to Artic le 10.1. Because the United States
has no export subsidy reduction commitments for upla nd cotton, it may have violated Article 10.1 by
applying such subsidies in a manner that results in circumvention of its e xport subsidy commitments.
The United States may have also therefore violated Article 8 of the Agriculture Agreement by
providing export subsidies "otherwise than in conform ity with this Agreement". Canada submits that
the Panel should refer to both item (j) and Articles 1 and 3 of the SCM Agreement for contextual
guidance in interpreting Article 10 of Agreement on Agriculture . Item (j) allows the Panel to
determine whether the United States provides "expor t credit guarantee[…] programmes" such that
"guaranteed export credit transactions guara nteed" under those programs are subsidized per se and
Articles 1 and 3 of the SCM Agreement enables the Panel to determine whether given quantities of
United States exports are subsidized on a transaction-by-transaction basis.936
7.779 Canada argues that the United States cannot de ny that United States export credit guarantees
involve a "financial contribution" in the form of a "potential direct transfer of funds" under
Article 1.1(a)(1)(i) of the SCM Agreement . Nor can the United States deny that the "export
guarantees" are contingent upon expor t performance under Article 3.1(a) of the Agreement. Canada
therefore addresses only the "benefit" requirement of the subsidy definition under Article 1.1(b) of the
SCM Agreement.937
7.780 According to Canada, item (j) of the I llustrative List may not be interpreted a contrario to
deem United States export credit guarantee practices as not providing export subsidies under
Article 10.1. Canada argues that whether an e xport subsidy exists under Articles 1 and 3 of the SCM
Agreement is relevant in determining whether the Un ited States programmes grant export subsidies
within the meaning of Article 1(e) of the Agreement on Agriculture . Where United States
programmes may not be deemed to provide ex port subsidies because they do not meet the
requirements of item (j), Articles 10.1 and 10.3 of the Agriculture Agreement nevertheless require the
United States to demonstrate that it has not grante d export subsidies within the meaning of Articles 1
and 3 of the SCM Agreement in respect of the relevant quantity of exports.938
7.781 The European Communities submits that Article 10.2 of the Agreement on Agriculture
cannot be seen as exempting export credit guarant ees granted to agriculture products from WTO
disciplines as this provision makes it clear that e xport credit guarantees are not one of the types of
export subsidies listed in Article 9.1 which a Member is given a limited authorization to apply. Thus,
export credit guarantees which qualify as export s ubsidies may be illegal under Article 10.1 when
they might lead to circumvention of the export subsidy commitments. Article 10.2 is designed to
develop disciplines of a broader nature than simply the regulation of export credits and export credit
guarantees which operate as an export subsidy, sinc e whether an export credit guarantee is an export
subsidy depends on an analysis of the structure of that instrument.

935 Executive summary of Canada's written submission to the first session of the first substantive
meeting, paras. 14-15.
936 Canada's response to Panel third party Question No. 31.
937 Executive summary of Canada's written submission to the first session of the first substantive
meeting, paras. 8-11 and Canada's response to Panel third party Question No. 32.
938 Canada's response to Panel third party Question No. 30.

7.782 The European Communities argues that in th e similar way the agreement to negotiate
disciplines on harmonized rules of origin does not imply that Members are exempted from other WTO
obligations on rules of origin, export credits or export credit guarantees which operate as export
subsidies are subject to the export subsidy disciplines of the Agreement on Agriculture and the SCM
Agreement.939
7.783 The European Communities disagrees with the United States' argument that there are no
disciplines on export credit guarantees. The discipline applying to export credit guarantees, where
they operate as export subsidies, is that they shou ld not be provided in a manner inconsistent with
Article 10.1. If they are provided inconsistently w ith Article 10.1 then they are not protected by
Article 13 and are subject to the prohibition in Article 3 of the SCM Agreement.
940
7.784 According to the European Co mmunities, the relationship between the Illustrative List and
Article 3.1(a) is addressed specifically by footnote 5 of the SCM Agreement . Item (j) describes
circumstances in which, inter alia , export credit guarantee progr ammes may constitute export
subsidies. In certain circumstances (e.g., where the government is the only provider), it may be that
the requirement set out in item (j) – export credit guarantees must not be provided at premium rates
which are inadequate to cover the long-term operating costs and losses of the programme – represents
the appropriate benchmark for determining that an export subsidy does not exist.941
7.785 New Zealand finds no basis for the assertion by the United States that export credit guarantee
programmes are not subject to the export subsidy disciplines of the Agreement on Agriculture .
Nothing in Article 10.2 suggests that it provides an exception for export credit guarantee programmes
from the disciplines of Article 10.1. According to Ne w Zealand, the inclusion of reference to such
programmes in the context of Article 10 supports th e opposite conclusion - that Members were in fact
concerned at the potential for such programmes to circumvent Members' export subsidy reduction
commitments. According to New Zealand, while Article 10.1 currently provides the only discipline
on the use of export credits, it is expected that the work envisaged in Article 10.2 will elaborate
further and more specific disciplines that will presuma bly make identification of the extent to which
such export credit programmes constitute export subsidies more straightforward.942
7.786 According to New Zealand, the Panel should refe r to both item (j) and Articles 1 and 3 of the
SCM Agreement for contextual guidance in the interpretation of Article 10 of Agreement on
Agriculture. The SCM Agreement provides both a general definition of an "export subsidy"
(specifically the definition of a "subsidy" in the te rms of Article 1 and the requirement of contingency
upon export in the terms of Article 3) and an Illustrative List containing specific examples of export
subsidies. Therefore Articles 1 and 3 and item (j) of the Illustrative List provide contextual guidance
for the interpretation of the terms in Article 10.943

939 European Communities' oral statement at the first session of the first substantive meeting, paras. 42-
43.
940 European Communities' response to Panel third party Question No. 37 (b).
941 European Communities' response to Panel third party Question No. 30.
942 Executive summary of New Zealand's written submission to the first session of the first substantive
meeting, para. 18.
943 New Zealand's response to Panel third party Question No. 31.

(d) Evaluation by the Panel
(i) Claims under the Agreement on Agriculture
i. Overview of Panel's approach
7.787 The initial issue before us is whether th e three United States export credit guarantee
programmes at issue conform fully to the export subsidy provisions in Part V of the Agreement on
Agriculture. Pursuant to the provisions governing the relationship between the Agreement on
Agriculture, the SCM Agreement (and the GATT 1994), and as articulated in Article 13(c)(ii) of the
Agreement on Agriculture , if they so conform, then our examination would end there. However, to
the extent that they do not "conform fully to" the provisions of Part V of the Agreement on
Agriculture, we may also conduct an examination unde r the prohibition on export subsidies in
Articles 3.1(a) and 3.2 of the SCM Agreement (and Article XVI of the GATT 1994).
944
7.788 The parties agree that export credit guarantees are not included in the non-exhaustive list of
export subsidies in Article 9.1, and that Article 10 of the Agreement on Agriculture is the relevant
provision. We adopt this shared view of the pa rties, without prejudice to any interpretation of
Article 9 of the Agreement on Agriculture.
7.789 We structure our examination under Article 10 of the Agreement on Agriculture as follows.
First, we consider whether United States agri cultural export credit guarantee programmes constitute
export subsidies for the purposes of Article 10.1 of the Agreement on Agriculture. This requires us to
identify the definitional elements of an export subsidy under Article 10.1 of the Agreement on
Agriculture, and to determine what, if any, are the re levant contextual elements provided in the SCM
Agreement (i.e. item (j) of the Illustrative List of Export Subsidies in Annex I of the SCM Agreement
and/or Articles 1 and 3 of the SCM Agreement).
7.790 Second, we examine whether the agricultura l export credit guarantee programmes constitute
"export subsidies" which conform fully to the provisions of Articles 10.1 and 8 of the Agreement on
Agriculture.
7.791 Third, we examine whether Article 10.2 of the Agreement on Agriculture provides an
"exception" or "carve out" or "deferral of disci plines" for export credit guarantee programmes that
constitute export subsidies within the meaning of Article 10.1 of the Agreement on Agriculture.
7.792 Our examination requires us to take account of the burden of proof set forth in Article 10.3.
As we have already mentioned 945, Article 10.3 provides a special ru le for proof of export subsidies
that applies in certain disputes under Articles 3, 8, 9, and 10 of the Agreement on Agriculture .946
Article 10.3 provides:
"Any Member which claims that any qua ntity exported in excess of a reduction
commitment level is not subsidized must establish that no export subsidy, whether
listed in Article 9 or not, has been grante d in respect of the quantity of exports in
question."

944 We refer to our "exempt from actions" and "order of analysis" examinations in Section VII:C, as
well as our overview of export subsidy obligations, supra, paras. 7.654 ff.
945 We refer to our discussion of the burden of proof, supra, Section VII:C.
946 Appellate Body Report, Canada – Dairy (Article 21.5 – New Zealand and US II) , paras. 69-71,
73-75. Contrary to the United States' assertion, in its further rebuttal submission, para. 191, we do not believe
that our observation (in our 20 June communication contained in Section VII:A) that no provisions of the
Agreement on Agriculture are identified as special or additional rules and procedures in Appendix 2 to the DSU
is at variance with our application of this burden of pr oof, which flows from the text of Article 10.3 itself and
related provisions.

7.793 As outlined above, the United States in effect cl aims or asserts in r esponse to the primary
claims made by Brazil that no export subsidies with in the scope of Article 10.1 have been granted by
virtue of the export credit programmes in question in excess of the commitment levels applicable to
either scheduled or unscheduled products. In th ese circumstances, as a result of the special rule on
burden of proof in Article 10.3, it is for Brazil as th e complaining party to prove that the quantity of
United States exports of a "scheduled" 947 agricultural product exceed the relevant quantity
commitment level referred to in the first clause of Article 3.3 of the Agreement. The United States
will then be treated as if it has granted WTO-inconsistent export subsidies in respect of the excess
quantity, unless the United States presents adequate evidence to "establish" that no export subsidy has
been granted through the United States export credit programmes in question in respect of this excess
quantity of exports. With respect to upland cotton and other unscheduled products, the Panel
considers that the United States' reduction commitment level, for the purposes of Article 10.3, is zero
for each unscheduled product. By virtue of the second clause of Article 3.3, that is the level to which
a Member must reduce any Article 9.1 export subsidies that were not in fact specifically made subject
to "scheduled" reduction commitments. Accord ingly, in the case of upland cotton and other
unscheduled products the same sequence is to be fo llowed, with Brazil as the complaining party first
having to prove that United States' exports of unscheduled products exceed that "zero" level.948
ii. Do the United States agricultural export credit guarantee programmes at issue constitute
export subsidies for the purposes of Article 10.1 of the Agreement on Agriculture?
7.794 The issue before us here is whether the Un ited States export credit guarantee programmes at
issue constitute "export subsidies" within the meaning of Article 10.1 of the Agreement on
Agriculture.
7.795 Article 10.1 of the Agreement on Agriculture is entitled "Prevention of circumvention of
export subsidy commitments". It states:
"Export subsidies not listed in paragraph 1 of Article 9 shall not be applied in a
manner which results in, or which threaten s to lead to, circumvention of export
subsidy commitments; nor shall non-commercia l transactions be used to circumvent
such commitments."
7.796 Article 1(e) of the Agreement on Agriculture states that the term "export subsidies" "refers to
subsidies contingent upon export performance, including the export subsidies listed in Article 9 of this
Agreement". According to its own terms, and read in conjunc tion with Article 1(e) of the Agreement
on Agriculture, Article 10.1 covers any subs idy contingent on export performance that is not listed in
Article 9.1.
7.797 The Agreement on Agriculture does not contain any further textual or contextual elaboration
of the terms "subsidies" "contingent upon export perfo rmance", beyond the list of export subsidies
defined in Article 9.1. Nor does the Agreement on Agriculture contain any specific guidance on the

947 The United States has scheduled export subsidy reduction commitments in respect of the following
thirteen commodities: wheat, coarse grains, rice, vegetable oils, butter and butter oil, skim milk powder, cheese,
other milk products, bovine meat, pigmeat, poultry meat, live dairy cattle, eggs. See Schedule XX of the United
States of America, Part IV, Sec tion II, entitled "Export Subsidies: Budgetary Outlays and Quantitative
Reduction Commitments", reproduced in Exhibit BRA-83 and Exhibit US-13.
948 In any event, ev en if there is no reduction commitment level in respect of unscheduled products,
affecting the rules of burden of proof that apply to Brazil's claims pertaining to unscheduled products so as to
remove the burden entirely from Brazil or to place the entire burden on Brazil to pr ove not only that exports
have been made, but even that export subsidies have been provided in respect of such exported products, this
would not materially affect our analysis, as we are of th e view that Brazil has discha rged this burden as well,
and the United States has failed to discharge its burden in this respect.

criteria that may be applied to determine when ex port credit guarantee programmes, in particular, in
respect of agricultural products may constitute "export subsidies".
7.798 However, as we have previously noted, Article 1 of the SCM Agreement defines a "subsidy"
as a "financial contribution" that confers a "benefit". In addition, "subsidies", as defined in Article 1
of the SCM Agreement, that are "contingent upon export performance" are prohibited by Article 3.1(a)
of the SCM Agreement. That provision reads:
"Except as provided in the Agreement on Agri culture, the following subsidies, within
the meaning of Article 1, shall be prohibited:
(a) subsidies contingent, in law or in fact
4, whether solely or as one of several
other conditions, upon export performance, including those illustrated in Annex I5 ..."
Article 10.1 of the Agreement on Agriculture differs from the same term in the SCM Agreement. The
two Agreements use precisely the same words to define "export subsidies". 949 We therefore believe
that it is appropriate to seek contextual guidance in the relevant provisions of the SCM Agreement for
our interpretation of the term "export subsidies" in Article 10.1 of the Agreement on Agriculture in
this factual situation.950
7.800 The text of Article 3.1(a) of the SCM Agreement prohibits subsidies contingent upon export
performance "including those illustrated in Annex I". Annex I to the SCM Agreement comprises an
"Illustrative List of Export Subsidies". One of the ite ms of this Illustrative List – item (j) – contains a
specific textual reference to "expor t credit guarantee ... programmes". Item (j) of the Illustrative List
reads:
"The provision by governments (or special institutions controlled by governments) of
export credit guarantee or insurance programmes, of insurance or guarantee
programmes against increases in the cost of exported products or of exchange risk
programmes, at premium rates which are in adequate to cover the long-term operating
costs and losses of the programmes."
7.801 Brazil asserts that both Articles 1 and 3 of the SCM Agreement and item (j) of the Illustrative
List provide relevant contextual guidance for the determination of what mi ght constitute an export

949 See, for example, Appellate Body Report, US – FSC.
950 Our examination of the United States export credit guarantee programmes on this basis is therefore
without prejudice to the interpretation of the term "export subsidies" in the Agreement on Agriculture based on
the definition of "export subsidies" in Article 1(e) and the text of Article 10.1, and other provisions of the
Agreement on Agriculture, in and of themselves, or on other available contextual guidance.

subsidy for the purposes of Article 10.1 of the Agreement on Agriculture . The United States asserts
that an item (j) inquiry is, in the first instance, determinative.951
7.802 We look for guidance to the overall disciplines contained in the SCM Agreement governing
export credit guarantees granted under a Member's e xport credit guarantee programmes. We see that
the SCM Agreement contains, in item (j) of the Illustrative List of Export Subsidies in Annex I, an
explicit indication as to when export credit guarantee programmes constitute per se export subsidies
for the purposes of the SCM Agreement.
7.803 Subject to the United States' view of the role and effect of Article 10.2 of the Agreement on
Agriculture, there is no disagreement between the parties to this dispute that, if an export credit
guarantee programme meets the elements of item (j), it is a per se export subsidy. We therefore
examine the United States export credit guarantee pr ogrammes in question under the context provided
by item (j) in the Illustrative List of the SCM Agreement. Only if the result of our examination is that
the item (j) test is not met will we proceed to a further contextual examination of the definitional
elements contained in Articles 1 and 3 of the SCM Agreement.
iii. Are premium rates under the United States e xport credit guarantee programmes inadequate to
cover long-term operating costs and losses pursuant to item (j)?
7.804 In general terms, the test for determini ng whether an export credit guarantee programme
satisfies the terms of item (j) is the net cost to the government, as the service provider, of providing
the service under the export credit guarantee programmes. 952 To discern this overall cost to
government, item (j) calls for an examination of wh ether the premium rates of the export credit
guarantee programme at issue are inadequate to c over the long-term operating costs and losses of the
programmes. Beyond that, item (j) does not set forth, or require us to use, any one particular
methodological approach nor accounting philosophy in conducting our examination. Nor are we
required to quantify precisely the amount by which costs and losses exceeded premiums paid.
7.805 We understand that we are to look at premiums in relation to long-term operating costs and
losses. In this dispute, in order objectively to assess premiums in relation to long-term operating costs
and losses, we believe it is also appropriate for us to take into account aspects of the structure, design
and operation of the measure before us. We are entitled to inquire whether the programme, including
in terms of the premiums charged, was set up in such a way that the total of all premiums would be

951 To the extent that the United States might contes t the "export contingent nature" of its export credit
guarantee programmes, we disagree that the United States could properly do so. We note that such programmes
are, by their very nature, contingent upon exportation. Pursuant to 7 USC section 5622(a) and (b), reproduced
in Exhibit BRA-141, the CCC may guarantee the repayment of credit made available to finance "commercial
export sales of agricultural commodities" (emphasis added). Only United States agricultural commodities are
eligible (see 7 USC 5622(h)), and such commodities mu st be exported. The programmes are conditional upon
exportation. Under 7 CFR 1493.40 and 1493.430, reproduced in Exhibit BRA-38, Exhibit US-6, a firm export
sale must exist before an exporter may submit an app lication for a payment guarantee. Such a firm export sale
is a condition for seeking a guarantee under the three United States programmes at issue. We therefore consider
that these programmes are export-contingent, in the sense of being conditional or dependent upon exportation
within the meaning of Article 3.1(a) of the SCM Agreement and Articles 10.1 and 1(e) of the Agreement on
Agriculture. In addition, we note that the stated purpose of the programme is to increase exports of United
States agricultural commodities and to compete against foreign agricultural exports - see 7 USC 5622(h).
952 We find support for this proposition in Appellate Body Report, Canada – Dairy (Article 21.5 – New
Zealand and US), para. 93. We further note that item (l) in the Illustrative List refers to "any other charge on the
public account constituting an export subsidy in the sens e of Article XVI of GATT 19 94". The reference to
"other" in item (l) supports the view that the other items in the Illustrative List also involve an examination of
"charges on the public account", or net cost to government. We are not, therefore, involved, in this part of our
analysis, with trying to discern or calcu late any benefit to the recipient. For this reason, we do not believe that
the arguments of the United States relating to whether or not a benefit to the recipient exists, for example, in its
first written submission, para. 177, are legally relevant to the issue before us.

likely to cover the total of all operating costs a nd losses under the programme. For example, where a
programme does not provide for premium rates that ar e fully reflective of the risks of a particular
transaction, this might be one indicator that the programme was set up in such a way that its long-term
operating costs and losses have to be borne, in total or in part, by the government.
953
7.806 We note that it was well-established in the WTO, and, prior to that, in the GATT, that export
credit guarantees may generally constitute export subsid ies. This possibility was identified in the
Illustrative List of Export Subsidies incorporated in the Tokyo Round Subsidies Code 954, and had
already been acknowledged by the 1960 Working Party.955
7.807 We recall that item (j) focuses on "The provi sion by governments (or special institutions
controlled by governments)" of export credit gua rantee programmes meeting certain conditions.
There is no disagreement between the parties that the CCC, a United States government agency, is the
agency responsible for administering the thr ee export credit guarantee programmes at issue. 956 Our
examination therefore focuses upon CCC's long-term operating costs and losses in administering these
programmes, while recognizing that the CCC operates w ithin the larger context of the United States
Treasury and the United States government as a whole.
7.808 We must examine the totality of the relevant evidence on the Panel record, on its merits, and
on the basis of the text of item (j), to come to an overall view of whether the United States
government charges premiums that are inadequate to cover the long-term operating costs and losses of
the three United States export credit guarantee progr ammes at issue: GSM 102, GSM 103 and SCGP.

953 We note the view expressed in GATT Panel Report, EEC – Airbus . Regarding the condition, "at
premium rates, which are manifestly inadequate to cover the long-term operating costs and losses of the
programmes" in item (j) of the Tokyo Round SCM Code, the panel considered that in assessing an exchange risk
programme, what counted was not the pa rticular premium rate applied to a particular transaction, but whether
the scheme was set up in such a way that the total of all premiums would be likely to cover the total of all costs
and losses under the programme. That GATT panel thus considered that item (j) was applicable to any
exchange risk programme which involved a net cost to the government. A programme that did not contain
premium rates and which was set up in such a way that its long-term operating costs and losses have to be
borne, in total or in part, by the government would therefore fall under the provision of item (j). As with any
unadopted report, we may find useful guidance to the extent we consider this relevant. See Appellate Body
Report, Japan – Alcoholic Beverages II, p. 14: "a panel could nevertheless find useful guidance in the reasoning
of an unadopted panel report that it considered to be relevant."
954 The text of item (j) of the Illustrative List of Export Subsidies annexed to the Tokyo Round
Subsidies Code was identical to the current item (j), except that it contained the term "manifestly" modifying
"inadequate to cover long term costs and losses of the programmes".
955 "Subsidies: Provisions of Article XVI:4", Report adopted on 19 November 1960 (L/381).
Article XVI:4 deals with exports of any product other than a primary product. That Working Party referred to a
list of practices which certain contracting parties agreed, for certain purposes, "generally are to be considered as
subsidies in the sense of Article XVI:4 [of the GATT 1994] or are covered by the Articles of Agreement of the
International Monetary Fund." That list included: "In respect export credit guarantees, the charging of
premiums at rates which are manifestly inadequate to cover the long-term operating costs and losses of the
credit insurance institutions". See BISD, 9S/185, paras. 5-6.
956 See Exhibit US-129 and Exhibit BRA-158. Esta blished in 1933, the CCC is a wholly owned
government corporation within the United States Depa rtment of Agriculture. It is the United States
government's primary financing arm for a range of domestic and international agricultural programs, including
extending export credit guarantees for commodity sales to other countries. The CCC has no employees. It
carries out the majority of its programs through the pers onnel and facilities of the Farm Service Agency (FSA).
A Board of Directors manages CCC, subject to the gene ral supervision and direc tion of the Secretary of
Agriculture, who is an ex officio director and chairperson of the Board. The Board consists of seven members,
in addition to the Secretary, appointed by the President of the United States with th e advice and consent of the
Senate. The CCC has its own disbursing authority rather than issuing payments through the Treasury
Department. It has a variety of funding mechanisms (Appendix B of Exhibit US-1 29 lists CCC accounts with
the Treasury Department).

We underline that our approach is based on the eviden ce, taken as a whole, and that no one avenue of
inquiry has, in isolation, been determinative for us.
7.809 We begin by examining the terms of the text of item (j).
a. "Export credit guarantee ... programmes"
7.810 Item (j) calls for an examination of export credit guarantee "programmes".
957 Brazil's claims
identify three such "programmes", that is, GSM 10 2, GSM 103 and SCGP. Brazil asserts that an
item (j) analysis must examine the export credit guarantee "programmes".
7.811 The United States does not disagree that GSM 102, GSM 103 and SCGP are "programmes".
The United States contends, however, that merely tracking the activity of GSM 102, GSM 103 and
SCGP on a net present value or cash basis by fiscal year would distort (overestimate) the costs of the
programme. The United States distinguishes between activity on a fiscal year basis as opposed to
cohort-based subsidy estimates and re-estimates that calculate net present value over the life of the
programme. According to the United States, Un ited States budget figures referred to in these
proceedings are on a fiscal year basis and do not reflect re-estimates on a cohort basis.
958
7.812 The United States therefore directs us to adopt a "cohort 959-specific" approach in our item (j)
evaluation.
7.813 The United States further argues 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 Federal government." 960
Because all cohorts disbursed since the inception of federal credit reform remain open, a logical
extension of the United States argument would be that it is impossible for this Panel, at this point in
time, to judge whether the CCC guarantee programmes satisfy the elements of item (j).
7.814 However, we have the mandate and duty, with in the time period provided under the covered
agreements, and respecting the terms of reference give n to us by the DSB, to examine Brazil's claims
concerning the United States export credit guarantee programmes. We are also not required to use the
accounting or regulatory characterization of the Me mber concerned in our item (j) examination. 961
We are required to interpret a treaty provision in accordance with its specific terms, and in its context.

957 As much of the evidence and argumentation submitted relates to the CCC export credit guarantee
activity collectively under the three programmes, we also consider that we may treat the programmes
collectively to the extent that we ha ve relevant evidence and argumentation before us. Keeping the applicable
burden of proof in mind, and to the extent that the r ecord permits, we also examine relevant aspects of the
programmes individually.
958 The United States insists that a fundamental tenet of credit reform accounting is the requirement that
the performance of the credit be tracked over its lifetime, which is done by tracking each cohort of credit until
the credit period has expired or lapsed. According to the United States, the only estimates and re-estimates that
may be applied directly against each other are upward and downward re-estimates fo r the same "cohort". The
United States nevertheless submitted a fiscal-year chart in Exhibit US-147 depicting performance of certain
cohorts on a fiscal year/cash basis.
959"Executive Office of the President, Office of Mana gement and Budget, June 2002: Circular No. A-
11, Part 5: Federal Credit Programs", reproduced in Exhibit BRA-116, defines a "cohort" as all loan guarantees
of a programme for which a subsidy appropriation is provided for a given fiscal year (except for modified pre-
1992 loan guarantees). All guarantees issued during fis cal year 2002 comprise a di stinct cohort. The Panel
understands that all cohorts for the CCC export cred it guarantee programmes under credit reform are still open,
although cohorts for 1994 and 1995 should close this year. Although the formal administrative steps had not
been taken to close the 1994 and 1995 cohorts, all financia l transactions necessary to do so are complete. See
United States' responses to Panel Questions 81(c) and 221(e).
960 United States' response to Panel Question No. 81(c).
961 See our more detailed discussion of this infra, footnote 993.

7.815 We see no explicit reference to the term "cohort" in the text of item (j). Nor do we read any
caveat or condition in the text of item (j) which woul d require us to await the closure of any or all
United States export credit guarantee cohorts before being able to conduct an objective assessment of
the matter before us. Our task is not to calculate with precision any difference between premiums and
operating costs and losses of certain cohorts on th e basis of any specific accounting methodology.
Rather, our task is to evaluate whether the pr emiums charged under the United States export credit
guarantee programmes are inadequate to cover long-term operating costs and losses.
7.816 We nevertheless deem that our duty to conduct a thorough and objective assessment of the
matter before us permits us also to take into account, to the extent relevant, the cohort-specific
evidence before us.
b. "Premiums"
7.817 The ordinary meaning of the word "premiums" is "an amount to be paid for a contract of
insurance".
962 There is no disagreement between the parti es about the meaning of "premiums" for the
purposes of item (j) in this dispute.
7.818 Under the GSM 102, GSM 103 and SCGP export credit guarantee programmes, such
"premiums" are the fees paid by the applicant exporter constituting the consideration for the payment
guarantee provided by the CCC.
7.819 Under the GSM 102 and GSM 103 programmes, the exporter must remit, with a written
application, the full amount of the guarantee fee, and applications will not be approved until the
guarantee fee has been received by CCC. 963 In return for this fee, th e CCC agrees to pay the exporter
(or assignee) an amount not to exceed the guaranteed valu e, plus eligible interest, in the event that the
foreign bank fails to pay under the foreign ba nk letter of credit or the related obligation 964 in
connection with the export sale to whic h CCC's guarantee coverage pertains. 965 The "guaranteed
value" is the maximum amount, exclusive of inter est that CCC agrees to pay the exporter (or
assignee) under the payment guarantee. 966 The fee is computed by multiplying the guaranteed value
by the guarantee fee rate. 967 Typically, 98 per cent of principal and a portion of interest (e.g.
55 per cent)968 at an adjustable rate is covered.969
7.820 Under the GSM 102 and GSM 103 export credit guarantee programmes, the guarantee fee
rates are based upon the length of the payment term s provided for in the export sale contract, the
degree of risk the CCC assumes, as determined by the CCC, and any other factors which the CCC
determines appropriate for consideration. 970 Fees vary by the guaranteed dollar value of the
transaction, the repayment period, and the principal repayment interval (annual or semi-annual). 971

962 Concise Oxford English Dictionary (Oxford: Clarendon Press, 1995).
963 7 CFR 1493.70(c), reproduced in Exhibit BRA-38. Guarantee fee rates paid in connection with an
approved application will ordinarily not be refundable.
964 7 CFR 1493.60, reproduced in Exhibit BRA-38.
965 7 CFR 1493.10(3), reproduced in Exhibit BRA-38.
966 7 CFR 1493.20(o), reproduced in Exhibit BRA-38.
967 7 CFR 1493.70 (b), reproduced in Exhibit BRA-38.
968 See Exhibit BRA-84.
969 See FAS Online: CCC Export Credit Guarantee Programs, reproduced in Exhibit BRA-71.
970 7 CFR 1493.70(a), reproduced in Exhibit BRA-38. We note, however, that the United States has
acknowledged that the fees are not risk-based. See e.g. Exhibit US-150.
971 United States' response to Panel Question No. 84. Exhibit BRA-98 contains a fee schedule for GSM
102 and GSM 103 announced by USDA on 4 September 2001, which re placed those in PR 1080-94 issued 26
September 1994 and PR 1085-94, issued 27 September 1994. This fee schedule was altered for GSM 102 to
include fees for 30-day and 60-day coverage, effective 1 October 2002 (the fee rates and length of coverage for

7.821 Under the SCGP, the exporter must similarly remit, with a written application, the full amount
of the guarantee fee. 972 In return for this fee, the CCC agre es to pay the exporter (or assignee) an
amount not to exceed the guaranteed value, plus eligib le interest, in the event that the importer fails to
pay under the importer obligation 973 in connection with the export sale to which CCC's guarantee
coverage pertains.974 The fee is computed by multiplying th e guaranteed value by the guarantee fee
rate.975 The guaranteed value is currently 65 per cent of the principal amount.976
7.822 According to uncontested information submitted to us, a total of roughly $246 million in
premiums was collected on CCC guarantees under the GSM 102, GSM 103 and SCGP programmes
over the period 1992-2003. 977 Pursuant to item (j), we examine whether premiums are inadequate to
cover the long-term operating costs and losses of the programmes.
c. "Are inadequate to cover"
7.823 Item (j) requires us to examine whether premiu ms charged are "inadequate" "to cover" long-
term operating costs and losses. "Inadequate " means: "not adequate; insufficient". 978 "Cover", in the
sense that it is used in item (j), means: "...t o be enough to defray (expenses, a bill, etc.)" 979; "to be
sufficient for, to counterbalance; as receipts that do not cover expenses...".980
7.824 We therefore understand that, under item (j), we are to assess whether or not premiums are
sufficient to meet the long-term operating costs and losses of the export credit guarantee programmes.
7.825 We are not called upon to make a precise quantification of the amount by which premiums
may or may not be sufficient. Rather, we are ca lled upon to compare premiums charged against long-
term operating costs and losses in order to assess the su fficiency of such premiums. In our view, such
sufficiency cannot be met without at least some indi cation that premiums are charged with a view to
covering long-term operating costs and losses.
7.826 Moreover, as we are looking into whether the government is incurring a net cost in running
the programmes, we understand that it is premiums , rather than any other source of revenue from
whatever source derived981, that are to be the revenue that covers long-term operating costs and losses.
Item (j) does not make any reference to any othe r source of revenue that must be examined in
counterbalance with operating costs and losses. Rath er, it explicitly identifies premiums. It then
juxtaposes premiums against long-term operating costs and losses.

GSM 103 remained unchanged). The revised fee rates are indicated in Exhibits US-20 and BRA-155. The fees
are expressed in cents per $100 of coverage, based on guaranteed value, with annual and semi-annual principal
repayment intervals, and with fees including a charge to provide adjustable per annum eligible interest.
972 7 CFR 1493.460(c), reproduced in Exhibit BRA-38. Guarantee fee rates paid in connection with an
approved application will ordinarily not be refundable.
973 7 CFR 1493.440, reproduced in Exhibit BRA-38.
974 7 CFR 1493.400, reproduced in Exhibit BRA-38.
975 7 CFR 1493.460(b), reproduced in Exhibit BRA-38. See also Exhibits BRA-166-168, which
indicate, inter alia, that the guarantee fees is $0.45 per $100 (up to 90 days) and $0.90 per $100 (90 to 180
days).
976 This is according to record evidence. 7 CFR 1493.460, reproduced in Exhibit BRA-38, provides that
current "guarantee fee rates" will be available by Programme Announcement. See FAS Online: CCC Supplier
Credit Guarantee Program, reproduced in Exhibit BRA-72.
977 Exhibit US-128.
978 Concise Oxford English Dictionary (Oxford: Clarendon Press, 1995); Webster's Revised
Unabridged Dictionary (1996).
979 Concise Oxford English Dictionary (Oxford: Clarendon Press, 1995).
980 Webster's Revised Unabridged Dictionary (1996).
981 We refer to United States' response to Panel Question No. 77.

d. "Long-term"
7.827 Item (j) does not define the words "long-term" nor does it identify any conceptual or temporal
benchmark, let alone a precise temporal period, which would constitute "long-term". Nor does it
stipulate that the examination called for must necessarily be an historical or retrospective one.
7.828 The ordinary meaning of "long-term" is "occurri ng in or relating to a long period of time."
982
In its ordinary meaning, "long-term" does not necessarily pertain to any particular temporal period.
Nor does it require that the "long-term" under consideration must be either in the future or in the past,
or have any particular temporal or conceptual benchmark.
7.829 According to the United States, the item (j ) analysis requires "a certain degree of
retrospection..." to make the requisite comparison between premiums and net operating results of the
programme. Brazil does not entirely agree, but nevertheless submits a considerable amount of
evidence pertaining to past performance.
983
7.830 The United States concedes that the programmes historically "admittedly incurred"
"significant losses" with respect to Poland and Iraq 984 which are no longer reflected in accounts
relating to cohorts since 1992. However, the United States asserts that to subject the programme to
the "analytical yoke" of the unique circumstances of the Polish and Iraqi defaults over 10 years ago
would effectively require elimination of the programme altogether. 985 While Brazil does not consider
that an examination beyond 10 years is "inappropriate", Brazil nevertheless believes that it is adequate
in this case to assess the performance of the CCC export credit guarantee programmes.986
7.831 The parties have submitted argumentation and evidence relating to the fiscal years since 1992,
largely concerning the fiscal years from 1992-2002, and including, where possible, more recent data.
Both parties agree that the period since 1992 is an adequately "long-term" period for the Panel to
assess in its examination of Brazil's claims in this dispute.
7.832 We understand the reference to "long-term" in item (j) to refer to a period of sufficient
duration as to ensure an objective examination wh ich allows a thorough appraisal of the programme
and which avoids attribut ing overdue significance to any unique or atypical experiences on a given
day, month, trimester, half-year, year or other sp ecific time period. Th e reference to "long-term"
guides us to undertake an overall appraisal of the programme over a sufficiently long period of time in
order to gain a full appreciation of the functioni ng of the programme and any relationship between
premiums charged and operating costs and losses.
7.833 On the basis of the evidence and argumentati on submitted to us, in our examination under
item (j), we believe that it is reasonable to take into account specific deve lopments over the period
since 1992. We note that this period coincides with the entry into effect of the United States Federal
Credit Reform Act of 1990, which introduced a reformed accounting methodology for the United
States government to measure and reflect the performance of, inter alia, its export credit guarantee
programmes, effective from fiscal year 1992. We al so note that one of the programmes in issue, the
SCGP was not in operation at the beginning of this pe riod. We further note that a part of the period
since 1992 – the years prior to 1995 – pre-date the entry into force of the WTO Agreement, and thus
the entry into force of the current set of agricu ltural export subsidy disciplines. We nevertheless
include this period in our examination, on the basis of the evidence and argumentation submitted.

982 Concise Oxford English Dictionary (Oxford: Clarendon Press, 1995).
983 Brazil's response to Panel Question No. 257(a)(1).
984 United States' rebuttal submission, paras. 172-174.
985 United States' response to Panel Question No. 221(i).
986 e.g. Brazil's 28 January 2004 comments on United States' response to Panel Question No. 226.

7.834 We consider that we may, however, also consid er, for contextual confirmation, developments
prior to this period. Item (j) contains no textual limitation on how "long-term" our analysis may be.
7.835 Furthermore, as we have already indicated 987, we also believe that the item (j) analysis need
not be a purely retrospective one. It also appropria tely takes into account elements of the structure,
design and operation of the measure which may affe ct the long-term operating costs and losses of the
programmes, in terms of whether the programmes involve a net cost to government.
e. "Operating costs and losses"
7.836 Item (j) refers to "operating costs and losses" . It does not identify what constitutes such
"operating costs and losses". It provides no furthe r precision or description of "operating costs and
losses". It does not provide an illustrative nor exha ustive list of such operating costs and losses, nor
does it supply any particular accounting methodology that must be followed in discerning such long-
term operating costs and losses.
7.837 We begin our examination of "operating costs and losses" by recalling the ordinary meaning
of these words. "Operating" or "operate" means to "manage, work, control; put or keep in a
functional state."
988 "Cost" may be defined as "the price paid or to be paid ... "a ... sacrifice". 989
"Losses" means "a person, thing or amount lost"; "the act or an instance of losing"; "the detriment or
disadvantage resulting from losing". 990 We observe that dictionaries are important guides to, not
dispositive statements of, definitions of words appearing in agreements and legal documents.991
7.838 The context of item (j) indicates that the "ope rating costs and losses" relate to export credit
guarantee programmes. We recognize that the terms "operating costs and losses" refer generally to an
economic, financial or accounting concept. Operating costs and losses in that sense generally connote
costs and losses in administering programmes. 992 It is not at all clear to us that these terms in item (j)
have obtained a rigid or universally agreed definition. Even if such a definition had arisen, we do not
see any indication that it has been included in item (j), or more broadly in the SCM Agreement, or in
any other covered agreement, as a common understanding among WTO Members. Therefore, in our
examination of the United States export credit gua rantee programmes at issue under item (j), we
decline to adopt one particular rigid definition of the terms "operating costs and losses", as those
terms are used in item (j). Nor do we believe that the meaning of operating costs and losses, as
referred to in item (j), are necessarily to be determined purely by reference to the domestic laws of the
Member whose measures are subject to our examination, here, the United States.
993

987 Supra, para. 7.805,
988 Concise Oxford English Dictionary (Oxford: Clarendon Press, 1995).
989 Concise Oxford English Dictionary (Oxford: Clarendon Press, 1995).
990 Concise Oxford English Dictionary (Oxford: Clarendon Press, 1995).
991 We find support for this proposition in Appellate Body Report, US – Offset Act (Byrd Amendment) ,
para. 248.
992For example, the term "operating cost" may mean "a term for prime or variable costs" (see, for
example, Dictionary of Economics (The Economist Books, 1999)). To the extent the term "operating" in item
(j) also refers to the term "losses", the term "operating loss" can mean a loss, before tax and interest, usually on
the principal trading activities of the business, ex cluding extraordinary ite ms (see, for example, Dictionary of
International Finance (The Economist Books, 1999) or the accounting loss made by a business from its
business activities in a given period (see, for example, Moles and Terry, The Handbook of International
Financial Terms (Oxford University Press, 1999)).
993We observe that item (j) in Annex I to the SCM Agreement does not contain any statements
analogous to the statement in footnote 6 to Article XIV of the General Agreement on Trade in Services , which
reads: "Tax terms or concepts in paragraph (d) of Article XIV and in this footnote are determined according to tax
definitions and concepts, or equivalent or similar definitions and concepts, under the domestic law of the Member
taking the measure." See also, for exam ple, Panel and Appellate Body Reports, US – FSC (Article 21.5 – EC) ,
paras. 8.93 and 140-141, respectively, interpreting certain terms in footnote 59 of the SCM Agreement.

7.839 We weigh the evidence before us as we deem relevant and appropriate, without prejudice to
the validity of any one approach, in isolation, as a conclusive measurement for long-term operating
costs and losses under item (j).
7.840 The parties agree that administrative expenses are among the "operating costs" that should be
taken into account under item (j).
994 Nor is there a difference between the parties in the total amount
of such administrative expenses for the CCC e xport credit guarantee programmes at issue:
approximately $39 million ($3 million per year fo r the years 1992-1996 and approximately $4 million
for the years 1997-2002).995
7.841 In our examination of "operating costs and losses" (in comparison with "premiums") under
item (j), we will examine whether there is a net co st to the United States government in administering
the three export credit guarantee programmes at issue. To discern any net cost to the United States
government, we will first consider the past perfo rmance of the United States export credit guarantee
programmes. Second, we will examine relevant el ements pertaining to the structure, operation and
design of the programmes.
f. Past performance of the United States export credit guarantee programmes
7.842 We first note that the United States government currently utilizes a "net present value"
approach to budget accounting for its export credit guarantee programmes. 996 Net present value
analysis basically calculates the value today of a future stream of income or cost. Under this
approach, the United States government identifies an annual "cost" 997 in terms of the "net present

According to the United States' response to Panel Question No. 229, CCC financial statements are
prepared in accordance with generally accepted accoun ting principles (GAAP), ba sed on accounting standards
promulgated by the Federal Accounting Standards Advisory Board (FASAB).
994See e.g., United States' response to Panel Question No. 77; United States' response to Panel Question
No. 221(c); Brazil's 28 January comments on the United States' response to Panel Question No. 221.
US "Statement of Federal Financial Accounting Standards No. 2: Accounting for Direct Loans and Loan
Guarantees", 23 August 1993, paragraph 38, reproduced in Exhibit US-127 reads: "Costs for administering
credit activities, such as salaries, legal fees and office co sts, that are incurred for credit policy evaluation, loan
and loan guarantee origination, closing, servicing, monitoring, maintaining accounting and computer systems,
and other credit administrative purposes, are recognized as administrative expense. Administrative expenses are
not included in calculating the subsidy costs of direct loans and loan guarantees." See United States' response to
Panel Question No. 221(d).
995See e.g. Exhibit BRA-133, setting out administrativ e expenses of the Unite d States export credit
guarantee programmes per fiscal year from line 00.09 of the United States budget. See also Exhibit US-128.
Exhibit BRA-119, Federal Credit Reform Act of 1990, P.L. 101-508, 5 November 1990, Section 504(g); 2 USC
661(c) all funding for an agency's administration of a direct loan or loan gu arantee programme shall be
displayed as distinct and separately identified subaccounts within the same budget account as the program's cost.
See Exhibit US-11, Exhibit BRA-117.
996Effective for fiscal year 1992, the Federal Credit Reform Act of 1990 ("FCR Act of 1990") required
the United States President's Budget to reflect the costs of direct loan and guarantee programs. Exhibit US-11,
Exhibit BRA-119, US Federal Credit Reform Act of 1990 , P.L. 101-508, 5 November 1990, Sec. 501 indicates
that the purposes of that legislation include: "to measure more accurately the costs of federal credit programs".
997Section 502(5)(c) of the United States Federal Credit Reform Act of 1990 , P.L. 101-508,
5 November 1990, reproduced in Exhibit BRA-119, indicates that the cost of a loan guarantee shall be the net
present value, when a guaranteed lo an is disbursed, of the cash flow from: (i) estimated payments by the
Government to cover defaults and delinquencies, interest subsidies, or other payments; and (ii) payments to the
Government including origination and other fees, pena lties and recoveries. See also 2 USC 661(a)(5)(C),
reproduced in Exhibit US-11 and Exhibit BRA-117, respectively; and Section 185.3(o) of Executive Office of
the President, Office of Management and Budget, June 2002: Circular No. A-11, Part 5: Federal Credit
Programs, reproduced in Exhibit BRA-116, defining "loan guarantee subsidy cost" and Section 185-2. See also,
e.g. Treasury Financial Manual, Part 2-Chapter 4600, reproduced in Exhibit US-149, See also, e.g., "United
States General Accounting Office, Report to the Director , Office of Management and Budget, Credit Reform:
Review of OMB's Credit Subsidy Model", August 1997, pp. 3-4, reproduced in Exhibit BRA-120. See also, e.g.

value"998 associated with its export credit guarantee pr ogrammes. According to the United States
government, a positive net present value means that the United States government is extending a
"subsidy" to borrowers; a negative present value m eans that the programme generates a "profit"
(excluding administrative costs) to the United States government.
999 The annual entries in the
"guaranteed loan subsidy" line in the United States budget, 1992-2002 (plus 2003 and 2004 estimates)
show us that, according to this formula, there h as been a positive "guaranteed loan subsidy" every
year.1000 If administrative expenses 1001 are added thereto, the annual amount of cost to the United
States government increases under this formula by approximately $39 million.
7.843 We realize that these amounts are initial estimates of the long-term costs to the United States
government. They are not, however, mere random guesses as to the amount of possible, but highly
unlikely, costs to the government. Nor, at the other extreme, are th ey historically verifiable real
amounts that have been, or actually will be, disbursed by the United States government. Rather, this
is a methodology used and relied upon by the Un ited States government to assess the estimated long-
term net cost to the United States government of export credit guarantees. Actual historical
experience is a "primary factor" on which estimates are based.
1002 The consistently positive numbers
in the United States budget guaranteed loan subsid y line indicate to us that the United States
government believes, based upon its own assessment, that it may not, even over the long term, be able
to operate the export credit guarantee programmes without some net cost to government. In
accordance with the FCR Act of 1990, such "estimates" are subject to certain re-estimations over the
lifetime of the guarantees involved. 1003 1004 Re-estimates "take into account all factors that may have

Exhibit BRA-123, United States Congressional Budget Office, Budgeting for Administrative Costs under Credit
Reform, January 1992. See Exhibit BRA-121, p. 6. See also, Exhibit US-42, OMB Circular No. A-11 (July
2003), sections 20.5(a); 20.5(f), pages 20-19, 20-22; Exhibit US-127, FASAB, Original Pronouncements,
Statement of Federal Financial Accounting Standards No. 2: Accounting for Direct Loans and Loan Guarantees;
Exhibit BRA-160, Office of the Chief Financial Officer, Credit, Travel and Accounting Policy Division,
Agriculture Financial Standards Manual, Revised May 2003; Exhibit BRA-161, Federal 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; Exhibit BRA-162, Government-wide Audited Financial
Statements Task Force, Credit Reform, Issues Paper, "Model Credit Program Methods and Documentation for
Estimating Subsidy Rates and the Model Information Store", Reference No. 96-CR-7, 1 May 1996; Exhibit
BRA-163, "Introduction to Federal Credit Budgeting, OMB Annual Training, 24 June 2002"; Exhibit BRA-185,
Congressional Budget Office Staff Memorandum, "An Explanation of the Budget ary Changes under Credit
Reform", April 1991.
9982 USC 661a.(5)(E), reproduced in Exhibits BRA-117 and US-11, states that "in estimating net
present values, the discount rate shall be the average inte rest rate on marketable Treasury securities of similar
maturity to the cash flows of the loan guarantee for which the estimate is being made".
999See Section 185.2 and definition of "loan guarantee subsidy cost" in Executive Office of the
President, Office of Management and Budget, June 2002: Circular No. A-11, Part 5: Federal Credit
Programs, reproduced in Exhibit BRA-116. See also definition of "cost" in 2 USC section 661a(5)(C),
reproduced in Exhibits BRA-117 and US-11. We note that the term "subsidy" in this sentence is used in the
sense of subsidy cost within the meaning of the United Stat es FCR Act of 1990, rather than strictly in the sense
of Article 1 of the SCM Agreement.
1000 Exhibit BRA-133.
1001 See e.g., Exhibit BRA-133 and Exhibit US-128.
1002"Federal Accounting Standards Advisory Board, 'Statement of Federal Financial Accounting
Standards, No. 19, Technical Amendm ents to accounting Standards for Dir ect Loans and Loan Guarantees' in
Statement of Federal Financial Accounting Standards No. 2" (March 2001), p. 16, para. 36, reproduced in
Exhibit BRA-118 states: "Actual historical experience of the performance of a risk category is a primary factor
upon which an estimation of default cost is based".
1003See Section 185.2 of Executive Office of the President, Offi ce of Management and Budget, June
2002: Circular No. A-11, Part 5: Federal Credit Programs , reproduced in Exhibit BRA-116, indicating that
United States agencies concerned (including the CCC) ar e required to re-estimate the subsidy cost throughout
the life of each cohort to account for differences between the original assu mptions of cash flow and actual cash
flow or revised assumptions about futu re cash flow. These re-estimates repr esent additional costs or savings to
the Government and are recorded in the budget. An upward re-estimate indicates that insufficient funds had

affected the estimate of each component of th e cash flows, including prepayments, defaults,
delinquencies, and recoveries," to the extent that those factors have changed since the initial estimate
was made for purposes of the budget year column of the budget.
1005
7.844 Brazil has also placed on the record the followi ng constructed "cost" formula, again based on
United States budget data:
(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)).
7.845 This formula indicates the following (including references to the specific United States
budget lines involved):

been paid to the financing account, so the increase (plus interest) is paid from the programme account to the
financing account. Permanent indefinite budget author ity exists for this. A downward re-estimate indicates
that too much subsidy has been paid into the financing account. See e.g. FASAB "Amendments to Accounting
Standards for Direct Loans and Loan Guarantees, Statement of Federal Financial Accounting Standards No.18",
May 2000, reproduced in Exhibit BRA-122, and FASAB "Original Pronouncements, Statement of Federal
Financial Accounting Standards No. 18: Amendments to Accounting Standards for Direct Loans and Loan
Guarantees in Statement of Federal Financial Accounting Standards No. 2", reproduced in Exhibit US-125.
1004 There are two types of re-estimates: interest rate re-estimates and technical re-estimates. The latter
adjust for revised assumptions about loan performance, such as differences between assumed and actual default
rates or new projections of repayments. Exhibit US-31 shows US budget summary of GSM 102, GSM 103 and
SCGP subsidy estimates and re-estimates by fiscal y ear, programme and financing accounts FY 1992-2004.
Exhibit US-32 shows apportionments for the CCC export credit guarantee program s. It indicates that in FY
2001, in respect of cohorts 1992-1999, there was a total downward re-estimate of $1,969,422. In FY 2002, in
respect of cohorts 1992 through 1999, there was a total upward re-estimate of $148,364,475. In FY 2003, in
respect of cohorts 1999-2002, there was a net re-estimate of -$3,039,202. Exhibit BRA-192 shows upward and
downward (technical and interest) re-estimates 1992-2003. Exhibits BRA-364 and BRA-365 show subsidy
rates and re-estimates for the programmes from the FY 2002 and 2003 Federal Credit Supplement.
1005 Section 185.3(x), of Executive Office of the President, Offi ce of Management and Budget, June
2002: Circular No. A-11, Part 5: Federal Credit Programs, p. 185-12, reproduced in Exhibit BRA-116, states:
"Re-estimates mean revisions of the subsidy cost estimat e of a cohort (or risk category) based on information
about the actual performance and or estimated changes in future cash flows of the cohort." See also United
States' response to Panel Question No. 221(f).

Table 3: Results of Brazil's constructed "cost" formula

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 +
$15,672,000 = $56,073,000
$3.320,000 + $570,000,000+ $0 =
$573,320,000
1994 $20,893,000 + $458,954,000 + $0 =
$479,847,000
$3,381,000 + $422,363,000 + $0 =
$425,744,000
1995 $18,000,000 + $62,000,000 + $0 =
$80,000,000
$3,000,000 + $551,000,000 +
$10,000,000 = $564,000,000
1996 $20,000,000 + $68,000,000 +
$26,000,000 = $114,000,000
$3,000,000 + $202,000,000 +
$61,000,000 = $266,000,000
1997 $14,000,000 + $104,000,000 +
$26,000,000 = $144,000,000
$4,000,000 + $11,000,000 +
$62,000,000 = $77,000,000
1998 $17,000,000 + $81,000,000 +
$54,000,000 = $152,000,000
$4,000,000 + $72,000,000 +
$62,000,000 = $138,000,000
1999 $14,000,000 + $58,000,000 + $0 =
$72,000,000
$4,000,000 + $244,000,000 +
$62,000,000 = $310,000,000
2000 $16,000,000 + $100,000,000 +
$99,000,000 = $215,000,000
$4,000,000 + $208,000,000 +
$62,000,000 = $274,000,000
2001 $18,000,000 + $149,000,000 +
$125,000,000 = $292,000,000
$4,000,000 + $52,000,000 +
$104,000,000 = $160,000,000
2002 $21,000,000 + $155,000,000 +
$61,000,000 = $237,000,000
$4,000,000 + $40,000,000 +
$93,000,000 = $137,000,000
Total $1,841,920,000 $2,925,064,000
Total difference 1,083,144,000

7.846 This data is taken from the "prior year" colu mn of the United States government budget. It
represents an additional informed appraisal, based on information generated by the United States
government itself, of the performance of export cr edit guarantee programmes. Moreover, it takes into
account the actual level of guarantees issued by the C CC in a given year, as opposed to an estimate of
this level. We compare the result of this formula with 1006 fiscal year/cash basis evidence submitted by
the United States 1007, which, the United States asserts, portrays "actual performance" of the
programmes. This reflects that, according to the United Stat es, total revenues exceed total expenses
of the programmes by approximately $630 million. By this United States approach, rescheduled
claims -- amounting to approximately $1.6 billion -- are not treated as "outstanding" claims. 1008 This

1006 See Brazil's 28 January comments on United States' response to Panel Question No. 221, para. 129.
We acknowledge that data relating to pa rticular cohorts and fiscal year data may not directly correlate, and we
are aware that United States budget data may not always reflect "actual performan ce" of the export credit
guarantee programmes. We are further sensitive to the fact that attention must be paid to the particular time
periods covered by the data in question. In our view, none of these considerations undermine the comparison
made.
1007 United States' response to Panel Question No. 264 (a).
1008 Column F of the cohort-based chart in Exhibit US- 128; column F in fiscal year/cash basis chart in
Exhibit US-147. See e.g. Exhibit BRA-431. Exhibit US-147 shows certain additional revenue and expense
figures for an additional amount of approximately $1 03.6 million. The additio nal information does not
materially change the picture before us.

amount is of the same order of magnitude as th e difference between the figures submitted by Brazil
($1.083 billion) and the United States ($630 million).
7.847 Thus, a major difference between the parties' approaches relates to the treatment of re-
scheduled debt.
7.848 By way of brief background, when the CCC pays out a claim, it is subrogated and pursues
repayment of the claim. Sometimes it is successful , in which case, the claim is deemed "recovered".
Although there are disagreements on certain factual aspects of the record, th ere is no disagreement
between the parties that, in principle, claims actually recovered may be treated as net revenue to (or at
least not as a long-term loss by) the CCC. Some times, however, the CCC is not successful in
recovering a paid-out claim. Then, as we understand it, one of two things may occur. First, the CCC
may "write off" that debt.
1009 According to the record, no amounts have actually been determined
uncollectible, written off or forgiven with respect to any post-1992 cohort.1010
7.849 Alternatively, the CCC will reschedule that debt, in which case it will conclude a
rescheduling agreement providing for the capitalizati on of the principal and interest. This does not
mean that the United States government collects an outstanding claim. 1011 In addition, reschedulings
provide for repayment of principal (on a sliding scal e or on equal payments) over terms such as 8, 10,
12, 14, 15 and 17 years, at various interest rates. 1012 It strikes us that given that the original terms of
the export credit guarantees extended under the prog rammes are less than 3 years (GSM 102); 180
days (SCGP) and 3-10 years (GSM 103), these resch edulings are for terms generally far in excess of
the original term of the guarantee.
7.850 Recalling our discussion of the "long-term" period relevant to our item (j) examination1013, we
observe that the only amounts written off duri ng the period since 1992 concern 1992 and pre-1992
cohorts. The write-offs occurred in fiscal years 1995 1014 and 1999.1015 These amounts have therefore
not been recovered. Amounts of debt forgiveness have also not been recovered. 1016 The record also

1009 Exhibit BRA-116, Section 185, p. 185-15. See also United States' response to Panel Question
No. 221(f).
1010 United States' response to Panel Questions Nos. 225, 265 and 273. See also Exhibit BRA-158.
1011 Column F in Exhibit US-147 indicates that approximately $1.6 billion of defaulted guarantees have
been re-scheduled, 1992-2003. In Column F of Exhibit US-148, the United States indicates $205 million in
"principal collected on re-schedulings ". The United States indicated to us that "a significant portion" of
principal collected on reschedulings "has not been reflected" in United States budget line 88.40 which is a basis
for the table in para. 7.845. This is apparently so despite the United States' acknowledgement to us that, "[a]s a
theoretical matter, such recovered prin cipal should be reflected in the budg et line 88.40". The United States
asserted before us: "Accounting research within the US Government suggests, however, that a significant
portion of [the amount of $205 milli on of principal which the US states it has collected on reschedulings] has
not in fact been reflected in that b udget line." (See United States response to Panel Question No. 264 (b)). In
any event, even if we accepted this assertion by the United States, it would not materially change our view.
1012 See Exhibit US-153. According to the record, the principal outstanding (as of 30 November 2003)
on re-scheduled amounts is $1,579,950,350.
1013 Supra, paras. 7.827 ff.
1014 United States' response to Panel Question Nos. 225 (Nigeria, $129,000) and 273.
1015 United States' response to Panel Question Nos. 225 and 273 (Argentina, $48,000; Russia and
Former Soviet Union, $13,000).
1016 The United States submits the following uncontested data concerning debt forgiveness:

Table 4: CCC Debt forgiveness

Cohort Fiscal Year of forgiveness Country Amount (US dollars)
Pre-1992 1991, 1994 Poland 1,406,000,000
(approximate)
Pre-1992 1997 Yemen 1,686,000

indicates sizeable defaults and rescheduli ngs concerning Iraq (appr oximately $2 billion) 1017 and
Russia and the other former Soviet Union republics. 1018 We note that post-1991 defaults on pre-1992
CCC export credit guarantees are treated separately 1019 under the net present value methodology
imposed by the FCR Act of 1990. At the very least, the existence of defaults on pre-1992 cohorts of a
large order of magnitude
1020 indicates to us that the CCC did not enjoy a premium-based or market-
generated equilibrium or surplus which it could carry forward from 1991, corresponding to the period
forming the focus of our long-term analysis under ite m (j) and, coincidentally, the advent of the FCR
Act of 1990, effective FY 1992.
7.851 The United States indicates that the standard accounting treatment of reschedulings by the
CCC is to no longer treat them as an outstanding claim, but rather as a new direct loan. 1021 This is an
instant reduction from the amount of claims outstanding in the year the terms of the rescheduling are

Pre-1992 1999 Honduras 5,951,000
Pre-1992 2002 Former Yugoslavia 3,343,000
Pre-1992 2002 Tanzania 8,806,000

See United States' response to Panel Question No. 225. The United States clarifies that all of the debt
in the table is associated with Paris Club (Poland, Former Yugoslavia) or Heavily Indebted Poor Country
(HIPC) (Honduras Tanzania and Yemen).
Exhibit BRA-114 contains a United States Treasury, February 2000 "Public Report to Congress: US
Debt Reduction Activity FY 1990 through FY 1999" outli ning the Multilateral Paris Club and Heavily Indebted
Poor Country (HIPC) Initiative (1996, enhanced in 2000).
See also USDA "Undersecretary A Schumacher, Statement before the United States Sub-Committee on
General Farm Commodities, Hearing on the Asian Financial Crisis", 4 February 1998, pp. 10-11, reproduced in
Exhibit BRA-87.
1017 Exhibit BRA-87, pp. 10-11. See also, "United States General Accounting Office, Report to the
Chairman, Task Force on Urgent Fiscal Issues, Committee on Budget, House of Representatives, International
Trade: Iraq's participation in US Agricultural Export Programs", November 1990, p. 2, reproduced in Exhibit
BRA-157. See also, "United States General Accounting Office, Status Report on GAO's Reviews of the
Targeted Export Assistance Program, and the GSM-102/103 Export Credit Guarantee program, Statement of
Allan I Mendelowitz, Trade Energy and Finance Issues, National Security and Inte rnational Affairs Division
before the Task Force on Urgent Fiscal Issues Committ ee on Budget, House of Representatives", 28 June 1990,
p. 9, reproduced in Exhibit BRA-152.
1018 See "United States 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), pp. 50-52 and 56-67
and Table 2.6, reproduced in Exhibit BRA-181. The record indicates that, in 2002, Iraq no longer participated
in the programme, and that FSU republics are no longer major beneficiaries. Congressional Research Service,
"Agricultural Export and Food Aid Programs" (updated 14 June 2002), p. CRS-7, reproduced in Exhibit BRA-
97,
1019 Exhibit BRA-116. See also, e.g. Exhibit US-127 re lating to the distinct treatment of pre-1992 loan
guarantees.
1020 We note the 1991 estimation by the United States GAO that "As of May 31, 1990, the Corporation
had approximately $8.6 billion outstanding in credit guarantees and $2.6 billion in accounts receivable resulting
from guarantee payments on delinquent loans. We estimate that the GSM 102 programs will cost the
Corporation about $6.7 billion in the long run, or about 60 pe r cent of the $11.2 billion face value of the
outstanding credits and receivables." See, United States GAO, Report to the Chairman, Subcommittee on
Criminal Justice, Committee on the Judiciary, House of Representatives. "Loan Guarantees: Export Credit
Guarantee Programs' Long-Run Costs are High", April 1991, reproduced in Exhibit BRA-115; See United
States GAO, Report to Congressional Requesters, "Loa n Guarantees: Export Credit Guarantee Program's Costs
are High", December 1992, p. 3, reproduced in Exhibit BRA-159.
1021 See United States' response to Panel Question No. 264(b). A "direct loan" is a disbursement of
funds by the government to a non-federal borrower under a contract that requires the repayment of such funds
within a certain time with or without interest. (Adapted from OMB Circular A-11), accessible on the FASAB
website (www.fasab.gov) Original Pronouncements, Version 3 (01/2004). See Exhibit BRA-116, section 185.3,
pp. 185-6.

finalized.
1022 Particularly given the magnitude in the amounts involved, we share Brazil's concerns
that the United States' treatment of rescheduled de bt before us understates th e net cost to the United
States government associated with the export credit guarantee programmes at issue.1023 1024
7.852 Our view does not change in light of the ev idence introduced by the United States ("Subsidy
Estimates and Re-estimates by Cohort") reflecti ng cumulative re-estimates on a cohort-specific
basis.1025 These figures show a positive subsidy of approximately $230 million, which approximates a
figure of $211 million submitted by Brazil. 1026 Neither figure includes administrative expenses of
approximately $39 million.
7.853 We note that, over the lifetime of the cohorts issued in 1992 and since, the record indicates an
overall lifetime downward re-estimate of $1.9 billion. 1027 With the exception of 2002, for which only
very recent data is necessarily available, the Unite d States directs the Panel to note that the trend for
all cohorts is uniformly favourable as compared to the original subsidy amount. The United States
submits that data for the 1992-199 6 and 1999 "cohorts" indicate pr ofitability. According to the
United States, when data for the -- as yet uncom pleted -- 2001 and 2002 cohorts are removed, the
$230 million is almost entirely eliminated. While ta king note that the process of estimates and re-
estimates by cohort is necessarily a fluid one that cannot be definitively finalized or forensically
analyzed until a cohort is "closed", we disagree w ith the United States that we should "eliminate" the

1022 In charts provided to us in Exhibits US-128 and -147, the US defines "claims outstanding" as
"claim payments" minus "claims recovered" minus "cla ims rescheduled". According to this treatment, a
rescheduled claim no longer constitutes an outstanding claim.
1023 We note that a 1991 report by the United Stat es' General Accounting Office referred to "long-run
costs" in terms of "the expenses the Corporation incurs over the long run, e.g. the next 18 years, because its
guaranteed credits and accounts receivable will not be fully repaid." We consider it relevant that a United States
government agency itself deems non-repaid accounts receivable to constitute "long-run costs". See
"United States GAO, Report to the Chairman, Su bcommittee on Criminal Ju stice, U.S. House of
Representatives Committee on the Judiciary, 'Loan Guar antees: Export Credit Gu arantee Programs' Long-Run
Costs are High'", April 1991. p.1, footnote 1, reproduced in Exhibit BRA-115.
1024 The record indicates different levels of resche dulings and outstanding claims for each of the three
programmes separately. However, we do not consider this legally determinative given the other elements we
have taken into account in our examination. In particular, we are not persuaded that any particular characteristic
of the GSM 103 programme or the SCGP programme or their long-term operating costs and losses would serve
to distinguish it for the purposes of item (j).
1025 We recall our discussion of "programmes" for the purposes of our item (j) analysis supra ,
paras. 7.810 ff. The United States submitted a revised and corrected version of the table in response to Panel
Question 221(a). The original version of the table appeared in paragraph 161 of the United States' rebuttal
submission. However, as acknowledged by the United States' agreement (in footnotes 82 and 96 of its further
written submission and footnote 160 of its further rebut tal submission) to Brazil's assertion (footnote 67 in
Brazil's 27 August comments on the United States' rebuttal submission), the total figure net of re-estimates is
$230,127,023, rather than the figure that originally appeared ($381,345,059). The United States acknowledged,
however, that data discrepancies occur with respect to cohorts 1992-1996 when compared to evidence submitted
by Brazil on "Net lifetime re-estimate" in Exhibit BRA -182. In the absence of internal documentation to
corroborate the figures originally submitted to the Pane l and unable to explain the relatively minor disparity in
figures, the United States "necessarily accepts" the figu res submitted by Brazil on "Net lifetime re-estimate" by
cohort.
1026 Exhibit BRA-193.
1027 See United States revised and corrected version of the table in response to Panel Question 221(a),
Exhibit BRA-193. The United States submits evidence, in Exhibit US-32, comprising internal United States
government budgetary documents, concerning the rea pportionment constituting a decrease of subsidy in the
permanent indefinite authority for the GSM programme as provided under the FCRA Act of 1990. According to
these documents, "[The] downward estimate of $1.9 billion is based on actual activity since the last reestimate
was approved and apportioned [...]" OMB Circular No. A- 11, Part 4, Instructions on Budget Execution (July
2003), reproduced in Exhibit US-43, describes the apportionment/reapportionment process.

data for certain, more recent, cohorts in our analys is. We have not been persuaded that cohort re-
estimates over time, will necessarily not give rise to a net cost to the United States government.1028
7.854 We believe that it is relevant for our item (j) analysis that, netting re-estimates against original
subsidy estimates on a cohort-specific basis yields a positive subsidy which reveals that over the long
term the United States government anticipates that it may not break even with its export credit
guarantee programmes.
7.855 Furthermore, we note that the CCC financial statements for the years 2002 and 2003 indicate
a "credit guarantee liability" of $411 million and $22 million, respectively. The CCC defines the term
"credit guarantee liability" as the estimated cash out flows of the guarantees on a net present value
basis.1029 "Liability" is defined as " ...a probable future outflow or other sacrifice of resources as a
result of past transactions or events." 1030 We observe that these amounts are not actual losses. They
are but another indicator, used and relied upon by the United States government, to assess the
estimated long-term cost to the United States government of export credit guarantees. They are
consistently positive, indicating to us that the CCC believes, based upon its own assessment, that it
may not, even over the long term, be able to ope rate the export credit guarantee programmes without
some net cost to government.
1031
7.856 The above considerations relating to the past performance of the programmes support a view
that the programmes are run at a net cost to the United States government. We next consider the
structure, operation and design of the programmes.
g. Structure, design and operation of the programmes

1028 See United States' response to Panel Question No. 22 1(a). For example, for a cohort that is on the
verge of closing, the original subsidy cost estimate for 1994 was $123 million; thus, applying the downward
re-estimate, the net cost of the programme to the United States Government is currently projected at $7 million.
For that cohort, there is currently a net cost indicated in the United States figures. Furthermore, the 1997, 1998,
2000, 2001 and 2002 data do not indicate a current appraisal of that the CCC export credit programmes will be
operated at no net cost to government. The $122 million positive figure for 1997 is a particularly large figure.
We note the United States assertion that "it is reasonable to expect that, in the fullness of time, the data will …
reflect further negative re-estimates for cohorts 2001 and 2002". While there may be a possibility (based on the
experience of certain of other cohorts) that this figure may diminish over the lifetime of the cohort concerned,
there is no assurance that this figure will necessarily evolve towards, and conclude as, zero or a negative figure.
1029 Exhibit US-129. Notes, p. 4.
1030 Exhibit US-130. Appendix E of the FASAB Statements of Federal Financial Accounting Concepts
and Standards. This differs from the definition of "loss" ("Any expense or irrecoverable cost, often referred to
as a nonrecurring charge, an expenditure from which no present or future benefit may be expected").
1031 See Exhibits BRA-194 and BRA-196. In CCC Financial Statements for 1999-2001, on the basis of
testing GSM 102 data, USDA indicates that by not using the current risk rating, they may have understated the
losses associated with these guarantees by about $430 million. The CCC Financial Statements, Fiscal Year
2001 indicates that the CCC credit reform subsidy amount for direct credits and guarantees and noted
substantially different credit reform accounting and reporting standards for the budget and financial statements
for the CCC. It stated that they continued to find lack of quality assurance over CCC foreign loan accounting
operations and preparations of its financial statements, and material weaknesses in the processes and procedures
used by USDA's lending agencies to estimate and r eestimate loan subsidy cost s since 1994. The USDA
Consolidated Financial Statement for Fiscal Year 1999 states: "We are unab le for the sixth consecutive year to
assess the reasonableness of USDA's credit program receiva bles and estimated losses on loan guarantees, stated
at about $70.7 billion and $1.7 billion, respectively, as they relate to the subsidy costs. These same problems
also materially impact the Department's budget submissions. Because we can provide no assurance on USDA's
credit reform financial data, the Congress and other decision-makers do not know whether the costs of USDA's
loan programs, estimated in excess of $27.3 billion as of 30 September 1999, can be relied upon."

7.857 In terms of the structure, design and operation of the export credit guarantee programmes
before us, there are several elements which lead us to believe that the programmes are not designed to
avoid a net cost to government.
7.858 We deem it relevant to our examination that the CCC borrows from the United States
Treasury.
1032 When it does borrow, it incurs interest, which is recognized as an interest expense in the
"Interest on debt to Treasury" row of the United States budget 1033 and in material submitted to us. 1034
If the CCC did not pay or record interest expense, it would not be permitted to borrow from Treasury.
Access to Treasury borrowings facilitates the functioning of the CCC's export credit guarantee
programmes. Moreover, for a cred itor, it provides the backing of the full faith and credit of the
United States government concerning its ability to pay a claim in the case of default by a borrower.
7.859 Moreover, the premiums are not geared towa rd ensuring adequacy to cover long-term
operating costs and losses for the purposes of item (j). We are of this view for several reasons.
7.860 First, there is a statutory fee cap in connection with transactions under the GSM 102 and
SCGP programmes, of no more than 1 per cent of the amount of credit to be guaranteed. This
1 per cent fee cap does not, however, apply to the GSM 103 programme.
1035
7.861 Second, the premiums are not risk-based 1036, either with respect to country risk or the
creditworthiness of the borrower in an individual transaction. 1037 All countries eligible for any of the
CCC export credit guarantee programmes are categori zed according to risk. CCC categorization of
countries is based on a United States government inte rnal risk classification system, which, according
to the United States, "is administratively controll ed and may not be released outside of the US
Government".1038 However, the United States has confirmed that "a country's risk classification has
no impact on the premiums payable under the United States export credit guarantee programmes". 1039

1032 FCRA Section 505, 2 USC Section 661d (c), reproduced in Exhibit US-11 and Exhibit BRA-117:
"The Secretary of the Treasury shall borrow from, receive from, lend to, or pay to the financing accounts such
amounts as may be appropriate."
1033 The Panel notes Exhibit US-129. In its response to Panel Question No. 270(i), the United States
assures us that references to the CCC "non-interest bear ing" debt or repayments are unrelated to the export
credit guarantee programmes at issue. In addition, in its response to Panel Question No. 270(ii), the United
States asserts that "permanent indefi nite borrowing authority from Treasury" is not available in respect of the
programmes. We note that 2 USC 661c(c)(2), providing an "exemption for mandatory programs", exempts all
CCC credit programs existing on 5 November 1990, from the "appropriations" requirement in 2 USC 661c(b)
and from the "modifications" requirement in 2 USC 661c(e). In its response to Panel Question No. 271, the
United States asserts that full reimbursement of the CCC for prior year net realized losses – as set out in Exhibit
US-152– do not include any portion attributable or allocable to the export credit guarantee programs. In its
response to Panel Question No. 271, the United Stat es submits that Treasury reimbursements of CCC net
realized losses "do not include any portion attributable or allocable to the export credit guarantee programs."
1034 e.g. Exhibit US-128; Exhibit US-148.
1035 See Exhibit BRA-300.
1036 The United States government acknowledges this. See Exhibit US-150 and United States' response
to Panel Question No. 86.
1037 e.g. United States' response to Panel Question No. 85. The United States has confirmed to us that
under the SCGP "CCC does not determine the creditwor thiness of participating importers[...]". Rather,
according to the United States, the risk sharing between the CCC and the exporter is intended to ensure that due
diligence is performed.
1038 United States' response to Panel Question No. 86. According to 7 USC 5622, the CCC shall not
make credit guarantees available in connection with sa les of agricultural commodities to any country that the
Secretary determines cannot adequately service the debt associated with such sale.
1039 See e.g. Exhibit US-150 and United States' resp onse to Panel Question No. 86. See also, "US
General Accounting Office, Report to the Ranking Mino rity 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, pp. 135-136, reproduced in Exhibit BRA-181: "Although

Rather than the premiums, it is the United States government subsidy estimates and re-estimates for
the export credit guarantee programmes that are determin ed in large part by the obligor's sovereign or
non-sovereign country risk grade.1040
7.862 In this respect, the statute governing the CCC export credit guarantee programmes currently
sets out certain restrictions on the United States use of export credit guarantees. In general, "the CCC
shall not make credit guarantees available in connec tion with sales of agricultural commodities to any
country that the Secretary determines cannot ad equately service the debt associated with such
sale."1041 The statute and the implementing regulations indicate that, in respect of GSM 102 and GSM
103, "Export credit guarantees ... shall not be used for foreign aid, foreign policy, or debt
rescheduling purposes".
1042 Moreover, pursuant to the regulati ons, "criteria considered by CCC in
reviewing proposals for country allocations under the GSM 102 or GSM 103 programs, will include,
but not be limited to, the following: (a) Potent ial benefits that the extension of export credit
guarantees would provide for the development of, expansion or maintenance of the market for
particular United States agricultural commodities in the importing country; (b) Financial and
economic ability of the importing country to adeq uately service CCC guaranteed debt; (c) Financial
status of participating banks in the importing count ry as it would affect their ability to adequately
service CCC guaranteed debt; (d) Po litical stability of the importing country as it would affect its
ability to adequately service CCC guaranteed debt; and (e ) Current status of debt either owed by the
importing country to CCC or to lenders protected by CCC's guarantees." 1043 Additional
considerations apply for GSM 103.1044
7.863 These criteria do not stipulate what might constitu te an acceptable level of risk in evaluating
whether countries can adequately service their debt. Nor does the statute impose any limitation on the
amount of guarantees that can be provided annuall y to a high-risk country (in the aggregate or
individually) or to high risks transactions. The CC C is, therefore, able to provide large amounts of
guarantees to high-risk countries with a resulting high rate of default.
7.864 Finally, there are additional indications on the record that premiums are not the source of
revenue that cover the long-term operating costs an d losses of the programmes. In this connection,
Brazil raises the issue of the adequacy of any revi ew of premiums by the United States government to
ensure that they are adequate to c over long-term operating costs and losses. 1045 The United States
provides evidence of annual review of premiums pertaining to FY 2003 and FY 2004. 1046 However,

GSM 102 recipient countries vary significantly from one another in terms of their risk of defaulting on GSM
102 loans, CCC does not adjust the fee that it charges for credit guarantees to take acco unt of country risk. [...]
CCC fees that included a risk-based component might not c over all of the country risk, but they could help to
offset the cost of loan defaults." In Exhibit BRA-153 , Audit Report of CCC for FY 2000 , June 2001, USDA's
Office of the Inspector General stated that fees for the GSM 102 and GSM 103 programs had not been changed
in 7 years, and as a result "may not be reflecting curren t costs." Without accounting for country risk in the fees
charged, the CCC foregoes an opportunity to cover the cost of loan defaults.
1040 e.g. Exhibit US-150.
1041 7 USC 5622(f), reproduced in Exhibits BRA-141, BRA -366.
1042 7 USC 5622(e), reproduced in Exhibits BRA-141, BRA-366; 7 CFR 1493.3, reproduced in Exhibit
BRA-38,
1043 7 CFR 1493.4, entitled "Criteria for country allocations", reproduced in Exhibit BRA-38. By virtue
of 7 CFR 1493.400, these restrictions and criteria also apply to the SCGP. Furthermore, the SCGP operates in
cases where credit is necessary to in crease or maintain United States expo rts to a foreign market and where
private United States exporters would be unwilling to provide financing without CCC's guarantee. The
programme is targeted toward those countries where the guarantees are nece ssary to secure financing of the
exports but which have sufficient financial strength so that foreign exchange will be available for scheduled
payments. Also see 7 CFR 1493.400 (a)(3).
1044 7 USC 5622(f)(2), reproduced in Exhibits BRA-141, and BRA-366; 7 CFR 1493.6, reproduced in
Exhibit BRA-38.
1045 Brazil's first written submission, para. 277.
1046 Exhibit US-150.

there is also evidence that even the United States government itself has recognized, in the audit report
relating to FY 2001:
"As reported, in [the] FY 1999 and 2000 fi nancial statement audits, CCC has not yet
conducted required annual reviews of fees associated with the General Sales Manager
(GSM) guarantee program. As a result, the 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."
1047
Since then, fees have been changed, but not substantially.1048
7.865 More importantly, evidence submitted by the Un ited States to substantiate its assertion that
there is an annual review of fees for USDA cred it programmes also indicates that fees that are
collected offset subsidy costs 1049 and result in a reduced "ending subsidy". 1050 However, they do not
come close to covering the "subsidy cost" of the programme. The United States government itself
acknowledges that the fees do not cover the subsidy cost. Indeed, the United States government also
provides a "Justification for not covering the subsidy cost of the program". In respect of FY 2004,
this is as follows:
"... cost information is an important basis in setting fees and re-imbursements.
Pricing and costing, however, are two diffe rent concepts. Setting prices is a policy
matter, sometimes governed by statutory prov isions and regulatio ns, and other times
by managerial or public policies.
The current fees for GSM 102, GSM 103 and SCGP are not risk-based. There are
several reasons for this. First of all, Se ction 211(b)(2) of the Agricultural Trade Act
of 1978, as amended, caps the current fees at 1 per cent for Short-Term Credit
Guarantees, as described in Section 202(a), which includes GSM 102 and SCGP. If
the fees were changed to a risk-based sy stem, this would most likely exceed 1 per
cent, which would require legislative amendment. There is no statutory fee cap for
GSM 103.
The US exporter currently pays a fee calculated on the dollar amount guaranteed,
based on a schedule of rates applicable to different lengths of credit periods. The
exporter therefore pays more for a longer term of coverage than for a shorter term. If
all fees were increased to the 1 per cent maximum to offset a greater portion of the
subsidy cost, all exporters would be payi ng the same for different coverage terms,
which would favour exporters seeking longer guarantees.

1047 See USDA, Office of Inspector General, Great Plains Region, Audit Report, Commodity Credit
Corporation's Financial Statements for Fiscal Year 2001, Audit Report No. 06401-4-KC, February 2002,
reproduced in Exhibit BRA-154; and "USDA, Office of Inspector General Financial and IT Operations Audit
Report of the CCC Financial Statements for FY 2000, Audit Report No. 06401-14-FM", June 2001, p. 31,
reproduced in Exhibit BRA-153. These audit reports indicate that the CCC had not conducted the review of fees
associated with the GSM guarantee programme (under OMB Circular A-129) . In addition, in a similar vein to
the audit report in respect of FY 2001 (Exhibit BRA-154), the audit report in respect of FY 2000 (Exhibit BRA-
153) states: "We recommended in our prior audit that CCC conduct the required review of fees to assure the
charges are set at levels that mini mize the corporation's cost without unduly impairing these loan program's
policy objectives, and ensure th at these loan guarantee fees are reviewed an nually in the future. In response to
our recommendations, CCC stated that the Foreign Agricultural Service would work with the OCFO staff to
develop a standard template for an annual review of fees."
1048 Exhibit BRA-155 and Exhibit US-20.
1049 We also refer to our general discussion of the Federal Credit Reform Act of 1990 and treatment of
export credit guarantees thereunder.
1050 See Exhibit US-150. CCC Export Credit Guarantee Programmes (FY 2004).

Finally, the current fee schedules for GSM 102, GSM 103 and SCGP are subject to
negotiations taking place under the World Trade Organization (WTO). Once an
agreement is reached under these negotiations, it is likely that the FAS will need to
revise the fee structure. Changing the fee structure at this time without knowing the
final outcome of these negotiations would be premature. We have however begun a
study of the historical default and claims rates that will be the basis for developing
options."
1051
7.866 These elements indicate to us that the premiums may serve to offset long-term operating costs
and losses to a certain degree. However, the prem iums are by no means proportionate to, reflective
of, nor geared towards, covering long-term operating costs and losses. It is the United States'
government's subsidy estimates and re-estimates, a nd ultimately, the availability of United States
government funds to cover any cost to government – rather than the premiums charged – which
effectively ensure coverage of the long-term ope rating costs and losses of the export credit guarantee
programmes.1052
7.867 We have conducted a detailed examination of the relevant evidence and argumentation
submitted by the parties. On the basis of the tota lity of the record eviden ce, including approaches
regularly relied upon by the United States government itself, we find that Brazil has established that
the United States CCC provides the GSM 102, GSM 103 and SCGP export credit guarantee
programmes "at premium rates which are inadequate to cover the long-term operating costs and losses
of the programmes" within the meaning of item (j) of the Illustrative List of Export Subsidies in
Annex I of the SCM Agreement. Our view is based on a careful consideration of the evidence, taken
as a whole, and no one element, in isolation, is determinative.
7.868 Moreover, recalling the burden of proof articulated in Article 10.3 of the Agreement on
Agriculture, the United States has not established that it does not provide these export credit guarantee
programmes at premium rates which are inadequate to cover the long-term operating costs and losses
of the programmes.
7.869 We therefore find that the United States e xport credit guarantee programmes at issue – GSM
102, GSM 103 and SCGP – constitute a per se export subsidy within the meaning of item (j) of the
Illustrative List of Export Subsidies in Annex I of the SCM Agreement.
iv. Are the United States export credit guarantee programmes applied in a manner which results
in, or threatens to lead to, circumvention of export subsidy commitments?
7.870 Having made this finding on the basis of the contextual guidance provided by the SCM
Agreement relating to export credit guarantees, we cons ider its relevance for our examination under
Article 10.1 of the Agreement on Agriculture. That provision refers to "export subsidies" not listed in
paragraph 1 of Article 9. Such export subsidies "s hall not be applied in a manner which results in, or
which threatens to lead to, circumvention of export subsidy commitments."
7.871 We recall our earlier observations concerning the burden of proof under Article 10.3 of the
Agreement on Agriculture
1053 and briefly summarize the parties arguments in this respect.

1051 The corresponding justification for not covering the subsidy cost in FY 2003 is substantially
similar. See Exhibit US-150.
1052 Our examination of the past performance of the programme sustains this finding. As we stated
supra, para. 7.866, the consistently positive numbers in the United States budget guaranteed loan subsidy line
indicate to us "... that the United St ates government believes, based upon its own assessment, that it may not,
even over the long-term, be able to operate the export credit guarantee programmes without some net cost to
government."
1053 Supra, paras. 7.271-7.273 of Section VII:C.

7.872 Brazil asserts that, in respect of upland cotton an d other unscheduled products, it is sufficient
for Brazil to establish that export credit guarantees constituting export subsidi es were provided. In
respect of scheduled products, once Brazil establishes that export credit guarantees constituting export
subsidies were provided in excess of United St ates quantitative reduction commitments, the United
States bears the burden of proof, by virtue of Ar ticle 10.3 to prove that those excess quantities of
scheduled products did not receive "export subsidies" within the meaning of Article 10.1. Brazil
alleges that the United States has provided export subsidies for scheduled agricultural commodities
that exceeded its quantitative reduction commitment s for most scheduled commodities and that it has
shown actual circumvention for at least one scheduled product, rice.
1054 The relevant test is not
whether the measure is mandatory or discretionary, but whether there is a mechanism in the measure
for CCC to stem or otherwise control the flow of CCC export credit guarantees. According to Brazil,
there is not.
7.873 The United States submits that it is not permitted to provide any export subsidies in respect
of unscheduled products, but that it is in co mpliance with its schedul ed quantitative reduction
commitments with respect to 12 out of the 13 scheduled commodities. 1055 In the United States view,
under a "mandatory/discretionary" analysis, the re levant question would be whether the provisions
establishing the export credit guarantee programmes mandate a breach of any WTO obligation. In the
United States view, they do not, in view of the va rious discretionary elements in the operation of the
programme that restrict the actual issuance of guarantees.
7.874 The Panel first examines the implications of its fi nding with respect to upland cotton and
other unscheduled commodities in respect of which the record evidence sust ains that export credit
guarantees are granted. We then examine the im plications with respect to certain scheduled
commodities. Finally, we examine the implications with respect to other scheduled and unscheduled
commodities.
a. Exports of upland cotton and other unsche duled agricultural products supported under the
export credit guarantee programmes
7.875 Recalling our discussion of the applicable burden of proof, we find that Brazil has shown that
export credit guarantees – constituting export subs idies within the meaning of Article 10.1 (and
therefore, necessarily, not listed in Article 9.1) – have been provided under the programmes in
question during the period we have examined in r espect of exports of upland cotton and certain other
unscheduled agricultural products. 1056 The United States has not shown that no export subsidy has
been granted in respect of such products. We ther efore conclude that, in respect of upland cotton and
other such unscheduled agricultural products on record, the United States applies export credit
guarantees constituting export subsidies in a manner which results in circumvention of its export
subsidy commitments inconsistently with Article 10.1 of the Agreement on Agriculture.

1054 In Exhibit BRA-300, Brazil calculates the quantity of US rice exports benefiting from the 3 US
export credit guarantees programmes at issue: FY 2003: 1,162, 700 metric tonnes; FY 2002: 1,236,700 metric
tonnes; FY 2001: 1,180,500 metric tonnes.
1055 United States' rebuttal submission, para. 183 and data in footnote 220
1056 In its first written submission, para. 266, Braz il identifies upland cotton, soybeans, corn, and
oilseed and oil products as unscheduled commodities in respect of which the United States has made export
credit guarantees available under the challenged programmes. Brazil also refers to "all other non-scheduled
commodities" and directs us to USDA "Summary of Export Credit Program Guarantee Activity", 1999-2003,
reproduced in Exhibit BRA-73. See also Exhibits US-12, US-41 and BRA-299. To the extent that it identifies
products within the product coverage of the Agreement on Agriculture that are within our terms of reference, we
consider Exhibit BRA-73 to be the relevant record evidence of such products for the purposes of this dispute.

b. Exports of scheduled products supported under the programmes
7.876 Turning to United States scheduled agricultural products, we recall that the United States
scheduled export subsidy reduction commitments are contained in Schedule XX of the United States
of America, Part IV, Section II entitled "Export Subsidies: Budgetary Outlays and Quantitative
Reduction Commitments".1057
7.877 In respect of scheduled products, Members are not subject to a general prohibition against
providing export subsidies listed in Ar ticle 9.1; rather, there is a limited authorization for a limited
group of Members 1058 to provide such subsidies up to the level of the reduction commitments
specified in their Schedule. As regards schedul ed products, when the specific reduction commitment
levels have been reached, the limited authorization to provide export subsidies as listed in Article 9.1
is transformed, effectively, into a prohibition agai nst the provision of the subsidies. Thus, where the
United States exports an agricultural product in qua ntities that exceed its quantity commitment level,
it will be treated for the purposes of Article 10.1 as if it has granted WTO-inconsistent export
subsidies, for the excess quantities, unless it presents adequate evidence to "establish" the contrary.
7.878 Brazil initially alleged that the United Stat es provided export subsidies for scheduled
agricultural commodities that exceeded its quantita tive reduction commitments for most scheduled
commodities over a certain time period (July 2001-Ju ne 2002): wheat, coarse grains, rice, vegetable
oils, butter, skim milk powder, cheese, other m ilk products, bovine meat, pig meat, poultry meat, live
dairy cattle and eggs.
7.879 The United States submits that it is in complia nce with its scheduled quantitative reduction
commitments with respect to wheat, coarse grains, butter and butter oil, skim milk powder, cheese,
other milk products, bovine me at, live dairy cattle and eggs 1059; that this may also be true for
vegetable oil and that, in fiscal year 2002 it would also be true for poultry meat. The United States
asserts that it did not use the GSM 102 or GSM 103 programmes during 2001-2002 with respect to
butter and butter oil, skim milk powder, cheese, other milk products, or eggs.
7.880 Brazil subsequently maintained that it has shown actual circumvention for at least one
scheduled product: rice.
1060 It also asserts that it has established threat of circumvention for
scheduled products stemming from the mandatory na ture of the programmes and CCC's inability to
stem or otherwise control the flow of CCC export credit guarantees.
7.881 We note that the United States has not specifically discharged its burden of establishing that it
did not grant WTO-inconsistent export subsidies, for the excess quantities of rice exported.

1057 The United States has scheduled export subsidy reduction commitments in respect of the following
thirteen commodities: wheat, coarse grains, rice, vegetable oils, butter and butter oil, skim milk powder, cheese,
other milk products, bovine meat, pigmeat, poultry meat, live dairy cattle, eggs. See Schedule XX of the United
States of America, Part IV, Sec tion II, entitled "Export Subsidies: Budgetary Outlays and Quantitative
Reduction Commitments", reproduced in Exhibit BRA-83 and Exhibit US-13.
1058 See supra, footnote 843.
1059 United States' rebuttal submission, para. 183 and, data in footnote 220.
1060 This is the case for at least one year (July 2001-June 2002). The United States did not rebut
Brazil's initial allegation in respect of this period. See, for example, footnote 150 of the United States further
rebuttal submission, where the United States asserts that "[t]he only commodity with respect to which the
United States did not provide ['uncontroverted' evidence that the respective quantities of exports under the
export credit guarantee programmes did not exceed the ap plicable quantitative reduction commitment] is rice".
Subsequently, in Exhibit BRA-300, Brazil calculated the qua ntity of United States rice exports benefiting from
the three United States export credit guarantees programmes at issue: FY 2003: 1,162, 700 metric tonnes; FY
2002: 1,236,700 metric tonne s; FY 2001: 1,180,500 metric tonnes. The quantitative United States export
subsidy reduction commitment (2000) for rice is 38,544 metric tonnes. See Exhibit BRA-83 and Exhibit US-
13.

Therefore, we find that the United States has applied export credit guara ntees constituting export
subsidies within the meaning of Article 10.1 – and th erefore, necessarily, not listed in Article 9.1 – in
a manner which results in circumvention of export s ubsidy commitments in respect of this particular
scheduled commodity. It has not been establishe d, however, that such actual circumvention has
resulted in respect of the twelve other United States scheduled commodities.
c. Scheduled products other than rice a nd unscheduled products not supported under the
programmes
7.882 We next consider whether the United States export credit guarantee programmes require the
provision of an "unlimited amount" of subsidies, so that scheduled commod ities other than rice and
unscheduled agricultural products not supported under the programmes, therefore, benefit from those
subsidies when the reduction commitment levels sp ecified in the United States' Schedule for those
agricultural products have been reached.
 1061
7.883 If so, we would conclude that the export credit guarantee programmes constituting export
subsidies within the meaning of Article 10.1 are applied in a manner that, at the very least, threatens
to lead to circumvention of the export subsidy commitments made by the United States, under the first
clause of Article 3.3 and/or Article 8, with respect to scheduled agricultural products other than rice
and other unscheduled products (not supporte d under the programmes). However, if these
programmes are not such as to necessarily create an unconditional legal entitlement to receive them,
then there would not necessarily be such a threat. We therefore examine whether an unconditional
statutory legal entitlement to an export credit guarantee exists in respect of such products.
7.884 The United States export credit guarantee progr ammes are classified as "mandatory" under
the United States Budget Enforcement Act of 1990.1062
7.885 The designation of "mandatory" under United States law means basically that the spending is
authorized by so-called "permanent law" 1063 rather than requiring annual appropriations. 1064 Brazil
cites evidence that under mandatory credit progra mmes loans must be available to all eligible

1061 We recall that Article 10.1 of the Agreement on Agriculture provides that export subsidies not
listed in Article 9.1 "shall not be applied in a manner which results in, or which threatens to lead to,
circumvention of export subsidy commitments ..." (emphasi s added). With respect to rice and to unscheduled
agricultural products supported under programmes, we have found, in paragraphs 7.875 and 7.881, that the
United States applies export credit guarantee program mes constituting export subsidies in a manner which
results in circumvention of its export subsidy commitments inco nsistently with Article 10.1. We consider that
the "or" in Article 10.1 indicates that either one (resulting in circumvention) or the other (threatening to lead to
circumvention) or both in combination would be adequate to trigger the remedies associated with this provision.
We also see "resulting in circumvention" as including and exceeding the concept of "threatening to lead to
circumvention". In this respect, we refer to and incorporate, mutatis mutandis , our findings in paragraphs
7.1494-7.1497 concerning the concept of "threat" and its relationship to the actual existence of a substantive
requirement. We therefore do not believe that it is necessary to conduct any additional examination here.
1062 See Exhibit BRA-295 "2004 US Budget, Federal Credit Supplement, Introduction and Table 2",
stating "[...] the program's BEA classification unde r the Budget Enforcement Act (BEA) of 1990 as
discretionary or mandatory"; and Table 2 (in which the classification "mandatory" is indicated).
1063 Supra, Section VII:C.
1064 2 USC 661c.(c)(2), reproduced respectively in Exhibit US-11 and Exhibit BRA-117, indicates that
all existing credit programmes of the CCC on 5 Novemb er 1990 are mandatory programs exempted from
otherwise applicable statutory requirements of appropriations and/or modifications. Pursuant to 2 USC
661c.(e), "An outstanding direct loan guarantee (or commitment) shall not be modified in a manner that
increases its costs unless b udget authority for the add itional cost has been provided in advance in an
appropriations Act." Pursuant to 2 USC 661c.(f), "when the estimated cost for a group of direct loan guarantees
for a given credit programme made in a single fiscal year is reestimated in a subsequent year, the difference
between the reestimated cost and the previous cost estimate shall be displayed" separately in the budget. There
is "hereby provided" permanent indefinite authority for these estimates.

borrowers.1065 This evidence states that appropriations actions do not effectively control mandatory
credit programmes.
7.886 This designation of "mandatory" under United St ates law is not, however, determinative for
our examination of the nature of the measure in the context of the WTO covered agreements.
Moreover, we do not believe that the "mandatory/discretionary" di stinction is the sole legally
determinative one for our examina tion of whether or not "threat" of circumvention of export subsidy
commitments within the meaning of Article 10.1 of the Agreement on Agriculture has been proven to
the required standard . This view is based, inter alia, on the reference in that provision to the manner
in which a measure is applied, rather than the act ual measure itself. We view this reference as
supporting an examination as to whether the measur e is actually applied in such a manner as to
threaten to lead to circumvention.
7.887 The statutory requirement that the CCC "shall make available ... not less than $5,500,000,000
in credit guarantees ..."1066 does not mandate that the CCC actually issue any particular level of credit
guarantees.1067 This law requires that CCC "make available" certain guarantees. However, the actual
issuance of guarantees is within the discretion of the CCC, which "may guarantee the repayment of
credit made available to finance commercial export sales of [United States] agricultural
commodities..." over certain time frames. 1068 The statute mak es clear that "[e]xpor t credit guarantees
issued pursuant to this section shall contain such terms and conditions as the Commodity Credit
Corporation determines to be necessary." 1069 The statute sets out certain required determinations that
the CCC must make in order to guarantee repayment, including that it must "develop, expand, or
maintain the importing country as a foreign market, on a long-term basis, for the commercial sale and
export of United States agricultural commodities, without displacing normal commercial sales....". 1070
It also sets out the purpose of the programme, to which end the CCC may use export credit guarantees
authorized under the statute.1071
7.888 The statute also provides certain restrictions on the use of export credit guarantees, including
that the CCC "...shall not make credit guarantees ava ilable in connection with sales of agricultural
commodities to any country that the Secretary determines cannot adequately service the debt
associated with such sale."1072 Brazil argues that the entitlement that qualified applicants have to CCC
guarantees is not curtailed by this latter requireme nt and that it is not relevant to stemming or
otherwise controlling the flow of CCC guarantees. 1073 While this does not curtail the amount of
guarantees that may ultimately be made available, it does indicate to us that there exists a discretion
(on the part of the Secretary) to determine situations in which guarantees cannot be made available.

1065"Congressional Budget Office Staff Memorandum, An Explanation of the Budgetary Changes under
Credit Reform", April 1991, p. 7, reproduced in Exhibit BRA-185,
10667 USC 5641(b)(1), reproduced in Exhibit BRA-297.
1067The Panel notes that except for programme year 1992, CCC has not since issued $5.5 billion in
guarantees in any year. Sales registrations have ranged from a low of $2.876 billion for programme year 1997
and have generally been approximately $3.0 billion-$3.2 billion. See United States' further rebuttal submission,
para. 201; United States' further written submission, para. 148 and accompanying table entitled CCC Export
Credit Guarantee Program Levels, Annual President's Budgets and Actual Sales Registrations, Fiscal Years
1992-2004. 7 USC 5622 note, reproduced in Exhibits BRA-141 and BRA-366, indicate that the CCC shall
make available for fiscal years 1996 through 2002 not less than $1,000,000,000 of direct credits or export credit
guarantees for exports to emerging markets.
10687 USC 5622(a)(1)(b), reproduced in Exhibit BRA-141; see also id. 5622(k) (imposing requirement
that certain percentages "of the total amount of credit guarantees issued for a fiscal year [be] issued," not merely
made available, with respect to certain products) (emphasis added).
1069 7 USC 5622(g), reproduced in Exhibits BRA-141, BRA-366.
1070 7 USC 5622(c), reproduced in Exhibits BRA-141, BRA-366.
1071 7 USC 5622(d), reproduced in Exhibits BRA-141, BRA-366.
1072 7 USC 5622(f)(1), reproduced in Exhibits BRA-141, BRA-366.
1073 Brazil 's comments (27 October) on Panel Question No. 142 posed to the United States, para. 91.

7.889 The statute sets out a limit on the total amount of guarantees issued in certain fiscal years with
respect to "processed or high value" agricultural prod ucts, with the balance to be issued to promote
the export of bulk or raw agricultural commodities (provided that this limit does not require a
reduction in the total amount of credit guarantees issued for the fiscal year).
1074
7.890 The regulations expand upon certain statutory provisions 1075, but nothing in the regulations
indicates that the CCC is required to issue a particular guarantee. They set forth restrictions and
criteria which the CCC will apply in the exercise of its discreti on to determine whether credit
guarantees will be issued, and guiding country allo cations and commodity allocations. There are no
quantitative requirements obligating the CCC to extend any particular type or amount of guarantees in
respect of any particular commodity.1076
7.891 Brazil also asserts that the fact that the CCC can deny guarantees to individuals who do not
meet eligibility criteria does not affect the conclusi on that the CCC cannot stem or otherwise control
the flow of export credit guarantees.1077
7.892 However, we are of the view that the actual issuance of a particular export credit guarantee
remains within the discretion of, and is susceptible to limitation by, the CCC. Availability of export
credit guarantees is governed by allocations in effe ct at any one time for specific commodities and
specific destinations. 1078 The CCC may increase allocations, and has done so 1079, but there is no
absolute legal requirement that it need necessarily do so. It has the ability to make commodity-
specific allocations (although many allocations ar e specific as to country of destination). 1080 An
exporter will not necessarily be entitled to an export credit guarantee in respect of exports of any
product at a given time. It is the CCC which decides upon country and product allocations, which
dictate the availability of guarantees to exporters. Allocations are made on a monetary basis, and do
not dictate whether or not the United States may surpass its quantitative export reduction
commitments in a given period (in respect of sche duled products), nor ex tend guarantees to other
unscheduled products. The fact that they operate in conjunction with other export subsidies listed in
Article 9.1 also does not necessarily lead to circumvention, at least in the case of scheduled products.
7.893 In order to pose a "threat" within the meaning of Article 10.1 of the Agreement on
Agriculture, we do not believe that it is sufficient th at an export credit guarantee programme might

1074 7 USC 5622(k), reproduced in Exhibits BRA-141, BRA-366.
1075 Exhibit US-6; Exhibit BRA-38.
1076 Pursuant to 7 CFR 1493.5: "The criteria considered by CCC in reviewing proposals for specific
U.S. commodity allocations within a specific countr y allocation will include, but not be limited to, the
following: (a) Potential benefits that the extension of export credit guarantees would provide for the
development, expansion or maintenance of the market in the importing country for the particular U.S.
agricultural commodity under consideration; (b) The best use to be made of the export credit guarantees in
assisting the importing country in meeting its particular needs for food and fiber...; (c) Evaluation, in terms of
program purposes, of the relative benefits of providing payment guarantee coverage for sales of the U.S.
agricultural commodity under consideration compared to providing coverage for sales of other U.S. agricultural
commodities; and (d) Evaluation of the near and long-term potential for sales on a cash basis of the U.S.
commodity under consideration." With respect to the SCGP, the United States agricultural commodity must be,
inter alia, determined to be a high-value agricultural product. See Exhibit BRA-38.
1077 Brazil 's comments (27 October) on Panel Question No. 142 posed to the United States, para. 90.
1078 e.g., Exhibit US-12 shows examples of progra mme announcements issued in accordance with 7
CFR 1493.10(d). These programme announcements indicate that USDA authorizes a certain amount of credit
guarantees for sales of particular commodities to particul ar estimations in a certain fiscal year. USDA also
amends commodity eligibility.
1079 See e.g. "USDA Announces $2.8 billion in Expo rt Credit Guarantees", FAS Press Release, 30
September 2003, reproduced in Exhibit BRA-296
1080 See e.g. USDA, "Summary of FY 2003 Export Credit Guarantee Programme Activity", reproduced
in Exhibit BRA-299. See also Exhibit US-41.

possibly, or theoretically, be used in a manner wh ich threatens to lead to circumvention of export
subsidy commitments.
7.894 We note that we would be entitled to take in to account historical practice under the measure
in order to discern its nature in terms of whether or not a "threat" arises. However, we cannot accept
that, just because an export subsidy has, historica lly, actually circumvented within the meaning of
Article 10.1 with respect to certain unscheduled and scheduled products
1081, a "threat" of
circumvention under Article 10.1 of the Agreement on Agriculture necessarily exists in respect of all
other products absent a provision in the statutory and regulatory framework of a Member governing a
certain measure that would guarantee that the measure would always and inevitably be used in a
WTO-consistent manner (or absolutely preclude the possibility that the measure might ever be used to
provide export subsidies that would contravene a Member's obligations under Article 10.1 of the
Agreement on Agriculture).
1082
7.895 We are of the view that the statutory and regulatory framework of the United States export
credit guarantee programmes is such that the CCC would not necessarily be required to issue
guarantees in respect of any other unscheduled agricultural product (not supported under the
programmes), or in respect of scheduled agricultu ral products other than rice, in a manner which
"threatens to lead to" circumvention of export subsidy commitments.
7.896 Keeping the applicable burden of proof in mind, we therefore decline to find that the export
credit guarantee programmes at issue are generally a pplied to scheduled agricultural products other
than rice and other unscheduled ag ricultural products (not suppor ted under the programmes) in a
manner which threatens to lead to circumvention of United States export subsidy commitments within
the meaning of Article 10.1 of the Agreement on Agriculture.
v. Does Article 10.2 of the Agreement on Agriculture exempt export credit guarantees that are
export subsidies from the anti-circumvention provision in Article 10.1 of the Agreement on
Agriculture?
a. Text
7.897 We recall (again) that Article 3.2 of the DSU recognizes that interpretative issues arising in
WTO dispute settlement are to be resolved through the application of customary rules of
interpretation of public international law. It is well settled in WTO case law that the principles
codified in Articles 31 and 32 of the Vienna Convention on the Law of Treaties (the " Vienna
Convention") are such customary rules.
1083
7.898 Thus, the task of interpreting a treaty provision must begin with its specific terms.
7.899 As always, we thus begin our examination with the specific terms of the text of the relevant
treaty provision. Article 10.2 of the Agreement on Agriculture provides:
"2. Members undertake to work toward the development of internationally
agreed disciplines to govern the provision of export credits, export credit guarantees

1081 See our findings supra, paras. 7.875 and 7.881.
1082 We thus believe that the export credit guarantee programmes we are examining are of a
fundamentally different nature than the mandatory and essentially unlimited subsidy (in the form of revenue
forgone that is otherwise due) examined in US – FSC. Our examination also shows that they are of a different
nature than the mandatory user marketing (Step 2) measure that we examine in paras. 7.742-7.748 and 7.1089-
7.1097..
1083 Article 31(1) provides in relevant part that: "A treaty shall be interpreted in good faith in
accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its
object and purpose."

or insurance programmes and, after agreem ent on such disciplines, to provide export
credits, export credit guarantees or insurance programmes only in conformity
therewith."
7.900 The United States argues that the text of Article 10.2 of the Agreement on Agriculture reflects
the deferral of disciplines on export credit gua rantee programmes contemplated by Members.
According to the United States, the structure and text of the Agreement on Agriculture reflect that
Members came to no agreement with respect to substantive disciplines on export credit guarantee
programmes.
7.901 We disagree with the United States view that " ... the plain words of Article 10.2 ... indicate
that the export credit guarantee programmes are not subject in any way to the export subsidy
disciplines of that Agreement."
1084 Indeed, our reading of the text of Article 10.2 of the Agreement on
Agriculture, in light of its context and the object and purpose of the Agreement, leads us to the
opposite conclusion. For the reasons that follow, we view the text as clearly indicating that export
credit guarantee programmes constituting export subsid ies for the purposes of Article 10.1 must not
be applied in a manner which results in, or which threatens to lead to, circumvention of export subsidy
commitments.
7.902 The text of Article 10.2 indicates that Members have undertaken to work toward the
"development of internationally agreed disciplin es to govern the provision of .... export credit
guarantees". It further indicates that, after agr eement has been reached on such disciplines, WTO
Members will be obliged to provide export credit guarantees only in conformity with such disciplines.
7.903 We recall that, in order to carve out or exempt particular categories of measures from general
obligations such as the prevention of circumvention of export subsidy commitments in Article 10.1 of
the Agreement on Agriculture , it would be reasonable to expect an explicit indication revealing such
an intention in the text of the Agreement. 1085 Therefore, we examine the text of Article 10.2 of the
Agreement on Agriculture in order to see whether there is a clear indication that the drafters intended
to carve-out export credit guarantees in respect of agricultural products from the export subsidy
disciplines in Article 10.1, or whether there is any provision that would do so.
7.904 However, we see no language in Article 10.2 whic h would modify the scope of application of
the general export subsidy disciplines in Article 10.1 in the Agreement on Agriculture so as to carve
out or exempt export credit guarantees from the export subsidy disciplines imposed by that
Agreement. We find no textual support for the United States assertion that Article 10.2 serves to
"defer disciplines" or to "except" export credit guarantee programmes from export subsidy disciplines.
7.905 The text tells us that WTO Members may not have been able to agree on new specific
disciplines governing agricultural export subsidies. However, the text does not tell us that, in light of
that, any other potentially relevant existing disciplines do not apply.
7.906 This contrasts starkly with the text of othe r provisions in the covered agreements, which
clearly carve out or exempt certain products or measures from certain obligations that would
otherwise apply pending the development of further multilateral disciplines.

1085We find support for our reasoning in Appellate Body Reports, US – Carbon Steel and US-
Corrosion-Resistant Steel Sunset Review, underlining the importance of the text and the role of cross-references
and clear textual indications about the relationship between treaty provisions. Also, for example, Appellate
Body Report, EC-Sardines, paras. 201-208; Appellate Body Report, EC – Hormones, para. 128, relating to the
treatment of a large/significant group of measures and a fundamental treaty obligation.

7.907 For example, the text of Article 6.1(a) of the SCM Agreement 1086 specified that the
presumption of serious prejudice flowing from the threshold total ad valorem subsidization of a
product "[did] not apply to civil aircraft" since it "was anticipated that civil aircraft will be subject to
specific multilateral rules. Similarly, the footnote to Article 8.2(a) of the SCM Agreement 1087
stipulates that: "Since it is anticipated that civil ai rcraft will be subject to specific multilateral rules,
the provisions of this subparagraph do not apply to that product." (emphasis added) Likewise,
Article XIII of the General Agreement on Trade in Services , entitled "Government Procurement"
provides another example of a clear textual indication that certain existing disciplines do not apply ,
and that future negotiations are contemplated. That provision stipulates:
"1. Articles II, XVI and XVII shall not apply to laws, regulations or
requirements governing the procurement by governmental agencies of services
purchased for governmental purposes and not with a view to commercial resale or
with a view to use in the supply of services for commercial sale.
2. There shall be multilateral negotia tions on government procurement in
services under this Agreement within two year s from the date of entry into force of
the WTO Agreement. (emphasis added)"
7.908 These provisions in the covered agreements show us that the Uruguay Round drafters were
well aware of how to take into account the prospect of development of international disciplines in
certain areas following the completion of the Uruguay Ro und, and of how to specify in the text of the
covered agreements that existing disciplines did not apply in a certain situation pending the
negotiation of future disciplines that would then g overn. Where the negotiators intended to carve out
certain measures from the existing disciplines impo sed by an agreement, including pending the
development of further multilateral or internationally agreed disciplines, they demonstrated that they
knew how to do so. They inserted clear textual guidance to this effect.
1088
7.909 However, Article 10.2 contains no such explicit textual indication that the existing disciplines
do not apply pending the negotiation of the internat ionally agreed disciplines to which Article 10.2

1086We realize that this provision has now lapsed, by virtue of the operation of Article 31 of the SCM
Agreement. Members took no action to extend the application of the provisions of this provision, nor of
Articles 8 and 9 concerning non-actionable subsidies beyond the period of five years from the date of entry into
force of the WTO Agreement. However, these provisions can nevertheless be instructive in understanding the
overall architecture of the Ag reement with respect to the different types of subsidies it sought and seeks to
address. We recall that the D ecision by the Arbitrator in US – FSC (Article 22.6 – US) , footnote 66, expressed
a similar view.
1087Ibid.
1088We find other examples in the covered agreem ents of explicit guidance as to the temporal
application of obligations pending the development of additional rules in other covered agreements.
For example, Article 9 of the Agreement on Rules of Origin , in Part IV of that Agreement, provides:
"With the objectives of harmonizing rules of origin and, inter alia, providing more certainty in the conduct of
world trade, the Ministerial Conference shall undertake the work programme set out below in conjunction with
the CCC, on the basis of the following principles:..". Part II of that Agreement is entitled "Disciplines to
Govern the Application of Rules of Origin". It cont ains two provisions. Article 2 is entitled "Disciplines
During the Transition Period". Article 3 is entitled "Dis ciplines after the Transiti on Period". This provides a
clear textual indication of the disciplines that apply pending the development of further disciplines.
Similarly, in the General Agreement on Trade in Services , Article X:1 provides for "multilateral
negotiations on the question of emergency safeguard measures based on the principle of non-discrimination.
The results of such negotiations shall enter into effect on a date not later than three years from the date of entry
into force of the WTO Agreement." Article X:2 provides guidance for the situation "in the period before the
entry into effect of the results of the nego tiations [...]". Article XV of the General Agreement on Trade in
Services obliges Members to "enter into negotiations with a view to developing the necessary multilateral
disciplines to avoid such trade distortive effects [...]". It does not, howeve r, contain any explicit carve-out from
any other potentially relevant and applicable subsidy disciplines.

refers. There is no footnote stating that the obl igations in Article 10.1 "do not apply" pending
development of future internationally agreed disciplin es. Nor is there any type of introductory caveat
to Article 10.2, such as "except as provided in Article 10.1..."; "notwithstanding the provisions of
Article 10.1..."; or "Nothing in any other provision of the Article 10 shall mean that the existing
disciplines governing agricultural export credit gua rantees do not apply to export credit guarantees on
agricultural products...".
1089
7.910 There is not even any indication along the lines of the caveat in Articles 5 and 6.9 of the SCM
Agreement, which both stipulate that they do "not a pply to subsidies maintained on agricultural
products as provided in Article 13 of the Agreement on Agriculture ". In turn, Article 13(c)(ii) of the
Agreement on Agriculture explicitly indicates that certain measures are "exempt from actions" based
on certain provisions of the SCM Agreement and Article XVI of the GATT 1994 upon fulfilment of
certain conditions.1090
7.911 The absence in Article 10.2 of such an explicit s tipulation supports our view that the general
export subsidy anti-circumvention disciplines appl y pending development of the "internationally
agreed disciplines" referred to in Article 10.2 of the Agreement on Agriculture . While those
internationally agreed disciplines are under negotia tion, the general disciplines on export subsidies
included in the Agreement on Agriculture (and, subject to the provisions of Article 13(c) and the terms
of the SCM Agreement, the export subsidy prohibition in Article 3 of the SCM Agreement ) apply.
Members have agreed to undertake to work towa rd the development of internationally agreed
disciplines. If Members do conclude an agreement on these specif ic disciplines, the second part of
Article 10.2 would be triggered (o r, more likely, would be taken into account and modified by the
specific disciplines) following any appropriate action by WTO Members.
b. Context, object and purpose
7.912 Our interpretation of the text finds support in the immediate context of Article 10.2, as well as
in the object and purpose. Article 10.2 is a sub-pa ragraph of Article 10, which is entitled "Prevention
of Circumvention of Export Subsidy Commitments". Article 10.1 refers to export subsidies "applied
in a manner which results in , or which threatens to lead to , circumvention of export subsidy
commitments". (emphasis added) The verb "circumvent" means, inter alia , "find a way round,
evade…".
1091 The title of Article 10, and the text of Article 10.1, indicates an intention to prevent
Members from circumventing or "evadi ng" their "export subsidy commitments". 1092 Under
Article 10.1, it is not necessary to demonstrate actual "circumvention" of "export subsidy
commitments". It suffices that "export subsidies" are "applied in a manner which … threatens to lead
to circumvention of export subsidy commitments".
7.913 In response to questioning, the United States asserts that "export credit guarantees are not
subsidies" within the meaning of Articles 9.1 or 10.1 of the Agreement on Agriculture , and that
Article 13(c) therefore does not apply to them.1093
7.914 Again, we recall that, it is well-established in th e WTO, and, prior to that, in the GATT, that
export credit guarantees may generally constitute e xport subsidies. This possibility was already

1089 Nor do other provisions of Article 10 contain such a carve out or exemption, such as "Nothing in
this provision shall mean that export credit guarantees may constitute export subsidies ...".
1090 See supra, para. 7.5 of Section VII:A, which reproduces an excerpt from the 20 June 2003
communication from the Panel.
1091The New Shorter Oxford English Dictionary, (1993).
1092 Appellate Body Report, US – FSC, para. 148.
1093 United States' response to Panel Question No. 88(c).

identified in the Illustrative List of Export Subsidies incorporated in the Tokyo Round Subsidies Code,
and had already been acknowledged by the 1960 Working Party.1094
7.915 Moreover, the entirely unreasonable implications of the approach a dvocated by the United
States before us can be demonstrated by the fo llowing proposition, which takes the United States
argument to its logical extreme. If, by virtue of Article 10.2, there are cu rrently no disciplines on
agricultural export credit guarantees, a WTO Member may therefore extend agricultural export credit
guarantee without charging any premium whatsoever, for an indefinite period, for an infinite amount,
and with or without any other conditions that a Member may wish. In our view, Members would have
found "a way round", a way to "evade", their comm itments under Articles 3.3 and 9.1, if they could
make available, in the form of export credit guarantees, export incentives that they are prohibited from
providing through other methods under the first clause of Article 3.3 and under Article 9.1.1095
7.916 The Panel put this proposition to the United States, and asked how the United States view of
Article 10.2 would reconcile with the title of Ar ticle 10 ("Prevention of Circumvention of Export
Subsidy Commitments").1096
7.917 The United States submitted that Article 10.2 applies only to export credit guarantees
"properly characterized as such", and then lists a nu mber of characteristics which, in the United States
view, compel characterization of the programmes as export credit guarantees benefiting from a
deferral of any disciplines by virtue of Article 10. 2: "export credit guarantees are offered pursuant to
programs which charge premiums; impose limits on tenor; impose limits on exposure to individual
bank obligations; impose limits on exposure to risk of default from different countries; define
shipping periods; and issue allocations (value li mitations) of potential guarantee availability for
specific commodities to be exported to specific destinations" and guaranteeing only a relatively small
portion of the interest. Consequently, the United States asserts, "participants remain exposed to a
significant component of the overall risk of default" . According to the United States, "[i]llegitimate
attempts to characterize export subsidy progra mmes as export credit guarantee programmes would be
subject to the anti-circumvention provisions of Article 10.1...".
1097
7.918 However, we see no indication in the text of th e provision that only certa in types of export
credit guarantees – those meeting certain criteria rela ting to premiums or tenor or limitation of risk
exposure – may benefit from a deferral of disciplin es, while certain other types – those not meeting
such criteria – would not. The text of Article 10. 1 refers to "export subsidies". The text of
Article 10.2 refers to "export credit guarantees". No further details or specific definitional elements
exist that would serve as a textual basis for the Un ited States view. The only question to be asked is
whether or not export credit guarantees constitute export subsidies for the purposes of Article 10.1,
and not whether a Member's agricultural export cred it guarantees may or may not be of a type that
would benefit from a deferral of disciplines.
7.919 Further context for Article 10 is found in Article 9.1 of the Agreement on Agriculture .
Article 9.1 of the Agreement on Agriculture lists a number of specifically identified export subsidies.

1094 See supra, para. 7.806.
1095 We note that the text of Article 10.2 is not limited to export credit guarantees, but also refers to
"export credits" and "export credit insu rance programmes". Logically, the im plications of any analysis of the
meaning of Article 10.2 for export credit guarantees would also have to be tenable in the context of export
credits. Under the United States' approach, a Member could provide an agricultural export credit at zero per
cent interest for a term of, for example, 50 years. We do not view this as a reasonable interpretation of
Article 10.2, particularly in light of the provisions of Article 10.1.
1096 United States' response to Panel Question No. 88(b).
1097 United States' response to Panel Question No. 88(b).

The terms "export credit guarantees" do not explicitly appear in the text listing such practices.
1098 The
United States asserts: "Conspicuously absent in Article 9.1 is any provision addressing such
practices, even though US export credit guarante e programmes had been in existence for nearly
fifteen years preceding the inception of obligations under the WTO." 1099
7.920 We acknowledge that Article 9.1 of the Agreement on Agriculture sets forth a list of six
specific practices known to the drafters and de emed to constitute export subsidies under the
Agreement on Agriculture . However, the existence of such a list does not negate the possibility that
other forms of export subsidies might exist, apart from those that appear in the list. If this were not
the case, there would have been no need for the draf ters to have included Article 10, which deals with
export subsidies "not listed in paragraph 1 of Ar ticle 9". Article 10 exists precisely to prevent
circumvention of export subsidy commitments thr ough the use of export subsidies not listed in
Article 9.1. Furthermore, if Members had inte nded to defer export subsidy disciplines on export
credit guarantees, they would have done so. In contrast to the United States ar gument that some sort
of implicit permission was maintained with respect to export credit guarantees in the drafting history
of Article 9.1, we find an express obligation in the final text of Article 10.1 of the Agreement on
Agriculture.
7.921 Article 3.3 of the Agreement on Agriculture prohibits the use of export subsidies listed in
Article 9.1: (i) in excess of reduc tion commitment levels in the case of scheduled products; and (ii) in
respect of non-scheduled products. It does not cover other types of export subsidies. The parties to
this dispute agree that Article 8 of the Agreement on Agriculture , pursuant to which Members
undertake "not to provide export subsidies otherwise than in conformity with this Agreement and with
the commitments as specified in that Member 's Schedule" serves to prohibit the use of listed and non-
listed export subsidies in excess of reduction commitment levels in the case of scheduled products and
to prohibit the use of export subsidies otherwise th an in conformity with reduction commitments and
the provisions of the Agreement.
1100
7.922 The final clause of Article 10.1 reads: "nor shall non-commercia l transactions be used to
circumvent such commitments." The United Stat es argues that instead of making any connection
between "non-commercial transactions" and export credit guarantees (by, for example, providing
guidance as to when export credit guarantees might be considered to be on "commercial" or "non-
commercial terms"), the Members agreed in Article 10.2 to provide wholly distinct treatment to
export credits, export credit guarantees and insurance. 1101 However, we understand the reference in
this final clause of Article 10.1 to refer, inter alia , to international food aid. In this respect,
Article 10.41102 provides additional guidance with respect to international food aid, setting out criteria,

1098 As we have noted, the parties to this dispute ag ree that Article 9.1 does not apply to export credit
guarantees and that Article 10 is the relevant provision for our analysis. Our examination is therefore without
prejudice to the interpretation of Article 9.
1099 United States' response to Panel Question No. 74.
1100 See Brazil's and the United States' respective responses to Panel Question No. 219.
1101 United States' response to Panel Question No. 219.
1102 Article 10.4 of the Agreement on Agriculture reads:

"Members donors of international food aid shall ensure:
(a) that the provision of international food aid is not tied directly or
indirectly to commercial exports of agricultural produ cts to recipient
countries;
(b) that international food aid transactions, including bilateral food aid
which is monetized, shall be carried out in accordance with the FAO
'Principles of Surplus Disposal and Consultative Obligations', including,
where appropriate, the system of Us ual Marketing Requirements (UMRs);
and

including references to certain internationally agr eed disciplines, which might help to identify when
international food aid might be considered to cons titute an export subsidy for the purposes of the anti-
circumvention disciplines of Article 10.1. We see no contradiction between this and an interpretation
of Articles 10.1 and 10.2 whereby, in contrast to Article 10.4, Article 10.2 contains no additional
substantive criteria, but nevertheless identifi es the possibility that export credit guarantees may
constitute export subsidies within the meaning of Article 10.1.
7.923 Still further context is found in item (j) of the Illustrative List of Export Subsidies, included in
Annex I of the SCM Agreement. This item explicitly refers to export credit guarantee programmes,
and offers criteria to assess wh ether such programmes constitute per se export subsidies. The United
States asserts that this Illustrative List, including item (j), had previously formed part of the Tokyo
Round Subsidies Code. For the United States, 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 provision 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.
7.924 We do not agree. The existence of item (j) and its direct reference to, and disciplines upon,
export credit guarantees does not support the United St ates view. In item (j), there is a recognition
that export credit guarantee programmes may constitute export subsidies per se, and a test is provided
to identify when they do so: when premiums are inadequate to cover long-term operating costs and
losses. The inclusion of a reference to agricultura l export credit guarantee programmes in the context
of Article 10 supports the conclusion that Members we re very well aware of the possibility that such
export credit guarantees may c onstitute export subsidies per se and that Members were, in fact,
concerned about the potential for such programmes to circumvent Members' export subsidy reduction
commitments. Members therefore undertook to de velop disciplines specific to agricultural export
credit guarantees. They did not, however, carve out such export credit guarantees from otherwise
applicable disciplines.
7.925 The existence of disciplines on export cred it guarantee programmes would not render the
internationally agreed disciplines envisioned by Ar ticle 10.2 unnecessary nor irrelevant. Rather, the
purpose of any eventual disciplines could be furthe r to facilitate the determ ination of when export
credit guarantee programmes in respect of agri cultural products constitute export subsidies per se by
developing and refining existing disciplines. Pe nding the development of such disciplines, certain
guidance already exists as to when export credit guarantees constitute export subsidies per se .1103
Such a reading of Article 10.2, in the context of Article 10.1, allows both provisions to have full
meaning and does not reduce either to inutility.
7.926 Article 10.2 sets out an intention on the part of Members to undertake to work toward the
development of internationally agreed disciplines regarding agricultural export credit guarantees. The
expression of this undertaking, however, does not am ount to a fiat to use those measures to confer
export subsidies without consequence and without limit. Admittedly, as the United States has argued,
the provision does not explicitly indicate that the disciplines which Members have committed
themselves to developing would apply in addition to disciplines which already exist. 1104 However,
such an explicit indication is not necessary in light of the unqualified wording of the provision, and its

(c) that such aid shall be provided to the extent possible in fully grant
form or on terms no less concessional than those provided for in Article IV
of the Food Aid Convention 1986."

1103 We refer to our examination above concerni ng the contextual guid ance available in the SCM
Agreement (i.e. item (j) of the Illustrative List of the SCM Agreement), leading to the finding in para. 7.869.
1104 See the United States' first written submission, para. 164.

context. While Article 10.1 currently provides the discipline in the Agreement on Agriculture on the
use of export credit guarantee programmes, the wo rk envisaged in Article 10.2 would presumably
elaborate further and more specific disciplines that could facilitate identification of the extent to
which such export credit guarantee programmes constitu te export subsidies, or to what extent export
credit guarantee programmes are not permitted. Such rules might, for example, provide more precise
rules applicable to all export credit guarantees, irrespective of a Member's reduction commitments
under the Agreement on Agriculture.
7.927 Our interpretation is not tantamount to saying that agricultural export credit guarantees will
always constitute export subsidies. It simply means that when an agricultural export credit guarantee
meets the definition of "export subs idy" for the purposes of Article 10.1, it will be subject to the anti-
circumvention disciplines imposed by that provision.
c. Subsequent practice
7.928 The United States also invokes Article 31(3)(b) of the Vienna Convention
1105, arguing that
"subsequent practice" supports the view that di sciplines on agricultural export credit guarantees were
deferred. According to the United States, such "s ubsequent practice" is evident in the years of
negotiations to develop internationally agreed disciplines immediately following the conclusion of the
WTO Agreement 1106 under the auspices of the Organization for Economic Co-operation and
Development (OECD) 1107 and subsequently within the WTO itself under the mandate of the Doha
Ministerial Declaration.1108
7.929 The record in these Panel proceedings does not s uggest that there is a discernible pattern of
acts or pronouncements implying an agreement among WTO Members on the United States'
interpretation of Article 10.2.1109 1110
7.930 However, even assuming that the United St ates has identified a "concordant, common and
consistent" sequence of acts or pronouncements whic h is sufficient to establish a discernible pattern
implying the agreement of the parties to a treaty regarding its interpretation 1111, we understand that
such practice would consist precisely of an impl ementation by Members of their undertaking in

1105 Article 31.3(b) of the Vienna Convention provides: "There shall be taken into account, together
with the context: [...] any subsequent practice in the app lication of the treaty which establishes the agreement of
the parties regarding its interpretation".
1107 Exhibit US-7 contains document TD/CONSENSUS(2000)25/REV4, Arrangement on Officially
Supported Export Credits: The Chairman's Revised Proposal for a Sector Understanding on Export Credits for
Agricultural Products, dated 9 July 2002.
1108 WT/MIN(01)/DEC/1. Exhibit US-8 contains a Cairns Group "Negotiating Proposal on Export
Competition" submitted to the Informal Meeting of the Special Session of the Committee on Agriculture, 18-
20 November 2002, containing proposals relating to, inter alia, export credit guarantees. Exhibit US-9 contains
document TN/AG/W/1/Rev.1, "Negotiations on Agriculture, First Draft of Modalities for the Further
Commitments", addressing, inter alia, export credit guarantees in the cont ext of export competition and export
subsidies. Exhibit US-10 contains document G/AG/NG/W/139-G/AG/W/50, "Export Credits for Agricultural
Products", Proposal by MERCOSUR (A rgentina, Brazil, Paraguay and Urug uay), Bolivia, Chile, Costa Rica,
Guatemala, India and Malaysia).
1109 We note that neither Brazil nor any of the third pa rties that expressed a view on this matter agree
with the United States' arguments in these Panel proceedings.
1110 We note that no revisions to, nor universally agreed interpretations of, the relevant provisions of the
Agreement on Agriculture (including within the meaning of Article 10 of the WTO Agreement) have, as yet,
resulted from the WTO negotiations launched on the basis of the Doha Ministerial Declaration. It is certainly
not our task to prejudge, or to try to predict the scope and content of, any future results of those negotiations.
1111 See Appellate Body Report, Japan – Alcoholic Beverages II , para. 107. See Appellate Body
Report, Chile – Price Band System, para. 213.

Article 10.2 "to work toward the development of internationally agreed disciplines to govern the
provision of export credits, export credit guarantees or insurance programmes ...".
7.931 Subsequent practice, if any, clearly and indisputably demonstrates that Members are
attempting to develop internationally agreed di sciplines. It does not reflect any concession or
agreement that there are no current rules in this ar ea. We therefore disagree with the United States'
argument that "subsequent practice" supports the pr oposition that there are pres ently no disciplines in
place.
7.932 In brief, our examination of the text of Article 10.2 in light of its context and the object and
purpose indicates that there is no justification fo r the United States' approach. Nowhere does the
Agreement on Agriculture define "export credit guarantees", exempt export credit guarantees from the
definition of export subsidies, nor enumerate char acteristics which might serve to exempt certain
export credit guarantees constituting export subsidies from the disciplines of Article 10.1. If the
drafters had intended to ensure that agricultural export credit guarantees were never to be considered
export subsidies, they would have clearly so indicated. However, they have not done so.
d. Drafting history
7.933 We believe that our examination of the text of Article 10.2 of the Agreement on Agriculture,
in its context and in light of the object and purpose of that agreement leads to a clear interpretation of
the text.1112 However, as the United States has relied u pon the drafting history of Article 10.2, and of
related provisions, to support its argument that Article 10.2 defers any disciplines on agricultural
export credit guarantees 1113 we consider that it is also appropriate for us to point out that nothing in
the drafting history of the provision would compel us to reach a different conclusion. Indeed, it
confirms our interpretation.
7.934 The drafting history included in the record of these Panel proceedings reflects that, in
July 1990, the Framework Agreement on Agricultu re Reform Programme ("DeZeeuw Text") was
circulated. Paragraph 20(e) of that draft text contemplated that Members would provide "data on
financial outlays or revenue forgone ... in respect of export credits provided by governments or their
agencies on less than fully commercial terms." Un der paragraph 22, that draft envisaged concurrent
negotiations to govern the use of export assistance, including "disciplines on export credits". Beyond
a general reference to "export credits", there was no express reference to export credit guarantees or
export credit guarantee programmes.
7.935 In June 1991, a Chairman's Note on Options in the Agriculture Negotiations was circulated.
In paragraph 48 of that Note, the Chairman identifie d "Other key issues on which at least in principle
decisions are needed are whether subsidised export credits and related practices ... would be subject to

1112 A treaty interpreter may take account of a treat y negotiating history in certain circumstances.
Article 32 of the Vienna Convention on the Law of Treaties provides:
"Article 32
Supplementary means of interpretation
 Recourse may be had to supplementary means of interpretation, including the
preparatory work of the treaty and the circumstan ces of its conclusion, in order to confirm the
meaning resulting from the application of article 31, or to determine the meaning when the
interpretation according to article 31:
(a) leaves the meaning ambiguous or obscure; or
(b) leads to a result which is manifestly absurd or unreasonable."

1113 See, e.g. United States' rebuttal submission, paras. 131 ff. At the second Panel meeting, we asked
the United States to present its detailed argument orally concerning the drafting history, including Exhibits
US-25-30.

reduction commitments." The Chairman requested decisions by the principals on "whether subsidized
export credits and related practi ces ... would be subject to reduction commitments unless they meet
appropriate criteria to be established in terms of the rules that would govern export competition."
7.936 Subsequently, in August 1991, the Chairman ci rculated a series of addenda on the Note on
Options "aimed at exploring certa in options in greater detail".
1114 Included among the addenda was
Addendum 10 on "Export Competition: Export Subsidi es to be subject to the terms of the Final
Agreement".1115 Section 3 of that Addendum, in paragr aph 48, sets out a proposed "Illustrative List
of Export Subsidy Practices." Item (h) refers explicitly to "Export credits provided by governments or
their agencies on less than fully commercial terms." More relevantly, item (i) refers explicitly to:
"Subsidized export credit guarantees or insurance programs."
7.937 In December 1991, the Chairman circulated for discussion a "Draft Text on Agriculture". 1116
Article 8.2 of that Draft Text lists "export subsidies" that "are subject to reduction commitments under
this Agreement", somewhat resembling the current Article 9.1 of the Agreement on Agriculture .1117
Article 9.1 of the Draft Text, similar to Article 10.1 of the current Agreement, provides that
"Subsidies contingent on export performance that are not listed in Article 8.2...shall not be applied in
a manner which results in, or which threatens to lead to, circumvention of export subsidy
commitments; nor shall non-commercial transactions be used to circumvent such commitments."
Paragraph 3 of Article 9 of that Draft Text states : "For the purposes of this Article, whether export
credits, export credit guarantees or insurance progra mmes provided by governments or their agencies
constitute export subsidies shall be determined on the basis of paragraphs (j) and (k) of Annex 1 to the
[SCM Agreement]."
7.938 Shortly thereafter, the Chairman of the Trade Negotiations Committee issued the "Draft Final
Act Embodying the Results of the Uruguay R ound of Multilateral Trade Negotiations". 1118 The
paragraph 3 of Article 9 that had a ppeared in the previous draft text was omitted. Article 10.2 of the
Draft Final Act read as follows:
"Participants undertake not to provide export credits, export credit guarantees or
insurance programs otherwise than in c onformity with internationally agreed
disciplines."
7.939 This draft language was subsequently replaced by the current final text of Article 10.2. The
revisions that occurred do not, in our view, establish that the drafters of the final text of Article 10.2
intended to defer the application of any and all disciplines on agricultural export credit guarantees.
7.940 Rather, the current text of Article 10.2 of the Agreement on Agriculture reflects that, while
Members may not have agreed on any new speci fic disciplines for agricultural export credit
guarantees, they nevertheless undertoo k to engage in the development of such internationally agreed
disciplines. They did not, however , explicitly indicate any intention to carve out the application of
other, existing disciplines. The omission of paragraph 3 of Article 9 of the December 1991 Draft Text
is consistent with a decision that the words we re mere surplusage, because export credits, export
credit guarantees and insurance programmes were within the disciplines on export subsidies according
to the terms of the agreement captured. The omis sion is much less consistent with a decision to
exclude such programmes from the disciplines altogeth er, considering the clear textual ability of the

1114 MTN.GNG/AG/W/1/Add.1 (2 August 1991), reproduced in Exhibit US-27.
1115 MTN.GNG/AG/W/1/Add.10 (2 August 1991), reproduced in Exhibit US-27.
1116 Exhibit US-28.
1117 Exhibit US-28. Annex 7 of that draft text lists export subsidies that shall be subject to reduction
commitments.
1118 MTN.TNC/W/FA (20 December 1991), reproduced in Exhibit US-29, contains the draft text of the
Draft Final Act pertaining to Agriculture.

disciplines to extend to such programmes and the lack of any attention to an explicit carve-out of such
programmes from the disciplines.
7.941 The United States notes that, as part of the nego tiations, Members had to prepare and submit
schedules of quantities and budget outlays during a b ase period to derive the export subsidy reduction
commitments ultimately reflected in the respectiv e schedules of the Member s. The United States
argues that had Members' export credit guarantees been considered export subsidies for these
purposes from the outset then the export credit gua rantee activity during the relevant period would
also have to have been added to the base figur es from which each Member's export subsidy reduction
commitments were calculated. 1119 According to the United States, the base period export subsidy
quantity in Schedule XX of the United States for each commodity would have been much larger. The
size of the quantities involved in the export cr edit guarantee programmes during the 1986-90 period
indicate it obviously understood that export credit guarantees were not subject to export subsidy
commitments. The amount of exports involved w as obviously very significant and would have meant
a significant difference in the level of export subsidy reduction commitments from which all Members
would now be negotiating.1120
7.942 We cannot accept this view of one Member as representative of an agreed interpretation or
understanding of all Members. As this dispute demonstrates, there is a difference of view between the
United States and the other WTO Members that are parties and third parties concerned on this very
point. As indicated in Article 3.2 of the DSU, a primary rationale of the dispute settlement system
established by the WTO Agreement is to clarify the existing provisi ons of the covered agreements in
accordance with customary rules of interpretation of p ublic international law. Our analysis, applying
those interpretative rules, indicat es to us that the text of the Agreement on Agriculture , as finally
negotiated, does not support the United States' view.
7.943 Having examined the WTO-consistency of the e xport subsidies for agricultural products, in
the first place, under the Agreement on Agriculture, we observe that, in accordance with
Article 13(c)(ii) of the Agreement on Agriculture , to the extent that the United States does not
conform fully with its export subs idy commitments under Part V of the Agreement on Agriculture , it
is susceptible to challenge under Articles 3.1(a) and 3.2 of the SCM Agreement and Article XVI of the
GATT 1994.
7.944 In the alternative, if we were to accept th e United States argument that export credit
guarantees cannot constitute export subsidies for the purposes of the Agreement on Agriculture and
that the export subsidy disciplines in Article 10.1 of the Agreement on Agriculture do not apply to
export credit guarantees, then export credit guarantees cannot "conform fully to the provisions of
Part V" of that Agreement within the meaning of Artic le 13(c)(ii) of the Agreement. That is, they are
not "export subsidies" for the purposes of the Agreem ent, and it is, in any event, conceptually not
possible to conform with non-existent disciplines and trigger the exemption from action provided for
in Article 13(c).
1121 They would thus not be "exempt from actions" based on Article 3 of the SCM
Agreement (and Article XVI of the GATT 1994 ) within the meaning of Article 13(c)(ii) of the
Agreement on Agriculture.
7.945 Having made these findings, we will now examine Brazil's claims based upon the export
subsidy provisions of the SCM Agreement.1122

1119 United States' rebuttal submission, paras. 147-148.
1121 We note that the panel in Canada – Aircraft (Article 21.5 – Brazil) was of the view that conformity
with certain disciplines could only occur when those disciplines actually applied to the measure in question.
See Panel Report, Canada – Aircraft (Article 21.5 – Brazil), paras. 5.143-5.145.
1122 See supra, Section VII:C, "Order of analysis", as well as this Section's overview of the relationship
between these provisions.

(ii) Claims under Article 3.1(a) (and 3.2) of the SCM Agreement
7.946 We have conducted a "contextual" analysis unde r item (j) of the Illustrative List of Export
Subsidies in Annex I of the SCM Agreement for the purposes of determining whether or not an export
subsidy exists within the meaning of Article 10.1 of the Agreement on Agriculture .
1123 We see no
reason, and none has been pointed out to us in these Panel proceed ings, why this analysis may not
also be applied directly in an examination of the merits of Brazil's claims under item (j)/Article 3.1(a)
of the SCM Agreement in respect of the export credit guarantee programmes in this factual situation.
7.947 We take into account the substantive relations hip between the export subsidy provisions of
the Agreement on Agriculture and the SCM Agreement1124, including that Article 3.1(a) of the SCM
Agreement applies "[e]xcept as provided in" the Agreement on Agriculture . To the extent that the
United States export credit guarantee programmes at issue – GSM 102, GSM 103 and SCGP – do not
conform fully to these provisions in Part V of the Agreement on Agriculture and do not benefit from
the exemption from actions provided by Article 13(c)(ii) of the Agreement on Agriculture , they are
also export subsidies prohibited by Article 3.1(a) for the reasons we have already given.1125
7.948 Article 3.2 of the SCM Agreement provides: "A Member shall neither grant nor maintain
subsidies referred to in paragraph 1" of Article 3. To the extent that the three United States export
credit guarantee programmes at issue are inconsistent w ith Article 3.1(a), they are, consequently, also
inconsistent with Article 3.2 of the SCM Agreement.
6. FSC Repeal and Extraterritorial Income (ETI) Act of 2000
(a) Main arguments of the parties
7.949 Brazil reiterates the claims and arguments ma de by the European Communities under the
Agreement on Agriculture and the SCM Agreement against the FSC Repeal and Extraterritorial
Income Act of 2000 (the "ETI Act of 2000") upheld by the panel and Appellate Body in the US - FSC
(Article 21.5 - EC) dispute. In that dispute, both the panel and Appellate Body found that the ETI Act
of 2000 violates Articles 8 and 10.1 of the Agreement on Agriculture and Articles 3.1(a) and 3.2 of the
SCM Agreement. Brazil requests the Panel to apply the re asoning as developed by that panel, and as
modified by the Appellate Body, in that case mutatis mutandis1126, in order to find that the ETI Act
of 2000 violates Articles 8 and 10.1 of the Agreement on Agriculture and Articles 3.1(a) and 3.2 of the
SCM Agreement.1127
7.950 Brazil submits that the ETI Act of 2000 provides an export subsidy to upland cotton.
According to Brazil, this Act eliminates tax lia bilities for exporters w ho sell products, including
upland cotton, in foreign markets. The tax concessions provided under the ETI Act of 2000 constitute
export subsidies within the meaning of Article 10.1 of the Agreement on Agriculture. The ETI Act of
2000 threatens to circumvent the United States e xport subsidy commitments by providing an export
subsidy to upland cotton despite the fact that th e United States does not have any export subsidy
reduction commitments for upland cotton in violati on Articles 8 and 10.1. As the ETI Act of 2000
subsidies do not fully conform to Part V of the Agreement on Agriculture , there is no "peace clause"

1123 This led to our finding supra, para. 7.869
1124 See, for example, our discussion of that relationship, supra, paras. 7.654-7.677.
1125 We recall that Article 3.1(a) of the SCM Agreement sets out a prohibition on subsidies contingent
upon export performance, "including those illustrated in Annex I". Annex I - the Illustrative List of Export
Subsidies - contains item (j). We have found that the challenged United Stat es export credit guarantee
programmes meet the definitional elements of a per se export subsidy in item (j). As they are among those
"illustrated in Annex I" for the purposes of Article 3.1(a) , they are included in the subsidies contingent upon
export performance prohibited by Article 3.1(a) of the SCM Agreement.
1126 Brazil's first written submission, para. 327.
1127 Brazil's first written submission, para. 352.

exemption from actions under the SCM Agreement. The ETI Act of 2000 also constitutes a prohibited
export subsidy within the meaning of Articles 3.1(a) and 3.2 of the SCM Agreement.1128
7.951 The United States asserted early in the proceedings that Brazil failed to make a prima facie
case with respect to the ETI Act of 2000. Brazil' s approach would put the Panel in the position of
having to violate its obligation under Article 11 of the DSU to "make an objective assessment of the
matter before it, including an objective assessment of the facts of the case and the applicability of and
conformity with the relevant covered agreements" (empha sis added). As a result of Brazil's " mutatis
mutandis" approach, the Panel is in no position to exer cise its judgment to follow, or decline to
follow, prior dispute settlement findings concerning the ETI Act of 2000, nor even in a position to
make factual findings concerning the Act. In the absence of a prima facie case by Brazil, the United
States submits that the Panel should reject Brazil's claims concerning the ETI Act of 2000.1129
7.952 The United States asserted that it was confident that the ETI Act of 2000 would be repealed in
the reasonably near future.1130
(b) Main arguments of the third parties
7.953 With respect to the export subsidies grante d to upland cotton under the ETI Act of 2000
which provide fiscal incentives in respect of United States exports, Argentina recalls that the ETI Act
of 2000 was found to be inconsiste nt with Article 3.1(a) of the SCM Agreement and Articles 10.1 and
8 of the Agreement on Agriculture.1131
7.954 China submits that the panel and Appellate Bo dy's reasoning and their conclusion in US –
FSC (Article 21.5 – EC) concerning the very same ETI Act of 2000 are of "extraordinary value" to the
Panel. Any substantive deviation from the reasoning and conclusions in the earlier case may disturb
and offend Members' legitimate expectations 1132 created through the adopted dispute settlement
reports and cast doubt on the DSB's authority and reput ation. In addition, China submits that the
DSB's authorization for the EC to impose counterm easures strengthens the weight of the panel and
Appellate Body reports and that the benefits of efficiency far outweigh any need to repeat work
already completed by the panel and Appellate Body. Too, the adopted reports reflect the collective
will of Members and the requirement of prompt compliance with dispute settlement rulings means
that adjudication in one case must benefit all Members. 1133
7.955 The European Communities submits that, pursuant to Article 17.14 of the DSU, parties to a
dispute must "unconditionally accept" adopted Appellate Body Reports as "a final resolution to that
dispute." The United States must be assumed to have unconditionally accepted the findings of the
Appellate Body in the US – FSC (21.5) dispute, which, by definition also included a finding that the
United States was illegally providing export subsidi es to unscheduled agricultural products such as
upland cotton. The European Communities fails to see how the United States can argue that Brazil
needs to establish a prima facie case. The European Communities is of the view that Brazil simply
needs to assert a claim.1134
7.956 New Zealand supports the claims made by Brazil, based on the findings already made in US
– FSC (Article 21.5 – EC) , that the tax incentives under the ETI Act of 2000 threaten to circumvent
United States export subsidy commitments w ithin the meaning of Article 10.1 of the Agreement on

1128 Executive summary of Brazil's first written submission, para. 43.
1129 Executive summary of the United States' first written submission, para. 44.
1130 See United States' response to Panel Question No. 119 (of 11 August 2003).
1131 Argentina's written submission to the first session of the first substantive meeting, para. 95.
1132 China cites Appellate Body Report, Japan – Alcoholic Beverages II and Panel Report, India –
Patents (EC), para. 7.30.
1133 China's written submission to the first session of the first substantive meeting, paras 20-25.
1134 European Communities' oral statement at the first session of the first substantive meeting, para. 45.

Agriculture and therefore cannot be exempt from actions under the SCM Agreement under
Article 13(c)(ii) of the Agreement on Agriculture . In addition, the Appellate Body found that there
was a prohibited subsidy under Article 3.1(a) of the SCM Agreement. Accordingly if the Panel finds,
as New Zealand believes it should, that the tax cuts under the ETI Act of 2000 are prohibited
subsidies under Article 3.1(a) of the SCM Agreement , the Panel is required to recommend under
Article 4.7 of the SCM Agreement that the United States withdraw the subsidies without delay.
1135
(c) Evaluation by the Panel
7.957 In the US – FSC (Article 21.5 – EC) dispute, the panel and Appellate Body found that the
United States ETI Act of 2000 and export subsidi es provided thereunder were inconsistent with
Articles 3.3, 8 and 10 of the Agreement on Agriculture, as well as Articles 3.1(a) and 3.2 of the SCM
Agreement. We note, as a matter of fact, that the Unite d States has not yet repealed the ETI Act of
2000.
7.958 In this dispute, Brazil submits that the same m easure is at issue and asks us to refer to the
claims and arguments made by the European Comm unities, and to apply the reasoning of the panel
and Appellate Body in that case, in order to find violations of Articles 8 and 10 of the Agreement on
Agriculture, as well as Articles 3.1(a) and 3.2 of the SCM Agreement in respect of upland cotton.
7.959 Brazil argues that its reference to the panel a nd Appellate Body reports is evidence reflecting
the nature, function and WTO-inconsistency of the ET I Act of 2000. Brazil directs the Panel and the
United States to a European Communities web-pa ge where all of the European Communities'
submissions can be viewed and downloaded. 1136 However, Brazil has not submitted any direct
evidence to us. Brazil has not, fo r example, even submitted a dir ect quotation from the underlying
legal instrument in question, nor has Brazil itself asserted its own specific claims or arguments on the
matter dealt with in the previous dispute, beyond purporting to incorporate by reference the claims
and arguments made by the European Communities, and the reasoning, findings and conclusions of
the panel and Appellate Body in the previous dispute.1137
7.960 We understand that the panel and Appella te Body findings in the previous US – FSC (Article
21.5 – EC) dispute between the European Communiti es and the United States provide relevant
guidance and we may – indeed must – take them into account. 1138 As with all adopted panel and
Appellate Body reports 1139, they provide valuable guidance. They create legitimate expectations
among WTO Members, and, therefore, should be take n into account where they are relevant to any
dispute.1140 However, they are not legally binding, excep t with respect to resolving the particular
dispute between the parties to that dispute.1141

1135 New Zealand's written submission to the first session of the first substantive meeting, paras. 3.18-
3.19.
1136 Brazil's oral statement at the first session of the first substantive meeting, para. 137, footnote 187.
1137 See Brazil's response to Panel Question No. 121, wh ere Brazil states that it is appropriate for us to
"make similar findings of fact, conclusions of law, and recommendations as the panel and Appellate Body in US
– FSC (21.5)".
1138 Panel Report, India – Patents (EC), para. 7.30.
1139 In Appellate Body Report, US – Shrimp (Article 21.5 – Malaysia), the Appellate Body clarified that
the same principle applies to Appellate Body reports.
1140 The panel in India – Patents (EC) examined the relevance of prior GATT Panel cases dealing with
the same measure. See Panel Report, India – Patents (EC), paras. 7.26-7.29.
1141 See Appellate Body Report, Japan – Alcoholic Beverages II , p. 14. Footnote 106 of that report
states: "It is worth noting that the Statute of the International Court of Justice has an explicit provision,
Article 59, to the same effect. This has not inhibited the development by that Court (and its predecessor) of a
body of case law in which considerable reliance on the value of previous decisions is readily discernible." See
also Panel Report, India – Patents (EC), para. 7.28 and footnote 106.

7.961 We understand Brazil to nevertheless seek a Panel process whereby we would simply apply
the reasoning, and findings and conclusions of the pa nel, as modified by the Appellate Body, in the
US – FSC (Article 21.5 – EC) dispute, without going through the ordinary procedural steps
constituting panel proceedings set out in the DSU, including the examination of the legal claims
against the measures constituting the matter before th is Panel on the basis of direct evidence and
argumentation submitted by the complain ing and defending parties in th is dispute. While Brazil has
supplemented the evidence and ar gumentation in that dispute 1142, it has not purported directly to
establish the elements comprising the basis of the findings and conclusions in that dispute.
7.962 We see no basis in the text of the DSU as it currently stands for such incorporation by
reference of claims and arguments made in a previ ous dispute nor for a quasi-automatic application of
findings, recommendations and rulings from a previous dispute . Nowhere is such a procedure
required or envisaged in the DSU or the relevant special rules and procedures. Rather, Articles 12.1
and 12.2 provide that:
"1. Panels shall follow the Working Pr ocedures in Appendix 3 unless the panel
decides otherwise after consulting the parties to the dispute.
2. Panel procedures should provide sufficient flexibility so as to ensure high-
quality panel reports, while not unduly delaying the panel process."
7.963 We are aware that, in terms of the resolution of a particular dispute between the parties to that
dispute, Article 17.14 of the DSU provides:
"Adoption of Appellate Body Reports
An Appellate Body report shall be adopt ed by the DSB and unconditionally accepted
by the parties to the dispute unless the DS B decides by consensus not to adopt the
Appellate Body report within 30 days following its circulation to the
Members." (footnote omitted)
7.964 Brazil submits that Article 17.14 of the DSU requires that after the adoption of an Appellate
Body report, the parties to the dispute are unconditionally bound by the results of that report.1143
7.965 We do not disagree with Brazil that panel and Appellate Body reports adopted by the DSB
must be considered final resolutions to a partic ular dispute between the parties to that dispute. 1144
Appellate Body Reports that are adopted by the DSB are, "… unconditionally accepted by the parties
to the dispute", and, therefore, must be treated by the parties to a particular dispute as a final
resolution to that dispute.
1145 At a given point in time, disputes must be viewed as definitely settled

1142 For example, before us, Brazil has referred to th e following elements that were not addressed in
that dispute: Article 13(c) of the Agreement on Agriculture and evidence that Brazil made inquiries to the
United States about the extent to which upland cotton benefited from the prohibited export subsidy addressed in
that dispute.
1143 Brazil's response to Panel Question No. 121.
1144 We find support for this proposition in the Appellate Body Reports in US – Shrimp (Article 21.5 –
Malaysia) and EC – Bed Linen (Article 21.5 – India).
1145 Appellate Body Reports that are adopted by the DSB are, as Article 17.14 provides, "[...]
unconditionally accepted by the parties to the dispute", a nd therefore, must be treated by the parties to a
particular dispute as a final resolution to that dispute. See Appellate Body Report, US – Shrimp (Article 21.5 –
Malaysia), paras. 96-97. The same principle [as that expressed in Article 17.14] applies to those aspects of the
Panel's report that are not appealed and are thus not addressed by the Appellate Body. Thus, the portions of the
original Report of the Panel that are not appealed, togeth er with the Appellate Body report resolving the issues
appealed must be considered as the final resolution of the dispute.
 See Appellate Body Report, EC – Bed Linen
(Article 21.5 – India), paras. 90-96.

by the WTO dispute settlement system .
1146 Moreover, it is clear to us that panels in implementation
proceedings are entitled to use Appellate Body findi ngs in the same dispute as a tool for their own
reasoning.1147
7.966 However, while the United States, as the defending party in the US – FSC (Article 21.5 – EC)
dispute, is "unconditionally bound" to accept the adopt ed reports in that dispute, the bounds of that
dispute are limited to the parties to that dispute.
7.967 We thus hasten to point out that we are not dealing here with the same dispute as US – FSC
(Article 21 .5 – EC ). Our terms of reference in this dispute were set by the DSB upon the
establishment of the Panel, and refer to Brazil's request for establishment of a panel.1148 We are not an
implementation panel constituted under Article 21.5 of the DSU charged with examining the existence
or consistency with the covered agreements of measures taken to comply with recommendations and
rulings in DS108. Although the defending Me mber is the same in both cases, Brazil was not a party
to that dispute. Thus, the panel and Appellate Body reports in that dispute cannot be taken as
providing a final resolution to the part of the matter before us concerning the ETI Act of 2000.1149
7.968 Nor was Brazil a third party in that previous dispute. We nevertheless note that a third party
considering that a measure already the subject of panel proceeding nullifies or impairs benefits
accruing to it under any covered agreement may ha ve recourse to "normal dispute settlement
procedures under [the DSU]".1150 If "normal dispute settlement procedures under [the DSU]" apply to
such a "follow-up" case brought by a third party then, a fortiori such normal dispute settlement
procedures must apply vis-à-vis a Member which was not a third party in the dispute.
7.969 Moreover, we disagree with Brazil that there is a complete identity between the "measure"
and the "claims" in this case and the US – FSC (Article 21.5 – EC) dispute and that it would therefore
be appropriate for us to make similar findings of fact, conclusions of law, and recommendations as the
panel and Appellate Body in US – FSC (Article 21.5 – EC).1151
7.970 The ETI Act of 2000 examined in the US – FSC (Article 21.5 – EC) dispute applies in respect
of a range of industrial and agricultural products. It therefore applies not only with respect to
products falling within the product scope of the Agreement on Agriculture 1152, but also in respect of
products outside that scope. By contrast, the measure subject to this particular claim by Brazil is the
ETI Act of 2000 in respect of upland cotton only. As we have already noted, upland cotton falls
within the product scope of the Agreement on Agriculture.1153
7.971 Moreover, in this case, we are adopting a different order of analysis than the one followed in
the US – FSC (Article 21.5 – EC) dispute. In that dispute, th e panel and Appellate Body first
examined the complainant's claims under the SCM Agreement, before considering the claims under
the Agreement on Agriculture. By contrast, we have decided to begin our analysis of Brazil's claims

1146 Appellate Body Report, EC – Bed Linen (Article 21.5 – India), para. 98.
1147 Appellate Body Report, US – Shrimp (Article 21.5 – Malaysia), paras. 107-109.
1148 WT/DS267/7.
1149 In its response to Panel Question No. 121, Brazil asserts that there is no precedent in the WTO or
the GATT that would require the Panel to find that the United States alone is bound in this case. We do not rely
on any "precedent" here, but rather on the text of the DSU as it currently stands.
1150 Article 10.4 of the DSU. Such a dispute shall be referred to the original panel wherever possible.
1151 Brazil's response to Panel Question No. 121.
1152 Article 2 and Annex 1 of the Agreement on Agriculture indicate the product coverage of that
Agreement.
1153 Brazil's request for establishment expressly refe rs to an upland-cotton related claim ("Export
subsidies provided to exporters of US upland cott on under the FSC Repeal and Extraterritorial Income
Exclusion Act of 2000 ('ETI Act'))". Brazil's only claim in this dispute dealing with products other than upland
cotton relates to the United States export credit guarantee programmes as export subsidies.

against the measure under the Agreement on Agriculture .1154 This is but one example of a panel's
mandate and authority to conduct an independent, thorough and objective assessment of the matter
before it rather than merely adopting findings in an other, previous, dispute. We note, however, the
different order of analysis we have adopted w ould not necessarily compel a different conclusion in
this case.
7.972 Furthermore, in contrast to the present case, there was no discussion of, or findings made on,
issues arising under Article 13 of the Agreement on Agriculture in the prior dispute settlement
proceeding. Brazil itself states that "[b]ecause the United States never raised the peace clause as a
defence in [US – FSC (Article 21.5 – EC) ] there were no findings by the panel or the Appellate Body
regarding the peace clause...".1155 While Brazil submitted arguments in the present Panel proceedings
linking the Part V claims in the previous case to th e terms of the peace clause in the present case, it is
not clear to us that we may directly transpose findings of violation of the substantive obligations in
Part V to a finding that the conditions of Article 13(c) of the Agreement on Agriculture are not
fulfilled. The legal nature of Article 13 is distin ct from the positive obligations contained in the legal
provisions of Part V of the Agreement on Agriculture.
1156
7.973 Nor are there any findings in the previous pa nel and Appellate Body report on whether, in
respect of upland cotton specifically, the ETI Act of 2 000 is an export subsidy which is in violation of
the United States' legal obligations under Part V of the Agreement on Agriculture . That is, the prior
dispute settlement proceeding would only give an an swer to the intermediate question of whether an
export subsidy exists in general under the ETI Ac t of 2000. It would not furnish a commodity-
specific answer pertaining to upland cotton in particular. 1157 In order to complete our examination
under Part V of the Agreement on Agriculture in this dispute, we would need to examine whether
cotton was a commodity eligible to benefit from th e fiscal incentives available under the ETI Act of
2000. Furthermore, if that was the case, we would have to go further and apply the Articles 10 and 8
reasoning specifically to upland cotton (i.e. we w ould have to apply and develop the panel and
Appellate Body's reasoning in that case: as th e United States has made no upland cotton-specific
export subsidy reduction commitments, it is not en titled to have any export subsidy on upland
cotton).1158
7.974 These inquiries would require us to be presented with, and to examine, evidence concerning
these matters. We do not understand Brazil to be ask ing us to seek the evidence and construct the
case on their behalf. However, that would be the effect of their request, if the Panel decided that it
needed to pursue Brazil's claim to its logical end- point. Rather, we understand Brazil to simply be
putting before us the proposition that the ETI Act has been found to grant prohibited subsidies and
that therefore we should endorse that conclusion in th is case as well. Viewed in this way, Brazil's use
of the US - FSC (Article 21.5 – EC) dispute as part of its argumentation is no different from the use
any party might make of an Appellate Body report which the party believes supports its case, except
that the facts and argumentation necessary to make out the claim before this Panel are entirely
missing.
7.975 In light of these distinctions between th e evidence and argumentation presented in the US –
FSC (Article 21.5 – EC) dispute and in this case, we are of the view that no direct transposition or

1154 See supra, Section VII:C, "Order of analysis".
1155 Brazil's response to Panel Question No. 120, para. 218.
1156 See supra, Section VII:C.
1157 Brazil indicated that, in the course of consultations , as well as in what it asserts were questions in
the context of the SCM Annex V exercise, it asked the United States about the amount of ETI Act of 2000
subsidies that went to upland cotton, but never received a response. Brazil's first written submission, para. 330,
footnote 581. See also Exhibits BRA-49 and BRA-101. In our view, this issue of specific data on cotton is not
a legally relevant consideration here because the substanc e of the measure itself was ne ver properly put in issue
before us.
1158 See supra, para. 7.666.

incorporation of the panel and A ppellate Body findings and conclu sions would, in any event, be
appropriate on the basis of the evidence and argumentation submitted in this dispute.
7.976 Articles 3.2 and 3.3 of the DSU reflect the importance to the multilateral trading system of
security, predictability and the prompt settlement of disputes.
 1159 However, these essential elements
must be balanced against fundamental concerns of due process and procedural fairness in WTO
dispute settlement.
7.977 We are compelled by Article 11 of the DSU to carry out "an objective assessment of the
matter" before us. We, as a panel, have extensive discretionary authority to request information from
any source (including a Member that is a party to th e dispute). Such authority is essential in order
properly to discharge a panel's ma ndate and responsibility under the DSU and the other covered
agreements.
7.978 The United States has not attempted to rebut the substance of Brazil's claims in respect of the
ETI Act of 2000, and has indicated that it intends to implement the rulings and recommendations of
the DSB in the previous dispute . In the Panel's view, that does not constitute an admission that
relieves Brazil of its duty to make a prima facie case, as Brazil submits.
1160 Rather, as a respondent,
the United States is entitled to expect Brazil to prove its own case in the present dispute.
7.979 Brazil has been on notice since the United States' first written submission that its duty to
make a prima facie case was in issue. The United States submitted that Brazil had failed to make such
a case by simply citing to and quoting from prior panel and Appellate Body reports and failing to
offer a description of the ETI Act of 2000. 1161 Brazil has chosen not to offer its own arguments or
description of the Act.
7.980 In its 5 September 2003 communication, the Panel indicated to the parties that, "on the basis
of the evidence and arguments presented to date, it is unable to form any view on whether the ETI Act
of 2000 satisfies the relevant provisions of the Agreement on Agriculture". We thereby put Brazil on
notice that the evidence and arguments submitted up to that point in the Panel proceedings did not
provide a sufficient basis for us to make a finding.
7.981 This communication was made in the contex t of the unique procedural and substantive
circumstances of these Panel proceedings. It a llowed Brazil an additiona l possibility to redress
deficiencies in its case.
7.982 In its further submission of 9 September 2003, Brazil acknowledged the Panel's view, but
nonetheless submitted no new evidence. 1162 Rather, Brazil expressed its belief that it had
demonstrated that the ETI Act of 2000 violated the export subsidy provisions of the Agreement on
Agriculture and the SCM Agreement, although it offered to submit any additional arguments and
evidence on issues the Panel believed had not been addressed in sufficient detail.
7.983 Mindful of our extensive discretionary authority to put questions to the parties to clarify the
factual and legal aspects of the matter before us , we considered whether we should specifically
indicate any deficiencies we perceived in the c ase brought by Brazil in order to give Brazil an
opportunity to remedy any such deficiencies at that stage of the proceedings.
7.984 We are well aware that the fact that it is for the party asserting the affirmative of a particular
claim or defence to discharge the burden of pr oof does not mean that a panel is "frozen into

1159 See, e.g., Panel Report US – Section 301 Trade Act, para. 7.75, with respect to Article 3.2 of the
DSU.
1160 Brazil's further written submission, para. 469.
1161 United States' first written submission, paras 184-189.
1162 Brazil's further written submission, para. 469.

inactivity".1163 A panel's extensive authority to put questions to the parties in order to inform itself of
the relevant facts of the dispute a nd the legal considerations applicable to such facts is not conditional
in any way upon a party having established, on a prima facie basis, a claim or defence.1164
7.985 In considering the nature of any further questi oning to the parties, we were, however, equally
conscious that, in our assessment of the matter, we may not relieve Brazil, as complaining party, of its
task of establishing the inconsistency of United St ates measures with the relevant provisions of the
covered agreements. In particular , we were and remain mindful that , in our questions posed to the
parties, we must not "overstep th e bounds of legitimate management or guidance of the proceedings
… in the interest of efficiency and dispatch." 1165 We are not permitted to make Brazil's case for
Brazil.
7.986 For all of these reasons, on the basis of the ev idence and arguments submitted, we are not in a
position to conclude that Brazil has established a prima facie case that the ETI Act of 2000 and
subsidies granted thereunder are incons istent with Articles 8 and 10.1 of the Agreement on
Agriculture in respect of upland cotton.
7.987 Having examined the WTO-consistency of the e xport subsidies for agricultural products, in
the first place, under the Agreement on Agriculture, we observe that, in accordance with
Article 13(c)(ii) of the Agreement on Agriculture , to the extent that Brazil has not demonstrated that
the United States ETI Act of 2000 is not in conf ormity with the United States export subsidy
commitments under Part V of the Agreement on Agriculture in respect of upland cotton, the United
States is "exempt from actions based on" Articles 3.1(a) and 3.2 of the SCM Agreement. We therefore
decline to examine Brazil's claims based on those provisions.1166
7. Claims under Article XVI:3 of the GATT 1994
(a) Main arguments of the parties
7.988 Brazil requests us to rule that the United St ates export and actionable subsidies provided
during MY 1999-2002 caused and continue to cause serious prejudice to the interests of Brazil by
resulting in the United States having more than an equitable share of world exports of upland cotton in
violation of Articles XVI:1 and XVI:3 of the GATT 1994.
7.989 The United States contends that that Brazil has failed to demonstrate a prima facie case of
inconsistency with Article XVI:3 of the GATT 1994, which applies only in respect of export subsidies.
(b) Main arguments of the third parties
7.990 New Zealand agrees with Brazil that the subsidies of the United States have operated to
increase United States' exports of upland cotton r esulting in the United States having a "more than
equitable share" of world export trade in upland co tton within the meaning of Article XVI:3 of the
GATT 1994 and thus have caused serious prejudice to th e interests of Brazil within the meaning of
Article XVI:1 of the GATT 1994 .
1167 The European Communities , without stating whether it
supports or opposes Brazil's claims on this issue, "p ut on record" its support on certain elements of

1163 See, for example, Panel Report, Thailand – H-Beams, para. 7.50.
1164 Appellate Body Report, Canada – Aircraft, para. 185.
1165 Appellate Body Report, Korea – Dairy, para. 149.
1166 See supra, Section VII:C "Order of Analysis" and Section VII:E, overview of the relationship
between the export subsidy provisions of the Agreement on Agriculture and the SCM Agreement.
1167 Paragraphs 2.35 and 2.36 of its further third party submission. See also its response to Panel
Question No. 56.

interpretation advanced by the Un ited States on Article XVI:3 of the GATT 1994.
1168 In response to
the question from the Panel, the European Communiti es further notes that "[i]t is conceivable ... that
one and the same measure may be at the same time an 'export subsidy' in the sense of Article XVI:3
and 'domestic support' within the mean ing of the Agreement on Agriculture." 1169 Australia, China
and Chinese Taipei have offered, in response the Panel's question, their views on the interpretation of
Article XVI:3 of the GATT 1994 .1170 Specifically, Australia argues that it is unambiguous that
agricultural domestic support programmes are ch allengeable under Article XVI:3 of the GATT 1994.
Australia also sheds light on the relations hip between Articles XVI:1 and XVI:3 of the GATT 1994 in
the context of the analysis of Article 13(b)(ii) of the Agreement on Agriculture.1171 China and Chinese
Taipei argue that agricultural domestic suppor t programmes are not challengeable under this
provision. Benin has also offered its views on certain aspects of this issue.1172
(c) Evaluation by the Panel
7.991 We understand that Brazil's claims u nder Article XVI:1 and XVI:3 of the GATT 1994
envisage a joint application of these two provisi ons. That is, Brazil does not seem to make
independent claims under paragraphs 1 and 3 of Article XVI, but rather requests us to rule that the
United States subsidies provided during MY 199 9-2002 caused and continue to cause serious
prejudice to the interests of Brazil by resulting in the United States having more than an equitable
share of world exports of upland cotton in join t violation of Articles XVI:1 and XVI:3 of the
GATT 1994.
7.992 For the reasons that follow, we do not believe that these provisions are susceptible to such
joint application. We do not believe that Brazil may assert a "serious prejudice" claim under
Article XVI:3. Rather, each provision – Article XV I:1 and Article XVI:3 -- requires application in
accordance with its own terms in respect of me asures that fall within its respective scope of
application. We thus examine the terms of these two distinct treaty provisions separately. Our
examination of Brazil's claim under Article XVI:1 of the GATT 1994 is included in Section VII:G
below, in conjunction with our actionable subsidies analysis.
1173
7.993 We limit our examination here to Brazil's claims under Article XVI:3 of the GATT 1994.
7.994 We see the first issue before us as wh ether or not Article XVI:3 of the GATT 1994 applies
only to export subsidies, or whether it also applies to other types of subsidies that may cause serious
prejudice within the meaning of Article XVI.1 of the GATT 1994 (and Article 5(c) of the SCM
Agreement).1174
7.995 Brazil disagrees with the United States ' assertion that the only subsidies governed by
Article XVI:3 are "export subsidies".

1168 The European Communities supports the interpretation of the term "more than equitable share" in
Article XVI:3 of the GATT advanced by the United States. See paragraph 3 of its oral statement at the resumed
session of the first substantive meeting.
1169 See the European Communities' response to Panel third party Question No. 56.
1170 See respective responses to Panel third party Question No. 56, which asked, inter alia, whether
agricultural domestic support programmes are challengeable under this provision.
1171 See paragraph 19 and 20 of its submission to the first session of the first substantive meeting.
1172 See Benin's response to Panel third party Question No. 44, in which it argues that the Panel is
required to take account of the effects of the US subsidies on the interest of Members other than the complaining
Member.
1173 See infra, Section VII:G.
1174 By virtue of footnote 13 of the SCM Agreement.

7.996 The Panel begins its interpretation with th e text of Article XVI:3 of the GATT 1994 .1175
Article XVI:3 appears in Section B of Article XVI. Entitled "Additional provisions on export
subsidies", it reads:
"Accordingly, contracting parties should seek to avoid the use of subsidies on the
export of primary products . If, however, a contracting party grants directly or
indirectly any form of subsidy which operates to increase the export of any primary
product from its territory, such subsidy shall not be applied in a manner which results
in that contracting party having more than an equitable share of world export trade in
that product, account being taken of the shares of the contracting parties in such trade
in the product during a previous representative period, and any special factors which
may have affected or may be affecting such trade in the product." (emphasis added)
7.997 We believe that the text of Article XVI:3 of the GATT 1994 itself indicates that the provision
is limited to "export subsidies" and does not addr ess rights and obligations of Members relating to
other types of subsidies.
7.998 We see that Article XVI of the GATT 1994 consists of two distinct "parts". Part A is entitled
"Subsidies in General". Part B of Article XVI is entitled "Additional Provisions on Export Subsidies".
Paragraph 3 of Article XVI is found in Part B entitled "Additional Provisions on Export Subsidies". It
is not found in Part A of Article XVI, entitled "Subsidies in General".
7.999 The text of paragraph 3 of Article XVI of the GATT 1994 refers to subsidies which
"operate[..] to increase the export of any primary product".
1176 The first sentence of Article XVI:3 of
the GATT 1994 refers to "subsidies on the export of primary products ".(emphasis added) These
aspects of the text and context of paragraph 3 s upport an interpretation that it deals with export
subsidies only, rather than domestic support subsidies.
7.1000 We take note that the second sentence of paragraph 3 reads:
"If, however, a contracting party grants dir ectly or indirectly any form of subsidy
which operates to increase the export of any primary product from its territory..."
7.1001 Brazil asserts that a reading of this part of Article XVI:3 of the GATT 1994 as pertaining to
"export subsidies" only would reduce this part of the treaty provision to redundancy or inutility, as
this sentence speaks not only of subsidies contingent upon export, but also of subsidies that operate to
increase the export of any primary product from a Member's territory.1177
7.1002 The United States submits that there is now a general prohibition of export subsidies in the
SCM Agreement which moves away from this statement in Article XVI:3 of the GATT 1994.1178
7.1003 We are well aware of our duties as a treaty interpreter. It is clear to us that the provisions of
the Agreement on Agriculture , the SCM Agreement and the GATT 1994 must be read in conjunction

1175 We refer to our "order of analysis" examination in Section VII:C, as well as our examination of the
relationship between the provisions of the other covered agreements and those of Article XVI of the GATT 1994
in Sections VII:E and F. We note that, unlike Article XVI:4, which by its terms clearly applies to "the export of
any product other than a primary product", Article XVI:3 applies to "subsidies on the export of primary
products". It therefore also potentially relates to products within the product coverage of the Agreement on
Agriculture.
1176 The first sentence of Article XVI:3 commences w ith the word "Accordingly...". We believe that
this indicates a conceptual sequitur to the recognition expressed in Article XVI:2 that "...subsidies on the export
of primary products may have harmful effects for other Members..." (emphasis added).
1177 Brazil's response to Panel Question No. 185 (a).
1178 United States' response to Panel Question No. 186.

and that, unless explicitly indicated, provisions of the Agreement on Agriculture and/or the SCM
Agreement cannot be taken to replace, subsume or exclude provisions of the GATT 1994. We are also
well aware that WTO obligations generally apply "cum ulatively" and that an appropriate reading of
the "inseparable package of right s and disciplines" in these covered agreements must, accordingly, be
a harmonious one that gives meaning to all the relevant provisions of these three equally binding
agreements.
1179
7.1004 As we have already seen, the term "export subsidy" – a subsidy contingent upon export
performance – is now defined in the current Agreement on Agriculture and the SCM Agreement. Such
a definition did not exist when Article XVI was originally drafted.
7.1005 Particularly in view of the rules pertaining to potential conflicts in Article 21.1 of the
Agreement on Agriculture and the General Interpretative Note to Annex 1A of the WTO Agreement
which would give precedence to the provisions of the Agreement on Agriculture and then the SCM
Agreement over a provision of the GATT 1994 to the extent of any conflict 1180, we do not believe that
it is appropriate to apply a separate or different definition of "export subsidies" under Article XVI:3
than that which is now applicable for the purpo ses of Articles 3.3, 8, 9, 10 and 1(e) of the Agreement
on Agriculture and Article 3.1(a) of the SCM Agreement. We see that the Agreement on Agriculture
contains scheduled export reduction commitments on export subsidies listed in Article 9.1 and a
general prohibition on export subsidies not listed in Article 9.1 which are applied in a manner which
results in, or threatens to lead to, circumventi on of these commitments (Article 10.1). Except as
provided in the Agreement on Agriculture , the SCM Agreement contains a general prohibition on
export subsidies in Article 3.1(a).
7.1006 This reading of the text of Article XVI:3 of the GATT 1994 , in its context, supports a
conclusion that Article XVI:3 applies only to "export subsidies" as that term is currently understood in
the WTO Agreement.1181 This reading finds support in the object and purpose of the agreement.1182
7.1007 While it is not necessary to resort to drafting history under these circumstances 1183, we
nevertheless observe that such an interpretation finds confirmation in the drafting history. The
relevant provisions of the Tokyo Round Subsidies Code clearly distinguished between export and
other subsidies.
7.1008 Article 8 dealt with "subsidies in general", with Article 8.2 referring to "export subsidies" and
Articles 8.3(c) and 8.4 dealing with "serious prejudice" in the sense of Article XVI:1. Article 9 dealt
with "export subsidies on products other than certain primary products", with Article 9.1 providing:

1179 See, e.g. Appellate Body Report , Argentina – Footwear (EC), paras. 81, 83-84; Panel Report ,
Indonesia – Autos, paras. 14.28 ff. In Brazil – Dessicated Coconut, the Appellate Body agreed with the panel
that:

"[...] the question for consideration is not whet her the SCM Agreement supersedes Article VI
of GATT 1994. Rather, it is whether Article VI creates rules which are separate and distinct
from those of the SCM Agreement, and which can be applied without reference to that
Agreement, or whether Article VI of GATT 1994 and the SCM Agre ement represent an
inseparable package of rights and disciplines that must be considered in conjunction." See
Appellate Body Report, Brazil – Dessicated Coconut, p. 15.

1180 See our other examination of these provisions above in Section VII:E, paras. 7.654 ff.
1181 We do not mean to suggest that export subsidies may never be included in a serious prejudice
analysis under Article XVI:1. Rather, we mean that su bsidies other than export subsidies may not form the
basis for an examination under Article XVI:3.
1182 See e.g. supra, footnote 920.
1183 See Articles 31 and 32 of the Vienna Convention, previously addressed supra, footnote 1112.

"Signatories shall not grant export subsidies on pr oducts other than certain primary products".
Article 10 dealt with "export subsidies on certain primary products". Article 10 provided:
"1. In accordance with the provisions of Article XVI:3 of the General Agreement,
signatories agree not to grant directly or indirectly any export subsidy on certain
primary products in a manner which results in the signatory granting such subsidy
having more than an equitable share of world export trade in such product, account
being taken of the shares of the signatories in trade in the product concerned during a
previous representative period, and any speci al factors which may have affected or
may be affecting trade in such product." (emphasis added)
7.1009 This suggests that the drafters of the Tokyo Round Subsidies Code considered that the export
subsidies in Article 10 of the Tokyo Round Subsidies Code were those subject to Article XVI:3 of the
GATT 1994.
7.1010 Article 11 of the Tokyo Round Subsidies Code addressed "subsidies other than export
subsidies". Article 11.2 provided, in part:
"Signatories recognize, however, that subsidies other than export subsidies ... may
cause or threaten to cause injury to a domestic industry of another signatory or
serious prejudice to the interests of another signatory or may nullify or impair
benefits accruing to another signatory under the General Agreement, in particular
where such subsidies would adversely affect the conditions of normal competition.
Signatories shall therefore seek to avoid causing such effects through the use of
subsidies."
7.1011 Read together with Article 10, this provision similarly suggests that the drafters of the Tokyo
Round Subsidies Code distinguished between the export subsidi es referred to in Article XVI:3 of the
GATT 1994 and other subsidies. The drafters indicated in Articles 9 and 10 that export subsidies were
subject to certain disciplines, while subsidies other than export subsidies were subject to other
disciplines and could form the main basis for a serious prejudice claim. This confirms our view of the
distinction between export subsidies and other (actionable) subsidies ma intained in the current text of
the SCM Agreement.
1184
7.1012 Returning to the current text of the treaty, we note that, other than the common reference to
"export subsidies" found in all of the three releva nt texts (i.e. (i) Article XVI:3; (ii) the export
subsidies provisions of the Agreement on Agriculture; and (iii) Article 3.1(a) of the SCM Agreement)
there is no further explicit textual linkage or cro ss-reference between any relevant provision of the
Agreement on Agriculture , any provision of the SCM Agreement – including Articles 3, 5 and 6 (in

1184 See supra, footnote 1181.

particular, Article 6.3(d))
1185 – and Article XVI:3 of the GATT 1994 that would compel us to find any
other scope of application for the obligation contained in Article XVI:3 of the GATT 1994.1186
7.1013 We look to Article 13 of the Agreement on Agriculture to discern whether there is any clear
articulation of the relationship between the rights and obligations in the Agreement on Agriculture and
the SCM Agreement and Article XVI:3 of the GATT 1994 during the implementation period that
would lead us to a different conclusion. We see that Article 13(b)(ii) of the Agreement on
Agriculture, relating to domestic support, contains no reference to Article XVI:3 of the GATT
1994.1187
7.1014 We understand this omission, in Article 13(b)(ii) of the Agreement on Agriculture , of any
reference to paragraph 3 of Article XVI of the GATT 1994 , to indicate that the drafters of
Article 13(b)(ii) of the Agreement on Agriculture did not believe that a domestic support measure
could ever be subject to actions under the "export subsidy" provisions of Article XVI:3 (and there was
thus no need to refer to that provision in Article 13(b)).
7.1015 In light of the extensive package of substan tive rights and obligations on domestic and export
subsidies resulting from the Uruguay Round in the Agreement on Agriculture and the SCM
Agreement, and the focus in both agreements upon di sciplines governing domestic support and export
subsidies, we do not consider it plausible that the drafters of Article 13(b)(ii) of the Agreement on
Agriculture simply overlooked the possibility that actions under Article XVI:3 might arise in respect
of domestic support and that such actions were not covered by the "exemption from actions" provided
by Article 13 of the Agreement on Agriculture . Indeed, we are not entitled to presume that this was
the case. Had the drafters wished to refer to all of Article XVI in Article 13( b)(ii) they could have.
However, they did not. They explicitly identifie d only paragraph 1 of the provision as potentially
applicable to the domestic support measures in question.

1185 At first blush, there appear to be similarities between Article XVI:3 of the GATT 1994 and
Article 6.3(d) of the SCM Agreement. Both call for a comparison of a Me mber's quantitative share in a certain
world phenomenon – "export trade" (Article XVI.3) or "market share" (Article 6.3(d)) – with a corresponding
share during a previous period. The tests contained in Article 6.3(d) and Article XVI:3 may be similar, but they
are certainly not textually or conceptually identical. For example, Article 6.3(d) does not contain the terms
"equitable share" and "special factors" . It also defines a "previous repr esentative period" for comparison as
three years. It also refers to "market share" rather than "export trade". We do not believe that the language of
Articles 5(c)/6.3(d) of the SCM Agreement suggests an intention by the Uruguay Round negotiators directly to
 develop and refine the requirements of Article XVI:3 of the GATT 1994 within the SCM Agreement insofar as
export subsidies are concerned. At leas t, if there were such an intention, they have not clearly so indicated in
the text of these two covered agreements.
1186 There is an explicit textual linkage between Ar ticle 6.3(d) and Article 5(c) of the SCM Agreement:
the chapeau of Article 6.3 states that "[s]erious prejud ice in the sense of paragraph (c) of Article 5 may arise
where one of the following [including the elements in Article 6.3(d)] apply...". We discuss the cross-reference
further infra., Section VII:G, in our examination of Brazil's claims under Article XVI:1.
1187 We see that Article 13(a)(ii) of the Agreement on Agriculture provides that "Green Box" domestic
support measures shall be "exempt from actions based on Article XVI of the GATT 1994 and Part III of the
Subsidies Agreement...".
Article 13(b)(ii) of the Agreement on Agriculture provides that certain " domestic support measures"
shall be "exempt from actions based on paragraph 1 of Article XVI of the GATT 1994 and Articles 5 and 6 of
the Subsidies Agreement...". This provision refers only to paragraph 1 of Article XVI. It does not refer to
Article XVI:3.
Article 13(c)(ii) of the Agreement on Agriculture stipulates that certain "export subsidies" shall be
"exempt from actions based on Article XVI of the GATT 1994 and Articles 3, 5 and 6 of the SCM Agreement".
In contrast to Article 13(b)(ii) which contains the limited reference to paragraph 1 of Article XVI of the GATT
1994, Article 13(c)(ii) refers to Article XVI in its entirety, necessarily includi ng both paragraphs 1 and 3, to the
extent relevant and applicable.

7.1016 We therefore find that Article XVI:3 applies onl y to export subsidies as that term is now
defined in the Agreement on Agriculture and the SCM Agreement.
7.1017 In any event, even if Article XVI:3 of the GATT 1994 is still susceptible to independent
application in respect of export subsidies, in light of our findings above that the challenged export
subsidy measures concerned – that the user ma rketing (Step 2) paymen ts to exporters under
section 1207(a) of the FSRI Act of 2002 and ex port credit guarantees under the GSM 102, GSM 103
and SCGP programmes – constitute prohibited subsidies in violation of the United States' obligations
under the export subsidy provisions (Ar ticles 3.3, 8 and/or 10) of the Agreement on Agriculture and
Articles 3.1(a) and 3.2 of the SCM Agreement – we do not believe that it is necessary to conduct an
examination of challenged export subsidy measures also under Article XVI:3 of the GATT 1994 for
the purposes of resolving this dispute.
F. IMPORT SUBSTITUTION SUBSIDY
1. Measure at issue
7.1018 This Section of our report deals with an alleged import subs titution subsidy under
Articles 3.1(b) and 3.2 of the SCM Agreement. Brazil's claim relates to section 1207(a) of the FSRI
Act of 2002 providing for user marketing (Step 2) payments to domestic users 1188, as described in
Section VII:C.
2. Claim under Article 3.1(b) (and 3.2) of the SCM Agreement
(a) Main arguments of the parties
7.1019 Brazil challenges section 1207(a) of the FSRI Act of 2002 as a per se import substitution
subsidy that is inconsistent with Articles 3.1(b) and 3.2 of the SCM Agreement. Brazil argues that
user marketing (Step 2) payments to domestic users are "subsidies" as defined in Article 1 of the SCM
Agreement. The subsidies are contingent on the u se of domestic over imported goods within the
meaning of Article 3.1(b) of the SCM Agreement: they are "conditional" on proof of consumption of
domestically produced upland cotton. Article 3.2 of the SCM Agreement requires that such subsidies
be neither granted nor maintained.
7.1020 According to Brazil, there is no inherent conflict between the prohibition on import
substitution subsidies in Article 3.1(b) of the SCM Agreement and the provisions of the Agreement on
Agriculture. Articles 1(a), 3.2 and paragraph 7 of Annex 3 of the Agreement on Agriculture deal with
the calculation of a Member's AMS and envisage th at measures directed at agricultural processors
shall be included to the extent that such measure s benefit the producers of the basic agricultural
products. However, according to Brazil, these provis ions do not require, nor grant permission, for a
Member to grant subsidies contingent upon import substitution.
7.1021 In Brazil's view, the introductory phrase to Article 3 of the SCM Agreement ("[e]xcept as
provided in the Agreement on Agriculture "), in conjunction with Article 21.1 and other provisions of
that Agreement, does not have the effect of carving agricultural domestic support out from the
prohibition imposed by Article 3.1(b) of the SCM Agreement. Brazil submits that the absence of any
conflict, coupled with the absen ce of any explicit exemption for import substitution subsidies in

1188 See section 1207(a) of the FSRI Act of 2002, reproduced in Exhibits BRA-29 and US-1. The
implementing regulations are found in 7 CFR 1427.100 et seq., reproduced in Exhibit BRA-37. The FAIR Act
of 1996 provided for user marketing (Step 2) payments to domestic users in section 136, reproduced in
Exhibits BRA-28 and US-22.
In this Section of our report, we limit our examination to Brazil's claim relating to user marketing
(Step 2) payments to domestic users. We address user marketing (Step 2) payments to exporters under
section 1207(a) of the FSRI Act of 2002 in Section VII:E.

Article 13(b) or anywhere else in the Agreement on Agriculture, supports the conclusion that import
substitution subsidies related to agricultural goods violate Article 3.1(b) of the SCM Agreement.
7.1022 The United States acknowledges that user marketing (Step 2) payments are "subsidies"
1189
and that, to receive a payment under the Step 2 programme, a domestic user "must open a bale of
domestically produced baled upland cotton".1190
7.1023 However, according to the United States, user marketing (Step 2) payments are included in
measures which comply with "domestic support reduction commitments" under the Agreement on
Agriculture within the meaning of Article 6.3 of the Agreement on Agriculture.
7.1024 The United States submits that the intro ductory language to Article 3 of the SCM Agreement
("[e]xcept as provided in the Agreement on Agriculture") renders that provision subject to the terms of
the Agreement on Agriculture . Under Article 6.3 of the Agreement on Agriculture , if a Member is
providing support within its domestic support reducti on commitments, then such support may not be
challenged under Article 3.1(b) of the SCM Agreement . This is because Article 3.1(b) of the SCM
Agreement applies "except as provided in the Agreement on Agriculture". Paragraph 7 of Annex 3 of
the Agreement on Agriculture recognizes that a Member has a right to provide subsidies contingent
upon use of domestic products under the Agreement on Agriculture. Moreover, pursuant to Article 21
of the Agreement on Agriculture , all of the Annex 1A agreements (including the SCM Agreement )
apply subject to the provisions of the Agreement on Agriculture . The United States asserts that,
inasmuch as Article 3.1(b) does not apply, the operation of the user marketing (Step 2) programme
also cannot violate Article 3.2 of the SCM Agreement.
(b) Main arguments of the third parties
7.1025 Argentina contends that there is no conflict betwee n Article 3.1(b) and any provision of the
Agreement on Agriculture. Paragraph 7 of Annex 3 of the Agreement on Agriculture does not refer to
the "subsidies contingent […] upon the use of domestic over importe d goods" mentioned in
Article 3.1(b) of the SCM Agreement. Moreover, paragraph 7 of Anne x 3 contains no mention of the
SCM Agreement. If the intention had been to exempt these measures from the prohibition contained
in Article 3.1(b) of the SCM Agreement, this would have been expressly stated.
1191
7.1026 Australia asserts that user marketing (Step 2) payments to domestic users are contingent
upon the use of domestic over imported goods. 1192 Australia does not consider that the phrase
"provide support in favour of domestic producers" in Article 3.2 of the Agreement on Agriculture
permits subsidies contingent upon the use of domestic goods. In Australia's view, the legal issue in
question relates to the condition attached to the grant of a subsidy, not the grant of a subsidy per se or
who might benefit from the subsidy. The fact th at a measure may benefit an agricultural producer
("support in favour of domestic producers") does not serve to override measures otherwise prohibited.
In the case of subsidies contingent upon the use of domestic goods, th ere is no conflict between either
the Agreement on Agriculture and the SCM Agreement or the GATT 1994, which discipline or prohibit
certain conditions attached to subsidies, includi ng subsidies in favour of agricultural producers
(subject only to the provisions of Article III:8(b) of the GATT 1994 ). There is no provision in the
Agreement on Agriculture which provides for an exception to, or cover for, import substitution
conditions attached to the grant of a subsidy. 1193 Australia emphasizes that Article 13(b)(ii) does not

1189 United States' response to Panel Question No. 108.
1190 United States' response to Panel Question No. 144.
1191 Argentina's response to Panel third party Question No. 40.
1192 Australia's response to Panel third party Question Nos. 38 and 39.
1193 Australia's response to Panel third party Question No. 40.

exempt non-"green box" domestic support measur es from actions based on Article 3 of the SCM
Agreement.1194
7.1027 The European Communities agrees with the United States that subsidies contingent upon
the use of domestic goods which are ma intained consistently with the Agreement on Agriculture are
not inconsistent with the SCM Agreement . The European Communitie s argues that subsidies
contingent upon the use of domestic goods ar e consistent with Article 3.2 of the Agreement on
Agriculture. The European Communities puts an emphasis on the phrase "in favour of", as not
requiring that support be "to" domestic producers. The same term is used in Article 1(a) (the
definition of AMS) and in Article 1(h) (definition of Total AMS). Paragraph 7 of Annex 3 recognizes
that a Member has a right to provide subsidies contingent upon use of domestic products under the
Agreement on Agriculture.1195
7.1028 According to the European Comm unities, Article 21.1 of the Agreement on Agriculture
provides that the other goods agreements w ill apply "subject to" the provisions of the Agreement on
Agriculture. A finding that a measure was an import substitution subsidy would mean that such a
subsidy would be prohibited under Article 3.1(b) of the SCM Agreement . In such an event, the
consequences of such a finding would have to be subordinated to the right to adopt such measures
under the Agreement on Agriculture (provided reduction commitments are respected). Moreover, the
chapeau of Article 3.1 of the SCM Agreement clearly exempts from the scope of that Article domestic
content subsidies which are maintained consistently with the Agreement on Agriculture.1196
7.1029 New Zealand does not agree that a right to provid e subsidies contingent upon the use of
domestic products contrary to Article 3 of the SCM Agreement can be found in the requirement that
subsidies "directed at agricultural producers […] to the extent that th ey benefit producers of the basic
agricultural product" be included in the calculation of AMS. There is no basis for reading such a right
into the Agreement on Agriculture . To do so would allow the possibility for exemption from action
under the SCM Agreement to exist other than by virtue of Article 13 of the Agreement on Agriculture.
Article 13 of the Agreement on Agriculture explicitly does not provide such exemption from action
under Article 3 of the SCM Agreement when it quite clearly could have done so. In New Zealand's
view that indicates that there was no intention on the part of the drafters that domestic support
measures, whether they conform with Article 6 of the Agreement on Agriculture or not, should be so
exempt.
1197
3. Examination by the Panel
(a) Relationship between Article 3.1(b) of the SCM Agreement and the domestic support
provisions of the Agreement on Agriculture
(i) Overview
7.1030 Article 3.1 of the SCM Agreement states:
"3.1 Except as provided in th e Agreement on Agriculture, the following subsidies,
within the meaning of Article 1, shall be prohibited: ...

1194 Australia's response to Panel third party Question No. 40.
1195 European Communities' oral statement at the first session of the first substantive meeting,
paras. 33-36.
1196 European Communities' oral statement at the first session of the first substantive meeting,
paras. 37-39.
1197 New Zealand's response to Panel third party Question No. 40.

(a) subsidies contingent, in law or in fact, whether solely or as
one of several other conditions, upon export performance, including
those illustrated in Annex I; ...
(b) subsidies contingent, whether solely or as one of several
other conditions, upon the use of domestic over imported goods."
(emphasis added, footnotes omitted)
7.1031 We recall once again that Article 3.2 of the DSU recognizes that interpretative issues arising
in WTO dispute settlement are to be resolved through the application of customary rules of
interpretation of public international law. It is we ll settled that the principles codified in Articles 31
and 32 of the Vienna Convention are such customary rules.
1198 The task of interpreting a treaty
provision must begin with its specific terms.
7.1032 We thus look to the specific terms of th e treaty text. The relationship between
the Agreement on Agriculture and the SCM Agreement is defined, in part, by the text of Article 3.1
of the SCM Agreement. That provision contains an introductory clause: "[e]xcept as provided in the
Agreement on Agriculture".
7.1033 In giving effect to this introductory phrase of Article 3.1 of the SCM Agreement, we have a
duty to read all the provisions of WTO agreements as a whole 1199, in a manner which respects and
gives effect to the text of all relevant provisions read in light of their context, object and purpose.
Indeed, we have already noted the interlocking nature of the SCM Agreement and the Agreement on
Agriculture.1200 The respective texts of these agreements expressly provide for a general order of
precedence among them, when certain conditions prevail.
7.1034 The introductory clause of Article 3.1 of the SCM Agreement ("[e]xcept as provided in the
Agreement on Agriculture") indicates that any examin ation of the WTO-consistency of a subsidy for
agricultural products under the SCM Agreement may depend upon the provisions of the
Agreement on Agriculture.1201
7.1035 Article 21.1 of the Agreement on Agriculture states:
"The provisions of GATT 1994 and of the other Multilateral Trade Agreements in
Annex 1A to the WTO Agreement shall a pply subject to the provisions of this
Agreement".
7.1036 This provision expressly acknowle dges the application of the GATT 1994 and the SCM
Agreement to agricultural products, while indicating that the Agreement on Agriculture would take
precedence in the event, and to the extent, of any conflict.1202

1198 We recall, once again, th at Article 31(1) of the Vienna Convention provides in relevant part that:
"A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of
the treaty in their context and in the light of its object and purpose."
1199 See Appellate Body Reports: Korea – Dairy and Argentina – Footwear (EC).
1200 We recall our general discussion of "order of analysis" in Section VII:C.
1201 As already mentioned in Section VII:C, we find support for our approach in the Appellate Body
Report in Canada – Dairy (Article 21.5 – New Zealand and US).
1202 Neither the introductory phrase in Article 3.1 of the SCM Agreement , nor Article 21.1 of the
Agreement on Agriculture mean that the Agreement on Agriculture must necessarily contain a provision that
would have the effect of carving out certain domestic support measures from the prohibition on import
substitution subsidies in Article 3.1(b) of the SCM Agreement or rendering those disciplines inapplicable to
agricultural domestic support. This view does not redu ce the introductory phrase to inutility. For example, the

7.1037 We recall that the WTO Agreement is a "single undertaking". All of the "covered
agreements"1203 in Annexes 1, 2 and 3 are integral parts of the same WTO Agreement1204, subject to
the integrated dispute settlement system established by the DSU. Each covered agreement contains
distinct obligations, which govern Members' conduc t within the parameters of the substance and
subject-matter of the particular provision and of the particular covered agreement. It is clear to us that
the same measure can be subject to more than one WTO obligation or commitment, although the
specific aspects of the measure that may be subject to an obligation or commitment may vary
depending upon the particular agreement or legal provision in question.
7.1038 We understand that Article 21.1 of the Agreement on Agriculture could speak to a situation
where, for example, the domestic support provisions of the Agreement on Agriculture would prevail
in the event that an explicit carve-out or exemp tion from the disciplines in Article 3.1(b) of the SCM
Agreement existed in the text of the Agreement on Agriculture . Another situation would be where it
would be impossible for a Member to comply with its domestic support obligations under the
Agreement on Agriculture and the Article 3.1(b) prohibition si multaneously. Another situation might
be where there is an explicit authorization in the text of the Agreement on Agriculture that would
authorize a measure that, in the absence of such an express authorization, would be prohibited by
Article 3.1(b) of the SCM Agreement.
7.1039 For the purposes of resolving this dispute, it is not necessary for us to decide upon any single
fixed meaning of a "conflict" or to identify a particul ar situation that might fall to be decided subject
to the order of precedence set out in Articles 21.1 of the Agreement on Agriculture and the
introductory clause to Article 3.1(b) of the SCM Agreement. This flows from our view that none of
the situations just mentioned arise in this dispute from the relevant provisions in the Agreement on
Agriculture.
7.1040 For the reasons that follow, we believe the domestic support provisions of the Agreement on
Agriculture, on the one hand, and Article 3.1(b) of the SCM Agreement, on the other, do not present
any conflict.1205
7.1041 We turn to the relevant provisions of the Agreement on Agriculture in order to discern
whether, and/or to what extent, these provisions affect a claim concerning the prohibition on import
substitution subsidies in Article 3.1(b) of the SCM Agreement.
 1206
(ii) Article 13 of the Agreement on Agriculture
7.1042 We first consider whether Article 13 of the Agreement on Agriculture articulates any clear
expression that the drafters intended th e domestic support provisions of the Agreement on Agriculture
to affect a claim under Article 3.1(b) during the implementation period.

introductory clause in Article 3.1 also relates to the expo rt subsidy prohibition in Article 3.1(a), and our view is
without prejudice to that relationship.
1203 The "covered agreements" are listed in Appendix 1 to the DSU.
1204 Article II:2 of the WTO Agreement.
1205 We recall and find support in the approach of certain previous panels, which have referred to a
presumption against conflict. Panel Report, Indonesia – Autos, para. 14.28; Turkey – Textiles, paras. 9.92-9.95.
1206 We find support in Appellate Body Reports, US – Carbon Steel and US - Corrosion-Resistant Steel
Sunset Review. These reports underline the im portance of the text and the role of cross-references and clear
textual indications about the relationship between and among treaty provisions. We also note that other
Appellate Body reports – for example, Appellate Body Report, EC – Sardines , paras. 201-208 and Appellate
Body Report, EC – Hormones , para. 128 – address relationships among certain treaty provisions, and, in
particular, situations where large groups of measures are (or are not) exempted from disciplines. In EC –
Sardines, para. 208, the Appellate Body stated: "[...] we mu st conclude that, if the negotiators had wanted to
exempt the very large group of existing technical regulati ons from the disciplines of a provision as important as
Article 2.4 of the TBT Agreement, they would have said so explicitly."

7.1043 Brazil argues that Article 13(b)(ii) of the Agreement on Agriculture does not exempt user
marketing (Step 2) payments to domestic user s under section 1207(a) of the FSRI Act of 2002 from
challenges under Article 3 of the SCM Agreement . Brazil therefore considers that it is entitled to
assert a claim that user marketing (Step 2) paymen ts to domestic users under section 1207(a) of the
FSRI Act of 2002 are subsidies contingent upon the use of domestic over imported goods, within the
meaning of Article 3.1(b) of the SCM Agreement.
7.1044 The United States seemed to indicate in its initial brief
1207 that Article 3.1(b) claims are
"exempt from action" by virtue of Article 13 of the Agreement on Agriculture . However, in
responding to Panel questioning, the United States ob serves that Article 13(b) "does not reference ...
Article 3" of the SCM Agreement, and that, on the United States' view, while Article 13(b) addresses
domestic support measures, Article 13 "would not a ppear to be applicable" to domestic support
measures constituting import substitution subsidies under Article 3.1(b) of the SCM Agreement.1208
7.1045 We therefore do not understand the parties to disagree that Article 13 of the Agreement on
Agriculture does not affect claims under Article 3.1(b) of the SCM Agreement.
7.1046 In any event, our own analysis, based on the text of Article 13 of the Agreement on
Agriculture, leads us to endorse what appears to be th e shared view of the parties based on their
submissions to the Panel.
7.1047 Article 3.1 of the SCM Agreement prohibits two types of subsidies: (i) those contingent on
export performance (so-called "export subsidies") in pa ragraph (a); and (ii) those contingent on the
use of domestic over imported goods (so-called "import substitution" subsidies) in paragraph (b).
7.1048 Article 13(b)(ii) of the Agreement on Agriculture exempts certain domestic support measures
in respect of agricultural products from actions based on Articles 5 and 6 of the SCM Agreement and
Article XVI of the GATT 1994, but does not refer to Article 3 of the SCM Agreement at all.
7.1049 Article 13(c)(ii) of the Agreement on Agriculture states that " export subsidies that conform
fully to the provisions of Part V of this Agreemen t, as reflected in each Member's Schedule, shall be
exempt from actions based on Article XVI of GAT T 1994 or Articles 3, 5 and 6 of the Subsidies
Agreement." (emphasis added) The negotiators were therefore fully aware of how to insert a
reference to Article 3 of the SCM Agreement when they deemed it appropriate to do so (as they did in
Article 13(c)). However, they inserted no such cr oss-reference when addressing obligations relevant
to domestic support measures in Article 13(b).
7.1050 As noted, Article 13(c)(ii) of the Agreement on Agriculture explicitly and exclusively refers
to "export subsidies", which are those dealt with in Article 3.1(a) of the SCM Agreement .
Article 13(c) of the Agreement on Agriculture does not refer to import substitution subsidies, or,
indeed, to any type of subsidy other than export subsidies. Therefore, claims relating to alleged
import substitution subsidies, under Artic le 3.1(b), do not fall within the ambit of Article 13(c) of the
Agreement on Agriculture.
7.1051 Had the drafters of Article 13 of the Agreement on Agriculture intended to exempt certain
measures from actions based on Article 3.1(b) in Artic le 13(c), they would have so indicated, either
by referring explicitly to "import s ubstitution" subsidies in the chapeau of Article 13(c) or by using
the more general reference to "subsidies" rather than qualifying the term "subsidies" by the term

1207 In United States' initial brief, footnote 2, the United States included Article 3.1(b) of the SCM
Agreement in the list of provisions in respect of which the United States asserted that "Brazil cannot maintain
any action – and the United States cannot be required to defend any such action – based on provisions specified
in the Peace Clause since the U.S. s upport measures for upland cotton conform to the Peace Clause." (footnote
omitted)
1208 United States' response to Panel Question No. 111.

"export" in the chapeau. Moreover, the provisions of the Agreement on Agriculture referred to in the
chapeau of Article 13(c) refer to the provisions of "Part V" of the Agreement on Agriculture . That
part contains export subsidy disciplines. They do not relate to domestic support.1209
7.1052 Thus, we believe that Article 13 of the Agreement on Agriculture does not affect our analysis
of Brazil's claim under Article 3.1(b) of the SCM Agreement.
(iii) Domestic support provisions in the Agreement on Agriculture
7.1053 We next turn to the substantive provi sions relating to domestic support in the Agreement on
Agriculture to check whether they affect our examinati on of Brazil's claim under Article 3.1(b) of the
SCM Agreement.
7.1054 Articles 6 and 7 of the Agreement on Agriculture and Members' schedules contain domestic
support commitments. Article 6.3 of the Agreement on Agriculture provides that "[a] Member shall
be considered to be in compliance with its dome stic support reduction commitments in any year in
which its domestic support in fa vour of agricultural producers expressed in terms of Current Total
[Aggregate Measurement of Support] does not exceed the corresponding annual or final bound
commitment level specified in Part IV of the Member's Schedule."1210
7.1055 Annex 3 of the Agreement on Agriculture is entitled "Domestic S upport: Calculation of
Aggregate Measurement of Support". Paragraph 7 of Annex 3 provides:
"7. The AMS shall be calculated as close as practicable to the point of first sale
of the basic agricultural product concerne d. Measures directed at agricultural
processors shall be included to the extent that such measures benefit the producers of
the basic agricultural products."

1209 That part of the Agreement on Agriculture consists of Article 8 ("Export Competition
Commitments"); Article 9 ("Export Subsidy Commitments "); Article 10 ("Prevention of Circumvention of
Export Subsidy Commitments") and Artic le 11 ("Incorporated Products"). Article 11 deals with incorporated
agricultural primary products. It ther efore addresses certain obligations relating to incorporated products, but
does not deal with the concept of contingency upon import substitution in general. This gives further contextual
support to our view that actions based on Article 3.1(b) of the SCM Agreement are not affected by Article 13 or
the substantive domestic support provisions of the Agreement on Agriculture.
1210 Article 1(a) of the Agreement on Agriculture reads, in part:

"(a) '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, which is: ...

(i) with respect to support provided during any year of the implementation period and thereafter,
calculated in accordance with the provisions of Annex 3 of this Agreement and taking into
account the constituent data and methodology us ed in the tables of supporting material
incorporated by reference in Part IV of the Member's Schedule;"

Article 3.2 of the Agreement on Agriculture provides:

"2. Subject to the provisions of Article 6, a Member shall not provide support in favour of
domestic producers in excess of the commitment levels speci fied in Section I of Part IV of its
Schedule." (emphasis added)

7.1056 The United States asserts that this provision re quires the United States to include its user
marketing (Step 2) payments in favour of dom estic upland cotton producers, even though such
payments are made to processors, within its calculati on of its AMS. The United States asserts that if
Members could not discriminate in favour of do mestic producers when making subsidy payments
through processors, there would be no reason for paragraph 7 of Annex 3.
1211 The United States thus
contends that user marketing (Step 2) payments to upland cotton domestic users that provide support
to domestic producers contingent on the use of domestic goods is consistent with the Agreement on
Agriculture.
7.1057 We do not agree. Domestic support reduction commitments are adopted pursuant to the
domestic support provisions contained in the Agreement on Agriculture , and the terms of Article 6.3
define the circumstances in which a Member shal l be deemed to be in conformity with those
commitments.
7.1058 However, Article 6.3 does not provide that compliance with such "domestic support reduction
commitments" shall necessarily be considered to be in compliance with other applicable WTO
obligations. Nor does it contain an explicit textua l indication that otherwise prohibited measures are
necessarily justified by virtue of compliance with the domestic support reduction commitments. The
obligations are parallel, and the operation of Article 6.3 of the Agreement on Agriculture does not pre-
empt or exclude the operation of the obligation under Article 3.1(b) of the SCM Agreement.
7.1059 We believe there is a clear distinction between a provision that requires a Member to include
a certain type of payment (or part thereof) in its AMS calculation and a provision that requires
inclusion in the AMS of subsidies contingent upo n import substitution. The United States, in this
dispute, would have us read such provisions synonymously. We decline to do so.
7.1060 Support "in favour of" domestic producers does not require or authorize contingency upon
use of domestic over imported goods.
7.1061 The fact that the Agreement on Agriculture foresees that certain domestic support measures
actually paid to other recipients may also "benef it" the producers of the basic agricultural products,
and require inclusion in the AMS of an amount to the extent this is the case, does not permit a
measure that is otherwise prohib ited. Annex 3 provides guidance on the calculation of the AMS.
Nowhere in the text is there recognition that a Member has a right to provide subsidies contingent
upon use of domestic products under the Agreement on Agriculture . Support "in favour of" or that
"benefits" domestic producers need not necessarily be support conditional upon the use of domestic
over imported goods.
7.1062 The provision of funds to processors of the pr oduct concerned need not have the consequence
of limiting access to such subsidies exclusively to domestic production, so as to ensure that it is only
available upon use of domestic over imported goods.
7.1063 The specific reference to subsidies that benefit the producers of the basic agricultural products
in paragraph 7 of Annex 3 does not entitle a Member to maintain subsidies contingent on the use of
domestic over imported goods consistently with the Agreement on Agriculture and the SCM
Agreement. The phrase "to the extent" in paragraph 7 of Annex 3 implies a requirement for Members
to make an annual determination and allocation of support that actually
benefits the "producers" of the
subsidizing Member. All types of "domestic suppor t in favour of agricultural producers" must be
tabulated for the purposes of setting and enfo rcing a Member's domestic support reduction
commitments. To the extent the subsidy benefits processors or other parties besides the domestic
producers, then, pursuant to paragraph 7 of Annex 3, that portion of the funds would not be included

1211 United States' response to Panel Question No. 116.

within AMS. The provision envisages that not a ll support paid to processors may benefit domestic
producers, and provides guidance as to the calculation of AMS in this situation.
7.1064 Indeed, the reference in the text to "to the extent that" clearly indicates that there is a range of
degrees to which a measure could be "in favour of" domes tic producers. It is not possible to read this
language as requiring or allowing conditionality upon the use of domestic products.
7.1065 We can conceive of domestic support measures pr ovided to processors which provide support
"in favour of domestic producers" and that are not contingent upon the use of domestic over imported
goods (and that would therefore be consistent with Article 3.1(b) of the SCM Agreement).1212
7.1066 Article 3 of the Agreement on Agriculture is entitled "Incorporation of Concessions and
Commitments". Pursuant to Article 3.1,
"1. The domestic support and export subsi dy commitments in Part IV of each
Member's Schedule constitute commitments limiting subsidization and are hereby
made an integral part of GATT 1994."
7.1067 From this, we understand that the limitation of subsidization imposed by the domestic support
reduction commitments in the Agreement on Agriculture relates to the object and purpose of imposing
quantitative limitations at certain defined levels. It does not address all of the qualitative aspects of
subsidization. That is, it sets permitted levels of support subject to reduction commitments and does
not deal exhaustively with all of the other potentia l characteristics of the support measure itself. The
issue of the grant of a subsidy per se or the general identification of potential recipients or
beneficiaries of the subsidy is therefore not legally relevant to the particular condition we are
currently examining that is attach ed to the grant of a subsidy, i.e. contingency upon the use of
domestic over imported goods.1213
7.1068 The terms "domestic support reduction commitme nt", AMS and Total AMS are germane to
the Agreement on Agriculture and, in fact, do not appear in Article 3 (or any other provision) of the
SCM Agreement.
7.1069 By contrast, the definition of a subsidy for the purposes of the SCM Agreement is contained in
Article 1 of that Agreement. The definitiona l elements of, and prohibition upon, an import
substitution subsidy are set out in Article 3.1(b) of the SCM Agreement. Nowhere in the texts of these
or any other provisions of the covered agreements do we find a statement that, should a measure
satisfying the conception of a compliant domestic support measure in Article 6 of the Agreement on
Agriculture also happen to meet the definitional criteria of an import substitution subsidy within the
meaning of Article 3.1(b) of the SCM Agreement, the prohibition in that provision would not apply, or
the subsidy would be effectively exempted from that prohibition.
7.1070 We find further support for our view in the absence we have already found of any reference to
import substitution subsidies under Arti cle 3.1(b) in Article 13 of the Agreement on Agriculture .1214
Article 13 of the Agreement on Agriculture sets out certain specific rules concerning the relationship
between the obligations in the SCM Agreement and the Agreement on Agriculture during the
implementation period, when Members sought to provide a degree of clarity which might not

1212 e.g., subsidies paid to processors regardless of the origin of the basic agricultural product.
1213 In this regard, we also note that the preamble to the Agreement on Agriculture records the
commitment of Members "to achiev[e] specific binding commitments in ... market access, domestic support;
export competition...". This preambular statement ca nnot, of course, override any provision which gives
primacy to the Agreement on Agriculture over a specific binding commitment in another covered agreement.
However, it is useful context to assist us in our inte rpretation that obligations in the covered agreements are
different in their nature and capable of applying in parallel.
1214 Supra, paras. 7.1042-7.1052.

otherwise have been entirely evident from the othe r substantive provisions defining the relationship.
The silence of Article 13 of the Agreement on Agriculture on Article 3.1(b) relating to import
substitution subsidies can be taken as a further indi cation that Members did not believe that such
subsidies were of such a nature as to merit the artic ulation of any particular treatment other than the
treatment already indicated in the substantive obligations under the SCM Agreement and the
Agreement on Agriculture.
7.1071 We do not see an inherent conflict between compliance with the domestic support reduction
commitments in Article 6.3 of the Agreement on Agriculture and the prohibition of import substitution
subsidies under Article 3.1(b) of the SCM Agreement so as to render the simultaneous application of
the provisions untenable. Article 3.1(b) of the SCM Agreement can be read together with the
Agreement on Agriculture provisions relating to domestic support in a coherent and consistent manner
which gives full and effective meaning to all of thei r terms. There is, therefore, no necessity to apply
the rules in Article 21.1 of the Agreement on Agriculture in order that the provisions of that agreement
would prevail over a conflicting provision.
7.1072 We recall the introductory phrase of Article 3 of the SCM Agreement ("[e]xcept as provided
in the Agreement on Agriculture "). We have concluded that the Agreement on Agriculture does not
"provide" otherwise so as to affect the prohibition on import substitution subsidies in Article 3.1(b) of
the SCM Agreement.
7.1073 We do not see the application of the Article 3.1(b) prohibition in respect of both industrial and
agricultural products as being manifestly contrary to the object and purpose of the Agreement on
Agriculture or the SCM Agreement. The fundamental prohibition in Article 3.1(b) is a cornerstone of
the subsidy disciplines imposed by the SCM Agreement – and indeed, appears in Part II of that
Agreement containing the most stringent SCM discip lines. It relates to the basic national treatment
provision in Article III:4 of the GATT 1994, which is a cornerstone of the GATT/WTO multilateral
trading system.
1215
7.1074 As the drafters indicated in the preamble of the Agreement on Agriculture , the "long-term
objective is to provide for substantial progressive reductions in agricultural support and protection".
The drafters did not indicate there an intention to undermine the fundamental disciplines applicable to
import substitution subsidies. Had they desire d to do so, they would have so indicated. 1216 It is not
our task to read in to the text such a caveat or exemption for subsidies that are contingent upon the use
of domestic over imported goods and subject to the Article 3.1(b) prohibition.1217
(b) Is there a subsidy contingent upon import substitution within the meaning of Article 3.1(b)?
7.1075 We once again recall that Article 3.1 of the SCM Agreement states:
"3.1 Except as provided in the Agreement on Agriculture, the following subsidies,
within the meaning of Article 1, shall be prohibited: ...

1215 See, for example, Appellate Body Report, US – Section 211 Appropriations Act, para. 241.
1216 We are aware that, for example, scheduled agricu ltural products are subject to certain quantitative
limits imposed by the export subsidy disciplines of the Agreement on Agriculture . These quantitative limits
may be considered less stringent than the outright prohib ition on export subsidies found in Article 3.1(a) of the
SCM Agreement . However, these less stringent obligations are explicitly spelled out in the text of the
Agreement, with further guidance provided in Articles 13 and 21 of the Agreement. We find no such guidance
in the text of either agreement relating to subsidies governed by Article 3.1(b) of the SCM Agreement.
1217 We can conceive of examples where issues of consistency with other provisions of the covered
agreements might arise where a Member grants agricultural domestic support: e.g. domestic support funded by
an internal tax collected only on imports might raise issu es of consistency with a Member's obligations in the
SCM Agreement or Article III of the GATT 1994 ; or a measure requiring the use of domestic over imported
goods might raise issues of consistency with the Agreement on Trade-Related Investment Measures.

(a) subsidies contingent, in law or in fact, whether solely or as
one of several other conditions, upon export performance, including
those illustrated in Annex I ...
(b) subsidies contingent, whether solely or as one of several
other conditions, upon the use of domestic over imported goods."
(footnote omitted)
7.1076 Article 3.1(b) of the SCM Agreement provides that subsidies "within the meaning of
Article 1" which are "contingent…upon the use of domestic over imported goods" are prohibited.
Consequently, in order for a measure to be an import substitution subsidy within the meaning of
Article 3.1(b) of the SCM Agreement, it must be a "subsidy" within the meaning of Article 1 of that
Agreement.
7.1077 There is no dispute between the parties that user marketing (Step 2) payments under section
1207(a) of the FSRI Act of 2002 constitute a "s ubsidy" for the purposes of Article 1 of the SCM
Agreement.
1218 Our own analysis confirms that this is the case.1219
7.1078 We therefore turn to the issue of contingency "upon the use of domestic over imported goods"
within the meaning of Article 3.1(b) of the SCM Agreement.
7.1079 We note that, under section 1207(a) of the FSRI Ac t of 2002, the condition of "use" of United
States domestic upland cotton pertains to all user ma rketing (Step 2) payments (i.e. those to domestic
users and exporters). Brazil has confirmed to us that its claim under Article 3.1(b) of the SCM
Agreement relates only to user marketing (Step 2) payments to domestic users under section 1207(a)
of the FSRI Act of 2002.1220
7.1080 We recall our earlier observation – in the context of our examination of section 1207(a) of the
FSRI Act of 2002 under Article 9.1(a) of the Agreement on Agriculture and Article 3.1(a) of the SCM
Agreement -- that the text of the single legal provisi on governing user marketing (Step 2) payments
identifies two distinct situations in which user marketing (Step 2) payments are made: 1221 eligible
exporters and eligible domestic users. The text of the measure itself therefore compels us to examine
separately the conditions pertaining to the grant of th e subsidy in these two distinct factual situations
addressed by the measure that involve two distinct sets of eligible recipients.
7.1081 We further recall our earlier observation 1222 that the meaning of "contingent" in Article 3.1(a)
of the SCM Agreement is "conditional" or "dependent for its existence upon", and that contingency "in
law" may be demonstrated on the basis of the wo rds of the relevant legal instrument. Such
conditionality may also be derived by necessary imp lication from the words actually used in the
measure. This legal standard applies not only to contingency under Article 3.1(a), but also to
contingency under Article 3.1(b) of the SCM Agreement.1223

1218 See United States' response to Panel Question No. 108.
1219 We refer to our findings, supra in Section VII:E, that a "subsidy" exists under section 1207(a) of
the FSRI Act of 2002 in the context of our examination of user marketing (Step 2) payments to exporters. The
measure makes no differentiation in the defining elemen ts of a "subsidy" between payments to exporters and
domestic users. Nor has the United States argued that such a differentiation exists.
1220 Brazil's response to Panel Question No. 94.
1221 See our findings supra, in Section VII:E.
1222 See our findings supra, in Section VII:E.
1223 Appellate Body Report, Canada – Autos, para. 123.

7.1082 The United States acknowledges that to receive a payment under the user marketing (Step 2)
programme, a domestic user must open a bale of domestically produced baled upland cotton.
1224 We
therefore understand the United States does not dispute that user marketing (Step 2) payments to
domestic users constitute a subsid y conditional or dependent upon the use of domestic over imported
goods within the meaning of Article 3.1(b) of the SCM Agreement.
1225
7.1083 In any event, our own analysis confirms this view. Section 1207(a) of the FSRI Act of 2002
provides that during the period beginning on the date of the enactment of the FSRI Act of 2002
through 31 July 2008, " .. the Secretary shall i ssue marketing certificates or cash payments, at the
option of the recipient, to domestic users and e xporters for documented purchases by domestic users
and sales for export by exporters..." made duri ng a week following a period during which certain
cotton price conditions are fulfilled. "Eligible upland cotton" is " domestically produced baled upland
cotton..." (emphasis added).
1226 Eligible upland cotton "must not be imported cotton". 1227 "Eligible
domestic users" are defined as follows:
"(1) A person regularly engaged in the business of opening bales of eligible upland
cotton for the purpose of manufacturing such cotton into cotton products in the
United States (domestic user), who has en tered into an agreement with CCC to
participate in the upland cotton user marketing certificate program;"
7.1084 Moreover, "[p]ayments ... shall be made available upon application for payment and
submission of supporting documentation, including proof of purchase and consumption of eligible
cotton by the domestic user or proof of export of eligible cotton by the exporter, as required by the
CCC-issued provisions of the Upland Cotton Do mestic User/Exporter Agreement" (emphasis
added).1228
7.1085 Therefore, user marketing (Step 2) payments to domestic users under section 1207(a) of the
FSRI Act of 2002 will not be made except upon proof of consumption of eligible upland cotton –
which must be "domestically produced", and "not imported". It is not just that it will invariably be
easier for domestic users to meet the conditions fo r user marketing (Step 2) payments to domestic
users by using domestic -- rather than imported -- upland cotton. The text of the measure explicitly
requires the use of domestically produced upland cotton as a pre-condition for receipt of the
payments.

1224 United States' response to Panel Question No. 144. The United States also confirms, in response to
Panel questioning concerning the relevance of Article III:8 of the GATT 1994, that the user marketing (Step 2)
payment is not made exclusively to domestic producers. See also, United States' response to Panel Question No.
118.
1225 See e.g., Appellate Body Report, Canada – Autos, para. 126.
1226 As defined in 7 CFR 1427.103, reproduced in Exhibit BRA-37.
1227 7 CFR 1427.103(c)(2), reproduced in Exhibit BRA-37.
1228 According to 7 CFR 1427.108, entitled "Payment", reproduced in Exhibit BRA-37, under the terms
of the agreement, upland cotton eligible for payment is cotton consumed by the domestic user within the
United States fulfilling certain conditions. In order to receive payments, domestic users of upland cotton must
submit proof of consumption in the form of reports of weekly consumption of eligible upland cotton. Exhibit
BRA-65 contains a sample cotton domestic user/exporter agreement, which the United States admitted
"appeared to be accurate versions of old Step 2 progr am documents" - see United States' response to Panel
Question No. 92. The United States submitted an updated version of the "Upland Cotton Domestic
User/Exporter Agreement", reproduced in Exhibit US-21 a nd also indicated that the official documents for the
upland cotton (step 2) program can be found at the FSA we bsite (www.fsa.usda.gov/daco). Section B-1 of that
Agreement indicates that in the event that the cotton is not used for the purpose (by a domestic user as a person
regularly engaged in manufacturing eligible upland cotton into cotton products within the United States) "the
payment received shall be returned immediately and with interest." Section B-5 of the Agreement indicates that
failure to submit an application or the weekly reports will result in dela ys in payments until all delinquent
application/ reports are received.

7.1086 The use of United States domestically produced upland cotton is a condition for obtaining the
subsidy. User marketing (Step 2) payments to domestic users under section 1207(a) of the FSRI Act
of 2002 are clearly conditional, or dependent upon, such use.
7.1087 As we have already found, the fact that th e user marketing (Step 2) payments are also
available in another factual situation explicitly identif ied in the text of the measure – i.e. exporters --
would not have the effect of dissolving such contingency in respect of domestic users, particularly in a
situation where the other factual contingency (upon export performance) also gives rise to a
prohibited subsidy. As we have previously noted, it would in our view be extremely odd, indeed, if a
Member could make a subsidy dependent upon two alternative c onditions, each of which would
separately give rise to a prohibited subsidy and a violation, but which would somehow become
"unprohibited" when combined.
7.1088 For these reasons, we find that section 1207(a) of the FSRI Act of 2002 providing for user
marketing (Step 2) payments to domestic users is a subsidy contingent upon the use of domestic over
imported goods within the meaning of Article 3.1(b) of the SCM Agreement.1229
(c) Is the measure mandatory?
7.1089 Finally, we consider whether the measure is mandatory.1230
7.1090 Turning to the text of the relevant legal provi sion, pursuant to section 1207(a)(1) of the FSRI
Act of 2002, "the Secretary shall issue marketing certificates or cash payments, at the option of the
recipient, to domestic users and exporters" (emphasis added).1231 We recall our conclusion above that
user marketing (Step 2) payments to exporters ar e mandatory. We are of the view that the same
principles are brought to bear here.1232
7.1091 The United States does not disagree that, subject to the availability of funds (that is, the
availability of CCC borrowing authority), user marketing (Step 2) payments must be made to all those
who meet the conditions for eligibility.1233
7.1092 We are of the view that section 1207(a)(1) of the FSRI Act of 2002 mandates the granting of
subsidies in that the United States authorities have no discretion not to allow it if domestic users fulfil
certain conditions.
7.1093 This is not a situation where the executive br anch of the United States government enjoys a
discretion that may, or may not, be ex ercised in a WTO-consistent manner. Any grant of a user
marketing (Step 2) payment to a domestic user under section 1207(a) of the FSRI Act of 2002 will
inevitably be contingent upon the use of Unite d States upland cotton and therefore constitute a
prohibited import substitution subsidy.
7.1094 The fact that the actual payment of subsidies is triggered only if certain market conditions
prevail does not impact upon our analysis of the normative nature and operation of the measure within
the United States legal system. The prevailing world market conditions are not exclusively within the
control of the United States government. Nor are the underlying determinative prices triggering the
existence and magnitude of user marketing (Step 2) payments to domestic users under section 1207(a)
of the FSRI Act of 2002. When certain market cond itions exist, the Secretary of Agriculture has no
discretion. The payments are automatically triggered.

1229 We note, in passing, the relatively low level of imports of upland cotton into the United States. See
USDA Fact Sheet: Upland Cotton, January 2003, reproduced in Exhibit BRA-4.
1230 See supra, Section VII:C, in particular, para. 7.336.
1231 Exhibit BRA-29.
1232 See supra, Section VII:E.
1233 United States' response to Panel Question No. 109.

7.1095 We recall that, pursuant to section 1601(e) of the FSRI Act of 2002, the Secretary is
authorized to adjust support to the maximum exte nt practicable to comply with total allowable
domestic support levels under the Uruguay Round Agre ements. This authority applies to certain
aspects of the user marketing (Step 2) programme.
1234 However, this authority pertains exclusively to
the level of United States domestic support commitments under the Agreement on Agriculture 1235, an
issue distinct from the constituent qualitative elements and conditionality of subsidies governed by the
SCM Agreement.1236
7.1096 As we have already observed, compliance w ith the domestic support reduction commitments
does not authorize or require the provision of subsidies contingent upon the use of domestic over
imported goods. Moreover, the level of domestic support is not legally relevant to whether or not that
domestic support is conditional upon im port substitution. Therefore, section 1601(e) of the FSRI Act
of 2002 is not legally determinative of whethe r the measure is of binding normative nature and
operation within the United States domestic legal system.
7.1097 For these reasons, we conclude that section 1207(a) of the FSRI Act of 2002 providing for
user marketing (Step 2) payments to domestic user s is inconsistent with Article 3.1(b) of the SCM
Agreement.1237
7.1098 Article 3.2 of the SCM Agreement provides: "A Member shall neither grant nor maintain
subsidies referred to in paragraph 1" of Article 3. To the extent that section 1207(a) of the FSRI Act
of 2002 providing for user marketing (Step 2) paym ents to domestic users is inconsistent with
Article 3.1(b), it is, consequently, also inconsistent with Article 3.2 of the SCM Agreement.
4. Claim under Article III:4 of the GATT 1994
(a) Main arguments of the parties
7.1099 Brazil claims that user marketing (Step 2) payments to domestic users violate Article III:4 of
the GATT 1994 and are not covered by Article III:8 (b) of the GATT 1994. Brazil argues that these
payments are subject to the disciplines of Article III:4 of the GATT 1994 because they are made to
domestic users of United States upland cotton and therefore, they are not exclusively paid to domestic
producers within the meaning of Article III:8(b) of the GATT 1994. Brazil, therefore, requests the
Panel to find that the United States acts inconsiste ntly with its obligations under Article III:4 of the
GATT 1994 by providing user marketing (Step 2) paymen ts to domestic users of United States upland
cotton.1238
7.1100 The United States submits that the user marketing (Step 2) programme provides benefits in
favour of United States upland cotton producers within the meaning of the Agreement on Agriculture.
According to the United States, Article 3.1 of the Agreement on Agriculture provides that the
domestic support commitments in Part IV of each Memb er's Schedule are made an integral part of the
GATT 1994 and therefore, the domestic support commitments of the United States are integral part of

1234 Section 1601(e) pertains to expenditures under subtitles A through E of the FSRI Act of 2002.
Section 1207(a) is in Subtitle B of that Act. Levels of expenditures under section 1207(a) are therefore covered
by the provision.
1235 United States' response to Panel Question No. 253. In response to Panel Question No. 253(b), the
United States confirmed that "section 1601(e) applies to the Aggregate Measure of Support commitments under
the Uruguay Round Agreement on Agriculture."
1236 We have discussed this in more detail supra, paras. 7.1053 ff.
1237 This finding is specific to the text of Article 3.1(b) of the SCM Agreement and Article 6.3 and
related domestic support provisions of the Agreement on Agriculture . It is without prejudice to issues arising
under Articles 3.3, 8 and 21 of the Agreement on Agriculture and Article 3 of the SCM Agreement in relation to
Members' rights and obligations with respect to export subsidies.
1238 Brazil's first written submission, paras. 342-351.

the GATT 1994 itself. The user marketing (Step 2) programme exists in favour of agricultural
producers within Current Total AMS, and the text of the Agreement on Agriculture does not prohibit
any particular form of delivery of such "amber box" domestic support. The United States notes that
Brazil's submission focuses exclusively on GATT jurisprudence involving Article III:8(b), which
predates the Uruguay Round Agreements. The Agreement on Agriculture imposed, for the first time,
rigorous disciplines on agricultural support and the commitments of the United States constitute an
integral part of the GATT 1994.
1239
7.1101 The United States also asserts that paragraph 7 of Annex 3 of the Agreement on Agriculture
specifically requires that "[m]easures directed at processors shall be included" in the calculation of
AMS to subject these measures to the domestic support reduction commitments established for the
first time in the Agreement on Agriculture . Therefore, according to the United States, it would be
illogical to include such payments in the requi red calculations and subject them to reduction
commitments if they were already prohibited under Article III:4 of the GATT 1994. The United States
submits that a coherent reading of the Agreement on Agriculture with the GATT 1994 indicates that
the user marketing (Step 2) progr amme, in conformity with the Agreement on Agriculture , does not
violate Article III:4 of the GATT 1994.1240
(b) Main arguments of the third parties
7.1102 Argentina submits, in response to the Panel's question, that Article III:4 of the GATT 1994
prohibits discrimination against im ported products, and so that provi sion is "also applicable" to the
present case.1241
7.1103 The European Communities agrees with the United States that subsidies contingent upon
the use of domestic goods, which are maintained consistently with the Agreement on Agriculture, are
not inconsistent with either Article 3 of SCM Agreement or Article III:4 of the GATT 1994.1242
7.1104 New Zealand submits that Brazil has demonstrated that marketing (Step 2) payments are
prohibited subsidies under Article 3.1(b) of the SCM Agreement, and that "on that basis, they also
violate" Article III:4 of the GATT 1994.1243
(c) Evaluation by the Panel
7.1105 We recall that we need not examine all claims before us. Rather, we need only address those
claims that must be addressed in order to resolve the matter in issue in the dispute 1244, provided that
we address those claims on which a finding is n ecessary in order to enable the DSB to make
sufficiently precise recommendations and rulings so as to allow for prompt compliance by a Member
in order to ensure effective resolution of disputes to the benefit of all Members.1245
7.1106 In light of our findings above under Article 3.1(b) and Article 3.2 of the SCM Agreement, we
do not believe that it is necessary to address Brazil's claim relating to the same measure – section

1239 United States' first written submission, paras. 146-149.
1240 United States' first written submission, para. 150.
1241 Argentina's response to Panel third party Question No. 40.
1242 European Communities' oral statement at the first session of the first substantive meeting,
paras. 33-38. See also European Communities' response to Panel third party Question No. 40.
1243 New Zealand's written submission to the first session of the first substantive meeting, para. 4.01.
See also New Zealand's response to Panel third party Question No. 40.
1244 Appellate Body Report, US – Wool Shirts and Blouses , p. 19. See also e.g., Appellate Body
Report, Canada – Autos, paras. 112-117, where the Appellate Body refe rs to and endorses that panel's exercise
of the "discretion" implicit in the principle of judicial economy.
1245 Appellate Body Report, Australia – Salmon, para. 223.

1207(a) of the FSRI Act of 2002 providing for user ma rketing (Step 2) payments to domestic users –
under Article III:4 of the GATT 1994.
G. A
CTIONABLE SUBSIDIES: CLAIMS OF "PRESENT" SERIOUS PREJUDICE
1. Measures at issue
7.1107 This Section of our report deals with alleged actionable subsidies, including certain alleged
subsidies that are not "exempt from actions" based on Articles 5 and 6 of the SCM Agreement and
Article XVI of the GATT 1994 within the meaning of Articles 13(b)(ii) and 13(c)(ii) of the Agreement
on Agriculture as a result of our findings in Sections VII: D, E and F of the Panel's report. These are
the following measures1246, as described in Section VII:C of this report:
(i) user marketing (Step 2) payments to domestic users and exporters;
(ii) marketing loan programme payments;
(iii) production flexibility contract payments;
(iv) market loss assistance payments;
(v) direct payments;
(vi) counter-cyclical payments;
(vii) crop insurance payments;
(viii) cottonseed payments for the 2000 crop; and
(ix) legislative and regulatory provisions currently providing for the payment of
measures in (i), (ii), (v), (vi) and (vii) above.1247
2. Overview of Brazil's present serious prejudice claims under the SCM Agreement and the
GATT 1994
7.1108 Brazil alleges present serious prejudice under Articles 5(c), 6.3(c) and 6.3(d) of the SCM
Agreement, and Articles XVI:1 and XVI:3 of the GATT 1994 . Brazil claims that United States
subsidies provided during MY 1999-2002 have caused, cause and continue to cause "serious
prejudice" to Brazil's interests by:
(i) significantly suppressing upland cotton prices in the United States, world
and Brazilian markets in violation of Articles 5(c) and 6.3(c) of the SCM
Agreement;
(ii) increasing the United States share of the upland cotton world market in
violation of Articles 5(c) and 6.3(d) of the SCM Agreement; and

1246 With regard to Brazil's claims concerning United States' export credit guarantee programmes,
Brazil clarified, in response to Panel Question Nos. 129 and 139, that Brazil's serious prejudice claims relating
to export credit guarantee programmes involve only GSM 102. According to Brazil, this is because either no
cotton allocations were made, or only negligible amounts of cotton were exported, under the GSM 103 and
SCGP export credit guarantee programme s during the years in question. In light of our findings in Section
VII:E, supra, we do not consider it necessary to include export credit guarantees under the GSM 102
programme in our analysis here. We therefore exercise judicial economy with respect to this claim of Brazil.
1247 See also Brazil's per se actionable subsidy claims in Section VII:I.

(iii) resulting in the United States having more than an equitable share of world
export trade in violation of Articles XVI:1 and XVI:3 of the GATT 1994.
3. Claims under Articles 6.3(c) and 5(c) of the SCM Agreement
(a) Introduction
7.1109 Part III of the SCM Agreement is entitled "Actionable Subsidies". It comprises Articles 5, 6
and 7. Article 5 of the SCM Agreement is entitled "Adverse Effects". According to its chapeau: "No
Member should cause, through the use of any subsidy referred to in paragraphs 1 and 2 of Article 1,
adverse effects to the interests of other Members, i. e. ...". Article 5(c) identifies "serious prejudice to
the interests of another Member" as one such adverse effect. Article 6.3(c) states that serious
prejudice in the sense of Article 5(c) may arise where "t he effect of the subsidy" is "significant price
suppression" "in the same market". Article 7 deals with remedies.
7.1110 Article 5 of the SCM Agreement provides: "No Member should cause, through the use of any
subsidy referred to in paragraphs 1 and 2 of Artic le 1, adverse effects to the interests of other
Members...". Therefore, to be an "actionabl e subsidy" for the purposes of Part III of the SCM
Agreement, there must first be a specific subsidy within the meaning of Articles 1.1 and 1.2 of the
SCM Agreement . We therefore now examine whether th e measures at issue are such specific
subsidies.
(b) Are the challenged measures "subsidies" for the purposes of an actionable subsidies analysis?
7.1111 Article 1 of the SCM Agreement provides, in part, that:
"1.1 For the purpose of this Agreement, a subsidy shall be deemed to exist if:
(a)(1) there is a financial contribution by a government or any public body within
the territory of a Member (referred to in this Agreement as "government"),
i.e. where:
(i) a government practice involves a direct transfer of funds (e.g.
grants, loans, and equity infu sion), potential direct transfers
of funds or liabilities (e.g. loan guarantees); ...
and
(b) a benefit is thereby conferred."
7.1112 Brazil alleges that all of the challenged measures constitute "subsidies". According to Brazil,
most of them – user marketing (Step 2) payments to domestic users and exporters; marketing loan
programme payments; production flexibility contr act payments; market loss assistance payments;
direct payments; counter-cyclical payments; crop insurance subsidies
1248; and cottonseed payments –
provide "financial contributions" in the form of "grants" to participating United States producers,

1248 Brazil clarifies in response to Panel Question No. 130 that its claim pertains to "two different types
of subsidies": the United States FCIC pays a portion of the premiums that farmers would otherwise have to pay
for obtaining crop insurance. Exhibit BRA-30 (section 508(e) of the Federal Crop Insurance Act); Exhibit
BRA-59 ("Briefing Room: Farm and Commodity Policy: Crop Yield and Revenue Insurance") Second, the
FCIC covers losses under crop insurance policies that exceed the amount of premiums collected, thus "providing
free reinsurance for private insurance companies offering crop insurance." Exhibit BRA-30 (section 508(k) of
the Federal Crop Insurance Act). Reinsurance agreement standards are set out in 7 CFR 400.161 et seq. ,
reproduced in Exhibit BRA-39.

processors, users or exporters of upland cotton with in the meaning of Article 1.1(a)(1)(i) of the
SCM Agreement.
1249
7.1113 Moreover, Brazil alleges that all of the measu res concerned confer a "benefit" within the
meaning of Article 1.1(b) of the SCM Agreement upon United States upland cotton producers and/or
users because the recipients of such payments were placed in a better, more advantageous, position
than would have been secured on the market.1250
7.1114 The Panel does not understand the United States to dispute that many of the challenged
measures – i.e. user marketing (Step 2) payments to domestic users and exporters; marketing loan
programme payments; crop insurance payments and cottonseed payments – constitute "subsidies" for
the purposes of Article 1 of the SCM Agreement.1251
7.1115 Nor, in the Panel's view, could the United Stat es properly do so in respect of any of these
payments. User marketing (Step 2) pa yments to domestic users and exporters 1252; marketing loan
programme payments, crop insurance payments 1253 and cottonseed payments are financial
contributions, essentially in the form of "grants" within the meaning of Article 1.1(a)(1)(i) of the SCM
Agreement.
7.1116 These grants are made by a United States government agency (CCC or FCIC). 1254 Each of
these United States government grants confers a benef it within the meaning of Article 1.1(b) of the
SCM Agreement as they place the recipient in a better position than the recipient otherwise would
have been in the marketplace.
7.1117 The United States, however, raises objections to Brazil's "subsidy" a llegations concerning
PFC, DP, MLA and CCP payments. The United States contends that Brazil has not established the
"amount" or "portion" of the subsidy properly a ttributable to upland cotton producers pursuant to
Article 1 of the SCM Agreement.1255
7.1118 We are of the view that PFC, DP, MLA and CCP payments constitute "financial
contributions" in the form of "grants" within the meaning of Article 1.1(a)(1)(i) of the SCM
Agreement. These grants are made by the CCC (which is a United States government agency). 1256
These United States government grants confer a benef it within the meaning of Article 1.1(b) of the
SCM Agreement as they place the recipient in a better positi on than they otherwise would have been
in the market.
7.1119 In our view, the argument of the United States relating to the "amount" or "portion" of the
subsidy "properly attributable to upland cotton produ cers" is not germane to the inquiry that is to be
conducted under Article 1 of the SCM Agreement . Here, we are asking whether a "financial
contribution" exists, and whether a "benefit" is th ereby conferred. We are not required precisely to
establish, at this stage, the quantity of that bene fit in respect of upland cotton. Although the United
States questions whether Brazil has established the am ount of the subsidy in respect of upland cotton,
we do not understand the United States to assert that no benefit whatsoever is conferred in respect of

1249 Brazil's further written submission, para. 32.
1250 Brazil's further written submission, para. 33.
1251 United States' responses to Panel Question Nos. 108 and 127.
1252 We have already found supra, that user marketing (Step 2) payments to domestic users and
exporters are "subsidies" within the meaning of Article 1 of the SCM Agreement. We refer to, and incorporate,
these findings in Sections VII:E and F.
1253 In the case of crop insurance payments, the FCIC pays a portion of the premium that a producer of
upland cotton would otherwise have to pay.
1254 See description of the measures in Section VII:C. See also Sections VII:E and F.
1255 United States' response to Panel Question No. 129.
1256 See description of the measures in Section VII:C. See also Sections VII:E and F.

upland cotton by these payments. In any event, we have found that these payments do, in fact,
manifest a strongly positive re lationship to upland cotton. 1257 We therefore do not change our view
that these payments, too, constitute "subsidies" within the meaning of Article 1 of the SCM
Agreement.
7.1120 In conclusion, the Panel finds that user mark eting (Step 2) payments to domestic users and
exporters1258; marketing loan programme payments; PFC payments; MLA payments; DP payments;
CCP payments; crop insurance payments; and cotton seed payments constitute "subsidies" within the
meaning of Articles 1.1(a) and (b) of the SCM Agreement.
(c) Are the challenged subsidies "specific" for the purposes of an actionable subsidies analysis?
(i) Main arguments of the parties
7.1121 Brazil claims that the United States subsidies at issue – i.e. user marketing (Step 2) payments
to domestic users and exporters; marketing loan programme payments; production flexibility contract
payments; market loss assistance payments; dire ct payments; counter-cyclical payments; crop
insurance subsidies; and cottonseed payments – are "s pecific" within the meaning of Article 2 of the
SCM Agreement.
7.1122 Brazil alleges such specificity as each of the programmes is provided to "discrete segments"
of the United States economy.1259 None are widely available throughout the United States economy to
a multitude of diverse industries. Eligibility for th e domestic support and export subsidies at issue is
either "explicitly" limited to the subset of the United States industry producing agricultural crops, to
subgroups of industries producing certain agricultural crops, or to upland cotton only. None of the
subsidies are generally available for all agriculture, much less any non-agricultural product.
7.1123 Brazil also alleges that user marketing (Step 2) payments to domestic users and exporters, are
"deemed to be specific" within the meaning of Article 2.3 of the SCM Agreement as they are
prohibited subsidies falling under the provisions of Article 3 of the SCM Agreement.1260
7.1124 The United States submits that, in principle, a subsidy that is limited to a small proportion of
United States commodities would be limite d and thus "specific". However, the SCM Agreement does
not establish any quantitative standard for determ ining when a subsidy is so limited, and the
determination must be made on a case-by-case basis.
7.1125 The United States does not expressly contest that user marketing (Step 2) payments to
domestic users and exporters; mark eting loan programme payments; PFC payments; MLA payments;
DP payments; CCP payments; and cottonseed payments are "specific" within the meaning of Article 2
of the SCM Agreement.
7.1126 However, the United States contends that Br azil has not established that crop insurance
subsidies are specific within the meaning of Article 2 of the SCM Agreement . According to the
United States, crop insurance subsidies are available to the whole United States agricultural sector and
the United States contends that this is too broad and diverse to constitute a single "enterprise or
industry or group of enterprises or industries".1261

1257 Supra, Section VII:D.
1258 We again recall that we have already found supra that user marketing (Step 2) payments to
domestic users and exporters are "subsidies" within the meaning of Article 1 of the SCM Agreement. Supra,
Sections VII:E and F.
1259 Brazil's further written submission, para. 42.
1260 Brazil's further written submission, footnote 16.
1261 United States' response to Panel Question No. 131(a).

(ii) Main arguments of the third parties
7.1127 Argentina stresses that the concept of "specificity" in Article 2 of the SCM Agreement is very
broad, since it refers to the subsidies for an en terprise or an industry or group of enterprises or
industries. According to Argentina, agricultura l subsidies are specific within the meaning of
Article 2, since they are not available for all products. Further, a subsidy in respect of all agricultural
crops (i.e. but not to other agricultural commodities, such as livestock ) is specific, as is a subsidy in
respect of certain identified agricultural products sp ecific to producers of certain agricultural products
and a subsidy in respect of upland cotton, but not other products.
1262
7.1128 Canada is of the view that, based on the ordinary meaning of the phrase "is specific to", read
in context and in light of the object and purpose of Article 2 and of the SCM Agreement , the
specificity test is concerned with the actual availability of a programme.
7.1129 Canada shares the view of the United States that, as a general matter, "all agriculture" is too
broad to qualify as a "group of enterprises or indus tries" for specificity purposes. Whether a subsidy
is specific in respect of all agricultural crops excep t other agricultural commodities, such as livestock
depends on: (1) the facts of a given case, as a panel would have to consider, inter alia, the number of
enterprises or industries (based on standard industria l classification) within the jurisdiction of the
granting authority that are actually eligible to receive the subsidy, and the level of diversification of
the "all agricultural crops" universe and (2) on the na ture of the measure in question and whether it
excludes enterprises or industries that might otherwise be reasonably or practically included.1263
7.1130 Canada further submits that where a programme appears de jure non-specific under
Articles 2.1(a) and (b), predominant use of a progra mme by "certain enterprises" (a defined term in
Article 2.1) would indicate, in the absence of any ot her reasonable explanation, that the availability of
the subsidy is limited in fact to such enterprises or industries under Article 2.1(c) and 2.4. Likewise,
where a programme appears de jure non-specific under Articles 2.1(a) and (b), the granting of
disproportionately large amounts of subsidy to certa in enterprises would indicate, in the absence of
any other reasonable explanation, that the availab ility of the subsidy is limited in fact to such
enterprises or industries under Article 2.1(c) and 2.4. In both cases, any predominance or
disproportionality should be measured over an appropriate period of ti me and in relation to the value
of production in question as compared to the total value of all agricultural production.1264
7.1131 China argues that "agricultural commodity" can be understood as equivalent to "agricultural
product" under the Agreement on Agriculture . In light of the respective definitions of "industry" and
"agriculture", the latter term meet s the definition of the former as it is the "science and practice of
using productive labour". China is of the view that: (1) any subsidy to agricultural commodities must
be considered as specific for th e purpose of Article 2 of the SCM Agreement ; (2) agriculture
producing all agricultural products is an industry and consists of "group of enterprises" by definition.
In addition, "subsidies in respect of 'all agricultu ral crops'" "certain identified agricultural products"
(i.e. but not to other agricultural commodities, such as livestock), "certain identified agricultural
products" and "upland cotton, but not other products" should all be deemed specific since "group of
enterprises" producing crops are targeted in all cases and the use of "a certain proportion of the value
of total United States commodities" or "a certa in proportion of United States farmland" will
necessarily be equivalent to "an enterprise or indus try or group of enterprises or industries" because
the "proportion" has to be generated by adding up th ose data from specific "enterprise or industry or
group of enterprises or industries".1265

1262 Argentina's response to Panel third party Question No. 51.
1263 Canada's response to Panel third party Question No. 51.
1264 Canada's response to Panel third party Question No. 51.
1265 China's response to Panel third party Question No. 51.

7.1132 India submits that the United States subsidies at issue are explicitly limited to certain
enterprises or industries, as none of the subsidies at issue are widely available throughout the United
States economy across industries. Eligibility for th e domestic support and export subsidies is either
"explicitly" limited to the subset of the Unite d States industry producing agricultural crops, to
subgroups of industries producing certain agricultura l crops, or to only upland cotton. None of the
subsidies are available for any non-agricultural product.1266
7.1133 The European Communities asserts that a subsidy granted to an economic operator which
does not require any production of agricultural prod ucts, and in which the subsidy may be used for
any purpose, does not appear, to the European Communities, to be specific in the sense of
Article 2.1(a).1267 With respect to crop insurance subsid ies, the European Communities understands
that different crop insurance policies apply to diffe rent agricultural products and if such differences
had the consequence that some agricultural produc ts will receive a benefit in circumstances where
other products will receive no benefit, or only a smaller benefit, the difference would be clearly
"specific".1268
7.1134 New Zealand submits that crop insurance subsidies to upland cotton producers enhances
United States upland cotton production, as the paym ents act as a direct production stimulant by
keeping marginal upland cotton land in produc tion. According to New Zealand, Brazil has
demonstrated that the crop insurance programme is limited to certain enterprises and thus is not
generally available but is effectively available only in respect of crops.1269
7.1135 Chinese Taipei states that a further reason for exclud ing "non-specific subsidies" from being
prohibited should be that the subsidies are gene rally available and no competitive advantage is
provided to a particular sector or some specific sect ors. If there is competitive advantage provided to
one or more sectors with the effect of excluding other sectors from receiving the advantages, it should
be considered as specific.1270
(iii) Evaluation by the Panel
7.1136 Pursuant to Article 1.2 of the SCM Agreement: "A subsidy as defined in paragraph 1 shall be
subject to the provisions of Part II or shall be subj ect to the provisions of Part III or V only if such a
subsidy is specific in accordance with the provisions of Article 2." Therefore, in order to qualify as an
"actionable subsidy" for the purposes of Part III of the SCM Agreement , a measure must be a
"specific" subsidy, as defined in Article 2 of the SCM Agreement.
7.1137 Article 2 of the SCM Agreement provides:

1266 India's oral statement at the resumed session of the first substantive meeting, p. 1.
1267 European Communities' response to Panel third party Question No. 51.
1268 European Communities' oral statement at the resumed session of the first substantive meeting,
paras. 5-6.
1269 New Zealand's oral statement at the resumed session of the first substantive meeting, paras. 12-13.
1270 Chinese Taipei's response to Panel third party Question No. 51.

"Article 2
Specificity
2.1 In order to determine whether a s ubsidy, 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 en terprises") 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 li mits access to a subsidy to certain
enterprises, such subsidy shall be specific.
(b) Where the granting authority, or the legislation pursuant to which the
granting authority operates, establishes objective criteria or conditions
2
governing the eligibility for, and the am ount of, a subsidy, specificity shall
not exist, provided that the eligibility is automatic and that such criteria and
conditions are strictly adhered to. The criteria or conditions must be clearly
spelled out in law, regulation, or other official document, so as to be capable
of verification.
(c) If, notwithstanding any appearance 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 a subsidy programme by a limited
number of certain enterprises, predomin ant use by certain enterprises, the
granting of disproportionately large amounts of subsidy to certain enterprises,
and the manner in which discretion has been exercised by the granting
authority in the decision to grant a subsidy.
3 In applying this subparagraph,
account shall be taken of the extent of diversification of economic activities
within the jurisdiction of the granting authority, as well as of the length of
time during which the subsidy programme has been in operation.
2.2 A subsidy which is limited to certain enterprises located within a designated
geographical region within the jurisdiction of the granting authority shall be specific.
It is understood that the setting or change of generally applicable tax rates by all
levels of government entitled to do so shall not be deemed to be a specific subsidy for
the purposes of this Agreement.
2.3 Any subsidy falling under the provisions of Article 3 shall be deemed to be
specific.
2.4 Any determination of specificity under the provisions of this Article shall be
clearly substantiated on the basis of positive evidence."
Article 2 of the SCM Agreement . Pursuant to Article 2.1(a) of the SCM Agreement , "[w]here 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." Pursuant to
Article 2(c), other factors (such as the use of a subsidy programme by a limited number of certain
enterprises or predominant use by certain enterprises) may be considered where there is an appearance
of non-specificity.
7.1139 According to the text of Article 2 of the SCM Agreement , a subsidy is "specific" if it is
specific to an enterprise or industry or group of enterprises or industries (referred to in the SCM
Agreement as "certain enterprises") within the jurisdicti on of the granting authority. This is one way
in which the SCM Agreement serves to define requirements as to the "recipients" of the benefit
bestowed by a subsidy. 1271 Beyond setting out this rather general principle, Article 2 of the SCM
Agreement does not speak with precision about when "specificity" may be found.
7.1140 Looking more closely at the textual terms used in the chapeau of Article 2 of the SCM
Agreement, the term "industry" may be defined as "a par ticular form or branch of productive labour; a
trade; a manufacture". 1272 "Specificity" extends to a group of industries because the words "certain
enterprise" are defined broadly in the opening terms of Article 2.1, as an enterprise or industry or
group of enterprises or industries.
7.1141 The provision does not offer any technical defi nition or additional, detailed indication about
how broadly or narrowly we are to classify an "in dustry". Nor is it necessary for the purposes of this
dispute to develop any fixed definition of the scope of an "industry" within the meaning of the
chapeau of Article 2.
7.1142 We nevertheless believe that an industry, or group of "industries", may be generally referred
to by the type of products they produce.1273 To us, the concept of an "industry" relates to producers of
certain products. The breadth of this concept of "industry" may depend on several factors in a given
case. At some point that is not made precise in the text of the agreement, and which may modulate
according to the particular circumstances of a given case, a subsidy would cease to be specific
because it is sufficiently broadly available through out an economy as not to benefit a particular
limited group of producers of certain products. The plain words of Article 2.1 indicate that specificity
is a general concept, and the breadth or narro wness of specificity is not susceptible to rigid
quantitative definition. Whether a subsidy is specific can only be assessed on a case-by-case basis.
7.1143 We see merit in the shared view of the parties th at the concept of "specificity" in Article 2 of
the SCM Agreement serves to acknowledge that some subsidi es are broadly available and widely used
throughout an economy and are therefore not subjec t to the Agreement's subsidy disciplines. The
footnote to Article 2.1 defines the nature of "obj ective criteria or conditions" which, if used to
determine eligibility, would preclude an affirmative conclusion of specificity. Such criteria are
"neutral, which do not favour certain enterprises ove r others, and which are economic in nature and
horizontal in application, such as number of employees or size of enterprise."

1271 See e.g., Appellate Body Report, US – Countervailing Measures on Certain EC Products ,
paras. 112-113.
1272 The New Shorter Oxford English Dictionary, (1993).
1273 See Panel Report, US – Softwood Lumber IV, para. 7.120.

7.1144 Furthermore, the concept of specificity in Article 2 of the SCM Agreement is germane to the
disciplines imposed by the SCM Agreement. The SCM Agreement is an agreement on trade in goods,
in Annex 1A of the WTO Agreement. By its own terms, subject to considerations reflected in the text
of some of its provisions, it applies in respect of all goods. The concept of specificity must be
considered within the legal framework and frame of reference of that agreement as a whole.
1274
7.1145 We do not understand that there is a dispute be tween the parties that many of the challenged
subsidies – i.e. user marketing (Step 2) payments to dom estic users and exporters; marketing loan
programme payments; PFC payments; MLA payments ; DP payments; CCP payments; and cottonseed
payments – are "specific" within the meaning of Article 2 of the SCM Agreement.
7.1146 In any event, a textual analysis of "the legi slation pursuant to which the granting authority
operates", to discern whether or not it "explicitly li mits access to a subsidy to certain enterprises"
leads us to conclude that such subsidies are "specific" within the meaning of Article 2.1(a).
7.1147 Certain of the measures at issue were or are av ailable specifically in respect of upland cotton:
user marketing (Step 2) payments depend on the domestic use or export of upland cotton. Other
products or industries are not eligible for the subsid y. Cottonseed payments went to first handlers,
while also, to some extent, benefiting producers of up land cotton. We believe that a subsidy that is
limited to a small proportion of industries, such as those producing one or two individual United
States products would be limited and thus "speci fic" within the meaning of Article 2 of the SCM
Agreement. These subsidies are "specific" as they are not even available in respect of a number of
commodities.
7.1148 Other measures before us pertain to a restricted number of agricultural products, but are not
widely or generally available in respect of all agri cultural production, let alone the entire universe of
United States production of goods. These measur es include the marketing loan programme
payments.
1275 They also include the measures available in respect of upland cotton as part of a
restricted basket of agricultural commodities. Th ese are the four types of domestic support which
permit production flexibility (PFC, MLA, DP and CCP payments) that were or are provided in respect
of certain agricultural production in a base period which satisfies certain eligibility criteria. These
criteria have the effect of limiting eligibility to a subset of basic agricultural products, including
upland cotton or certain other programme crops. We therefore find that these subsidies are "specific"
within the meaning of Article 2. The fact that some of the subsidies go to farmers who may produce
different commodities, or, in theory, may not pr oduce a given commodity does not mean, by some
process of reverse reasoning, that the specificity that is apparent from the face of the grant instrument
no longer exists.
7.1149 The United States disagrees with Brazil's alle gation that crop insurance subsidies are
"specific".
7.1150 Crop insurance subsidies are, generally, availabl e for most crops but they are not generally
available in respect of the entir e agricultural sector in all areas.
1276 Each insurance plan is available

1274 There is no analogous concept of specificity in, for example, the Agreement on Agriculture.
1275 Section 1202 of the FSRI Act of 2002 identifies 17 "loan commodities"; Section 131 of the FAIR
Act of 1996 identified several commodities, including upland cotton. The statute and regulations implementing
the marketing loan programme set out specific provisions regarding upland cotton. See supra, Section VII:D.
1276 Exhibit BRA-30 (Section 518 of the Federal Crop Insurance Act) contains a list of the "agricultural
commodities" covered by insurance policies that are subsidized under the Federal Crop Insurance Act. The text
of this legislative instrument indicates that the term "agricultural commodity" includes, inter alia, cotton and
other United States crops. Livestock (while not expressly enumerated) would fall under the blanket reference to
"any other agricultural commodity". The fact that the definition expressly excludes "stored grain" supports this,
in that here is no analogous exclusion for livestock). We note that, even assuming arguendo that the text of the
granting instrument shows any appearance of non-specifi city, record evidence indicat es that there are pilot

for a defined list of crops to which th e FCIC determines that it is adapted. 1277 The proportion of the
premium borne by the FCIC is set out in each plan. The major plan type (actual production history) is
available for approximately 100 agricultural co mmodities, and specifies upland cotton as one of
them.1278 The other four plan types (group risk, cr op revenue coverage, income protection and
revenue assurance) are available only for a limited number of eight commodities or less and they each
specify upland cotton as one of them.1279 Certain sample policy provisions specify "cotton".1280 There
are no subsidized crop insurance policies on the record available to all agricultural producers. They
are therefore, in fact, not even generally availa ble to the industry which can be categorized as the
agricultural industry.
7.1151 In our view, the industry represented by a portion of United States agricultural production that
is growing and producing certain agricultural crops (and certain livestock in certain regions under
restricted conditions) is a sufficiently discrete seg ment of the United States economy in order to
qualify as "specific" within the meaning of Article 2 of the SCM Agreement.
7.1152 As a factual matter, we have found that the crop insurance subsidy is not universally available
for all agricultural production. Rather, it is genera lly limited to certain "crops", it differentiates
among such crops and it is only available in certa in regional "pilot programmes" in respect of
livestock. The facts of this case therefore do not re quire us to address the United States argument that
the crop insurance subsidy is generally available to the United States agricultural sector as a whole,
and thus, according to the United States, would not be specific within the meaning of Article 2.
7.1153 Finally, we address the "specificity" of user marketing (Step 2) payments to domestic users
and exporters under Article 2.3 of the SCM Agreement . Pursuant to Article 2.3 of the SCM
Agreement: "Any subsidy falling under the provisions of Ar ticle 3 shall be deemed to be specific."
By virtue of this provision, a subsidy falling wi thin the provisions of Article 3 (i.e. a subsidy
contingent upon export performance within the meaning of Article 3.1(a) of the SCM Agreement or a
subsidy contingent upon the use of domestic over imported goods within the meaning of
Article 3.1(b) of the SCM Agreement) is "deemed to be specific" for the purposes of Part I of the SCM
Agreement. We recall our findings that user marketi ng (Step 2) payments to domestic users and
exporters under section 1207(a) of the FSRI Act of 2002 are prohibited subsidies under Articles 3.1(a)
and (b) of the SCM Agreement.1281 As we have found that user marketing (Step 2) payments to
domestic users and exporters unde r section 1207(a) of the FSRI Act of 2002 "fall within the
provisions of Article 3", we consequently find that these are "specific" subsidies within the meaning
of Article 2.3 of the SCM Agreement. Furthermore, because of the substantial similarities between
user marketing (Step 2) payments to domestic users and exporters under section 1207(a) of the FSRI
Act of 2002 and under secti on 136 of the FAIR Act of 1996, we find that the latter are also specific
within the meaning of Article 2.3 of the SCM Agreement.
7.1154 For these reasons, we conclude that all of the subsidies at issue – i.e. user marketing (Step 2)
payments to domestic users and exporters; marketing loan prog ramme payments; PFC payments;
MLA payments; DP payments; CCP payments; crop insurance payments and cottonseed payments –
are "specific" within the meaning of Article(s) 2.1(a) and/or 2.3 of the SCM Agreement.

programmes for livestock – AGR and "AGR-lite" in cer tain regions – but that these programmes are not
universally available in respect of all livestock within the United States. See, for example, Exhibits BRA-174
through -176, -271 and -272.
1277 See, for example, Exhibit BRA-175 concerning USDA FCIC "Cotton Crop Provisions".
1278 See USDA Risk Management Agency lists of crops covered under the 2002 and 2003 crop years
crop insurance programs, reproduced in Exhibits BRA-62 and BRA-57, respectively; Brazil's rebuttal
submission, para. 55, and United States' 27 August comments, footnote 48.
1279 See also supra, para. 7.517.
1280 See "Income Protection – Cotton Crop Provisions" USDA FCIC, 2000-321 and "Cotton Crop
Provisions" USDA FCIC, 99-021, reproduced in Exhibits BRA-174 and BRA-175.
1281 Sections VII:E and F.

7.1155 Having found that the measures at issue constitu te specific subsidies within the meaning of
Articles 1.1 and 1.2 of the SCM Agreement , we continue our examination of Brazil's claims under
Articles 5(c) and 6.3(c) in Part III of the SCM Agreement.
(d) Panel's approach to serious prejudice clai ms under Articles 5(c) and 6.3(c) of the SCM
Agreement
(i) Relevant legal provisions
7.1156 Article 5 of the SCM Agreement, entitled "Adverse effects" states, in part:
"No Member should cause, through the use of any subsidy referred to in paragraphs 1
and 2 of Article 1, adverse effects to the interests of other Members, i.e.:
(a) injury to the domestic industry of another Member
11;
(b) nullification or impairment of benefits accruing directly or indirectly to other
Members under GATT 1994 in particular the benefits of concessions bound under
Article II of GATT 1994
12;
(c) serious prejudice to the interests of another Member. 13"
Part V.
12 The term "nullification or impairment" is used in this Agreement in the same sense as it is
used in the relevant provisions of GATT 19 94, and the existence of such nullification or
impairment shall be established in accordance with the practice of application of these
provisions.
13 The term "serious prejudice to the interests of another Member" is used in this Agreement in
the same sense as it is used in paragraph 1 of Article XVI of GATT 1994, and includes threat
of serious prejudice.
7.1157 Article 6.3(c) of the SCM Agreement provides:
"Serious prejudice in the sense of paragraph (c) of Article 5 may arise in any case
where one or several of the following apply:

(c) the effect of the subsidy is a signi ficant price undercutting by the subsidized
product as compared with the price of a like product of another Member in the same
market or significant price suppression, price depression or lost sales in the same
market;"
7.1158 Brazil submits that the United States subsidies at issue have caused serious prejudice to its
interests within the meaning of Article 5(c) in the form of "significant price suppression" under
Article 6.3(c) of the SCM Agreement . The United States disagrees. Before examining specific
elements of Brazil's claims, we outline our treatment of certain arguments put to us by the parties, as
well as the considerations that will guide our analysis of these claims.

(ii) Panel's treatment of certain arguments of the parties
7.1159 We recall that the United States reproaches Braz il for not identifying the "subsidized product
for each of the types of subsidies from which it claims serious prejudice".1282
7.1160 Specifically, the United States argues that Brazil has failed to properly take account of, or
"expense", the duration of the "benefit" associated wi th certain annually recurring subsidies and has,
furthermore, not demonstrated "how much" or "to what extent" United States cotton exports are
subsidized.
7.1161 According to the United States, because paymen ts which permit planting flexibility are not
"tied to the production or sale" of upland cotton, as suggested by Annex IV of the SCM Agreement,
they must be allocated by Brazil across the total value of production of each recipient. 1283 The United
States asserts that Brazil has failed to demonstrate wh ich product benefits from the subsidy. In order
to perform the calculation, under the Annex IV guidelines, one must know what the subsidized
product is. The United States asserts that, in the c ontext of this dispute, a subsidy provided to a
recipient who does not produce upland cotton cannot be said to provide a benefit to upland cotton and
cannot be regarded as having one of the effects de scribed in Article 6.3 insofar as upland cotton is
concerned.1284
7.1162 The United States further argues that paragraph 7 of Annex IV of the SCM Agreement
indicates that the drafters took it for granted that th e benefits of certain subsidies should be allocated
to future production. According to the Unite d States, Brazil cannot have it both ways: it cannot
expense the entire value of payment to a particular crop year for which the payment was received but
also claim that the subsidy continues to exist in a later year in which new recurring subsidies are
made.1285
7.1163 The United States submits that the Panel must utilize some methodology to determine the
benefit to upland cotton from a subsidy not tied to production of upland cotton and considers that
Annex IV continues to provide useful context for the necessary task of identifying the products that
benefit from a subsidy not tied to the production or sale of a given product.1286
7.1164 Brazil states that the only legal basis for the a lleged "allocation" requirement of "untied"
subsidies cited by the United States is Annex IV of the SCM Agreement which, like Article 6.1(a), is
now defunct. 1287 Brazil is of the view that the United States continues to try and transform this
dispute into a countervailing duty investigati on based on the now-defunct Annex IV of the SCM
Agreement.
7.1165 Brazil emphasizes that 100 per cent of the four types of payments which permit planting
flexibility (i.e., PFC, DP, MLA and CCP payments) are paid to the bank accounts of current upland
cotton producers, conferring for each a “benefit” to upland cotton producers. Brazil further asserts
that, under existing countervailing duty procedures, 100 per cent of the contract payments would be
allocated across the production value of the producer s because the total amount of benefits to the
company producing the subsidized goods would firs t be calculated. According to Brazil, no
deductions are made depending on how the s ubsidy is used by the recipients (i.e . to pay rents). Only

1282 United States' oral statement at the resumed session of the first substantive meeting, para. 9.
1283 United States' response to Panel Question No. 125 (9), para. 24.
1284 United States' further rebuttal submission, paras. 13-14.
1285 United States' oral statement at the second substantive meeting, para. 32.
1286 United States' response to Panel Question No. 231.
1287 Brazil's further rebuttal submission, paras. 103-104.

in case the subsidy is not de facto tied to the production of the subsidized product, is there in a second
step an allocation of the benefit (100 per cent) over the total value of the company’s production.
1288
7.1166 The Panel sees a common thread in these arguments of the United States: the nature of the
examination that we are to conduct in examining Brazil's claims under Part III of the SCM Agreement.
In particular, certain of these arguments by the United States raise the question of the appropriateness
of applying certain relatively precise quantitativ e and/or "countervailing duty" methodologies and
concepts, found in Part V of (or elsewhere in) the SCM Agreement , when conducting a "serious
prejudice" analysis under Part III of the SCM Agreement.
7.1167 On the basis of the text of Part III, and for th e reasons that follow, we are of the view that,
while they may provide contextual – and general conceptual – guidance, the more precise quantitative
concepts and methodologies found in Part V of the SCM Agreement are not directly applicable in our
examination of Brazil's actionable subsidy claims under Part III of the SCM Agreement.1289
7.1168 Governed by the provisions of Part V of the SCM Agreement, a unilateral countervailing duty
investigation by a Member aims to establish wh ether imports of a subsidized product are causing
material injury to a given Member's domestic i ndustry and the level of any permissible countervailing
duty. Accordingly, Articles 10-23 of the SCM Agreement set forth obligations relating to the
imposition of countervailing duties. In particular, Article 10 of the SCM Agreement provides that:
"Members shall take all necessary step s to ensure that the imposition of a
countervailing duty 36 on any product of the territory of any Member imported into the
territory of another Member is in accord ance with the provisions of Article VI of
GATT 1994 and the terms of this Agreemen t. Countervailing duties may only be
imposed pursuant to investigations initi ated and conducted in accordance with the
provisions of this Agreement and the Ag reement on Agriculture." (footnotes omitted
in part)
GATT 1994.

According to Article 32.1 of the SCM Agreement:

"[n]o specific action against a subsidy of another Member can be taken except in
accordance with the provisions of GATT 1994, as interpreted by this Agreement."
(footnote omitted)
Article VI:3 of the GATT 1994 reads:

"[n]o countervailing duty shall be levied on any product of the territory of a Member
imported into the territory of another Me mber in excess of an amount equal to the
estimated bounty or subsidy determined to have been granted, directly or indirectly,
on the manufacture, production or export of such product in the country of origin or
exportation… The term "countervailing duty" shall be understood to mean a special

1288 Brazil's 28 January 2004 comments on United States' response to Panel Question No. 242, paras.
197-198.
1289 By this, we do not mean to say that we entirely disagree that the general order of magnitude of a
subsidy may be a relevant consideration in a serious prejudice analysis in a pa rticular case (where such
information is probative and readily available).

duty levied for the purpose of offsetting any bounty or subsidy bestowed, directly, or
indirectly, upon the manufacture, production or export or any merchandise."
7.1169 By contrast, Article XVI of the GATT 1994 contains certain rights and obligations concerning
subsidies, as do Parts II and III of the SCM Agreement. Under the multilateral "actionable subsidies"
disciplines in Part III of the SCM Agreement, a WTO panel established by the DSB assesses the extent
to which a Member's subsidy causes "adverse effects" to the "interests" of other Members.
1290
Pursuant to Article 5(c), one form of adverse effect s is "serious prejudice to the interests of another
Member". Pursuant to Article 6.3(c), such serious prejudice may arise where the effect of the subsidy
is significant price suppression in the same market.
7.1170 The remedies available in a Me mber's unilateral countervailing duty action under Part V of
the SCM Agreement also contrast sharply with the re medies available for successful multilateral
actions under Part III of the SCM Agreement.
1291 Footnote 35 of the SCM Agreement sets out rules
pertaining to the relationship between these two sets of obligations and remedies. The role of the
WTO dispute settlement system is different than the role of a national investigating authority
imposing countervailing duties: where a claim u nder Part III prevails, the subsidizing Member
concerned is obligated to take appropriate steps to remove the adverse effects or withdraw the
subsidy.
7.1171 Other aspects of the current text of the provisions of Part III of the SCM Agreement further
support the view that the focus of an "adverse effe cts"/"serious prejudice" analysis does not call for
any precise quantification of the subsidy at issue.
7.1172 Articles 7.2-7.10 of the SCM Agreement are "special or additional rules and procedures"
identified in Appendix 2 to the DSU. Entitled "Remedies", Article 7 sets out procedures and remedies

1290 Similarly, under the multilateral "prohibited subsidies" disciplines in Part II of the Agreement, a
panel assesses whether or not a Member is granting or maintaining prohibited subsidies within the meaning of
Article 3 of the Agreement.
1291 In the unilateral trade remedy context, Article 19.1 provides:

"If, after reasonable efforts have been made to complete consultations, a Member makes a
final determination of the existence and amount of the subsidy and that, through the effects of
the subsidy, the subsidized imports are causing injury, it may impose a countervailing duty in
accordance with the provisions of this Article unless the subsidy or subsidies are withdrawn."

By contrast, Articles 7.8-7.10 outline the multilateral remedies where an actionable subsidies claim
prevails:

"7.8 Where a panel report or an Appellate Body report is adopted in which it is
determined that any subsidy has resulted in adve rse effects to the interests of another Member
within the meaning of Article 5, the Member gr anting or maintaining such subsidy shall take
appropriate steps to remove the adverse effects or shall withdraw the subsidy.

7.9 In the event the Member has not taken appropriate steps to remove the adverse
effects of the subsidy or withdraw the subsidy within six months from the date when the DSB
adopts the panel report or the Appellate Body report, and in the absence of agreement on
compensation, the DSB shall grant authorization to the complaining Member to take
countermeasures, commensurate with the degree and nature of the adverse effects determined
to exist, unless the DSB decides by consensus to reject the request.

7.10 In the event that a party to the dispute requests arbitration under paragraph 6 of
Article 22 of the DSU, the arbitrator sha ll determine whether the countermeasures are
commensurate with the degree and nature of the adverse effects determined to exist."

pertaining to dispute settlement proceedings involvin g actionable subsidy claims. Article 7.2 requires
that a request for consultations in an actionable subsidies dispute include a statement of available
evidence with regard to (a) "the existence and nature of the subsidy in question; and (b) ...the serious
prejudice caused to the interests of the member requesting consultations."
1292 (emphasis added)
7.1173 This provision does not explicitly refer to the "magnitude" or "amount" or "value" of the
subsidy, let alone to any precise quantitative met hodologies pertaining to its breakdown or allocation.
Rather, while it may not preclude consideration of th e general order of magnitude of a subsidy where
this information may be relevant and readily available, we understand it to call for a qualitative and, to
some extent, quantitative analysis of the existence an d nature of the subsidy and the serious prejudice
caused.1293 Allocating absolutely precise proportions of the subsidy to the product concerned, or
trying to trace with precision where each subsidy dollar may be spent by a recipient, is not a necessary
exercise on the part of the Panel. Broader considerations are at play in a serious prejudice analysis
than those involved in a countervailing duty sense.
7.1174 If a request for consultations in an actionable subsidies case must set out a statement of
available evidence with regard to "the existence a nd nature of the subsidy in question", and need not
focus on its amount or value (let alone any more pr ecise quantitative concepts or methodologies) then
the focus of the claims in an actionable subsidi es dispute may also logically be the existence and
nature of the subsidy in question.
1294
7.1175 Pursuant to Article 7.3 of the SCM Agreement: "The purpose of the consultations shall be to
clarify the facts of the situation and to arrive at a mutua lly agreed solution." (emphasis added) These
facts would necessarily pertain to the subject of th e request for consultations, including the statement
of available evidence. They would thus logically pe rtain to the existence and nature of the subsidy.

1292 Footnote 19 to the SCM Agreement states:

"In the event that the request relates to a subsidy deemed to result in serious prejudice in terms
of paragraph 1 of Article 6, the available evid ence of serious prejudice may be limited to the
available evidence as to whether the conditions of paragraph 1 of Article 6 have been met or
not."

Article 6.1 of the SCM Agreement is no longer applicable. It may nevertheless still provide relevant
guidance for understanding the original architecture of the Agreement. The Pa nel is of the view that the Report
of the Arbitrator, US – FSC, note 56 is relevant here. As that Arbitration noted, although Article 6.1 has lapsed,
it is nevertheless "helpful ... in understanding the over all architecture of the Agr eement with respect to the
different types of subsidies it sought and seeks to addr ess". We have similarly referred to this treatment supra,
Section VII:E. Article 6.1(a) stated that "Serious prejudice in the sense of paragraph (c) of Article 5 shall be
deemed to exist in the case of: (a) the total ad valorem subsidization of a product exceeding 5 per cent" (footnote
omitted). The particular explicit reference to the special requirements in such a case, which dealt with
calculating the total ad valorem subsidization of a product pursuant to the provisions of Annex IV, supports our
view that in other cases, not involving Article 6.1(a), there is no requirement to quantify the amount or value of
subsidization at this phase of the dispute settlement proceedings.
1293 The same is true for the SCM Agreement multilateral disciplines on prohibited subsidies.
Article 4.2 of the SCM Agreement similarly requires that a request for consultations in a prohibited subsidies
dispute include a statement of available evidence with regard to the existence and nature of the subsidy (and not
its magnitude or amount).
1294 We note that Annex V of the SCM Agreement contains "Procedures for developing information
concerning serious prejudice". Paragraph 2 of Annex V envisages that the DSB may "initiate the procedure to
obtain such information from the government of the subsid izing Member as necessary to establish the existence
and amount of subsidization...". We see this as in indication that information relating to the general order of
magnitude of the subsidy could be relevant in a given case. We recall, however, that the Annex V procedures
also related to the establishment of the presumption of serious prejudice in Article 6.1 and Annex IV (based
upon an ad valorem rate of subsidization) during the period of application of that provision. See supra, footnote
1292.

We see no requirement in Article 7.3 that the consul tations clarify the facts of the situation, including
facts relating to the precise quantification of the amount of the subsidy.1295
7.1176 This contrasts with the text of Part V of the SCM Agreement, dealing with countervailing duty
investigations. There, Article 19.4 provides that "no countervailing duty shall be levied on any import
in excess of the amount of the subsidy found to exist, calculated in terms of subsidization per unit of
the subsidized and exported product." Therefore, the general rationale of a unilateral countervailing
duty investigation is to determine whether or not a c ountervailable subsidy exists and, if so, to ensure
that any countervailing duty levied on any import is not in excess of the amount of the subsidy found
to exist, calculated in terms of subsidization per unit of the subsidized and exported product.
Logically, should a Member make an affirmative de termination that a counter vailable subsidy exists,
these provisions in Part V necessitate calculation of the amount of the subsidy before a countervailing
duty may be imposed. Moreover, they require the ca lculation of that amount to be performed in a
certain way: "in terms of subsidization per unit of the subsidized and exported product".
7.1177 In view of the contrast in the text, context, legal nature and rationale of the provisions in
Part III of the SCM Agreement relating to a multilateral assess ment as to whether a Member is
causing, through the use of any subsidy, "adverse effects" in the form of "serious prejudice to the
interests of another Member" and Part V of the Ag reement relating to obligations of a Member in
conducting a unilateral countervailing duty investiga tions, we decline to transpose directly the
quantitative focus and more detailed methodological ob ligations of Part V into the provisions of
Part III of the SCM Agreement.1296
7.1178 We again recall the particular United States arguments we address here.
7.1179 First, the United States argues that we are under an obligation to precisely quantify the
subsidies at issue in our serious pr ejudice analysis under Part III of the SCM Agreement . For the
reasons we have given, we see no textual basis for this argument. If the text of Part III of the
agreement imposes no such general requirement to quan tify the overall amount of the subsidy, then it
also, logically, cannot impose any more precise conceptual or methodological requirements. Thus, we
find no textual support in the serious prejudice pr ovisions in Part III for the United States argument
that annually recurring subsidies must be "expensed" to one year alone, so that the "benefit" of the
measure does not survive past that year. The con cept of "benefit" is a definitional element of a
subsidy pursuant to Article 1.1(a)(2) of the SCM Agreement.1297 Inasmuch as we are not required to
calculate an amount of "benefit", we cannot logica lly be required to conduct any sort of precise
"expensing" of the "benefit". 1298 Moreover, we see no textual basis for reading the different terms –

1295 See Appellate Body Reports: US – Countervailing Measures on Certain EC Products and US –
Corrosion-Resistant Steel Sunset Review . The presence in the text of the same SCM Agreement of specific
provisions requiring quantitative precision demonstrates to us that negotiators were well aware of how to craft
such provisions, and to indicate that certain obligations apply in serious prejudice cases. They could, for
example, have inserted clear introductory language or cross-references to Part V of the SCM Agreement, as they
did, for example, in footnote 11 of the SCM Agreement , indicating that "The term 'injury to the domestic
industry' is used [in Article 5(a)] in the same sense as it is used in Part V." However, they have not done so in
Article 5(c) relating to serious prejudice. The lack of any explicit textual indication to this effect supports a
conclusion that obligations such as those in Part V of the Agreement do not apply in a serious prejudice
examination under Part III of the Agreement.
1296 This does not mean, however, that the concept and definition of a "specific" "subsidy" – set out in
Articles 1 and 2 of the SCM Agreement – differs under Part III and Part V. The provisions of Articles 1 and 2
define those subsidies that are susceptible to remedies under the other parts of the Agreement.
1297 We are aware that provisions in Part V of the Agreement, e.g. Article 14, speak to the identification
and quantification of the benefit in ce rtain circumstances and that this gu idance has been deemed relevant in
understanding of benefit as that term is used in Article 1. See Appellate Body Report, US – Countervailing
Measures on Certain EC Products, paras. 108, 110.
1298 This is not to say that we do not recognize that the "expensing" principle was devised as a "rule of
thumb" and can be quite useful in certain circumstances in considering the effects of a subsidy. We do not

"benefit" and "adverse effects"/"serious prejudice" – synonymously. Were we to discern an identity
between the concept of "benefit" to a recipient and the concept of "adverse effects" to another
Member's interests, we would effectively reduce th e provisions of Part III to redundancy. As a treaty
interpreter, the Panel is precluded from doing so.
1299
7.1180 Second, the United States argues that Brazil must establish the precise extent to which United
States subsidies provided in respect of "upland cotton" production were actually "passed through" to
the exporter, after having been processed and sold, before being traded.1300 We have already cited the
provisions governing the imposition of a countervailing duty in Part V of the SCM Agreement, and in
Article VI of the GATT 1994 . 1301 In addressing these provisions, the Appellate Body has recently
observed:
"... GATT/WTO dispute settlement practice is consistent with and confirms our
interpretation that, where countervailing duties are used to offset subsidies granted to
producers of input products, while the duties are to be imposed on processed
products, and where input producers and downstream processors operate at arm's
length, the investigating authority must estab lish that the benefit conferred by a
financial contribution directly on input producers is passed through, at least in part, to
producers of the processed product subject to the investigation. Therefore, we agree
with the Panel that:
'If it is not demonstrated that there has been such a pass-through of
subsidies from the subsidy recipient to the producer or exporter of the
product, then it cannot be said that subsidization in respect of that
product, in the sense of Article 10, footnote 36, and Article VI:3 of
GATT 1994, has been found.'"
 1302 (footnote omitted)
7.1181 These principles apply in the context of a countervailing duty investigation governed by
Part V of the Agreement. As they also relate to the definitional elements of a subsidy – i.e. a financial
contribution conferring a benefit – in Article 1 of the Agreement, we consider that they are also of
relevance to our examination, to the extent it con cerns the "subsidized product" under Article 6.3(c).
However, again, the textual distinctions between Parts III and V lead us to believe that while the
countervailing "pass-through" principles may well be rele vant, they are not directly applicable to our
examination of serious prejudice under Articles 5(c) and 6.3(c) of the SCM Agreement.
7.1182 Third, the United States argues that certain subs idies that are allegedly not directly tied to
current production of upland cotton would need to be allocated over total production on a recipient's
farm.

disagree with the general proposition underlying such "expensing" rules, which we understand to be that, with
the passage of time, a subsidy's effects may diminish. For example, a subsidy granted 9 or 10 years ago would
indubitably be less likely to affect producers decisions now than it did 8 years ago. However, we see no basis
for any particular precision concerning "expensing" in the text of Part III.
1299 In order to find a violation of the actionable subsidies provisions in Part III of the SCM Agreement,
it would suffice simply to establish the existence of a subs idy – i.e. a financial contribution conferring a benefit
(and possibly that the subsidy was specific under Article 2) in order to establish that such a subsidy necessarily
has adverse effects. This cannot be so. A fundamen tal tenet of the subsidy disciplines enshrined in the SCM
Agreement is that Members are permitted to grant or maintain specific subsidies to the extent that they do not
cause adverse effects within the m eaning of Articles 5 and 6 of the SCM Agreement. Logically, there must be
some specific subsidies that do not cause such adverse ef fects. Otherwise, there would be no need for the
drafters to have crafted any of the criteria and conditions specified in Articles 5 and 6 of the SCM Agreement.
1300 See also infra, our discussion of like product and subsidized product.
1301 See supra, para. 7.1168, citing Articles 10 and 32.1 of the SCM Agreement and Article VI
of the GATT 1994.
1302 Appellate Body Report, US – Softwood Lumber IV, para. 146.

7.1183 We recall that Article 6.1(a) of the SCM Agreement stated:
"6.1 Serious prejudice in the sense of para graph (c) of Article 5 shall be deemed to
exist in the case of:
(a) the total ad valorem subsidization * of a product exceeding 5 per cent; ..."
* The total ad valorem subsidization sha ll be calculated in accordance with the
provisions of Annex IV. (subsequent footnote omitted)
7.1184 Annex IV of the SCM Agreement was entitled "Calculation of the Total Ad Valorem
Subsidization (paragraph 1(a) of Article 6)". Purs uant to its paragraph 1, "[a]ny calculation of the
amount of a subsidy shall be done in terms of the cost to the granting government." Pursuant to its
paragraph 2, in general, "[in] de termining whether the overall rate of subsidization exceeds 5 per cent
of the value of the product, the value of the produc t shall be calculated as the total value of the
recipient firm's sales in the most recent 12-month pe riod, for which sales data is available, preceding
the period in which the subsidy is granted." (footnotes omitted) Paragraph 3 stated:
"3. Where the subsidy is tied to the production or sale of a given product, the
value of the product shall be calculated as th e total value of the recipient firm's sales
of that product in the most recent 12-month period, for which sales data is available,
preceding the period in which the subsidy is granted."
7.1185 These provisions ceased to apply at the end of 1999.
1303 Neither party to this dispute seeks to
apply them directly.
7.1186 We agree with the United States that these provisions may nevertheless provide relevant
contextual guidance for interpreting "serious prejudice" within the meaning of Articles 5(c) and 6.3 of
the SCM Agreement.1304 While we certainly do not dispute the widely held premise that subsidies to
producers relate generally to the products they make, there is nothing in the text of Part III of the SCM
Agreement that requires any particular precise calculations or the application of any particular
methodology concerning this element.1305
7.1187 The reference in Annex IV, paragr aph 3, to "tied to the production or sale" existed in order to
inform the calculation that would form the ba sis for the establishment of the presumption in
Article 6.1(a) that a 5 per cent subsidization rate causes serious prejudice. The text of Article 6.1(a)
clearly indicated that, in order for such a presump tion to be established, a specific calculation had to

1303 As already noted in footnote 1292, the Panel is of the view that the Report of the Arbitrator, US –
FSC, note 56 is relevant: As that Arbitration noted, although Articles 8 and 9 have lapsed, they are nevertheless
"helpful ... in understanding the overall Architecture of the Agreement with respect to the different types of
subsidies it sought and seeks to address". The Appellate Body referred to the text of Annex IV and its reference
to the "recipient firm" as one of multiple textual factors in the course of clarifying the meaning of "benefit" to
the recipient for the purposes of a countervailing duty investigation without explicitly discussing the
significance of it no longer applying. See Appellate Body Report, US – Countervailing Measures on Certain
EC Products, para. 112. We do not understand this reference by the Appellate Body as indicating that the text
of Article IV may still have an equivalent legal value as the current text of the Agreement.
1304 United States response to Panel Question No. 231. See e.g., United States' oral statement at the
resumed session of the first substantive meeting, para. 20.
1305As already mentioned (see supra, paras. 7.1169 ff), there is no textual analogue in Part III to the
countervailing duty provisions in Part V of the Agreement, and, in particular, Article 10 and footnote 36 of the
SCM Agreement or Article VI:3 of the GATT 1994, requiring any sort of precise allocation of subsidies. See
Appellate Body Report and Panel Report, US – Softwood Lumber IV , addressing pass-through in the
countervailing context.

be undertaken and special rules were designed to furt her inform the nature of the calculation that had
to be undertaken.
1306 Negotiators indicated their awareness that the creation of such a presumption
dependent upon the existence of a precise numerical benchmark would require guidance as to how the
numerical benchmark would be established. Among th e specifications that negotiators set out were
those in Annex IV, paragraph 3 (i.e. where a "subsid y [is] tied to the production or sale of a given
product," the amount of that subsidy would be compared only to the value of a firm's sales of that
product). Those specifications are, however, no longer applicable.
7.1188 Looking to the text of Article 6.1(a), it is cl ear to us that one way in which the negotiators
originally countenanced that a presumption of serious prejudice could be established was through the
calculation of a total ad valorem subsidization of a product exceeding 5 per cent. Article 6.2 tells us
that notwithstanding such a total ad valorem subsidization, serious prejudice shall not be found if the
subsidizing Member demonstrates that the subsidy in question has not resulted in any of the effects
enumerated in paragraph 3.
7.1189 The text of this provision clearly disti nguishes between the quantitative benchmark in
Article 6.1(a) and the other, more qualitative, el ements involved in discerning the effects of the
subsidy spelled out in Article 6.3. This clear demarcation between, on th e one hand, the quantitative
benchmark of subsidization and, on the other, the effects that may or may not accompany a subsidy
satisfying the quantitative level in Article 6.1(a), is at the crux of the analysis which takes place under
Article 6.3. At the very least, it is distinct, a nd different, from a quantitative analysis intended to
establish a percentage of total ad valorem subsidization. This confirms to us that it is not necessary to
establish such a rate of subsidization under Article 6.3 (although we are not precluding the possibility
that it might be relevant in a given case).
7.1190 The fact that Article 6.2 foresees that a subsidy with a certain total ad valorem subsidization
percentage may nevertheless not cause "serious prejudi ce" is, to us, consistent with the view that,
while the magnitude of a subsidy may be relevant in some cases where such information is probative
and readily available, the magnitude of a subsidy ma y not, in and of itself, be determinative of the
nature or extent of its effects. A massive (" inefficient") subsidy of a certain design may have
relatively miniscule effects, whereas a smaller s ubsidy of a different nature may have relatively
greater effects. Furthermore, the variable where the effects are manifest may differ.
(iii) Considerations guiding the Panel's analysis
7.1191 We consider it axiomatic that the nature of a given subsidy may play an important role in
determining its effects. We are well aware that the subsidies before us are of differing natures,
manners of operation and orders of magnitude. The effects flowing from certain of the subsidies

1306 In this respect, footnote 62 of the SCM Agreement indicates: "An understanding among Members
should be developed, as necessary, on matters which are not specified in this Annex or which need further
clarification for the purposes of paragraph 1(a) of Article 6." We note that, at its regular meeting in June 1995,
the SCM Committee established an "Informal Group of Experts" ("IGE") to examine matters which were not
specified in Annex IV to the Agreement or which needed further clarification for the purposes of paragraph 1 of
Article 6 and to report to the Committee such reco mmendations as the IGE considered could assist the
Committee in the development of an understanding among Members, as necessary, regarding such matters. At
the Committee's regular meeting in April 1998 (see G/SCM/M/16, paras. 68-82), the SCM Committee discussed
and took note of the report of the IGE in document G/SCM/W/415/Rev.1, and asked the IGE to continue to try
to resolve issues that remained un resolved. Subsequently, at its November 1999 meeting (see G/SCM/M/24,
paras. 14-19), the Committee discussed and took note of the IGE's supplementary report, in document
G/SCM/W/415/Rev. 2/Suppl. 1, on calculation issues related to Annex IV of the SCM Agreement. That report
indicates that: "The Group reached consensus on a recommendation regarding ad hoc loan guarantees. The
Group did not reach a consensus on any of the other issues discussed. Th e Group considers th at there are no
further issues on which consensus is likely to be reach ed, and therefore considers that it has completed its
mandate from the Committee."

certainly might, in isolation, be of a different nature and degree than those flowing from certain
others.
7.1192 We recall that the chapeau of Article 5 of the SCM Agreement states: "No Member should
cause, through the use of any subsidy referred to in paragraphs 1 and 2 of Article 1, adverse effects to
the interests of other Members, i.e. ...".(emphasis added) Article 5 refers to the adverse effects caused
through the use of any specific subsidy within the meaning of the SCM Agreement . Article 6.3(c)
requires an examination of "the effect of the s ubsidy" through a price phenomenon ("significant price
suppression") and refers to a "subsidized product". We do not see the Article 6.3(c) reference to "the
effect of the subsidy" (in the singular, rather than the plural) as meaning that a serious prejudice
analysis of price suppression must clinically isolate each individual subsidy and its effects.
1307 Rather,
these textual references to "any subsidy", "the subsid y" and the "subsidized product" in Articles 5(c)
and 6.3(c) suggest that while due attention must be paid to each subsidy at issue as it relates to the
subsidized product, a serious prejudice analysis may be integrated to the extent appropriate in light of
the facts and circumstances of a given case. 1308 In our view, these textual references to "any subsidy"
and "the effect of the subsidy" permit an integrat ed examination of effects of any subsidies with a
sufficient nexus with the subsidized product an d the particular effects-related variable under
examination. Thus, in our price suppression analys is under Article 6.3(c), we examine one effects-
related variable – prices – and one subsidized prod uct – upland cotton. To the extent a sufficient
nexus with these exists among the subsidies at is sue so that their effects manifest themselves
collectively, we believe that we may legitimately treat them as a "subsidy" and group them and their
effects together. We derive contextual support for this view from Article 6.1 and Annex IV 1309, which
referred to the concept of total ad valorem subsidization and envisaged that, "[i]n determining the
overall rate of subsidization in a given year, s ubsidies given under different programmes and by
different authorities in the territory of a Member shall be aggregated".
7.1193 Finally, the fact that, in this dispute, certain of the subsidies before us 1310 are also prohibited
subsidies does not lead us to change our view as to the nature of the serious prejudice analysis. We
note that there are different remedies available in respect of prohibited and actionable subsidies under

1307 Taken to an extreme, this could mean that se parate dispute settlement proceedings, or at least
separate claims, would need to be brought with respect to the seri ous prejudice caused by each and every
individual subsidy, even where these subsidies exist cont emporaneously and interact in concert in respect of a
single subsidized product to produce a single result in the form of a price phenomenon.
1308 We recall the approach of the panel in Panel Report, Indonesia-Autos, para. 14.206. In the context
of deciding to examine subsidies under an expired measure, that panel observed that it had before it "... a variety
of different subsidy measures provided pursuant to a single National Car programme". Under those
circumstances, the panel determined,

"...that it makes little sense to treat each one separately when analysing the existence of
serious prejudice. Rather, we must assess the 'effect of the subsidies' on the interests of
another Member to determine whether serious pr ejudice exists, not the effect of 'subsidy
programmes.' "

That panel was dealing with a different basket of measures, under a single programme. It was also
dealing with a different issue than the precise issue here before us (which involves questions not only of
temporal, but also substantive, interrelationships among the subsidies at issue). Furthermore, it was dealing
with different legal claims and arguments under Article 6. 3(c) and 5(c) (relating to price undercutting, rather
than price suppression). We do not understand that panel to suggest that the effects of all challenged subsidies
in existence more or less contemporaneously and with any connection whatsoever with a subsidized product
must be aggregated in a serious prejudice analysis. Ho wever, to the extent that it does suggest such an
approach, our approach here is not id entical and is tailored to the particul ar facts and circumstances of this
dispute and of the measures before us.
1309 As we have already stated, this provision has lapsed, but may still be relevant in indicating the
original architecture of the Agreement. See supra, footnote 1292.
1310 i.e. user marketing (Step 2) payments to domestic users and exporters.

Articles 4.7
1311 and 7.81312 of the SCM Agreement, respectively.1313 There is no indication in the text
of Article 5(c), or any other provision of the SCM Agreement , that a Member is precluded from
bringing both prohibited and actionable subsidy claims against the same measure, nor that a panel is
precluded from examining such claims or from ma king the recommendation foreseen in Article 4.7
and also making a finding that the same measure is causing adverse effects within the meaning of
Article 5 of the SCM Agreement, thereby triggering the operation of the remedy in Article 7.8.1314
7.1194 Consonant with this textual a nd contextual guidance, we will therefore undertake an analysis
focusing on the existence 1315 and nature of the subsidies in question by examining their structure,
design and operation with a view to discerning their effects. In this case, we also have readily
available to us information relating to the general order of magnitude of many of the subsidies at issue
(i.e. we have already established, in another context, elements relevant to the order of magnitude of
the subsidies) 1316 and we will take this into account as an element in determining whether or not
"significant price suppression" and/or "serious prejudice" exist. To the extent a sufficient nexus exists
between certain subsidies and any suppression of prices of the subsidized product, we aggregate these
subsidies and their effects. These guiding consid erations are relevant to several aspects of our
analysis, including our examination of: "subsidized product" 1317; the existence of "price suppression"
in the same market1318; whether the price suppression is "significant"; 1319 and the existence of a causal

1311 Article 4.7 of the SCM Agreement reads:

"4.7 If the measure in question is found to be a prohibited subsidy, the panel shall
recommend that the subsidizing Member withdraw the subsidy without delay. In this regard,
the panel shall specify in its recommendation the time-period within which the measure must
be withdrawn."

1312 Article 7.8 of the SCM Agreement reads:

"7.8 Where a panel report or an Appellate Body report is adopted in which it is
determined that any subsidy has resulted in adve rse effects to the interests of another Member
within the meaning of Article 5, the Member gr anting or maintaining such subsidy shall take
appropriate steps to remove the adverse effects or shall withdraw the subsidy."

1313 We recall our findings in Sections VII:E and F that the user marketing (Step 2) payments under
section 1207(a) of the FSRI Act of 2002 constitute proh ibited subsidies under Articles 3.1(a) and (b), and
Article 3.2, of the SCM Agreement. As a consequence, in respect of these prohibited subsidies, we are bound by
Article 4.7 of the DSU to "recommend that the subsidizing Member withdraw the subsidy without delay". See
infra, Section VIII.
1314 It is not unusual for a measure of a Member to be subject to multiple WTO obligations, which may
result in multiple findings of inconsistency with the covered agreements. Depending upon how a Member opts
to implement the rulings and recommendations of the DS B in a particular dispute, sufficient implementation
may be achieved through one integrated act . That is, in a situation similar to the one before us, withdrawal of a
prohibited subsidy within the meaning of Article 4.7 of the SCM Agreement may also be sufficient to remove its
adverse effects within the meaning of Article 7.8 of the SCM Agreement. However, it may be, for example, that
withdrawal of the prohibited contingency may not wholly achieve removal of adverse effects or that removal of
the adverse effects may not equate with withdrawal of the prohibited subsidy. This would, of course, depend
upon the particular facts and circumstances surrounding the implementation.
1315 Which, in any event, the United States does not dispute.
1316 See supra, Section VII:D and footnote 895. We underline that our view relating to the order of
magnitude of a subsidy is specific to the circumstances we face in this particular case, and that our view might
very well be different in another case where even this extent of information may either not be relevant or not be
available. As we have already indicated, we see no re quirement precisely to quantify the subsidy in a serious
prejudice analysis under Part III of the SCM Agreement.
1317 See infra, paras. 7.1216 ff, including footnote 1336.
1318 See infra, paras. 7.1290 ff, in particular, para. 7.1303 concerning the price-contingent subsidies
before us: marketing loan programme payments; user marketing (Step 2) payments; and MLAs and CCPs; and

link between certain of the subsidies and "significant price suppression". 1320 This approach ensures
that we determine, as the text of the treaty requires, whether or not "the effect of the subsidy" is
"significant price suppression" in the same market within the meaning of Article 6.3(c) which
constitutes "serious prejudice" within the meaning of Article 5(c).
(e) Reference period
7.1195 Article 5(c) and Article 6.3(c) of the SCM Agreement do not refer to any specific time period
within which we must conduct our evaluation.
7.1196 Brazil asserts that the Panel must select an appropriate period of time for analyzing Brazil's
claims under Articles 5(c) and 6.3 of the SCM Agreement relating to the "present" effects of the
United States measures at issue. According to Br azil, 1999-2002 is a reasonable period of time, since
data for those years is essentially complete.
7.1197 The United States counters that the appropriate re presentative period for demonstrating
present serious prejudice will depend on the nature of the subsidies at issue. Normally, the most
recent period for which data are available will be the appropriate period. According to the United
States, Brazil must demonstrate serious prejudice for MY 2002.
7.1198 The Panel concurs with the United States assertion that MY 2002 is a relevant year for our
serious prejudice inquiry. It represents a recent period for which essentially complete data exists.
The identification of "significant price suppression" fl owing from "the effect of the subsidy" calls for
an evaluation of this effects-based phenomenon that cannot be conducted in the abstract. Rather,
discerning adverse effects of subsidies seems to us to require reference to a recent historical period.
We believe, however, that it is important for the est ablishment of "current" serious prejudice that such
prejudice would be established to exist up to, and including, a recent point in time.
1321
7.1199 We also believe that subsidies granted prior to MY 2002 are relevant to our evaluation.
Consideration of developments ove r a period longer than one year, while not necessarily required (at
least in Articles 5(c) and 6.3(c)) provides a more robust basis for a serious prejudice evaluation than
merely paying attention to developments in a singl e recent year. It may put such developments in a
broader temporal context. In addition, having foun d that the subsidies exist and have been provided
over a longer period of time than one year, it would be inappropriate to look at trends only in the last
year to arrive at any conclusion on serious prejudice . It may, for example, be that the market may
well already be distorted in a given year due to subsidies.
7.1200 In our examination, we are required to ensure that the "effect of the subsidy" is the situation in
question (i.e. significant price suppression under Ar ticle 6.3(c)). These elements also address the
concerns of the United States regarding alleged unusua lly high or low production or yields in a given
crop year: in exercising our judgment about the cau sal link between the subsidies and any prejudice
caused, we ensure that we are satis fied that such subsidies in r espect of United States upland cotton
has caused prejudice which can be said to be serious within the meaning of Article 5(c). If other
causes have had effects which diminish the effects of the subsidies to a level which we conclude could
not be serious, then we could not arrive at a proper serious prejudice finding under Article 5(c).
7.1201 The fact that the legal and regulatory provisions governing payment of many of the subsidies
at issue – i.e. measures under the FAIR Act of 1996, ad hoc legislation providing for MLA payments

para. 7.1307 concerning the non-price-contingent subsidies before us: PFC and DP payments and crop insurance
payments.
1319 See infra, paras. 7.1316 ff, in particular, para. 7.1332.
1320 See infra, paras. 7.1349 and 7.1350.
1321 We recall our findings in Section VII:D of our re port pertaining to United States subsidies, MY
1999-2002.

and cottonseed payments for the 2000 crop – have expired is immaterial to our serious prejudice
analysis. Subsidies granted under expired measures may have had adverse effects at the time they
were in effect, and may still have lasting adverse effects.
1322
(f) Role of econometric modelling results used by Brazil in this dispute
7.1202 Brazil initially submitted that the economist that it had retained to perform quantitative
simulation modelling for this dispute, Dr. Sumner 1323, had found that but for the United States
subsidies subject to that modelling exercise, United States production of upland cotton during the
period of MY 1999 to MY 2002 would have been an average of 28.7 per cent lower than actual
United States production and United States exports w ould have declined on average by 41.2 per cent
during the period of MY 1999 to 2002. According to Brazil, Dr. Sumner found that but for the United
States subsidies provided to the United States upla nd cotton industry, the A-Index would have been
higher by an average of 12.6 per cent or 6.5 cents per pound during the period of MY 1999 to
2002.
1324 Dr. Sumner also presented the results of his an alysis orally, in the course of the substantive
Panel meetings.
7.1203 The parties disagree as to the accuracy and ade quacy of the results of the econometric model
submitted by Brazil, which focuses on a "but for" examination of the produ ction, export and price
effects of the United States subsidies. The United States criticizes the model for, inter alia, relying on
an inappropriate baseline; failing to take into account "futures price" information available to
producers; effects of the subsidies on production co sts; the treatment of PFC payments and crop
insurance payments in the model and a number of other modelling deficiencies. It also argues that the
model is ineffective for use in retr ospective analysis. The United States asserts that Brazil's analysis
appears flawed in several respects and as a result, the conclusions drawn are biased and misleading.
7.1204 In response to a United States request, the Panel informed the parties that it did not require
(nor preclude) the parties' further rebuttal submissi ons, nor their oral statements during the second
Panel meeting, to address the methodology, equations or parameters underlying the simulation model
used by Brazil. The Panel gave the parties an additional opportunity fo r a written exchange and

1322 Panel Report, Indonesia – Autos, para. 14.206. See also ruling in Section VII:B.
1323 We note that it is open for a Member to dete rmine the composition of its own delegation for the
purposes of WTO dispute settlement. Neither the DSU nor the SCM Agreement contains specific rules on any
sort of qualification of experts. We would underline, that, in this dispute, we consider the participation of
experts, as part of the submissions of the parties and third parties, contributed constructively to our duty to
conduct an objective assessment of the matter before us.
Dr. Sumner participated in the first and resumed sessions of the first substantive meeting as well as in
the second substantive meeting with the Panel. Exhibit BRA-104 contains Dr. Sumner's curriculum vitae. In
addition to Dr. Sumner's contributions annexed to this re port and to Brazil's submissions/statements, the record
also includes the following material: Exhibits BRA-105, -275, -279, -280, -313 through -315, -325, -326, -342
through -346 and -396; Exhibit US-56. Dr. Sumner's modelling results involved the use of the so-called
"FAPRI" model. In response to Panel Question No. 203, Brazil submitted evidence pertaining to FAPRI's status
and credentials, in Exhibits BRA-376 through -380.
Without prejudice to any relevance to our serious prejudice examination, we also note that Brazil
submitted expert opinion statements by Mr. Christopher Campbell of the Environmental Working Group, in his
capacity as an expert in the design and use of com puter software in USDA commodity subsidy database
information (Exhibits BRA-316 and -368). As we note infra, in footnotes 1361/1375 and 1465, respectively,
Mr. Andrew MacDonald and Mr. Christopher Ward also participated, and provided expert opinions, as part of
Brazil's delegation in these Panel proceedings.
Dr. Glauber, a member of the United States delegation and government also contributed expert
opinions and material in this capacity, and his work was cited by the parties. See, for example, Exhibit BRA-
131; Exhibits US-76, -91.
Certain third party submissions/statements (e.g. of Benin and Chad) also involved the participation of
experts, including Mr. Minot and Mr. Malloum. See e.g. supra, para. 7.54.
1324 Brazil's further written submission, para. 183.

indicated that, if necessary, at the discretion of th e Panel, a further Panel meeting with the parties
would be held to address this specific material. The parties were advised that this was without
prejudice to the relevance and significance whic h the Panel might ascribe to the quantitative
simulation model and related evidence and argumentation in its report.1325 Several further exchanges
occurred between the parties in respect of this issue.1326
7.1205 We have taken note of the outcomes of the simulations submitted by Brazil 1327, and the
parties' exchanges of views thereon. We have not relied upon the quantitative results of the modelling
exercise – in terms of estimating any numerical va lue for the effects of the United States subsidies,
nor, indirectly, in our examination of the causal link required under Articles 5 and 6.3(c) of the SCM
Agreement.
7.1206 Without prejudice to the relevance or utility of such simulations generally to a serious
prejudice analysis under Part III of the SCM Agreement, we would point out our particular concern
here, in ensuring procedural fairness between the parties and the reliability of evidence, that the
underlying model itself was not equally accessible to th e parties and, as relevant, to the Panel in these
proceedings. Brazil did not itself have access to the model. While Brazil instructed the organization
which owned and operated the model (FAPRI) as to the modifications and adaptations that Brazil
believed needed to be made in order to produce th e econometric results presented to the Panel, Brazil
could not itself autonomously check the use of tho se modifications and adaptations. When the United
States asked to be able to analyse the model and its workings, FAPRI stipulated that neither Brazil nor
the Panel could have similar access.
7.1207 However, we observe that the simulations were prepared by experts, and explained to the
Panel by experts. The outcomes of the simulations are consistent with the general proposition that
subsidies bestowed by Member governments have the potential to distort production and trade and the
elimination of subsidies would tend to reduce "ar tificial" incentives for production in the subsidized
Member. This is one of the underlying rationales for the establishment of the subsidy disciplines in
the SCM Agreement.
7.1208 We further do not disagree with another b asic assumption underlying the modelling used by
Brazil in this dispute: that the effects of a subsidy may vary depending upon the nature of the
subsidy. We also note that the United States would support this proposition. Again, we consider this
to make common economic sense.
7.1209 In light of the nature of our examination of Brazil's claims under Part III of the SCM
Agreement, based upon an interpretation of the text, in light of its context, object and purpose 1328, we
have taken the analyses in question into account wher e relevant to our analysis of the existence and
nature of the subsidies in question, and their effects, under the relevant provisions of the SCM
Agreement, and have attributed to them the evidentiary weight we deemed appropriate.
(g) Role of studies by other organizations/academic institutions
7.1210 The parties have also brought to our attention a number of studies produced by the United
States government, several international governme ntal and non-governmental organizations and

1325 See supra, Section VII:A.
1326 See supra, Section VII:A.
1327 Dr. Sumner estimates that the cumulative effects of the subsidies, for MY 1999-2002, are
(approximately): a 28 per cent increase in United States upland cotton acreage; a 29 per cent increase in United
States production, a 41 per cent increase in United States exports and a 12.6 per cent decrease in world price (A-
Index). In terms of relative magnitude, from subsidies with largest to smallest effect: 1. marketing loan/LDP; 2.
user marketing (Step 2) payments; 3. crop insurance payments; 4. CCP payments; 5. DP payments.
1328See supra, paras. 7.1156 ff.

academic institutions. Brazil asserts that many of these studies have made findings that substantiate
its arguments that United States subsidies have "caused" "significant" "price suppression".
1329
7.1211 Certain third parties support Brazil's arguments concerning the relevance of these studies in
this dispute.1330
7.1212 We consider it relevant that numerous studies find, for various reasons, that a removal of
certain of the United States subsidies, over certain time periods, would lead to an alteration in United

1329 The studies referred to include:
• Exhibit BRA-210: "Production and Trade Policies Affecting the Cotton Industry", ICAC, July 2002.
• Exhibit BRA-224: "Factors Affecting the United States Farm Price of Upland Cotton", Leslie Meyer
(USDA 1998).
• Exhibit BRA-233: "Production and Trade Policies Affecting the Cotton Industry", ICAC,
September 2001.
• Exhibit BRA-234: "Rethinking U.S. Agricultural Policy: Changing Course to Secure Farmer
Livelihoods Worldwide", Daryll E. Ray, Daniel G. De La Torre Ugarte, Kelly J. Tiller, Agricultural
Policy Analysis Center, The University of Tennessee.
• Exhibit BRA-235: "What is the Impact of Removing Agricultural Support", IMF World Economic
Outlook 2002, Chapter II; IMF (2002), How Do Industrial Country Agricultural Policies Affect
Developing Countries?
• Exhibit BRA-236: "Market Access for Developing Country Exports – Selected Issues", IMF and the
World Bank, 26 September 2002.
• Exhibit BRA-237: "Rich Countries Should Show the Way to Trade: World Bank urges Action to
Further Open Markets to Developing Countries", World Bank, press release 2003/094/S, 27 September
2002.
• Exhibit BRA-238: "Trade Distortions and Cotton Markets: Implications for Australian Cotton
Producers", Cotton Research and Development Corporation, April 2001.
• Exhibit BRA-264: Goreux, "Prejudice Caused by Indu strial Countries subsidies to cotton sectors in
Western and Central Africa".
• Exhibit BRA-275: "U.S. Cotton Supply Response und er the 2002 Farm Act", Paul C. Westcott and
Leslie A. Meyer (USDA, 2003).
• Exhibit BRA-276: "Report of the Commission on the Application of Payment Limitations for
Agriculture", Submitted in Response to Section 1605, FSRI Act of 2002 (USDA, 2003).
• Exhibit US-62: IMF Working Paper (2003) "Measuring the Impact of Distortion in Agricultural Trade
in Partial and General Equilibrium".
• Exhibit BRA-222: Westcott and Price (USDA 2001) "A nalysis of the United States Commodity Loan
Programme with Marketing Loan Provisions".
Parties' critiques of certain of these "third party" studies are found in Exhibit US-91 and Exhibit
BRA-275.
1330 For example, Argentina considers that the number and quality of the empirical and econometric
analyses presented by Brazil, which were carried out by both international organizations and various prestigious
United States economic research institutions such as the USDA, provide irrefutable evidence of the collective
and individual effects of each subsidy programme on the price of cotton. See Argentina's written submission to
the resumed session of the first substantive meeting, para. 34. According to Benin and Chad, the Oxfam report
– using data from the International Cotton Advisory Committee - estimates that in 2001 alone, sub-Saharan
exporters lost $302 million as a direct consequence of United States cotton subsidies. The Report further notes
that Benin's actual cotton export earnings in 2001/02 were $124 million. However, had United States subsidies
been withdrawn, Benin's export earnings are estimated to have been $157 million. Therefore, the value lost to
Benin as a result of United States subsidies was $33 million. Chad's cotton export earnings in 2001/02 were $63
million, although in the absence of United States subsidies, Chad would have earned $79 million, thus reflecting
a loss of $16 million. For the period from 1999/2000 to 2001/2002, Oxfam estimates a total cumulative loss of
export earnings of $61 million for Benin and $28 million for Chad. Benin and Chad agrees with Oxfam when it
emphasizes, "the small size of several West African economies and their high levels of dependence on cotton
inevitably magnify the adverse effects of United States subsidies. For several countries, US policy has
generated what can only be described as a major economic shock." See Benin and Chad's written submission to
the resumed session of the first substantive meeting, paras. 19-21.

States production and exportation and to a change in certain world or United States prices. This is
consistent with the general proposition that subs idies bestowed by Member governments have the
potential to distort production and trade flows and the elimination of subsidies would tend to reduce
"artificial" incentives for production in the subsidizi ng Member. As we have already noted, this is
one of the underlying rationales for the estab lishment of the subsidy disciplines in the SCM
Agreement.
7.1213 However, none of these various studies address the precise legal issues arising under Part III
of the SCM Agreement, based on the measures, period, facts, argumentation and evidence before us.
For example, although some address possible moveme nts in the A-Index, others, including certain
studies of USDA, do not address the issue of world price movements at all, but rather focus on effects
on United States prices. Furthermore, each of these studies is premised on certain econometric
assumptions concerning inter alia , treatment of certain measures, selection of baseline, and supply
and demand elasticities.
7.1214 They are, therefore, not only subject to the same considerations – in terms of the legal and
factual analysis that we must conduct under the SCM Agreement – as we have already discussed in the
context of the outcomes of the simulations used by Brazil 's quantitative simulation model(s) 1331, but
also were not legally or factually tailored to the matter before us.
7.1215 In light of the nature of our examination of Brazil's claims under Part III of the SCM
Agreement, based upon an interpretation of the text, in light of its context, object and purpose 1332, we
have taken the analyses in question into account wher e relevant to our analysis of the existence and
nature of the subsidies , and their effects. We have attributed to them the evidentiary weight we
deemed appropriate.
(h) "Like product" and "subsidized product"
7.1216 The text of Article 6.3(c) refers to "like product" 1333 and "subsidized product". As the
identification of the "subsidized product" may affe ct the conception of "like product", we address
them together.
7.1217 Brazil asserts that upland cotton 1334 is the "subsidized product" for the purposes of its
allegations of serious prejudice. According to Br azil, it has submitted evidence to establish that each
of the subsidies at issue is a production- and export-enhancing subsidy in respect of upland cotton lint.
According to Brazil, "it is the production, export and use of upland cotton lint that benefits from the
United States subsidies challenged by Brazil".1335

1331 Supra, paras. 7.1202 ff.
1332 Supra, Section VII:C.
1333 There is a clear indication in the text of Article 6.3(c) of the SCM Agreement that an examination of
price undercutting is to focus on whether there is "significant price undercutting by the subsidized product as
compared with the price of a like product of another Member in the same market" (emphasis added). However,
the structure of the remaining text of the provision does not clearly indicate whether this requirement to
establish a "subsidized product" and "like product" also n ecessarily applies to a price suppression analysis. In
this regard, the text merely reads: "the effect of the subsidy is ... significant price suppression, depression or lost
sales in the same market." It may therefore be asked whether or not the same requirement of a "subsidized
product" and a "like product" also applies to a price suppression analysis under Article 6.3(c) of the SCM
Agreement. We observe, however, that Article 6.3(c) calls for an examination of pr ice suppression, and that
price suppression necessarily involves the prices of certain products. Thus , our examination of "prices" in the
world market necessarily relates to "prices" of certain "products". Accordingly, we address the concepts of
"subsidized product" and "like product".
1334 See supra, Section VII:C, including, in particular, footnote 258 where we discuss the product
subject to this dispute.
1335 See Brazil's further written submission, para. 79.

7.1218 The United States submits that Brazil needs to identify the "subsidized product" for each of
the types of subsidies that Brazil alleges is causi ng the serious prejudice. According to the United
States, Brazil has not established to whom certai n payments go and whether certain payments may
properly be attributed to exported upland cotton. The United States further a sserts that account must
be taken of the extent to which the subsidies are not tied to current upland cotton production.
7.1219 The Panel recalls that Article 6.3(c) of the SCM Agreement requires us to examine whether
"the effect of the subsidy" is "significant price suppression".
7.1220 We understand the term "subsidized" "product", as used in Article 6.3(c), to refer to a
"product" that is "subsidized", i.e. in respect of wh ich a subsidy is directly or indirectly granted or
maintained.
1336
7.1221 To the extent that the United States argues that Brazil has not established that the "subsidized
product" is upland cotton in the form traded on the world market, we recall Brazil's assertion in this
dispute that it: "agreed with USDA's classificati on of upland cotton lint as a distinct agricultural
product". This is the product traded in the worl d market. Thus, according to Brazil, the Brazilian
product that is "like", i.e. identical to or which has characteristics closely resembling the subsidized
United States product, is Brazilian upland cotton lint.1337
7.1222 The United States indicated that "[f]or purposes of this dispute, the United States is not
arguing that all United States cotton is 'unlike' Brazilian cotton".1338
7.1223 We therefore do not understand there to be disag reement between the parties as to the core
meaning of "like" product for the purposes of Article 6.3(c) of the SCM Agreement in this dispute.
7.1224 Furthermore, we do not understand the United St ates to have argued that United States
production of upland cotton does not benefit from any subsidies. Rather, the United States asserts that
at least certain of the subsidies at issue may not re late to upland cotton in the form that it is exported
and traded in the world market.
7.1225 We note that the text of the United States legal or regulatory instruments governing the grant
of a number of the subsidies before us explicitly or implicitly make the grant of the subsidy available
in respect of upland cotton: (1) marketing loan programme payments 1339 and (2) user marketing

1336 On the basis that Brazil has identified upland cotton lint as the "subsidized product" for the
purposes of its serious prejudice claims, we do not believe that the structure, design and operation of the United
States cottonseed payments within our terms of reference manifest a sufficiently close nexus with the subsidized
product and the alleged price effects of the subsidy at i ssue so as to cause significan t price suppression within
the meaning of Article 6.3(c). As described supra, Section VII:C, these cottonseed payments were paid to first
handlers of cottonseed for the 2000 crop of cottonseed, and were shared with producers to the extent that
revenue from the sale of that product was shared with the producer. Brazil itself separates "cottonseed revenue
received by farmers" from "cotton lint price received by farmers" in, for example, Brazil's response to Panel
Question No. 125(c), Exhibits BRA-169, -287, as does the USDA Fact Sheet: Upland Cotton (January 2003),
reproduced in Exhibit BRA-4. Cottonseed is an oilseed, used to make cottonseed oil and meal. For this reason,
we do not include cottonseed payments in the remainder of our Article 6.3(c) analysis.
1337 Brazil's further written submission, paras. 80-81. See also supra, footnote 258.
1338 United States' response to Panel Question No. 126. In its response to Panel Question No. 154, the
United States indicated its agreement that upland cotton is a "primary product or commodity" within the
meaning of Article 6.3 (d) of the SCM Agreement.
1339 7 CFR 1427.5(b)(11), reproduced in Exhibit BRA-36, in respect of marketing loan refers to
conditions "for a bale of cotton to be eligible" which include that it must be "ginned" by certain ginners. With
respect to LDPs, the upland cotton need not be ginned for eligibility, but the LDP is disbursed after the upland
cotton is ginned.

(Step 2) payments to exporters and domestic users.1340 Other subsidies are also available in respect of
upland cotton. Crop insurance subsidies are granted in respect of contracts to insure against losses
arising in respect of "upland cotton".1341
7.1226 The four types of domestic support which permit production flexibility (PFC, MLA, DP and
CCP payments) were or are provided in respect of a restricted list of products, including upland
cotton, which satisfy certain specific eligibility criteria. 1342 We recall our earlier observation that we
do not need to make any precise quantificatio n for the purposes of our examination under
Articles 5(c) and 6.3(c) 1343, nor do we need to ascertain the precise proportion of subsidies actually
benefiting upland cotton. We nevertheless recall that we have established, as a matter of fact, that, in
the case of these subsidies, there is a strongly po sitive relationship between recipients of these
payments and current upland cotton production. 1344 The fact that some of the subsidies are paid to
farmers who do not produce upland cott on presently (a small number), or that the subsidies or part of
them in some cases are "captured" by landowners or others, does not alter the proposition that upland
cotton production is, in fact, benefiting from the subsid ies. We are, nevertheless, well aware that the
particular structure, design and operation of the measures must be taken into account in discerning the
effects of these subsidies in our examination of price suppression under Article 6.3(c).
7.1227 Finally, to the extent that the United States argu es that it is the "subsidized product" – rather
than the "effect of the subsidy" – which must cause "significant price suppression" 1345 within the
meaning of Article 6.3(c) of the SCM Agreement, we disagree. The text of Articles 5 and 6 of the
SCM Agreement support the conclusion that it is the effect s of the United States subsidies – not the
effects of the "subsidized product" – that ar e at issue in a claim of price suppression under
Article 6.3(c). The chapeau of Article 5 states: "No Member should cause, through the use of any
subsidy ... adverse effects to the interests of an other Member." (emphasis added) Similarly,
Article 6.3(c) provides: "Serious prejudice in the sen se of paragraph (c) of Article 5 may arise in any
case where ... (c) the effect of the subsidy is ... significant price suppression ...". (emphasis added)
These references in Articles 5(c) and 6.3(c) to the "e ffect of the subsidy" contrast with the language
used in the countervailing duty provisions in Part V of the Agreement.1346

1340 7 CFR 1427.103(b), reproduced in Exhibit BRA-37, in respect of user marketing (Step 2)
payments, defines eligible upland cotton as "baled" up land cotton "lint"; "loose"; semi-processed and reginned
(processed) motes. In the case of pa yments to exporters, the text of th e measure indicates that an eligible
exporter includes a producer. In the case of payments to domestic users, the United States has indicated that the
Step 2 programme is also designed precisely to benefit the producer .
1341 Some policies specify that the insured crop is upland cotton. See Exhibit BRA-174, USDA FCIC,
Income Protection, Cotton Crop Provisions, section 7.
1342 See supra, Section VII:D.
1343 See supra, paras. 7.1177 and 7.1179
1344 See supra, Section VII:D.
1345 United States' oral statement at the resumed session of the first substantive meeting, para. 9.
1346For example, Article 15 of the SCM Agreement deals with the determination of injury in a
countervailing duty investigation. Article 15.1 requir es a determination of injury to be based "on positive
evidence and involve an objective examination of both (a) the volume of the subsidized imports and the effect of
the subsidized imports on prices in the domestic market for like products and (b) the consequent impact of these
imports on the domestic producers of such products." (emphasis added, footnotes omitted). Article 15.2 states,
in part: "... With regard to the effect of the subsidized imports on prices, the investigating authorities shall
consider whether there has been a significant price undercutting by the subsidized imports as compared with the
price of a like product of the importing Member, or whether the effect of such imports is otherwise to depress
prices to a significant degree or to prevent price in creases, which otherwise would have occurred, to a
significant degree." (emphasis added) Similar additional references to the "effects of the imports"; "impact of
the subsidized imports", "the effect of the subsidized imports" also exist in Article 15. Article 15.5 stipulates:

"It must be demonstrated that the subsidized imports are, through the effects of subsidies ,
causing injury within the meaning of this Agreem ent. The demonstration of a causal

7.1228 There is no disagreement between the parties th at an examination under Article 6.3(c) may
precede any examination under Article 5(c). There is also no disagreement, in this part of this
dispute, that an affirmative conclusion under Article 6.3(c) is a necessary
1347 element for an
affirmative serious prejudice findi ng under Article 5(c). We will therefore first examine Brazil's
claim under Article 6.3(c), which calls for an examination of "price suppression" "in the same
market".
7.1229 An analysis of price suppression requires an analysis of prices. The "prices" we examine will
necessarily depend upon the product and the particular market under examination. We therefore turn
next to an examination of the textual condition of "in the same market" in Article 6.3(c) of the SCM
Agreement.
(i) "In the same market"
(i) Main arguments of the parties
7.1230 Brazil asserts that the term "in the same market" in Article 6.3(c) can refer to either an
individual country, regional or world market since Article 6.3(c) does not specify which geographic
(or even product) markets are relevant for an analysis of price suppression.
1348 The "same market(s)"
for the purposes of Brazil's price suppression claims under Article 6.3(c) are: (i) the world market for
upland cotton; (ii) the Brazilian market; (iii) the United States market; and (iv) 40 third country
markets where Brazil exports its cotton and where United States and Brazilian "like" upland cotton is
found.1349 Brazil submits evidence in support of its ar gument that global price effects in the world
market – Cotlook "A-Index" and B-Index and New York futures prices and spot prices reflecting
global supply and demand influences – are transmitted to the other markets.
7.1231 The United States argues that the later use of "in the sa me market" in Article 6.3(c) suggests
that the significant price suppression or depression must occur when "the subsidized product" is found
"in the same market" as "a like product of another Member." This phrase requires identification of a
particular domestic market of a Member in which price effects are alleged to have occurred so as to
allow a comparison in that market. The term "same market" in Article 6.3 (c) cannot be interpreted to
include the world market because that would render redundant the word "same".
1350
(ii) Main arguments of the third parties
7.1232 Argentina considers that Brazil has presented su fficient evidence with respect to the
significant effect of subsidies on prices for each relevant geographical market, including the United
States, Brazil, the African countries, other pr oducer countries and Brazilian export markets.
Argentina states that price movements of the United States, the Cotlook "A" Index and third country
(e.g. Brazilian and Argentine) market prices are dire ctly interconnected, and this is an unquestioned
and irrefutable fact. Moreover, United States cotton fo rms part of Cotlook's "A" Index basket, so that

relationship between the subsidized imports and the injury to the domestic industry shall be
based on an examination of all relevant evidence before the authorities." (emphasis added,
footnotes omitted).

Other provisions in Part V of the SCM Agreement contain similar references to "through the effects of
the subsidy, subsidized imports are causing injury..." e.g. Article 19.1.
1347 There is, however, a disagreement between the par ties as to whether this is not only a "necessary",
but also a "sufficient" requirement. We address this issue infra paras. 7.1368 ff.
1348 Brazil's further written submission, paras. 94-96.
1349 Brazil's response to Panel Question No. 233.
1350 United States' further written submission, para. 91.

the Panel cannot ignore the fact that the United States subsidies have a decisive impact on the price of
cotton in the world market.
1351
7.1233 Benin and Chad agree with Brazil that for the purposes of Article 6.3(c), the term "market"
could encompass an individual country, a region, or th e world market for cotton. In addition, in the
view of Benin and Chad, Brazil has clearly established the causal link between United States
subsidies and suppressed prices in the world market.1352
7.1234 The European Communities disagrees with the United States contention that the term "same
market" in Article 6.3 (c) cannot be interpreted to include the world market because that would render
redundant the word "same". In accordance with its or dinary meaning, the term "market" may refer to
any geographical market, including not only national or regional markets but also the world market,
provided that there is such a world market for the product under consideration. The European
Communities' position is that there is no world mark et for the purposes of Article 6.3 (c) where the
existence of trade barriers has the consequence that the conditions of competition, and in particular
the price levels prevailing in one geographical area are significantly different from those prevailing in
another geographical area. Unlike, for example, impor t duties, quotas or transport costs, subsidies do
not, of themselves, insulate the prices in one geographical area from those in other areas and,
therefore, do not lead to existen ce of separate geographical markets. 1353 The European Communities
has not taken a position on the factual issue of whether, "in relation to cotton", there is a world market
for the purposes of Article 6.3 (c).1354
(iii) Evaluation by the Panel
7.1235 The Panel naturally begins its examination with the text of the treaty. Article 6.3(c) of the
SCM Agreement provides that serious prejudice within the meaning of Article 5(c) may arise in any
case where the effect of the subsidy is "significant price suppression ... in the same market".
7.1236 We first examine the ordinary meaning of "market", which can be: "a place ... with a demand
for a commodity or service" 1355; "a geographical area of demand for commodities or services"; "the
area of economic activity in which buyers and sellers come together and the forces of supply and
demand affect prices".1356
7.1237 In one of its ordinary meanings, therefore, th e term "market" may refer to a (geographical)
area of economic activity in which buyers and sellers come together and the forces of supply and
demand affect prices. While we understand there to be a geographic implication to the term, we also
see that there is no limitation or restriction on the scope of such a geographic area of economic
activity. It could, for example, be a local, regional, national, continental or, even, global, geographical
area, provided that the conditions of competition for sales of the product in question provides an
appropriate foundation for a finding th at a "market" exists within th at area. The degree to which a
market is limited by geography will depend on the product itself and its ability to be traded across
distances. If barriers exist (such as distance), the in teraction between buyers and sellers which allows
one price to affect another may not be apparent.
7.1238 Returning to the text of the treaty, we see that Article 6.3(c) of the SCM Agreement also does
not identify any particular "same market" where price suppression must be demonstrated. It does not
specify that there must a particular "domestic" "sam e market". The ordinary meaning of the term is

1351 Argentina's oral statement at the resumed session of the first substantive meeting, paras. 23-26.
1352 Benin and Chad's written submission to the resumed session of the first substantive meeting,
para. 6.
1353 European Communities' response to Panel third party Question No. 47.
1354 European Communities' response to Panel third party Question No. 45.
1355 The New Shorter Oxford English Dictionary, (1993).
1356 Merriam-Webster Dictionary online.

not constrained to a particular geographic area of economic activity. The text of the provision does
not, therefore, exclude the possibility that the "world market" could be relevant to our inquiry into
price suppression under Article 6.3(c).
7.1239 Furthermore, the text of Article 6.3(c) of the SCM Agreement does not refer either to
"imports" into or "exports" out of any particular Memb er's market, or any particular market at all. It
therefore leaves open the possible geographical frame of reference that might define a market as a
"world market".
7.1240 The immediate context of the provision would also support the view that the term "market"
refers to a geographical area, and, furthermore, th at there is no geographical or conceptual limitation
on the connotation of "market" in Article 6.3(c) of the SCM Agreement. Articles 6.3(a) and (b) of the
SCM Agreement each identify a particular "market" and a particular trade flow. They refer,
respectively to: "imports into" "the market of the subsidizing Member"; and "exports" from "a third
country market". Had the drafters wished to identify or place a conceptual or geographical constraint
on the particular market that must be examined for the purposes of Article 6.3(c), they could have.
However, they did not. The absence of a similar refe rence to any particular trade flows "into" or "out
of" (a) Member'(s') domestic market(s), would ther efore support the view that the "market" for the
purposes of an Article 6.3(c) examination of price suppression is an unspecified geographical area that
could include a "world market".
1357
7.1241 Further contextual guidance is present in other provisions of the SCM Agreement.
7.1242 For example, Article 15.2 of the SCM Agreement , dealing with a price suppression
examination in the course of a countervailing duty investigation, states, in pertinent part:
"... With regard to the effect of the subs idized imports on prices, the investigating
authorities shall consider whether there has been a significant price undercutting by
the subsidized imports as compared with the price of a like product of the importing
Member, or whether the effect of such imports is otherwise to depress prices to a
significant degree or to prevent price increases, which otherwise would have
occurred, to a significant degree...".(emphasis added)
7.1243 That provision indicates clearly that the "marke t" frame of reference for the price suppression
examination is the domestic market of the impor ting Member. The trade flow involved is "such
imports", that is, the subsidized imports that are exported by the allegedly subsidizing Member into
the market of the Member conducting the counte rvailing duty investigation Furthermore, the
Agreement itself contemplates the compartmentalization of a Member's domestic market in certain
situations where there may be a localized or target ed impact in a certain geographic area within the
importing Member's market. 1358 The absence of any such (or analogous) explicit requirement (or

1357 The existence of such a "world market" could depend on many factors. The nature of the "market"
to be examined for the purposes of Article 6.3(c) may well differ from case to case depending upon the facts of
the particular case, including the commodity or "subsidized product" at issue. Indeed, there may not always be
a "world market" for any given product. In order to ch aracterize a certain geographical area, whether it is the
territory of one or more Members or the entire world, as a "market", the conditions of competition prevailing
within that geographical area would need to manifest at least some degree of homogeneity. The conditions of
competition for sales of the product in question would have to provide an appropriate foundation for a finding
that a "market" exists within that area.
1358 Article 16.4 of the SCM Agreement states:

"In exceptional circumstances, the territory of a Member may, for the production in question,
be divided into two or more competitive markets and the producers within each market may
be regarded as a separate industry if (a) the producers within such market sell all or almost all
of their production of the product in question in that market, and (b) the demand in that

permission) in Article 6.3(c) to constrain the mean ing of "market" to any particular geographic area,
or to focus particularly upon a particular trade flow (i.e. imports into, or exports from, a particular
areas) supports the view that we are not precluded from reading the term "market" as including a
geographical area which may embrace the entire world.
7.1244 This is consistent with the object and purpose of the Agreement, which is to reduce trade
distortion through the grant of subsidies by Member governments.
1359 Trade distortion may occur in
multiple possible geographical areas.
7.1245 Here, the product we are dealing with is upland cotton. It is a fungible commodity that does
not rapidly spoil and is readily transportable, and that is, in fact, regularly traded in large quantities all
over the world. 1360 Key participants in this upland cott on market are producers and consumers of
upland cotton. As with any basic, fungible comm odity, prices for upland cotton are determined by
supply and demand. Market prices are affected by the perception and anticipation of market
participants as to current and probable future movements of production and consumption as essential
determinants of demand, supply, and, consequently, price.1361

market is not to any substantial degree supplied by producers of the product in question
located elsewhere in the territory. In such circumstances, injury may be found to exist even
where a major portion of the total domestic industry is not injured, provided there is a
concentration of subsidized imports into such an isolated market and provided further that the
subsidized imports are causing injury to the producers of all or almost all of the production
within such market."
1359 See supra, Section VII:E, footnote 920.
1360 For example, International Cotton Advisory Committee, Cotton: World Statistics (September
2002), reproduced in Exhibit BRA-9 and International Cotton Advisory Committee, Cotton: World Statistics
(September 2003), reproduced in Exhibit BRA-208, indicate worldwide cotton supply and use, and cotton
supply and use in 68 countries, and production, consumption imports and exports of cotton lint in recent years.
See also Cotton Outlook; USDA ERS, Cotton and Wool Outlook (Exhibits BRA-10, -20, -189, -253, -328, and -
382). We recall, as well, for example, Chad's oral st atement at the resumed session of the first substantive
meeting, paras. 7-11.
USDA ERS recognizes that "Trade is particularly im portant for cotton. Thirty per cent of the world's
consumption of cotton fiber crosses international borders before processing, a larger share than for wheat, corn,
soybeans, or rice...". See USDA ERS, Briefing ro om, Cotton: Background (from www.ers.usda.gov),
reproduced in Exhibit BRA-13.
1361 We recall the statement of Mr. Andrew MacDonald, retained by Brazil and a member of Brazil's
delegation at the resumed session of the first substantive meeting and the second substantive meeting with the
Panel. Annex II to Brazil's further written submission contains a notarized "declaration" of Mr. MacDonald
dated 21 May 2003. Mr. MacDonald's statement is focused on upland cotton only, and references to "cotton"
are to "upland cotton". A written version of Mr. MacDonald's oral statement at the resumed session of the first
substantive meeting with the Panel is provided in Exhib it BRA-281. See, in particular, para. 4 of Exhibit BRA-
281 and para. 11 of Annex II to Brazil' s further written submission. See also supra, footnote 1323, relating to
the involvement of experts as members of party and third party delegations in these Panel proceedings, and
infra, footnote 1375 on Mr. MacDonald's further involvement. The record indicates that, at the time of this
Panel proceeding, Mr. MacDonald is the Vice President and "President -elect of the Liverpool Cotton
Association and will take office as its President in 2004"; President of the Private Sector Advisory Panel of the
International Cotton Advisory Committee; and Chairman of the Spinners' Committee of the International
Textiles Manufactures Federation, and had worked fo r thirty years in the "cotton business", including
purchasing and negotiating upland cotton from a variety of sources, trading cotton futures in the New York
Futures market, reviewing "leading cotton trade journals " such as "Cotton Outlook" on a daily basis. Mr.
MacDonald "never worked for producer s of upland cotton". Mr. MacDonald indicated that his "experience is
that of a businessman intimately familiar with the factor s and mechanisms that are used to price and negotiate
price for upland cotton in many individual countries, as well as the international market." Mr. MacDonald also
provided expert opinion evidence on another issue in Exhibit BRA-401.

7.1246 While certain WTO Members and non-Members ma y produce, consume and/or export cotton
relatively more or less upland cotton than others
1362, and world trade flows of upland cotton may vary
in volume over different periods of time across vari ous countries and regions of the world, we see no
factual elements in the record before us that woul d lead us to conclude that there is a necessity
geographically to compartmentalize our anal ysis or to superimpose any degree of
regional/continental/national/sub-national isolation or to limit our analysis to particular isolated
impacts in a particular geographical area. We would also point out that it is not our task to select an
appropriate market: it is for the complaining Memb er to identify the market for the purposes of its
claim. We then determine whether it is a "market" within the meaning of Article 6.3(c) and whether
the effect of the subsidy is proven in that market.
7.1247 Our conclusion that such a world market, in f act, exists in this case, does not preclude the
existence of other relevant markets for the purposes of our analysis. In saying that a "world market"
may exist for upland cotton, we do not mean to cons truct a monolithic "world market" that reads out
every other possible connotation of "market" under Article 6.3(c).
7.1248 Therefore, this does not mean that we ca nnot also conduct another inquiry into other
geographical areas within the world market, which meet the definition of "same market" in the sense
of Article 6.3(c). This would not, however, permit, for example, coupling an examination of Brazil's
product under the conditions of competition prevailing in one Member's market with an examination
of the United States' product under the conditions of competition prevailing in another Member's
market. This would not meet the definition of " same market" because the frame of reference would
necessarily have to be, at that level, either one or the other Member's market in which both Brazilian
and United States upland cotton were present and competing for sales. Applying the frame of
reference of a geographic region consisting of a pa rticular Member's market, it could not be two
different such "markets".
7.1249 We therefore disagree with the United States assertion 1363 that, if a complaining party could
merely assert price suppression or depression in the wo rld market, the word "same" in the phrase "the
same market" would be rendered inutile because the subsidized and non-subsidized products could
always be deemed to be in the same "world mark et". If there truly is a world market for a given
commodity, which we believe there is in the presen t case, then our price suppression analysis in the
context of that world market would occur within that frame of reference. The selection of the relevant
market will then impact upon the concepts of e ffect (of the subsidy), significance (of the price
suppression) and seriousness (of the prejudice) under the relevant articles.
7.1250 We believe that our interpretation allows the text of Article 6.3(c) to be read effectively in its
context. Annex V of the SCM Agreement contains "Procedures for Developing Information
Concerning Serious Prejudice." Paragraph 1 of Annex V requires that the parties to the dispute and
any third-country Member concerned shall notify to the DSB, as soon as the provisions of Article 7.4
have been invoked, the organiza tion responsible for administrati on of this provision within its
territory and the procedures to be used to comply with requests for information. Article 6.6 of the
SCM Agreement states that "[e]ach Member in the market of which serious prejudice is alleged to
have arisen shall ... make available ... all relevant in formation ... as to the changes in market shares of
the parties to the dispute as well as concerning prices of the products involved" (emphasis added).
7.1251 Furthermore, the information gathered duri ng the information-gathering process "should
include, inter alia, data concerning the amount of the subsidy in question (and, where appropriate, the
value of total sales of the subsidized firms), prices of the subsidized product, prices of the
non-subsidized product, prices of other suppliers to the market , changes in the supply of the
subsidized product to the market in question and changes in market shares." (emphasis added) Our

1362 See, for example, Exhibits BRA-9 and BRA-209.
1363 United States' response to Panel Question No. 159.

interpretation allows these provisions to be read also as applying to particular markets where
competition exists between Brazilian and United States upland cotton.
7.1252 Similarly, we do not agree with the United St ates' proposition that the subsidized and other
products could never be found in the same geographic market and still be considered to be in the same
"world market". In our view, as we have already indicated, the world market is a geographic market.
Where price suppression is demonstrated in that ma rket, it may not be necessary to proceed to an
examination of each and every other possible market where the products of both the complaining and
defending Members are found.
(j) Is there price suppression in the same world market?
(i) Main arguments of the parties
7.1253 Brazil asserts that "price suppression" in Article 6.3(c) of the SCM Agreement refers to the
situation where prices are prevented from rising (i.e . but for the subsidies, market prices would have
been higher) or where prices actually declined. 1364 Brazil asserts that the effects of United States
subsidies in MY 1999-2002 cause "significant price suppression" in the Brazilian, United States and
world markets.
7.1254 Brazil states that "significant" price suppression is such as to meaningfully affect suppliers
(i.e., Brazilian, African and other non-United States suppliers) competing with the subsidized product.
Brazil further argues that "significance" may also be judged in appropriate situations based on the
vulnerability of a Member and its affected industry to serious prejudice from even smaller amounts of
price suppression.1365
7.1255 The United States submits that there has been no "price suppression" within the meaning of
Article 6.3(c) of the SCM Agreement . The United States does not ag ree that a world market for
upland cotton can exist, as Article 6.3(c) requires an examination of a Member's domestic market
where both Brazilian and American upland cotton ar e competing for sales. The United States
disagrees that Brazil has established price suppression in any "same market" within the meaning of
Article 6.3(c).
7.1256 For the United States "significant" modifies "price suppression or depression" and therefore,
it is the effect on prices that must be "significant" and not the direct effect on producers. Such price
suppression must be demonstrated in respect of Brazilian products alone.
1366 The United States
disagrees with Brazil that the meaning of "signi ficance" may vary depending upon the complaining
Member. The United States asserts that Brazil's deve lopmental status is irrelevant for purposes of
Article 6.3(c).1367
(ii) Main arguments of the third parties
7.1257 Argentina states that it does not understand how the United States can simply brush aside the
Panel's findings in Indonesia - Autos, since this was the only dispute under the GATT-WTO that dealt
with the interpretation of the term "significant" . Argentina also fails to understand how the United
States can claim that Brazil argued that it is the effect on producers that must be significant, and not
on prices, when Brazil has submitted copious evidence, based on numerous empirical and
econometric analyses, of the effects of the subsidies on prices. Argentina states that an increase in the
world price of cotton would be significant, even if international price suppression or depression were

1364 Brazil's further written submission, paras. 83-89.
1365 Brazil's further written submission, paras. 94-97.
1366 United States' further written submission, para. 86.
1367 United States' further written submission, paras. 85-87.

to amount to only one per cent per pound, since su ch an increase would enable countries such as
Brazil and Argentina to recover their competitive positions in the world cotton market. At no time
does the United States seem to s uggest that a suppression or depression effect of 12.6 per cent on
international cotton prices is not "significant" within the meaning of Article 6.3(c).
1368
7.1258 The European Communities takes issue with Brazil's interpretation that it is relevant to
consider not only the impact on the producers concerned, but also the impact on the government of
the complaining Member in assessing the "significance" of price depression or suppression for the
purposes of Article 6.3 (c). The European Communiti es contends that Brazil's interpretation belies the
correct approach it advances elsewhere that the existence of serious prejudice must be presumed
whenever it is established that the ef fect of the subsidy is to cause, inter alia , significant price
depression or suppression, without it being necessary to show, as an additional and separate
requirement, that such price depression or suppression causes a serious prejudice to the interest of the
Member concerned. The European Communities also rejects Brazil's suggestion that the threshold for
establishing the existence of serious prejudice shoul d be lower when the complaining party is a
developing country Member, as Article 6.3 (c) is not special and differential treatment provision.
1369
7.1259 New Zealand agrees with Brazil that even a very small level of price suppression may have a
meaningful effect, for example where large volumes of a product may be traded. New Zealand asserts
that the United States argument that the significance of the price suppressive effect of the subsidy can
only be determined by reference to the effect on ‘price' should be re jected since Articles 5 and 6 are
concerned with the adverse effects of a subsid y and therefore, it is entirely appropriate under
Article 6.3(c) to consider whether price suppression is "significant" by reference to the effect of the
price suppression on the Member alleging adverse effect s to its interests. According to New Zealand,
what renders price suppression significant or insigni ficant is whether or not it causes adverse effects
to the Member concerned, not whether or not an arbitrary level of numeric significance is achieved as
implied by the United States.
1370 Such an approach is not inconsistent with the United States assertion
that the drafters of Article 6.3(c) used the term "s ignificant" to create a threshold to ensure that not
just "any theoretical price effect" would suffice.1371 For New Zealand, the phrase "in the same market"
serves to locate the price suppressive effects rather than define their substance.1372
(iii) Evaluation by the Panel
i Is there a world market "price"?
7.1260 We begin our examination, as always, with the relevant text of the treaty. Article 6.3(c) of the
SCM Agreement calls for an examination of whether "the e ffect of the subsidy is a ... significant price
suppression, price depression or lost sales in the same market."
7.1261 "Price" suppression requires an examination of "prices". Before examining whether or not
price suppression in the world market exists, we fi rst discern which "price" we are to examine in the
"world market".

1368 Argentina's oral statement at the resumed session of the first substantive meeting, paras. 18-22.
1369 European Communities' written submission to the resumed session of the first substantive meeting,
paras. 5-9.
1370 New Zealand's written submission to the resumed session of the first substantive meeting,
paras. 2.21, 2.23 and 2.24.
1371 New Zealand's written submission to the resumed session of the first substantive meeting,
para. 2.25.
1372 New Zealand's written submission to the resumed session of the first substantive meeting,
paras. 2.26-2.27.

7.1262 The ordinary meaning of "price" is: "the am ount of money or goods for which a thing is
bought or sold"; "value or worth".1373
7.1263 Brazil focuses on the A-Index and the New York Futures price as the bases for its world
market "price suppression" allegations. The United St ates, contends that while these price discovery
mechanisms are "price quotes", neither constitutes an actual world market "price" which may be the
subject of an analysis under Article 6.3(c) of the SCM Agreement.
7.1264 The "A-Index" is a composite of an average of the five lowest price quotes from a selection of
the principal upland cottons traded in the worl d market obtained by Cotlook, a private UK-based
organization.1374 The New York Cotton futures index refl ects an exchange of a standard futures
contract (Cotton No. 2 futures contract). The issue before us is whether we may consider either or
both of these as a "price" for the purposes of analysing whether or not "price suppression" has
occurred in the same "world market" for the purposes of Article 6.3(c) of the SCM Agreement.
7.1265 We first consider the A-Index. There are f our main reasons why we believe that we may
consider it as a "price" for the purposes of analysin g whether or not "price suppression" has occurred
in the same "world market" for the purposes of Article 6.3(c) of the SCM Agreement in this dispute.
7.1266 First, in respect of the upland cottons compri sing the constituent elements of the A-Index,
both Brazilian Middling 1 3/32" and United States prices for Memphis and California/Arizona
Middling 1 3/32" are among the constituent quotes.
7.1267 Second, we have before us credible ev idence that the A-Index "summarizes price
developments of the physical market [for upland cotton] in various countries around the world" and
that the A-Index is perceived by key market par ticipants – growers, consumer and traders – as
reflecting the "world" market price for upland cotton.1375
7.1268 Third, we find consistent, supporting evidence in the fact that the International Cotton
Advisory Council refers to the A-Index as expressing "world" or "international" "cotton prices".1376
7.1269 Fourth, and perhaps more relevantly for the purposes of this dispute, the USDA ERS has itself
referred to the A-Index as the "world price"1377 and as the "indicator of world price levels"1378 and as a
measurement of United States relative [upland] cotton competitiveness in the "world market".1379

1373 Concise Oxford English Dictionary (Oxford: Clarendon Press, 1995).
1374 "Cotton Outlook", April 5 2002, p. 2, reproduced in Exhibit BRA-11. See also
http: www.cotlook.com. The prices are quoted c.i.f Northern Europe.
1375 See contributions of Mr. Andrew MacDonald, retained by Brazil and a member of Brazil's
delegation, in Annex II to Brazil's further wr itten submission and Exhibit BRA-281. See also supra, footnote
1323, relating to the involvement of experts as members of party and third party delegations in these Panel
proceedings, and footnote 1361 on Mr. MacDonald in particular. Mr. MacDonald also states: "The A and B-
Index reflects how interconnected the 'world' price for cotton is with the prices of cotton in the individual
country markets that make up these indices".
1376 Exhibit BRA-19.
1377 The United States government has itself referred to the A-Index as the "world price", USDA ERS
"Cotton and Wool Outlook", p. 3, Figure 2, reproduced in Exhibit BRA-20,: "World price rises 45 per cent
during March 2002-March 2003", c iting source: "Cotlook Limited". Th e accompanying text reads: "...the
world price of cotton has risen 45 per cent from March 2002 to March 2003". The United States government
has also referred to the A-Index as the "indicator of world price levels", USDA ERS "Background for 1995
Farm Legislation", p.12, reproduced in Exhibit BRA-12. It has also referred to the A-Index as a measurement of
United States relative cotton competitiveness in the "world market". Ibid, p. 19, first column: Addressing
developments in the A-Index during the period MY 1991-MY 1993: "Over 85 per cent of the time U.S. cotton
was selling competitively on the 'world ma rket' ". We further recall the Ap pellate Body's reference to "world

7.1270 Moreover, and perhaps most importantly, th e United States government relies upon the A-
Index as a "price" which is a key determinant for whether or not certain of its market condition-
contingent subsidies will be paid.
1380 The United States "adjusted world price" is precisely an
adjustment of the A-Index which, by necessary implication, would mean that the A-Index represents –
at least in the estimation of the United States gove rnment for the purposes of its subsidies to upland
cotton – the "world price" which is achievable in the market in which United States upland cotton
competes.
1381
7.1271 The United States "adjusted world price" is based on and derived from the A-Index. It is
adjusted to United States base quality and average location. 1382 The USDA announces the "adjusted
world price" and CCA each Thursday, when the USDA also announces conse quent loan deficiency
payment rates and user marketing (Step 2) certificate payment rates for upland cotton.1383
7.1272 Rather than reflecting "disparate price quot es from around the world" as the United States
asserts, the considerations we have just mentioned ra ther lead us to conclude, as a matter of fact, on
the basis of our assessment of the evidence before us, including th e oral statements of various
Members of the parties' delegations at th e meetings of the Panel with the parties 1384, that the A-Index
may serve as an indication of the "world price" – in terms of the "amount of money set for sale of
upland cotton" or the "value or worth" of upland co tton – for the purposes of our analysis of whether
or not price suppression has occurred in the same "world market" under Article 6.3(c) of the SCM
Agreement.
7.1273 We next examine the New York Futures Exchange futures contract values. This value is a
reflection of market forces of supply and demand at a futures market, based in New York, where daily
trading is conducted, and contracts are entered into, on the basis of price levels that reflect the daily
perception of the probable future direction of upland cotton prices. 1385 We believe that the A-Index

market prices" as a benchmark in another context. See, for example, Appellate Body Report, Canada –
Dairy(Article.21.5, – New Zealand and US), paras. 86 ff.
1378 USDA ERS "Background for 1995 Farm Legislation", p.19, reproduced in Exhibit BRA-12.
1379 Ibid, p. 19, first column: Addressing developments in the A-Index during the period MY 1991-MY
1993: "Over 85 per cent of the time U.S. cotton was selling competitively on the 'world market' ".
1380i.e., concerning the marketing loan programme payments: Sections 1201(a)-(b), 1202(a)(6),
1202(b)(6), 1204(b), 1205(a)(1), 1205(b), 1205(c)(1), 1608 of the FSRI Act of 2002 and 7 USC 7286 (Section
166 of the FAIR Act as amended) and 7 CFR 1427.22; and concerning the user marketing (Step 2) payments,
Section 1207(a) of the FSRI Act of 2002; 7 CFR 1427.107 and section 136 of the FAIR Act of 1996.
1381 The United States government eff ectively acknowledges, in another context, that the name itself is
indicative of its role: "In the case of upland cotton, the alternative repayment rate is the adjusted world price
(AWP) and reflects, as the na me indicates, an estimate of world prices , adjusted to the Un ited States". See
Exhibit BRA-50.
1382 The adjusted world price for individual qualities is determined using the schedule of loan premiums
and discounts and location differentials. A "coarse count adjustment" (CCA) may be applicable for cotton with
a staple length of 1-1/32 inches or shorter and for certain lower grades with a staple length of 1-1/16 inches and
longer.
1383 See FSA, News Release: "USDA announces prev ailing world market price, loan deficiency
payment rate and user marketing certificate payment rate for upland cotton", reproduced in Exhibit US-72.
This Exhibit also gives a indication as to how the AWP (and CCA) are determined.
1384 Statement of Andrew MacDonald, Annex II to Brazil's further submission and Exhibit BRA-281.
See supra, footnotes 1375 and 1323.
1385 Statement of Mr. Andrew MacDonald, Annex II to Brazil's further written submission and Exhibit
BRA-281: "The New York Cotton Exchange's futures market is the only important futures market for cotton in
the world. Trading is conducted with price levels reflecting the daily perception of the market participants
worldwide, on how prices w ill develop in the future, as well as in th e near and medium-term[...]. It is the
principle price and trend indicator for the whole worldw ide cotton market, and as such the 'New York futures
price' is a key mechanism used by the growers, trade and cotton consumer s in determining the current market

and the New York Futures Index have different f unctions and rationale: one summarizes actual daily
upland cotton price quotes under certain conditions; the other is, inter alia, an instrument for global
price discovery for future delivery of cotton. While we do not understand the United States to
disagree with the proposition that the New York futures values are prospectively indicative of market-
based price expectations, we do not need to rely on these values as a current "world price" for the
purposes of our examination under Article 6.3(c).
7.1274 We therefore find, as a factual matter, that the A-Index can be taken to reflect a world price in
the world market for upland cotton that is sufficient to form the basis for our analysis as to whether
there is price suppression in the same world market within the meaning of Article 6.3(c) for the
purposes of this dispute.
ii Is there "price suppression"?
7.1275 The current text of Part III of the SCM Agreement does not provide a definition or any
interpretative guidance concerning the meaning of "price suppression" or "depression" as those terms
are used in Article 6.3(c) of the SCM Agreement.
7.1276 The ordinary meaning of "suppress" is "[p]re vent or inhibit (an action or phenomenon)";
1386
"Depression" can be defined as: "the action of pr essing down; the fact or condition of being pressed
down"1387
7.1277 Thus, "price suppression" refers to the situation where "prices" – in terms of the "amount of
money set for sale of upland cotton" or the "value or worth" of upland cotton – either are prevented
or inhibited from rising (i.e. they do not increase when they otherwise would have) or they do actually
increase, but the increase is less than it otherwise would have been. Price depression refers to the
situation where "prices" are pressed down, or reduced.
1388
7.1278 This reading of the textual terms "price suppression" and "depression" in Article 6.3(c) of the
SCM Agreement finds general contextual support in Article 15.2 of the SCM Agreement, which, for a
Member's countervailing duty investigation, requires an examination of "...whether the effect of [the
subsidized] imports is otherwise to depress prices to a significant degree or to prevent price increases,
which otherwise would have occurred ... ".
7.1279 The text of Article 6.3(c) of the SCM Agreement , in its context, indicates that we need to
undertake an inquiry into whether upland cotton pr ices either were pressed down, prevented or
inhibited from rising, or while they did actually increase the degree and magnitude of increase was
less than it otherwise would have been.
7.1280 We next turn to the question of how we assess whether or not "price suppression" has
occurred in the same "world market" which we have found to exist. We believe the following
considerations are relevant to our examination: (a) the relative magnitude of the United States'
production and exports in the world upland cotton mark et; (b) general price trends; and (c) the nature
of the subsidies at issue, and in particular, whethe r or not the nature of these subsidies is such as to
have discernible price suppressive effects. We examine each of these considerations in turn.

values as well as the contract prices for forward deliveries, in both the international and domestic markets." See
supra, footnotes 1375, 1384 and 1323.
1386 The New Shorter Oxford English Dictionary, (1993).
1387 The New Shorter Oxford English Dictionary, (1993).
1388 In the remainder of our analysis, we use the term "price suppression" to refer both to an actual
decline (which otherwise would not have declined, or would have done so to a lesser degree) and an increase in
prices (which otherwise would have increased to a greater degree).

a. relative magnitude of United States' production and exports
7.1281 We begin with the relative magnitude of th e United States' production and exports in the
world upland cotton market in the marketing years 1999 to 2002.
7.1282 In the period under consideration, the United States was the world's second largest producer
of upland cotton, accounting for approx imately one-fifth of world production.
1389 In the marketing
years 1999 to 2002, the respective shares of the Unit ed States in world production of upland cotton
were approximately 19.2, 19.3, 20.6 and 19.6 per cent, respectively.
7.1283 Furthermore, the United States was the world's largest exporter of upland cotton during the
marketing years 1999 to 2002. According to the r ecord evidence, the Unite d States share of world
exports increased from approximately 23.5 per cent in MY 1999 to 24.5 per cent in MY 2000 to 37.3
per cent in MY 2001 to 39.9 per cent in MY 2002.1390
7.1284 In comparison, according to r ecord evidence, Brazil's share of world production of upland
cotton was approximately 3.8 to 5 per cent in the marketing years 1999 to 2002, while Brazil's share
of world exports of upland cotton never exceeded 2.4 per cent in the same period.1391
7.1285 We believe that, due to the large relativ e proportion of the United States production and
export of upland cotton, the United States exerted a substantial proportionate influence on prices in
the world market for upland cotton.
b. general price trends
7.1286 In terms of general price trends, the United St ates acknowledges that market prices in recent
years have been "extraordinarily low"
1392, and even that there was a "dramatic plunge" in prices.1393
7.1287 We asked the parties to provide us with a char t of the weekly United States adjusted world
price, the A-Index, the nearby New York futures price, the average United States spot market price
and prices received by United States producers from January 1996 to the present. Brazil's
submission
1394, which does not materially differ from that of the United States1395, is as follows:

1389 We estimated the shares for upland cotton using the World Cotton Statistics of the International
Cotton Advisory Committee (Exhibit BRA-208), by subtracting the data for production/exports of "extra-fine
cotton" from production/exports of "cotton". We note that the United States share of word upland cotton
production in MY 1998 was approximately 16 per cent.
1390 According to data submitted by Brazil (Exhibit BRA-302), the United States share in world exports
of upland cotton were 24.1 per cent, 24.7 per cent, 38.3 per cent and 41.6 per cent in the marketing years 1999
to 2002, respectively. The United States also submitted data pertaining to the United States share in world
exports of upland cotton, in response to Panel Question No. 160, as well as in, for example, Exhibits US-119
and -120. They show an increase during the marketing years 1999 to 2002, as follows: 1999/2000: 24.1 per
cent; 2000/01: 24.7 per cent; 2001/02: 38.2 per cent; 2002/03: 39.3 per cent. We note that while the absolute
figures provided by the United States in response to Panel Question No. 160 differ slightly from those of Brazil,
they are of the same general order of magnitude and direction. Our analysis is not materially affected by the
slight differences in the figures submitted by the parties.
1391 We estimated the shares for upland cotton using the World Cotton Statistics of the International
Cotton Advisory Committee (Exhibit BRA-208), by subtracting the data for production/exports of "extra-fine
cotton" from production/exports of "cotton".
1392 e.g. United States' oral statement at the resumed session of the first substantive meeting, para. 21.
1393 United States' further written submission, para. 17.
1394 Exhibit BRA-311, indicating that the data was obtained from the Cotton Outlook published by
Cotlook, Ltd.
1395 Exhibit US-73.

Chart 1: Various upland cotton "prices" and "indicators"
Upland Cotton Prices: 1996 - Present
20.00
30.00
40.00
50.00
60.00
70.00
80.00
90.00
January-96
April-96
July-96
October-96
January-97
April-97
July-97
October-97
January-98
April-98
July-98
October-98
January-99
April-99
July-99
October-99
January-00
April-00
July-00
October-00
January-01
April-01
July-01
October-01
January-02
April-02
July-02
October-02
January-03
April-03
July-03
October-03
cents per pound
Adjusted World Price NY Futures Weekly Average of US Spot Markets Weekly Average of the A-Index Prices Received by Producers

7.1288 This depicts a broad decline in the overall le vel of these price trends from 1996 through the
beginning of calendar year 2002, with intermittent peaks and valleys . From 2002, there is a general
upward trend. This chart also demonstrates that there is a broad similarity in many of the price trends
depicted. The fact that prices dropped from 1996 through the beginning of 2002 is relevant.
However, it is not, in and of itself, conclusive fo r a determination of price suppression. Nor is the
increase from 2002 conclusive that a determinati on that any price suppression necessarily ceased at
that point. We need to examine whether these pri ces were suppressed, that is, lower than they would
have been without the United States subsidies in respect of upland cotton.
c. nature of the subsidies
7.1289 In this respect, we first recall that the exis tence of the United States subsidies challenged in
this dispute is not in question. We consider that the nature of the United States subsidies at issue – in
terms of their structure, design and operation – is re levant in assessing whether or not they have price
suppressing effects. We see before us two general t ypes of United States subsidies: those that are
directly price-contingent, and those that are not . We consider that, in light of the guiding
considerations we have already outlined
1396, this distinction is critical for the purposes of our price
suppression analysis in terms of the nexus which th e subsidies have to any price suppression and to
the subsidized product at issue. We examine each of these two types of subsidies in turn.

1396 Supra, paras. 7.1191-7.1194.

 (i) price-contingent subsidies

7.1290 We consider it highly relevant that certain of th e United States subsidies are directly linked to
world market prices. Foremost among these are the marketing loan programme payments and the
user marketing (Step 2) payments. MLA payments and CCP payments are also included in this
category. We examine each in turn.
7.1291 First, under the marketing loan programme 1397, benefits to producers result when the United
States adjusted world market price falls below the lo an rate. The repayment rate for upland cotton is
the lower of the two. When the adjusted world mark et price is lower than the loan rate, the producer
repays at less than the loan rate. This differe nce is referred to as a "marketing loan gain".
Alternatively, a producer may forego a marketing loan and receive a "loan deficiency payment"
("LDP") in the amount of the difference between the lower adjusted world market price and the loan
rate. Where producers repay at less than the loan rate, there is patently a financial contribution
supplementing the income of the producer. We ha ve no doubt that the payments stimulate production
and exports and result in lower world market prices than would prevail in their absence. Moreover,
the text of the measure indicates that the paymen ts are mandatory, where certain market conditions
prevail.1398
7.1292 The magnitude of payments under the marketing loan programme was – and continues to be –
countercyclical and dependent upon the adjusted world price, which is derived from the A-Index. The
greater the difference between the adjusted world pr ice and the marketing loan rate, the greater the
subsidy payment.
7.1293 The proposition that the per unit payment under the marketing loan programme increases
when the gap between the adjusted world price and th e loan rate widens is borne out by the following
graph:1399

1397 See our description of the measure supra, Section VII:C.
1398 Section 1201(a) of the 2002 FSRI Act provides that "... the Secretary shall make available to
producers on a farm nonrecourse marketing assistance lo ans for loan commodities pro duced on the farm"; and
"[t]he producers on a farm shall be eligible for a marketing assistance loan for any quantity of a loan commodity
produced on the farm." Section 1202 sets out the loan rate for upland cotton. See Exhibit BRA-29. We refer to
and incorporate our general discussion of the mandatory/d iscretionary distinction in Section VII:C. We also
refer to and incorporate mutatis mutandis our findings in Sections VII:E and F that section 1601(e) of the FSRI
Act of 2002, pertaining to expenditures under subtitles A through E of the FSRI Act of 2002, addresses levels of
domestic support for the purpose of a Member's domestic support commitments under the Agreement on
Agriculture. However, it does not deal with a Member's compliance with the serious prejudice provisions of the
SCM Agreement and therefore is not legally relevant here.
1399 Brazil's response to Panel Question No. 167, para. 150.

Chart 2: Difference between loan rate and adjusted world price

7.1294 This graph illustrates that except for a short period in MY 2000, the adjusted world price was
below the marketing loan rate throughout virtually the whole period from MY 1999-2002. The
shaded portion of the graph corresponds to the diffe rence between the adjusted world price and the
marketing loan rate of approximately 52 cents. Th e graph indicates that the marketing loan subsidy
by the United States government, at certain points, was greater than the market value of the product
itself. It accounted for more than half of the difference between the adjusted world price and the
marketing loan rate (and thus of United States upland cotton producer revenue). The further the
adjusted world price drops, the greater the exte nt to which United States upland cotton producers'
revenue is insulated from the decline, numbing Un ited States production decisions from world market
signals.
7.1295 We concur with Brazil, who cited certain USDA economists 1400 in support, that the structure,
design and operation of the marketing loan prog ramme has enhanced production and trade-distorting
effects.1401 The payments stimulate production and exports and result in lower world market prices
than would prevail in their absence. The counter-c yclical nature of the programme means that the
lower the United States adjusted world price, the gr eater the magnitude of the subsidy received by
United States upland cotton producers over a given time period.
7.1296 Over the period MY 1999-2002 shown in the chart above, when United States prices
decreased, due to the marketing loan's impact on United States production of upland cotton, this did
not have the effect of decreasing United States pr oduction or export. Rather, we see that United
States production and exports essentially continue d or increased over the period MY 1999-MY 2002,
reflecting the enhanced competitiveness of United States producers in world trade. 1402 The structure
of the measure, directly linked to the A-Index, aff ects the world market generally. In particular over
the period MY 1999-MY 2002, the United States adjusted world price, that is, the determinative price
for the availability and magnitude of the United St ates marketing loan programme payments and user

1400 See e.g., Exhibits BRA-222 and -223.
1401 The fact that theUnited States notifies the marketing loan programme as "amber box" support under
the Agreement on Agriculture may not necessarily be determinative for the purpose of our "adverse effects"
analysis under Part III of the SCM Agreement.
1402 See e.g., Exhibit BRA-223.

marketing (Step 2) payments was almost always below – and at times well below – this marketing
loan rate throughout this period.
7.1297 While we do not believe it is necessary to cal culate the precise amount of the subsidies in
question, we observe that we have this information readily available on the record.
1403 This is a very
large amount.
7.1298 Turning next to user marketing (Step 2) payments 1404, we see that they contribute to
artificially higher prices for United States upland cotton in the way of eliminating any positive
difference between United States internal prices and international prices of upland cotton.1405
7.1299 Ceteris paribus, in the case of user marketing (Step 2) payments to exporters, the relatively
lower prices that the foreign purchaser must pay have a positive impact on export demand for United
States upland cotton. Similarly, payments to domestic users stimulate the demand for United States
upland cotton by domestic users to the same degree that lower prices of United States upland cotton
would stimulate such demand. User marketing (S tep 2) payments tend to enhance the demand for
United States upland cotton and raise the price received by upland cotton producers.
1406 T h e
payments therefore stimulate production and exports and result in lower world market prices than
would prevail in their absence.
7.1300 Furthermore, as the triggering, and magnitude, of user marketing (Step 2) payments are also
linked to prices – indeed, they are contingent upon the relationship betw een the A-Index and the
United States adjusted world price – the observations that we have made above in the context of the
marketing loan programme payments are similarly applicable here. 1407 The structure of the measure,
directly linked to the A-Index, affects the world market generally. While we do not believe it is
necessary to calculate the precise amount of the subsid ies in question, we observe that we have this
information readily available on the record.1408 This is a very large amount.
7.1301 Third, United States upland cotton producers were also receiving MLA payments and CCP
payments, which are/were also expressly linke d to market prices. The United States has
acknowledged that MLA payments were paid in light of low commodity prices. The 1998 MLA
payments were intended essentially as a 50 per cen t additional PFC payment. The 1998, 1999 and
2001 Act each appropriated a dollar amount to assi stance which was divided among PFC payment
recipients proportionately to their respective pr evious PFC payment. The 2000 Act provided for
payments at the same contract payment rates as the 1999 Act. CCP payments, established by the
FSRI Act of 2002, are provided to producers of a covered commodity for each of the 2002 through

1403 Supra, Section VII:D.
1404 We have already addressed the United States statutory and regulatory provisions for the user
marketing (Step 2) programme under the FSRI Act of 2002. See Section VII:C for a description of the
measures. See also our findings in Section VII:E (concerning payments to exporters) and Section VII:F
(payments to domestic users) under the Agreement on Agriculture and the SCM Agreement. We refer to, and
incorporate, our findings concerning the mandatory nature of the measure.
1405 The United States asserts: "The Step 2 program has been constructed and implemented in a manner
to support the price paid to US upland cotton producers by purchasers of their product. [...] Step 2 payments are
provided to merchandisers or manufacturers who use upla nd cotton, as they represent the first step in the
marketing chain where these payments could be made and have the greatest impact on producer prices". See
United States' oral statement at the first session of the first substantive meeting, para. 24.
1406 We recall the basic economic proposition that th e effect on the producer of a subsidy may be
affected by the elasticities of supply and demand.
1407 Supra, paras. 7.1293-7.1296.
1408 Supra, Section VII:D and footnote 895.

2007 crop years whenever the effective price falls below the target price1409, which is fixed by the Act
at 72.4 cents per pound for upland cotton.
7.1302 We agree with the view of USDA economists th at, due to their market-price contingency,
CCPs may influence production decisions indirectly by reducing total and per unit revenue risk
associated with price variability in some situations. In the price range from the loan rate up to the
target price minus the DP payment rate, changes in producer revenues due to changes in market prices
are partly offset by the countercyclical payments if the base acreage crop is planted, thereby reducing
total revenue risk associated with price variability. 1410 We have confirmed a strong positive
relationship between upland cotton (base acre) pr oducers receiving annual payments and upland
cotton production.1411 Moreover, the payments are mandatory, under certain market conditions.1412
7.1303 These three subsidies are provided for in the same legal measure: the FSRI Act of 2002. 1413
They are granted, to varying degrees, in respect of the production and sale and/or export of the
subsidized product under examination: upland cotton. They are also price-contingent. In the
particular facts and circumstances of this dispute, we consider that these three subsidies therefore have
a nexus with the subsidized product and the single eff ects-related variable - world price - that we are
called upon to examine in our price suppression analysis under Article 6.3(c). The effects of these
three price-contingent subsidies are, in our view, manifest in the movements in upland cotton prices in
the same world market during the reference period . We consider these to be the subsidies whose
effects we are required to evaluate for the purposes of our Article 6.3(c) analysis.
7.1304 These subsidies were not, however, the only s ubsidies in respect of United States upland
cotton during this period. Other types of subsidies, not directly tied to world market prices of upland
cotton, were also granted. We turn to these subsidies below.

1409 The effective price is equal to the sum of (1) the higher of the national average farm price for the
MY, or the loan rate for the commodity and (2) the DP rate for the commodity.
1410 See USDA study in "The 2002 Farm Act, Provisions and Implications for Commodity Markets"
(November 2002), reproduced in Exhibit BRA-42: The extent of the offset depends on how much of the
acreage base is planted as well as the relationship betwee n the producer's expected selling price and expected
season average price. Furthermore, as they increase net producer reve nue, they may affect agricultural
production through wealth and investment effects. The effect of the additional inco me stabilization for farmers
is to reduce the cost of capital for upland cotton producers and, thereby, to keep land in the production of upland
cotton that otherwise would have been removed from producing upland cotton because of low cotton prices.
The FSRI Act of 2002 prov ides, on an on-going basis, for payments under certain market conditions. This
contrasts with the ad hoc nature of the MLA payments. Under the FSRI Act of 2002, United States producers
are currently aware that such payments are available under certain conditions and that there is no need to be
uncertain as to whether United States Congress may or may not decide to authorize such payments in a given
year. This certain claim on future payments under certain conditions increases United States producers'
economic stability. Also, e.g., "Farm Program Payments and the Economic Viability of Production Agriculture",
reproduced in Exhibit BRA-130, contains a 2002 USDA ERS report to the United States Congress indicating its
view that "such payments can affect production and, thus, market prices and export availability".
1411 Supra, Section VII:D.
1412 Section 1104(a) of the FSRI Act of 2002, reproduced in Exhibit BRA-29. We refer to and
incorporate our general discussion of the mandatory/discretionary distinction in Section VII:C. We also refer to
and incorporate mutatis mutandis our findings in Sections VII:E and F that section 1601(e) of the FSRI Act of
2002, pertaining to expenditures under subtitles A throug h E of the FSRI Act of 200 2, addresses levels of
domestic support for the purpose of a Member's domestic support commitments under the Agreement on
Agriculture. However, it does not deal with a Member's compliance with the serious prejudice provisions of the
SCM Agreement and therefore is not legally relevant here.
1413 As we have noted, MLAs, which we also include in this group, were granted pursuant to legislation
to supplement PFCs.

 (ii) subsidies not contingent upon price

7.1305 First, the PFC and DP payments are/were granted. For PFC payments, the 1996 Act
appropriated a budgetary amount to the programme for each fiscal year from 1996 through 2002 and
allocated a certain percentage of that amount to each of the seven programme commodities. 1414 DPs,
established by the FSRI Act of 2002, provide suppor t to producers based on historical acreage and
yields for nine commodities, including upland co tton, for each of the 2002 through 2007 crop
years.1415 We agree with the view of the USDA Economic Research Service 1416 that because DP
payments do not expressly depend upon current production of upland co tton and are not directly tied
to market prices, their price suppression effects ar e not as easily discernible as those of certain other
subsidy programmes (the marketing loan programme and the user marketing (Step 2) programme and
CCP payments). DP payments are tied to b ase acreage. They enhance producer wealth and
investment potential, including lowering of risk aversion. 1417 We have confirmed a strong positive
relationship between upland cotton (base acre) pr oducers receiving annual payments and upland
cotton production.1418 The text of the measure indicates that these payments are mandatory.1419
7.1306 Second, we recall the fact that the United St ates government pays a certain proportion of the
insurance premium that would otherwise be paya ble by the United States upland cotton producer.
This means reduced cost and heightened economic security to the United States upland cotton
producer.
1420 Moreover, the insurance coverage affect s United States upland cotton producers' risk
considerations. Each of these will have positive ramifications for producer wealth and investment and
economic stability. While we do not believe it is necessary to calculate the precise amount of the

1414 The amount appropriated for each fiscal year ranged between $5.8 billion to $4.008 billion. The
amount of this allocated to upland cotton in each fiscal year was 11.63 per cent. We incorporate our description
of the measure, supra, Section VII:C.
1415 We incorporate our description of the measure, supra, Section VII:C.
1416 Exhibit BRA-42.
1417 The United States acknowledges that these programmes may have some impact on production,
albeit the United States says that the research concludes that the impact appears negligible. For the United
States, it is "widely accepted" that these programs have wh ole farm impacts rather than crop-specific impacts.
We observe that PFC payments and DP payments mean higher cash flow and higher wealth in terms of net
worth for United States upland cotton producers. Unite d States producers that enrol under the PFC and DP
payment programmes obtain an entitlement to receive future payments which increases their net wealth. This
will have various predictable effects, including enhanced investment prospects due to better access to loans (as
the producers are perceived as having a lower risk of default); ability to pay existing loans and other debt; a
lowered aversion to risk which may allow a producer to assume riskier planting strategies; and an income-
stabilizing effect as a producer may make production decisions taking into account this government revenue
stream of income. This is particul arly the case when the PFC and DP paym ents are considered in conjunction
with the market loss and its countercyclical component, respectively. We incorporate our description of the
measure in Section VII:C, including the requirement to use the land for an agricultural or conserving use. These
payments provide an incentive to maintain land in agricultural use. Moreover, while a producer has the ability
to vary production among certain crops, the strongly positive relationship between upland cotton (base acre)
producers receiving annual payments and upland cotton pr oduction shows that they are, to a certain degree, an
incentive for continuity. We also refer to and incorporate our findings on these measures in Section VII:D.
1418 Supra, Section VII:D.
1419 See description of the measure in Section VII: C. We refer to and incorporate our general
discussion of the mandatory/discretionary distinction in Section VII:C. We also refer to and incorporate mutatis
mutandis our findings in Sections VII:E and F that section 1601(e) of the FSRI Act of 2002, pertaining to
expenditures under subtitles A through E of the FSRI Act of 2002, addresses levels of domestic support for the
purpose of a Member's domestic support commitments under the Agreement on Agriculture. However, it does
not deal with a Member's compliance with the serious prejudice provisions of the SCM Agreement and therefore
is not legally relevant here.
1420 See description supra, Section VII:C and Exhibits referenced therein, as well as, for example,
Exhibit BRA-229.

subsidies in question, that informati on is readily available on the record. 1421 The text of the measure
indicates that these payments are mandatory.1422
7.1307 With respect to this second group of subsidies we have identified, we note that none of them
are price-contingent. The PFC and DP payments ar e provided in the same legal measure as the three
price-contingent subsidies we have discussed above - the FAIR Act of 1996 and the FSRI Act of
2002, respectively - whereas crop insurance subsidi es have a separate legal basis. PFC and DP
payments and crop insurance subsidies, were/are gr anted, to varying degrees, in respect of the
subsidized product under examination: upland cott on. However, in the particular facts and
circumstances of this dispute, the combination of these elements indicates to us that these particular
subsidies are more directed at income support. This combination attenuates the nexus between these
subsidies with the subsidized product and the single e ffects-related variable - world price - that we
are called upon to examine in our price suppression an alysis under Article 6.3(c). These subsidies are
of a different nature, and thus effect, than the ot her (price-contingent) subsidies we have examined
above.1423 Because they are of a different nature and effect, we decline to aggregate them and their
effects with those of the mandatory price-contingent subsidies in our price suppression analysis here.
Rather, we must consider them separately.
d. conclusion as to the existence of price suppression in the same world market
7.1308 As we have just indicated, several of the United States subsidies are directly linked to world
prices for upland cotton, thereby numbing the response of United States producers to production
adjustment decisions when prices are low. We have readily available information on the record
showing us that the price-contingent subsidies in question involve very large amounts of United States
government money benefiting United States upland cott on. In our view, the collective operation of
these subsidies was akin to a very large, counter cyclical, deficiency payment laced with additional
enhancements. We believe that the structure, design and operation, particularly of the price-
contingent subsidies, constitutes strong evidence supporting a finding of price suppression.
7.1309 In this respect, we recall th at the United States does not disagree with the proposition that
increased production and supply which reaches world mark ets will have an effect on prices. This is
the underlying logic for the United States' argument that China's sales of 11.6 million bales between
MY 1999-2001 was a significant factor that depressed world prices.
1424 Neither party therefore
disputes the proposition that suppressed world pri ces may follow from an increased supply being
infused on the world market, over and above existing available world supply of fungible upland
cotton.

1421 See supra, Section VII:D. Exhibit BRA-57 and Exhibit BRA-374 show the amount of "subsidy"
and "premium discount" in recent years. We note the Un ited States' argument that cr op insurance subsidies are
generally available for most crop producers and hence do not give a specific advantage to one crop or another.
Our inquiry into any serious prejudice caused by the United States subsidies in this dispute under the provisions
of Part III of the SCM Agreement is not limited to an inquiry of the effects of those subsidies on cotton vis-à-vis
other crops. Rather, our inquiry focuses on the imp act of the United States subsidies on upland cotton
production and prices.
1422 Sections 508(b)(1), 508(b)2)(A) and 508(b)(3) of the Federal Crop Insurance Act, reproduced in
Exhibit BRA-30, provide that catastrophic risk protection and alternative risk protection shall be provided.
Section 508(c)(1)(A) provides that additional coverage shall be provided. Section 508(e) of the legislation
provides that the FCIC shall pay a part of the premium in respect of certain policies. We refer to and
incorporate our general discussion of the mandatory/discretionary distinction in Section VII:C. We also refer to
and incorporate mutatis mutandis our findings in Sections VII:E and F that section 1601(e) of the FSRI Act of
2002, pertaining to expenditures under subtitles A throug h E of the FSRI Act of 200 2, addresses levels of
domestic support for the purpose of a Member's domestic support commitments under the Agreement on
Agriculture. However, it does not deal with a Member's compliance with the serious prejudice provisions of the
SCM Agreement and therefore is not legally relevant here.
1424 United States' further written submission, paras. 41-43.

7.1310 We believe that this has occurred in the world market for upland cotton. Between
MY 1998-2002, the A-Index fell on average approximately 30 per cent below its 1980-1998 average.
7.1311 Moreover, we have before us credible evid ence that prices for upland cotton transactions
throughout the world are influenced by referenc e to the New York futures market and largely
determined by the A-Index price.
1425 Physical upland cotton is traded on spot markets in each country
where upland cotton is produced, or under forward delivery contracts involving domestic or export
sales. The levels reflected in the futures market may influence the levels of the prices for spot
markets and forward delivery contracts. Moreover, the price movements in the A-Index, the New
York futures, spot prices and the United States adju sted world price indicates that United States and
world prices for upland cotton are closely linked, and that price movements and trends originating
from the United States market are closely tracked by, and would also influence, prices on the world
market.1426 The link between the A-Index and the Un ited States adjusted world price and the
parallelism in the price movements confirms the link between prices in the United States and the
world market. As we have already indicated, th e United States exerts a substantial proportionate
influence in this world market.
1427
7.1312 On the basis of these considerations, we find th at price suppression has occurred in the same
world market within the meaning of Article 6.3(c) of the SCM Agreement.
7.1313 We also find that developments in the wo rld upland cotton price would inevitably affect
prices in other markets where Brazil and the United States may compete, due to the nature of the
world prices in question and the nature of the wo rld upland cotton market, and the relative proportion
of that market enjoyed by the United States and Brazil. All individual sales of upland cotton by Brazil
and the United States in any domestic market in which both were present would occur against this
backdrop.
1428
7.1314 We recall the United States' argument that much of the evidence submitted by Brazil in the
context of its Article 6.3(c) submissions indicates that it was the prices of Brazil's product that
undercut the prices of the United States' product in certa in markets. The United States argues that a
finding of price suppression is not possible under the se conditions. In this respect, we note that the
text of Article 6.3(c) of the SCM Agreement refers to: "significant price undercutting by the
subsidized product as compared with the price of a like product of another Member in the same
market or significant price suppression ... in the same market". We understand this conjunction "or",
in this context, to indicate alternative inde pendent conditions which may exist. It does not indicate
any necessity to cumulate the conditions of pri ce undercutting and price suppression in order to find
price suppression amounting to serious prejudice. That is, price suppression under Article 6.3(c)
exists independent of any finding of price undercutting. Nothing in the context or object and purpose
of this provision indicates otherwise to us. We find confirmation for our view in the drafting history

1425 Statement of Andrew MacDonald, Annex II to Brazil's further submission. See supra, footnotes
1375 and 1323. See the chart in Ex hibit BRA-311; Exhibit US-73, cited supra, para. 7.1287. While the
particular United States price quote for the purposes of the A-Index may not have been consistently among the
lowest price quotes taken into account in the calculation of the A-Index, the United States adjusted world price –
the determinative price for the marketing loan programme payments as well as user marketing (Step 2)
payments – is derived from the A-Index.
1426 Supra, paras. 7.1287-7.1288.
1427 Supra, para. 7.1285.
1428 We also find support for our view in the statements by Mr. McDonald, Annex II to Brazil's further
written submission, in particular, para. 24 (see also supra footnote 1375) and Mr. Ward, Exhibit BRA-283, in
particular, para. 11. We further note Chad's third party oral statement at the resumed session of the first
substantive meeting with the Panel, e.g. para. 3. See also, generally, supra, footnote 1323, concerning the
participation of experts as part of the parties' and third parties' delegations in these Panel proceedings.

of the provision.1429 Moreover, the text makes it clear that the conditions set out in Article 6.5 of the
SCM Agreement pertain to "price undercutting" for the purpose of paragraph 3(c) of Article 6. They
do not refer to price suppression under Article 6.3(c) of the SCM Agreement.1430
7.1315 In light of this finding, we do not believe that it is necessary to proceed to any further
examination of the parties' evidence and argum entation relating to alle ged price suppression in
individual country markets.1431
iii Is it "significant" price suppression?
7.1316 It may not simply be any price suppression which will necessarily fulfil the conditions of
Article 6.3(c) of the SCM Agreement . Rather, the text of Article 6.3(c) stipulates that we must
examine whether "the effect of the subsidy is a ... significant price suppression, price depression or
lost sales in the same market." (emphasis added)
7.1317 The current text of the SCM Agreement does not define "significant" for the purposes of
Article 6.3(c), nor does it expressly specify any elemen ts or criteria that would inform how a panel
would go about assessing whether or not any pri ce suppression or depression is "significant" under
this provision.
1432
7.1318 The only prior WTO panel to have examined the me aning of this term in Article 6.3(c) of the
SCM Agreement in the context of a price undercutting claim observed that:
"Although the term "significant" is not defi ned, the inclusion of this qualifier in
Article 6.3(c) presumably was intended to ensure that margins of undercutting so
small that they could not meaningfully affect suppliers of the imported product whose
price was being undercut are not considered to give rise to serious prejudice"
1433
7.1319 That panel did not, therefore, attempt to devel op a general definition or interpretation of the
term "significant", but rather re lied upon its apparent rationale as a me chanism to filter out effects of
insignificant degree or magnitude.

 1429 Articles 31 and 32 of the Vienna Convention. Exhibit BRA-372 indicates that an 18 July 1990
Report by the Chairman on the Negotiating Group on Subsidies and Countervailing Measures
(MTN/GNG/NG10/W/38) shows what is now Article 6.3(c) referred to price suppression as a result of price
undercutting as opposed to an independent ground ("Ther e is a significant price undercutting by the subsidized
products as compared with the price of a like product of another signatory in the same market resulting in price
suppression..."). Following various proposals, a subsequent draft Chairman's text
(MTN/GNG/NG19/W/38/Rev.2) inserts an "or" between "significant price undercutting by the subsidized
products as compared with the pric e of a like product of another signatory in the same market" [or] "the
subsidized imports result in price supp ression, price depression or lost sales in the same market...". This "or"
remained in the final text, rendering "price undercutting" independent from "significant price suppression".
1430 We observe, in passing, evidence in Exhibit BRA-383 which indicates that, for MY 1999 - MY
2002, the average price (cents per pound) for exports of United States upland cotton was 45.33, while, for
Brazil, it was 44.65. The A-Index was 51. 94.
1431 For this reason, it is also not necessary for us to express any view with respect to the United States
assertion that Brazil's statement of findings and recomme ndations requested is limited to the "Brazilian, United
States and world markets", and that Brazil has not specifically requested us, in that portion of its submissions,
to request a finding in respect of individual third country export markets.
1432 Some contextual guidance as to how significance may have, at leas t originally, be conceived, may
be derived from the provisions of the agreement. We recall that Article 6.1(a) of the agreement, which has now
lapsed, indicated that serious prejudice "sha ll be deemed to exist" where the total ad valorem rate of
subsidization exceeded 5 per cent. Thus, evidence as to the ra te of subsidization may be relevant to this issue.
We do not, however, consider it necessary to consider this element here.

7.1320 Primarily on the basis of this prior panel re port, Brazil suggests that the level of price
suppression meaningfully affects non-subsidized supplie rs of the like product (i.e., Brazilian, African
and other non-United States suppliers) competing with the subsidized product. For Brazil, the notion
of "meaningfully affect" and "serious prejudice" are essentially equivalent for the purpose of
Article 6.3(c) of the SCM Agreement.
1434 Brazil asks us to reject the "two-step approach" suggested
by the United States under Article 6.3(c), whereby an affirmative conclusion on "significance" under
Article 6.3(c), would be followed by an examinat ion of whether or not such "significant price
suppression" constitutes "serious prejudice" within the meaning of Article 5(c).1435
7.1321 For its part, the United States asserts that we should not ascribe much weight to the
Indonesia – Autos panel's view, as that panel conducted no te xtual examination and also indicated it
was making an assumption about the meaning of the term "significant". 1436 For the United States, it is
the effect on prices (of the Brazilian product) that must be "s ignificant". The existence of any direct
effect on Brazilian producers is not relevant to an assessment of the significance of price suppression;
rather, significant price suppression may or may not have any effect on producers.
7.1322 We realize that Article 6.3(c) is the only su b-paragraph of Article 6.3 that contains a
qualifying adjective – "significant" – that modifi es the particular effects-based situation under
examination. We believe that th e degree of "significance" of any price suppression found to exist in
the course of the Article 6.3(c) examination would also ordinarily be a relevant consideration in
assessing – under the chapeau of Article 6.3 – whether or not "serious prejudice" "may" exist within
the meaning of Article 5(c) of the SCM Agreement. Indeed, we agree entirely with the United States
that "...it is conceivable that the effect of the subsidy could be price suppression so significant that it
alone rises to the level of serious prejudice to the interests of another Member."
1437
7.1323 We do not, however, believe that this is an issue that can be resolved by an examination of the
text of Article 6.3(c) in isolation. In our vi ew, the question whether or not "significant" price
suppression within the meaning of Article 6.3(c) will necessarily amount to "serious prejudice" within
the meaning of Article 5(c) will also depend on the cl arification of the remaining relevant text of the
treaty provision in question, i.e. the chapeau of Article 6.3. We must remain cognizant of the terms of
both the sub-paragraphs of Article 6.3 and the ch apeau of that provision. We are precluded from
reducing either one to redundancy.
7.1324 To us, it is therefore essential first to establish whether or not the conditions in Article 6.3(c)
exist. If they do, then, due to the particular treaty text and structure of Article 6.3(c) and its chapeau,
we would consider the textual terms of the chapeau of Article 6.3(c).
7.1325 As always, we turn first to the treaty text in qu estion: "significant". The ordinary meaning of
the term "significant" is "impor tant; notable ... consequential". 1438 The term "significant" therefore
connotes something that can be characterized as important, notable or consequential.
7.1326 In the text of Article 6.3(c), the term "significant" modifies the term "price suppression or
depression". Therefore, under Article 6.3(c), the "s omething" that must be important, notable or
consequential is the "price suppression or depression".
7.1327 We endorse the shared view of the parties th at we can find relevant contextual support
(although not direct methodological guidance) for this reading of "significant" "price suppression" in

1434 Brazil's 28 January 2004 comments on United States' response to Panel Question No. 234.
1435 See United States' response to Panel Question No. 234; and Brazil's 28 January 2004 comments on
United States' response to Panel Question No. 234.
1436 United States' further written submission, para. 82.
1437 United States' response to Panel Question No. 234, para. 135.
1438 The New Shorter Oxford English Dictionary, (1993).

Article 15.2 of the SCM Agreement.1439 That provision reads, in pertinent part: "whether the effect of
[the subsidized] imports is otherwise to depress pr ices to a significant degree or to prevent price
increases, which otherwise would have occurred, to a significant degree... ". (emphasis added)
7.1328 This reading of the text in its context confirms to us that it is the degree of price suppression
or depression itself that must be "significant" (i.e. important, notable or consequential) under
Article 6.3(c) of the SCM Agreement. In determining whether the price suppression is "significant", it
may be relevant to look at the degree of the price suppression or depression in the context of the
prices that have been affected – that is, at the degree of significance of suppression or depression.
1440
7.1329 Such significance may be manifest in a number of ways. The "significance" of any degree of
price suppression may vary from case to case, depe nding upon the factual circumstances, and may not
solely depend upon a given level of numeric significance. 1441 Other considerations, including the
nature of the "same market" and the product under consideration may also enter into such an
assessment, as appropriate in a given case.
7.1330 We cannot believe that what may be significant in a market for upland cotton would
necessarily also be applicable or relevant to a mark et for a very different product. We consider that,
for a basic and widely traded commodity, such as upland cotton, a relatively small decrease or
suppression of prices could be significant because, fo r example, profit margins may ordinarily be
narrow, product homogeneity means that sales are price sensitive or because of the sheer size of the
market in terms of the amount of revenue i nvolved in large volumes traded on the markets
experiencing the price suppression.
7.1331 The SCM Agreement contains certain provisions in Artic le 27 relating to substantive special
and differential treatment for developing countries, including relating to certain aspects of actionable
subsidies disciplines. However, we do not find any such explicit provision for substantive special and
differential treatment for developing countries in Article 6.3(c) of the SCM Agreement relating to the
assessment of "significance" of any price suppression.
7.1332 During the period under consideration, given the relative magnitude of United States
production and exports
1442, the overall price trends we identified in the world market 1443, and the
nature of the mandatory United States subsidies in question – in particular, the market-price
contingent, countercyclical, nature of the marke ting loan programme, the user marketing (Step 2)
programme, MLA payments and CCP payments 1444 – and the readily available evidence of the order
of magnitude of the subsidies 1445, we are certainly not, by any means, looking at an insignificant or
unimportant world price phenomenon.1446

1439 See e.g., United States' response to Panel Question No. 148 and Brazil's further written submission,
para. 88.
1440 United States' response to Panel Question No. 148.
1441 In any event, we note that no such numeric standard is provided in Part III of the Agreement. This
contrasts, to a certain extent, with the provisions of Part V of the agre ement, which contain, for example,
indications of "amount" of the subsidy which are de minimis (less than 1 per cent ad valorem) and volumes of
the "subsidized product" which are negligible. See e.g. Article 11.9 of the SCM Agreement
1442 We refer to, and incorporate our examination supra, paras. 7.1281-7.1285.
1443 Supra, paras. 7.1287-7.1288.
1444 We refer to, and incorporate, our examination of the structure, design and operation of these
measures, supra, paras. 7.1289-7.1303.
1445 Supra, Section VII:D and footnote 895.
1446 See also our discussion infra, para. 7.1395. As we deem this a sufficient basis for our
determination of "significance", it is not necessary for us also to consider any impact on Brazilian producers
here. We observe, however, that any such examination would only reinforce our finding.

7.1333 We therefore consider that the degree of pri ce suppression we have found to exist in the same
world market is "significant" within the meaning of Article 6.3(c) of the SCM Agreement.
(k) "The effect of the subsidy"
(i) Main arguments of the parties
7.1334 Brazil submits that the United States market generated excess supplies of upland cotton
through the use of large subsidies which have great ly increased United States exports. In turn, this
suppressed prices in the interconnected global commodi ty markets of upland cotton, a basic fungible
commodity. According to Brazil, the evidence it s ubmits, when considered independently, confirms
the causal link between United States subsidies and significant price suppression, but, when taken as a
whole, overwhelmingly shows the existence of a close and important link in MY 1999-2002.
1447
Brazil also asserts that each of the United States s ubsidies, individually, have resulted in "serious
prejudice" within the meaning of Articles 5(c) and 6.3(c) of the SCM Agreement.
7.1335 Brazil does not disagree that the Panel can and s hould take "other factors" into account, to the
extent they are relevant. For Brazil, even though so me of these factors may have contributed to lower
and suppressed prices during MY 1999-2002, the Unite d States arguments and evidence do not refute
Brazil's evidence that the impact of $12.9 billion in United States subsidies on United States acreage,
production, exports and prices was significant.
7.1336 The United States submits that Brazil has not demonstrated causation. 1448 It was other
factors, and not United States subsidies, that affected world cotton markets during the MY 1999-2002
and caused the dramatic plunge in cotton prices.
1449 The United States also alleges that the use of the
years 1998 (due to drought) and 2001 (due to unusu ally high yields) are misleading. The United
States also denies that any of the subsidies, individually, had the effects alleged by Brazil.
(ii) Main arguments of the third parties
7.1337 Argentina considers that the subsidies granted by the United States to its cotton sector over
the MY 1999-2002 period have caused and still cau se serious prejudice to the interests of other
Members, including Argentina, in that they have a significant suppressing or depressing effect on
international cotton prices, within the meaning of Articles 5(c) and 6.3(c) of the SCM Agreement.1450
7.1338 Paraguay submits that "cotton trade is affected by the United States measures" because
cotton production has a considerable impact on its economy, and especially on its rural populations
which depend on cotton for their livelihood. Thus, the impact on trade in countries like Paraguay is
devastating and causes the migration of rural populati ons to the urban areas, further aggravating the
economic situation of a country dependent on its agriculture.
1451
(iii) Evaluation by the Panel
7.1339 Article 5(c) of the SCM Agreement provides that: "[n]o Member should cause, through the
use of any subsidy referred to in pa ragraphs 1 and 2 of Article 1, a dverse effects to the interests of
other Members, i.e.: ...serious prejudice to the interests of another Member". (emphasis added)
7.1340 Article 6.3(c) of the SCM Agreement provides that: "Serious prejudice in the sense of
paragraph (c) of Article 5 may arise in any case where one or several of the following apply: ... (c) the

1447 Brazil's further written submission, paras. 104-105.
1448 United States' further written submission, para. 17.
1449 United States' further written submission, paras. 45-70.
1450 Argentina's written submission to the resumed session of the first substantive meeting, para. 50.
1451 Paraguay's written submission to the resumed session of the first substantive meeting, paras. 10-11.

effect of the subsidy is a significant price undercutting by the subsidized product as compared with the
price of a like product of another Member in the same market or significant price suppression, price
depression or lost sales in the same market." (emphasis added)
7.1341 The text of the treaty requires the establishment of a causal link between the subsidy and the
significant price suppression.
7.1342 In considering the nature of the causal link that must exist between the subsidy and the price
suppression, we recall the general distinction we ha ve drawn between the provisions of Part III and
Part V of the SCM Agreement, and our general approach to this serious prejudice analysis.
1452
7.1343 Articles 5 and 6.3 of the SCM Agreement do not contain the more elaborate and precise
"causation" and non-attribution language which is contained in the trade remedy provisions of the
SCM Agreement, as well as in the Anti-dumping and Safeguards Agreements.1453 The absence of such
detailed language, which exists elsewhere in the covered agreements, including in the immediate
context of the same (SCM) agreement may be taken as a demonstration that the drafters knew how to
craft a precise causation standard when they deemed it appropriate. However, they have not done so
with as much precision here.1454
7.1344 While this may suggest that we need not necessar ily separate, distinguish and attribute, to a
precise degree, all of the different effects from the va rious factors, we believe, nevertheless, that the
condition of a causal link requires us to ensure that the significant price suppression is "the effect of
the subsidy" within the meaning of Article 6.3(c). This necessarily calls for an examination of United
States subsidies, within the context of other po ssible causal factors, to ensure an appropriate
attribution of causality.
7.1345 We therefore, first, examine whether or not "the effect of the subsidy" is the significant price
suppression which we have found to exist in the sa me world market. As this examination is
necessarily a fact-specific examination that w ill vary from case to case, we will conduct an
examination of the arguments and evidence before us as a whole, and come to a conclusion on the
basis of the evidence in its entirety.
7.1346 We then consider the role of other alleged cau sal factors in the record before us which may
affect our analysis of the causal link between th e United States subsidies and the significant price
suppression.

1452 Supra, paras. 7.1156 ff.
1453 For example, Article 15.5 of the SCM Agreement provides:

"It must be demonstrated that the subsidized im ports are, through the effects of subsidies,
causing injury within the meaning of this Agreement. The demonstration of a causal
relationship between the subsidized imports and the injury to the domestic industry shall be
based on an examination of all relevant evidence before the authorities. The authorities shall
also examine any known factors ot her than the subsidized imports which at the same time are
injuring the domestic industry, and the injuries caused by these other factors must not be
attributed to the subsidized imports. Factors which may be relevant in this respect include,
inter alia , the volumes and prices of non-subsidized imports of the product in question,
contraction in demand or changes in the patterns of consumption, trade restrictive practices of
and competition between the foreign and domestic producers, developments in technology and
the export performance and productivity of the domestic industry." (footnote omitted)
See also Article 4.2 of the Safeguards Agreement and Article 3.5 of the Anti-dumping
Agreement.

1454 Furthermore, Articles 6.4 and 6.5 of the SCM Agreement set forth certain detailed considerations to
be taken into account when demonstr ating the causation of the occurrence of the element in question under
paragraphs 3(b) and 3(c) (concerning price undercutting).

i Is there a causal link?
7.1347 There are four main, cumulative, grounds why we believe that a causal link exists between
certain of the challenged United States subsidies and the significant price suppression.
7.1348 First, as we have already indicated, we believe that the United States exerts a substantial
proportionate influence in the world upland cotton market.
1455 This substantial proportionate
influence flows, inter alia, from the magnitude of the United States production and export of upland
cotton. We recall again that the United States doe s not disagree with the proposition that a Member's
proportionate magnitude in world production and co nsumption of upland cotton might be a relevant
consideration here. 1456 Nor does the United States disagree with the proposition that increased
production and supply of upland cotton which reach es the world markets will have an effect on
prices.1457
7.1349 Second, we recall our examination of the nature of the United States subsidies at issue. In
particular, we recall that several of the Unite d States subsidies – marketing loan programme
payments, the user marketing (Step 2) payments, MLA payments and CCP payments – are directly
linked to world prices for upland cotton, ther eby insulating United States producers from low
prices.1458 We believe that the structure, design a nd operation of these three measures constitutes
evidence supporting a causal link with the significan t price suppression we have found to exist.
Furthermore, while we do not believe that it is stri ctly necessarily to calculate precisely the amount of
the subsidies in question, we observe that we have readily available information on the record
showing us that the price-contingent subsidies in question involve very large amounts of United States
government money benefiting United States upland co tton production. We agree with the United
States that "the question is one of the nature of the subsidy examined and the degree of any predicted
effect, which could range from significant to negligible." 1459 These price-contingent subsidies were,
in our view, sufficient to cause the significant pric e suppression that we have found to exist in the
same world market.
7.1350 It is true that PFC payments, DP payments and crop insurance payments were/are also granted
contemporaneously with these price-contingent subs idies. However, in our view, Brazil has not
established that, in light of their structure, design and operation, these measures – which are more
concerned with income support than directly with world price effects – had a sufficient nexus with the
marketing of the subsidized product and the price suppression effects as to render their inclusion or
non-inclusion in our price suppression analysis legally determinative in respect of the significant price
suppression that we have found in the same world ma rket. We nevertheless observe that they did not
have the effect of diminishing, or cancelling out, the significant price suppression. However, because
of the different nature and effect of these subsidi es, we decline to aggregate them and their effects
with those of the price-contingent subsidies in our serious prejudice analysis. In our view, Brazil has
not established that the significant price suppression we have found was "the effect of" these non-
price-contingent subsidies within the meaning of Article 6.3(c).
1460

1455 Supra, paras. 7.1281-7.1285.
1456 e.g. United States' further rebuttal submission, pa ra. 37. The United States was the second largest
producer of upland cotton, accounting for approximately 20 per cent of the world's cotton production in the
relevant years. See our findings, supra, para. 7.1282. China, the largest producer, had a slightly higher average
share of world production in MY 1999-2002. See "Cotton: World Statistics," ICAC, September 2003, p. 4,
reproduced in Exhibit BRA-208.
1457 This is the underlying logic for the United States' argument that China's sales of 11.6 million bales
during MY 1999-2001 was a significant factor that depressed world prices.
1458 Supra, paras. 7.1289-7.1303.
1459 United States' response to Panel Question No. 164.
1460 We refer to, and incorporate, the considerations guiding our analysis, supra, paras. 7.1191-7.1194
and the citations indicated there.

7.1351 Third, there is a discernable temporal coinci dence of suppressed world market prices and the
price-contingent United States subsidies. Looking at the period, we see the following:
• United States production of upland cotton increased from MY 1998 to MY 2001 and,
while production dropped in MY 2002, there was still an overall increase in MY 2002
compared to MY 1998;

• the United States' share of world upland co tton production increased to and remained
at a level of approximately 20 per cent;1461

• United States prices received by United States upland cotton producers decreased by
34 per cent between MY 1998 and MY 2001;1462

• the A-Index in MY 1999 – MY 2002 was, on average, 29.5 per cent below its 1980-
1998 average;1463

• United States exports increased by approximately 160 per cent from MY 1998 to
MY 2001 and by an even greater percentage from MY 1998-MY 2002;

• United States share of world exports of upland cotton increased;1464 and

• United States imports of upland cotton remained at comparatively low levels.

7.1352 These data reveal that, over the same period that the subsidies in question were being granted,
the United States market generated large supplies of upland cotton. Over this same time period,
market revenue of United States upland cotton produ cers decreased. So did world market prices.
There was also a marked increase in United States exports, both absolute and in terms of relative
share of world exports. Even taking into account that in 1998, production may have been driven
downward by drought and high levels of crop aban donment and that, in 2001, production may have
been driven upward by high yi elds, we see a strong temporal coin cidence between the United States
subsidies and the drop in United States prices, the drop in – and suppression of – world market prices,
the increase in United States exports.
7.1353 Fourth, we find credible evidence on the r ecord concerning the divergence between
United States producers' total costs of production 1465 and revenue from sales of upland cotton since

1462 USDA Fact Sheet: Upland Cotton (January 2003), p. 4-5, reproduced in Exhibit BRA-4.
1463 The A-Index averaged 73.54 and 51.88 US-cents/lb in the periods of MY 1980-1998 and
MY 1999-2002, respectively. Exhibit BRA-209.
1464 See supra, para. 7.1283, pertaining to export data on the Panel record.
1465 We believe that not only coverage of variable costs, but also of fixed costs, would be necessary, at
least over the medium to longer term, in order for United States upland cotton producers rationally to opt to
remain United States upland cotton producers. We find support for this proposition in Appellate Body Report,
Canada – Dairy (Article 21.5 – New Zealand and US) , paras. 87, 88. Only an analysis of the total cost of
production takes account of the economic resources the producer invests in the product. Fixed and variable
costs are the total amount which the producer incurs in order to produce the product and the total amount it must
recoup, in the long-term, to avoid making losses. To the extent that the producer charges prices that do not
recoup the total cost of production, over time, it sustains a loss which must be financed from some other source,
or else the producer simply has to close down his business. We recall, for example, the statement of Mr.
Christopher Ward, reproduced in Exhibit BRA-283. Mr . Christopher Ward, who is a Brazilian producer and
exporter of upland cotton, also made a statement regarding the conditions of producing upland cotton in Brazil
at the resumed session of the first substantive meeting wi th the Panel as a member of Brazil's delegation. See
supra, footnote 1323, relating to the involvement of experts as members of party and third party delegations in
these Panel proceedings.

1997.
1466 This supports the proposition that United St ates upland cotton producers would not have
been economically capable of remaining in the production of upland cotton had it not been for the
United States subsidies at issue
1467 and that the effect of the subsidies was to allow United States
producers to sell upland cotton at a price lower than would otherwise have been necessary to cover
their total costs.
7.1354 If market revenue alone is compared to United States upland cotton producers' total costs of
production, the information before us reveals that United States upland cotton producers would on
average have lost money for each planted acre in every year since MY 1998, and made a small profit
in MY 1997.
1468 We do not believe the utility of the record data is fundamentally undermined by any
of the criticisms levied by the United States for the purposes of this dispute, particularly as the data
are calculated in accordance with a methodology which the USDA itself has deemed to be a
sufficiently reliable reflection of United States upland cotton producers' costs and revenues. 1469 That
the figures before us are cumulated to show a result over the six-year period from 1997-2002 also
lends itself to an assessment of the medium- to longer- term examination of developments in the
United States upland cotton industry.
1470 We believe that the existence of this gap between upland

1466 See USDA "Characteristics and Production Costs of United States Cotton Farms" (October 2001),
reproduced in Exhibit BRA-16, in which the USDA ERS indicates that, for 1997, producing a pound of upland
cotton cost United States farmers 38 cents in operating costs and another 35 cents in overhead-costs (average
total cost of production: 73 cents per pound). Brazil's arguments address the marketing years since 1997.
1467 We note that the USDA has acknowledged that "Potential net revenue is the bottom line in a
producer's decision to participate in government programs...". See Exhibit BRA-12, p. 20.
1468 See e.g., Brazil's response to Panel Question No. 163, para. 136. See also "Costs and Returns of
United States Upland Cotton Farmers MY 1997-2002", reproduced in Exhibit BRA-323. Exhibit BRA-206
shows the revenue gap for United States production of upland cotton lint. Exhibit BRA-353 depicts producers'
cumulative loss without contract paymen ts. See also United States' respons e to Panel Question No. 163, para.
100 and accompanying chart. See also Brazil's response to Panel Question No. 163, paras. 131-136. Depending
upon which figures before us are taken into account, we see that United States upl and cotton pro ducers would
have suffered cumulative losses during MY 1997-2002 of approximately $872 (or $748) per acre of upland
cotton. As either of these indicates a gap, we need not select between them for the purposes of resolving this
dispute. We also note that "operating costs" include the costs of "ginning". They also break down data
pertaining to upland cotton and cottonseed. Due to the small relative magnitude of cottonseed returns data in
relation to cotton lint returns, we do not consider that its inclusion in some of the data considered materially
affects our findings here.
1469 Brazil's further rebuttal submission, para. 72. The United States, in this dispute, takes issue with the
methodology applied to calculate these figures, and the reliability of the figures as a reflection of the choices and
expectations of United States upland cotton producers. However, the cost projections by the USDA cited by
Brazil are updates of a 1997 USDA cost survey. As the United States has indicated, in every year subsequent to
1997, the USDA takes the results of the 1997 cost survey and updates it to reflect the general increase in prices
according to the producer pr ice index. We observe that, according to the USDA, the reliability of the USDA
estimate may differ depending upon the amount of time that has elapsed since the USDA survey year. See
USDA's website: www.ers.usda.gov/costs and returns/....
This approach may not fully reflect all of the techno logical and structural change since 1997 in United
States upland cotton production. We nevertheless also u nderstand that certain developments affecting costs and
returns may be reflected to a certain extent through the USDA's updated estimation process (e.g., pest
eradication bringing new (low cost) areas of the United States into production or the adoption of biotech cotton
which requires fewer pesticide applications: the cost of production demonstrates that the cost for seed increased
from $17.63 in MY 1997 to $47.99 in MY 2002). This increase may reflect developments such as the
introduction of more expensive biotech cotton seed vari eties. At the same time, costs for fertilizer and
chemicals remained constant or fell. This is also consistent with the use of biotech crops.
We note that Exhibits BRA-14 and BRA-251 contain surveys of comparative costs of production of
raw cotton in various countries. We are aware that su ch cross-country comparison s are affected by numerous
considerations. We observe that this evidence reflects that the United St ates cost of production is higher than
the cost of production in many other countries.
1470 We disagree with the United States that an exam ination of United States upland cotton producers'
"off farm income" may be a legally relevant considera tion in the examination before us. We are considering

cotton producers' total production costs and market revenue, on the one hand, and the effect of the
subsidies, on the other hand, was to sustain a highe r level of output than would have occurred in the
absence of the United States subsidies at issue.1471
7.1355 While there may well have been other factors a ffecting prices in the world market over this
time period, on the basis of the above examination of these four factors, taken together, we find that a
causal link exists between the mandatory United States price-contingent subsidies at issue – marketing
loan programme payments, user marketing (Step 2) payments, MLA payments and CCP payments –
and the significant price suppression that we have f ound to exist. However, no such causal link has
been established in respect of the non-price conti ngent subsidies before us, that is, PFC and DP
payments and crop insurance subsidies.
7.1356 We proceed to an examination of other causal factors in order to see whether any of these
would have the effect of attenuating this causal link, or of rendering not "significant" the effect of the
subsidy.
ii Other alleged causal factors
7.1357 We address each of the other causal factors alleged by the United States in turn.
7.1358 First, the United States asserts that prices have been historically low because of the weakness
in world demand for cotton due to competing, low- priced synthetic fibres, and weak world economic
growth. Brazil argues that data on world consumption do not support the United States claim of weak
world demand. It seems to us that if the low pr ices acknowledged by both parties were caused by
persistent weakness in the world demand for uplan d cotton, one would reasonably expect a reduction
in production of upland cotton. However, Unite d States upland cotton production increased over the
period.
1472 Although we see an increase in world polyester production, we also see an increase in
world cotton production up until 2001 and we do no t see pronounced declines in world consumption
of upland cotton.1473 We do not find this United States argument compelling.
7.1359 Second, the United States argues that burgeoning United States textile imports, reflecting the
strong United States dollar since the mid-1990's and declining United States competitiveness in textile
and apparel production, have fundamentally shifted the disposition of United States cotton production
from domestic mills to export markets. The Unite d States asserts that the growing United States

costs and market revenues in respect of upland cotton. Our examination is one of the upland cotton industry.
We find support for this proposition in the references to "subsidized product" and "like product" in Article 6.3(c)
of the SCM Agreement, and contextual support in such references in Article 15 of the SCM Agreement. We are
inquiring into whether, in respect of upland cotton production, United States producers' revenues in respect of
upland cotton were insufficient to sustain their total cost s incurred. We are not looking into the possibility of
cross-subsidization or cross-financing of insufficient market revenues for upland cotton that may have come
from other United States industries . Indeed, the very fact that th e United States relies on such cross-
subsidization as a possible source of revenue would tend to support the proposition that upland cotton producers
would have lost money over the longer term if they were involved in upland cotton production alone. If the
infrastructure of United States upland cotton production supports the "off farm income" then the subsidies are
supportive of that income as well. If the infrastructure of United States upland cotton production does not
support "off farm income", the producer need not produce upland cotton. However, we have seen, as a factual
matter, that United States producers co ntinue to produce upland cotton, and still receive subsidies in relation to
production.
1471 Exhibit BRA-109, containing 2001 testimony of the then-Chairman of the National Cotton Council
before the United States House Agriculture Committee would support this proposition: "during the past three
years, many cotton farmers have avoi ded bankruptcy only because Congress has authorized emergency relief to
supplement the FAIR Act's inadequate fixed payments". This tells us that United States upland cotton producers
rely on United States government subsidies to cover their production costs.
1472 USDA Fact Sheet: Upland Cotton (January 2003), p. 4, reproduced in Exhibit BRA-4.
1473 "Cotton: World Statistics," ICAC, September 2003, p. 3-4, reproduced in Exhibit BRA-208.

cotton-equivalent trade deficit and growth in United States retail purchases of cotton fibres has
supported world cotton prices. We see that exchan ge rate adjustments affect textile trade flows.
1474
We do not see how this United States assertion conc erning support, rather than suppression, of world
upland cotton prices is germane to our examination of other possible causal factors that might have
suppressed world upland cotton prices.
7.1360 Third, the United States asserts that the strong United States dollar since the mid-1990's has
had an inverse effect on the world price of cotton, as cotton is traded internationally in dollars. 1475
Brazil disagrees. We observe that the United Stat es' share of world upland cotton production did not
decline materially and its share of world upland cotton exports increased markedly at the same time
the United States dollar appreciated during MY 1999-2001. 1476 While we acknowledge that exchange
rates are indeed important for United States upl and cotton production and exportation, and would
affect market prices, such market prices are not guiding United States producer decisions (except to
the extent that, when they are lower than the marketing loan rate, they dictate the magnitude of United
States government subsidies to producers). United States producers' market revenue was effectively
sheltered from such currency/price developments by vi rtue of the United States subsidies (mainly the
marketing loan programme and the u ser marketing (Step 2) programme). 1477 We do not find this
United States argument compelling.
7.1361 Fourth, the United States asserts that China s ubsidized the release of millions of bales of
government stocks between 1999 and 2001, which was instrumental in pushing down upland cotton
prices to very low levels. Brazil concurs that s uppressed world prices would inevitably follow from
millions of additional million bal es being added to available world supply of upland cotton where
demand is relatively inelastic. We endorse the shared view of the parties that an infusion of a large
amount of supply onto the market would exert a dow nward pressure on prices. The fact that such
additional supplies became available on the world market may well have affected world prices.
However, it was smaller in magnitude than the Unite d States exports over this period. In addition, it
did not have a dampening effect upon United St ates production or exports, which both continued
and/or increased over this period.
7.1362 Finally, the United States asserts that upland cotton planting decisions that are not limited
only to benefits derived from United States subsidies, but rather are driven by other factors such as (1)
the effect of technological factors of upland cotton production, which includes boll weevil eradication
and genetically modified upland cotton (2) th e relative movement of upland cotton prices vis-à-vis
prices of competing crops, which affect upland co tton producers' planting decisions and (3) the
expected prices for the upcoming crop year.
1478 Even assuming that the effect of the two cited
technological factors reduced the cost of producti on for some United States upland cotton farmers,
which may not be fully reflected in USDA cost-reve nue estimate updates, the record still shows that
the total cost of production for United States produ cers increased over the period in question, while
world market prices were suppressed. Furthermore, during MY 1999-2002, we have found a strongly
positive relationship between upland cotton base acr es and continued produc tion of upland cotton.1479

1474 See for example, Exhibit BRA-100.
1475 United States' further written submission, paras. 35-36.
1476 See, e.g. our findings supra, paragraphs 7.1281-7.1285.
1477 See supra, Chart 2, para. 7.1293. The USDA effectively recognizes this, at least with respect to the
marketing loan programme. Exhibit BRA-100 contains a USDA ERS discussion of "US Cotton and the
Appreciation of the Dollar". Addressing the maintenanc e of "relatively steady" US cotton production despite
the fall in the dollar-denominated world price for cotton, it states: "Finally, cotton producers benefit from the
marketing loan programme, which helps producers maintain revenues while permitting large adjustments in
market prices." Also see, for example, Exhibit BRA -214. In Exhibit BRA-213, the National Cotton Council
indicated, in 2001 that "without the pr esence of US cotton's Step 2 program to offset some of the impact of a
strong dollar, US raw cotton exports would likely have experiences a far larger decline" (since 1996).
1478 United States' further written submission, paras. 45-70.
1479 Supra, Section VII:D.

Thus, it is reasonable to conclude that United States producers continued to grow upland cotton due to
United States subsidies rather than market prices or expected market revenue.
7.1363 Although some of these factors may have cont ributed to lower, and even suppressed, world
upland cotton prices during MY 19 99-2002, they do not attenuate th e genuine and substantial causal
link that we have found between the United States ma ndatory price-contingent subsidies at issue and
the significant price suppression. Nor do they reduce the effect of the mandatory price-contingent
subsidies to a level which cannot be considered "significant".
(l) The chapeau of Article 6.3 of the SCM Agreement and "serious prejudice"
(i) Main arguments of the parties
7.1364 Brazil contends that an examination under Article 6.3(c) of the SCM Agreement is
determinative of "serious prejudice" for the purposes of Article 5(c) of the SCM Agreement, and that
no further showing is necessary. 1480 However, even if it were, Brazil submits that it has discharged
this burden as well.
7.1365 The United States is of the view that the use of "may" in the introductory sentence of
Article 6.3 of the SCM Agreement indicates that serious prejudice need not arise even if one or more
of the circumstances listed in Article 6.3 are found. If Brazil demonstrates one or more of the criteria
in Article 6.3 is met, Brazil must then demonstrate "serious prejudice" – that is, that the "prejudice"
caused by the effects of the subsidy were "serious."1481
(ii) Main arguments of the third parties
7.1366 India is of the view that nothing more than the demonstration that one of the effects
enumerated in Article 6.3 exists is necessary to arri ve at a finding of "serious prejudice". The effects
listed in Article 6.3 themselves equate to serious prejudice. Subsidies listed under Article 6.1 are
deemed to cause serious prejudice, hence such a presu mption is rebuttable under Article 6.2 if the
subsidy does not result in any of the effects enumerated in Article 6.3. No such rebuttal is envisaged
under Article 6.3.1482
7.1367 New Zealand submits that there is no basis for drawing from a comparison of language used
in Articles 6.1 and 6.3 the conclusion that there is so me other standard, independent of Article 6, that
must be demonstrated in order to show "serious prejudice". New Zealand states that a comparison of
both the language and substance of Articles 6.1 and 6.3, in the context of Articles 5 and 6 of the SCM
Agreement, supports the contrary conclusion – that if a complainant has demonstrated the existence of
one or more of the effects enumerated in Article 6. 3 there is "serious prejudice" that is an adverse
effect of the subsidy within the meaning of Article 5. Both must be seen in the context of concern in
this part of the SCM Agreement with the effects of subsidies on other Members.
1483
(iii) Evaluation by the Panel
i "Serious" prejudice
7.1368 Article 5(c) of the SCM Agreement sets out the concept of "serious prejudice" to the interests
of another Member as one of three forms of "adverse effects" in Article 5 of the SCM Agreement. The
chapeau of Article 6.3 states that "[s]erious prejudice in the sense of paragraph (c) of Article 5 may

1480 Brazil's response to Panel Question No. 229.
1481 United States' further written submission, paras. 77-79.
1482 India's oral statement at the resumed session of the first substantive meeting, p. 2.
1483 New Zealand's written submission to the resumed session of the first substantive meeting,
para. 211.

arise in any case where one or several of the following apply."(emphasis added) Article 6.3(c) defines
one circumstance in which such "serious prejudice" "may" arise.
7.1369 The parties disagree as to whether the establishmen t of all of the requisite elements in Article
6.3(c) is sufficient, in and of itself, to also establish the existence of serious prejudice within the
meaning of Article 5(c). Brazil believes that it is, but, even if not, it submits evidence to substantiate
that "serious prejudice" exists.
1484 The United States, however, argue s that even if Brazil establishes
that the conditions in Article 6.3(c) are met, the us e of the term "may" in the chapeau of Article 6.3
signifies that Brazil must still demonstrate that the "p rejudice" caused by the effects of the subsidy is
"serious" within the meaning of Article 5(c) of the SCM Agreement.
7.1370 The ordinary meaning of the word "may" in the chapeau of Article 6.3 of the SCM Agreement
may express "possibility" or "permission". 1485 We agree with the United States that the use of the
word "may" in the chapeau of Article 6.3(c) may, at least, play such a permissive role. In this sense,
the ordinary meaning of the chapeau of Article 6.3 would be that there is a "possibility" or
"opportunity" for serious prejudice in the sense of Ar ticle 5(c) to arise where one or more of the
effects-based situations listed in Article 6.3 is found. A panel would be permitted to find serious
prejudice upon finding that one of these listed effects-based situations exists.
7.1371 There is an explicit and bald textual linkage be tween Article 6.3(c) and Article 5(c) through
the cross-reference in the chapeau of Article 6.3 of the SCM Agreement. This textual linkage contains
no additional express criteria to establish serious prejudice within the meaning of Article 5(c).
7.1372 Moreover, nowhere else in Articles 5 and 6 of the SCM Agreement are any additional criteria
explicitly or specifically identified that would in form a panel's examination as to when serious
prejudice would or would not arise within the meaning of Article 5(c) once the conditions in one or
more of the paragraphs of Article 6.3 are fulfilled.
7.1373 The absence of any reference in Articles 5 and 6 of the SCM Agreement to any such
additional criteria that would inform a panel's examination as to when serious prejudice would or
would not arise within the meaning of Article 5( c) once the conditions in one or more of the
paragraphs of Article 6.3 are fulfilled differs from the level of detailed affirmative guidance provided
in respect of the price and volume effects, in Article 6.4, that would go to the establishment of
displacement or impediment of exports for the purpo se of Article 6.3(b); and, in Article 6.5, with
respect to the establishment of price undercuttin g for the purposes of Article 6.3(c) of the SCM
Agreement.
7.1374 In contrast, the text of the chapeau of Article 6.3 of the SCM Agreement is silent as to any
factors which would guide an examination under its te rm "may". We do not believe that, in light of
this relatively detailed express guidance that is ava ilable on certain aspects relevant to the Article 6.3
examination, there is another set of entirely undefined requirements or conditions that must also guide
our examination and that must also be demonstrat ed in order to find serious prejudice within the
meaning of Article 5(c). Indeed, we believe that th e use of "may" in the chapeau of Article 6.3 could
be seen as an implicit cross-reference to these othe r, more specific, requirements spelled out in the
other paragraphs of Article 6 relating to price a nd volume effects of subsidies that are generally
referred to in Article 6.3.
1486
7.1375 The indication in the chapeau of Article 6.3 th at serious prejudice may arise when "one or
several" of the effects-based situations in the sub- paragraphs exist(s) does not change our view. In

1484 Brazil's further written submission, paras. 437 ff.
1485 Concise Oxford English Dictionary (Oxford, Clarendon Press, 1995).
1486 We note, however, that no such detailed guidance is available, e.g. in resp ect of price suppression
under Article 6.3(c).

using this phrase, the drafters indicated their awareness that at least one of the effects-based
phenomena in the various sub-paragraphs of Article 6.3 must exist, but that it was conceptually
possible that several might co-exist or overlap in a serious prejudice analysis. The simultaneous co-
existence of situations identified in several of the sub-paragraphs would bolster, rather than negate, a
finding of serious prejudice. We thus do not understa nd their reference to "one or several" to require
any sort of cumulative application of the sub-para graphs of Article 6.3, so as to obliterate the
possibility that the establishment of one of the e ffects-based situations identified in a single sub-
paragraph would be sufficient to ground a finding of serious prejudice in the sense of Article 5(c).
7.1376 This interpretation – that a demonstration of the existence of one or more of the effects-based
situations enumerated in Article 6.3 is sufficient to ground a finding of "serious prejudice" within the
meaning of Article 5(c) – finds support in the context of the provision.
7.1377 The language in Article 6.3 ("may") contrasts with the contextual language in Article 6.1
("shall").1487 At first blush, it could be concluded that the "may" in Article 6.3 could then only be
permissive and conditional, rather than permissive in all circ umstances. Following this reasoning,
had the drafters intended Article 6. 3 to be determinative in all circumstances for "serious prejudice"
under Article 5(c), they presumably could and would have used "shall".
7.1378 This contrast is not, in itself, dispositive, b ecause of the different substantive focuses of the
two provisions. Under Article 6.1, "serious prej udice" was given meaning by reference to qualitative
and quantitative criteria pertaining to the partic ular types and characteristics of the subsidies
themselves. Serious prejudice was "deemed" to ex ist upon identification of subsidies with such
characteristics or qualities. As the titles of Articl es 5 ("Adverse Effects") and 6 ("Serious Prejudice")
of the SCM Agreement indicate, the underlying rationale for these provisions is to focus upon
subsidies with adverse effects. Thus, the subsidies of the nature enumerated in the sub-paragraphs of
Article 6.1 were deemed to have such effects.
7.1379 However, it is critical to also take note of the text of Article 6.2, which states:
"Notwithstanding the provisions of paragra ph 1, serious prejudice shall not be found
if the subsidizing Member demonstrates th at the subsidy in question has not resulted
in any of the effects enumerated in paragraph 3."
7.1380 Thus, under Article 6.2, it was open to a subs idizing Member to rebut the presumption of
serious prejudice by showing that, despite its natu re, in fact, the subsidy did not actually cause any
effect tantamount to serious prejudice. That is, that the subsidy had not caused any of the effects
enumerated in Article 6.3. In our view, Article 6.2 serves to clarify that a prerequisite for a finding of
serious prejudice is that at least one of the four effects-based situations in Article 6.3 must be
demonstrated. It indicates to us that demonstration that at least one of the four effects-based situations
in Article 6.3 exists is a necessary basis to conclude that serious prejudice exists.
7.1381 A symmetrical reading of the text of Article 6.2 could be that it identifies, by implication, the
situations listed in Article 6.3 as, in and of themselves, constituting or giving rise to, serious prejudice.
That is, the elements in Article 6.3 may be not only necessary, but also sufficient, conditions, to
support a serious prejudice finding under Article 5(c) of the SCM Agreement.
7.1382 Another reading of the text could result in an asymmetry, whereby demonstration that none of
the effects-based situations enumerated in Article 6.3 existed would mean that serious prejudice did
not exist, but demonstration that one or more of the effects enumerated in Article 6.3 existed would

1487 We are aware that this provision has lapsed, through the operation of Article 31. Nevertheless, we
find it may provide relevant guidance as to the original architecture of the SCM Agreement . See supra,
footnote 1292.

not be sufficient to find serious prejudice. If ther e were other elements above and beyond those in
Article 6.3 that had to be demonstrated to show serious prejudice, we might wonder why Article 6.2
would not also require a subsidizing Member to show that those elements were not present in order to
avoid the presumption of serious prejudice in Article 6.1 of the SCM Agreement?
7.1383 The qualitative and quantitative focus upon the typ es and characteristics of certain subsidies
in Article 6.1 contrasts with the effects-based focus of Article 6.3. For the purposes of an Article 6.3
examination, there is thus no need to "deem" certain effects to arise from subsidies of a certain nature,
as there was in Article 6.1. Rather, Article 6. 3 does not attempt to define any qualitative or
quantitative aspects of the subsidy: its effects-based focus embraces a subsidy of any nature that has
the adverse effects enumerated and is therefore "actionable".
7.1384 Moreover, we find further contextual guidance in other provisions of the SCM Agreement .
Article 27.8 of the SCM Agreement stipulates:
"There shall be no presumption in terms of paragraph 1 of Article 6 that a subsidy
granted by a developing country Member resu lts in serious prejudice, as defined in
this Agreement. Such serious prejudi ce, where applicable under the terms of
paragraph 9, shall be demonstrated by positive evidence, in accordance with the
provisions of paragraphs 3 through 8 of Article 6."
7.1385 This provision makes it clear that "serious prejudice" "shall be demonstrated by positive
evidence, in accordance with the pr ovisions of paragraphs 3 throug h 8 of Article 6". Thus, the
considerations spelled out in Artic les 6.3-6.8 are considered to be determinative in terms of
establishing serious prejudice. This provision makes no reference to any other, super-added
requirements to establish "serious prejudice" after ha ving established that the effects-based situations
in one of the paragraphs of Article 6.3 exist. We consider that the rationale underlying this explicit,
contextual guidance informs the meaning of the references in Article 6.4 of the SCM Agreement to
"for the purpose of paragraph 3(b)", and in Article 6.5 to "for the purpose of Article 3(c)".
7.1386 The United States argues that these references serve to establish displacement or impediment
or price undercutting for the purposes of Article 6.3 of the SCM Agreement , but do not explicitly
indicate that such phenomena necessarily constitute, or result in, serious prejudice for the purposes of
Article 5(c). According to the United States, ha d Members intended that a finding under Article 6.3
would necessarily suffice to demonstrate serious prejudice, one also would have expected Articles 6.4
and 6.5 to mandate a finding of serious prejudi ce where a finding of one of the effects under
Article 6.3 is mandated.
1488
7.1387 We disagree with this argument of the United Stat es, particularly in light of the references in
Article 6.7 ("Displacement or impediment resulting in serious prejudice shall not arise under
paragraph 3..."), and in Article 6.8 ("In the absence of circumstances referred to in paragraph 7, the
existence of serious prejudice should be determined ...). These references indicate that the
examination called for under Article 6.3 of the SCM Agreement , as informed by the more detailed
guidance in Articles 6.4-6.8, could equally serve to establish whether or not serious prejudice exists,
for the purposes of Article 5(c) of the SCM Agreement.
7.1388 An interpretation that the term "may" in th e chapeau of Article 6.3 does not require the
establishment of any additional elements to t hose established under one of the paragraphs of
Article 6.3 would also be consistent with the object and purpose of the agreement. It would also find

1488 United States' response to Panel Question No. 149.

support in the drafting history of the provision.1489 In this respect, we understand that the term "may"
was, at least originally, intended to demonstrate that the list in Article 6.3 is illustrative and not
exhaustive. Pursuant to the footnote 13 attached to Article 5(c), the concept of "serious prejudice" is
used in the same sense as in Article XVI.1, which includes inter alia the threat of serious prejudice.
Therefore, it was appropriate to state that serious prejudice in the sense of paragraph (c) of Article 5
may arise where any of the listed effects exists b ecause there may be other circumstances in which
serious prejudice could be demonstrated, including, for example, where there is a threat of serious
prejudice. The use of the word "shall" could have been taken to mean that Article 6.3 provides the
exhaustive enumeration of situations in which serious prejudice can ever arise. As we are dealing
with one of the listed items in Article 6.3, it is not necessary for us, here, to decide on whether or not
there may exist situations – other than those enumer ated in Article 6.3 – in which serious prejudice
could be established.
7.1389 We would therefore be permitted to find that serious prejudice has arisen upon fulfilment of
the elements in one or more of the paragraphs of Article 6.3(c). In this connection, we note the
presence of the qualifying term "significant", which modifies the term "price suppression" in
Article 6.3(c). The presence of this qualifying term, which permits consideration of the degree or
intensity of the effects caused, stands in sharp contrast to the absence of any such (or analogous) term
in the other paragraphs of Article 6.3.
1490 Nevertheless, we fail to see how the absence of any element
of degree in paragraphs 3(a), 3(b) and 3(d) of Article 6 would result in the complaining Member being
separately required to prove that any prejudice is i ndeed "serious" even after having established that
one of the listed effects-based situations exists. If the drafters had intended that the complaining

1489 The Tokyo Round Subsidies Code, where the word "may" appeared in this context for the first time,
contained a basic rule on serious prejudice (Article 8.3), which was conceptually similar to Article 5 of the
current SCM Agreement. It provided:

"2. Signatories [...] agree that they shall seek to avoid causing, through the use of any subsidy:
(a) injury to the domestic industry of another signatory, [footnote omitted]
(b) nullification or impairment of benefits accruing directly or indirectly to another signatory under the
General Agreement, [footnote omitted] or
(c) serious prejudice to the interests of another signatory.
25

Article 8.4 of the Code stated:

"4. The adverse effects to the interests of anot her signatory required to demonstrate nullification
or impairment or serious prejudice may arise through
(a) the effects of the subsidized imports in the domestic market of the importing signatory,
(b) the effects of the subsidy in displacing or impeding the imports of like products into the market of
the subsidizing country, or
(c) the effects of the subsidized exports in displacing the exports of like products of another signatory
from a third country market." (emphasis added, footnotes omitted)

The term "may arise" in the chapeau of Article 8.4 seems to suggest that the items enumerated in (a)
through (c) are simply intended to be examples of possible ways in which serious prejudice (and/or nullification
or impairment) could show itself. That is, this list in the Tokyo Round Subsidies Code seems to be an
illustrative, non-exhaustive list of situations constitutin g serious prejudice, with the "may" leaving open the
possibility that other situations as well might lead to or constitute serious prejudice. It appears that the drafting
of the terms "serious prejudice may arise" was directly carried over from the Tokyo Round Subsidies Code into
Article 6.3 of the SCM Agreement. This phrase appears unchanged in the chapeau of versions of the negotiating
text of what is now Article 6.3 of the SCM Agreement (i.e., MTN/GNG/NG10/W/38 and Revisions).
1490 We discuss this term in more detail below.

Member should separately establish that the prej udice caused by the eff ects of the subsidy was
"serious", they would have defined the requirements for this purpose.
1491
7.1390 We therefore do not believe that, once we have c oncluded that the conditions in Article 6.3(c)
are fulfilled, and thus that serious prejudice "in the sense of paragraph (c) of Article 5""may" arise, a
separate examination of the existence of "serious prejudice" under the chapeau of Article 6.3 or
Article 5(c) is necessary. 1492 Our examination of the text, in its context, indicates to us that the
Article 6.3(c) examination is determinative also fo r a finding of serious prejudice under Article 5(c).
That is, an affirmative conclusion that the effects-base d situation in Article 6.3(c) exists is a sufficient
basis for an affirmative conclusion that "serious pr ejudice" exists for the purposes of Article 5(c) of
the SCM Agreement.
7.1391 In any event, even assuming arguendo that any sort of additi onal demonstration is necessary
to establish that the "significant price suppression" we have found to exist in the same world market
constitutes prejudice amounting to "serious prejudice" within the meaning of Article 5(c), we believe
that Brazil has also fulfilled that burden.
7.1392 For the purposes of this dispute, we do not be lieve that it is necessary to develop a fixed
interpretation of the outer parameters of what may constitute "serious prejudice" to the interests of
another Member within the meaning of Article 5(c) of the SCM Agreement. At the very least, given
the subject matter covered by the SCM Agreement – government subsidies in respect of goods – the
effects-based situations identified in the sub-para graphs of Article 6.3, and the reference in the
chapeau of Article 6.3 to serious prejudice "in the sen se of" Article 5(c), we believe that such "serious
prejudice" may involve the effects of subsidies on the complaining Member's trade in a given product.
That is, it addresses the volumes and prices and flows of such trade, which may, by logical extension,
affect a producing Member's domestic production of that product. We therefore consider that a

1491 While we can conceive of a theoretical situation where a panel would not be compelled to deem
even the most de minimis effects of a subsidy inevitably to give rise to, or constitute, serious prejudice, the facts
of the case before us do not envisage such a situation.
1492 We find support for this proposition in previous WTO and GATT panel reports. The only other
WTO panel to have examined these provisions (including "may"), the Indonesia-Autos panel, did not conduct
such an additional examination, but apparently consider ed that it was sufficient to establish serious prejudice
through the fulfilment of the conditions in Articles 6.3(a) through (d).
This approach was essentially consistent with the approach of three GATT 1947 panels. Two of these
disputes were based exclusively on Article XVI of GATT 1947 , as they occurred prior to the entry into force of
the Tokyo Round Agreement on Interpretation and Application of Articles VI, XVI and XXIII of the General
Agreement on Tariffs and Trade . At that time, the term "serious prejudice" in Article XVI:1 – without any
further textual elaboration – was the only reference to th is concept in the GATT rules governing subsidies. In
EC – Sugar Exports (Australia) , the panel noted that the European Communities scheme in question and its
application "had contributed to depress world sugar prices in recent years and that thereby serious prejudice had
been caused indirectly to Australia, although it was not possible to quantify the prejudice in exact terms" (i.e.
effectively, that price depression constitu ted serious prejudice). See Panel Report, EC – Sugar Exports
(Australia), Section V, conclusion (g). In EC – Sugar Exports (Brazil) the panel similarly found that the
European Communities scheme in question "[...] had been applied in a manner which in the particular market
situation prevailing in 1978 and 1979, contributed to de press sugar prices, and that this constitutes a serious
prejudice to Brazilian interests in terms of Article XVI:1". See Panel Report, EC – Sugar Exports (Brazil),
Section V, conclusion (f).
The panel in EEC – Wheat Flour Subsidies , which occurred after the entry into force of the Tokyo
Round Subsidies Code, framed its examination in terms of whether the subsidies in question had led to market
displacement or price undercutting, and conducted no further, separate, inquiry concerning serious prejudice.
These dispute settlement reports indicate that serious prejudice involved the effects of subsidies on a
Member's trade in a given product as such, i.e., the volumes and prices an d flows of such trade, rather any
further effects on a Member's domestic industry, or othe r issues such as the sign ificance of the particular
industry producing the product in question to the overall "interests" of the complaining Member.

detrimental impact on a complaining Member's produc tion of, and/or trade in, the product concerned
may fall within the concept of "prejudice" in Article 5(c) of the SCM Agreement.1493
7.1393 Moreover, the prejudice involved must be "seri ous". In one of its ordinary meanings,
"serious" means "important" and "not slight or negligible". 1494 Thus, the prejudice in terms of the
effect on Brazil's production of, and/or trade in, up land cotton must be such as to affect Brazil's
production of upland cotton, to a degree that is "important", "not slight or negligible", or meaningful.
7.1394 We recall our conclusion that the price suppression is "significant". 1495 We note, moreover,
Brazil has submitted evidence to substantiate its asser tions that there is a close relationship between
movements of Brazilian prices and movements in the A-Index and that Brazilian producers have
suffered from the suppressed price trends in the Br azilian market and in Brazilian export markets,
including in terms of Brazilian producers having reduced production and investment.1496
7.1395 In the particular facts and circumstances of th is case, whether or not we consider the impact
and magnitude of the price suppression or the materiality of effect upon Brazilian producers of upland
cotton in terms of the "significance" of the price suppression or in terms of the question as to whether
or not such "significant" price suppression amounts to "serious prejudice" under the chapeau of
Article 6.3, we arrive at the same conclusion: such "significant price suppression" amounts to
"serious prejudice" within the meaning of Article 5(c) of the SCM Agreement.
ii Serious prejudice to the interests of "another Member"
7.1396 Brazil also asserts that other WTO Members, in particular African cotton-producing
Members, have suffered serious prejudice as a result of the United States subsidies. The United
States asserts that the only Member's interests at issue under Article 5(c)/Article 6.3(c) examination
are those of Brazil, as the complaining party in this dispute.
7.1397 In terms of third parties, whereas the European Communities agrees with the United States
that, for the purposes of Article 6.3(c), only the price effects on the "products" of Brazil are
relevant
1497, New Zealand asserts that just because Brazil is th e "other party" in the context of

1493 In contrast to a trade remedy investigation, in the context of a serious prejudice analysis under
Article 5(c), we are not considering a "domestic industry" test where there may be a need to show that a
domestic industry is being materially or seriously injured.
1494 Concise Oxford English Dictionary (Oxford, Clarendon Press, 1995).
1495 Supra, para. 7.1333.
1496 Annex III to Brazil's further submission contains notarized statements by 27 Brazilian "cotton"
producers – some in English, some in Portuguese – ge nerally attesting to the nature of cotton production in
Brazil, lower cotton price trends in recent years and/or the effects of these price trends on their production and
investment decisions. For example, Mr. Christopher Ward (see supra, footnote 1465) states that, "[o]ver the
past three years I have experienced lower prices for both my domestic Brazilian and export sales". Another
producer states that "I initiated my cotton planting in the 1998/99 crop year" and "was very encouraged with the
prospect of getting a good profit margin", doubling his acreage in crop year 1999/2000. This producer was
"forced to sell" at low prices, subsequently reduced his planted area in crop year 2000/2001 by more than half
and then "decided to abandon cotton planting". A further producer indicates that he decided to reduce, as of the
2003/2004 crop year, his planted area by 50 per cent, and would only change his decision if "there is a further
substantial rise in current prices". A different producer indicates that he is no longer planting cotton and the last
time he planted was in 2000/2001, with an area of 100 hectares. According to him, "[t]he lack of adequate price
and elevated costs when compared to other cultures led me to stop producing cotton." Yet another producer
indicates that he reduced his cotton plat ed area "during this last crop-year due to last crop's prices, which left us
quite dispirited".
1497 European Communities' response to Panel third party Question No. 55.

Article 5(c), this does not mean that other Memb ers too cannot be suffering the serious prejudice
through the use of the subsidies at issue by the United States.
1498
7.1398 Certain third parties have also argued that the concept of "another Member" in Article 6.3(c)
would include Members other than the complaining Member in a particular dispute.1499
7.1399 For example, Argentina submits that, despite the fact that Brazil is the complainant, the
concept of "another Member" within the meaning of Article 6.3(c) includes Argentina, which
submitted allegations relating to the price effect of United States subsidies and has also suffered
serious prejudice.1500
7.1400 Benin and Chad also submit that the Panel is required to take account of the effects of the
United States subsidies on the interests of Member s other than the complaining Member in assessing
the WTO-consistency of the United States subsidies 1501, for the following reasons: (1) the drafters of
Article 5 of the SCM Agreement referred to "Members" in the plural, connoting an obligation on
behalf of the subsidizing Member not to cause adverse effects to the interests of all WTO Members –
not just the complaining Member; (2) when the drafters of the SCM Agreement intended to refer only
to the "complaining Member", they used this term sp ecifically, such as in Article 6.7, or in paragraph
2 of Annex V; (3) it is consistent with Article 3.8 of the DSU, which refers to the "adverse impact"
on "other Members" in the plural, referring to all WTO Members despite the fact that the SCM
Agreement provides special and additional rules for disput e settlement; (4) by contrast to Article 10.2
of the DSU, Article 10.1 is not limited to providing third parties with the right to present views, as it
mandates that the "interests" of the third parties sha ll be "fully taken into account"; (5) if Article 24.1
of the DSU has any meaning, this "special situation" of Benin and Chad must be given full,
substantive consideration by the Panel; and (6) th e fact that Brazil has specifically addressed the
serious prejudice caused to Benin and Chad's economies provides addition support for the position
that the serious prejudice to Benin and Chad needs to be examined by the Panel.
7.1401 China asserts that "another Member" under Article 6.3 of the SCM Agreement includes any
Member, the prices of whose like product, as supplied in the same market, at the same level of trade
and at comparable times, is capable of being comp ared to the prices of the subsidized product for the
purpose of determining whether "significant price undercutting" exists under Article 6.3(c).
1502
7.1402 The Panel recalls that, Article 7 of the SCM Agreement, entitled "Remedies", sets forth the
steps to be taken by a Member that believes that it has suffered adverse effects within the meaning of
Part III of the SCM Agreement. Article 7.2 of the SCM Agreement, a special and additional rule or
procedure identified in Appendix 2 to the DSU, provides that:
"A request for consultations under paragraph 1 shall include a statement of available
evidence with regard to (a) the existence and nature of the subsidy in question, and
(b) the injury caused to the domestic industry, or the nullification or impairment, or
serious prejudice [footnote omitted] caused to the interests of the Member requesting
consultations." (emphasis added)
7.1403 The text of Article 7.2 of the SCM Agreement makes it clear that the dispute settlement
procedures set forth in Article 7 of the SCM Agreement may only be invoked by a Member where that

1498 New Zealand 's response to Panel third party Question No. 55.
1499 Chinese Taipei does not claim that it is an "another Member" in th e sense of Article 6.3(c) of the
SCM Agreement. See Chinese Taipei's response to Panel third party Question No. 55.
1500 Argentina's response to Panel third party Question No. 55.
1501 Benin and Chad's response to Panel third party Qu estion Nos. 44 and 55. We also recall that the
delegation of Benin at the resumed session of the first substantive meeting included Mr. Nicholas Minot. See
supra, Section VII:A, para. 7.54 and footnote 118.
1502 China's response to Panel third party Question No. 55.

Member believes that it has itself suffered serious prejudice as a result of subsidization. From this,
the only logical inference is that the serious prejudice under examination by a WTO panel is the
serious prejudice experienced by the complaining Member.
7.1404 Our view of the nature of the dispute settlement process under Article 7 of the SCM
Agreement is bolstered by the substantive provisions of Articles 5 and 6 of the SCM Agreement. The
chapeau of Article 5 of the SCM Agreement reads:
"No Member should cause, through the use of any subsidy referred to in paragraphs 1
and 2 of Article 1, adverse effects to the interests of other Members, i.e. ..."

7.1405 This general introductory statem ent refers to "other Members" in the plural, and could be
taken to refer to Members other than exclusivel y the complaining Member. However, the more
precise text of Article 5(c) refers to "serious prejudice to the interests of another Member" (emphasis
added). The related footnote 13 of the SCM Agreement specifies: "The term "serious prejudice to the
interests of another Member" is used in this Agreem ent in the same sense as it is used in paragraph 1
of Article XVI of GATT 1994, and includes threat of serious prejudice."
1503
7.1406 The entirety of Articles 7.2-7.10 of the SCM Agreement are special and additional rules or
procedures identified in Appendix 2 to the DSU. However, none of these provisions contains any
special rules or procedures pertaining to other WTO Members or to third parties to a dispute governed
by these provisions (in conjunction with the provisions of the DSU). As Article 7 of the SCM
Agreement makes no mention of third parties, the cust omary rights and obligations governing third
party participation in panel proceedings in Article 10 of the DSU pertain.
7.1407 Pursuant to Article 10.1 of the DSU,
"The interests of the parties to a disput e and those of other Members under a covered
agreement at issue in the dispute shall be fully taken into account during the panel
process."
7.1408 We are bound to take the interests of the parties and those of other Members under the SCM
Agreement into account during the Panel process.1504

1503 The focus on the trade effects of subsidization in Article XVI:1 of the GATT 1994 on any other
Member is carried over into Part III of the SCM Agreement. As we have already seen, Article 6.3 of the SCM
Agreement provides that serious prejudice may arise where one or several of four listed situations exist, and
Article 6.3(c) addresses price suppression. Article 6. 7 allows a subsidizing Member to raise a defence to a
displacement/impedance clai m where "imports from the complain ing Member" or "exports from the
complaining Member" are affected by such factors as export prohibitions or restrictions, natural disasters, and
arrangements limiting exports. These provisions of Article 6.7 assume that the produc ts subject to a claim of
serious prejudice arising from displacement or impedance originate in the complaining Member.
1504 We further note the provisions of Article 3.8 of the DSU:

"In cases where there is an infringement of the obligations assumed under a covered
agreement, the action is considered prima facie to constitute a case of nullification or
impairment. This means that there is normally a presumption that a breach of the rules has an
adverse impact on other Members parties to that covered agreement , and in such cases, it
shall be up to the Member against whom the complaint has been brought to rebut the charge."
(emphasis added)

This phrase also recognizes the particular natu re of the rights and obligations of the covered
agreements.

7.1409 We recall that two least-developed country WTO Members – Benin and Chad – have reserved
third party rights in these Panel proceedings. We take note of the provisions of Article 24 of the DSU,
entitled "Special Procedures Involving Least-Developed Country Members". Article 24.1 states:
"1. At all stages of the determination of the causes of a dispute and of dispute
settlement procedures involving a least-developed country Member, particular
consideration shall be given to the speci al situation of least-developed country
Members. In this regard, Members shall exercise due restraint in raising matters
under these procedures involving a least-developed country Member. If nullification
or impairment is found to result from a measure taken by a least-developed country
Member, complaining parties shall exercise due restraint in asking for compensation
or seeking authorization to suspend the application of concessions or other
obligations pursuant to these procedures."
7.1410 While this provision seems to us primarily to address a situation where a least-developed
country Member would be the Member complained against in a particular WTO dispute settlement
proceeding, the first sentence of the provision is sufficiently generally worded to encompass the
situation where least-developed country Members are involved as third parties in a Panel proceeding.
This requires that at all stages of the dispute settle ment procedures, which includes this Panel process,
particular consideration shall be given to the situation of least-developed countries.
1505 W e
understand this direction, contained in the DSU, to address the procedural aspects of the dispute
settlement process, rather than our substantive exam ination under the covered agreements. We recall
our references, in Section VII:A, supra.
7.1411 As we have already observed, by the terms of Article 10.1 of the DSU, we are already bound
to take the interest of all WTO Members – naturally including least-developed country Members –
fully into account in our substantive examination under Part III of the SCM Agreement. In taking such
full account of all Members' interests, we do not view it as conceptually or practically possible to take
certain Members' interests more fully into account than those of other Members.
7.1412 Nor, in the course of our substantive examinati on of the merits of Brazil's claims in this
dispute, do we believe that this full "taking into account" of all Members' interests would entitle us to
alter the terms of the treaty text which determines th e substantive rights and obligations of Members.
In this respect, we note that the s ubstantive subsidy disciplines in the SCM Agreement envisage, in
Article 27, certain substantive special and differential treatment for developing and least-developed
countries. Of certain relevance to this dispute ar e the substantive special and differential treatment
provisions relating to the obligations of deve loping countries in terms of Part III of the SCM
Agreement.1506

1505 See supra, Section VII:A, where we identify elements germane to the participation of Benin and
Chad, as least-developed country Members in these Panel proceedings.
1506 Articles 27.8 and 27.9 of the SCM Agreement provide:

"27.8 There shall be no presumption in terms of paragraph 1 of Article 6 that a subsidy
granted by a developing country Member results in serious prejudice, as defined in this
Agreement. Such serious prejudice, where applicable under the terms of paragraph 9, shall be
demonstrated by positive evidence, in accordance with the provisions of paragraphs 3
through 8 of Article 6.

27.9 Regarding actionable subsidies granted or maintained by a developing country
Member other than those referred to in paragraph 1 of Article 6, action may not be authorized
or taken under Article 7 unless nullification or impairment of tariff concessions or other
obligations under GATT 1994 is found to exist as a result of such a subsidy, in such a way as
to displace or impede imports of a like produc t of another Member into the market of the

7.1413 However, we do not see, in the text of Article 6.3(c) of the SCM Agreement , any specific
provision concerning substantive special or differential treatment in the situation dealt with under
these particular Panel proceedings.
7.1414 For these reasons, in examining Brazil' s allegations under Part III of the SCM Agreement that
it has suffered serious prejudice to its interests w ithin the meaning of Article 5(c), we take full
account of the interest of all Members – including those of least-developed Members – in these
dispute settlement proceedings in accordance with the rights and obligations provided for in Part III of
the SCM Agreement. Pursuant to Article 3.2 of the DSU, we are called upon to clarify the rights and
obligations in this covered agreem ent through application of customary principles of interpretation of
public international law.
7.1415 Therefore, we have taken into account serious prejudice allegations of other Members to the
extent these constitute evidentiary support of the e ffect of the subsidy borne by Brazil as a Member
whose producers are involved in the production and trade in upland cotton in the world market.
However, we have not based our decision on any alleged serious prejudice caused to them.
7.1416 In conclusion, in light of all of these considera tions, we find that the effect of the mandatory,
price contingent United States subsidies at issue – that is, marketing loan programme payments, user
marketing (Step 2) payments and MLA paymen ts and CCP payments – is significant price
suppression in the same world market for upla nd cotton in the period MY 1999-2002 within the
meaning of Articles 6.3(c) and 5(c) of the SCM Agreement.
4. Claims under Articles 6.3(d) and 5(c) of the SCM Agreement
(a) Introduction
7.1417 As we have already mentioned, Part III of the SCM Agreement is entitled "Actionable
Subsidies". Article 5 of the SCM Agreement is entitled "Adverse Effects". According to its chapeau:
"No Member should cause, through the use of any subsidy referred to in paragraphs 1 and 2 of
Article 1, adverse effects to the interests of other Members, i.e. ...". Article 5(c) identifies "serious
prejudice to the interests of another Member" as one such adverse effect. Article 6.3(d) of the SCM
Agreement provides:
"Serious prejudice in the sense of paragraph (c) of Article 5 may arise in any case
where one or several of the following apply ...
(d) the effect of the subsidy is an in crease in the world market share of the
subsidizing Member in a particular s ubsidized primary product or commodity
17 as
compared to the average share it had during the previous period of three years and
this increase follows a consistent trend over a period when subsidies have been
granted."
17Unless other multilaterally agreed specific ru les apply to the trade in the product or
commodity in question.
7.1418 We recall that, pursuant to the chapeau of Article 5 of the SCM Agreement , to be an
"actionable subsidy" for the purposes of Part III of the SCM Agreement, there must first be a specific

subsidizing developing country Member or unless injury to a domestic industry in the market
of an importing Member occurs."

subsidy within the meaning of Articles 1.1 and 1.2 of the SCM Agreement . We refer to, and
incorporate, our earlier findings that the subsidies at issue – user marketing (Step 2) payments to
domestic users and exporters
1507; marketing loan programme payments; PFC payments; MLA
payments; DP payments; CCP payments; crop in surance payments; and cottonseed payments
constitute "subsidies" within the meaning of Articles 1.1(a) and (b) of the SCM Agreement that are
"specific" within the meaning of Articles 1.2 and 2 of the SCM Agreement.
7.1419 Having established that these subsidies may be actionable for the purposes of Article 5, we
observe that there is no disagreement between the parties that an examination under Article 6.3(d)
may precede any examination under Article 5(c) of the SCM Agreement . There is also no
disagreement, in this part of this dispute, that an affirmative conclusion un der Article 6.3(d) is a
necessary element for an affirmative serious prejudice finding under Article 5(c). We therefore first
examine the elements of Brazil's claim under Article 6.3(d) of the SCM Agreement.
7.1420 The text of Article 6.3(d) of the SCM Agreement consists of at least the following six
definitional elements: (i) the effect of the subsidy; (ii) is an increase in the world market share; (iii) of
the subsidizing Member; (iv) in a particular subsidized primary product or commodity; (v) as
compared to the average over the preceding period of three years; and (vi) this increase "follows a
consistent trend over a period when subsidies have been granted."
7.1421 There is no disagreement between the parti es that the United States is the [alleged]
"subsidizing Member", nor that upland cotton is the "particular subsidized primary product or
commodity" in question.1508
7.1422 However, the parties disagree on the meaning of "world market share". Due to the evidence
each party marshals in line with its own understandi ng of these terms, the answer to the question of
whether or not an "increase" exists following a period manifesting a consistent trend within the
meaning of Article 6.3(d) would differ.
7.1423 We thus now examine the meaning of "world market share" in the text of this treaty
provision.
(b) "World market share"
7.1424 Brazil argues that the phrase "world market share" as used in Article 6.3(d) of the SCM
Agreement means a Member's share of the world market for exports.1509

1507 We again recall that we have already found supra that user marketing (Step 2) payments to
domestic users and exporters are "subsidies" within the meaning of Article 1 of the SCM Agreement. Supra,
Sections VII:E and F.
1508 United States' response to Panel Question No. 154 ; Brazil's further written submission, para. 262.
Footnote 17 of the SCM Agreement, linked to Article 6.3(d), states that the provision applies to a particular
subsidized primary product or commodity "[u]nless other multilaterally agreed specific rules apply to the trade
in the product or commodity in question." In this dispute, the parties are in agreement that footnote 17 does not
affect a claim under this provision concerning upland cotton. See, e.g. Brazil's further written submission,
para. 275; United States' response to Panel Question No. 156: (Brazil notes that footnote 17 does not carve out
upland cotton from the scope of Article 6.3(d), as there ar e no multilateral agreed "specific" rules that apply to
the trade of upland cotton. Brazil further submits examples of what it conceives would be covered by footnote
17, in the form of: The International Agreement on Olive Oil and Table Olives , EC OJ L214, 4 August 1987,
reproduced in Exhibit BRA-246; The International Sugar Agreement of 1977, 9 Australian Treaty Series (1978),
reproduced in Exhibit BRA-248; and a list of further "International Commodity Agreements" from the website:
europa.eu.int/eur-lex/en/..., reproduced in Exhibit BRA-2 47. The United States asserts that it is not aware of
any other multilaterally agreed specific rules that apply to upland cotton within the meaning of footnote 17.)
Given this agreed view of the parties, we wish to emphasize that our reasoning is without prejudice to the
interpretation of footnote 17.

7.1425 The United States is of the view that the reference to "world market share" in Article 6.3(d)
of the SCM Agreement "encompasses all consumption of upland cotton, including consumption by a
country of its own cotton production" and that "US co tton's share of total world consumption" is "US
exports plus domestic US consumption divided by total world consumption". 1510 In response to a
Panel question, the United States asserted: "The Un ited States has proposed that the US share of the
world market for upland cotton must be measured by that portion of world consumption of upland
cotton satisfied by United States upland cotton."1511
7.1426 As third parties, Argentina and New Zealand argue that the United States errs in its
interpretation of the expression "world market share" in Article 6.3(d) by trying to identify it with
"share in world consumption". However, the European Communities supports the United States'
arguments: the ordinary meaning of "world market" is the sum of all the geographical markets for the
product concerned, including the domestic market of the subsidizing Member. 1512 Paraguay
generally requests the Panel to find that the measur es applied by the United States are inconsistent
with the obligations laid down in va rious provisions of the GATT 1994 and the SCM Agreement, and
to take account of the arguments put forward by Brazil.1513
7.1427 We must therefore interpret the phrase "world ma rket share" in order to decide whether it
refers to the world export market (as Brazil argues), or whether it encompasses all consumption of
upland cotton, including consumption by a country of its own cotton production (as the United States
argues), or whether it refers to something else.
7.1428 We recall our examination of the term "market" in the context of our Article 6.3(c)
analysis.
1514 We see no reason, and none has been pointed out to us, why a similar approach to this
terms cannot be taken here in the circumstances of this dispute.
7.1429 As we have already observed, the term "market" can be defined as: "a place ... with a demand
for a commodity or service" 1515; "a geographical area of demand for commodities or services"; "the
area of economic activity in which buyers and sellers come together and the forces of supply and
demand affect prices".
1516 In one of its ordinary meanings, therefore, "market" may refer to a
geographical area of economic activity in which buyer s and sellers come together and the forces of
supply and demand affect prices, that is, a locus of competition for sales of a particular commodity.
7.1430 As we have already noted 1517, the meaning of a the term "market" may vary depending upon
the geographical context in which the term is used. That is, if the frame of reference is a market
within a sub-federal unit within a Member, a Member 's domestic market, or a continental or regional
market, the meaning would be different than, for ex ample, a "world market" in the context in which
the term is used in Article 6.3(d) of the WTO Agreement.
7.1431 The ordinary meaning of "world market" is th e global geographical area of economic activity
in which buyers and sellers come together and the forces of supply and demand affect prices.
7.1432 We see no foundation in the plain meaning of these terms to find that "world market" as used
in Article 6.3(d) would necessarily not include the domestic market of the subsidizing Member.

1509 Brazil's further written submission, para. 265.
1510 United States' further written submission, paras. 97 and 99 and footnote 52.
1511 United States response to Panel question No. 239(b), para. 148.
1512 European Communities' written submission to the resumed session of the first substantive meeting
paras. 14-16.
1513 Paraguay's written submission to the resumed session of the first substantive meeting, para. 15.
1514 Supra, paras. 7.1235-7.1252
1515 The New Shorter Oxford English Dictionary, (1993).
1516 Merriam-Webster Dictionary Online.
1517 See supra, paras. 7.1246-7.1247.

Rather, we see that this may be a geographic term inclusive of all national "markets", to the extent that
such inclusion would be germane to the inquiry envisaged by the provision.
7.1433 The text of Article 6.3(d) also refers to a particular "share" of this world market. The
ordinary meaning of the word "share" is "a: a por tion belonging to, due to, or contributed by an
individual or group; b: one's full or fair portion".
1518
7.1434 According to Article 6.3(d), it is the "share of the subsidizing Member" that must be
examined. Thus, we need to examine the portion of the world market that is satisfied by the
subsidizing Member's producers. We are of the view that a plain reading of the combined terms
"share of the subsidizing Member" and "world market " in Article 6.3(d) calls for an examination of
the portion of the world's supply that is satisfied by the subsidizing Member's producers.
7.1435 Therefore, we disagree with Brazil's argument that a Member's share of the world market
would necessarily consist solely of the Member's exports as a proportion of the world export market,
and would not embrace relevant developments with in the domestic market of the Member. Like
Brazil, we believe that a Member's exports are re levant to an examination under this provision.
However, unlike Brazil, we also believe that a Member's supply (which may not ultimately be
exported) is also a relevant consideration for the purposes of this provision.
7.1436 Furthermore, we agree with the United Stat es that certain developments within the
subsidizing Member's domestic market may be re levant. However, we disagree with the United
States argument that a Member's share of the worl d market within the meaning of Article 6.3(d)
would necessarily include a Member's own consumption.
1519
7.1437 We derive support for this interpretation of th e text of Article 6.3(d) from the immediate
context of Article 6.3(d), that is, other paragraphs in the same Article: Article 6.3(a) refers to
"imports" and Article 6.3(b) refers to "exports". Both of these provisions contain market-specific
references. Article 6.3(a) indicates that a Member's domestic market (as a potential destination for the
exports of other Members) may indeed be relevant to a serious prejudice analysis. Article 6.3(b)
indicates that the market of a third country Me mber to which the subsidizing and complaining
Member exports may also be relevant. Article 6. 3(c) does not refer specifically to the domestic
market of any Member. It refers to "the sam e market", which we have found may refer to a
geographical area, including the world.
1520
7.1438 Other provisions of the covered agreements provide additional contextual guidance.
Article XVI:3 of the GATT 1994 explicitly refers to "world export trade". Article 27.6 of the SCM
Agreement, dealing with achievement by developing country Members of export competitiveness
explicitly refers to the situation where "a devel oping country Member's exports of [a] product have
reached a share of at least 3.25 per cent in world trade of that product".
7.1439 Brazil would have us read the terms "world market share" in Article 6.3(d) to be synonymous
with the phrases "world export trade" or the share of a Member's exports in world trade in these other
contextual provisions. The United States asserts that, had Members intended that "world export
trade" be the relevant concept to apply in Article 6.3(d), one would have expected use of that phrase.
7.1440 We agree entirely with the United States on this point. The use of the phrase "world export
trade" in Article XVI:3 of the GATT 1994 demonstrates to us that the drafters were well aware of how

1518 Merriam-Webster Dictionary Online.
1519 We note that the United States at times refers to an approach which seems to resemble the one we
adopt (see, for example, United States response to Panel Question No. 239(b), para. 148, cited supra, at para.
7.1425). However, the United States' arguments focus on the term "consumption" and, as we have noted, infra,
at footnote 1527, the United States' data includes imports, which is not reflective of our approach.
1520 Supra, 7.1235-7.1252.

to insert this concept when they so intended. I ndeed, the fact that this particular phraseology had
existed since the inception of the GATT 1947 means that the Uruguay Round negotiators could very
well have simply transposed those terms from the text of Article XVI:3 of the GATT 1947 into
Article 6.3(d) of the SCM Agreement.1521 However, they did not do so.
7.1441 Similarly, the use of the terms "a developing country Member's exports of [a] product have
reached a share of at least 3.25 per cent in worl d trade of that product" in Article 27.6 of the SCM
Agreement demonstrates to us that negotiators were well aware of how to include a reference to a
Member's share of world export trade in the product concerned in the same SCM Agreement.
However, again, they did not do so.
7.1442 Rather, the Uruguay Round negotiators used di fferent words in Article 6.3(d) of the SCM
Agreement. We attribute meaning to the fact that the nego tiators used such different words. It is not
our task to read into the text obligations which do not exist or concepts which are not there. We
therefore cannot read the terms "world market shar e" in Article 6.3(d) as referring to a Member's
share of "world export trade".
7.1443 Brazil has submitted evidence to us that the inte rpretation of the phrase "world market share"
as referring to the share of a member 's exports in world export trade in Article 6.3(d) is consistent
with the USDA's1522 own use of the term "world market share" , as well as with the use of that term by
other Members – e.g. and the European Communities1523 and Canada.1524

1521 The Tokyo Round negotiators had done just this, maintaining the Article XVI:3 reference to "more
than an equitable share of world export trade" in Articles 10.1 and 10.2 of the Tokyo Round Subsidies Code.
1522 Exhibit BRA-277 (USDA, Cotton: World Markets and Trade , January 2000, "Francophone West
African Cotton Exports Reach 14 Percent of World Market Share", also stating such "exports are 14 per cent of
world trade"); Exhibit BRA-277 (USDA, Oilseeds: World Markets and Trade , Circular Series FOP 11-01,
November 2001, p. 1,"Growth in World Soybean Trade Be nefits Brazil", states: "As the demand for soybeans
has surged in recent years, Brazil has been able to increase exports both re lative to their competitors, as well as
in absolute terms. Brazil's exports have grown from 8.9 million tons three years ago to an estimated 17.5 million
tons in the coming October-September year. Th is growth represents a rise in Brazil's world market share from
23.1 per cent three years ago, to 30.5 per cent expected this coming year.") (emphasis added); Exhibit BRA-277
(Paul C. Westcott and Linwood A. Hoffman, Market and Trade Economics Division, Economic Research
Service, USDA, "Price Determination for Corn and Wh eat: The Role of Market Factors and Government
Programs," Technical Bulletin N° 1878, July 1999, p. 7, under the sub-heading "Exports" states: "Although the
United States is the world's largest exporter of wheat, it has a smaller world market share than for corn,
averaging slightly over 30 per cent of global wheat trade in 1990-96."); Exhibit BRA-277 ("World Coarse
Grains Situation and Outlook," FASOnline, p. 1, states: "G lobal corn trade is forecas t up marginally to a five
year high. Increased exports fr om China and Argentina are exp ected to encroach into US world market share ,
reducing expected exports 2.9 million tons from 1998/99.") (emphasis added); Exhibit BRA-277 (USDA,
"World Beef, Pork, and Broiler Trade Forecast to Reac h Record High in 2002; Competition for Market Share
Stiffens," Livestock and Poultry: World Markets and Trade, Circular Series DL&P 1-02, March 2002 states:
"World beef, pork, and poultry exports for 2002 are forecast to rise to new records. For beef and pork, the
United States will be facing stiff competition in key mark ets, especially Japan. Fo r poultry, US exports are
projected to continue growing, although Brazil is making gains in their world market share.") (emphasis added);
Exhibit BRA-277 ("U.S. Agricultural Market Share Holds Its Own," FASOnline, October 1998, p. 1, states:
"Exports fell ... and are projected to fall ... Despite the de cline, it's important to remember that the United States
has managed to retain its share of the global agricultural trade pie: the U.S. world market share is forecast to
remain at 19.5 per cent in 1999.") (emphasis added).
1523 EUROPA, Trade Issues, Sectoral Issues, "Trade in Agricultural Goods and Fishery Products," Press
Release, Brussels, 11 July 2002, p. 3, reproduced in Exhibit BRA-277 states: "The same factors also help to
explain why an obverse picture is seen in exports. The EU exports far less to developing countries than the
U.S., and is in fact losing world market share in farm commodity products (due to restraint in use of export
measures and supply-side limiting measures.") (emphasis added).
1524 Agriculture and Agri-Food Canada, "Challenges and Implications Arising from the Achievement of
CAMC's 2005 Agri-food Export Target," June 1998, p. 9, reproduced in Exhibit BRA-277 states: "For most

7.1444 This evidence indicates that some WTO Memb ers, including the United States itself,
sometimes utilize the phrase "world market share" wh en referring, in the context of world agricultural
trade, including world trade of upland cotton, to the proportional share of a Member's exports in
relation to world exports.
7.1445 However, we do not view this evidence as dete rminative for the interpretation of the phrase
"world market share" in Article 6.3(d) of the SCM Agreement. It is not a formal interpretative tool
within the meaning of Articles 31 or 32 of the Vienna Convention , much less a universally agreed
interpretation among WTO Members within the meaning of the WTO Agreement.
7.1446 Our interpretation of the text, in its context, also finds support in the object and purpose of the
subsidy disciplines in the SCM Agreement . As we have already mentioned, Part III of the
SCM Agreement, containing Articles 5-7, is entitled "Actionable Subsidies". Article 5 of the
SCM Agreement is entitled "Adverse Effects"; Article 6 is entitled "Serious Prejudice".
7.1447 From even this rudimentary outline, it is evident to us that Part III of the SCM Agreement
focuses on the effects of subsidies in respect of pr oducts produced by a Member's producers, in order
to discern, for example, whether and to what ex tent such subsidies increase their production (and
export) of the product concerned in a manner that cau ses adverse effects. Why is this so? Because
such increase in the production and export of th e product concerned from the subsidizing Member –
which does not flow from the operation of market fo rces but rather reflects governmental interference
through the bestowal of subsidies – may adversely affect other Members' production and export of the
product concerned.
7.1448 If we held the view that the actionable subsidies provisions in Part III of the SCM Agreement
were limited to export subsidies
1525 – which we most definitely do not – then we would perhaps be
more sympathetic to the view that "world market share" in Article 6.3(d) referred to "world export
trade". This would dovetail with the hypothetical sc ope of application of that provision in such a
scenario.
7.1449 However, we hasten to underline that actionable subsidies governed by the provisions of
Part III of the SCM Agreement are not limited to export subsidies, or even to subsidies which may
necessarily affect a subsidizing Member's exportation. Rather, Part III of the SCM Agreement relates
generally to adverse effects, including those that may be the effect of subsidies that affect production.
This includes not only those subsidies that, while not contingent upon export performance within the
meaning of Article 3.1(a), may still incidentally fac ilitate or promote exportation. It also embraces
subsidies that promote production itself, whether or not exportation of such production necessarily
results.1526
7.1450 In order to dovetail with the actual scope of a pplication of Article 6.3(d), and with the overall
architecture of the subsidies disciplines in the ag reement, we believe that it is not only entirely
reasonable, but also necessary, to read the phrase "w orld market share" in a manner which takes into
account both production and exports. This supports our interpretation of that provision as referring to
the share of the world market supplied by the subsidizing Member.

bulk commodities, Canada may significantly increase export volume but have relatively little impact on world
prices because of its small share of the world market." (emphasis added).
1525 Article 3.1(a) in Part II of the SCM Agreement addresses, and indeed prohibits, subsidies contingent
upon exportation. An interpretation that actionable subsidies included only export subsidies would render the
distinction between the prohibited subsidy disciplines in Part II of the SCM Agreement and the actionable
subsidies disciplines in Part III of the SCM Agreement a nullity. We, as a treaty interpreter, are not permitted to
do so.
1526 For example, Article 6.3(a) focuses on effects within the domestic market of the subsidizing
Member.

7.1451 By contrast, a focus on a Member's consumption share, plus exports, in world consumption in
Article 6.3(d) would run counter to the underlying ob ject and purpose of the subsidy disciplines in the
agreement. We do not find tenable the proposition that the expression "world market share" in
Article 6.3(d) includes the increase in consumption of the Member granting the subsidy. 1527 I t i s
simply unfathomable to us why an agreement that focuses on subsidies in respect of products would
contain a provision effectively limiting an increase in a Member's consumption of a product, including
of their own product.
7.1452 Indeed, increased consumption of a product w ould potentially lead to enhanced demand,
which might then be satisfied either by the subs idizing Member's own produc tion, or from imports.
To the extent imports increased due to enhanced cons umption, this would be more likely to benefit,
rather than adversely effect, the interests of ot her WTO Members. Such a situation would most
definitely not fall within the "adverse effects" paradigm envisaged in Part III of the SCM Agreement.
7.1453 The aim of Articles 5 and 6 is to address the a dverse effects of subsidies on the interests of
other Members. Specifically, it is concerned with adverse effects to other Members caused when one
Member uses subsidies in order to increase its share of the world market for a particular product. To
construe "world market share" as including a refere nce to the consumption of a Member as a share of
world consumption of a product would subvert the underlying rationale of Article 6.3(d).
7.1454 We thus understand the terms "world market share" in the text of Article 6.3(d) to refer to the
share of the world market supplied by the subsidizing Member.
7.1455 We consider that this interpretation of the text , in its context, and in light of the object and
purpose of the subsidy disciplines in the SCM Agreement is clear and unambiguous. We would
therefore be entitled to stop our interpretive examination here. 1528 However, we note that recourse to
the drafting history of the provision only serves to confirm this interpretation.
7.1456 As we have already mentioned, Article XVI of the GATT 1947 contained two "parts". Part A
was entitled "Subsidies in General". Part B was en titled "Additional Provisions on Export Subsidies".
Article XVI:3 of the GATT 1947, in Part B, read:

1527 To the extent that the United States could be understood to have argued that the United States share
of total world consumption is: (United States consumption + United States exports)/ total world consumption.
(United States response to Panel Question 197 and Exhibit US-47.), we would note that calculation of the
converse figure (Non-United States consumption + non-United States-exports)/total world consumption
(presuming that other WTO Members would also apply the same methodology) results in a total world market
share that exceeds 100 per cent. (See Brazil's 28 Ja nuary comments on United States' response to Panel
Question No. 236). Furthermore, the United States data and methodology double count exports as part of the
"world market share" of the exporting country and part of the consumption of the importing country that
contributes to total world consumption. (See United States' response to Panel Question No. 197 and footnote
24). There, the United States indicates that the fi gure for United States consumption includes imports.
Exhibit US-120 contains USDA, Economic Research Service, Fibres Yearbook , Appendix Table 2, "Upland
Cotton Supply and Use". For the years MY 1965-2003, it shows a consistently very low ratio of imports to
United States production of upland cotton (for example, MY 2001, the ratio was 5:19,603 bales; the ratio was at
its highest in 1998, at 427:13,426). Although the United States asserts that "United States cotton imports are
often zero and, even when positive, have accounted fo r less than one per cent of consumption over the past
decade", this United States-specific an alysis would not be susceptible of universal application to all WTO
Members, particularly in the case of a Member whose imports accounted for a larger proportion of domestic
consumption. To the extent that the United States could be understoo d to have argued in these Panel
proceedings that the United States share of total world consumption is: (United States consumption of US cotton
+ United States exports)/ total world consumption, as in , for example, United States' response to Panel Question
No. 238(b), footnote 15, the above observations on the reference to "consumption" and the "consumption" data
submitted to us would still hold. See also supra, footnote 1519.
1528 Supra, footnote 636.

"3. Accordingly, contracting parties should seek to avoid the use of subsidies on
the export of primary products. If, however, a contracting party grants directly or
indirectly any form of subsidy which operates to increase the export of any primary
product from its territory, such subsidy sha ll not be applied in a manner which results
in that contracting party having more than an equitable share of world export trade in
that product, account being taken of the shares of the contracting parties in such trade
in the product during a previous representative period, and any special factors which
may have affected or may be affecting such trade in the product." (emphasis added)
7.1457 As we have already observed, the Tokyo Round Subsidies Code contained four main
substantive provisions on subsidies:
1529 Article 8 ("Subsidies – General Provisions"), Article 9
("Export subsidies on products other than certain primary products"); Article 10 ("Export subsidies on
certain primary products"); and Article 11 ("Subsidies other than export subsidies").
7.1458 Article 9.1 stipulated that: "[S]ignatories sh all not grant export subs idies on products other
than certain primary products". Article 10.1 of the Tokyo Round Subsidies Code read:
"1. In accordance with the provisions of Article XVI:3 of the General
Agreement, signatories agree not to grant dir ectly or indirectly any export subsidy on
certain primary products in a manner which results in the signatory granting such
subsidy having more than an equitable share of world export trade in such product,
account being taken of the shares of the signatories in trade in the product concerned
during a previous representative period, and any special factors which may have
affected or may be affecting trade in su ch product." (emphasis added, footnotes
omitted)
7.1459 This suggests that the drafters of the Tokyo Round Subsidies Code considered that the export
subsidies in Article 10 of the Tokyo Round Subsidies Code were subject to Article XVI:3 of the GATT
1994. Read in context, the drafters indicated that those export subsidies on certain primary products
were subject to certain disciplines, other export subs idies were subject to certain other disciplines and
subsidies other than export subsidies were subject to still other disciplines and could form the main
basis for a serious prejudice claim.
1530
7.1460 The text of Article 6.3(d) 1531 of the current SCM Agreement is cited above, as are the export
subsidy provisions of the current Agreement on Agriculture and the SCM Agreement.1532
7.1461 At first blush, there appear to be overar ching similarities between Article XVI:3 and
Article 6.3(d). For example, both call for a compar ison of a Member's quantitative share in a certain
world phenomenon with a corresponding share during a previous period. While the tests contained in
Article 6.3(d) and Article XVI:3 may be similar, they are certainly not textually or conceptually
identical. For example, Article 6.3(d) does not contain the terms "equitable share" and "special
factors"; and it defines a "previous representative period" for comparison as three years. It also refers
to "world market share" rather than "world export tr ade". It also refers to "a particular subsidized
product or commodity" rather than "certain primary products".
7.1462 As we have already indicated 1533, we believe that the text of Article XVI:3 refers only to
export subsidies which are now also governed by the prohibition in Article 3.1(a) of the

1529 See supra, paras. 7.1007 ff. Also see supra, footnote 1492 for a discussion, in another context, of
the GATT panel reports which occurred prior and subsequent to the entry into force of the Tokyo Round
Subsidies Code.
1530 Supra, paras. 7.999 ff of Section VII:E.
1531 Supra, para. 7.1417.
1532 e.g. supra, paras. 7.654 ff.
1533 Supra, paras. 7.999 ff of Section VII:E.

SCM Agreement (except as provided in the Agreement on Agriculture). It does not address actionable
subsidies governed by the provisions of Part III of the SCM Agreement . By extension, we do not
believe that the language of Articles 5(c)/6.3(d) of the SCM Agreement suggests an intention by the
Uruguay Round negotiators directly to develop and refine the requirements of Article XVI:3 of the
GATT 1994 within the actionable subsidy provisions of the SCM Agreement. At least, if there was
such an intention, they have not clearly so indicated in the text of these two covered agreements.
7.1463 Rather, the Uruguay Round negotiators indicated in the text their intention to devise a new
test pertaining to Members' "not-necessarily-export- contingent-subsidies" in respect of primary
products and commodities, and which would take in to account considerations germane to worldwide
trade in such products and commodities, including trends in production and export that would be
affected by Members' bestowal of subsidies.
7.1464 We therefore find that the phrase "world mark et share" of the subsidizing Member in
Article 6.3(d) of the SCM Agreement refers to share of the world ma rket supplied by the subsidizing
Member of the product concerned.
7.1465 As Brazil's evidence and argumentation in this dispute focused exclusively upon a different,
and in our view erroneous, legal in terpretation of the phrase "world market share" in Article 6.3(d),
we find that Brazil has not established a prima facie case of violation of Article 6.3(d) or Article 5(c)
of the SCM Agreement.
1534
5. Claim under Article XVI:1 of the GATT 1994
(a) Main arguments of the parties
7.1466 Brazil requests us to rule that the United States subsidies provided during MY 1999-2002
caused and continue to cause serious prejudice to th e interests of Brazil by resulting in the United
States having more than an equitable share of world exports of upland cotton in violation of
Articles XVI:1 and XVI:3 of the GATT 1994.
7.1467 Brazil clarifies, in responding to a Panel question, that it does not seek relief under
Article XVI in respect of "expired measures", by which Brazil understands the Panel to mean the legal
instruments consisting of the FAIR Act of 1996 as we ll as the various emergency appropriation Acts
in 1998-2001 providing, inter alia, for MLA payments.1535

1534 In accordance with the Panel's duty to make an objective assessment of the matter before it
pursuant to Article 11 of the DSU concerning the interpretation of the term "world market share" in
Article 6.3(d) of the SCM Agreement, we nevertheless observe that data pertaining to the share of United States
exports as a proportion of world exports – i.e. corresponding to the legal interpretation proposed by Brazil in
these proceedings – can be found in Exhibits BRA-206 and BRA-302 and in United States response' to Panel
Question No. 160. See also our findings supra, para. 7.1283.
 Data pertaining to the share of United States consumption as a proportion of world consumption – i.e.
corresponding to the legal interpretation proposed by the United States in these proceedings – can be found in
Exhibits US-47, US-70 and US-71. United States figures (MY 1995-1998 data from USDA/FAS, Cotton,
World Markets and Trade ; and otherwise from Production, Supply and Demand Estimates
(www.fas.usda.gov/psd) and USDA, World Agricultural Supply and Demand Estimates Report (December
(2003)) show the following for "US consumption and exports as a share of world consumption": MY 1995/96 –
21.3 per cent; MY 1996/97 – 20.4 per cent; MY 1997/98 – 21.6 per cent; MY 1998/9 – 17.4 per cent; MY
1999/2000 – 18.6 per cent; MY 2000/01 16.9 per cent; MY 2001/2 – 19.8 per cent; MY 2002/3 – 19.6 per cent.
(2002/03 is considered an estimate).
 We also recall our findings supra, relating to the United States share of world upland cotton
production, para. 7.1282.
1535 Brazil's response to Panel Question No. 250, para. 184.

7.1468 The United States contends that Brazil's joint claim under Articles XVI:1 and XVI:3 of the
GATT 1994 has no legal basis. According to the United States, Article XVI:3 pertains only to export
subsidies and Brazil has failed to demonstrate a prima facie case of inconsistency with Article XVI:3.
(b) Main arguments of the third parties
7.1469 Argentina
1536, China1537, Chinese Taipei 1538, the European Communities 1539 and New
Zealand1540 are generally of the view that a finding of serious prejudice under Article 5(c) of the SCM
Agreement would be determinative for a finding under Article XVI:1 of the GATT 1994.
(c) Evaluation by the Panel
7.1470 We understand that Brazil's claims u nder Article XVI:1 and XVI:3 of the GATT 1994
envisage a joint application of these two provisions. That is, Brazil does not make independent claims
under paragraphs 1 and 3 of Article XVI, but rather re quests us to rule that the United States subsidies
provided during MY 1999-2002 caused and continue to cause serious prejudice to the interests of
Brazil by resulting in the United States having more than an equitable share of world exports of
upland cotton in joint violation of Articles XVI:1 and XVI:3 of the GATT 1994.
7.1471 As we have already indicated 1541, we do not believe that these provisions are susceptible to
such joint application. Rather , each requires application in accordance with its own terms. We
therefore examine the terms of these two distinct treaty provisions separately.
7.1472 Article XVI:1 of the GATT 1994 , is found in Part A of that article, entitled "Subsidies in
General". It states:
"If any [Member] grants or maintains any subsidy, including any form of income or
price support, which operates directly or indi rectly to increase exports of any product
from, or to reduce imports of any product in to, its territory, it shall notify ... in
writing of the extent and nature of the subs idization, of the estimated effect of the
subsidization on the quantity of the affected product or products imported into or
exported from its territory and of the circumstances making the subsidization
necessary. In any case in which it is determin ed that serious prejudice to the interests
of any other contracting party is caused or threatened by any such subsidization, the
contracting party granting the subsidy shall, upon request, discuss with the other
contracting party or parties concerned, ..., the possibility of limiting the
subsidization."
7.1473 There is an explicit textual linkage between Article 6.3(d) and Article 5(c) of the
SCM Agreement: the chapeau of Article 6.3 states that "[ s]erious prejudice in the sense of paragraph
(c) of Article 5 may arise where one of the following [including the elements in Article 6.3(d)]
apply...".
7.1474 Following that cross-reference to Article 5(c), we see that footnote 13 to Article 5(c)
explicitly refers to Article XVI:1 of the GATT 1994. It states: "The term "serious prejudice to the
interests of another Member" is used in this Agreem ent in the same sense as it is used in paragraph 1
of Article XVI of GATT 1994, and includes threat of serious prejudice."

1536 Argentina's response to Panel third party Question No. 53.
1537 China's response to Panel third party Question No. 53.
1538 Chinese Taipei's response to Panel third party Question No. 53.
1539 European Communities response to Panel third party Question No. 53.
1540 New Zealand's response to Panel third party Question No. 53.
1541 See Section VII:E.

7.1475 As the term "serious prejudice" in both provisions of the two agreements is used "in the same
sense", our findings of "serious prejudice" under Articles 5(c)/6.3(c) of the SCM Agreement would
also be conclusive for a finding of "ser ious prejudice" under Article XVI:1 of the GATT 1994. That
is, if the terms "serious prejudice" are used "in the same sense" in the two provisions, a finding of
"serious prejudice" under Article 5(c) must necessar ily also constitute a finding of "serious prejudice"
also for the purposes of Article XVI:1. In addition, the remedies available under Part III of the
SCM Agreement are at least as effective as those that would be available under Article 19.1 of the
DSU in respect of an infringement of Article XVI:1 of the GATT 1994.
7.1476 In light of our findings of inconsistency with Articles 5(c) and 6.3(c) of the
SCM Agreement
1542, and for these reasons, we see no need for an additional examination of "serious
prejudice" for the purposes of Article XVI:1 of the GATT 1994.1543
H. ACTIONABLE SUBSIDIES: CLAIMS OF "THREAT OF" SERIOUS PREJUDICE
1. Measures at issue
7.1477 This Section of our report deals w ith alleged actionable subsidies from
MY 2003-MY 2007.1544 These are the following measures, as described in Section VII:C of this
report:
(i) export credit guarantees under the GSM 102 programme1545;
(ii) user marketing (Step 2) payments to exporters and domestic users1546;
(iii) marketing loan programme payments;
(iv) direct payments;

1542 Supra, para. 7.1416.
1543 To the extent that Brazil's argument under Article XVI:1 also focuses upon the attainment of an
"inequitable share of world ex port trade" within the meanin g of Article XVI:3 of the GATT 1994 , we have
addressed this supra, in Section VII:E.
1544 As regards the "implementation period" – during which Article 13 of the Agreement on Agriculture
applies – the United States is of th e view that the end of the 2003 calendar year is not relevant to this dispute
because US commitments with resp ect to cotton are specified by marketing year. See United States' response
to Panel Question No. 124. To the extent that there is any issue as to precisely when in "2003" the
implementation period for purposes of Article 13 expires, we recall our findings in supra, Section VII:D relating
to claims of threat of serious prejudice. In particular, we recall our statement in paragraph 7.595. Given those
findings, we are of the view that th e United States cannot, in any event, benefit from the conditional protection
of Article 13 of the Agreement on Agriculture during MY 2003 or subsequently in relation to claims of threat of
serious prejudice.
1545 We recall that, in Section VII:E, we have found that export credit guarantees under the three export
credit guarantee programmes before us constitute export subsidies in violation of Article 10.1 and 8 of the
Agreement on Agriculture and prohibited export subsidies under Articles 3.1(a) and 3.2 of the SCM Agreement.
We note that Brazil's references to GSM 102 in its claims of threat of seri ous prejudice are somewhat
inconsistent. While it does not refer to GSM 102 as one of the five "mandatory" subsidies in question, it
nevertheless refers to the GSM 102 pr ogramme in various places in its thr eat analysis. In any event, Brazil
clarified, in response to Panel Question No. 139, that Brazil's serious prejudice claims relating to export credit
guarantee programmes refer only to one of the three United States export credit guarantee programmes,
GSM102. According to Brazil, this is because either no upland cotton alloca tions were made or only negligible
amounts of cotton were exported under the GSM 103 and SCGP programs during the years in question.
1546 We recall that, in Section VII:E, we have foun d that the aspect of the measure providing for
payments to exporters constitutes an export subsid y in violation of the Articles 3.3 and 8 of the Agreement on
Agriculture and a prohibited export subsidy under Articles 3.1(a) and 3.2 of the SCM Agreement; in Section
VII:F, we have found that the aspect of the measure providing for payments to domestic users is an import
substitution subsidy within the meaning of Articles 3.1(b) and 3.2 of the SCM Agreement.

(v) counter-cyclical payments;
(vi) crop insurance payments; and
(vii) legislative and regulatory provisions providing for the payment of measures
(i)-(vi) above.
2. Overview of Brazil's claims of threat of serious prejudice under the SCM Agreement and
the GATT 1994
7.1478 Brazil alleges "threat of serious prejudice" unde r Articles 5(c), 6.3(c) and 6.3(d) of the
SCM Agreement, and Articles XVI:1 and XVI:3 of the GATT 1994. Brazil claims that United States
subsidies to be granted during MY 2003-MY 2007 th reaten to cause serious prejudice to Brazil's
interests as follows:
(i) threat of significantly suppressing uplan d cotton prices in the United States,
world and Brazilian markets in violation of Articles 5(c) and 6.3(c) of the
SCM Agreement;
(ii) threat of increasing the United States share of the upland cotton world
market in violation of Articles 5(c) and 6.3(d) of the SCM Agreement; and
(iii) threat of the United States continuing to have more than an equitable share
of world export trade in violation of Articles XVI:1 and XVI:3 of the GATT
1994.
3. Claim of threat of serious prejudice under Articles 5(c) and 6.3(c) of the SCM Agreement
(a) Main arguments of the parties
7.1479 Brazil submits that the appropriate test for "threat"
1547 of serious prejudice for the purposes of
Articles 5(c) and 6.3(c)/(d) of the SCM Agreement is whether the payments are mandated by legal
mechanisms and whether there ar e any effective limits on the volume of production, volume of
exports or the budgetary expenditures related to upland cotton. Brazil also asserts an alternative test:
the same elements necessary to demonstrate presen t serious prejudice focusing on the likely effects of
the subsidies in suppressing world prices and increasi ng and maintaining a high level of world export
market share.
7.1480 According to Brazil, the United States subsidies at issue threaten to cause serious prejudice
within the meaning of Article 5(c) of the SCM Agreement because, under either test:
- five types of subsidies (user marketing (Step 2) payments; marketing loan
programme payments; DP payments; CCP payments; and crop insurance
payments) are "mandatory" payments to eligible recipients, with unlimited
budgetary expenditures and on an unlimited amount of upland cotton
production.
- existing "present" serious prejudice in MY 1999-2002 is proof that a "threat"
exists in MY 2003-MY 2007 given the substantial similarity between the
measures in question and the increase of subsidies under the FSRI Act of
2002;

1547 Brazil refers, in support, to past GATT Panel Reports in EC – Sugar Exports (Australia) and EC –
Sugar Exports (Brazil) and the WTO Appellate Body Report in US – FSC.

- the nature of the United States subsid ies and their likely trade effects are
evidence of "threat";
- given continuing high costs of production, the United States producers' cost-
revenue gap will remain significant a nd United States producers will remain
dependent on all United States subsidi es to maintain current levels of
production throughout MY 2003-MY 2007;
- the significant production, export and price-suppressing effects of the
mandated United States subsidies w ill exist between MY 2003-MY 2007
even as world prices fluctuate (as DP payments, crop insurance and export
credit guarantees are not impacted by market price fluctuations);
- current and projected price levels indicate that marketing loan programme
payments and CCP payments will be made during MY 2003-MY 2007;
- USDA's projected upland cotton acreage, United States Senators' statements
and research by independent or other e xperts all support a finding of threat of
serious prejudice between MY 2003-MY 2007;
- the increasing reliance of United States producers on export sales will
enhance the price suppressing effects of the subsidies (particularly the user
marketing (Step 2) payments and the export credit guarantees).
7.1481 The United States asserts that Brazil's test for "threat" of serious prejudice is incorrect as it
would produce a threat determination wherever s ubsidies by a large exporter have no effective
production or export limitations. According to the Un ited States, the appropriate test for "threat" is
whether there is a clearly foreseen and imminent lik elihood of future serious prejudice in light of
future market conditions, world prices and other factors.
1548
7.1482 The United States argues that Brazil has not demonstrated a clearly foreseen and imminent
likelihood of future serious prejudice, mainly becau se: no "present" serious prejudice exists and thus
no threat can be presumed 1549; and certain of the allegedly "mandatory" measures (marketing loan
programme payments, user marketing (Step 2) payments and CCP paym ents) depend upon price
conditions which may or may not be fulfilled in the future. Indeed , according to the United States,
futures prices indicate that prices may be close to the average that existed in the era before Brazil
alleged serious prejudice.
(b) Main arguments of the third parties
7.1483 Argentina agrees with Brazil that the threat of serious prejudice is clearly foreseeable and
imminent because of the effects of the even larg er subsidies provided under United States' legislation
for the MY 2003-MY 2007 period. Argentina contends that the guaranteed flow of subsidies will lead
to a higher level of United States' cotton produc tion and exports, and result in price suppression and
depression as well as an increasing and inequitable wo rld market share for cotton, thus creating a
source of permanent uncertainty that confirms th e threat of serious prejudice generated by the
subsidies. According to Argentin a, future subsidies will continue to be necessary to bridge the gap

1548 The United States cites, in suppo rt, the "threat" of injury standa rd applicable in a countervailing
duty investigation, articulated in Article 15.7 of the SCM Agreement.
1549 As the Panel has found "present" serious prejudice within the meaning of Articles 6.3(c) and 5(c),
this argument of the United States – that no "present" serious prejudice exists and thus no threat can be
presumed – is no longer valid.

between market prices and the total production co sts of the upland cotton producers of the United
States, especially considering that the USDA forecasts an increase in total production costs.
1550
7.1484 The European Communities asserts that subsidies without any "pre-established limitations"
in terms of value and volume are not in and of th emselves dispositive of the existence of threat of
serious prejudice. It argues that other factors, including in particular factors analogous to those listed
in Article 15.7 (ii)-(v) of the SCM Agreement, may also be relevant and should be examined as well.
The European Communities considers that in light of Article 15.7 of the SCM Agreement a
determination of threat of serious prejudice, like a determination of injury, must "be based on facts
and not merely on allegation, conjecture or remo te possibility". Also, the relevant "changes in
circumstances" must be "clearly foreseen and imminent".1551
7.1485 New Zealand supports Brazil's arguments and asserts that Brazil has brought evidence to
show that the United States subsidies threaten to cause serious prejudice to Brazil’s interests in the
future. It agrees with Brazil that the very same f actors creating present serious prejudice also create a
threat of serious prejudice in the future. It cites to the fact that United States' subsidies are mandated
to continue until MY 2007, that they are effectiv ely unlimited, and that they have already caused
serious prejudice to Brazil’s interests. New Zealand further asserts that the continued operation of the
subsidies for a further four years cannot but be c onsidered to threaten further serious prejudice to
Brazil’s interests.1552
(c) Evaluation by the Panel
7.1486 Article 5 of the SCM Agreement states:
"No Member should cause, through the use of any subsidy referred to in paragraphs 1
and 2 of Article 1, adverse effects to the interests of other Members, i.e.:
(a) injury to the domestic industry of another Member 11;
(b) nullification or impairment of benefits accruing directly or indirectly to other
Members under GATT 1994 in particular the benefits of concessions bound
under Article II of GATT 199412;
(c) serious prejudice to the interests of another Member." 13
Part V.
12 The term "nullification or impairment" is used in this Agreement in the same sense as it is
used in the relevant provisions of GATT 19 94, and the existence of such nullification or
impairment shall be established in accordance with the practice of application of these
provisions.
13 The term "serious prejudice to the interests of another Member" is used in this Agreement in
the same sense as it is used in paragraph 1 of Article XVI of GATT 1994, and includes threat
of serious prejudice.

1550 Argentina's written submission to the resumed session of the first substantive meeting, paras. 44-
49.
1551 European Communities' written submission to the resumed session of the first substantive meeting,
paras. 17-26.
1552 New Zealand's written submission to the resumed session of the first substantive meeting, paras.
3.01- 3.06.

7.1487 Footnote 13 to Article 5(c) of the SCM Agreement makes it clear that: "The term "serious
prejudice to the interests of another Member" is used in this Agreement in the same sense as it is used
in paragraph 1 of Article XVI of GATT 1994, and includes threat of serious prejudice ." (emphasis
added)
7.1488 As we have already noted, Article XVI:1 of the GATT 1994, in Section A of that Article, is
entitled "Subsidies in General". It states:
"If any [Member] grants or maintains any subsidy, including any form of income or
price support, which operates directly or indi rectly to increase exports of any product
from, or to reduce imports of any product in to, its territory, it shall notify ... in
writing of the extent and nature of the subs idization, of the estimated effect of the
subsidization on the quantity of the affected product or products imported into or
exported from its territory and of the circumstances making the subsidization
necessary. In any case in which it is determined that serious prejudice to the interests
of any other contracting party is caused or threatened by any such subsidization, the
contracting party granting the subsidy shall, upon request, discuss with the other
contracting party or parties concerned, ..., the possibility of limiting the
subsidization." (emphasis added)
7.1489 Article XVI:1 of the GATT 1994 refers to the situation where "... serious prejudice to the
interests of any other Member is caused or threatened by any such subsidization" (emphasis added).
7.1490 There is an explicit textual linka ge between Article 5(c) of the SCM Agreement and the
chapeau of Article 6.3 of the SCM Agreement. The chapeau of Article 6.3 states: "[s]erious prejudice
in the sense of paragraph (c) of Article 5 may arise where one of the following apply...".
Article 6.3(c) then sets out the condition that "t he effect of the subsidy" is "significant price
suppression" "in the same market".
7.1491 We consider it significant that the text of Article 5(c) of the SCM Agreement indicates that the
term "serious prejudice to the interests of another Member" is used in the SCM Agreement "in the
same sense as it is used in para graph 1 of Article XVI of GATT 1994, and includes threat of serious
prejudice" (emphasis added).1553
7.1492 We believe that this phrase gives rise to two initial issues:
- first, what guidance do we find in the indication that "serious prejudice"
"includes threat of serious prejudice" in footnote 13 of the SCM Agreement?;
and
- secondly, what guidance do we find in the phrase "... serious prejudice to the
interests of any other Member is caused or threatened by any such
subsidization" in Article XVI:1 of the GATT 1994?
7.1493 With respect to the first question, the cited le gal provisions make it clear that, whatever the
overall scope of the concept of serious prejudice may be, that scope includes the concept of "threat"
of serious prejudice. The ordinary meaning of the verb "include" is: "comprise or reckon in as part of
a whole."1554 Thus, serious prejudice includes a threat of serious prejudice.1555

1553 By virtue of footnote 13 of the SCM Agreement.
1554 Concise Oxford English Dictionary (Oxford: Clarendon Press, 1995).
1555 The converse would not necessarily hold. That is, a finding of threat of serious prejudice would
not necessarily include present serious prejudice.

7.1494 With respect to the second question, we cons ider the meaning of the phrase "... serious
prejudice to the interests of any other Member is caused or threatened by any such subsidization"
(emphasis added) in Article XVI:1 of the GATT 1994. The main question is whether to read the "or"
inclusively, or exclusively. That is, are we to read this phrase in the sense of either one ("caused")
or the other ("threatened"), but not both would be adequate to trigger the remedies in Article 7 of the
SCM Agreement?
1556 Or should we read this phrase rather as "caused or threatened " in the sense of
 either one or the other, or both in combination ("caused or threatened [to be caused]") would be
adequate ?
7.1495 We believe that "threat" of serious prejudice refers to something distinct from serious
prejudice. However, in terms of the rising con tinuum of seriously prejudicing another Member's
interests, that ascends from a "threat" of serious prejudice" up to "serious prejudice", we see "serious
prejudice" as necessarily including the concept of a "threat" and exceeding the presence of a "threat"
for purposes of answering the relevant inquiry. 1557 This is confirmed by the text of footnote 13 of the
SCM Agreement, which indicates that serious prejudice "includes" threat of serious prejudice.
7.1496 In this respect, we observe that present serious prejudice would more often be preceded in
time by a prejudice that threatens to become serious, and serious prejudice would be the realization of
a threat of serious prejudice.1558
7.1497 The text of the cited legal provisions leads us to conclude that either serious prejudice, or
threat of serious prejudice, or both in combination, may trigger the remedies available in Article 7 of
the SCM Agreement. The existence of either one, or the other, is both a necessary and sufficient
condition, in and of itself, to achieve this.
7.1498 Turning to the particular factual situation be fore us, there are two main measures providing
for payment of the United States subsidies in question:
- the FSRI Act of 2002 and implementing regulations (relating to MY 2002 – MY
2007)
1559; and

1556 As, pursuant to footnote 13, "serious prejudice" in Article 5(c) is used in this same sense.
1557 We do not mean to imply that the concept of serious prejudice to another Member's interests within
the meaning of Article 5(c) of the SCM Agreement can be iden tified with the concept of "material injury" or
"serious injury" to a Member's domestic industry as those terms are used in the trade remedy provisions of the
SCM Agreement , the Anti-dumping Agreement or the Agreement on Safeguards . We nevertheless recall the
view of the Appellate Body in addressing a similarly worded requirement in Article 2.1 of the Agreement on
Safeguards in US – Line Pipe, paras. 170-171:

"The question at issue is whether the right [to apply a safeguard measure] exists in this particular case.
And, as the right exists if there is a finding by the competent authorities of a 'threat of serious injury' or
- something beyond - 'serious injury', then it seems to us that it is irrelevant, in determining whether
the right exists , if there is 'serious injury' or only 'threat of serious injury' - so long as there is a
determination that there is at least a 'threat'. In terms of the rising continuum of an injurious condition
of a domestic industry that ascends from a 'threat of serious injury' up to 'serious injury', we see 'serious
injury'- because it is something beyond a 'threat' - as necessarily including the concept of a 'threat'
and exceeding the presence of a 'threat' for purposes of answ ering the relevant inquiry: is there a right
to apply a safeguard measure?"

1558 Ibid. In the only previous WTO Panel Report on "serious prejudice" ( Indonesia – Autos ) the
"threat" claims were made in the alternative to the "p resent" serious prejudice claims. Having found present
serious prejudice, the Panel declined to examine the alternative "threat" claims. See Panel Report, Indonesia –
Autos, para. 14.257.
1559 Certain transition rules apply, e.g. section 1106(d) entitled "special rule for 2002 crop year" relating
to direct payments and counter-cyclical payments.

- legislation providing for crop insurance subsidies prior to and since MY 2002.
7.1499 Brazil's "present" "serious prejudice" claims pertain to measures in force and subsidies
granted from MY 1999-MY 2002. Our finding of "present" serious prejudice thus pertain also to
measures in force and subsidies paid in MY 2002, the first year of the FSRI Act of 2002.
7.1500 Brazil's "threat" claims pertain to subsidies granted (or yet to be granted) under measures in
force from MY 2003-MY 2007. This is the remaining pe riod of application of the FSRI Act of 2002.
It is clear that the existing subsidy programmes are currently envisaged to remain in effect between
MY 2003-MY 2007.
7.1501 Because the Panel's "present" serious prejudice findings include findings of inconsistency that
deal with the FSRI Act of 2002 and subsidies gran ted thereunder in MY 2002, the United States is
obliged to take action concerning its present stat utory and regulatory framework as a result of our
"present" serious prejudice finding. We recall that, pursuant to Article 7.8 of the SCM Agreement, the
United States is under an obligation to "take approp riate steps to remove the adverse effects or ...
withdraw the subsidy".
1560
7.1502 Furthermore, we have found that certain of the measures challenged in the "threat" context are
prohibited subsidies which must be withdrawn "without delay" pursuant to Article 4.7 of the
SCM Agreement – i.e. user marketing (Step 2) payments to exporters and domestic users; and export
credit guarantees in respect of certain pr oducts under the GSM 102, GSM 103 and SCGP
programmes.1561 Required withdrawal of these prohibited subsidies within the time frame we set
below would, we believe, have real, practical implic ations for the scope of the measures subject to the
threat analysis (i.e. the basket of measures that is th e subject of the threat analysis that pertains to MY
2003-MY 2007 would include measures that the United States must, in any event, withdraw without
delay).
7.1503 We consider that, upon required implementati on by the United States of this Panel's
prohibited subsidy findings and present serious prej udice findings, the basket of measures in question
may be so significantly transformed or manifestly different from the measures that are currently in
question that it is not necessary or appropriate to address Brazil's claims of threat of serious prejudice
under Articles 5(c) and 6.3(c) of the SCM Agreement.1562
4. Claim of threat of serious prejudice under Articles 5(c) and 6.3(d) of the
SCM Agreement
7.1504 We recall our finding above 1563 that Brazil's evidence and argumentation in this dispute
focused exclusively upon a legally erroneous interp retation of the phrase "world market share" in
Article 6.3(d) of the SCM Agreement. As Brazil has also relied upon this same interpretation in its
"threat" evidence and argumentation, we similarly find that Brazil has not established a prima facie
case of violation of Article 6.3(d) (nor of Article 5(c)) here.
5. Claims under Articles XVI:1 and XVI:3 of the GATT 1994
7.1505 We recall the Panel's finding above that, in light of the Panel's finding under Article 5(c) of
the SCM Agreement, it is not necessary to make findings also under Article XVI:1 of the GATT
1994.1564 We further recall our finding above that Article XVI:3 of the GATT 1994 pertains only to
export subsidies as those are currently defined in the Agreement on Agriculture and the

1560 See Section VII:G and Section VIII.
1561 See Sections VII:E , F and Section VIII.
1562 See e.g. Panel Report, US – FSC.
1563 Supra, Section VII:G.
1564 Supra, Section VII:G.

SCM Agreement.
1565 On this basis, it is not necessary for us to address these claims of Brazil in order
to resolve this dispute.
I. CLAIMS OF PER SE INCONSISTENCY
1. Measures at issue
7.1506 This Section of our report deals with alleged actionable subsidies, including certain alleged
subsidies that are not "exempt from actions" based on Articles 5 and 6 of the SCM Agreement and
Article XVI of the GATT 1994 within the meaning of Articles 13(b)(ii) and 13(c)(ii) of the Agreement
on Agriculture as a result of our findings in Sections VII:D, E and F of our report. These are the
following measures, as described in Section VII:C of this report:
(i) Allegedly mandatory legislative provisi ons and implementing regulations providing
for the payment of the following subsidies:
- user marketing (Step 2) payments to domestic users and exporters;1566
- marketing loan programme payments;1567
- direct payments;1568
- counter-cyclical payments;1569 and
- crop insurance payments.1570
2. Main arguments of the parties
7.1507 Brazil alleges that the legislative and regulatory provisions governing these five United States
subsidies constitute "per se" violations of Articles 5(c) and 6.3(c) and (d) of the SCM Agreement and
Articles XVI:1 and XVI:3 of the GATT 1994 for the period MY 2002-MY 2007. According to Brazil,
they are "mandatory in nature" and fall into two ge neral categories: certain payments vary depending
upon prevailing market conditions (i.e. marketing loan, counter-cyclical payments and require
payment (with no budgetary or quantitative limitati ons), others (i.e. crop insurance payments and
direct payments) do not; while user marketing (Step 2) payments are "somewhat of a hybrid". The
five subsidies necessarily threaten to cause seri ous prejudice where market conditions require their
joint payment. In addition, they cause threat of serious prejudice even when market conditions are
such that only crop insurance and direct payments are made.
7.1508 The United States argues that even if the measures concerned do not permit the United States
government discretion to grant the subsidies in certa in market conditions, it is not clear that such

1565 Supra, Section VII:E.
1566 Section 1207(a) of the FSRI Act of 2002, reproduced in Exhibit BRA-29 and 7 CFR 1427.103, 7
CFR 1427.104(a)(1) and (2), 7 CFR 1427.105(a) and 7 CFR 1427.108(d), reproduced in Exhibit BRA-37.
1567 Sections 1201(a)-(b), 1202(a)(6), 1202(b)(6), 1204(b), 1205(a)(1), 1205(b), 1205(c)(1), 1608 of the
FSRI Act of 2002, reproduced in Exhibit BRA-29 ; 7 USC 7286 (Section 166 of the FAIR Act as amended); and
7 CFR 1427.22, reproduced in Exhibit BRA-36.
1568 Section 1103(a)-(d)(1) of the FSRI Act of 2002, reproduced in Exhibit BRA-29 and 7 CFR
1412.502, reproduced in Exhibit BRA-35.
1569 Sections 1104(a)-(f)1 1608 of the FSRI Act of 2002, reproduced in Exhibit BRA-29 and 7 CFR
1412.503, reproduced in Exhibit BRA-35.
1570 Section 508(a)(8), Section 508(b)(1), Section 508(b)(2)(A)(ii), 508(b)(3), 508(e) and 508(k) and
516 of "the ARP Act of 2000". The ARP Act of 2000 amended the Federal Crop Insurance Act which is
reproduced in Exhibit BRA-30 as amended through Public Law 107-136, 24 January 2002. See Brazil's first
written submission, footnotes 178 and 184.

market conditions will arise. The United States asserts that both it and Brazil agree that, given certain
conditions such as price levels, these challenged meas ures would be "mandatory" in the sense that the
United States could not arbitrarily decline to provide them. However, for purposes of a
mandatory/discretionary analysis, no WTO-incons istency is mandated by those measures because
serious prejudice does not necessarily result, even where there is no discretion not to provide
payment.1571
3. Main arguments of the third parties
7.1509 The European Communities claims that the Panel should reject Brazil’s per se claim. First,
it claims that Brazil's argument that a Member can challenge measures of another Member on a per se
basis when those measures mandate a violation of its WTO obligations would have absurd and
unacceptable results when applied to WTO provisions which, like Article 5(c) of the SCM Agreement,
incorporate a "trade effects" test. It also clai ms that the "mandatory" standard invoked by Brazil
would result in the creation of third category of pr ohibited adverse effects in addition to actual and
threatened serious prejudice, which is nowhere me ntioned in Article 5(c): the mere possibility of
threat of serious prejudice in certain circumstances. Furthermore, in light of the European
Communities argument that threat of serious prejudice must be imminent and foreseeable, it further
argues that under Brazil’s interpretation, it would be sufficient to establish a per se violation if a
complaining party demonstrated that the legislation at issue mandates action that threatens serious
prejudice in certain circumstances, no matter how remo te the likelihood that such circumstances will
ever materialise.
1572
4. Evaluation by the Panel
7.1510 The Panel recalls that it need not examine all le gal claims before it. Rather, we need only
address those claims that must be addressed in orde r to resolve the matter in issue in the dispute. 1573
This is the case provided that we address those clai ms on which a finding is necessary to enable the
DSB to make sufficiently precise recommendations a nd rulings so as to allow for prompt compliance
by a Member in order to ensure effective resolution of disputes to the benefit of all Members.1574
7.1511 In light of our findings above in Sections VII: E, F, G and H, we do not believe that it is
necessary to address Brazil's per se claims relating to these measures under Articles 5(c) and 6.3(c)
and (d) of the SCM Agreement and Articles XVI:1 and XVI:3 of the GATT 1994.
VIII. CONCLUSIONS AND RECOMMENDATIONS
8.1 In light of the findings above, we conclude as follows:
(a) Article 13 of the Agreement on Agriculture is not in the nature of an affirmative
defence;
(b) PFC payments, DP payments, and the le gislative and regulatory provisions which
establish and maintain the DP programme, do not satisfy the condition in
paragraph (a) of Article 13 of the Agreement on Agriculture;

1571 United States' 28 January 2004 comments on Brazil' s response to Panel Question No. 257 (a) (ii),
para. 192.
1572 European Communities' written submission to the resumed session of the first substantive meeting,
paras. 27-36.
1573 Appellate Body Report, US – Wool Shirts and Blouses , page 19. See also e.g. Appellate Body
Report, Canada – Autos, paras. 112-117, where the Appellate Body refe rs to and endorses that panel's exercise
of the "discretion" implicit in the principle of judicial economy.
1574 Appellate Body Report, Australia – Salmon, para. 223.

(c) United States domestic support measures cons idered in Section VII:D of this report
grant support to a specific commodity in excess of that decided during the 1992
marketing year and, therefore, do not sa tisfy the conditions in paragraph (b) of
Article 13 of the Agreement on Agriculture and, therefore, are not exempt from
actions based on paragraph 1 of Article XVI of the GATT 1994 or Articles 5 and 6 of
the SCM Agreement;
(d) concerning United States export credit guarantees under the GSM 102, GSM 103 and
SCGP export credit guarantee programmes:
(i) in respect of exports of upland cotton and other unscheduled
agricultural products supported under the programmes
1575, and in
respect of one scheduled product (rice):
- United States export credit guarantees under the GSM 102, GSM 103
and SCGP export credit guarantee programmes are export subsidies
applied in a manner which results in circumvention of United States'
export subsidy commitments, within the meaning of Article 10.1 of
the Agreement on Agriculture and they are therefore inconsistent
with Article 8 of the Agreement on Agriculture;
- as they do not conform fully to the provisions of Part V of the
Agreement on Agriculture, they do not satisfy the condition in
paragraph (c) of Article 13 of the Agreement on Agriculture and,
therefore, are not exempt from actions based on Article XVI of the
GATT 1994 or Articles 3, 5 and 6 of the SCM Agreement;
- United States export credit guarantees under the GSM 102, GSM 103
and SCGP export credit guarantee programmes are provided by the
United States government at premium rates which are inadequate to
cover long-term operating costs and losses of the programmes within
the meaning of item (j) of the Illustrative List of Export Subsidies in
Annex I of the SCM Agreement , and therefore constitute per se
export subsidies prohibited by Ar ticles 3.1(a) and 3.2 of the SCM
Agreement.
(ii) however, in respect of exports of unscheduled agricultural products
not supported under the programmes
1576 and other scheduled
agricultural products:
- the United States has established that export credit guarantees under
the GSM 102, GSM 103 and SCGP export credit guarantee
programmes have not been applied in manner which either results in,
or which threatens to lead to, circumvention of United States export
subsidy commitments within the meaning of Article 10.1 and that
they therefore are not inconsistent with Article 8 of the Agreement on
Agriculture;

1575 As indicated supra, Section VII:E, paragraph 7.875, referring to Exhibit BRA-73, to the extent they
are within our terms of reference and within the product scope of the Agreement on Agriculture.
1576 i.e. unscheduled agricultural products, to the extent they are within our terms of reference and
within the product scope of the Agreement on Agriculture , other than those indicated supra, Section VII:E,
paragraph 7.875.

- in these circumstances, and as Brazil has also not made a prima facie
case before this Panel that the programmes do not conform fully to
the provisions of Part V of the Agreement on Agriculture , this Panel
must treat them as if they are exempt from actions based on
Article XVI of the GATT 1994 and Article 3 of the SCM Agreement
in this dispute.
(e) concerning section 1207(a) of the FSRI Act of 2002 providing for user
marketing (Step 2) payments to exporters of upland cotton:
(i) section 1207(a) of the FSRI Act of 2002 providing for user marketing
(Step 2) payments to exporters of upland cotton is an export subsidy,
listed in Article 9.1(a) of the Agreement on Agriculture , provided in
respect of upland cotton, an unsche duled product. It is, therefore,
inconsistent with the United States' obligations under Articles 3.3 and
8 of the Agreement on Agriculture;
(ii) as it does not conform fully to the provisions of Part V of the
Agreement on Agriculture , it does not satisfy the condition in
paragraph (c) of Article 13 of the Agreement on Agriculture and,
therefore, is not exempt from actions based on Article XVI of the
GATT 1994 or Articles 3, 5 and 6 of the SCM Agreement;
(iii) section 1207(a) of the FSRI Act of 2002 providing for user marketing
(Step 2) payments to exporters of upland cotton is an export subsidy
prohibited by Articles 3.1(a) and 3.2 of the SCM Agreement.
(f) concerning section 1207(a) of the FSRI Act of 2002 providing for user
marketing (Step 2) payments to domestic users of upland cotton: it is an
import substitution subsidy prohibited by Articles 3.1(b) and 3.2 of the SCM
Agreement;
(g) concerning serious prejudice to the interests of Brazil:
(i) the effect of the mandatory price-contingent United States subsidy
measures – marketing loan programme payments, user marketing
(Step 2) payments, MLA paymen ts and CCP payments -- is
significant price suppression in the same world market within the
meaning of Article 6.3(c) of the SCM Agreement constituting serious
prejudice to the interests of Brazil within the meaning of Article 5(c)
of the SCM Agreement;
(ii) however, Brazil has not established that:
- the effect of PFC payments, DP payments and crop insurance
payments is significant price suppression in the same world market
within the meaning of Article 6.3(c) of the SCM Agreement
constituting serious prejudice to the interests of Brazil within the
meaning of Article 5(c) of the SCM Agreement; or
- the effect of the United States subsidy measures listed in
paragraph 7.1107 of Section VII:G of this report is an increase in the
United States' world market share within the meaning of

Article 6.3(d) of the SCM Agreement constituting serious prejudice
within the meaning of Article 5(c) of the SCM Agreement.
(h) concerning the ETI Act of 2000:
(i) Brazil has not made a prima facie case before this Panel that the ETI
Act of 2000 and alleged export su bsidies provided thereunder are
inconsistent with Articles 10.1 and 8 of the Agreement on Agriculture
in respect of upland cotton;
(ii) with respect to the condition in Article 13(c)(ii) of the Agreement on
Agriculture, as Brazil has also not made a prima facie case before
this Panel that they do not conform fully to the provisions of Part V
of the Agreement on Agriculture in respect of upland cotton, this
Panel must treat them as if they are exempt from actions based on
Article XVI of the GATT 1994 and Article 3 of the SCM Agreement
in this dispute.
8.2 Under Article 3.8 of the DSU, in cases where there is an infringement of the obligations
assumed under a covered agreement, the action is considered prima facie to constitute a case of
nullification or impairment. We conclude that, to the extent that the United States has acted
inconsistently with the covered agreements, it has nullified or impaired benefits accruing to Brazil
under these agreements.
8.3 In light of these conclusions:
(a) we recommend pursuant to Article 19.1 of the DSU that the United States bring its
measures listed in paragraphs 8.1(d)(i) a nd 8.1(e) above into conformity with the
Agreement on Agriculture;
(b) as required by Article 4.7 of the SCM Agreement, we recommend that the United
States withdraw the prohibited subsidies in paragraphs 8.1(d)(i) and 8.1(e) above
without delay. The time-period we specify must be consistent with the requirement
that the subsidy be withdrawn "without delay".
 In any event, this is at the latest
within six months of the date of adop tion of the Panel report by the Dispute
Settlement Body or 1 July 2005 (whichever is earlier);
(c) pursuant to Article 4.7 of the SCM Agreement, we recommend that the United States
withdraw the prohibited subsidy in paragra ph 8.1(f) above without delay and, in any
event, at the latest within six months of the date of adoption of the Panel report by the
Dispute Settlement Body or 1 July 2005 (whichever is earlier); and
(d) we recall that, in respect of the subsidies subject to our conclusion in
paragraph 8.1(g)(i) above, pursuant to Article 7.8 of the SCM Agreement:
"7.8 Where a panel report or an Appellate Body report is adopted
in which it is determined that an y subsidy has resulted in adverse
effects to the interests of another Member within the meaning of
Article 5, the Member granting or maintaining such subsidy shall
take appropriate steps to remove the adverse effects or shall withdraw
the subsidy."

Accordingly, upon adoption of this report, the United States is under an obligation to
"take appropriate steps to remove the adverse effects or ... withdraw the subsidy".