Document: BRAZIL’S COMMENTS ON THE 22 DECEMBER US COMMENTS CONCERNING BRAZIL’S ECONOMETRIC MODEL
Date: 20 January 2004
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

I. BRAZIL’S INTRODUCTORY COMMENTS

1. Brazil’s response to the US 22 December 2003 Comments Concerning Brazil’s Econometric
Model (“US Critique”) is divided into two parts. First, Brazil provides some introductory comments
setting the US Critique into perspective. And, second, Brazil offers Professor Sumner’s detailed
response to the US critique.

2. The United States Critique initially focuses on pr oving a point that has never been contested
by Brazil, i.e., that the Sumner model is not exac tly like the FAPRI model. As Professor Sumner
points out, he never claimed that his model was identical to the FAPRI model. The United States
points to no contradictions between what Professo r Babcock has stated and what Professor Sumner
stated in Annex I or his other statements con cerning the links between his model and the FAPRI
model. Nevertheless, while there are differences between the Sumner model and the FAPRI model,
the record is undisputed that the core elements of the FAPRI model – the hundreds of demand and
supply equations – are identical. The differences in Professor Sumner’s model are primarily the result
of his use of the CARD international cotton m odel and additions to th e FAPRI model made by
Professor Sumner. The additions were necessary to enable the FAPRI/CARD modelling framework
to respond to the questions before this Panel.

3. The United States Critique asserts that Professo r Sumner’s choice of baselines has prejudiced
the outcome to such an extent that his results are not usable.
1 But the record shows that the significant
acreage, production, export and price effects found in Professor Sumner’s Annex I results using the
CARD international cotton model and the am ended FAPRI US crops model based off the
(recalibrated) FAPRI preliminary November 2002 base line are essentially the sa me even when used
against other baselines. 2 The United States first argued that Professor Sumner should have used the
FAPRI 2003 baseline. 3 Professor Sumner responded by running his model on that later baseline. 4
There were no significant changes between Annex I and those results for either the period from
MY 1999-2002 or in the period from MY 2003-2007. 5 The United States Critique raises a new
argument that Professor Sumner manipulated the FAPRI preliminary November 2002 baseline. 6 This
allegation is wrong. Any differences are the result of a necessary recalibration of the model following
the use of the CARD international cotton model rather than the FAPRI international crops models and
some update incorporating more recent macroeconomic data. 7 As Professor Sumner demonstrates
below, there are no significant differences with his Annex I result by using this slightly modified
baseline.8 Indeed, the fact that Professor Sumner’s simulation model generates nearly identical results
regardless of the baselines used demonstrates the robustness of the Sumner model.

4. In criticizing Professor Sumner’s modelling of th e four different types of contract payments,
the United States repeats its baseless arguments that th e contract payments have absolutely no effect
on production decisions for upland cotton. The notion that an estimated
9 $4.7 billion10 of amber box

1 US 22 December 2003 Comments on Brazil’s Econometric Model, paras. 35-38, especially para. 38.
2 These other baselines include the original FA PRI preliminary November 2002 baseline and the
official FAPRI January 2003 baseline.
3 US 7 October 2003 Oral Statement, paras. 36-39.
4 Exhibit Bra-325 (Results of Professor Sumner’s Modified Model Based on the January 2003 FAPRI
baseline); Exhibit Bra-326 (Results of Professor Sumner’s Modified Model) and Exhibit Bra-331 (Description
of Methodology Comparing the Analysis of US Upland Cotton Subsidies Under the January 2003 Baseline to
Analysis under the November 2002 Baseline, Daniel A. Sumner, November 2003).
5 See Exhibit Bra-326 (Results of Professor Sumner’s Modified Model).
6 US 22 December 2003 Comments on Brazil’s Econometric Model, para. 36.
7 See Professor Sumner’s discussions below, Response to Section III.
8 See Professor Sumner’s discussions below, Response to Section III.
9 Brazil is still waiting the United States to provide the data that would permit the calculation of the
exact amount of support to upland cotton from the contract payments. Brazil hopes that the United States will
produce the data on 20 January 2004.

(presumptively trade- and production-distorting) subs idies paid to current producers of upland cotton
and allocated as support to upland cotton had no ef fect on upland cotton production has been, and
remains today, incredible. The United States has never explained why upland cotton base acreage
payments are so much higher than other programme crops (except rice). The obvious reason is that
Congress and the NCC expected the bulk of acreage hi storically planted to upland cotton to continue
to be planted to upland cotton, a high-cost crop. Nor has the United States been able to explain how
there could be no production effects when US upl and cotton producers would have lost $332.79 per
acre over a six-year period if they had received no contract payments.
11 NCC representatives stated
that these payments were “critically needed” 12 to “make ends meet” 13, i.e., to cover their cost of
production.

5. In fact, Professor Sumner has been, in the vi ew of Brazil, probably ove rly conservative in his
estimation of the effects of these contract payments on US upland cotton production. Brazil notes that
the nature of Professor Sumner’s modelling does not permit an assessment of the cumulative losses
such as the $332.79 per acre over a six-year period. Even Professor Sumner acknowledges that his
use of only $0.25 of each direct payment dollar as having production effects is probably low in light
of the obvious impact of this subsidy in supporti ng the continued survival of many US producers.
14
Similarly, Professor Sumner’s use of only $0.40 of each counter-cyclical payment dollar as having
production effects
15 is also low in light of the fact that $1 billion in payments in MY 2002 were
crucial to the economic survival of many upland co tton producers. In light of the evidence produced
by Brazil, the US Critique that Professor Sumner’s analysis is fundamentally wrong for not
concluding that these huge subsidies, filling almost ha lf of the cost-revenue gap, have no effects is
completely unjustified.

6. The United States Critique also expresses amazement that Professor Sumner could attempt to
model the effects of export credit guarantees. The fa ct that FAPRI has not yet modelled this subsidy
is completely irrelevant. Nor is Professor Su mner blazing new economic ground by modelling export
credit guarantees. The NCC has a team of economists working with the United States on this dispute,
headed by Gary Adams, a former FAPRI ec onomist who worked on the FAPRI upland cotton
model.
16 NCC economists concluded in 2001 that ma jor changes to the GSM 102 programme would
result in 500,000 fewer bales being exported from the United States and result in a 3 cent per pound
increase in prices. 17 It is curious that the United States, assisted by NCC economists, now seeks to
contradict the conclusions of the beneficiari es of this GSM 102 programme by asserting that there
were no production, export or price effects fro m this subsidy. The NCC’s 2001 findings, which
Professor Sumner used conservatively to estimate the production, export and price effects of the
export credit guarantee programmes, was supported by the fact that $1.6 billion in US upland cotton
exports between MY 1998-200 2 were covered by GSM 102 export credit guarantees.
18 F u r t h e r
support for the NCC’s 2001 estimate comes from the US Congressional Research Service that
concluded that guarantees have “mainly benefited exports of wheat, wheat flour, oilseeds, feed grains

10 This figure is based on Brazil’s estimates at paragraph 8 of its 9 September 2003 Further Submission
as updated by the table at paragraph 8 of its 22 December 2003 Answers to Questions.
11 Brazil’s 2 December 2003 Oral Statement, para. 27.
12 Brazil’s 22 July 2003 Oral Statement, paras. 52-54 and 58-60 and exhibits cited therein.
13 Exhibit Bra-324 (NCC Chairman’s Report by Kenneth Hood, 24 July 2002, p. 2).
14 Brazil’s 9 September 2003 Further Submission, Annex I (paras 48-51 setting out high and low
estimates of production effects for the four contract payments).
15 Brazil’s 9 September 2003 Further Submission, Annex I (paras 48-51 setting out high and low
estimates of production effects for the four contract payments).
16 See Exhibit Bra-395 (“Trade Issues Facing the US Cotton Industry,” Speech by Dr. Mark Lange,
President and CEO, National Cotton Council, San Antonio, 6 January 2004), Lange noted that Gary Adams had
spent “countless hours” working with USTR on the Brazil upland cotton dispute.
17 Exhibit Bra-41 (“The Future of Federal Farm Commodity Programmes (Cotton),” Hearings before
the House of Representatives Committee on Agriculture, 15 February 2001, p. 12).
18 Brazil’s 9 September 2003 Further Submission, para. 188.

and cotton”.19 Andrew Macdonald has also testified to the export-enhancing effects of the US GSM
102 programme.20 In its evaluation of the US Critique’s claim that Professor Sumner – and the 2001
NCC economists – incorrectly estimated the effects of removing the GSM 102 subsidies, the Panel
must consider this uncontested evidence.

7. The United States Critique also challenges Pr ofessor Sumner’s modelling of the effects of
removing crop insurance subsidies. The US Critique focuses primarily on the fact that FAPRI has not
yet modelled these subsidies.
21 But this is irrelevant. What is relevant are the facts which show that
$788 million in crop insurance subsidies were provided to upland cotton producers between
MY 1999-2002.22 And it is relevant that USDA’s ow n economists found that lower pre-2000 ARP
Act crop insurance subsidies had significant prod uction and price effects for upland cotton (as
opposed to other programme crops). 23 Current higher crop insurance benefits under the 2000 ARP
Act would certainly have higher effects. Prof essor Sumner’s crop insurance modelling is also
consistent with USDA’s own econom ists’ conclusion that the “availability of subsidized crop
insurance affects farmers’ current crop production d ecisions by creating a direct incentive to expand
production”.24 It is uncontested that the amount of crop insurance subsidies received by upland cotton
producers is directly related to the amount of upland cotton they plant. 25 Given this evidence, it was
reasonable for Professor Sumner to conclude that ea ch dollar of crop insurance subsidies had direct
effects on US production.

8. With respect to Professor Sumner’s modelling of marketing loan payments, the US Critique is
essentially silent.
26 This silence is no doubt due to the fact that Professor Sumner’s model uses
exactly the same elasticities and estimates of effect s as the FAPRI model, for which the United States
has indicated it has no objection. 27 Further, Professor Sumner’s findings regarding the effects of
marketing loan payments between MY 1999-2002 are very much consistent with those of
Westcott/Price who found that in MY 2001 that mark eting loan payments caused 3 million additional
acres to be planted to upland cotton with an implied price decline of 10 cents per pound (or 33 percent
of the MY 2001 price).28 Brazil has already addressed the various US critiques of the use of so-called
“lagged prices” by noting that USDA, FAPRI, Professor Sumner and a host of other economists have
used these prices in countless models and that an y use of futures market prices in large-scale
simulation models is impossible.
29 Further, the faulty and primitive US futures methodology for
estimating the production effects of marketi ng loan programmes is no substitute for the
comprehensive models used by USDA, FAPRI and Professor Sumner. 30 Most pointedly, the US
futures methodology suffers from the fatal flaw that it does not even focus on the price that does get

19 Brazil’s 9 September 2003 Further Submission, para. 189.
20 Brazil’s 9 September 2003 Further Submission, Annex II (Statement of Andrew Macdonald,
paras 49-50).
21 US 22 December 2003 Comments on Brazil’s Econometric Model, paras 25-30.
22 Brazil’s 9 September 2003 Further Submission, Table 1, para. 8.
23 Brazil’s 22 August 2003 Rebuttal Submission, paras. 62-66.
24 Exhibit Bra-63 (C.Edwin Young, Randall D. Schnepf, Jerry R. Skees and William W. Lin:
“Production and Price Impacts of US Crop Insurance Subsidies: Some Preliminary Results, p. 4).
25 Brazil’s 22 August 2003 Rebuttal Submission, para. 53.
26 The United States points out a typo (US 22 December 2003 Comments on Brazil’s Econometric
Model, paras. 73-74) that did not affect the act ual analysis undertaken by Professor Sumner ( see below,
Comments on Section VI).
27 See below, Comments on Section VI.
28 Brazil’s 7 October 2003 Oral Statement, paras. 31-33 and the references contained therein.
29 See Professor Sumner’s 9 October 2003 Closing Statement attached as Annex II to Brazil’s
9 October 2003 Closing Statement, his 2 December 2003 Oral Statement (Exhibit Bra-342, paras. 24-28),
Exhibit Bra-345 (paras. 6-14) as well as Brazil’s 22 December 2003 Answers to Questions, paras. 37-42).
30 See Brazil’s 2 December 2003 Oral Statement, paras. 42-55.

the attention of US producers who depend on marketing loan payments – the adjusted world price
(AWP).
31

9. Nor does the US Critique find any fault with Professor Sumner’s analysis of the Step 2
subsidies.
32 Brazil notes that Professor Sumner models the effects of Step 2 domestic and export
subsidies in exactly the same manner as FAPRI. Professor Sumner’s Step 2 analysis is also
completely consistent with the overwhelming evidence that Step 2 export and domestic subsidies have
significant production, export, and world price effects. As with the GSM 102 subsidies, the NCC has
been quite vocal in praising the production and export effects of the Step 2 subsidies.
33 There would
simply be no basis for the United States to contradict these testimonies from the users and
beneficiaries of the Step 2 programme.

10. The Panel must also assess the validity of the US critique in view of the overwhelming non-
econometric evidence that the US subsidies had significant production, export and price effects.
34 For
example, the Panel must ask whether it is reasonable to conclude, as the United States argues, that
$12.9 billion dollars in amber box, presumed tr ade-distorting subsidies had no effect on US
production, US exports, and world prices. It is fu rther uncontested that USDA’s own data shows that
the average US upland cotton farm would have lost $872 per acre during MY 1997-2002 – but had a
“profit” of $106 per acre when subsidies are included in their revenue.

11. Further, the Panel must also examine the US Critique of Professor Sumner’s analysis in light
of the evidence of other econometric studies examining the effects of removing US upland cotton
subsidies. The United States has argued that all these studies – including USDA’s studies – were
wrong in finding significant production, export, and pr ice effects. Would the United States also argue
that all of these other economists analyzed the US upland cotton subsidies and their effects on the
(world) upland cotton market “for the express purpose of achieving pre-conceived results”?
35 Brazil
submits that a common sense analysis of these other studies, including USDA’s own studies, shows
that Professor Sumner’s results are both valid as well as conservative. They are certainly within the
ranges of the other econometric studies in the reco rd and consistent with what would be expected
given the non-econometric evidence in the record.

12. Finally, Brazil notes US suggestions that Professor Sumner made modelling choices “for the
express purpose of achieving pre-conceived results”
36 and “in order to exaggerate acreage and
ultimately price impacts”. 37 These are offensive and inappropriate charges directed at one of the
world’s leading agricultural economists. Member s of the NCC admitted that “Dr. Sumner is a
brilliant economist” who is “well-respected” and a “widely recognized UC [University of California]
economist” who is a “confidant to the administration on trade and other issues”.38 Personal attacks by
the United States against Professor Sumner’s integrity are ironic given the fact that only seven months
ago he was one of only two private US economists to be asked by the Chairman of the US

31 See Brazil’s 2 December 2003 Oral Statement, paras. 42-55.
32 The United States points out a typo (US 22 December 2003 Comments on Brazil’s Econometric
Model, paras. 76) that did not affect the actual analysis undertaken by Professor Sumner ( see below, Comments
on Section VI).
33 For an example of the extensiv e evidence supporting this fact, see Brazil’s Further Submission,
paras. 141, 178-180.
34 See inter alia Brazil’s 9 September 2003 Further Submission, Sections 3.3.4.1-3.3.4.6; Brazil’s 7
October 2003 Oral Statement, Section 2; Brazil’s 18 November 2003 Further Rebuttal Submission, Sections
3.1-3.4, 3.7; Brazil’s 2 December 2003 Oral Statement, Section 5.
35 US 22 December 2003 Comments on Brazil’s Econometric Model, para. 9.
36 US 22 December 2003 Comments on Brazil’s Econometric Model, para. 9.
37 US 22 December 2003 Comments on Brazil’s Econometric Model, para. 1. See also para. 38.
38 Exhibit Bra-396 (“Farm Groups Shocked at UC Economist’s Testimony in WTO Dispute,” Western
Farm Press, September 2, 2003)(quoting Earl Williams , President of California Cotton Ginners and Growers
Association).

Commission on the Application of Payment Limitations for Agriculture, Chief USDA Economist
Keith Collins, to testify before that Commission. In evaluating the effects of additional payment
limitations, the Report of the Commission relies, inter alia, on the testimony and advice provided by
Professor Sumner.
39

13. While the US Government has attacked Prof essor Sumner’s professional integrity, the leaders
and members of the US National Cotton Council have gone further during this long dispute. They
have met with and pressured Professor Sumner to discontinue his work before the Panel. 40 Moreover,
NCC members have and continue to seek to cut off research and scholarship funds for the University
of California at Davis, in protest of Pr ofessor’s Sumner’s work in this dispute.41 One NCC member
representative even went so far as to be quoted as sa ying that “if this had been a military issue, what
Dr. Sumner did would be called treason”. 42 Recently, the President of the NCC threatened both
Professors Sumner and Babcock with unspecified action following the end of the WTO proceedings,
stating “[i]n another time and venue there will be a full examination of the actions taken by these 2
economists”.43 This threat was elaborated in a recent an alysis in a leading Agricultural Newspaper,
the Western Farm Press:

In the trade issue with Brazil, NCC President and CEO Mark Lange remains incensed
at [Brazil’s] WTO action. More specifically, he is angry because two US economists
hired on to Brazil’s payroll and prepared testimony against the United States in the
WTO action . University of California economist Dan Sumner, former assistant
secretary of agriculture, was hired to assist in the case. Lange added that Sumner
‘appears to have hired’ Professor Bruce Babcock, an agricultural economist at Iowa
State University and director of the Center for Agricultural and Rural Development to
attempt to modify the Food and Agricu ltural Policy Research Institute baseline
projections for use by the Brazilians. “Thi s action was taken without the knowledge
of FAPRI,” said Lange of the University of Missouri-based facility. Lange said
Babcock receives federal funds for the CA RD programme and he pledged “a full
examination of the actions of these two guys” once the WTO issue is settled .
California cotton industry leaders and others have protested Sumner’s actions to the
dean of U.C. Davis school of agriculture and have lobbied for private research and
scholarship funds to be withdrawn from the University in protest of Sumner’s
actions.44
14. Over the past six months, NCC members have been instrumental in coordinating efforts to
attempt to force officials of the University of Ca lifornia at Davis to require Professor Sumner to stop

39 Exhibit Bra-397 ( “Report of the Commission on the Application of Payment Limitations for
Agriculture,” August 2003).
40 Exhibit Bra-396 (“Farm Groups Shocked at UC Economist’s Testimony in WTO Dispute”, Western
Farm Press, 2 September 2003)(“group of representatives from cotton, wheat and rice met with Professor
Sumner in mid-August to express their displeasure over his testimony before the Panel”).
41 Exhibit Bra-396 (“Farm Groups Shocked at UC Economist’s Testimony in WTO Dispute”, Western
Farm Press, 2 September 2003)(Earl Williams, Presid ent of the California Cotton Ginners and Growers
Associations was quoted as stating “A nd we are going to bring pressure to bear on the university that would
allow someone from a public, taxpayer supported institution to have such latitude that can reap such harm on the
supporters of the University”.).
42 Exhibit Bra-396 (“Farm Groups Shocked at UC Economist’s Testimony in WTO Dispute”, Western
Farm Press, 2 September 2003) quoting Earl Williams.
43 Exhibit Bra-395 (“Trade Issues Facing the US Cotton Industry,” Speech by Dr. Mark Lange,
President and CEO, National Cotton Council, San Antonio, January 6 )(underlining added); See also Exhibit
Bra- 398 (Western Farm Press, 7 January 2004 , p. 3).
44 Exhibit Bra-398 (Western Farm Press, 7 January 2004, p. 2).

his work in this dispute.
45 To their credit, these U.C. Davis o fficials have refused to bend to the
pressure.

15. As Dr. Lange’s statements quoted above indicates, the NCC now has focused on Professor
Babcock for his very limited role in working with Pr ofessor Sumner in the application of parts of the
FAPRI and CARD models. Professor Babcock’s letter
46 is addressed to leading House and Senate
staff members who have “relied on FAPRI and CARD to provide objective and high quality
quantitative and qualitative assessment of US farm po licy alternatives”. Professor Babcock’s letter
states he is “prepared to do whatever it takes to mend this relationship, including disassociating
myself from future official FAPRI analyses if so desi red”. The letter provides the Panel with insights
into the type of pressure imposed by the NCC on the economists providing the Panel with assistance
in this dispute.

16. These efforts by the representatives of th e US upland cotton producers who are heavily
dependent upon US subsidies and US Congressional support for their economic survival is perhaps
understandable, but nonetheless deplorable. Prof essor Sumner has demonstrated considerable
courage and fortitude in continuing his work to assist the Panel and ultimately all WTO Members in
this dispute. Brazil has no doubts that the United Stat es is also appalled at the prospect that either of
these two distinguished economists would suffer an y adverse professional consequences from their
assistance to the Panel and the Parties in this disp ute. Given the obligation of all WTO Members to
cooperate and assist the Panel in making an objective assessment of the facts of a dispute, Brazil is
certain the United States will unequivocally condemn any such threats, including those now being
made by the US National Cotton Council.

17. With these introductory remarks in mind, Br azil presents below Professor Sumner’s response
to the US 22 December 2003 Comments Concerning Brazil’s Econometric Model.

45 Exhibit Bra-396 (“Farm Groups Shocked at UC Economist’s Testimony in WTO Dispute,” Western
Farm Press, 2 September 2003).
46 Exhibit US-114.

II. PROFESSOR SUMNER’S COMMENTS CONCERNING THE US CRITIQUE OF HIS
MODEL

Response to “Comments from the United States of America
Concerning Brazil’s Econometric Model” dated December 22, 2003

Daniel A. Sumner

20 January 2004

18. This response to the US critique of the modelling work on US cotton subsidies conducted by
myself and my colleagues addresses each of the US comments in the order in which they appear in the
US critique submitted on 22 December 2003. However, let me start with some general comments I
feel are in order.

19. Much of the US critique repeats the descripti on of my adaptations to the FAPRI model, as
provided in Annex I and subsequent documents. 47 The model I developed was based on the core
domestic crops model of FAPRI with several additions and modifications to fit the questions before
this Panel. I stated in detail where my model made those additions and modifications. 48 Thus, these
US comments add nothing by reasserting that my model was not identical to the FAPRI model. Since
I never claimed that my model was the FAPRI mode l, I frankly do not understand the point of these
repeated assertions that are written as though they were exposing some revelation.

20. Second, the United States at least three times asserts claims about my motivations for
modelling choices. Twice in the very first para graph the United States asserts that my modelling
choices were made “in order to exaggerate” acreage and price impacts. Then in paragraph 9, the
United States asserts that my modelling choices were made, “for the express purpose of achieving
pre-conceived results”. I am puzzled how the Un ited States would claim to have any evidence about
my motivation. But more important, these statem ents suggest seriously immoral and unprofessional
behaviour on my part. This is a very serious charge that I do not take lightly. I submit that besides
being simply wrong, such attacks have no place in these proceedings.
49

21. Most of the substantive issues raised in the US critique are si mply re-statements of assertions
that the United States disagrees with the modelling choices made in Annex I. 50 My argum ents for
why I modelled the policies as I did have been prov ided to the Panel on several previous occasions
and there is no reason to repeat t hose arguments in this document. I will refer to those arguments as
necessary in footnotes.

47 See my Closing Statement on 9 October 2003, attached as Annex II to Brazil’s 9 October 2003
Closing Statement, and my statements in Exhibits Bra-313 to 315, my 2 December 2003 Statement to the Panel
in Exhibit Bra-342, as well as the detailed reactions to US criticism of my model in Exhibits Bra-343-345.
48 See Annex I to Brazil’s 9 September 2003 Further Submission and Exhibit Bra-313.
49 Some of the economic material presented by the United States in this case has been authored directly
by Dr. Glauber. I note that the 22 December 2003 “Comments” are not attributed to anyone by name, therefore
I am unable to respond directly to any individual person with respect to these personal charges.
50 However, the United States does not propose othe r methods for modelling the subsidy programmes
in case they disagree with my model choices. They simply state that these progr ammes should not cause any
effects – a position that is clearly untenable given th e other economic evidence about the effects of the
programs, including statements by the users and beneficiaries of the programmes.

Section II

22. Paragraphs 5 to 11 of the US critique are de voted to reasserting what I stressed in Annex I
that was submitted many months ago, namely th at I made adaptations to the FAPRI modelling
framework. As I have explained, the FAPRI framew ork alone was not appropriate for the analysis of
the questions before this Panel and therefore I m odified and supplemented the framework. However,
let us put these modifications and additions in pers pective. Of the hundreds of equations used to
compute the results, almost all are directly taken from the FAPRI domestic crops model. The basic
behavioural supply and demand e quations are taken directly from the FAPRI model as are the
elasticities used to quantify those equations. In Annex I, and in subsequent documentation
51, I tried to
avoid taking credit for work that was not mine. At the same time, I tried to be clear about the
distinctions between my work and that of FAPRI and CARD.

23. Professor Bruce Babcock from CARD – with whom I worked together in his private capacity
– provided a letter to Congressional staff economists
52 who are familiar with “official” FAPRI
analysis of US policy questions, but who have not followed these proceeding closely. In that letter,
Professor Babcock explained to them what he and I have always been clear about and had already
stated to this Panel. My analysis used part of the FAPRI modelling system, but was not conducted by
the full FAPRI team and was not “official” FAPR I analysis. These Congressional staff members had
not had access to Annex I or other material submitted to this Panel and Professo r Babcock felt a need
to clarify these facts. There was no new information in the letter that he sent these staff members that
was not already included in Annex I and in the subsequent material provided to the Panel.

24. For example, Professor Babcock points out that the baseline was the November 2002
preliminary FAPRI baseline not the official 2003 FAPRI baseline that became available after I
undertook my analysis. He also points out that I used the CARD international cotton model rather
than the FAPRI full international model in my analysis.
53 This is not new to those of us who have
participated in this Panel proceeding, but Professo r Babcock decided to make these clarifications to
the Congressional staff members.54

25. One point made in the Babcock letter – and emphasized in the US critique – is the obvious
fact that if a different team of analysts with a different model had conducted the analysis the results
would have been different. That is always true. Different analysts to whom the same question is
posed would come up with at least a somewhat di fferent model. Obviously a FAPRI team conducting
an official “FAPRI” analysis would have developed a model that is at least somewhat different from
my adaptations. In part this occurs because, w ith complex issues involved, the questions themselves
may be interpreted slightly differently, and becau se, in many cases, there are a range of equally
acceptable approaches to an economic modelling choice. It is much less clear how the direction of the
results would have changed if di fferent teams with different mode ls conducted analyses. As the
review of the independent literatu re and the independent models in this case suggests, most analyses
of US cotton subsidies have found larger impacts than I found in my research.
55 It is not clear
whether an “official” FAPRI analysis would have found larger or smaller impacts if FAPRI would
have been posed the same questions as those posed in Annex I, and if the FAPRI team analyzing these
questions had considered all the evidence presented to this Panel.

51 See in particular Exhibit Bra-313.
52 Exhibit US-114.
53 I will discuss the latter issue in greater detail in my comment on Section VII.
54 The letter responds a perception of concern among some in the United States about the participation
of US economists and US based models providing eviden ce on behalf of Brazil. In particular, Professor
Babcock clarified that his FAPRI colleagues at the Univers ity of Missouri had not participated in the analysis
and that this work was done in a private capacity not at a part of an “official” FAPRI project.
55 See for example the review of independent studies in Exhibit Bra-344.

Section II. A.

26. The heading of this section is oddly contradicted by its content. The heading says the “Brazil
Model Not Comparable to the FAPRI System”, yet the next three paragraphs proceed to compare
these two models. Several incorrect assertions are included here, but these are repeated in more detail
in later sections and so are dealt with below. Ho wever, one clarification is important to make both
here and below. Whereas the FAPRI system does not include separate explicit provisions for crop
insurance and export credit guarantee programmes, this does not imply that the FAPRI system
assumes that there are zero supply impacts of these programmes. Rather, effects of these programmes
are imbedded in the baseline of the FAPRI framework.

27. If the FAPRI system had been posed questions about the impacts of crop insurance or export
credit guarantee programmes, the natural approach w ould be to proceed as described in Annex I and
in subsequent submissions: to ask how a new scen ario with these programmes removed would differ
from the baseline that includes these programmes. This procedure was precisely what FAPRI analysts
did when they analyzed payment limit rules for the Commission on Payment Limitation in analysis
presented in June 2003.
56 The FAPRI framework also does not contain any explicit provisions on
payment limitations. These were added to the syst em for the analysis of the effect of payment
limitations, much as I added equations on crop insu rance and export credit guarantees for purposes of
my Annex I analysis.

28. It is simply wrong to assert that, because a programme is not identified separately in the
FAPRI framework, its effects must be assumed to be zero. Furthermore, as discussed further below,
in some cases the best evidence on the impact of a programme is from the users of that programme.
This was my judgment about the impacts of the e xport credit guarantee programmes. It certainly
makes no sense whatsoever to assume that a programme has zero effect, simply because its impacts,
which are known to be positive, are difficult to quantify precisely.

Section II.B.1

29. I explained in great detail the basis for my approach to PFC, DP, MLA and CCP payment
programmes.
57 Clearly I disagree with the assertion made in paragraph 16 and 17. There is no new
content here and there is no reason to repeat my argument and evidence. I note, however, that no
“official” FAPRI analysis of these payment progr ammes has asked the question how acreage would
respond if cotton programmes were removed while the payments for the other programme crops
remained in place. The FAPRI analysis is concerne d with the very different question of what would
be the impact for all crops if the payment progra mmes were removed for all crops simultaneously.
Therefore, I had to make some adjustments to the treatment of these programmes, as the question that
faces this Panel could not be answered by the trad itional FAPRI framework. In addition, as footnote

56 See for example, FAPRI analysis FAPRI-UMC Report #05-03 and #06-03 to be found at
http://www.fapri.missouri.edu/FAPRI_Publications.htm and partly reproduced in Exhibit Bra-228.
57 Annex I, paras. 37-51; and my oral statements on 22 July (Exhibit Bra-105, paras 20-33), 2
December (Exhibit Bra-342, paras 31-37) and my closing statement on 9 Octo ber (Part 4); Exhibits Bra-280,
Bra-313, and Bra-345 (paras 18-34). Some of the key arguments I made can be summarized as follows:
• none of the studies in the literature analyzes the amount of payments made in connection with a
specific crop that are received by current producers of that crop,
• none of the studies in the literature focuses on the specific effects of these payments for cotton due to
o the high per-acre payments for cotton reflecting higher costs of production,
o the restrictions on planting fruits and vegetables affect particularly cotton production,
• direct and counter-cyclical payments give farmers an incentive to produce the crop for which they have
base acreage,
• future updates of base induce farmers to plant their base acreage to the programme crop or even expand
the area planted to the programme crop.

57 highlights, my judgment is that the programmes all have some commodity-specific acreage impact
for cotton.

30. The table referred to in paragraphs 21 through 24 simply shows that when the planting impact
of these payment programmes for cotton are assumed to have no specific impact on cotton acreage,
but only a broad and diffuse effect on all programme crops, then the resulting acreage impact will
indeed be nearly zero.

Section II.B.2

31. Annex I as well as subsequent submissions and oral discussions with the Panel have
explained in detail my approach to the productio n impacts of crop insurance and why my approach,
for example by leaving out risk reduction impacts, is conservative.
58 The approach is straightforward.
The crop insurance subsidy lowers costs to cotton gr owers and the acreage impact of lower costs in
percentage terms may be calculated by multiplying the lower per acre costs by the elasticity of supply.
The FAPRI framework has not been used to assess the production impacts of crop insurance. But the
impacts of crop insurance subsidies are implicit in the FAPRI baseline. 59 My approach made the
impacts explicit so that I could assess the acreage effects of removing the subsidy. This is discussed
in somewhat more detail below.

32. Paragraphs 25 through 30 and the table referre d to there simply repeat the US claim that
hundreds of millions of dollars of crop insurance subs idies for cotton producers has had zero effect on
farmers’ choices to grow cotton. I disagree and my model has quantified these impacts using FAPRI
elasticities and other features of the FAPRI US crops model.

33. Not withstanding the “intuition” of the United States, the analysis that underlies paragraph 29
of the US critique is evidence of faulty economic reasoning. Furthermore, the US claim about how
the FAPRI model treats crop insurance subsidies is misleading at best.
60 As noted above, the FAPRI
framework includes the value of crop insurance subsid ies implicitly and has not previously been used
to analyze the impact of eliminating crop insurance for cotton. Crop insurance for cotton is a service
purchased by farmers on a per-acre basis in their business of producing cotton. The subsidy provided
by the US government lowers the cost of this serv ice. It is a principle of basic economics that a
subsidy that lowers marginal costs results in the same impact as a direct price subsidy on output.
Following this principle, I first calculate the regi onal cotton crop insurance subsidy rate per acre of
cotton as a percentage of net revenue and then mu ltiply those subsidy ratios times the elasticity of
cotton acreage response applicable to that region. The United States is right that there are more
complex ways to model the impact of crop insuran ce, for example, by noting that crop insurance has
an additional acreage impact due to risk reduction. But, the methodology I apply is straightforward,
conservative and based on intuitive economic logic and basic principles.

Section II.B.3

34. Paragraphs 31 through 34 and the table to which they refer again simply repeat the US
assertion that billions of dollars of subsidized export credit guarantees for cotton exports have zero
effect on US production and exports. I find this implausible on its face and based my quantification
of the impact on estimates provided by representative of users of the programme. This seems to me to
be a reasonable approximation. My use of that estimate was conservative relative to the National

58 See also Exhibit Bra-313.
59 While there is no specific equation modelling the effect s of crop insurance, its effects are part of the
baseline that projects a level of planted acreage against the background of the continuation of the crop insurance
programme.
60 Paragraph 29 of the US Critique.

Cotton Councils estimates, as explained in deta il in response to questions from the Panel 61, and as the
US acknowledges in footnote 17 to paragraph 32 of its critique. The National Cotton Council testified
that the impact on export was 500,000 bales and the imp act that I estimate is considerably smaller. I
use my model, based significantly on FAPRI elasticities and other parameters to calculate the price,
acreage and other impacts of the initial shift of 5 00,000 bales. This resulted in much lower net
impacts on price and export quantities than estimated by the National Cotton Council.
62

Section III

35. In paragraphs 35 through 38 of the US criti que, the United States points out that the baseline
prices reported in Annex I are not the same as baseline prices provided to the United States by
Professor Babcock on November 26 as part of the model documentation. 63 The United States implies
that I have manipulated the base line to generate higher effects. 64 This allegation has no basis
whatsoever.

36. The documentation deliv ered by Professor Babcock
65 was the FAPRI US crops model that
was calibrated with the system of FAPRI inte rnational crops models to reproduce the FAPRI
November 2002 preliminary baseline projections. The Annex I analysis began with these FAPRI
November 2002 preliminary baseline projections. Ho wever, the Annex I results were developed by
linking the FAPRI US crops model with the CARD international cotton model that was developed by
researchers at Iowa State University. Unfortunate ly, the description of the baseline in Annex I and
subsequent submissions was imprecise by not making this distinction explicit. Instead, I labelled the
baseline as an (unpublished) FAPRI November 2002 preliminary baseline rather than a slight
modification thereof. This slight modification was required for internal consistency reasons, as
explained below.

37. The table below provides a full comparison of the differences in the baseline reported in
Annex I and the FAPRI November of 2002 preliminary baseline. As can be seen, they are different
but those differences are very small overall.

38. There are two reasons for the small difference s between the baseline projections used in the
Annex I analysis and reported in Annex I a nd the November 2002 FAPRI preliminary baseline
projections. The first was caused by the need to calibrate the CARD cotton model rather than the
FAPRI international model with the US crops mode l. Consistency with the CARD international
cotton model implied very small changes in the b aseline. The second source of difference was that
new macroeconomic projections became ava ilable in late November, 2002. These new
macroeconomic projections were incorporated into the CARD international cotton model. I stress that
the equations of the FAPRI US crops model were not changed in any way. Again, the slight changes
between the baseline projections are solely a result of the calibration of the model, once with the
FAPRI international crops models (FAPRI prelim inary November 2002 baseline) and once with the
CARD international cotton model (Annex I model), as well as the updated macroeconomic data used.

39. To put this baseline issue in perspective, Brazil has provided the Panel with several sets of
results from similar models on sev eral alternative baselines, including the official FAPRI 2003

61 Brazil’s 27 October Answers to Questions, paras. 104-107.
62 In table 5.Ig of Annex I, I report an average expo rt effect of 300,000 bales and an average US price
effect of about 0.5 cents per pound, as opposed to the NCC estimate of 500,000 bales and 3 cents per pound.
63 See Exhibit Bra-346.
64 Paragraph 38 of the US critique.
65 Exhibit Bra-343, para. 11 and Exhibit Bra-346.

baseline.
66 The bottom line is that these results are ex tremely robust to those alternative baselines and
slight modifications to modelling specifics.

40. The same robustness applies to the results using the FAPRI November 2002 preliminary
baseline and the modification applied. The Un ited States assertion that the Annex I baseline
meaningfully affects (“exaggerate[s]”
67) the effects of removing US cotton subsidies is, therefore,
unfounded.

41. To analyze the validity of the US assertion, we have recalibrated the CARD international
cotton model (used to generate the Annex I results ) to replicate exactly the FAPRI November 2002
preliminary baseline. We also used the m acroeconomic projections used by FAPRI in
November 2002.
68 Rerunning the model of Annex I yields results that are nearly identical to those
reported in Annex I. Removal of US cotton subsidies would decrease US production by an average of
24.9 per cent from 2003 to 2007. 69 Mill use would decrease by 6.4 per cent. 70 US exports would
decrease by 41.5 per cent. 71 The US Season average price would increase by 15.1 per cent. 72
Importantly, the A index price would increase by 10.6 per cent. In Annex I, I reported a change in the
A index price of 10.8 per cent relative to the baseline. 73 This difference of less than 0.2 percentage
points is simply not material.

42. In sum, it is unfortunate that this confusi on occurred in the labeling of the baseline used in
Annex I. The important point, however, is that it ha s not affected the results of my analysis. Indeed,
having run the Annex I model off the non-modi fied version of the FAPRI November 2002
preliminary baseline projections provides one more indication of the robustness of those results.

66 This includes my Annex I model based off the FAPRI preliminary November 2002 baseline, my
cotton-focussed model based off the FAPRI preliminary November 2002 baseline and the FAPRI January 2003
baseline, as well as a number of independent third party studies (Exhibit Bra-344).
67 Paragraph 38 of the US critique.
68 Both of these modifications result in an Annex I modelling system that is calibrated to exactly
generate the FAPRI preliminary November 2002 baseline. It no longer contains any modifications that the
United States criticizes as generating overstated resulting effects (paragraphs 36-37 of the US critique).
69 The Annex I result was 26.3 percent (paragraph 65).
70 The Annex I result was equally 6.4 percent (Table I.5a).
71 The Annex I result was 44 percent (paragraph 68).
72 The Annex I result was 15.3 percent (paragraph 69).
73 The Annex I result was 10.8 percent (paragraph 70).

Comparison between baseline projections

 2003 2004 2005 2006 2008
 Planted Area (million acres)
Annex I baseline 13.7802 14.8798 14.7722 14.6525 14.2744
FAPRI baseline 13.7820 14. 7205 14.7716 14.6584 14.2519
 Harvested Area (million acres)
Annex I baseline 12.0444 13.0666 12.9761 12.8739 12.5282
FAPRI baseline 12.0462 12. 9164 12.9751 12.8791 12.5068
 Yield (bales per acre)
Annex I baseline 1.3325 1.3328 1.3410 1.3494 1.3579
FAPRI baseline 1.3325 1. 3328 1.3408 1.3492 1.3578
 Production (million bales)
Annex I baseline 16.0497 17.4157 17.4010 17.3715 17.0121
FAPRI baseline 16.0519 17. 2152 17.3974 17.3769 16.9818
 Free Stocks (million bales)
Annex I baseline 4.9155 4.6527 4.3863 4.3458 4.0330
FAPRI baseline 4.8188 4. 4349 4.2145 4.1920 3.8837
 Imports (millions bales)
Annex I baseline 0.0050 0.0050 0.0050 0.0050 0.0050
FAPRI baseline 0.0050 0. 0050 0.0050 0.0050 0.0050
 Mill Use (million bales)
Annex I baseline 7.7825 7.7018 7.6339 7.5896 7.5245
FAPRI baseline 7.7429 7. 6547 7.5968 7.5532 7.4927
 Exports (Million bales)
Annex I baseline 9.7667 9.9817 10.0384 9.8275 9.8054
FAPRI baseline 9.9042 9. 9495 10.0260 9.8513 9.8024
 Season Average Price ($/lb)
Annex I baseline 0.450 0.477 0.503 0.512 0.539
FAPRI baseline 0.457 0. 488 0.512 0.520 0.547
 A Index Price ($/lb)
Annex I baseline 0.507 0.534 0.558 0.576 0.596
FAPRI baseline 0.524 0. 547 0.568 0.587 0.605
 Adjusted World Price ($/lb)
Annex I baseline 0.372 0.398 0.419 0.436 0.455
FAPRI baseline 0.387 0. 410 0.428 0.446 0.463
 Step 2 Payments ($/lb)
Annex I baseline 0.057 0.060 0.063 0.047 0.052
FAPRI baseline 0.054 0. 060 0.063 0.047 0.052

Section IV
43. In section IV of the US critique, the United States claims that my model does not forecast
future or explain historical outcomes of cotton pl antings and that variables, such as the ratio of
soybean to cotton futures prices, are more highly co rrelated to acreage variations in the seven years
from 1996 to 2002.
74 The United States claims that this has some relevance for the validity of my
model and its simulation results. These claims are seriously flawed.

44. Section IV of the US critique demonstrates a complete lack of understanding of the role of
policy simulation models. A policy simulation m odel is not designed to and does not have the
capability of forecasting. Policy simulation models are designed to ask “but for” counterfactual
questions not to attempt to replicate a specific histor y or forecast the future. Specific statistical tools

74 See inter alia paragraphs 39-42 of the US critique. This is the entire theme of section IV.

apply to forecasting economic time series – generall y based on some variant of regression analysis –
to forecast/predict future or explain historic outco mes of, for instance, cotton plantings. Contrary to
the assertion of paragraph 39 of the US critique, no professional economist would ever propose a
simulation model designed to consider the impacts of policy alternatives as the appropriate tool for
forecasting the future or for explaining historical data for an industry. I certainly would never propose
the use of a policy simulation model for forecasting purposes.
75

45. I begin my response to the US critique in section IV by noting that – as I understand it – the
questions before the Panel relate to the analysis of the effects of the US cotton subsidies, not to predict
cotton plantings for future marketing years.
76 The simulation model that I have presented in Annex I
and in later submissions to the Panel addresses exactly that first question before the Panel. Given the
baseline that covers historical data for marketing years 1999-2001 and projections for marketing years
2002-2007, my simulation model asks what would ha ve been or what would be the effects of
removing the US subsidies on US acreage, use and exports of cotton as well as on cotton prices and
other variables.

46. The United States is wrong when it implicitly claims that the ability of a policy simulation
model to forecast or account for variations in a tim e series provides any useful guide to its reliability
in terms of the simulation results that it generates – for example in assessing what may happen if
policy variables were to change.

47. Forecasting models are typically based on multiv ariate time series regression analysis that
accounts for short-run and long-run trends, serial correlation of times series and exogenous factors. In
agriculture, projecting acreage choices would likely i nvolve projecting climate variations, pest trends,
and many other variables. (Any standard ec onometrics textbook provides the basics for forecasting
economic time series.
77)

48. Neither my Annex I model nor the FAPR I policy model (nor the USDA policy models)
provides an appropriate framework for statistical anal ysis explaining historical variations in acreage
or for forecasting future acreage. 78 The purpose of simulation models is to isolate the effects of, for
instance, subsidy programmes as they occur against the baseline results. Policy simulation models do
not claim to be useful for forecasting purposes and they are not. But this is irrelevant to their stated
purpose as “but for” (counterfactual) policy analysis tools.

49. My simulation model assumes “average” trends for many variables that change in real world
situations, but are set at averages in the baseline (o r at historical outcomes). For example, my model
assumed average weather conditions for marketing years 2002-2007. However, no doubt, there will
be years with weather better than the average and years with weather worse than the average. The
model cannot predict this, and, therefore, any deviatio ns in the real world that impact on, for instance,
planting decisions, would result in “projections” by the model to be necessarily wrong – to the extent
that important outcomes of variables, such as weather, deviate from the baseline.

75 I note that the claims made by the United States about the “Sumner model” apply with equal (lack
of) force to the FAPRI models themselves. No one uses these models to forecast, nor should they. The models
are used and useful to ask “but for” questions, which forecasting models are not in a position to do.
76 Thus, any assertions of the United States that my model cannot predict future or explain past
outcomes of cotton planting is not a relevant factual statement that helps this Panel determine the effects of the
US cotton subsidies.
77 See for example, William H. Greene, Econometric Analysis Prentice Hall; 5th edition (2002) (cited
in Brazil’s 22 December Answers to Qu estions, para. 42) A classic and still useful reference is Charles R.
Nelson, Applied Time Series Analysis for Managerial Forecasting, Holden Day, San Francisco. (1973).
78 Running the same correlation calculations that the United States applied to my model off the FAPRI
or USDA’s FAPSIM model would very likely not reveal significantly higher correlations as these simulations
models are – like my adaptation of the FAPRI model – not designed for that purpose.

50. A simple illustration may clarify the point that statistical regression models and policy
simulation models serve different purposes. Consid er a period in which a large direct production
subsidy was in force, but the parameters of the pr ogramme did not change. Given changes in climate,
agronomic factors or other economic incentives, pl anted acreage would change over the period, but
none of the changes in acreage would be due to chan ges in the subsidy, because there were none. The
result of any time-series regression analysis of a limited number of data points is incapable of
isolating the effects of variables, such as subsidy programmes, that do not change considerably during
the period under analysis. Other variables would ex plain the variation in acreage over the period and
would be better predictors of future acreage shif ts so long as the large s ubsidy programme remained
unchanged.

51. But does this mean that the large direct produc tion subsidy is irrelevant to planted acreage?
No, of course not. Does this mean that a model to consider the amount of acreage that would be
planted, but for the subsidy, should assume the subsidy was irrelevant? No, of course not. Therefore,
a statistical regression (or correlation) model appl ied to analyze the effects of such “constant
variables” would fail to capture their importance. In sum, only a policy simulation model, of the
general sort that I have provided in Annex I will adequately isolate the effects from the cotton subsidy
programme hidden in the regression analysis.

52. Similarly, policy simulation models are not usually very good at forecasting future or
explaining past events, as explained above. Does this mean that the simulation analyzed the effects of
the subsidy programmes incorrect?
79 No, of course not, if they are properly designed.

53. The United States further claims that there are small positive or negative correlations between
the expected net revenue and planting decisions, as a result of my model.
80 The table referred to in
paragraphs 43 though 52 of the US critique and the discussion in tho se paragraphs also illustrate the
misunderstanding that the United States evidently has about model evaluation and the meaning of the
statistics they produce. The table at paragraph 49 reports simple correlations coefficients based on
seven observations for a few variables. First, I not e that the sample size for these variables is simply
too small for any meaningful statistical analysis. Second, simple (univariate) correlation coefficients
are not measures of explanatory power as the United States implies, for example, in paragraph 42 of
its critique.
81 Simple correlation coefficients tell us nothing of interest when many variables affect an
outcome.82 This again highlights the difference between forecasting or explanatory models and policy
simulations models that ask “but for” counterfact ual questions. Nothing in this section of the US
critique relates in any way to the usefulness of models for policy analysis.

54. Correlation coefficients measure linear statis tical relationships between two variables in
isolation from all other influences. They do not indicate causation and they do not even indicate a
statistical relationship between variables that tak es place in the real-world situation when there are
many simultaneous statistical and causal relationships in place. It follows that the figures presented in
the table at paragraph 49 are not indicative of cau sation or even of the contribution to statistical
explanatory power in the current case where many va riable are interrelated. Whether the figures are

79 The United States implies this in paragraphs 40-50 of its critique.
80 Paragraphs 43-46 and table at paragraph 49 of the US critique
81 Paragraphs 41-42 and 45-49.
82 The case of cotton plantings is a good example. Plan ting decisions are a function of expected
revenue itself determined by expected market revenue and expected government payments. It is further a
function of expected revenue for other crops, of weather conditions at planting time, of expected demand for the
crop, expected weather during the grow ing season and so forth. Simple univariate correlation measures linear
statistical relationships, not causation or even statistical relationships if there are many factors that potentially
affect the outcome of a variable. This explains that there may be a negative correlation where one intuitively
expects a positive correlation as a re sult of ignoring the effects of all other factors on the variable to be
explained.

positive or negative, large or small, they have no statistical significance and provide no meaningful
information.

55. In sum, the US statement at paragraph 50 of its critique has no basis whatsoever. As with all
policy simulation models, including the FAPRI a nd USDA simulation models, any single factors or
set of variables in my model are not necessarily expected to “explain” the time series data. The model
was not designed to explain historic events or pred ict future outcomes. Instead my model is designed
to simulate what would be expected to happen if US subsidies were removed. A test of the model
would be to observe responses if subsidies were removed and other factors were held constant.
Presenting a set of simple correlation coefficients on seven years of historical data over which
subsidies remained in place provides no evidence of any relevance.

56. Finally, I refer the Panel to the many in stances in which I have addressed the question of
lagged prices used to model farmers’ price expectations at planting time.
83 I will not repeat these
arguments here to respond to the US criticism that I should have used futures market prices.84 I would
note that Brazil’s submissions have thoroughly addressed the US arguments that US farmers planting
decisions are made in accordance with futures market prices.85

Section V

57. This section of the US critique repeats again that my model differs from the FAPRI US crops
model. It also asserts that the United States had di fficulties in replicating results of my analysis from
the electronic files. This section also reveal s that the United States made several mistaken
“assumptions” about how certain variables entered the model. As indicated before, given the
complexities of working with these models, both Prof essor Babcock and I have repeatedly offered to
work with the United States to replicate my results.
86 US government or other economists working on
the US critique of my model could have contacted either Professor Babcock or myself requesting any
needed information or assistance with any problems they have had. If they would have done so, we
could have clarified any ambiguities and the United States could have avoided the evident errors made
in applying my model. However, they did not contact either of us. As a result they made
inappropriate assumptions and have failed to apply the model correctly.

58. Let me begin by addressing the US statemen ts about the differences between the Annex I
model and the FAPRI model.
87 The essence of those differences was explained in Annex I while the
operational details were specified more precisely in Exhibit Bra-313. Annex I attempted to provide a
relatively simple heuristic discussion of the m odelling approach. Exhibit Bra-313 provided the
operational equations. These operational specification ar e made explicit in equations (4), (5) and (6)
in Exhibit Bra-313. As explained in Exhibit Bra-313, my approach to the PFC, MLA, DP and CCP
payment programmes and for crop insurance was to use a constant regional acreage elasticity (taken
from the FAPRI crops model publications).88 These elasticities were the averages of the time-varying
elasticities used over previous periods, as reported by the FAPRI US crops model that I adapted. I

83 See my 9 October Closing Statement attached as An nex II to Brazil’s 9 October Closing Statement,
my 2 December Oral Statement (Exhibit Bra-342, paras. 24-28), Exhibit Bra-345 (paras.6-14) as well as Brazil’s
answers to question 213 from the Panel on which I have provided input (Brazil’s 22 December Answers to
Questions, paras. 37-42).
84 See paragraphs 51-52 of the US critique.
85 Brazil’s 2 December Oral Statement, Section 5.2 and the accompanying exhibits, as well as my oral
explanations on 3 December, including Exhibit Bra-371.
86 See my oral statement on 2 December (Exhibit Bra-342, para. 5 and 8) , Exhibit Bra-331 (para. 10),
letter of Professor Bruce Babcock attached to Brazil’s 5 November letter to the Panel
87 See section V
88 The regional supply elasticities used for the cons tant elasticity calculations to determine the PFC,
DP, MLA and CCP effects and the crop insurance effects are as follows: Corn Belt, 0.219; Central Plains,
0.942; Delta, 0.544; Far West, 0.041; South East, 0.615; and Southern Plains, 0.362.

then apply this constant elasticity to the percenta ge effects of the subsidy on net revenue. This
constant elasticity modelling is we ll established in the literature. 89 Paragraphs 53-56 of the US
critique misstate the operational model I used a nd ignore the information in Exhibit Bra-313 that
explains how the heuristic explanation in Annex I was operationalized.

Sections V.A to V.C

59. In sections V.A and V.B, the Unites States fa ils to acknowledge that, because the level of net
returns vary from year to year, the constant el asticity specification explained in Exhibit Bra-313
means that the impacts of the PFC, MLA, DP, CCP and crop insurance programmes will vary as well.
When one recognizes this commonly applied feature of my specification, there is no inconsistency
whatsoever between the acreage impacts in the periods 1999 through 2002 and 2003 through 2007.

60. In fact, the United States acknowledges its understanding of the operational specifications
explained in Exhibit Bra-313 in paragraphs 63 through 66 of section V.C. And they acknowledge that
with constant percentage effect, the number of acr es shifted will depend on th e percentage impacts of
the subsidies on net revenue, not the absolute do llar impacts. The US observations about the
programme effects in section V.A (paragraphs 57-60), section V.B (paragraphs 61-62) and in the table
that follows paragraph 62 of the US critique are explained by my explicit description of the
operational specifications of the Annex I model in equa tions (4) through (6) in Exhibit Bra-313. It is
therefore puzzling why the United States included S ection V.A and V.B in the document at all, since
they provide no new information. The United Stat es first simply mischaracterizes my approach as
linear, and then states that the results are not in line with that linear characterization. As I explained
in Exhibit Bra-313 (equations (4) through (6)) and as repeated by the United States in section V.C, my
model uses a constant elasticity, constant percentage effect for these impacts.
90

61. Let me clarify this a little further. The FAPRI US crops model applies a constant linear
response to any added revenue. My Annex I model takes the same approach for all variables that are
included from the standard FAPRI US crops model. This refers to all variables for which no
modifications are reported in Exhibit Bra-313. The FAPRI linear system means that a $100 increase
in subsidy has the same effect on acreage whether the base revenue is $200 or $1,000. My alternative
approach is used for PFC, MLA, DP and CCP paymen ts as well as crop insurance. It implies that a
subsidy that is a constant 10 per cent of net revenue has a constant percentage effect on acreage.
Hence, a $100 increase in subsidy has a bigger per centage effect on acreage if base revenue were
$200 (a 50 per cent increase) than if base revenue were $1,000 (a 10 per cent increase). Constant
percentage impacts and constant elasticity models are far more common in the economics literature
than are strictly linear models. Constant percentage effects do not imply larger impacts in general. In
effect, a constant percentage effect says that subs idies have a bigger acreage effect when they are a
bigger share of net revenue than when they are a smaller share of net revenue.

62. Section V.B on crop insurance contains some additional US mistakes in applying my model.
The United States seems to apply a constant per-acre crop insurance benefit for all regions. This is
inconsistent with my approach and with reality. As explained in paragraphs 54 and 55 of Annex I,
crop insurance subsidy rates differ substantiall y by region and my model incorporates those
differences. When the constant percentage effects are incorporated and when one applies the different
regional subsidy rates, there is absolutely no in consistency between the results in the period from
1999 through 2002 and the period 2003 through 2007.
91

89 See Sumner, Daniel A., and Michael Wohlgenant, “Eff ects of an Increase in the Federal Excise Tax
on Cigarettes,” American Journal of Agricultural Economics, 1985, vol. 67, 235-242.
90 I note that contrary to the US assertion in paragraph 66, my methodology has not changed between
Annex I and Exhibit Bra-313.
91 The United States claims in paragraph 62 that th e existence of crop insurance had a negative impact
in the acreage in the Corn Belt and that this would be an implausible result (paragraph 62 of the US Critique and

Section V.D.

63. The point of paragraphs 67 and 68 and th e table to which they refer, which follows
paragraph 70 (“Example of Southern Plains Acreage Impact”), are not at all clear. Most importantly,
the United States is simply incorrect that I used onl y market revenue plus marketing loan gains as the
basis for the percentage calculation.
92 The full net revenue including all programme payments are
included in the model specification. It is not clear why the United States made this mistaken
assumption.

64. In addition, the labelling of the table itself is not clear. For example, neither Annex I nor my
other submissions include regional acreage effects of subsidy programmes. This is because the focus
of this case is on national and international impacts. It appears that it was the United States which
calculated the figures reported in the table following paragraph 70 (“Example of Southern Plains
Acreage Impact”). I note that the marketing year 2005 planting effect of crop insurance in the
Southern Plains that the United States labels “Sum ner Impact” exceeds the effect I report in Annex I
for the entire United States.
93 This reason for this seems to be that the United States presents first
round effects, i.e., effects before any feedback e ffects (second-round effects) from both the US crops
model itself as well as before any feedback from th e CARD international cotton model. To be clear,
these US figures are not the equilibrium figures that I re ported in Annex I. They are also not the first-
round effects that were intermediate for the resu lts reported in Annex I because of mistaken US
assumptions, as discussed below.

65. Further, the column (2) of the US table at paragraph 70 (“Example of Southern Plains
Acreage Impact”) is labelled “Programme Revenue,” yet includes crop insurance. I assume this refers
to the total subsidy per acre, not programme reve nue. Also, the “programme revenue” only includes
revenue from DP and CCP payments as well as crop in surance. No revenue from the marketing loan
programme (10.06 cents per pound in MY 2005 pu rsuant to an AWP of 41.94 cents per pound
reported in the baseline)
94 is included in the calculations. By not including marketing loan payments
in its calculations, the United States does not follo w its own proposition of what the right approach
is.95 Rather, it has excluded marketing loan revenue entirely from its calculations in the table at
paragraph 70 of its critique (“Ex ample of Southern Plains Acreage Impact”), leading to distorted
elasticity calculations.

66. There are a number of further problems in the examples the United States provides in the
tables at paragraph 70 of the US critique (“Example of Southern Plains Acreage Impact”) that seem to
account for the differences they have created by misapplying my model. Let us use the crop
insurance calculations as an example. I calculate th at the Southern Plains crop insurance subsidy is
$26.14 per acre, not $24.67 per acre
96, as the United States enters into its table in the “programme
revenue” column. Furthermore the acreage elasticity th at I use is not 0.28, but rather 0.362. These

the accompanying table). This is, however, not true. Net crop insurance subsidie s in the Corn Belt were
negative over time, with indemnity payments being below premium payments. Therefore, the program provided
farmers with a net negative return causing negative acreag e impacts. This is an entirely plausible result. See
below the discussion on the amount of crop insurance subsidy payments (at paragraph 66, note 96 below). I also
note that cotton is not an important crop in the Corn Belt and that crop insurance benefits in the more important
regions in the Southern Plains and in the Southeast are much higher.
92 See paragraph 68 of the US Critique.
93 Compare the 0.446 million acres reported by the United States without offering any source with the
results I have reported in Annex I, Table I.5d, which is 0.420 million acres.
94 See Annex I, Table I.5a.
95 See paragraph 68 of the US Critique.
96 The regional crop insurance subsidy rates that I use are as follows: Corn Belt: -$0.70; Central
Plains: $28.24; Delta: $7.37; Far West: $13.62; Southeast: 15.71; Southern Plains: 26.14.

two further obvious errors in the US application of my model account for the bulk of the differences
that the United States seems to imply (incorrectly) were errors on my part.

67. Besides this, the table following paragraph 70 of the US critique (“Example of Southern
Plains Acreage Impact”) not only contain numbers th at are not my reported impacts, they also make
the serious conceptual error of simply adding the impact of each programme across the columns to get
a “total” effect. This is an error because the eff ects of the programmes are not independent. In order
to estimate the impacts of removing these three sets of programmes together, one must simulate that
scenario explicitly. The resulting impacts will be sm aller than the sum of the impacts of removing
each programme one at a time. For example, if one removed the crop insurance programme for
cotton, supply would fall and the market price of cotton in the United States would rise. This would
imply that the CCP programme would have a smaller s ubsidy element and its effect would be smaller.
The fact that the United States reported the simple sum of impacts across programmes and represented
that as the impact due to the three sets of programmes together seems to demonstrate either an
inadvertent error or a basic lack of understanding of how the programme and the model operates.

Section V.E

68. There are several problems and inconsistencie s in the discussion and tables included in this
section. These problems also apply to the calculations in section V.D.
97 The United States
improperly applied my model and, therefore, it is not surprising that they found different results. I
note that the United States in paragraphs 71 of its critique states that “reasonable assumptions were
made to facilitate the calculations”. I repeat again that Professor Babcock and myself offered the
United States our assistance in replicating the resu lts. Any request for assistance would have avoided
these problems and the need for the United States to make “reasonable assumptions … to facilitate the
calculations”.

69. One important problem that vitiates any claims in this section is that the numbers that are
labeled “Sumner’s Reported Impacts” in the three charts that follow paragraph 72 are not what I
reported in Annex I Tables I.5.b, I.5.c and I.5.d. 98 The United States compares two sets of numbers
that were evidently generated by the United States , neither of which is the result that I actually
reported to this Panel.

70. As noted above, it seems that the United Stat es provides direct acreage effects (so-called first-
round effects) that do not take into account feedback effects from either the US crops model or the
CARD international cotton model. These feedback adjustments are very large and the US figures do
not represent the new, much smaller, equilibrium effects.

71. With this in mind, I will address the US arguments in section V.E. The United States claims
that my approach to estimating the acreage impacts of removing PFC/DP, CCP/MLA, and crop
insurance subsidies is deeply fl awed because their attempted replication of the my methodology
showed sharply lower impacts in 2002 – 2007 than what they claim were my estimated impacts.
99 As
I will demonstrate, the difference between the two se ts of estimates of the United States is primarily
due to differences in the magnitude of elasticities of supply the United States used, as compared to the
elasticities that I actually used. The United St ates applied time-varying, linear elasticities 100 because
this is what is suggested by the FAPRI linear modelling framework. My Annex I results of the effects

97 I have combined the discussion of these points to avoid any repetition in an already lengthy and
technical document.
98 Nor are these the figures that I have reported using the FAPRI January 2003 baseline (Exhibit Bra-
325)
99 Paragraph 69 of the US Critique and second set of tables following paragraph 70 of the US Critique,
as well as the three charts following paragraph 72 of the US Critique.
100 I have explained that in my comments on section V.A-V.C.

of these listed programmes are, however, based on a cons tant elasticity structure. As I will show, the
US implementation of the United States’ method us ing time-varying, linear elasticities is deeply
flawed and leads to a dramatic underestimation of the e ffects. To clarify this step by step, I take as a
starting point the US implementation of my Annex I methodology.
101

72. The United States calculates time-varying, linear elasticities by multiplying the slope
coefficient in the FAPRI US crops model by real ne t revenue (net revenue divided by a GNP deflator)
and dividing the result by base acreage. 102 Net revenue used in this calculation is expected market
revenue plus marketing loan gains. Contrary to the US approach and as discussed above, I use a set of
elasticities that does not vary with time. The fi rst chart below shows how the different elasticity
estimates change the estimated acreage effects of removing PFC/DP, CCP/MLA, and crop insurance
subsidies.103

Chart 1
Estimated Direct Acreage Effects of the Removal of Selected U.S.
Subsidies Using U.S. Elasticity Estimates and Constant Elasticity
Estimates (taking into account interaction effects)
0
0.5
1
1.5
2
2.5
3
1999 2000 2001 2002 2003 2004 2005 2006 2007
Year
Direct Acreage Effects
US Time-varying Estimates
 Constant Elasticity

73. I note again that these acreage effects are “fir st-round” effects that represent an intermediate
calculation step towards estimating the new equili brium results. Therefore, these figures are
conceptually different from the equilibrium acreage effects reported in Annex I.104

74. These effects are also not the same as the fi rst-round acreage effects that I have estimated
using the Annex I model because of differing subsidy levels, as explained below.

101 All calculations are presented in Exhibit Bra-399 (‘AcreageDiscrepancies.xls’) attached to the
electronic version of this document.
102 Base acres are the acreage planted under the baseline scenario.
103 The chart presents total effects from all thr ee subsidy programs (PFC/DP, MLA/CCP and crop
insurance) and controls for interaction effects.
104 The Annex I effects take into account second round effects on price and quantities resulting from
the first round effects and also the feedback from the CARD international cotton model leading to an
equilibrium effect.

75. I note that the effects reported in chart 1 are qu ite similar to the pattern of effects presented by
the United States, as reported in the charts following paragraph 72 of the US critique.
105 I h a v e
included the aggregate effects from these three pr ogrammes, controlling for interaction effects
between them, which accounts for the differences between my figures and the sum of the figures
presented by the United States.

76. I also note that, in chart 2, the pattern of acr eage effects estimated by my use of a constant
elasticity model specification
106 is consistent with the pattern of the importance of these subsidies, i.e.,
the share of the total net revenue presented by these subsidies.

Chart 2
Reduction in Net Revenue from Elimination of AMTA/DP,
MLA/CCP, and Crop Insurance Subsidies
0%
5%
10%
15%
20%
25%
30%
35%
40%
1999 2000 2001 2002 2003 2004 2005 2006 2007
Year
Percentage

77. The results in chart 1 would suggest that mo st of the discrepancy between the first-round
effects that lead to my Annex I results and those first-round effects calculated by the United States is
due to different assumptions regarding elasticities.

78. However, it is not true that the difference in the assumptions regarding the elasticities does
primarily account for the difference. First, there is much less difference betw een the results from the
two assumptions regarding the elasticities once an er ror in the United States’ method for calculating
its time-varying, linear elasticities is corrected.
107 As documented in the Final USCROPS2003.xls
file108, the United States calculates the supply elasticity by multiplying the slope parameter by real net
revenue and then dividing it by base acreage. Net revenue in this calculation includes marketing loan

105 They are not identical, as the United States used the FAPRI January 2003 baseline provided with my
cotton-focused model for these calculations. The similarity of the figures demonstrat es again the robustness of
the model if different baselines are used.
106 I have discussed this feature of a constant elasticity model in my comments on section V.A-V.C
above.
107 As discussed below, the United States also uses compares results from two different baselines.
108 Exhibit US-115.

gains and expected market revenue, but it does not include crop insurance subsidies and the other
government subsidies that are to be removed in this simulation.
109 As the United States correctly
points out when they question whether I included th ese subsidies for the calculation of the percentage
change in net revenue from subsidy removal 110, these subsidies should also be counted towards net
revenue when calculating the elasticity of supply. 111 The mistaken assumption by the United States
that I have not done so seems to have let the Un ited States to also leave these revenue components out
of their calculation, thereby generating misleading results.

79. The following chart 3 shows that when the time-varying, linear elasticities are correctly
calculated, then the choice of time-varying, linear elasticities or constant elasticities makes much less
difference to the estimated impacts of subsidy re moval than suggested by the United States in the
three charts following paragraph 72 of the US critique.

Chart 3
Estimated Acreage Effects of the Removal of Selected U.S.
Subsidies Using Corrected U.S. Elasticity Estimates and
Constant Elasticity Estimates
0
0.5
1
1.5
2
2.5
3
1999 2000 2001 2002 2003 2004 2005 2006 2007
Year
Direct Acreage Effects
Corrected Time-varying
Estimates
Constant Elasticity

80. Finally, one last source of difference is that the United States uses the model calibrated to the
FAPRI 2003 baseline112 rather than the baseline used to estimat e the effects reported in Annex I. The
next chart (4) compares the actual direct acreage effects (first round effects) from removal of PFC/DP,
CCP/MLA, and crop insurance subsidies based off the baseline used to generate the Annex I results to
those that would have resulted from using the correct US time-varying, linear elasticity approach, the
correct net revenue estimates and the same baseli ne. As shown below, adopting the corrected
United States procedure compared to my constant elasticities approach would have resulted in a
dramatic increase in the estimated impacts of remo ving these subsidies in 1999, somewhat higher
estimates in 2000 and 2001, and a bit lower estimates in 2003 to 2007.

109 I note that I also made this point in my comments on section V.D above.
110 See paragraph 68 of the US Critique.
111 I note that I correctly included these subsidies.
112 Provided by Brazil as an attachment to its 18 November 2003 Further Rebuttal Submission.

Chart 4
A Comparison of "First-Round" Acreage Effects Used to Generate
Annex I Results and Those Supported by United States-Suggested
Methodology
0
0.5
1
1.5
2
2.5
1999 2000 2001 2002 2003 2004 2005 2006 2007
Year
Direct Acreage Effects
Corrected Time-varying
Estimates
Direct Effects Used in Annex I
Simulations

81. In sum, the bottom line of these calculations is that, if the United States had followed the
approach that they and I agree would be correct for calculating total net revenue and resulting time-
varying, linear elasticities, the resulting effects woul d not be significantly different whether simulated
using constant elasticities or time-varying, linear el asticities. I used the constant elasticity method
because it makes the common sense as sumption that equal percentage changes in net revenue should
give rise to similar changes in acreage. 113 As noted above, this is also a standard approach in
economic literature.

82. Finally, I would like to stress that any rema ining differences from using different elasticity
approaches are still on the level of “first round” e ffects, not equilibrium effects. The resulting
equilibrium effects would show results that ar e even less different based on the choice of time-
varying, linear versus constant elasticities. In short, this choice does not meaningfully affect my
Annex I results.

Section VI.

83. In paragraphs 73-74 of the US critique, the United States calls into questions my modelling
approach for the marketing loan programme by d escribing it as revealing a “lack of knowledge of the
programme, a broader deficiency in economics or some previously unknown modification of the
FAPRI or CARD models”. These allegations are baseless. Indeed, the United States simply
identified a typo in the transcription of equation 2 in Exhibit Bra-313. This transcription typo was not
made in the electronic model and, therefore, does not affect the results of my Annex I model. In the
Annex I model, as in the FAPRI US crops model, the acr eage in year ‘t’ is affected by the loan rate in
year ‘t’ (not the loan rate in ‘t-1’ as errone ously reported in Exhibit Bra-313). I regret the
inconvenience if this typo caused some confusion.

113 I have discussed this above providing the example of a $100 payments and base revenues of $200
and $1000.

84. It turns out that, contrary to what the United States implies in paragraph 74 of its critique, this
typo introduced no ambiguity at all and would not have affected the results in any significant way.
The fact is that the loan rate for cotton is essentially constant over the full period of analysis and, thus,
the loan rate in period ‘t’ is equal to the loan rate in period ‘t-1’.
114 Despite the tone of the paragraph,
the model was clear, and the subscript ‘t’ or ‘t-1’ make no difference at all in this case. Yet, I stress
again that this typo only occurred in the transcript of equation (2) in Exhibit Bra-313, and not in the
electronic versions of the Annex I model itself.

85. In paragraph 74 the United States makes a major issue of what amounts to their own semantic
confusion. The model that I use for the marketing loan benefits for cotton is as specified in equation
(2) (noting the typo discussed above). As noted by the United States, the electronic versions of the
models show that the marketing loan effect is b ased on the difference between the loan rate and what
is labeled as the loan repayment ra te. For crops other than rice and cotton the loan repayment rate is
the US market price of the crop (a local market pric e). For cotton and rice the loan repayment rate is
an international price and, for cotton specifically, it is the adjusted world price (AWP). Thus, there is
no discrepancy between Exhibit Bra-313 and the electronic documentation provided. The formulation
that I use for the marketing loan impacts is the same as the FAPRI US crops model.

86. Paragraph 75 of the US critique simply repeats their discussion from the section V.C., which I
have addressed above.

87. Finally, in paragraph 76 of its critique, th e United States alleges that I have taken an
“illogical” approach on specifying the export effect of Step 2 payments that constitutes “a departure
from the specifications in the FAPRI framework.” Similar to my response to the US critique at
paragraph 73, I regret that I made another typo in the subscript in Exhibit Bra-313 that was not
included in the electronic version of the model and, therefore, does not affect my results. Of course
exports in period ‘t’ market the crop produced in that period. The US marketing years are calibrated
so that this is generally true. The United States is correct that, with the typo, equation (7) obviously
makes no sense. The subscript should have referred to production in period ‘t’ rather than ‘t-1’,
which, of course, is the equation contained in my model as well as in the FAPRI US crops model.
Despite the US tone in paragraph 76, I expect th e United States is aware that the specification of
equations (7) and (8) follow the FAPRI model, as pr ovided in the electronic verification of both the
FAPRI US crops model as well as my cotton-focuse d model. Removal of the export step-2 and
domestic step-2 subsidies increase effective demand for US cotton by lowering the effective net price
paid by buyers.

Section VII

88. In paragraphs 77 through 80 of the US critique, the United States notes that the CARD
international cotton model used different supply and demand elasticities than found in a paper by
FAPRI-Missouri economist Seth D. Meyer. In fact there are several sets of such elasticities in the
literature.

89. I relied on the CARD model and the CARD elast icities for four simple reasons. First, the
authors of the published studies that underlie the CARD international cotton model include Professors
Babcock and Beghin, who are two of the most widely-published and respected agricultural
economists in the field. The scholarly credibility of their work and that of their CARD colleagues has
been reinforced by scores of professionally-refereed academic articles to their credit as well as awards
and other accolades.
115 In terms of quality objective resear ch in agricultural commodity market
economics and related areas, the CARD team has a long distinguished track record and a top notch

114 I note that the loan rate was 51.92 cents per pound in marketing years 1999-2001 and 52 cents per
pound in all later marketing years, so there is a tiny difference between 2001 and 2002.
115 Exhibit Bra-400 (List of Publications of Professors Babcock and Beghin).

professional reputation. By contrast, I do not know the professional work of Seth D. Meyer, and have
not been able to locate any of his work in professionally-refereed publications.

90. Second, the CARD international cotton model w as the model that had been used by CARD in
its respected work on other international commodity analysis. I would note that the various CARD
international commodity models developed by Pr ofessors Babcock and Beghin and their colleagues
have been used and relied upon in a number of diffe rent studies and been published in professionally
referred publications.
116

91. Third, the elasticity parameters incorporated in the CARD model are well within the range of
estimates found and applied for many agricultural co mmodities. Finally, the United States provides
no evidence to support a suggestion that the Meyer est imates are in any way more appropriate for the
questions posed by this Panel than the estimat es imbedded in the CARD model. Therefore,
United States assertion that use of the CARD model somehow “exaggerates” impacts is simply
unfounded.
117

Conclusion

92. The Annex I model adapted from the FAPRI US crops model and th e CARD international
cotton model is an appropriate tool for both forw ard- and backward-looking “but for” counterfactual
US agricultural policy analysis questions, such as those facing this Panel. The conservative results
from my Annex I model are well within any plau sible range and supported by other economic and
econometric evidence.

93. Over the past months of this lengthy proceed ing, I have responded to each criticism raised by
the United States at various occasions
118 and have explained why none affects the validity of my
model or its results.

94. Professor Babcock and I have been fully transp arent about the manner in which the effects of
the US subsidies have been simulated and I have rebutted any US allegations that I made my
modelling choices to achieve pre-conceived results. To that end, I have explained each of my

116 Refereed articles using CARD international models:
Fuller F., J. Beghin, J. Fabiosa, C. Fang, H. Matthey, and S. De Cara. “China’s Accession to the WTO. What Is
at Stakes for Agricultural Markets?” Review of Agricultural Economics 25(2) (2003): 399-414.
Beghin J., B. El Osta, J. Cherlow, and S. Mohanty. “The Cost of the US Sugar Program Revisited,”
Contemporary Economic Policy 21 (1) (2003): 106-116. Reprinted in International Sugar Journal 105 (2003):
293-303.
Fuller F., J. Beghin, S. Mohanty, J. Fabiosa, C. Fang, and P. Kaus. " Accession of the Czech Republic, Hungary,
and Poland to the European Union: Impacts on Agricultural Markets,” The World Economy 25(3) (2002): 407-
428.
Fang C., and J. Beghin. "Urban Demand for Edible Oils and Fats in China. Evidence from Household Survey
Data," Journal of Comparative Economics, 30 (4) (2002): 732-753.
Fabiosa, J.F., D.J. Hayes and H.H. Jensen. 2002. "Technology Choices and the Economic Effect of a Ban in the
Use of Over-the-Counter antibiotics in US Swine Rations." Food Control 13(2), 97-101.
Hayes, D.J., H.H. Jensen, L. Backstrom, and J.F. Fabi osa. 2001. "Economic Impact of a Ban on the Use of
Over-the-Counter Antibiotics in US Swine Rations." International Food and Agribusiness Management Review
Vol 4., p 81-97.
Fuller F., J. Beghin, S. Mohanty, J. Fabiosa, C. Fang, and P. Kaus. " The Impact of the Berlin Accord
and European Enlargement on Dairy Markets," Canadian Journal of Agricultural Economics, 47 (5) (1999 –
appeared in 2000): 117-130.
117 It is also useful to remind ourselves that larger elasticies may mean smaller price impact, but also
imply larger impacts on quantities and in particular la rger acreage elasticities mean more acreage in the non-
subsidized countries that is driven out of cotton by the US cotton subsidy programmes.
118 See inter alia US 7 October 2003 Oral Statement, paras. 26-50 and US 22 December 2003
Comments on Brazil’s Econometric Model.

modelling steps and offered my assistance to the Panel and the United States to facilitate the
understanding of this complicated econometric model and its results.

95. The United States has criticized my choice of baseline and I have provided analysis under
various other baselines, demonstrating the robustn ess of my results. The United States has also
criticized my modelling choices for PFC, MLA, DP and CCP payments, crop insurance and export
credit guarantees. I have provided evidence that these choices were reasonable and, in fact,
conservative. Concerning the largest US subsi dy, the marketing loan programme, I note that the
United States has not criticized its modelling. I have explained that the use of lagged prices for a
large-scale policy simulation analysis is standard and does not generate biased or exaggerated results
– in fact, no futures prices could or have been used in such models.

96. In sum, I stand by my conclusions in Anne x I “that very large subsidies provided to US
producers and users of upland cotton have had and will continue to have large impacts on quantities of
US cotton produced, used and traded and on both US and world prices of cotton”.

Table of Cases

Short Title Full Case and Citation
EC – Sugar Exports I
(Australia)
GATT Panel Report, European Communities – Refunds on Exports of
Sugar Complaint by Australia, L/4833 – 26S/290, adopted
6 November, 1979.
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.
US – Gasoline Appellate Body Report, United States – Standards for Reformulated and
Conventional Gasoline, WT/DS2/AB/R, adopted 20 May 1996.
EC – Hormones Appellate Body Report, European Communities - Measures Concerning
Meat and Meat Products (Hormones), WT/DS26/AB/R, adopted
13 February 1998.
Australia – Salmon Panel Report, Australia – Measures Affecting Importation of Salmon,
WT/DS18/R, adopted 6 November 1998.
EC – Bananas Panel Report, European Communities – Regime for the Importation, Sale
and Distribution of Bananas – Recourse to Arbitration by the European
Communities under Article 22.6 of the DSU , WT/DS27/ARB, adopted
9 April 1999.
Brazil – Aircraft Panel Report, Brazil – Export Financing Programme for Aircraft,
WT/DS46/RW, adopted 28 August 2000.
Indonesia –
Automobiles
Panel Report, Indonesia – Certain Measures Affecting the Automobile
Industry, WT/DS54/R, adopted 23 July 1998.-
Argentina – Textiles
and Apparel
Panel Report, Argentina – Measures affec ting Imports of Footwear,
Textiles, Apparel and Other Items, WT/DS56/R, adopted 22 April 1998.
Canada – Aircraft Panel Report, Canada – Measures affecting the Exports of Civilian
Aircraft, WT/DS70/R, adopted 20 August 1999.
Canada – Aircraft Appellate Body Report, Canada – Measures affecting the Exports of
Civilian Aircraft, WT/DS70/R, adopted 20 August 1999.
Japan – Agricultural
Products
Appellate Body Report, Japan – Measures Affecting Agricultural
Products, WT/DS76/AB/R, adopted 19 March 1999.
Korea – Dairy
Safeguards
Appellate Body Report, Korea – Definitive Safeguard Measure on
Imports of Certain Dairy Products , WT/DS98/AB/R, adopted
12 January 2000.
Canada – Dairy Appellate Body Report, Canada – Measures Affecting the Importation of
Milk and the Exportation of Dairy Products, WT/DS103/AB/R, adopted
27 October 1999.
Canada – Dairy (21.5)
(II)
Appellate Body Report, Canada – Measures Affecting the Importation of
Milk and the Exportation of Dairy Products, WT/DS103/AB/RW,
adopted 17 January 2003.
US – FSC Appellate Body Report, United States – Tax Treatment for “Foreign
Sales Corporation”, WT/DS108/AB/R, adopted 20 March 2000.
Australia – Leather Panel Report, Australia – Subsidies Provided to Producers and Exporters
of Automotive Leather, WT/DS126/R, adopted 16 June 1999.
Australia – Leather
(21.5)
Panel Report, Australia – Subsidies Provided to Producers and Exporters
of Automotive Leather, WT/DS126/RW, adopted 11 February 2000.
US – 1916 Act Appellate Body Report, United States – Anti-Dumping Act of 1916,
WT/DS136/AB/R, adopted 26 September 2000.

US – Wheat Gluten Panel Report, United States – Definitive Safeguard Measures on Imports
of Wheat Gluten from the European Communities, WT/DS166/R, adopted
19 January 2001.
US – Wheat Gluten Panel Report, United States – Definitive Safeguard Measures on Imports
of Wheat Gluten from the European Communities, WT/DS166/R, adopted
19 January 2001.
Chile – Agricultural
Products (Price Band)
Appellate Body Report, Chile- Price Band System and Safeguard
Measures Relating to Certain Agricultural Products, WT/DS207/AB/R,
adopted 23 October 2002.
US – CVD’s on EC
Products
Appellate Body Report, United States – Countervailing Duties on EC
Products, WT/DS212/AB/R, adopted 8 January 2003.
Canada – Aircraft II Panel Report, Canada – Measures Affecti ng the Export of Civilian
Aircraft, WT/DS222/R, adopted 19 February 2002.
EC – Sardines Appellate Body Report, European Communities – Trade Description of
Sardines, WT/DS231/AB/R, adopted 23 October 2002.
EC – Sardines Panel Report, European Communities – Trade Description of Sardines,
WT/DS231/R, adopted 23 October 2002.
Japan – Apples Appellate Body Report, Japan – Measures affecting the Importation of
Apples, WT/DS245/AB/R, adopted 10 December 2003.

List of Exhibits
Second Declaration of Andrew Macdonald, 27 January 2004. Exhibit Bra- 401
“Genetically Engineered Cotton Suffering from Production Problems”,
Organic Consumers Organization, 11 January 2002.
Exhibit Bra- 402
“NCC will Intensify Emphasis for Quality, Yield Answers”, Western
Farm Press, 3 March 2001.
Exhibit Bra- 403
“Benefits - BT Cotton”, Monsanto Imagine. Exhibit Bra- 404
“Sample Costs to Produce Cotton Transgenic Herbicide- Resistant Acala
Variety”, San Joaquin Valley, University of California Cooperative
Extension, 2003.
Exhibit Bra- 405
“Cotton Cost-Return Budget in Southwest Kansas”, Kansas State
University Agricultural Experiment Station and Cooperative Extensive
Service, October 2003.
Exhibit Bra- 406
Documents on Cost of Production Insurance Plan for Cotton. Exhibit Bra- 407
Export – Import Bank of the United States, Standard Repayment Terms. Exhibit Bra- 408
Ex-Im Bank Fee Schedule. Exhibit Bra- 409
Export Insurance Services. Exhibit Bra- 410
“The Federal Scoop: US Government Financing for Service Exports”,
Export America, May 2003.
Exhibit Bra- 411
Cotton and Wool Situation Outlook and Outlook Yearbook, USDA,
November 2003, Table 16.
Exhibit Bra- 412
“Agricultural Cash Rents”, USDA, NASS, July 1999. Exhibit Bra- 413
“Agricultural Land Values and Cash Rents,” USDA, NASS,
August 2003.
Exhibit Bra- 414
“Agricultural Land Values”, USDA, NASS, April 1999. Exhibit Bra- 415
“What is a Farm Bill?”, Congressional Research Service, Report for
Congress, 5 May 2001.
Exhibit Bra- 416
“Commodity Program Entitlements: Deficiency Payments”, USDA,
May 1993.
Exhibit Bra- 417
Washington Post v. United States Department of Agriculture, 943 F.
Supp. 31 (D.D.C. 1996).
Exhibit Bra- 418
Allocation Calculations Based on Brazil’s Methodology and US
Summary Data.
Exhibit Bra- 419

Agricultural Outlook Tables, November 2003, Table 17. Exhibit Bra- 420
ERS Briefing Room: Farm Income and Costs: US Farm Sector Cash
Receipts from Sales of Agricultural Commodities, USDA.
Exhibit Bra- 421
Fruits and Tree Nuts Yearbook, USDA, October 2003, Table A-2. Exhibit Bra- 422
Vegetables and Melons Yearbook, USDA, July 2003, Table 3. Exhibit Bra- 423
Allocation Calculations Based on US Methodology and US Summary
Data.
Exhibit Bra- 424

Questions from the Panel to the parties –
second substantive Panel meeting

I. TERMS OF REFERENCE

192. Regarding the interest subsidies and storage payments listed by the United States in its
response to the Panel's Question No. 67:

(a) Please provide a copy of the regulations under which they are currently provided and
under which they were provided during the marketing years 1996-2002;

(b) Please indicate whether there are any su ch payments which are not provided to
implement the repayment rate for upland cotto n within the marketing loan programme.
USA

Brazil’s Comment:

1. The United States finally confir ms that the “other payments” ( i.e., interest and storage
payments) are not separate subsidies but rather a component of the marketing loan programme.
1 The
US acknowledgement eliminates any question whether su ch payments are within the Panel’s terms of
reference.2 Brazil’s request for the establishment of a panel clearly includes “subsidies and domestic
support … relating to marketing loans … providing dir ect or indirect support to the US upland cotton
industry”.3 Based on the US answer, Brazil amends the table at paragraph 8 of its 22 December 2003
Answers to Question 196 to add $65 million “other payments” to the $832.8 million for marketing
loans, for a grand total of $887.8 million in marke ting loans for MY 2002. Brazil also makes similar
changes for MY 1999-2001 that combine “other paym ents” and marketing loan payments in Table 1
of Brazil’s 9 September 2003 Further Rebuttal Submission.

193. Are interest subsidies and storage payments already included in the amounts shown in
your submissions to date for payments under th e marketing loan programme? Has there been
any double-counting? BRA

194. Does the United States maintain its position stated in response to the Panel's Question
No. 67 that "it would not be appropriate for the Panel to examine payments made after the date
of panel establishment"? If so, please explain wh y. Can Brazil comment on this statement?
BRA, USA

Brazil’s Comment:

2. Brazil’s 22 December 2003 response to this questio n, particularly its reference to the request
for the establishment of the panel and existing juri sprudence, provides a comprehensive response to
the points raised by the United States.
4 Brazil would offer the following additional comments to the
US Answer.

3. Contrary to the suggestion at paragraphs 3-4 of the US 22 December 2003 response, Brazil’s
11 August 2003 response to Question 19 did not change in any way the scope of Brazil’s request for
the establishment of a panel (“Panel Request”). Qu estion 19 asked Brazil to clarify the measures in
respect of which Brazil sought relief. Brazil’s an swer referred to one set of measures relating to

 1 US 22 December 2003 Answers to Questions, para. 2.
 2 US 30 September 2003 Further Submission, paras. 6-7; US 7 October 2003 Oral Statement, para. 2.
 3 WT/DS267/7, p. 2 (paragraphs relating to both the 2002 FSRI and the 1996 FAIR Act).
 4 Brazil’s 22 December 2003 Answers to Questions, paras. 3-5.

Brazil’s serious prejudice claims as those involvi ng domestic support and export subsidy payments
that had been made and were required to be made by the terms of the various statutory instruments
identified in the Panel Request from MY 1999 th rough MY 2007. Some of these payments are
relevant to Brazil’s present serious prejudice clai ms for the period MY 1999-2002, and some of the
payments are relevant to Brazil’s threat of seri ous prejudice claims for the period MY 2002-2007.
But as Brazil indicated in its 22 December 2003 An swer to Question 195, the text of the Panel
Request (as well as Brazi l’s 11 August 2003 Answer to Question 19) in no way limits the type or
scope of the payments made under those statutory and regulatory instruments up to 18 March 2003.

4. It is curious that the United States in its 22 December 2003 response takes an opposite
position in this dispute than the one it took as the complaining party in the only other WTO serious
prejudice dispute.
5 In Indonesia – Automobiles,,6 the measures at issue provided for past, present, and
future subsidy payments. Indonesia argued, similar to the US arguments here, that the effects of
expired measures could no longer be examined fo r the purposes of current serious prejudice under
Articles 5 and 6 of the SCM Agreement. Rejecting such a restrictive interpretation of Articles 5 and
6, the panel noted that:

If we were to consider that past subsidies were not relevant to our serious prejudice
analysis as they were “expired measures” while future measures could not yet have
caused actual serious prejudice, it is hard to imagine any situation where a panel
would be able to determine the existen ce of actual serious prejudice. Thus, we
decline to proceed on the course suggested by Indonesia.
7
At no time did the panel find, as Indonesia argued, that only non-expired subsidies paid under the
measures at issue up until the date of establishment of the panel should have been considered for the
purposes of assessing serious prejudice. Indeed, the US position in this dispute is practically the same
as what Indonesia argued – and the US argued against 8 – in Indonesia – Automobiles . Brazil recalls
the consistent US positions that (a) so-called “r ecurring” subsidies for MY 1999-2001 cannot be the
basis for any serious prejudice claims 9, combined with (b) its claim that only current 2002 subsidies
up to 18 March 2003 ( i.e., eight months of subsidies for MY 20 02) can be the basis for any serious
prejudice claims.10 Given these two arguments, in the words of the Indonesia – Automobiles panel,
“it is hard to imagine any situation where a panel would be able to determine the existence of actual
serious prejudice”.

5. As in Indonesia – Automobiles, the legal statutes and regulations set out in the Panel Request
that mandate the payment of subsidies did not change between 18 March 2003 and 20 January 2004.
Indeed, the 2002 FSRI Act and its implementing regul ations will remain identical (unless amended by
the US Congress) until the end of MY 2007. No r has the 2000 ARP changed since 18 March 2003.
The mandated subsidies from these statutes and regul ations were flowing before 18 March 2003 and
they will continue to flow thereafter. This case does not present the situation where a new legal
instrument providing subsidies is enacted after the panel request was established. Nor is it even a
situation as in Chile – Agricultural Products (Price Band ,
11, in which a significant amendment to the
legal instrument covered in the panel request w as made long after the panel was established. The
rationale of the Appellate Body in Chile – Agricultural Products (Price Band) and of the panel in
Indonesia – Automobiles is to allow the Panel to conduct the required objective assessment under

 5 US 22 December 2003 Answers to Questions, paras. 3-5.
 6 Panel Report, Indonesia – Automobiles, WT/DS54/R.
 7 Panel Report, Indonesia – Automobiles, WT/DS54/R, para. 14.206.
 8 Panel Report, Indonesia – Automobiles, WT/DS54/R, paras. 4.44-4.50.
 10 US 11 August 2003 Answers to Questions, para. 134; US 22 December 2003 Answers to Questions,
paras. 3-5.
 11 Panel Report, Chile – Agricultural Products (Price Band), WT/DS207/R, paras. 7.3-7.8.

DSU Article 11 based on all the relevant facts. Th ese decisions are also grounded in the need for the
“prompt settlement” of disputes under DSU Article 3.4 – and are structures to avoid the endless filing
of precision-timed annual disputes and the litigation gaming strategy envisioned by the US argument.

II. ECONOMIC DATA

195. Does the United States wish to revise it s response to the Panel's Question No. 67 bis, in
particular, its statement that "the United States ... does not maintain information on the amount
of expenditures made under the cited programme s to US upland cotton producers"? Did the
United States make enquiries of the FSA in the course of preparing its original answer? USA

Brazil’s Comment:

6. Brazil notes that the US answer is larg ely unresponsive to the Panel’s question.

7. The Panel’s question whether the United States “maintains information” is straight-forward.
A correct answer would have been “yes”. The ordina ry meaning of the word “maintain” is “practice
habitually”, “observe”, “cause to continue (a state of affairs, a condition, an activity)”.
12 T h e
United States consistently misled Brazil and th e Panel by stating that USDA never collected,
organized and maintained information regarding th e amount of contract payments paid to current
producers of upland cotton.13 There is no doubt that these statements were false and misleading. It is
significant that the United States has made no attempt to refute the evidence produced by Brazil in its
18 November 2003 Further Rebuttal Submission regard ing the FSA forms completed by practically
every US farm receiving contract or marketing loan payments. 14 Nor can the United States dispute
that all of the information collected from the contract and acreage forms is (and was) maintained in a
centralized database in USDA’s Kansas City fac ility. The rapid response of USDA’s Kansas City
office to the rice FOIA request provides compelli ng evidence of the habitual practice of the US
government in “maintaining” both contr act and planted acreage information. 15 Indeed, the strongest
proof of the United States’ misleading conduct is the fact that USDA produced within three weeks the
rice data in response to a FOIA request, and that the United States effectively admitted in its 18 and
19 December 2003 and 20 January 2004 Letters to the Panel that it maintains this information.

8. In fact, the United States continues to mislead the Panel in its 22 December 2003 Answer to
Question 195. It states that “because those payments are decoupled from current production,
expenditures under such programmes are not trac ked by whether the recipient produces upland
cotton”.16 Neither Brazil nor the Panel ever asked the United States how the programmes are
“tracked”. Rather, the Panel asked whether the Un ited States “maintains information” that would
permit the calculation of the amount of such payments . As Brazil has demonstrated in using the rice
FOIA request17, in discussing its proposed methodology, and in using the incomplete summary data
provided by the United States on 18/19 December 2003, this is a simple exercise.18

 12 New Shorter Oxford Dictionary, 1993 edition, p. 1669.
 13 US 27 August 2003 Comments on Brazil’s Rebuttal Submission and Answers to Additional
Question, paras. 20, 21, 27; US 11 August 2003 Answer to Question 60; The United States made similar
statements during the consultations held between November 2002 and January 2003.
 14 Brazil’s 18 November 2003 Further Rebuttal Submission, Section 2.2.
 15 Exhibit Bra-368 (Second Statement of Christopher Campbell – Environmental Working Group,
1 December 2003).
 16 US 22 December 2003 Answers to Questions, para. 6.
 17 Exhibit Bra-368 (Second Statement of Christopher Campbell – Environmental Working Group,
1 December 2003).
 18 Brazil’s 20 January 2004 Answers to Additional Questions, paras. 43-55; Brazil’s 28 January
Comments and Requests Regarding US Data, Section 9.

9. The United States also asserts that “Braz il has also not asserted that the United States
maintains information on the receipt of decoupled payments for upland cotton base acres by upland
cotton producers”.19 Once again, the United States misleads and misrepresents. What Brazil asserted
was that the United States maintains information in a centralized database on the amount of contract
acreage, contract yields, and upland cotton plantings on contract acreage that would permit the ready
calculation of the exact amount of contract payments received by current producers of upland cotton.20
The fact that the United States claims not to have performed the simple calculation from this data does
not mean the United States does not maintain the information requested by Brazil and the Panel.

196. Please provide the latest data for th e 2002 marketing year on payments under the
marketing loan, direct payments, counter-cyclical payments, user marketing certificate (step 2)
programmes and export credit guarantee programmes. BRA, USA

Brazil’s Comment:
10. Brazil notes the new and increased figures ( $415 million) that the US 22 December response
presented for Step 2 payments during MY 2002. This figure should replace Brazil’s figure presented
at paragraph 8 of its 22 December 2003 Answers to Questions.
21

197. Please provide actual data for 2002/2003 for US exports, US consumption and per cent
of world consumption to replace the projected data in Exhibit US-47. If available, please
provide projected data for 2003/2004 to replace the forecast data. USA

Brazil’s Comment:

11. The US 22 December 2003 response admits at not e 24 to the table at paragraph 15 that the US
“consumption” standard for “world market share”, within the meaning of Article 6.3(d) of the SCM
Agreement, includes tabulating US exports and US imports and US domestic consumption of US
origin upland cotton.
22 This acknowledgement that imports are also included highlights the fact that
the United States is double counting exports as part of the world market share of the exporting country
and part of the world market share of the importing country. 23 Since internationally-traded upland
cotton is not similarly included twice in the tota l “world consumption,” summing up the individual
world market shares of all countries generates a total world market share vastly exceeding 100 per
cent – a manifestly absurd result. 24 As Brazil has stated before, th e Panel should not rely on the US
interpretation of world market share as share of world consumption – the proper interpretation of the
term refers to the share of world exports.25

12. Further, Brazil notes the new information presented by the United States concerning US
upland cotton exports in MY 2002 and 2003. These figures (11.9 million bales and 13.2 million bales
respectively) would replace Brazil’s latest information, as contained in Exhibit Bra-302 (11.3 million
bales and 11.2 million bales respectively). Th ese new facts support Brazil’s threat of serious
prejudice claim under Article 6.3(d) and footnote 13 of the SCM Agreement. For both marketing

 19 US 22 December 2003 Answers to Questions, para. 7.
 20 Brazil’s 18 November 2003 Further Rebuttal Submission, Section 2.2.
 21 See Brazil’s comment on US 22 D ecember 2003 Answer to Question 192(b) above concerning the
treatment of “other payments.” US 22 December 2003 Answer s to Questions, para. 2. This US statement
eliminates any doubt that “other payments” are within the Panel’s terms of reference.
 22 US 22 December 2003 Answers to Questions, para. 15 (note 24).
 23 See Brazil’s 2 December 2003 Or al Statement, para. 66. See also Brazil’s comment on Question
136, below.

24 See Brazil’s comment on Question 136, below.
 25 See Brazil’s 7 October 2003, Oral Statement, paras. 38-41; Brazil’s 18 November 2003 Further
Rebuttal Submission, paras. 170-173; Brazil’s 2 December 2003 Oral Statement, para. 66.

years, the US world market share, i.e., the US share of world exports, is or will be even above its
previous three-year average, strengthening the co nsistent trend of increasing world market shares
since MY 1996 (as well as since MY 1986).
26

198. Please comment on the respective merits of the price-gap calculations of MY1992
deficiency payments in US comments of 27 August, footnote 14 ($867 million), and Brazil's
response to the Panel's Question No. 67 ($812 million). BRA, USA

Brazil’s Comment:

13. As indicated in Brazil’s 22 Decembers Answ ers to Questions, Brazil agrees with the US
methodology of calculating MY 1992 deficiency payments
27 for purposes of an AMS approach, as
developed by the United States in its 27 Augus t 2003 Comments on Brazil’s 22 August 2003 Rebuttal
Submission.28

14. However, Brazil strongly disagrees with the US proposition that the US AMS calculation of
deficiency payments is “conservative”. 29 The US calculation is the only appropriate one under
paragraphs 10 and 11 of Annex 3 of the Agreement on Agriculture. The United States suggests that it
should have used “eligible” acreage rather than “actual” acreage for the calculation. 30 However,
paragraph 10 of Annex 3 does not refer to elig ible acreage; it refers to “the quantity of production
eligible to receive the applied administered price”. 31 Production eligible to receive the applied
administered price under the deficiency payment programme is calculated based on the eligible,
participating acreage and the a pplicable programme yield (not the actual yield). Any production
exceeding the programme yields and any production on acreage that did not participate in the
deficiency payment programme necessarily was not eligible production. Thus, the fact that
theoretically more acreage coul d have participated in the upland cotton deficiency payment
programme ( i.e., those farms opted to not participate) cannot artificially inflate the upland cotton
AMS figure resulting from this programme. Thus, any production that takes place on a farm not
participating in the deficiency payment programme is not, in fact, eligible to receive the applied
administered price and, therefore, cannot be part of the AMS calculation under paragraphs 10 and 11
of Annex 3.

199. What is the composition of the A-Index? We do note footnote 19 and, for example,
Exhibit BRA-11, but please explain more in detail how this index is calculated. BRA

200. Concerning the chart on page 37 of Brazil's further rebuttal submission, why did Brazil
use a futures price at planting time? Is this a relevant measure for assessing acreage response?
BRA

201. Is data available to show the proportion of US upland cotton production sold under
futures contracts, and the prices under those cont racts, at different times during the marketing
year? If so, please provide summarized versions to the Panel. How does a futures sale impact
the producer's entitlement to marketing loan programme payments? BRA, USA

 26 See Brazil’s 27 October 2003 Answers to Questions, paras. 123-129. See also Brazil’s 22
December 2003 Answers to Questions, pa ras. 133-139, concerning Brazil’s arguments regarding a “consistent
trend.”
 27 Brazil emphasizes that it does not agree with to applying any price-gap calculation method for the
calculation of marketing loan payments for AMS purposes. See inter alia Brazil’s 27 August 2003 Comments
on US Rebuttal Submission, paras. 10-16.
 28 Brazil’s 22 December 2003 Answers to Questions, para. 10.
 29 US 22 December 2003 Answers to Questions, para. 19.
 30 US 22 December 2003 Answers to Questions, para. 19.
 31 Emphasis added.

Brazil’s Comment:

15. Brazil notes that the study cited by the United States 32 on upland cotton farmers’ use of
hedging instruments is relatively dated (from 1996) a nd analyzes a time period during which prices
were high. Therefore, it may not reflect farmer s’ use of hedging instruments during the period of
investigation.

16. In addition, Brazil notes that the futures ma rket is not only used as a hedging instrument by
US farmers, but also by farmers in other pa rts of the world, including Brazilian farmers
.33 It is also
used by speculators. 34 It follows that the number of open contracts does not bear any relationship to
the amount of the US upland cotton crop hedged by futures contracts at the New York futures
market.35

202. Concerning paragraph 7 of the US oral st atement, are the expect ed cash prices shown
for February only? Can the US provide the prices for January and March of each year as well?
USA

Brazil’s Comment:

17. Brazil notes that the expected cash price is not the relevant price for purposes of analyzing the
effects of the marketing loan programme. Since any marketing loan benefits are calculated as the
difference between the loan rate and the adjusted world price, it would be necessary to look at the
expected adjusted world pri ce to draw any conclusions.
36 This point is admitt ed by the United States
in paragraph 75 of its 22 December 2003 Answers to Questions: “… because farmers will receive a
government payment for the difference between the loan rate and the adjusted world price”.37

18. Brazil also notes that the figures presented by the United States differ to a minor degree from
the ones presented by Brazil.
38 Brazil does not know the reason for these minor differences and does
not consider them to be material.

203. Please provide information concerning th e organization, mandate, credentials and
standing of FAPRI. BRA

204. Which support to upland cotton is not captu red in the EWG data ref erred to in Brazil's
18 November further rebuttal submission? BRA

205. Does the United States accept or agree with the EWG data submitted by Brazil? If not,
please explain your reasons. USA

 32 US 22 December 2003 Answers to Questions, para. 20.
 33 Exhibit Bra-281 (Statement of Andrew Macdonald – 7 October 2003, para. 13).
 34 Exhibit Bra-281 (Statement of Andrew Macdonald – 7 October 2003, para. 13).
 35 The United States appears to suggest this relati onship in paragraph 21 of its 22 December 2003
Answers to Questions.
 36 See Brazil’s 2 December 2003 Oral Statement, Section 5.2 for further details on this point.
 37 Brazil addresses this point in greater detail in its comment on Question 212 and 213 below.
 38 Compare US figures at paragraph 22 of the US 22 December 2003 Answers to Questions with
Brazil’s figures as reported in Exhibit Bra-356 (January – March Quotes of the December Futures Contract,
Expected and Actual AWP and Cash Price) and at paragraph 44 of Brazil’s 2 December 2003 Oral Statement.

Brazil’s Comment:

19. As a preliminary comment, the United St ates answer does not rebut evidence from EWG’s
expert analyst that the EWG data undercounts the amount of contract payment and marketing loan
payment subsidies.
39 While it undercounts the data, the EWG data and the estimates generated by
Brazil’s 14/16th methodology for MY 2002 are very close. Brazil estimates the MY 2002 direct
payments to current cotton producers at $454.5 million 40, while the EWG data shows MY 2002 direct
payments to current cotton producers of $451.4 million. 41 Similarly, Brazil’s estimates that the
MY 2002 CCP payments to current co tton producers were $935.6 million 42, while the EWG data
shows $893 million.43 Thus, as Brazil has argued, the EWG data could certainly be used by the Panel
as evidence supporting Brazil’s 14/16th methodology, as explained previously and elaborated further
below.

20. The US 22 December 2003 response asserts, at paragraph 25, that Brazil has overestimated
the support to upland cotton from contract payments. However, the summary US data produced on 18
and 19 December 2003 seems to show that only between 10-20 per cent of US upland cotton
producers planted upland cotton on non-cotton base acreage.
44 The EWG data showed that, in
MY 2002, 15 per cent of the contract payments re ceived by current producers of upland cotton were
from other contract acreage crops. 45 The United States refused to produce any information regarding
current upland cotton production on non-upland cotton base acreage.46 However, the EWG database –
although understating the amounts – supports a findi ng that farms producing upland cotton received a
significant amount of non-upland cotton contract payments. The EWG database therefore also
supports an adverse inference by the Panel that th e actual data withheld by the United States would
show even higher payments to current upland co tton producers than the EWG data or the Brazilian
estimates. It also demonstrates that the EWG data is not a comparable substitute for the information
requested by the Panel on 8 December 2003 and 12 January 2004. 47 The EWG data contains no
information about acreage planted and, thus, does not allow for any farm-specific allocation. It is also
incomplete in terms of actual payments made.

21. The US statement in paragraph 24 of it s 22 December 2003 response focuses on the large
number of farms not receiving di rect payments. What the United States largely ignores is the
predominance of very small non-co tton producing farms that receive very small upland cotton base
payments. In fact, according to the US summary data, the 45 per cent of farms that received upland
cotton contract payments (but did not produce upland cotton) received only between 15 and 25 per
cent of the upland cotton contract payments.
48 It is undisputed that the bulk of upland cotton is

 39 Brazil’s 18 November 2003 Further Rebuttal Submission, paras. 29-30; Exhibit Bra-316 (Statement
of Christopher Campbell, paras. 12-15); Brazil’s 22 December 2003 Answer to Question 204, paras. 25-26.
 40 Brazil’s 18 November 2003 Further Rebuttal Submission, para. 8.
 41 Exhibit Bra-317 (Environmental Working Group Database: Table of Results, Table 2).
 42 Brazil’s 18 November 2003 Further Rebuttal Submission, para. 8.
 43 Exhibit Bra-317 (Environmental Working Group Database: Table of Results, Table 2).
 44 See Electronic PFC and DCP Summary Files prov ided by the United States on 18 and
19 December 2003 respectively, data for upland cotton production on farms without upland cotton base. Brazil
notes that this does not mean that these farms have no contract base acreage whatsoever. Instead, the
United States has withheld that data (Brazil’s 28 January 2004 Comments and Requests Regarding US Data,
Section 2).
 45 Exhibit Bra-317 (Environmental Working Group Database: Table of Results, Table 5 (MY 2002)).
 46 US 18 and 19 December 2003 Letters to the Panel and US 20 January 2004 Letter to the Panel. See
also Brazil’s 28 January 2004 Comments and Requests Regarding US Data, Sections 2-3.
 47 See Brazil’s 28 January 2004 Comments and Reques ts Regarding US Data which details the
information that could have been adduced with the information withheld by the United States.

48 See Electronic PFC and DCP Summary Files prov ided by the United States on 18 and
19 December 2003 respectively. The upland cotton co ntract acreage on farms not producing upland cotton
represents between 15 and 25 per cent of total upland co tton contract acreage. Brazil has used contract acreage

produced in very large operations 49, and the EWG data confirms this. 50 The EWG data shows that
5 per cent of farms receiving the highest amounts of upland cotton payments account for 41-45 per
cent of marketing loan payments, i.e., 41-45 per cent of production. The top 10 per cent of farms
account for 55-58 per cent of production, and the top 20 per cent of farms account for 70-72 per cent
of production.51

22. The United States makes the assertion in para graph 25 of its 22 December 2003 response that
in MY 2000-2002, “only 71, 77, and 74 per cent respectively of upland cotton base acreage payments
went to farms that planted upland cotton”. The United States claims this EWG data shows that
Brazil’s 14/16
th methodology overestimates the amount of contract payments to upland cotton. This is
incorrect. First, even the incomplete EWG data shows a very high percentage of upland cotton
contract payments directly connected with the cu rrent production of upland cotton. Second, the EWG
data cannot be used to calculate the amount of non-upland cotton base payments attributable to
current producers of upland cotton. 52 Because the EWG data cannot match contract acreage and
planted acreage of the same farm – it is payment da ta, not acreage data. Given the fact that 10-20 per
cent of US upland cotton is planted on farms wi thout upland cotton base (but some other base
acreage)53, non-upland cotton contract payments would make up for the shortfall alleged by the
United States. 54 This further highlights the need for th e withheld US data. The United States
obviously knows what the data shows and can e asily calculate the amount of non-cotton base
payments allocable to upland cotton production. The US decision not to release even “non-
confidential” data that would show the amount of allocated payments is strong evidence that it knows
that the actual data is larger than the EWG and Brazilian estimates.

23. Finally, the United States in paragraph 26 argues that summary data it produced on
18/19 December 2003 shows that in MY 2002, 29. 4 per cent of total cropland on farms receiving
upland cotton contract acreage payments was plan ted to upland cotton. This figure is highly
misleading, because it includes all of the acreage from farms with upland cotton base acreage that do
not plant upland cotton. When only farms that currently produce upland cotton are included, then
about 50 per cent of the cropland acreage on these farms that actually produce upland cotton was
planted to upland cotton. Indeed, the United Stat es acknowledges this fact in paragraph 186 of its
22 December 2003 Answers to Questions.

24. Further, because of the US refusal to pr ovide the information requested by the Panel on
8 December 2003 and 12 January 2004, it is impossible to determine from the US incomplete
summary data the diversity of the cropland for upl and cotton producers accounting for the majority of
upland cotton production. Indeed, strong evidence th at upland cotton producers concentrate in upland
cotton production is found in the EWG data, which s hows that 85 per cent of the contract payments

as a proxy for payments, which is a conservative proxy, as presumably the less productive farms ( i.e. those with
lower yields and thus fewer payment units per payments acre and fewer payments per acre) stopped producing
upland cotton.
49 Brazil’s 27 October 2003 Answer to Questions, paras 7-8.
50 Exhibit Bra-317 (Environmental Working Group Database: Table of Results, Table 3).
 51 Exhibit Bra-317 (Environmental Working Group Database: Table of Results, Table 3).
 52 Without the farm-specific data the United States has refused to produce, it is impossible to know for
certain what non-upland cotton cont ract payments received by current upland cotton producers are properly
allocated to upland cotton production.

53 Even for those farms that mainly plant on upland cotton base, additional non-upland cotton contract
payments would need to be allocated. See Electronic PFC and DCP Summary Files provided by the
United States on 18 and 19 December 2003 respectively. See also Brazil’s 20 January 2004 Answers to
Additional Questions, paras. 43-55 and Brazil’s 28 January 2004 Comments and Requests Regarding US Data,
Section 9.
 54 See Brazil’s 28 January 2004 Comments and Requests Regarding US Data, Section 9.

received by upland cotton producers were upland cotton payments.
55 This supports USDA’s own
reports on cotton specialization, which indicate that the considerable bulk of cotton is produced in
farms that specialize largely in upland cotton production.56

206. Please explain how the graph in paragraph 40 of the US further rebuttal submission was
derived. In so doing, please clarify whether the figures are on a cents per pound basis or some
other basis. What averaging method was used? Can you prepare individual charts showing
average US and Brazilian cotton prices for each of those third country markets? USA

Brazil’s Comment:

25. The United States asserts in paragraph 28 of its 22 December 2003 response that “FOB is
greater than FAS except where the vessel is not changed at the port of export, in which case the values
are equal”. As set forth in the Second Declaration of Andrew Macdonald, “in practice there is in fact
no difference in cost between FAS and FOB, since th e ship loads and unloads the cargo, and thus, the
difference in selling price between cotton which is sold FAS and cotton which is sold FOB is
negligible”.
57 Further, Mr. Macdonald agreed with the US statement quoted above, but noted that
“vessels are rarely ‘changed’ in the port,” and even if they were, “there would be an insignificant
interest loss and thus, no difference between FAS and FOB values”. 58 Brazil directs the Panel to
Mr. Macdonald’s Second Declaration, in which he provides additional details supporting his expert
opinion.59

26. Brazil notes that the United States does not a ppear to have any difficulty with comparing
Brazilian FOB prices with US FAS prices since it mak es this comparison in the graph in paragraph 30
of its 22 December 2003 Answers to Questions. B ecause of the negligible difference between these
two types of prices based on export value, Brazil agrees that there is no difficulty in comparing such
FOB and FAS prices. This would include the vari ous pricing comparisons between US and Brazilian
prices set out in Brazil’s 22 December 2003 Answers to Questions 233 and 235.

27. Finally, Brazil notes the US acknowledgement that the United Stat es used only a “simple
average unit price” comparison between US and Brazilian prices in paragraph 30 of its
22 December 2003 response. As Brazil has indicated, fro m a statistical point of view this is a totally
inappropriate way to compare prices because of the enormous distortions it creates.
60 T h e
United States should have used “weighted average” unit value pricing comparisons.

207. Please indicate whether any of the measures challenged in this dispute obliges cotton
farmers to harvest their crop in order to receive the benefit of the programme (subsidy). USA

Brazil’s Comment:

28. The United States confirms that the marketi ng loan programme requires farmers to harvest
their upland cotton to receive marketing loan payments.
61 In addition, the Step 2 programme requires

 55 Exhibit Bra-317 (EWG Database: Table of Results, Table 5, MY 2002, top line, far right side under
“percentage of total contract payments”, 85.07 per cent).
 56 Brazil’s 27 October 2003 Answer to Question 125(a), paras. 7-10.
 57 Exhibit Bra-401 (Second Declaration of Andrew Macdonald, 27 January 2004, p. 2).
 58 Exhibit Bra-401 (Second Declaration of Andrew Macdonald, 27 January 2004, p. 2).
 59 Exhibit Bra-401 (Second Declaration of Andrew Macdonald, 27 January 2004).
 60 See following webpages which discuss, in a variety of contexts, the significant distortions that can
occur with statistics by using simple aver ages as opposed to weighted averages:
http://www.statcan.ca/english/edu/power/ch13/estimation/estimation.htm;
http://www.grantedc.com/publications/Grant%20Co%20Washington%20W&FB%20Report%202003.pdf
 61 US 22 December 2003 Answers to Questions, para. 31.

the use or export of upland cotton to trigger payments. 62 Brazil notes that the crop insurance
programme requires farmers to plant upland cotton to receive premium subsidies. No harvest is
required from farmers to receive indemnity paym ents, which in turn may trigger additional
reinsurance payments to the private insurance companies running the crop insurance programme.63

208. Please provide data for the marketing years 1992 and 1999-2002 of the "quantity
of production to receive the applied administered price" ( Agreement on Agriculture , Annex 3,
paragraph 8) for purposes of a price-gap calcul ation of support through the marketing loan
programme. USA

Brazil’s Comment:

29. Brazil notes that this question direc tly implicates earlier evidence and arguments
demonstrating that the United States has never us ed a “price-gap” methodology for calculating its
marketing loan portion of AMS, inter alia, for upland cotton. 64 Rather, the United States has always
used and notified a budgetary methodology in accounting for marketing loan payments (marketing
loans, loan deficiency, certificate payments, and interest & storage payments).65 In particular, when it
agreed with other WTO Members on what the US “b ase level” would be for purposes of Total AMS,
the United States chose to calculate marketing loan payments using a budgetary approach.

30. This is easily seen by first examining Exhibit Bra-191 66, which is a document in which the
United States notified “supporting material related to commitments on agricultural products contained
in Schedule XX - United States”. Marketing loan payments for upland cotton are listed on page 20 of
the document. The document lists the US loan deficiency payments for upland cotton for MY 1986 as
$126.860 million, for MY 1987 as $0.364 million, and for MY 1998 as $42.038 million. Comparing
these figures with the actual budgetary outlays for lo an deficiency payments in MY 1986-88, as set
out in Exhibit Bra-4, show the same figures (rounded out). Similar budgetary outlays are used for
marketing loan gains and interest and storage paym ents that are also related to “marketing loan
payments”. In addition, Exhibit Bra-191 67 contains an Annex which is the “Supporting Table for
Cotton: Deficiency Payment Calculation for GATT AMS.” This table is there because the
United States used the “price-gap” formula of Annex 3, paragraph 10 of the Agreement on
Agriculture to calculate the AMS for deficiency pa yments. But no such supporting table exists for
marketing loan payments, because a budgetary approach was used. In short, there is no doubt that the
United States Total AMS Commitments were based, inter alia, on the US decision to use budgetary
outlays for calculating its marketing loan payments for upland cotton.

31. The US decision under Annex 3, paragraph 10 to use budgetary outlays instead of the price-
gap formula in calculating upland cotton AMS for mark eting loan payments is legally binding on the
United States. Annex 3, paragraph 5 stat es that “[t]he AMS calculated as outlined below [i.e.,
paragraphs 6-13 of Annex 3] shall constitute the base level for the implementation of the reduction
commitments on domestic support.” The marketing loan budgetary decision reflected in
G/AG/AGST/USA was incorporated into the US schedul es and set the US “base level” of total AMS.
The title of the G/AG/AGST/USA suggests its lega lly binding character – “Supporting Tables
Relating to Commitments on Agricultural Products in Part IV of the Schedules.” These “supporting

 62 US 22 December 2003 Answers to Questions, para. 31.
 63 Brazil’s 24 June 2003 First Submission, paras. 80-83.
 64 See Brazil’s 27 August 2003 Comments on US Rebuttal Submission, paras. 10-16.
 65 See, e.g., Exhibit Bra-191 (G/AG/AGST/USA, p. 20); Exhibit Bra-47 (G/AG/N/USA/43, p. 20);
Exhibit Bra-150 (G/AG/N/USA/10, p. 18).
 66 G/AG/AGST/USA, p. 20.
 67 G/AG/AGST/USA, p. 21-22.

tables” were the basis upon which the “final bound co mmitment level specified in Part IV” of the US
schedule was determined.

32. Annex 3, paragraph 5 of the Agreement on Agri culture indicates that the United States is
bound by its initial decision to calculate AMS usi ng a budgetary approach (as permitted in Annex 3,
paragraph 10 of the Agreement on Agriculture). Th is conclusion follows from the text of Article 6.3
of the Agreement on Agriculture:

A Member shall be considered to be in compliance with its domestic support
reduction commitments in any year in wh ich its domestic support in favour of
agricultural producers expressed in terms of Current Total AMS does not exceed the
corresponding annual or final bound commitment level specified in Part IV of the
Member’s Schedule.
33. Further, Article 3.2 provides that “[s]ubject to the provisions of Article 6, a Member shall not
provide support in favour of domestic producers in excess of commitment levels specified in Section I
of Part IV of its Schedule”. The United States’ “final bound commitment level specified in Section I
of Part IV” of the US Schedule is currently $19.1 bi llion. Nothing in Article 6 or any other provision
of the Agreement on Agriculture permits a Member such as the United States to change its Annex 3,
paragraph 10 choice of budgetary or price ga p calculations for the purposes of calculating current
AMS.

34. Brazil has previously detailed the reasons why permitting Members to reverse the Annex 3,
paragraph 10 choice to calculate current AMS for a product would make the disciplines of Article 3.2
and 6.3 of the Agreement on Agriculture inutile.
68 The United States never denied it has always
notified marketing loan payments using a budge tary approach, and has never rebutted Brazil’s
arguments that permitting a Member to change its el ection under Annex 3, para graph 10 to calculate
current AMS would lead to the nullification of a Memb er’s obligations under Articles 3.2 and 6.3.
Indeed, the US Answer to Questi on 208 provides the best example of such a nullification, when the
United States admits that “if the applied admi nistered price for marketing years 1999-2002 were
compared to the 1992 applied administered pri ce, the resulting negative numbers . . . show the
decrease in the level of support from MY 1992.” 69 Translated, this means that the huge increase in
marketing loan payments to $2.5 billion in mark eting loan payments in MY 2001 would not be
counted towards US total AMS for MY 2001.

35. Brazil emphasizes again that while the United St ates makes what are theoretical arguments in
this dispute, its WTO partners properly rely on the past and most recent US notifications.
70 And these
notifications consistently demonstrate that the United States properly treats the budgetary outlays for
marketing loan payments for cotton as well as other programme crops as part of its total current AMS.
These notifications further demonstrate that US budgeted outlays for marketing loans have
significantly increased in MY 1999-2002 over the level of such loans in MY 1992.71

36. In light of the arguments and evidence set out above, there is little need for Brazil to comment
on the calculations provided by the US 22 December 2003 response. Brazil notes that the US applies
a contradictory approach to the quantity of elig ible production for MY 1992 and MY 1999-2002. For
example, the United States uses actu al production figures calculated from harvested acreage for MY
1999-2002, while it calculates eligible production for MY 1992 as planted eligible acreage multiplied

 68 Brazil’s 27 August 2003 Comments on US 22 August 2003 Rebuttal Submission, paras. 10-16.
 69 US 22 December 2003 Answer to Question 208, para. 37.
 70 See, e.g., Exhibit Bra-191 (G/AG/AGST/USA, p. 20); Exhibit Bra-47 (G/AG/N/USA/43, p. 20);
Exhibit Bra-150 (G/AG/N/USA/10, p. 18).
 71 Brazil’s 9 September 2003 Further Submission, Table 1.

by the yield on harvested acreage.72 This grossly overstates the eligible production. In fact, the US
“eligible production” figures even overstate actual production in MY 1992 by 432,333 bales. 73 The
actual eligible production for MY 1992 was 6.485 billion pounds 74, not the 7.748 billion calculated by
the United States. 75 When compared to the actual production eligible for marketing loans in MY
1999-2002, the Panel can see that significantly greater US upland cotton production was provided
marketing loan benefits in each of those later years compared to MY 1992.

209. It is understood that the data in the graph in paragraph 5 of the US oral statement are
as at harvest time, while the data in the graph in paragraph 39 of Brazil's oral statement are as
at planting time. Please explain why the trend of US acreage increase/decrease differs between
these two graphs. BRA, USA

Brazil’s Comment:

37. Brazil reemphasizes its position that only pl anted acres constitute a reliable measure for
planting decisions in a single country, such as the United States.
76 This is highlighted by the fact that
changes in planted and harvested acreage for the United States during MY 1996-2003 do not move in
parallel. Contrary to the US assertion that the “movements in acreage figures are fairly similar”77, in
fact, the US planted and harvested acreage changes are in entirely opposite directions in 3 out of
8 marketing years78, vary by great magnitudes in a further 3 out of 8 marketing years 79, and are “fairly
similar” only in 2 out of 8 marketing years.80 This overall picture can hardly be called “fairly similar”
movements. Brazil refers the Panel to its 22 December 2003 Answer to Question 210 81,
demonstrating that in fact US planted acreage and a proxy for worldwide planted acreage move in
quite opposite directions, demonstrating that US pr oducers of upland cotton do not take their planting
decisions based on the same market-based price factors as other producers worldwide.82

210. Are worldwide planted acreage figures available? BRA, USA

Brazil’s Comment:

38. Brazil agrees that no data on harvested acres is available on a worldwide basis. However,
Brazil strongly disagrees that the only possible co mparison between US and worldwide upland cotton
acreage needs to be done on the basis of harvested acreage. 83 As discussed before, the only valid
measure of farmers planting decisions is planted acres, as harvested acres figures are distorted by
variations over time in the abandonment rate. 84 Therefore, it is critical to use planted acreage for the

 72 US 22 December 2003 Answer to Question 208, paras 33-35.
 73 Compare US figure at paragraph 33 of its 22 Decem ber 2003 Answers to Questions (16,142,333
bales) with the actual production in MY 1992 of 15,710,000 bales, as reported in Exhibit Bra-4 (“Fact Sheet:
Upland Cotton”, USDA, January 2003, p. 4).
 74 11,164,726 planted eligible acres times 0.837 (share of planted acres that was harvested (Exhibit Bra-
4 (“Fact Sheet: Upland Cotton,” USDA, January 2003, p. 4 (Abandonment Rate))) times 694 pounds per
harvested acre (Exhibit Bra-4 (“Fact Sheet: Upland Cotton,” USDA, January 2003, p. 4 (Yield))).
 75 US 22 December 2003 Answers to Questions, para. 33.
 76 Brazil’s 27 October 2003 Answers to Questions, paras. 27-28; Brazil’s 18 November 2003 Further
Rebuttal Submission, para. 87; Brazil’s 22 December 2003 Answers to Questions, paras. 30-32.
 77 US 22 December 2003 Answers to Questions, para. 39.
 78 MY 1997, 1999, 2000.
 79 MY 1996, 1998, 2001.
 80 MY 2002, 2003.
 81 Brazil’s 22 December 2003 Answers to Questions, para. 31-36.
 82 Brazil’s 18 November 2003 Further Rebuttal Submission, Section 3.4 (containing further references).
 83 US 22 December 2003 Answers to Questions, para. 40.
 84 Brazil’s 27 October 2003 Answers to Questions, paras. 27-28; Brazil’s 18 November 2003 Further
Rebuttal Submission, para. 87; Brazil’s 22 December 2003 Answers to Questions, paras. 30-32.

United States in any analysis of congruence in pl anting decisions between the United States and the
rest of the world. However, harvested acres may serve as a proxy for planted acreage on a worldwide
basis.
85 On this basis, no congruence exists betw een the planting decisions of US upland cotton
farmers and upland cotton farmers worldwide. 86 But, even if one were to look at harvested acres for
both US and worldwide planting decisions, there is no congruence in the movements.87

211. Brazil presents a graph in paragraph 59 of its further rebuttal submission indicating the
increasing cumulative loss incurred by cotton pr oducers. Please comment on the argument that
US cotton producers could not continue operating without subsidies. In particular:

(a) to what extent does the use of 1997 surv ey technological coefficients with annually
updated values affect the results?

Brazil’s Comment:

39. Brazil reads the Panel’s question as requesting the United States to provide an estimate of
how much the updated 2003 USDA ARMS 1997 survey overstates the $872 per acre deficit between
total costs and market revenue for the period MY 1997-2002. The United States’ 22 December 2003
response declines to provide any dollar per acre estim ate. Indeed, the US response appears to raise
more questions than it provides answers.

40. The United States has claimed that the 2003 USDA cost data used by Brazil in calculating the
$872 per acre deficit
88 cannot be relied on by the Panel. 89 Because this is a fact asserted by the
United States, it has the burden of establishing it. 90 The Panel should expect the United States, which
employees the USDA personnel who created the 2003 cotton update of the 1997 ARMS study, to
have provided statements or other evidence from these cost experts explaining why the 2003 update is
unreliable and cannot be used by the Panel. No su ch statements were provided. Brazil has examined
the websites of USDA and the US National Cotton Council carefully and cannot find any warnings
that the 2003 upland cotton costs and revenue are unreliable. Indeed, the current NCC website
provides a direct link to the ERS-USDA costs an d returns website for each major US region. 91
Presumably, the NCC intended its Members to rely on such data or they would not have included the
link. Further, the United States neglected to in form the Panel that the 2003 upland cotton cost and
revenue data has benefited from a “new costs of production estimation methodology” implementing
the American Agricultural Economics Association (AAEA) Recommendations. 92 It is reasonable for
the Panel to find that the 2003 cotton updates to the 1997 ARMS study using this new AAEA-
recommended methodology results in a more accurate estimate of cotton costs and revenues – not a
less accurate estimate.

41. What the United States attempts to prove in its 22 December 2003 Answer to Question 211(a)
is that the use of biotechnology cotton (“BT cotton”) has lowered costs, and that somehow these lower
costs were not reflected in the annual updated USDA co sts and returns surveys. It is noteworthy that
the United States now admits that the USDA personnel updating the 1997 ARMS study properly

 85 Brazil’s 22 December 2003 Answers to Questions, para. 32.
 86 Brazil’s 22 December 2003 Answers to Questions, para. 33.
 87 Brazil’s 22 December 2003 Answers to Questions, para. 34.
 88 Brazil’s 18 November 2003 Further Rebuttal Submission, Section 3.1.
 89 See e.g. US 22 December 2003 Answers to Questions, para. 43.
 90 See e.g. Appellate Body Report, Japan – Apples , WT/DS245/AB/R, para. 157 (“It is important to
distinguish, on the one hand, the principle that the complainant must establish a prima facie case of
inconsistency with a provision of a covered agreement from, on the other hand, the principle that the party that
asserts a fact is responsible for providing proof thereof.”).
 91 htt://risk.cotton.org/CotBudgets/cotbudget.htm, visited 20 January 2004.
 92 See www.ers.usda.gov/briefing/FarmIncome/Glossary/compare.htm visited 28 January 2004. A link
to this ERS page is provided on the NCC Webpage.

updated the cost of production data to show increased upland cotton seed costs. 93 But, without citing
any proof, the United States asserts that these same personnel that properly updated the cotton cost
data (to reflect increased (BT-cotton and overall) seed costs) improperly failed to “capture the cost
savings from technological changes that alter the mix of production activities and inputs.”94

42. The credibility of this assertion is difficult to accept given the fact that the US government
during the period of investigation touted the productivity benefits of using, inter alia , BT-cotton. 95
Indeed, an Economic Research Service-USDA Report updated through 27 October 1999 analyzed
ARMS data concerning the use of BT cotton. 96 The ERS report identified increased yields and lower
use (and hence costs) of pesticides as indicated below:

Comparison of mean yields shows that in most cases (4 of 7 region/year cases for
which data were sufficient) adopters of Bt cotton appear to obtain statistically
significant higher yields than nonadopters. Although less prevalent, similar results (2
of 5 cases) were observed for Bt corn. For the case of herbicide-tolerant crops, the
results are mixed: only for a few regions and in some years are yields higher for
adopters. Most of the time (4 of 5 for corn, 9 of 13 for soybeans, 3 of 5 for cotton),
differences in yields are statistically insignificant.
Comparison of mean pesticide acre-treatmen ts for 1997 shows that in most cases (2
of 3) the adoption of Bt cotton reduces treatments of insecticides normally used on
the pests targeted by Bt. In 1 of 3 cases, total treatments for all other cotton pests are
higher for adopters than nonadopters. Insecticide treatments for Bt-targeted pests on
corn are significantly lower for Bt users than for nonusers. Adoption of herbicide-
tolerant varieties accompanied statisti cally significant reductions in herbicide
treatments in 4 of 8 cases across all crops, mostly for soybeans.
It is difficult to imagine how USDA ERS personnel wo rking with ARMS survey data could arrive at
the conclusions of (a) higher yields for BT cotton and (b) lower use of pesticides and chemicals in
1999 as detailed above, but the USDA personnel upda ting the cotton cost data in 1999-2002 could
not. This evidence suggests that because information on the cost savings for using BT cotton were
widely available for farmers and the ERS, then they would also be known to those updating the cotton
cost survey. Thus, the Panel can conclude that the published USDA cost survey properly identified
both cost increases and cost savings.

43. Finally, to attempt to answer the Panel’s question concerning the graph at paragraph 59 of
Brazil’s 18 November 2003 Further Rebuttal Submissi on, Brazil analyzed the extent to which any
alleged overstating of costs could impact on the hug e $872 per acre cost-revenue gap. The answer, as
outlined below, is very little.

44. To conduct this analysis, Brazil first assume d, contrary to the evidence outlined above, that
the USDA employees updating the cost savings data
97 “got it wrong”. Brazil then determined that the
largest published estimate of the possible cost savings for using BT-cotton was $20 per acre. 98 The

 93 US 22 December 2003 Answer to Question 211(a), para. 45.
 94 US 22 December 2003 Answer to Question 211(a), para. 45.
 95 See http://www.ers.usda.gov/publications/tb1906/tb1906b.pdf visited 28 January 2004; US
22 December 2003 Answers to Questions, para. 44 (note 44).
 96 http://www.pestlaw.com/x/guide/1999/USDA-19990625A.html visited 28 January 2004.
 97 Brazil’s 27 October 2003 Answers to Questions, p. 56 (setting out USDA data).
 98 Exhibit Bra-404 (Monsanto Imagine, “Benefits – BT Cotton” downloaded from
www.monsanto.co/monsanto/layout/our_pledge/bnefits/bt_cotton.asp visited 28 January 2004). The document
concludes that the average US cotton farmer using BT –cotton has “average net incomes . . . increased by $50
per hectare in the United States” The Monsanto assertio n of $50 per hectare translates into $20.2 per acre
because one hectare constitutes 2.47 acres.

next step was to determine that between 1997-20 02 an average of 58 per cent of cotton acreage was
planted to BT-cotton between MY 1998-2002. This is reflected in the graph below:
99

45. With 58 per cent of US acreage between 1998-2 002 was planted to BT-cotton, this meant that
the average per acre national cotton cost savings was $12 between 1997-2002 (0.58 x $20). But recall
that the United States answer claims that the USDA 1998-2002 cost data reflects the cost increases for
BT-cotton seed, but not the cost savings from use of fewer chemicals. Therefore, to reflect the net
cost savings, Brazil further deducted the differe nce in between increased cotton-seed in 1997 and
between 1998-2002 ($12.8 per acre). 100 Thus, in the best-case US scenario, the total amount of
average cost savings allegedly not reflected in published USDA data was $24.8 per acre.

46. Brazil recalls that the total six-year deficit between total costs and total revenue from USDA’s
2003 revenue and costs estimates ( i.e., the updated 1997 ARMS Study) is $872 per acre. 101 Brazil
then assumed (1) the accuracy of the $12 per acre net cost reduction from using BT-cotton, (2) that
the $12 per acre net cost savings existed for th e entire 1998-2002 period, and (3) that USDA cost
experts updating the 1997 ARMS Study in 1998-2002 were not aware of such cost reductions or
improperly failed to include them in the latest USDA update of cotton revenue and costs, then the
1997-2002 deficit between USDA’s total reported costs and total mark et revenue would still be $748
per acre.102

47. In sum, while Brazil believes that at least some of the assumptions listed above are highly
questionable, the “best case” that the United States could have put forwar d (but did not) shows
continued huge long-term deficits of $748 per acre between US producers’ total costs and their market
revenue. In short, the United States has not met its burden of proving that its own USDA data was
hopelessly flawed. Brazil and the Panel can prope rly rely on the 2003 cotton cost and revenue data
showing either $872 or $748 average per acre defici ts between costs and ma rket revenue during MY
1997-2002. Both figures reflect huge gaps between mark et revenue and total costs of production. As
Brazil has argued, this evidence strongly supports the significant impact of the US subsidies on US
production, exports and on world prices.

 99 http://www.whybiotech.com/index.asp?id= visited 28 January 2004.
 100 This was done by subtracting the amount of increased seed costs in Exhibit Bra-323 (Costs and
Returns of US Upland Cotton Farmers, MY 1997-2002) from MY 1997 – this was 0 in 1998, $1 in 1999, $13 in
2000, $20 in 2001, and $30 in 2002.

101 Brazil’s 18 November 2003 Further Rebuttal Submission, paras. 59-62.
 102 This figure has been calculated by applying the $12 per acre time five years (which is conservative,
because in earlier years less Bt-cotton was planted) a nd also deducting the yearly increases in seed costs
(compared to the 1997 basis), since the $12 represented a net cost saving, i.e., net of cost increases to due higher
seed costs.

(ii) Comment on US Argument concerning Canada Dairy

48. Finally, Brazil notes the US attempt to di stinguish the Appellate Body’s decision in Canada –
Dairy in paragraph 42 of the US 22 December 2003 Answer to Question 211. In assessing the
credibility of these new US arguments, it is instructiv e to review what the United States argued before
the Appellate Body in Canada – Dairy. First, on the issue of whether average cost of production data
should be used, the United States made the following arguments in Canada – Dairy:

[T]he Panel correctly recognized that an individual producer cost of production
benchmark was unworkable. The Panel noted that governments rarely have the sort
of detailed, producer-specific information th at such a test would require. Indeed, as
discussed below, Canada itself was unable to supply the necessary data regarding
individual producer participation in the CEM market to support its claim that no
payments were being made. … In sum, the Panel’s reliance on the CDC’s average
total cost of production data as a ‘sufficient, albeit conservative, approximation of the
average total cost of production of the Canadi an dairy industry’ is consistent with the
Appellate Body’s instruction to sue an average total cost of production benchmark in
this case.
49. The Panel will recall that the United States in this dispute has argued that using an average
total cost of production was not appropriate.
103 Yet, as in Canada – Dairy, the issue in this dispute is
not whether there are certain producers that may sell cotton (or milk) below their total cost of
production. Of course, there will be some efficien t producers who will be able to do so, even with
few or no subsidies. Rather, the issue generally in both cases is whether, on average, the producers’
total costs of production are above the prices received by the producers in the relevant markets. Thus,
as in Canada – Dairy, the average total cost of production ge nerated by USDA and used by Brazil is
more than a “useful approximation”.

50. The United States’ arguments in this dispute that fixed costs should not be considered by the
Panel mirrored arguments made by Canada in Canada – Dairy . Consider the following arguments
made by the United States (which we re accepted by the Appellate Body) in Canada – Dairy and
which are practically identical to arguments made by Brazil in this dispute:

With respect to imputed costs, the Pane l correctly recognized that these are “real
costs” that a producer must recoup in order to stay in business over time. In
economic terms, these costs represent opportuni ty costs or the costs associated with
opportunities that are foregone by not putting the producers’ resources to their best
use. The producers’ resources include fam ily labour, its managerial services, and its
capital. There is a cost associated with us ing all of these resources. For example, if a
farmer foregoes the opportunity to earn cash wages off the farm in order to contribute
his labour to the farm’s production, the valu e of his labour is properly counted as an
economic cost to the farm even though the farmer does not pay cash wages to
himself. Likewise, it makes no sense to suggest, as Canada does, that the farm which
hires labour and management services is incurring a cost, while the farm that uses
family labour and management is making a profit.
104
Likewise, the Panel correctly concluded that there was no basis to exclude the
marketing, transportation, and administra tive costs included in the CDC cost of
production data. … [T]he panel properly concluded that these are also ‘real costs’

 103 US 18 November 2003 Further Rebuttal Submission, Section IV.F.3(1) – (4).
 104 Appellee Submission of the United States, Canada – Dairy (21.5)(II), para. 40 ( see
http://www.ustr.gov/enforcement/briefs.shtml).

that producers must recoup if they are to remain in business over time. … The costs
incurred by the farmer that must be recouped to avoid going out of business do not
stop at the ‘farm gate’.
105
Brazil agrees with the United States that all of the costs identified above (which the Appellate Body
accepted in its decision) are “real costs” that a producer must recoup “in order to stay in business over
time”. This is precisely Brazil’s point in this case.

51. The United States argues that Canada – Dairy is inapposite because “the issue for which
Brazil seeks to use total costs is not whether a subsidy exists but to evaluate the effect of the subsidy,
an altogether different analysis”.
106 First, this is incorrect as a factual matter. One use of the total cost
of production data by Brazil has been as circum stantial evidence to demonstrate that contract
payments are support to upland cotton and that such payments provide a benefit to US upland cotton
producers.107 This is directly analogous to the issue of wh ether the subsidy existed in Article 9.1(c) of
the Agreement on Agriculture in Canada – Dairy.

52. Second, the evidence of the total cost of production was used in both cases to demonstrate
that both dairy and cotton producers were selling thei r products into a market well below their total
costs of production. In Canada – Dairy , Canadian producers were selling C-milk into the export
market well below their total cost of production. In cotton, the US producers were selling into all
identifiable markets at well below their total costs of production. 108 And in both cases, the subsidies
provided by the Canadian and US governments permitted these producers to continue to produce
without regard for the gap between market revenue and total costs of production. In sum, without
both the Canada – Dairy panel and this Panel examining total costs of production, it would be
difficult to determine whether all the alleged subsidi es existed, and second, to determine the role that
subsidies played in maintaining production.

(a) to what extent do producers base planting decisions on their ability to cover operating
costs but not whole farm costs? USA

Brazil’s Comment:

53. Brazil generally agrees that covering operati ng costs are important to producers who are
making planting decisions “in the short term – that is, the market price for one year”.
109 And it is true
that during a one-year “short term” period, a producer may be able to afford to receive revenue that
only meets its operating costs and at least some of the fixed costs. 110 But the US 22 December 2003
Answer to Question 211(b) appears to suggest 111 that even over a long-term period of time – between
5-10 years – producers can continue to plant upland cotton oblivious to whether they meet their total
costs of production. This is, of course, econom ic nonsense for agriculture or any other economic
sector.

 105 Appellee Submission of the United States, Canada – Dairy (21.5)(II), para. 42 ( see
http://www.ustr.gov/enforcement/briefs.shtml).
 106 US 22 December 2003 Answer to Question 211, para. 42.
 107 Brazil’s 22 August 2003 Rebuttal Submission, paras. 30-41; Brazil’s 18 November 2003 Further
Rebuttal Submission, paras. 59-72; Brazil’s 2 December 2003 Oral Statement, paras. 25-33.
 108 Compare the prices set out in Brazil’s 22 December 2003 Answers to Questions 233 and 235, and in
Exhibits Bra-383 – Bra-388, with US total cost of production data in Exhibit Bra-323 (Costs and Returns of US
upland cotton Farmers MY 1997-2002).

109 US 9 October 2003 Closing Statement, para. 12 (The full context of the quote is as follows: “Total
costs are relevant over the long-term, but Brazil uses this (inaccurate) number to compare to revenue in the short
term – that is, the market price for one year.”).

110 See Exhibit Bra-283 (Statement of Christopher Ward – 7 October 2003, paras. 7-10).
 111 See in particular the graph at paragraph 47 of the US 22 December 2003 Answer to
Question 211(b).

54. Basic economics holds that no business can continue to operate unless its total costs of
production are met over the long term. The United States recognizes this when it states, in its
18 November 2003 Further Rebuttal Submission, that “in the long run, producers will have to cover
these asset and overhead (i.e., economic) costs”.
112 USDA’s ERS suggests that the long term is a
period between 5-10 years 113, and Christopher Ward testified th at the normal recovery period for
cotton equipment investments is 5-7 years. 114 In light of this evidence, Brazil focused on total costs
for a six-year period of time between MY 1997-2002 in analyzing the long-term cost/revenue gap. 115
By contrast, the US graph at paragraph 47 of its 22 December 2003 Answer to Question 211(b)
improperly focuses on only operating costs. Neither the US graph nor the US response provides any
hint as to how US cotton producers could survive fo r six years without market revenue covering their
fixed costs, i.e., covering lease or mortgage payments, payi ng labor, recovering equipment costs, and
paying taxes and insurance. 116 In fact, the land-specific costs must be paid every year simply to be
able to continue farming on leased land or to avoid foreclosure in the case of owner-operators.117

55. The US arguments that economists are only concerned with examining operating costs, and
not total costs, are simply not correct. For ex ample, the University of California Cooperative
Extension economists conduct a large number of st udies regarding costs of production for different
types of, inter alia, upland cotton farms in California. Ever y one of these studies, which are relied on
throughout the agricultural industry in California a nd other states, contains a detailed examination of
all types of costs.118 Other economic studies of the cost of production similarly provide for total costs,
including the land charge and rents.119

56. Additional evidence that total costs are relevant to planting decisions even in the short term of
one year is found in several documents on an intended but not introduced “Cost of Production
Insurance Plan for Cotton”. The entire intent of this project to develop new a insurance programme
was to provide comprehensive insurance covering total costs – not just operating costs.
120 If upland
cotton producers were solely concerned with cove ring only their operating costs each year, then the
project would not also have sought to provide co tton producers with protection from increased fixed

 112 US 18 November 2003 Further Rebuttal Submission, para. 122.
 113 Exhibit US-84 (Production Costs Critical To Farm ing Decisions, William D. McBride, ERS, p. 40
(quoted in US 18 November 2003 Further Rebuttal Submission, para. 118).

114 Exhibit Bra-283 (Statement of Christopher Ward – 7 October 2003, para. 10).
 115 This was not, therefore, a “ran domly selected period,” as the United States alleges in paragraph 41
of its 22 December 2003 Answer to Question 211(a).
 116 See Brazil’s 18 November 2003 Further Rebuttal Submission, paras. 64-69 (setting forth
composition of fixed costs. This evidence has never been rebutted by the United States).

117 See Brazil’s 18 November 2003 Further Rebuttal Submission, paras. 64-69 (setting forth
composition of fixed costs. This evidence has never been rebutted by the United States).
 118 Exhibit Bra-405 (Sample Cost to Produce Cotton – Transgenic Herbicide-Resistant Alacla Variety,
San Joaquin Valley, University of California Cooperative Extension, 2003). A large number of cost of
production studies by the University of California Coope rative Extension for cotton, as well as for many other
crops, can be found at www.ucanr.org/CES.CEA.shtml.
 119 Exhibit Bra-406 (Cotton Cost-Return Budget in Southwest Kansas, Kansas State University
Agricultural Experiment Station and Cooperative Extensive Service, October 2003).
 120 Exhibit Bra-407 (Documents on Cost of Production Insurance Plan for Cotton)(“Review of the
FCIC Cost of Production Insurance Plan for Cotton,” Sparks Companies, Inc., 15 September 2003, p. 11, 12 and
16. (COP insurance policy is based on the farmer’s total cost .”)); “Underwriting Review of FCIC Cost of
Production Insurance Plan for Cotton,” Jeffrey T. LaFrance, Ph.D, 13 September 2003, p. 5 (“… the basis for
the guarantee is not a farmer-chosen per centage of expected or predicted revenue; rather it is a percentage of an
estimate of the total cost of production .); “Review of Poposed ‘Cost of Production Insurance Plan for Cotton,’
Jerry R. Skees, Dr. Barry J. Barnett, Dr. J. Roy Black, and James Long, 15 September 2003, p.32 (“Purchasers
will be required to provide estimate s of variable expenses per acre, fixed expenses per acre, and land expenses
per acre in addition to the acreage and historical yield information required for existing cotton insurance
products.”) emphasis added

costs such as leasing land, employing workers, and annual financing costs for replacement equipment.
Yet, the “Cost of Production Insurance Plan for Cotton” programme focused on annual protection that
would include all types of costs, because that is what the sponsors perceived farmers needed.

57. Finally, the Panel should recognize that the mo st efficient low-cost US producers will be able
to withstand lower market prices without the need for significant subsidies for a year or two. But
higher-cost producers will not. The ERS study on production costs cited by the United States
highlighted the ability of higher-cost producers to survive in the shorter term only through
government payments:

Low-cost producers are generally better able to survive periods of low prices and
thrive when prices improve, while high-cost producers are often the first to exit
farming when prices are low.
121

Also, this cost-price squeeze has put an emphasis on enhancing revenues through a
variety of sources, such as government programmes, and on controlling or cutting
costs. Government programme support has likely helped many producers remain in
business and may explain why structural ad justments in these industries have been
gradual.
122
Many US upland cotton producers are “high- cost” producers, accordin g to USDA’s latest
comprehensive cost of production survey. 123 Brazil notes that Professor Sumner found that roughly
70 per cent of US planted acreage would continue to be planted to upland cotton even without the US
subsidies.124 This finding that 30 per cent of the US cotton acreage would not remain planted to
cotton is consistent with the conclusion that it is the category of high-cost cotton producers that would
not be able to survive without US subsidies – even in the short term.

212. Brazil states in paragraph 37 of its oral statement that studies of Westcott and Price
found that the effect of the programme on cotton is to add an additional 1 to 1.5 million acres
during marketing years 1999-2001 and to suppress US prices by 5 cents per pound. Does the US
reject these findings? Why or why not? USA

Brazil’s Comment:

58. At the outset, Brazil notes that USDA econo mists Westcott and Price are among the most
experienced and well-respected USDA analysts, w ho both have long records of publication of US
government reports and other research studies. They have an in-depth knowledge of the marketing
loan programme. Further, they received comments and suggestions for their study from leading US
agricultural economists such as Professor Bruce Gardner.
125 Westcott and Price’s study was their best
estimate of the effects of the marketing loan progra mme. It bears repeating that they developed their
study independently of this dispute in 2000.

 121 Exhibit US-84 (Production Costs Critical To Farmi ng Decisions, William D. McBride, ERS, p. 40).
This study includes a graph regarding wheat farmers on page 41 which illustrates that low-cost producers can
survive much lower prices while high er-cost wheat farmers require much higher prices even to meet their
operating costs. The same dynamic exists for US cotton farmers.
 122 Exhibit US-84 (Production Costs Critical To Farming Decisions, William D. McBride, ERS, p. 41).
 123 Exhibit Bra-16 (“Characteristics and Production Costs of US Cotton Farms”, USDA, October 2001).
 124 Brazil’s 9 September 2003 Further Submission, Annex I, Table 5a.
 125 Exhibit Bra-222 (“Analysis of the US Commodity Loan Program with Marketing Loan Provisions,”
USDA, AER 801, cover page).

59. The Westcott/Price study is an approved USDA paper published by USDA’s Economic
Research Service. 126 It is only during this dispute that the United States’ government began to
characterize this study as an “interesting ‘academic’ exercise” 127, whereas, outside this dispute, its
results represent USDA’s official view on the effects of the marketing loan programme.

60. Brazil recalls that the US Payment Lim itations Commission, chaired by USDA’s Chief
Economist, requested Westcott and Price to update their study and analyze the effects of the
marketing loan programme in MY 2001. 128 This official US Commission never criticized the
approach chosen by Westcott and Price; rather, the Payment Limitations Commission relied on it. It
is not clear to Brazil why the United States considers this study to be appropriate for analyzing effects
of current agricultural policies and for consideri ng policy reform proposals such as more effective
payment limitations in a domestic political contex t, but, when US upland cotton subsidy programmes
undergo multilateral scrutiny in a WTO context, the United States considers the very same study to be
fatally flawed and unreliable.

61. Indeed, the United States goes so far as to ch aracterize the Westcott/Price study as irrelevant
for the analysis of this Panel.
129 The United States claims that using baseline projections for the
period MY 1999-2001 will not suffice for the Panel’ s analysis, as the Panel needs to assess “actual
conditions”.130 Brazil notes that the 2000 USDA baseline act ually projected much higher prices than
occurred during the period MY 1999-2001, thus the 5-cent per pound price suppression found by
Westcott and Price understate the effects of “actual conditions”. 131 This is confirmed by the fact that,
when Westcott and Price used actual data to up date their study for the Payment Limitations
Commission, their results showed much stronge r effects of the marketing loan programme. 132 Brazil
notes that Professor Sumner has analyzed the effect s of the marketing loan programme using actual
MY 1999-2001 data.133 Not surprisingly, the overall results of both Westcott/Price studies are in line
with Professor Sumner’s results.134

62. The United States also rejects the Westcott/Pri ce study because its lagged price analysis based
on the 2000 USDA baseline allegedly would not re flect farmers’ actual price expectations.135 Brazil
and Professor Sumner have addressed the issues of th e inappropriateness of using futures prices in
complex modeling systems before. 136 The undisputed evidence is that – as the United States itself
admits137 – futures market prices cannot be used for such modeling systems.138

63. Brazil also notes that Westcott and Price in their updated MY 2001 analysis used actual MY
2001 prices as farmers’ price expectations. This cr edits farmers with accurate information about

 126 Exhibit Bra-222 (“Analysis of the US Comm odity Loan Programme with Marketing Loan
Provisions”, USDA, AER 801).

127 US 22 December 2003 Answers to Questions, para. 48.
 128 Brazil’s 7 October 2003 Oral Statement, paras. 31-34.
 129 US 22 December 2003 Answers to Questions, para. 48.
 130 US 22 December 2003 Answer s to Questions, para. 49. Brazil notes that the United States
understands “actual conditions” to refer to actual price expectations held by US upland cotton producers. These
are, however, as Brazil and the United States agree, “fundamentally unobservable”.
 131 Brazil also notes that the 2000 USDA ba seline contained actual data for MY 1998, i.e., the
Westcott/Price study used USDA’s FAPSIM model for retrospective analysis.
 132 See Brazil’s 7 October 2003 Oral Statement, paras. 31-34.
 133 See Annex I of Brazil’s 9 September 2003 Further Submission, para. 4, Table I.5e (regarding the
data used, baseline and resulting effects of the marketing loan programme).
 134 See inter alia Brazil’s 7 October 2003 Oral Statement, paras. 9, 34.
 135 US 22 December 2003 Answers to Questions, paras. 50-51.
 136 See Brazil’s 20 January 2004 Comments on US Model Critique, para. 56 (for further references).
 137 US7 October 2003 Oral Statement, para. 34.
 138 Brazil offers additional rebuttal arguments in its comment on the US 22 D ecember 2003 Answer to
Question 213, below.

upcoming prices and represents a third approach to modeling price expectations – the others being of
course lagged prices and futures market prices.

64. In the context of its critique of the Westcott/Price study, the United States repeats its
contention that futures market prices are the appropriate indicator for upland cotton farmers’ price
expectations, and that the effect of the marke ting loan programme can be judged by looking at
farmers’ expectations about the US seasonal aver age cash price in the upcoming marketing year.
139
This approach is simply factually wrong. There is no question that marketing loan payments are
based off the adjusted world price – not a cash price. Both Brazil and Professor Sumner explained
this fact in detail on 2 and 3 December 2003. 140 Indeed, the United States acknowledges this fact
elsewhere in its 22 December 2003 Answers to Questions. 141 Thus, the effects of the marketing loan
programme would depend on upland co tton farmers’ expectations about the adjusted world price. All
of the repeated US arguments that there are no e ffects of the marketing loan programme for upland
cotton in MY 1999-2001 because the expected US cash price was above the loan rate are simply
meaningless.142

65. The US argument that the marketing loan pr ogramme has no effects if the expected US cash
price is above the loan rate is, however, also wrong on its merits. (The same would be true had the
United States relied on the correct price – the adjust ed world price.) Brazil demonstrated that the
spread between the January to March quotes of the D ecember futures contract and the adjusted world
price is (i) 18.5 cents 143 (if measured against the average AWP for the following marketing year) or
(ii) 12.22 cents 144 (if measured against the December AWPs). 145 Subtracting this spread from the
average of the January to March quotes of the D ecember futures contract provides the expected
adjusted world price (i) for the upcoming marketi ng year and (ii) for the upcoming December. As
Professor Sumner has explained, it is also not at all clear which futures pr ices to use for any such
calculations.146 Taking the quotes of just one month for a single futures contract, as the United States
does, is an overly simplistic approach. 147 But whether one assumes that farmers look at the average
AWP for the upcoming marking year or at some particular AWP for a specific month such as

 139 US 22 December 2003 Answ ers to Questions, para. 51. See also US 18 November 2003 Further
Rebuttal Submission, Section IV.G (for earlier US arguments using this fatally flawed approach).
 140 See Brazil’s 2 December 2003 Oral Statement, Sec tion 5.2 and Exhibits Bra-370 – Bra-371. See
also Brazil’s 22 December 2003 Answer s to Questions, para. 155; Braz il’s 20 January 2004 Answers to
Additional Questions, para. 21.
 141 US 22 December 2003 Answers to Questions, para. 75. Also Exhibit US-126 calculates the
marketing loan benefit correctly as the difference between the loan rate and the adjusted world price, rather than
– as implied by the United States in its other arguments – as the difference between the loan rate and the cash
price.

142 US 22 December 2003 Answers to Questions, pa ra. 51. Brazil is puzzled to learn that the
United States continues to ignore these basic facts about the operation of the marketing loan program for upland
cotton and continues to rely on this seriously flawed ar gument. Brazil recalls again that the United States is
fully aware of its error, as demonstrated by its statements in paragraph 75 of its 22 December 2003 Answers to
Questions and by Exhibit US-126, both of which rely on the adjusted world price as the basis for calculating
marketing loan benefits.

143 Exhibit Bra-356 (January – March Quotes of th e December Futures Contract, Expected and Actual
AWP and Cash Price).
 144 Exhibit Bra-370 (The Differen ce Between the Adjusted World Price and the December Futures
Contract), presented by Professor Sumner on 3 December 2003.
 145 Concerning the problems inherent in the choice of the exact spread, see Exhibit Bra-345 (Response
to Further US Criticism of the Annex I Model of th e Effect of US Cotton Subsidies – Daniel Sumner,
2 December 2003, para. 13).
 146 Bra-345 (Response to Further US Criticism of the Annex I Model of the Effect of US Cotton
Subsidies – Daniel Sumner, 2 December 2003, paras. 11-12).
 147 Bra-345 (Response to Further US Criticism of the Annex I Model of the Effect of US Cotton

December, the fact is that the expected world pri ce has always been well below the loan rate during
MY 1999-2002.148

66. Moreover, even if the expected adjusted world price would not have been below the loan rate,
that does not mean that there are no effects fro m the marketing loan programme. As Professor
Sumner explained on 3 December 2003, this is becau se farmers have a probability distribution for the
expected adjusted world price. That means they will expect with a certain likelihood that the adjusted
world price will be below (or above) the mean of the expectation.
149 It follows that even if farmers
expect the mean of the probability distribution for the AWP to be above the loan rate, they will
nevertheless expect some marketing loan payments to be made.150

67. In sum, Brazil emphasizes that the Westco tt/Price studies are important evidence of the
effects of the upland cotton marketing loan programme that corroborate the effects found by Professor
Sumner and the effects that are implied by all th e non-econometric evidence for the effects of the US
upland cotton subsidies presented by Brazil.

68. Finally, Brazil notes a new US argument that undercuts the US arguments regarding the peace
clause. The United States argues for the first time in its 22 December 2003 Answers to Questions that
the marketing loan programme does not guarantee US upland cotton producers 52 cents per pound in
income.
151 Rather, there is additional revenue genera ted by the marketing loan programme that
increases the effective support level – so- called “marketing loan facilitated revenue”.152 This revenue
results from several sources. First, US farmers receive a domestic farm price when selling their crop.
This price is consistently above the adjusted worl d price, off which the mark eting loan payments are
based.153 It follows that US farmers receive additional revenue, as the US farm price plus the
difference between the loan rate (52 cents) and the adjusted world price (below the US farm price)
will exceed 52 cents. 154 Second, by cleverly marketing their upland cotton crop, US farmers can
maximize this additional marketing loan facilitate d revenue, which Westcott and Price assumed to be
14 cents.155

69. In Exhibit US-126, the United States provides monthly data on the amount of additional
marketing loan facilitated revenue. This actual data demonstrates considerable additional positive
revenue “facilitated” by the marketing loan progra mme. Thus, using an adjusted world price as the
loan repayment rate for upland cotton (as opposed to a local posted county price used for other crops

 148 See Brazil’s 2 December 2003 Oral Statement, pa ras. 43-47, and Professor Sumner’s oral
explanation on 3 December 2003.
 149 See Exhibit Bra-371 (Simple Example of the Calculation of Expected Marketing Loan Benefit).
 150 Professor Sumner’s oral explanations on 3 December 2003; Brazil’s 2 December 2003 Oral
 151 In passing, Brazil notes that the use of 14 cents as marketing loan facilitated revenue was taken from
the assumptions in USDA’s own FAPS IM policy simulation model (Exhibit Bra-222 (“Analysis of the US
Commodity Loan Program with Marketing Loan Provisions,” USDA, AER 801, p. 11)). In addition, Westcott
and Price demonstrate that the additional marketing loan facilitated revenue for MY 1999 is 12.7 cents – very
close to the authors’ assumption (Exhibit Bra-222 (“An alysis of the US Commodity Loan Programme with
Marketing Loan Provisions,” USDA, AER 801, p. 8)). Finally, Exhibit US-126 does not contradict the
appropriateness of using 14 cents, as Exhibit US-126 does not provide the entire marketing loan facilitated
revenue received by farmers (see Brazil’s arguments in the main body of its comment).
 152 US 22 December 2003 Answers to Questions, paras. 50-52. Brazil notes that this additional revenue
in rare circumstances can also turn out to be negative.

153 See Brazil’s 27 October 2003 Answers to Questions, chart at paragraph 172 and Exhibit Bra-311
(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 1996 to the present).
 154 US 22 December 2003 Answers to Questions, paras. 50-52. Brazil notes that this additional revenue
may also turn out to be negative, as shown by Exhibit US-126.
 155 US 22 December 2003 Answers to Questions, para. 52.

except rice) increases the revenue guarantee beyond the official loan rate, as shown by the data in
Exhibit US-126. This data, however, understates th e real effect for two basic reasons. First, it
calculates the additional revenue based on an average national cash price that may be quite different
from the price an actual upland cotton farmer receives for its crop. Second, and more importantly, it
omits the second source of “marketing loan facilitate d revenue” – the timing decisions of farmers in
marketing their crop and taking out marketing loan benefits.

70. The existence of additional marketing loan programme facilitates reve nue further highlights
the importance of the upland cotton marketing lo an programme in assisting upland cotton producers
to close the gap between costs and market returns. It also invalidates further the US argument during
the peace clause phase of this dispute that a rate of support should be used for purposes of the “peace
clause” analysis, as the rate of support is the only measure that the United States controls.
156 T h e
United States now admits that it does not control the ra te of support either, as the rate of support may
be above (or even below) 52 cen ts, depending on market conditions 157, and farmers’ timing decisions
for the marketing of their crop. Nor does the Un ited States control the flow of marketing loan
payments, as there is no mechanism in the upla nd cotton marketing loan programme to stem or
control the flow of upland cotton marketing loan paym ents. This is precisely one of the reasons that
Brazil has challenged this mandatory programme as causing a threat of serious prejudice.

213. What differences, if any, can be observed in the results of econometric models in the
literature which use lagged prices and those which use futures prices to analyse the effect of
prices on planting decisions? BRA, USA

Brazil’s Comment:
71. The United States focuses its response entirely on Professor Sumner’s model. In fact, it does
not provide an answer to the question posed by the Panel. Brazil recalls that this question asks for
differences in results that can be observed from models in the literature that use lagged prices and
futures prices. In its 22 December 2003 response to this question, Brazil detailed that there are no
comparable models that use futures prices, but th at all models discussed in the context of this
proceeding – as well as all other large-scale multi-co mmodity models – use some variant of lagged
prices.158

72. At the outset, Brazil notes that the United States has presented no econometric model in this
dispute. The United States has not taken advant age of the economic and econometric expertise of
USDA’s Economic Research Service to substantiate econometrically its argument that $12.9 billion in
upland cotton subsidies have had no effect on produ ction and exports of US upland cotton and have
had no effects on US or world prices.

73. Instead, the United States has criticized various aspects of Professor Sumner’s model.
159 In
particular, it has focused its critique on Professor Sumner’s approach to modeling farmers’ price
expectations. However, Professor Sumner and Brazil have effectively rebutted all of these
criticisms.160

 156 See inter alia US 11 July 2003 First Submission, para. 94; US 22 July 2003 Oral Statement,
paras. 12-13.
 157 These market conditions are in pa rticular reflected in the spread between the adjusted world price
and the cash price received by US upland cotton producers.
 158 Brazil’s 22 December 2003 Answers to Questions, paras. 37-42.
 159 US 7 October 2003 Oral Statement, paras. 26-50; US 22 December 2003 Comments on Brazil’s
Econometric Model.
 160 See Exhibit Bra-345 (Response to Further US Criticis m of the Annex I Model of the Effects of US
Cotton Subsidies – Professor Daniel Sumner, 2 December 2003, paras. 6-14, with further references).

74. The United States cites Andrew Macdonald in su pport of its propositions that futures prices
are the better price indicators.161 However, once again, the United States takes a quote out of context.
What Mr. Macdonald actually said in the cited para graph is that New York futures prices are an
indicator of the direction in which prices will move in the future, i.e., price trends, not an indicator of
actual price in the future.162

75. The United States further cites a US governme nt study that allegedly demonstrates that a
certain percentage of US upland cotton produ cers rely on the New Yo rk futures market to price their
crop for actual sales.163 While Brazil cautions against the use of the specific results of the study (as it
is somewhat dated) 164, Brazil agrees that at least some farmers price their crop with reference to the
New York futures price. However, what this study does not demonstrate is that US upland cotton
producers rely on the futures market in making their planting decisions many months before
marketing.

76. The basic question that arises from the US critic ism is the following: is Professor Sumner’s
approach to model farmers’ price expectations biased towards generating stronger effects? The
United States correctly notes that “[t]he lagged prices used by Brazil and [Professor Sumner] can[,] at
best, be an approximation of farmers’ price expectations”.
165 This is an obvious fact; the actual price
expectations of thousands of farmers are “fundamentally unobservable”.166

77. There are three basic approaches to modeling fa rmers’ price expectations: (1) using lagged
prices, (2) using futures market prices if availabl e, and (3) using rational expectations in various
forms, including crediting farmers with complete information ( i.e., using the actual price as the
expected price
167).

78. It is not clear that any of these approaches lead to a priori biased results. However, it is
standard practice among economists to use lagged prices in a large-scale, multi-commodity
econometric policy simulation framework. FAPRI, USDA and the US Congressional Budget Office
(“CBO”) use lagged prices in their models. Indeed the United States admits that using futures prices
for these models is not feasible and has never been done.
168 Had Brazil attempted to use this
unconventional and untested approach for its model, the United States could have raised legitimate
concerns as to the reliability of the model resu lts. Any such results would have been purely
speculative.169

79. Indeed, Brazil would have had to develop equations to predict futures prices for those
commodities for which a functioning futures market exists. It also would have had to use an
altogether different modeling approach for price exp ectations for crops for which there is no futures
market. Again, this would have been purely speculative.
170

 161 US 22 December 2003 Answers to Questions, para. 57
 162 Exhibit Bra-281 (Statement by Andrew Macdonald – 7 October 2003, para. 13, even clearer
paras. 17, 28, 31).

163 US 22 December 2003 Answers to Questions, para. 58.
 164 See Brazil’s comment on Question 201, above.
 166 Brazil’s 9 September 2003 Further Submission, Annex I, para. 18.
 167 Westcott/Price have chosen this approach for the update of their study for purposes of the Payment
Limitations Commission.
 169 Exhibit Bra-345 (Response to Further US Criticis m of the Annex I Model of the Effect of US
Cotton Subsidies – Daniel Sumner, 2 December 2003, paras. 9-14).
 170 Exhibit Bra-345 (Response to Further US Criticis m of the Annex I Model of the Effect of US
Cotton Subsidies – Daniel Sumner, 2 December 2003, paras. 9-14).

80. The approach favoured by the Unite d States is not itself free of problems.
171 So far, futures
market prices have only been used in statistical est imation using aggregate time-series data and not in
econometric policy simulations. 172 Using it for modeling purposes raises further questions about the
choice of futures contracts, the time period ove r which quotations are used, and calculations of
appropriate spreads, among others.173

81. In sum, there are good reasons that FAPRI, USDA and the CBO use lagged prices in their
policy simulation models. The Panel will recall that the FAPRI model (using lagged prices) was
influential in the policy-making process leading to the 2002 FSRI Act, and that FAPRI, USDA and
CBO models (all of which are based on lagged prices ) are used regularly in US policy evaluation and
formulation. Professor Sumner’s approach u ses a simple and commonly used proxy for the
fundamentally unobservable price expectations of farmers.
174 Brazil is puzzled that the United States
now views the very approach that every credible econometric policy simulation model takes as a
significant error once this approach is used by Brazil in this dispute.

82. The United States further argues that in year s with strong exogenous shocks lagged price
models are poor proxies for price expectations.
175 The United States criticizes Professor Sumner’s
MY 2002 results as grossly overstated. 176 Brazil notes that it is has never relied on Professor
Sumner’s results of individual years. Instead, Br azil has used averages of the effects of the US
programmes in MY 1999-2002 and MY 2003-2007. Using these averages mitigates any problems
that may have existed from the use of lagged prices in any individual year.

83. Finally, Brazil notes that the United States relies on elasticities supplied by Professor Sumner
in Annex I to calculate acreage responses fro m the expected lower cash prices in MY 2002. 177
However, these US calculations the United States are meaningless for several reasons. First, the
futures prices used by the United States are pr oblematic. Using only a single month’s quotes for a
single contract does not appropriately model the complexities of farmers’ planting and marketing
timings.178 Second, it is unclear from the US response wh ether the United States used an appropriate
spread for the calculation of price expectations held by farmers. 179 Third, it is therefore unclear
whether the United States has calculated the appr opriate change in price expectations between
MY 2001 and 2002. Finally, even assuming that all of these problems did not exist, the results
calculated by the United States using Professor Sumn er’s elasticities fail to provide meaningful
results. These elasticities were applied in Prof essor Sumner’s model to obtain direct effects, i.e.,
effects before any feedback from the FAPRI US crops model and the CARD international cotton
model.
180 Thus, the results are nowhere near the results that one would have obtained using Professor
Sumner’s full Annex I model. For all these reasons, Brazil strongly disagrees with the conclusion that
the marketing loan programme did not have any eff ect in MY 2002. Brazil also recalls its arguments

 171 Exhibit Bra-345 (Response to Further US Criticis m of the Annex I Model of the Effect of US
Cotton Subsidies – Daniel Sumner, 2 December 2003, paras. 9-14).
 172 Exhibit Bra-345 (Response to Further US Criticis m of the Annex I Model of the Effect of US
Cotton Subsidies – Daniel Sumner, 2 December 2003, para. 9).
 173 Exhibit Bra-345 (Response to Further US Criticis m of the Annex I Model of the Effect of US
Cotton Subsidies – Daniel Sumner, 2 December 2003, paras. 11-13).
 174Exhibit Bra-345 (Response to Further US Criticism of the Annex I Model of the Effect of US Cotton
 175 US 22 December 2003 Answers to Questions, para. 61.
 176 US 22 December 2003 Answers to Questions, para. 63.
 177 US 22 December 2003 Answers to Questions, para. 63.
 178 Exhibit Bra-345 (Response to Further US Criticis m of the Annex I Model of the Effect of US
Cotton Subsidies – Daniel Sumner, 2 December 2003, para. 12).
 179 Brazil’s 2 December 2003 Oral Statement, para. 44; Exhibit Bra-345 (Response to Further US
Criticism of the Annex I Model of the Effect of US Co tton Subsidies – Daniel Sumner, 2 December 2003, para.
13).
 180 See Brazil’s 20 January 2004 Comments on US Model Critique, paras. 64, 70.

and evidence regarding the serious flaws in the US application of its futures price methodology using
expected cash prices rather than expected adjusted world prices.181

III. DOMESTIC SUPPORT

214. Please provide a copy of regulations regar ding the marketing loan programme and loan
deficiency payments published at 58 Federal Register 15755, dated 24 March 1993. What does
this regulation indicate about the target price? USA

215. Please expand or comment on the statemen t at paragraph 91 of the US further rebuttal
submission that the counter-cyclical target pric e ceases to be paid when the farm price rises
above 65.73 cents per pound. In this scenario , should the Panel disregard Direct Payments?
BRA, USA

216. How many times have upland cotton pro ducers been able to update their base acres
since 1984? How do upland cotton producers come to note the possibility of future updating?
Please provide examples of relevant material. BRA, USA

Brazil’s Comment:

84. In addition to its own answer
182, Brazil offers two comments to the US response to this
question. First, the United States makes a f actual mistake in describing the calculation of base
acreage under the deficiency payment programme. 183 While the United States’ description of the
calculation of deficiency payment crop base as the rolling five-year average minus the high and low
year would be correct for other deficiency pa yment crops, upland cotton (and rice) had a special
provision.184 7 CFR 1413.7(c) mandates the calculation of upland cotton base as “the average of the
acreages planted and considered planted to such cr op for harvest on the farm in each of the 3 crop
years preceding such crop year. 185 For farms participating in the programme, all current base acreage
was “considered planted”. 186 Therefore, for the base to cha nge, farmers had to opt out of the
programme.187

85. Second, Brazil does not consider credible or relevant a statement by the United States that
“[g]iven the current US fiscal situation,”
188 any further base update four years from now seems
“unlikely”. The Panel must determine whether th e 2002 FSRI Act update of the direct and counter-
cyclical payment base is a violation of paragrap hs 6(a) and (b) of Annex 2 of the Agreement on
Agriculture.

217. What is the reason for reducing payments under the PFC and direct payments
programmes for planting and harvesting fruit, vegetables and wild rice on certain base acreage?
Please comment on the statements by the Eu ropean Communities that "the reduction in
payment for fruit and vegetables, if the EC underst ands correctly, is in fact designed to avoid
unfair competition within the subsidising Member." (EC oral statement at first session, first
substantive meeting, paragraph 29) and "To find otherwise would not permit a WTO Member
wishing to introduce decoupled payments to take account of important elements of internal
competition (…)" (EC response to Panel third party Question No. 5). USA

 181 See Brazil’s comment on Question 212, above.
 182 Brazil’s 22 December 2003 Answers to Questions, paras. 47-50.
 183 US 22 December 2003 Answers to Questions, paras. 67-68.
 184 Exhibit Bra-26 (7 CFR 1413, Deficiency Payment Program, 1993 edition).
 185 Exhibit Bra-26 (7 CFR 1413.7(c)).
 186 Exhibit Bra-26 (7 CFR 1413.3, “Considered planted acreage”).
 187 Brazil’s 22 December 2003 Answers to Questions, para. 47.
 188 US 22 December 2003 Answers to Questions, para. 70.

Brazil’s Comment:

86. The United States does not answer the Panel’s first question as to “what is the reason” that
PFC and direct payments are reduced for planting and harvesting fruits, vegetables, and wild rice. No
reason is provided in the US 22 December 2003 response.

87. Nor does the United States take advantage of the Panel’s second question to comment on the
statement made by the European Communities that “the reduction in payment for fruit and vegetables,
is in fact designed to avoid unfair competition within the subsidizing Member”.
189 No US comment is
provided. The EC argument involves considerable speculation about the “design” of the US
measures. With the United States deciding not to prov ide any such reasons, the Panel is left without a
factual basis to know whether the US reduction of payment based on growing fruits and vegetables is
intended to “minimize any distorti on which may be caused by any decoupled payments in markets
which were historically undistorted by subsidies”.190

88. The EC argument appears to attempt to impo se a “trade distortion” test to the criteria of
Annex 2, paragraph 6. However, Brazil notes that the EC argued that a decoupled domestic support
measure need not be tested with regard to the “fundamental requirement” in Annex 2, paragraph 1 to
determine whether it has “trade distorting effects”. 191 Nor do any of the specific criteria in
paragraph 6(b) of Annex 2 refer to “trade distorting effects”. 192 Annex 2, paragraph 5 requires the
specific criteria of Annex 2, paragraph 6 to be met for a direct payment measure to be included within
the green box.

89. But even if Annex 2, paragraph 6(b) include d a “trade distorting effects” test, the EC is
simply wrong that the elimination or reduction of PFC and direct payments when fruits and vegetables
and wild rice are grown does not “distort” trade. The EC argument ignores the distortion in trade in
the products on which payments are focused, i.e., upland cotton and the other programme crops rather
than fruits, vegetables, and wild rice. Limiting or prohibiting payments for types of products
representing 60 per cent of the value of production in a region such as California, Florida, or Arizona
has the effect of maintaining production in the 40 per cent of the value of crops for which programme
payments are received.
193 This “distorts” the trade in the ag ricultural crops receiving the payment by
maintaining or increasing their production. The practical effect of the PFC and direct payment
restriction is that the resources are targeted to wards certain “types” of crops only. Negotiators
intended that measures that were so linked to curre nt production were not properly part of the green
box.

90. In light of this evidence, the EC’s argument boils down to asserting that trade distortions for
products that traditionally have been subsidized should be permitted in order to prevent trade
distortion in markets for non-subsidized products. Thus, the EC’s argument is not one that would
avoid distortions; it is one of maintaining existing distortions, contrary to the object and purpose of
the Agreement on Agriculture.
194

 190 EC 11 August 2003 Answer to Third Party Question 11, para. 30.
 191 EC 11 August 2003 Answer to Third Party Questions 6 and 9, paras. 17, 23-25.
 192 Indeed, the United States has acknowledged that such effects can be presumed if the specific criteria
in paragraph 6 of Annex 2 are not complied with. See US 11 August Answer to Question 31, para. 65 (“if a new
measure does not conform to the basic and applicable policy-specific criteria in Annex 2, it will not have the
benefit of the presumption that it meets the fundamental requirement of the first sentence.”).

193 Exhibit Bra-105 (“Statement of Professor Daniel Sumner at the First Meeting,” para. 24); Oral
Statement of Brazil, paras. 65-66.
 194 See Brazil’s 22 August 2003 Rebuttal Submission, paras. 8-9, note 15.

91. The only thing the US 22 December 2003 response does is to repeat earlier faulty arguments
attempting to defend the fruits, vegeta bles, and wild rice payment limitation. 195 The US response is
useful because it finally clarifies that the US argu ment boils down to the assertion that if a direct
payment measure does not require production, then it cannot violate Annex 2, paragraph 6. The US
22 December 2003 response states, at paragraph 73, th at “paragraph 6 [no subsection listed] prohibits
basing payments on production requirements … ”. 196 It further states that the reduced PFC and direct
payments “are not ‘related to, or based on, the type or volume of production’ since the recipient need
not produce anything at all ”.197 But there has never been an issue whether PFC and direct payments
require production. All this means is that they comply with Annex 2, paragraph 6(e), in that “no
production shall be required in order to receive such payments”. But what about Annex 2,
paragraph 6(b), which must be interpreted to have a separate meaning apart from paragraph 6(e)?

92. Paragraph 6(b) focuses on the amount
 of payments related to the type of production. In other
words, if a farmer decides to produce something (re cognizing that he or she need not under Annex 2,
paragraph 6(e)), does the direct payment provision condition the amount of payment on the type of
production undertaken? The answer with respect to the 1996 FAIR and the 2002 FSRI Act for PFC
and direct payments is a clear “yes”. The amount of the PFC or direct payments falls when prohibited
crops are grown – and increases when the prohibited crops cease to be grown. These legal provisions
send a fairly compelling message to the farmer – channel your current production into certain crops to
continue receiving the full amount of direct paym ents today. This re-couples payments to current
production.

93. The United States claims, at paragraph 73 of its 22 December 2003 response, that all a
producer need do to receive the full payment is to “ merely refrain from producing fruit, vegetables, or
wild rice”.
198 This is an interesting dismissal given that the practical effect of this provision is to
direct production away from crops that represent up to 60 per cent of the value of available options for
cotton farmers in states such as Florida, California, and Arizona.

94. Moreover, the logic of the US argument le ads to an evisceration of any disciplines in
Annex 2, paragraph 6, and is therefore contrary to the object and purpose of that provision. Consider
the following hypothetical: a m easure provides for a direct payment that was reduced by 75 per cent
if a farmer produced any of 99 per cent of the available crop options; as a practical matter, farmers
could only plant one or two crops (or no crops) and still receive the full payment. Under the US
argument, because the farmer had no obligation to grow any crops, it could “merely refrain” from
producing 99 per cent of available crops. Like the fruits, vegetables and wild rice exception, this
argument would emasculate the green box requirement of Annex 2, paragraph 6(b).

218. Please comment on the testimony of USDA Chief Economist Keith Collins cited in
paragraph 36 of Brazil's oral statement regar ding the trade-distorting and production-
distorting nature of the marketing loan payments. USA

Brazil’s Comment:

95. The United States states in its response to th is question “that marketing loan payments are
potentially production- and trade-distorting”.
199 Yet, Keith Collins’ statement did not say
“potentially” production- and trade-distorting. Dr. Collins stated that market ing loan payments “are

 195 US 22 December 2003 Answers to Questions, para. 73.
 196 US 22 December 2003 Answers to Questions, para. 73.
 197 US 22 December 2003 Answers to Questions, para. 73.
 198 Emphasis added.
 199 US 22 December 2003, Answers to Questions, para. 74 (emphasis added).

unambiguously trade-distorting and production-distorting”.
200 This is quite a different statement than
the one the United States appears to “agree” to . Coming from the Chief Economist of the USDA,
who is one of the most-widely respected agricultural economists, it is positive evidence that marketing
loan payments are not only “potentially” production- and trade-distorting, but that these payments
have, in fact, “unambiguously” distorted US production and exports of upland cotton. But
Dr. Collin’s statement also confirms what other evidence in the record already demonstrates: the
effect of the marketing loan programme is to su stain economically unviable US production of upland
cotton, that in turn increases US exports and suppresses world prices.201

96. In a further response to this question, th e United States itself provides the reason why its
arguments about the expected cash price as a meaningf ul measure of the effects of the marketing loan
programme are seriously flawed. The United States confirms that marketing loan benefits are not
paid off the cash price (so that any expectations about future cash prices would matter), but that
“farmers will receive a government payment fo r the difference between the loan rate and the adjusted
world price ”.
202 Thus, what potentially matters in eval uating the effects of the marketing loan
programme is the expected adjusted world price, and not the expected cash price. 203 Looking at the
expected adjusted world price, it is below the loan rate in all marketing years during the period of
investigation and, therefore, the marketing loan pr ogramme is expected to have a significant effect on
US farmers’ upland cotton planting decisions. 204 This fact confirms all the other evidence presented
by Brazil to demonstrate the trade- and production-distorting effects of the marketing loan
programme.
205

IV. EXPORT CREDIT GUARANTEES

219. Under the Agreement on Agriculture the general position is that the use of export
subsidies, both those listed in Article 9.1 as well as those within the scope of Article 1(e) which
are not so listed, may only be used within the limits of the product specific reduction
commitments specified in Part IV of Members' Schedules. One might therefore have expected
that Article 3.3 of the Agreement on Agriculture would have prohibited the use of both listed and
non-listed export subsidies in excess of reduction commitment levels in the case of scheduled
products and, in the case of non-scheduled prod ucts, would have simply prohibited the use of
any export subsidy. Instead, the Article 3.3 pr ohibition is limited in both cases to export
subsidies listed in Article 9.1. What significance, if any, does this contextual aspect have for
how Article 10.2 might be interpreted having regard, inter alia, to:

(a) the fact that export performance-related tax incentives, which like subsidized export
credit facilities were considered as a possibl e candidate for listing as an Article 9.1
export subsidy in the pre-December 1991 Dra ft Final Act negotiations, have been held

 200 Brazil’s 2 December 2003 Oral Statement, para. 36 and Exhibit Bra-211 (“The Current State of the
Farm Economy and the Economic Impact of Federal Policy,” Hearings before the Committee on Agriculture,
US House of Representatives, p. 43)(emphasis added).

201 Brazil’s 9 September 2003 Further Submission, Section 3.3.4.7.1; Brazil 7 October 2003 Oral
Statement, paras. 31-33; Brazil’s 18 November 2003 Further Rebuttal Submission, Sections 3.1, 3.2, 3.4 and
3.7.1; Brazil’s 2 December 2003 Oral Statement, Section 5.2.

202 US 22 December 2003 Answers to Questions, para. 75 (emphasis added).
 203 Brazil’s 2 December 2003 Oral Statement, Secti on 5.2. Brazil notes that the United States, in
Exhibit US-126, appears to acknowledge this fact, as it ca lculates the marketing loan benefit as the difference
between the loan rate and the adjusted world price, rather than the cash price, as the United States implies in its
other arguments.
 204 Brazil’s 2 December 2003 Oral Statement, Section 5.2, in particular paras. 44-50 (including Exhibits
Bra-356-359) and Professor Sumner’s oral explanations on 3 December 2003 (including Exhibit Bra-370-371).
 205 Brazil’s 9 September 2003 Further Submission, Section 3.3.4.7.1; Brazil 7 October 2003 Oral
Statement, paras. 31-33; Brazil’s 18 November 2003 Further Rebuttal Submission, Sections 3.1, 3.2, 3.4 and
3.7.1; Brazil’s 2 December 2003 Oral Statement, Section 5.2.

(for example, in United States – Tax Treatment for Foreign Sales Corporations ,
WT/DS108) to be subject to the anti-circumvention provisions of Article 10.1; and

(b) the treatment of international food aid and non-commercial transactions under
Article 10? USA

Brazil’s Comment:

97. Brazil agrees with the United States that Ar ticle 8 of the Agreement on Agriculture assumes
the role the Panel suggests one might have expected Article 3.3 to play.
206 Article 8 prohibits the use
of both those export subsidies listed in Article 9.1 and those not listed in Article 9.1 other than in
conformity with the Agreement on Agriculture and the commitments specified by a Member in its
Schedule.

98. However, Brazil does not consider that th is fact provides illuminating context for the
interpretation of Article 10, including Articles 10.1 and 10.2. The question is whether Article 10.2 of
the Agreement on Agriculture exempts or carves-out export credits from the disciplines included in
Article 10.1. The Appellate Body has concluded that to exempt or carve-out particular categories of
measures from general obligations such as the ex port subsidy obligations in the Agreement on
Agriculture, the exemption or carve-out must be explicit in the text of an agreement.
207 Article 10.2
includes no such explicit exemption or carve-out. 208 The negotiators knew how to make such an
exemption or carve-out explicit, as evidenced by, for example, Article 13 of the Agreement on
Agriculture, footnote 15 to Article 6.1(a) of the SCM Agreement, and the second paragraph of
item (k) of the Illustrative List of Export Subsidies. 209 The United States has not rebutted these
arguments.

99. Instead, the United States appeals to what it considers to be “similarity” between the
treatment of export credit instruments and inte rnational food aid in Articles 10.2 and 10.4.
210 These
two provisions are fundamentally different, however . Article 10.2 announces Members’ intent to
work toward negotiations on specific disciplines for export credits, and calls on Members to adhere to
those disciplines once they are adopted. As Br azil noted in its 22 December 2003 Answers to
Questions, the nature of the disciplines negotiated a nd the way in which they are transposed into the
WTO will dictate the effect they will have on cl aims against export credits under Article 10.1. 211 At
least for the time being, however, Article 10.2 does not meet the standard for carve-outs or
exemptions set by the Appellate Body in EC – Sardines and EC – Hormones , and export credits are
subject to the disciplines of Article 10.1.
212

100. Article 10.4 similarly does not meet the sta ndard for exemptions or carve-outs set by the
Appellate Body in EC – Sardines and EC – Hormones. However, it does provide specific disciplines
for international food aid through reference to FAO and Food Aid Convention provisions. In Brazil’s

 206 See US 22 December 2003 Answers to Questions, para. 79.
 207 Appellate Body Report, EC – Sardines , WT/DS231/AB/R, para. 201-208; Appellate Body Report,
EC – Hormones, WT/DS26/AB/R, para. 128.
 208 See Brazil’s 22 July 2003 Oral Statement, paras. 100-115; Brazil’s 22 August 2003 Rebuttal
Submission, paras. 99-100; Brazil’s 27 August 2003 Comments on US Rebuttal Submission, paras. 33-52;
Brazil’s 18 November 2003 Further Rebuttal Submissi on, paras. 219-220; Brazil’ s 2 December 2003 Oral
Statement, paras. 73-76; Brazil’s 22 December 2003 Answers to Questions, paras. 51-57.
 209 See, e.g,. Brazil’s 2 December 2003 Oral Statement, para. 75.
 210 US 22 December 2003 Answers to Questions, paras. 80-82.
 211 Brazil’s 22 December 2003 Answers to Questions, paras. 51-57.
 212 See Brazil’s 22 July 2003 Oral Statement, paras. 100-115; Brazil’s 22 August 2003 Rebuttal
Submission, paras. 99-100; Brazil’s 27 August 2003 Comments on US Rebuttal Submission, paras. 33-52;
Brazil’s 18 November 2003 Further Rebuttal Submissi on, paras. 219-220; Brazil’ s 2 December 2003 Oral
Statement, paras. 73-76; Brazil’s 22 December 2003 Answers to Questions, paras. 51-57.

view, Article 10.4 could be considered an example of the situation envisioned in paragraph 56 of
Brazil’s 22 December 2003 Answers to Questions.
213 Article 10.4 sets out a benchmark against
which to determine whether particular internati onal food aid measures cons titute “export subsidies”,
within the meaning of Article 10.1. Thus far, the Appellate Body’s decisions (in US – FSC 214 and
Canada – Dairy 215) have directed panels to contextual guidance included in the SCM Agreement for
this determination. In a case against internationa l food aid measures, however, a panel could look to
the alternative benchmarks set out in Article 10. 4 as context for its determination whether those
measures constitute “export subsidies” for the purposes of Article 10.1. (A panel could also look to a
Member’s notifications to the Committee on Agricu lture. The United States, for example, notifies
international food aid – or some portion of the international food aid provided by it – as export
subsidies to be counted towards its reduction commitments.216)

220. What will be the relevance of Articles 9 and 10.1 of the Agreement of Agriculture to
export credit guarantees when disciplines are internationally agreed? BRA

221. In respect of the table in paragraph 161 of the US August 22 rebuttal submission
(concerning the cohort specific treatment of ex port credit guarantees), the Panel notes the
subsequent US agreement (footnotes 82 and 96 in US further submission of 30 September 2003;
footnote 160 in US 18 November further rebutta l submission) to Brazil's assertion (footnote 67
in Brazil's 27 August 2003 comments on US rebutta l submission) that the total figure net of re-
estimates should be $230,127,023 instead of the figure which originally appeared ($381,345,059).

(a) Please submit a corrected table reflecting a ll of the necessary information to produce
this result, to the extent this is possible for the reasons indicated in footnote 96 in US
further submission of 30 September 2003.

Brazil’s Comment:

101. The data provided by the United States in the chart accompanying its response demonstrates
that using the net present value methodology im posed by the US Federal Credit Reform Act
(“FCRA”), premiums for the CCC guarantee programmes over the period 1992-2002 were inadequate
to cover the operating costs and losses of the programmes, in the amount of $230 million.
217 For a
complete assessment under item (j), administrati ve expenses in the amount of approximately
$39 million should be added.218

102. Brazil addresses further the US chart in its comments on other US answers, below.

(b) Please clarify whether and how the Panel should treat the figures in Exhibit BRA-182
for the net lifetime re-estimates for each respective cohort.

 213 Brazil’s 22 December 2003 Answers to Questions, para. 56.
 214 Appellate Body Report, US – FSC, WT/DS108/AB/R, para. 136-140.
 215 Appellate Body Report, Canada – Dairy, WT/DS103/AB/R and WT/DS113/AB/R, paras. 87-90.
 216 See, e.g., Exhibit Bra-99 (G/AG/N/USA/39, p. 2).
 217 US 22 December 2003 Answers to Questions, chart included in response to Question 221(a).
 218 Exhibit Bra-133 (Guaranteed Loan Subsidy and Administrative Expenses of US Export Credit
Guarantee Programmes GSM 102, GSM 103 and SCGP).

Brazil’s Comment:
103. The United States’ response is inaccurate. In st ating that “all of the first five cohorts (1992-
1996), including 1994, are profitable”, 219 the United States oddly neglects to account for the most
recent reestimate data, which it has included in its own chart, provided with its response to question
221(a). That chart shows massive upward reestimat es in 2003 for the 1992, 1993, 1994, 1996, 1997
and 2001 cohorts. Accounting for those reestimates, the 1994 cohort, which the United States asserts
is nearly closed220, does not show profitability. Nor do the 1997, 1998, 2000, 2001 or 2002 cohorts.

104. The United States is implying that over time, c ohorts will turn out to be positive. The data
does not support this implication. Upward reest imates continue, even on “older” cohorts, and net
results do not suggest profitability with anywhere near the uniformity suggested by the United States.

105. Finally, Brazil emphasizes that showing gains or losses for particular cohorts is not relevant
for the purposes of item (j), which calls for the assessment of a “ programme” across its entire
portfolio.
221

(c) The Panel notes that the CCC 2002 financial statement in Exhibit BRA-158 refers to
annual "administrative" expenses of $4 million, and that the US has also referred to this
figure in its submissions (e.g. US first written submission, paragraph 175). Please
confirm whether the figures in the table in paragraph 161 of the US August 22 rebuttal
submission (or a corrected version thereof) includes "administrative expenses", of
approximately $4 million per year over the period 1992-2002, and explain why (or why
not) this affects the substantive result.

Brazil’s Comment:

106. Brazil agrees that for a co mplete assessment under item (j), administrative expenses in the
amount of approximately $39 million
222 should be added to the $230 million of losses recorded in the
chart accompanying the US response to question 221(a), or to $211 million of losses recorded in the
Brazilian chart included as Exhibit Bra-193.

(d) Please identify what is considered an "a dministrative expense" for this purpose.

(e) The Panel notes the US statement in par agraph 160 of its answers to Panel questions
following the first meeting that all cohorts are still open although the 1994 and 1995
cohorts will close this year. Is this still an a ccurate statement? If not, please indicate
whether any cohorts have since "closed" for the period 1992-2002.

Brazil’s Comment:

107. The United States’ response is inaccurate. Us ing the most recent data available, provided by
the United States with its response to question 221( a), the subsidy figure net of reestimates for the
1994 cohort will in fact be positive, indicating losses. Based on this same data, the same thing can be
said for other “older” cohorts, such as 1997 and 1998. Moreover, the United States’ data
demonstrates that 2002 and 2003 reestimates for “older” cohorts 1992, 1993, 1994, 1996 and 1997 are
all upward, indicating adjustments for even greater losses than previously anticipated.

 219 US 22 December 2003 Answers to Questions, para. 86.
 220 US 22 December 2003 Answers to Questions, para. 93.
 221 See Brazil’s 2 December 2003 Oral Statement, pa ra. 81; Brazil’s 18 November 2003 Further
Rebuttal Submission, para. 248; Brazil’s 27 August 2003 Comments on US Rebuttal Submission, para. 61.
 222 Exhibit Bra-133 (Guaranteed Loan Subsidy and Administrative Expenses of US Export Credit
Guarantee Programmes GSM 102, GSM 103 and SCGP).

108. Brazil emphasizes, however, that show ing gains or losses for particular cohorts is not relevant
for the purposes of item (j), which calls for the assessment of a “ programme” across its entire
portfolio.

(f) The Panel notes the current "high" figures for 1997 and 1998 indicated in the original
US chart. Pending their confirmation a nd/or updating by the US, why does the US
assert that a cohort will necessarily reach a "profitable" result (for example, the 1994
cohort, which has almost closed still indi cates an outstanding amount)? Do "re-
estimates" reflect also expectations about a cohort's future performance?

Brazil’s Comment:

109. Once again, the United States’ response is inaccu rate. The United States asserts that data for
the 1994 cohort indicate profitability.
223 Using the most recent data av ailable, however, provided by
the United States with its 22 December 2003 respon se to question 221(a), the subsidy figure net of
reestimates for the 1994 cohort will in fact be pos itive, indicating losses. Based on this same data, the
same thing can be said for other “older” cohorts, such as 1997 and 1998. Moreover, the
United States’ data demonstrates that 2002 and 2003 reestimates for “older” cohorts 1992, 1993,
1994, 1996, 1997 are all upward, indicating adjustments for even greater losses than previously
anticipated.

110. The United States shows no evidence to support its assertion that Pakistani and Ecuadorean
defaults account for an important part of the poor performance of the 1997 cohort.
224 Nor does it offer
any evidence to show that those defaults were resched uled, or that they are performing. Additionally,
the United States’ assertion that it expects the 1998 c ohort to show profitability is not supported by
the data included with its response to question 221(a). 225 As recently as 2002, upward reestimates
were made to the 1998 cohort, indicating that there is no discernible trend of profitability.

111. In any event, Brazil notes that show ing gains or losses for a particular cohort is not relevant
for the purposes of item (j), which calls for the assessment of a “ programme” across its entire
portfolio.
226

(g) Why should the Panel "eliminate" the 2001 and 2002 cohorts from its examination, as
suggested in paragraph 198 of the US further rebuttal submission?

Brazil’s Comment:

112. The United States confuses two issues in paragraphs 96-97 of its response.
227 First, it notes
that reestimates need to be applied to the subsidy est imate included in the prior, actual year column of
the US budget, since the original subsidy estimat e included in the budget year column of the US
budget includes subsidy figures for some guarantees that are budgeted but not in fact granted. In
other words, fewer guarantees are granted than were budgeted to be granted. Brazil recognized this in
Exhibit Bra-193, as does the United States in the ch art included with the US response to question
221(a). Nonetheless, both Brazil and the United States reach the same conclusion – over the 10-year
period, operating costs and losses outpace premiums collected for the CCC programmes (even before
administrative expenses are included in the calcula tion). The United States tracks losses of $230

 223 US 22 December 2003 Answers to Questions, para. 93.
 224 US 22 December 2003 Answers to Questions, para. 94.
 225 US 22 December 2003 Answers to Questions, para. 94.
 226 See Brazil’s 2 December 2003 Oral Statement, pa ra. 81; Brazil’s 18 November 2003 Further
Rebuttal Submission, para. 248; Brazil’s 27 August 2003 Comments on US Rebuttal Submission, para. 61.
 227 US 22 December 2003 Answers to Questions, paras. 96-97.

million in the chart accompanying its response to Question 221(a), and Brazil tracks losses of $211
million in Exhibit Bra-193.

113. The second point the United States makes is th at the data it has presented in its response to
question 221(a) includes no “operating experience” with the 2001 and 2002 cohorts.
228 This is wholly
inaccurate. Estimates of costs and losses are based, first and foremost, on historical experience with
borrowers.229 Moreover, the chart included in the US response to question 221(a) shows that
reestimates – which are in part made to reflect operating results – have already been made for both the
2001 and 2002 cohorts.

114. Finally, the United States’ assertion that there is a “trend of negative reestimates”
230 is not
borne out by the data provided by the United States itself, in its response to question 221(a). In 2002,
upward reestimates were made for the 1992, 199 3, 1994, 1995, 1996, 1997 and 1999 cohorts.
Similarly, in 2003, upward reestimates were made for the 1992, 1993, 1994, 1996, 1997, 2001 and
2002 cohorts. It is not at all “reasonable to expect that in the fullness of time the data will … reflect
further negative reestimates for cohorts 2001 and 2002”, 231 as the United States asserts, for the simple
reason that recent data provided by the United States shows significant upward reestimates across all
cohorts, including “older” cohorts that are presumably closer to closing.

115. For all of these reasons, the US sugg estion that the 2001 and 2002 cohorts should be
disregarded by the Panel in its item (j) analysis should be rejected.

(h) Why should the Panel "eliminate", in addition, the 2000 cohort, as also suggested in
paragraph 198 of the US further rebuttal submission for which information is
presumably more "complete"?

Brazil’s Comment:

116. The United States notes that the original subs idy estimate for the 2000 cohort was reduced to
reflect the fact that fewer guarantees were granted than were budgeted to be granted.
232 This is wholly
irrelevant, and does not even remotely imply profitability for those guarantees that were actually
issued in fiscal year 2000. As the data provide d by the United States in its response to question
221(a) demonstrates, there is still a large positive subsidy estimate, indicating losses, for the 2000
cohort.

117. Moreover, the data provided by the United St ates in its response to question 221(a) shows
that, as cohorts age, downward reestimates can not be assumed. In 2002, upward reestimates were
made for the 1992, 1993, 1994, 1995, 1996, 1997 a nd 1999 cohorts. Similarly, in 2003, upward
reestimates were made for the 1992, 1993, 1994, 1996, 1997, 2001 and 2002 cohorts. Brazil also
notes that cohorts that are “older” than the 2000 cohort – such as the 1994, 1997 and 1998 cohorts,
continue to show positive subsidy estimates, or losses.

 228 US 22 December 2003 Answers to Questions, paras. 96, 99.
 229 See e.g. Brazil’s 22 August Rebuttal Submission, para. 113 (including notes 234-235), Exhibit Bra-
118 (Federal Accounting Standards Advisory Board, S TATEMENT OF FEDERAL FINANCIAL ACCOUNTING
STANDARDS NO. 19, Technical Amendments to Accounting Standards for Direct Loans and Loan Guarantees in
Statement of Federal Financial Accounting Standards No. 2 (March 2001), p. 16 (para. 36) (“Actual historical
experience of the performance of a risk category is a primary factor upon which an estimation of default cost is
based.”)).

230 US 22 December 2003 Answers to Questions, para. 98.
 231 US 22 December 2003 Answers to Questions, para. 98.
 232 US 22 December 2003 Answers to Questions, para. 101.

118. For these reasons, the US suggestion that th e 2000 cohort should be disregarded by the Panel
in its item (j) analysis should be rejected.

(i) Under the US approach, at what point in time could a Panel ever make an assessment of
the programme, if it had to wait for each cohort to be completed before it could be
"properly" assessed? Why is it inapprop riate for the Panel to include these "most
recent years" in its evaluation, as the US suggests in paragraph 199 of its 18 November
further rebuttal submission? USA

Brazil’s Comment:

119. Brazil notes that the United States has not answered the Panel’s question. In the
United States’ view, it is only appropriate to make an assessment of a programme under item (j) using
a net present value accounting methodology once all cohorts in a period are closed. The United States
specifically argues as follows:

Not until the cohort is closed can one make an assessment as to whether or not that
particular cohort represents a cost to the Federal Government.
233
120. According to the United States, no cohort in the period 1992-2002 has yet closed. Therefore,
in the United States’ view, were the Panel to undertake a 10-year assessment of the CCC programmes
under item (j) using a net present value accounting me thodology, it could only do so for the period
1982-1991. Of course, since net present valu e accounting for the CCC programmes only began in
1992, following passage of the FCRA in 1990, su bsidy estimate and reestimate figures would be
unavailable for this period.

121. In insisting that it is necessary to wait until c ohorts are closed to be used for the purposes of
item (j), the United States is effectively saying th at net present value accounting is not an appropriate
way to assess a programme under item (j). As the Unite d States is well aware, the whole point of net
present value accounting, endorsed by the US Congress and the President of the United States in the
FCRA, is to assess the costs of contingent liabilities, like guarantees, when they are issued, rather than
when they are paid (on a default of the underlyi ng loan). Brazil notes that there are important
retrospective elements to the net present va lue accounting methodology imposed by the FCRA –
initial estimates of costs and losses are based, firs t and foremost, on historical experience with
borrowers
234, and reestimates are calculated annually to adjust initial estimates as dictated by actual
results. In any 10-year period, of course, the mo st recent years will have been subject to fewer
reestimates than the earlier years. This is not, as the United States suggests, a flaw in the
methodology. It is the methodology. The methodology records what the US Congress, the
US President and US government accountants agr ee is a more actuarially appropriate means of
assessing the costs and losses of contingent liabilities like guarantees.235

122. The United States’ rejection of net present value accounting as an accurate way to make an
assessment under item (j) is particularly odd give n the United States’ conclusion that it would be

 233 See e.g. US 11 August 2003 Answers to Questions, para. 159.
 234 See e.g. Brazil’s 22 August 2003 Rebuttal Submission, para. 113 (including notes 234-235), Exhibit
Bra-118 (Federal Accounting Standards Advisory Board, S TATEMENT OF FEDERAL FINANCIAL ACCOUNTING
STANDARDS NO. 19, Technical Amendments to Accounting Standards for Direct Loans and Loan Guarantees in
Statement of Federal Financial Accounting Standards No. 2 (March 2001), p. 16 (para. 36) (“Actual historical
experience of the performance of a risk category is a primary factor upon which an estimation of default cost is
based.”)).
 235 Brazil’s 22 July 2003 Oral Statement, para. 128.

inappropriate “to subject the [CCC programmes] to the analytical yoke of the unique circumstances of
the Polish and Iraqi defaults over 10 years ago . . ”.
236

123. The United States had previously made th is assertion, albeit only with respect to Iraq.
237 The
United States has offered no support whatsoever for this assertion 238, which is inaccurate in at least
two respects. As Brazil has noted, these defaults were not “over 10 years ago”. The US General
Accounting Office reports that the losses in Iraq occurred over the period 1990-1997.239 Nor are these
defaults “unique,” as the United States argues. As discussed below in Brazil’s comments on the US
response to question 225, the evidence regarding write-offs by the CCC (not even mentioning defaults
that are not written off) demonstrates that the Iraqi and Polish defaults are not at all “unique”.

124. Setting factual inaccuracies aside, if the Unite d States wants to put post-1991 defaults on pre-
1992 guarantees behind it, it should embrace, rather than reject, the net present value accounting
methodology adopted in the FCRA. Using net present value accounting and the FCRA formula to
make an assessment of the CCC programmes under item (j), the United States is not held accountable
(in these proceedings, at least) for post-1991 defau lts on pre-1992 cohorts. Post-1991 activity on pre-
1992 CCC guarantees is treated separately
240, and is not in any way included in the data provided by
the United States in its response to question 221(a), or by Brazil in Exhibit Bra-193. Even without the
effect of the Iraqi and Polish defaults, both th e United States and Brazil conclude that the CCC
programmes have lost money over the period 19 92-2002 (the United States puts those losses at over
$230 million; Brazil at $211 million). (For a complete assessment under item (j), administrative
expenses in the amount of approximately $39 million should be added.241)

125. Rejecting the use of net present value a ccounting to assess the CCC programmes under item
(j) does not keep the United States from cherry picki ng the results of the FCRA formula to make its
case. According to the United States, using data for some cohorts that have not yet closed is
acceptable, but using data for other cohorts that have not yet closed is not acceptable. Several points
are clear regarding the United States’ approach.

126. First, it is factually inaccurate for the United States to assert, in paragraph 103 of its response,
that “trends” suggest that annual downward reestimates on older cohorts will continue and will grow.
The chart included with the US response to question 221(a) indicates upward reestimates in 2002 for
every cohort during the period 1992-1999. Similarly, that same chart shows upward reestimates in
2003 for the 1992, 1993, 1994, 1996, 1997 and 2001 c ohorts. Moreover, that same chart shows
“trends” of positive net subsidy estimates after adjus ting for cumulative reestimates, even for cohorts
that the United States considers are close to closing – 1994, 1997 and 1998. In other words, these
aging cohorts are losing money . Thus, it is not at all factually accurate to conclude that reestimates
are generally downward as a cohort ages and approaches closure, or that as a cohort approaches
closure, the data suggests that it will have made money.

 236 US 22 December 2003 Answers to Questions, para. 102.
 238 As the party asserting this fact, the United States bears the burden of proving it. See e.g. Appellate
Body Report, Japan – Apples, WT/DS245/AB/R, para. 157 (“It is important to distinguish, on the one hand, the
principle that the complainant must establish a prima facie case of inconsistency with a provision of a covered
agreement from, on the other hand, the pr inciple that the party that asserts a fact is responsible for providing
proof thereof.”).
 239 Brazil’s 27 August 2003 Comments, para. 65 (and document cited at note 81).
 240 See e.g. Exhibit Bra-116 (Office of Management and Budget, Circular No. A-11, Section 185, p.
185-4); Notes to Financial Statements contained in Exhibit US-129 (US Department of Agriculture, Office of
Inspector General, Financial and IT Operations, Au dit Report, Commodity Credit Corporation’s Financial
Statements for Fiscal Years 2003 and 2002, Audit Report N° 06401-16-FM (November 2003) p. 15).
 241 Exhibit Bra-133 (Guaranteed Loan Subsidy and Administrative Expenses of US Export Credit
Guarantee Programmes GSM 102, GSM 103 and SCGP).

127. Second, even if one accepts the US argumen t that the 2001 and 2002 cohorts should be left
out of the calculation because there are not yet any “ operating results” for those years (a point that is
itself factually inaccurate, as addressed by Brazil above)
242, this does not explain the United States’
decision to eliminate the 2000 cohort – for whic h it acknowledges there are “operating results” –
when it concludes that “cohorts 1992-1999, taken as a whole, currently reflect a net negative
reestimate (i.e., profitable performance)”. 243 When the 2000 cohort is included, the data provided by
the United States in the chart accompanying its respon se to question 221(a) show losses. This is a
gross example of the cherry-picking exercise in wh ich the United States would have the Panel engage
to gerrymander a result in the United States’ favour. Consistent with the Panel’s duty to make an
objective assessment of the facts, it should not accept this approach.

128. Third, the US approach does not tell the Panel anything about how the CCC programmes fare
when assessed under item (j). Item (j) calls fo r an assessment of the entire portfolios of the
programmes themselves.244 In contrast, the US approach only offers some indication of how
particular, carefully-selected cohorts are performing (and as discussed in the previous two paragraphs,
the results do not even reflect profitability for tho se cohorts). The data provided by the United States
itself demonstrates that using the net present value methodology imposed by the FCRA, premiums for
the CCC guarantee programmes over the period 1992-2002 were in adequate to cover the operating
costs and losses of the progra mmes, in the amount of $230 million. 245 For a complete assessment
under item (j), administrative expenses in the amount of approximately $39 million should be
added.246

129. If the Panel does not consider that net presen t value accounting is an appropriate way of
assessing the CCC programmes under item (j), Brazil h as also demonstrated that the long-term
operating costs and losses of the programmes outpace premiums collected, using a cash-basis
accounting methodology. The chart included at paragr aph 165 of Brazil’s 11 August 2003 Answers,
reproduced below, tracks this result:

 242 US 22 December 2003 Answers to Questions, para. 99.
 243 US 22 December 2003 Answers to Questions, para. 103.
 244 See Brazil’s 2 December 2003 Oral Statement, para. 81; Brazil’s 18 November 2003 Further
Rebuttal Submission, para. 248; Brazil’s 27 August 2003 Comments on US Rebuttal Submission, para. 61.
 245 US 22 December 2003 Answers to Questions, chart included in response to Question 221(a). See
also Exhibit Bra-193.
 246 Exhibit Bra-133 (Guaranteed Loan Subsidy and Administrative Expenses of US Export Credit
Guarantee Programmes GSM 102, GSM 103 and SCGP).

Fiscal
year
Premiums collected (88.40) +
Recovered principal and interest
(88.40) + Interest revenue (88.25)
Admin. expenses (00.09) + Default
claims (00.01) + Interest expense
(00.02)
1993 $27,608,000 + $12,793,000 +
$15,672,000247 = $56,073,000
$3.320,000248 + $570,000,000 249+
$0250 = $573,320,000
1994 $20,893,000 + $458,954,000 + $0 251 =
$479,847,000
$3,381,000252 + $422,363,000 253 +
$0254 = $425,744,000
1995 $18,000,000 + $62,000,000 + $0 255 =
$80,000,000
$3,000,000 + $551,000,000 +
$10,000,000256 = $564,000,000
1996 $20,000,000 + $68,000,000 +
$26,000,000257 = $114,000,000
$3,000,000258 + $202,000,000 259 +
$61,000,000260 = $266,000,000
1997 $14,000,000 + $104,000,000 +
$26,000,000261 = $144,000,000
$4,000,000262 + $11,000,000 263 +
$62,000,000264 = $77,000,000
1998 $17,000,000 + $81,000,000 +
$54,000,000265 = $152,000,000
$4,000,000266 + $72,000,000 267 +
$62,000,000268 = $138,000,000
1999 $14,000,000 + $58,000,000 + $0 269 =
$72,000,000
$4,000,000270 + $244,000,000 +
$62,000,000271 = $310,000,000
2000 $16,000,000 + $100,000,000 +
$99,000,000272 = $215,000,000
$4,000,000273 + $208,000,000 274 +
$62,000,000275 = $274,000,000
2001 $18,000,000 + $149,000,000 +
$125,000,000276 = $292,000,000
$4,000,000277 + $52,000,000 278 +
$104,000,000279 = $160,000,000

 247 Exhibit Bra-126 (US budget for FY 1995, p. 156).
 248 Exhibit Bra-126 (US budget for FY 1995, p. 156).
 249 Exhibit Bra-126 (US budget for FY 1995, p. 156).
 250 No budget line, Exhibit Bra-126 (US budget for FY 1995, p. 156).
 251 Exhibit Bra-95 (US budget for FY 1996, p. 162).
 252 Exhibit Bra-95 (US budget for FY 1996, p. 161).
 253 Exhibit Bra-95 (US budget for FY 1996, p. 162).
 254 Exhibit Bra-95 (US budget for FY 1996, p. 162).
 255 Exhibit Bra-94 (US budget for FY 1997, p. 176).
 256 Exhibit Bra-94 (US budget for FY 1997, p. 175).
 257 Exhibit Bra-93 (US budget for FY 1998, p. 175).
 258 Exhibit Bra-93 (US budget for FY 1998, p. 174).
 259 Exhibit Bra-93 (US budget for FY 1998, p. 175).
 260 Exhibit Bra-93 (US budget for FY 1998, p. 175).
 261 Exhibit Bra-92 (US budget for FY 1999, p. 106).
 262 Exhibit Bra-92 (US budget for FY 1999, p. 105).
 263 Exhibit Bra-92 (US budget for FY 1999, p. 106).
 264 Exhibit Bra-92 (US budget for FY 1999, p. 106).
 265 Exhibit Bra-91 (US budget for FY 2000, p. 112).
 266 Exhibit Bra-91 (US budget for FY 2000, p. 111).
 267 Exhibit Bra-91 (US budget for FY 2000, p. 112).
 268 Exhibit Bra-91 (US budget for FY 2000, p. 112).
 269 Exhibit Bra-90 (US budget for FY 2001, p. 112).
 270 Exhibit Bra-90 (US budget for FY 2001, p. 110).
 271 Exhibit Bra-90 (US budget for FY 2001, p. 111).
 272 Exhibit Bra-89 (US budget for FY 2002, p. 118).
 273 Exhibit Bra-89 (US budget for FY 2002, p. 116).
 274 Exhibit Bra-89 (US budget for FY 2002, p. 117).
 275 Exhibit Bra-89 (US budget for FY 2002, p. 117).
 276 Exhibit Bra-88 (US budget for FY 2003, p. 120).

2002 $21,000,000 + $155,000,000 +
$61,000,000
280 = $237,000,000
$4,000,000281 + $40,000,000 282 +
$93,000,000283 = $137,000,000
Total $1,841,920,000 $2,925,064,000
Long-term
Net Cost $1,083,144,000

130. In Exhibit US-128, the United States has also provided data to be used for an assessment of
the CCC programmes under item (j) us ing cash-basis accounting. As discussed further in Brazil’s
comment to the US response to question 222, the data offered by the United States in Exhibit US-128
leads to the same conclusion, when adjusted to account properly for the impact of rescheduling on
defaults.284

131. Finally, an even more fundamental appr oach demonstrates the incredibility of the
United States’ assertion that “trends” suggest that the CCC programmes are making and will continue
to make profits. Congressional testimony by USDA officials and reports by the US General
Accounting Office demonstrate that 1990-1997 de faults on Iraqi and Polish CCC guarantees
amounted to approximately $4 billion.
285 The US General Accounting O ffice also noted in 1995 that
defaults on Russian and Former Soviet Union GSM 102 guarantees similarly reached $2 billion by the
end of 1993, and that despite repeated rescheduli ng agreements, those debts were not being repaid.
286
These defaults were not, therefore, all “over 10 years ago”, as the United States suggests at
paragraph 102 of its 22 December 2003 response. Nor are they “unique”, as the United States also
suggests at paragraph 102. In addition to this $6 billion in defaults, the United States’ response to
question 225 cites to further “writte n-off” or “forgiven” defaults of $20 million. This does not, of
course, account for other defaults that have not yet been written-off or forgiven.

132. Even if premiums collected over the entire lifetime of the CCC guarantee programmes are
considered, these defaults, in the amount of over $6 billion, would mean net losses in the amount of

 277 Exhibit Bra-88 (US budget for FY 2003, p. 118).
 278 Exhibit Bra-88 (US budget for FY 2003, p. 119).
 279 Exhibit Bra-88 (US budget for FY 2003, p. 120).
 280 Exhibit Bra-127 (US budget for FY 2004, p. 109).
 281 Exhibit Bra-127 (US budget for FY 2004, p. 107).
 282 Exhibit Bra-127 (US budget for FY 2004, p. 108).
 283 Exhibit Bra-127 (US budget for FY 2004, p. 108).
 284 At paragraph 103 of its 22 December 2003 respon se, the United States refers to “the uniform
performance of reschedulings”. The United States has offered no proof that its reschedulings are performing.
Yet as the party asserting this fact, the Unite d States bears the burden of proving it. See, e.g., Appellate Body
Report, Japan – Apples , para. 157 (“It is important to distinguish, on the one hand, the principle that the
complainant must establish a prima facie case of inconsistency with a provision of a covered agreement from,
on the other hand, the principle that th e party that asserts a fact is responsible for providing proof thereof.”). In
fact, according to the US General Accounting Office, resc heduling of GSM defaults has not historically been
“performing,” and has rather been in arrears. See Brazil’s 22 August 2003 Comments, para. 99 (and note 94).
 285 See Brazil’s 11 August 2003 Answers to Questions, para. 167 (second bullet point), citing Exhibit
Bra-87 (“Testimony of August Schumacher Jr., Unde r Secretary, Farm and Foreign Agricultural Service,
USDA, before the Subcommittee on General Farm Comm odities, Hearing on the Asian Financial Crisis,
4 February 1998,” p. 10-11) and Exhibit Bra-157 (US General Accounting Office, R EPORT TO THE CHAIRMAN,
TASK FORCE ON URGENT FISCAL ISSUES, COMMITTEE ON THE BUDGET, HOUSE OF REPRESENTATIVES,
International Trade: Iraq’s Participation in US Agricultural Export Programs , GAO/NSIAD-91-76
(November 1990), p. 27 (Table IV.2)). See also Brazil’s 18 November 2003 Further Submission, para. 251.
 286 See Brazil’s 22 August 2003 Rebuttal Submission, para. 109 (note 226), citing 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. 50-52 and Table 2.6). See also Brazil’s 18 November 2003
Further Submission, para. 251.

over $5.5 billion .287 Brazil emphasizes that this is just ta king account of the defaults about which
Brazil is aware. Brazil also notes that while the United States emphasizes the role of rescheduling in
the recovery of defaults (which Brazil disputes in its comments on the US answer to question 222
below), the more than $6 billion in defaults discussed here have not been rescheduled , or at least
where they have been (in the case of Russian a nd Former Soviet Union), they are in arrears.
288 This
demonstrates that long-term operating un-recovered and non-recoverable costs and losses for the CCC
programmes have outpaced premiums collected by a considerable amount.

133. Item (j) does not require the Panel to adopt or to reject any particular methodology to assess
the CCC guarantee programmes.
289 Nor do the facts require the Panel to endorse any one
methodology to determine that the CCC guarant ee programmes constitute export subsidies under
item (j). Brazil has demonstrated that under any methodology, properly applied, premiums for the
CCC guarantee programmes over the period 1992-2002 were inadequate to cover the operating costs
and losses of the programmes.

222. For GSM 102, 103 and SCGP, please provi de year-by-year amounts from 1992 to 2003
with respect to: (i) cumulative outstanding guar antees; (ii) claims paid; (iii) recoveries made;
(iv) revenue from premiums; (v) other current revenue, including interest earned; (vi) interest
charges paid; and (vii) administrative costs of running the programmes. Please indicate any
allocation methodologies used to calculate administrative costs. USA

Brazil’s Comment:

134. Exhibit US-128, provided by the United States in response to this question, allegedly
demonstrates that using a cash basis accounti ng methodology, the CCC export credit guarantee
programmes generate money. In fact, the United States claims that revenue collected outpaces total
expenses for the three programmes by $666 million. Brazil has offered a similar chart at paragraph
165 of its 11 August 2003 Answers. Brazil’s ch art demonstrates that th e CCC programmes lost
$1.048 billion over the period of FY 1993-2002. The total difference between the US result and
Brazil’s result is $1.75 billion.

135. This figure closely corresponds to the tota l “Claims Rescheduled” figure reported by the
United States in Exhibit US-128.
290 Indeed, the difference betw een the chart provided by the
United States in Exhibit US-128 and Brazil’s ch art in paragraph 165 of its 11 August 2003 Answers
lies in the treatment of rescheduled debt. 291 The United States treats defaulted guarantees that have

 287 Brazil has calculated that the highest amount of premiums that could have been generated would
amount to approximately $450 million. See Brazil’s 11 August 2003 Answers to Questions, para. 167 (second
bullet point). Data included in Exhibit US-128 suggests that Brazil is over-estimating the amounts of premia
collected.

288 The US General Accounting Office noted that defaults on Russian and Former Soviet Union
guarantees reached $2 billion by the end of 1993, and that despite repeated rescheduling agreements, those debts
were not being repaid. 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.
50-52 and Table 2.6). Brazil raised this point in its 22 August 2003 Rebuttal Submission (at para. 109, note
226) and its 18 November 2003 Further Submission (para. 251). It remains unrebutted by the United States.
 289 See Brazil’s 22 December 2003 Answers to Questions, paras. 68-75.
 290 The fact that both figures do not match exactly is explained by the fact that the United States
analyses data covering FY 1992-2003 on a cohort-specifi c basis, while the data available to Brazil covers FY
1993-2002 and represents actual performance of the CCC programs during a given fiscal year.
 291 If the Panel were to compare all other totals, it would readily see that the totals correspond, taking
into account that the US data covers FY 1992-2003 and is on the basis of cohorts, while Brazil’s data covers
only FY 1993-2002 and represents the actual performance of the programs in a fiscal year. Brazil does not have

been rescheduled as 100 per cent recovered on the day the terms of the rescheduling are agreed.
292
Brazil, on the other hand, has treated rescheduled cl aims as receivables, until they have been actually
recovered.293 Only once CCC actually collects incremental amounts on a rescheduled claim is the
corresponding incremental amount of the default c onsidered “recovered” and no longer a loss to
CCC.294 Under Brazil’s approach, whatever portion of r escheduled claims is collected in a particular
year is treated as a recovery, whereas under the United States’ approach, the entirety of the
rescheduled claims is treated as a recovery at the moment the terms of the rescheduling are agreed.

136. Brazil’s approach is the more actuarially appr opriate of the two, and is consistent with the
cash-basis accounting preferred by the United States in this dispute. Under cash-basis accounting,
when financial commitments are rescheduled, they would normally be re-amortized on a new, longer
payment schedule that reduces the amount of each periodic payment due from the borrower.
Rescheduling does not mean that a creditor collects on an outstanding claim – it just means that the
creditor hopes to do so in the future by reducing th e amount the borrower has to pay each month.
295
CCC, in fact, acknowledges that all it possesses followi ng a rescheduling is a receivable, and that not
all receivables are collectable. 296 (And in fact, CCC rescheduling has historically been in arrears. 297)
The US approach, therefore, overstates the effect rescheduled guarantees have on claims paid, by
automatically treating rescheduled guarantees, in ev ery instance, as actual recoveries of claims paid,
at the moment the terms of the rescheduling are agreed. (Indeed, the CCC’s Financial Statement for
FY 2002 and 2003 confirm that rescheduling of e xport credit guarantee receivables covered both
principle and interest, thereby confirming that not all of the rescheduled debt performs and that
additional interest charges were also rescheduled.)298

access to FY 2003 data, as the actual figures for that year will only be published in connection with the FY 2005
budget.
 292 See Exhibit US-128. The United States defines “Claims Outstanding” (G) as “Claim Payments” (D)
minus “Claims Recovered” (E) minus “Claims Rescheduled” (F). It follows that a rescheduled claim no longer
constitutes an outstanding claim at the moment the terms of the rescheduling are agreed. Instead, for accounting
purposes, the rescheduling is simply treated as 100 percent recovered.

293 This is the reason that Brazil treats recovered principle as a revenue inflow for accounting purposes.
The principle recovered is netted against the claims paid by CCC ( see Brazil’s 11 August 2003 Answers to
Questions, para. 163).
 294 Contrary to this approach, the United States nets defaults paid against the sum of recovered and
rescheduled defaults (see Exhibit US-128). However, it only hopes to eventually recover rescheduled debt; the
rescheduling alone does not mean it will do so.
 295 See Exhibit Bra-115 (US General Accounting Office (“GAO”), Report to the Chairman,
Subcommittee on Criminal Justice, US House of Representatives Committee on the Judiciary, “Loan
Guarantees: Export Credit Guarantee Programs’ Long-Run Costs Are High,” GAO/NSIAD-91-180,
19 April 1991, p. 3 (Table 1, Note a) (“GAO/NSIAD-91-180”) (accounts receivable for the GSM programmes
“[i]ncludes delinquent payments and rescheduled debt not yet due.”) (emphasis added).
 296 Brazil’s 27 August 2003 Comments on US Rebuttal Submission, para. 64.
 297 Brazil’s 22 August 2003 Comments, para. 99. See also 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. 50-52 and Table 2.6 (noting that in 1995 defaults on Russian and Former Soviet Union
guarantees reached $2 billion by the end of 1993, and that despite repeated rescheduling agreements, those debts
were not being repaid.); Exhibit Bra-152 (GAO, Statement of Allan I. Mendelowitz, Director, Trade, Energy
and Finance Issues, National Security and International Affairs Division, before the Task Force on Urgent Fiscal
Issues of the Committee on Budget of the US House of Representatives, Status Report on GAO’s Reviews of the
Targeted Export Assistance Programme, the Export E nhancement Programme, and the GSM-102/103 Export
Credit Guarantee Programmes , GAO/T-NSIAD-90-53, 28 June 1990, p. 14 (noting that historically, the
majority of GSM support that is rescheduled is “in arrears.”).

298 Exhibit US-129 (CCC Financial Statements for FY 2002 and 2003 – Audit Report, USDA, Office of
the Inspector General, Report No. 06401-16-FM, November 2003, Note 5, p. 22).

137. Brazil maintains its position that it is not a ppropriate to treat as “recovered” those losses
(resulting from defaults) that were actually incurre d by the CCC export credit guarantee programmes
and that are rescheduled, until such a point in time when the money actually has been recovered.
Therefore, Brazil maintains that its cash-basis formul a is the appropriate one. It follows that the CCC
export credit guarantee programmes su ffered losses of $1.1 billion between fiscal years 1993-2002,
resulting in a finding that the CCC programmes operate at premium rates inadequate to cover the
long-term operating costs and losses of the programmes, within the meaning of item (j).

223. Are the premium rates applicable to GSM 102, 103 and SCGP subject to regular review
as to their adequacy in enabling the opera ting costs and losses associated with these
programmes? If so, what criteria or benchmarks are taken into consideration for this purpose?
Secondly, how do the premium ra tes applied compare with the implicit cost of forfaiting
transactions and with premiums for export credit insurance? USA

Brazil’s Comment:

138. Although the United States asserts that premium rates for the GSM-102, GSM-103 and SCGP
programmes are “reviewed annually”
299, it offers no evidence to support this assertion. 300 As Brazil
has already noted, both USDA’s Inspector General and the US General Accounting Office have noted
the CCC’s failure to change its premium rates or to reflect credit risk in those rates – and its inability
to do so given the one-per cent fee cap included in US law – as evidence of a failure to cover costs
and losses.301

139. The CCC guarantee programmes are unique financing instruments that are not available on
the market.
302 Brazil has demonstrated that forfaits and CCC export credit guarantees are not similar
financial instruments, and therefore that the te rms for forfaits cannot serve as benchmarks against
which to determine whether CCC export credit guarantees confer “benefits”.303 The United States has
offered no evidence that the two instruments “compete as a method for trade financing over
comparable tenors in similar markets ….” 304 Further, the regulations for the CCC programmes belie
the United States’ assertion that “an importer does not necessarily realize any benefit from a CCC
export credit guarantee”.
305 The regulations state that the programmes operate in cases where banks
“would be unwilling to provide financing without CCC’s guarantee”.306 To summarize the differences
between the two instruments, the essential function of a CCC guarantee is to make possible an export
sale that would otherwise be impossible. A forfait, by contrast, does not make an impossible sale
possible, but instead merely allows an exporter to collect its receivable without waiting for that
receivable to come due.
307 This opportunity, offered by the forfait, only arises if the CCC guarantee
has made the sale happen in the first place.

 299 US 22 December 2003 Answers to Questions, para. 107.
 300 As the party asserting this fact, the United States bears the burden of proving it. See Appellate Body
Report, Japan – Apples , para. 157 (“It is important to distinguish, on the one hand, the principle that the
complainant must establish a prima facie case of inconsistency with a provision of a covered agreement from,
on the other hand, the principle that the party that asserts a fact is responsible for providing proof thereof.”).

301 Brazil’s 22 December 2003 Answers to Questions, paras. 63-64.
 302 See Exhibit Bra-190 (Affidavit of Marcelo Franco, Seguradora Brasileira de Crédito à Exportação).
 303 Brazil’s 22 August 2003 Rebuttal Submission, paras. 103-105; Brazil’s 27 August 2003 Comments
on US Rebuttal Submission, paras. 68-70; Brazil’s 7 October 2003 Oral Statement, para. 72; Brazil’s
18 November 2003 Further Rebuttal Submission, paras. 233-241; Brazil’ s 2 December 2003 Oral Statement,
para. 79; Brazil’s 22 December 2003 Answers to Questions, paras. 65-66.
 304 US 22 December 2003 Answers to Questions, para. 109.
 305 US 22 December 2003 Answers to Questions, para. 109.
 306 Exhibit Bra-38 (7 CFR 1493.10(a)(2) (GSM 102 and GSM 103 regulations)). See also Exhibit Bra-
38 ((7 CFR 1493.400(a)(2) (SCGP regulations)).
 307 See, e.g., Brazil’s 18 November 2003 Further Rebuttal Submission, para. 237.

140. Even if the two instruments were similar, the United States has not met its burden to establish
(under either Article 10.3 of the Agreement of Agriculture, or as the party asserting the fact) that CCC
guarantees are provided on terms no better than those offered for forfaiting instruments on the market.
Although the United States curiously repeats its argu ment that it “does not have access to specific
implicit rates available in the marketplace”
308, Brazil presented evidence regarding forfaiting fees five
months ago, with its 27 August 20 03 submission. That evidence demonstrates that forfaiting fees are
well above fees for CCC export credit guarantees. 309 It also demonstrates that unlike CCC guarantee
fees, which vary on the basis of only one factor – the length of the underlying credit – forfaiting fees
additionally vary according to the risks involved in the transaction 310, as one would expect of any
market-based financial instrument.

141. Similarly, export credit insurance and CCC e xport credit guarantees are not similar financial
instruments, and therefore the terms for export cr edit insurance cannot serve as benchmarks against
which to determine whether CCC export credit guara ntees confer “benefits”. The United States has
acknowledged the differences between CCC guarantees and export credit insurance.
311 One critical
difference, noted by the WTO Secretariat in the WTO document quoted by the United States in
paragraph 108 of its 22 December 2003 response, is that premia for insurance vary according to the
credit rating or risk status of both the importer and the importing country. 312 In contrast, neither
importer risk nor country risk have any impact on the premiums payable for GSM 102, GSM 103 or
SCGP guarantees.313 Moreover, Brazil notes that while export credit insurance is indeed available for
agricultural commodities, export cr edit insurance for agricultural co mmodities is limited to 360 days,
or the expected/useful life of the commodity in question. 314 In contrast, CCC guarantees are available
for terms of up to 10 years.315

142. Even if the two instruments were similar, the United States has not met its burden to establish
(under either Article 10.3 of the Agreement of Agriculture, or as the party asserting the fact) that CCC
guarantees are provided on terms no better than thos e offered for export credit insurance obtained on
the market. The United States argues that “[p]ri vate commercial quotes for export credit insurance
are simply not available to the United States”.
316 Brazil attaches two premium fee schedules: first, a
fee schedule published by Export Insurance Services, Inc., a private broker for export credit insurance
for small businesses offered by the US Export-Import Bank (“Ex-Im Bank”) (Exhibit Bra-410); and
second, a fee schedule published by Ex-Im Bank itself for export credit insurance for small businesses
(Exhibit Bra-409).

143. The Panel will note that the rates in Ex-Im Bank’s own fee schedule, which do not even
include administrative fees that would be adde d by a private broker such as Export Insurance
Services, exceed those offered for CCC guarantees by considerable margins.
317 When administrative

 308 US 22 December 2003 Answers to Questions, para. 109.
 309 Brazil’s 27 August 2003 Comments on US Rebuttal Submission, paras. 76-77 and Exhibit Bra-199
(Trade and Forfaiting Review, Volume 6, Issue 9 July/August 2003).

310 Brazil’s 27 August 2003 Comments on US Rebuttal Submission, paras. 75-76.
 311 US 11 August 2003 Answers to Questions, para. 179. The United States has correctly observed that
“[i]f the commercial market does not offer a particular borrower the exact terms offered by a government, then
the government is providing a benefit to the recipient . . .” Panel Report, Canada – Aircraft II , WT/DS222/R,
 313 See US 11 August 2003 Answers to Questions, para. 184; Brazil’s 11 August 2003 Answers to
Questions, paras. 192, 195.

314 Exhibit Bra-408 (Export-Import Bank, Standard Repayment Terms), p. 3 (Chart II, no. 2), 4 (second
bullet point). Brazil made a similar point with respect to forfaits. See Brazil’s 27 August 2003 Comments,
para. 78.

315 Brazil’s 24 June 2003 First Submission, para. 101.
 316 US 22 December 2003 Answers to Questions, para. 109.
 317 Compare Ex-Im Bank schedule in Exhibit Bra-409 with CCC fee schedule in Exhibit Bra-155.

fees levied by a market-based institution are acc ounted for, the differences become even more
pronounced.318

144. This comparison likely understates the extent to which CCC rates are below-market, for two
reasons. First, government support from Ex-Im Bank does not constitute a market benchmark for the
purposes of Article 1.1(b) of the SCM Agreement.
319 Nonetheless, this comparison demonstrates that
the CCC guarantee programmes do not even meet non-market benchmarks.320 Second, the
comparison involves export credit insurance for smal l businesses. As noted by the US International
Trade Administration’s Foreign Commercial Service, export credit insurance for small businesses is
offered at reduced premium rates.321

145. Finally, because the provisions address some what different disciplines and could require
different means of implementation, Brazil reiterates its earlier request that the Panel find that the CCC
programmes constitute export subsidies by virtue of both Articles 1 and 3.1(a) of the SCM Agreement
and item (j).322

224. Please indicate how the CCC's cost of borrowing was treated in the 2002 financial
statement of the CCC, in Exhibit BRA 158. USA

Brazil’s Comment:

146. Brazil notes that it has accounted for CCC’s interest expense and revenue figures (lines 00.02
and 88.25 of the US budget) in its cash-basis accounting methodology.
323

225. Please indicate whether there was any instan ce where the CCC "wrote off" debt and, if
so, please indicate the accounting regulation or principle used. If a "written off" debt is
subsequently recovered, do the CCC's accounts ref lect both the interest cost and interest
received in relation to the debt during the time it was "written off"? USA

Brazil’s Comment:

147. As noted in Brazil’s comment on the US res ponse to question 221(i), if the Panel uses a net
present value accounting methodology to assess the CCC programmes under item (j), the
United States would not be held accountable (in these proceedings, at least) for write-offs on pre-1992
cohorts. Activity on CCC guarantees issued before 1992 is not in any way included in the net present

 318 Compare Export Insurance Services, Inc. fee schedule in Exhibit Bra-410 (p. 6-7) with CCC fee
schedule in Exhibit Bra-155.

319 See Appellate Body Report, United States – Countervailing Duties on EC Products ,
WT/DS212/AB/R, para. 124 (Appellate Body questions whether a “fair market price” is reached when a
government “shapes” the market, stating that “[t]he Panel’ s absolute rule of ‘no benefit’ may be defensible in
the context of transactions between two private parties taking place in reasonably competitive markets; however,
it overlooks the ability of governments to obtain certain results from markets by shaping the circumstances and
conditions in which markets operate.”). See also Arbitrator’s Decision, Brazil Aircraft , WT/DS46/RW,
para. 6.95 (One reason the Panel offered for rejecting a proposed benchmark was that the benchmark was “the
direct result of a government guarantee,” rather than an indication of the “commercial or market rate of
interest.”). See also id., paras. 6.90-6.92, 6.104.
 320 The Panel will recall that Brazil made a simila r comparison between Ex-Im Bank export guarantee
fees and CCC export guarantee fees , and reached the same result. See Brazil’s 22 August 2003 Comments,
para. 110.
 321 Exhibit Bra-411 ( The Federal Scoop: US Government Financing for Service Exports , E XPORT
AMERICA (May 2000), p. 33).
 322 Brazil’s 18 November 2003 Further Rebuttal Submission, para. 228.
 323 See Brazil’s 11 August 2003 Answers to Questions, para. 165. See also Brazil’s comments on
Question 221(i), above.

value data provided by the United States in its r esponse to question 221(a), or by Brazil in Exhibit
Bra-193.
324 Even without the effect of the write-o ffs detailed in paragraph 114 of the US
22 December 2003 response – all of which relate to pre-1992 cohorts – both the United States and
Brazil conclude that the CCC programmes have lo st money over the peri od 1992-2002 (the United
States puts those losses at over $230 million; Brazil at $211 million). 325 (For a complete assessment
under item (j), administrative expenses in the amount of approximately $39 million should be
added.326)

148. Under a cash-basis accounting methodolog y of assessing the CCC programmes under item (j),
the United States should be held accountable for write-offs and “debt forgiveness” (as defined in
paragraph 113 of the US response) that occurred during the period 1992-2002, even if it relates to
guarantees that were issued before 1992. Alth ough this is not clear from the US 22 December 2003
response, to the extent that the write-offs cat alogued in paragraph 114 of the US 22 December 2003
response are related to defaults that occurred in the period 1992-2002, Brazil presumes that the
defaults themselves would be included in the line item (00.01) for default claims, which are tracked in
the chart included at paragraph 165 of Brazil’s 11 August 2003 Answers to Questions, and reproduced
in Brazil’s comments on the US response to question 221(i), supra. Applying a cash-basis accounting
methodology, Brazil demonstrated that long-te rm operating costs and losses outpace premiums
collected over the period 1992-2002 for the CCC programmes, by $1.083 billion.

226. If a debt was "written off" more than te n years ago, does it still create a cost to the
programme? If so, how is this reflected in th e 2002 financial statement of the CCC, in Exhibit
BRA 158 (or any other material)? USA

Brazil’s Comment:

149. As discussed in Brazil’s comment on the US r esponse to question 225, if the Panel uses a net
present value accounting methodology to assess th e CCC programmes under item (j), the United
States would not be held accountable (in these proceedi ngs, at least) for write-offs that occurred more
than 10 years ago. The reason is that those write-o ffs would relate to guarantees issued prior to 1992.
Activity on CCC guarantees issued before 1992 is not in any way included in the net present value
data provided by the United States in its response to question 221(a), or by Brazil in Exhibit Bra-
193.
327

150. Under a cash-basis accounting methodolog y of assessing the CCC programmes under item (j),
the United States would not be held accountable fo r write-offs and “debt fo rgiveness” that occurred
more than 10 years ago (at least in this proceedi ng), assuming that the period of review is 1993-2002.
This is because the underlying defaults would also have occurred more than 10 years ago, even before
the write-offs or forgiveness.

151. However, Brazil would like to correct the United States’ mischaracterization of Brazil’s
position about the 10-year period of review for an assessment under item (j). Brazil does not agree, as
the United States asserts, that an examination beyond 10 years is “inappropriate”.
328 Rather, Brazil

 324 As Brazil notes in its comment on Question 221(g) , however, estimates of costs and losses made in
the context of the FCRA formula are based, first and foremost, on historical experience with borrowers. Thus,
prior defaults would tend to lead to positive subsidy estimates on new guarantees.
 325 See US 22 December 2003 Answers to Questions, response to Question 221(a); Brazil’s Exhibit
Bra-193.
 326 Exhibit Bra-133 (Guaranteed Loan Subsidy and Administrative Expenses of US Export Credit
Guarantee Programmes GSM 102, GSM 103 and SCGP).
 327 As Brazil notes in its comment on the US respons e to Question 221(g), however, estimates of costs
and losses made in the context of the FCRA formula are based, first and foremost, on historical experience with
borrowers. Thus, prior defaults would tend to lead to positive subsidy estimates on new guarantees.
 328 US 22 December 2003 Answers to Questions, para. 102.

considers that a 10-year period is adequate in this case to get a picture of the performance of the CCC
programmes’ portfolio. If the Panel wishes to look beyond that 10-year period, Brazil does not
believe that doing so would be “inappropriate”. Brazil has noted that should the Panel wish to
corroborate evidence showing that over the peri od 1992-2002, the long-term operating costs and
losses for the CCC programmes outpace premiums collected, it could look to CCC’s 2003 financial
statements, which state that uncollectible am ounts on pre-1992 CCC guarantees outpace premiums
collected during the period 1981-1991 by nearly $2 billion.
329

227. The United States has indicated that Braz il continues to "mischar acterize" the amount
of $411 million in the 2002 financial statement of the CCC, in Exhibit BRA 158, pp. 18 & 19.
Can the United States please indicate how it believes this amount – referred to on p. 19 of the
Exhibit as "Credit Guarantee Liability-End of Fiscal Year" - should be properly characterized?
How, if at all, does it represent CCC operating costs or losses? USA

Brazil’s Comment:

152. In paragraphs 117-118 of its 22 December 2003 response, the United States again rejects use
of the FCRA formula as an appropriate methodolog y to make an assessment of the CCC programmes
under item (j), since it is based on “estimates”. As not ed above, the United States’ view is that it is
only appropriate to use a net present value accounting methodology once all cohorts in a period are
closed.
330 In paragraphs 117 and 121 of its 22 December 2003 response, the United States argues that
the “credit guarantee liability” figure included in th e CCC financial statements, which is calculated
using a net present value accounting methodology, does not reflect “losses”, within the meaning of
item (j), but instead only estimated losses.

153. This does not stop the United States from app ealing to the FCRA formula when it believes it
suits its purposes to do so. In paragraph 119, the United States c ites with approval the $22 million
credit guarantee liability figure used in CCC’s 2003 financial statements as evidence of “good
performance” by the CCC guarantee programmes. Braz il notes, however, that at page 4 of the notes
to its 2003 financial statements, CCC defines the term “credit guarantee liability” as “the estimated
net cash outflows (loss) of the gu arantees on a net present value basis”.
331 Thus, the $22 million
figure still represents a “loss”, as does the $230 million cumulative figure listed in the chart included
with the US response to question 221(a). For a complete assessment under item (j), administrative
expenses in the amount of approximately $39 million should be added.
332

154. Finally, Brazil directs the Panel’s attention to the massive increase from 2002 to 2003 in the
losses CCC considers it will incur at the time all post- 1991 guarantee cohorts are closed. At page 15
of the notes to its 2003 financial statements, CCC es timates that when all post-1991 cohorts close, it

 329 Notes to Financial Statements contained in Exhibit US-129 (US Department of Agriculture, Office
of Inspector General, Financial and IT Operations, Audit Report, Commodity Credit Corporation’s Financial
Statements for Fiscal Years 2003 and 2002, Audit Report N° 06401-16-FM (November 2003) p. 15). Brazil
notes that unlike the CCC 2002 financial statements included in Exhibit Bra-158, the CCC 2003 financial
statements included in Exhibit US-129 are not publicly available on the USDA website. See
http://www.usda.gov/oig/rptsauditsccc.htm.

330 See e.g. US 11 August 2003 Answers to Questions, para. 159 (“Not until the cohort is closed can
one make an assessment as to whether or not that pa rticular cohort represents a cost to the Federal
Government.”).
 331 Notes to Financial Statements contained in Exhibit US-129 (US Department of Agriculture, Office
of Inspector General, Financial and IT Operations, Audit Report, Commodity Credit Corporation’s Financial
Statements for Fiscal Years 2003 and 2002, Audit Report N° 06401-16-FM (November 2003) p. 4).

332 Exhibit Bra-133 (Guaranteed Loan Subsidy and Administrative Expenses of US Export Credit
Guarantee Programmes GSM 102, GSM 103 and SCGP).

will have lost $1.16 billion (as opposed to th e $770 million it reported in its 2002 financial
statements).
333

228. What accounting principles should the Pane l use in assessing the long-term operating
costs and losses of these three programmes? For example, if internal US Government
regulations require costs to be treated differently to generally accepted accounting principles, is
it incumbent on the Panel to conduct its analysis in accordance with that treatment? BRA, USA

V. SERIOUS PREJUDICE

229. What is the meaning of the words "may arise in any case where one or several of the
following apply" (emphasis added) in Article 6.3 of the SCM Agreement? Please comment on
the possibility that these words indicate that on e of the Article 6 subparagraphs may not be
sufficient to establish serious prejudice and that serious prejudice should be considered an
additional or overriding criterion to the factors specified in the subparagraphs. BRA

230. Please comment on Brazil's views on Article 6.3 of the SCM Agreement as stated in
paragraphs 92-94 of its further submission. USA

231. Do you believe that the now-expired Article 6.1 and/or Annex IV of the SCM Agreement
are relevant context for the Panel's interpretation of Article 6.3? USA

Brazil’s Comment:

155. For the reasons Brazil has previously artic ulated, Brazil disagrees that Article 6.1 and
Annex IV of the SCM Agreement are relevant contex t for interpreting the present text of Part III of
the SCM Agreement.
334

156. The US 22 December 2003 response to Questi on 243 confirms the fundamental role that
Annex IV plays in its analysis of actionable s ubsidies in Part III of the SCM Agreement. The
United States treats Annex IV as if the title of th e Annex were “Calculation of the Total Ad Valorem
Subsidization for Subsidies Subject to Part III of the Agreement”. But all participants know and agree
that Annex IV is dead. If it were not, then Braz il’s submissions would certainly have been far more
concise, as the total ad valorem subsidization for the US subsidies is 95 per cent over the four-year
period of investigation.

157. The US reference in paragraph 131 of its 22 December 2003 Answer to Question 231 to the
Appellate Body report in US – CVD’s on EC Products is inapposite. That case involved
countervailing duty measures, not actionable subsi dy measures and claims under Part III of the SCM
Agreement. The Appellate Body’s c itation to Annex IV was in the context of citing to a long list of
SCM provisions that refer to the “recipient” of a “benefit” in the SCM Agreement. The Appellate
Body did not, as the United States seeks to do in this case, use Article IV as the sole legal basis for the
wholesale inclusion of countervailing duty methodologies into Part III of the SCM Agreement.

158. In paragraph 132 of its 22 December 2003 An swer, the United States continues to make the
assumption that contract payments are “not tied to the production of upland cotton”. As a factual

 333 Notes to Financial Statements contained in Exhibit US-129 (US Department of Agriculture, Office
of Inspector General, Financial and IT Operations, Audit Report, Commodity Credit Corporation’s Financial
Statements for Fiscal Years 2003 and 2002, Audit Report N° 06401-16-FM (November 2003) p. 15). The
United States reports that premiums of $246 milli on were collected on CCC guarantees over the period 1992-
2003. See Exhibit US-128.
 334 Brazil’s 18 November 2003 Further Rebuttal Submission, paras. 96-107; Brazil’s 2 December 2003
Oral Statement, paras. 4-6.

matter, Brazil has demonstrated that contract payments are tied to the production of upland cotton. 335
The evidence of much higher upland cotton per-acre payments, among many other facts, demonstrates
that the de jure “flexibility” is, in practice, not ex ercised by upland cotton producers 336, and that the
bulk of the upland cotton contract payments are paid to current upland cotton producers.337

159. More importantly, while the United States rep eats its calls for Brazil to implement various
allocation methodologies in paragraph 132 of its 22 December 2003 Answers to Questions, it refuses
to provide the information that would allow Brazil or the Panel to even perform a calculation using
the flawed US methodology based on Annex IV. And the United States is just plain wrong to suggest
in paragraph 132 of its 22 Decem ber 2003 response that Brazil has “refus[ed] to countenance any
allocation of the decoupled payments it has cha llenged … ”. Brazil’s 20 January 2004 Answer to
Question 258 explained in greater detail in Br azil’s methodology for allocating the payments. 338
Brazil even demonstrated that applying the US allocation methodology with the flawed and
incomplete US 18/19 December 2003 data resulted in levels of support to upland cotton that were
consistent with Brazil’s 14/16
th Methodology.339

232. How, if at all, should the Panel take in to account the effects of other factors in its
analysis of the effects of US subsidies under Arti cle 6.3? If the Panel should compare the effects
of other factors to establish the relative signific ance of one compared to others, how would this
be done? What would be relevant “factors” for this purpose? BRA

233. In Brazil's view, what is or are the "same market(s)" for the purposes of Article 6.3(c)?
Does Brazil's view of "world market" imply that regardless of which domestic (or other)
"market" is examined, price suppression will be identifiable? BRA

234. Does "significant" price suppression und er Article 6.3(c) necessarily amount to
"serious" prejudice within the meaning of Article 5(c)? Could the level of "significance" of any
price suppression under Article 6.3(c) determine whether any prejudice under Article 5(c) rises
to the level of "serious prejudice"? USA, BRA

 335 See Brazil’s 22 August 2003 Rebuttal Submission, Section 2.2 and references included therein. See
also Brazil’s 18 November 2003 Further Rebuttal Submission, Section 3.7.5.
 336 See Brazil’s 22 August 2003 Rebuttal Submission, Section 2.2 and references included therein. See
also Brazil’s 18 November 2003 Further Rebuttal Submission, Section 3.7.5.
 337 Brazil’s 18 November 2003 Further Rebuttal Submission, Section 2.1; Brazil’s 28 January 2004
Comments and Request Regarding US Data, Section 9. See also Brazil’s comment on Question 205, above.
 338 Brazil’s 20 January 2004 Answers to Additional Questions, paras. 43-55.
 339 Brazil’s 28 January 2004 Comments and Requests Regarding US Data, Section 10.

Brazil’s Comment:

160. The US 22 December 2003 response again ignores the determination of the panel in
Indonesia – Automobiles , which found that the term “significant” in Article 6.3(c) required
examination of a link between the size of the margins of undercutting and whether those margins
could “meaningfully affect supp liers of the imported product”.
340 Under this “meaningfully affect”
standard, the focus, at least fo r the purposes of Article 6.3(c) 341, is on producers of the non-subsidized
like product. Have their revenue, investments, or crop choices been “meaningfully affected” by the
level of price suppression experienced? These are the types of questions that provide guidance as to
whether a particular level of price suppression is significant or not. The notion of “meaningfully
affect” and “serious prejudice” are, in essence, equivalent for the purpose of Article 6.3(c).

161. The US 22 December 2003 response to Question 234, at paragraph 136, states that “[t]he use
of the term ‘significant’ however, would seem to be intended to prevent insignificant price effects
from rising to the level of serious prejudice.” But this statement presumes some sort of an objective
standard exists by which to judge what are “insi gnificant price effects”. The United States provides
no suggestions how this Panel or fu ture panels are to make such an abstract determination. The
United States’ position implies th at the “Panel will know them when they see them”. But the
Article 6.3(c) test, at least, requires the Panel to make an assessment of the relationship between the
price effects and serious prejudice. And this link is to be judged by whether the price effects are
“significant”.

162. The Panel should firmly reject the two-step pr ocess suggested by the US interpretation. The
first step would require a finding, using some unkno wn, non-textual standard, of whether a particular
price level of suppression is “significant”. Evid ence that Brazilian producers would have lost
$71.5 million during MY 1999-2002 from only one cent per pound of price suppression
342 would be
totally irrelevant for the first step. 343 Only if a panel makes this “significant” finding, divorced from
any impact on producers, would it move to the second step, i.e., whether that level of now-significant
price effects caused serious prejudice. But such an interpretation, like many proposed by the
United States in this dispute, would leave Members w ho lost millions of dollars due to the effects of
subsidies without a remedy. There is no textual basis for such a result, which would be contrary to the
object and purpose of the SCM Agreement. In sum, the Panel should adopt the Indonesia –
Automobiles standard of judging significance in light of whether the particular level of price
suppression “meaningfully affects” non-subsidized suppliers of the like product.344

 340 “Although the term “significant” is not defined, the inclusion of this qualifier in Article 6.3(c)
presumably was intended to ensure that margins of undercutting so small that they could not meaningfully affect
suppliers of the imported product whose price was being undercut are not considered to give rise to serious
prejudice…” (emphasis added). Panel Report, Indonesia – Automobiles, WT/DS54/R, para. 14.254.
 341 Brazil notes that Articles 6.3( a), (b) and (d) do not contain similar qualitative or quantitative
qualifiers.
 342 Brazil’s 9 September 2003 Further Submission, para. 258 (citing a $143 million loss from a 2 cents
per pound level of price suppression).
 343 A good example of evidence that would be irrelevant under the first part of the US test is found in
the testimony of Christopher Ward. He indicated that a 10 percent increase in prices for Mato Grosso producers
in MY 2000 and MY 2001 would have permitted them to cover their variable costs for MY 2001 and come
close to covering variable costs in MY 2000. Howeve r, because of the losses th ey 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. Exhibit Bra-283 (Statement of
Christopher Ward – 7 October 2003, paras. 8-10 and accompanying graph).
 344 The US example of a per-unit payment of 0.0001 cents per pound in paragraph 136 is irrelevant,
because under its hypothetical, this particular level of price suppression could neve r “meaningfully affect” any
suppliers of the like product.

163. 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”.345 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. Under th ese circumstances, any measurable and identifiable
effect on the world price from the subsidies provided by a singl e Member is important. In this case,
the Panel is faced with particularly compelling facts – during MY 1999-2002 (and even during MY
1997-1998) the record shows that the absolute nume rical 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.346

164. Finally, the United States argues in paragraph 136 that the effect of Brazil’s interpretation is
that any production subsid y would run afoul of Part III of the SC M Agreement, thus turning it into a
prohibited subsidies provision. There is no basis fo r this argument. First, it is difficult to see how
extremely low levels of production subsidies (0.0001 cents per pound price effects in the US example)
could “materially affect” any competing producers of the non-subsidized Member. Only production
subsidies that generate price suppression significant enough to “materially affect” competitors would
be subject to the disciplines of Part III. This is far from an insignificant threshold, and gives meaning
to the word “significant”.

165. Second, this US argument is similar to othe r arguments it has made to the effect that any
limitations on the amount of subsidies would change “actionable” subsidies to “prohibited”
subsidies.
347 The United States loses sight of the basic f act that an actionable subsidy that creates
adverse effects is a violation of WTO rules. No Member has the right to provide unlimited production
subsidies if they cause serious prejudice. Members deciding to impose discretionary or mandatory
limits on the amount of production subsidies may si gnificantly diminish the possibility that such
subsidies create significant price suppression or an ongoing threat of serious prejudice. But it is
wrong for the United States to argue that because th e only practical way to impose limitations on
production subsidies may be some sort of a cap on su ch subsidies necessarily an actionable subsidy is
turned into a “prohibited subsidy”.
348

235. Please comment on paragraphs 8, 9 and 10 of the US 2 December oral statement, in
particular, why the average Brazilian price is shown as lower than the average US price. BRA

236. The Panel notes Exhibit US-47 (and the chart in paragraph 13 of the US 2 December
oral statement). Please provide a conceptually analogous chart to Exhibit US-63 with respect to
data relating to the US interpretation of "world market share". USA

Brazil’s Comment:

166. Brazil considers it telling that the United States does not provide the percentage figures
underlying the chart at paragraph 138 of its 22 December 2003 response. This is because the
percentage figures reveal that the US methodology suffers from a fatal flaw. The sum of the US
world market share, as defined by the United States
349, and the “rest of the world” market share, as

 345 Brazil’s 9 September 2003 Further Submission, Table 22; Brazil’s 7 October Oral Statement,
paras. 30-34.

346 See Brazil’s 9 September 2003 Further Submission, paras. 148-161, 190, 200-232, 254, 379-384 and
Table 23.
 347 US 2 December 2003 Oral Statement, paras 83-84.
 348 US 2 December 2003 Oral Statement, paras 83-84.
 349 “(Domestic Mill Use + Exports)” / Total World Consumption; see US 22 December 2003 Answers
to Questions, para. 137.

defined by the United States
350, far exceeds 100 per cent. To clarify this point, Brazil presents the
following table, based on the data provided by the United States in Exhibit US-47 and in response to
question 197.351

 US Domestic
Consumption
US
Exports
World
Consump-
tion
Non-US352
Domestic
Consumption
Non-US
Exports
US
Share
353
Non-
US
Share
Total
Share
 million bales per cent
1995 10.647 7.675 86.040 75.393 19.900 21.29 110.75 132.05
1996 11.126 6.865 88.031 76.905 20.100 20.44 110.19 130.63
1997 11.349 7.500 87.138 75.789 19.300 21.63 109.12 130.76
1998 10.401 4.298 84.640 74.239 19.400 17.37 110.63 128.00
1999 10.194 6.750 90.957 80.763 20.600 18.63 111.44 130.07
2000 8.862 6.740 92.172 83.310 19.800 16.93 111.87 128.79
2001 7.696 11.000 94.381 86.685 18.100 19.81 111.02 130.83
2002 7.270 11.900 97.930 90.660 18.700 19.58 111.67 131.25
2003 6.200 13.200 97.690 91.490 19.100 19.86 113.20 133.06

167. Indeed, as the Panel can readily see, the “rest of the world” “world market share”, as defined
by the United States, exceeds 100 per cent – a result that defies any logic.

168. For the ease of the Panel’s reference, Br azil presents an excerpt from its own figures
originally presented in Exhibit Bra-302,
354 showing that, under Brazil’s and USDA’s definition of the
“world market share,” the total world market share equals 100 per cent.

 350 “(Non-US Domestic Mill Use (i.e. consumption) + Non-US Exports) / Total World Consumption.
 351 US 22 December 2003 Answ ers to Question, para. 15 and Exhib it US-120. Since the United States
did not provide any data on “Non-US Exports,” Brazil has used USDA published figures on “Foreign Cotton
Exports” from USDA’s Cotton and Wool Yearbook (Exhibit Bra-412 (Cotton and Wool Situation and Outlook
Yearbook, USDA, November 2003, Table 16).

352 “World Consumption minus US Domestic Consumption.”
 353 The 2003 figure differs a little from what would seem to be the 2003 figure in the US table at
paragraph 138 of the US 22 December 2003 Answers to Questions. It appear s that the reason is the
United States use of its non-updated figures from Exhibit US-47, rather than the updated MY 2002 and 2003
figures from its 22 December 2003 response to Question 197, para. 15.
 354 See also Brazil’s 27 October 2003 Answers to Questions, paras. 123-129.

 US upland cotton
exports
Non-US upland
cotton exports
World upland
cotton exports
US
Share
Non-
US
Share
Total
Share
 million bales per cent
1995 7.375 19.394 26.769 27.55 72.45 100.00
1996 6.399 19.384 25.783 24.82 75.18 100.00
1997 7.060 18.534 25.594 27.58 72.42 100.00
1998 4.056 18.559 22.615 17.94 82.06 100.00
1999 6.303 19.805 26.108 24.14 75.86 100.00
2000 6.303 19.170 25.473 24.74 75.26 100.00
2001 10.603 17.072 27.675 38.31 61.69 100.00
2002 11.266 15.796 27.062 41.63 58.37 100.00
2003 11.225 17.690 28.915 38.82 61.18 100.00

169. Brazil will address the US arguments that th e world market share means share of world
consumption in detail in its comments on the following questions.

237. Could a phenomenon that remains at approximately the same level over a given period
of time be considered a "consistent trend" within the meaning of Article 6.3(d)? Do parties
have any suggestions as to how to determine a "c onsistent trend", statistically or otherwise?
BRA, USA

Brazil’s Comment:

170. As noted in its 22 December 2003 response to this question, Brazil agrees that a phenomenon
that remains at approximately the same level over a given period cannot be c onsidered a consistent
trend.
355 However, as detailed in that answer, this is not the situation facing this Panel. The data
clearly establishes that, in MY 2001, 2002 and 2003, there is an increase in the US world market share
over the previous three-year average, and that th is increase follows a consistent trend since MY 1996
(and MY 1986). 356 In response to this question, the Un ited States again relies on an utterly wrong
interpretation of the term “world market share” in Article 6.3(d) of the SCM Agreement. The term

 355 Brazil’s 22 December 2003 Answers to Questions, para. 134.
 356 Brazil’s 22 December 2003 Answers to Questions , paras. 133-139; Br azil’s 27 October 2003
Answers to Questions, paras 123-129. Brazil further note s the new information presented by the United States
concerning US upland cotton exports in MY 2002 and 2003. These figures (11.9 million bales and 13.2 million
bales respectively) would replace Brazil’s latest information, as contained in Exhibit Bra-302 (11.3 million bales
and 11.2 million bales respectively). These new facts strengthen Brazil’s threat of serious prejudice claim under
Article 6.3(d) and footnote 13 of the SCM Agreement. See US 22 December 2003 Answers to Questions,
para. 15 and Brazil’s comment to US 22 December 2003 Answer to Question 197, above.

does not mean “world consumption share”, but world market share of exports, as detailed by Brazil
many times, including in these comments.

238. According to the US interpretation of the term "world market share":

(a) should the domestic consumption of closed markets be added into the denominator?

Brazil’s Comment:

171. Brazil understands that the Panel’s question referred to the distinction between “competitive
markets,” where world upland cotton producers/e xporters compete for available share of world
exports, and “closed markets”, where no competition for export market share can take place because
of subsidies like the domestic Step 2 programme, tariffs, or non-tariff barriers.
357 The US
22 December 2003 response, at paragraph 140, affi rms that the United States would greatly increase
and distort the Article 6.3(d) denominator by including, inter alia, all sales of US upland cotton in the
US market. Yet, there is little “international trade” in the US domestic upland cotton market, because
there were only marginal imports during MY 1999-2002. 358 The effect of the US argument is to
obscure and hide the huge volume and market share increase in US exports in “competitive” markets
during MY 1998-2003. As Brazil has argued, the US focus on “consumption” as opposed to “trade”
is contrary to the text, context, and object and purpose of Article 6.3(d).
359 Article 6.3(d) focuses on
“trade”, not domestic consumption, and thus i nvolves competitive world markets where exports and
trade take place.360

172. It is noteworthy that the US answer ignores un-rebutted evidence that USDA’s top economists
and analysts repeatedly use the phrase “world ma rket share” to describe and analyze how US
agricultural exporters are performing in competitive world markets for exports.
361 The United States
never provided a single instance in which USDA ec onomists – or any other Member’s economists –
included domestic US consumption in their analysis of the US “world market share”. This is because
the unique US notion of “consumption” (which co mbines exports, domestic use, and imports as part
of “consumption”) simply does not exist (in the literature or trade statistics) outside of the US
arguments in this case.

(b) if US production and consumption increased by the same percentage, whilst the rest of
the world's production and consumption remai ned steady, would this imply an increase
in the US "world market share" by a different percentage?

Brazil’s Comment:

173. The US 22 December 2003 response in effect ack nowledges, at paragraph 142, that the US
subsidies could be subject to a challenge under Ar ticle 6.3(d) even though those subsidies did not
cause any increase in US exports. Under the US theory, even though none of the non-subsidized
producer/exporters of upland cott on would have lost any world export market share, these producers
could initiate a claim against the United States under Article 6.3(d), in addition to Article 6.3(a),
because the US domestic production and domestic consumption increased. This US response

 357 Brazil detailed its arguments concerning the focu s of Article 6.3(d) on competitive markets and
where “trade” takes place in its 7 October 2003 Oral Statement, paras. 38-41.
 358 For example, between MY 1999-2001, US imports represented only 0.2 percent of total US mill use
of upland cotton. See Exhibit Bra-4 (“Fact Sheet: Upland Cotton,” USDA, January 2003, p. 4-5).
 359 Brazil’s 7 October 2003 Oral Statement, paras 38-41; Brazil’s 27 October 2003 Answers to
Question, paraa. 202-206; Brazil’s 18 November 2003 Further Rebuttal Submission, paras. 170-172; Brazil’s 2
December 2003 Oral Statement, paras. 62-65.

360 Brazil’s 7 October 2003 Oral Statement, para. 39.
 361 Brazil’s 7 October 2003 Oral Statement, note 78.

highlights the disconnect between its theory and the rea lity of what Article 6.3(d) really is about – the
impact of subsidies on trade in the product in question in competitive international markets.

174. Of course, the Part III of the SCM Agreemen t discipline addressing th e Panel’s hypothetical
factual situation is Article 6.3(a). The United Stat es argues in paragraph 143 that “Brazil’s approach
… would allow a larger or even dominant upland cotton consumer to provide huge per-unit
production subsidies that increased the share of its own domestic consumption that its production
supplied without any disciplines under Article 6.3(d) , regardless of the impact on other Members who
could potentially supply that increasing domestic c onsumption” (emphasis added). But what the US-
posited hypothetical outlines is a classic “displacement or impedence” case under Article 6.3(a). “But
for” the “huge per-unit production subsidies”, th e non-subsidized Member exporters would have
increased or maintained their export market share in the market of the subsidizing Member. Thus,
interpreting Article 6.3(d) to mean the “world ma rket share of exports” does not leave non-subsidized
Member producers who are squeezed out of the subsidizing Member’s market without a remedy. And
the fact that Article 6.3(d) does not also discipline the situation covered by Article 6.3(a) is hardly
surprising, since negotiators presumably intended different provisions to cover different situations.

175. Indeed, the US argument in paragraph 143 high lights the fallacy of its interpretation. It
argues that “the ordinary meaning of ‘world market share’ in Article 6.3(d) … would capture impacts
both on the market of the subsidizing Member (as in Article 6.3(a)) and in third-country markets
(Articles 6.3(b) and 6.3(c))”.
362 But if that were true, then ther e would be no need for Articles 6.3(a)
and 6.3(b).363 The US interpretation would render one of the sets of disciplines a nullity, in violation
of the customary rules of treaty interpretation as codified in the Vienna Convention.

176. Finally, rather than capturing all the po ssible instances where subs idies can cause serious
prejudice in world markets, the US “consumption” interpretation of “world market share” leaves a
gaping hole in the serious prejudice remedies. The facts of this case show how the US interpretation
would completely hide the huge US increase in wo rld market share of exports – from 25 per cent in
MY 1999 to 41.6 per cent in MY 2002. Where a Me mber uses subsidies to capture export market
share in the competitive world market, it causes serious prejudice by limiting the opportunities for
non-subsidized Members to increase their exports.
364 The record shows that African upland cotton
producers, with among the lowest world production costs, actually lost world market share to the
United States between MY 1998-2002. 365 Yet, the US interpretation of Article 6.3(d) would deny
them, as well as Brazil, any remedy to challenge su ch an increase in the US world market share of
exports.

 362 US 22 December 2003 Answers to Questions, para. 143.
 363 Article 6.3(a) disciplines the situation described in the Panel’s question: a Member using subsidies
to increase the share of domestic consumption satisfied by domestic supply (i.e., displacing or impeding imports
into the market of the subsidizing Member). Article 6.3(b) disciplines such effects of a Member’s subsidies
(displacing or impeding exports) in a third country market. Article 6.3(c) disciplines significant price effects of
a Member’s subsidies in all markets. Brazil’s 2 December 2003 Oral Statement, para. 63.
 364 See Brazil’s 9 September Further Submission, paras. 451-456; paras 444-453 (facts supporting the
interconnected relationship between the serious prejudiced due to price suppression and the serious prejudice
due to increased world market share); Annex III Stat ements by Brazilian producers Christopher Ward, Jaime
Naito, Aloysio Lerner and Ronaldo Spirlandelli de Oliveria, among others.
 365 Brazil’s 9 September 2003 Further Rebuttal Submission, Section 7.1 and Figure 26 following
para. 282.

(c) does Saudi Arabia have a small wo rld market share for oil? USA

Brazil’s Comment:

177. Contrary to the US 22 December 2003 response, Brazil has no difficulty appreciating the
relevance of the Panel’s question. Even accep ting the US figures, which include Saudi Arabian
consumption of crude oil to produce refined produc ts that are then exported, the US response
highlights the significant (25 per cent) differenc e between their “consumption” methodology and a
world market share of exports methodology.
366

239. How does the US respond to Brazil's assertions that, under the US interpretation of the
term "world market share":

(a) there would be no WTO disciplines on production-enhancing subsidies that increase a
Member's world market share of exports? (see paragraph 64 of Brazil's 2 December
oral statement);

Brazil’s Comment:

178. The US 22 December 2003 response confirms Br azil’s arguments that the US interpretation
leaves no direct remedy for a Member who either loses or is not able to increase its world market
share of exports as a result of another Member’s subsidies.
367 The United States asserts in
paragraph 147 of its answer, that Article 6.3(b) provides such a remedy. But that provision only
addresses a non-subsidizing Member’s right to contest the effects of subsidies in, inter alia, increasing
a subsidizing Member’s export market share in an individual third country market. The EC – Sugar
Exports I (Australia) and EC- Sugar Exports II (Brazil) 368 disputes demonstrated how difficult it can
be for a non-subsidizing Member to demonstrate disp lacement or impedence in an individual third
country market. Article 6.3(d) helped to addr ess this legal vacuum by providing clear, objective
guidelines for subsidizing Members to know when th eir increase in world market share of exports
would be subject to disciplines, and to provide an objective basis for the injured non-subsidized
exporting Member to evaluate and protect its rights.

179. The United States further argues, in paragraph 147 of its response, that Article 5(a) of the
SCM Agreement would provide a remedy for a non-s ubsidized Member who lost world market share
in exports. But while that provision relates to “i njury to the domestic industry of another Member”,
footnote 11 of the SCM Agreement qualifies that the “i njury” “is used in the same sense as it is used
in Part V”. “Injury” is defined in Article 15.1 et seq. of the SCM Agreement as that caused by (a) the
volume of the subsidized imports and the effect of the subsidized imports on prices in the domestic
market for like products, and (b) the consequent im pact of these imports on the domestic producers of
such products. In the context of this dispute, this remedy would appear to apply only to US
subsidized exports to the Brazilian market ( i.e., the “domestic” market). Contrary to the US
argument, Article 5(a) would not address the situ ation covered by Article 6.3(d), where Brazilian
exporters suffer serious prejudice by an increase in the US world market share of exports.

180. Finally, the United States claims, at paragr aph 147 of its response, that Article XVI:1 of
GATT 1994 would provide Brazil with the right to challenge the US world market share for exports.
Brazil agrees that GATT Article XVI:1, as read in conjunction with GATT Article XVI:3, provides
for a very analogous recourse as that provided for in Article 6.3(d), i.e., any subsidies that increase
exports and lead to an inequitable share of world export trade. But the United States contradicts itself

 366 US 22 December 2003 Answers to Questions, para. 145.
 367 See e.g. Brazil’s 2 December 2003 Oral Statement, para. 64.
 368 GATT Panel Report, EC – Sugar Exports I (Australia) , L/4833 – 26S/290, para . 4.26-4.27; GATT
Panel Report, EC – Sugar Exports II (Brazil), L/5011-27S/69, para. 414.

in offering up an Article XVI:1 remedy (which is inexorably linked to Article XVI:3, second
sentence) in paragraph 147, while arguing elsewhere that this provision is no longer applicable and
has been replaced by Article 6.3.369

181. In sum, the Panel is left with the US interp retations that (a) there is no longer any disciplines
for a Member suffering from a decr ease in its world market share for exports under Article XVI:3,
second sentence on the one hand
370, and (b) Article XVI:3’s presumed successor, Article 6.3(d), does
not apply to the world market share of exports. In effect, Members are left without any explicit
protection for their loss of world market share of expor ts due to massive subsidization. Such a result
defies the text, context, and object and purpose of Article 6.3(d), as Brazil has repeatedly argued.

182. In any event, whether there may be – outside Article 6.3(d) of the SCM Agreement – indirect
disciplines that may provide some relief to non-subsidizing Members whose rights have been nullified
and impaired by a subsidizing Member’s increase in world market share of exports does not free the
Panel from its obligation to interpre t the term “world market share” in Article 6.3(d) in accordance
with its “ordinary meaning, in their context and in light of the treaty’s object and purpose”. Brazil
demonstrated that under a Vienna Convention analysis, the term “world market share” means world
market share of exports – not consumption.
371

(b) a Member's exports would have to be disregarded in calculating their "world market
share" in terms of "world consumption"? (see e.g. paragraph 65 of Brazil's 2 December
oral statement) USA

Brazil’s Comment:

183. In paragraph 148 of its 22 December 2003 response, the United States does not address the
substance of the Panel’s question or Brazil’s earlie r arguments. That is, the United States does not
respond to the fact that its methodology double counts exports as part of the world market share of the
exporting country and the importing country.
372 In effect, the United States requires this Panel to
ignore this illogical conceptual error in its interpre tation of the term “world market share”. Instead,
the United States insists that it is not incumbent upon the Panel “to interpret the term ‘domestic
consumption’”.373 Brazil agrees, but that is because the term “domestic consumption” is nowhere to
be found in the text or context of Article 6.3(d) of the SCM Agreement. Nor is it consistent with the
object and purpose of Article 6.3(d). But since the United States would read “consumption” into that
text, then the Panel must closely examine its mean ing, using appropriate context to do so. And it
should reject the use of that term if it leads to an interpretation that is illogical, leads to absurd results,
and otherwise fails to live up to the standards on th e interpretation of international treaties, as set out
in the Vienna Convention.

240. Does Article XVI:3 of GATT 1994 provide context in interpreting Article 6.3(d) of the
SCM Agreement? Do these provisions apply separately? If not, could it indicate that "world
market share" is intended to mean the same as "share of world export trade"? USA

 369 US 22 December 2003 Answers to Questions, para. 149.
 370 US 22 December 2003 Answers to Questions, para. 146.
 371 Brazil’s 7 October 2003 Oral Statement, paras. 38-41; Brazil’s 27 October 2003 Answers to
Question, para. 202-206; Brazil’s 18 November 2003 Further Rebuttal Submission, paras. 170-172; Brazil’s 2
December 2003 Oral Statement, parass 62-65.

372 The United States admits that its methodology counts imports as part of domestic consumption. See
US 22 December 2003 Answers to Questions, Table at para. 15 and note 24.
 373 US 22 December 2003 Answers to Questions, para. 148.

Brazil’s Comment:

184. Regarding the first question, Brazil has previ ously detailed the basis for its arguments that
Article XVI:3, second sentence of GATT 1994 provid es very important context for interpreting
Article 6.3(d).
374 In response to the Panel’s second questi on, Brazil has demonstrated that these
provisions do apply separately, for the reasons Brazil has earlier stated. 375 With respect to the third
question, the phrase “world market share” in the text of Article 6.3(d) is intended to mean the same
thing as “share of world export trade”.376

185. The United States points out several differen ces between Article XVI:3 and Article 6.3(d),
one of which is its faulty interpretation that Ar ticle XVI:3, second sentence only deals with “export”
subsidies. Brazil has earlier demonstrated that the pool of subsidies that could cause serious prejudice
is the same for Article 6.3(d) and Article XVI:3, second sentence.
377

186. The United States further argues that Brazil ag reed in the Tokyo Round Subsidies Code that
GATT 1994 Article XVI:3 is limited to export subsidies.
378 This is not correct, as demonstrated by
the text of the Tokyo Round Code. 379 It uses the language “shall include” and “export subsidy” in
connection with the notion of a more than equitable share of world trade. 380 Thus, an inequitable
share of world trade may result from export subsidies, but it is not limited to that source. Moreover,
whatever the interpretation of these terms may ha ve been in the now extinct plurilateral Tokyo Round
Subsidies Code, the only text that continues to exis t is the ordinary meaning of the words used in
Article XVI:3, second sentence, which must be inte rpreted according to its ordinary meaning in its
context, and in light of the object and purpose of the GATT. Yet, the United States argues that even
that provision is “incapable of definition or application”.381

187. The United States argues in paragraph 151 that the use of the term “market” provides the
fundamental key to its interpretation. The US argument would include all markets where upland
cotton is produced, consumed, or used when it states that Article 6.3(d) is not limited to “markets in
international trade”. But this argument ignores th e fundamental focus of Article 6.3 (as well as
Part III of the SCM Agreement itself) on international trade and the impact of subsidies on
competition between subsidized and non-subsidized pro ducers and their products. For example,
Article 6.3(a) involves situation, in which exporters are impeded or displaced from the market of the
subsidizing Member. Articles 6.3(b) and 6.4 involv e the situation, in which the export share of a
subsidizing Member squeezes out or limits the expor t share of the non-subsidizing Member in a third

 374 Brazil’s 18 November 2003 Further Rebuttal Submission, para. 172.
 375 Brazil’s 27 October 2003 Answer to Question 161, para. 130 and Question 196(b), paras. 202-206.
 376 Brazil’s 18 November 2003 Further Rebuttal Submission, paras 170-172; Brazil’s 7 October Oral
Statement, paras. 38-41.
 377 Brazil’s 27 October 2003 Answer to Question 185, paras. 194-201; Brazil’s 18 November 2003
Further Rebuttal Submission, paras 178-179.

378 US 22 December 2003 Answers to Questions, para. 149.
 379 US 27 October 2003 Answers to Questions, para. 130. For purposes of Article XVI:3 of
the General Agreement and paragraph 1 above:

(a) “more than an equitable share of world 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 bearing in mind the developments on world markets;

(b) with regard to new markets traditional 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’[.]

380 See US 27 October 2003 Answers to Questions, para. 130.
 381 US 22 December 2003 Answers to Questions, para. 149; US 27 October 2003 Answers to
Questions, paras. 131-132.

country market. And the United States has argued that Article 6.3(c) only involves situations, in
which prices are suppressed in markets where comp etition between the subsidized products and the
non-subsidized like products take place. 382 In essence, the key to initiating a claim under all three of
these provisions is demonstrating that “trade” and “competition” have been affected through the use
of subsidies.

188. The Panel must ask how is it possible that Artic les 6.3(a) – (c) only apply to situations where
international trade and competition actually take place (or are impeded from taking place), while
Article 6.3(d) is totally different – it is to be read without any reference to competition and trade at
all? The United States asserts that the “world” in “world market share” means the “entire world,”
without regard to whether there is trade or comp etition between subsidizi ng Member products and
those of non-subsidizing Members. 383 But this slavishly literal reading goes too far. Brazil submits
that read in this context, along with the other cont extual provisions such as “trade” in footnote 17 of
the SCM Agreement, and Article XVI:3, second sentence, that the US interpretation is simply wrong.

189. The United States further argues, at paragraph 149 of its response, that “Brazil has not offered
any objective definition” of “equita ble share”. This is incorrect. 384 Further, the fact that certain
GATT and WTO provisions express disciplines in broad terms, such as “equitable” or “reasonable” or
“serious” or “significant,” does not mean that a treaty interpreter can simply throw up his or her hands
and find, as the United States urges, that a provision is incapable of interpretation. Article 31 of the
Vienna Convention provides that “the words of a treaty are to be given their ordinary meaning, in their
context and in light of the treaty’s object and purpose”.
385 Further, the Appellate Body held in US –
Gasoline that “an interpreter is not free to adopt a r eading that would result in reducing whole clauses
or paragraphs of a treaty to redundancy or inutility”. 386 Thus, the Panel should reject this US attempt
to condemn Article XVI:3.

190. However, should the Panel decide that GA TT Article XVI:3, second sentence is, indeed,
inapplicable, then this certainly strengthens the basis for the Panel to in terpret the phrase “world
market share” in Article 6.3(d) as meaning the “share of world export trade”. It is inconceivable that
negotiators – who certainly did not expressly te rminate the application of Article XVI:3, second
sentence – would also intend, without making it e xplicit, that there would be no disciplines for
subsidies that allowed Members to seize world market share of exports in competitive markets.

241. How does the US reconcile it s data on consumption for 2002 in US Exhibit 40, Table 1
with the "consumption" data it refers to in it s 30 September submission, paragraph 34, Exhibit
US-47 or US-71? USA

Brazil’s Comment:

191. The US 22 December 2003 response appears to ha ve clarified that the graph in paragraph 34
of its 30 September 2003 Further Submission relates to US finished cotton fibre consumption, while
the “consumption” referred to in Exhibits US-40, US-47 and US-71 relates to upland cotton lint
consumption by US textile mills. Brazil has demons trated the irrationality of the US world market
share of upland cotton consumption data in terms of Article 6.3(d). Brazil has also demonstrated the
irrelevance of the US arguments concerning the US consumption of finished textile products.
387

 382 US 18 November 2003 Further Rebuttal Submission, paras. 37-40.
 383 US 22 December 2003 Answer to Questions, para. 151.
 384 Brazil refers the Panel and the United States to its oral answers to the Chairman’s questions during
the October 2003 meeting of the Panel, paragraphs 17-18 of Brazil’s 9 October 2003 Closing Statement, and
paragraphs 189-193 of Brazil’s 27 October 2003 Answers to Questions.

385 Appellate Body Report, US. – Gasoline, WT/DS2/AB/R, p. 17.
 386 Appellate Body Report, US – Gasoline, WT/DS2/AB/R, p. 23.
 387 Brazil’s 7 October 2003 Oral Statement, para.25.

242. How much of the benefits of PFC, MLA, CCP and Direct Payments go to land owners?
If not all of the benefits go to land owners, what proportion goes to producers? USA

Brazil’s Comment:

192. The Panel’s question is set out in a sec tion entitled “Serious Prejudice” and uses the word
“benefit” relating to contract payments. Brazil will address its comments to the US
22 December 2003 response in two senses of the word “benefit”. First, Brazil will address its
comment with respect to the definition of the term “b enefit” as it is used in Article 1.1(b) of the SCM
Agreement. Second, the question also appears to address “benefit” in a more generic sense, as it
relates to the effects of contract payments on US production, exports, and the world price of upland
cotton. Brazil believes it is this second sense of the term “benefit” to which the Panel’s question was
directed. However, the United States’ answer concludes by asserting that “35 per cent of the value of
decoupled payments would be nefit upland cotton producers”
388, suggesting that it interpreted the
Panel’s question as directed at the term “benefit ” in the sense of Article 1.1(b) of the SCM
Agreement. The United States also suggests that the remaining 65 per cent of the US contract
payments do not constitute a benefit within the meaning of Article 1.1(b) of the SCM Agreement.

“Benefit” under Article 1.1(b) of the SCM Agreement

193. As set forth below, for the purposes of Artic le 1 of the SCM Agreement, the record shows
that 100 per cent of contract payments are pa id to the bank accounts of current upland cotton
producers on terms that constitute “benefits”.

194. Under the 2002 FSRI Act, direct and counter-cyclical payments are only paid to “producers
on farms for which payment yields and base acres are established”.
389 “Producers” are defined in the
Act as “an owner, operator, landlord, tenant, or sharecropper that shares in the risk of producing a
crop and is entitled to share in the crop availability for marketing from the farm, or would have shared
had the crop been produced”. A similar defin ition of “producer” existed for the 1996 FAIR Act .390
As implemented, USDA acknowledges that contract pa yments “are paid only to farm operators rather
than farmland owners, with payment benefits split between the operator and owners in the case of
crop-share rental arrangements”. 391 Thus, the only “landlords” or “owners” who directly receive
contract payments are those who are producers of upland cotton, i.e., those that share in the risk of
producing an upland cotton crop.392 The USDA study further states that “[t]he operators' receipt of the
PFC payments compensates for higher land costs that may result from the effects of the PFC
programme”.393

195. Brazil has proved that without the receipt of the PFC, market loss assistance, direct and
counter-cyclical payments in their bank accounts, US upland cotton producers could not meet their
costs – including their lease and land-related costs. Even if these current producers may subsequently
write checks to their landlords who do not share in the risk of producing a crop, that does not mean
that the subsidies that the producers are legally entitled to receive from USDA do not provide them
with a “benefit”, within the meaning of Article 1. 1(b) of the SCM Agreement, as the United States
appears to argue. Rather, the full amount of the payment is made to the current producers.

 388 US 22 December 2003 Answers to Questions, para. 158.
 389 Exhibit Bra-29 (Sections 1103 and 1104 of the 2002 FSRI Act).
 390 Exhibit Bra-28 (Section 111(b) of the 1996 FAIR Act).
 391 Exhibit US–78, p. 44.
 392 See Brazil’s 22 July 2003 Oral Statement, para. 57; Brazil’s 22 August 2003 Rebuttal Submission,
paras. 19, 24.
 393 Exhibit US–78, p. 44.

196. The Appellate Body has held that a “benefit” ex ists if a financial contribution is received by a
“recipient” or a “producer” of the subsidized good on terms more favourable than those available to
the recipient in the market. 394 Producers of US crops who have contract base acreage receive these
payments from USDA. In Canada – Aircraft, the Appellate Body established that “a benefit does not
exist in the abstract, but must be received and enjoyed by a beneficiary or a recipient”, noting that
“the term benefit, therefore, implies that there must be a recipient”. 395 The Appellate Body in US –
CVD’s on EC Products held that “the focus of any analysis of whether a ‘benefit’ exists should be on
‘legal or natural persons’ instead of on productive operations”.396 Contrary to the US arguments, it is
legally irrelevant for purposes of determining the existence of a “benefit” under the SCM Agreement
whether a benefit received by a “recipient” is subsequently transferred to other non-recipients.

197. The United States’ 22 December 2003 response con tinues its efforts to transform this dispute
into a countervailing duty investigation based on now-defunct Annex IV of the SCM Agreement. The
United States alleges in paragr aph 158 of its 22 December 2003 response that only 35 per cent of
PFC, market loss, CCP and direct payments “w ould benefit upland cotton producers”. If the
United States is using the word “benefit” in the sen se of Article 1.1(b) of the SCM Agreement, then
the statement is legally as well as factually wrong. As Brazil has demonstrated above, 100 per cent of
the four types of contract payments are paid to the bank accounts of current upland cotton producers.
Thus, there is no doubt that each of the four contr act payment subsidies confers a “benefit” to upland
cotton producers.

198. Finally, even if this case was a counter vailing duty investigati on, under existing CVD
procedures, 100 per cent of the contract payments – not 35 per cent – would be allocated across the
production value of the producers. This is, again, b ecause, first, the total amount of benefits to the
company producing the subsidized goods would be calculated. No deductions are made depending on
how the subsidy is used by the recipients ( i.e., to pay rents). 100 per cent of the subsidy is
countervailable. Only in case the subsidy is not de facto tied to the production of the subsidized
product, is there in a second step an allocation of the benefit (100 pe r cent) over the total value of the
company’s production.

Use of “benefit” to assess the amount of s ubsidies that could cause serious prejudice

199. The more likely use of the term “benefit” in the Panel’s question is the extent to which
contract payments contributed to and will contribut e to the serious prejudice suffered by Brazil. In
other words, to what extent do contract payments enhance and support the production and exports of
US upland cotton, and to what extent do they su ppress world prices? Braz il has produced evidence,
inter alia , through Professor Sumner’s analysis, that the contract payments have various effects on
production, exports and world prices. The isolated effects of these contract payments are less than
those created by the marketing loan programme. Brazil acknowledged that one reason why the
serious prejudice effects of PFC payments are relatively small is because a certain percentage of the
payments were capitalized into land va lues and subsequently into land rents.
397 Brazil noted that this

 394 In Canada – Aircraft, the Appellate Body found that:
…the word “benefit”, as used in Article 1.1(b), implie s some kind of comparison. This must be so, for
there can be no “benefit” to the recipient unless the “financial contribution” makes the recipient “better
off” than it would otherwise have been, absent that contribution. In our view, the marketplace provides
an appropriate basis for comparison in determining whether a “benefit” has been “conferred” because
the trade distorting potential of a “financial contribution” can be identified by determining whether the
recipient has received a “financial contribution” on terms more favourable than those available to the
recipient in the market.”(emphasis in original and underlining added)
Appellate Body Report, Canada – Aircraft, WT/DS70/AB/R, para. 157; The same language is included in
Appellate Body Report, US – CVD’s on EC Products, WT/DS212/AB/R, para. 106.
 395 Appellate Body Report, Canada – Aircraft, WT/DS70/AB/R, para. 154.
 396 Appellate Body Report, US – CVD’s on EC Products, WT/DS212/AB/R, para. 110.
 397 Brazil’s 27 October 2003 Answer to Question 179, paras. 164-167.

evidence is supported by Professor Sumner’s c onclusions because significant amounts of the PFC
payments (approximately two thirds) were available to generate production effects.
398 Finally, Brazil
also demonstrated that the total USDA-estimat ed increase in land values from PFC payments
translated into less than one per cent of an upland cotton producers’ total costs.399

200. The United States 22 December 2003 response now claims for the first time that only 35 per
cent of the value of decoupled payments benef ited upland cotton production during the period of
investigation.400 Having asserted this fact, the United States bears the burden of proving it. 401 But
even a cursory look at the evidence proffered by th e United States shows that this assertion is simply
not true.

201. The US assumption is that every dollar of ev ery contract payment placed into the bank
accounts of producers leasing land (approximately 65 per cent of upland cotton land is “leased” or
“rented”) is immediately required to be paid to non-producer landlords. 402 The United States
produced no evidence that 100 per cent of even PFC payments (let alone market loss assistance, direct
or counter-cyclical payments) to cash rent cott on producers were consumed by increased rents during
the period of investigation or since contract payments began in 1996. 403 Further, the United States
produces no evidence that 65 per cent of the upland co tton land is cash-rented. In fact, only 25 per
cent of the US upland cotton land is cash-rented, whereas 40 per cent is share-rented. 404 As
established above, share-rent lease agreements mean that the landlord is considered a producer of
upland cotton. Therefore, even under the flawed US theory, much more than just 35 per cent, in fact
at least 75 per cent, should be considered benefits to upland cotton producers.

202. But do the facts even support the US allegati on that rents increased because of the contract
payments? Indeed, the most rece nt USDA cotton cost of production data shows that the opportunity
cost of land decreased from $58.33 per acre in MY 1997 to $46.76 per acre in MY 2002.
405 This data
was reinforced by testimony in 2001 by the NCC President, who disagreed with the suggestion that
“the payments that we are receiving are increasing land values or holding them up”.406 Instead of PFC
payments, the NCC President stated his belief that the “strong economy outside of agriculture … has
supported land values … ”. 407 This cotton-specific cost data and testimony by the recipients of PFC
payments contradicts the US “35 per cent” assumption.

 398 Brazil’s 27 October 2003 Answer to Question 179, para. 167.
 399 Brazil’s 27 October 2003 Answer to Question 179, para. 167.
 400 US 22 December 2003 Answers to Questions, para. 157.
 401 As the party asserting this fact, the United States bears the burden of proving it. See e.g. Appellate
Body Report, Japan – Apples, para. 157 (“It is important to distinguish, on the one hand, the principle that the
complainant must establish a prima facie case of inconsistency with a provision of a covered agreement from,
on the other hand, the principle that the party that asserts a fact is responsible for providing proof thereof.”).

402 US 22 December 2003 Answers to Questions, para. 158.
 403 Furthermore, even cash-rent landlords also make decisions that affect production such as land
levelling, irrigation installation and related investments. Therefore benefits to landlo rd have significant effects
on yields and acreage planted to cotton.
 404 Exhibit Bra-16 (Characteristics and Production Costs of US Cotton Farms, USDA, October 2001, p.
23).

405 Exhibit Bra-323 (Costs and Returns of US Upland Cotton Farmers, MY 1997-2002, USDA).
 406 Exhibit Bra-41 (Congressional Hearing, “The Future of the Federal Farm Commodity Programmes
(Cotton),” House of Representatives, 15 February 2001, Testimony of Robert McLendon, p. 21).
Mr. McLendon responded to a question by Congressman Dooley who stated: “I am concerned that a significant
portion of that is going to be capitalized in rents, land values – and, you know, I hope we find ways in which we
can structure our program so … we can actually see asse t valuations that are more commensurate with actual
market conditions … .”
 407 Mr. McLendon was accompanied at the Congressional Hearing by now-President of the NCC,
Mark Lange (then Chief NCC Economist), who said nothing to contradict Mr. McLendon’s sworn testimony.
See Exhibit Bra-41 (Congressional Hearing, “The Future of the Federal Farm Commodity Programs (Cotton),”
House of Representatives, 15 February 2001, p. 6).

203. It is also possible to test the US “35 pe r cent” assumption by examining non-cotton-specific
cash rent and land value data. If the US assumption we re correct, then cash land rents for cropland in
states where upland cotton is produced should have increased significantly since the guaranteed PFC
payments started in MY 1996. Further, it would be presumed, if the Unite d States is correct, that
65 per cent of all the PFC upland cotton-related pa yments (as well as the other three contract
payments) were captured by increased cash rents fo r cropland during MY 1996-2002. But this is
simply not the case, as demonstrated below.

204. USDA carefully tracks cropland cash rents in all US states. In almost all of the 16 states
where cotton is produced, land rents for cropland increased only slightly between MY 1996 and MY
2003.
408 This is in contrast to the value of cr opland which increased to a far greater extent. 409 The
United States seeks to have the Panel assume that both cropland values and cash rents increased
significantly by stating, in paragraph 156 of its 22 December 2003 response, that “land rent data …
follows the same trend” as land values. This is a misleading statement because, while cash rents
increased, they did so at a much lower rate. For example, in Texas, cash rents for land increased
13.5 per cent ($18.50 to $21.00 per acre) during 1996-2003 while the value of an acre of cropland
increased 28 per cent, from $674 in 1997 to $937 in 2003. 410 The increase in cash rents in Texas is
less than the inflation rate (17 per cent) for the seven-year period.411

205. Cash rents in other US states produci ng upland cotton increased by similar amounts:
412

US State413 Cash Rent 1996 Cash Rent 2002 Difference Percentage Change
Texas $18.50 $21.00 $2.50 13.5 per cent
Oklahoma $25.60 $27.00 $1.40 5.5 per cent
Arkansas $48.80 $53.00 $4.20 8.6 per cent
Louisiana $53.00 $57.00 $4.00 7.5 per cent
Mississippi $45.00 $54.00 $9.00 20.0 per cent
Alabama $39.00 $36.00 - $3.00 -7.7 per cent
Florida $30.00 $32.00 $2.00 6.7 per cent
Georgia $36.40 $39.00 $2.60 7.1 per cent
South Carolina $23.80 $28.50 $4.70 19.7 per cent

 408 Exhibit Bra-413 (USDA, NASS “Agricultural Cash Rents, July 1999, p. 2-3); Exhibit Bra-414
(USDA, NASS “Agricultural Land Values and Cash Rents,” August 2003, p. 12-13.)(examining cropland cash
rent values).

409 Exhibit Bra-415 (USDA, NASS, “Agricultural Land Values”, April 1999, p. 4); Exhibit Bra-414
(USDA, NASS, “Agricultural Land Values and Cash Rents,” August 2003, p. 12-13).
 410 Exhibit Bra-413 (USDA, NASS “Agricultural Cash Rents, July 1999, p. 2-3); Exhibit Bra-414
(USDA, NASS “Agricultural Land Values and Cash Rents”, August 2003, p. 12-13.)(examining cropland cash
rent values).

411 http://woodrow.mpls.frb.fed.us/research/data/us/calc/ ($1.00 in 1996 is worth $1.17 in 2003).
 412 Exhibit Bra-413 (USDA, NASS “Agricultural Cash Rents, July 1999, p. 2-3); Exhibit Bra-414
(USDA, NASS “Agricultural Land Values and Cash Rents”, August 2003, p. 12-13.)(examining cropland cash
rent values).

413 Data for several other states is distorted by the f act that cash rents for irrigated land, which is not
used for upland cotton production, are shown.

206. As the figures demonstrate, the increase in cash re nts is below the inflation rate of 17 per cent
in most of the states. The highest numerical increase between 1996 and 2 002 is $9 in Mississippi.
Being extremely conservative, Brazil has assume d that this Mississippi increase represents the
increase in cash rents for all US upland cotton cropland. It follows that for MY 2002 (with
13.8 million acres planted to upland cotton) and w ith about 25 per cent of upland cotton land cash-
rented, these $9 mean that $31 million of the total of $454.5 million
414 in direct payments found their
way into increased cash rent s for upland cotton land. 415 Thus, USDA’s own data shows that only
6.8 per cent of the MY 2002 direct payments could have been attributable to increased cash rents –
not 65 per cent as the United States asserts.

207. It should be noted that none of this analys is includes CCP payments. If CCP payments were
included with direct payments, the percentage share would be even lower. Generally, the
United States agrees that cash rents also reflect long-term expectations about crop prices and
programme benefits. While direct payments are pa id regardless of prices, CCP payments vary with
prices. Therefore, one can expect that the paym ents will be discounted by a margin reflecting the
uncertainty about the availability of CCP payments in future years for which cash rents are fixed.

208. The United States claims that cash rents are “sticky” and do not respond quickly to the
increased net revenue from the use of the land.
416 The United States further suggests that the
estimated 34-41 per cent of PFC payments capture d for MY 1997 as set out in an August 2003 ERS
study will be higher for later years. 417 But the evidence outlined above suggests that cash rents for
cropland did not increase significantly between MY 1996- 2002, and thus do appear to reflect to any
considerable extent the effects of PFC or other contract acreage payments. The US assertion amounts
to speculation, as the authors of the August 2003 study properly acknowledge. 418 Cash rents may be
just as easily, if not more, affected by expected low prices for upland cotton, as suggested by the NCC
President419, or other factors such as interest rates. The absence of evidence of significant cash rent
increases more than seven years after enactment of the 1996 FAIR Act suggests that whatever
production effects from direct payments and CCP paym ents exist presently will continue to exist in
the future – supporting Brazil’s threat of serious prejudice claims.

209. The above discussion has focused on PFC payments , since that is the only type of contract
payment for which the United States presented eviden ce. However, the United States “35 per cent”
assumption also was made regarding CCP payments and market loss assistance payments.
420 T h e
Panel will look in vain for any evidence produced by the United States that only 35 per cent of MY
2002 CCP payments benefited upland cotton prod ucers who cash rent upland cotton cropland.
Because CCP payments are triggered on a year-by-year basis depending on low prices for upland
cotton, a non-producing landlord cannot know in what amount CCP payments will be made. Further,
as Brazil has demonstrated repeatedly, given the high non-land-related production costs involved in
producing cotton, most US producers simply could not profitably produce cotton without CCP

 414 Brazil’s 22 December 2003 Answer to Question 196, para. 8.
 415 13.8 million acres times 0.25 times $9 equals $31,050,000.
 416 US 22 December 2003 Answer to Question 242, para. 157.
 417 US 22 December 2003 Answer to Question 242, para. 157.
 418 Exhibit Bra-310 (“The Incidence of Government Program Payments on Agricultural land Rents:
The Challenges of Identification,” Roberts, Kirwan, Hopkins, p. 769) (“It could be … [and] [m]ore research is
needed to verify these incidence estimates to ascertain the time it takes for re nts to reflect changes in associated
government payments and to measure how incidence is ultimately capitalized into land values.”).

419 Exhibit Bra-41 (Testimony of Roberto McLendon, p. 7)(“I think people that are professional farm
managers have been concerned for the last 2 or 3 years that we are going to have a decrease in land values
because they saw it in the 1980’s. We had low prices a nd a bad situation. Again, in my opinion, we have had
such a strong economy outside of agriculture it has supported land values, but that support won’t last forever …
.”)

payments. Therefore, there is little, if any, b asis for a non-producing landlord to demand increased
rents to capture CCP payments.

210. The evidence that is before the Panel indi cates that every eligible upland cotton producer
planting on upland cotton base acreage (approximately 75 per cent of such producers), received a
CCP check in MY 2002.
421 The record shows that the high co sts of these producers meant that they
had to use this money to cover their production cost s, including the costs related to the cash rents they
were required to pay. Thus, in an immediate “c over your annual costs” sense, 100 per cent of the
payments each year of the period of investigation “benefited” the producers of upland cotton.422

211. Similarly, the United States provides no evidence concerning how much of the market loss
assistance payments during MY 1998-2001 did not benefit upland cotton farmers. Brazil
demonstrated that all producers (not non-producing landlords) planting on upland cotton or other base
acreage were entitled to receive market loss assistance payments. The producers had the legal right to
receive these payments. Thus, the United States did not meet its burden of showing that only 35 per
cent of the market loss payments “benefited” upland cotton production.

212. Finally, the United States provides no evidence to support its argument that only “35 per
cent” of the amount of direct payments unde r the 2002 FSRI Act “benefit” producers of upland
cotton. As Brazil demonstrated, in MY 2002, US cotton producers needed all of the direct payment
subsidies to cover their production costs and to re-coup losses from MY 2001.

213. Brazil recalls its showing that even under th e US approach, the percentage should be 75 per
cent rather than 35 per cent, i.e., including land that is owned or share rented by producers. However,
also for producers that cash rent their upland co tton land, not all of their contract payments are
capitalized in land values and translated into higher cash rents. Thus, by far the greatest portion of
contract payments is available to cause productio n effects along the lines discussed in the literature
and by Professor Sumner
423, as well as by Brazil.424

214. In conclusion, 100 pe r cent of the contract payments paid to, received, and deposited in the
accounts of current “producers” of upland cotton (a pplying Brazil’s allocation methodology) in MY
1999-2002 constituted a “benefit” within the meani ng of Article 1.1(b) of the SCM Agreement.
425
The relevant issue regarding “benefit” to production is not, as the United States argues, the amount of
the funds paid; this dispute does not involve a counte rvailing duty investigation. Rather, the focus of
any generic “benefit” analysis is on the effects of the subsidies. The record shows that the various
types of contract payments stimulated US produc tion of upland cotton to different extents, ranging
from 15 per cent for PFC payments to 40 pe r cent for CCP payments, as estimated by
Professor Sumner.426

243. Can the Panel assume that any support at all, even marketing loan programme
payments, benefits upland cotton if an upl and cotton producer has other agricultural
production besides upland cotton? USA

 421 Brazil’s 18 November 2003 Further Rebuttal Submission, Section 2.1, para. 23; Brazil’s
9 September 2003 Further Submission, paras. 59-331; Brazil’s 22 August 2003 Rebuttal Submission, para. 50
citing Exhibit Bra-173 (Revised Estimate of Support Granted by Commodity via Counter-Cyclical Payments).
 422 Brazil’s 27 October 2003 Answers to Question 125(c), paras. 15-25.
 423 Brazil’s 9 September 2003 Further Submission, Annex I, paras. 37-42 and Exhibits Bra-280 and
Bra-345 (paras. 18-34).
 424 Brazil’s 18 November 2003 Further Rebuttal Submission, Section 3.7.5.
 425 Similarly, 100 per cent of the contract payments , as allocated by Brazil, were “support to” upland
cotton, within the meaning of Article 13(b)(ii) of the Agreement on Agriculture.
 426 Brazil’s 9 September 2003 Further Submission, Annex I, paras. 43-51.

Brazil’s Comment:

215. Contrary to the assumption permeating the US 22 December 2003 response, Brazil reiterates
that there is no legal requirement for a claimant under Part III of the SCM Agreement to quantify on
an ad valorem basis the amount of the challenged US subsidies.
427 Annex IV – which the US
response shows is the only legal basis for its arguments – is dead. Even when alive, it only applied to
Article 6.1(a), not Article 6.3 of the SCM Agreemen t. The Panel’s obligation under Part III of the
SCM Agreement is to conduct an objective assessment of the evidence regarding the “effects” of the
challenged subsidies. This means it must first ex amine the evidence regarding whether each of the
supports is a “financial contribution,” confers a “benefit,” and is “specific”.

216. Detailing the precise amount of the financial contribution ending up in the bank accounts of
US upland cotton producers is not a legal pre-requisite to Brazil’s actionable subsidy claims. If the
Panel finds that Brazil is legally required to examine the exact amount of the subsidies in order to
assess their “effects,” then it need only ask why the United States h as refused to produce the evidence
to determine such an amount. 428 In the absence of the most ac curate evidence, withheld by the
United States, Brazil refers the Panel to eviden ce and the allocation of the amount of “support to
upland cotton” it has presented in the peace clause portion of its various submissions. 429 T h i s
evidence is part of the record pursuant to Brazil’s alternative arguments and is offered as evidence of
the amount of such subsidy payments.

217. With the above-referenced qualifications, Br azil would answer the Panel’s question with a
qualified “yes”. First, Brazil agrees with the United States’ assumption, in paragraph 159 of its
22 December 2003 response, that the full amount of marketing loan payments for upland cotton
production “benefits” US producers even if they al so produce other crops. The logic of the US
assumption means that the full amount of crop insu rance and Step 2 payments, which are also de jure
linked to production, sale or export of upland cotton, would “benefit” upland cotton production. With
respect to contract payments, Brazil’s allocati on methodology first considers every acre of upland
cotton grown on an acre of upland cotton contract base to “benefit” (or constitute “support to”) upland
cotton.
430 In other words, Brazil’s allocation methodol ogy does assume that all such cotton to cotton
matches do “benefit” upland cotton, regardless of the other agricultural production of the farm. 431
Brazil notes that the cotton to cotton matches accounts for most of the contract payments to current
upland cotton producers. 432 However, for those cotton producers growing cotton on non-upland
cotton base acres, Brazil does not ignore other agricultural production of the particular farm. Rather,
it allocates the payments attributable to upland co tton based on the overall composition of programme
crops for that particular farm. 433 Of course, Brazil’s methodology could not be fully applied because
of the refusal of the United States to produce the necessary farm-specific information.434

 427 Brazil’s 18 November 2003 Further Rebuttal Submission, paras. 96-107; Brazil’s 2 December 2003
Oral Statement, paras. 4-6. See also Brazil’s comment on Question 231, above.
 428 US 18 and 19 2003 December Letters to the Pa nel; US 20 January 2004 Letter to the Panel; See
also Brazil’s 28 January 2004 Comments and Requests Regarding US Data.
 429 These facts are summari zed in Annex 1 to Brazil’s 9 October 2003 Closing Statement, but are also
contained in a number of Brazil’s earlier submissions to the Panel beginning with its 24 June 2003 First
Submission; See also Brazil’s 18 November 2003 Further Rebuttal Submission, Sections 2.1 and 2.4; Brazil’s
2 December 2003 Oral Statement, Sections 5.1 and 5.3.
 430 Brazil’s 20 January 2004 Answers to Additional Questions, para. 47.
 431 Brazil’s 20 January 2004 Answers to Additional Questions, paras. 44-48.
 432 See Electronic PFC and DCP Summary Files provided on 18 and 19 December 2003 respectively.
See also Brazil’s 18 November 2003 Further Rebuttal Submission, paras. 22-24.
 433 Brazil’s 20 January 2004 Answers to Additional Questions, paras. 48-55. Thus, contrary to the US
assertions in the last sentence of paragraph 163, Brazil does not advocate allocating a non-tied payment across
the total value of the recipients production.
 434 Brazil’s 28 January 2004 Comments and Requests Regarding US Data, Sections 4, 8 and 9.

218. The US 22 December 2003 response highlights th e differences between the parties on how to
allocate the “benefit” for payments made under the four types of contract payments. Further, the US
response reflects the parties’ differences over whethe r the quantification exercise is relevant for the
peace clause “support to cotton,” or whether it is in stead relevant for assessing Brazil’s claims under
Part III of the SCM Agreement.

219. Brazil’s position is that the allocation 435 of contract payments is required in the peace clause
portion of the proceeding. Brazil has set forth in considerable detail the factual evidence supporting
the de facto link between the contract payments and the production of upland cotton. 436 Brazil further
provided considerable detail concerning its allo cation methodology and the application of that
methodology.437 Brazil even attempted to apply the US “across the value of the farm” methodology,
based on the incomplete and scrambled US data. 438 Brazil presented extensive legal arguments
supporting the requirement under Article 13(b)(ii) to collect and tabulate any and all support for a
specific commodity such as upland cotton. 439 For example, Brazil’s 22 August 2003 Rebuttal
Submission stated:

[T]he phrase “support to a specific commodity” … read in its context, requires the
Panel to tabulate any non-green box domest ic support payments that are linked in
some manner to the production of upland cotton. Contrary to the US arguments,
440
there is nothing in the text of Article 13(b)(ii) limiting the support to only that
provided to a single commodity. Nor does the text limit support to only that
requiring a recipient to produce or to produ ce a specific commodity as the United
States alleges.
441 Rather, it requires examining whether a specific commodity
receives support from a domestic support measure identified in the chapeau of Article
13(b) and whether there is some sort of link between the support at issue and the
specific commodity.
442 Thus, the question of “support to a specific commodity” is
fundamentally a factual question requiring an examination of different types of
support set out in the chapeau of Article 13(b).443

 435 Brazil’s 11 August 2003 Answer to Question 40 provided detailed analysis regarding the application
of its 14/16th methodology. Brazil explained in its Rebuttal Submission that: “Necessarily, this process requires
allocation of support that may be provided to producers of more than one type of agricultural product, but which
is not provided to producers in general.” See Brazil’s 11 August Answer to Question 40. An allocation process
is also required with respect to Annex 3 paragraph 7 support to processors of agricultural products,” ‘to the
extent that such measures benefit the producers of the basi c agricultural product.” Brazil’s 22 August 2003
Rebuttal Submission, note 33.

436 The United States has refused to produce the most relevant information – the precise amount of
contract payments received by current US upland cotton producers. Brazil summarized much of the available
evidence, demonstrating that the contract payments are, de facto, tied to the production of upland cotton, in its 9
October 2003 Closing Statement, Annex I.

437 Brazil’s 11 August 2003 Answer to Question 40. Brazil’s 22 December 2003 Answer to Question
258, paras. 43-55; Brazil’s 28 January 2004 Comments and Requests Regarding US Data, Sections 9 and 10.
See also Brazil’s 11 August 2003 Answer to Question 40. An allocation process is also required with respect to
Annex 3 paragraph 7 support to processors of agricultural products,” ‘to the extent that such measures benefit
the producers of the basic agricultural product.” Brazil’s 22 August 2003 Rebuttal Submission, note 33.
 438 Brazil’s 28 January 2004 Comments on Data Provided by United States, Section 10.
 439 See Brazil’s 22 August Rebuttal Submission, paras. 13-22; Brazil’s 22 August 2003 Comments on
US Answers, paras. 48-53, 58, 61; Brazil’s 11 August 2003 Answers to Questions, paras. 54-55, 57-58, 61-64,
66-72, 129-132; Brazil’s 24 July 2003 Closing Statement, para. 8; Brazil’s 22 July 2003 Oral Statement, paras.
13-26; Brazil’s 24 June 2003 First Submission, paras 130-134.

440 US 11 August Answer 2003 to Question 38, para. 81.
 441 US 11 August 2003 Answer to Question 38, para. 81.
 442 Compare Brazil’s 11 August 2003 Answer to Question 41, paras. 57-58.
 443 Brazil’s 22 August 2003 Rebuttal Submission, para. 14.

220. The US 22 December 2003 response reiterates, in paragraphs 161-163, the US peace clause
arguments that the absence of any requirement to produce upland cotton in the statutory provisions of
the 1996 and 2002 Farm Acts for direct and counte r-cyclical payments (as well as PFC and market
loss assistance payments) completely insulates th ese subsidies from any actionable subsidy challenge
during the implementation period. Brazil demonstr ated how this extremely narrow US “production
requirement” test is contrary to the chapeau of Article 13(b)(ii), contrary to the context of Annex 2,
paragraph 6(e), contrary to the context of Annex 3, paragraphs 10, 12, and 13, and contrary to the
context of the AMS definition in Artic le 1(a) (referring to “in general”).
 444 Brazil also demonstrated
that the US “production requirement” test is cont rary to the object and purpose of the Agreement on
Agriculture, because it carves out huge amounts of amber box subsides from any discipline of the
SCM Agreement during the implementation period.445

221. The United States argues, at paragraph 163 of its 22 December 2003 response, that Brazil’s
allocation methodology “eliminates the concept of non-product specific support for purposes of the
peace clause since a non-tied payment may always be allocated according to the recipient’s
production”. Brazil notes again its fundamental disagreement with the US assumption that
$935.6 million in CCP payments and $454.5 million in direct payments paid in MY 2002 to current
producers of upland cotton are “untied” subsidies.
446 The overwhelming evidence in the record shows
they are de facto “tied” to upland cotton production.447 Further, the United States incorrectly assumes
that “non-product specific support” is the language set out in Article 13(b)(ii). The actual text is
“support to a specific commodity”, which requires the tabulation – and allocation if necessary – of
any and all support provided to producers, users, or e xporters of a particular product. The test is not
whether the domestic support requires production, but rather whether the domestic support provides
support for the production of a particular commodity.448

222. Further, as Brazil noted in its 11 August 200 3 response, all of the domestic support measures
challenged by Brazil have an “upland cotton specifi c link in terms of historic, updated, or present
upland cotton acreage, present upla nd cotton production or prices, or upland cotton groups of
insurance policies or other specific upland cotton provisions”
449 The ordinary meaning of the terms
“non-product specific” support that is provided “in general” is support to producers of all or almost all
commodities or agricultural products, such as irrigation, state credit programmes, and other
infrastructure subsidies such as farm roads. Thus, even if the peace clause test were “product-specific
support,” Brazil’s interpretation does not read out any meaning to “non-product specific support”.

223. In sum, Brazil’s methodology for allocating th e various subsidy payments that “benefit” or
“support” upland cotton is reasonable and based on an extensive factual record demonstrating the link
between such payments and current upland cotton production. If the United States disagreed, it was
required to do more than simply assert the de jure form of the legal instruments of the contract
payments. Rather, it must produce the farm-specific evidence that would permit a detailed assessment
of the “other agricultural production” (and the valu e) of each producer of upland cotton. It has
refused to do so. Therefore, the US 22 Dece mber 2003 response to Question 243, besides being

 444 See, in particular, Brazil’s 22 August 2003 Rebuttal Submission, paras. 15-22 (legal arguments), as
well as factual evidence regarding each direct payment s ubsidy, in paras. 24-52. Since August, Brazil has
presented considerable additional evidence establishing the de facto link between each type of contract payment
and the production of US upland cotton. See Annex 1 of Brazil’s 9 October 2003 Closing Statement; Brazil’s
27 October 2003 Answers to Questions, paras. 7-26, 37-40; Brazil’s 18 November 2003 Further Rebuttal
Submission, Section 3.7.5; Brazil’s 2 December 2003 Oral Statement, Section 5.3.

445 Brazil’s 22 July 2003 Oral Statement, paras. 21-25.
 446 Brazil’s 22 December 2003 Answers to Question 196, para 8.
 447 See e.g. Brazil’s 9 October 2003 Closing Statement, Annex I; Brazil’s 27 October 2003 Answers to
Question 125(2)(a), paras. 7-25; Brazil’s 18 November 2003 Further Rebuttal Submission, Section 3.7.5.
 448 Brazil’s 22 August 2003 Rebuttal Submission, paras. 15-22.
 449 Brazil’s 11 August 2003 Answer to Question 41, paras. 57-58.

largely legally and factually wrong, is an astounding display of hubris in light of the US refusal to
produce the very evidence that would permit the application of the methodology it advocates.

244. What proportion of the 2000 cottonseed payments benefited producers of upland cotton ,
given that payments were made to first handlers, who were only obliged to share them with the
producer to the extent that the revenue from sale of the cottonseed was shared with the
producer? (see 7 CFR §1427.1104(c) in Exhibit US-15). BRA

245. Can a panel take Green Box subsidies into account in considering the effects of non-
Green Box subsidies in an action based on Articles 5 and 6 of the SCM Agreement? BRA, USA

246. Can a panel take prohibited subsidies into account in considering the effects of subsidies
in an action based on Articles 5 and 6 of the SCM Agreement? BRA, USA

Brazil’s Comment:

224. The Panel is well aware that Brazil considers Article 5 and its referen ce to “any” subsidy to
require the Panel to take prohibited subsidies into account for a serious prejudice claim.
450 There is no
contradiction between the implementing obligations of a Member under Articles 4.7 and 7.8 of the
SCM Agreement. Thus, the Panel must take prohi bited subsidies into account in considering the
effects of subsidies in an action based on Articles 5 and 6 of the SCM Agreement.

247. Can the Panel take into account trends and volatility in market and futures prices of
upland cotton after the date of establishment of the Pa nel? If so, how do they affect the analysis
of Brazil's claim of a threat of serious prejudice? BRA, USA

Brazil’s Comment:

225. Brazil’s 22 December 2003 response to this ques tion covers most of the points raised in the
US 22 December 2003 response. In response to the US argument at paragraph 149 that the Panel’s
terms of reference as well as Brazil’s threat claims are limited to subsidy payments up to, but not
after, 18 March 2003, Brazil refers the Panel to its Comments to Question 194 above, and to its
20 January 2004 Answer to Questi ons 257(ii), at paragraphs 17-22 . Brazil has, further, responded to
improper use of futures prices at the time of planti ng, instead of the adjusted world price, in its
Comments to Questions 212 and 213, above.

VI. STEP 2

248. In respect of the level of Step 2 payments in certain time periods, the Panel notes, inter
alia, footnote 129 in the US first written submission; footnote 33 in the US 18 November further
rebuttal submission; and Exhibit BRA-350. Have Step 2 payments ever been zero since the
elimination of the 1.25 cent per pound threshold in the FSRI Act of 2002? In what
circumstances could a Step 2 payment be zero? How does the elimination of the 1.25 cent per
pound threshold in the FSRI Act of 2002 affect your response? BRA, USA

Brazil’s Comment:

226. Brazil notes the US admission that one of th e reasons for the elimin ation of the 1.25 cent
threshold is to “correct for some long term changes in the valuation of currencies”.
451 T h u s , t h e
United States effectively admits that Step 2 pa yments cause US exports to increase despite the

 450 Brazil’s 22 December 2003 Answers to Questions, para. 147; Brazil’s 27 October 2003 Answers to
Questions, paras. 108-110.
 451 US 22 December 2003 Answers to Questions, para. 171.

appreciation of the US dollar. In fact, the United States has never rebutted the considerable evidence
that one of the main effects of the US upland cott on subsidies is to cause US exports of upland cotton
to increase even when the US dollar is appreciating rapidly.
452

249. The Panel notes that the definition of eligible "exporter" in 7 CFR 1427.104(a)(2)
includes "a producer":

(a) How does this reconcile with Brazil's argume nt that Step 2 "export payments" do not
directly benefit the producer?
453 How, if at all, would this be relevant for an analysis of
the issue of export contingency under the Agreement on Agriculture or the SCM
Agreement? BRA

(b) How does this reconcile with Dr. Glauber's stat ement in Exhibit US-24, p. 3 (referring to
"the 1990 Farm Bill and subsequent legi slation") that Step 2 payments do not go
directly to the producer? USA

(c) What proportion of Step 2 "export p ayments" go to producers? Please supply
supporting evidence. USA

VII. REMEDIES

250. Does Brazil seek relief under Article XVI of GATT 1994 in respect of expired measures?
What type of recommendation would the Panel be authorized to make? (Brazil further
submission, paragraph 471 (iii)) BRA

251. In light, inter alia, of Article 7.8 of the SCM Agreement, if the Panel were to find that any
subsidies have resulted in adverse effects to the interests of another Member within the meaning
of Article 5 of the SCM Agreement, should it make any recommendation other than the one set
out in the first sentence of Article 19.1 of the DSU? BRA

252. Without prejudice to any findings by the Panel, if the Panel were to find that any of the
challenged measures constitute prohibited subs idies within the meaning of Article 3 of the SCM
Agreement, what are the considerations that should guide the Panel in making a
recommendation under Article 4.7 of the SCM Agreement relating to the time period "within
which the measure must be withdrawn"? What should that time period be? BRA

VIII. MISCELLANEOUS

253. Regarding the adjustment authority related to Uruguay Round compliance in s.1601(e)
of the FSRI Act of 2002 (the so-called "circuit-breaker provision"):

(a) Does it relate to export credit guarant ees, crop insurance and cottonseed payments?

(b) Does it relate only to compliance with AMS commitments?

(c) Is the authority discretionary? If so, can its exercise be limited by the legislative branch
of government?

(d) How would the Secretary exercise her auth ority to prevent serious prejudice to the
interests of another Member? How would she exercise her authority to prevent a threat

 452 Brazil’s 9 September 2003 Further Submission, paras. 124-128 and the Exhibits cited therein;
Brazil’s 18 November 2003 Further Rebuttal Submission, paras. 78-80.
 453 For example, Brazil's response to Panel Question 125, paragraph 14.

of serious prejudice to the interests of another Member? At what time and on the basis
of what type of information would she exercise her authority?

(e) What does "to the maximum extent practica ble" mean? In what circumstances would it
not be practicable for the Secretary to exercise her adjustment authority? USA

Brazil’s Comment:

227. In its arguments at paragraphs 176, 178 and 180 of its 22 December 2003 response, the
United States speculates about the “thoughts,” “antic ipations,” “contemplations,” “understandings”,
and “belief” of the US Congress. Yet it provid es no citation to the extensive Congressional debates
on the 2002 FSRI Act. Speculation about legislative (or negotiators’) intentions not backed up by
reference to the record of the debates is not po sitive evidence. Further, if any Member could
successfully plead compliance with WTO rules by simply inserting language asserting the provision
“provides assistance to producers in a way that is consistent with [its] obligations under the Uruguay
Round Agreement on Agriculture”
454, then there would be little role for any WTO panel. The only
“evidence” of US legislators’ intent before the Panel is the text of the 2002 FSRI Act.

228. In sum, the record now shows that both Br azil and the United States agree that (1) Section
1601(e) applies only to Total AMS
455, (2) Section 1601(e) does not apply to serious prejudice caused
to US trading partners by US subsidies to upland cotton covered by the 2002 FSRI Act 456, and, (3) the
2002 FSRI Act does not provide any discretion for the USDA Secretary specifically to limit the
amount of upland cotton marketing loan, Step 2, direct or counter-cyclical payments.457

254. Would payments made after the date of panel establishment be mandatory under the
marketing loan, direct payments, counter-cyclical payments and user marketing certificate (step
2) programmes, but for the circuit-breaker provision? USA

Brazil’s Comment:

229. Brazil established that mark eting loan, Step 2, direct and counter-cyclical payments are
mandatory, within the traditional mandatory/discretionary distinction under GATT/WTO law.
458 In its
20 January 2004 Answers to Additional Questions , Brazil has responded to US arguments that
conditions attached to the payment of subsidies would make these subsidies non-mandatory.459

230. Brazil notes further that the listed programmes are not only mandatory within the meaning of
WTO law, but are also mandatory under US budget law. They create a legal entitlement to the
payment.
460 While the United States now argues that payments depend on the availability of funds 461,

 454 US 22 December 2003 Answer to Question 253(a), para. 176.
 455 US 22 December 2003 Answer to Question 253(b), para. 178.
 456 US 22 December 2003 Answer to Question 253(d), para. 180.
 457 US 27 October 2003 Answer to Question 162, para 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 paym ents to qualified recipients.”), para . 97 (“there is no present limit on the
total amount of payments that can be made under each of these programs although for counter-cyclical
payments a maximum total outlay can be calculated using the base acres, base yields, and maximum payment
rate for each commodity produced during the historical base period.”).
 458 See Brazil’s 20 January 2004 Answers to Additional Questions, paras. 17 (with further references),
24-30.
 459 Brazil’s 20 January 2004 Answers to Additional Questions, paras. 27-30.
 460 Exhibit Bra-416 (“What Is A Farm Bill,” Congressi onal Research Service, Report for Congress, 5
May 2001) (“Commodity programmes are entitlements. Expenditures are based upon programme rules and
commodity market conditions. Eligible farmers are guara nteed legislatively-specified support based on these
rules and conditions.”). USDA noted with respect to an earlier commodity program – the deficiency payment

the legal entitlement nature of these programmes m eans that payments must be made – if necessary
after CCC funds have been replenished.

231. Finally, Brazil recalls that the United States argued in the peace clause portion of this dispute
that is has no control over the flow of the upland cotton subsidies.
462 In fact, there is no legal
mechanism to stem, or otherwise control, the fl ow of these upland cotton subsidies, which cause a
permanent source of uncertainty in the world upland cotton market.463 Thus, the US subsidies cause a
threat of serious prejudice, in violation of Articles 5(c), 6.3(c) and 6.3(d) as well as footnote 13 of the
SCM Agreement, and GATT Articles XVI:1 and 3.

255. How does Brazil respond to US assertions concerning the circuit-breaker provision? (see
US 2 December oral statement, paragraph 82). Does this mean that US subsidies cannot be
"mandatory" for the purposes of WTO dispute settlement? BRA

256. The United States submits that the Panel ca nnot make rulings without allocating precise
amounts of payments to upland cotton production . However, to the extent that such precise
data is not on the Panel record, to what extent can the Panel rely on less precise data, and on
reasonable assumptions, in fulfilling its duty under Article 11 of the DSU in this case? USA

Brazil’s Comment:

232. Because the United States has refused to co operate in producing the most precise data
concerning the amounts of contract payments to upland cotton producers, the Panel should (1) first
draw adverse inferences from the US refusal to c ooperate, and (2) use the best information available
in making its determination.
464 Brazil presents the factual and legal basis permitting the Panel to make
findings based on reasonable assumptions in its separate 28 January Comments and Requests
Regarding US Data. These separate comments address most of the points raised in the extensive –
and largely unresponsive – US answer to Question 256.465 Additional points are set out below.

233. First, there is relevant WTO jurisprudence th at provides a legal basis for the Panel to draw
inferences from the best information available in the record in order to comply with the requirements
of Article 11 of the DSU.
466 For example, in the US – Wheat Gluten case, the panel requested that the
United States supply it with certain information that had been redacted from the public version of a
USITC Report, but despite several requests, the United States refused to submit the information. 467
The panel decided that while having access to all the requested information from the United States
would have furnished a more extensive basis for its examination and have facilitated an objective
assessment of the facts, there were other facts of re cord that the panel was required to include in its
“objective assessment”.468 Ultimately, the panel determined that the United States violated provisions
of the Agreement on Safeguards on the b asis of the available factual record. 469 W h e n t h e

program – that “[d]eficiency payments are entitlements; that is, spending is determined by rules that define
eligibility and govern benefit levels rather than by the annual appropriations process. USDA and Congress have
no control over deficiency payment outlays.” (Exhibit Bra-417 (“Commodity Program Entitlements: Deficiency
Payments”, USDA, May 1993).

461 US 22 December 2003 Answers to Questions, para. 182.
 462 In the context of the peace clause arguments, the United States ar gued that it could not control the
amount of budgetary outlays under the programmes.
 463 Brazil’s 20 January 2004 Answers to Additional Questions, paras. 18-22 (with further references).
 464 Brazil’s 28 January 2004 Comments and Requests Regarding US Data, Section 6.
 465 See also Brazil’s 28 January 2004 Comments and Requests Regarding US Data, Section 11.
 466 Brazil’s 9 October 2003 Closing Statement, paras. 2, 9 ( citing Panel Report, Argentina – Textiles
 467 Appellate Body Report, US – Wheat Gluten, WT/DS166/AB/R, para. 168.
 468 Panel Report, US – Wheat Gluten, WT/DS166/R, para. 8.12.
 469 Panel Report, US – Wheat Gluten, WT/DS166/R, para. 8.12.

United States appealed this decision, the Appellate Body affirmed the panel, stating that “where a
party refuses to provide information requested by a pane l, that refusal will be one of the relevant facts
of record, and indeed, an important fact, to be taken into account in determining the appropriate
inference to be drawn”. 470 The Appellate Body further indicated that it “deplored the conduct of the
United States” in refusing to cooperate and provid e information that was within its exclusive
control.471

234. Another example of a panel using the best in formation available when a Member refused to
provide documents within its exclusive control is the Argentina – Textiles and Apparel case. In that
case, the United States requested Argentina to produ ce complete original customs documents of all
footwear imports to demonstrate that Argentin a was imposing and requiring payment of specific
duties in excess of its bound duty rates of 35 per cent ad valorem.
472 Argentina refused to provide the
complete (or any) documents. 473 The United States then provided examples of customs documents,
which Argentina contested on a variety of authenticity and relevance grounds. 474 The panel rejected
these Argentine arguments and found that “the United States has provided sufficient evidence”.475 In
so holding, the panel noted that “[i]n situations wh ere direct evidence is not available, relying on
inferences drawn from relevant facts of each case f acilitates the duty of inte rnational tribunals in
determining whether or not the burden of proof has been met”.476 The panel further held that there is a
requirement for collaboration of the parties in the presentation of the facts and evidence to the panel,
and emphasized especially the role of the respondent in that process.477

235. Applying these concepts to the allocation i ssues involved in the p eace clause portion of this
dispute indicates that the Panel has more than sufficient evidence in the record to support a reasonable
estimate of the amount of contract payment s upport provided to upland cotton in MY 1999-2002. 478
Brazil detailed its views concerning the appropriate allocation methodology for purposes of the peace
clause.479 Faced with the US refusal to provide the data necessary to calculate the precise amount of
support to upland cotton from the US contract pa yments using Brazil’s (and the US) allocation
methodology, Brazil offered extensive circumstantial evidence in support of its alternative so-called
“14/16th methodology”.480 The Panel may properly draw advers e inferences that the United States
data would, if produced, have shown that Brazil’s 14/16 th methodology undercounted the amount of
support to upland cotton. 481 Such an adverse inference supports the other extensive evidence that the
14/16th methodology provides a reasonable estimate.482

 470 Appellate Body Report, US – Wheat Gluten, WT/DS166/AB/R, para. 174.
 471 Appellate Body Report, US – Wheat Gluten, WT/DS166/AB/R, para. 171.
 472 Panel Report, Argentina – Textiles and Apparel, WT/DS56/R, para. 6.54.
 473 Panel Report, Argentina – Textiles and Apparel, WT/DS56/R, para. 6.56.
 474 Panel Report, Argentina – Textiles and Apparel, WT/DS56/R, para. 6.33.
 475 Panel Report, Argentina – Textiles and Apparel, WT/DS56/R, para. 6.65 (emphasis added).
 476 Panel Report, Argentina – Textiles and Apparel, WT/DS56/R, para. 6.39.
 477 Panel Report, Argentina – Textiles and Apparel, WT/DS56/R, para. 6.40.
 478 Brazil recalls that the United Stat es has invoked the peace clause of Article 13 of the Agreement on
Agriculture. As demonstrated by Brazil, the peace clause is in the nature of an affirmative defense. And even if
the Panel were to disagree, Brazil established a prima facie case of inconsistency of the US measures with
Article 13(b)(ii) of the Agreement on Agriculture. Neith er the claim nor the measur es to which it relates are
outside the Panel’s terms of reference, within the meaning of the Appellate Body decision in Japan –
Agricultural Products, paras. 129-130.
 479 Brazil’s 20 January 2004 Answers to Additional Questions, paras. 43-55.
 480 These facts are summari zed in Annex 1 to Brazil’s 9 October 2003 Closing Statement, but are also
contained in a number of Brazil’s earlier submissions to the Panel, beginning with its 24 June 2003 First
Submission. See also Brazil’s 18 November 2003 Further Rebuttal Submission, Sections 2.1 and 2.4; Brazil’s
2 December 2003 Oral Statement, Sections 5.1 and 5.3.
 481 Brazil’s 28 January 2004 Comments and Requests Regarding US Data, Section 6.
 482 Brazil’s 28 January 2004 Comments and Requests Regarding US Data, Section 6.

236. Turning to its claims of serious prejudice and threat thereof, Brazil remains of the firm view
that neither Part III of the SCM Agreement nor GA TT Article XVI requires an exact determination of
the amount of subsidies involved.
483 Rather, Brazil must demonstrate their effects.484 Nevertheless,
and as an alternative legal argument, Brazil presented extensive evidence concerning the amounts as
well as the effects of each challenged subsidy. This is th e same evidence Brazil used to demonstrate
the amount of support to upland cotton.

237. The United States asserts that Brazil has to a llocate all contract payments received by an
upland cotton producing farm over the total value of that farm’s sales.
485 However, even though the
United States alone is in exclusive control of the in formation that would permit such an allocation, it
has refused to produce that informa tion. Even if it would be Brazil’s burden to establish this fact, the
United States has done everything to frustrate Brazil’s ability to do so. In particular, the United States
first wrongly asserted that data on plantings of farms was not available to it and – after Brazil
demonstrated that this was incorrect486 – refused to produce the evidence.487

238. Indeed, even if the Panel were of the view that the US allocation methodology would provide
the best means of evaluating the amount of support to upland cotton, the refusal of the United States
to produce the requested data prevents the Panel fro m applying that methodology. In the face of this
lack of cooperation, the Panel is required to appl y some other methodology to estimate the amount of
contract payment support, i.e., Brazil’s 14/16 th methodology, or some variant thereof. To hold
otherwise would obviously penalize Br azil, who sought the information, inter alia, for the purpose of
demonstrating that the US methodology would rev eal amounts of support similar to those estimated
by Brazil’s own 14/16th methodology.

239. It is ironic that among the evidence that supports Brazil’s 14/16
th methodology is the
incomplete summary data provided by the United States. Brazil attempted to use that data to perform
a simplified version of the (improper) US allocation methodology. 488 Brazil does not believe, as the
Panel’s question suggests, that it can make reasona ble assumptions using this methodology based on
the fragmented summary data provided by the Unite d States. Nevertheless, although Brazil cautions
against the use of its results, and although this me thodology is not relevant for purposes of the peace
clause, Brazil notes that these results are only margin ally smaller than the results of Brazil’s own
14/16th methodology.489

240. Thus, contrary to the US 22 December 2003 arguments 490, there is evidence provided by
Brazil in the record on which the Panel can rely in making an objective assessment of the facts and in
deciding on Brazil’s claims under Part III of the SCM Agreement and GATT Article XVI (as well as
under Article 13(b)(ii) of the Agreement on Agriculture ). Brazil has also met its burden of proof in
establishing a prima facie case concerning its claims of inconsistency of the US measures with these
provisions.

 483 See Brazil’s comment on Question 243, above.
 484 See inter alia Brazil’s 2 December 2003 Oral Statement, paras. 4-6 (a nd the references cited
therein).

485 See US 22 December 2003 Answers to Questions, paras. 185-186, 10-11, 160-164.
 486 Brazil’s 18 November 2003 Further Rebuttal Submission, Section 2.2; Exhibits Bra-368 – Bra-369.
 487 See generally Brazil’s 28 January 2004 Comments and Requests Regarding US Data.
 488 Brazil’s 28 January 2004 Comments and Requests Regarding US Data, Section 10.
 489 Brazil’s 28 January 2004 Comments and Requests Regarding US Data, Section 10.
 490 US. 22 December 2003 Answers to Questions, paras. 185-186.

IX. ADDITIONAL QUESTIONS PO SED ON 23 DECEMBER 2003 AND
12 JANUARY 2004

257. The Panel takes note of the Appellate Body Report in United States – Sunset Review of
Anti-Dumping Duties on Corrosion-Resistant Carbon Steel Flat Products from Japan (DS244),
which was circulated to WTO Members on 15 Dece mber 2003. The Panel is aware that this
report has yet to be adopted by the Dispute Settlement Body. Nevertheless, the Panel asks the
parties to respond to the following related questions.

(a) In tht report, the Appellate Body cautioned against the "mechanistic" application of the
so-called "mandatory/discretionary distinctio n" and stated that the import of this
distinction may vary from case to case (para. 93). For the Appellate Body, the question
of whether a measure is mandatory or not is relevant "if at all" only as part of the
assessment of whether the measure is, as such, inconsistent with particular obligations.
How, if at all, are these statements and the related findings concerning the
mandatory/discretionary distinction in that Appellate Body Report relevant to:

 (i) the legal standard and elements Br azil sets out to establish its export and
prohibited subsidy claims under the provisions of the Agreement on Agriculture
and Articles 3.1(a) and (b) of the SCM Agreement, concerning: BRA

 - Step 2 payments (see, e.g. paras. 244-245 & 250 Brazil's first written submission;
Panel Question 109 and parties' responses/comments thereon); and

 - export credit guarantee programmes: GSM-102, GSM-103 and SCGP (see, e.g.,
para. 90 Brazil's oral statement at second Panel meeting).

 (ii) the legal standard and elements Brazil sets out to establish its serious prejudice
and "threat of serious prejudice" claims, and in particular, its designation of
marketing loan; crop insurance; counter-cyclical payments; direct payments
and Step 2 as "mandatory"? BRA

 (iii) the legal standard and elements Brazil sets out to establish its " per se" "serious
prejudice" claims (e.g. Brazil's 9 September further submission, para. 417 ff; US
oral statement at second Panel meeting, para. 86 ff.)? BRA

(b) How and to what extent are the legal and regulatory provisions cited in paras. 415 and
423 of Brazil's 9 September further submissi on "normative" in nature and treated as
binding within the US legal system (see, e.g., para. 99 of the Appellate Body Report)?
Does your response differ depending on whether the payments are dependent upon
market price conditions? BRA

(c) Does Brazil challenge as "mandatory" the "subsidies" themselves, the subsidy
programmes or the legal/regulatory provisions for the grant or maintenance of those
subsidies, or something else? BRA

(d) Does the "requirement" upon the CCC to make available "not less than" $5.5 billion
annually in guarantees have a normative character and operation? (see, e.g. Brazil's
response to Panel Question 142; Exhibit BRA-297, 7 USC 5641(b)(1); 7 USC 5622(a) &
(b); paragraph 201 of US 18 November furt her rebuttal submissions). Is this
requirement "mandatory"? If so, how does the CCC have "discretion" not to make this
amount of guarantees available in a given year? USA

(e) Does the US agree that, under the Budget Enforcement Act of 1990, the Office of
Management and Budget classifies the export credit guarantee programmes as
"mandatory" (see Brazil's response to Panel Question 142, para. 89)? Does this exempt
the programmes from the requirement to receive new Congressional budget authority
before it undertakes new guarantee commitments ( e.g. Exhibit BRA-117 (2 USC
661(c)(2))? USA

Brazil’s Comment:

241. Brazil makes several observations with r espect to the United States’ 20 January 2004
responses to Questions 257(d) and 257(e).

242. First, the evidence discussed in the Panel’s qu estions and the US responses is only relevant to
a determination whether the United States is in compliance with Article 10.1 of the Agreement on
Agriculture with respect to scheduled products
. For unscheduled products, the Appellate Body held
that it is inconsistent with Article 10.1 to provide any export subsidies. 491 Brazil has demonstrated
that CCC guarantees were extended for unscheduled products during the period 1992-2003. Having
also demonstrated that the CCC programmes constitute export subsidies (under Articles 1.1 and 3.1(a)
of the SCM Agreement, and under item (j)), Brazil has therefore established that the United States has
circumvented its export subsidy commitments with r espect to unscheduled products, in violation of
Article 10.1. Brazil has also demonstrated th at CCC guarantees continue to be available for
unscheduled products.492 Since it is inconsistent with Article 10.1 to provide any export subsidies, the
availability of CCC guarantees leads to a threat of circumvention of the US export subsidy
commitments.

243. Second, the test to determine whether the Unite d States is threatening to circumvent its export
subsidy commitments with respect to scheduled products is not
 whether the CCC guarantee
programmes are “mandatory” as opposed to “discretionary.” 493 Rather, to determine whether export
subsidies result in, or threaten to lead to, ci rcumvention of the United States’ export subsidy
commitments, the test set out by the Appellate Body in US – FSC is whether there is a “mechanism in
the measure” for CCC to “stem[], or otherwise control[], the flow of” CCC export credit guarantees.494

244. Under this test, the threat
 of circumvention is not abated simply because, as the United States
notes, the CCC is not actually required to issue the “not less than $5,500,000,000 in credit guarantees”
that it must, as a matter of law, make available every year.495 The threat arises because, year-on-year,
the CCC announces its plans to extend over $6 billion in guarantees, as it did for fiscal year 2004. 496

 491 Appellate Body Report, US – FSC, WT/DS108/AB/R, para. 150.
 492 Exhibit Bra-299 (“Summary of FY 2003 Export Credit Guarantee Program Activity,” USDA,
covering GSM-102, GSM-103 and SCGP). For 1999-2002, s ee also Exhibit Bra-73 (“Summary of Export
Credit Guarantee Program Activity,” USDA, covering GSM 102, GSM 103 and SCGP for US fiscal years 1999-
2003). For 1992-1998, see Exhibit US-41.
 493 The Panel will recall that in addition to its threat of circumven tion claims with respect to scheduled
products, Brazil has also demonstrated that the Un ited States has used the CCC guarantee programs to
circumvent its export subsidy commitments with respect to rice (a scheduled product). See Exhibit Bra-300
(Calculation on US Rice Exports Benefiting from GSM 102, GSM 103 and SCGP). The United States has not
rebutted this evidence.
 494 Appellate Body Report, US – FSC , WT/DS108/AB/R, para. 149. Brazil’s 27 October 2003
Answers to Questions, para. 88; Brazil’s 18 November 2003 Further Rebuttal Submission, para. 257; Brazil’s
2 December 2003 Oral Statement, pa ras. 90-91; Brazil’s 20 January 20 04 Answers to Ad ditional Questions,
para. 13.

495 Brazil is aware of no other provision of US la w that provides a floor, and not a corresponding
ceiling, for support to US industry.
 496 Exhibit Bra-296 (“USDA Announces $2.8 Billion in Export Credit Guarantees,” FAS Press Release,
30 September 2003).

It is required to do so by law. 497 It is, moreover, altogether exem pt from any ceiling on the amount of
guarantees it extends, and from the normal requirement that it receive new budget authority before
undertaking new guarantee commitments (the progra mmes’ “mandatory” status under US law “does
not effectively constrain credit activity”). 498 The CCC uses that exem ption liberally, increasing
allocations throughout the fiscal year to meet the needs of US exporters.499

245. Even if the CCC does not reach its goal of i ssuing over $6 billion in guarantees by year end,
the fact that US law tells it that it must make available at least this amount, the fact that it sets its
sights on and actually announces this amount, and the fact that nothing in US law sets any upward
bound on the amount of guarantees it can issue, communicates a threat that it will circumvent its
export subsidy commitments. Even if the CCC does not reach its goal of issuing $6 billion in export
credit guarantees, foreign competitors of US farmers s ee that it has announced its intent to do so, that
it has the authority to do that and an unlimited am ount more, and that there is no “mechanism in the
measure” for CCC to “stem[], or otherwise control[], the flow of” CCC export credit guarantees.500

246. Moreover, foreign competitors of US farmer s have seen how, as an historical matter, the
United States has applied the CCC guarantee progr ammes to surpass its quantitative export subsidy
reduction commitments – even when falling short of its announced intent to issue $6 billion in
guarantees. Brazil has demonstrated how this threat materialized for one product – rice – in fiscal
years 2001, 2002 and 2003 (despite the fact that the CCC did not reach its announced intent of
handing out $6 billion in guaran tees in any of those years).
501 Foreign producers’ fears that the threat
will materialize in other years for other products ar e legitimate, and the threat is therefore tangible
(regardless whether or not the CCC meets its goal of handing out $6 billion in guarantees in any given
year).

247. Merely having what the United States claims is the unwritten, administrative discretion to
“tamp down the actual issuance of guarantees” would not be enough under this test.
502 The reason the
Appellate Body in US – FSC looked for an affirmative “m echanism in the measure ” subject to an
Article 10.1 claim that would stem or control the fl ow of subsidies, rather than merely accepting as
sufficient the unwritten administrative discretion to do so, is that only when such a mechanism exists,
will foreign competitors of US farmers know with a degree of assurance that the threat of

 497 Brazil’s 18 November 2003 Further Rebuttal Submission, para. 261, citing Exhibit Bra-297 (7
U.S.C. § 5641(b)(1); 7 U.S.C. § 5622(a), (b)). See also Brazil’s 2 December 2003 Oral Statement, para. 91,
citing Exhibit Bra-366 (7 U.S.C. § 5622 note, “Promotion of Agricultural Exports to Emerging Markets, para.
(a) (“The Commodity Credit Corporation shall make availa ble for fiscal years 1996 through 2002 not less than
$1,000,000,000 of direct credits or export credit guara ntees for exports to emerging markets under section 201
or 202 of the Agricultural Trade Act of 1978 (7 U.S.C. 5621 and 5622), in addition to the amounts acquired or
authorized under section 211 of the Act (7 U.S.C. 5641) for the program.”)). See also Exhibit Bra-367 (Section
3203 of the 2002 FSRI Act (extending mandate to 2007)).
 498 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 program’s BEA classification under the Budget
Enforcement Act (BEA) of 1990 as discretionary or mandatory”); Exhibit Bra-117 (2 U.S.C. § 661(c)(2))
(exempting CCC programmes from appropriations requirement); Exhibit Bra-185 (Congressional Budget Office
Staff Memorandum, “An Explanation of the Budgetary Changes under Credit Reform,” April 1991, p. 7 (for
quote provided in text above)).

499 Brazil’s 27 October 2003 Answers to Questions, para. 95, citing the archived list of USDA press
releases announcing suppleme ntal allocations extended throughout fiscal year 2003
(http://www.fas.usda.gov/excredits/exp-cred-guar.asp).
 500 Appellate Body Report, US – FSC, WT/DS108/AB/R, para. 149.
 501 Exhibit Bra-300 (Calculation on US Rice Exports Benefiting from GSM 102, GSM 103 and SCGP).
The United States has never rebutted Brazil’s showing. The CCC announced guarantee allocations of $5.762
billion in 2001, $6.1 58 billion in 2002, and $6.247 billion in 2003, while granting guarantees in the amount of
$3.227 billion in 2001, $3.388 billion in 2002, and $3.223 billion in 2003. See Exhibit US-41.
 502 US 20 January 2004 Answers to Questions, para. 3.

circumvention is not real. The purpose of the mechanis m, in other words, is to diminish the threat.
(Had this not been the Appellate Body’s intent , it would simply have stuck to the traditional
mandatory/discretionary formula it has used elsewhere and that the United States asserts applies in the
analysis of an Article 10.1 claim.)

248. In any event, the “discretionary elements” that the United States asserts
503 abate the threat
posed by its annual announcement that it will issu e over $6 billion in CCC export credit guarantees
are an illusion, for at least two reasons.504

249. First, the United States has offered no evidence that the CCC may reject “any individual
application”
505 (much less that there is a “mechanism” to do so in order to avoid circumvention of US
export subsidy commitments). As Brazil has pr eviously noted, the CCC guarantee programmes are
classified as “mandatory” under US law. 506 The Congressional Budget Office (“CBO”) and the
Congressional Research Service (“CRS”) (legislative branch agencies charged with servicing the US
Congress) have both noted the inability of executiv e branch agencies charged with implementing
mandatory programmes to deny support to eligible borrowers. 507 The United States cites a non-
programme specific document for a generic principle that mandatory and discretionary classifications
under the Budget and Enforcement Act “‘do not de termine whether a programme provides legal
entitlement to a payment or benefit’”. 508 Speaking specifically with respect to USDA mandatory
programmes, however, the CRS states 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’”.509

 503 US 20 January 2004 Answers to Additional Questions, para. 3.
 504 Brazil has elsewhere explained the CCC’s authority to undertake an inquiry into whether particular
countries are creditworthy, and the possibility that this in quiry 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’s 27 October 2003 Answers to Questions, para. 92. Under the United States’ FSC measure,
US authorities were permitted to und ertake a factual inquiry into, among other things, whether the foreign-
source income of the foreign corpora tion was “effectively connected with th e conduct of a trade or business
within the United States.” Appellate Body Report, US – FSC, WT/DS108/AB/R, para. 16. This authority, and
the possibility that the f actual inquiry 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” FSC benefits, leading to a threat of circumvention of the United States’
export subsidy reduction commitments.

505 US 20 January 2004 Answers to Additional Questi ons, para. 3. The United States has not offered
any support for its assertion that CCC has the authority “to suspend the issuance of expert credit guarantees
under any particular allocation”. In any event, Brazil demonstrates infra that the allocation process does not
remotely abate the threat that the United States will circumvent its quantitative export subsidy reduction
commitments.
 506 Exhibit Bra-295 (2004 US Budget, Federal Cr edit Supplement, Introduction and Table 2 (CCC
Export Loan Guarantee Program classi fied as “Mandatory” in Table 2, an d 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”).
 507 See Exhibit Bra-117 (2 U.S.C. § 661(c)(2)); Exhibit Bra-185 (Congressional Budget Office Staff
Memorandum, “An Explanation of the Budgetary Changes under Credit Reform,” April 1991, p. 7 and Table 2);
Exhibit Bra-186 (Congressional Research Service Issue Brief for Congress, “Agriculture and the Budget,”
IB95031 (16 February 1996), p. 3).
 508 US 20 January 2004 Answers to Additional Questions, para. 7.
 509 Exhibit Bra-186 (Congressional Re search Service Issue Brief for Congress, “Agriculture and the
Budget,” IB95031 (16 February 1996), p. 3). The United States made a similar error in its 30 September 2003
Further Submission, at paragraph 156, when it cited the very same generic, non-agency-specific document
(Circular A-11) for the principle that “the ability of CCC to issue guarantees is constrained by the apportionment
process . . .” As Brazil has demonstrated, the CCC prog rams are exempt from the requirement that to receive
new Congressional budget authority before undertaking new guarantee commitments. See Exhibit Bra-117 (2
U.S.C. § 661(c)(2)).

250. Second, the “discretionary elements” cited by the United States do not in any way abate the
threat that the United States will circumvent its export subsidy commitments for scheduled products:

• The existence of eligibility criteria does not abat e the threat. The focus for deciding whether
a measure is discretionary is on whether it provides government officials with the discretion
to implement the measure in a WTO-consistent manner.
510 Objective conditions, such as
objective eligibility criteria, are not appropria tely considered in determining whether a
measure gives an implementing official “discreti on” to act in a WTO-consistent fashion. For
example, the FSC measure payments were only available where the income concerned was of
foreign origin. Despite the fact that non-foreign sourced income would thus be excluded from
FSC benefits, the measure was still found to th reaten the circumvention of export subsidy
commitments. Similarly, CCC guarantees are only available if an exporter meets the
eligibility criteria set out in 7 C.F.R. § 1493.30. 511 The fact that a CCC official cannot legally
issue a CCC guarantee to a non-eligible e xporter does not make the CCC programmes
“discretionary”.

• The authority to limit guarantees given for exports to particular “destination[s]” and the
authority to employ “exposure limits applicable to individual bank obligors” 512, like the
authority to determine that particular d estination countries are uncreditworthy and are
ineligible for guarantees 513, do not reduce the threat of circumvention. The United States’
export subsidy commitments are undertaken on a quantitative basis, and not on a destination
or individual bank basis. Removing particular destination countries or banks from the list of
those countries or banks eligible for CCC gua rantees is utterly irrelevant to the CCC
programmes’ absolute activity levels – CCC can simply shift those guarantees to other
countries and banks.

• Nor does the authority to limit the “time within which export must occur” 514 reduce the threat
of circumvention. A requirement that the export that is the subject of a guarantee occur
within a certain period of time following i ssuance of the guarantee only matters if the
guarantee is issued in the first place; the requirement does nothing to control the flow of those
guarantees or to abate the threat that they will circumvent the US export subsidy
commitments.

• Nor does the allegedly commodity-specific a llocation process that the United States cites
515
reduce the threat of circumvention. More than 95 per cent of allocations are made on a
country-specific basis only, with less than 5 per cent of 2003 allocations made on a scheduled
product-specific basis. 516 And the press release announcing initial allocations for 2004
contains no product-specific allocations. 517 More importantly, the allocations are made on a
monetary basis, which provides virtually no assuran ce that the United States will not surpass

 510 Appellate Body Report, US – 1916 Act, WT/DS136/AB/R, para. 100.
 511 Exhibit US-6.
 512 US 20 January 2004 Answers to Additional Questions, para. 3.
 513 See US 30 September 2003 Further Submission, para. 154.
 514 US 20 January 2004 Answers to Additional Questions, para. 3.
 515 US 20 January 2004 Answers to Additional Questions, para. 3. See also US 30 September 2003
Further Submission, para. 155.
 516 See Brazil’s 27 October Answers to Questions, para. 99, note 136 and 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 allocations for scheduled products as follows: $200 million for wheat to Korea; $85 million for wheat
to Pakistan; and, $10 million for vegetable oils for Tunisia.). See also Brazil’s 18 November 2003 Further
Rebuttal Submission, para. 261 (second bullet point).

517 Exhibit Bra-296 (“USDA Announces $2.8 Billion in Export Credit Guarantees,” FAS Press Release,
30 September 2003).

its quantitative export subsidy reduction commitments.
518 Brazil has demonstrated how this
threat materialized for one product (rice) 519; the threat that it might happen in some years for
other products is therefore tangible.

251. Thus the “discretionary elements” cited by the United States do not abate the threat of
circumvention of its export subsidy commitments. The United States erroneously states that “Brazil’s
own approach would require a showing that the pr ogrammes mandate that the premium rates will be
insufficient to cover long-term operating costs and losses of the programmes”.
520 The Panel will
recall Brazil’s demonstration that the United States has exported quantities of scheduled products in
excess of US quantitative reduction commitments. 521 Thus, under Article 10.3 of the Agreement on
Agriculture, the burden falls on th e United States to prove that those excess quantities of scheduled
products did not receive “export subsidies,” within the meaning of Article 10.1. The burden is on the
United States to show, in its own words, that the CCC programmes mandate that premium rates will
be sufficient to cover long-term operating costs and losses of the programmes, within the meaning of
item (j), and that CCC guarantees do not constitute financial c ontributions that confer benefits and are
contingent on export, with the meaning of Articles 1.1 and 3.1(a) of the SCM Agreement.

252. But whomever bears the burden, Brazil has s hown that the CCC does not have the discretion
to charge fees that will enable it to meet its long-term operating costs and losses. Both USDA’s
Inspector General and the US General Accounting O ffice have noted the CCC’s failure to change its
premium rates or to reflect credit risk in those rates – and in particular the maximum one-per cent
premium rate imposed by US law522 – as evidence of a failure and inability to cover costs and losses.523
There is no affirmative “mechanism” in place to stop the CCC programmes from constituting export
subsidies under item (j), and in fact the fee ceili ng imposed by US law is a mechanism that ensures
that the programmes will operate as export subsidies.

253. Moreover, Brazil has demonstrated that the CCC export credit guarantee programmes confer
“benefits” per se, within the meaning of Article 1.1(b) of the SCM Agreement (as well as that they are
financial contributions and are contingent on export), and therefore that they constitute per se export
subsidies for the purposes of Article 10.1.
524 Among other reasons ( e.g., the regulations for the CCC
programmes, and a comparison to non-market be nchmarks established by the US Export-Import
Bank)525, Brazil has made this per se showing by demonstrating that CCC export credit guarantees are
unique financing instruments for agricultural comm odity transactions that are not available on the
commercial market for terms longer than the marketing cycles of the eligible commodities. 526 F a r
from an affirmative “mechanism” to prevent CCC guarantees from constituting export subsidies,
guarantees under the CCC programmes constitute export subsidies per se.

 518 Brazil’s 27 October 2003 Answers to Questions, para. 100.
 519 Exhibit Bra-300 (Calculation on US Rice Exports Benefiting from GSM 102, GSM 103 and SCGP).
 520 US 20 January 2004 Answers to Additional Questions, para. 4.
 521 Brazil’s 2 December 2003 Oral Statement, para. 78; Brazil’s 24 June 2003 First Submission,
para. 265.
 522 US 11 August 2003 Answers to Questions, para. 180. See also Exhibit Bra-297 (7 U.S.C. §
5641(b)(2)).
 523 Brazil’s 22 December 2003 Answers to Questions, paras. 63-64.
 524 See, e.g., Brazil’s 18 November 2003 Further Rebuttal Submission, paras. 233-241.
 525 This evidence is summarized at paragraphs 231-241 of Brazil’s 18 November 2003 Further Rebuttal
Submission.

526 See Brazil’s 24 June 2003 First Submission, paras. 289-292; Brazil’s 22 July 2003 Oral Statement,
para. 116; Brazil’s 11 August 2003 Answers to Questions, paras. 139-140, 152-157, 183-187; Brazil’s
22 August 2003 Rebuttal Submission, paras. 103-105; Brazil’s 22 August 2003 Comments, paras. 92-93, 109-
113; Brazil’s 27 August 2003 Comments on US Rebuttal Submission, paras. 68-80; Brazil’s 7 October 2003
Oral Statement, para. 72; Brazil’s 18 November 2003 Further Rebuttal Submission, paras. 230-242; Brazil’s
2 December 2003 Oral Statement, para. 79.

254. Everything about the CCC programmes aggravates and legitimizes the fear foreign
competitors of US farmers have that the programme s will be used to circumvent the United States’
export subsidy commitments. Brazil has demonstrated that under Articles 1.1 and 3.1(a) of the SCM
Agreement, and item (j), guarantees under the programmes constitute per se export subsidies. The
CCC issues these export subsidies free from the normal budgetary constraints placed on federal
spending. The only constraint pl aced on the programmes is one that in fact encourages fear of
circumvention – the obligation the US Congr ess has placed on the CCC to make available a minimum
of $6.5 billion of CCC guarantees every year.
527 While the United States considers CCC’s failure to
actually grant $6.5 billion in guarantees in a given y ear as significant to its defense, it misunderstands
the obligation included in Article 10. 1. Article 10.1 prohibits the threat of circumvention. Foreign
competitors of US farmers see and fear the unchecked authority US farmers and the CCC have to
circumvent US export subsidy commitments. Their f ear is legitimate, since that unchecked authority
has been used in the past to circumvent those commitments.528

255. There is no affirmative “mechanism in the measu re” that will stem or control the flow of CCC
guarantees in a way that will abate the threat of circumvention of the US export subsidy commitments
with respect to scheduled products. To abate the fe ar that makes the threat real, foreign competitors
need to see a mechanism in place that will keep the United States from using the CCC programmes to
provide export subsidies that surpass the US reducti on commitments. The nature of the obligation in
Article 10.1 – the prohibition of a threat
 – is such that it cannot be met with a showing that there is
mere discretion to avoid surpassing those commitments. That the Appellate Body failed to apply the
traditional mandatory/discretionary distinction in in terpreting the standard required by Article 10.1
demonstrates its understanding that to prevent a meas ure from posing a threat of circumvention, there
needs to be some affirmative mechanism in place to reduce the legitimate fear of circumvention.

258. Please submit a detailed explanation of th e method by which one could calculate total
expenditures to producers of upland cotton under th e four relevant programmes on the basis of
the data which it seeks. BRA

 527 For citations, see Brazil’s 2 December 2003 Oral Statement, para. 91.
 528 Exhibit Bra-300 (Calculation on US Rice Exports Benefiting from GSM 102, GSM 103 and SCGP).