Document: WT/DS267/R/Add.2 Page I-170 ANNEX I-5 ANSWERS OF BRAZIL TO QUESTIONS POSED BY THE PANEL FOLLOWING THE RESUMED FIRST SUBSTANTIVE MEETING OF THE PANEL
Date: 27 October 2003
Document codes: WT/DS267/R/Add.2
Complainant: Brazil
Respondent: U.S.
Third parties: Argentina, Australia, Benin, Canada, Chad, China, Taiwan, EU, India, New Zealand, Pakistan, Paraguay, Venezuela, Japan, Thailand
Dispute stage: Mutually Agreed Solution
Agreements cited: Art. 3, 5, 6  Subsidies and Countervailing Measures (SCM)Art. 3.3, 7.1, 8, 9.1, 10.1  AgricultureArt. III:4, XVI  GATT 1994

Table of Cases

Short Title Full Case and Citation
EC – Sugar Exports II
(Brazil)
GATT Panel Report, European Communities – Refunds on Exports of
Sugar Complaint by Brazil, L/5011 – 27S/69, adopted
10 November, 1980.
EEC – Wheat Flour GATT Panel Report, European Economic Community – Subsidies on
Export of Wheat Flour, SCM/42, circulated 21 March 1983.
EC - Hormones Appellate Body Report, EC Measures Concerning Meat and Meat
Products (Hormones), , adopted 13 February 1998.
EC- Bananas Appellate Body Report, European Communities – Regime for the
Importation, Sale and Distribution of Bananas, , adopted
25 September 1997.
Argentina – Textiles
and Apparel
Panel Report, Argentina – Measures affecting Imports of Footwear,
Textiles, Apparel and Other Items, , adopted 22 April 1998.
Canada - Aircraft Appellate Body Report, Canada – Measures Affecting the Export of
Civilian Aircraft, , adopted 20 August 1999.
India – Quantitative
Restrictions
Panel Report, India – Quantitative Restrictions on Imports of
Agricultural, Textile and Industrial Products, , adopted
22 September 1999.
Korea – Dairy
Safeguards
Appellate Body Report, Korea – Definitive Safeguard Measure on
Imports of Certain Dairy Products, , adopted
12 January 2000.
US - FSC Appellate Body Report, United States – Tax Treatment for “Foreign
Sales Corporation”, , adopted 20 March 2000.
US – FSC (21.5) Appellate Body Report, United States – Tax Treatment for “Foreign
Sales Corporation.” Recourse to Article 21.5 of the DSU by the
European Communities. , adopted 29 January 2002.
Argentina – Footwear
Safeguards
Appellate Body Report, Argentina – Safeguard Measures on Imports of
Footwear, , adopted 12 January 2000.
US – Section 301 Panel Report, United States – Sections 301-310 of the Trade Act of 1974,
, adopted 27 January 2000.
EC - Sardines Appellate Body Report, European Communities – Trade Descriptions of
Sardines, WT/DS231/AB/R, adopted 23 October 2002.

List of Exhibits

“Production and Trade Policies Affecting the Cotton Industry,” ICAC,
September 2003
Exhibit Bra- 284
“Agriculture Fact Book 2001-2002,” Chapter 3 – American Farms. Exhibit Bra- 285
Direct and Counter-Cyclical Programme Contract, Form CCC-509,
USDA, Commodity Credit Corporation
Exhibit Bra- 286
Market Revenue and US Government Payments to US Upland Cotton
Producers.
Exhibit Bra- 287
“NASS to Update Acreage If Necessary,” National Agricultural
Statistics Service, USDA, 29 September 2003.
Exhibit Bra- 288
7 CFR 1412.606; 7 CFR 718.102, 2003 Edition Exhibit Bra- 289
“Farmers Must File Acreage to Receive 2002 Payments,” Kansan Online
Ag Briefs; AFBIS Inc. Crop Watch, June 2003
Exhibit Bra- 290
“Direct and Counter-Cyclical Payment Programme”, Farm Service
Agency, USDA, April 2003.
Exhibit Bra- 291
7 CFR 718.102, 2002 Edition Exhibit Bra- 292
Data for Acreage Chart Exhibit Bra- 293
“The World Fact Book – Benin,” CIA. Exhibit Bra- 294
2004 US Budget, Federal Credit Supplement, Introduction and Table 2 Exhibit Bra- 295
“USDA Announces $2.8 Billion in Export Credit Guarantees,” FAS
Press Release, 30 September 2003
Exhibit Bra- 296
7 U.S.C § 5641(b)(1); 7 U.S.C. § 5622(a), (b) Exhibit Bra- 297
“USDA Amends Commodity Elig ibility under Credit Guarantee
Programmes”, FAS Press Release, 24 September 2002.
Exhibit Bra- 298
“Summary of FY 2003 Export Credit Guarantee Programme Activity”,
USDA, Covering GSM-102, GSM 103 and SCGP
Exhibit Bra- 299
Calculation on US Rice Exports Benefiting from GSM-102, GSM-103
and SCGP.
Exhibit Bra- 300
Additional Results from Professor Sumner’s Model. Exhibit Bra- 301
Revised and Extended Data on Article 6.3(d) Claim. Exhibit Bra- 302

John C. Beghin and Holger Matth ey. “Modelling World Peanut Product
Markets: A Tool for Agricultural Tr ade Policy Analysis”. Center for
Agricultural and Rural Development (CARD), May 2003.
Exhibit Bra- 303
John C. Beghin, Barbara El Osta, Jay R. Cherlow, and Samarendu
Mohanty. “The Cost of the US Suga r Programme Revisited”, Centre for
Agricultural and Rural Development (CARD), March 2001.
Exhibit Bra- 304
Larry Salathe, J. Michael Price and David Banker. “An Analysis of the
Farmer Owned Reserve Programme 1977-82. American Journal of
Agricultural Economics, February 1984.
Exhibit Bra- 305
“Supply Response under the 1996 Farm Act and Implications for the US
Field Crops Sector,” Lin et al., USDA, July 2000.
Exhibit Bra- 306
Change in US and World Exports in Per cent. Exhibit Bra- 307
“Decoupled Payments: Household In come Transfers in Contemporary
US Agriculture,” ERS, Agriculture Economic Report N° 822.
Exhibit Bra- 308
Barnard C., Nehring, R., Ryan, J., Collender, R. “Higher Cropland
Values from Farm Programme Pa yments: Who Gains?” Economic
Research Service. USDA, Agricultural Outlook November 2001.
Exhibit Bra- 309
“The Incidence of Government Pa yments on Agricultural Land Rents:
The Challenges of Identification,” Roberts, Kirwan and Hopkins,
August 2003, American Journal of Agricultural Economics.
Exhibit Bra- 310
Side by Side Chart of the Weekly US Adjusted World Price, the A-
Index, the nearby New York Futures Price, the Average US Spot Market
Price and Prices Received by US Producers from January 1996 to the
present.
Exhibit Bra- 311
Cotton Outlook Reports dated 7 June 2002, 27 September 2002 and
4 October 2002.
Exhibit Bra- 312

A. REQUEST FOR PRELIMINARY RULINGS

122. Does Brazil allege that cottonseed payments , interest subsidies and storage payments are
included in the subsidies that cause serious pr ejudice? Do they appear in the economic
calculations? BRA

Brazil’s Answer:

1. Cottonseed payments, interest subsidies and storage payments are included in the set of
subsidies that Brazil alleges cause serious prejudice to its interests within the meaning of Articles 5(c)
and 6.3 of the SCM Agreement and Article XVI of GATT 1994. The amounts of cottonseed
payments and interest subsidies/storage payments range from $50 million to $216 million per year.
1
To appreciate the size of these subsidies, the annual amount of each of them separately far exceeds the
total amount of Brazilian assistance to its upland cotton farmers of $10 million in MY 2001 by a
factor of 4 to 21. 2 Indeed, the annual, individual amount of US cottonseed payments, interest
subsidies and storage payments also by far exceed s the amounts of subsidies paid by most other
cotton-producing countries.

2. The United States has notified cottonseed paymen ts as trade-distorting amber box subsidies to
the WTO.
3 Thus, these payments are presumed to be trad e-distortive. Interest subsidies and storage
payments appear to be part of the operation of the marketing loan programme that has also been
notified to the WTO as a trade-distortive amber box subsidy, and is therefore presumed to be trade-
distortive. The United States has not notified them separately to the WTO.
4

3. The economic calculations provided by Brazil on the effect of US subsidies in filling the cost
revenue gap include cottonseed payments a nd interest subsidies/storage payments.
5 They are also
included as part of the overall level of US subsidiza tion provided. However, they are not part of the
econometric model developed by Professor Daniel Sumner.6

123. Does Brazil’s request for th e establishment of the Panel name the statute authorizing
cottonseed payments for the 1999 crop? BRA

Brazil’s Answer

4. To the extent that cottonseed payments fo r the MY 1999 crop were authorized by Section
204(e) of the Agricultural Risk Protection Act of 2000, Brazil’s request for the establishment of the
Panel names the statute authorizing these payments.
7 This act authorized the payment of $100 million
in cottonseed payments. However, Brazil did not explicitly identify in its request for establishment
P.L. 106-113, which serves as the legal basis for a further $79 million in cottonseed payments for the
MY 1999 cottonseed payments.

 1 Brazil’s 9 September Further Submission, Table 1, p. 4.
 2 Exhibit Bra-284 (“Production and Trade Policies Affecting the Cotton Industry,” ICAC,
September 2003, p. 6).
 3 Exhibit Bra-47 (G/AG/N/USA/43, p. 20).
 4 Exhibit Bra-47 (G/AG/N/USA/43, p. 20).
 5 Brazil’s 22 August Rebuttal Submission, para. 30 and 40.
 6 To the extent that interest subsidies and storage payments operate to compensate for any cost incurred
by US upland cotton producers from the participation in the marketing loan program (for instance, for the
storage cost resulting from storing physical upland cotton as collateral for the marketing loan), these subsidies
have been considered in Professor Sumner’s model. However, those costs do not occur, if a producer decides to
opt for a loan deficiency payment rather then taking out a marketing loan.
 7 WT/DS267/7, p. 2.

5. Brazil emphasizes that it is not challenging the underlying statutes authorizing the payment of
cottonseed payments in MY 1999, 2000 and 2002, i.e., Brazil does not challenge those payments
per se. Brazil challenges as “measures” the payments of those subsidies as causing adverse effects to
its interests. The United States and Braz il have consulted about those payments.
8 Brazil properly
included reference to all “payments” for upland co tton in its request for the establishment of the
Panel.9 This is sufficient to properly identify cott onseed payments as measures for the purposes of
Brazil’s request for the establishment of the Panel.

B. EXEMPTION FROM ACTIONS

6. According to its revised timetable, the Pane l will issue its report to the parties after the
end of the 2003 calendar year. Does this have any impact on “exempt[ion] from actions” under
Article 13(b)(ii) and 13(c)(ii) of the Agreement on Agriculture? BRA, US

Brazil’s Answer:

6. No. Brazil’s claims relate to prohibite d and actionable subsidi es provided during MY 1999-
2002 when the United States had no peace clause protection. Brazil’s threat of serious prejudice
claims relate to the present threat of serious prejudice caused by subsidies provided during MY 1999-
2002, as well as the threat caused by subsidies that are required to be provided through the end of
MY 2007 by the 2002 FSRI Act and the 2000 ARP Ac t. The fact that the Panel will issue its
determination regarding these subsidies after the termination of the “peace clause” in 2004 has no
impact on the analysis of these claims.

C. IDENTIFICATION OF THE SUBSIDIZED PRODUCT

125.

(2) Brazil has submitted that "The record suggests that historic producers are current
producers." It points to factors including th e specialization of upland cotton producers, the
need to recoup expensive investments in cotto n-specific equipment, and the geographic focus
and climatic requirements of upland cotton producti on in the "cotton belt". (Brazil's rebuttal
submission, footnote 98, on page 24)

(a) Regarding the specialization of upland cotton producers and the geographic focus of
upland cotton production, how does Brazil take account of the fact that cotton is
produced in 17 of the 50 states of the Unit ed States and that average cotton area is
approximately 38% of a cotton farm's acres? (This information is taken from the US's
response to question 67bis, footnote 35). BRA

 8 Exhibit Bra-101 (Questions for the Purposes of the Consultations, Questions 14.1 et seq., p. 13).
 9 The “measures” identified include (1) “domestic support subsidies provided to the US upland cotton
industry during marketing years 1999-2001”, (2) “domestic support subsidies that are mandated to be provided
to the US upland cotton industry during marketing years 2002-2007”, (3) “all subsidies benefiting upland cotton
that have trade distorting effects or effects on production by the US upland cotton industry”, (4) “domestic
support, and all other subsidies provided under regulations, administrative procedures . . . for the production, use
and/or export of US upland cotton and upland cotton products”. WT/DS267/7, pages 1, 2, 3.

Brazil’s Answer

7. In contrast to the information cited in th e Panel’s question, more relevant information
concerning specialization of cotton producers in cott on farms is set out in Exhibit Bra-16, which is a
2001 USDA report on the cost of production of cotton farms. That report contains the following
figure:
10

8. This evidence shows that farms with 500 or more acres of upland cotton are heavily
specialized in the production of cotton. While these farms represented 33 per cent of US farms
producing upland cotton, they produced 75 per cent of total US upland cotton in MY 1997. 11 Thus,
the great majority of US production of upland cotton takes place on farms that largely specialize in the
production of upland cotton.

9. Other data regarding specialization is found in a 1998 USDA report indicating that most
smaller farms – defined as farms with income below $250,000 and which account for 92 per cent of
all US farms – tend to produce only one or at most two crops.
12 This is illustrated in the chart below:

 10 Exhibit Bra-16 (“Characteristics and Production Costs of US Cotton Farms”, USDA, October 2001,
p. 9).
 11 Exhibit Bra-16 (“Characteristics and Production Costs of US Cotton Farms”. USDA, October 2001,
p. 7).
 12 Exhibit Bra-285 (“Agriculture Fact Book 2001-2002”, Chapter 3 - American Farms, p. 32).

10. Approximately 55 per cent of upland co tton is produced on such smaller farms. 13 Thus, even
for those smaller farms producing upland cotton, the evidence suggests that over 50 per cent produce
mainly upland cotton and the rest produce at most one additional crop. This evidence is consistent
with Brazil’s argument concerning cotton specialization.

11. With respect to the Panel’s question, the 38 pe r cent figure cited by the United States refers to
“planted cotton acreage” as a percentage of “total acreage operated”.
14 The United States provides no
information on what “total acreage operated” means. Nor does the United States provide the Panel
with the amount of “planted cotton acreage” as a pe rcentage of “total PFC/DP base acreage”. It may
be that the cotton acreage accounts for most of a fa rm’s “base acreage”. Thus, the “total acreage
operated” is not the appropriate basis to calculate a percentage of base acreage for farms producing
upland cotton. The best evidence of specializati on is the actual payments made to upland cotton
producers discussed in Brazil’s Answer to Question 125 (5). The next best evidence is the USDA
data on specialization of cotton farms cited above.

12. Moreover, Brazil’s arguments are not dependent on proof that the majority of cotton farms
produce only upland cotton. The evidence suggests that larg er farms tend to grow at least some other
crops and, therefore, may have more than one type of PFC/market loss assistance or direct and
counter-cyclical payment “base acreage”.
15 As Christopher Ward testified, farmers rotate the
production of several different crops, planting one cr op on a certain portion of the farmland, and then

 13 Exhibit Bra-16 (“Characteristics and Production Costs of US Cotton Farms,” USDA, October 2001,
Table 7) tabulating farms with value of production less than $250,000.
 14 Exhibit Bra-16 (“Characteristics and Production Costs of US Cotton Farms,” USDA, October 2001,
Table 3).

15 This is also demonstrated by Exhibit Bra-286 (D irect and Counter-cyclical Program Contract, Form
CCC-509, USDA, Commodity Credit Corporation), which provides for the possibility to establish base acres for
different crops.

moving the production of that same crop to another portion of the farmland.
16 But the fact that crops
are rotated or that some farmers have multiple t ypes of “base acres” and produce more than one crop
on their farm does not mean that farmers do not continue to plant upland cotton and use cotton-
specific machinery and ginning facilities. This is confirmed by the fact that between MY 1999-2002,
there were no wide swings in planted upland cotton acreage.17

13. Finally, while the United States is correct in stating that upland cotton is produced in
17 states, 66 per cent of upland cotton is produced in only 5 states, and 90 per cent is produced in only
10 out of the 50 US states.
18 In addition, even within each of these 10 states, upland cotton tends to be
grown in relatively distinct geographical regions. This is shown in the graph below:19

(c) Regarding the high cost of upland cotton production, can Brazil show that farms who
planted upland cotton could only have cov ered their costs by receiving upland cotton,
rice or peanut payments in every year from 1999 through 2002? BRA

Brazil’s Answer:

14. Between MY 2000-2002, US upl and cotton producers could not make a profit, unless they
grew upland cotton on upland cotton or rice (or p eanut in MY 2002) base acreage. Brazil provides
data below for each of the four marketing years covering the period of investigation (MY 1999-2002).
This evidence is consistent with a conclusion that the great majority of upland cotton was produced on
upland cotton base acreage. In responding to this question from the Panel, Brazil took into account

 16 Exhibit Bra-283 (Statement of Christopher Ward – 7 October 2003, para. 2)
 17 See Brazil’s Answer to Question 125(6).
 18 Exhibit Bra-107 (US and State Farm Income Data, Farm Cash Receipts, ERS, USDA, June 2003).
 19 http://usda.mannlib.cornell.edu/reports/nassr/field/planting/uph97.pdf , Usual Planting and
Harvesting Dates for US Field Crops, National Agricultural Statistics Service, USDA, December 1997, p. 7.

Dr. Glauber’s comment that Step 2 payments are not received by US upland cotton producers but
rather by exporters and domestic users.
20 Brazil generally agrees with this statement. Therefore,
Brazil has excluded Step 2 payments from the pool of revenue received by US upland cotton
producers.21 It presents data on the total amount of market revenue for upland cotton lint and seed,
marketing loan benefits, crop insurance payments, cottonseed payments, so-called “other payments”22
and PFC, market loss assistance, direct and counter-cyclical payments.

15. The following chart shows revenues of upland cotton producers in MY 1999:
23

Market Revenue and Government Support in M Y
1999
0
10
20
30
40
50
60
70
80
90
100
ce
nt
s
pe
r
po
un
MLA Payments
PFC Payments
Other Payments
Cottonseed Payments
Crop Insurance
Marketing Loan
Cottonseed Revenue Received by U.S.Farmers
Cotton Lint Price Received by U.S. Farmers

16. The chart shows that US upland cotton prod ucers received total revenue of 91.54 cents per
pound of upland cotton produced. At the same time , the average cost of production was 82.03 cents
per pound in MY 1999 24 and prices received by producers were 45 cents per pound. 25 It follows that
US producers could not produce upland cotton without th e financial assistance of the US Government
in the form of large amounts of subsidies. US producers needed 4.46 cents per pound from the total
combined upland cotton PFC and market loss assistance payment of 13.97 cents per pound to recover
their costs.26

 20 Exhibit US-24, p. 3 fifth and sixth paragraph.
 21 This does not affect Brazil’s view that Step 2 payments are properly incl uded in the peace clause
analysis under Article 13(b)(ii) of the Agreement on Ag riculture as “support to upland cotton”. While Step 2
payments may not directly benefit domestic producers of up land cotton, they do so indirectly. As they increase
demand for US upland cotton, they increase prices received by US producers and are, therefore, properly
described as “support to upland cotton”.
 22 Interest subsidies and storage payments.
 23 See Exhibit Bra-287 (Market Revenue and US Government Payment to US Upland Cotton
Producers).
 24 Exhibit Bra-205 (Costs and Revenues of US Upland Cotton Producers).
 25 Exhibit Bra-4 (“Fact Sheet: Upland Cotton,” USDA, January 2003, p. 5).
 26 Thus, they could have produced upland cotton on wheat, corn, grain sorghum, cotton and rice base
acreage without suffering a loss.
 Cents per pound

17. In MY 2000, the financial situ ation of US upland cotton producers worsened. While the price
they received for upland cotton lint increased to 49.8 cents per pound
27, their total revenue fell to
84.74 cents per pound28, only slightly above their average cost of production of 82.69 cents per pound.

Market Revenue and Government Support MY 2000
0
10
20
30
40
50
60
70
80
90
cen
ts
per
po
un
d
MLA Payments
PFC Payments
Other Payments
Cottonseed Payments
Crop Insurance
Marketing Loan
Cottonseed Revenue Received by U.S. Farmers
Cotton Lint Price Received by U.S. Farmers

18. Again, large amounts of US subsidies were in strumental in closing the gap between the US
cost of production and the market returns of producers. For MY 2000, the 13.86 cents per pound in
upland cotton PFC and market loss assi stance payments as well as all ot her subsidies were needed to
close the gap between the cost of production and the market returns. 29 Average US upland cotton
producers could also have covered their total costs had they planted upland cotton on rice base acres.
But they would have suffered a marginal loss on corn or other crop base acres.

19. The results for MY 2001 show a similar result:

 27 Exhibit Bra-4 (“Fact Sheet: Upland Cotton”, USDA, January 2003, p. 5).
 28 See Exhibit Bra-287 (Market Revenue and US Government Payment to US Upland Cotton
Producers).
 29 See Exhibit Bra-287 (Market Revenue and US Government Payment to US Upland Cotton
Producers).
 Cents per pound

Market Revenue and Government Support in MY 2001
0
10
20
30
40
50
60
70
80
90
1
cents p er p ound
MLA Payments
PFC Payments
Other Payments
Crop Insurance
Marketing Loan
Cottonseed Revenue Received by U.S. Farmers
Cotton Lint Price Received by U.S. Farmers

20. US producers received a total revenue of 79.41 cents per pound, 30 only 29.8 cents per pound
of which was market revenue for upland cotton lint. At the same time, they faced an average cost of
production of 76.44 cents per pound. 31 Thus, the average US produ cer of upland cotton needed an
upland cotton or rice PFC and market loss assistan ce payment to break even, while upland cotton
production on corn or any other crop base acreage would have generated a loss.

21. For MY 2002, average US producers even suffered a loss from upland cotton production on
upland cotton base acres
32, let alone corn or other crop base acres, except for rice and peanuts. 33 The
average US upland cotton producer receive d total revenues of 82.96 cents per pound 34, while their
average total cost for MY 2002 was 83.59 cents per pound.35

 30 See Exhibit Bra-287 (Market Revenue and US Government Payment to US Upland Cotton
Producers).

31 Exhibit Bra-205 (Costs and Revenues of US Upland Cotton Producers).
 32 Brazil notes that it is not in a position to quantify the effect of the yield update for purposes of the
counter-cyclical payments and, thus, likely underestimated the amount of those payments ( See Brazil’s Answer
to Questions 125 (8)). With slightly higher counter-cyclical payments than assumed by Brazil, US producers of
upland cotton might have made a small profit in MY 2002.
 33 Brazil notes that while evidently some former corn producers had shifted to upland cotton
production, the fact that they were allowed to update their base acres to upland cotton base acres meant that they
could now receive upland cotton payments (See Brazil’s Answer to Question 125 (7)).
 34 See Exhibit Bra-287 (Market Revenue and US Government Payment to US Upland Cotton
Producers).
 35 Exhibit Bra-205 (Costs and Revenues of US Upland Cotton Producers).

Market Revenue and Government Support in MY 2002
0
10
20
30
40
50
60
70
80
90
1
cents per pound
CCP Payments
Direct Payments
Other Payments
Cottonseed Payments
Crop Insurance
Marketing Loan
Cottonseed Revenue Received by U.S. Farmers
Cotton Lint Price Received by U.S. Farmers

22. The overall conclusion of this analysis is that , on average over the period of investigation, US
upland cotton producers needed and received upland cotton or rice programme payments to cover (or
almost cover) their total cost of production. At the same time, as total reve nue decreased relative to
the cost of production, US upland cotton acreage increased between MY 1999-2001. 36 Because
upland cotton producers with non-upland cotton or rice base acreage would have lost money (even
with the subsidies), they would have been forced to switch out of upland cotton production. This
means that the only producers that could remain were those with upland cotton or rice base. The fact
that upland cotton acreage increased through MY 20 01 suggests that only a small portion of upland
cotton in the United States could have been grown on non-upland cotton base acres.

23. Similarly, in MY 2002, the option to update the base acreage (and yield for the CCP payment
programme) allowed those producers that produ ced on non-upland cotton base acres in MY 1998-
2001 to receive the considerably higher upland co tton payments under the 2002 FSRI Act. Because it
is not economically sustainable to grow upland cotton on non-upland cotton (-rice or -peanut) base,
the ability to update suggests that by MY 2002 nearly all US producers grew on upland cotton base.

24. Moreover, the data above indicates that even with subsidies, the average US producers did not
earn any or, at most, a small profit during MY 1999- 2002. As Christopher Ward testified, there is a
strong need to generate profits to stay in the upland cotton business.
37 These profits pay for
investments in new machinery and technologies, as well as for losses incurred in years with low
prices. But even with large subsidies, US producer s only met their costs. Without subsidies, they
were not even able to meet their variable cost in MY 2001.

25. In sum, during most of the period of investigation, US producers of upland cotton needed the
high upland cotton payments from the PFC, market loss assistance, direct and counter-cyclical
payment programmes to generate sustainable returns (MY 1999), simply break even (MY 2000-

 36 Exhibit Bra-4 (“Fact Sheet: Upland Cotton,” USDA, January 2003, p. 4). See also Brazil’s Answer
to Question 125 (6).
 37 Exhibit Bra-283 (Statement of Christopher Ward – 7 October 2003, para. 10).

2001), or almost meet their total costs (MY 2002). It is, therefore, reasonable to assume that the great
majority of US upland cotton was grown on upland cotton base acres.

(3) In calculating the amount of PFC, MLA, direct and counter-cyclical payments that went
on upland cotton, Brazil made an adjustment for the ratio of current acreage to base acreage
(see its answer to question 67, footnotes 2, 3, 4 an d 5). Is this an appropriate adjustment for the
particular factors referred to above? Why or why not? BRA, US

Brazil’s Answer:

26. Brazil refers the Panel to its answers to Qu estion 125 (8), Question 125(2)(a), and to Question
125(2)(c) for Brazil’s arguments why its methodology is reasonable to use in the absence of direct
evidence collected and controlled exclusively by the United States concerning the amount of those
payments to upland cotton producers. 38 In the absence of such direct evidence, Brazil has set forth 39
extensive circumstantial evidence that US producers of upland cotton received such payments.40

(4) Dr. Glauber has alleged that there are st atistical problems in comparing planted acres
to programme acres because of abandonment of crops and also because planted acres are only
survey estimates, not reported figures (See Exhibi t US-24, the first full paragraph in P2).
Would it be more appropriate to divide harvest ed acreage by base acreage? What margin of
error is there between the survey estimates and reported figures? BRA, US

Brazil’s Answer:

27. The appropriate figures to use for farmers’ decisions on upland cotton acreage are the official
USDA figures for acres planted to upland cotton. Dr. Glauber discussed certain programme and
statistical issues that may have applied in the ear ly 1990s, but which – with the termination of the
deficiency payment programme from MY 1996 on – are no longer relevant.
41

28. The planted acre figures used by Brazil are th e only official USDA data for planted acres of
crops. These data are reported by the Farm Service Agency (FSA) in its Fact Sheet on Upland
Cotton.
42 Planted acres reflect the choice by farmer s to commit land to upland cotton production by
cultivating, fertilizing, seeding and applying other in puts during the pre-planting and planting period.
In some parts of the United States, variable weather and other conditions mean that some land that has
been planted to upland cotton, or to some other crops , is not harvested. But, there is no question that
this land was committed at the time of planting to upland cotton production. Further, once the
planting takes place, that decision generally pr ecludes further upland cotton production (or other
crops) for that marketing year.

29. According to USDA’s National Agricultural Statistics Service (NASS), the procedure for
measuring and reporting planted acres for upland cotton and other crops starts with a June survey of
planted acres for each crop, which is well after planting commitments for upland cotton have been
made early in spring. The June planted acre figures are updated in NASS files each month as
additional data becomes available. Revisions in the figures on planted acres are determined in
December and reported in the Crop Production report each year. These data include revisions based

 38 See also Brazil’s 9 October Closing Statement, para. 2.
 39 Inferences drawn from this ev idence satisfy Brazil’s burden of proof in the absence of direct
evidence. See Panel Report, Argentina – Textiles and Apparel, WT/DS56/R, para. 6.39.
 40 See Brazil’s 9 October Closing Statement, Annex I for a summary of the evidence and further
references.

41 Brazil notes that Dr. Glauber’s assertions were ma de in the context of the acreage reduction and set
aside requirements under the US deficiency payment programme.
 42 Exhibit Bra-4 (“Fact Sheet: Upland Cotton,” USDA, January 2003, p. 4).

on FSA’s certified acreage information. As Exhibit Bra-288 makes clear, NASS reported the 2003
revisions using FSA information in the Octobe r Crop Production report, rather than waiting until
December.
43

(5) Do the acreage reports under section 1105(c) of the FSRI Act of 2002 indicate or assist
in determining the number or proportion of acres of upland cotton planted on upland cotton
base acres? Was there an acreage reporting requirement for upland cotton during MY1996
through 2002? BRA, US

Brazil’s Answer:

30. The short answer to both of the Panel’s questi ons is “yes”. Regrettably, the United States has
refused to provide Brazil or the Panel with the num ber or proportion of acres of upland cotton planted
on upland cotton base acres for MY 1999-2002, despite Brazil’s repeated efforts to obtain this
information over the past year and despite the Pa nel’s Question 67bis, in which the United States
claimed incorrectly that it did not have access to this information.44

31. As implemented, Section 1105(c) of the 2002 FSRI Act requires any recipient of direct and
counter-cyclical payments to submit, as a conditi on of eligibility of receiving the payments, “annual
acreage reports with respect to all cropland on the farm”.
45 This means that the precise acreage for
each crop grown on the farm must be tabulated and identified in an annual report. Depending on the
state and the county, these acreage reports are generally due by the middle of each calendar year.46

32. In addition to the annual acreage reports, th e 2002 FSRI Act required all farms eligible for
direct and counter-cyclical payments to file app lication forms establishing and proving their historic
production of the 10 programme crops.
47 The required information includes the types, amount, and
yields of all direct and counter-cyclical paym ent base acreages during the period 1998-2001 or
reference to the earlier PFC base acreage. All of these applications were due no later than 1 June each
year.48 USDA reported in July 2003 that 99.6 per cent of eligible farms had completed the required
applications and signed up for the di rect and counter-cyclical programme. 49 Farms submitting both
the annual programme acreage reports and the historic base-acreage application form were required to
provide a specific farm identification number. Th is farm “ID” would appear to permit USDA to
determine for each reporting farm the annual acreage mix of crops and the amount of direct and
counter-cyclical base acreage for each one of those crops.

33. With respect to the period 1996-2001, the re gulations under the 1996 FAIR Act required any
recipient of PFC payments and marketing loans (o r loan deficiency payment) to submit annual
acreage reports for each of the commodities plan ted for harvest on a farm enrolled in such a
programme.
50 This reporting requirement was a mandator y condition to receive payment. It would

 43 Exhibit Bra-288 (“NASS To Update Acreage If Necessary,” National Agricultural Statistics Service,
USDA, 29 September 2003).
 44 See US 27 August Comments on Brazil’s Rebu ttal Submission and Answer to Question 67bis,
para. 21 (The United States admitted that it “tracked to tal expenditures,” but denied that it collected or could
derive the information requested by the Panel).
 45 Exhibit Bra-29 (Section 1105 of the 2002 FSRI Act) and Exhibit Bra-289 (7 CFR 1412.606) and
Exhibit Bra-289 (7 CFR 718.102, 2003 edition).
 46 Exhibit Bra-290 (“Farmers must file acreage to receive 2002 payments,” Kansan Online Ag Briefs,
second paragraph); Exhibit Bra-290 (AFBIS Inc. Crop Watch, June 2003).

47 Exhibit Bra-286 (Direct and Counter-cycli cal Program Contract, Form CCC-509, USDA,
Commodity Credit Corporation)
 48 Exhibit Bra-291 (“Direct and Counter-Cyclical Payment Program,” Farm Service Agency, USDA,
April 2003).
 49 Annex 2 to Exhibit Bra-105 (National Enrollment Report, USDA, 17 July 2003, last attachment).
 50 Exhibit Bra-292 (7 CFR 718.102, 2002 edition)

appear that the United States has collected precise acreage and payment information on (1) farms with
PFC cotton base acreage, and (2) farms that pro duced upland cotton and r eceived PFC and marketing
loan payments. Combined with the specific farm identification number, this information would
clearly permit the matching of information on a farm’s crop base acreage and current planting and,
thus, the collection of the amount and type of PFC (and market loss assistance) payments made to
producers of upland cotton between MY 1999-2001.

34. In sum, the United States has exclusive cont rol of the information that would provide the
amount and type of PFC, market loss assistance, direct and counter-cyclical payments made by the US
Government to US cotton producers during MY 1999- 2002. The United States also has not provided
information regarding the amount of updated upla nd cotton direct and counter-cyclical payment base
acreage, the average yields applying to that (update d) base acreage, or the total amount of direct and
counter-cyclical payment funds pa id to holders of upland base acr eage for MY 2002. All of this
information is exclusively in the control of the United States and was first requested by Brazil over a
year ago.
51 The Panel first requested this information in August 2003. 52 If the United States
continues to refuse to provide this information, then Brazil submits that the Panel must either (1) draw
adverse inferences that the information retained by the United States reflects greater payments than
those estimated by Brazil,53 or alternatively, (2) rely on Brazil’s estimate that the payments equal total
upland cotton base acreage payments times the ratio of upland cotton planted acreage to upland cotton
base acreage.

(6) Please prepare a chart showing upla nd cotton base acreage, planted acreage and
harvested acreage for MY1996 through 2002. Does the planted acreage fluctuate within a broad
band? If not, does this indicate any stability in decisions to plant the same acres to upland
cotton? BRA, US

Brazil’s Answer

35. Brazil has prepared the requested chart s howing the developments of upland cotton base
acreage, planted acreage and harvest ed acreage between MY 1996-2002.
54 The chart below shows
that planted acreage does not fluctuate within a broad band. Instead, planted acreage fluctuates
between a low of 13.1 million acres in MY 1998 and a high of 15.5 million acres in MY 2001.55

 51 Exhibit Bra-49 (Brazil’s Questions for the Purposes of Annex V Procedure, March 2003) and Exhibit
Bra-101 (Brazil’s Questions for the Purposes of the Consultations, 22 November 2002)

52 Question 67bis.
 53 The Appellate Body in Canada – Aircraft addressed the issue of drawing adverse inferences from a
party’s refusal to provide information requested by a panel. It stated that “a panel has the legal authority and the
discretion to draw inferences from the facts before it.” Moreover, it stated that a panel should examine very
closely whether the full ensemble of the facts on the record reasonably permits the inference urged by one of the
parties to be drawn, because a party’s refusal to collaborate has the potential to undermine the functioning of the
dispute settlement system. Furthermore, the Appellate Body noted that if it had been “deciding the issue that
confronted the Panel, we might well have concluded that the facts of record did warrant the inference that the
information Canada withheld . . . included information prejudicial to Canada’s denial that the EDC had
conferred a benefit and granted a prohibited export subsidy.” (Appellate Body Report, Canada – Aircraft ,
WT/DS70/AB/R, para. 205).

54 Brazil again notes that it is not in a position to provide the updated MY 2002 base acreage, but uses
the upland cotton PFC base acreage for that year.
 55 Exhibit Bra-293 (Data for Acreage Chart).

Upland Cotton Base, Planted and Harvested Acreage
0
2
4
6
8
10
12
14
16
18
1996 1997 1998 1999 2000 2001 2002
Marketing Year
Mil. Acres
Base
Planted
Harvested

36. Indeed, aggregate producers’ decisions to pl ant upland cotton are fairly stable. Despite
drastic changes in upland cotton prices, the amount of planted acres only varies within a narrow
range, confirming that US producers are largely isol ated from upland cotton market price incentives.
The data shown in this chart is also consistent with Brazil’s argument that most upland cotton was
planted on upland cotton base acreage. The amount of acreage planted to upland cotton always
remains below the amount of upland cotton base acreage – a fact that supports Brazil’s assumption
that upland cotton producers receive payments related to upland cotton base.
56

(7) Brazil states that one third of all US farm s with eligible acreage decided to update their
base acreage under the direct payments and count er-cyclical payments programmes using their
MY1998-2001 acreage. What is the proportion of the current base acreage for upland cotton
resulting from such updating? Is the observed updating of base acreage consistent with Brazil's
argument that it is only profitable to grow upland cotton on base acreage (and peanut and rice
base acreage)? BRA

Brazil’s Answer

37. Regarding the first question, Brazil does not know the proportion of current base acreage for
upland cotton resulting from the 2002 updating of the base acreage. This information is exclusively
collected and maintained by the United States. As indicated in answer to Question 125(5), USDA
required all eligible farms to f ile applications by 1 June 2002 establishing and updating their base
acreage. Brazil notes that the United States was quickly able to report that overall 99.6 per cent of
eligible farms enrolled in the programme. This suggests that the United States is in possession of
farm-specific information regarding the percentage of (1) the total amount of upland cotton direct and
counter-cyclical payment base acreage, and (2) the nu mber of farms growing upland cotton that chose
to update their base acreage. Brazil reiterates its request to the United States for this information.
57

 56 Brazil has discussed the validity of this assumption in its answers to Questions 125 (3) and (8).
 57 Exhibit Bra-49 (Brazil’s Questions for the Purposes of Annex V Procedure, March 2003) and Exhibit
Bra-101 (Brazil’s Questions for the Purposes of the Consultations, 22 November 2002)

38. The answer to the second question is yes. As indicated in Brazil’ s Answer to Question
125(2)(c), upland cotton producers would lose money in MY 2000-2001 (even with the subsidies) if
they grew upland cotton on anything other than upland cotton or rice base acreage. The record
indicates that PFC per acre payments were $30.84 fo r upland cotton and $23.48 per acre for corn in
MY 2001.58 There were no PFC or market loss payments for peanut base under the 1996 FAIR Act. 59
Testimony from NCC representatives indicated that a number of producers in the south-eastern part of
the United States grew upland cotton on corn base acreage during MY 1999-2001. 60 NCC
representatives argued that it would only be “fair” for producers with corn base acreage that had
switched into upland cotton production to be ab le to update their base acreage to receive upland
cotton direct and counter-cyclical payments. 61 NCC’s efforts were successful, as reflected in the fact
that under the 2002 FSRI Act, maximum total direct and counter-cyclical pe r acre payments for
upland cotton base acreage is $109.50, while for corn it is $54.10 per acre. This large increase in per
acre payment for cotton relative to corn in the 2002 FSRI Act reflects the much higher cost of
producing upland cotton – and the expectation that historic cotton producers receiving such high
payments will continue to grow high-cost upland cotton.

39. Given the much higher per acre payments in MY 2002 for upland cotton base acreage, any
producer who could gain more upland cotton base acr eage would certainly take advantage of the
chance to update. Thus, any increases in the updated upland cotton base in MY 2002 reflect the
economic incentive to obtain significantly greater additional revenue by switching to upland cotton
acreage than in staying with historical corn, wheat, oats, barley sorghum and barley acreage. Finally,
the higher per acre payments for upland cotton also reflect the squeeze in profits for those cotton
producers that grew upland cotton in MY 1999-2001 on corn base acreage, as testified to by NCC
representatives, discussed above.

(8) How could one take account of uplan d cotton producers who receive PFC, MLA, direct
and counter-cyclical payments for other covered commodity base acreage? BRA, US

Brazil’s Answer

40. The best information to use would be th e actual data collected by the United States
concerning the amount of PFC, MLA, DP, and CCP payments to US upland cotton producers. In the
absence of this information, Brazil’s methodology assumes that US producers of upland cotton grew
upland cotton on upland cotton base acreage. This is a reasonable proxy, because there will be some
upland cotton that is grown on rice (and peanut) base receiving higher payments, and some upland
cotton that is grown on, e.g., corn base receiving somewhat lower payments. On average, Brazil’s
approach would roughly cancel out the over-counting of rice and peanut payments and the under-
counting of corn and any other lower-paying programme crop payments.

 58 Brazil’s 9 October Closing Statement, Annex 1, para. 31, citing Brazil’s 22 August Rebuttal
Submission, paras 32-34.

59 Brazil’s 24 June First Submission, para. 45; Brazil’s 22 August Rebuttal Submission, para. 24
 60 See NCC testimony quoted in Brazil’s 24 June 2003 First Submission, para. 53 citing Exhibit Bra-41
(Congressional Hearing, “The Future of Federal Farm Commodity Programs (Cotton),” House of
Representatives, 15 February 2001, p.32).

61 “[W]hat has happened is, under Freedom to Farm . . . in the Southeast we moved from corn, like I
have done, to cotton. So the last few years we have increased our cotton acreage in Georgia, for instance, to
about a million and a half acres; we are getti ng [PFC] payments on about 900,000 acres . [W]e have a
tremendous production in the Southeast that is not getting a [Market Loss] payment or a regular [PFC] payment.
So we are recommending . . . to this committee that a farmer have a choi ce with remaining with his existing
acreage and yield, or he has an option to move to a modified acreage and yield on his farm or acreage on his
farm, and this would make this, we think, fair . . . And this happened . . . outside the Southeast, but it is been
more pronounced in the Southeast than any other section of the Country.” (emphasis added) Exhibit Bra-41
(“The Future of Federal Farm Commodity Programs (Cotton),” Hearing before the House of Representatives
Committee on Agriculture, 15 February 2001, p. 32). Brazil’s 24 June First Submission, para. 53.

F. PROHIBITED SUBSIDIES

128. Could the US respond to Brazil's assertions relating to the meaning and effect of the
introductory phrase of Article 3 (“Except as provided in the Agreement on Agriculture ....”)?
Would the meaning/effect change if Article 13 of the Agreement on Agriculture did not exist?
BRA, US

Brazil’s Answer

41. In commenting on the first question direct ed to the United States, Brazil notes that the
United States argues that the phrase “except as provided in the Agreement on Agriculture” necessarily
means that negotiators intended to carve out bot h domestic local content and export subsidies for
agricultural products from the disciplines of Article 3 of SCM Agreement. 62 But the United States’
argument twists the meaning of the phrase “ except as provided”. The word “except” does not imply
that there must be something in the Agreement on Agricultu re that carves out the disciplines on local
content subsidies in the SCM Agre ement. The phrase only means that if the Agreement on
Agriculture clearly and unambiguously (i) exempts such agricultural subsidies from the SCM
Agreement, or (ii) changes the ob ligations contained in the SCM Agreement, then the provisions of
the Agreement on Agriculture that conflict with those of the SCM Agreement will prevail. The
Appellate Body’s jurisprudence teaches that it is only where the text clearly and unambiguously
provides for modified obligations does the “except as provided” language become operational.
63

42. In essence, what the United States seeks fro m the Panel is an interpretation that the
prohibition on local content subsidies does not apply to agricultural goods. Yet, nothing in the
Agreement on Agriculture or the SCM Agreemen t provides the carve-out the United States now
seeks.

43. Brazil agrees that the Agreement on Agriculture constitutes lex specialis as opposed to the lex
generalis of the SCM Agreement. The Agreement on Agriculture applies to a subset of goods
covered by the SCM Agreement and, in case of c onflicting provisions, the rights and obligations
contained therein should prevail over those of the SCM Agreement. Brazil agrees that the
introductory phrase of Article 3 of the SCM Agreement makes explicit the lex specialis nature of the
Agreement on Agriculture.

44. However, the US argument goes further than the principle of lex specialis derogat generalis
as it is normally applied. The United States wants th e Panel to apply this principle in a way that
effectively derogates explicit and specific provisions of the SCM Agreement whenever the Agreement
on Agriculture is silent about such provisions . This is an absurd application of the lex specialis
principle. The lex specialis is to be read together with the lex generalis. In fact, every effort must be
made to read the two provisions in a harmonious manner. The derogation of the lex generalis is
called for only in situations when an irreconcilabl e conflict between the two texts arises. It is a
fundamental tenet of law that absolute contradictions between laws cannot be presumed; they must be
established by a systematic analysis of the texts invo lved to identify any unequivocal incompatibility.
Such conflict or incompatibility does not exist with re gard to Article 3.1(b) of the SCM Agreement.
The Agreement on Agriculture specifies no right or obligation that would, by necessity, derogate the
obligation contained in Article 3.1(b) of the SCM Agreement. The Appellate Body and panels have

 63 Appellate Body Report, EC – Hormones, WT/DS26/AB/R, para. 128; Appellate Body Report, EC –
Bananas, WT/DS27/AB/R, paras. 157-158; Appellate Body Report, EC – Sardines , WT/DS231/AB/R,
paras. 201, 208.

rightly cautioned against interpretations that woul d exempt disciplines from entire sections of WTO
agreements in the absence of a clear and unambiguous carve-out of rights and obligations.64

45. Furthermore, the United States’ interpreta tion, which would (permanently) carve out all
agricultural products from the prohibition of Article 3. 1(b), is contrary to the object and purpose of
Article 3 of the SCM Agreement. Negotiators expressed their intent that local content subsidies are a
special class of trade-distorting subsidies. Becau se of their particularly trade-distortive nature,
negotiators dispensed with the requirement of show ing any adverse effects and made them prohibited
subsidies. Given the special prohibited nature of such subsidies – coupled with the ability of
negotiators to carve such subsidies out explicitly from the operation of the SCM Agreement – it
would be expected that any exception from the disciplines would be clear and unambiguous.

46. The answer to the second question is “no”. As Brazil’s earlier submissions have articulated,
Article 13(b) is not the only basis for Brazil’s argument that the Agreement on Agriculture does not
carve out agricultural local content subsidies from the Article 3.1(b) prohibition of local content
subsidies.
65 As Brazil has argued, there is no inherent conflict between requiring the notification and
scheduling of payments to processors of agri cultural goods benefiting domestic producers under
Annex 3, paragraph 7 of the Agreement on Agricult ure and the prohibition on payments to processors
of agricultural goods that are contingent upon the use of domestic over imported goods. 66
Nevertheless, the absence of any reference to Article 3 of the SCM Agreement in Article 13(b) of the
Agreement on Agriculture (while a similar reference exists for export subsidies) is consistent with
Brazil’s other arguments that local content subsidies for agricultural goods are prohibited subsidies.

47. The US interpretation elimin ating any prohibitions on agricultural local content subsidies
creates a sharp distinction in the way that the ot her group of normally prohibited subsidies – subsidies
contingent upon export – are treated under the Agreement on Agriculture. The Agreement on
Agriculture provides many instances in which expor t subsidies for an individual agricultural product
may be challenged as prohibited subsidies under the Agreement on Agriculture. These include
prohibitions on export subsidies for unscheduled products, prohibitions on subsidies given to products
where support is beyond the scheduled reduction co mmitments, and prohibitions on subsidies that
lead to circumvention of export subsidy reduc tion commitments. By contrast, under the US
interpretation of local content subsidies, there will never be an instance in which local content
subsidies for an individual agricultural product would ever be prohibited.

48. It would be expected that such radically di fferent treatment of local content subsidies would
be spelled out clearly in the Agreement on Agriculture . Yet, the only link the United States can find
to justify its total exclusion of local content prohibited subsidies is the provision in Annex 3,
paragraph 7 to include local content subsidies – along with the multitude of other types of domestic
subsidies that are not prohibited subsidies – in the support to be counted for total AMS. All that
Annex 3, paragraph 7 stipulates is that AMS calcu lations shall include measures that “benefit the
producers of the basic agricultural pr oducts”. Such language contains nothing that conflicts with the
obligation established in Article 3.1(b) of the SCM Agreement. Brazil notes that measures that
“benefit the producers of the basic agricultural products” may or may not be “contingent upon the use
of domestic over imported good”. In both situations these subsidies must be included in AMS
calculations. However, when challenged under the DS U, those subsidies that require local content

 64 Appellate Body Report, EC – Hormones, WT/DS26/AB/R, para. 128; Appellate Body Report, EC –
Bananas, WT/DS27/AB/R, paras. 157-158; Appellate Body Report, EC – Sardines , WT/DS231/AB/R, paras.
201, 208; Panel Report, India – Quantitative Restrictions, WT/DS90/R, para. 5.103.
 65 Brazil’s 22 July Oral Statement, paras. 84-86; Brazil’s 11 August Answers to Questions, paras. 215-
217; Brazil’s 22 August Rebuttal Submission, paras. 131-144.
 66 Brazil’s 22 August Rebuttal Submission, paras. 137-140 (setting out examples where no such
conflict would exist).

will be found to violate Article 3.1(b) of the SC M Agreement, and the subsidizing Member will be
urged to withdraw such measures.

G. SPECIFICITY/CROP INSURANCE

129. In the event that the Panel does not consid er that the alleged prohibited subsidies fall
within the provisions of Article 3 and are theref ore, pursuant to Article 2.3, "deemed to be
specific", are there any other grounds on which Br azil would rely in order to support the view
that such measures are "specific" within the meaning of Article 2 of the SCM Agreement (see,
for example, fn 16 of Brazil's further submission)? BRA

Brazil’s Answer:

49. Brazil brought prohibited subsidy claims agains t the Step 2 export and domestic payments, as
well as against the CCC export credit guarantee programmes GSM 102, GSM 103 and SCGP.
Concerning the latter, only GSM 102 is relevant for Brazil’s serious prejudice claims and, thus, the
questions of specificity within the meaning of Article 2 of the SCM Agreement only needs to be
addressed for that subsidy.

50. Step 2 export and domestic payments are de jure specific subsidies because they are only
available for exporters and dom estic users of upland cotton.
67 Exporters or domestic users of extra-
long staple cotton, any ot her crop or any other produc t are not eligible to receive Step 2 payments.
Consequently, the United States has notified Step 2 payments as cotton-specific non-green box
domestic support.
68 Thus, Step 2 payments are specific with in the meaning of Article 2.1 of the SCM
Agreement in much the same way as marketing loan payments or cottonseed payments.

51. Brazil notes that the Panel’s question raises a hypothetical situation that is highly unlikely
given the clear export contingency of the GSM 102 export credit guarantee programme. Unlike the
crop insurance programme, GSM 102 export credit guar antees are available for exports of most US
agricultural commodities.
69 However, GSM 102 support is provided only to enterprises exporting
agricultural products and, thus, for the reasons set forth in Brazil’s answer to Question 131(a), these
subsidies are both de jure and de facto specific. 70

130. Does Brazil agree that the US insurance premium subsidy is available in respect of all
agricultural products? Please cite relevant portions of the record. BRA

Brazil’s Answer

52. Brazil does not agree that the US crop insurance premium subsidy is available in respect of all
agricultural products. At the outset, Brazil woul d like to clarify that the US crop insurance
programme encompasses two different types of subs idies. First, the US Federal Crop Insurance
Corporation pays farmers a portion of the premiums that they have to pay for obtaining crop
insurance.71 Second, the Federal Crop Insurance Cor poration covers losses under crop insurance

 67 Exhibit Bra-29 (Section 1207(a) of the 2002 FSRI Act) and Exhibit Bra-28 (Section 136(a) of the
1996 FAIR Act).
 68 See e.g. Exhibit Bra-47 (G/AG/N/USA/43, p. 20). Braz il disagrees with the cl assification of Step 2
export payments as “domestic support.” Brazil also considers Step 2 domestic payments to be prohibited local
content subsidies within the meaning of Article 3.1(b) of the SCM Agreement and Article III:4 of GATT 1994.
 69 See Brazil’s Comment to Question 142.
 70 See Brazil’s Answer to Question 131.
 71 Exhibit Bra-30 (Section 508(e) and Section 508(h)(5)(A) of the Federal Crop Insurance Act).
Exhibit Bra-59 (“Briefing Room: Farm and Commodity Policy: Crop Yield and Revenue Insurance”).

policies that exceed the amount of premiums collected, thus providing free reinsurance for private
insurance companies offering crop insurance.72

53. Brazil has demonstrated that crop insurance po licies that are eligible for subsidy payments –
both premium and reinsurance subsidies – are not available in respect of all agricultural products. The
United States claims that crop insurance subsidies ar e and will in the future be available to livestock
and dairy producers.
73 This assertion is incorrect. First, it is entirely irrelevant if crop insurance will
be available to livestock and dairy producers in th e future. The question that faces the Panel is
whether the US crop insurance subsidies in MY 1999-2002 are specific, not whether they may at
some point in the future become less specific. Br azil demonstrated that except for a very narrow pilot
programme that began in MY 2002, there were no livestock “crop” insurance policies during MY
1999-2002.

54. Second, Brazil has demonstrated that crop insurance is currently – in MY 2003 – only
available to livestock producers in a limited number of US states and counties.
74 The Adjusted Gross
Revenue policy cited by the United States 75 covers only “incidental amounts of income from animals
and animal products and aquaculture reared in a controlled environment,” which must not exceed
“35 per cent of expected allowable income”.76 In addition, this policy is only available for producers
in a limited number of counties in 18 US states. 77 Even making the entirely unrealistic assumption
that all US livestock in those pilot counties would be eligible for adjusted gross revenue coverage,
that production78 would only represent 7.58 per cent of the value of total US livestock production. 79
In addition, Brazil has demonstrated that the total value of US livestock and dairy production
represents 52 per cent of the value of total US agriculture. 80 Thus, even taking into account the pilot
counties for the adjusted gross revenue coverage, at l east 48 per cent of the value of US agriculture is
excluded from crop insurance subsidy benefits.

55. Third, the 2000 ARP Act itself e xplicitly limits its application to, inter alia, US crops, and
does not cover insurance for the production of dairy, beef, poultry, pork and other livestock.
81

56. In sum, the US crop insurance subsidies are not available to all US agricultural production.

 72 Exhibit Bra-30 (Section 508(k) of the Federal Cr op Insurance Act). For the reinsurance agreement
standards see Exhibit Bra-39 (7 CFR 400.161 et seq.).
 74 Brazil’s 7 October Oral Statement, para. 7.
 75 Brazil notes that this policy is the only one that is cited by the United States in support of its
allegation that crop insurance would be available to a ll US agricultural products. Brazil is not aware of any
other policy that would enable and in particular enabled US dairy or livestock producers during MY 1999-2002
to benefit from crop insurance subsidies.
 76 Exhibit Bra-272 (“Fact Sheet: Adjusted Gross Revenue,” Risk Management Agency, USDA,
February 2003, p. 1).
 77 Exhibit Bra-272 (“Fact Sheet: Adjusted Gross Revenue,” Risk Management Agency, USDA,
February 2003, p. 1,3).

78 The record shows that most farms are small, and that many small farms specialize in beef production.
See Bra-285 (“Agriculture Fact Book 2001-2002, Chapter 3 – American Farms, Figures 3.1 and 3.8). Therefore,
these farms could not be eligible under the pilot progra mme because more than 35 pe r cent of their revenue is
generated from the production of livestock. This suggests that even the figure of 7.58 per cent of total US
livestock production is a significant overestimate.

79 Exhibit Bra-271 (Analysis of the Market Value of Livestock in Adjusted Gross Revenue Insurance
Pilot States and Counties).
 80 Brazil’s 22 August Rebuttal Submission, para. 59 and Exhibit Bra-177 (“ERS Briefing Room: Farm
Income and Costs: Farm Income Forecasts”).
 81 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.

131. How should the concept of specificity – and, in particular, the concept of specificity to
"an enterprise or industry or group of enterprises or industries" -- in Article 2 of the SCM
Agreement apply to subsidies in respect of agr icultural commodities? Please answer the
following questions, citing the principles in Article 2 of the SCM Agreement: BRA, US

(a) is a subsidy in respect of all agricultural, but not other, products specific?

(b) is a subsidy in respect of all agricultural crops (i.e. but not to other agricultural
commodities, such as livestock) specific?

 (c) is a subsidy in respect of certain identified agricultural products specific?

 (d) is a subsidy in respect of upland cotton, but not other products, specific?

 (e) is a subsidy in respect of a certain proportion of the value of total US
commodities (or total US agricultural commodities) specific?

 (f) is a subsidy in respect of a certain proportion of total US farmland specific?

Brazil’s Answer

57. The short answer to Questions 131(a) – (f) is “yes.”

58. Brazil’s Further Submission sets forth a deta iled analysis of the legal requirements for de
facto and de jure specificity (paras. 34-40), demonstrating th e broad agreement between the official
US interpretation of Article 2 of the SCM Agre ement in the Statement of Administrative Action
(“SAA”) and the position of Brazil. Brazil also pr ovided a detailed application of those requirements
for each of the relevant subsidies (paras. 41-70). Brazil offers the following additional comments
below:

59. With respect to Question 131(a), a US subsidy th at is made available to all enterprises in the
industry producing agricultural commodities is specifi c. As Brazil and the United States agree, the
purpose of the specificity requirements is to “f unction as an initial screening mechanism to winnow
out only those foreign subsidies which truly are broadly available and widely used throughout an
economy”.
82 The United States’ SAA notes that “all governments, including the United States,
intervene in their economies to one extent or anot her, and to regard all such interventions as
countervailable would produce absurd results”. Among such “absurd results” would be
countervailing “public highways and bridges, as well as a tax credit for expenditures on capital
investment even if available to all industries and sectors”.83 After providing these examples, the SAA
states that “the specificity test was not in tended to function as a loophole through which narrowly
focused subsidies provided to or used by discret e segments of an economy could escape the purview
of the CVD law”.84

60. The US subsidies at issue in this case – including crop insurance – are de jure limited under
Article 2.1(a) because they “explicitly limit acc ess to a subsidy to certain enterprises”, i.e., those
producing, using, or exporting either crops, certain crops, or one crop. 85 The US subsidies are also
de facto specific under Article 2.1(c) because they are u sed by a limited number of enterprises in
relation to all enterprises and industries making up the US economy. Only the group of enterprises

 82 Exhibit Bra-148 (“Statement of Administrative Action,” p. 929).
 83 Exhibit Bra-148 (“Statement of Administrative Action,” p. 929-30).
 84 Exhibit Bra-148 (“Statement of Administrative Action,” p. 930).
 85 Brazil’s 9 September Further Submission, paras. 34-70.

producing agricultural crops is entitled to receive or actually use these subsidies. All other enterprises
and all other industries are excluded from the right to receive and, in fact, do not use such subsidies.

61. The broad diversification of the US economy is a relevant fact for the Panel to consider for
de facto specificity under Article 2.1(c) (“account shall be taken of the extent of diversification of
economic activities within the jurisdiction of the granting authority”.). The US SAA indicates that the
US Department of Commerce should take “account of the number of industries in the economy in
question” in “determining whether the number of industries using a subsidy is small or large”.
86 The
US industry growing and producing agricultural produc ts, or even the sub-industry of US producers
who grow crops, are in the words of the US SAA, “a discrete segment” of the US economy. The
value of all US agricultural production of all commodities is only 0.8 per cent of total US GDP. 87
Article 2.1(c) requires a Panel to undertake a “cas e by case” approach to diversification, and Brazil
believes the approach presented here and endorsed by the US SAA is an appropriate application of the
provision. In the case of the United States, there is a multitude of US industries that do not use the US
subsidies at issue in this case. By contrast, in the case of Benin, the agricultural industry represents
38 per cent of its GDP.
88 For a country like Benin, subsidies to the entire agriculture sector would
most likely not be considered to be specific because they are widely available to a large portion of the
producers within the economy. No such facts exist for the cotton subsidies at issue in this dispute.

62. Brazil sees no basis in the text of Article 2 of the SCM Agreement for a different specificity
test to be applied to subsidies for the purpose of Part V (countervailing measures) and Part III
(actionable subsidies) of the SCM Agreement. Nor does Brazil see any basis to apply a different test
of specificity for agricultural and other types of g oods and industries – no such distinction exists in
Article 2 of the SCM Agreement. For example, wo uld a subsidy provided only to the US automotive
parts industry (which includes thousands of ente rprises) be specific while a subsidy provided to
thousands of enterprises producing agricultural crops not be specific? There cannot be much doubt
that the US automotive parts industry is a discr ete segment of the US economy, and a discrete
“industry”. Brazil (and the US SAA) is of the view that in both these instances, the subsidy would be
specific. All of the US subsidies challenged by Brazil are narrowly focused on, at most, a portion of
the industry producing agricultural products.

63. With respect to Question 131(b), a subsidy that is provided to enterprises producing all
agricultural crops is specific. Because the applicable indus try is the one producing all agricultural
commodities, a subsidy to only enterprises pr oducing crops but not to enterprises producing other
agricultural commodities is specific. Brazil notes th e entirely different approach the United States
now asserts in this case, regarding crop insurance, and the official interpretation offered in the SAA.
89
While the Panel, of course, is not bound by the unilateral interpretation of the United States in the
SAA, Brazil believes that the SAA, in this instance, correctly describ ed the intent of the drafters
regarding specificity. The producers of US crops ar e discrete enterprises within a US industry. None
of these subsidies is provided to enterprises produci ng other types of agricultural products that make
up approximately 50 per cent of the value of the US agricultural commodities. 90 In the case of crop
insurance, it is useful to recall that many of the small US farming enterprises – representing 92 per
cent of US farms – produce livestock, including beef.91

 86 Exhibit Bra-148 (“Statement of Administrative Action,” p. 931).
 87 Exhibit Bra-269 (“Gross Domestic Product by Industry for MY 1999-2001,” Robert J. McCahill and
Brian C. Moyer, November 2002, p. 36).
 88 Exhibit Bra-294 (“The World Fact Book – Benin,” CIA, p.6)
 89 The “SAA thus contains the view of the Administration, submitted by the President to Congress and
receiving its imprimatur, concerning both interpretation and applicatio n and containing co mmitments, to be
followed by future Administration, on which domestic as well as international actors can rely.” Panel Report,
 90 See Brazil’s Answer to Question 130.
 91 Exhibit Bra-285 (Agriculture Fact Book 2001-2002, Chapter 3 – American Farms, Figures 3.1 and
3.8).

64. In deciding the question, the Panel should also take into account the significant implications
of accepting the US arguments that any subsidy pr ovided to all agricultural producers of all
agricultural commodities would be non-specific. This interpretation would create a new class of
trade-distorting agricultural subsidies that are non- actionable. The United States has always notified
its crop insurance subsidies as amber box subsidies, i.e., presumptively trade distorting. And USDA
economists have found that even lower subsidi es provided by the pre-2000 ARP Act increased US
upland cotton acreage by 1.2 per cent and US upland cotton exports by 2 per cent.
92 Professor
Sumner found that the higher subsidies provided by the 2002 ARP Act increased US upland cotton
acreage by 3.3 per cent, US exports by 3.8 per cent, and decreased world A-Index prices by 1.3 per
cent on average for each year between MY 2000-2002.93

65. The US specificity interpretation would permit, for example, a Member to provide a revenue
guarantee to every enterprise producing any agricultu ral commodity to pay for the total cost of
production plus a reasonable profit margin of 10 pe r cent. The US interpretation would permit
Members to make direct payments to every farming enterprise that are tied to a constructed average
price index for all agricultural products (not individu al prices such as the CCP) and a farmer’s current
total production. A Member could also provide free inputs for the production of all agricultural
commodities to every enterprise producing any ag ricultural product without that subsidy being
actionable under Articles 5 and 6 of the SCM Agreem ent. In short, if the criteria is, as the
United States argues, that the subsidy only need be provided to all farming enterprises, then any type
of trade distorting non-green box domestic subsidy m eeting that universal application criteria would
escape discipline under the SCM Agreement.

66. The USinterpretation would create a gaping hole in the disciplines of the Agreement on
Agriculture and the SCM Agreement. Such an inte rpretation is clearly inconsistent with the object
and purpose of the Agreement on Agriculture, which is to “correct[] and prevent[] restrictions and
distortions in world agricultural markets”. It is inconsistent with the SCM Agreement’s object and
purpose of disciplining trade-distorting actionable subs idies. And it is completely inconsistent with
the interpretation including in the United States’ SAA.

67. With respect to Questions 131(c) and (d), for the reasons set forth above and in Brazil’s
earlier submissions, a subsidy that is mandated to be provided to only certain enterprises in respect of
a handful of identified agricultural products (suc h as the 10 “programme” crops of the direct and
counter-cyclical payment programme) but not pr ovided to most other enterprises within the
agricultural industry producing crops or agricultura l commodities, is specific under Article 2.1(a) of
the SCM Agreement. Similarly, there is de facto specificity because these same subsidies covered by
the Panel’s questions (c) and (d) are only used by certain enterprises of the overall industry producing
agricultural commodities (which is the case for a ll the US subsidies except crop insurance and GSM
102).
94

68. Regarding Question 131(e), if a subsidy is paid only to enterprises that produce or
manufacture products representing a certain portion of the value of the products of a single industry
(such as the US industry producing agricultural comm odities), then the subsidy would be specific.
Evaluating specificity based on the “value” of produc ts produced by a single industry is a useful tool
for measuring the extent to which the subsidy is provi ded to discrete enterprises within an industry, or
within an economy. When many enterprises in th e most highly revenue generating segments of an
industry do not receive a subsidy – such as the absence of crop insurance for livestock including beef,
poultry and pork, among others – then the subsidy is specific because it is only used by a certain
number of enterprises within the industry.

 92 Brazil’s 22 August Rebuttal Submission, paras. 63-64.
 93 Brazil’s 9 September Further Submission, Annex I, Table 1.5d.
 94 Brazil’s 9 September Further Submission, paras. 41-61.

69. Finally, with respect to Qu estion 131(f), another tool for evaluating the specificity of a
subsidy is the amount of total US farmland that receives the subsidy. The use of “farmland” is a
rough proxy for the number of enterprises producing agricultural products within the meaning of
Article 2.1. For example, only 38 per cent of US farmland is used for the growing of crops (including
hay) that are eligible for the payment of crop insurance.
95 By contrast, 62 per cent of US farmland is
used for the production of livestock that, with onl y a few exceptions, is not covered by US crop
insurance. When used in conjunc tion with the “value” data discu ssed in Question 131(e) above, this
acreage data confirms the fact that a number of enterprises within the industry producing agricultural
commodities do not receive the crop insurance subsidy. Braz il notes that the United States has not
contested the use of similar acreage data to demonstrate the specificity of other US subsidies.96

H. EXPORT CREDIT GUARANTEES

137. Please elaborate the meaning of "net losses" as is used in paragraph 70 of Brazil's 7
October oral statement. BRA

Brazil’s Answer

70. The term “net losses” was, in the context of an oral statement, merely a shorthand reference to
the elements of item (j) – the provision of th e CCC guarantee programmes at “premium rates which
are inadequate to cover the long-term operating costs and losses of the programmes”.

71. To prove that the CCC guarantee programmes suffered “net losses” (or in other words meet
the elements of item (j)), Brazil referred, in pa ragraph 70, to the comparison of cohort-specific
subsidy figures from the “guaranteed loan subsid y” line of the US budget with cohort-specific
reestimates from Table 8 of the Federal Credit Supplement
97, summed over the period 1992-2002 to
determine the performance of the CCC programmes over the long term.

72. Whether starting with the cohort-specific subs idy figure from the budget year column of the
US budget or with the cohort-specific subsidy figure from the prior year column of the US budget, the
result of this exercise is a positive subsidy number.
98 The CCC arrives at the very same result in its
2002 financial statements. Specifically, the 2002 financial statements provide a cumulative subsidy
figure for all post-1991 CCC guarantees, taking account of all adjustments for defaults, fees and
reestimates undertaken for all cohorts in all years through 2002. This exercise results in a cumulative

 95 Exhibit Bra-143 (Agricultural Statistics 2003, National Agricultural Statistics Service, USDA. Table
IX-6; See also Summary of Business Application, Risk Ma nagement Agency. USDA. Accessed 21/10/03,
http://www3.rma.usda.gov/apps/sob/ Based on the 1997 census (the most recent year), the total land in farms is
968,338,000 acres; the total cropland used for crops was 348,701,000 acres; idle cropland and grassland pasture
was 580,165,000 acres; the number of acres insured on rangeland, forage seed, forage production, alfalfa seed
(i.e., crops that could be grown on grassland pasture) was 12,575,000 acres. If cropland not used for crops was
included, then the total amount of acr eage not producing insured commoditie s would be 58.61 per cent and the
total amount of acreage used to produce insured (or potentially insured) commodities under the 2002 ARP Act
would be 41.39 per cent. Brazil notes that this does not include any reference to the recent pilot programs
discussed elsewhere. However, the percentages would not change to any great extent if such acreage were
included, given the 35 per cent limit on livestock imposed by the crop insurance program.

96 See Brazil’s 9 September Further Submission, paras. 43-61 (discussion of specificity regarding PFC,
MLA, DP, and CCP subsidies).
 97 Table 8 of the 2004 Federal Credit Supplement is included at Exhibit Bra-182.
 98 Brazil has offered calculations using the cohort -specific subsidy estimat e from the budget year
column of the US budget (para. 115 of Brazil’s 22 August Rebuttal Submission), and using the cohort-specific
subsidy estimate from the prior year column of the US budget (Exhibit Bra-193).

positive subsidy figure of $411 m illion for the period 1992-2002.
99 The Panel will recall that under
the Federal Credit Reform Act, when “payments from” the government exceed “payments to” the
government on a net present value basis, a positive subsidy results, meaning that CCC is “los[ing]
money”.100

73. Brazil has explained that the FCRA cost form ula is one way to determine the performance of
the CCC export credit guarantee programmes relative to th e elements of item (j). Application of the
formula demonstrates that over the period 1992-2002, CCC guarantees under the GSM 102, GSM 103
and SCGP programmes were provided “at premium rates which are inadequate to cover the long-term
operating costs and losses of the programmes.”

74. The United States objects to the appropriate ness of the FCRA formula as a proxy for the
analysis required by item (j).101 The United States’ objection is based on the fact that re-estimates are
still being undertaken for all CCC guarantee co horts during the period 1992-2002. Brazil has
therefore also offered a number of other methods to confirm that operating costs and losses for the
CCC guarantee programmes outpace premiums collected during the period 1992-2002 102, or in other
words, that the CCC guarantee programmes suffered “net losses” over that long-term period.

138. Please comment on Brazil’s views stated in paragraph 70 of its 7 October oral statement.
US

Brazil’s Comment

75. Brazil notes an inadvertent error in paragraph 70 of its 7 October Oral Statement. Exhibit
Bra-193 does indeed compare cohort-specific reestim ates to cohort-specific subsidy figures from the
prior year column of the US budget. However, the comparison of cohort-specific reestimates to
cohort-specific subsidy figures from the budget year co lumn of the US budget is reflected in the table
at paragraph 115 of Brazil’s 22 August Rebuttal Submission, rather than in Exhibit Bra-192.

76. In Exhibit Bra-192, Brazil subtracted downward reestimates from and added upward
reestimates to the original subsidy figure included in the budget year column of the “guaranteed loan
subsidy” line of the annual US budget.

139. In the context of export credit guarantees, is the Panel correct in understanding that
Brazil's claims of inconsistency with the Agriculture Agreement involve GSM 102, GSM 103 and
SCGP, but that it limits its "serious prejudice" allegations in respect of export credit guarantee
programmes to the GSM 102 programme, and does not challenge GSM 103 and SCGP in this
respect? If so,

(a) could Brazil please explain why it did so, a nd confirm that all the data relied upon in its
further submissions (e.g. in Table 13) relat e to the GSM 102 programme rather than to
GSM 102, GSM 103 and SCGP (and, if the data n eeds to be adjusted to take account of
a narrower "serious prejudice" focus, supply GSM-102-relevant data)? BRA

 99 Exhibit Bra-158 (US Department of Agriculture, Office of Inspector General, Financial and IT
Operations, Audit Report, “Commodity Credit Corporation’s Financial Statements for Fiscal Year 2002”, Audit
Report No. 06401-15-FM (December 2002), Notes to the Financial Statements, p. 19).

100 Exhibit Bra-121 (US General Accounting Office, Report to Congressional Committees, “Credit
Reform: US Needs Better Method for Estimating Cost of Foreign Loans and Guarantees,” GAO/NSIAD/GGD-
95-31, December 1994, p. 20)). For the FCRA formula, see Exhibit Bra-117 (2 U.S.C. § 661a(5)(c)).
 102 Brazil’s 11 August Answers to Panel Questions, paras. 163-168; Brazil’s 22 August Rebuttal
Submission, para. 109.

77. The Panel is correct in understanding that Br azil’s serious prejudice claims involve only GSM
102. All tables and figures that make reference to export credit guarantees in the context of Brazil’s
serious prejudice claims represent data on GSM 102 only. The reason that Brazil’s serious prejudice
claims do not cover GSM 103 and SCGP is that ei ther no cotton allocations were made under the
programme (GSM 103 for most of the marketing years covered by the period of investigation) or that
only negligible amounts of cotton were exported un der the programme (SCGP and – if exports took
place – GSM 103).
103 Almost all US upland cotton exports that benefited from a CCC export credit
guarantee were covered by the GSM 102 programm e. Thus, the only CCC export credit guarantee
programme that significantly contributed to the upland cotton-related serious prejudice suffered by
Brazil was the GSM 102 programme. Consequently, Brazil has excluded GSM 103 and SCGP from
its serious prejudice claims.

78. However, Brazil has included GSM 102, GSM 103 and SCGP in its export subsidy claims
under the Agreement on Agriculture and the SCM Ag reement. All three CCC export credit guarantee
programmes constitute export subsidies within the meaning of Articles 10.1, 8 and 1(e) of the
Agreement on Agriculture and Articles 1 and 3.1(a) of the SCM Agreement, and fulfil the criteria of
item (j) of the Illustrative List of Export Subsidies attached as Annex I to the SCM Agreement.

(b) for the purposes of Article 13(c)(ii) of the Agreement on Agriculture , is it necessary for
the Panel to examine only GSM 102 or should the Panel's examination include also GSM
103 and SCGP? Why or why not? BRA

79. The Panel needs to examine all three progra mmes under Article 13(c)(ii) of the Agreement on
Agriculture. This provision exempts export subsidies from actions based on Article XVI of GATT
1994 and Articles 3, 5 and 6 of the SCM Agreement. Brazil has brought claims under Article XVI of
GATT and Articles 5 and 6 of the SCM Agreemen t against CCC’s GSM 102 export credit guarantee
programme. Thus, to properly address these claims , the Panel needs to determine whether the GSM
102 programme fully conforms to the provisions of Part V of the Agreement on Agriculture, within
the meaning of Article 13(c)(ii) of that Agreement.

80. In addition, Brazil has brought claims under Article 3.1(a) of the SCM Agreement against
CCC’s GSM 102, GSM 103 and SCGP export credit gu arantee programmes. To properly address
these claims, the Panel needs to determine wh ether the GSM 102, GSM 103 and SCGP programmes
fully conform to the provisions of Part V of th e Agreement on Agriculture, within the meaning of
Article 13(c)(ii) of that agreement.

81. To demonstrate that CCC’s GSM 102, GSM 103 and SCGP programmes do not fully
conform to the provisions of Part V of the Agreement on Agriculture, Brazil has established that GSM
102, GSM 103 and SCGP constitute export subsidies and violate Articles 10.1 and 8 of the Agreement
on Agriculture by circumventing or threatenin g to circumvent US export subsidy reduction
commitments. The programmes, thus, do not conform fully to the provisions of Part V of the
Agreement on Agriculture.

140. Could Brazil explain how, if at all, it has treated export cred it guarantees for the
purpose of Table 1 of its further submission? BRA

82. Brazil has not included GSM 102 for the purpose of Table 1 of its Further Submission. While
Brazil has demonstrated that GSM 102 export credit guarantees constitute export subsidies within the
meaning of the Agreement on Agriculture and the SCM Agreement
104, Brazil is not in a position to
quantify the benefit to the recipients that has arisen from the application of the GSM 102 export credit

 103 Exhibit Bra-73 (Summary of Export Credit Guarantee Programs FY 1999-2003).
 104 Brazil’s 22 August Rebuttal Submission, para. 102-110

guarantee programme to exports of US upland co tton between MY 1999-2002. Brazil has no data –
nor has the United States provided any – that would en able it to calculate the benefit involved in the
GSM 102 transactions.
105

83. However, the National Cotton Council, whic h represents the industry benefiting from the
GSM 102 programme, has provided what appears to be a reasonable estimate of the benefits to US
upland cotton producers, users and exporters. The se benefits are significant enough to generate an
additional 500,000 bales of US upl and cotton exports per year and to raise domestic US prices by
3 cents per pound.
106

84. Having proven the export subsidy characte r of the GSM 102 programme, as well as having
proven the production and export- enhancing as well as A-Index-suppressing effects of the
programme107, Brazil has met its burden of proof under Articles 5 and 6.3 of the SCM Agreement and
GATT Article XVI to establish that the GSM 102 pr ogramme causes serious prejudice to the interests
of Brazil.

141. The Panel notes the US argument, inter alia in its further submission, that the export
credit guarantee programmes are "self-sustaining". Recalling that item (j) of the Illustrative
List of Export Subsidies in Annex I of the SCM Agreement refers to "premium rates", could the
US expand upon how it takes into account the premium rates for the export credit guarantee
programmes in its analysis. US

Brazil’s Comment:

85. As Brazil has argued elsewhere, the Unite d States cannot make a showing that the CCC
guarantee programmes do not constitute export subsidies by appealing to an a contrario interpretation
of item (j), since item (j) does not admit of an a contrario defense.
108

86. Even if item (j) does admit of an a contrario defense, proving that the CCC programmes are
“self-sustaining” is not enough. Were an a contrario defense possible, it would require the
United States to demonstrate that over a period constituting the long term, “premium rates” are
adequate to cover operating costs and losses, which include but are not limited to “claims or defaults”.
In contrast, the United States has argued that it is sufficient to show that “claims or defaults” do not
exceed “revenue from whatever source it may be derived”.
109 “Revenue from whatever source it may
be derived” gives credit to the United States for re venue that is not recognized as relevant for the
purposes of item (j), and “claims or defaults” ignores “operating costs and losses” that are relevant for
the purposes of item (j).110

87. As a factual matter, Brazil quite evidently do es not agree that the premium rates for the CCC
programmes meet their long-term operating cost s and losses. Brazil has presented voluminous
quantitative data demonstrating that long-term operating costs and losses incurred by the CCC
programmes outpace premiums collected. Brazil has also provided statements from the USDA
Inspector General 111 and the US General Accounting Office 112 establishing that CCC’s failure to

 105 However, Brazil has established that GSM 102 guarantees confer benefits per se, since there is no
comparable commercial instrument available in the marketplace.
 106 See also Brazil’s Answer to Question 143.
 107 Brazil’s 9 September Further Submission, paras. 184-192.
 108 Brazil’s 11 August Answers to Panel Questions, paras. 143-149.
 109 US 11 August Answers to Panel Questions, para. 145.
 110 See Brazil’s 11 August Answers to Panel Questions, para. 162; Brazil’s 22 July Oral Statement,
paras. 122-123.

111 Exhibit Bra-153 (US Department of Agriculture Office of Inspector General Financial and IT
Operations Audit Report of the Commodity Credit Corporation’s Financial Statements for Fiscal Year 2000,
Audit Report No. 06401-14-FM (June 2001), p. 31 (“ [T]he fees CCC charges for its GSM-102 and GSM-103

account for country risk or the credit rating of th e borrower in setting guarantee fees means that CCC
is charging “premium rates” that do not allow it to cover its operating costs and losses over the long-
term.

142. The US has pointed out that there are ma ny limitations on granting export credit
guarantees and that there is no requirement to issue any particular guarantee (US further
submission, paras 153-156). Can the Commodity C redit Corporation decline to grant an export
credit guarantee even in cases where the programme conditions are met? US

Brazil’s Comment

88. No, the CCC cannot decline to grant an e xport credit guarantee even in cases where the
programme conditions are met. The CCC cannot “stem [], or otherwise control[], the flow of” CCC
export credit guarantees. 113 The CCC export credit guarantee progr ammes therefore threaten to lead
to (and in fact have led to) circumvention of the United States’ export subsidy reduction
commitments, within the meaning of Article 10.1 of the Agreement on Agriculture.

89. Under the Budget Enforcement Act of 1990 , the US Office of Management and Budget
classifies the CCC export credit guarantee programmes as “mandatory”.
114 Mandatory programmes
like the CCC export credit guarantee programmes are exempt from the requirement in US law that a
programme receive new Congressional budget author ity before it undertakes new loan guarantee
commitments.115 As the Congressional Budget Office has noted, support via mandatory programmes
like the CCC export credit guarantee programmes “mus t be available to all eligible borrowers”,
without regard to appropriations limits. 116 The Congressional Research Service has similarly stated
that “[e]ligibility for mandatory programmes is written into law, and any individual or entity that
meets the eligibility requirements is entitled to a payment as authorized by the law”.117

90. The fact that the CCC can de ny guarantees to individuals who do not meet the eligibility
criteria does not, of course, affect the conclusion th at CCC cannot “stem[], or otherwise control[], the
flow of” CCC export credit guarantees.118 The United States’ FSC measure had eligibility criteria, but

export credit guarantee programmes have not been changed in 7 years and may not be reflecting current costs”.).
Exhibit Bra-154 (US Department of Agriculture Office of Inspector General Great Plains Region Audit Report
of the Commodity Credit Corporation’s Financial Statements for Fiscal Year 2001, Audit Report No. 06401-4-
KC (February 2002), p. 49 (“[T]he fees CCC charge d for its GSM-102 and GSM- 103 export credit guarantee
programmes have not been changed for many years and may not be reflecting current costs”.).

112 Exhibit Bra-181 (US General Accounting Office, Report to the Ranking Minority Member,
Committee on Agriculture, Nutrition, and Forestry, US Senate, “Former Soviet Union: Creditworthiness of
Successor States and US Export Credit Guarantees,” GAO/GGD-95-60 (February 19 95), p. 135-136). At
paragraph 110 of its 22 August Comments on US Answers, Brazil included an extract from this General
Accounting Office study demonstrating that CCC’s low premium rates do not allow it to cover its costs and
losses, and that the CCC programmes do not meet non-market, let alone market, benchmarks.
 113 Appellate Body Report, US – FSC, WT/DS108/AB/R, para. 149.
 114 Exhibit Bra-295 (2004 US Budget, Federal Cr edit Supplement, Introduction and Table 2 (CCC
Export Loan Guarantee Programme classified as “Manda tory” in Table 2, and in the “Introduction”, the Office
of Management and Budget states that Table 2 provides “the programme’s BEA classification under the Budget
Enforcement Act (BEA) of 1990 as discretionary or mandatory”).
 115 See Exhibit Bra-117 (2 U.S.C. § 661(c)(2)).
 116 Exhibit Bra-185 (Congressional Budget Office Staff Memorandum, “An Explanation of the
Budgetary Changes under Credit Reform”, April 1991, p. 7). See also Id., Table 2, which verifies that the CCC
export credit guarantee programmes are “mandatory” programs. Braz il notes that this does not mean that the
CCC programmes do not receive appropriations. The United States ack nowledges in its 11 August Answer to
Question 11 that the CCC programmes receive appropriations.
 117 Exhibit Bra-186 (Congressional Re search Service Issue Brief for Congress, “Agriculture and the
Budget”, IB95031 (16 February 1996), p. 3 (emphasis added)).
 118 Appellate Body Report, US – FSC, WT/DS108/AB/R, para. 149.

the Appellate Body still concluded that nothing in the measure “stem[ ed], or otherwise control[led],
the flow of” FSC benefits, leading to a threat of circumvention of the United States’ export subsidy
reduction commitments.
119

91. The entitlement that qualified applicants ha ve to CCC guarantees is not curtailed by the
requirement in US law that CCC not make availabl e guarantees to countries that cannot adequately
service debt.
120 That CCC has the authority to deny guaran tees on this basis is not relevant, for at
least three reasons.

92. First, under the United States’ FSC measure, US authorities were permitted to undertake a
factual enquiry into whether the foreign-source in come of the foreign corporation was “effectively
connected with the conduct of a trade or business within the United States”.
121 This authority, and the
possibility that the factual enquiry could limit the amount of income that would qualify for the FSC
exemption, did not prevent the Appellate Body from concluding that nothing in the FSC measure
“stem[ed], or otherwise control[led], the flow of” FS C benefits, leading to a threat of circumvention
of the United States’ export subsidy reduction commitments.122 Similarly, the authority that CCC has
to undertake an enquiry into whether particular count ries are creditworthy, and the possibility that this
enquiry could end up reducing the amount of CCC guarantees, does not prevent a conclusion that
nothing “stem[s], or otherwise control[s], the flow of” CCC guarantees. (Brazil notes that, in any
event, a conclusion by CCC that a particular country is not creditworthy would not necessarily reduce
the threat of circumvention, since nothing prevents CCC from simply reassigning the country’s
allocation to a country that is creditworthy.)

93. Second, as Brazil has previously noted, the US General Accounting Office (“GAO”)
concluded that the requirement that CCC not ma ke available guarantees to countries that cannot
adequately service debt does not remotely curtail CCC’s extension of its guarantees. According to the
GAO, “the statute does not place any limit on the amount of guarantees that can be provided each year
to high-risk countries in aggregate or individually”.
123 Thus, the theoretical possibility to halt support
to non-creditworthy countries does not “stem[], or otherwise control[],” the flow of CCC
guarantees.
124

94. Third, CCC is not concerned enough about creditworthiness to vary its fees based on the
country risk involved.
125 Nor does US law require the CCC to take account of the creditworthiness of
individual guarantee recipients in the fee charged. In fact, CCC fees expressly do not take account of
the credit rating of an individual borrower.126 Thus, even if CCC finds a country to be creditworthy, it
is not compensated for particularly poor individual credit risks.

95. Nor is the entitlement that qualified appli cants have to CCC guarantees curtailed by CCC’s
ability to adopt product- and country-specific alloca tions for its export credit guarantee programmes.
Although CCC adopts initial allocations at the outset of a fiscal year, it generously increases those
allocations as needed. In its announcement of in itial allocations for fiscal year 2004, for example,
which extends $2.8 billion in allocations fo r CCC guarantees, USDA st ated that CCC will
subsequently make additional allo cations throughout the year that will bring total 2004 allocations to

 119 Appellate Body Report, US – FSC, WT/DS108/AB/R, para. 12.
 120 See US 30 September Further Submission, para. 154.
 121 Appellate Body Report, US – FSC, WT/DS108/AB/R, para. 16.
 122 Appellate Body Report, US – FSC, WT/DS108/AB/R, para. 149.
 123 Exhibit Bra-181 (US General Accounting Office, Report to the Ranking Minority Member,
Committee on Agriculture, Nutrition and Forestry, US Senate, “Former Soviet Union: Creditworthiness of
Successor States and US Export Credit Guarantees,” GAO/GGD-95-60 (February 1995), p. 7).
 124 Appellate Body Report, US – FSC, WT/DS108/AB/R, para. 149.
 125 Brazil’s 22 August Comments on US Answers, paras. 109, 112.
 126 Brazil’s 22 August Comments on US Answers, paras. 109, 112.

more than $6 billion.127 Browsing the archived list of USDA press releases announcing supplemental
allocations extended throughout fiscal year 2003, 128 for example, demonstrates that this is exactly
what CCC does – it increases allocations as needed. As noted above, CCC is not required to receive
new Congressional budget authority before it underta kes these additional allocations. In fact,
Congress requires CCC to make available at least $5.5 billion in guarantees – it does not put a ceiling
on the amount to be granted. 129 The allocation process does not “stem[], or otherwise control[]”, the
flow of CCC export credit guarantees. 130 In fact, it enables CCC to increase the guarantees it can
provide.

96. Nor does CCC’s ability to adopt product-specifi c allocations for its export credit guarantee
programmes mitigate the significant threat, under Artic le 10.1 of the Agreement on Agriculture, that
the United States will surpass its agricultural export subsidy reduction commitments by virtue of the
CCC export credit guarantee programmes. This thr eat implicates both unscheduled and scheduled
agricultural commodities.

97. For unscheduled products, the ability to adopt allocations is irrelevant. Since CCC export
credit guarantees are available for unscheduled products
131, the threat of circumvention of the US
reduction commitments is tangible, and the United States is in violation of Article 10.1. As Brazil has
previously noted, the Appellate Body held that for unscheduled products, it is inconsistent with
Article 10.1 to provide any export subsidies.132 Moreover, the record dem onstrates that the threat has
materialized, since CCC guarantees have been extended to unscheduled products during, for example,
1999-2003.133

98. For scheduled products, the process of adop ting product-specific allocations for CCC export
credit guarantee programmes does not mitigate the threat of circumvention – or does not “stem[], or
otherwise control[]”, the flow of CCC export credit guarantees – for at least three reasons.
134

99. First, as the list of allocations included in the programme activity report for fiscal year 2003
demonstrates135, most allocations are only made on a c ountry-specific basis, and not on a product-
specific basis. In fact, less than 8 per cent of the allocations listed on the 2003 programme activity

 127 Exhibit Bra-296 (“USDA Announces $2.8 Billion in Export Credit Guarantees,” FAS Press Release,
30 September 2003).
 128 See http://www.fas.usda.gov/excredits/exp-cred-guar.asp.
 129 Exhibit Bra-297 (7 U.S.C. § 5641(b)(1); 7 U.S.C. § 5622(a), (b)).
 130 Appellate Body Report, US – FSC, WT/DS108/AB/R, para. 149.
 131 Exhibit Bra-298 ( “USDA Ame nds Commodity Eligibility under Credit Guarantee Programmes”,
FAS Press Release, 24 September 2002). Exports of unscheduled agricultural products that are eligible for CCC
export credit guarantee coverage include: barley malt and barley extract, corn products, cotton (including cotton
yarn, cotton fabric, cotton products, including cotton linters), fish and shellfish, fresh and dried fruits (including
apples, apricots, avocados, blueberries, cherries, clementines, dates, figs, grapefruits, grapes, kiwi, watermelons,
cantaloupe, honeydrew, nectarin es, oranges, peaches, pears, plums, prune s, raisins, raspberries, strawberries,
tangerines and mixtures thereof), fruit and vegetable concentrates, 100 per cent fruit juices, hay, hides and skins,
honey, soybean protein products, vegetables (including asparagus, beans, broccoli, carrots, cauliflower, celery,
garlic, lettuce, mushrooms, onions, peas, peppers, potatoes, spinach, squash, sweet corn, tomatoes, and mixtures
thereof), wood products (including lumber etc.), wool (including wool fabrics, wool yarn and mohair), worms.

132 Appellate Body Report, US – FSC, WT/DS108/AB/R, para. 150.
 133 Exhibit Bra-299 (“Summary of FY 2003 Export Credit Guarantee Programme Activity”, USDA,
covering GSM-102, GSM-103 and SCGP). For 1999-2002, s ee also Exhibit Bra-73 (“Summary of Export
Credit Guarantee Programme Activity”, USDA, covering GSM 102, GSM 103 and SCGP for US fiscal years
1999-2003).

134 See also Brazil’s 24 June First Submission, paras. 300-301.
 135 Exhibit Bra-299 (“Summary of FY 2003 Export Credit Guarantee Programme Activity”, USDA,
covering GSM-102, GSM-103 and SCGP).

report are product-specific.
136 The press release announcing initia l allocations for 2004 contains no
product-specific allocations. These allocations do not “stem[], or otherwise control[], the flow of”
CCC export credit guarantees in a way that would curb th e threat that they will be used to surpass the
United States’ export subsidy reduction commitments for scheduled products.137

100. Second, the allocations are made on a monetary basis, which provides virtually no assurance
that the United States will not surpass its quantitative export subsidy reduction commitments. This
might not happen for all scheduled products in all year s, but the threat that it will happen is tangible.
Rice provides a good example. Based on the monetary amounts of exporter applications received for
the CCC programmes, US export data, and averag e world prices, CCC guarantees to support US rice
exports caused the United States to surpass its qua ntity export subsidy reduction commitments in
fiscal years 2001, 2002 and 2003. 138 (Even if monetary allocations were relevant, nothing limits the
amount of funds that can be allocated. The CCC pr ogrammes operate without the constraints of the
appropriations process, and Congress requires that CCC make available a minimum of $5.5 billion in
export credit guarantees.)

101. Third, the United States’ schedule demonstrat es that the CCC export credit guarantees are not
the only subsidies available to support exports of scheduled commodities. Combining CCC
guarantees with these other export subsidies augments the threat that the United States will exceed its
export subsidy reduction commitments.

102. In summary, the CCC cannot “stem[], or otherwise control[], the flow of” CCC export credit
guarantees.
139 None of the factors mentioned by the United States stem the flow of those guarantees,
which CCC cannot decline to grant in cases where the programme conditions are met. The CCC
export credit guarantee programmes therefore threat en to lead to (and in fact have led to)
circumvention of the United Stat es’ export subsidy commitments, within the meaning of Article 10.1
of the Agriculture Agreement.

103. With respect to its claims under the SCM Ag reement, Brazil notes that even if the CCC had
the discretion not to grant export credit guarantees in cases where the programme conditions are met,
it would not affect Brazil’s claim that the guarantees confer benefits per se. As Brazil has discussed
elsewhere, since CCC export credit guarantees from the GSM 102, GSM 103 and SCGP programmes
are unique financial instruments for agricultural co mmodity transactions that are not available on the
commercial market (certainly not for terms longe r than the marketing cycles of the eligible
commodities), each time they are granted, they confer benefits within the meaning of Article 1.1(b) of
the SCM Agreement.

143. Brazil agrees with National Cotton Counc il estimates of the effects of the GSM 102
programmes (Brazil's further submission, para. 190) but it also cites a different conclusion by
Prof. Sumner (paragraph 192). Brazil cites other estimates by Prof. Sumner throughout its
further submission. Does Brazil adopt Prof. Sumn er's conclusions and estimates as part of its
submission? BRA

104. Brazil considers both the National Cotton Counc il’s and Professor Sumner’s estimates as
independent parts of the record that demonstrate the serious prejudice caused by the GSM 102
programme to the interests of Brazil. The NCC has a staff of expert economists (including the former

 136 Exhibit Bra-299 (“Summary of FY 2003 Export Credit Guarantee Programme Activity”, USDA,
covering GSM 102, GSM 103 and SCGP (Total GSM 102, GSM 103 and SCGP allocations for fiscal year 2003
are listed as $6.025 billion, with product-specific alloca tions as follows: $370 million of GSM 102 guarantees
to Korea; $85 million of GSM 102 guarantees to Pakistan; and, $10 million of GSM 102 guarantees to Tunisia).
 137 Appellate Body Report, US – FSC, WT/DS108/AB/R, para. 149.
 138 Exhibit Bra-300 (Calculation on US Rice Exports Benefiting from GSM 102, GSM 103 and SCGP).
 139 Appellate Body Report, US – FSC, WT/DS108/AB/R, para. 149.

director of the FAPRI cotton model) and has tes tified to Congress that the effects of the GSM 102
programme increase annual US cotton exports by 500,000 bales and have a 3-cent per pound price
effect.140 Brazil has no reason to doubt the accuracy and reliability of the sworn NCC testimony to the
US Congress.

105. Professor Sumner has based his analysis of the effects of the GSM 102 export credit
guarantee programme on the earlier work by the National Cotton Council. Professor Sumner has
modelled the impact of the GSM 102 export credit guarantee programme as a shift out of the demand
curve for US upland cotton by 500,000 bales.
141 Brazil believes that the resulting lower estimates of
the effects of the GSM 102 programme offered by Professor Sumner are yet another illustration of the
conservative (and reasonable) nature of his model.

106. In response to the Panel’s Question, Prof essor Sumner has rerun the model analyzing the
results of a fixed 500,000 bales export effect rather than a shift out of the demand curve by that
amount. His original results showed an average annual 305,000 bales export-increasing effect for MY
1999-2002.
142 But the assumption of a fixed 500,000 bale export-increasing effect from the GSM 102
programme results in an average world price e ffect between MY 1999-2002 of 0.928 cents per pound
(or 1.80 per cent) compared to 0.57 cents per pound (or 1.12 per cent) estimated under the previous
assumption.143 For the period MY 2003-2007 the average world price effect would be 1.07 cents per
pound or 1.93 per cent compared to the 0.53 cents per pound or the 0.96 per cent estimated
previously.
144

107. Brazil has submitted the analysis of Pr ofessor Sumner along with results from other
economists and other evidence throughout its submi ssions. The Panel should consider the complete
record in analysing the collective effects of the US subsidies. Both the NCC’s as well as Professor
Sumner’s studies are positive evidence of the expor t-enhancing and price-suppressing effects of the
GSM 102 export credit guarantee programme. Both the NCC’s testimony as well as Professor
Sumner’s original as well as revised analysis establishes that GSM 102 causes serious prejudice to the
interests of Brazil, within the meaning of Articles 5(c), 6.3(c) and 6.3(d) of the SCM Agreement, and
within the meaning of Articles XVI:1 and 3 of GATT 1994.

I. ACTIONABLE SUBSIDIES

145. The Panel notes that different remedies a re available in respect of prohibited and
actionable subsidies under Articles 4.7 and 7.8 of the SCM Agreement . If the Panel were to
conclude that a subsidy was prohibited and we re to make a recommendation under Article 4.7
of the SCM Agreement to withdraw the subsidy without delay, can the Panel:

(a) also conclude that the same subsidy had resu lted in adverse effects to the interests of
another Member? If so, what would be the value of such a conclusion in terms of the
settlement of the matter before the Panel? BRA, US

 140 Exhibit Bra-41 (“The Future of Federal Farm Commodity Programmes (Cotton)”, Hearing before
the House of Representatives Committee on Agriculture, 15 February 2001, p. 12).

141 Brazil’s 9 September Further Submission, Annex I, para. 59. For reasons internal to the FAPRI
model, Professor Sumner did not include the 3 cents per pound price effect estimated by the NCC in the shift out
of the demand curve, thus generating more conservative results. In addition, the implicit supply and demand
elasticities used by the NCC imply la rger price impacts than those in the FAPRI model used by Professor
Sumner, again leading to more conservative results.
 142 See Exhibit Bra-301 (Additional Results from Professor Sumner’s Model, Table “Impact of removal
of Export Credit (fixed exports)”).
 143 Exhibit Bra-301 (Additional Results from Professor Sumner’s Model, Table “Impact of removal of
Export Credit (fixed exports)).
 144 Exhibit Bra-301 (Additional Results from Professor Sumner’s Model, Table “Impact of removal of
Export Credit (fixed exports)).

Brazil’s Answer

108. Regarding the first question, the Panel can conc lude that prohibited subsidies have resulted in
adverse effects to the interests of another Member. Article 5(c) of the SCM Agreement provides that
no Member should cause serious prejudice through the use of any subsidy. That includes subsidies
that are prohibited under Article 3. Nothing in th e text of Articles 4.7 and 7.8 of the SCM Agreement
suggests that a complaining party must make a choice between prohibited and actionable subsidy
remedies. Brazil has a right to remedies provided by both provisions if the Panel makes the
underlying findings that a prohibited subsidy such as Step 2 and export credit guarantees also are
actionable subsidies that caused serious prejudice.

109. With respect to the second question, th ere will be value in the Panel making a
recommendation under both Articles 4.7 and 7.8 of the SCM Agreement. A subsidy becomes a
prohibited subsidy because it is contingent on exports or on the use of domestic over imported goods.
If the forbidden contingency is removed, the s ubsidy may still cause ongoing adverse effects. In
addition, there may still be continuing adverse effect s from subsidies that were previously contingent
on export or local content subsidies. Without a recommendation under Article 7.8, these ongoing as
well as continuing adverse effects could not be remedied. Finally, recommendations on both
prohibited and actionable subsidy claims may avoid la ter complications in the event of an appeal of
the Panel’s final determination.

110. Thus, Brazil urges the panel to make firs t a recommendation under Article 4.7 of the SCM
Agreement that the Step 2, as well as GSM 102, GSM 103 and SCGP export credit guarantee
programmes be withdrawn without delay. The Pa nel should also make a recommendation that the
United States remove the adverse effects of th e Step 2 and GSM 102 export credit guarantee
programmes under Article 7.8 of the SCM Agreement.

(b) take into account the effects of the interact ion of those prohibited subsidies with other,
allegedly, actionable subsidies? If so, how is this relevant to the issue of causation under
Article 5 of the SCM Agreement? BRA, US

Brazil’s Answer

111. With respect to the first question, the text of Article 5 of the SCM Agreement provides that
“[n]o Member should cause, through the use of any subsidy referred to in paragraphs 1 and 2 of
Article 1, adverse effects”. The clear intention is for panels to take into account in assessing adverse
effects any and all subsidies that are specific, incl uding those found to be prohibited under Article 3.
The only subsidies excluded are those that are not sp ecific. The ban on adverse effects also embraces
adverse effects caused by the interaction between all actionable subsidy programmes.

112. Because the Panel is required to examine all actionable subsidies in making its causation
determination, it is not appropriate for it to separatel y analyze the individual effects of each subsidy.
Thus, the Panel should look at the interaction of the various types of subsidies at issue and at their
collective effects. No attribution of the effects to i ndividual subsidies or to prohibited and “other”
actionable subsidies is necessary because the remedies of Articles 4.7 and 7.8 of the SCM Agreement
are not contradictory.

113. Even if the Panel were to decide that it woul d be appropriate to examine individual effects of
subsidies, Brazil has produced extensive evidence of the link between the serious prejudice caused

and the individual and collective effect s of all of the actionable subsidies. 145 If the Panel chooses to
examine the individual instead of the collective effects of some of the US subsidies, it can do so based
on the evidence produced by Brazil. 146 This evidence establishes cau sation whether the subsidies are
examined individually or collectively. With resp ect to the interactive effects of the various US
subsidies, please see Brazil’s Answer to Questions 146.

146. Brazil acknowledges that there are some interaction effects that may increase or
decrease the overall effects of the subsidies (Braz il's further submission, para. 225). How would
your analysis under Articles 5(c) and 6.3 of the SCM Agreement and Article XVI of GATT 1994
differ if it excluded, for example, crop insurance subsidies, PFC and/or direct payments? BRA

Brazil’s Answer:

114. The evidence in the record is more than sufficient to establish present and threat of significant
price suppression, increasing world market share, and inequitable share of world export trade even if
PFC/direct payments and crop insurance subsidies were not deemed to be actionable subsidies.

115. In response to the Panel’s question, Brazil ask ed Professor Sumner to use his model described
in Annex I to Brazil’s 9 September Further Submission to eliminate the effects of all subsidies except
the PFC/direct payment and crop insurance subsidies . Professor Sumner’s analysis examined the
effects of the remaining US subsidies with respect to a number of factors such as planted acreage,
production, US price, adjusted world price etc. The complete set of results is set forth in Exhibit Bra-
301.
147 Brazil describes the interactive effects of all US subsidies except crop insurance and
PFC/direct payments on US export and world A-Index prices below.

116. Analyzing the results for the MY 1999-2002 period from Exhibit Bra-301 shows that but for
the payments from all US subsidy programmes (e xcept the PFC and crop insurance), US exports
would have fallen by 36.81 per cen t and the world A-Index prices would have increased on average
by 11.00 per cent (or 5.73 cents per pound). When crop insurance and PFC/direct payments are
included in the original analysis, US exports fa ll by 41.17 per cent and A-Index world prices would
increase by 12.55 per cent (6.5 cents per pound).
148

117. When the period for MY 2003-2007 is examined, eliminating all subsidies except for crop
insurance and direct payments means that, on aver age, US exports would fall by 37.31 per cent and
the A-Index world price would increase by 8.36 per cent (4.63 cents per pound). 149 By comparison,
when all US subsidies (including PFC/direct paymen t and crop insurance) are eliminated, US exports,
on average, would decrease by 44.02 per cent and the A-Index price would increase by 10.80 per
cent.150

 145 Brazil’s 9 September Further Submission, Sections 3.3.4.7 (individual effects) and 3.3.4.8
(collective effects). See also Brazil’s 7 October Oral Statement, paras 31-34 (USDA’s analysis of individual
effects of marketing loan subsidies for cotton for marketing years 2000 and 2001).

146 The collective and individual effects of the various US subsidies are analyzed by Professor Sumner
at Tables 1.5(a) – (e) of Annex I to Brazil’s 9 September Further Submission. See also Brazil’s 9 September
Further Submission, Sections 3.3.4.7 (individual effects) and 3.3.4.8 (collective effects). See further Brazil’s 7
October Oral Statement, paras 31-34 (USDA’s analysis of individual effects of marketing loan subsidies for
cotton for marketing years 2000 and 2001).

147 See Exhibit Bra-301 (Additional Results from Professor Sumner’s Model, Table “Impact of removal
of all domestic support except PFC/direct payments and crop insurance”)
 148 Brazil’s 9 September Further Submission, Annex I, Table I.5a.
 149 See Exhibit Bra-301 (Additional Results from Professor Sumner’s Model, Table “Impact of removal
of all domestic support except PFC/direct payments and crop insurance”)
 150 Brazil’s 9 September Further Submission, Annex I, Table I.5a.

118. Brazil notes that most of its evidence does not involve proof regarding PFC/direct payments
or crop insurance and would, therefore, not be imp acted by the assumption in the Panel’s question. In
addition, many of the econometric analysis cited by Brazil focus on only some of the subsidies
challenged by Brazil. The results of these studi es are consistent with the findings of Professor
Sumner’s analysis set out in Annex I to Brazil’ s 9 September Further Submission and Exhibit Bra-
301. In sum, even ignoring the effects of the cr op insurance and PFC / dir ect payment programmes,
the US subsidies cause serious prejudice to the interests of Brazil, within the meaning of Articles 5(c),
6.3(c) and (d) and GATT Articles XVI:1 and 3.

148. How should the significance of price suppression or depression be assessed under
Article 6.3(c) of the SCM Agreement ? In terms of a meaningful effect? Or another concept?
BRA, US

Brazil’s Answer

119. The significance of price suppression should be assessed by reference to whether it
meaningfully affects producers or suppliers of the same product that receives the benefits of the
challenged subsidies.151 Price suppression that does not meaningfully affect suppliers or producers of
a product cannot give rise to serious prejudice, since it would not be significant. The text of
Article 6.3 does not set a numerical limit on the le vel of price suppression. What renders price
suppression significant or insignificant is whether or not it causes adverse effects to the producers or
suppliers of the Member(s) concerned, not whethe r an arbitrary level of numeric significance is
achieved.
152

120. Contrary to the US arguments, there is not an artificial distinction between whether price
suppression is “significant” and whether such levels of suppression meaningfully affect suppliers or
producers of the product receiving the benefits of the subsidies. Brazil provided considerable
evidence setting forth how its producers suffered adve rse effects from the levels of price suppression
that can be attributed to US subsidies during MY 1999-2002.
153 A good example of the significance
of the levels of price suppression demonstrated by Brazil for MY 2000-2001 is found in the testimony
of Christopher Ward. He indicated that a 10-per ce nt increase in prices for Mato Grosso producers in
MY 2000 and MY 2001 would have pe rmitted them to cover their variable costs for MY 2001 and
come close to covering variable costs in MY 2000. 154 However, because of the losses they suffered
without such revenue increases, many Mato Grosso producers reduced production or were forced out
of cotton production – Mato Grosso production fell by 34 per cent between MY 2000-2001.155

121. The record shows that the adverse effects suffered by Brazilian producers have also been
suffered by producers in Africa.
156 Nicolas Minot testified for Benin at the hearing on 8 October. His
econometric analysis focused on the effect of lower upland cotton prices on poverty among Benin
cotton farmers. Based on his economic analysis, a ten per cent decrease in upland cotton prices drove

 151 Brazil’s 9 September Further Submission, paras. 251-259; Brazil’s 7 October Oral Statement, paras.
30-34.
 152 See also New Zealand’s 1 October Further Third Party Submission, paras. 2.21-2.27, tying the
analysis of significance under Article 6.3(c) to the notion of serious prejudice to the Member(s) concerned under
Article 5(c).
 153 Brazil’s 9 September Further Submission, paras. 444-455 and Annex III.
 154 Exhibit Bra-283 (Statement of Christopher Ward – 7 October 2003, paras. 8-10 and accompanying
graph).
 155 Exhibit Bra-283 (Statement of Christopher Ward – 7 October 2003, paras. 8-10 and accompanying
graph).
 156 Statement of Mr. Minot. Oral Statement of Benin, 8 October 2003, paras. 29-33 ; Statement of
Mr. Ibrahim Malloum, Oral Statement of Chad, 8 October 2003, paras. 13-15.

approximately 83,500 Benin upland cotton farmers below the poverty line. 157 The evidence that
African producers have suffered adverse effects by r eason of the effects of the US subsidies confirms
and supports the evidence presented by Brazil that its producers are suffering adverse effects as well.

122. But even if the Panel decides to adopt some sort of numerical standard not reflected in the text
of Article 6.3(c), Brazil has also set forth evidence showing that the levels of price suppression found
by a number of different economists are “significant”.
158 In assessing whether the various levels of
price suppression found by USDA and other economists are “significant,” the Panel should take into
account the fact that upland cotton is a primary commodity traded in huge volumes and produced and
consumed in a large number of countries. Un der these circumstance s, any measurable and
identifiable effect on the world price from the subsidies provided by a single Member is important. In
this case, the Panel is not faced with a difficu lt decision because during MY 1999-2002 – and even
during MY 1997-1998 – the record shows that the absolute numerical levels of price suppression
caused by some or all of the US subsidies were significant, ranging from 4 to 26.3 per cent of the
world price, and 10 to 33.6 per cent of the US price.
159

153. Would the conditions in Article 6.3(d) of the SCM Agreement be satisfied in respect of
time periods other than the one specified? What relevance, if any, would this have for Brazil's
claims? BRA

Brazil’s Answer

123. Brazil has demonstrated that the conditions of Article 6.3(d) of the SCM Agreement are
fulfilled for MY 2001, 2002 and 2003.160 The record indicates that the conditions of Article 6.3(d) of
the SCM Agreement would also have been fulfilled for MY 1999 and 2000. In addition, the increase
in the US share of the world upland cotton market fo llows a consistent trend. This consistent trend
exists whether the Panel analyzes the trend ove r the period MY 1996-present (described by USDA as
constituting a significant change in US farm policy 161) or over the period MY 1986-present (since the
introduction of the marketing loan programme for upland cotton162).

124. The US world market share in MY 2000 w as 24.7 per cent, an increase over the previous
three-year average (MY 1997-1999) of 23.2 per cent.
163 Similarly, the US market share in MY 1999
was 24.1 per cent, an increase over the previous three-year average (MY 1997-1998) of 23.4 per
cent.164

125. Further, if the “time period” for assessi ng a “consistent trend” was changed from 1996-2003
to 1985-2003, the results would not be different. The following figure demonstrates that the increase
in the US world market share also follows a consistent trend since MY 1986.
165

 157 Benin’s 8 October Oral Statement (Statement of Nicolas Minot, para. 24-25) (estimating that a
40 per cent reduction in price caused 334,000 people to fall below the poverty line, and indicating that smaller
reductions in the cotton price cause roughly proportional changes in income, as shown in Table 3 of his paper
attached to Benin’s 1 October Further Third Party Submission).

158 Brazil’s 9 September Further Submission, Table 22, page 110; Brazil’s 7 October Oral Statement,
paras. 30-34.
 159 See Brazil’s 9 September Further Submission, paras. 148-161, 190, 200-232; 254 Table 23, 379-
384. See also Brazil’s 7 October Oral Statement, paras. 31-34.
 160 Brazil’s 9 September Further Submission, Sections 3.4 and 4.12.2.
 161 Exhibit Bra-79 (“US Farm Programme Benef its: Links to Planting Decisions & Agricultural
Markets“, USDA, Agricultural Outlook, October 2000, p. 10).
 162 Exhibit Bra-12 (“Cotton, Background for the 1995 Farm Legislation,” USDA, April 1995, p. 15)
 163 Exhibit Bra-302 (Revised and Extended Data on Article 6.3(d) claim).
 164 Exhibit Bra-302 (Revised and Extended Data on Article 6.3(d) claim).
 165 Exhibit Bra-302 (Revised and Extended Data on Article 6.3(d) claim).

US World Market Share Upland Cotton (MY 1986-2003)
0
5
10
15
20
25
30
35
40
45
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
marketing year
pe
rce
nta
ge

126. The trend line beginning in MY 1986 in the gra ph above shows an overall consistent increase
of US export market share over an 18-year period. This steady long-term increase coincides with the
introduction of the marketing loan programme in MY 1986. Another highly trade distortive subsidy,
the Step 2 payments, was introduced in MY 1990. The combination of these two subsidies, along
with the other trade-distortive subsidies, played an important role in the progressive increase in US
world market share over the long-term period c overed by the MY 1986-2003 graph above. Thus,
looking at all the trends collectively provides corroborating evidence that the large increases in the US
world market share from MY 1998 to the present are ca used, in significant part, by the US subsidies,
in violation of Articles 5(c) and 6.3(d) of the SCM Agreement.

127. Brazil notes that MY 1998 was an unusual year with a relatively low US world market share
as a direct result of a 20-per cent abandonment of upland crop acreage due to weather-related
issues.
166 But for those weather-related problems, the US world market share would have been higher
in MY 1998.

128. Finally, Brazil wishes to correct a typogra phical error in its calculation of the US world
market share for MY 1997. The correct market share (as reflected in Figure 26 of Brazil’s
9 September Further Submission) is 27.6 per cent, rather than 19.8 per cent,
167 as was incorrectly
noted in Exhibit Bra-206. Brazil notes that this typographical error did not affect the calculations of
the increase in the US world market share.
168 Correcting for this error, Brazil resubmits the corrected
figures:

 166 See US 30 September Further Submission, para. 19.
 167 The error results from a typographical error in the line of the “total world exports”, which were
26.7 million bales in MY 1997 and not 36.7 million bales, as erroneously included in the calculation.
 168 Brazil notes that Figure 26 of Brazil’s 9 September Further Submission is unaffected by this data
error and shows a very similar trend in the US world market share in cotton.
 percentage

Figure 25 (para. 270)169
U.S. World Market Share Upland Cotton (MY 2001)
0
5
10
15
20
25
30
35
40
45
1996 1997 1998 1999 2000 2001
marketing year
percentage
U.S. World Market Share
Linear (U.S. World Market Share)

Figure 37 (para. 402)170
U.S. World Market Share Upland Cotton (MY 2002)
0
5
10
15
20
25
30
35
40
45
1996 1997 1998 1999 2000 2001 2002
marketing year
pe
rc
en
ta
ge
U.S. World Market Share
Linear (U.S. World Market Share)

 169 Exhibit Bra-302 (Revised and Extended Data on Article 6.3(d) claim).
 170 Exhibit Bra-302 (Revised and Extended Data on Article 6.3(d) claim).
 percentage

Figure 38 (para. 405)
171
U.S. World Market Share Upland Cotton (MY 2003)
0
5
10
15
20
25
30
35
40
45
1996 1997 1998 1999 2000 2001 2002 2003
marketing year
percentage
U.S. World Market Share
Previous 3-Year Average
Linear (U.S. World Market Share)

129. As the Panel can see, all three graphs show a trend line that matches the actual curve even
better than the trend line presented by Brazil in its 9 September graphs. Also, all trend lines show that
there is a dramatically increasing US world mark et share in upland cott on, in violation of
Article 6.3(d) of the SCM Agreement.

161. Would a finding of serious prejudice under Article 5(c) of the SCM Agreement be
determinative for a finding under Article XVI:1 of the GATT 1994? Why or why not? What, if
any, is the role of footnote 13 of the SCM Agreement in this context? BRA, US

Brazil’s Answer

130. A finding of serious prejudice based on the effects described in SCM Article 6.3(a), (b), (c) or
(d) would be determinative for a finding under GA TT Article XVI:1. GATT Article XVI:1 concerns
measures that are (i) subsidies, and which (ii) cause or threaten serious prejudice to the interests of
any other Member. Footnote 13 of the SCM Agreem ent provides that “[t]he term ‘serious prejudice
to the interests of another Member' is used in this Agreement in the sam e sense as it is used in
paragraph 1 of Article XVI of GATT 1994, and includes threat of serious prejudice”. Footnote 13
clarifies that the instances that constitute serious prejudice within the meaning of the SCM
Agreement, including Article 5(c), constitute at the same time serious prejudice within the meaning of
GATT Article XVI:1. In addition, if the Panel dete rmines that a particular measure is a “subsidy”
under Articles 1 and 2 of the SCM Agreem ent, that measure would constitute ipso facto a subsidy for
the purposes of GATT Article XVI:1. In sum, Articles 5(c) and 6.3 of the SCM Agreement
operationalize and clarify the meaning of serious prejudice as contained in GATT Article XVI:1.
172

163. Are US cotton producers able to cover the fixed and variable costs without subsidies?
Please provide substantiating evidence. Of what rel evance is this, if any, to Brazil's actionable
subsidy claims ? US, BRA

 171 Exhibit Bra-302 (Revised and Extended Data on Article 6.3(d) claim).
 172 This interpretation of the relationship between Articles 5(c) and 6.3 of the SCM Agreement and
GATT Article XVI:1 is without prejudice to the continue d relevance of GATT Article XVI:3, as discussed in
Brazil’s answers to Question 185.

Brazil’s Answer:

131. Brazil has established in paragraphs 117-12 3 of its 9 September Further Submission that
between MY 1997-2002, US upland cotton producers on average were not able to cover their total
cost of production, i.e., the sum of fixed and variable costs.
173 The gap between the total cost of
production and the revenue generate d from both upland cotton lint and cottonseed increased steadily
from 2.66 cents per pound in MY 1997 to 39 cents per pound in MY 2001 before falling slightly to
34.38 cents per pound in MY 2002. 174 On a percentage basis, the average total costs to produce a
pound of upland cotton in the United States betwee n MY 1999-2002 were 77 per cent higher than the
average market prices received by US farmers.175

132. Similarly, the Institute for Agriculture a nd Trade Policy in Minneapolis found in a study
entitled “United States Dumping on World Agricu ltural Markets” that based on USDA cost of
production data, the United States exported its upland cotton below its total cost of production in each
year between MY 1990-2001. The study found th at US upland cotton was exported between 9 and
57 per cent below the total cost of production.
176 This evidence on export prices is entirely consistent
with Brazil’s analysis of the gap between total cost of production and farm prices.177

133. Further, Brazil has used USDA data and the FAPRI 2003 baseline projections on prices and
costs of production to analyze the likely gap between total costs of production and market revenues.
178
Based on this information, the gap between total cost of production and market returns to producers of
upland cotton will be between 24.85 cents per pou nd in MY 2003 and 21.85 cents per pound in MY
2007.179

134. Thus, US producers were not able to meet th eir total cost of production since MY 1997, and
based on USDA and FAPRI baselines, they will not be able to meet their total cost of production
through MY 2007. This means that US upland cott on producers would not have met their cost of
production for 11 consecutive years absent large US Government subsidies. The average gap between
the total cost of production and market return in those eleven years will be 22.85 cents per pound.
180
The only possible conclusion is that many US pr oducers and much US production could not exist
without US subsidies, as confirmed by the National Cotton Council.181

135. The consistently large cost-re venue gap, among other factors, establishes the link between US
subsidies and increased and maintained high levels of US production and exports. Given the high cost
of production that significantly exceeds market re venues, absent the US subsidies, many US

 173 See also Brazil’s Answer to Question 125 (2) (c).
 174 Exhibit Bra-205 (Costs and Returns of US Upland Cotton Producers).
 175 See Exhibit Bra-205 (Costs and Revenues of US Upland Cotton Producers). The number represents
the gap between the cost of production of cotton lint and the price received by producers for cotton lint. It does
not take into account cottonseed revenue that would slightly narrow the gap.
 176 Exhibit Bra-212 (“United States Dumping on World Agricultural Markets,” Institute for Agriculture
and Trade Policy, p. 21).

177 Farm prices are somewhat lower than export prices.
 178 Brazil’s 9 September Further Submission, paras. 353-359.
 179 Exhibit Bra-205 (Costs and Returns of US Upland Cotton Producers).
 180 In such a situation it is materially irrelevant whether US producers met their variable cost of
production. Meeting at least the variable cost of production may be a short-term option for farmers to stay in
business. However, over the long-run, farmers need to cover their total cost of production. Not covering total
cost of production for eleven consecutive years would certainly force any producer in any industry out of
business.

181 Exhibit Bra-3 (Roger Thurow / Scott Kilman, “US Subsidies Create Cotton Glut That Hurts Foreign
Cotton Farms,” The Wall Street Journal, 26 June 2002, p. A1) quoting Kenneth Hood, the then Chairman of the
National Cotton Council as saying “cotton farmers . . . can’t exist without subsidies.”

producers would have to cut upland cotton produc tion, and much upland cotton acreage would no
longer be planted to upland cotton. This result is intuitively clear and is confirmed by evidence of
significant production cut-backs by Mato Grosso pro ducers (34 per cent) who are sensitive to changes
in prices, as described in Christopher Ward’s statement of 7 October.
182 It is also confirmed by the
results of many economists examining the effects of eliminating US subsidies. They found that
eliminating the US subsidies that cover the US producer cost-revenue gap would result in lower US
production, leading to lower US exports and higher US and world prices.183

136. The Panel has also asked for US cost data on variable and fixed costs. Brazil provides below
the most recent USDA data covering the period MY 1997-2002.
184 These data demonstrate that the
“gross value of the US production” did not permit US upland cotton producers to cover their total
costs of production. In MY 2001, the gross value of the production did not even permit them to cover
their variable costs of production. In MY 2002, th eir revenue only covered s lightly more than their
variable costs. Not reflected in the chart below is the fact that US subsidies made up all (or almost
all) the difference between the “gross value of the US production” and the “total costs listed” between
MY 1997-2002.

US cotton production costs and returns per plante d acre, excluding direct Government payments,
1997-2002 1/
Item 1997 1998 1999 2000 2001 2002
 dollars per planted acre
Gross value of production:
 Primary product: Cotton 477.48 307.20 274.48 324.33 222.60 257.88
 Secondary product: Cottonseed 68.07 48.90 40.32 50.85 48.80 49.95
 Total, gross value of production 545.55 356.10 314.80 375.18 271.40 307.83

Operating costs:
 Seed 17.63 17.87 18.35 30.10 37.82 47.99
 Fertilizer 35.31 31.76 29.91 31.32 35.26 30.56
 Chemicals 60.19 58.54 58.60 58.32 59.25 56.80
 Custom operations 23.27 13.02 19.67 19.93 19.99 19.25
 Fuel, lube, and electricity 31.64 26.29 26.64 36.97 36.49 31.37
 Repairs 25.39 27.32 26.28 27.18 28.53 29.10
 Interest on operating inputs 6.57 5.40 5.61 7.55 4.71 2.31
 Ginning 62.75 43.78 53.08 51.46 57.14 55.61
 Purchased irrigation water 8.71 6.89 6.12 6.55 5.05 5.01
 Total, operating costs 271.46 230.87 244.26 269.38 284.24 278.00

 182 See Exhibit Bra-283 (Statement of Christopher Ward – 7 October 2003, para. 6) discussing a drop in
the upland cotton acreage in Mato Grosso by 35 per cent between 2000/2001 and 2001/2002 due to low upland
cotton prices.
 183 The collective and individual effects of the various US subsidies are analyzed by Professor Sumner
at Tables 1.5(a) – (e) of Annex I to Brazil’s 9 September Further Submission. See also Brazil’s 9 September
Further Submission, Sections 3.3.4.7 (individual effects) and 3.3.4.8 (collective effects). See further Brazil’s
7 October Oral Statement, paras 31-34 (USDA’s analysis of individual effects of marketing loan subsidies for
cotton for marketing years 2000 and 2001).

184 http://www.ers.usda.gov/Data/CostsAndReturns/data/recent/Cott/R-USCott.xls, visited
25 October 2003

Allocated overhead:
 Hired labour 33.72 33.92 35.48 36.98 37.89 38.16
 Opportunity cost of unpaid labour 28.03 28.76 29.27 29.90 30.28 32.73
 Capital recovery of machinery and
equipment 94.21 93.16 96.80 97.97 101.49 100.39
 Opportunity cost of land 58.33 46.04 51.84 51.68 43.83 46.76
 Taxes and insurance 14.97 14.20 15.07 15.93 16.68 17.01
 General farm overhead 15.55 14.21 15.35 15.82 16.11 15.97
 Total, allocated overhead 244.81 230.29 243.81 248.28 246.28 251.02

Total costs listed 516.27 461.16 488.07 517.66 530.52 529.02

Value of production less total costs
listed 29.28 -105.06 -173.27 -142.48 -259.12 -221.19
Value of production less operating
costs 274.09 125.23 70.54 105.80 -12.84 29.83
1/ Estimates based on 1997 survey.
2/ Method used to determine the opportunity cost of land.

J. CAUSATION

165. Please comment (and submit substantiating evidence) on the US assertion that the FAPRI
model has been designed and developed for pr ospective analysis, and is not suitable for
retrospective counterfactual analysis. What is the reliability of past FAPRI-produced analyses
when compared with actual data for the period covered by them? Is there any other instrument
that can be used to try to identify the effect of subsidies already granted, or of their removal?
BRA, US

Brazil’s Answer

137. Concerning the first question, there is nothi ng inherently different in using a calibrated
simulation model (the category of models into which th e FAPRI and many other models fall) to
investigate (i) questions of the future effects on prices and quantities of a potential change in policy
or, instead, (ii) questions of how the recent pattern of prices and quantities w ould have been different
if a different set of policies would have been in place. Calibrated simulation models, including the
FAPRI model, are routinely used for both kinds of questions. The applications are identical. In one
case, the comparison for the results from the counte r-factual policy option is to an unobserved future
baseline. In the other case, the comparison for the results from the counter-factual policy option is
retrospective to past actual events.

138. The FAPRI policy simulation framework is an elaborate set of suppl y and demand equations
(along with associated stock equations and equilibri um conditions that set quantity supplied equal to
quantity demanded). The framework includes, as a component, a set of “baseline” projections of
agricultural prices and quantities for future peri ods that are based on explicit assumptions about
policy, climate, technological change, macroeconom ic conditions, etc. In many applications, the
relevant questions investigated by the model are of the following form: if some specific policy were
different in the future, how would this affect the future outcomes for farm commodity prices and
quantities. For example, this is the form of questi on that is often posed in the context of options for
changing US farm subsidies in the future. Becau se they have baseline projection components, the
FAPRI framework and a few others are well suited fo r these future-oriented questions. But the use of
such models to analyze the recent past is also common whenever that is a relevant question.

139. As with other calibrated simu lation models, the FAPRI model itself is also used routinely for
both projections and retrospective counterfactual analysis. One recent publication that applied
retrospective counterfactual analysis concerned worl d peanut (groundnut) policy. That study adapted
the basic FAPRI framework, much as it was adapted to apply to the current case for upland cotton, to
consider international peanut policy questions. The model is calibrated to three recent years –
1999/2000, 2000/2001 and 2001/2002 – and examines a peanut trade liberalization scenario.
185

140. A second recent retrospective counterfactual app lication was to the US sugar programme in a
project conducted for the US General Accounting Offi ce. In that analysis, a version of the FAPRI
domestic sugar model was combined with th e CARD international sugar model (much as
Professor Sumner has done for upland cotton, as report ed in Annex I to Brazil’s 9 September Further
Submission). The model was calibrated to 1999 data , and results considered the effects of policy
reform relative to the 1999 crop year actual outcomes.
186

141. In addition, Brazil notes that USDA has freque ntly used calibrated simulation models to
perform retrospective, counterfactual analysis. For example, USDA economists calibrated the USDA
“SWOPSIM” model, which was used extensively to analyze trade policy options in the 1980s and
1990s, to 1989 data and solved it for commodity prices and quantities that would have obtained in that
year under alternative trade liberalization scenarios.187

142. The USDA “FAPSIM” model, which is quite similar to the FAPRI model, is a calibrated
simulation model that is also used for retrospective counterfactual an alysis and for considering policy
options relative to projections. According to J. Michael Price of the USDA Economic Research
Service, who was one of the developers of the m odel and currently maintains and operates the model,
it is calibrated to historical data each year as well as to the official USDA baseline. That model is
used for responding to questions about future policy options and to retrospective counterfactual
questions. Indeed, one of the first published appli cations of the “FAPSIM” model was a retrospective
counterfactual analysis of US grain storage policy.188

143. One of the most recent applications of the USDA “FAPSIM” model was to respond to
requests for both alternative projections and re trospective counterfactual analysis from the
Commission on the Application of Payment Limitations for Agriculture . These results, which have
been discussed in previous submissions by Brazil, used the FAPSIM policy framework.
189

144. According to the Commission Report (chaired by the Chief USDA Economist):

“Westcott and Price analyzed the effects of eliminating marketing loans on
production and prices of major crops over the period from 1998 through 2005. The

 185 Exhibit Bra-303 (John C. Beghin and Holger Matthey. “Modeling World Peanut Product Markets: A
Tool for Agricultural Trade Policy Analysis.” Center for Agricultural and Rural Development (CARD),
May 2003).
 186 Exhibit Bra-304 (John C. Beghin, Barbara El Osta, Jay R. Cherlow, and Samarendu Mohanty. “The
Cost of the US Sugar Programme Revisited,” Center for Agricultural and Rural Development (CARD),
March 2001).

187 See http://www.ers.usda.gov/data/sdp/view.asp?f=trade/92011/ and
http://www.ers.usda.gov/data/sdp/view.asp?f=trade/92012/.

188 Exhibit Bra-305 (Larry Salathe, J.Michael Pri ce and David Banker. “An Analysis of the Farmer
Owned Reserve Program 1977-82.” American Journal of Agricultural Economics, February 1984, p. 1-11).
 189 See Brazil’s 7 October Oral Statement, paras. 31-34.

baseline used for the analysis was the USDA 2000 baseline, which did not anticipate
the sharp decline in cotton price for 2001 crop year.”190

“The Commission requested that the above study be updated to take into account the
sharp decline in cotton prices for the 2001 crop (Westcott). The updated analysis
indicated that elimination of marketing lo an benefits for the 2001 crop would have
lowered cotton acreage by 2.5 to 3.0 million acres or 15-20 per cent and reduced rice
acreage by 300,000 acres or 10 per cent.”
191
145. Finally, there are literally hundreds of othe r academic and government studies using a variety
of models calibrated on retrospective data that analyze policy questions. All computable general
equilibrium models use this approach, and most academic partial equilibrium simulation models do so
as well.

146. Concerning the second question, it is difficult to determine the reliability of the analysis of
potential (i.e., future) policy outcomes because – by definition – the baseline approach will not mirror
exactly the actual conditions. This is why base line projections use long-term data to even out
inevitable fluctuations in commodity market developments. Similarly, the but for analysis of a
retrospective study attempts to simulate what woul d have (but did not actually) occur with different
policy assumptions. However, the retrospective analys is has the benefit of using actual market data
and not projected benchmarks. It is, of course, possible to critique selected portions of the FAPRI
baseline projections if they are treated as forecast s of the future values for prices and quantities.
Against this benchmark, the FAPRI projections – like all others – will sometimes miss future
movements in commodity markets.

147. One measure of the reliability of the FAPRI b aseline is that the FAPRI model continues to be
relied upon regularly by a variety of US government and US industry organizations to guide decisions
on important policy questions. USDA even provided the FAPRI economists with their highest award
based on the 2002 baseline analysis.
192 In addition, FAPRI economists over the years have performed
checks to ensure that the FAPRI model is as reliab le as possible. For example, observed (actual)
planted acreage has generally responded in the dir ections the model projects when the loan rates and
other driving factors are relatively constant. In addition, FAPRI constantly examines the internal
consistency of the model and its economic logic when compared to actual market events and
conditions and makes appropriate adjustments, as necessary.

148. Concerning the third question, there are a number of other potential simulation modelling
frameworks that can be used as instruments to respond to retrospective counterfactual policy
questions. The USDA FAPSIM model is one such framework. It was used, for example, in the
Westcott/Price analysis of the effect of removing all marketing loan payments for MY 2000 and MY
2001.
193 However, the FAPSIM model does not have a full international cotton model as used in the

 190 Exhibit Bra-276 (Report of the Commission on the Application of Payment Limitations for
Agriculture, August 2003, p. 124).
 191 Exhibit Bra-276 (Report of the Commission on the Application of Payment Limitations for
Agriculture, August 2003, p. 125). See further: Westcott, Paul C. “Marketing Loans and Payment Limitations.”
Presentation to the Commission on the Application of Payment Limitations for Agriculture, May 2003 as cited
in the Payment Limitations Report; Exhibit Bra-222 (West cott, Paul C., and J. Michael Price. Analysis of the
US Commodity Loan Program with Marketing Loan Provisions. USDA, ERS Agricultural Economic Report
801, April 2001); Westcott, Paul and Mike Price. Estimates done at the request of the Commission on the
Application of Payment Limitations for Agriculture u tilizing the Economic Research Service’s FAPSIM model,
2003 as cited in the Payment Limitations Report.
 192 Brazil’s 9 September Further Submission, Annex I, para. 4 (last sentence).
 193 See Brazil’s 7 October Oral Statement, paras 32-33.

FAPRI/CARD framework, and thus would be less appropriate for dealing with the world price aspects
of this case. In general, for specific questions about how quantities and prices of upland cotton would
have been different but for US upland cotton subsid ies, the appropriate models with which Brazil is
familiar would all follow the same basic simulation framework as the FAPRI model.

167. How does Brazil react to Exhibit US-44? BRA

Brazil’s Answer

149. The United States claims that Exhibit US -44 demonstrates the “disconnect between the
decline in cotton prices … and the incen tive offered by US marketing loans.”
194 But all that Exhibit
US-44 does is to show monthly A-Index prices for upland cotton. These prices, as with other primary
agricultural commodities, move up and down with larg e swings. This exhibit provides no insight into
the link between US producer’s decisions to k eep planting upland cotton as upland cotton prices
(including A-Index prices) move up and down. Furthe r, the quantity of subsidies provided by the US
marketing loan is a function of the difference between the loan rate (currently 52 cents per pound) and
the adjusted world price (AWP) for upland cotton – not the A-Index price. 195 As the Panel can see
from the chart provided in response to Question 181, the AWP is consistently and considerably below
the A-Index.

150. A relevant graph to examine the causal link between US subsidies and US production is one
with a horizontal line representing the marketing loan rate, and which compares that line against the
AWP, which is the basis for the payment of marketing loans. This is illustrated in the graph below:
196

Average World Price and Loan Rate
0
10
20
30
40
50
60
06/
08/
19
99
06/
10/
19
99
06/
12/
19
99
06/
02/
20
00
06/
04/
20
00
06/
06/
20
00
06/
08/
20
00
06/
10/
20
00
06/
12/
20
00
06/
02/
20
01
06/
04/
20
01
06/
06/
20
01
06/
08/
20
01
06/
10/
20
01
06/
12/
20
01
06/
02/
20
02
06/
04/
20
02
06/
06/
20
02
06/
08/
20
02
06/
10/
20
02
06/
12/
20
02
06/
02/
20
03
06/
04/
20
03
06/
06/
20
03
ce
nts
pe
r
po
un
d
Difference Between Loan Rate and Average World Price

151. This graph shows first what the Exhibit US-44 neglected to illustrate – that except for a short
period in MY 2000, the AWP was below the loan rate throughout all of MY 1999-2002, and that
marketing loan payments corresponding to the diffe rence between the AWP a nd the loan rate were

 195 See Brazil’s Answer to Question 180.
 196 The data is based on the data collected for Brazil’s Answer of Question 181, see Exhibit Bra-311.
 Cents per pound

made. All of the dark area below the 52 cents line represents marketing loan subsidies paid to US
upland cotton producers. This illustrates US producer s’ indifference to market prices. To paraphrase
the United States, the line of 52 cents per pound illu strates a “disconnect,” but it is not one between
the A-Index price and US subsidies. Rather, th is graph illustrates the disconnect between the AWP
(and more importantly, the US price received by upland cotton producers) and the acreage and
production response of US producers: even when pr ices go to record lows, US producers’ revenue is
insulated from the decline. This revenue not only kept them in production, but it allowed them to
increase production during MY 1999-2001. And more re markably, it kept many of the producers
planting 14.2 million acres of cotton when the AW P was near record lows in the period from
February-June 2002. These low prices during the crucial planting decision period are clearly reflected
in the figure above. 197 It was this period that USDA economists Westcott and Price examined and
found that but for the marketing loan payments in MY 2001, US upland cotton production would be
2.5-3 million bales less than it actually was.

152. Thus, this graph helps explain why there is such a limited response from high-cost US upland
cotton producers to changes in upland cotton prices. Of course, the graph above does not represent
the full amount of revenue supplied by all US s ubsidies. Other programme features and other
programmes provide additional subs idies that cause the effective per unit revenue guarantee to be
much higher than the loan rate.

153. If the purpose of Exhibit US-44 was to demonstrate the absence of a link between US upland
cotton production (and price suppression) and US marke ting loan payments, then it flies in the face of
the findings of USDA’s own economists. Brazil h as referenced the testimony of USDA’s chief
economist, among many other USDA economists, w ho have candidly acknowledged the enormous
production and price effects that US marketing loan subsidies have on stim ulating and maintaining
large amounts of US upland cotton production.
198

170. Brazil quotes a report that states that a 10 per cent increase in soybean prices reduces
upland cotton acreage by only 0.25 per cent (Brazil's 7 October oral statement, para. 27). Could
Brazil indicate if this analysis is done on a short-run basis or a long-run basis? BRA

Brazil’s Answer

154. The authors of the USDA study cited by Brazil – USDA economists Westcott and Meyer –
use a “modified version of the estimated elasticities from Lin et al.,”199 which Westcott/Meyer refer to
as a technical improvement. The original study by Li n et al. appears to estimate short to medium-run
elasticities. Lin et al. use what they describe as “new supply response elasticities . . . in short-term,
acreage forecasting applications”. 200 For the estimation of the elasticities themselves, Lin et al. use
two models that are solved by regression analysis of the effect of expected relative price changes
between crops and the resulting acreage effects in the two following years.201

 197 See Brazil’s 7 October Oral Statement, paras. 32-33.
 198 Brazil’s 9 September Further Submission, paras. 148-161. See further Brazil’s 7 October Oral
Statement, paras 31-34.
 199 Exhibit Bra-275 (“US Cotton Supply Response Under the 2002 Farm Act,” Westcott and Meyer,
USDA, 21 February 2003, p. 9). Brazil is not in a position to specify in which sense the estimated elasticities
are modified.
 200 Exhibit Bra-306 (“Supply Response under the 1996 Farm Act and Implications for the US Field
Crops Sector,” Lin et al., USDA, July 2000, p. 2).
 201 Exhibit Bra-306 (“Supply Response under the 1996 Farm Act and Implications for the US Field
Crops Sector,” Lin et al., USDA, July 2000, p. 9-16).

155. Lin et al. present their results in Table 21 of their study.
202 It appears that the resulting
estimates of the acreage pr ice elasticities are short or medium -term elasticities (acreage reaction one
to three years in the future), and that the adaptations by Westcott and Meyer are also short to medium-
term elasticities.203

172. Please estimate the price effect, in cents per pound, of the growth in the US retail
market which it is said has directly contributed to strengthening world cotton prices. US

Brazil’s Comment

156. Brazil emphasizes that its claims under Article 6.3(c) of the SCM Agreement revolve around
the present and threatened suppression of prices. Thus, whether world upland cotton prices are
strengthening or weakening is irrelevant to the question whether those prices would have been higher
(at any price level) but for the US subsidies.

176. With reference to Figure 4 of Brazil's Further Submission, how does Brazil explain the
apparent decrease in prices in 2001 and the increa se of the A-Index in recent months, despite
the continued use of US subsidies on upland cotton? BRA

Brazil’s Answer

157. Brazil has consistently argued that over the period of investigation (MY 1999-2002), the US
subsidies caused price suppression that was significa nt when A-Index prices declined and when A-
Index prices increased both during and near the e nd of the period of investigation in mid-2003. 204 As
Brazil explained at the meeting on 7 October 2003, A -Index prices rise and fall for a variety of supply
and demand reasons. 205 One of the reasons that prices fell as low as they did in MY 1999-2001 and
did not rise as far as they should have in MY 2002 was due to the US subsidies. This is best
illustrated in Figure 14, set out in Brazil’s 9 September Further Submission and reproduced below:

 202 Exhibit Bra-306 (“Supply Response under the 1996 Farm Act and Implications for the US Field
Crops Sector,” Lin et al., USDA, July 2000, p. 60).
 203 Due to the adaptations, the elasticities reported by Westcott and Meyer are not identical to those
reported by Lin et al.

204 Brazil’s 9 September Further Submission, paras. 83-89 (discussing definition of “price
suppression”); paras. 92-93 (discussing “causation”).
 205 Brazil’s 7 October Oral Statement, paras. 18-28.

Figure 14206
Price Suppression MY 1999-2002
40
45
50
55
60
65
70
1 999 2000 2001 2002
marketing year
A-Index w/ out U.S. Subsidies
A-Index

158. This figure represents Professor Sumner’s find ings, but a similar figure could be reproduced
to reflect other levels of price suppression – incl uding the 33.6 per cent suppression of US prices
found by USDA’s own economists for MY 2001, 207 as well as the ICAC and other international
organizations’ findings of price suppression caused by US subsidies for upland cotton. 208 Professor
Sumner’s findings indicate that during MY 1999-2002, there were a number of global supply and
demand factors (including $12.9 billion in US subsid ies) that caused upland cotton prices to fall and
remain at low levels compared to historical pric es throughout the period of investigation. The upper
line on the graph reflects the contribution of the $12.9 billion in US subsidies to keeping A-Index
prices suppressed. The area below the upper line and above the darker area reflects the amount of
price suppression. In other words, regardless of whether market prices rise or fall, there is always a
price-suppressive effect.

159. With respect to the Panel’s specific question re garding the effects of US subsidies in the latter
half of MY 2002, the record shows that US and A-Index prices rose in MY 2002 for a number of
supply
and demand factors – many of which also impacted the market during the fall of prices in MY
1999-2001. The most important supply factor was the decline in production of 1.71 million tons in
MY 2001-2002 by non-US producers such as the Afri can Franc zone, Southern Africa, East Asia,
South Asia, and the former Soviet Union countries. 209 The evidence suggests that many of these
producers could not maintain existing levels of pr oduction at lower prices that existed in MY 2001
and MY 2002. For example, Christopher Ward te stified that even though Brazilian Mato Grosso
producers had extremely high yields and low costs, they were forced by low prices to cut their
production by 34 per cent in 2001 and by 25 per cent in 2002, compared with 2000 production
levels.
210 Similarly, Mr. Ibrahim Malloum, President of CottonChad, testified that lower prices in MY

 206 A-Index prices with and withou t subsidies are based the baseline and the change from the baseline
as reflected in the results of Professor Sumner’s simulation model. See Brazil’s 9 September Further
Submission, Annex I, Table I.5a.
 207 Brazil’s 7 October Oral Statement, para. 32-33.
 208 See Brazil’s 9 September Further Submission, paras. 148-162 (discussing price suppressing effects
of marketing loan payments including Figure 11 at paragraph 160), para. 190 (NCC estimates of 3 cent per
pound price suppressing effect from only the GSM 102 program), paras. 200-213 (various international studies),
paras. 214-232 (Professor Sumner’s analysis). See also Brazil’s 7 October Oral Statement, paras 31-34
(discussion of Westcott/Price studies of price suppressing effects of marketing loans in MY 2000 and MY
2001).

209 Exhibit Bra-208 (“Cotton: World Statistics,” ICAC, September 2003, p. 28-29).
 210 Exhibit Bra-283 (Statement of Christopher Ward – 7 October 2003, para. 6).

2001-02 meant that Chadian production fell because producers could not afford inputs such as
fertilizer.
211

160. For US producers at the time of planting for the MY 2002 crop – between January-April 2002
– the AWP and US price received by US producers were near record lows.
212 Faced with an annual
39 cents per pound differential between total costs and such prices in MY 2001, US cotton producers
still planted 14.2 million acres of upland cotton for MY 2002. 213 The resulting US production in MY
2002 was 16.73 million bales (or 3.64 million metric tons). This is an extraordinary amount of
acreage and production given the huge gap betw een US producers’ costs and expected market
revenue. It is estimated that without US subs idies, US production in MY 2002 would have been
approximately 1.92 million metric tons, or 1.72 milli on metric tons less than what US upland cotton
farmers actually produced. 214 The effects of this additional 1. 72 million metric tons of subsidy-
generated production can be judged from the effects of an actual decline in world supply of 2.365
million metric tons215, which contributed to an increase in A-Index prices of 33 per cent between MY
2001 and MY 2002. 216 If an additional 1.72 million metric tons of US production were taken out of
world supply, prices would have been even higher. Professor Sumner has indicated that A-Index
prices in MY 2002 would have increased by 17.70 per cent absent the US subsidies. 217 Thus, the
effect of the US subsidies in MY 2002 – even as prices increased – was to suppress prices.

178. The Panel notes Exhibit US-63. Could the US please provide a conceptually analogous
graph concerning US export sales during the same period? US

Brazil’s Comment

161. Brazil offers a conceptually analogous figur e to Exhibit US-63 concerning US and rest-of-
the-world export sales. The figure below shows the relative changes in US and non-US exports as
compared to the previous year for the period MY 1997-2002, based on data covering the period MY
1996-2002.
218

 211 Chad’s 8 October Oral Statement (Statement of Ibrahim Malloum, para. 7).
 212 See Brazil’s Answer to Question 167.
 213 Exhibit Bra-4 (“Fact Sheet: Upland Cotton,” USDA, January 2003, p. 4).
 214 Brazil’s 9 September Further Submission, Annex I, Table I.5a applying the percentage change.
 215 Exhibit Bra-208 (“Cotton: World Statistics,” ICAC, September 2003, p. 4).
 216 Exhibit Bra-208 (“Cotton: World Statistics,” ICAC, September 2003, p. 106).
 217 Brazil’s 9 September Further Submission, Annex I, Table I.5a.
 218 Exhibit Bra-307 (Change in US and World Exports in Percent). The exhibit also contains the
underlying data for the figure with the sources being described in more detail in Exhibit Bra-302 (Revised and
Extended Data on Article 6.3(d) claim).

Percent Chan ge in
-60
-40
-20
0
20
40
60
80
1997 1998 1999 2000 2001 2002
marketing year
ch
an
ge
in
pe
rc
ent
fro
m
pr
evi
ou
s
ye
ar
United States
Rest of the World

162. The figure demonstrates that US exports in creased in every year except for MY 1998, during
which the United States claims it suffered a major cr op failure. In addition, US exports increased in
all years, except for MY 1998, more than exports from non-US producers, which since MY 2000 even
decreased continuously. The figure demonstrates that the United States gains world market share,
with its own exports increasing since MY 1999, at th e expense of non-US exports, which have fallen
since MY 2000.

163. In sum, this figure supports Brazil’s claim of serious prejudice under Articles 5(c) and 6.3(d)
of the SCM Agreement. It also supports Brazil’s claim of serious prejudice under Articles XVI:1 and
3 of GATT 1994 because the USshare of world export tr ade increased, in significant part, by the US
subsidies at the expense of other lower-cost producers.

179 Could Brazil comment on the argument that decoupled payments and other subsidies to
upland cotton are largely being capitalized into land values and that removing these subsidies
would reduce the cost of production of upland cotton producers (US 7 October oral statement,
para. 48). What would be the net effect of these adjustments? BRA

Brazil’s Answer

164. A February 2003 study by ERS economists estimated that “decoupled” payments lead to an
increase of about 8 per cent in US farmland values.
219 A more comprehensive ERS 2001 report
estimating the regional effects of all subsidies (not just decoupled subsidies) on land values found that
land values increased by 16 per cent in the regions wh ere upland cotton is grown. This is shown in
the following chart:220

 219 Exhibit Bra-308 (“Decoupled Payments: Household Income Transfers in Contemporary US
Agriculture,” ERS Agricultural Economic Report No. 822).

220 Exhibit Bra-309 (Barnard C., Nehring, R., Ryan, J., Collender, R. “Higher Cropland Value from
Farm Programme Payments: Who Gains?” Economic Research Service. USDA Agricultural Outlook November
2001, p. 29).
 Change in percentage from previous year

ERS/USDA Estimated Cropland Value Attributable to
Commodity Programme Payments
Region
Total Value of Land
Harvested in 8
Programme Crops
Estimated Value
Attributable to
Commodity
Programme
Payments
Per cent of Value
Attributable to
Commodity
Programme
Payments
Prairie Gateway 41.70 9.40 23.00
Mississippi Portal 17.30 2.70 16.00
Fruitful Rim 21.60 2.20 10.00
Southern Seaboard 18.20 1.80 10.00
Eastern Uplands 4.60 0.50 10.00
Total 103.40 16.60 16.05

165. Brazil notes that neither of these studies provid es an estimate of the percentage of each dollar
of “decoupled” or total subsidy payments that are capitalized into land values. However, an
August 2003 study by ERS economists indicates that PFC payments in MY 1997 resulted in an
increase of land rents by 34-41 cents of per PFC dollar.
221 Thus, contrary to the premise of the
Panel’s question, this evidence suggests that PFC payments are somewhat, but not “largely
capitalized” into land rents.

166. There would be only a minimal impact on tota l costs of production for upland cotton farmers
from the removal of both “decoupled” and total US subsidies. For the allegedly “de-coupled”
payments referred to in the February 2003 ERS st udy, the impact of an 8 per cent reduction in land
values translates into a decrease in total costs of US upland cotton producers by less than one per cent
(0.75 per cent).
222 If the effects on increased land values from all subsidies are taken into account
(using the 2001 ERS regional study), then US upland cotton producers’ costs would have declined
between MY 1999-2002 by only 1.49 per cent.
223 In response to the Panel’s question, the net effect of
these tiny adjustments throughout MY 1999-2002 on th e very wide cost-revenue gap and the other
costs of production analysis conducted by Brazil in its various submissions is obviously minimal.

167. Finally, the United States at paragraph 48 of its 7 October Oral Statement criticized Professor
Sumner’s analysis for allegedly not factoring into his estimates the effect of direct payments being
capitalized into increased land rents. The US criticis m is misplaced. Professor Sumner’s model used
very low estimates of production incentives for ever y dollar of PFC payments (only 15 per cent) and
direct payments (only 25 per cent).
224 By taking a very conservative approach for these direct
payments, Professor Sumner’s analysis more than allows for the effects these payments have in
increasing land values. This can be illustrated by using the 34-41 per cent results of the August 2003
land rent study referred to above. The results of this study suggest that 66-59 cents of each PFC
dollar are not reflected in increased rents. This leaves more than enough residue from each PFC and
direct payment dollar to account for the only 15-25 per cent production effects for PFC/direct
payments found by Professor Sumner.225

180. Please describe the precise formula as to how USDA determines the "adjusted world
price" using the Liverpool A-Index, the NY futures price and any other relevant price
indicators. Please submit substantiating evidence. BRA, US

 221 Exhibit Bra-310 (“The Incidence of Government Program Payments on Agricultural Land Rents:
The Challenges of Identification”, Roberts, Kirwan, and Hopkins, August 2003, American Journal of
Agricultural Economics, p. 767.).
 222 Exhibit Bra-7 (ERS Data: Commodity Costs and Returns).
 223 Exhibit Bra-7 (ERS Data: Commodity Costs and Returns).
 224 Brazil’s 9 September Further Submission, Annex I, para. 48.
 225 Brazil’s 9 September Further Submission, Annex I, para. 48.

Brazil’s Answer:

168. Brazil looks forward to rece iving a detailed description of the complicated calculation of the
adjusted world price from the United States in reply to this question. Brazil has set forth a brief
description of the calculation of th e adjusted world price in paragraph 73 of its 24 June First
Submission, and will elaborate to the best of its understanding.

169. The details of the complicated calculation me thod for the adjusted world price are laid down
in 7 CFR 1427.25.
226 The weekly Cotton Outlook published by Cotlook Ltd. provides a somewhat
simpler description of the process. Exhibit Bra-51 includes the Cotton Outlook description of the “US
Pricing Mechanism”, including the calculation of the adjusted world price for the week of
31 January 2002.227

170. The descriptions shows that the adjusted wo rld price is calculated based on the A-Index from
which a total adjustment factor is subtracted, thus:

The Adjusted World Price
 (AWP) is calculated from CIF North Europe quotations,
adjusted for shipping, location and quality differentials. The Shipping Differential is
derived from the average over the preceding 52 weeks, or as many of that number of
weeks for which quotations are available, of the difference, calculated from
Thursday’s values only, between the average of the Memphis and California/Arizona
CIF North Europe quotations, and the Middling 1-3/32” (31-35) domestic spot market
average. However, the Shipping Differentia l in any week may not fall below, or rise
above 115 per cent, of an assessed actual transportation cost (now 12.9 cent). A
further discount, the Course Count Adjustment
, is applied by reference to the amount
by which the World Quality difference exceeds the appropriate Loan Quality
Difference. It applies to cotton of any grade stapling 1-1/32” or shorter, and to
selected lower grades in longer staples.
228
171. Brazil also notes that under certain conditions , the Secretary of Agriculture is entitled to
reduce the adjusted world price belo w the result of this calculation – th e so-called Step 1 adjustment.
In such circumstances, the adju sted world price would be reduced by a maximum of the difference
between the A-Index and the average of the cheap est US Middling 1-3/32” CIF North Europe quotes
– thus, the amount by which the US price quotes exceed the average of the fi ve cheapest price quotes
worldwide. Such a downward adjustment would increase the amount of marketing loan payments that
US upland cotton farmers receive and help close the cost-revenue gap that US producers face.

181. Please provide a side-by-side chart of the w eekly US adjusted world price, the Liverpool
A-Index, the NY futures price, and spot market prices from 1996-present. What, if anything,
does this reveal? BRA, US
Brazil’s Answer

172. In Brazil Bra-311, Brazil provides a side-by-side chart of the weekly US AWP, the A-Index,
the nearby New York futures price, the average US spot market price and prices received by US
producers from January 1996 to the present. Th e figure below shows the respective price
developments over this period. Exhibit Bra-311 also contains a colour copy of this chart.
229

 226 Exhibit Bra-36 (7 CFR 1427.25).
 227 Exhibit Bra-51 (Cotton Outlook, 1 February 2002, p. 16).
 228 Exhibit Bra-51 (Cotton Outlook, 1 February 2002, p. 16) (emphasis in original).
 229 The data has been obtained from the Cotton Outlook published by Cotlook, Ltd. in Liverpool.

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

173. The figure demonstrates that the A-Index pri ce is consistently 12-14 cents per pound higher
than the adjusted world price (“AWP”), which constitutes the basis for the US marketing loan
payments. The average difference between both prices over the 1996-present period is 13.76 cents
per pound. As expected, both prices move in parallel. Further, both prices follow the price trends that
originate from the New York futures market or at leas t move in parallel to those prices. There is also
a close linkage between the average US spot market price and the New York futures and A-Index
prices.

174. The figure further demonstrates that the New York futures prices a nd the average US spot
market prices are usually more volatile than the A-Index and AWP prices. Thus, any rapid increases
or decreases in the New York futu res prices will not necessarily be reflected to the same extent in
AWP or prices received by US producers – the pric es of which marketing loan and counter-cyclical
payments, respectively, are triggered. They may just be a temporary phenomenon.

175. In sum, the price movements support Brazil’ s argument that New York futures, US and
international prices for upland cotton are closely linked, and that price movements and trends
originating from the US market are closely tracked by prices on the world markets.
230

176. That US and international – and indeed Brazilian – prices closely track each other
demonstrates that production and price effects from the US subsidies on the US market are
transmitted to the international upland cotton market and to third country markets such as the
Brazilian market or markets where Brazil exports its upland cotton. The Panel will remember that the
A-Index is composed of price quotes from 16 di fferent upland cotton export markets around the
world.
231 Thus, if USDA studies like those undertak en by Westcott and Price establish price-
suppressing effects of the US subsidies for the US market, those effects will also occur on the

 230 See Section 3.3.4.9 of Brazil’s 9 September Further Submission, para. 233-250.
 231 Brazil’s 9 September Further Submission, Annex II, para. 24.

international and third country markets. The para llelism in the price movements establishes the link
between price suppression in the US and international markets and other third country markets.

182. Please explain why the US can be taken to be price leaders, or price setters, (and not just
takers) when US producers receive large subsid y payment to support the difference between
world prices and their own costs? BRA

Brazil’s Answer:

177. The Panel’s question focuses first on “US produ cers” who receive large subsidies. One of the
premises of this question is that US producers receive subsidies that account for the difference
between world prices and their own costs. This is not entirely correct. US producers receive what the
USDA refers to as “Average price received by US producers”. During the MY 1999-2002 period, this
US producer price was on average 9.2 cents per pound, or 17.6 per cent, below the world A-Index
price.
232 Other than the first month of marketing year 1999, the A-Index price was always higher than
the US price received by US producers between MY 1999-2002. The lower prices paid to US
producers are partly explained by the transportation costs of upland cotton from the United States to
foreign markets, where most US upland cotton is marketed. However, as the Panel’s question
suggests, the total revenue received by US produc ers includes marketing loan payments that are a
function of the set loan rate (52 cents in MY 20 02) and the adjusted world price that itself is
determined in part by reference to the A-Index prices.

178. During MY 1999-2002, individual US producers of upland cotton did not “set” or “lead” A-
Index prices. Most US producers were isolated from the effects of market price during MY 1999-
2002. As the Panel’s questions implies, on average, US producers were generally able to cover their
costs based on a combination of market revenue and the large subsidies they received during MY
1999-2002.
233 The guaranteed subsidies and price suppor t at high price levels ensured a revenue
stream that left them largely indifferent to market prices throughout the entire period of investigation.

179. The Panel’s question further asks how the Unite d States could be a “price setter” in the world
upland cotton market. Individual US exporters of US upland cotton do not “set” or “control” the
price of upland cotton. In a world-wide market such as the upland cotton market, no single private
trader has the market power (in an anti-trust sense) to “set” the world price. As Andrew Macdonald
testified, prices of upland cotton are discovered hourly and daily by traders in the futures, spot, and
forward delivery markets based on key supply and demand factors.
234 Nor has Brazil argued that the
US leads prices down by initiating a price war, as may occur with industrial products.

180. What Brazil has argued is that the United States is a leading driver of the world upland cotton
market to the extent it suppresses the price of upla nd cotton. The United States can do this because of
its large guaranteed production and di rect subsidies that inject a near permanent stream of large US
production and supplies into the world market. US export subsidies drive the world market in the
sense that they stimulate the demand for high-cost US upland cotton at the expense of other world
producers. Further, its size (by far the largest e xporter and second largest producer), its transparency,
which in turn plays a major role in the price discovery in the New York futures market, and the ability
of US exporters to use the Step 2 and GSM 102 tools to market US upland cotton, allow it to suppress
world prices.
235 Only by taking these price-suppressing factors into account could it be said that the
United States “leads” world prices.

 232 See Brazil’s Answer to Question 181 for data on the A-Index prices and the prices received by US
producers.
 233 See Brazil’s Answer to Questions 125 (2) (c) and 163.
 234 Brazil’s 9 September Further Submission, Annex II, paras 11-13, 15-25 and 38-42.
 235 Brazil’s 9 September Further Submission, paras. 134-145; Annex II, paras. 38-42 and Chad’s 8
October Oral Statement (Statement of Ibrahim Malloum), para. 13-14.

181. For example, the large size of the US pr oduction, which represents approximately 20 per cent
of total world supply annually, is a key fact or in driving and influencing world prices.
236 Shifts in US
production caused by good or bad US weather influence total world supply and create an impact on
world prices.
237 In much the same way as US weather play s a role in the discovery of world prices
(by reducing US and, thus, world stocks), continue d high levels of US produ ction generated by US
subsidies suppressed world prices throughout the period of investigation by increasing world supplies.

182. Further, the dominant (over 40 per cent) export market share of the United States coupled
with the Step 2 and GSM 102 export subsidies creates a further suppressing effect on world prices.
238
These export subsidies allow US exporters to price their upland cotton below the prices of most other
world producers because Step 2 gives them (not US producers) the difference between the lowest US
price and the A-Index price (the average five lowest prices in the world market). 239 These subsidies,
along with the domestic production and direct paymen t subsidies, have perm itted exporters of high-
cost US upland cotton to increase US world mark et share even as prices plunged throughout MY
1999-2001. Thus, while individual US exporters may not have “set” or “led” prices, the US subsidies
allowed these exporters to continue marketing high-cost US cotton at whatever market price was
determined by global supply and demand conditions.

K. ARTICLE XVI OF GATT 1994

183. Why does Brazil believe that the appropri ate "previous representative period" is the
term of the previous Farm Bill, MY1996-2002? (Brazil's further submission, para. 282) BRA

Brazil’s Answer:

183. The Panel’s question has stimulated a re-eva luation by Brazil of the appropriate “previous
representative period” in relation to Article XVI:3. Brazil agrees with the US arguments made in the
EEC – Wheat Flour GATT dispute that the appropriate “previous representative period” in
Article XVI:3 should be one in whic h trade patterns have not been distorted by subsidies. In that
dispute, the United States correctly argued:

…that the three most recent calendar years could not be used as the representative
period in the case since, given the distortion of trade patterns resulting from the heavy
use of export subsidies by the EEC, it di d not constitute a period during which
“normal market conditions existed.” There was ample GATT precedent for selecting
a period when subsidization was not unduly affecting the market shares. During the
1995 Review Session it was agreed that in de termining what is an equitable share of
world trade, the CONTRACTING PARTIES s hould not lose sight of the “fact that

 236 Brazil’s 9 September Further Submission, para. 135.
 237 Consider the following market reports: Exhibit Bra- 312 (Cotton Outlook, 4 October 2002, p. 3
(“Current developments on the production side – though perhaps not the consumption side – would seem to be
constructive for prices. Yield potential in several parts of the world appears to be diminishing as a result of
unfavourable weather – including storm systems affecting open cotton in parts of the United States.”)); Exhibit
Bra-312 (Cotton Outlook , 27 September 2002, p.3 (“Tropical Storm Isidore drove New York futures to higher
levels earlier this week, on the grounds that its predic ted path would bring heavy rainfall across a huge swathe
of the south eastern United States and the Memphis Territory, and thus damage yield and quality prospects…
[D]espite the adverse weather, the US will continue to need to make inroads into what remains a significant
exportable surplus.” )); and Exhibit Bra-312 (Cotton Outlook, 7 June 2002, p. 3 “Many eyes are directed
towards developments in West Texas, where rain appear s to have fallen too heavily in places where it is less
needed and insufficiently in the dryland areas where soil moisture is lacking.”)).
 238 See Brazil’s 9 September Further Submission, paras. 139-142.
 239 Chad’s 8 October Oral Statement (Statement of Ibrahim Malloum), para. 14; Brazil’s 9 September
Further Submission, Annex II, paras. 31, 49-53.

the export subsidies in existence during the selected representative period may have
influenced the share of the trade obtained by the various exporting countries.”
(GATT, BISD 3
rd Supplement, paragraph 19, page 226). Then, in 1960, the
CONTRACTING PARTIES adopted a Panel Re port which dealt with notification of
subsidies, in which it was agreed that an analysis of the effect of a subsidy should
include statistics “… for a previous representative year, which were possible and
meaningful, should be the latest period pr eceding the introduction of the subsidy or
preceding the last major change in the subsidy.” (GATT, BISD 9 th Supplement,
Annex II(b)(ii), page 194)…. Thus, it was necessary to examine a period of which
preceded the adoption of the EEC’s subsidy syst em in order to assure that the trade
distorting effect which the EEC system had already had on world markets was
minimized as a factor in judging “equitable share.”
240
184. There has been no period since the 1930s when US producers of upland cotton were not
subsidized.241 Since the 1980s in particular, US upland cotton producers have been guaranteed very
high levels of government payments by a variet y of subsidies, including the marketing loan
programme that began in MY 1986. The revenue guar antee that these subsidies provide has locked in
large amounts of apparently permanent high-cos t US upland cotton production and exports. These
distortions exist even in those years in which actual quantities of payments under the programmes are
minimal due to higher prices. This is because the subsidies provided to high-cost producers in years
of low prices mean they stay in business to c ontinue to produce upland cotton also at times when
subsidies fall due to increased prices. The rela tively small planted acreage and production response
by US producers to market prices over many year s reflects the effects of this guaranteed US
government revenue.

185. In view of the US arguments in EEC – Wheat Flour and the long-term distortions in the US
production and exports caused by US subsidies, one appropriate “representa tive period” would be a
simulated period in which no subsid ies were provided. The Panel would examine the question: what
would be a Member’s share of world trade if it recei ved no subsidies? This qu estion, of course, is a
function first of the amount of acreage and produc tion, and ultimately exports attributed to the
subsidies. The Panel is fortunate to have the benefit of very recent 2003 analysis by USDA
economists Westcott and Price, who estimated that up to 3 million US acres of upland cotton
production would have not been planted in MY 2001 if no marketing loan payments were made that
year. These 3 million acres represent 19.36 per cent of US upland cotton acreage in MY 2001.
242 A
reduction by this amount would imply a reduction in US production of 3.79 million bales for MY
2001.243 Consequently, US exports would also fall by about 3.79 million bales, representing 34.74 per
cent of US exports in MY 2001. 244 The implied export effects from the Westcott/Price study are very
similar to those found by Professor Sumner, who estimated the export-increasing effects of the
marketing loan programme in the comparable period to be 29.67 per cent and the effects of all US
subsidies to increase US exports by 48.16 per cent.245

186. The record provides an example of what the US share of world export trade in upland cotton
would be in a marketing year in which production and exports fell by amounts similar to those
estimated by Professor Sumner and Westcott/Price. In MY 1998, 20 per cent of US upland cotton

 240 GATT Panel Report, EEC – Wheat Flour, para. 2.8 – 2.9 (emphasis added).
 241 See Brazil’s 9 September Further Submission, para. 269.
 242 Exhibit Bra-4 (“Fact Sheet: Upland Cotton,” USDA, January 2003, p. 4).
 243 19.36 per cent of 19.603 million bales as reported in Exhibit Bra-4 (“Fact Sheet: Upland Cotton,”
USDA, January 2003, p. 4).

244 Exhibit Bra-4 (“Fact Sheet: Upland Cotton”, USDA, January 2003, p. 5).
 245 Brazil’s 9 September Further Submission, Annex I, Tables I.5d and I.5a. See paras. 17-18 and 75
for determining the comparable period.

acreage was abandoned and US harvested acreage fell by 2.8 million acres compared to MY 1997.
246
US production fell by 4.77 million bales and US exports fell by 3 million bales. As a result, US world
market share declined from 27.6 per cent in MY 1997 to 17.9 per cent in MY 1998. 247 This
considerable decrease in the US share of world ex port trade provides an approximation for the Panel
to assess what the equitable US share would be but for the US subsidies in MY 2001-2003. Thus,
MY 1998 is a useful representative period for the Panel to examine (in conjunction with Professor
Sumner’s and USDA economists Westcott/Price’s analysis).

187. An alternative representative period that the Panel could use for assessing the inequitable
nature of the US share of world export trade in upland cotton is the period MY 1994-96, during which
the average level of US subsidies fell to “only” $495 million per year.
248 The development of the US
world market share in MY 1994-1996 compared to MY 2001-2003 is shown in the graph below:249

U.S. Share of World Export Trade (MY1994-2003)
10
15
20
25
30
35
40
45
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
marketing year
pe
rce
nta
ge

188. During the period 1994-1996, US producers were generally able to cover their total costs of
production largely from market revenue. In th ese conditions, US world market share averaged
28.4 per cent.250 Yet, in conditions where market revenue plunged, costs of production and the cost-
revenue gap increased. Average MY 1999-2002 US s ubsidies were six times greater than the period
MY 1994-96, and US world market share increa sed to between 38 and 41.6 per cent in MY 2001-
2002. These record high levels of world market shar e were purchased with large increases in both the
quantity and level of guaranteed subsidies in MY 2001-2003 – huge marketing loan payments as well
as increases in revenue support of 10 cents a pound resulting from the 2002 FSRI Act. 251 Thus, even
though the period MY 1994-1996 was still heavily in fluenced by the revenue guarantees provided by
the numerous US upland cotton subsidy programmes, this period could be a representative period for
the Panel to examine for the purposes of making its “inequitable” share of world export trade findings.

 246 Exhibit Bra-4 (“Fact Sheet: Upland Cotton”, USDA, January 2003, p. 4-5).
 247 Exhibit Bra-302 (Revised and Extended Data on Article 6.3(d) claim).
 248 See Brazil’s 9 September Further Submission, para. 110, note 145 and Figure 2.
 249 Exhibit Bra-302 (Revised and Extended Data on Article 6.3(d) claim).
 250 Exhibit Bra-302 (Revised and Extended Data on Article 6.3(d) claim).
 251 Brazil’s 9 September Further Submission, para. 309.
 percentage

184. Why does Brazil believe that an "equitable share" is one which factors out all subsidies?
To the extent that domestic support a nd export subsidies are permitted by the Agreement on
Agriculture, why should they not be accepted as being normal conditions in analyzing an
equitable market share? (See Brazil's further submission, paras 288-289) BRA

Brazil’s Answer:

189. Brazil believes, for the reasons artic ulated by the United States in the EEC - Wheat Flour
dispute quoted in Brazil’s Answer to Question 183, that the appropriate representative period for
evaluating the inequitable share of share of world export trade is one in which no (or at most very
few) trade-distorting subsidies were provided. Selecting an earlier representative period where the
market share is not tainted with subs idies allows an assessment of whether a later market share is
tainted by subsidies. As the United States argued well in EEC – Wheat Flour, the inequitable nature
of a world market share can best be judged in comparison to what an equitable, i.e., non-heavily
subsidized world market share would be. This is consiste nt with Brazil’s arguments in paragraphs
288-289 of its 9 September Further Submission that a non-subsidized world market share of 17 per
cent is, by definition, an equitable share for the purpose of Article XVI:3. By contrast, a heavily
subsidized and subsidy-increased world market share of 41.6 per cent in MY 2002 is inequitable.
252

190. With respect to the second question, Brazil not es that although agricultural domestic and – to
a certain extent - export subsidies are not prohibite d, GATT Article XVI places clear limits to such
subsidization. Section A determines, for example, that subsidies must be notified when the operate
“directly or indirectly to increase exports of any product from, to reduce imports of any product into,
its territory”. More specifically, it established that the subsidizing Member must avoid causing
serious prejudice to the interest of other Members. Therefore, even purely domestic subsidies should
only be granted in a manner that does not affect the equilibrium of world trade that would be achieved
in their absence.

191. The GATT Article XVI obligations – especially those of the second sentence of paragraph 3 –
are primarily focused on the effects of subsidies th at operate to increase exports. Paragraph 2 places
particular emphasis on the fact that such subsid ies “may cause undue disturbance” to the “normal
commercial interests” of other Members. Large s ubsidies stimulating expor ts cannot be understood
not to cause “undue disturbance” that affect the “n ormal commercial interest” of other Members.
Otherwise, GATT Article XVI:3 would be stripped of any meaning. If, the starting point to an
analysis of an equitable share grandfathers subsidies that were being previously granted, such analysis
would start from an inequitable situation of equilibrium.

192. The term “equitable” is defined as something that is “characterized by equity or fairness; fair,
just.”
253 “Equitable” does not relate to something that is “legal” or “permitted.” Something that is
permitted may well be not equitable. The fact that certain subsidies are “permitted” does not
grandfather their effects and transforms them in to “normal conditions in analyzing an equitable
market share,” as put by the Panel in this question. The text of GATT Article XVI:3 requires that the
test of “equitable” market share be primarily and in trinsically linked with the concept of fairness.
Therefore, an “equitable” analysis of a fair equilibrium of market shares cannot be one that starts by
accepting as legitimate – or as “normal conditions” – the effects of widespread and expensive
subsidies that only a few Members can afford, to the expense of developing countries.

193. Brazil does not believe that subsidies representi ng 95 per cent of the value of a widely-traded
commodity product like upland cotton can ever be c onsidered to have been provided under “normal
conditions”. Nor can a dramatic in crease in absolute levels of s ubsidies coupled with the increase in

 252 See Brazil’s 9 September Further Submission, para. 288.
 253 The New Shorter Oxford English Dictionary, 1993 edition, p. 843.

the subsidization rate (and in absolute subs idy payments) during the period MY 1999-2002 over a
previous representative period be considered to be “normal conditions”. Further, when a more than
doubling of world market share by a WTO Member co incides with record low world prices, record
gaps between total costs and market revenue and r ecord amounts of that Member’s subsidies, the
subsidies cannot be considered to have been provided in “normal conditions”.

185. Please respond to the following quest ions concerning the relationship between
Article XVI:3 of the GATT 1994, the disciplines on export subsidies and domestic support in the
Agreement on Agriculture and the disciplines on prohibited export subsidies and actionable
subsidies in Articles 3, 5(c) and 6.3(d) of the SCM Agreement. BRA, US

(a) Are agricultural domestic support progr ammes challengeable under Article XVI:3 of
the GATT 1994? How, if at all, is the title of Section B of Article XVI ("Additional
provisions on export subsidies" (emphasis added)) relevant? How, if at all, are Articles
13 and 21.1, or any other provisions of the Agreement on Agriculture, relevant?

Brazil’s Answer

194. With respect to the first question, the answ er is that any domestic support programme that
grants “directly or indirectly” “ any form of subsidy which operates to increase the export of any
primary product” is covered by the second senten ce of Article XVI:3. All of the domestic support
subsidies challenged by Brazil in this case operate to increase US exports. Professor Sumner found
that each of the challenged US subsidies he examined had the effect of increasing US exports.
254

195. Because Article XVI, including Article XVI:3, d eals with serious prejudice to the interests of
another Member, the direct context for interpreti ng its provisions is found in Article 5 of the SCM
Agreement. Article 5 makes no distinction between subsidies contingent upon export and domestic
support subsidies. It provides that “[n]o 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”.
Articles 1 and 2 of the SCM Agreement in turn make no distinction between export and domestic
support subsidies.

196. The United States argues that the only subs idies governed by Article XVI:3 are export
subsidies.
255 This argument misreads Article XVI:3. A lthough the first sentence of Article XVI:3
refers to “subsidies on the export of primary products,” the second sentence provides:

“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 . . .”
The word "however" is important, as it signifies that the second sentence contradicts the first and does
not follow from it. Similarly, the use of the phrase “on the export of primary products” in the first
sentence of Article XVI:3 is quite different from the phrase “which operates to increase the export of”
in the second sentence of Article XVI:3. The notio n of “on the export” is analogous to the export
contingency set out in Article 3.1(a) of the SCM Ag reement. However, the phrase “which operates to
increase the export of” does not contain an export contingency requirement. Rather, it focuses on
effects – whether the subsidies have the effect of incr easing exports. Thus, read in light of the SCM
Agreement, the second sentence of Article XVI:3 en compasses a notion of export-related subsidies
that is far broader than subsidies that are “contingent upon export performance;” it includes as “export
subsidies” those that operate to increase exports.

 254 Brazil’s 9 September Further Submission, Annex I, Tables 5a-5g.

197. Indeed, the reading of the second sentence of Article XVI:3 as meaning “subsidies contingent
upon the export of products” would render Article XVI:3 a nullity. This is because under the US
interpretation, any form of subsidy covered by th e second sentence of Article XVI:3 would already be
deemed prohibited as an export subsidy under Article 3.1(a). Given Article 13 of the Agreement on
Agriculture, GATT Article XVI:3 is clearly intended to continue to provide ri ghts and obligations for
Members. Further, Article XVI is not a prohibited subsidy provision – it is an actionable subsidy
provision. The subsidies and the provisions of Article XVI that are not superceded by the provisions
of the SCM Agreement or the Agreement on Agriculture
256 must be read consistent with the
actionable subsidy provisions of Article 5 of the SCM Agreement. Article 5 makes no distinction
between subsidies that are contingent upon export and those that are not.

198. With respect to the Panel’s second question, th e title of Section B is not determinative. In
light of the use of the phrase “any form of subsid y” in the second sentence of Article XVI:3, the title
of Section B is properly read as encompassing any subsidies that have any effect on a Member’s
exports – whether they be “export subsidies” con tingent upon export or whether they are “export
subsidies” having the effect of increasing exports. Finally, Brazil notes that the US argument that
places primary reliance on the title of Section B to in terpret the second sentence of Article XVI: 3 is
also questionable given the fact that Article XVI:5 is also covered by the title of Section B – and it
deals with all types of subsidies covered by Article XVI.

199. With respect to the Panel’s reference to Article 21 of the Agreement on Agriculture, Brazil
does not believe that it is particularly rele vant. As the Appellate Body noted in the EC – Bananas
case, Article 21 of the Agreement on Agriculture pr ovides that the provisions of GATT 1994 and the
other multilateral trade agre ements on trade in goods “ shall apply subject to the provisions of this
Agreement”.
257 The drafters of the WTO Agreement did not intend agricultural trade to be a GATT-
free zone − quite the opposite. They simply provided transitional provisions in Article 13 of the
Agreement on Agriculture to moderate the appli cation of some GATT provisions, strictly on a
temporary basis. 258

200. Article 13 of the Agreement on Agriculture is not that relevant in providing guidance
regarding whether domestic support measures are included within the meaning of “any type of
subsidy” under Article XVI:3, second sentence. Article 13(b)(ii) exem pts non-green box domestic
support only from actions based on paragraph 1 of GA TT Article XVI, and does not directly exempt
Article XVI:3. However, Article XVI:1 and 3 must be read together in order to assert a claim of
serious prejudice.
259

201. Article 13(c)(ii) of the Agreement on Agricu lture provides that during the “implementation
period”, export subsidies that conform fully to Pa rt V, as reflected in a Member's Schedule, are
exempt from “actions” based on Article XVI. By implication, such export subsidies are subject to
actions under Article XVI after the expiry of the peace clause and will be subject to such actions as of
the time that the Panel issues its ruling. Th e same applies for green box domestic support under
Article 13(a)(ii). Those subsidies are also ex empt from actions under GATT Article XVI, including
Article XVI:3. But these subsidies can be challe nged under Article XVI:3 following the termination
of the peace clause.

(b) Are the requirements of Article XVI:3 of the GATT 1994 reflected in, developed by or
subsumed by the requirements in Article 6.3(d) of the SCM Agreement, or in any other

 256 See US- FSC, WT/DS108/AB/R, para 117 quoted in Question 185(a).
 257 Appellate Body Report, EC – Bananas, WT/DS27/AB/R, para. 155.
 258 Appellate Body Report, EC – Bananas, WT/DS27/AB/R, para. 155.
 259 Brazil’s 7 October Oral Statement, para. 59 (arguing that Articles XVI:1 and 3 are directly linked).

provisions of the covered agreements? Of what relevance, if any, is the Appellate Body
260 here?

Brazil’s Answer:

202. Brazil agrees that Article 6.3(d) reflects one of the situations that would also fall under GATT
Article XVI:3. An increase in the world market sh are compared to the previous three-year average
through the effects of subsidies would be consistent with a finding of an inequitable share of world
trade under GATT Article XVI:3. However, an incre ase over the previous three-year average is not a
necessary prerequisite for a finding of a violation of GATT Article XVI:3. For example, a Member’s
share of world export trade may be inequitable even if that share has not increased over the average of
the past three years. Similarly, a Member’s increase in exports may be inequitable even if an increase
in exports has not followed a consistent trend, as required under Article 6.3(d).

203. GATT Article XVI:3 is concer ned with whether a particular level of a Members’ share of
world export trade is equitable, whereas Article 6.3(d) of the SCM Agreement only addresses an
increase in the share. Article 6.3(d) creates a pres umption that an increase in a Member’s world
market share over its previous three-year average that follows a consistent trend over a period when
subsidies have been granted nullifies and impairs ot her Member’s rights. No such presumption exists
for Article XVI:3 – the nullification and impairment must be demonstrated by showing that the share

 260 WT/DS108/AB/R, para 117:
"… the provisions of the SCM Agreement do not provide explicit assistance
as to the relationship between the export subsidy provisions of the
 SCM Agreement and Article XVI:4 of the GATT 1994. In the absence of
any such specific textual guidance, we must determine the relationship
between Articles 1.1(a)(1) and 3.1(a) of the SCM Agreement and
Article XVI:4 of the GATT 1994 on the basis of the texts of the relevant
provisions as a whole. It is clear from even a cursory examination of
Article XVI:4 of the GATT 1994 that it differs very substantially from the
subsidy provisions of the SCM Agreement, and, in particular, from the
export subsidy provisions of both the SCM Agreement and the Agreement on
Agriculture. First of all, the SCM Agreement contains an express definition
of the term "subsidy" which is not contained in Article XVI:4. In fact, as we
have observed previously, the SCM Agreement contains a broad package of
new export subsidy disciplines that "go well beyond merely applying and
interpreting Articles VI, XVI and XXIII of the GATT 1947". Next,
Article XVI:4 prohibits export subsidies only when they result in the export
sale of a product at a price lower than the "comparable price charged for the
like product to buyers in the domes tic market." In contrast, the
 SCM Agreement establishes a much broader prohibition against any subsidy
which is "contingent upon export performance". To say the least, the rule
contained in Article 3.1(a) of the SCM Agreement that all subsidies which
are "contingent upon export performance" are prohibited is significantly
different from a rule that prohibits only those subsidies which result in a
lower price for the exporte d product than the comp arable price for that
product when sold in the domestic market. Thus, whether or not a measure
is an export subsidy under Article XVI:4 of the GATT 1947 provides no
guidance in determining whether that measure is a prohibited export subsidy
under Article 3.1(a) of the SCM Agreement . Also, and significantly,
Article XVI:4 of the GATT 1994 does not apply to "primary products",
which include agricultural products. Unquestionably, the explicit export
subsidy disciplines, relating to agricultural products, contained in Articles 3,
8, 9 and 10 of the
 Agreement on Agriculture must clearly take precedence
over the exemption of primary products from export subsidy disciplines in
Article XVI:4 of the GATT 1994."

of world export trade is inequitable. While a particular situation may – as in this dispute – fall under
both provisions, the focus and proof required for both provisions can be different.

204. Thus, Article 6.3(d) of the SCM Agreement s ubjects a specific subset of the situations
covered by GATT Article XVI:3 to the remedy provided in Article 7.8 of the SCM Agreement. But it
does not cover all of the situations covered by GATT Ar ticle XVI:3. This marks the crucial
distinction between the provisions on export subsidi es in the SCM Agreement that “take precedence”
over those in GATT
261 and the provisions on actionable subsidies in both agreements that are
complementary.

205. With respect to the Appellate Body’s holding in paragraph 117 of US – FSC , the provisions
on export subsidies in Articles 3 and 4 of the SC M Agreement represent the results of years of
negotiations that have pushed the level of obligation in this area well beyond Article XVI:4. The
conclusion that the Appellate Body drew in that in stance was that “whether or not a measure is an
export subsidy under Article XVI:4 of the GATT 1947 provides no guidance in determining whether
that measure is a prohibited export subsidy under Article 3.1(a) of the SCM Agreement.” Brazil
agrees that the provisions of Article XVI:2-4 that deal with subsidies contingent upon export
performance are superceded by the respective export subsidy provision contained in the Agreement on
Agriculture and in the SCM Agreement.

206. However, as Brazil has argued in response to Question 185(a), the second sentence of GATT
Article XVI:3 is not a provision limited to subsidies contingent upon export performance. Rather, its
disciplines apply to any form of subsidy that operates to incr ease the exports of a Member. Thus, it is
not superceded by the export subsidy provisions of the Agreement on Agriculture and the SCM
Agreement. Rather, it provides rights and obligatio ns concerning any form of a subsidy independent
of the right and obligations set forth in Article 3 of the SCM Agreement.
262

(c) Of what relevance, if any, is the fact that the definition of "subsidy" in Article 1 of the
SCM Agreement and the prohibition on subsidies contingent upon export in
Article 3.1(a) were introduced in the Uruguay Round, but did not exist at the time that
the GATT 1947 was negotiated?

Brazil’s Answer

207. The short answer is “not at all.” What is important for the Panel to consider is the entire
package of Uruguay Round agreements, including the GATT 1994 and the contemporaneous SCM
Agreement, not what was in GATT 1947.

208. Every agreement attached to the WTO Agre ement is contemporaneous with every other
attached agreement. The GATT 1947 no longer binds WTO Members; what is binding is the GATT
1994. The SCM Agreement and the GATT 1994 must be read together, and each provides “context”
for interpreting the other, in the sense of Article 31(2) of the Vienna Convention on the Law of
Treaties. As the Appellate Body noted in Argentina – Footwear
263, and as is now well established, the
WTO Agreement is a single undertaking. All WTO ob ligations are, therefore, generally cumulative,
and Members must comply with all of them simulta neously: “It is important to understand that the
WTO Agreement is one treaty.”264 Thus, in as far as GATT Article XIX and the Agreement on
Safeguards apply cumulatively, GATT Article XVI and the SCM Agreement apply cumulatively.

 261 Appellate Body Report, US – FSC, WT/DS108/AB/R, para. 117.
 262 See GATT Panel Report, EC – Sugar Exports (II), para. V.(g).
 263 Appellate Body Report, Argentina – Footwear Safeguards, WT/DS121/AB/R, paras. 82-84.
 264 Appellate Body Report, Korea – Dairy Safeguards , WT/DS98/AB/R, para. 74-75; quotation from
para. 75 (emphasis added).

Brazil refers the Panel to its Answer to Question 1 85(a) for a further discussion of the issues relevant
to Question 185(c).

N. CLARIFICATIONS

189. Please indicate whether the correct figure in paragraph 37 of Brazil's 7 October oral
statement is 38.1 per cent or 38.3 per cent? BRA

Brazil’s Answer

209. Brazil confirms that the correct figure in para graph 37 of Brazil’s 7 October Oral Statement is
38.3 per cent, i.e., that the US world market share in MY 2001 was 38.3 per cent.265

190. Please confirm that the figure "17.5" in paragraph 43 of Brazil's 7 October oral
statement, is "percentage point". BRA

Brazil’s Answer

210. Brazil confirms that the figure “17.5” in pa ragraph 43 of Brazil’s 7 October Oral Statement
refers to an increase by 17.5 percentage points in the world market share. Brazil further notes that –
as explained in note 468 to Figure 26 of its 9 September Further Submission – the world market share
refers to the world market share in the intern ational cotton market, including the upland cotton and
extra-long staple cotton market, as data on upland co tton only is not available to Brazil. However,
given the small size of the extra-long staple market as compared to the upland cotton market, this only
minimally distorts the data.
266

191. Could Brazil clarify its statement in para. 12 of its 9 September further submission:
"Alternatively crop insurance is not specific because the 2000 ARP Act denies benefits to
commodities representing more than half of th e value of US agriculture. Further US crops
represent only 0.8 per cent of total US GDP." (emphasis added) BRA

Brazil’s Answer

211. Brazil thanks the Panel for bringing to its attention the error in paragraph 12 of its 9
September Further Submission. As clarified in paragraphs 67-69 of the same submission, Brazil
meant to state that “[a]lte rnatively, crop insurance is specific because the 2000 ARP Act denies
benefits to commodities representing more that half of the value of US agriculture” (emphasis added).

 265 Exhibit Bra-206 (Data on Article 6.3(d) claim).
 266 Compare Exhibit Bra-208 (“Cotton: World Statistics,” ICAC, September 2003, p. 2-7).

ANNEX I-6

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

27 October 2003

A. REQUEST FOR PRELIMINARY RULINGS

122. Does Brazil allege that cottonseed payments , interest subsidies and storage payments are
included in the subsidies that cause serious pr ejudice? Do they appear in the economic
calculations? BRA

123. Does Brazil's request for th e establishment of the Panel name the statute authorizing
cottonseed payments for the 1999 crop? BRA

B. EXEMPTION FROM ACTIONS

124. According to its revised timetable, the Pane l will issue its report to the parties after the
end of the 2003 calendar year. Does this have any impact on "exempt[ion] from actions" under
Article 13(b)(ii) and 13(c)(ii) of the Agreement on Agriculture? BRA, US

1. The scheduled issuance of the Panel’s report after the end of the 2003 calendar year has no
impact on the applicability of Article 13(a)(ii), (b)( ii) and (c)(ii) of the Agreement on Agriculture to
the US measures in this dispute. There is no qu estion, and Brazil has not contested, that Article 13
was in effect at the time of the Panel’s establishmen t, and the Panel’s terms of reference set on that
date are to examine the matter raised in Brazil’s panel request in light of the covered agreements,
which include the Agreement on Agriculture.

2. As a separate matter not presented by this dispute, the United States notes that the
commitments of the United States with respect to cotton are specified by marketing year, not calendar
year. Therefore, the end of the 2003 calendar year would in any case not be relevant to the question
of when the provisions of Article 13 cease to have effect with respect to US support measures for
upland cotton.
1

C. IDENTIFICATION OF THE SUBSIDIZED PRODUCT

125.

(1) In view of requirements in the FAIR Ac t of 1996 and the FSRI Act of 2002 that contract
acreage remain in agricultural or conservation uses and which impose penalties if the producer
grows fruits or vegetables, how likely is it th at the producer with upland cotton base acreage
will not use his or her land to produce programme crops or covered commodities? US

1 See Agreement on Agriculture Article 1(i) (“‘[Y]ear’ in paragraph (f) above and in relation to the
specific commitments of a Member refers to the calendar, financial or marketing year specified in the Schedule
relating to that Member.”)

3. With respect to contract acreage on a farm, the 2002 Act generally allows any commodity or
crop to be planted on base acres on a farm for whic h direct payments are made, with limitations for
certain commodities (fruits, vegetables (other than le ntils, mung beans, and dry peas), and wild rice).
With some exceptions, planting of those limited commodities on base acres is prohibited and could
lead to reduced or eliminated direct payments.
2 Otherwise, a producer (or landowner) is permitted to
make any other use of the land so long as the land on the farm in a quantity equal to base acreage is
used for an agricultural or conserving use. 3 Thus, the direct payment recipient has the flexibility to
plant and harvest any other commodity or crop on the land representing their upland cotton base
acreage; indeed, direct payment recipients may pl ant nothing at all and still receive payment. (We
note that the foregoing description of the “planting flexibility” under the 2002 Act is relevant only to
base acres on a farm for which direct payments are made; other acres on the farm need not comply
with any of the contract requirements set out in Sections 1105 and 1106 of the 2002 Act.)

4. The data demonstrate that planting and harv esting decisions by US producers result in US
upland cotton area varying significantly. In market ing year 2003, for example, US farmers planted
13,748,000 acres, a decline of 11.3 per cent from the recent high reached in marketing year 2001.
4 As
indicated in the US closing statement at the second session of the first panel meeting, US harvested
acreage largely increases and decreases in line with the rest of the world.
5 In marketing year 2001,
US area harvested increased by almost the exact same percentage as did the rest of the world. In
marketing year 2002, the per cent decline in harvested acreage in the United States was greater than
that observed in the rest of the world. Thus, regardless of whether US farmers who plant upland
cotton may also be holders of upland cotton base acres, and contrary to Brazil’s assertions, US
farmers respond to market signals by planting or harvesting upland cotton much as producers in the
rest of the world do.

(2) Brazil has submitted that "The record su ggests that historic producers are current
producers." It points to factors including th e specialization of upland cotton producers, the
need to recoup expensive investments in cotto n-specific equipment, and the geographic focus
and climatic requirements of upland cotton produc tion in the "cotton belt". (Brazil's rebuttal
submission, footnote 98, on page 24)

(a) Regarding the specialization of upland cotton producers and the geographic focus of
upland cotton production, how does Brazil take account of the fact that cotton is
produced in 17 of the 50 states of the Unit ed States and that average cotton area is
approximately 38% of a cotton farm's acres? (This information is taken from the US's
response to question 67bis, footnote 35). BRA

(b) Regarding the geographic focus of upland cotton production, how many other crops can
upland cotton producers viably grow in th e cotton belt, other than fruits and
vegetables? US

5. Based on planted acreage data as reported by National Agricultural Statistics Service
6, US
upland cotton is produced in several diverse regi ons across the Cottonbelt, generally known as the
Southeast, Delta, Southwest, and West regions. Acro ss the regions (as well as within a given region),
producers are faced with differing physical growi ng environments as well as economic factors that
help determine the viability of upland cotton or some other alternative crop in any given year. Over

2 See US Answer to Question 26 from the Panel, para. 56.
3 2002 Act, § 1105(a)(1)(D) (Exhibit US-1).
4 US Department of Agriculture, National Agricultural Statistics Service, Acreage. Cr Pr 2-5 (6-03).
June 30, 2003. Available at: http://usda.mannlib.cornell.edu/reports/nassr/field/pcp-bba/acrg0603.pdf
5 See US Closing Statement at the Second Session of the First Panel Meeting, paras. 5-6; Exhibit US-
63.
6 See Exhibit Q125(2)(b).

the last several years, producers have reduced plantings of upland cotton and increased plantings to
alternatives. A list of the full range of alterna tive crops that are viable in these areas would be
extensive. Below we present a regional breakdown of some principal alternative crops to upland
cotton as well as historical plantings since 1996 of these crops compared with upland cotton.

6. Upland cotton producers in the Southeast region (Alabama, Florida, Georgia, North Carolina,
South Carolina, and Virginia) have corn and soybean s as principal alternative crops. Peanuts are also
an alternative, though mainly in Georgia. Be tween 1996 and 2003, area planted to upland cotton,
corn, and soybeans in the Southeast averaged about 8.6 million acres, ranging from 8.2 to 9.1 million
acres. During this same period, upland cotton area ranged from 3.0 to 3.6 million acres. Since 2001,
upland cotton has been reduced in favour of corn and soybeans in this region.

7. Upland producers in the Delta region (Ark ansas, Louisiana, Mississippi, Missouri, and
Tennessee) also have corn and soybeans as an alternativ e and, to a lesser extent, rice in some areas.
Between 1996 and 2003, area planted to these 4 cr ops averaged 22.9 million acres, ranging from 22.2
to 23.8 million. At the same time, upland cotton ar ea ranged from 3.2 to 4.6 million acres. Like the
Southeast region, the Delta area planted to upla nd has declined since 2001 in favour of corn and
soybeans.

8. The Southwest region (Texas, Oklahoma, and Kansas) has the most diverse growing
environment of the 4 regions. In the northern part of the region – where most of upland cotton is
grown – principal alternatives to upland cotton may include wheat and sorghum. In the southern part,
however, corn, soybeans, and sorghum are generally an alternative to upland cotton. The Southwest
region planted an average of 26.3 million acres to these 5 crops between 1996 and 2003.7 Area
ranged from 24.5 to 27.9 million acres during this period. Meanwhile, upland cotton area ranged
from 5.7 to 6.7 million acres. Since 2000, upland area in the Southwest has fallen in favour of
sorghum, wheat, and corn.

9. In the West region (California, Arizona, a nd New Mexico), upland producers have a variety
of alternatives, including corn, extra-long staple (ELS) cotton, alfalfa, a nd wheat. Between 1996 and
2003, area planted to these 5 crops averaged 4.3 million acres in the region, ranging from 4.0 to 4.6
million. At the same time, upland cotton area has ranged from 0.7 to 1.4 million acres. The last
several years, however, have seen upland area declin e in favour of one or more of the alternative
crops.

(c) Regarding the high cost of upland cotton production, can Brazil show that farms who
planted upland cotton could only have cov ered their costs by receiving upland cotton,
rice or peanut payments in every year from 1999 through 2002? BRA

(d) Regarding the need to recoup investments in cotton-specific equipment, is it important
to planting decisions that upland cotton producers cannot run any other crop through
their cotton-pickers? How does this affect the likelihood that they will grow other
crops? US

10. The National Agricultural Statistics Service (NASS) reported that in 2002, farmers paid
an average of $225,000 for a cotton picker .
8 Farmers may respond to machinery costs through the
contracting-out of harvesting operations and rental or leasing of cotton-picking machinery.

7To be conservative, we have excluded Kansas wheat and sorghum acreage from the totals presented
due to the state's large production of these crops and relatively small production of cotton.
8 US Department of Agriculture, Natio nal Agricultural Statistics Service, Agricultural Prices 2002
Summary. Pr 1-3 (03)a July 2003. Available at: http://usda.mannlib.cornell.edu/
reports/nassr/price/zap-bb/agpran03.pdf

11. In the short run, investment costs may slow acreage adjustments to market prices. This does
not mean, however, that cotton producers do not respond to changes in market prices. Research by
Lin et al. suggest that cotton producers may, in fact, be more responsive to own price changes (that is,
the response of cotton acreage to changes in co tton prices as opposed to changes in prices of
competing crops) than other competing crops are.
9 In the long run, fixed assets like cotton pickers
are less of a constraint to entry, and thus one woul d expect the acreage response to changes in price to
be larger.

Acreage own-price elasticity for major field crops
Crop National acreage price elasticity
Wheat 0.34
Corn 0.293
Sorghum 0.55
Barley 0.282
Oats 0.442
Soybeans 0.269
Cotton 0.466
Source: Lin et al., Appendix table 21 (Exhibit US-64).

(3) In calculating the amount of PFC, MLA, direct and counter-cyclical payments that went
on upland cotton, Brazil made an adjustment for the ratio of current acreage to base acreage
(see its answer to question 67, footnotes 2, 3, 4 an d 5). Is this an appropriate adjustment for the
particular factors referred to above? Why or why not? BRA, US

12. Brazil’s adjustment is not appropriate. It does not explicitly take into account any of the
factors referred to above. Instead, Brazil’s belated adjustment is simply based on the assumption that
all of the planted cotton acreage was by producers who had cotton base acreage exactly equal to their
planted acreage. This assumption is inaccurate and causes Brazil's figures to be in error. For some
producers, cotton planted acres exceed their histori cal base, and some cotton acres are planted by
producers who have no cotton base. As noted in the US further submission, important changes such
as lowered costs from pest eradication and adoption of biotechnology have lowered costs and brought
new areas and farmers into cotton production. Brazil’s adjustment takes no account of these changes.

13. More fundamentally, the relevant point is that any producers who have upland cotton base
will receive direct and counter-cyclical payments regardless of whether they plant upland cotton.
Thus, the decision to plant upland cotton will be based on expected economic returns of cotton and
competing crops – not the level of direct and coun ter-cyclical payments that are decoupled from the
decision to produce upland cotton. And the fact th at these are decoupled payments means that the
amount of the payment could not in any event be allocated only to cotton production.

(4) Dr. Glauber has alleged that there are stat istical problems in comparing planted acres
to programme acres because of abandonment of crops and also because planted acres are only
survey estimates, not reported figures (See Exhibi t US-24, the first full paragraph in P2).
Would it be more appropriate to divide harvest ed acreage by base acreage? What margin of
error is there between the survey estimates and reported figures? BRA, US

14. Exhibit US-24 outlines the statistical problem s associated with dividing complying base acres
by planted acres. The discussion addressed co mplying base acres under the Acreage Reduction
Programme of 1990 Farm Bill and did not address programme payment acres as defined under the

9 Lin, W., et al.. Supply Response Under the 1996 Farm Act and Implications for the US Field Crops
Sector. US Department of Agriculture, Economic Re search Service, Technical Bulletin No. 1888 ,
Appendix table 21 (Exhibit US-64).

1996 Farm Bill. Dividing harvested acreage by base acreage could potentially overstate the difference
if there is significant acreage abandonment after producers reported their payment acres to the Farm
Service Agency. Also, there remains a problem with the comparison since harvested acres are survey-
based while base acres are reported numbers.

15. In the June Acreage report, the National Agricultural St atistics Service reports reliability
estimates for selected crops. The reliability of acreage estimates is computed by expressing the
deviations between the planted acreage estimates and the final estimates as a per cent of the
final estimates and averaging th e squared percentage deviations for the 1983-2002 twenty-year
period; the square root of this average beco mes statistically the "Root Mean Square Error.”
Probability statements can be made concerning expected differences in the current estimates
relative to the final estimates assuming that fa ctors affecting this year's estimate are not
different from those influencing the past 20 years. For example, the "Root Mean Square Error"
for the upland cotton planted estimate is 2.4 per cent. This means that chances are 2 out of 3
that the current cotton acreage will not be above or below the final estimate by more than 2.4
per cent. NASS reports that the 90 per cent confidence interval for the upland cotton estimate
is 4.1 per cent. This means that chances are 9 out of 10 (90 per cent confidence level) that the
difference will not exceed 4.1 per cent.
10

(5) Do the acreage reports under section 1105(c) of the FSRI Act of 2002 indicate or assist
in determining the number or proportion of acres of upland cotton planted on upland cotton
base acres? Was there an acreage reporting requirement for upland cotton during MY1996
through 2002? BRA, US

16. The acreage reports filed under Section 1105(c) of the 2002 Act by farms receiving direct and
counter-cyclical payments indicate what crops are planted on a farm. A farm is an administrative
construct that consists of tracts of land that are ope rated as one unit. The farm may be operated by
more than one producer, and a producer may pro duce crops on more than one farm. The acreage
report does not indicate the quantity of base acres on the farm. Because the acreage reports are filed
after the planting season but before the harvest, the reports do not contain information on the quantity
of production on each farm.

17. Based on a very preliminary review of a sa mpling of marketing year 2002 acreage reports, the
United States estimates that roughly 53 per cent of farms that were eligible for direct and counter-
cyclical payments for upland cotton base acreage al so planted at least one acre of upland cotton in
2002. That is, approximately 47 per cent of farms receiving direct and counter-cyclical payments in
2002 for upland cotton base acreage planted no upland cotton at all.

18. Over the period 1996 through 2002, there was no statutory requirement for acreage reports by
recipients of decoupled payments or marketing lo an payments. By regulation, producers who signed
up for disaster assistance or who received marketing loan benefits (including loan deficiency
payments) were asked to file planting acreage reports. Reports for producers receiving disaster
assistance were to cover all acreage on the farm wh ile reports for producers receiving marketing loan
benefits were to cover only acreage for the crop recei ving benefits. As a result, acreage reports over
the period of the 1996 Act are incomplete.

(6) Please prepare a chart showing upla nd cotton base acreage, planted acreage and
harvested acreage for MY1996 through 2002. Does the planted acreage fluctuate within a broad
band? If not, does this indicate any stability in decisions to plant the same acres to upland
cotton? BRA, US

10 US Department of Agriculture. National Agricultural Statistics Service. Acreage. CrPr 2-5 (6-03).
30 June 2003. Pp 38-39.

19. The following chart shows upland cotton base acreage, planted acreage and harvested acreage
for marketing years 1996 through 2002:

US upland cotton area (thousand acres)
Crop year Base acreage 1/ Planted acreage 2/ Harvested acreage 2/
1996 16128 14395 12632
1997 16213 13648 13157
1998 16412 13064 10449
1999 16377 14584 13138
2000 16268 15347 12884
2001 16239 15499 13560
2002 16217 (est.) 13714 12184
1/ US Department of Agriculture, Farm Service Agency
2/ US Department of Agriculture, National Agricultural Statistics Service, selected Acreage reports

20. Over the period 1996-2002, US upland co tton planted acres ranged considerably, from
13,064,000 acres to 15,499,000 acres. Year-over-y ear, planted and harvested acreage can rise or fall
significantly. For example, from marketing year 2001 to marketing year 2002, planted acreage fell by
1.785 million acres or 11.5 per cent; harvested acreage fell by 1.376 million acres or 10.1 per cent.
As was pointed out in the US closing statement at the second session of the first substantive meeting
of the Panel and in Exhibit US-63, year-over-year changes in US harvested cotton acreage have been
similar to year-over-year changes for harvested co tton acreage outside of the United States. These
data do not provide any information on whether th e same or different acres are planted to upland
cotton.

21. As noted above in the US answer to Ques tion 125(5), based on a preliminary review of a
sampling of marketing year 2002 acreage reports, it would appear that nearly half of farms receiving
direct and counter-cyclical payments in 2002 for upland cotton base acreage planted no upland cotton
at all. That so many farms that produced upland cotton during the historical base period of 1993-1995
or 1998-2001 no longer plant even a single acre of upl and cotton suggests that there has been a large
exit of past cotton producers and a large entry of new producers or a large expansion by other
historical cotton producers.

(7) Brazil states that one third of all US farm s with eligible acreage decided to update their
base acreage under the direct payments and count er-cyclical payments programmes using their
MY1998-2001 acreage. What is the proportion of the current base acreage for upland cotton
resulting from such updating? Is the observed updating of base acreage consistent with Brazil's
argument that it is only profitable to grow upland cotton on base acreage (and peanut and rice
base acreage)? BRA

(8) How could one take account of uplan d cotton producers who receive PFC, MLA, direct
and counter-cyclical payments for other covered commodity base acreage? BRA, US

22. Under Brazil’s approach, one would need to take account of upland cotton producers
receiving decoupled payments only for base acreage for other covered commodities. This follows
from Brazil’s explanation that “only the portion of upland cotton [decoupled] payments that actually
benefits acres planted to upland cotton can be considered support to upland cotton”.
11 Thus, under
Brazil’s approach, one would need to deduct a ny production (or acreage) attributable to such
producers from the acreage figures Braz il has used to adjust the amount of decoupled payments on
upland cotton base acreage.

11 Brazil’s Answer to Question 67 from the Panel, fn. 2-5.

(9) Assuming that Brazil's payment figures we re to amount to a prima facie case, please
answer the following questions: US

(a) How would the United States calculate or estimate the proportion of upland cotton
producers who receive subsidy payments for upland cotton base acreage?

(b) Should any adjustment estimates be made for any factors besides those listed by Brazil?

(c) What adjustment estimate would it be appropriate to make?

(d) How could one take account of up land cotton producers who receive decoupled
payments for other programme crop base acreage?

(e) Could the US specifically indicate what, in its view, are the flaws in the approach
summarized in paras. 6-7 of Brazil's closing oral statement on 9 October (i.e. the use of
the ration of 0.87 to adjust the amount of total upland cotton direct and CCPs for the
MY to obtain the amount of subsidies recei ved by upland cotton producers)? Can the
US suggest an alternative approach that would yield reliable results in its view?

23. Putting Peace Clause and green box issues to one side, the United States believes that the
issue of what payments may be attributed to upland cotton production is fundamentally part of
Brazil’s burden to present evidence substantiating the amount of the subsidy that it is challenging.
However, the United States would note that this issue is not a matter of “the proportion of upland
cotton producers who receive subsidy payments for upland cotton base acreage.” Rather, the issue is,
first, what is the quantity of decoupled paymen ts received by upland cotton producers; second, how
are those payments allocated across the total value of each farm’s agricultural production; and third,
how much and in what amount are US cotton exports subsidized by these payments.

24. Brazil has conceded that decoupled paymen ts made with respect to upland cotton base
acreage are not “tied to the production or sale” of upland cotton, by adjusting such payments by
0.87.
12 That is, Brazil recognizes that, even on its theo ry, at least 0.13 of these payments “can[not] be
considered support to upland cotton” because at le ast that fraction of upland cotton base acres were
not planted to upland cotton in marketing year 2002 . Because these payments are not “tied to the
production or sale” of upland cotton, as suggested by Annex IV of the Subsidies Agreement, they
must be allocated across the total value of producti on of each recipient. Brazil has not denied the
applicability of the allocation methodology set out in Annex IV, but neither has Brazil provided any
evidence relating to the total value of production of decoupled payment recipients.13

25. Brazil claims that its “suggested methodology is based on the conclusion that all upland
cotton producers received these payments”. 14 In fact, Brazil’s methodology is based on the further
assumptions that (1) every acre of upland cotton in marketing year 2002 was planted by a holder of
upland cotton base acreage and (2) no such base acr eage holder planted more upland cotton than his
or her base acres.
15 Brazil has provided no evidence to support these assumptions, which is no

12 In addition to issues relating to the “adjustment,” the United States disagrees with the total amount of
decoupled payments paid with respect to upland cotton ba se acreage that Brazil calculates and uses as the base
for its adjusted payment amounts. See US Answer to Additional Question 67bis from the Panel, para. 28, fn. 37,
38.
13 As noted in the Panel’s Question 125(2)(a), aver age cotton area is approximately 38 per cent of a
cotton farm’s acres. Thus, a substantial portion of th e average cotton farm’s agricultural production will be
derived from production of other crops.
14 Brazil’s Closing Statement at the Second Session of the First Panel Meeting, para. 8.
15 Using figures for marketing year 2002 planted acrea ge and base acreage, Brazil claims, “Out of the
16.2 million upland cotton base acres, 2.1 million were not planted to upland cotton in MY2002.” Brazil’s
Closing Statement at the Second Session of the First Panel Meeting, para. 6. However, given the planting and

surprise since the evidence is to th e contrary. For example, the fluctuations in upland cotton planted
and harvested area in recent years and the fact that one-third of all US farms with eligible acreage
decided to update their base acreage using th eir MY1998-2001 acreage, imply substantial new
entrants or new acreage that were not included in the base period figures under the 1996 Act. In fact,
as noted above in the US answer to Question 125(5), based on a preliminary review of marketing year
2002 acreage reports, the United States estimates that nearly half of all farms receiving direct and
counter-cyclical payments in 2002 for upland cotton base acreage planted no upland cotton at all.

26. We also note that there are substantial re quirements with which a payment recipient must
comply (see US answer to Question 162), such as highly erodable cropland conservation requirements
and wetland conservation requirements.

D. "LIKE PRODUCT"

126. Does the US agree that the product at i ssue is upland cotton lint and that Brazilian
upland cotton lint is "like" US upland cotton lint within the meaning of Article 6.3(c) of the
SCM Agreement in that it is a separate like product that is identical or has characteristics
similar to the upland cotton lint from the United States? (e.g. Brazil's further submission, para.
81) US

27. For purposes of this dispute, the United States is not arguing that all US cotton is "unlike"
Brazilian cotton. There are some grades of cotton that both produce. Such grades would have similar
characteristics although, as noted by Mr. Ward at the second session of the first panel meeting,
Brazilian lint has been sold in the past at a substan tial discount to the New York futures price. That
discount has been declining over time as Brazil, a re latively new supplier internationally, works to
establish a reputation for quality and reliability.

E. "SUBSIDIES"

127. The Panel notes that the US contests that export credit guarantees constitute
"subsidies". The Panel recalls that the US ag rees that Step 2 payments are "subsidies" and
wishes to have confirmation that it is correct in understanding that the US does not disagree
that the following are "subsidies" for the purposes of Article 1 of the SCM Agreement:
marketing loan/loan deficiency payments, PFC, direct payments, market loss assistance and
CCP payments, crop insurance payments, cotton seed payments, storage payments and interest
subsidy (without prejudice to the Panel's rulings on the US requests for preliminary rulings on
the latter two payments). US

28. With respect to marketing loan payments, the United States agrees that these product-specific
amber box payments that are made to producers of upland cotton for the production of upland cotton
are subsidies within the meaning of Article 1 of the Subsidies Agreement.

29. With respect to crop insurance payments, th rough which the United States pays a portion of
the crop insurance premium for producers, the Un ited States agrees that these amber box payments
are subsidies within the meaning of Article 1 of th e Subsidies Agreement. We note, however, that
these payments are not product-specific because they are not made to upland cotton producers for the
production of upland cotton. Rather, they are non-product-specific support made to “producers in
general” (that is, generally). Further, these cr op insurance payments are not specific within the
meaning of Article 2 of the Subsidies Agreement because they are available with respect to all

base acreage numbers, the most Br azil can logically claim is that “ at least 2.1 million [base acres] were not
planted to upland cotton in MY2002”. That is, if in 2002 new producers without base acres planted upland
cotton or if some historical producers planted more than th eir base acres, then some portion of the 14.1 million
planted acres in MY2002 were not planted “on” upland cotton base acres.

agricultural products for which policies are offered by private companies. Therefore, pursuant to
Article 1.2, this “subsidy” is not subject to the provisions of Part III of the Subsidies Agreement.

30. With respect to cottonseed payments, we reca ll that these payments are not within the terms
of reference of the Panel.
16 With respect to “other payments” for upland cotton notified by the United
States to the WTO – that is, storage payments and in terest subsidy – the United States also recalls that
these payments are not within the Panel’s terms of reference. 17 Without prejudice to the US request
for preliminary rulings on these three types of payments, the United States considers that these
product-specific amber box payments are subsidies within the meaning of Article 1.

31. With respect to green box production flexibility contract payments under the 1996 Act and
direct payments under the 2002 Act, the United Stat es does not consider that Brazil has demonstrated
what is the amount of the subsidy attributable to upland cotton producers pursuant to Article 1.
Article 1 requires that a financial contribution by a government or public body or income or price
support confers a benefit. The subsidies Brazil chal lenges are subsidies to producers, users, and/or
exporters of upland cotton. However, Brazil has not identified the portion of the production flexibility
contract payments that is properly attributable to upland cotton producers as opposed to other
recipients of this subsidy. In fact, Brazil con cedes that the entire amount of these payments does not
confer a benefit on upland cotton producers by reduc ing the amount of production flexibility contract
payments and direct payments on upland cotton b ase acres by the proportion 14/16. However, Brazil
has provided no evidence of the amount of these d ecoupled payments received by producers that
currently produce cotton. Nor has Brazil demonstrated how much or to what extent US cotton exports
are subsidized.

32. With respect to ad hoc market loss assistance and counter-cyclical payments under the 2002
Act, the United States also does not consider that Brazil has demonstrated what is the amount of the
subsidy attributable to upland cotton producers pursu ant to Article 1. Specifically, as with production
flexibility contract payments and direct payments, Brazil has not identified the portion of the subsidy
that is properly attributable to producers of upl and cotton as opposed to other recipients of this
subsidy. Brazil has not identified the benefit to upland cotton producers conferred by these payments.
Rather, Brazil merely assumes that for every up land cotton harvested acre, upland cotton producers
had a corresponding upland cotton base acre. Howe ver, Brazil has provided no evidence of the
amount of these decoupled payments received by producers that currently produce cotton.

F. PROHIBITED SUBSIDIES

128. Could the US respond to Brazil's assertions relating to the meaning and effect of the
introductory phrase of Article 3 ("Except as pr ovided in the Agreement on Agriculture....")?
Would the meaning/effect change if Article 13 of the Agreement on Agriculture did not exist?
BRA, US

33. It is not entirely clear to the United States to which assertions of Brazil the Panel refers in its
question. Moreover, the United States does not believe Brazil has purported to ascribe a specific
meaning to that particular phrase. Indeed, with respect to Article 3.1(b), Brazil’s arguments would
effectively delete the introductory phrase in its entirety.
18

G. SPECIFICITY / CROP INSURANCE

129. In the event that the Panel does not consid er that the alleged prohibited subsidies fall
within the provisions of Article 3 and are theref ore, pursuant to Article 2.3, "deemed to be

16 See, e.g., US Further Submission, para. 8.
17 See US Further Submission, paras. 6-7.
18 See Answer of the United States to Panel Question 144, infra.

specific", are there any other grounds on which Br azil would rely in order to support the view
that such measures are "specific" within the me aning of Article 2 of the SCM Agreement (see,
for example, fn 16 of Brazil's further submission)? BRA

130. Does Brazil agree that the US insurance premium subsidy is available in respect of all
agricultural products? Please cite relevant portions of the record. BRA

131. How should the concept of specificity - and, in particular, the concept of specificity to
"an enterprise or industry or group of enterprises or industries" -- in Article 2 of the SCM
Agreement apply to subsidies in respect of agricultural commodities? Please answer the
following questions, citing the principles in Article 2 of the SCM Agreement: BRA, US

(a) is a subsidy in respect of all agricultural, but not other, products specific?

34. The United States does not regard a domestic subsidy as being specific solely because the
subsidy is limited to the agricultural sector. As pr eviously noted, this proposition is codified in the
US countervailing duty regulations, at 19 C.F.R. § 35 1.502(d). Thus, the United States is of the view
that the agricultural sector is too broad and too dive rse to constitute a single “enterprise or industry or
group of enterprises or industries”.

(b) is a subsidy in respect of all agricultural crops (i.e. but not to other agricultural
commodities, such as livestock) specific?

35. It is difficult to opine on this question in th e abstract. However, this fact pattern does not
apply to the US insurance premium subsidies, which are also available in respect of livestock.

(c) is a subsidy in respect of certain identified agricultural products specific?

36. It is difficult to opine on this question in th e abstract. However, this fact pattern does not
apply to the US insurance premium subsidies since the premium subsidy is a single subsidy
programme available in respect of all products (while policies issued by private parties are in certain
instances available in respect of certain identified products).

(d) is a subsidy in respect of upland cotton, but not other products, specific?

37. The United States assumes that this would re quire that the subsidy be limited to certain
entities or the upland cotton industry and so would be specific. This fact pattern, however, does not
apply to the US insurance premium subsidies since the premium subsidy is a single subsidy
programme available with respect to all products (w hile policies issued by private parties are in
certain instances available in respect of certain identified products).

(e) is a subsidy in respect of a certain proportion of the value of total US commodities (or
total US agricultural commodities) specific?

38. In principle, a subsidy that is limited to a sufficiently small proportion of US commodities
would be “limited”, and, thus, “specific” within the meaning of Article 2.1(c). However, the
Subsidies Agreement does not establish any quantitative standards for determining when a subsidy is
so limited, and a proposal to establish such st andards was rejected during the Uruguay Round.
Therefore, the determination must be made on the basis of the facts of the particular case. This is the
approach taken by the US Department of Commerce for purposes of the US countervailing duty law.

(f) is a subsidy in respect of a certain proportion of total US farmland specific?

39. This question is not presented in this dispute, but the United States would note that “land” is
neither an “enterprise” nor an “industry”, and so the proportion of farmland as such would not be
appear to be relevant to the analysis under Article 2 of the Subsidies Agreem ent. The issue also does
not appear to fall within the scope of Article 2.2, wh ich deals with regional specificity – that is, "total
US farmland" does not correspond to a “designated geographical region”.

132. Please state the amount and percentage of upland cotton acreage covered by each crop
insurance programme and/or policy under the ARP Act of 2000. US

40. There is one crop insurance programme, through which the United States provides premium
subsidies on crop insurance policies that are o ffered by private insurance companies under the
authority of the Federal Crop Insurance Act. Th ere is no specific crop insurance programme or
policies for cotton authorized under the Agricultural Risk Protection Act of 2000. Within this crop
insurance programme, there are different plans of in surance that offer different types of coverage,
such as production plans of insurance or revenue plans of insurance. All such plans of insurance are
reinsured by FCIC and a premium subsidy paid by the US Government, is available. The amount and
percentage of upland cotton acreage covered by each plan of insurance is shown in Exhibit US-65.

133. Concerning Brazil's arguments in its oral statement, para. 7, can the US indicate if any
producers of livestock outside a pilot progr amme are covered by the crop insurance
programme? US

41. Yes, producers of livestock outside of pilot programmes are covered by the crop insurance
programme. In addition, there are policies being de veloped pursuant to pilot programmes in order to
expand the scope of insurance produc ts offered by private insurers to livestock producers. Thus, US
crop insurance payments on premiums are made to a broad range of agricultural producers across the
agricultural sector, including many livestock producers.

42. Livestock producers are eligible for severa l forms of “crop insurance” benefits under the
provisions of the same operational statute that provi des for benefits for “crops”. Under the Federal
Crop Insurance Act (7 USC 1501-1524), the Federa l Crop Insurance Corporation (FCIC), an entity
within the US Department of Ag riculture, can approve insurance products if there is “sufficient
actuarial data” to justify it to producers of “agricultural commodities”.
19 See 7 USC 1508(a). The Act
defines “agricultural commodity” to include a lengthy list of commodities, including such non-plant
commodities as “finfish” and “mollusks”. The de finition also includes any “other agricultural
commodity”, except stored grain (the crop that produced the grain would be elig ible for coverage), as
determined by the Board of Directors of FCIC.

43. Thus, FCIC has the authority to offer in surance for livestock under its regular insurance
programmes. The FCIC has a pproved products providing income protection to producers with
livestock on t heir farm as contemplated in the stat ute. In addition, with the enactment of the
Agricultural Risk Protection Act of 2000 (ARPA) (Pub. Law 106-224), Congress specifically
mandated that FCIC offer pilot programmes for livestock. See 7 USC 1523.

44. The Adjusted Gross Revenue (AGR) product pr ovides protection against low revenue due to
unavoidable natural disasters and market fluctuations that occur during the insurance year. Covered
farm revenue consists of income from all agricultural comm odities, including amounts of income
from animals and animal products and aquaculture reared in a controlled environment. To be eligible
to purchase an AGR policy, the producer can earn no more than 35 per cent of expected allowable
income from animals and animal products. Because the amount of livestock is considered incidental,

19 See 7 US Code § 1508.

the expenditures are not counted against the funding limitations for livestock contained in 7 USC
1523 (which have never been reached).

45. The 35 per cent limit does not apply in th e so-called “AGR-lite” programme, which was
developed by, and originally available only in, Penn sylvania , the state that developed the policy.
However, beginning with the 2004 crop year, an “A GR-lite” product will be expanded to counties in
Connecticut, Delaware, Maine, Vermont, Massach usetts, New Hampshire, New Jersey and Rhode
Island, and selected counties in West Virginia, New York, and Maryland, as approved by RMA. In
all, the AGR-lite programme will now cover about 300 counties. That expansion of AGR-Lite was
announced in an 18 August 2003, press release, available on the RMA website.

46. There are at least four kinds of products specifically for livestock available to livestock
producers, and they are described at the webs ite of the Risk Management Agency (RMA)
(www.rma.usda.gov). There are two different polici es that are available for swine producers. The
first is Livestock Risk Protect (LRP- Swine). Or iginally that product was available only in Iowa.
RMA recently announced that the policy may be o ffered to swine producers in 10 additional states:
Illinois, Indiana, Kansas, Minnesota, Nebraska, Ne vada, Oklahoma, Texas, Utah and Wyoming. The
other policy available to swine producers is Livest ock Gross Margin (LGM), which is available in
Iowa. For cattle, there are two specialized polici es available. Livestock producers may purchase a
LRP-Feeder Cattle policy in Colorado, Iowa, Kans as, Nebraska, Nevada, Oklahoma, South Dakota,
Texas, Utah, and Wyoming. Finally, there are “LRP-Fed Cattle” policies in Illinois, Iowa and
Nebraska.

134. Please state the annual amount of premiums paid or cont ributions made by US upland
cotton farmers relating to each of the crop insu rance programmes and/or policies supported by
the US Risk Management Agency and the Federa l Crop Insurance Corporation in each year
from 1992 through 2002. US

47. Please see Exhibit US-66.

135. Please state the annual amount of insura nce indemnity payments made by the US
government; or insurance companies particip ating in crop insurance programmes and/or
policies under the ARP Act of 2000 to upland cotton farmers in each year from 1992 through
2002. US

48. Please see Exhibit US-67.

136. Is the US arguing that crop insurance subs idies corresponding to "over 90 per cent of
insured cotton area" (US 7 October oral statement, para. 46) in MY1999 through 2002 are
consistent with paragraph 8(a) of Annex 2 of the Agreement on Agriculture? Is it correct that
in the past these subsidies were nonetheless no tified to the Committee on Agriculture as
non-product specific AMS (see, for example, G/AG/N/USA/43 in Exhibit BRA-47)? US

49. The United States has notified crop insuran ce payments to the Committee on Agriculture as
non-product specific support. This is consistent with the US position that crop insurance subsidies are
generally available subsidies to the agricultural sector as a whole.
20 In the US oral statement of
7 October 2003, it is pointed out that over 90 per cent of the cotton area currently under the
programme is insured at coverage le vels of 70 per cent or less of e xpected yield (or revenue). Over
all commodities, almost 70 per cent of total insured area is insured at 70 per cent or less of expected
yield or revenue. Thus, associated subsidies would be consistent with paragr aph 8(a) of Annex 2 of
the Agreement on Agriculture – that is, payments for relief from natural disasters that Members have

20 US Comments on Brazil’s Rebuttal Submission, paras. 34-42; US Rebuttal Submission, paras. 93-98;
US Further Submission of September 30, 2003, paras. 14-15.

agreed have no or at most minimal trade-distorting effects or effects on production. The point is made
to stress that such subsidies that satisfy green box criteria are likely non-production distorting,
contrary to the assertions made by Brazil.

H. EXPORT CREDIT GUARANTEES

137. Please elaborate the meaning of "net losses" as is used in paragraph 70 of Brazil's
7 October oral statement. BRA

138. Please comment on Brazil's views stated in paragraph 70 of its 7 October oral statement.
US

50. In specific response to Brazil’s views stated in that paragraph, the United States invites the
attention of the Panel to para graphs 157-162 of the 22 August US Rebuttal Submission, the table
accompanying paragraph 161 of that submission, and paragraphs 144-150 of 30 September Further
Submission of the United States. Paragraph 70 of Brazil’s 7 October oral statement is simply a
recapitulation of arguments it had previously advanced.

51. As noted in paragraph 144 of the US Further Submission, current data for each of the cohorts
for 1992, 1993, 1994, 1995, 1996, and 1999 indicates a profit.
21 As stated in OMB Circular No. A-
11: “The subsidy cost is the estimated present value of the cash flows . . . resulting from a direct loan
or loan guarantee . . . . A positive net present value means that the Government is extending a subsidy
to borrowers; a negative present value means that th e credit programme generates a ‘profit’
(excluding administrative costs) to the Government.”22

139. In the context of export credit guarantees, is the Panel correct in understanding that
Brazil's claims of inconsistency with the Ag riculture Agreement involve GSM 102, GSM 103
and SCGP, but that it limits its "serious prej udice" allegations in respect of export credit
guarantee programmes to the GSM 102 programme, and does not challenge GSM 103 and
SCGP in this respect? If so,

(a) could Brazil please explain why it did so, a nd confirm that all the data relied upon in its
further submissions (e.g. in Table 13) relat e to the GSM 102 programme rather than to
GSM 102, GSM 103 and SCGP (and, if the data n eeds to be adjusted to take account of
a narrower "serious prejudice" focus, supply GSM-102-relevant data)? BRA

(b) for the purposes of Article 13(c)(ii) of the Ag reement on Agriculture, is it necessary for
the Panel to examine only GSM 102 or should the Panel's examination include also GSM
103 and SCGP? Why or why not? BRA

140. Could Brazil explain how, if at all, it has treated export cred it guarantees for the
purpose of Table 1 of its further submission? BRA

141. The Panel notes the US argument, inter alia in its further submission, that the export
credit guarantee programmes are "self-sustaining". Recalling that item (j) of the Illustrative
List of Export Subsidies in Annex I of the SCM Agreement refers to "premium rates", could the
US expand upon how it takes into account the premium rates for the export credit guarantee
programmes in its analysis. US

21 See also US Rebuttal Submission, para. 161 (chart of Subsidy Estimates and Reestimates by Cohort);
US Further Submission, fns. 82 and 96.
22 OMB Circular No. A-11, section 185.2, pp. 185-3 and 185-4 (italics added) (Exhibit Bra-116).

52. Item (j) of the Illustrative List of Export Subsidies in Annex I of the SCM Agreement is
concerned with whether premium rates are inade quate to cover the long- term operating costs and
losses of the programmes. A rate is applied against a transaction amount to generate revenue to
cover any costs and losses. In the context of the export credit guarantee programmes, the
premium rate is applied against the volume of a particular transaction to generate revenue.
The mere rate as an abstract number cannot ge nerate revenue. Consequently, premium rates
as applied to the volume of transactions is necessarily the principal source of programme
revenue. In addition, recoveries – whether direct or through rescheduling – are an additional
source of revenue. Revenue from all these sourc es are applied against its operating costs (e.g.,
administrative expenses) and losses from its claims experience. Alternatively, such recoveries
may be viewed not as revenue but as a reduction of loss arising from claims experience. For
example, a full recovery of an amount already pa id as a claim yields a net loss of zero.
Arithmetically, this would yield the same result as treating the recovery as revenue, offsetting
the equivalent amount of prior loss.

53. As the United States noted in footnote 81 of its 30 September Further Submission, Brazil has
erroneously argued that item (j) compels considerati on only of premiums on the revenue side of the
ledger for purposes of covering long-term operating co sts and losses. In Brazil’s Comment on the US
answer to Panel question 77 (para. 94), Brazil states that “item (j) limits the revenue to be used to
offset operating costs and losses to ‘premium rates’ ”. To the contrary, item (j) envisions an
examination of whether premium rates are inadequa te to cover long-term operating costs and losses.
It does not say that all other revenue must be ex cluded from the calculation of whether a loss has
occurred. Brazil would argue that if the United St ates paid a claim on day 1 and recouped in full on
day 2 the amount it had paid, it could not include su ch recovery in a determination of whether the
programme satisfied item (j). Such a draconian result is economically illogical and certainly not
compelled by the text. As noted above, whether the recovery is viewed as revenue or as a subtraction
from loss, the net result would be the same, but it must be included in any evaluation of whether
premium rates cover long-term operating costs and losses.

54. As the United States further noted in its res ponse to Panel question 77 (11 August Answers to
Panel Questions, para. 145), item (j) applies to thr ee different types of programmes: export credits,
export credit guarantees, and insurance. In the ca se of export credit guarantees and insurance, the
provider will occasionally incur claims. To the exte nt such claims or defaults exceed revenue from
whatever source it may be derived, the net result would be a loss arising from operations. In an
accounting sense such result would constitute an ‘operating loss.’.

55. Revenues derived from fees paid in connec tion with the export credit guarantee programmes
form an integral part of the estimate and re-est imate process that currently indicate profitability for
each of the cohorts in 1992, 19 93, 1994, 1995, 1996, and 1999.
23 The application of the rates in this
regard to the analysis is properly extended to 1992, as this is the first fiscal year of applicability of
government-wide accounting for federal credit progr ammes under the Credit Reform Act of 1990.
This period also conforms with the period that Brazil recognizes as appropriate for analysis under
item (j).24 As a result of such profitability, the programmes are self-sustaining.

142. The US has pointed out that there are ma ny limitations on granting export credit
guarantees and that there is no requirement to issue any particular guarantee (US further

23 See Answer of the United States to Panel Question 138, supra. See also US Rebuttal Submission,
para. 161 (chart of subsidy estimates and reestimates by cohort); US Further Submission, fns. 82 and 96.
24 See First Submission of Brazil (24 June 2003), para. 282: “[A] ten-year period . . . fulfils the criterion
of being ‘long-term’ within the meaning of item (j).” In contrast, no such long-term analysis is possible with
respect to the Supplier Credit Guarantee Programme, the regulations for which were first promulgated only on 1
July 1996, with transactions commencing during fiscal year 1997.

submission, paras 153-156). Can the Commodity Credit Corporation decline to grant an
export credit guarantee even in cases where the programme conditions are met? US

56. A proper response to this question requires one to define by what is meant by “programme
conditions”. The arguments of Brazil would appear to create a tautological circularity: if one assumes
that none of the various discretionary progra mmatic and budgetary bases that would permit the
Commodity Credit Corporation not to issue a particul ar export credit guarantee are in effect, then can
the CCC decline to grant that particular guarantee? Under those circumstances the question itself
dictates that the answer must be “no”. The Un ited States submits, however, that assuming away all
of the real-world bases that would permit CCC to de cline issuance of a guarantee is not a proper basis
for analysis.

57. The fact remains, as the United States has pointed out, that numerous bases exist for denial of
a guarantee.
25 Brazil has argued, however, that “CCC does not enjoy the discretion to refuse to issue
a guarantee to an eligible individual”. 26 This is simply not true. Perhaps a practical example would
further illustrate the point. As the United States mentioned during the first substantive meeting of the
Panel, CCC internally maintains limits on the amo unt of its exposure to obligations of particular
foreign banks. 27 Although a qualified applicant might apply for an export credit guarantee for an
eligible good to an eligible destination (each of those elements themselves constituting potential bases
for denying an application), notwithstanding the eligib ility of the applicant, good, and destination, if
the foreign-bank obligor envisioned in th e transaction would exceed the applicable internally
established exposure limit if it consummated the tr ansaction, CCC could and would deny the
application for the guarantee. Thus, while it is true that the CCC does not engage in any arbitrary or
standard-less denials, the point is that no exporter seeking to engage in a particular export transaction
can be certain of obtaining a credit because of CCC decisions relating to the conditions for issuance of
export credit guarantees.

143. Brazil agrees with National Cotton Counc il estimates of the effects of the GSM 102
programmes (Brazil's further submission, para. 190) but it also cites a different conclusion by
Prof. Sumner (paragraph 192). Brazil cites other estimates by Prof. Sumner throughout its
further submission. Does Brazil adopt Prof. Sumn er's conclusions and estimates as part of its
submission? BRA

I. STEP 2 PAYMENTS

144. Is the Panel correct in understanding that the US does not dispute that Step 2 (domestic)
payments are contingent upon import substitution, and that it argues that such measures are
permitted due to the operation of the provisions of the Agreement on Agriculture? How is that
relevant to a claim under Articles 5 and 6 of the SCM Agreement? US

58. The United States acknowledges that to recei ve a payment under the Step 2 programme a
domestic user must open a bale of domestically pr oduced baled upland cotton. As the United States
noted in its Further Submission of 30 September 2003
28, the introductory clause of Article 3.1 of the
Subsidies Agreement, “Except as provided in the Ag reement on Agriculture”, applies to both Articles
3.1(a) and 3.1(b). Brazil’s arguments would dele te the application of the introductory clause to
Article 3.1(b). As the exception’s applicability to Article 3.1(b) must be given meaning, the United
States has noted that the Agreement on Agriculture does permit domestic content subsidies in favour

25 See, e.g., US Further Submission (30 September), paras. 153-156
26 Second Oral Statement of Brazil (7 October), para. 67.
27 See http://www.fsa.usda.gov/ccc/banks_foreign_rqts.htm.
28 Paras. 165-176.

of agricultural producers, albeit paid to processors, if such subsidies are provided consistently with the
Member’s domestic support reduction commitments.
29 The European Communities concur.30

59. As the United States has prev iously indicated to the Panel
31, the United States reports all Step
2 payments as product-specific domestic support to cotton. As the United States is entitled to the
protection of the Peace Clause under Article 13(b)( ii) of the Agreement on Agriculture, the United
States is exempt from action under Articles 5 and 6 of the Subsidies Agreement. By their express
terms, Articles 5 and 6 do “not apply to subsidi es maintained on agricultural products as provided in
Article 13 of the Agreement on Agriculture”.

60. The question of “import substitution” is otherw ise irrelevant to Brazil’s claims under Articles
5(c) and 6, which focus on the effect of the pa rticular subsidy without regard to the origin
requirements of the subsidy. In contrast, Article 3.1(b) focuses on whether a subsidy is contingent
upon use of domestic over imported goods to determine whether a partic ular subsidy is a prohibited
subsidy irrespective of its effect.

J. ACTIONABLE SUBSIDIES

145. The Panel notes that different remedies a re available in respect of prohibited and
actionable subsidies under Articles 4.7 and 7.8 of the SCM Agreement. If the Panel were to
conclude that a subsidy was prohibited and w ere to make a recommendation under Article 4.7
of the SCM Agreement to withdraw the subsidy without delay, can the Panel:

(a) also conclude that the same subsidy had resu lted in adverse effects to the interests of
another Member? If so, what would be the value of such a conclusion in terms of the
settlement of the matter before the Panel? BRA, US

(b) take into account the effects of the interact ion of those prohibited subsidies with other,
allegedly, actionable subsidies? If so, how is this relevant to the issue of causation under
Article 5 of the SCM Agreement? BRA, US

61. As a practical matter, there may be limited va lue in a particular dispute from making a finding
that a particular subsidy is both a prohibited su bsidy and causes adverse effects. If a subsidy is
prohibited, then the remedy required to be recomme nded under Article 4.7 is to withdraw the subsidy
without delay. A finding at the same time th at a subsidy causes serious prejudice, if done
cumulatively with an analysis of other subsidies, would mean that it would leave unclear the question
of whether the other, non-prohibited subsidies cause adverse effects. That may diminish the value (in
terms of resolving the dispute) of any finding concerning those other subsidies.

62. On the other hand, if the Panel were to make a separate “adverse effects” analysis for each of
the non-prohibited subsidies, there would be no reason to so analyze any prohibited subsidy. First, an
adverse effects analysis of a prohibited subsidy could not affect a panel’s findings with respect to each
non-prohibited subsidy. Second, since under Article 4 the panel would have recommended
withdrawal of the prohibited subsidy, complianc e with Article 4 would also comply with a
recommendation under Article 7. Therefore, havi ng made a recommendation under Article 4 with
respect to a subsidy, there would be no utility to also making a recommendation under Article 7.

29 US Further Submission (September 30, 2003), para. 167; First Written Submission of the United
States, paras. 146-150.
30 Answers of the European Communities to Panel Ques tion 40, paras. 72-78; First Oral Statement of
the European Communities, paras. 31-37.
31 See, e.g., First Written Submission of the United States, para. 129; G/AG/N/USA/43, at 20
(Supporting Table DS:6) (Exhibit Bra-47)

146. Brazil acknowledges that there are some interaction effects that may increase or
decrease the overall effects of the subsidies (Braz il's further submission, para. 225). How would
your analysis under Articles 5(c) and 6.3 of the SCM Agreement and Article XVI of GATT 1994
differ if it excluded, for example, crop insurance subsidies, PFC and/or direct payments? BRA

147. Does the US agree that subsidies provi ded under the marketing loan programme,
counter-cyclical payments and market loss a ssistance are or were more than minimally
trade-distorting? If so, please elaborate on th e type of effects which are more than minimally
trade-distorting within the meaning of Annex 2 of the Agreement on Agriculture but less than
adverse effects within the meaning of Article 5 of the SCM Agreement. US

63. The issues of whether a measure is more than minimally trade-distorting and whether a
measure has adverse effects require two different analyses. While it may be a necessary condition
that a subsidy has trade- or production-distorting eff ects in order to find that it causes adverse effects,
it is not a sufficient condition. The question under an adverse effects analysis is one of the effect on a
particular Member’s “interests” – for example, wh ether injury to the domestic industry of another
Member, nullification or impairment, or serious prejudice to the interests of another Member.
Therefore, the mere showing that a subsidy can distort trade or production does not necessarily mean
it has, for example, seriously prejudiced a particular Member’s interests.

64. Marketing loan payments, counter-cyclical payments, and market loss assistance payments
provide different types of support that can be expected to have different effects. As noted in the US
answer to Question 127, the United States notifies marketing loan payments as product-specific amber
box support. These payments are linked to producti on of upland cotton in favour of the producers of
upland cotton – a producer must have harvested co tton to receive the payment. Therefore, the
United States considers that marketing loan payments could not satisfy the general and policy-specific
criteria set out in Annex 2 of the Agreement on Ag riculture and therefore could not be deemed to
have met the fundamental requirement of that Annex.

65. That a particular support measure does not c onform to the general and policy-specific criteria
of Annex 2 is relevant to the type of support it is deemed to be, which has meaning for a Member’s
compliance with its reduction commitments. That a particular measure is not green box, however,
would not suffice to demonstrate that a measure has “adverse effects” within the meaning of Articles
5 and 6 of the Subsidies Agreement. A finding that a subsidy has caused adverse effects is a fact-
intensive analysis. In the case of a claim of serious prejudice, for example, one of the four effects set
out in Article 6.3 must be demonstrated (such as significant price suppression or depression by the
subsidized product in the same market as the non-s ubsidized product is found) and the effects caused
by the subsidy must rise to the level of “serious pr ejudice.” Such a fact-intensive analysis must take
into account, inter alia, the nature and amount of the subsidy, market c onditions, and other factors
affecting production, consumption, and prices.

66. Therefore, a conclusion that a measure does not provide green box support and therefore
would not be deemed to have no or at most mini mal trade-distorting effects or effects on production
cannot take the place of the fact-intensive ex amination required to show causation under the WTO
Agreements. For example, marketing loan paymen ts provide a revenue floor of 52 cents per pound
for US upland cotton producers. The effect of th is subsidy would depend in large part on the
producer’s expected market revenue at the time of planting – that is, whether this expected revenue
was above or below 52 cents per pound. Thus, the effect of this subsidy would be quite different from
a subsidy that merely provided an unchanging per unit payment (e.g., 10 cents per pound), even if as a
result of prices that actually develop over the cour se of a marketing year the per-unit payments under
these two measures turn out to be the same. As an other example, a measure that provided, in the
aggregate, $1 of support linked to production of upland cotton could not satisfy the general and

policy-specific criteria of Annex 2 of the Agreement on Agriculture
32, but it would be difficult to
conceive that the effect of $1 in subsidies could be “significant price suppression [or] price
depression” or “an increase in the world market sh are of the subsidizing Member” given the large
number of market participants (including cott on producers worldwide), highly developed cotton
markets, and volume and value of cotton trade.

67. With respect to counter-cyclical payments under the 2002 Act, the United States recalls that
according to Brazil’s interpretation of the first sentence of Annex 2 as a stand-alone requirement, if a
measure has no more than minimal trade-distorting effects or effects on production, it follows that
such a measure must be deemed green box. As the United States has demonstrated, the economic
literature on decoupled payments (counter-cyclical payments are decoupled from production although
linked to current prices) suggests that the effects on production of such income transfers are no more
than minimal.
33 Therefore, although the United States would not contend that counter-cyclical
payments conform fully to the policy-specific criteri a in Annex 2, there is not only no evidence that
such payments have more than minimal trade-distorting effects or effect on production, but the
evidence suggests the contrary. In such a case, the effect of a paym ent that does not have more than
minimal effects on production would not appear to be “significant price suppression [or] depression”
or an “increase in the world market share of the subsidizing Member”, much less “serious prejudice”.

68. The expired market loss assistance payments were ad hoc payments made during the 1999,
2000, and 2001 marketing years to holders of b ase acreage. These payments were not linked to
production – that is, a recipient need not have pro duced upland cotton or any crop at all in order to
receive the payment.
34 However, because these payments were explicitly made in reaction to low
commodity prices, the United States considered th at these payments would not conform fully to the
criteria in Annex 2 of the Agreement on Agricu lture and therefore notified these payments as non-
product-specific amber box support. As noted a bove with respect to the 2002 counter-cyclical
payments, however, the economic literature on paym ents decoupled from production suggests that the
effects on production of income transfers such as the market loss assistance payments are no more
than minimal. 35 Therefore, the evidence suggests that th e effect of such payments could not be
“significant price suppression [or] depression” or an “increase in the world market share of the
subsidizing Member” resulting in “serious prejudice”.

148. How should the significance of price suppres sion or depression be assessed under Article
6.3(c) of the SCM Agreement? In terms of a meaningful effect? Or another concept? BRA, US

69. As the United States has previously noted
36, in Article 6.3(c) the term “significant” modifies
the phrase “price suppression or depression”, suggesting that it is the level of price suppression or
depression itself that must be “important, notable” or “consequential”.37 As Brazil agrees38, important

32 For example, the measure would not qualify as dec oupled income support because, by requiring that
recipients have produced upland cotton, the amount of the payment would be “related to, or based on, the type
or volume of production . . . undertaken by the producer in any year after the base period”. See Agreement on
Agriculture, Annex 2, para. 6(b).
33 See, e.g., US Rebuttal Submission, paras. 59-64.
34 Supplemental legislation authorizing each of these payments was passed several months after
planting for the crop year in question had occurred. Even if producers had some expectations of payment at
planting time, they were eligible to receive such a paymen t regardless of what crop th ey planted. Indeed, they
could choose not to plant and still be eligible for the payment. This would argue that market loss assistance
payments, like production flexibility contract payments, direct payments, and counter-cyclical payments, are
decoupled from planting decisions.
35 See, e.g., US Rebuttal Submission, paras. 59-64.
36 US Opening Statement at the Second para. 58.
37 US Further Submission, para. 83.
38 See Brazil’s Further Submission, para. 88 (“This interpretation of price suppression and price
depression is consistent with the relevant context of Article 6.3(c), which includes Article 15.2 of the SCM

context for interpreting this phrase can be found in Article 15.2 of the Subsidies Agreement, which
sets out for countervailing duty purposes th e same effects found in Article 6.3. 39 This text confirms
that the relevant analysis is whether the level of price suppression or depression itself is “significant”:

With regard to the effect of 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 increases , which otherwise would have
occurred, to a significant degree.
40
Thus, Article 15.2 provides contextual support for reading the term “significant price suppression [or]
depression” in Article 6.3(c) according to the ordinary meaning of its terms – that is, it is the degree of
price suppression or depression itself that must be “significant”.

70. As suggested by this analysis, it is not the effect on the producers of the complaining Member
that must be “significant”. In determining whet her the alleged price suppression or depression is
“important” or “notable”, it will of course be relevant to look at that suppression or depression in the
context of the prices that have b een affected – that is, at the degree of suppression or depression. One
absolute level of suppression or depression could be significant in the context of prices for one
product but not for another and meaning must be given to the phrase “in the same market”.

149. What is the meaning of "may" in the chapeau of Article 6.3(c) in the context of Brazil's
assertion that there is no need to conduct a distinct analysis of "serious prejudice" under Article
5(c) after having made a finding under 6.3(c) or (d)? (Brazil's further submission, paras 437 ff).
How, if at all, are Articles 6.2 and 6.8 relevant in this context? What context should the Panel
use for assessing serious prejudice under Article 5(c) of the SCM Agreement if the Panel takes
the view that Article 6.3(c) and (d) are permissive conditions for a determination of serious
prejudice? US

71. The chapeau of Article 6.3 states that “[s]erious prejudice in the sense of paragraph (c) of
Article 5 may arise in any case where one or more of the following apply”. The Article then goes on
to detail four effects that “may” result in serious prejudice arising. Brazil’s reading would re-write the
chapeau of Article 6.3, changing the permissive “may” into the obligatory “shall”. The ordinary
meaning of “may” is “to express possi bility, opportunity, or permission”.
41 Therefore, the ordinary
meaning of the chapeau of Article 6.3 would be th at there is a “possibility” or “opportunity” for
serious prejudice in the sense of Article 5(c) to arise where one or more of the effects listed in
Article 6.3 is found.

72. Article 6.2 clarifies that a prerequisite for a fi nding of serious prejudice is that at least one of
the four effects in Article 6.3 must be demonstrated. That is, Article 6.2 precludes a panel from
finding serious prejudice (“serious prejudice sh all not be found”) if a subsidizing Member
demonstrates that the subsidy has not had any of th e effects listed in Article 6.3. This provided a
subsidizing Member with a means to overcome the presumption created through the operation of

Agreement. That provision discusses standards for the determination of injury in countervailing duty cases and
provides that the investigating authorities should consider whether the effect of imports is ‘to depress prices’ or
‘to prevent price increases, which otherwise would have occurred . . .’[.]”) (emphasis added).
39 Effects on prices form one part of a determination of injury for countervailing duty purposes.
Pursuant to Article 15.1, such a determination of injury involves an objective examination of (a) the volume of
subsidized imports and the effect of the subsidized impor ts on prices in the domestic market for like products
and (b) the consequent impact of these imports on the domestic producers of such products.
40 Subsidies Agreement, Article 15.2 (italics added).
41 The Random House Dictionary of the English Language, Unabridged Edition at 886 (1983).

Article 6.1 while that provision was still in effect. However, Article 6.1 demonstrates that Members
knew how to create a presumption of serious prejudice: they did so by explicitly stating that, in certain
cases, “[s]erious prejudice . . . shall be deemed to exist” (italics added). Article 6.2, while providing a
means to rebut that presumption, does not by its terms establish that serious prejudice “shall be
deemed to exist” if one of the effects in Article 6.3 exists.

73. Article 6.4 lends further contextual support to the interpretation that the use of the term “may”
in the chapeau of Article 6.3 signifies that the effects listed in Article 6.3 are permissive conditions for
a determination of serious prejudice. Article 6.4 states that “displacement or impeding of exports
shall include any case in which, subject to the provisions of paragraph 7, it has been demonstrated that
there has been a change in the re lative shares of the market to the disadvantage of the non-subsidized
like product”. Thus, given certain situations furt her explained in Article 6.4, displacement or
impeding of exports “shall” exist. However, Arti cle 6.3 does not state that, given those situations,
displacement or impeding of exports resulting in serious prejudice shall exist. That is, the situations
in Article 6.4 which must result in a finding of displacement or impeding of export do not, by the
terms of the Article, also result in a finding of serious prejudice.

74. Article 6.5 similarly defines a situation in which “price undercutting” under Article 6.3(c)
“shall” be found but does not also mandate a finding of serious prejudice. Had Members intended (as
Brazil contends) 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 prejudice
where a finding of one of the effects under Article 6.3 is mandated.

75. Article 6.8 provides further contextual support for reading Article 6.3 as setting out certain
permissive conditions that could result in a panel fi nding that serious prejudice to the interests of a
Member exist. Article 6.8 states that, “in the absence of circumstances referred to in paragraph 7”,
which merely preclude a panel from finding disp lacement or impediment resulting in serious
prejudice, “the existence of serious prejudice should be determined on the basis of the information
submitted to or obtained by the panel” (italics a dded). Again, this provision does not mandate a
finding of serious prejudice should one or more of th e effects set out in Article 6.3 be demonstrated.
Rather, it emphasizes that “the existence of serious prejudice” (rather than the existence of one of the
effects in Article 6.3) “should be determined” by th e panel based on the information before it. Thus,
while a panel may be precluded from making a finding of serious prejudice (where, for example, a
complaining party has only alleged displacement or impediment under Article 6.3, but one of the
conditions in Article 6.7 exist), there is no curre ntly effective provision under which a panel is
compelled to find serious prejudice.

150. Is the list in Article 6.3 of the SCM Agree ment exhaustive, or co uld serious prejudice
arise in circumstances other than those listed in paragraphs (a) through (d)? US

76. Article 6.3 sets out four circumstances in wh ich the effects of subsidies “may” give rise to a
finding of serious prejudice. Article 6.2 establishes that “serious prejudice shall not be found” if a
subsidizing Member demonstrates that a challenged subsidy has not resulted in any of those four
effects. Therefore, Articles 6.3 and 6.2 indicate that serious prejudice may not be deemed to have
arisen without at least one of the four effects listed in Article 6.3 having been demonstrated.

151. Where in the text of Article 6.3(d) of the SCM Agreement is there a basis to take into
account that 1998 may be a "misleading" year for the purposes of comparison? For example,
unlike the text of Article XVI:3 of the GATT 1994, there does not seem to be a general reference
to "special factors". US

77. Article 6.3(d) requires that a complaining pa rty demonstrate that the effect of a challenged
subsidy is an increase in the world market share in a particular subsidized primary product or
commodity as compared to the average share it had dur ing the previous period of three years and this

increase follows a consistent trend over a period wh en subsidies have been granted. Where the
evidence offered by a complaining party relies in large part on abnormal production and trade data
evidently caused by factors unrelat ed to the challenged subsidy (in the case of the United States in
1998, severe drought and record abandonment of plante d acres), use of that data cannot satisfy the
complaining party’s burden of demonstrating causation – that is, the “effect of the subsidy”.

78. Article 6.3(d) sets out a fairly mechanical two-part test: first, there must be an increase in
world market share as compared to the average over the preceding period of three years. Thus,
assuming arguendo that Brazil could challenge expired ma rketing year 2001 support measures, this
test would compare the world market share of US upland cotton in that year to the average over the
preceding three years. Brazil, however, has misinter preted Article 6.3(d) and examined the US world
export share.

79. The second part of the test is that any su ch increase over the average of the preceding three-
year period “follows a consistent trend over a period when subsidies have been granted”. The
marketing year 2001 payments challenged by Brazil were first introduced for the 1996 marketing year
by the 1996 Act. Thus, Brazil must demonstrate that the alleged increase in world market share
follows a “consistent trend” between marketing years 1996-2001. In fact, there is no consistent trend
showing an increasing US world market share over th is period; that world market share has been
inconsistent but showing a tendency to decline over that period. As demonstrated in Exhibit US-47,
US world market share surpassed 20 per cent in bo th marketing years 1996 and 1997 but has not
thereafter.

80. Finally, as the United States has noted in its further submission, Brazil has limited its claim
under Article 6.3(d) to alleged effects in marketing year 2001.
42 Thus, there can be no finding that
challenged US subsidies under the 2002 Act presently cause serious prejudice within the meaning of
Article 6.3(d). As the United States has previo usly noted, moreover, payments with respect to
marketing year 2001 expired with the granting of support in respect of the 2002 marketing year’s
production, which began on 1 August 2002 – that is , seven months before this Panel’s terms of
reference were established. Th e result is that Brazil is asking the Panel to make findings and a
recommendation with respect to subsidies that had b een replaced at the time of panel establishment
and that no longer exist to be withdrawn even were a recommendation to be made.

152. If the US is correct in asserting that the Article 13(b)(ii) Agreement on Agriculture
analysis is a year-by-year analys is, how would this affect the Panel's examination of Brazil's
claims of serious prejudice, including the three year period and the trend period in
Article 6.3(d) of the SCM Agreement? US

81. Article 13(b)(ii) exempts from action measures that, inter alia, conform fully to the provisions
of Article 6 of the Agreement on Agriculture. Ch ief among those provisions is the obligation that a
Member remain within its Annual and Final Bound Commitment Levels for its Aggregate
Measurement of Support, a commitment that is expressed by year. Therefore, while a Member may
breach the Peace Clause in a give n year by exceeding its bound commitment level, that Member may
in the following year not breach the Peace Clause if its domestic support measures once again do not
exceed its commitment levels. Thus, to gauge wh ether domestic support measures have breached the
Peace Clause requires a year-by-year analysis.
43

42 US Further Submission, para. 100.
43 Brazil agrees that the Peace Clause requires a year-b y-year comparison. Brazil insists, however, that
once a Member has breached the Peace Clause once, that Member can never thereafter regain Peace Clause
protection. There is nothing in the text of the Peace Clause that supports Brazil’s view on this point – nor, as a
result, has Brazil pointed to any supporting text.

82. The year-by-year analysis under the Peace Clause does not affect how the Panel would
undertake a serious prejudice analysis; it affects only the Panel's analysis of which of the US measures
that Brazil has challenged may be the subject of th e serious prejudice analysis. In the event, Brazil
has only claimed that the effect of US subsidies in marketing year 2001 was inconsistent with Article
6.3(d). Therefore, the Panel’s task is first to analyze whether US domestic support measures in
marketing year 2001 breached the Peace Clause. If so, then the Panel would be able to undertake a
serious prejudice analysis – and that second analysis is distinct from the first one. The United States
has demonstrated that US meas ures in marketing year 2001 do not grant product-specific support to
upland cotton in excess of that decided during the 1992 marketing year, whether measured according
to the level of support granted by those measures or a price-gap AMS calculation.

83. With respect to the two-part test of the thr ee-year average and consistent trend over a period
when subsidies have been granted, the Peace Clau se would have no impact on these tests. That is,
assuming arguendo that marketing year 2001 measures were not exempt from action, the fact that the
Peace Clause exempts from action measures for other marketing years would not preclude the Panel
from examining data and evidence from those years as part of its serious prejudice analysis of the
2001 measures. The payments made in those other marketing years (that is, the marketing year 1999
measures and the marketing year 2000 measures) w ould be exempt from action; evidence relating to
those years would not be sheltered from examination by the Panel in its serious prejudice analysis of
the 2001 measures.

153. Would the conditions in Article 6.3(d) of the SCM Agreement be satisfied in respect of
time periods other than the one specified? What relevance, if any, would this have for Brazil's
claims? BRA

154. Does the US agree that upland cotton is a "p rimary product or commodity" within the
meaning of Article 6.3(d) of the SCM Agreement? (ref. Brazil's further submission, para. 262)
and within the meaning of Article XVI:3 of the GATT 1994? US

84. Yes.

155. Please respond to Brazil's identification of the seven-year period beginning with
MY1996 (following the passage of the FAIR Act of 1996) as the "most representative period"
for the purposes of Article 6.3(d)? (ref. Brazil further submission, para. 269) US

85. Brazil has challenged only those US subsidies that allegedly had the effect of increasing US
world market share in marketing year 2001 – that is, marketing year 2001 payments. The second part
of the test under Article 6.3(d) is that any increase in world market share that is the effect of the
challenged subsidy over the average of the preceding three-year period “follows a consistent trend
over a period when subsidies have been granted”. The marketing year 2001 payments were granted
under the 1996 Act. Therefore, the “period when subsidies have been granted” for purposes of an
analysis of the effect of marketing year 2001 support would be the marketing year 1996-2001 period.

86. The United States believes that marketing year 2001 support cannot cause present serious
prejudice because these payments expired when marke ting year 2002 payments began to be made.
Nonetheless, if marketing year 2001 payments ar e the challenged measures for purposes of Brazil’s
Article 6.3(d) claim, there is no basis to include marketing year 2002 within the period when subsidies
have been granted. (We also note that Brazil iden tifies a seven-year period beginning with marketing
year 1996 but presents data only for the six-year period through marketing year 2001.)

156. Does the US agree that "...footnote 17 [of the SCM Agreemen t] does not carve out
upland cotton from the scope of Article 6.3(d) of the SCM Agreement"? (ref. Brazil further
submission, para. 275). US

87. The United States is not aware of any “other multilaterally agreed specific rules apply to the
trade in the product or commodity in question” within the meaning of footnote 17 to Article 6.3(d) of
the Subsidies Agreement.

157. Does the reference to "trade" in footnote 17 of the SCM Agreement have any impact on
the interpretation of "world market share" in Article 6.3(d)) If so, what is it? US

88. The use of the term “trade” in footnote 17 provides useful context in interpreting the phrase
“world market share” in Article 6.3(d). Specifi cally, Article 6.3(d) speaks of an increase in a
Member’s “world market share”, not an increase in a Member’s “world trade share”. By using the
term “market” and not “trade”, Article 6.3(d) establishes that its scope is not limited to cross-border
movements of a primary product or commodity. That is, the “world market” for a primary product or
commodity encompasses all the markets in the entire “world”, including the market of the allegedly
subsidizing Member. Had Members desired instead to restrict the analysis under Article 6.3(d) to
cross-border shipments, they could have used the phrase “world trade share” or, in Brazil’s preferred
formulation, “world export share”, or even (as in GATT 1994 Article XVI:3) “world export trade”.
They did not. Finally, we note that, rather than elaborating on the test under Article 6.3(d), footnote
17 was intended to describe those products or commodities not covered by Article 6.3(d) and
therefore could use the term “trade”.

158. Please respond to Brazil's assertion that " ...the absence of any payment, production or
expenditure limitations in the US marketing loan programme is analogous to the EC sugar
regime that was challenged in EC - Sugar Ex ports II (Brazil) and EC - Sugar Exports I
(Australia)." (ref. Brazil further submission, para. 317) US

89. The EC sugar export regime challenged by Australia and Brazil under the GATT 1947 was
manifestly different than the US marketing lo an programme, primarily in that the challenged
programme was an export subsidy providing export refunds on exportable surpluses of sugar. The
Sugar Exports panel concluded that in the particular market situation prevailing in 1978 and 1979, the
EC system had caused serious prejudice to Brazil’s interests because it had been applied in a manner
which contributed to depress sugar prices. The panel also concluded that the lack of “pre-established
effective limitations” on those export refunds and th e application of that refund system “constituted a
permanent source of uncertainty in world sugar mark ets and therefore constituted a threat of serious
prejudice. The panel’s finding on serious prejudice was made carefully, circumscribed by “the
particular market situation prevailing in 1978 and 1979”. However, the panel’s finding on threat of
serious prejudice was made without any explanation a nd apparently without argument by the parties.
Therefore, it is difficult to see how the Panel could draw useful guidance from this finding by that
panel or draw conclusions on relevant types of payments.

159. The EC, in its oral statement (paras 9 and 10), disagrees with the US interpretation of
the terms "same market". Can the US comment on the EC's view? US

90. The United States still has difficulty with th e EC view. The United States cannot understand
how the "world" can be one "market" for purposes of Article 6.3(c), which by its nature calls for a
comparison of the prices of the goods of one Member when competing in a market with the goods of
another Member. Goods are not sold to the "world" – they are sold in the market of a particular
country.

91. The EC on the other hand evidently considers th at it is at least possible that the world could
function as one market and therefore constitute a “same market” for purposes of analyzing whether

the “effect of the subsidy” is “significant pri ce suppression [or] depression” of the price of a non-
subsidized product in the same market. For the re asons set forth in the US further submission, the
United States considers that such an interpreta tion would render the “in the same market” language
inutile because the subsidized and non-subsidized products could never be found in the same
geographic market and still be cons idered to be in the same “world market”. Furthermore, under the
EC's approach, a Member could be selling at a pric e well above another Member's price in the same
country, and yet be found to be depressing prices on the "world market" due to a comparison between
sales prices of the Member in one country compared to sales prices of the other Member in a different
country.

92. However, the EC itself concedes that a “world market” could only be deemed to exist if there
were not significant barriers to trade in the product at issue, such as customs duties, technical barriers
to trade, etc. The EC’s own explanation suggests that such a “world market” is unlikely to exist
because of significant barriers to trade somewhere in the world. Thus, even under the EC’s approach,
it is not the case that there is a “world market” for upland cotton.

160. Without prejudice to the meaning of "world market share" as used in Article 6.3(d) of
the SCM Agreement, can you confirm the world ex port share statistics provided in Exhibit
BRA-206? US

93. The table below reflects most recent updates for 2002-03 and 2003-04. We caution that, as
noted in the footnotes in the table, the data are drawn from different sources and data sets. Also, we
have corrected data in BRA-206 for 1997-98 for to tal world exports, world upland exports, and US
export share.

World cotton exports (million bales)
Year US upland
exports (1)
Total world
exports (2)
ELS world
exports (3)
World upland
exports (4)
US Share of
World Exports
(5)
1996-97 6.399 26.929 1.017 25.912 24.70%
1997-98 7.06 26.838 1.106 25.732 27.44%
1998-99 4.01 23.668 1.085 22.583 17.76%
1999-00 6.303 27.326 1.193 26.133 24.12%
2000-01 6.303 26.589 1.127 25.462 24.75%
2001-02 10.603 29.052 1.325 27.727 38.24%
2002-03 11.266 30.629 1.989 28.640 39.34%
Average:
 98/99 -
00/01

5.539

25.861

1.135

24.726

22.40%
 99/00 -
01/02
7.736 27.656 1.215 26.441 29.26%
 00/01 -
02/03
9.391 28.757 1.480 27.276 34.43%
Source:
(1) USDA,Fact Sheet Upland Cotton, 2003 p.5
(2) USDA, ERS. Cotton and Wool Yearbook, 2002, p. 31; Fact Sheet Upland Outlook, USDA, Oct
2003 table 2
(3) ICAC, Cotton World Statistics, Sept. 2003, p. 7.
(4) Calculation: (2) - (3)
(5) Calculation: (1)*100/(4)

161. Would a finding of serious prejudice under Article 5(c) of the SCM Agreement be
determinative for a finding under Article XVI:1 of the GATT 1994? Why or why not? What, if
any, is the role of footnote 13 of the SCM Agreement in this context? BRA, US

94. Article 5(c) establishes that one of the adve rse effects that a subsidizing Member should not
cause to the interests of other Members is “serious pr ejudice”, and footnote 13 to that Article states
that the term “‘serious prejudice to the interests of another Member’ is used in the same sense as it is
used in paragraph 1 of Article XVI of GATT 1994” . Therefore, “serious prejudice” under Subsidies
Agreement Article 5(c) and GATT 1994 Article XVI:1 must be read to have the same meaning. As
Article 5(c), and Article 6 which explains it, are the more detailed provisions on “serious prejudice”
and contain a more effective remedy than the consultation envisioned under GATT 1994 Article
XVI:1, the Panel’s analysis should begin with the Subsidies Agreement provisions. Were the Panel to
agree that Brazil has not established that the eff ect of the challenged subsidy is “serious prejudice”
within the meaning of the Subsidies Agreement, it would be difficult to see how the Panel could then
determine that “serious prejudice” exists within the meaning of GATT 1994 Article XVI:1 since the
term is used “in the same sense” in these provisions.

162. Can the US confirm that marketing loan/LDP , step 2 and counter-cyclical payments are
mandatory if the price conditions are fulfilled? US

95. The statutory authority for marketing loan payments, step 2 payments, and counter-cyclical
payments does not provide the Secretary with the authority to arbitrarily decline to make these
payments to qualified recipients. However, certain conditions must be met before these payments will
be made: price conditions must be met, the producer must meet all conditions for payment, including
compliance with "sodbuster" and "swampbuster" provisions and any planting restrictions, the
Commodity Credit Corporation (CCC) must not have exhausted its statutory borrowing authority, and
Congress must not have cut back on the programme, by an appropriations bill or otherwise.

96. As the question notes, different price cond itions apply to each of these payments. For
example, in the case of marketing loan payments , the adjusted world price (as calculated by the
Department of Agriculture) must be below 52 cents per pound. Recently, the adjusted world price has
been above 52 cents per pound and thus no marketi ng loan payments have been made to qualified
recipients.

97. There is no preset limit on the total amount of payments that can be made under each of these
programmes although for counter-cyclical payments a maximum total outlay can be calculated using
the base acres, base yields, and maximum paymen t rate for each commodity produced during the
historical base period. In addition, for certain recipients, per-person payment limits may apply. We
also note that under Section 1601(e) of the 2002 Act, the Secretary has the authority (so-called
"circuit breaker" authority) to make adjustment s to farm programmes because of WTO domestic
support reduction commitments. Presumably, this au thority could result in refusals to make certain
payments.

98. Conditions for receiving counter-cyclical and marketing loan payments are numerous. The
programme contract for counter-cyclical payments is required by section 1105 of the 2002 Act. That
section provides explicitly that the producers must agree: (A) to comply with the requirements dealing
with the highly erodible cropland conservation found at 16 USC 3811 et seq.; (B) comply with the
wetland conservation requirements found at 16 USC 3821 et seq .; (C) comply with the planting
flexibility requirement of Section 1106 of the 2 002 Act; (D) use the land representing the base acres
for an agricultural or conserving use but not for a non -agricultural, commercial, or industrial use, as
determined by the Secretary; and (E) control n oxious weeds and otherwise maintain the land in
accordance with sound agricultural practices as dete rmined by the Secretary of Agriculture, if the
agricultural or conserving use involves the noncu ltivation of any portion of the land as permitted
under the specification just set out in (D). For marketing loans, the loan agreement and loan

regulations, contained in 7 CFR part 1421, specify various conditions that must be met and followed
by the producer. Under 16 USC 3811 et seq., the wetland and conservation provisions cited above are
made applicable to all commodity benefits, including loans.

163. Are US cotton producers able to cover th e fixed and variable costs without subsidies?
Please provide substantiating evidence. Of what rel evance is this, if any, to Brazil's actionable
subsidy claims ? US, BRA

99. The United States notes that even using cost data that reflects 1997 cost structures
44, US
producers appear to have been able to cover variable costs through the sale of cotton at harvest time in
every year but marketing years 2001 and (more narrowly) 2002. In this, US producers were no
different than Brazil’s farmer witness, Christophe r Ward, who stated: “But even with these high
yields and the excellent quality of our land, we were not able to fully recover all of our variable costs
of production during the 2000/01 an d 2001/02 seasons[,]” a position evidently shared by most
producers in Mato Grosso, Brazil’s leading cotton-producing state.45

100. Furthermore, even in years in which US produ cers may not have been able to cover fixed and
variable costs, it does not follow that it is subsid ies that covered these costs. Again, Mr. Ward
explained that in marketing years 2000 and 2001, “Nor were we able to meet our total costs which
include the additional fixed costs.” Therefore, producers can cover costs from revenue sources other
than subsidies. That harvest prices at times fa ll below costs does not necessarily mean that subsidies
have had the effect of maintaining production.

US upland cotton operating costs compared to harvest cotton price
Year Cotton price at harvest
($/lb)
Average operating cost
($/lb)

1998 0.64 0.481
1999 0.47 0.418
2000 0.57 0.473
2001 0.35 0.447
2002 0.42 0.453
Source: USDA, Economic Research Service, Ag ricultural Resources Management Survey
(www.ers.usda.gov/data/ costsandreturns/testpick.htm)

K. CAUSATION

164. When the US points, in its oral statement of 7 October, to the alleged "bias" of Prof.
Sumner's model, is it arguing that US subsidi es are irrelevant to the movement in prices and
production (acreage) of upland cotton? US

101. The United States recognizes that subsidies can potentially affect production and prices of
upland cotton. 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. The criticisms of Dr. Sumner’s
model outlined in the US oral statement of Octobe r 7, 2002 take issue with many of the underlying

44 Recall that the Department of Agriculture conduc ted a survey of cotton farmers in 1997. For any
cost data published by the Department since that time, the 1997 data has merely been updated by applying the
producer price index to ‘update’ input costs. See US Closing Statement at the Second Session of the First Panel
Meeting, paras. 10-11.
45 Statement of Mr. Christopher Wa rd at the Second Session of the First Panel Meeting, para. 6
(emphasis added). Mr. Ward goes on to state: "Based on my discussions with many producers relating to Mato
Grosso cotton production and revenue, I know that most other producers in State of Mato Grosso were in the
same situation as we were during the 1999-2000 period." (Id (emphasis added)

assumptions in the model, particularly in regards to how decoupled payments were modelled and the
choice of baselines used by Dr. Sumner, which have le d to results that have exaggerated the impact of
US subsidies on world cotton markets.

165. Please comment (and submit substantiating evidence) on the US assertion that the
FAPRI model has been designed and developed for prospective analysis, and is not suitable for
retrospective counterfactual analysis. What is the reliability of past FAPRI-produced analyses
when compared with actual data for the period covered by them? Is there any other instrument
that can be used to try to identify the effect of subsidies already granted, or of their removal?
BRA, US

102. FAPRI uses its models for prospective analyses; that is, they analyze the future effects of
proposed programme changes against a baseline th at assumes current programmes are in place.
Recent examples of FAPRI analyses include the effects of stricter payment limitations on US
farmers
46, an analysis of the European Union’s 2003 CAP Reform Agreement47, and the effects on the
US dairy industry of removi ng current Federal regulations. 48 These analyses are forward-looking
examinations of the effects of policy changes.49

103. Econometric modelling systems similar to the ones maintained by FAPRI and USDA are
designed for prospective analyses of altern ative policy assumptions. The foundation for
forward-looking analyses is the baseline projections, which are conditioned on specific assumptions
for exogenous variables, i.e., those that are inde pendent of the modelling system. The baseline model
is also conditioned to incorporate the current structure of specific commodity markets through
equation specifications, elasticity estimates, and structural shift and dummy variables. As a result, the
baseline models will not be appropriately structured to analyze changes over a historical period. For
example, models calibrated for the current structure of the US textile industry may not be appropriate
to assess the structure present in the late 1990's due to the tremendous changes that have occurred.
Another difficulty of using the system over a histori cal period is the degree of external shocks that
impact the model. In prospective analysis, assessing the impacts of alternative policies occurs absent
of extreme shocks from independent variables.

46 FAPRI. FAPRI Analysis of Stricter Payment Limitations FAPRI-UMC Report #05-03 17 June 2003.
15 pp. Available at: http://www.fapri.missouri.edu/FAPRI_Publications.htm.
47 FAPRI. Analysis of the 2003 CAP Reform Agreement. FAPRI Staff Report #2-03, 9 September
2003. 16 pp. Available at: http://www.fapri.missouri.edu/FAPRI_Publications.htm
48 FAPRI. The Effects on the United States Dairy Industry of Removing Current Federal Regulations.
FAPRI-UMC Report #03-03. April 2003. 14 pp . Available at http://www.fapri.missouri.edu/
FAPRI_Publications.htm
49 FAPRI recognizes the forward-looking nature of its analyses and the limitations of those baselines
quite clearly:

Each year, FAPRI prepares a set of baseline pr ojections that provide information about the
outlook for agricultural markets, farm progra mme spending, farm income, and a variety of
other indicators. The baseline then serves as the point of comparison for analyses of
alternative policy options....

The baseline is not a forecast of what will happen, but rather a projection of what could
happen under a particular set of assumptions. Cu rrent global policies ar e held in place, even
when there is reason to suspect changes are likely....

In reality, these assumptions are certain to be violated and actual market outcomes will differ
from the deterministic baseline projections presented in the supply-demand tables....

FAPRI 2003 US Baseline Briefing Book, Foreward, page 1. FAPRI-UMC Technical Data Report
04-03 (March 2003) (www.fapri.missouri.edu).

104. As mentioned by Dr. Sumner in Annex I to Brazil’s submission of 30 September, baseline
models such as the one utilized by FAPRI or USDA are not forecasting models. They are used to
analyse proposed policy changes.
50 The attached table shows the forecast accuracy for year ahead
price forecasts by FAPRI.

FAPRI farm price projections for upland cotton compared to actual prices, MY1999-2003 ($/lb)
FAPRI published
baseline
Marketing
year
FAPRI
projected price
Actual price 1/ Difference 2/
January 1998 1999/00 0.689 0.45 -0.239
January 1999 2000/01 0.531 0.498 -0.033
January 2000 2001/02 0.479 0.298 -0.181
January 2001 2002/03 0.554 0.43 -0.124
January 2002 2003/04 0.385 0.463 3/ 0.078
Source: FAPRI, USDA World Agricultural Supply and Demand Estimates
1/ Marketing year average farm price reported by USDA.
2/ Actual farm price minus forecast price
3/ Average cotton farm price for August 2003. USDA is prohibited from publishing cotton price
forecasts.

105. One potential approach to using a baseline mode l to estimate the effects of subsidies during a
historical period would be to use an ex post prospective analysis. Under an ex post analysis, instead
of using the current baseline for measurement, one would use a past baseline to make year-ahead
projections of the effects of subsidies on the cotton market. For example, to analyze the effects of
subsidies on the 1998/99 marketing year, one could use the January 1998 FAPRI baseline model to
project the effects of removing subsidies and compare them to baseline levels for the 1998/99
marketing year. To analyze the 1999/00 marketing year, one would update the baseline to the January
1999 baseline and so on, until the current baseline. This would provide baseline comparisons that
would reflect the estimated effects of the programmes at the time of planting in each year.

166. The US states that "futures prices demo nstrate that market participants predict
increasing upland prices over the course of the ma rketing year" (US 7 October oral statement,
para. 62). Please elaborate on this argument including citing specific futures prices. US

106. Exhibit US-68 shows average daily closing prices for the December 2003 cotton futures
contract. Daily futures prices for December 2003 and May 2004 delivery have increased by as much
as 35 per cent from January 2003 levels.

107. Futures prices reflect a price that a buyer is willing to pay to secure a supply at a given price
and protect against the possibility of prices rising even higher. Thus, where futures contract prices are
higher than current market prices, the futures pri ces suggest that cotton buyers are concerned about

50 For example, the US Department of Agriculture explains:
The projections are a conditional scenario with no shocks and are based on specific
assumptions regarding the macroeconomy, agricu ltural policy, the weather, and international
developments. In particular, the baseline incorporates provisions of the Farm Security and
Rural Investment Act of 2002 (2002 Farm Act) and assumes that current farm legislation
remains in effect through the projections peri od. The projections are not intended to be a
Departmental forecast of what the future will be , but instead a description of what would be
expected to happen under a continuation of the 2002 Farm Act, with very specific external
circumstances. Thus, the baseline provides a point of departure for discussion of alternative
farm sector outcomes that could result under different domestic or international assumptions."
USDA Agricultural Baseline Projections to 2012. Office of the Chief Economist, US Department of
Agriculture.

the possibility of cotton prices rising still higher and are willing to lock in a purchase price that carries
a premium over current prices.

108. In fact, current futures prices reveal that market participants anticipate upland cotton prices
rising over the current 2003 marketing year.

New York Cotton Exchange, Closing Futures Prices MY03
Friday, 24 October 2003
51
December 2003 contract 82.11 cents per pound
March 2004 contract 84.34 cents per pound
May 2004 contract 84.50 cents per pound
July 2004 contract 84.64 cents per pound

That is, a producer may sell cotton futures for Dece mber delivery at 82.11 cents per pound, but for
deliver later in marketing year 2003 the price rises to greater than 84 cents per pound. To update the
information provided by the United States to the Panel in its further submission
52, these futures prices
indicate that the market expects cotton prices to remain well above their 20-year average of 67.86
cents per pound (1983-2002) within the current 2003 marketing year and well above what Brazil
calculates as the 1980-98 A-index average (74 cents per pound) – that is, the average for the period
before Brazil alleges serious prejudice through significant price suppression or depression. 53 Thus,
given expected cotton prices reflected in futures c ontracts, Brazil has not demonstrated any clearly
foreseen and imminent likelihood of serious prejudice. Quite the contrary: in marketing year 2003,
upland cotton producers expect high and increasing prices.

167. How does Brazil react to Exhibit US-44? BRA

168. Please confirm that the production figures cited in Exhibit US-47 are for upland cotton
only and do not include textiles. US

109. Yes, the production figures cited in Exhibit US-47 are for upland cotton production only.
They do not include the raw cotton equivalent of textile production.

169. Can the US confirm the accuracy of the fa cts and figures cited in the four bullet points
in paragraph 12 of Brazil's 7 October oral statement? US

110. From paragraph 12 of Braz il’s 7 October oral statement:

 Between MY 1999-2001, prices received by US upl and cotton farmers fell by 34 per cent, yet
US production increased by 20.3 per cent. . . . .

 Fact check: We can confirm the price and production figures given and would note again
Brazil’s selective use of marketing year 2001 as the end-point for its comparison. As Brazil
complains of effects over marketing years 1999-2002, it would appear that Brazil has simply
chosen to use MY2001 figures to inflate the figures it presents.

 Between MY 1999-2002, the average US upland cotton farmer would have lost 24.3 cents per
pound for every pound of cotton produced if reven ue were based only on market revenue.
The US response to this huge gap between ma rket prices and costs was to increase

51 Current futures contract prices are available at: http://www.nybot.com/cotton/ (click on “Futures”).
52 See, e.g., US Further Submission, para. 118.
53 Brazil’s Further Submission, para. 114, figure 6.

production leading to an increase of US exports by 78.7 per cent and to an increase in the US
world market share from 24.1 per cent to 41.6 per cent. . . . .

 Fact check: Based on Economic Research Service (ERS) estimates provided in Exhibit US-
69, the market value of upland cotton (including the value of cottonseed) averaged $325.06
per acre over MY 1999-2002. Operating costs averaged $261.35 per acre over MY 1999-
2002. The value of upland cotton production l ess operating costs averaged $63.71 per acre.
Based on an average upland cotton yield of 577 pounds per planted acre, upland cotton
producers received 11.05 cents per pound above their operating costs.

 We can confirm the export figure but note th at the US share of “world exports” rose from
24.1 per cent in 1999/00 to 39.34 per cent in 2002/03. (See US response to Question 160). In
addition, we note that US world market share over the marketing year 1999-2002 period fell
from 18.6% in MY1999 to 16.9% in MY2000, rose to 19.8% in MY2001, and fell again to
19.6% in MY2002.
54

 Between MY 1999-2001, the US dollar appreciated approximately 15 per cent against the
currencies of other worldwide cotton producers. . . . US exports increased by 68 per cent. . .

 Fact check : ERS calculates a commodity-weighted exchange rate index for upland cotton
based on the real exchange rates of importing c ountries, weighted by the share of US cotton
exports.55 Based on this index, the dollar appreciated by 6.2 per cent from 1999 to 2001.
ERS also calculates a commodity weighted exch ange rate index based on the currencies of
other cotton producers and their share in world cotton trade. Based on this index, the dollar
appreciated by 11 per cent from 1999 to 2001.

 Fact check: We can confirm the US upland cotton export figure and again note Brazil’s use
of marketing year 2001 for its comparison.

 US costs of production are much higher than those of most other exporters of upland cotton,
yet the US export market share increased from 24.1 per cent to 41.6 per cent between MY
1999-2002.

 Fact check : In paras. 284 and 285 of its Furthe r Submission of 9 September 2003, Brazil
uses data from the International Cotton Adviso ry Committee (ICAC) to compare costs of
production across countries, which represents the most complete published comparisons of
costs of cotton production for major cotton prod ucing countries. Nevertheless, even when
good survey data are available for one country, using cost of production data to draw valid
economic conclusions is fraught with difficulties. In fact, the ICAC specifically discourages
this kind of cross-country comparison: “ Because of a number of limitations, it is not
advisable to compare the costs of production among several countries at the same time”.
56

 Fact check: Over the period 1999/00 to 2002/03, the US share of world exports rose from
24.1 per cent to 39.34 per cent. (See US response to Question 160).

170. Brazil quotes a report that states that a 10% increase in soybean prices reduces upland
cotton acreage by only 0.25% (Brazil's 7 Octo ber oral statement, para. 27). Could Brazil
indicate if this analysis is done on a short-run basis or a long-run basis? BRA

54 See Exhibit US-47.
55 See Exhibit US-69.
56 Raffiq Chaudhry, International Cotton Advisory Committee, “Cost of Producing Raw Cotton”
Presented at the III Brazilian Cotton Congress, Brazil, 31August 2001 (emphasis added).

171. In paragraphs 22 and 23 of its further submission, we understand that the US is, in
short, claiming that increased total supply (i.e. including polyester) drove prices down. On the
other hand, we note that, according to the fi gures in the chart in paragraph 22 of the same
submission, the world production of cotton during this period has basically been steady. Do all
polyester fibres as represented by these figures comp ete directly with cotton? That is to say, do
these figures for polyester fibres include, for exam ple, those that are used for textiles that
technically cannot be substituted by cotton? US

111. The figures in the chart in paragraph 22 represent world polyester textile production.
Polyester competes with cotton either directly in th e fibre market or indirectly through apparel and
other intermediate products.

172. Please estimate the price effect, in cents per pound, of the growth in the US retail
market which it is said has directly contributed to strengthening world cotton prices. US

112. As was presented in the table in paragraph 27 of the Further Submission of the United States
of 30 September 2003, US retail purchases of raw cotton fibre increased from 12.3 million bales in
1990 to 20.9 million bales in 2002, an increase of 8. 6 million bales. This increase accounted for the
entire increase in world retail purchases of raw co tton fibre over the same period and reflects an
increase at the world level of 10 per cent. Based on the average demand elasticity of -0.25 used by
Dr. Sumner in his analysis (see Annex 1 of Braz il’s Further Submission to the Panel, para 23), an
equivalent price decline of 40 per cent would be necessary to generate a 10 per cent increase in
demand of cotton, all else held equal. Of course, this omits other factors such as supply response of
world cotton producers and competition of manmade fibres. Nonetheless, it is clear that the growth in
retail purchases of cotton fibres in the United States has strengthened world prices.

173. The US asserts that "burgeoning US textile imports … shifted the disposition of US
cotton production from domestic mills to export markets" (US further submission, para. 20). A
similar description appears in paragraph 33, toge ther with the explanation that "the share of
world cotton consumption supplied by US cotton has been roughly the same since 1991/92".
Why have sales of US cotton for export increase d and sales of cotton imported into the US
increased? US

113. The role and impact of rapidly growing US textile and apparel impor ts is fundamental in
explaining the shift in the use of US cotton productio n from domestic mills to foreign mills. As noted
at paragraphs 20 and 33 of the US further submission, the US textile and apparel industry has suffered
from declining competitiveness compared with off-s hore producers for many years, reflecting many
factors, including higher wage costs, a strong US dollar, etc. As domestic mills have shut down in the
United States, and production has moved overseas, dom estic demand for US cotton by domestic mills
has declined sharply.

114. But US consumer demand for cotton products has not declined. That demand has
increasingly been met by lower-priced imports of cott on textiles and apparel. As can be seen in the
table following paragraph 34 of the US further submission, US imports of cotton textiles (in cotton
equivalents) have more than tripled since 1990. It is important to note that the import, export, and
consumption data in that table are expressed in bale s of cotton-equivalent. In other words, the data
are not “sales of cotton imports”, but rather represent the amount of cotton imbedded in the particular
products.
57

57 These estimates of the “cotton equivalent” of textile imports are done by USDA’s Economic
Research Service, based an a set of internationally-accepted conversion factors. See Cotton and Wool Situation
and Outlook Yearbook. Market and Trade Economics Division, Economic Research Service. US Department of
Agriculture, November 2002, CWS-2002.

115. US cotton is grown to be used to make co tton textiles and apparel. The point of the US
submission is to explain how the location of wher e US cotton is manufactured into products has
shifted. US and world consumers continue to purchase cotton products. But increasingly US
consumers purchase those cotton products, made from exported US cotton, from overseas
manufacturers as US manufacturers are less able to compete. That is the structural transformation that
paras. 33-34 and the accompanying table seeks to present and explains at least in part some of the
changes in US exports.

174. How, if at all, did the Asian financial crisis affect the United States' world market share?
Did it disproportionately affect the US as compared to other exporters? US

116. The Asian financial crisis disrupted cotton consumption (spinning) in the major consuming
countries of Thailand, Indonesia, and the Republic of Korea in 1997/98, reducing their mill use 9 per
cent from the preceding year. In addition, the declin e in world economic growth induced by the crisis
reduced total world cotton consumption 3.4 per cent in 1998/99 from the pre-crisis level in 1996/97.
Subsequently, however, the depreciation of curre ncies in these three countries boosted their cotton
consumption due to expanding tex tile exports. World cotton consum ption rose 11 per cent between
1996/97 and 2002/03, while consumption in Thailand, Indonesia, and Korea collectively rose 16 per
cent. During this same period, US spinners lost ma rket share to textile imports, due in large part to
currency effects, and US domestic mill use fell 35 per cent.

117. US export share in these markets is influenced by total supply availability, qualities produced,
and price. For example, US export share of the thr ee countries’ consumption fell by more than half in
1998/99, due to the drought-devastated US crop. E xport share has since returned to the pre-crisis
level of about 30 per cent and, with higher consumption, this added about 400,000 bales to US exports
between 1996/97 and 2002/03. Since the combined total consumption increase for Thailand,
Indonesia, and Korea was about 800,000 bales, this indicates that other exporters also increased
exports by about 400,000 bales. As US mill use of cotton declined while exports increased, US world
market share was left relatively unchanged (with a slight downward bent) by the Asian financial
crisis.

175. With reference to paragraphs 57-58 and the related table on page 21 of the US further
submission, could you please clarify the arguments regarding the ratio of the soybean futures to
the cotton futures prices since in the table the inverse ratio is used? US

118. Attached is a corrected version of the table. The ratio of cotton futures price to soybean
futures prices is positively correlated with movement in planted cotton area.

Expected cotton and soybean prices and planted cotton acreage
Year December cotton
futures
(cents/lb)
November
soybean futures
($/bushel)
Ratio of cotton
futures to soybean
futures
Planted cotton
acres
(million acres)
1996 78.58 7.23 10.87 14.4
1997 76.82 6.97 11.02 13.6
1998 72.13 6.64 10.86 13.1
1999 60.32 5.11 11.8 14.6
2000 61.31 5.32 11.52 15.3
2001 58.63 4.67 12.55 15.5
2002 42.18 4.50 9.37 13.7
2003 59.6 5.26 11.33 13.5

176. With reference to Figure 4 of Brazil's Fur ther Submission, how does Brazil explain the
apparent decrease in prices in 2001 and the increa se of the A-Index in recent months, despite
the continued use of US subsidies on upland cotton? BRA

177. Could the United States further elaborate on paragraph 50 of its 7 October oral
statement? US

119. Lin et al. estimated that the own-price elasticity of cotton acreage under the FAIR Act was
0.466.
58 This is identical to the 2003 net-return el asticity reported by Dr. Sumner. However, it is
incorrect to equate a price elasticity to net-return elasticity given the linear specification utilized by
Dr. Sumner. The implied price elasticity from Dr . Sumner’s model would be approximately 50 per
cent larger than the net-return elasticity. Larger el asticities imply greater acreage shifts to change in
policies or prices.

120. The relationship between the price elasticity and a net revenue elasticity can be shown as
follows. Given a linear specification as described by Dr. Sumner, then cotton area (CA) can be
expressed:

(1) CA = a0 + a1*CNR + a2*Z,
where CNR is Expected Cotton Net Returns and Z is a vector of other variables including returns
from competing crops.

The elasticity with respect to CNR is found by diffe rentiating the equation with respect to CNR. The
derivative is the coefficient a1. The elasticity, eNR, is expressed as follows:

(2) eNR = a1 * CNR / CA.

With CNR a function of the cotton price P, the elas ticity with respect to P can be determined by
taking the derivative of the equation with respect to price P. Based on equation (1) from page 13 of
Annex I, the derivative with respect to price P is a1*Y, where Y is expected yield.

It follows that the price elasticity is eP = a1 * Y * P / CA. One can then conclude that eNR/eP = ENR
/ (Y*P).

The relationship between eNR and eP can be found by looking at the relationship between CNR and
Y*P. Specifically, eP = ((Y * P) / CNR) * eNR.

In recent years, the ratio of (Y * P) / CNR has been approximately 1.5, implying that eP = 1.5 * eNR
= 1.5 * 0.466 = 0.699.

178. The Panel notes Exhibit US-63. Could the US please provide a conceptually analogous
graph concerning US export sales during the same period? US

121. Exhibit US-70 shows in table and graph form the per cent change over the previous year for
upland cotton exports by the United States and the rest of the world. In addition, the United States
provides in Exhibit US-71 a table and graph demonstrating the absolute levels of US exports and
domestic consumption. As the figures show, over the last seven years domestic consumption has
declined by almost the same amount by which expor ts have increased, leaving US world market share
largely unchanged.

58 Lin, W., P.C. Westcott, R. Skinner, S. Sanford, and D.G. De La Torre Ugarte. Supply Response
Under the 1996 Farm Act and Implications for the US Field Crops Sector. US Department of Agriculture,
Economic Research Service, Technical Bulletin No. 1888, Appendix table 21.

179. Could Brazil comment on the argument that decoupled payments and other subsidies to
upland cotton are largely being capitalized into land values and that removing these subsidies
would reduce the cost of production of upland cotton producers (US 7 October oral statement,
para. 48). What would be the net effect of these adjustments? BRA

180. Please describe the precise formula as to how USDA determines the "adjusted world
price" using the Liverpool A-Index, the NY futures price and any other relevant price
indicators. Please submit substantiating evidence. BRA, US

122. The Adjusted World Price (AWP) is equal to the Northern Europe (NE) price (the 5-day
average of the 5 lowest-priced growths for Middling 1-3/32 inch cotton, cost, insurance and freight
[CIF] northern Europe), adjusted to US base quality and average location. The AWP 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 st aple length of 1-1/16 inches and longer. The AWP
and CCA are announced each Thursday.
59

123. A Step 1 adjustment to the AWP may be ma de when the 5-day average of the lowest US
growth quote for Middling 1-3/32 inch cotton, CI F United States-northern Europe (USNE) price,
exceeds the NE price and the AWP is less than 115 pe r cent of the loan level. The Secretary of
Agriculture may lower the AWP up to the difference between the USNE price and the NE price. A
Step 1 adjustment has never been made, although the conditions have been met many times.

181. Please provide a side-by-side chart of the w eekly US adjusted world price, the Liverpool
A-Index, the NY futures price, and spot market prices from 1996-present. What, if anything,
does this reveal? BRA, US

124. Exhibit Q181 sets out weekly price movements for the Adjusted World Price, the Liverpool A
Index, the nearby New York cotton futures pri ce and the spot market price from January 1996 to
present.

182. Please explain why the US can be taken to be price leaders, or price setters, (and not just
takers) when US producers receive large subsid y payment to support the difference between
world prices and their own costs? BRA

L. ARTICLE XVI OF GATT 1994

183. Why does Brazil believe that the appropri ate "previous representative period" is the
term of the previous Farm Bill, MY1996-2002? (Brazil's further submission, para. 282) BRA

184. Why does Brazil believe that an "equitable share" is one which factors out all subsidies?
To the extent that domestic support and expo rt subsidies are permitted by the Agreement on
Agriculture, why should they not be accepted as being normal conditions in analyzing an
equitable market share? (See Brazil's further submission, paras 288-289) BRA

185. Please respond to the following questions concerning the relationship between Article
XVI:3 of the GATT 1994, the disciplines on export subsidies and domestic support in the
Agreement on Agriculture and the disciplines on prohibited export subsidies and actionable
subsidies in Articles 3, 5(c) and 6.3(d) of the SCM Agreement. BRA, US

(a) Are agricultural domestic support progr ammes challengeable under Article XVI:3 of
the GATT 1994? How, if at all, is the title of Section B of Article XVI ("Additional

59 See Exhibit US-72.

provisions on export subsidies" (emphasis added)) relevant? How, if at all, are Articles
13 and 21.1, or any other provisions of the Agreement on Agriculture, relevant?

125. As indicated in the US opening statement at the recent panel meeting 60, GATT 1994
Article XVI:3 applies only to export subsidies. Paragraph 3 is found in Part B of Article XVI, entitled
“Additional Provisions on Export Subsidies”, as oppo sed to Part A, which is entitled “Subsidies in
General”. Paragraph 2 (also in Part B) states that “[c]ontracting parties recognize that the granting of
a subsidy on the export of any product may have harmful effects for other contracting parties”
(emphasis added). Paragraph 3 begins with the wo rd “[a]ccordingly”, the ordinary meaning of which
is “[i]n accordance with the logical premises; correspondingly” 61, and follows with “contracting
parties should seek to avoid the use of subsidies on the export of primary products” (emphasis added).
That is, “in accordance with” the recognition in paragraph 2 that e xport subsidies may have harmful
effects, paragraph 3 address the use of “subsidies on the export of primary products”. The second
sentence of paragraph 3 follows this hortatory stat ement with the obligation not to apply subsidies
“which operate[] to increase the export of any prim ary product” in a manner that “results in a
contracting party having more th an an equitable share of world export trade in that product”.
Paragraph 4 “[f]urther” addresses export subsidies fo r “any product other than a primary product”.
Thus, the text and context of paragraph 3 indicate th at this provision is addressed to export subsidies
and not domestic support programmes.

126. The Peace Clause provides further context suppor ting this interpretation. Article 13(c)(ii)
exempts export subsidies that conform fully with Part V of the Agreement on Agriculture from, inter
alia, “actions based on Article XVI of GATT 1994” – that is, including Article XVI:3 on export
subsidies. Article 13(b)(ii), on the other hand, exempts conforming domestic support measures from,
inter alia, “actions based on paragraph 1 of Article XVI of GATT 1994” but does not mention Article
XVI:3. Thus, Article 13 lends contextual support to the notion that Article XVI:3 applies to export
subsidies on primary products or commodities but does not apply to domestic subsidies on such
products.

(b) Are the requirements of Article XVI:3 of the GATT 1994 reflected in, developed by or
subsumed by the requirements in Article 6.3(d) of the SCM Agreement, or in any other
provisions of the covered agreements? Of what relevance, if any, is the Appellate Body
Report in US-FSC, para. 117 here?

127. Article 6.3(d) of the Subsidies Agreement does not, by its terms, interpret or replace GATT
1994 Article XVI:3. In fact, the range of measures potentially actionable under Article 6.3 is broader
than the export subsidies subject to GATT 1994 Artic le XVI:3. In addition, the analysis under these
two provisions is different. Article 6.3(d) is con cerned with whether the effect of a subsidy is to
increase the world market share of the subsidizing Member; GATT 1994 Article XVI:3 is concerned
with whether export subsidies result in a Member having “more than an equitable share in world
export trade” in a particular product. However, an important similarity between these two provisions
is the scope of products covered by their r espective disciplines. GATT 1994 Article XVI:3 is
concerned with export subsidies on primary products; Article 6.3(d) is concerned with any subsidy on
“a particular subsidized primary product or comm odity”. This similar product coverage resulted
because Members desired to provide more operationally effective subsidies disciplines with respect to
these products but had found the “more than equ itable share” language of GATT 1994 Article XVI:3
to be unworkable. For further discussion, please see the US response to Question 186 from the Panel.

(c) Of what relevance, if any, is the fact that the definition of "subsidy" in Article 1 of the
SCM Agreement and the prohibition on subsidies contingent upon export in

60 US Opening Statement at the Second Session of the First Panel Meeting, para. 60.
61 The New Shorter Oxford English Dictionary, vol. 1, at 15 (1993 ed.) (third definition).

Article 3.1(a) were introduced in the Uruguay Round, but did not exist at the time that
the GATT 1947 was negotiated?

128. The United States notes the Appellate Body’s discussion of relevant differences between the
provisions of the Subsidies Agreement and those of GATT 1994 in United States – FSC.

186. Could the United States please expand upon its statement that "[t]hese are the types of
considerations that led to the negotiation of the Subsidies Agreement...." (US further
submission, para. 109)? Is there any relevant mat erial, including, for example, drafting history
that might support this statement? US

129. Dissatisfaction with the difficulties in applying the “more than equitable share” standard of
GATT 1994 Article XVI:3 was an important motiva tion for the negotiation of stronger and more
operational disciplines in the WTO Subsidies Agreem ent. In two separate challenges in 1979 and
1980 to the sugar export subsidy programme of th e European Communities by Australia and Brazil,
panels were unable to find that the export ref unds provided by the Communities resulted in a “more
than equitable share” of world export trade.
62 Similarly, in the 1983 US challenge to export subsidies
on wheat flour by the European Communities (quoted in the US further submission), “[t]he [p]anel
found that it was unable to conclude as to whether the increased [EC] share [of world exports of
wheat flour] has resulted in the EEC ‘having more than an equitable share’ in terms of Article 10 [of
the Subsidies Code], in light of the highly artificia l levels and conditions of trade in wheat flour, the
complexity of developments in the markets, including the interplay of a number of special factors, the
relative importance of which it was impossible to assess, and, most importantly, the difficulties
inherent in the concept of ‘more than equitable share’”.
63

130. Significantly, the latter two of these pane l reports explicitly considered the 1979 Tokyo
Round Subsidies Code and its interpretive gloss on th e “more than equitable share language”. Article
10.2 of the 1979 Subsidies Code (of which both Braz il and the United States were signatories) stated,
in pertinent part:

 For purposes of Article XVI:3 of the Ge neral Agreement and paragraph 1 above:

(a) "more than an equitable share of wo rld export trade” shall include any case in
which the effect of an export subsidy granted by a signatory is to displace the
exports of another signatory beari ng in mind the developments on world
markets;
(b) with regard to new markets traditi onal patterns of supply of the product
concerned to the world market, region or country, in which the new market is
situated shall be taken into account in determining ‘equitable share of world
export trade’[.]

That is, the 1979 Subsidies Code represented an e ffort to make operational the discipline provided in
GATT 1994 Article XVI:3 by giving additional meaning to the phrase “more than an equitable share
of world export trade”. Despite that effort, howev er, the panel considering the Brazilian challenge to
EC sugar export subsidies and the panel considering the US challenge to EC wheat flour export
subsidies remained unable to find any inconsiste ncy with GATT 1994 Article XVI:3 (in the words of

62 European Communities – Refunds on Exports of Sugar , L/4833, 26S/290 (adopted 6 November
1979) (complaint by Australia); European Communities – Refunds on Exports of Sugar , L/5011, 27S/69
(adopted 10 November 1980).
63 European Economic Community – Subsidies on Export of Wheat Flour , SCM/42, para. 5.3
(unadopted 21 March 1983).

the Wheat Flour panel) “in light of . . . , most im portantly, the difficulties inherent in the concept of
‘more than equitable share’”.

131. Thus, there was a recognition in the Uruguay Ro und subsidies negotiations that the effort in
the 1979 Subsidies Code to make GATT 1994 Article XVI:3 more operationally effective had not
succeeded. For example, a reference paper on GA TT subsidies rules and the existing status of
discussion of these rules prepared by the GATT Secr etariat for the Negotiating Group on Subsidies
and Countervailing Measures states:

The most pronounced difficulties have occu rred in connection with the concept of
“more than an equitable share” embodied in Article XVI:3 of the GATT. The
Agreement on Subsidies and Countervailing Measures (Article 10) attempted to bring
precision to Article XVI:3 but it has not always been found to give clear guidance on
its interpretation. Consequently a number of disputes involving the concept of “more
than an equitable share” have not found a satisfactory solution and in some cases
have provoked retaliatory subsidization. The case-by-case application of this concept
has revealed its imprecisions and the fact that it largely refers to notions which escape
objective criteria. There is, for example, sufficient imprecision in this concept to
allow countries using export subsidies to argue that these subsidies do not result in
obtaining more than equitable share. On the other hand it is not always possible to
provide causality between the subsidy and the increase share. Furthermore, it is
impossible to derive a general line of case law from the decisions of panels, some of
which have given divergent interpretations.
64
132. A checklist of issues for the negotiations b ased on Contracting Parties’ written submissions
and oral statements prepared by the Secretariat de monstrates that Contracting Parties were well aware
of these difficulties and the need to move away from the “more than an equitable share” concept:

There is a need for review, with a view to improving GATT disciplines, of the
provisions of Article XVI:2 and 3. Notably there is a need to build on the recognition
embodied in Article XVI:2 and the exhortation in the first sentence of XVI:3 in the
direction of improving the conditions of competition on world markets for primary
products currently covered by the equitabl e share criterion in the second sentence of
Article XVI:3.
The review should examine the application of the “more than an equitable share” rule
for primary products. This rule has serious conceptual flaws and in practice has
failed to provide clear guidance as to the permissible scope of primary product
subsidization. . . . .
The Negotiating Group should consider negotia ting a similar prohibition to that of
Article 9 of the Code on the use of export subsidies for forest, fishery and farm
products.
The prohibition on export subsidies for products other than basic or primary products
under Article XVI:4 and Article 9 of the C ode should be extended to agricultural,
forestry and fishery products, in other words to all basic or primary products.
A major objective of these negotiations shoul d be to extend the existing prohibition
on export subsidies to cover all products, primary as well as non-primary.

64 Subsidies and Countervailing Measures: Note by the Secretariat , MTN.GNG/NG10/W/4, at 79 (28
April 1987) (Section VI.3).

There are serious deficiencies in Article XVI:3 of the GATT and in Article 10 of the
Code, notably the fundamental problems c onnected with the ‘more than equitable
share’ concept. However, these problems arise from the basic fact that current
disciplines for primary products are significantly weaker than those which apply to
manufactured goods. They cannot be resolv ed merely by making minor adjustments
to rules which are intrinsically defective. The only genuine, long-term solution is an
effective prohibition on all export subsidies. Accordingly at this stage of the
negotiating process, there is little value in tr ying to improve the “more than equitable
share” rule, which is only relevant so long as there is no general prohibition on export
subsidies.
65
133. Reflecting the desire of Members to move away from the “more than an equitable share”
concept which had repeatedly been found by pane ls to be incapable of application, the WTO
Subsidies Agreement does not provide any further definition or interpretation of GATT 1994 Article
XVI:3. Instead, it contains the general prohibitio n on export subsidies in Article 3 and rules on
adverse effects, including serious prejudice.

M. THREAT CLAIMS

187. Please provide USDA's projections of mark eting loan/LDP payments, direct payments
and counter-cyclical payments to be made during MY2003 through 2007 based on the most
recent USDA baseline projection. US

134. The following table shows projections for cotton marketing loan/LDP payments, direct
payment and counter-cyclical payments for crop years 2003 through 2008, as published in the
FY2004 Mid-Session Review on 15 July 2003. We note that projected outlays for marketing year
2003 are likely to be significantly overstated given the increase in prices and futures prices over the
course of this marketing year. For example, no ma rketing loan payments are currently being made
because the adjusted world price is above the marketing loan rate.

Projected outlays (million dollars)
Item 2003 2004 2005 2006 2007 2008
Direct payments 587 587 587 587 587 587
Counter-cyclical
payments
929 602 521 521 521 521
Loan deficiency
payments
420 298 193 137 137 82
Marketing loan gains 22 13 8 6 6 3
Certificate gains 1/ 196 114 75 55 52 29
1/ Includes value of non-cash marketing loan transactions.

188. Can the United States comment on the FAPRI projections for cotton provided in Exhibit
BRA-202? US

135. The FAPRI projections presented by Brazil in Exhibit BRA-203 reflect the January 2003
FAPRI projections. These projections were publishe d by Iowa State University in January 2003. 66
The same projections were published by FAPRI at the University of Missouri in March 2003 and
were referenced by the United States in Exhibit US-52.

65 Checklist of Issues for Negotiations: Note by the Secretariat , MTN.GNG/NG10/W/9/Rev.4, at 26-28
(12 December 1988).
66 Food and Agricultural Policy Research Institute. FAPRI 2003: US and Worl d Agricultural Outlook.
Iowa State University Staff Report 1-03. January 2003.

136. Of significance is the difference between the January 2003 baseline and the preliminary
baseline of November 2002 utilized by Dr. Sumner in his analysis. Under the January 2003 baseline,
the Adjusted World Price (AWP) forecasts for 2002/ 03 to 2007/08 are considerably higher than the
forecasts made in the preliminary November 2002 b aseline. Because loan de ficiency payments and
marketing loan gains are calculated based on the diffe rence between the loan ra te and the AWP, this
means that expected marketing loan subsidies under the November 2002 baseline are far higher than
expected marketing loan subsidies under the January 2003 baseline. Thus, the effects of eliminating
marketing loans would tend to be biased upwards using the preliminary November 2002 baseline.

Differences in the Adjusted World Price forecast between the November 2002 and January 2003
FAPRI baseline ($/lb)
 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08
November 2002
baseline 1/
0.3597 0.3722 0.3983 0.4194 0.436 0.4548
January 2003 baseline
2/
0.448 0.454 0.46 0.46 0.467 0.48
Difference 0.0883 0.0818 0.0617 0.0406 0.031 0.0252
1/ As presented by Dr. Sumner in Annex I and oral statement of 7 October 2003.
2/ As reported in Exhibit BRA-203 and Exhibit US-52

N. CLARIFICATIONS

189. Please indicate whether the correct figure in paragraph 37 of Brazil's 7 October oral
statement is 38.1% or 38.3%? BRA

190. Please confirm that the figure "17.5" in paragraph 43 of Brazil's 7 October oral
statement, is "percentage point". BRA

191. Could Brazil clarify its statement in para. 12 of its 9 September further submission:
"Alternatively crop insurance is not specific because the 2000 ARP Act denies benefits to
commodities representing more than half of th e value of US agriculture. Further US crops
represent only 0.8 per cent of total US GDP." (emphasis added) BRA

List of Exhibits

64 Lin, W., et al.. Supply Response Under the 1996 Farm Act and Implications for the US Field
Crops Sector. US Department of Agriculture, Economic Research Service, Technical Bulletin
No. 1888, Appendix table 21

65 Amount and percentage of upland cotton acreage coverage by crop insurance policy

66 Premiums paid by upland cotton producers

67 Insurance indemnity payments to upland cotton producers

68 New York Cotton Futures, Average Daily Cl osing Prices for Decembe r 2003 Contract (chart
and data)

69 US Department of Agriculture, Economic R esearch Service, Cost of Production Estimates;
Commodity-Weighted Exchange Rate Estimates

70 US and Rest of World Exports of Upland Cotton, Year-Over-Year Per cent Change, 1996-
2002

71 US Exports and Domestic Cons umption of Upland Cotton, 1996-2002

72 US Department of Agriculture, Press Release on Adjusted World Price (18 October 2003)

73 Weekly Price Movements: Adjusted World Price, Liverpool A-Index, New York cotton
futures, spot market price, January 1996 to present

74 National Agricultural Statistics Service, Plan ted Acreage of Selected Crops by Region and
State