EUROPEAN COMMUNITIES – EXPORT SUBSIDIES ON SUGAR
Document: COMPLAINT BY AUSTRALIA Report of the Panel
Date: 15 October 2004
Document codes: WT/DS265/R
Complainant: Australia
Respondent: EU
Third parties: Barbados, Belize, Brazil, Canada, China, Colombia, Cuba, Fiji, Guyana, India, Jamaica, Kenya, Madagascar, Malawi, Mauritius, New Zealand, Paraguay, Saint Kitts and Nevis, Eswatini, Tanzania, Thailand, Trinidad and Tobago, U.S., Côte d’Ivoire
Dispute stage: Appellate Body
Agreements cited: Art. 3.3, 8, 9.1, 10.1  AgricultureArt. 3.2, 3.1(a)  Subsidies and Countervailing Measures (SCM)

EUROPEAN COMMUNITIES – EXPORT SUBSIDIES
ON SUGAR

COMPLAINT BY AUSTRALIA

Report of the Panel

I. INTRODUCTION
1.1 This proceeding was initiated by three complaining parties, Australia, Brazil and Thailand.
1.2 In communications dated 27 September 2002, Au stralia and Brazil requested consultations
with the European Communities pursu ant to Article 4 of the Understanding on Rules and Procedures
Governing the Settlement of Disputes (" DSU"), Article XXII:1 of the General Agreement on Tariffs
and Trade 1994 ("GATT 1994"), Article 19 of the Agreement on Agriculture, and Articles 4.1 and 30
of the Agreement on Subsidies and Countervailing Measures (" SCM Agreement"), with respect to
export subsidies provided by the Europ ean Communities to its sugar industry 1. Australia and Brazil
held consultations with the European Communities in Geneva on 21 and 22 November 2002 but these
consultations did not result in a resolution of the dispute.
1.3 On 14 March 2003, pursuant to Article 4 of the DSU, Article XXIII of the GATT 1994,
Article 19 of the Agreement on Agriculture , and Articles 4 and 30 of the SCM Agreement, Thailand
requested consultations with the European Communiti es with respect to certain subsidies provided by
the European Communities in the sugar sector. 2 Consultations were held in Geneva on 8 April 2003
but failed to resolve the dispute.
1.4 On 21 July 2003, Australia, Brazil and Thaila nd requested the establishment of a panel
pursuant to Articles 4.7 and 6 of the DSU and Article XXIII:2 of the GATT 1994.
1.5 At its meeting on 29 August 2003, the Di spute Settlement Body (DSB) established a panel
pursuant to the requests of Australia (); Brazil (); and Thailand
(), in accordance with Article 6 of the DSU. At that meeting, the parties to the dispute
agreed to establish a single panel pursuant to Article 9.1 of the DSU with standard terms of reference.
1. Terms of reference
1.6 The terms of reference are the following:
"To examine, in the light of the relevant provisions of the covered agreements cited
by Australia in document WT/DS265/21, by Brazil in document WT/DS266/21 and
by Thailand in document WT/DS283/2, the matters referred therein to the DSB by
Australia, Brazil and Thailand, and to make such findings as will assist the DSB in
making the recommendations or in giving the rulings provided for in those
agreements."
2. Panel composition
1.7 On 15 December 2003, Australia, Brazil and Th ailand requested the Director-General to
determine the composition of the panel, pursu ant to paragraph 7 of Article 8 of the DSU. This
paragraph provides:
"If there is no agreement on the panellists within 20 days after the date of the
establishment of a panel, at the request of either party, the Director-General, in
consultation with the Chairman of the DSB and the Chairman of the relevant Council
or Committee, shall determine the com position of the panel by appointing the
panellists whom the Director-General cons iders most appropriate in accordance with

1 WT/DS265/1, G/L/569, G/AG/GEN/52, G/SCM/D47/1 and WT/DS266/1, G/L/570, G/AG/GEN/53,
G/SCM/D48/1, respectively.
2 WT/DS283/1, G/L/613, G/AG/GEN/58, G/SCM/D53/1.

any relevant special or additional rules or procedures of the covered agreement or
covered agreements which are at issue in th e dispute, after consulting with the parties
to the dispute. The Chairman of th e DSB shall inform the Members of the
composition of the panel thus formed no later than 10 days after the date the
Chairman receives such a request."
1.8 On 23 December 2003, the Director-General accordingly composed the Panel as follows:
 Chairman: Mr Warren Lavorel

 Members: Mr Gonzalo Biggs
 Mr Naoshi Hirose

3. Third parties
1.9 Australia, Barbados, Belize, Brazil, Ca nada, China, Colombia, Côte d'Ivoire , Cuba, Fiji,
Guyana, India, Jamaica, Kenya, Madagascar, Malawi, Mauritius, New Zealand, Paraguay, Saint Kitts
and Nevis, Swaziland, Tanzania, Thailand, Trinidad and Tobago, and the United States notified their
interest to participate in the panel proceedings as third parties.
1.10 At the request of some third parties, all third parties were invited to attend, as observers, the
entirety of the first and second substantive meetings with the parties (see paragraphs 2.5-2.9 below).
4. Organizational meeting
1.11 On 9 January 2004, the Panel sent a draft timetable and draft working procedures to the
parties. These were subsequently discussed at the organizational meeting that the Panel held with the
parties on 14 January 2004. The timetable (tenta tive) and working procedures were adopted as
amended at the organizational meeting. No decision with respect to third parties was taken at the
organizational meeting. (See also paragraphs 2.1-2.9 below.)
5. Meetings with the parties and third parties
1.12 The Panel met with the parties on 30, 31 March, 1 April, and on 11 and 12 May, 2004. In
accordance with paragraph 6 of Appendix 3 of the DSU, third parties were invited to a session during
the first substantive meeting set aside for that purpose. Third parties were also invited to observe the
entirety of the first and second substantive meetings (see paragraphs 2.5-2.9 below).
6. Reports
1.13 At the request of the European Communities, pursuant to Article 9.2 of the DSU on multiple
complaints, the Panel is issuing three reports for this dispute, one for each complaining party.
1.14 On 4 August 2004, the Panel issued its Interim Reports to the parties. On 17 August 2004,
the Panel received comments from the parties. On 24 August 2004, the parties submitted further
written comments on the comments received on 17 Augus t 2004. The Panel issued its Final Reports
to the parties on 8 September 2004.

II. PRELIMINARY RULINGS BY THE PANEL AND OTHER ISSUES
1. Notification of third parties' interest
2.1 In this case, the Republic of Kenya (Kenya) on 26 September, 2003 and the Republic of Côte
d'Ivoire (Côte d'Ivoire) on 5 Novemb er, 2003 requested to participate as third parties after the ten-day
notification period specified by the Chairman of the DSB at the time of the establishment of the Panel,
but before the Director-General was asked by the pa rties to compose the Panel pursuant to Article 8.7
of the DSU. The parties agreed to accept Kenya as a thir d party but the Complainants objected to the
participation of Côte d'Ivoire.
2.2 Article 10 of the DSU is silent on when Members need to notify to the DSB their interest in
participating in any specific dispute as third par ties. All parties referred to the GATT Council
Chairman's Statement of June 1994, providing for a ten-day notification period. 3 The status of that
Chairman's Statement had been discussed on sever al occasions at the DSB and the timing of third-
party notifications was the subject of proposals in the context of the DSU negotiations.
2.3 The Panel recalled, inter alia, the Appellate Body's decision in EC – Hormones, which stated
that "the DSU leaves panels a margin of discreti on to deal, always in accordance with due process,
with specific situations that may arise in a par ticular case and that are not explicitly regulated." 4 In
addition, with regard to the two requests at issue, the Panel noted that in this particular dispute:
(a) the selection and composition of the Panel did not appear to have been adversely
affected; and
(b) the Panel process had not been hampered.
2.4 On the basis of these considerations, the Pa nel therefore decided, in its ruling dated
16 January 2004, to accept as third parties all Members that had expressed a third-party interest and
saw no reason to treat them differently. In doi ng so, the Panel emphasized that its decision was
specific to this dispute and was not intended to offe r a legal interpretation of the ten-day notification
period referred to in the GATT Council Chairman's Statement.
2. Third parties enhanced rights
2.5 Prior to the Panel starting work, Mauritius, on behalf of 14 ACP sugar producing countries 5,
requested that the Panel provide the ACP countries with extended third-party rights in the proceedings
of the Panel. At the preliminary stage of the dispute, i.e. before any submissions had been made to the
Panel, the Panel was not in a position to assess wh ether the economic situation of any third party
would be specifically affected by the outcome of this dispute. However, in light of the importance of
trade in sugar for many third parties, the Panel decided, in a ruling dated 16 January 2004, as follows:
"After hearing the parties' views and considering the third parties' written
communications on this issue, the Panel invited all third parties to attend the entirety
of the first substantive meeting as observers ; to make a written submission to the
Panel and receive the submissions of the par ties and third parties for that meeting;
and to present their views orally at a session of that meeting, set aside for that
purpose."

3 GATT Council C/COM/3.
4 Appellate Body Report on EC – Hormones, footnote 138.
5 Barbados, Belize, Côte d'Ivoire, Fiji, Guyana, Jamaica, Kenya, Madagascar, Malawi, Mauritius,
St. Kitts and Nevis, Swaziland, Tanzania and Trinidad and Tobago.

2.6 In a letter dated 1 April 2004, the same countries requested enhanced rights as third parties in
the remaining procedure of the Panel. After co mments by the parties on this request, the Panel
decided, in a ruling dated 14 April 2004 "that, beyond those rights already provided for in the DSU, in
the Working Procedures adopted by this Panel, as well as in its ruling da ted 16 January 2004 (see
paragraph 2.4 above), the following additional rights were granted to all third parties for the purpose
of this case:
(a) "the third parties will receive a copy of the written questions to the parties posed in
the context of the first substantive meeting of the Panel;
(b) the third parties will receive the written rebuttals of the parties to the second meeting
of the Panel and the parties' replies to the questions mentioned in (i) above;
(c) the third parties may attend the second substa ntive meeting of the Panel to take place
on 11 and 12 May 2004, as observers (but it is not envisaged that the third parties will
provide any further written submission or make an oral statement to the Panel during
that second meeting); and
(d) the third parties will review the summary of their respective arguments in the draft
descriptive part of the Panel report."
2.7 In considering whether to grant any additional ri ghts to third parties, the Panel believed that it
was important to guard against an inappropria te blurring of the distinction drawn in the DSU between
the rights of parties and those of third parties. Fu rthermore, the Panel considered that, as a matter of
due process, it was appropriate to provide the same procedural rights to all third parties."
2.8 On behalf of the sugar-exporting ACP countries, Guyana, on 22 April 2004, requested that
ACP sugar-producing countries be allowed to "pr esent arguments, including oral statements and
observations " at the second substantive meeting of the Panel with the parties.
2.9 After consideration of Guyana's request on behalf of ACP sugar-p roducing countries, the
Panel did not see any need to change its decision of 14 April 2004 (see paragraphs 2.6 and 2.7 above)
and reiterated its invitation to all third parties to attend the second meeting of the Panel as "observers",
on the understanding that the third parties would not make any (further) written or oral statements to
the Panel.
3. Request for additional working procedur es for the protection of proprietary
information
2.10 On 13 January 2004, Australia and Thailand requested that the Panel adopt additional
working procedures for the protection of proprieta ry information purchased from LMC International
(LMC) relating to data on EC costs of sugar prod uction that the complaining parties claimed they
would use in their first written submission.
6 Such additional working procedures would, inter alia,
limit the third parties' access to such confidential information to "view-only" prescriptions.

6 On this question, Australia and Thailand jointly sent a written communication to the Panel on
13 January 2004 and Australia, with the support of Th ailand, sent another written communication to the Panel
on 19 January 2004. Finally, Australia, Brazil and Thailand also sent a written communication to the Panel on
23 January 2004.

2.11 The European Communities opposed 7 the request, arguing, inter alia , that LMC statistical
data was not the type of information that should benefit from exceptional and additional rules for the
protection of confidential information. It added th at the rules suggested by Australia and Thailand
were discriminatory vis-à-vis third parties who would only be entitled to "view" the confidential data.
2.12 After consideration of the parties' argumen ts, the Panel decided, in a ruling dated
27 January 2004, to reject the request from Australia and Thailand.
2.13 The Panel recalled, in particular, that the following provisions of the DSU and of the Rules of
Conduct, were relevant and applicable to the i ssue of confidential information in WTO dispute
settlement proceedings.
2.14 Article 18.2 of the DSU on communications with panels or the Appellate Body provides:
"2. Written submissions to the panel or the Appellate Body shall be treated as
confidential, but shall be made available to th e parties to the dispute. Nothing in this
Understanding shall preclude a party to a di spute from disclosing statements of its
own positions to the public. Members shall treat as co nfidential information
submitted by another Member to the panel or the Appellate Body which that Member
has designated as confidential . A party to a dispute shall also, upon request of a
Member, provide a non-confidential summary of the information contained in its
written submissions that could be disclosed to the public." (emphasis added)
Moreover, paragraph 3 of Appendix 3 to the DSU states:
"3. The deliberations of the panel and the documents submitted to it shall be kept
confidential. Nothing in this Understanding shall preclude a party to a dispute from
disclosing statements of its own positions to the public. Members shall treat as
confidential information submitted by another Member to the panel which that
Member has designated as confidential . Where a party to a dispute submits a
confidential version of its written submissions to the panel, it shall also, upon request
of a Member, provide a non-confidential summa ry of the information contained in its
submissions that could be disclosed to the public." (emphasis added)
2.15 The Panel further ruled that "All parties and third parties would thus have to treat as
confidential any information identified by a party to this dispute as confidential (including the
statistical data from LMC if Australia and Thailand had designated them as such). The parties and
third parties shall not disclose any such information without the formal authorization of the party who
had designated such information as confidential. In this regard, parties and third parties have the
responsibility for all members of their delegation. In particular, no member of the delegation of any
party or third party shall disclose to any person out side the delegation any information designated as
confidential by a party to the present dispute. Any such information could only be used for the
purposes of submissions and argumentation in this dispute."
2.16 The Panel noted also that it had the right not only to receive confidential information, but also
to seek it. To this effect, Article 13 of the DSU on the Right to Seek Information provides that:
"1. Each panel shall have the right to seek information and technical advice from any
individual or body which it deems appropriate. However, before a panel seeks such

7 The Panel received written communications from th e European Communities on 3 January 2004 and
15 January 2004. A lthough not solicited, the Pane l also received written comm unications from three third
parties: Fiji on 16 January 2004; Mauritius on 16 January 2004; and Jamaica on 20 January 2004.

information or advice from any individual or body within the jurisdiction of a
Member it shall inform the authorities of that Member. A Member should respond
promptly and fully to any request by a panel for such information as the panel
considers necessary and appropriate. Confidential informatio n which is provided
shall not be revealed without formal authorization from the individual, body, or
authorities of the Member providing the information." (emphasis added)
2.17 The Panel was of the view that parties and third parties were bound by the DSU provisions on
confidentiality. In the present circumstances, these provisions were, according to the Panel, sufficient
to protect the confidentiality of the statisti cal data from LMC, during the panel process and
afterwards, as indicated above.
2.18 As for the Panel, pursuant to the DSU and the Rules of Conduct
8, it was bound not to disclose,
in the panel reports, or in any other way, any in formation designated as confidential by a party under
these procedures.
2.19 Finally, the Panel recalled that it had the right to reconsider the need for additional working
procedures for the protection of confidential inform ation if circumstances changed and so warranted
such exceptional working procedures after consultation with the parties.
4. Amicus curiae
2.20 On 24 May 2004, the Panel received an unsolicited amicus curiae brief from Wirtschaftliche
Vereinigung Zucker ("WVZ"), an association re presenting German sugar producers. The Panel
invited the parties to make comments thereon, if they so wished. Australia, Brazil and Thailand
requested in their comments that the Panel re ject the document submitted by WVZ on the grounds,
inter alia, of due process as well as the late submissi on of the document. The European Communities
did not wish to make any comments on the WVZ document.
5. Breach of confidentiality
2.21 Brazil informed the Panel on 2 June 2004 that the amicus curiae brief submitted by WVZ
disclosed information that Brazil had submitted to the Panel in confidence. Brazil, accordingly,
wished to bring this breach of confidentiality to th e Panel's attention, and requested that the Panel
"investigate how the breach occurred". Thailand supported the request made by Brazil in this regard.
2.22 The Panel noted the seriousness of the matter at issue, and invited the parties and third parties
to comment on Brazil's allegation, and on the appropriate remedy, "if such a breach had in fact
occurred." Such comments were to be submitted by the end of the day on 8 June 2004.
2.23 The European Communities noted that it attached the utmo st importance to the strict
observance of the confidentiality rules set out in the DSU and in the working procedures of the Panel
by all parties and third parties. It shared the con cerns expressed by Brazil. It noted further that it had
treated as strictly confidential all information designated as such by Brazil in these proceedings.
2.24 On 4 June 2004, the Panel invited, by letter, comments from the parties and third parties "on
Brazil's allegation, and on the appropriate remedy, if such a breach has in fact occurred."

8 With regard to the obligation of the Panel (and memb ers of the Secretariat) to respect confidentiality,
Articles III:2, IV:1 and VII:1 of the Rules of Conduct for the Settlement of Disputes confirm that members of
the Panel and Secretariat staff assisting the Panel shal l at all times maintain the confidentiality of dispute
settlement deliberations and proceedings together with any information identified by a party as confidential. No
covered person shall at any time use such informati on acquired during such deliberations and proceedings to
gain personal advantage or advantage for others.

2.25 The Panel received responses, dated 8 June 2004, from Australia, the European Communities
(parties), and from India (third party). All thr ee Members supported the request made by Brazil (see
paragraph 2.21 above).
2.26 On 10 June 2004, the Panel requested, in a lette r, information from the WVZ "with respect to
the exact source[s] (documents, websites, etc.) used for the data referred to" in its document. The
Panel further requested "information about the orig inal currency nominations if different from the
nominations in Euros used" in the document.
2.27 The Panel received a response from WVZ on 15 Ju ne 2004 in which WVZ indicated that it
had been able to examine an attachment to Brazil' s submission, the Datagro report, which referred to
another LMC study than the one used by WVZ in the document received by the Panel on
24 May 2004. According to WVZ, this LMC documen t was not designated as confidential. It also
indicated that WVZ was "not in a position to reveal the source of its information regarding the
evidence submitted by Brazil."
2.28 Comments on the response from WVZ were receive d from Brazil on 18 June 2004 in which
Brazil reiterated its request (see paragraph 2.21) that the Panel summarily reject the WVZ amicus
curiae brief. Brazil also requested that the Panel "m ake a full report of this incident to the Dispute
Settlement Body."
III. FACTUAL ASPECTS
3.1 The European Communities established, in 19 68, a Common Organization (CMO) for Sugar,
the main rules of which are today set out in "Council Regulation (EC) No. 1260/2001 on the common
organization of the markets in the sugar sector" (the Regulation), dated 19 June 2001. The Regulation
is valid for marketing years 2001/2002 to 2005/2006 and the information below refers to those years.
3.2 The Regulation sets out the basic rules with respect to, inter alia, the intervention prices for
raw and white sugar, respectively; the basic price and the minimum price for beet; A and B quotas as
well as C sugar; import and export licences; le vies; export refunds; and preferential import
arrangements.
1. Product coverage
3.3 The EC sugar regime applies inter alia to cane and beet sugar, sugar beet, and sugar cane as
well as to isoglucose.
9 The sugar cane and the sugar beet ar e primarily transformed into raw sugar
and/or white sugar.
2. Quotas
3.4 The sugar regime establishes two categories of production quotas: one for A sugar and the
other one for B sugar (see paragraph 3.6). These quotas constitute the maximum quantities eligible
for domestic price support and direct export subsid ies (in EC terminology, "refunds"). The quota
system does not involve any limits on the quantities of sugar that may be produced or exported.
However, sugar produced in excess of A and B quan tities, called C sugar, while not subject to quota,
is not eligible for domestic price support or direct export subsidies and must be exported. 10 If no

9 Article 1 of the Regulation.
10 Article 10.5 of the Regulation.

proof has been supplied that the C sugar has been e xported within the required time limits, a charge is
levied on that sugar.
11
3.5 Sugar production quotas are allocated in the fi rst instance to member States, with current
quotas applying to the marketing years 2001/02 to 2005/06. Member States, in turn, allocate quota to
each undertaking (processor) on the basis of its act ual production during a particular reference
period.
12
3.6 The Regulation fixes a basic quota for the en tire Community for the production of A and B
sugar. The basic quantities for A and B sugar are set, respectively, at 11,894,223.3 tonnes (white
sugar)13 and 2,587,919.20 tonnes (white sugar)14. Each of these quantities is broken down by member
State which in turn allocates quantities to produ cer undertakings established on its territory. A
Member state may transfer quota between undertakings , "taking into consideration the interests of
each of the parties concerned, particularly sugar beet and cane producers", up to a maximum of
10 per cent of an undertaking's A or B quota (with some limited exceptions).
15 Each undertaking may
carry forward to the next marketing year sugar that it has produced in excess of its A and B quota (i.e.
C sugar) up to a limit of 20 per cent of its A quota. 16 It may also carry forward all or part of its B
sugar production. In addition, an undertaking may ca rry forward all or part of its production of A and
B sugar which has been reclassified as C sugar after reduction of the guaranteed quantities in
conformity with Article 10 of the Regulation. Quantities carried forward must be stored for 12
consecutive months from a date to be determined.
17
3. Intervention price
3.7 To achieve the objectives of the common agri cultural policy and in order to stabilize the
EC sugar market, the EC Regulation provides for intervention agencies to buy in sugar. An
intervention price is established for this purpose at a level which will ensure a fair income for sugar-
beet and sugar-cane producers. 18 The intervention price valid for standard quality 19 is €63.19/100 kg
for white sugar and €52.37/100 kg for raw sugar. 20 The actual price received for white sugar is, on
average, around 10 to 20 per cent in excess of the inte rvention price. The intervention price is valid
for the domestic market and as a guaranteed minimum price to be paid by EC purchasers for imports
of sugar from ACP states and India.
4. Basic and minimum prices
3.8 A basic price for quota beet of standard quality 21 is derived from the intervention price of
white sugar and has been established at €47.67 per tonne.22 The Regulation also establishes minimum
prices for A and B beet, standard quality, intended to be processed into A and B sugar, respectively
and paid by sugar manufacturers buying beet. Th e minimum price of A beet has been set at €46.72

11 Article 13 of the Regulation.
12 Paragraph 11 of the Recital of the Regulation.
13 Article 11.1 of the Regulation.
14 Article 11.2 of the Regulation.
15 Article 12 of the Regulation.
16 Commission Regulation (EEC) No. 65/82, Article 2.
17 Article 14 of the Regulation.
18 Recital 2 of the Regulation.
19 "Such standard qualities should be average qualities representative of sugar produced in the
Community and should be determined on the basis of criteria used by the sugar trade." Recital, 3of the
Regulation.
20 Article 2 of the Regulation.
21 For the definition of "standard quality" of beet, see Annex II of the Regulation.
22 Article 3 of the Regulation.

per tonne whereas the minimum price for B beet has been fixed at €32.42 per tonne. 23 Manufacturers
are required to pay growers at least the minimum pr ice for A and B beet they process into A and B
sugar. The price for beet paid by the manufacturer to produce C sugar may be lower than that paid for
A and B beet.24
5. Basic production levy and B levy
3.9 In accordance with Article 15, a basic productio n levy shall be charged to manufacturers on
their production of inter alia A and B sugar, when the forecasts and adjustments 25 result in a
foreseeable overall loss. 26 Such a levy shall not exceed 2 per cent of the intervention price for white
sugar. Another levy of a maximum 37.5 per cent of the intervention price for B sugar may be charged
if the loss is not fully covered by the proceeds from the levy mentioned above.
6. Import and export licences
3.10 Imports into and exports from the European Communities of inter alia cane or beet sugar and
isoglucose are subject to the presentation of an im port or export licence, issued by the respective
member States. These licences are valid throughout the Community and are subject to the lodging of
a security.
7. Export refunds
3.11 In order to enable inter alia the products mentioned in para graph 3.3 above to be exported
without further processing at world market prices, the difference between the world market price and
the Community price may be covered by export re funds. The export refund for raw sugar may not
exceed that of white sugar. Such refunds shall be the same for the whole Community and for all sugar
except C sugar but may vary according to destination. Refunds may be fixed at regular intervals or by
a tendering procedure for products for which such a procedure has been used in the past. 27 Refunds
are paid directly from the EC budget. However, the system of levies outlined in paragraph 3.9 is
designed to recover from EC producers part of the co st of export refunds for quota sugar produced in
excess of EC consumption.
8. Management Committee for Sugar
3.12 Article 42 of the Regulation establishes a Mana gement Committee for Sugar to assist the EC
Commission to consider any issue referred to it by the Commission, or by a member State, with
respect to the management of the sugar regime , such as the preparation of supply and demand
forecasts.
9. Commitments
3.13 The commitments set out in the table in Section II, of Part IV of the EC's Schedule amount to
€499.1 million and 1,273.5 thousand tonnes. A footnote to the table provides:
"Does not include exports of sugar of ACP and Indian origin on which the
Community is not making any reduction commitments. The average of export in the
period 1986 to 1990 amounted to 1.6 mio t."

23 Article 4 and Article 5 of the Regulation.
24 Article 21 of the Regulation.
25 Paras. 1 and 2 of Article 15 of the Regulation.
26 See paragraph 3 of Article 15 of the Regulation.
27 Article 27 of the Regulation.

According to the European Comm unities' latest notification (marketing year 2001/2002) to the
Committee on Agriculture, total exports of sugar amounted to 4.097 million tonnes (product weight).

10. Preferential import arrangements
3.14 The European Communities is required to im port 1,294,700 tonnes (white sugar equivalent)
of cane sugar, called "preferentia l sugar" under Protocol 3 to Anne x IV to the ACP/EC Partnership
Agreement.
28 It also has agreed to import 10,000 tonnes of preferential sugar from India. Preferential
sugar is imported at zero duty and at guaranteed prices. 29
3.15 In addition to imports of ACP/India preferential cane sugar, special preferential raw cane
sugar (SPS sugar) may be imported from the same countries which benefit from the ACP/India
preferential arrangements in order to ensure adequate supplies to Community refineries.30 Volumes of
SPS sugar vary from year to year but have amount ed to around 320,000 tonnes per year in recent
years. A reduced rate of duty is levied on imports of such sugar. The quantities of SPS sugar to be
imported is decided on the basis of a supply balance forecast for each marketing year.
11. Review
3.16 The current EC sugar regime is scheduled for review in 2006.
IV. MAIN ARGUMENTS31
A. PARTIES' REQUESTS FOR FINDINGS
4.1 The complaint examined by the Panel is relate d to the European Communities' measures with
respect to the common organization of its markets in sugar.
4.2 Australia requests, for the reasons set out in its submission, that the Panel make the following
rulings:
• C sugar produced under the EC regime is pr ovided with an export subsidy within the
meaning of Article 9.1(c) of the Agreement on Agriculture;

• this export subsidy has not been subjected to the EC's reduction commitments under
the Agreement on Agriculture, inconsistently with the provisions of Article 9.1 of that
Agreement

• as C sugar exports – which are provide d with export subsidies defined under
Article 9.1(c) – are in excess of the quantit y outlay commitment levels specified in
Section II of Part IV of the EC Schedule, the EC is acting inconsistently with the
provisions of Article 3.3 of the Agreement on Agriculture;

28 As referred to in Chapter 2 of Title II of the Regulation.
29 Commission Regulation (EC) No. 1159/2003 sets out detailed rules of application for the importation
of cane sugar under certain tariff quotas and preferential arrangements.
30 Article 39 of the Regulation.
31 Note by the Panel: Note that this section summ arizes the parties argume nts and evidence as the
Panel understood them. Note also that the individual factual and legal arguments by each of the complaining
parties were endorsed by the other complaining parties. No te finally that footnotes in this and the section that
summarizes the arguments of third parties are those of the parties if not indicated otherwise.

• alternatively, if the Panel finds that th e EC's export subsidies on C sugar are not
export subsidies within the meaning of Article 9.1 of the Agreement on Agriculture ,
the EC is applying other export subsidies in a manner which results in, or threatens to
lead to, circumvention of export subsidy commitments, inconsistently with the
provisions of Article 10.1 of the Agreement on Agriculture;

• under either of the alternatives, as the EC provides export subsidies on C sugar
otherwise than in conformity with the Agreement on Agriculture and with the
commitments as specified in its Schedule, the EC is acting inconsistently with its
undertaking under the provisions of Article 8 of the Agreement on Agriculture;

• the EC is providing export subsidies to C s ugar inconsistently with the provisions of
Articles 3.1(a) and 3.2 of the SCM Agreement;

• the EC grants direct export subsidies on the export of 'ACP/India equivalent' sugar,
within the meaning of Article 9.1(a) of the Agreement on Agriculture;

• the export subsidies have not been subject ed to the EC's reduction commitments
under the Agreement on Agriculture, inconsistently with Article 9.1;

• the footnote to the EC's Schedule does not permit the EC to derogate from its
reduction commitment obligations under Articles 9.1, 3.3 and 8 of the Agreement on
Agriculture;

• the export subsidies on 'ACP/India equivalent ' sugar are in excess of the budgetary
outlay and quantity reduction commitments specified in the EC's Schedule,
inconsistently with Article 3.3 of the Agreement on Agriculture;

• as the EC is providing export subsidies on 'ACP/India equivalent' sugar otherwise
than in conformity with the Agreement on Agriculture and with the commitments
specified in its Schedule, it is acting incons istently with the provisions of Article 8 of
the Agreement on Agriculture;

• the EC is providing direct export subsidies to 'ACP/India equivalent' sugar, within the
meaning of paragraph (a) of Annex I of the SCM Agreement, inconsistently with the
provisions of Article 3.1(a) of that Agreement.

4.3 Australia requests that the Panel recommend to the Dispute Settlement Body, in accordance
with Article 19.1 of the Understanding on Rules and Procedures Governing the Settlement of Disputes
and Article 4.7 of the Subsidies Agreement, that the EC:
• bring its export subsidies for sugar into conformity with its obligations under the
Agreement on Agriculture; and

• withdraw the export subsidies inconsistent with the SCM Agreement within 90 days.

4.4 Brazil requests, for the reasons set out in its s ubmission, that the Panel make the following
rulings:
• the EC violates Article 9.1(a) of the Agreement on Agriculture since it does not
subject to its reduction commitments all of the sugar to which it grants direct export
subsidies;

• the EC accords subsidies within the meaning of Article 9.1(c) of the Agreement on
Agriculture to its exports of C sugar; the EC therefore grants subsidies in excess of
its quantity reduction commitment for sugar in consistently with Articles 3.3 and 8 of
the Agreement on Agriculture;

• the export subsidies that the EC grants to A and B quota sugar and to ACP/India
sugar are subject to the EC's reduction commitments for sugar; the EC therefore
grants subsidies in excess of its quantity reduction commitment for sugar
inconsistently with Articles 3.3 and 8 of the Agreement on Agriculture; and

• the EC's export subsidies for quota sugar, C sugar and ACP/India equivalent sugar are
granted inconsistently with Articles 3.1(a) and 3.2 of the SCM Agreement;

• alternatively, if the Panel finds that the footnote is a valid qualification of the EC's
substantive obligations under the Agreement on Agriculture, the EC is not complying
with the terms of its footnote and is thus violating Articles 3.3, 8 and 9.1 of the
Agreement on Agriculture.

• alternatively, if the Panel finds that the EC's subsidies on sugar are not export
subsidies within the meaning of Article 9.1 of the Agreement on Agriculture , these
subsidies are export subsidies that are applied in a manner which results in, or
threatens to lead to, circumvention of the EC's export subsidy reduction commitments
and are therefore inconsistent with Article 10.1 of the Agreement on Agriculture.

4.5 Brazil also requests that the Panel recommend to the DSB, in accordance with Article 19.1 of
the DSU and Article 4.7 of the SCM Agreement, that the European Communities bring its export
subsidies for sugar into conformity with its obligations under the Agreement on Agriculture by
withdrawing without delay the export subsidies for sugar inconsistent with the Agreement on
Agriculture.
4.6 In view of the remedy to which Br azil is entitled under Article 4.7 of the SCM Agreement,
Brazil requests that the Panel make a finding an d recommendation with regard to its claim under
Article 3 of that Agreement. Brazil further requ ests that the Panel specify in its recommendation the
time period within which the European Communities must withdraw the illegal portion of the export
subsidies for sugar, and that the period not exceed the 90 days previous panels have allowed for
withdrawal of prohibited subsidies.
32
4.7 Thailand requests, for the reasons set out in its submission, that the Panel make the following
rulings:
• the EC accords subsidies within the meaning of Article 9.1(c) of the Agreement on
Agriculture to its exports of C sugar;

• exports of ACP/India equivalent suga r are covered by the EC's reduction
commitments and are accorded subsidies within the meaning of Article 9:1(a) of the
Agreement on Agriculture;

32 Panel Report on Canada – Aircraft Credits and Guarantees ; Panel Report on Canada – Autos ;
Panel Report on Canada – Aircraft; Panel Report on Brazil – Aircraft; Panel Report on Australia – Automotive
Leather II.

• the quantity of sugar in respect of which the EC grants export subsidies within the
meaning of Article 9:1 of the Agreement on Agriculture is in excess of its export
quantity reduction commitment;

• the expenditures that the EC allocates for s ubsidies within the meaning of Article 9:1
of the Agreement on Agriculture to its exports of sugar are in excess of its budgetary
outlay reduction commitment; and

• to rule in the light of these findings that th e subsidies granted by the EC to its exports
of sugar are inconsistent with Articles 3.3 and 8 of the Agreement on Agriculture;

• alternatively, if the Panel finds that the EC's subsidies on exports of sugar are not
export subsidies within the meaning of Article 9.1 of the Agreement on Agriculture ,
these subsidies are export subsidies inconsistent with Article 10.1 of that Agreement;

• the EC's export subsidies for quota sugar a nd ACP/India equivalent sugar are granted
inconsistently with Articles 3.1(a) and 3.2 of the SCM Agreement.

4.8 Thailand requests the Panel to recommend, in accordance with Article 19.1 of the DSU and
Article 4.7 of the SCM Agreement, that the DSB request the Eur opean Communities to bring its
export subsidies for sugar into confor mity with its obligations under the Agreement on Agriculture by
withdrawing within 90 days the export subsidies for sugar that are inconsistent with that Agreement.
4.9 For the reasons set out in its submissions, the European Communities requests the Panel to
find that:
• exports of C sugar did not benefit from export subsidies within the meaning of
Article 9.1(c) of the Agreement on Agriculture;

• the Complainants' claim under Article 10.1 of the Agreement on Agriculture was
outside the terms of reference of the Panel; or,

• alternatively, exports of C sugar did not benefit from any "other export subsidies"
within the meaning of Article 10.1;

• subsidiarily, exports of C sugar were not in excess of the EC's reduction
commitments;

•
 subsidiarily, by bringing this claim, the Co mplainants were acting inconsistently with
the general principle of good faith and Article 3.10 of the DSU;

• subsidiarily, the alleged inconsistencies did not nullify or impair any benefits
accruing to the Complainants;

• the SCM Agreement did not apply to subsidies granted with respect to agricultural
products or, to the extent that it did, that exports of C sugar did not benefit from
export subsidies within the meaning of Article 3.1(a) of the SCM Agreement.

• footnote 1 was consistent with the Agreement on Agriculture;

• subsidiarily, by bringing this claim, the Co mplainants were acting inconsistently with
the general principle of good faith and Article 3.10 of the DSU;

• subsidiarily, the alleged inc onsistency did not nullify or im pair any benefits accruing
to the Complainants;

• to the extent that it was within the Panel's terms of reference, the claim that footnote 1
did not permit the EC's practice of exporting with refunds a quantity equivalent to the
ACP/India imports was unfounded.

B. T
ERMS OF REFERENCE
1. Provisions and measures at issue
4.10 The European Communities submitted that certain issu es brought by the Complainants
constituted separate "claims" and thus fell outside the Panel's terms of reference.
4.11 The European Communities contended that, wh ile the Complainants' panel requests cited
Article 10.1 of the Agreement on Agriculture (but not Item (d) of the Illustrative List of Export
Subsidies), none of the Complainants specified th e measure which was allegedly inconsistent with
that provision. In the European Co mmunities' view, Article 10.3 of the Agreement on Agriculture did
not relieve the Complainants of their obligations under Article 6.2 of the DSU. The Complainants had
to identify, in their panel requests, "the specific measures at issue and provide a brief summary of the
legal basis of the complaint sufficient to present the problem clearly". The European Communities
considered that the Complainants' claims under Article 10.1 of the Agreement on Agriculture failed to
meet that standard. In particular, the allegation that the provision of C beet was an export subsidy
within the meaning of Item (d) of the Illustrative List, was not an argument, but a "claim" on its own,
which was not within the terms of reference of the Panel. Moreover, th e European Communities
continued, exports of sugar were not a "measure" within the meaning of Article 6.2 of the DSU. They
were private transactions which could not, as such, be the subject of dispute settlement.
4.12 The European Communities submitted that a mere reference to the EC's "sugar regime" or to
Council Regulation (EC) No. 1260/2001 (which consis ted of 51 articles, with numerous paragraphs
and subparagraphs, as well as 6 annexes, and covered 45 pages of the Official Journal of the European
Communities) was not sufficiently "specific". Rath er, the Complainants should have identified the
specific elements of the EC's sugar regime whic h, according to them, provided the alleged export
subsidies applied by the European Communities so as to circumvent its reduction commitments
inconsistently with Article 10.1. of the Agreement on Agriculture . In the European Communities'
opinion, the Complainants had failed to do so. Fo r example, while the panel requests claimed that
exports of C sugar were subsidized because they were made at prices below the average total cost of
production of sugar, they contained no trace of what the European Comm unities considered as
separate "claims" that: (a) the "exemption" of C beet from the minimum prices for A and B beet
provided an export subsidy to the sugar producers; and that (b) there was a "payment" from European
Communities consumers to EC sugar producers in the form of "artificially high" domestic prices for A
and B sugar, as advanced by Brazil.
4.13 The European Communities submitted further that Brazil and Thailand had made a claim, on
a subsidiary basis, regarding an alleged failure to respect the terms of the footnote in the EC's
Schedule, which according to the European Commun ities, was not made in their panel requests.
Consequently, the European Communities contende d that these claims fell outside the terms of
reference of the Panel.
4.14 The Complainants asserted that they had properly stated their claims in their panel requests,
and specifically referred to the original texts in these requests. They denied having submitted, in their
first written and oral submissions, further legal claims involving separate legal provisions or measures

different from those presented in their respective panel requests. In their view, the European
Communities was confusing "claims", which must be stated in panel requests, with "arguments", to be
developed in the course of the Panel's proceedings. According to the Appellate Body, Article 6.2 of
the DSU required that the claims, but not the arguments, had to be sufficiently specified in the request
for the establishment of a panel in order to allow the defending party and any third parties to know the
legal basis of the complaint.33
4.15 The Complainants stressed that the European Communities' cont entions had to be examined
in light of Article 10.3 of the Agreement on Agriculture . Because of the reversal of the burden of
proof, it was not incumbent on them to identify or enumerate the WTO agreements, provisions, or
export subsidy definitions that the European Commun ities might choose to invoke in its defence. It
was the European Communities' duty to prove that no subsidy of any kind, under any WTO
agreement, had been granted by any EC measure to sugar exports in excess of its reduction
commitments. In the Complainants' view, any and all EC measures that might confer a subsidy on
these sugar exports, any and all WTO agreements with subsidy provi sions were thus within the terms
of reference of the Panel by virtue of Article 10.3 of the Agreement on Agriculture . In particular,
since the scope of Article 10.1 of the Agreement on Agriculture extended to export subsidies as
defined in the WTO agreements other than those lis ted in Article 9.1, the Article 10.1 obligation was
not contingent on a claim of inconsistency with the provisions of the SCM Agreement or any other
WTO Agreement. For the Complainants, th e export subsidy defin itions of GATT 1994 had
application to the export subsidies covered by the provisions of Article 10.1 of the Agreement on
Agriculture.
4.16 The Complainants also countered that they ha d sufficiently identified the regulations that
were likely to be relevant in the present dispute in their requests for consultations, in their respective
requests for the establishment of a panel, as well as in their first submissions. They considered the
reference to (EC) Council Regulati on No. 1260/2001 to be sufficiently specific to meet due process
requirements. For example, Article 10.1 of the Agreement on Agriculture had been clearly identified
in their respective panel requests as a claim in the al ternative in relation to their basic claim regarding
exports in excess of export subsidy reduction commitments. To allege subsidized exports in excess of
reduction commitments as well as an incons istency with Articles 3.3 and 8 of the Agreement on
Agriculture was sufficient, in their view, to meet the requirements of Article 6.2 of the DSU. By
virtue of Article 10.3, it was then up to the exporting Member to prove that "no export subsidy,
whether listed in Article 9 or not, has been granted with respect to" those exports of sugar in excess of
reduction commitment levels. Imposing the requireme nt on the Complainants to identify all "other"
export subsidies individually would have the eff ect of limiting the burden of the exporting Member,
re-reversing the burden of proof of Article 10.3 as applied to Article 10.1, and ultimately rendering
Article 10.3 meaningless and ineffective, contrary to the basic rules of treaty interpretation.
4.17 Australia added that the European Communities woul d fall short of meeting its own standard
given that, on a number of occasions it had used comparable language in its own panel requests.
Brazil underlined that while it was theoretically possibl e that some subsections of EC Regulation No.
1260/2001 played no role in the provision of the ch allenged subsidies, Brazil's failure to identify and
expressly exclude any of those subsections from its description of the measure at issue would not
mean that Brazil had not properly identified the meas ure at issue within the meaning of Article 6.2 of
the DSU. Australia and Brazil refuted the European Communities' contention that their panel
requests only covered certain "payments", as sugg ested by the European Communities. In their
opinion, the existence of payments was only one aspect of the subsidies at issue in the present dispute.
Australia emphasized that the measu res at issue were clearly identified in its panel request as the
subsidies provided by the European Communities in excess of reduction commitment levels.
Australia identified the source of the subsidization and the nature of legal complaint, including the

33 Appellate Body Report on EC – Bananas III, para. 143.

relevant legal provisions. Australia noted that the precise nature of the "payments" under
Article 9.1(c) were legal arguments that did not have to be included in the panel request.
4.18 Furthermore, in the Complainants' view, nothing prevented them from anticipating the
European Communities' rebuttal arguments, either in th eir first written submissions or in their rebuttal
submissions. Article 9.2(b)(iv), for example, wa s brought into the case by the Complainants as a
counter-argument, not as a claim of inconsistency, in response to arguments made by the European
Communities. As the European Communities itself had raised the footnote as justification for non-
compliance with its obligations, the Complainants we re entitled to provide rebuttal arguments in that
context, citing any WTO provisions, any EC laws or regulations, or other factual evidence. The
Complainants had referred specifically to Article 9. 2(b)(iv) to underline that the footnote, even if
interpreted as imposing a quantity limit, would lead the European Communities to act inconsistently
with its obligations by failing to achieve the reductio ns required by that provision. As a consequence,
the European Communities would be providing export subsidies in contravention of the Agreement on
Agriculture – a violation of Article 8, which undisputedly was within the terms of reference. The
Complainants reiterated that such rebuttal argument s needed not be mentioned in the panel requests,
and that, in the present case, their assertions regard ing the scope of application of the footnote were
thus subsidiary arguments supporting their basic legal claim that the Eu ropean Communities was
exceeding its export subsidy reduction commitments.
4.19 The European Communities maintained its argumentation. Thus, of the several claims
raised by the Complainants with respect to C sugar under Article 9.1(c) of the Agreement on
Agriculture, only one was properly before the Panel, i.e. the claim that exports of C sugar were
"payments on exports" because they were made below average total cost of production. With respect
to the footnote in the EC's Schedule, the Europ ean Communities contended that any suggestion that
the European Communities was acting inconsis tently with Article 9.2(b)(iv) of the Agreement on
Agriculture had appeared for the first time during the firs t substantive meeting of the Panel, not in the
requests for panel establishment, nor in the first wr itten submissions of the Complainants, but only in
the first oral statements of Brazil and Thailand. Si nce that provision was not mentioned in the Panel's
terms of reference, it could not fo rm the basis for a finding of incons istency with any other provision
of the Agreement on Agriculture . Nor had any of the Complainants set out a brief summary
suggesting that the alleged failure of the European Communities to respect the terms of the footnote
was the legal basis of their complaint. In the European Communities' view, the Complainants should
have claimed that the European Communities did no t, in fact, re-export ACP/India sugar but rather
exported an equivalent amount. Th is would have required a referen ce to, and identification of, the
footnote, because that was the legal provision alle gedly infringed. The Eu ropean Communities also
considered that this was necessarily a separate claim, because it was premised on the assumption that
the footnote was a valid justification for the Eu ropean Communities exceeding its commitments, but
that the footnote did not sanction an excess in resp ect of ACP/India equivalent sugar but only re-
exported ACP/India equivalent sugar. As proof that the alleged non-respect of the footnote was a
separate claim, the European Communities observed that Brazil and Thailand had made the "claim" as
an "alternative claim." However, the corresponding legal basis was not set out in the requests for
establishment of a panel.
4.20 The European Communities acknowledg ed that Article 10.3 of the Agreement on Agriculture
relieved the Complainants from the obligation of having to prove their claim that the European
Communities granted export subsidies in excess of its reduction commitments. In its view, however,
Article 10.3 did not exempt the Complainants from id entifying, in their panel requests, the relevant
measures that provided the alleged export subsid ies, in accordance with Article 6.2 of the DSU (see
also paragraph 4.12). Moreover, the European Co mmunities observed that Article 10.3 was not listed
among the special or additional rules and proce dures on dispute settlement in Appendix 2 to the DSU
and thus did not derogate from the requi rements imposed by Article 6.2 of the DSU. The European
Communities further considered that the issue of who should bear the burden of proof should not be

confused with the distinct issue of who must stat e the claims. The Complainants' interpretation of
Article 10.3 would be incompatible with the b asic requirements of due process because it would
impose upon the European Communities the impossible task of identifying all the conceivable export
subsidies. The inversion of the burden of proof could not have the consequence of depriving the
defending party of the fundamental procedural right "to know what case it has to answer and what
violations have been alleged".34
4.21 The Complainants reiterated that they had shown that EC exports of sugar exceeded its
reduction commitments (see paragraphs 4.28- 4.29) . Unless the European Communities could prove
that the excess was not subsidi zed, the European Communities was acting inconsistently with its
obligations under Articles 3.3 and 8 of the Agreement on Agriculture , and Article 3 of the
SCM Agreement. If the European Communities could not pr ove that the excess was not subsidized,
no other provisions of the agreemen ts were relevant. But if the European Communities claimed that
the excess was not subsidized, or that reduction co mmitments did not apply to all or part of the
excess, then the Complainants were entitled to raise, by way of counter-arguments, any WTO
provisions, as well as any EC laws or regulations, or other factual evidence, to rebut the EC claims.
In the Complainants' views, none of these rebuttal arguments or evidence needed to be mentioned in
their requests for panel establishment.
2. Procedural matters
4.22 Australia observed that the European Communities di d not raise any concerns in regard to
alleged deficiencies in its panel request until six months after the Panel was established and more than
two months after the Panel was composed. The European Communities did not raise any concerns
with respect to the establishment of the Panel nor di d it seek a preliminary ruling at an early stage of
the Panel process, actions it had taken in recent di sputes in which it was a respondent. Instead, the
European Communities had waited until its first wri tten submission to raise concerns in regard to
Article 10.1. Nor had it sought to discuss the issue with Australia, in the context of the opportunity
provided by Article 7 of the DSU to modify the standard terms of re ference. In this regard, Australia
recalled that the principle of good faith under Article 3.10 of the DSU required respondents to act
promptly in identifying procedural deficiencies and br inging them to the attention of the complaining
Members, and to the DSB, or the Panel.
4.23 Brazil was of the opinion that the European Comm unities had not made any credible attempt
to show that it had suffered prejudice in the conduct of its defence due to an alleged lack of clarity or
deficiencies in the panel request. According to Br azil, a showing of prejudice was essential to any
argument that a claim had not been set out with sufficient specificity in a panel request.
4.24 In response, the European Communities first recalled that its objection related to the fact
that it could not identify, in the panel requests, some of the "claims" stated by the Complainants in
their first submissions. The European Communities, therefore, could not have complained before
receiving the Complainants' first submissions. Sec ondly, although it had suffered a prejudice, the
European Communities did not agree that it was requi red to show prejudice, because that requirement
was not mentioned in Article 6.2 of the DSU.
C. BURDEN OF PROOF
4.25 The Complainants submitted that, under Article 10.3 of the Agreement on Agriculture , the
burden of proof rested with the European Comm unities to demonstrate that no export subsidy,
whether listed in Article 9 of the Agreement on Agriculture or not, had been granted to sugar exports
in excess of the European Communities' reduction commitment level.

34 Appellate Body Report on Thailand – H-Beams, para. 88.

4.26 Drawing attention to the analyses by the Appellate Body in a number of cases
35, the
Complainants held that they only bore the burden of proof in relation to the quantitative aspect, i.e.
that the European Communities was exporting quantities in excess of its scheduled reduction
commitment level. If the Complainants met this burden and the European Communities contested the
export subsidization aspect of the claim, then the European Co mmunities had an obligation, or legal
burden, to establish that no export subsidy had been granted to the quantity exported in excess of the
reduction commitment level specified in its Schedule. According to the Complainants, this analysis
applied to their claims under Articles 3, 8, 9 and 10.1 of the Agreement on Agriculture.36
4.27 The European Communities agreed that it would have the burden of proof under
Article 10.3 of the Agreement on Agriculture with respect to the "subsidization aspect" of the
Complainants' claim, assuming that the Complainants had met their burden of proof with respect to
the "quantitative aspect" of their claims. However, the European Communities held that some of the
Complainants' "claims", in its view, had not been pr operly stated in the panel requests as required by
Article 6.2 of the DSU, and were therefore outside the terms of reference of the Panel (see paragraphs
4.10-4.13 and 4.19-4.20).
1. Quantitative aspect
4.28 In order to discharge their burden of proof in respect of the quantitative aspect of their claims
under Articles 3, 8, 9 and 10.1 of the Agreement on Agriculture , the Complainants referred to the
European Communities' notifications to the Committee on Agriculture. 37 The notified data showed
that the European Communities had exported 4.097 million tonnes of sugar in the 2001-2002
marketing year. The Complainants pointed out that this figure, which excluded food aid, represented
more than three times the scheduled quantity reduction commitment level of 1.273 million tonnes, and
underlined that in every marketing year since 1995, the European Communities had exported sugar in
amounts three to four times the level of its reducti on commitments. The Complainants stressed that it
was the fact that the European Communities' total exports of sugar exceeded the European
Communities' reduction commitment levels that mattered, regardless of how the sugar was
categorized. Having met their burden of proof in r espect of the quantitative aspect of their claim, the
Complainants noted that the European Communities did not contest the supplied factual evidence.
4.29 The Complainants indicated that, to the best of their knowledge, most, if not all, of the excess
exports, were accounted for by the C sugar and AC P/India equivalent sugar categories. With
particular reference to AC P/India "equivalent" sugar, Australia and Thailand observed that, during
the marketing year 2001-2002, the European Comm unities notified export subsidies amounting to
€482.8 million against a scheduled budgetary ou tlay reduction commitment of €499.1 million but
excluded from its reduction commitments some €800 m illion in direct export subsidies on 1.6 million
tonnes of sugar from its reduction commitments. Similarly, quantity commitments had been exceeded
by 1.378 million tonnes.

4.30 The European Communities admitted that current exports of sugar were in excess of the
figure shown in the EC's Schedule. However, this did not mean that the European Communities had
breached its export subsidy reduction commitments; rather the Complainants' claim was based on a
misunderstanding of the information contained in the EC's Schedule.

35 Panel Report on US – FSC, para. 7.136; Panel Report on Canada – Dairy, paras. 7.33-7.34; Panel
Report on Canada – Dairy (Article 21.5 – New Zealand and US ), paras. 6.3-6.6; Appellate Body Report on
Canada –Dairy (Article 21.5 – New Zealand and US II), para. 73.
36 Appellate Body Report on Canada – Dairy, paras. 69-72.
37 Exhibit COMP-17.

4.31 The European Communities explained that it did not grant any export subsidies to exports of
C sugar. However, if the Panel were to find that C sugar indeed benefited from export subsidies, the
European Communities submitted that its sugar ex ports would not be in excess of the reduction
commitments when those were interpreted in good fa ith and in the context of the Modalities Paper.
With respect to ACP/India equivalent sugar, the European Communities submitted that the burden of
proving their case rested with the Co mplainants because they had also misinterpreted the footnote. In
the European Communities' view therefore, exports of ACP/India equivalent sugar were not in excess
of its scheduled commitments, when these were interpreted in good faith. 38
2. Export subsidization aspect
4.32 The Complainants submitted that, as the party claiming that the excess quantity was not
subsidized, the European Communities had the obliga tion to demonstrate that such excess had not
been granted export subsidies. In other words, that none of the Article 9.1 listed subsidies had been
granted in respect of the quantity of sugar that was exported in excess of the European Communities'
scheduled reduction commitment level; and no "other" export subsidies were being applied to such
sugar exports, for the purposes of Article 10.1. The Complainants held that, if the European
Communities did not produce any evidence in that re gard, it would have failed to establish that an
export subsidy was not being applied to sugar, within the meaning of either Article 9.1 or Article 10.1
of the Agreement on Agriculture.
4.33 The European Communities responded that the Complainants ' interpretation of Article 10.3
of the Agreement on Agriculture was incompatible with the basic requirements of due process 39
because it would impose upon it the impossible task of identifying all the conceivable export
subsidies which, the European Communities held, it did not grant. The inversion of the burden of
proof could not possibly have the consequence of depriving the defending part y of this fundamental
procedural right. Referring to th e Appellate Body's analysis in Canada – Dairy 40, the European
Communities indicated that it was not requesting that the Complainants make a prima facie case that
the elements of the "claimed exports subsidies" were present. Rather, the European Communities
contended that the export subsidization aspect was also part of the claim to be made by a complaining
party, and that Article 10.3 did not exempt the Complainants from identifying the relevant "payments"
that provided the alleged export subsidies. 41 While acknowledging that Article 10.3 transferred to the
respondent the burden of proof with respect to the "export subsidization aspect", the European
Communities stressed that, before such transfer c ould take place, the Complainants had to comply
with the requirements of Article 6.2 of the DSU.
4.34 The Complainants reiterated that the European Comm unities had failed to discharge its
burden of proof in its submissions and in panel he arings. As already indicated in paragraph 4.18
above, Article 10.3 of the Agreement on Agriculture did not require them to lead in the presentation of
evidence to the Panel in relation to the export s ubsidization aspect. Nevertheless, for reasons of
procedural efficiency, but without relieving the European Communities of its burden, and without
waiving their rights under Article 10.3 of the Agreement on Agriculture , the Complainants had
addressed several points in their respective submissi ons, but only in anticipat ion of arguments that
they expected the European Communities to submit.

38 The parties' arguments in respect to these claims are presented in Section IV.D with respect to
C sugar, and in Section IV.E with respect to ACP/India equivalent sugar.
39 Appellate Body Report on Thailand – H Beams, para. 88.
40 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II), paras. 70-71.
41 See Section IV.B, Terms of reference.

D. C
 SUGAR
4.35 With respect to C sugar, the Complainants recalled that, by subsidizing exports in excess of
its reduction commitments42, the European Communities had acted in consistently with Articles 3.3, 8,
and 9.1(c) or, alternatively, 10.1 of the Agreement on Agriculture, and that the European Communities
had the burden of proof (see Section IV.C above).
1. Article 9.1(c) of the Agreement on Agriculture
4.36 The Complainants submitted that C sugar benefited fro m export subsidies falling within the
description of Article 9.1(c) of the Agreement on Agriculture and observed that Article 9.1(c)
subsidies were subject to reduction commitments in accordance with the provisions of Article 9.1. A
measure that met the description of any of the subpa ragraphs (a) through (f) of Article 9.1 was, by
definition, an export subsidy and, as such, necessarily subject to the reduction commitments of the
scheduled product in question. They pointed out that Article 9.1 was, in that respect, similar to the
Illustrative List of Export Subsidies in Annex I of the SCM Agreement. Since the European
Communities had not subjected C sugar to the required quantity reduction commitments, the
Complainants argued that the non-inclusion of C sugar in the quantity reduction commitments was
inconsistent with Article 9.1, and thus with Articles 3.3 and 8, of the Agreement on Agriculture.
4.37 The European Communities replied that the exports of C sugar did not benefit from export
subsidies falling within Article 9.1(c) of the Agreement on Agriculture or from any "other export
subsidy" within the meaning of Article 10.1. More over, even if exports of C sugar were found to
benefit from export subsidies, the European Comm unities submitted, subsidiarily, that those would
not exceed the reduction commitments scheduled by the European Communities, or, if they did,
would do so by much less than claimed by the Complainants, if the reduction commitments were
interpreted in good faith and taking into account the context provided by the Modalities Paper (see
also Section IV.D.3(a)).
(a) "Payment"
4.38 The Complainants first recalled the Canada – Dairy jurisprudence, on which they had
principally based their arguments. They asserted th at, in order to determine whether a payment had
been made, an examination was needed of a ll monetary and non-moneta ry economic costs of
production, i.e. whether the price of the exported agri cultural product at issue reflected all the
economic resources invested in the production of that product 43, not only those invested by the
economic operator who engaged in the pr ocessing or export of C sugar. They recalled that a
"payment" within the meaning of Article 9.1(c) denoted a "transfer of economic resources" whether in
the form of money or in some other form which conferred value such as payments-in-kind; that it
"may take place in many different factual and regulatory settings" 44 and that it was not limited to
payments by governments, but could be made and funded by private parties. 45 The existence of a
payment-in-kind would be determined by comparin g prices with an objective standard, reflecting the
proper value of the product to the producer. 46 The appropriate benchmark for ascertaining if a
payment was made was whether the prices paid to the producers were below the "total cost of
production". 47 This benchmark represented an objective st andard against which to assess whether the

42 Exhibit COMP-17.
43 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II) , paras. 110
and 119.
44 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US), para. 76.
45 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II) , paras. 87 and
132.
46 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US), para. 73.
47 Ibid., paras. 71, 76, 86-87 and 114.

prices paid were sufficient for producers to recover the average fixed and variable costs of production
and thus avoid making "losses" over the longer term. 48 Furthermore, since the international
obligations of the European Communities, not of its member States, were at issue in the present case,
the benchmark had therefore to be a single, Community-wide, cost of production figure rather than the
cost of production figures for each individual EC member State.49
4.39 Australia identified a "payment" on C sugar in that it was being sold at below the average
total cost of production by the sugar producer to th e world market. Australia defined "producer" as a
collective term for all enterprises engaged in the pr oduction of sugar, from the growing of sugar beet
or cane to the processing/refining of sugar from sugar beet or sugar cane or from raw cane sugar. The
transfer of resources in this case was from the EC sugar producer to the purchaser, in that the price
charged by the producer of the sugar was less than the proper value of the sugar to the producer.
According to Australia, the export production r eceived an advantage b ecause the payment was
financed by virtue of governmental action. In response to additional questions from the Panel,
Australia went on to identify other "payments" within the production chain which involved sales at
prices that did not reflect the "proper value" of the product to the producer. In respect of these
payments, Australia indicated however that while, in its view, they clearly fell within the definition of
Article 9.1(c), and were indistinguishable from the Canada – Dairy case, it was not necessary to
dissect the structure of the EC sugar regime to find a payment. These payments were as follows: 50
(a) the "payment" from the beet grower to the sugar processor in the form of beet sold
below its proper value to the grower, i.e. beet sold below its costs of production. As
set out in the evidence presented by Australia , C beet was categorized into C1 and C2
beet in the main C sugar-producing countries, with C2 beet being priced on the basis
of an approximately *** split of revenue from C sugar sales. Over the 11 years to
2002-03 the payment for C2 beet was estimated to have averaged *** per cent of the
average total cost of producing beet in France and *** per cent in Germany.

Therefore, for sugar produced from C2 b eet, Australia submitted that there was a
payment-in-kind, in the form of beet sold below its proper value, by the growers to
the processors.51
(b) a sale by the sugar processor to the export er: in most cases that Australia was aware
of, that sugar was sold onto the world mark et via an exporter. The exporter purchased
the sugar from the sugar processor and then so ld it onto the world market. The price
paid by the exporter was, in the case of all C sugar exports, below the total average
costs of production. Thus, Australia submitted that there was a payment-in-kind from
the sugar processor to the sugar exporter in the form of sugar below its production
costs which enabled the exporter to sell the sugar onto the world market.
4.40 Brazil noted that there may be multiple "payment s" within the meaning of Article 9.1(c)
involved in the production and sale for export of a single product such as sugar. 52 Brazil underlined
that it could have simply shown that C sugar was bei ng sold for export below the average total cost of
production, but that it went further and identified three examples of "payments" within the meaning of
Article 9.1(c) that occurred in the process of produc tion and export sale of C sugar, and which gave
"an advantage" to "export production" of C sugar. These "payments" were as follows:

48 Panel Report on Canada – Dairy (Article 21.5 – New Zealand and US II), panel report, para. 5.28.
49 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II), paras. 96-97.
50 Australia's first written submission, paras. 11 1-113; see also Australia's replies to Panel
questions 46-48.
51 Exhibit ALA-1, pp 10-11; Australia's reply to Panel question 62.
52 Brazil's first written submission paras. 42-49; Brazil's replies to Panel questions 46-48 and 62.

(a) high internal prices paid by EC consumer s, through a combination of governmental
actions such as intervention prices, quotas, export refunds and import restraints, to
processors of C sugar.
 53 According to Brazil, a similar payment was made by EC
taxpayers who were taxed to support export refunds. The transfer of economic
resources consisted of the transfer of m oney from the consumers and taxpayers (the
"payers") to the processors and exporters (t he "payees"). Through these "payments",
the export of C sugar at prices below the av erage total cost of production of C sugar
was facilitated;
(b) a "payment" was found in the EC sugar regi me's requirement for minimum prices for
A and B quota beet, which enabled beet grower s to sell C beet to processors at prices
below its cost of production. Such a "payment" constituted a transfer of economic
resources in the form of a payment-in-kind to the sugar processors. Brazil underlined
that, in this case, the "payers" were the b eet growers who transferred C beet to the
processors (the "payees") at prices that did not reflect the cost of production of the
beet. Brazil noted that although prices between growers and processors for C beet
were not regulated by the EC, available ev idence indicated that the growers normally
received *** per cent of the world market price for a large portion of C beet, except
for that portion that was treated as C1 beet.
54 This price was far less in monetary
terms than the 58 per cent of the intervention price that growers received for A and B
beet, and far below the average total cost of producing beet.
55
(c) a third "payment" was found in the export sale of C sugar on the world market at
prices below its average total cost of production. This "payment" constituted a
payment-in-kind by the producers (the "pay ers"), who transferred resources provided
by the European Communities to the world market buyers of this sugar (the
"payees"). The world market buyers gain ed access to this sugar supply at prices
below its average total cost of production. Brazil submitted that, by enabling C sugar
producers to make this payment-in-kind, the EC regime conferred an advantage to EC
export production, notwithstanding the fact that the exporters themselves "made" the
payment.
4.41 Calling for a sector-wide approach, Thailand submitted that, in light of the Canada – Dairy
jurisprudence summarized in paragraph 4.38 above, there was no requirement to distinguish between
C sugar sold to exporters, C sugar sold abroad, a nd C beet sold to processors, or to identify the
individual transactions through which the payments we re made, or to examine, in a disaggregated
manner, the "payments" made by beet farmers and those made by sugar processors. All that was
required in order to determine the existence of a "payment" was a comparison between the average
total cost of production of all opera tors involved in the production of C sugar and the average price at
which C sugar was sold for export. Thailand noneth eless stated that it would have no objection if the
Panel were to examine separately the payments, including those made by beet farmers and those made
by sugar processors.
56
4.42 The Complainants contended that the existe nce of "payments" within the meaning of
Article 9.1(c) of the Agreement on Agriculture could be established from data on costs of production

53 Exhibit COMP-1, para. 81. In particular, the Court of Auditors reported that the annual cost to the
budget of surplus sugar was approximately €1,500 million, some €800 million of which were obtained from
production levies on A and B quota sugar, with the balance paid for by European taxpayers.
54 Exhibit COMP-1, C 50/11, para. 16.
55 Exhibit BRA-1, Table 5.
56 Thailand's replies to Panel question 62.

and returns on world markets. They submitted production cost data 57 which showed that, for the
marketing years 1992/93 to 2002/03, beet growers failed to recoup between *** and *** per cent of
their total cost of producing C beet. These losses were financed by the very high returns received by
the growers of beet for A and B quota sugar. Duri ng the same period, the processors failed to recover
between *** and *** per cent of their total cost of production of C sugar, while export market returns
from C sugar represented *** per cent of the average total production costs. 58 Further statistical
evidence59 showed that, while the average total cost of sugar production in the European Communities
was higher than the prices received for C sugar on the world market, C sugar continued to be exported
in what the Complainants considered to be signif icant quantities. In their view, the losses would be
unsustainable in normal commercial operations if processors were to produce only C sugar. The fact
that there was no independent production of C suga r confirmed that C sugar could not be produced
absent a payment.
4.43 Citing various studies 60, the Complainants contended that in 2002/03, the Community-wide
cost of production of all sugar in the European Communities was *** per tonne. At the same time,
the world market price for sugar (as measured by the London Daily Price) was on average €144.88
per tonne, which was less than *** per cent of the cost of production in the European Communities,
implying that the cost of producing sugar was more than *** times the price that same sugar
commanded on the world market. The Complainants pointed to the assessments undertaken by the
European Communities' own official bodies, whic h had acknowledged that the gap between the cost
and the price of C beet and C sugar was financed by virtue of the governmental action taken by the
European Communities through its sugar regime. 61 According to the Complainants, the figures also
showed that for the entire period from marketi ng year 1992/93 through 2002/03, although C sugar
prices were below average total costs, 62 these prices exceeded marginal costs. Thus, C sugar prices
were able to generate a positive contribution to net income once marginal costs were covered. 63
Whichever method was considered the most accurate for estimating the world market price, the price
received for C sugar was invariably lower than the average cost of producing C sugar (see also
paragraph 4.74 et seq.).
4.44 The European Communities responded that only one of the payments cited by the
Complainants was properly before the Panel, i.e. the payments-in-kind from EC sugar producers in
the form of export sales of C sugar below total aver age cost of production. The EC considered that
each of the other "payments" alleged by the Compla inants constituted a distinct claim that was not
within the Panel's terms of reference (see Section B above, Terms of reference). While raising doubts
regarding the precise nature of those "payments" an d the way in which they would provide an export
subsidy within the meaning of Article 9.1 (c.) of the Agreement on Agriculture , the European
Communities disagreed that the prices paid by the EC consumers for A and B sugar involved
"payments". The EC consumers paid the prevailing domestic market price and, therefore, transferred
no "economic value" to the sugar producers.
4.45 In the European Communities' view, the Comp lainants had misread the jurisprudence in
Canada – Dairy, on which they were basing their claims and allegations. The Canada – Dairy cases
concerned different factual circumstances involving the provision of an agricultural input below its

57 Exhibit ALA-1, pp 9; Exhibit COMP-2, Table 2.1, pp. 8-9; Exhibit BRA-1, Table 5, p. 29;
Diagram 2, para. 18.
58 Exhibit ALA-1, p. 9.
59 Including official EC and member State documentati on, OECD papers, studies of research institutes,
information available from the private sugar sector as well as confidential LMC data.
60 Exhibit BRA-1, Annex B, Table B.15, and Table 5, p. 29; Exhibit COMP-2, para. 3.9, p. 43.
61 Exhibit COMP-1, C 50/16, para. 96.
62 Exhibit BRA-1, para. 18; Diagram 2.
63 Ibid., para. 43(a); Diagram 11.

average total cost of production which constituted a "p ayment" to the processor of that input. If that
payment was "financed by virtue of government act ion", and if it was contingent on the subsequent
exportation of the processed product, only then w as the processed product deemed to benefit from an
"export subsidy" subject to reduction commitments.
4.46 The European Communities considered th at the Complainants' allegations in
paragraphs 4.38-4.42 would imply that the producers of C sugar were at the same time the providers
and the recipients of the alleged export subsidy, and that C sugar was at the sa me time the subsidized
product and the product which conf erred the export subsidy. The European Communities contended
that, insofar as the sales of C sugar involved a "payment"
64, the recipient of such payment and,
therefore, of the alleged subsidy, would be the forei gn buyers of C sugar, rather than the producers of
C sugar. In turn, the goods subsidized by such payments would not be the exports of C sugar, but
instead the goods manufactured by the foreign buyers of C sugar into which C sugar was
incorporated.
4.47 While a cost of production benchmark may be appropriate in certain cases where sales were
made within the domestic market, the European Communities continued, it would not always be so, as
illustrated by the first Canada – Dairy case. The Appellate Body had emphasized that in order to
establish the existence of a "payment", it was "necessary to scrutinize carefully the facts and
circumstances" of the measure at issue in each case.
65 Furthermore, even if the provision of C beet
constituted a "payment on exports", the Complainants would still have to show that it was "financed
by virtue of governmental action". In this rega rd, the European Communitie s considered that the
Complainants had overlooked some important differe nces between the production of milk at issue in
Canada – Dairy, and the production of C beet. The availab ility and the cost of C beet could vary
greatly between EC regions, as well as from one year to another, depending on a multiplicity of
factors, which did not involve "governmental action", or at least the type of action at issue in this
dispute. For example, the production of beet was affected by climatic conditions and diseases to a
much greater extent than the production of milk. Al so, beet farmers were much less specialized than
milk farmers as beet was produced on a rotational basis. As a result, the production of C beet,
according to the European Communiti es, was as likely to be "financed" by A and B beet as by other
alternative crops, and vice versa. For those reasons, the "causal link" between the alleged
"governmental action" and the provision of C beet was not "tight" enough to consider that sales of C
beet were "financed by virtue of governmental action".
4.48 The European Communities further submitted that the cost of production of sugar was not a
relevant benchmark in order to establish whethe r export sales of C sugar involved "payments".
Instead, the relevant benchmark was the world mark et price for sugar. The European Communities
held that the Appellate Body had resorted to a co st of production benchmark in view of the specific
circumstances of Canada – Dairy. That benchmark could not be m echanically applied to the present
case but it might be appropriate in situations where, as in Canada – Dairy, the sales were made within
the domestic market. However, when the sales we re made in the world market, the only relevant
benchmark for determining the existence of "payme nts" was the price prevailing in that market.
 66
The use of a cost of production benchmark in case s involving input subsidies to exported goods was
supported by Items (j) and (k) of the Illustrative List of the SCM Agreement, as explained by the
Appellate Body. Those two provisions were not c oncerned with the export of goods below cost of
production, but instead with the granting of subs idies to exported goods through the provision of

64 Exhibit EC-10, paras. 46-49; Exhibit EC-11, paras. 16-17. Since, according to the European
Communities, the alleged payments would not, in any ev ent, provide an export subsidy to C sugar according to
the Appellate Body's interpretation, the European Communities did not consider it necessary to revisit these two
issues, but reserved the right to raise them in the event of an appeal.
65 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US), para. 76.
66 Ibid. para. 93.

certain financial services (export credits, guarantees a nd insurance) at a price below the cost to the
service provider. Like the measure at issue in Canada – Dairy, and unlike the measure at issue in this
dispute, Items (j) and (k) of the Illustrative List were concerned with input subsidies.
4.49 Recalling that Article 9.1(c) did not identify any specific benchmark, and that the examination
of whether a measure involving "payments" had to be made, in each case, having regard to the
"factual and regulatory setting of the disputed measure" 67, the European Communities drew attention
to the reasoning of the Appellate Body with respect to the "administered domestic price" 68, as well as
with world market prices 69, when these had been considered for their relevance as possible
benchmarks in Canada – Dairy:
"... a comparison between CEM prices and world prices gives no indication on the
crucial question, namely whether Canadi an export production has been given an
advantage. Furthermore, if the basis for comparison were world market prices, it
would be possible for WTO Members to subsidize domestic inputs for export
processing, while taking care to maintain th e price of these inputs to the processors at
a level which equalled or marginally exceeded world market prices."
70
4.50 According to the European Communities, this statement was additional proof that the
Appellate Body's decision not to use the world market price as a benchmark in Canada – Dairy was
linked to the fact that the alleged "payments" consisted of the provision of inputs for processing
within Canada (see also paragraph 4.45). The Eu ropean Communities asserted that the mere fact of
exporting goods below the average total cost of production provided no "advantage" to that "export
production", unlike the provision of inputs below cost within the exporting country.
4.51 The European Communities submitted further th at the alleged payments conferred no
"benefit" to C sugar and that the Complainants' inte rpretation of Article 9.1(c) would make it possible
to establish the existence of an export subsidy in a situation where, far from receiving a benefit
through the alleged subsidy, the supposed recipien t of the subsidy was in fact making a financial
contribution and providing a benefit to anothe r operator in another Member. The European
Communities reasoned that if the sales of C sugar involved a "payment", it would follow that the
producers of C sugar were foregoing part of the sugar's "proper value" to them. Insofar as the C sugar
producers received a benefit, such benefit was not conferred by the "payments" themselves, but
instead by the previous "financing" of the payments "by virtue of governmental action". Such
government "financing", however, did not necessarily i nvolve a subsidy and, even if it did, it was not
contingent upon export performance . According to the European Communities, the Complainants'
interpretation of Article 9.1(c) would render inapplicable the othe r constituent element of the notion
of subsidy, i.e. the requirement that the me asure provided a "benefit". It would transform
Article 9.1(c) into a per se rule against exports below cost of production, totally disconnected from
the existence of subsidization. Article 9.1(c) w ould then become a form of anti-dumping instrument,
which was not even found in the Anti-Dumping Ag reement. The European Communities contended
that neither the Agreement on Agriculture nor its drafting history contained any suggestion that the
drafters had intended to impose stricter discip lines against the dumping of agricultural products
through Article 9.1 (c).
4.52 Responding to the European Communities' argume nt in paragraphs 4.45, 4.48, and 4.50
above, the Complainants held that the legal reasoning and conclusions in Canada – Dairy were not
limited to the specific case of subsidized inputs fo r processing, and that the citations mentioned were

67 Ibid. para. 76.
68 Ibid. para. 81.
69 Ibid, para. 83.
70 Ibid, para. 84.

not only intended to explain the factual situatio n existing in that case. To the contrary, the
Complainants reaffirmed that, on the basis of the jurisprudence cited in paragraph 4.38, neither the
text of Article 9.1(c), nor Canada – Dairy , limited the universe of export subsidies or payments as
alleged by the European Communities. The Appella te Body had interpreted the precise provision that
the Complainants had argued was being breached in the present case, i.e. Article 9.1(c). In their view,
the European Communities' assertion would imply that no Appellate Bo dy or panel reports would be
considered relevant because of differing factual situations.
4.53 The Complainants considered that, even if Canada – Dairy were to be construed in the
limited manner suggested by the European Commun ities, the present case fitted directly within the
scope of that case because one of the "payments" at issue involved the sale of C beet (a primary
product) to sugar processors at below the average total cost of production. The Complainants went on
to underline the similarities between the milk regime in Canada – Dairy and the sugar regime in the
present case. Both were quota-based systems deliv ering price support; in both cases the product at
issue was manufactured from a primary product, and the final product had to be exported;
"governmental action" provided the supply of the primary product at prices below that for which the
same product could be sold on the domestic marke t; and in both cases the primary product was sold
at below the average total cost of production and the losses were financed by the governmental action.
4.54 The Complainants further argued that there was nothing in the wording of Article 9.1(c) and
the rulings of the panel and Appellate Body in Ca nada-Dairy to suggest that Article 9.1(c) only
applied to payments made in the form of sales of inputs to domestic processors. If the European
Communities' argument were correct, Article 9.1(c) would not, for example, apply to cases involving
agricultural products that needed no processing prior to exportation; products that were processed by
farmers themselves; those processed by cooperatives or other entities owned by the farmers; or those
which farmers exported for processing abroad. Th erefore the Complainants contended that if
Article 9.1(c) were interpreted to exclude such products, a distinction would be made that was
completely divorced from the purpose of that provision, and Members would be given the opportunity
to escape their export subsidy reduction commitments simply by integrating the production and
processing of agricultural products. An acceptance of the European Communities' interpretation
would therefore defeat the purpose of Article 9.1(c).
4.55 In the context of the application of Article 9. 1(c), the Complainants continued, the factual
situation in regard to C sugar was even more compelling given the emphasis by the Appellate Body
on the importance of maintaining the distinction between the domestic suppor t and export subsidies
disciplines in the Agreement on Agriculture .
 71 That distinction had been ignored by the European
Communities. In this way, the European Communities was eroding the rights of other WTO
Members accruing from its export subsidy commitments and obligations under the Agreement on
Agriculture, as the level of C sugar exports, as well as the European Communities' overall sugar
exports, had increased over the period 1995 to the present. Since, unlike in the Canadian milk regime,
there were no independent producers of either C be et or C sugar in the European Communities, he
cross-subsidization was total. Moreover, all C s ugar was exported at prices below cost of production
with the losses financed from the sales of quota s ugar in the domestic and export market with the
benefit of EC price support. The level of C s ugar production as a percentage of total production was
much higher than in the Canadian dairy regime. The difference between the costs of production and
the returns on C sugar was equally higher, implying a higher level of cross-subsidization.
4.56 The Complainants maintained that the cro ss-subsidies provided from price support were
captured by WTO definitions of subsidies continge nt on export performance. They considered that
the European Communities' arguments c onflicted with the jurisprudence of Canada – Dairy as they
rested on the proposition that domestic price suppor t could never form part of an export subsidy

71 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US), para. 92.

definition within the meaning of Article 9.1(c). On the contrary, subsidization of exports through
legitimate price support had been captured by export subsidy definitions since the early days of
GATT. The fact that the system of income or price support constituted a subsidy contingent on export
performance was irrelevant. The real issue, a ccording to the Complainants, was whether such
support, in whole or in part, came within the de finitional scope of an export subsidy within the
meaning of Article 9.1(c) of the Agreement on Agriculture. (See also paragraph 4.59 below).
4.57 Referring to the European Communities' argu ments summarized in paragraph 4.46, the
Complainants submitted that the provider of the e xport subsidy was the European Communities itself,
because there were "payments on the export of an agri cultural product that are financed by virtue of
governmental action" within the meaning of Article 9.1(c). The European Co mmunities itself, not its
sugar producers, took the governmental action that fi nanced the payments, thereby giving rise to the
subsidy. The EC producers were the recipients of the subsidy, in that they could increase their net
income by making sales of C sugar at prices well belo w the cost of production. The EC producers, in
turn, also made the "payments" when selling the C sugar to the world market buyer at prices below
total cost. But this was irrelevant as "the payment could be made by private parties." 72 According to
Article 1 of the SCM Agreement, however, a "subsidy" could only be provided by a government, or at
government direction.
4.58 The Complainants submitted further that the "subsidy" was conferred by the "payments
financed by virtue of governmental action", and that the European Communities had erred in
assimilating the concept of "payment" with the broa der concept of "subsidy". In their view, the
"payment" was only one element of a "subsidy" as defined in Article 9.1(c). Nothing in the text of
Article 9.1(c), or in the Appellate Body's interpre tation thereof, suggested that the recipient of the
payment was, or needed to be, the same person th at received the subsidy. The payment could be
made by, or to, a private party. Moreover, it was well established that there could be more than one
beneficiary of a subsidy, with one party being the beneficiary of a subsidy that was actually paid to
another party.73 In the present case, the EC sugar producer s received a subsidy notwithstanding the
fact that the world market buyers of C sugar might also benefit. Citing the ruling of the Appellate
Body in Canada – Dairy 74, the Complainants maintained that a payment could only be financed by
virtue of a governmental action that conferred a be nefit on the entity making the payment. However,
for there to be a "payment" by the entity bene fiting from that governmental action, it was not
necessary that the benefits of that governmental action be transferred to the recipient of the
payments.75
4.59 The Complainants, referring to the European Communities' arguments with respect to
"benefit" (see for instance paragraph 4.51) disagreed that the notion of "benefit", or the requirement
that a benefit be "conferred" on the recipien t of the payments, was a constituent element of
Article 9.1(c). That word was not even reflected in the text of that provision. The Complainants
recalled that the chapeau of Article 9.1 made clear that all the items listed in the subsections of that
article constituted an "export s ubsidy." Because Article 9.1 stipul ated that a payment within the
meaning of Article 9.1(c) constitu ted an export subsidy, once the el ements of Article 9.1(c) were
satisfied, then for the purposes of the Agreement on Agriculture , there was no need to make any
additional showing that the other elements of an export subsidy as defined under Article 1 of the
SCM Agreement were also present.
76 The Complainants also recalled that, in any case, under
Article 10.3 of the Agreement on Agriculture, the burden was on the European Communities to show
that it was not providing the benefit that it considered to be required under Article 9.1(c).

72 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II), para. 87.
73 Panel Report on Canada – Aircraft Credits and Guarantees, para. 7.229.
74 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US), para. 93.
75 Ibid, para. 84.
76 Appellate Body Report on Canada – Dairy, para. 90.

4.60 The Complainants maintained that payments by private parties came within the definitional
scope of Article 9.1(c). In this connection, they argued that the European Communities' argument that
the "payment" must confer the benefit was based on the importation of a notion into Article 9.1(c) that
could not logically be applied to payments by pr ivate parties. While a government may decide for
non-economic reasons to sell a product on non-commercial terms, a private party would, in the normal
course of business, make sales on conditions prevaili ng in the market, thus in a manner that did not
confer a "benefit" on the recipient of the payment. If the European Comm unities were correct that
only sales on terms conferring a benefit on the purchaser were regarded to be "payments" within the
meaning of the Article 9.1(c), this provision woul d in practice not apply to payments by private
parties. Therefore, yet again its purpose would be defeated.
4.61 In the Complainants' view, th e European Communities' interpretation would also place undue
emphasis on the recipients of the payment, requiring that they obtain an "advantage" or "benefit". The
Complainants submitted that the European Communi ties' argument could not be reconciled with the
jurisprudence of the Appellate Body relating to this issue. In Canada – Dairy , the panel had found
that "[a] reading of Article 9.1(a) to the effect that a 'payment' exists only if a benefit is granted, is
further mandated by the general context of th is provision which includes Article 1 of the
SCM Agreement… [t]hat provision explicitly requires that a "benefit" be conferred for there to be a
'subsidy' under the SCM Agreement". This reasoning was explicitly rejected by the Appellate Body,
which noted that while "[t]he concept of 'benefit' is an integral part of the definition of 'subsidy' in
Article 1.1 of the SCM Agreement… the Panel used this term, not to assist in defining the term "direct
subsidies" in Article 9.1(a) of the Agreement on Agri culture but to define the word "payment". This
ruling was held to demonstrate that the Appellate Bo dy did not consider the concept of benefit to be
relevant for determining the existence of paym ents. It was also argued that the European
Communities' position was inconsistent with the reasoning of the Appellate Body in Canada – Dairy
(Article 21.5 I). In that case, the Appellate Body considered whether the sale of so-called
"commercial export milk" ("CEM") to domestic milk processors at world market prices would
constitute a "payment" within the meaning of Artic le 9.1(c). In the Complainants' opinion, it was
clear that the Appellate Body considered that a sale of a product at a price below the average cost of
production constituted a payment within the meaning of Article 9.1(c) even if the purchaser could
have bought the product at the same price on the world market and the sale therefore did not confer on
the purchaser a "benefit". As the Appellate B ody pointed out, the crucial question for a panel
applying Article 9.1(c) was whether export production had been given an advantage. If the losses that
producers incurred as a result of export sales at pr ices below the average cost of production were
financed by virtue of government action, then ex port production had been given an advantage. For
the Complainants, it was obvious that a payment coul d only be "financed by virtue of a governmental
action" where that governmental action conferred a benefit on the entity making the payment.
However, for there to be a "payment" by the entity benefiting from that governmental action, it was
not necessary that the benefits of that governmental action be transferred to the recipient of the
payments.
4.62 The Complainants underlined that, in both the Canada – Dairy case and in the present case,
the payers received an advantage as they were not charging prices which fully reflected their total
production costs because of cross-subsidization of export production from quota production. In the
same way, export production had been given an advantage. Further, as outlined in paragraph 4.58, the
"subsidy" was not found in the "payment" itself, but in regard to the three elements comprising the
export subsidy definition of Article 9.1(c), taken together, and by examining the losses made and the
financing received by the entities making the "payme nt". In this connection, the Complainants
underlined that there was no need to adopt a "recipien t-oriented" approach to the determination of the
payments, and thus no need to show a "benefit". The Complainants argued that, even though private

parties could make the payments, it was the Memb er which was "responsible for ensuring that it
respects its export subsidy commitments under the covered agreements".77
4.63 Brazil pointed out that EC sugar producers did, in any case, obtain a benefit from the
Article 9.1(c) subsidies on the export of C sugar to the extent that those subsidies made profitable
sales that were made well below the producers' total cost of production. Brazil considered that, as a
factual matter, the European Communities had not disputed this benefit. Further, this benefit satisfied
the requirements of Article 1.1(b) of the SCM Agreement.
4.64 In relation to the European Communities' cont ention regarding the appr opriate benchmark in
order to determine the existence of payments, the Complainants reiterated that the most appropriate
benchmark in this case was the cost of production benchmark, for the reasons articulated by the
Appellate Body in Canada – Dairy, and referred to in paragraph 4.38 above. As in Canada – Dairy,
the domestic price was not appropriate because the intervention prices ensured it remained at
artificially high levels. Similarly, the world ma rket price did not provide a suitable benchmark
because C sugar could only be sold at prices competi tive with world market prices because it received
export subsidies that made it competitive on that market. Applying the world market price as a
benchmark would allow most subsidizing practices to escape the strictures of Article 9.1(c). The only
subsidies that would be captured under that provisi on would be those designed to undercut the world
market price. The Complainants noted that th e European Communities provided no substantive
reasons in support of its arguments and did not expl ain, in particular, why the factual differences
between Canada – Dairy and the present case called for a different benchmark; why in the present
circumstances, the cost of production benchmark could not serve as an appropriate test; and why the
world market price was more appropriate in spite of the reasoning of the Appellate Body. 78 In
contrast, the Complainants highlighted that the Appellate Body in Canada – Dairy found that in
circumstances "where the alleged payment is ma de by an independent economic operator and the
domestic price is administered" the average cost of production represents the appropriate standard. As
the factual circumstances in the present case were that the payments were also made by private
operators and the domestic price was administered, the average cost of production was the appropriate
benchmark.
4.65 The European Communities responded that the Canada – Dairy jurisprudence confirmed
that the requirement to show an "advantage" or "benefit" 79 was implicit in the requirement that there
must be a "payment". The "crucial question" wa s whether the "payments" themselves conferred an
"advantage" to the "export production", rather than to the foreign purchasers of that production. The
European Communities stressed that the "payments" alleged in the present dispute did not transfer any
"economic value" to the sugar producers and ther efore did not confer any "advantage" to "export
production". To the contrary, through those "payments", it was the sugar producers who transferred
"economic value" to their foreign customers. Th e "actions" which, according to the Complainants,
"financed" the "payments", constituted distinct measures from the alleged "payments" and were
subject to specific disciplines under the Agreement on Agriculture , since some of those actions were
not subsidies (e.g. the tariff protection), while others involved subsidies (e.g. the intervention
purchases), but were not export contingent. Even assuming that the exports of C sugar involved
"payments", the European Communities continued, su ch "payments" would not confer a subsidy on
exports of C sugar.
4.66 Even if Article 9.1(c) did not use the term "benefit", the European Communities considered
that all the measures listed under Article 9.1 were de scribed as "export subsidies" in the chapeau of
that provision. They had, therefore, to be interp reted in the context of the notion of "subsidy". The

77 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II), para. 95.
78 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II), para. 95.
79 Appellate Body Report on Canada – Aircraft, para. 153.

existence of a "benefit" was inherent in the notion of "subsidy". Consequently, if the exports of a
given agricultural product received no benefit fro m a certain measure, these products could not be
deemed "subsidized" by such a measure.
4.67 The European Communities submitted that its reading of Article 9.1(c) and of Canada –
Dairy as addressing exclusively the supply of inputs within the exporting country, was supported
contextually both by the SCM Agreement, as confirmed by the Appellate Body
80, and by the Members'
schedules. The European Communities held that the definition of a subsidy in the SCM Agreement
envisaged the existence of a subsidy without a "financial contribution" 81 or in circumstances where
the "financial contribution" was made by a privat e party rather than by a government, similar to
Article 9.1(c).82 In contrast, Article 1 of the SCM Agreement always required, as an indispensable
element for the existence of a subsidy, the conferral of a "benefit" 83, and provided no exception to this
requirement. Furthermore, under the SCM Agreement, the provision of goods by the government or
by a private party, in the circumst ances described in Article 1.1(a)(1)(iv), could constitute a subsidy if
it conferred a benefit to the enterprise receiving such goods. The existence of a benefit had thus to be
determined in relation to prevailing market c onditions in the country of provision or purchase 84 or, in
the case of export subsidies, in the world market. 85 On the other hand, under the SCM Agreement, the
mere fact of exporting goods at "too low" a price ha d never been considered a subsidy, let alone an
export subsidy, regardless of the benchmark.
4.68 The European Communities thus considered that the solution reached by the Appellate Body
in Canada – Dairy was in line with the a pplicable rules of the SCM Agreement with respect to input
subsidies, except that the Appellate Body took the view that, in certain circumstances, the existence of
a subsidy had to be established in relation to a cost of production benchmark, rather than to a domestic
market or world market price benchmark. The European Communities saw no apparent reason why
agricultural products should be subject to stricter disciplines on export subsidies than other products.
Recalling that the starting point for the negotiation of the rules on subsidies included in the Agreement
on Agriculture was Article XVI of the GATT 1947, which only prohibited export subsidies on non-
primary products, the European Communities asserted that the intention of the drafters of the
Agreement on Agriculture was rather the opposite.
4.69 With regard to the Members' Schedules, the European Communities noted that the schedules
of reduction commitments were part of the WTO Agreement and, as such, relevant context for the
interpretation of Article 9.1(c) of the Agreement on Agriculture . The European Communities
reasoned that, if the Complainants' interpretation of Article 9.1(c) were correct, those Members, which
prior to the conclusion of the WTO Agreement provided export subsidies covered by the
Complainant's interpretation, should have been expected to schedule reduction commitments with
respect to those measures. Yet, not a single WTO Member did so, even though many of them applied,
and continued to apply, price support measures (or tariff protection) having the effect of "cross-
subsidizing" exports at below cost of producti on. In the European Communities' view, this
demonstrated that the interpretation of Article 9.1(c) advanced by the Complainants was not
envisaged by any Member, including the Complainan ts themselves, and would have, if upheld, far-
reaching and unintended implications, including fo r developing countries. In support of this
argument, the European Communities referred to documentation suggesting that a number of

80 Appellate Body Report on US – FSC (Article 21.5 – EC), para. 141.
81 Article 1.1(a)(2) of the SCM Agreement.
82 Ibid., Article 1.1(a)(1)(iv).
83 Ibid., Article 1.1(b).
84 Article 14(d) of the SCM Agreement.
85 Item (d) of the Illustrative List of Export Subsidies in Annex I of the SCM Agreement.

countries, including Australia, Brazil, and Thailand, ha d been exporting sugar at a loss for years, and
applying measures to keep domestic prices above world market prices.86 87
(b) "Financed by virtue of governmental action"
4.70 The Complainants submitted that there was a strong demonstrable link between the
"payments" and the "governmental action" in the present case and referred to an assessment by the EC
Commission88 suggesting that full liberalization of the EC sugar market would lead to a reduction in
EC production of sugar to one thir d of present levels and even to its disappearance in the long run,
and that profitability was only maintained through the EC sugar regime. The Complainants inferred
that, under such circumstances, sugar production, including C sugar, in the European Communities
depended on governmental action for its existence.
4.71 The Complainants recalled that the EC sugar regime regulated C sugar production and exports
through Council Regulation No. 1260/2001. The f unding of the payments that C sugar producers
were making was the direct consequence of the extr emely tight regulatory framework set out in that
Regulation, under which quota holders were accorded the exclusive rights to make sales at guaranteed
prices covering all or most of their fixed costs of production. The European Communities had created
a legal framework that encouraged overproduction, segregated the export market for C sugar from the
domestic market, generated the profits used to fund the export of that sugar, and imposed sanctions
for failure to export such sugar. The EC Commissi on itself regarded the regime as a factor of market
balance89, fulfilling market stabilization objectives. 90 According to the Complainants, the
governmental action involved in the EC sugar regi me represented therefore a strong nexus with the
'payments', sufficient to meet the Appellate Body's test established in Canada – Dairy.
4.72 The Complainants asserted that the instruments of the regime provided a strong incentive to
EC quota holders to defend their quotas through su rplus C sugar production, whether or not the
production of C sugar would be below the costs of its production. A quota value was delivered to a
sugar quota holder through a combination of the EC system of subsid ies and domestic supply
restrictions. The intervention price provided a gua ranteed price some three times greater than the
world price, but due to the domestic supply rest rictions, quota holders secured market prices
substantially in excess of the intervention price. They also received export subsidies for quota
quantities in excess of domestic supply needs. As there had not been any intervention purchasing for
around 25 years, subsidized exports were obviously more profitable than selling into intervention.
Given that high costs of production made EC sugar processors uncompetitive by world market
standards, the quota value was directly attributable to the governmental action prescribed in the EC
regime.

86 Exhibit EC-21. See also Exhibit EC-17, pp. 27-30; Exhibit EC-18, p. 2; Exhibit EC-20, pp. 1-4;
Exhibits EC-22 and EC-23; Exhibit EC-19.
87 At the interim review, Australia recalled that the Complainants strongly rebutted the European
Communities' position, arguing that to assert an equivalence between the EC regime and the sugar policies of
other exporters ignored the elements of the EC regi me which made it WTO-inconsistent. Specifically, the
exceptionally high level of EC support, the delivery of that support through quotas for sales on the domestic
market, the restrictions on carryover of C sugar and the requirement that C sugar not carried over be exported.
These elements of the EC regime drove the production and export of subsidized C sugar and distinguished it
from other regimes. The Complainants noted that the European Communities had failed to respond to the other
arguments on "payments" raised by the Complainants and hence the European Communities had not met its
burden of proof on these issues under Article 10.3 of the Agreement on Agriculture.
88 Exhibit COMP-6, p. 33.
89 Exhibit COMP-6, p. 34.
90 EC Council Regulation No. 1260/2001, chapeau para. 2.

4.73 The Complainants sustained that beneficiaries of sugar production quotas were protected from
virtually all foreign sources of competition, thro ugh a combination of import tariffs and special
safeguard measures, and through the exportation, with export refunds, of a quantity of sugar allegedly
"equivalent" to the quantity imported from the ACP c ountries and India. They were also protected
from potential competition from new domestic supplie rs because only sugar produced by holders of
production quota was entitled to receive price support and export refunds. As a result, there was no
competition between domestic sugar quota holders, and no re-allocation of quotas to the more
efficient domestic producers. The level of the in tervention prices covered the production costs of the
least efficient sugar producer with the consequence that the more efficient producers enjoyed, what
the staff of the EC Commission described as, "comfortable margins".
91
4.74 The Complainants contended that, as in Canada – Dairy, this controlling governmental action
was "indispensable" to the transfer of resources fro m consumers and tax payers to sugar processors
for A and B quota sugar and, through them, to growers for A and B quota beet. 92 The European
Communities' action thereby financed growers to suppl y beet for C sugar to processors at prices that
did not reflect the average total co st of the beet, and for those processors, in turn, to provide C sugar
to buyers at world market prices that did not reflect its average total cost. EC sugar producers were
thus able to recover most or all of their fixed co sts by producing and selling quota sugar either in the
protected domestic market or, with export refunds , in the world market. EC producers could then
produce and export C sugar profitably as long as the wo rld market price was higher than the marginal
cost of producing C sugar. 93 The Complainants argued that alloca tion of the right to supply the EC
domestic market through quotas and the high prices for A and B quota sugar provided producers with
a strong quota insurance incentive to produce C sugar. That is, in the face of unpredictably variable
yield, producers can ensure that they always prod uce sufficient sugar to receive those high prices for
their full quota and to protect their long term access to quota. The Complainants considered that these
EC policy induced reasons for C sugar production were confirmed by the fact that, as mentioned in
paragraph 4.43 above, there were no independent producers producing exclusively C sugar: C sugar
production was profitable only for the beneficiaries of A and B quota allocations.94
4.75 Furthermore, the Complainants continued, the governmental action regulating the domestic
sugar market cross-subsidized sales of C sugar that otherwise would not be made, or would be made
at a loss. They maintained that there was a single line of sugar production, fo r all sugar, irrespective
of the destination markets. The same was true, mutatis mutandis, for sugar beet. The higher revenue
sales for quota sugar in the internal market effectively financed some or all of the costs of C sugar.
C sugar was cross-subsidized through direct s ubsidies, price support mechanisms and related
mechanisms for quota sugar, all of which were re gulatory instruments of the EC sugar regime. The
sales of C sugar were profitable at prices that me rely exceeded marginal costs because the higher
revenue sales in the internal market "effectively 'f inanced' part of the lower revenue sales by funding
the portion of the shared fixed costs attr ibutable to the lower priced products." 95 Again, the same was
true, mutatis mutandis, for sugar beet. In the Complainants' view, this provided further evidence of
the "demonstrable" link between the government acti on and the payment. Further, the Complainants
argued that the structure of support through quotas and restrictions on quota trade and carryover of
C sugar provided a particularly strong quota insurance reason for C sugar production. 96 T h e
Complainants asserted that, if the producer had a c hoice to either sell on the EC domestic market or
on the world market, the former would be more at tractive, given that the EC regime delivered a
domestic price of some 3.5 times the world price of A quota sugar and 2.5 times that of B quota sugar.

91 Exhibit COMP-6, p. 12.
92 Appellate Body Report on Canada – Dairy, para. 120.
93 Exhibit COMP-2, p. 121.
94 Exhibit ALA-1, p. 31. See also Exhibit COMP-2, p. 117.
95 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II), paras. 139-140.
96 Exhibit ALA-1, pp. 25-27.

4.76 The Complainants considered that the dis tinction between domestic support and export
subsidies in the Agreement on Agriculture would be eroded if a WTO Member were entitled to use
domestic support without limit to subsidize the exports of agricultural products. The benefits intended
to accrue through a WTO Member's export subs idy commitments would thus be undermined. 97 This
rationale applied to the EC sugar industry, incl uding both growers and processors who disposed of C
beet and C sugar at prices that did not recover th eir total costs of production. The provision of
domestic support measures coupled with high levels of tariff protection allowed extensive support to
producers, inconsistent with the limitations imposed through the export subsidy disciplines.
4.77 The Complainants contended that C sugar exports were not incidental to the manufacture and
sale of quota sugar as these amounted to between *** per cent and *** per cent of quota production
between the 1992/93 and 2001/02 marketing years. 98 The share of C sugar in production and exports
demonstrated that C sugar was thus not a mere "spill over" of quota production, but a significant
structural component of EC sugar production. As EC sugar production was dependent on
governmental action for its very existence, there was clearly a demonstrable link between the payment
and the governmental action sufficient to meet the tests established by the Appellate Body. The
regulation of the EC regime, in the form of guara nteed prices for quota sugar and the forced export of
over-quota production, the Complainants continued, underscored this governmental action. The
maintenance of C sugar production and exports in the face of the high difference between production
costs and prices received was only made possible by the subsidies on quota sugar and sugar processed
from imported raw cane sugar and because of the absen ce of controls in the EC regime to prevent
cross-subsidization. Australia noted that, with respect to subsid ies for processing, competition from
imports was effectively neutralized in regard to the guaranteed prices for some imported sugar,
equating to the domestic support price for quota sugar. The Complainants reiterated that there was
thus a "payment" which had been financed "by virtue of governmental action".
4.78 The European Communities responded that even if the domestic support provided to A and
B quota sugar had the incidental effect of "financing " or "cross-subsidizing" exports of C sugar, this
would not be sufficient to consider that those e xports benefited from "export subsidies" subject to
reduction commitments under the Agreement on Agriculture. The relevant question was not whether
exports of C sugar were contingent upon subsidization, but instead whether the subsidies provided by
the European Communities were contingent upon such exports. 99 The European Communities
considered that the Complainants had not allege d, let alone proven, that the measures which,
according to them, "financed" or "cross-subsidized" the exports of C sugar were contingent, i.e.
"conditional", "dependent for their existence" on the exports of C sugar.
4.79 The European Communities noted that some of the measures cited by the Complainants, such
as import tariffs or safeguard measures (see for instan ce paragraph 4.73) , were not even subsidies.
Other measures, such as the intervention price and the production quotas, were indeed typical
domestic price support mechanisms, and were already subject to the European Communities' domestic
support reduction commitments under the Agreement on Agriculture . Therefore, the question of
whether these measures provided export subsidies to C sugar did not even arise, in the European
Communities' opinion. Even if these measures provided an indirect benefit to C sugar, they were not
contingent upon the export of C sugar and, therefore, could not be characterized as "export subsidies".
The European Communities explained that a suga r producer's eligibility for A and B production
quotas did not depend on whether it exported any sugar. Likewise, the right to sell A and B sugar into
intervention was not conditional upon whether it exported C sugar or indeed any sugar at all.

97 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US), paras. 90-92.
98 Exhibit ALA-1, p. 5.
99 Appellate Body Report on Canada – Aircraft , para. 172; Appellate Body Report on Canada –
Aircraft (Article 21.5 – Brazil), para. 48.

4.80 In relation to the Complainants' assertions in paragraph 4.77, the European Communities
observed that the volume of C sugar production fluctu ated considerably from one marketing year to
another, due to weather conditions, which affected both the beet yield and the sugar content of the
beet, and to the evolution of the world market prices for sugar.
100 Sugar producers were free to decide
whether or not to produce C sugar for export. The European Communities submitted that, far from
requiring the exportation of C sugar, the EC regul ations provided for the possibility to store and
"carry forward" to the next marketing year any sugar produced in excess of the A and B quotas up to
an amount equivalent to 20 per cent of the A quota (see also paragraph 4.48).
101
4.81 The Complainants responded that the European Communitie s' arguments in paragraphs 4.78
and 4.79 disregarded the fact that any type of go vernmental action financing payments on exports of
agricultural products was covered by Article 9.1(c) .102 There could be no doubts therefore that the
governmental action financing the pa yments could take the form of import tariffs, safeguard actions
and other measures that would not constitute subs idies within the meaning of Article 1 of the
SCM Agreement.
4.82 The European Communities also in correctly ascribed a test to Article 9.1(c) requiring that the
financing it provided to C sugar e xports be contingent on such exports. In doing so, the European
Communities was shrinking the export subsidy definiti on of that provision into one single element,
thus implying that the governmental action constituted the subsidy. The terms of Article 9.1(c) clearly
linked the requirement of export contingency to the "payments", not to the "governmental action" by
virtue of which they were financed.103 Hence, in order for the "payment on the export", including that
made by a private party, to constitute an export subsidy in accordance with Article 9.1(c), such a
payment had to be financed "by virtue of govern mental action", with the requisite nexus existing
between both elements.104 The Complainants thus considered that the "demonstrable link" and "clear
nexus" between the "payments" and the "governmental action" was well established in this case.
4.83 The Complainants submitted that it was th is additional requirement which prevented
Article 9.1(c) from becoming a per se anti-dumping rule, as advanced by the European Communities
(see paragraph 4.51), and distinguished the subsidiz ation defined in Article 9.1(c) from the kind of
price discrimination by private actors with whic h anti-dumping instruments were concerned. In
response to the European Communities' argument that the Complainants' interpretation would
transform Article 9.1(c) into a provision prohibiting dumping by private operators, it was argued that
Members would not be made responsible for export transactions by private operators that escaped
their control. This was because there could onl y be an export subsidy within the meaning of
Article 9.1(c) if there were (i) "payments" (ii) "on the export" (iii) "financed by virtue of
governmental action". As to "payments", the Appella te Body stated that that the government "must
play a sufficiently important part in the process by which a private party fund s 'payments', such that
the requisite nexus exists between 'governmental action' and 'financing'". It was thus clear that only
payments which were directly linked to a governmental action were covered by Article 9.1(c). As to
the requirement that the payments be "on the expo rt", the Canada – Dairy panel correctly concluded
that there was a payment "on the export" only if th e Member caused it to be a payment contingent
upon export performance. In the Complainants' view, the mere fact that private persons decided to
export products below the average total cost of production was consequently not sufficient to establish
export contingency. Finally, not any "financing" was covered by Article 9.1(c) but only financing

100 Exhibit COMP–2, pp. 117-121.
101 Article 14 of Regulation No. 1260/2001; and Article 2(1) of Commission Regulation (EEC)
No. 65/82.
102 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US) , paras. 91, 102
and 112.
103 Panel Report on Canada – Dairy, para. 7.90.
104 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II), paras. 131-133.

that resulted from a governmental action. Each of the three elements constituting an export subsidy
within the meaning of Article 9.1(c) was thus pr esent only if the Member, not private operators,
caused it to be present.
4.84 The Complainants held that the inconsistency of the C sugar regime was attributable to
numerous governmental decisions. In particular, th e Complainants noted that: first, the European
Communities had decided to provide price support to sugar producers, thereby "financing" the
"payments on the export" of C sugar; second, the European Communities had chosen to deliver that
support through a set of shares in quota access to th e domestic market, third,; third, the European
Communities had decided to permit (and encourage) producers to sell an amount of sugar that
exceeded the amount of that quota, which – together with a series of other measures – had created the
requisite nexus between the "payments" and the "gov ernmental action" by virtue of which they were
financed; and, fourth, the European Communities ha d decided to require producers to sell the excess
amount of sugar on the world market, thereby ensuri ng that all payments were "on the export" of
C sugar. The presence of all three elements cons tituting an export subsidy within the meaning of
Article 9.1(c) was thus the direct and foreseeab le consequence of actions by the European
Communities, not merely the decisions of private sugar producers responding to market incentives.
4.85 The European Communities responded that an "advantage" had to be conferred by the
"payment", i.e. by the provision of goods, rather than by the measures that "financed" the "payment",
consistently with the defin ition of a "subsidy" in the SCM Agreement, which required that the
"benefit" had to be conferred by the "financial c ontribution". The European Communities held that in
the present case, the "financial contribution" would be the exports of C sugar. Accordingly, it was
those exports which would need to provide a "benefit" to the sugar producers. In the European
Communities' opinion, the Complainants were combining two of the three requirements of
Article 9.1(c), i.e. the requirement that there must be a "payment" and the requirement that such
"payment" be "financed by virtue of government al action". The European Communities reiterated
that the existence of an "advantage" was necessary in order to establish that there was a "payment". If
there was no "payment", the subsequent question of how such "payment" was financed did not even
arise. Consequently, the Complainants could not rely on the actions that supposedly financed the
"payments" in order to conclude that there was a "p ayment". Rather, they should have demonstrated
first that there was a "payment".
4.86 The European Communities subm itted that, from the fact that a party had derived an
"advantage" from certain "governmental actions", it did not follow necessarily that any provision of
goods made by that party would "t ransfer economic resources" to the recipient of the goods. The
European Communities was not saying that the "governmental action" referred to in Article 9.1(c)
might never provide a "benefit" to the produ cers of exported goods. Rather, the European
Communities' contention was that the "benefit" had to be examined on its own merits, and under the
relevant WTO rules. It was essential to maintain this distinction because the notion of "governmental
action" encompassed a very broad range of measures, including measures that were not subsidies (e.g.
import duties). In the European Communities' view , by de-linking the "benefit" from the "payment"
and attaching it to the "governmental action", the Co mplainants' interpretation of Article 9.1(c) would
extend the application of the strict rules on export subsidies provided in the Agreement on Agriculture
to virtually any form of government intervention which might have the incidental effect of "financing"
sales at a loss. According to the European Communiti es, this was never intended by the drafters of
the Agreement on Agriculture.
(c)
 "payment on the export"
4.87 The Complainants contended that the payments made by C sugar producers were payments
"on the export" of "an agricultural product" within the meaning of Article 9.1(c). C sugar was
included in Annex 1 of the Agreement on Agriculture and was therefore an agricultural product within

the meaning of that Agreement. Further, C suga r could only be sold upon its exportation: if not
carried forward, C sugar "may not be disposed of on the Community's internal market and must be
exported without further processing."
105 Because of that legal requirement, the Complainants
considered that subsidies to C sugar, which must be exported, were subsidies "on the export" of that
product. Similarly, because C beet could be proc essed only into C sugar, a product that had to be
exported, payments to growers of C beet were also payments "on the export" of that product.
4.88 The European Communities responded that the alleged "payments" took the form of
exports, but were not made on "exports." The requi rement of "contingent upon export performance"
set out in the Agreement on Agriculture had to be read in the same way as the same requirement
imposed by the SCM Agreement.106 Unlike in Canada – Dairy, the making of the alleged "payments"
was not conditional on any exports being made by the r ecipient of the payments or by a third party.
By ignoring this difference, the Complainants' interp retation of Article 9.1(c) collapsed two distinct
legal requirements, i.e., the existence of "payments" , and the existence of "exports", with the former
action being contingent upon the second. Combin ing the two requirements made it possible to
characterize as "export subsidies" payments whic h were not conditional upon exports. In the
European Communities' view, this amounted to sayi ng that the alleged "payments" were contingent
upon themselves, which would render the second le gal requirement, "on exports", redundant. Such
interpretation also confused the distinction between the disciplines on domestic support, export
subsidies and market access, a distinction whic h was, in the European Communities' opinion, a
fundamental feature of the Agreement on Agriculture.
4.89 From the domestic support perspective, th e European Communities continued, the
Complainants' interpretation would imply that, whenev er a system of price support had the incidental
effect of financing exports below average total co st of production, the Member concerned would be
required, in order to avoid a breach of its export s ubsidy commitments, to dismantle that system of
price support, even if such a system was fully in conformity with the relevant provisions of the
Agreement on Agriculture concerning domestic support. If a subsidy were export contingent, the
European Communities continued, it should be possibl e, at least in theory, to remove the condition
which made it export contingent, wh ile maintaining the subsidy. If an alleged export subsidy could
not be withdrawn except by withdrawing a legitimate system of domestic price support, it was
because, according to the European Communities, it was not contingent "on exports".
4.90 With respect to market access, the Eur opean Communities recalled that the terms
"governmental action" in Article 9.1(c) enco mpassed a broad range of government measures
107,
including import tariffs. 108 The Complainants' interpretation would imply that, if high import duties
had the incidental effect of "cross-financing" expor ts below the average total cost of production, the
Member concerned would have no alte rnative but to lower its import duty levels, even if such duties
were within that Member's tariff bindings. The European Communities reiterated that the domestic
support for A and B sugar was not contingent upon exports of C sugar which was demonstrated by the
fact that some sugar producers did not produce any C sugar at all. The European Communities noted
that according to data for the most recent marketing year, there were no exports of C sugar from Italy,
Greece and Portugal, while exports from Finland, Spain and Belgium/Luxemburg represented only a
fraction of their total sugar output.
4.91 The Complainants responded that the European Communities incorrectly ascribed to them an
interpretation that the "payments themselves" were "exports" and considered that the sole argument in
that regard rested on the assertion that domestic suppor t could not form part of export subsidization.

105 Article 13.1 of Regulation No. 1260/2001.
106 Appellate Body Report on US – FSC, para. 141.
107 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US), para. 112.
108 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II), para. 144.

Having rebutted such argument in paragraphs 4.55, 4.59 and 4.82 above, the Complainants disagreed
that they were required to establish that the domestic support provided to sugar producers was
contingent on exports of C sugar. As shown by the Complainants, si nce C sugar had to be exported,
all sales of C sugar constituted sales for export. C onversely, if C sugar were not required to be
exported, there would be no payment on C sugar. Thus, a payment occurred only when C sugar was
exported.
4.92 Moreover, when interpreting the terms of Article 9.1(c) that defined export contingency, the
Complainants considered that it was important to r ecall that that provision defined the obligations of
Members, not those of private persons acting inde pendently of their government. A payment could
therefore be regarded as a payment "on the export" only if the Member caused it to be a payment on
the export. The mere fact that private persons decide d to export products below the average cost of
production was consequently not sufficient to establi sh export contingency. In the present case, the
European Communities had adopted a regulation that required the export of all C sugar. Sugar
producers were free to decide whether or not to produce C sugar but they were not free to decide
whether to sell that sugar for domestic consumption or for export. The export contingency was thus
the result of a measure taken by the European Communities.
4.93 Australia submitted that C sugar exports were a signi ficant structural component of EC sugar
production, with C sugar exports fluctuating aro und 17 per cent of the combined A and B quota for
the European Communities during th e decade to 2001-02. Also, production of C beet and C sugar
was due in part to the need for producers to ensure their quota receipts, and in part to the profits
derived from A and B sugar and the consequent pr ofits made on the marginal production costs of
C sugar.109 In Australia's view, beet and sugar producers did not decide to produce and export C sugar
through market based decisions.
4.94 The Complainants concurred with the EC Commission's re ference to the EC sugar regime as
"a factor of market balance, fulfilling the market stabilization objectives of the sugar regime" (see also
paragraph 4.71 above.) and considered that this was relevant, not only in regard to the requirement
that the payments be made "by virtue of government al action", but also in regard to the requirement
that payments be made "on the export". In their view, the payments to C sugar, which had already
been shown by the Complainants to be made "by virtue of governmental action", were made on the
export because they were contingent and dependent on C sugar being exported.
4.95 The Complainants disagreed that their inte rpretation would have the consequence that
Members would be required to dismantle their price support systems whenever these had the
incidental effect of financing exports below average total cost of production. Such an effect, by itself,
did not give rise to an export subsidy within the mean ing of Article 9.1(c). The payments financed by
such programmes had also to be contingent upon export performance. The Complainants recalled that
in Canada – Dairy , the panel had noted that the mere exis tence of parallel markets for domestic use
and for export with different prices did not n ecessarily constitute an export subsidy within the
meaning of Article 9.1.
110 Consequently, the mere existence of a domestic and an export market with
different prices, and spill-over effects, from one to the other did not constitute an export subsidy
within the meaning of Article 9.1(c). It was thus not the effect of cross-subsidization resulting from
the decisions of private operators, by itself, th at rendered the European Communities' scheme of
domestic support inconsistent with Article 9.1(c).
4.96 There were many options available to the European Communities to deliver support in
accordance with the Agreement on Agriculture , including the possible removal of the contingency
element, while maintaining the underlying subs idy. In the present case, the Complainants suggested

109 Exhibit ALA-1, p. 5.
110 Panel Report on Canada – Dairy, para. 7.62.

that the European Communities could repeal the requirement that C suga r be exported and permit
C sugar to be sold in the domestic market or in troduce changes requiring that any sugar produced in
excess of any year's quota be carried over to the next year's quota. The sugar regime was the only EC
regime governing an agricultural product that required excess production to be exported. Thailand
stressed in this connection that the CMO for s ugar was the only CMO of the European Communities
that permitted (and indeed encouraged) producers to exceed their production quotas and required them
to export the surplus. Thailand's interpretation of Article 9.1(c) would therefore not require the
European Communities to do anything that it was not already doing in the field of agriculture. If the
European Communities were to align its sugar polici es to those followed in other agricultural sectors,
it would ensure their consistency with Article 9.1(c). According to the Complainants, this also
suggested that the European Communities was fully capable of devising means to provide permissible
domestic support without allowing this support, in the words of the Appellate Body, to produce "spill-
over economic benefits for export production."
111 The Complainants noted in this regard that the
Appellate Body had specifically stated in Canada – Dairy that an appropriate benchmark in
determining whether "payments" existed under Artic le 9.1(c) should respect the separation between
export subsidy and domestic support disciplines. Th e Appellate Body had stated that if domestic
support could be used, without limit, to provide su pport to exports, it would undermine the benefits
intended to accrue through a Member's export subsidy commitments.
4.97 The European Communities responded that if it permitted sales of C sugar in the EC
market, those sales would depress the prices within the EC internal market, thereby undermining the
level of domestic price support. Further, they would not be made at below the average total cost of
production, but rather at the supported price prevailing within the EC market. In the European
Communities' view, therefore, those sales would not involve "payments". In order to withdraw the
alleged "export contingency", the European Comm unities would have no option but to eliminate the
price differential between its domestic market and the export market, which was the very essence of
any system of domestic price support. Removing the "export contingency" element by preventing
exports of C sugar would amount, in the European Communities' opinion, to withdrawing the subsidy,
since the alleged subsidies were the "payments" and not the domestic support and other measures that,
according to the Complainants, financed the "payments".
4.98 Furthermore, the European Communities mainta ined that the Complainants' interpretation
would introduce an unjustified difference in trea tment between two equally legitimate forms of
domestic support: price support (including price suppor t resulting from tariff protection) and income
support linked to production (e.g. through "deficienc y payments" equal to the difference between the
market price and a target price). In the European Communities' opinion, both systems of domestic
support were just as apt to "finance" exports belo w cost of production. Yet, on the Complainants'
interpretation, such exports would be prohibited only if they were "financed" by a system of price
support, or by tariff protection, but not if they we re "financed" by deficiency payments or a similar
system. Any Member providing domestic price suppor t or tariff protection would be required to put
in place mechanisms to ensure that it made no e xports below cost of production. In contrast,
Members would be free to "finance" an unlimited quantity of exports below cost of production via
"deficiency payments" or other systems of income support linked to production, because sales in the
domestic market would also be made below cost. The Complainants' interpretation would alter the
architecture of the Agreement on Agriculture by redrawing the agreed boundary between domestic
support and export subsidies in a manner that no pa rticipant in the Uruguay Round negotiations could
have anticipated. And it would introduce a totally unjustified difference in treatment between different
forms of domestic support and, ultimately, between Members.

111 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US), para. 90.

2. In the alternative, Article 10.1 of the Agreement on Agriculture
4.99 Should the Panel decide that the exports of C sugar were not subsidized by payments financed
by virtue of governmental action within the meaning of Article 9.1(c), the Complainants submitted,
in the alternative, that the Eur opean Communities had to address their claims under Article 10.1. In
this regard, they recalled that under Article 10.3 of the Agreement on Agriculture , the European
Communities had the burden of establishing that suga r exported in excess of its quantity commitment
level was not subsidized by way of export subsidies not listed in Article 9.1 112, and that this reversal
of the burden of proof extended to establishing the absence of any export subsidy whether listed in
Article 9.1 or not (See section IV.C, Burden of proof).
4.100 Referring to the Appellate Body finding in US-FSC113, the Complainants continued, three
elements had to be met under Article 10.1 of the Agreement on Agriculture, i.e. that: (a) there was a
subsidy not identified in Article 9.1; (b) that s ubsidy was contingent on export; and (c) the subsidy
resulted in, or threatened to lead to, circumven tion of a Members' export subsidy commitments (the
"circumvention" element). Though the European Communities had the obligation to demonstrate that
these elements were not present, the Complainants set out the following arguments for reasons of
procedural efficiency, and without waiving their rights under Article 10.3 of the Agreement on
Agriculture. The Complainants thus argued that the European Communities was applying an export
subsidy of a type not listed in Article 9.1, in a manner which resulted in, or which threatened to lead
to, circumvention of export subsidy commitments, inconsistently with Article 10.1.
4.101 The European Communities responded that certain issues brought by the Complainants
under Article 10.1 of the Agreement on Agriculture actually constituted "claims" which were, in its
view, outside the terms of reference of the Panel (see section I.1, Terms of reference). Alternatively,
the European Communities submitted that exports of C sugar did not benefit from any "other export
subsidies" within the meaning of Article 10.1 of the Agreement on Agriculture.
(a) Item (d) of the Illustrative List of Export Subsidies
4.102 The Complainants submitted that Item (d) of the Illustrative List of Export Subsidies in
Annex I of the SCM Agreement was clearly applicable to the pr esent case. They specifically referred
to the analysis of the panel in Canada – Dairy setting out the three elements which needed to be
established:
(a) the provision of products for use in export production on terms more favourable than
for provision of like products for use in domestic production;
(b) by governments either directly or indir ectly through government mandated schemes;
and
(c) on terms more favourable than those commercially available on world markets.114
4.103 With respect to the first element 115, the Complainants submitted that, physically, C beet was
identical to A and B quota beet, and had the same end use as an input into a manufacturing process.
The three classes of beet were thus "like products". However, the regime provided for the supply of C
beet and quota beet to processors on different terms. First, C beet could not be processed into sugar

112 Panel Report on Canada – Dairy (Article 21.5 – New Zealand and US II), para. 5.142.
113 Appellate Body Report on US – FSC, paras. 135-154.
114 Panel Report on Canada – Dairy (Article 21.5 – New Zealand and US II), para. 5.157; Panel Report
on Canada – Dairy, para. 7.128.
115 Panel Report on Canada – Dairy, para. 7.129; Panel Report on Canada – Dairy (Article 21.5 – New

for sale on the domestic market, and thus most C beet was processed into C sugar for export.
116 All
C sugar must be exported without an export refund.117 Conversely, most sugar on the domestic market
was quota sugar, processed from A and B beet. Se cond, while growers were guaranteed a fixed
minimum price for quota beet, 118 no fixed price was set for C beet, the Regulation permitting the
provision of C beet at a lower price than quota beet. While the price obtained for C beet was not
uniform, as a general rule C beet was provided to processors on terms more favourable than those of
A and B beet. Referring to the average prices, as did the panel in Canada – Dairy 119, products for
export production, the Complainants continued, we re being supplied for less than like products for
domestic production. By controlling the disposal of C sugar, the European Communities limited the
use to which C beet could be put and hence ensure d that C beet was available at prices that were
"more favourable" than the prices of A and B beet. According to the Complainants, the first element
of Item (d) of the Illustrative List was therefore satisfied.
4.104 With respect to the second element, the Co mplainants noted its similarity to the
"governmental action" component of Article 9.1(c) of the Agreement on Agriculture as both phrases
denoted some level of government al involvement in the subsidiza tion of export products. However,
the Complainants pointed out that the residual natu re of Article 10.1 meant that it might cover export
subsidies which did not satisfy some component of an Article 9.1 subsidy. 120 Thus, this second
element had been interpreted more broadly, accord ing to the Complainants, than similar phrases in
Article 9.1(a) and Article 9.1(c) of the Agreement on Agriculture.121 The Complainants submitted that
should the Panel find that there was no 'governmental action' component under Article 9.1(c), this
would not preclude a positive finding on the second element of Item (d) of the Illustrative list.
4.105 Turning to the substantive test of the second element, the Complainants recalled that the panel
in Canada – Dairy had held that the prohibition on diversion of CEM back into the domestic
regulated market and the exemption which gave processors for export access to the lower CEM prices
were sufficient for a finding that the provision of milk was "made or mandated by government for
export."
122 They considered that these two factors were also present in the EC sugar regime as the
European Communities exempted C beet from the mi nimum price requirement under Article 5 of the
Regulation, while Article 13 of the Regulation operate d to ensure that C beet could not be used to
produce products that would obtain the higher regulat ed prices for sugar sold within the European
Communities. Similarly, by exempting C beet from the minimum price requirement and preventing
the use of C beet to produce sugar that coul d be placed on the domestic market, the European
Communities mandated the provision of beet for C sugar exports on terms more favourable than
would be available for beet used for the production of sugar for sale on the domestic market. The
second element of Item (d) of the Illustrative List was therefore satisfied.
4.106 As concerns the third element, the Complainan ts considered that the focus of the third
element was on the comparative attractiveness to exporters of sourcing products for export production
from either the domestic market or from the world market, rather than specifically on the regulation of
access to the world market. If the domestic mark et was a more attractive source than the world
market, this element was established. Furtherm ore, the domestic product supplied on favourable
terms for export production was beet. There was no world market for beet in commercial quantities,
as beet was perishable and comparatively expensive to transport. Pointing to footnote 57 to Item (d)

116 Except for C sugar carried forward or for use in the manufacture of alcohol and ethanol.
117 Article 1 of Regulation No. 1260/2001.
118 Ibid., Article 5.
119 Panel Report on Canada – Dairy, paras. 2.51, 7.129.
120 Ibid., para. 7.125.
121 Panel Report on Canada – Dairy, para. 7.130; Panel Report on Canada – Dairy (Article 21.5 – New
122 Panel Report on Canada – Dairy (Article 21.5 – New Zealand and US II), para. 5.160.

of the Illustrative List, the Compla inants held that, when comparing the attractiveness to exporters of
sourcing beet from the EC domestic market or th e world market, the former was necessarily more
attractive to exporters as, for technical and othe r reasons (including protective tariffs against
imports)123 commercial quantities of beet could not be ac quired on the world market on any terms.
The terms of domestic supply were thus inevitably more favourable, ac cording to the Complainants.
The third element of Item (d) of the Illustrative List was therefore satisfied.
4.107 Contending that they had established the three elem ents of Item (d) of the Illustrative List, the
Complainants held that it was not necessary to consider whether the subsidies provided were
"contingent upon export performance" 124, as all measures within the Illustrative List were, by
definition, contingent upon export performance. Recalling the Appellate Body's finding that the
determination of 'export subsidies' under Article 10.1 of the Agreement on Agriculture should draw on
the interpretation of that term under the SCM Agreement125, the Complainants argued that the export
subsidy provided under the sugar regime thus fell within the terms of Article 10.1 of the Agreement
on Agriculture. Under Article 10.1, the European Communities had the burden of establishing that its
regime in respect of C beet was not an export subsidy to C sugar within the meaning of Item (d) of the
Illustrative List.
4.108 Turning to the circumvention test, the Co mplainants recalled the jurisprudence in Canada –
Dairy126 and in US – FSC 127 and held that the appropriate test of circumvention was whether the
European Communities was transferring economic resources to excess exports through methods other
than those prohibited under Articles 3.3 and 9.1 of the Agreement on Agriculture. The Complainants
observed that they had previously established (see paragraph 4.28 in Burden of proof) that the
European Communities exported quantities of sugar in excess of the quan tities specified in its
reduction commitments. Having demonstrated that pa rt of the excess quantity, C sugar, received an
export subsidy within the meaning of Item (d) of Annex I of the SCM Agreement, or alternatively,
within the meaning of Article 1.1 of the SCM Agreement, and having established the export
contingency element, the Complainants submitted that the European Communities was circumventing
its export subsidy commitments, inconsistently with Article 10.1 of the Agreement on Agriculture.
4.109 The European Communities responded that exports of C s ugar did not benefit from export
subsidies within the meaning of Item (d) of the I llustrative List and that this claim was unfounded.
The relevant issue, in the European Communities' view, was whether the EC sugar regime mandated
the provision of C sugar. From the fact that th e EC sugar regime "mandate d" minimum prices for A
and B beet, it did not follow that the "provision" of C beet to the sugar producers was directly or
indirectly "mandated" by the EC authorities. The European Communities reiterated that the beet
farmers were entirely free to decide whether or not to produce C beet for export, and that the price of

123 According to the EC Schedule CXL, the bound rate on fresh sugar beet (HS 1212 91 91) was 67
ECU/tonne plus a special safeguard (SSG). The bound rate on dried or powdered sugar beet (HS 121291 20)
was 230 ECU/tonne plus SSG. The bound rate on sugar cane (HS 1212 92 00) was 46 ECU/tonne plus SSG.
Exhibit ALA-1, Table 3, for 2002/2003 indicative price; based on the WTO bound rates and sugar beet prices
of €47.60/tonne for A quota and €28.84 /tonne for C1 beet, the ad valorem equivalent of the above rates for
fresh beet would currently be 140 per cent and 232 per cent respectively. For C2 pr ices (Table 3), the rate
would be 676 per cent, plus the SSG; see also Taric database, Taric Code 1212918000, third country duty rate
of €67/tonne. This figure did not include the special safeguards imposed on imports of sugar beet. (Note by the
Secretariat: 1 ECU = 1 Euro).
124 Panel Report on Canada – Dairy, paras. 7.132-3; Panel Report on C anada – Dairy (Article 21.5 –
New Zealand and US II), para. 5.164.
125 Appellate Body Report on US – FSC , para. 136; Appellate Body Report on Canada – Dairy ,
para. 87.
126 Panel Report on Canada – Dairy, para. 7.133; Panel Report on Canada – Dairy (Article 21.5 – New
Zealand and US II), paras. 5.167-174.
127 Appellate Body Report on US – FSC, paras. 148 and 152.

the C beet was freely agreed between the grower s and the sugar producers. In the European
Communities' view, the absence of any element of government compulsion was confirmed by the fact
that, in some member States, there was no production of either C beet or C sugar (see also
paragraph 4.90).
4.110 The European Communities was of the view that the mere fact that a government measure
enabled or promoted the provision of goods by privat e parties was not sufficient to consider that such
action was "mandated" by the government. The interpretation of "manda ted" found contextual
support in the definition of "subsidy" included in Article 1 of the SCM Agreement, according to which
the supply of goods to an enterprise could not be co nsidered as a subsidy unless it was carried out by
the government or by a public body. The only exception to this was provided in
paragraph 1.1(a)(1)(iv). The European Communities recalled that the panel in US – Export
Restraints
128, had rejected the claim by the United States that a restriction on exports of an input
conferred a subsidy to the processors simply because it had the effect of making that input available at
a lower price in the Canadian market. To the Eu ropean Communities, the term "mandated" suggested
a greater degree of government compulsion than th e terms "entrust" or "direct". Since the EC
authorities had not "explicitly and affirmatively dele gated or commanded" the beet farmers to provide
beet to the sugar producers for export, it was not providing goods indirectly through a "government-
mandated scheme" within the meaning of Item (d) of the Illustrative List.
4.111 The European Communities contended that the Complainants' reasoning with respect to the
term "mandated" and their reliance on th e interpretation made by the panel in Canada – Dairy,
disregarded the ordinary meaning of that term. According to the European Communities, that
reasoning had been implicitly but unequivocally reject ed by the Appellate Body in that same case,
when it had emphasized that the terms "by virtue of governmental action" did not, unlike the term
"mandated", involve any "compulsion".
129 In the European Communities' opinion, therefore,
Article 9.1(c) of the Agreement on Agriculture encompassed a broader range of government measures
than Item (d) of the Illustrative List. Like the Ca nadian producers of CEM, the EC beet farmers were
free to decide whether or not to produce C beet. Consequently, the measures at issue could not be
characterized as "obligating", "driving" or "mandating" the beet farmers to "provide" additional beet
for export.130
4.112 The Complainants considered that the European Comm unities' argument in paragraph 4.109
was based on an interpretation of Item (d) of the Illustrative List which suggested that the export
subsidy definition should be restricted to state tr ading operations. The relative freedom of a beet
grower to grow C beet did not form part of the test s of Item (d). Instead, the tests related to whether
the European Communities mandated the production of C beet to exporters on th e same terms as beet
sold on the domestic market, i.e. whether the beet farmer had the freedom to sell C beet to exporters
on the same terms that he obtained for beet destined for the domestic sugar market. This was clearly
not the case: C beet did not benefit from the fixed minimum price guarantee for quota beet and could
not be used to produce sugar for sale on the domestic market.
(b) Article 1.1 of the SCM Agreement
4.113 Australia submitted, in the alternative, that if it were found that the EC regime did not
provide an export subsidy under Item (d) of the I llustrative List, the Eur opean Communities still had
to show that no other export subsidy was provided, a ccording to the general definition of a subsidy in
Article 1.1 of the SCM Agreement. Australia noted that, for the purpose of the SCM Agreement, a

128 Panel Report on US – Export Restraints, para. 8.44.
129 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II), para. 128; and
footnote 113.
130 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US), para. 117.

subsidy shall be deemed to exist if there was an y form of income or price support in the sense of
Article XVI of GATT 1994; and a benefit was thereby conferred.
4.114 With respect to the first requirement, Austra lia held that the EC regime was explicitly
designed to provide income support for beet grower s through the minimum pr ice scheme previously
outlined above (see for instance paragraphs 4.103 and 4.105,) The "chap eau" of Council Regulation
No. 1260/2001131 described the objectives of the sugar regi me as "to ensure that Community growers
of sugar beet and sugar cane continued to be nefit from the necessary guarantees in respect of
employment and standards of living…". To achieve this, Australia continued, the regime provided for
an intervention price which "…must be fixed at a le vel which will ensure a fair income for sugar-beet
and sugar-cane producers…". The high import barriers and the existence of quota limits maintained
the high price of sugar sold on the domestic ma rket, and supported the income of growers and
processors.
4.115 Australia noted that Article XVI of GATT 1994 included within its scope any income or price
support "which operates directly or indirec tly to increase exports of any product". According to
Australia, the income guaranteed to EC growers and processors from the sale of quota sugar acted to
counter any loss incurred on C sugar, in effect cr oss-subsidising C sugar exports. Moreover, the
exclusion of C beet from the fixed minimum price re quired to be paid for quota beet allowed for its
supply at a lower price, thus reducing the cost to the sugar processor. The fact that the price and
income support were delivered thr ough quota sugar was no barrier to th e application of Article XVI,
which governed measures acting "directly or indirectly to increase exports". Moreover, citing
Article XVI:4, Australia noted that the EC regime obtained a price on the world market for C sugar
which was lower than that obtained on the domestic market for A and B sugar. The regime therefore
provided a subsidy within the definitional terms of Article XVI:4. Considering that Section B dealt
with the export subsidy subset of the broader term s of Article XVI:1, Australia was of the view that
the EC regime also provided a subsidy "which opera ted directly or indirectly to increase exports of
any product." The EC sugar regime was therefor e within the terms of Article 1.1(a)(2) of the
SCM Agreement.
4.116 To constitute a subsidy under Article 1.1 of the SCM Agreement, Australia continued, it must
further be shown that a benefit was conferred by the regime. According to Australia, the term 'benefit'
under Article 1.1(b) of the SCM Agreement referred broadly to any "favourable or helpful factor or
circumstance" afforded to the r ecipient of a measure under Article 1.1(a), and required a comparison
between the situation of a recipient of this measur e, and the situation of that recipient absent the
measure.132 If the measure delivered any form of advant age to the recipient, the measure rendered a
"benefit" under Article 1.1(b). Australia asserted that, in the present case, the provision as a whole
referred to an advantage enjoyed by the recipients of income or price support under the EC regime,
and that this advantage was readily identified. Th e price support given to quota beet and sugar, from
which C beet and C sugar were excluded, allo wed for the provision of beet for export sugar
production at a lower price, thereby reducing the co st to the processor of producing export sugar.
Further, the subsidies delivered through the high domestic price support le vel contributed to the
offsetting of the cost of production, incurred by the sale of C sugar at the world market price. The
definition of a subsidy under Article 1.1 of the SCM Agreement was therefore satisfied in Australia's
view.
4.117 In order for this subsidy to fall with in the terms of Article 10.1 of the Agreement on
Agriculture, it had to be further established that the subs idy was an export subsidy. In this regard,
Australia reiterated that C sugar was manufactured ex clusively from C beet, and that C sugar must be

132 Appellate Body Report on Canada – Aircraft, paras 153-157; Panel Report on Canada – Aircraft,
para. 9.112.

exported (unless carried over). C beet was excluded from the fixed minimum prices required for A
and B beet, conditional upon its not being used for quota sugar production. Therefore, the provision
of C beet at lower cost for C sugar manufacture was conditional upon the exportation of C sugar. The
regime therefore provided a subsidy contingent upon export performance.
4.118 The European Communities replied that the EC sugar regime provided price support to A
and B sugar and to A and B beet, but not to C suga r or C beet. Moreover, the price support for A and
B sugar and beet was not contingent upon exports of sugar and, therefore, did not constitute an export
subsidy. There was no requirement to produce C s ugar and, consequently, no requirement to export
C sugar in order to benefit from the price support. Furthermore, the EC regulations allowed sugar
produced above the A and B quotas, up to an amount equivalent to 20 per cent of the A quota, to be
"carried forward". The European Communities fu rther submitted that the definition of "export
subsidy" found in Articles XVI.1 and XVI.3 of th e GATT 1994 did not purport to define the notion of
export subsidy. The European Communities considered that for the purpose of the Agreement on
Agriculture, Article 1(e) defined the notion of "expor t subsidies" as "subsidies contingent upon
export performance". A system of price or income support which "operates so as to increase exports"
was not "contingent upon export pe rformance" and could not be cons idered as an export subsidy for
the purposes of the Agreement on Agriculture , regardless of its characterization under Article XVI.
According to Australia's definition, virtually any form of domestic support would then have to be
considered as an export subsidy.
4.119 Australia submitted that the European Communities' rebuttal was premised on the same, in
its view, legally incorrect arguments that the European Communities had used in relation to
Article 9.1(c) of the Agreement on Agriculture, i.e. that "contingency" must attach to the provision of
price support, as compared to a "contingency" a ttached to "export." Australia underlined that
Article XVI of GATT 1994 was not predicated on the subsidy being contingent on export. Rather, on
the basis of a plain reading of Article XVI of GATT 1994, it was the operation of the income or price
support in increasing exports that constituted a subsidy contingent on export performance.
4.120 Australia recalled that the expor t subsidy definitions in the SCM Agreement provided
contextual guidance on the definition of an expor t subsidy for the purposes of Article 10.1 of the
Agreement on Agriculture , as did Article 1.1 of the SCM Agreement, for the purposes of a definition
of a "subsidy". Article 1.1(a)(2) made it clear that income or price support in the sense of Article XVI
of GATT 1994 came within the scope of a subsidy definition. For the purposes of those export
subsidies listed in the Illustrative List, the elemen t of subsidization provided through price or income
support formed part of an export subsidy in the ci rcumstances described in Items (b), (d) and (l) .
Read in the context of Article 3.1(a) of the SCM Agreement, all subsidies included in the Illustrative
List constituted 'subsidies conti ngent on export performance' in the circumstances defined in the
respective items. According to Au stralia, therefore, the income or price support did not need to be
provided exclusively for exports.
4.121 In this context, Australia considered that the Ad Note to Article XVI:3 , paragraph 2
, directly
addressed the situation in regard to C sugar as arrangements involving: (a) "a system of price
stabilization or of the return to domestic produ cers of a primary product independently of the
movements of export prices"; (b) "which results in the sale of the product for export at a price lower
than the price charged for the like product to buye rs in the domestic market"; and (c) "where the
operations of that system are wholly or partly fi nanced out of government funds in addition to the
funds collected from producers in respect of th e product concerned." Australia held that
Article XVI:4 of GATT 1994 would also capture such forms of subsidy, in circumstances where such
subsidy resulted in the sale of a product for export at a pri ce lower than the comparable price charged
for the like product to buyers in the domestic market.

3. Good faith
(a) Exports of C sugar were consistent with the reduction commitments
4.122 The European Communities submitted that even if exports of C sugar were found to benefit
from export subsidies, these would not exceed the re duction commitments scheduled by the European
Communities, or would do so by much less than claimed by the Complainants. According to the
European Communities, the Complainants' allegations failed to take into account the context provided
by the Modalities Paper (see, for instance, pa ragraphs 4.37 and 4.143-4.145) as well as the
requirements of the principle of good faith. By disregarding that the base quantity in the EC's
Schedule did not include exports of C sugar, the Complainants' interpretation led to a result which
was unfair because it would require the European Comm unities to reduce its exports by a much larger
percentage (60 per cent) than that agreed in th e Modalities Paper and applied by all other Members
(21 per cent). In the European Communities' view, that result was not compatible with a good faith
interpretation of its commitments.
4.123 The European Communities first recalled that its schedule of export subsidy reduction
commitments was "an integral part" of the GATT 1994 and, therefore, of the WTO Agreement. As
such, it had to be interpreted in accordance with the "customary rules of interpretation of public
international law" embodied in Articles 31 and 32 of the Vienna Convention on the Law of Treaties
("Vienna Convention"). Noting that the "general rule of interpretation" set out in Article 31.1 of the
Vienna Convention required interpreting treaty provisions "in good faith", 133 the European
Communities maintained that, even if th e Modalities Paper was not part of the WTO Agreement , it
was an agreement reached by all the participan ts in the Uruguay Round in connection with the
conclusion of the Agreement on Agriculture. As such, it was relevant "context" for the interpretation
of the schedules of reduction commitments, in accordance with Article 31.2(a) of the Vienna
Convention.
4.124 The European Communities asserted that its schedule reflect ed the understanding that exports
of C sugar did not benefit from export subsidies and th at the Complainants were aware of this fact.
The figure shown in the EC's Schedule LXXX under the heading "base quantity level" only included
the exports of A and B sugar during the base period 1986-1990. The European Communities supplied
statistical data showing that the total quantity of sugar exported from the European Communities
during the base period was higher than the scheduled 1986-1990 base levels in EC Schedule
LXXX.
134 The figures that appeared under the heading "annual and final quantity commitment levels"
were calculated from that "base quantity level" by applying the reduction percentage agreed in the
Modalities Paper. Recalling its reasoning summarized in paragraphs 4.122 an d 4.125, the European
Communities concluded that the base quantity leve l would have been 3,188,200 tonnes instead of
1,612,000 tonnes, and the final commitment leve l would have been 2,514,700 tonnes (i.e. 79 per cent
of 3,188,200 tonnes) instead of 1,273,500 tonnes (i.e. 79 per cent of 1,612,000 tonnes) 135 if C sugar
had been taken into account. Total exports of sugar during marketing year 2001/2002 were 2,443,600
tonnes (including exports of C sugar, and adjust ed for ACP/India equivalent sugar which was,
according to the European Communities, subject to a 1.6 million tonnes ceiling), i.e. 71,100 tonnes
below the final commitment level as calculated a bove. The European Communities concluded that
the breach of the European Communities' reduction commitments alleged by the Complainants would
thus result exclusively from a scheduling error.

133 See for instance A. D'Amato, Good Faith, in Encyclopaedia of Public International Law , Ed. Max
Planck Institute, New Holland, 1999, Vol. II, p.599; and B. Cheng, General Principles of Law as applied by
International Courts and Tribunals, Cambridge, Grotius, 1987, p. 118.
134 See Table 8 of the European Communities' first written submission; and Exhibit EC-9.
135 See Table 9 of the European Communities' first written submission.

4.125 The European Communities indicated that its r easoning was equally valid with respect to its
budgetary outlay commitments. In other words, if the Panel found that the C sugar regime provided
export subsidies, it would follow that the European Communities would have been required to include
the amount of the export subsidies provided to expor ts of C sugar during the base period in the base
outlay level from which the annual commitment leve ls were calculated, in accordance with the
provisions of the Modalities Paper. According to the European Communities, the determination of
that amount would require the calculation of the di fference between the annual average total cost of
production during each year of the base period and the actual prices of the export transactions made
during that year. In this context, the European Communities indicated that Supporting Table 11
accompanying the EC Schedule LXXX
136 specified that the amounts used in the calculation of the
base outlay level for sugar were those of the pr oducer levies collected on the production of A and B
sugar during the base period and used to finance the refunds on exports of A and B sugar. No refunds
were granted on exports of C sugar. It was clear, therefore, that the base outlay level scheduled by the
European Communities did not include any outlay with respect to exports of C sugar.
4.126 The European Communities contended that, until recently, the Complainants had shared the
understanding that exports of C sugar did not be nefit from export subsidies and that exports of
C sugar were not included in the scheduled base quan tity and outlay levels. First, the C sugar regime
had been in place since 1968 and was well-known to all the participants in the Uruguay Round and, in
particular, to the Complainants, who were all majo r exporters of sugar. Before the Uruguay Round,
Australia and Brazil had also challenged the Europe an Communities' system of export subsidies for
sugar137 but neither of them had raised any question. Similarly, during the Uruguay Round
negotiations, no participant had ma de any suggestion that exports of C sugar benefited from export
subsidies and should be subject to the reduction commitments, despite successive submissions, by the
European Communities, of three draft schedules 138, followed by the verification process, which
allowed the other participants ample opportunity, in the European Communities' opinion, to check the
commitments.
139 After the conclusion of the Uruguay R ound, the European Communities asserted,
official assessments conducted by Australia140, the United States141, and ISO 142, confirmed that shared
understanding.
4.127 The European Communities submitted that the inte rpretation made by the Appellate Body in
Canada – Dairy, on which the Complainants had principally based their allegations, was a novel one,
which could not have been anticipated by any pa rticipant when the commitments were scheduled.
The European Communities asserted that Article 9. 1(c) was meant to address so-called "producer-
financed subsidies" financed from the proceeds of production levies. Nothing in the drafting history
of Article 9.1(c) suggested that the negotiators had in mind the European Communities' C sugar
regime or, more generally, that they regarded th e export of agricultural commodities below cost of

136 Exhibit EC-4.
137 GATT Panel Report on EC – Sugar Exports (Australia), BISD 26S/290; GATT Panel Report on EC
– Sugar Exports (Brazil), BISD 27S/69.
138 The European Communities indicated having submitted a first draft schedule of commitments on
16 December 1992 (Exhibit EC-4), a revised draft on 14 December 1993 (Exhibit EC-6), and a final version on
25 March 1994.
139 Appellate Body Report on EC – Computer Equipment , paras. 109-110. Tariff commitments
"represent a common agreement among all Members" and "any clarification of the scope of tariff concessions
that may be required during the negotiations is a task for all interested parties".
140 Exhibit EC–12, pp. 8 and 38; see also Exhibit EC-14, p. 37: ABARE confirmed that "production
beyond the combined A and B quotas, called C sugar receiv es no price support" and th at C sugar "is exported
without support"; Exhibit EC-13 (the European Communities underlined that a distinction was established
between "EC net exports" and "subsidized exports" in Table 1 on page 9).
141 Exhibit EC-15, p. 25.
142 International Sugar Organisation, The 1994 GATT Uruguay Round Agreement on Agriculture and
the World Sugar Market, MECAS (99)16, 19 October 1999, p. 26.

production as an export subsidy. Also, three succe ssive rulings by the Appellate Body on the same
issues had been necessary to define the test on whic h the Complainants had relied in the present case.
The European Communities contended that the interpretation eventually adopted had not been
advanced by any of the parties during the proceedings and was strongly criticised by all of them, as
well as by other Members, before the DSB on the grounds that it had no basis in the text of the
Agreement on Agriculture.
143
4.128 The European Communities underlined what it considered as fundamental differences
between the present dispute and Canada – Dairy . First, the alleged violation of the scheduled
commitments in Canada Dairy did not result from a scheduling error made during the negotiations,
but rather from Canada's introduction, after th e conclusion of the WTO Agreement, of a new
regulatory regime. Secondly, the measures at issue in Canada – Dairy did not exist when the
reduction commitments were negotiated, as they we re not introduced by Canada until August 1995.
Third, Canada had believed that the new regime wo uld allow milk processors to increase their exports
without breaching Canada's reduction commitments. 144 Fourth, Canada did not contest that the
regime in place during the base period, and up to 1995, conferred export s ubsidies, which was why
Canada deemed it necessary to replace it. 145 Fifth, Canada did not argue that the base level did not
include all the subsidized exports made during the base period. For these reasons, the panel's finding
in Canada Dairy that Canada had acted inconsistently with its redu ction commitments did not require
it to reduce its subsidized exports beyond the level ag reed by the participants in the Uruguay Round.
In contrast, the European Communities continued, the regime in the present case was in place at the
time of the negotiations and indeed was the basis for the negotiated commitments. The European
Communities, reiterating the points made in paragraphs 4.122-4.126, submitted in the alternative, that
exports of C sugar should not be deemed to be in excess of the European Communities' reduction
commitments, unless it was established (and, if so, only to that extent) that the quantity of subsidized
exports exceeded the level of the final commit ment that resulted from applying the reduction
percentage agreed in the Modalities Paper to a base quantity which included exports of C sugar made
during the base period.
4.129 Alternatively, should the Panel find that the C sugar regime provided export subsidies in
excess of the reduction commitments, the only course of action consistent with the requirements of
good faith would be for the Complainants to agree to the correction of the European Communities'
scheduling commitments so as to include the exports of C sugar in the base levels and to rectify the
annual commitments accordingly. Otherwise, the European Communities would be prejudiced,
because it would be effectively required to reduce the quantity of subsidized exports by a much larger
percentage than the one agreed to in the negotiati ons, namely by 60 per cent. Furthermore, if the
footnote on ACP/India sugar were found to be inva lid, the overall percentage of export subsidy
reduction would be 73 per cent. (See also paragraphs 4.123-4.124) In this regard, the European
Communities indicated that the possibility to correct errors in the text of a treaty was specifically
envisaged in Article 79 of the Vienna Convention.
4.130 The Complainants responded that the issue before the Panel was the treaty text, i.e. the EC
Schedule, which had to be interpreted in accordan ce with the customary rules of interpretation of
public international law. Consequently, their alleged understandings during the Uruguay Round
negotiations, as well as the verification process, were i rrelevant as they were not part of the "context"
under Article 31, nor "supplementary means of interpretation" under Article 32, of the Vienna
Convention. In relation to the European Communities' contention in paragraphs 4.123-4.124, the
Complainants submitted that Article 3.2 of the DSU made clear that recourse to the interpretative

143 Exhibit EC-10, statements by Australia, New Z ealand and the United States; and Exhibit EC-11,
statement by Canada.
144 Panel Report on Canada – Dairy, paras. 2.34-2.37.
145 Ibid., paras. 4.279-4.280.

rules of the Vienna Convention were to be used to "clarify the existing provisions", and that dispute
settlement must not add to or diminish rights and obligations provided in th e covered agreements.
Panels must follow the textual approach underlying the Vienna Convention rules and "interpretation
was not a matter of revising treaties or of readin g into them what they did not expressly or by
necessary implication contain".
146 The Complainants held that, rath er than a good faith clarification,
the European Communities was seek ing from the Panel a revision of its Schedule, and a diversion
from the ordinary meaning imparted from the Schedule's text, and ultimately changing the figures in
the EC Schedule by "interpreting" them. In their view, the figures indicated in the EC Schedule in
respect of its export reduction commitments for sugar were unequivocal.
4.131 The Complainants rejected the characterization of the Modalities Paper as an "agreement"
reached by all participants in the Uruguay Roun d. In their view, only the commitments undertaken
under the Agreement on Agriculture were legally binding, which explained why that Agreement made
no reference to the Modalities Paper. Recalling th at the Modalities Paper was prepared during the
latter stages of the negotiation of the Agreement on Agriculture , and not "on the occasion of the
conclusion of the treaty" as required by Article 31.2 of the Vienna Convention, the Complainants held
that the Modalities Paper did not provide "context" for the determination of the scope of subsidy
reduction commitments in these proceedings becau se it was not an "agreement" relating to the
Agreement on Agriculture , and because it was not accepted as an "instrument" made in connection
with the conclusion of the Agreement on Agriculture.
4.132 The Complainants submitted that the intentions of the parties in the Uruguay Round should be
taken into account when considering whether the Modalities Paper was context. These were explicitly
reflected in the Note by the Ch airman of the Negotiating Group on Market Access, which confirmed
that the Modalities Paper was issued "for the pur pose of completing draft Schedules of concessions
and commitments in the agricultural negotiations and for facilitating the verification process leading
to the establishment of formal Schedules to be annexed to the Uruguay Round Protocol" and "on the
understanding of participants in the Uruguay Round that these negotiating modalities shall not be used
as the basis for dispute settlement proceedings und er the MTO Agreement". This meant that the
Modalities Paper was not intended to provide any basis, interpretative or otherwise, for dispute
settlement proceedings, and thus w ould not give rise to rights and obligations which could be the
subject of dispute settlement proceedings, but was is sued for a limited purpose, i.e. "completing draft
schedules".
4.133 The Complainants acknowledged that the sole role the Modalities Paper could play in the
interpretation of the Agreement on Agriculture and the associated schedules, was as "a supplementary
means of interpretation", i.e. as an element of the "preparatory work" under Article 32 of the Vienna
Convention. In that context, they considered that the Panel's discretion to look at the Modalities Paper
as such was limited to "confirming" the meaning resulting from the interpretation of the EC's
Schedule under Article 31 of the Vienna Convention. This limitation was due to the fact that the EC's
Schedule was neither "ambiguous or obscure", nor le d to "a result which was manifestly absurd or
unreasonable" as required by the Vienna Convention (see also paragraph 4.130). Brazil added that,
should the Modalities Paper be considered as "pre paratory work", it should be accorded limited
probative value, in light of the Chairman's Note.
4.134 The Complainants indicated that they became aware that exports of C sugar were made
below cost of production and, therefore subsidized , only after the NEI report (see footnote 149) was
issued in 2000.

146 See R. Jennings and A. Watts (eds.), Oppenheim's International Law , 9 th ed. (Longman 1992),
Vol. I, p. 1271.

4.135 Australia submitted that it did not have access to information that would have enabled it to
make a definitive assessment that C sugar exports were being subsidized in the sense of Article 9.1(c)
of the Agreement on Agriculture. It contended, however, that the European Communities had access
to a wide range of information sources that woul d have enabled Australia to make an informed
assessment of the cross subsidization of C suga r exports. The European Communities itself had
identified a problem with C sugar since the EC Commission had proposed prohibiting the production
of such sugar in 1973 147, and knew, as far back as 1981, that the EC sugar regime resulted in the
pooling of producers' receipts from sales in internal markets at supported prices. 148 Australia noted
that until late 2003, there was a marked absence of any published information undertaken by EC
institutions on the economics of its sugar produc tion and trade. Following an accumulation of
evidence from European sources (including reports published or commissioned by the EC 149) and in
light of the increase in C sugar exports from 1995 to 2000, Australia indicated that it was only then
able to undertake independent detailed research which enabled it to challenge the European
Communities' assertions that C sugar exports were not subsidized. In relation to the lack of reaction
evoked by the European Communities (see paragraph 4. 126), Australia referred to its letter of 10
December 1993 where it had registered its expectati on that there should not be any exclusions from
reduction commitments.
150 The reference was not specific to C sugar and was primarily intended to
register concerns about the European Communities' announced intent to exclude some sugar from its
reduction commitments.
4.136 Brazil noted that it did not carry out any independe nt verification of schedules and held that
no developing country Member had the resources requi red to examine in detail every other Member's
Schedule, not only in connection with the Agreement on Agriculture , but also the other agreements.
Brazil had relied on the good faith of all Members to complete their Schedules in accordance with
their negotiated obligations.
4.137 The Complainants did not agree that the EC's Schedule contained a "scheduling error", that
the error was shared, or excusable, as alleged by the European Communities (see paragraphs 4.124,
4.129, and 4.150). In any case, the European Co mmunities' claim was undermined by the absence of
any subsequent efforts by the European Communiti es to rectify this "error". In their view, the
European Communities had committed more than a technical oversight, as it had failed to meet
fundamental obligations in relation to its reducti on commitments on a scheduled agricultural product
under the Agreement on Agriculture . The Complainants sustained that the European Communities
was itself responsible for the scheduled levels of bi ndings of base period and final commitment levels
and that its schedule was developed in the fu ll knowledge that these commitment levels were
irrevocable. The European Communities knew th at, unlike tariff bindings, there was no WTO
procedure for the deconsolidation of scheduled bindings on export subsidy reduction commitments,
and that it would be accountable unde r the terms of Article 10.3 of the Agreement on Agriculture in
relation to Articles 3.3, 9.1 and 10.1, for any exports in excess of reduction commitment levels.
4.138 Brazil observed that it was not the first time that a WTO Member allegedly had erred in the
preparation of its schedule and pointed to H ungary's case in 1996 which involved an error in
establishing base period levels for export subsidy co mmitments. Brazil recalled that Hungary was not
allowed to correct its error. However, Hungary obtained a waiver from the General Council allowing
for a transitional period within which Hungary would bring its export subsidies into conformity with

147 Exhibit COMP-8, p. 9.
148 L/5113, para. 33.
149 For example, Exhibits COMP-1, 2, 4, 10, 11, 12, 13, 17; and EC Regulation No. 1260/2001.
150 Exhibit ALA-5.

its reduction commitments, as originally specified in its Schedule.
151 Brazil also recalled the
European Communities' standpoint in those circumstances.152
4.139 The Complainants agreed with the European Comm unities (see paragraph 4.129) that
Article 79 of the Vienna Convention set out the process by which an error can be corrected in a treaty.
However, the nature of the error addressed was clarified by Article 48.3 of the Vienna Convention
which stated that Article 79 applied to an "error rela ting only to the wording of the text of a treaty",
i.e., addressing situations where there were drafting errors in the treaty text, and only applying in
situations "where the parties are agreed that it contains an error". The Complainants asserted,
therefore, that Article 79 had no application to th e case of a contracting State failing to meet its
obligations under a treaty. Article 48 of the Vienna Convention dealt with the much more serious case
of error that might be invoked by a State to invalidate its consent to be bound by a treaty. A State
could not invoke an error to invalidate its consen t to be bound by a treaty where the State had
"contributed by its own conduct to the error or if th e circumstances were such as to put that State on
notice of a possible error". Further, a mistake as to (or ignorance of) the law did not constitute an
error as to a fact or situation. In the present case, the requirements of Article 48 were thus not met,
because, were there an error, th e European Communities not only contributed to it, but made it.
Brazil added that, under the DSU, the Panel did not have the authority to permit the European
Communities to correct a scheduling error. Moreover, Thailand underlined that under Article 48, a
State may invoke error only where "the error relates to a fact or situation wh ich was assumed by that
State to exist at the time when the treaty was concl uded…". The fact or situation that the European
Communities assumed existed, in Thailand's understanding, was that no export subsidies were granted
to C sugar, as it could not have anticipated the ruling in Canada – Dairy . However, a mistake as to
(or ignorance of) the law did not constitute an error as to a fact or situation.153
4.140 The Complainants held that all Members were obliged to abide by Article 9.1(c) of the
Agreement on Agriculture , as interpreted by the Appellate Body. Australia recalled the statement it
had made on adoption of the final Canada Dairy re port by the DSB, supporting the compliance by all
WTO Members of their export subsidy reduction commitments. 154 Furthermore, Australia considered
that the European Communities had not availed itself, as a matter of prudential practice, of the
opportunity to undertake an assessment of the appli cation of Article 9.1(c) to C sugar against the
export subsidies identified in the Modalities Paper. Brazil pointed out that, regardless of whether it
had taken the Appellate Body "no less than three su ccessive rulings" (see paragraph 4.127) to define a
precise test, the basic economic principle on which the Canada – Dairy's allegedly "novel" and
"unanticipated" interpretation by the Appellate Body had been presaged by both Jacob Viner in 1923,
as well as by GATT Article XVI:1. According to Brazil, Viner had recognized 155 that this "dumping"
could take the form of "bounty dumping" financed by governments.
4.141 Referring to the European Communities' analysis in paragraph 4.128, the Complainants
pointed out that the scope of the Agreement on Agriculture (or the other WTO agreements) was not
limited to measures adopted after its entry in to force and that the WTO did not allow the
"grandfathering" of past practices that were inc onsistent with its provisions. Many measures that

151 WT/GC/M/23, p. 17.
152 The European Communities had taken the view that: "each Member had to respect its
commitments, in particular since there were no procedur es available which would allow such corrections. The
European Communities were not convinced, on the basis of the evidence provided, that the situation was the
result of an error and urged Hungary to comply with its commitments", G/AG/R/5, 5 July 1996, para. 13.
153 See R. Jennings and A. Watts (eds.), Oppenheim's International Law, 9th ed. (Longman, 1992), Vol.
I, p. 1289, footnote 3 (citing Eastern Greenland Case (1933), PCIJ, Series A/B, No. 53, p. 92 and Abu Dhabi
arbitration, ICLQ, 4th Series, Vol. i (1952), p 253; ILR, 18 (1951), p. 144).
154 Exhibit EC-11, para. 18.
155 Jacob Viner, Dumping: A Problem in International Trade , University of Chicago Press (1923),
reprinted, Augustus M. Kelley (1991), 113-114.

existed before the WTO Agreement came into effect – including, for example, the US foreign sales
corporation tax rules challenged by the European Communities itself – had since been found to be
inconsistent with one or more of the WTO agreem ents. The European Communities, therefore, could
not argue that, because of its wrong judgement, it ought to be allowed to correct its Schedule. A
Panel finding to the contrary would have troubl ing implications for future negotiations. Thailand
added that there was thus no basis in law or logic that would permit the re-interpretation of an export
reduction commitment in the light of jurispruden ce that emerged after the commitment was made.
Thailand suggested that this could possibly be done by the membership under the procedures for
interpretations set out in Article IX:2 of the Marrakesh Agreement Establishing the WTO (WTO
Agreement), but certainly not by a panel in the framework of a proceeding under the DSU.
4.142 Thailand stressed that it would not be consiste nt with the principle of good faith if the
European Communities were the only Member of th e WTO that would effectively be exempted from
this obligation through a re-interpretation of its export reduction commitments in the light of the
allegedly unexpected consequences of the Appellate Bo dy's interpretation of Article 9.1(c). Thailand
considered that in invoking the principle of good faith, the European Communities was actually
asking the Panel to replace the export subsidy reduc tion commitments that it assumed in its schedule,
with the export subsidy reduction commitments th at it claimed it would have assumed if it had known
of the Appellate Body's interpreta tion of Article 9.1(c) at the time when it formulated its reduction
commitments. Alternatively, the European Comm unities was asking the Panel to deny Thailand the
right to invoke Article 9.1(c) in DSU proceedings because, allegedly, Thailand too, could not have
expected that interpretation. WTO Members, including the European Communities, would be
extremely concerned if panels were to begin divi ding the Appellate Body's rulings into "expected"
and "unexpected" rulings and were to refuse to give full effect to any "unexpected" rulings.
4.143 The European Communities, referring to the Complainants' assertions in paragraphs 4.130
and 4.133, reiterated the points ma de in paragraphs 4.123-4.124. Since the "base quantity" was part
of the EC's Schedule and, therefore, part of the text of the WTO Agreement , the European
Communities sustained that "an examination of the ordinary meaning of the terms of a treaty must
take into account all of those terms"
156, and in particular, the Modalities Paper, which, although not a
covered agreement, and not explicitly mentioned in the Agreement on Agriculture, was not deprived
of interpretative value. If exports of C Sugar were found to benefit from export subsidies, it would
follow that the figures in the EC Schedule would be inaccurate as a matter of fact, because they would
include only part of the total "quantity of subsid ized exports", and the same would be true for the
"base quantity". Therefore, the European Communi ties was not pleading that its consent to the WTO
Agreement was invalid because it made an error with r espect to facts outside the treaty, or with
respect to the interpretation of the treaty. Rather , the European Communities' contention was that the
Complainants' interpretation of Article 9.1(c) woul d have the necessary implication that there was an
obvious error in the text itself of the treaty, due to a manifest discrepancy between the meaning of the
headings in the EC's Schedule and the figures s hown under those headings. In the European
Communities' opinion, that discrepancy could not be ignored by the Panel and needed to be resolved
by way of interpretation. The interpreter's task, in turn, was to reach an interpretation which gave
meaning and reconciled all the terms of the treaty.
4.144 With respect to the Chairman's Note on the Modalities Paper, the European Communities
contended that it meant that WTO Members could not bring claims under the DSU based on the
violation of the Modalities Paper, but not that that text was irrelevant for the interpretation of the
Agreement on Agriculture . The European Communities emphasized that the Modalities Paper was
reached after protracted negotiations among participan ts, with a view to imposing specific obligations
upon themselves, was drafted in mandatory terms, and purported to be binding, not mere "scheduling
guidelines", such as those used for GATS Schedules. Despite its temporary nature, the Modalities

156 Appellate Body Report on Korea – Various Measures on Beef, para. 96.

Paper was an "agreement". It had, in fact, e xhausted its legal effects upon the conclusion of the WTO
Agreement, which, in the European Communities' view, e xplained why it had not been carried over to
the Agreement on Agriculture . The European Communities also asserted that, in practice, the
participants in the Uruguay Round had treated the Modalities Paper as a binding agreement, since the
purpose of the "verification process" was to check the conformity of the schedules with the Modalities
Paper. Citing Article 1(a) of the Vienna Convention, the European Communities held that the term
"agreement" could encompass not only treaties but also informal and/or non-binding agreements. The
Modalities Paper was thus "context", not "preparatory work". In accordance w ith the basic rule of
interpretation of Article 31.1, treaty provisions must be interpreted always in their context, and, in the
European Communities' view, this included also the elements falling within Article 31.2 (a).
4.145 However, in the alternative the European Co mmunities submitted that, if the Panel were to
conclude otherwise, it would still be justified to resort to the Mo dalities Paper under Article 32 of the
Vienna Convention as preparatory work. It was precisel y because the Modalities Paper was drafted
with a view to agreeing on the commitment s to be scheduled subsequently in the WTO Agreement,
that it must be considered as made "in connection" with that Agreement. The European Communities
stressed that the preamble of a treaty, which by definition imposed no legal obligations, was classified
as "context" under Article 31.2 of the Vienna Convention (see also paragraph 4.149).
4.146 In relation to the argument presented in paragr aph 4.138, the European Communities clarified
that when Hungary had claimed an error, the Eu ropean Communities had not taken the position that
scheduling errors were irrelevant per se. Rather, the European Communities' position was that there
had been no error. The European Communities al so pointed out that Hungary, unlike the European
Communities in this case, had not claimed in 1996 th at the error had been shared by the other
Members. The European Communities also explained that none of its claims involved the application
of Article 48 as that provision, in its view, ex clusively addressed the conditions under which error
may be invoked in order to invalidate a State's cons ent to a treaty (see paragraph 4.139). It did not
exhaust all the possible legal consequences of e rror. In the present dispute, the European
Communities had not contended that its consent to the WTO Agreement was vitiated by error, but
rather that the purpose of Article 48 was to allow th e party that "made" an er ror to plead that such
error invalidated its consent. If the State which " made" the error were precluded, for that reason
alone, from invoking Article 48, that provision would become inapplicable. The issue, addressed by
the exception in paragraph 2 of Article 48, was not w ho "made" the error, but rather whether the State
that "made" the error and that pleaded the invalidity "brought the error upon itself".
4.147 The European Communities was not convinced by Brazil's arguments in paragraph 4.136
because of the substantial differe nce between the quantity mentione d in the schedule (1.617 million
tonnes) and the total quantity of EC exports dur ing the base period (4.788 million tonnes). Given
Brazil's "compelling interest" in the sugar sector , the European Communities considered that the
Brazilian authorities would have had the time to co mpare European Communities' draft schedule with
the ISO or other easily available statistics, during the course of a three-year period. The European
Communities noted that Brazil was the world's larg est exporter of sugar and that the European
Communities was the world's second largest exporter and the main provider of export subsidies for
sugar. For geographical reasons, the European Comm unities was also Brazil's most direct competitor
in most export markets. Further, the European Communities asserted that LMC data were available
before 2000, and that subscriptions to the LMC re ports was already possible. In any case, it was
totally irrelevant whether or not the Complainants were aware in 1994 that the exports of C sugar
were made below total cost of production because at that time nobody thought that this could be of
any relevance whatsoever for estab lishing the existence of a "payment". The Complainants' position
summarized in paragraphs 4.140-4.141 presupposed that, in 1994, they had anticipated the
interpretation of Article 9.1(c) made by the Appellate Body in Canada – Dairy.

4.148 Responding to the European Communities' argument in paragraph 4.144, Thailand pointed
out that the Modalities Paper was analogous to the GATS scheduling guidelines, which "were to assist
in the preparation of … national schedules of initial commitments. 157 From Thailand's perspective,
there was consequently no reason to give the GATS scheduling guidelines an interpretative value
under the Vienna Convention different from that of the Modalities Paper. Thailand noted that the
interpretative value of the GATS guidelines in the Mexico-Telecommunications case was limited to
that of a supplementary means of interpretation under Article 32 of the Vienna Convention .
Furthermore, the Modalities Paper was establis hed only by those Members of the WTO who
participated in the Uruguay Round and Article 31.2(a) of the Vienna Convention would apply to these
arrangements only if they were made by "all" Me mbers of the WTO, including those who acceded to
the WTO at a later stage. The Modalities Paper thus could not be seen to be accepted by all parties as
it was not formally part of the Agreement on Agriculture , nor part of the package of obligations
"accepted" by acceding Members. Thailand also pointed to the instan ces when the European
Communities had expressed contrary views on this issue.158
4.149 Referring to the Complainants arguments in pa ragraph 4.148 and to the panel's findings in
EC – Tariff Preferences159, the European Communities asserted that subsequent accession to a treaty
involved an implicit acceptance of all relevant contextu al elements for the interpretation of that treaty.
The panel had even concluded that an inform ally adopted UNCTAD document, established by a
special negotiating group, was "context" within the meaning of Article 31.2(a), even though that
document expressly stipulated that it was not legally binding. The European Communities found
illogical that an agreement which was "context" when the treaty was concluded ceased to be so
subsequently. What mattered was whether all the part ies that concluded the treaty were parties of the
agreement made in connection with the conclusion of that treaty.
(b) Good faith and estoppel
4.150 If, despite the arguments by the European Communities summarized in Sections IV.D.1,
IV.D.2 and IV.D.3(a) above, the Pane l were to conclude that exports of C sugar were in excess of the
European Communities' re duction commitments, the European Communities submitted,
subsidiarily, that by claiming that the European Communities was in breach of those commitments,
the Complainants were not exercising reasonably their rights under the DSU. The European
Communities held that the Complainants were seeki ng to benefit from an excusable scheduling error,
which would unfairly advantage the Complainants, and upset the balance of concessions.
Furthermore the Complainants were estopped from br inging this claim because they had contributed
to that error through their own conduct. For t hose reasons, the European Communities considered
that the Complainants were acting inconsistently with the general principle of good faith and with
their obligation under Article 3.10 of the DSU to engage in dispute settlement procedures in good
faith.
4.151 In addition to the arguments and definitions already summarized in paragraph 4.122, the
European Communities submitted that the principle of good faith was "at once a general principle of
law and a principle of general international law"
160 that "informs" 161 all covered agreements. The
European Communities cited jurisprudence in support of the view that there was a basis for a dispute

157 Scheduling of Initial Commitments in Trade in Services: Explanatory Note MTN.GNS/W/164
(3 September 1993), para. 1.
158 Panel Report on EC – Bananas III (US), paras. 4.105-4.106, 4.99; Appellate Body Report on EC –
Bananas III, para. 157.
159 Panel Report on EC – Tariff Preferences, paras. 7.81-7.88.
160 Appellate Body Report on US – FSC, para. 166.
161 Appellate Body Report on US – Hot-Rolled Steel, para. 101.

settlement panel to determine, in appropriate cases, whether a Member had not acted in good faith,
 162
and that the principle of good faith controlled not only the performance of obligations but also the
exercise of Members' rights, enjoining them to exercise their WTO rights "reasonably" and
prohibiting the "abusive" exercise of those rights. 163 The European Communities described the
principle of good faith as "pervasive" in certain ca ses, particularly "if po st-determination evidence
relating to pre-determination facts were to emerge , revealing that a determination was based on … a
critical factual error." 164 The European Communities also held th at the exercise of the right to submit
claims to a panel had to be used reasonably, and in accordance with Article 3.10 of the DSU and with
the general principle of good faith.
4.152 The European Communities also referred to estoppel as a general principle of international
law165, which followed from the broader principle of good faith. The European Communities argued
that it was one of the principles which Members were bound to observe when engaging in dispute
settlement procedures, in accordan ce with Article 3.10 of the DSU.166 The European Communities
referred to several descriptions of the operation of the principle of estoppel as a basis for its claims
and argumentation, and held that the following f eatures were generally accepted as essential elements
of estoppel: the party invoking estoppel must have been induced to undertake legally relevant action
or abstain from it; by relying in good faith upon clear and unambiguous representations by the other
State; and reliance must prejudice the addressee, i.e., subsequent deviation from the original
representation must cause damage to the relying St ate, or result in advantages for the representing
State. Estoppel might arise not only from expres s statements, the European Communities continued,
but also from various forms of conduct, including silence, where, upon a reasonable construction,
such conduct implied the recognition of a certain factual or juridical situation.167
4.153 In view of the above, the European Communiti es concluded that, if the Complainants held
that they were already of the view, at the time of the conclusion of the WTO Agreement, that exports
of C sugar benefited from export subsidies, the Eu ropean Communities considered that they would
not have acted in good faith because they had faile d to advise the European Communities to include
those exports in the base quantity. If, on the ot her hand, the Complainants confirmed that they
believed until recently that exports of C sugar did not involve export subsidies, the European
Communities submitted that they would not be acting in good faith by seeking to take advantage of an
excusable and common scheduling error in orde r to exact from the European Communities a
concession that was never negotiated with, or requ ested from, the European Communities during the

162 Appellate Body Report on US – Offset Act (Byrd Amendment), para. 297.
163 Appellate Body Report on US – Shrimp, para.158; B. Cheng, General Principles of Law as applied
by International Courts and Tribunals, Cambridge, Grotius, 1987, p. 118.
164 Appellate Body Report on US – Cotton Yarn, para. 81.
165 The European Communities gave the following examples of judicial application of the principle of
estoppel in support of its view: Arbitral Award by the King of Spain Case (ICJ Reports, 1960, 192 at 213);
Temple of Preah Vihear Case (ICJ Reports, 1962, 6 at 32); opinions of Judges Alfaro and Fitzmaurice in the
Temple of Preah Vihear Case (ICJ Reports, 1962, 39-51, and 61-51); Brownlie, Principles of Public
International Law (Oxford, 2003), p. 616); J.P. Müller and T. Cottier, in Encyclopaedia of Public International
Law, Ed. Max Planck Institut, North Holland, 1992, p. 118.
166 According to the European Communities, the panel in India – Autos suggested that the principle of
estoppel was applicable in WTO disputes (footnote 364). The panel in Argentina – Poultry Anti-Dumping
Duties declined to rule on this issue, in view of the fa ct that the conditions identified by Argentina for the
application of that principle were not present (footnote 58). The European Communities further stated that a
number of other panels have addressed and rejected estoppel arguments, having regard to the specific facts of
the dispute, without questioning the applicability of this principle to GATT/WTO disputes. See Panel Report on
EEC (Member States) – Bananas I , para. 362; Panel Report on Guatemala – Cement II , paras. 8.23-8.24, and
Panel Report on EC – Asbestos, para. 8.60.
167 The European Communities referred in this regard to the judgement of the ICJ in the Temple of
Preah Vihear Case (ICJ Reports, 1962, 6-32 32); see also opinions, in the same case, of: Judge Fitzmaurice, p.
62; Judge Alfaro, pp. 41-42; case law summarized by Judge Alfaro at pp. 43-51 of his opinion.

Uruguay Round, and for which no compensation was paid nor received. Referring to its arguments
concerning the awareness, lack of reaction, and shar ed understanding in paragr aphs 4.124 and 4.126,
the European Communities submitted that it legitimately should have been able to rely upon the
Complainants' conduct when it decided not to includ e exports of C sugar in the base levels. Its
position had therefore been prejudiced as outlined in pa ragraph 4.129. To the extent that the alleged
violation resulted from the non-inclusion of the expor ts of C sugar in the scheduled base levels, the
Complainants were thus estopped from claiming that the European Communities was in breach of its
reduction commitments.
4.154 The Complainants rejected the European Communities' arguments that they had sought to
exercise their rights unreasonably, that panels had the power to determine whether a Member had not
acted in good faith, and that Article 3.10 imposed a requirement on Members' rights to submit claims
to a panel. Further they rejected the European Communities' argument that their conduct had given
rise to an estoppel.
4.155 Australia submitted that the jurisprudence cited by the European Communities in support of
its argument summarized in paragraph 4.151 could not be relied upon, because of selective or partial
quotation of the relevant sections. The Appellate Body had considered that the fact that a Member
had violated its obligation, in and of itself, did not lead to a finding that the Member had not acted in
good faith.
 168 The doctrine of "abuse of right" cited by the European Communities had been referred
to in the context of Article XX of GATT 1994, the operation of which involved a balance between the
rights of Members when an exception was invoked. 169 That balance would be upset if a Member were
permitted to "abuse or misuse its right to invoke an exception". In the present case, the Complainants
were not seeking to rely on an exception which needed to be balanced against the treaty rights of other
Members to ensure those rights were not devalued . Rather, the Complainants were seeking to
exercise their rights to engage in dispute settlement in relation to the breach by another Member of its
obligations under the WTO agreements. Finally, in another instance, the Appellate Body had
expressly declined to express a view on the matter.170
4.156 With respect to the European Communities' arguments in paragr aphs 4.150-4.152, the
Complainants responded that Article 3.10 dealt with th e good faith observance of procedural rules 171
and did not apply to the right of a WTO Member to bring a particular claim. As such, it could not
provide the basis for a claim of estoppel. Moreover, Article 3.10 did not expressly refer to a principle
of estoppel. Since WTO Members had a fundamental right to pursue dispute settlement proceedings
they could not be estopped from exercising that ri ght. The Complainants considered that, although
the principle of estoppel was linked to the general principle of good faith
172, this did not mean that a
WTO Member could rely on that principle to de feat a claim brought by another Member. The
principle of estoppel was not imported into the WTO ag reements by the reference in Article 3.2 of the
DSU to the customary rules of interpretation of publ ic international law, and it was not a customary
rule of interpretation.
4.157 The Complainants contended that the reference to good faith in Article 3.10 applied only "if a
dispute arises" and therefore was relevant not to th e decision to pursue dispute settlement, but to how
the parties "engage in these procedures" after the "dispute arises". Article 3.10 of the DSU could not
provide the basis for a claim of estoppel. They further contended that the European Communities
ignored the distinction between Article 3.7 of the DSU, which regulated the initiation of a dispute
("before bringing a case"), and Article 3.10 of the DSU, which regulated the conduct of Members

168 Appellate Body Report on US – Offset Act (Byrd Amendment), paras. 297-298.
169 Appellate Body Report on US – Shrimp, para. 158
170 Appellate Body Report on US – Cotton Yarn, para. 81.
171 Appellate Body Report on US – FSC, para. 166.
172 1984 ICJ Reports, p. 305, para. 130.

engaged in dispute settlement procedures ("if a dispute arises"). The European Communities'
argument that the Complainants were barred from bringing complaints as they were not acting in good
faith, or were estopped from doing so, related to their obligations under Article 3.7 of the DSU, as it
was that provision which addressed the launching of cases by Members, by providing in part that
"[b]efore bringing a case, a Member shall exercise its judgement as to whether action under these
procedures would be fruitful". According to th e Complainants, the weight to be given under
Article 3.7 to the judgement of a Member bringi ng a case was emphasized by the Appellate Body in
EC – Bananas III, where it found that "a Member has broad discretion in deciding whether to bring a
case against another Member under the DSU. The language of … Article 3.7 of the DSU suggests,
furthermore, that a Member is expected to be largely self-regulating in deciding whether any such
action would be "fruitful".
173 Also, the Appellate Body had confirmed that complainants were entitled
to benefit from the presumption of good faith perfo rmance of the obligations under Article 3.7 of the
DSU as: "given the "largely self-regulating" nature of the requirement in the first sentence of
Article 3.7, panels and the Appellate Body must presume, whenever a Member submits a request for
establishment of a panel, that such Member does so in good faith, having duly exercised its judgement
as to whether recourse to that panel would be "fruitf ul". Article 3.7 neither requires nor authorizes a
panel to look behind that Member's decision and to qu estion its exercise of judgement. Therefore, the
Panel was not obliged to consider this issue on its own motion."174
4.158 The Complainants asserted that, although the prin ciple of estoppel had been raised by parties
in earlier disputes, it had never been applied by a panel in determining a claim before it. Australia
noted that the EC argumentation seemed to impl y that a number of panels did not question the
applicability of estoppel in disputes. Referring in particular to India – Autos 175, Australia contended
that the panel did not suggest that estoppel "was applicable in WTO disputes", but commented, in
footnote 364 to its report, that "there may be an argument that a general principle such as estoppel
may apply to WTO dispute settlement". Australia questioned whether the cited statement expressed
support for the application of estoppel in the WTO. 176 Brazil noted that the European Communities
had not pointed to one single instance in which a panel had relied on the estoppel doctrine to deny a
WTO Member access to dispute settlement procedures to resolve a substantive dispute or to reject an
individual claim ab initio. Brazil also recalled the standpoint the European Communities had adopted
in past disputes, when it had maintained that a WTO Member's decision to pursue dispute settlement
proceedings was not subject to a rule of good faith; that Members had a "fundamental right to resort to
dispute resolution at any time; and that such right could be restricted only by clear and unambiguous
language."
177
4.159 The Complainants further asserted that the conditions for the application of estoppel were
not present in these proceedings 178, and that the European Commun ities had not presented the facts
necessary to justify the invocation of the doctrines of estoppel or good faith in this dispute. Australia
submitted that if, despite its arguments to the contra ry, the Panel were to find that the principle of
estoppel could be applied in WTO disputes, and accepting arguendo the content of the principle put
forward by the European Communities, its conduct could in no way give rise to estoppel. This
content included: a "clear and unambiguous repre sentation" by the Complainants, and that the
European Communities was "induced" to act in relian ce of that representation. In the Complainants'

173 Appellate Body Report on EC – Bananas III, para. 135.
174 Appellate Body Report on Mexico – Corn Syrup (Article 21.5 – US), para. 74.
175 Panel Reports on India – Autos, footnote 364.
176 See also Panel Report on Argentina – Poultry Anti-Dumping Duties , para. 7.20 and footnote 58;
Panel Report on Guatemala – Cement II, paras. 8.23-8.24.
177 Appellate Body Report on US – FSC, para. 63 (citations omitted).
178 It is generally agreed that the party invoking estoppel "must have been induced to undertake legally
relevant action or abstain from it by relying in good faith upon clear and unambiguous representations by the
other State", see J.P. Müller and T. Cottier, in Encyclopaedia of Public International Law , Ed. Max Planck
Institute, North Holland, 1992, p. 116.

view, these conditions were without a doubt not sa tisfied in this case. First, the European
Communities had not argued that it relied upon "cl ear and unambiguous representations" made by the
Complainants, but rather that it relied upon their "s ilence" (see for instance paragraph 4.152). The
Complainants recalled that, in EEC (Member States) – Bananas I, the panel had rejected a similar
argument presented by the European Communities, noting that: "estoppel could only result from the
express, or in exceptional cases implied, consent of such parties or of the contracting parties".
Applying this standard the panel had found that "[ t]he mere inaction of the contracting parties could
not in good faith be interpreted as an expressi on of their consent to release the EEC from its
obligations under Part II of the GATT".179
4.160 Since silence could only amount to representati on in "exceptional circumstances" such as
where there was a duty or obligation to object, Thailand noted that the Euro pean Communities had
pointed to no legal authority, as there was none in its view, to support a lower threshold of
"reasonable expectations to speak". Moreover, the Complainants were under no "duty to object"
180
during the bilateral meetings or the verificati on process and furthermore could not reasonably be
expected to do so. In this resp ect, Thailand recalled that the purpose of the verification process,
referred to by the European Communities in thes e proceedings as giving an opportunity to the
Complainants to object (see paragraph 4.126), was to give each participant in the Uruguay Round the
opportunity to verify whether the export subs idy reduction commitments assumed by the other
participants were consistent with the guidelines fo r negotiations set out in the Modalities Paper. The
purpose of the verification process was not, in Thaila nd's view, to alert participants to instances in
which they had not retained options open to th em under the Modalities Paper or to settle disputes
about the consistency of the commitments assumed with the Agreement on Agriculture . Therefore,
the Complainants' silence could not be deemed to have constituted an implic it agreement, seemingly
because they failed to object during the verification process.
4.161 Transposing the reasoning of the Appellate Body in EC – Computer Equipment 181, Thailand
also contended that the Complainants only had the duty to ensure that their export interests were
safeguarded. Thailand had not therefore "acted in bad faith by not advising the EC" to include
C sugar exports in the base period levels. It w as for the European Communities to define its export
subsidy reduction commitments in terms which su ited its needs. The European Communities could
not, for these reasons, legitimately expect that other WTO Members advise it to raise its base period
levels so that it could grant more export subsidies. There were many reasons why a participant in a
multilateral trade negotiation might not wish to ma intain measures affording protection to domestic
producers even though such measures were specifica lly provided for by the negotiating modalities.
Many participants had used such negotiations as a means to overcome domestic interests opposed to
trade liberalization or had simply agreed to liberal ize beyond the agreed modalities in an effort to
advance their national economic interests. Furthermor e, even if its silence were held to constitute a
representation, the European Communities would need to demonstrate that it in fact relied on
Thailand's silence, and its own decision not to assume export subsidy reduction commitments for
sugar, when determining the scope of the Eur opean Communities' own export subsidy commitments
for sugar.
182 Yet, in Thailand's knowledge, there was no record to suggest that the European
Communities had relied on the Complainants' silenc e when the European Communities scheduled its
base quantity levels and that it would have acted differently if the Complainants had raised objections.
Thailand therefore did not believe that the assumption that the European Communities would have
increased the base period levels if advised of its "s cheduling error", and that the Complainants were
aware of this, could be advanced.

179 GATT Panel Report on EEC (Member States) – Bananas I, paras. 361 and 363.
180 See Temple of Preah Vihear Case (ICJ Reports,1962) p. 62; see also Panel Report on Guatemala –
Cement II, footnote 791 ("it is clear that not any silence can be considered to constitute consent").
181 Appellate Body Report on EC – Computer Equipment, para. 109.
182 Panel Report on Argentina – Poultry Anti-Dumping Duties, para. 7.39.

4.162 The Complainants contested the premises upon which the European Communities had based
its argumentation on estoppel. Recalling the situation with regard to the availability and access to the
relevant sources of information during th e Uruguay Round (see paragraph 4.135), Australia
contended that the European Communities provided substantial manufacturing and export subsidies to
sugar processors but did not consider it appropriate to conduct a survey of the EC sugar companies to
establish how their loss-making activities were being fi nanced. Consequently, any expectation by the
European Communities that Australia was in a posi tion to speak, or had a "duty to speak", was not
reasonable. Furthermore, as this dispute involve d claims that the European Communities was not
complying with its WTO treaty obligations, it was the European Communities' performance of its
treaty obligations that was at issue. In particul ar, those treaty obligations which could allegedly be
extinguished by the European Communities' assertion that, prior to the conclusion of the WTO treaty,
the Complainants had a responsibility to draw certain matters to its attention.
4.163 In Brazil's view, the implications of the European Communities' argumentation were that any
WTO Members that were initiating dispute settleme nt proceedings regarding measures in effect
before the WTO agreements entered into force were ac ting in bad faith, in that they should be treated
as having accepted the measure by their "silence" bot h before and since the WTO agreements entered
into force. This suggested th at WTO Members could initiate dis pute settlement proceedings against
the European Communities only when the Eur opean Communities itself knew during the Uruguay
Round that its measures would be inconsistent with the WTO agreements.
4.164 Thailand also argued that the obligations of a WTO Member were obligations towards all
other WTO Members. A Member of the WTO invoking estoppel would therefore have to establish
that it was induced to act in reliance of the represen tations of all the other WTO Members. If not, the
doctrine of estoppel would lead to a complex and incongruous web of the rights and obligations
among WTO Members inconsistent with the multilatera l character of WTO law. For instance, the
rights and obligations of Members that acceded to the WTO and those of the original Members of the
WTO might differ. It was therefore not surprising th at no panel to date had applied the principle of
estoppel in the GATT or WTO context.
4.165 The European Communities replied that the rights and obligations under the DSU were
expressly provided in Article 3.10 of the DSU as clarified by the Appellate Body in US – FSC, and
were, inter alia, that Members must exercise their right to institute dispute settlement proceedings "in
good faith". The general principle of good faith and Article 3.10 of the DSU imposed additional
requirements upon Members to prevent them, in par ticular, from exercising their right to request a
panel in an abusive manner so as to exact a manifest ly unfair advantage, or in circumstances where a
Member was estopped from doing so by virtue of its previous conduct. The suggestion that the
exercise of this right should be subject exclusively to Article 3.7 of the DSU found no support in the
language of Article 3.10, which, according to the European Communities, covered any action
regulated by the DSU
, including that taken by Members under Article 6 of the DSU. The European
Communities recognized however that Article 3.7 of the DSU was an expression of the principle of
good faith. But that provision did not exhaust all the requirements imposed by that principle with
respect to the initiation of dispute settlement pro ceedings because it exclusively concerned the issue
of whether such action would be "fruitful", i.e. the necessity or opportunity of bringing a case, with a
view to prevent frivolous complaints. According to the European Communities, this argument found
support in the Appellate Body statement in US – Corrosion-Resistant Steel Sunset Review.183
4.166 With respect to the Complainants' analysis in paragraph 4.158, the European Communities
considered that a "dispute "arises" from the moment that two Members disagreed on the interpretation
of the WTO Agreement, whether or not they had taken any formal action under the DSU, as evident in
Article 4.7 of the DSU. The term "dispute settlement procedur es" used in Article 3.10 comprised all

183 Appellate Body Report on US – Corrosion-Resistant Steel Sunset Review, para. 86.

the "procedures" regulated by the DSU and not just the panel phase, including, inter alia , the
provisions of Article 6. It was also incorrect that the exercise of the right to request a panel was
subject exclusively to Article 3.7 of the DSU. That provision was but one of the expressions of the
principle of good faith.184
4.167 Responding to the argument summarized in pa ragraph 4.164, the European Communities
considered that the principle of estoppel did not op erate by derogating or amending tacitly the treaty
rights and obligations of the parties concerned but was a procedural defence which precluded one
party from exercising a right vis-à-vis another party but without modifying the substantive obligations
of that party.185 In the present case, the European Communities' contention was that the Complainants
were precluded from bringing a claim under Article 9. 1(c) and therefore that the Panel should reject
their claims, even if it upheld them in substance. Since estoppel did not alter the substantive rights of
Members under the WTO Agreement but only the exercise of those rights, the European Communities
was of the view that it could operate exclusively between two Members.
4.168 Further, the European Communities underlined that estoppel was a matter of adjectival, rather
than substantive, law and accordingly the effect of a true estoppel was confined to the parties. 186 The
contention that estoppel amounted to "consent" (see paragraph 4.160) was wrong and without
foundation in public intern ational law. Referring to recent pa nels' interpretation of that notion 187, the
European Communities sustained that the existe nce of estoppel must be established from the
perspective of the party who claimed it. The issue was whether that party could rely legitimately on
the representations made by the other party, rega rdless of whether such representations amounted to
"consent", as in, for example, circumstances where representations made by error or inadvertence
could be legitimately relied upon and give rise to estoppel. The European Communities considered
that assimilating estoppel to "consent" would render larg ely superfluous the institution of estoppel. In
the European Communities' view, if a party "consen ted" to something, it gave up its substantive
rights, and there was no need for the other party to invoke a procedural defence, such as estoppel,
against the exercise of such rights.
4.169 The European Communities submitted that from th e fact that the Complainants were aware
that exports of C sugar were not included in the base quantity, and from the fact that they did not raise
any question, it could reasonably infer that the Comp lainants shared, at the time of the conclusion of
the WTO Agreement, its view that exports of C suga r did not benefit from export subsidies. In this
regard, the European Communities also considered th at silence could be legitimately construed as a
representation of lack of objections, not only wh ere there was a "duty to speak", but also in
circumstances where it was reasonable to expect th at the other parties would speak. The European
Communities asserted that the existence of estoppel required that the party relying on the
representations made by the other party suffered a "p rejudice" as a result of such reliance. In the
present case, the European Communities sustained that upholding the Complainants' allegations
would unfairly penalize the European Communi ties, as outlined in paragraph 4.129, for an
unanticipated and until recently, shared, scheduli ng error. This would upset the balance of
concessions.
4.170 As further proof of the existence of a shared understanding among WTO Members, the
European Communities recalled its reasoning in paragr aph 4.69. The fact that, for example, Brazil or
Thailand, considered that their measures, and therefore also the European Communities' measures, did
not provide export subsidies, amounted to a "cl ear representation" in the European Communities'

184 Ibid.
185 Panel Report on India – Autos, footnote 364.
186 Sinclair I., The Vienna Convention on the Law of the Treaties , 2nd Edition, Manchester University
Press, 1984, p. 88.
187 Panel Report on EC – Asbestos, para. 8.60; Panel Report on Guatemala – Cement II, para. 8.23.

view. Additionally, the Complainants' lack of reaction during the Uruguay Round clearly indicated to
the European Communities that they shared the understanding that the C sugar regime did not provide
export subsidies.
4.171 The Complainants responded that the sugar policies applied by other WTO Members
referred to by the European Communities were irrelevant in these Panel proceedings.
4.172 Thailand, in turn, submitted that it was precisely because the doctrine of estoppel was a
procedural defence precluding a party from exercisi ng its rights vis-à-vis another party, that it would
create discrepancies between the rights that different WTO Members might assert under the DSU.
The European Communities' argumentation implied that in future multilateral trade negotiations
Members would be forced to make objections against another Member's attempts to qualify
obligations under WTO law through notes in schedules, lest they would risk losing their rights under
the WTO. This would create an onerous negotia ting environment, where the better resourced WTO
Members would have an advantage over the sm aller and poorer countries. WTO law would not
provide an efficient, secure and fair framework for multilateral trade negotiations if WTO Members
were allowed to use the silence of other Memb ers during the negotiations as an excuse for not
performing their commitments.
E.
ACP/INDIA "EQUIVALENT" SUGAR
4.173 The Complainants claimed that the European Commun ities had exceeded its export subsidy
reduction commitments, inter alia , by according export subsidies to ACP/India equivalent sugar 188.
They recalled that the European Communities had the burden of proof under Article 10.3 of the
Agreement on Agriculture to establish that it had not exceeded its export subsidy reduction
commitments.
4.174 The Complainants asserted that they were not questioning the preferential access of
ACP/India sugar to the EC market and were not asking for a change in the requirement that
ACP/India sugar be purchased at intervention pri ces. Rather, the Complainants were seeking to
address the measures which, in their view, did not conform to the WTO disciplines, notably by asking
the European Communities to cease exporting sugar in excess of its reduction commitments.
1. Article 9.1(a) of the Agreement on Agriculture
4.175 The Complainants submitted that the European Comm unities granted export subsidies listed
in Article 9.1(a) of the Agreement on Agriculture to exports of ACP/India equivalent sugar. By virtue
of Article 2 of the Agreement on Agriculture, the European Communities' budgetary outlay and export
quantity reduction commitments cove red this category of sugar notwithstanding the footnote inserted
in the European Communities' Schedule of Con cessions. Consequently the European Communities
acted inconsistently with its obligations under Articles 3.3 and 8 of the Agreement on Agriculture.
4.176 The Complainants further submitted that a quan tity of sugar that the European Communities
considered to be "equivalent" to the amount of su gar imported under preferential trade arrangements
was exported from the European Communities to th ird countries using export refunds. The export
refunds granted to ACP/India equivalent sugar were the same as the export refunds granted to A and
B quota sugar and thus these payments clearly consti tuted "direct subsidies" provided by government,
to firms, to the exporting industry and to produ cers of sugar, "an agricultural product", and were
"contingent on export performance", within the meaning of Article 9.1(a) of the Agreement on

188 The Complainants explained that, by bringing th is case, they were not seeking to affect the
preferential access of the ACP countries and India to the EC market and were not requesting that the European
Communities withdraw the preferential market access it granted to those countries.

Agriculture. As the export refund system was identical to the system of export refunds for quota
sugar, which the European Communities recognized to be covered by its export subsidy reduction
commitments189, Article 9.1(a) brought within its scope such subsidies, which had to be, accordingly,
subject to reduction commitments.
4.177 The Complainants pointed out that, as the European Communities had exported 1,725,100
tonnes of this sugar category alone during marketing year 2001-2002, such subsidized exports were in
excess of the European Communities' sche duled commitment levels for that year. 190 The
Complainants submitted statistical data which s uggested that most of the "preferential" sugar
imported by the European Communities (principally into the UK) was actually consumed in the
European Communities.191 The European Communities had also admitted that the export subsidies on
"preferential" sugar were subsidies on EC quota sugar, up to a quantity limit of 1.6 million tonnes.192
4.178 The European Communities responded that the Complain ants had failed to properly
interpret the European Communities' scheduled co mmitments. The allegations that the European
Communities had exceeded its export subsidy commi tments should therefore be rejected. The
European Communities explained that it had prov ided export refunds to an amount of exports
equivalent to the sugar it imported under preferentia l import arrangements and th at such exports were
eligible to receive export refunds. The European Communities noted that its export statistics did not
distinguish between refined sugar obtained from ACP/India equivalent sugar and other sugar.
4.179 According to the Complainants, the figures supplied by the European Communities in its
submissions to the Panel, as well as its notifications to the Committee on Agriculture clearly indicated
that it had exceeded its quantity commitmen t levels in marketing year 2001-2002. 193 These figures
constituted an admission on the part of the European Communities that, in that marketing year, it had
granted export refunds to 2,651,900 tonnes of sugar amounting to €1,217,247,000. The Complainants
also took note of the European Communities' categor ization of quantity of sugar that benefited from
these refunds into "ACP/India equivalent sugar" and "notified A+B sugar". The European
Communities had also confirmed that it was applying export subsidies to ACP/India equivalent sugar
within the meaning of Article 9.1(a) of the Agriculture Agreement, in line with the historical record.194
The Complainants recalled that, if the European Communities claimed that the exports of ACP/India
equivalent sugar were not subsidized, it had th e burden of proof, under Article 10.3 of the Agreement
on Agriculture, to establish that no export subsidies applied to such exports.
4.180 The Complainants reiterated that their claim was based on the following premises: the export
refunds were export subsidies within th e meaning of Article 9.1(a) of the Agreement on Agriculture ;
the export refunds granted to ACP/India equivalent sugar and "notified A+B sugar" should be counted
against the European Communities' reduction comm itments; and, for marketing year 2001-2002, the
European Communities' quantity commitment le vel was 1.273 million tonnes and budgetary outlay
commitment level was €499.1 million. In th eir view, the European Communities' reduction
commitments covered the exports of ACP and I ndia equivalent sugar, given the European
Communities' own admission that all the export ref unds granted to sugar were export subsidies, and

189 The European Communities notified certain export refunds for quota sugar. These refunds,
provided under Article 27 of the Regulation, were the same as those provided to ACP/India equivalent sugar.
190 Exhibit COMP-15, p. 17.
191 The United Kingdom was the major importer of "Preferential" sugar (approximately 1.1 million
tonnes), but exported less than 400,000 tonnes (104,000 tonnes to other EC member States and 383,000 tonnes
to third countries). Source http://statistics.defra.gov.uk.
192 EC advice at consultations 21/22 November 2002, confirming that the exports in question of
'Preferential sugar' were sourced from A and B quota. S ee also Exhibit COMP-11, p. 9; and L/4833 para. 2.19
(GATT Panel Report on European Communities – Refunds on Exports of Sugar).
193 See Tables 10, 11, and 12 of the European Communities' first written submission.
194 Exhibit ALA-6.

that the export refunds granted to all categories of sugar were subject to reduction commitments. The
European Communities' contention that its expor t subsidy commitment levels were significantly
higher than the level cited by the Complainants found no basis in the EC's Schedule, when
considering the figures under the headings "annual and final outlay commitment levels" and "annual
and final quantity commitment levels".
2. Exemptions through unilateral insertions in Schedules
4.181 Referring to the European Communities' assertion before the WTO Committee on Agriculture
that it had not assumed reduction commitments in respect of ACP/India equivalent sugar
195, the
Complainants considered that such a position was lega lly untenable. They submitted that Members
could not exempt themselves from their obligations under the Agreement on Agriculture by including
reservations in their Schedule of Concessions that mu st be subsequently accorded the same, or greater
weight, than any provision of a WTO Agreement with which the schedule text might directly conflict.
To the extent that the Europ ean Communities purported to diminish its obligations under the
Agreement on Agriculture, the footnote, in their view, constituted an impermissible reservation under
international law.
4.182 The Complainants considered that, if Member s could validly modify their obligations under
the Agreement on Agriculture through entries in their Schedule, the purpose of Article XVI:5 of the
WTO Agreement would be frustrated. The WTO Agreement foreclosed the possibility of making any
reservation to the obligations under these Agreemen ts. If Members were permitted to qualify their
obligations under the Agreement on Agriculture or Article II of GATT through notes to their
Schedules, the WTO Agreement would effectively be reopened by interpretation. The Complainants
sustained that the Agreement on Agriculture did not provide for reservations of any kind, and in this
respect, was different from GATS, which expressl y permitted Members to impose "conditions and
qualifications" on certain types of scheduled obligations. 196 This principle was reinforced by
Article 3.1 of the Agreement on Agriculture.
4.183 With respect to the Agreement on Agriculture , the Complainants submitted that a Member
could not grant export subsidies without a corres ponding reduction commitment. First, Article 3.1
made clear that export subsidy commitments expressed in a Schedule "constitute commitments
limiting subsidization and are hereby made an inte gral part of GATT 1994." A Member may not use
a footnote to negate "an integral part of GATT 1994."
4.184 The Complainants submitted further that Artic le 3.3 prohibited Members from providing
export subsidies in respect of agricultural products specified in their Schedules "in excess of the
budgetary outlay and quantity commitment levels sp ecified therein". Further, Members "shall not
provide such subsidies in respect of any agricultu ral product not specified in that Section of its
Schedule". Thus, any subsidy provided to a scheduled agricultural product, such as sugar, was subject
to the reduction commitments "specified" in a Member 's Schedule. In the Complainants' view, export
subsidies granted to an agricultural product were th erefore either subject to reduction commitments in
accordance with Article 9.2(b)(iv), or they were inconsistent with the requirements of the Agreement
on Agriculture. There was no alternative category. The Complainants reasoned that, as sugar was a
product "specified" in the EC's Schedule, the European Communities was under the obligation to
reduce its budgetary outlays and export quantities of subsidized sugar in accordance with its

195 Exhibit COMP-21: The European Communities had replied that: "As indicated in footnote 1 of the
table on export subsidies contained in Part IV, Section II of Schedule CXL, the EC is not undertaking any
reduction commitment on exports of ACP or Indian sugar. Consequently, any financial assistance is not
reported to the WTO. For information, these exports amount to approximately 1.6 million tonnes per year."
196 General Agreement on Trade in Services, Annex 1B to the Marrakesh Agreement Establishing the
WTO, Articles XVII and XX.

scheduled commitments. In this context, the Comp lainants asserted that the reduction commitments
under the first clause of Article 3.3 represente d narrower commitments than the export subsidy
commitments on unscheduled products mandated by the second clause of Article 3.3.197
4.185 Having recalled the substance of Article 3.3, the Complainants held that, under Article 8, each
WTO Member undertook not to provide export subsidies otherwise than in conformity with the
Agreement on Agriculture and with the "commitments as specified" in the Member's Schedule. The
Complainants submitted that the footnote was no t a "commitment" "specified" "in" a schedule
because it did not provide "specific binding commitments" regarding "export competition". Article 8
specifically stated that all export subsidies must be "in conformity with this Agreement and with the
commitments" set out in the Schedule of Concessions . By adding the conjunctive "and", the drafters
left no doubt that it was not sufficient for a Me mber to act consistently with its reduction
commitments; it must also act consistently with the Agreement on Agriculture and that Agreement
permitted only those export subsidies th at the Member agreed to reduce to specified levels. Further,
neither Article 3, nor Article 8, could be given a meaning which wa s contrary to the letter and the
spirit of those provisions. The Complainants emphasized that the provision of "specific binding
commitments" regarding "export competition" was one of the objects and purposes of the Agreement
on Agriculture, as reflected in its Preamble. The footnote therefore conflicted with both provisions.
4.186 Article 9.1 of the Agreement on Agriculture confirmed that Members were not entitled to
select unilaterally the export subsid ies in respect of which they made reduction commitments. In the
chapeau of Article 9.1, the words "are subject to reduction commitments" left no choice to WTO
Members, requiring that all export subsidies lis ted be subject to reduction commitments. The
Complainants reasoned that, as long as an export subsidy fell within the terms of any of the
subparagraphs of Article 9.1, it was subject to reduction commitments.
4.187 Lastly, Article 10.1 of the Agreement on Agriculture obliged Members to refrain from
applying export subsidies not listed in Article 9.1 in a manner which circumvented their export
subsidy commitments. In the Complainants' view, th at provision also expressed the intent to confine
the right of a Member to accord subsidies, to the subsidies that it was committed to reducing.
Consequently, a footnote to a Schedule could no t be used to create a category of scheduled
agricultural products that were not subject to a Member's reduction commitments. The European
Communities had therefore an unqualified obligation to subject those direct export subsidies to its
reduction commitments, and the footnote could not override or invalidate the treaty text.
4.188 The Complainants submitted that GATT and WT O jurisprudence endorsed by the Appellate
Body established that WTO Members could incorp orate in their Schedule of Concessions only acts
yielding rights, not acts diminishing obligations.
 The GATT and the Agreement on Agriculture did not
permit reservations. In EC – Bananas III, the Appellate Body found that the ordinary meaning of the
term "concessions" suggested that a Member ma y yield rights and grant benefits, but it cannot
diminish its obligations198, a principle further confirmed in EC – Poultry 199, and reaffirmed in Chile –
Price Band System.200
4.189 Any exception to the European Communities' commitments under the Agreement on
Agriculture, in their view, would have had to be provided through a formal WTO waiver, in
accordance with the provisions of Article IX:3 of the WTO Agreement . They noted that a waiver
could only be granted in exceptional circumstanc es. The European Communities would also have
needed to seek a waiver for any recalculation of base level outlays and quantities, given that it had

197 Appellate Body Report on US – FSC, para. 147.
198 Appellate Body Report on EC – Bananas III, paras. 153-158.
199 Appellate Body Report on EC – Poultry, para. 98.
200 Appellate Body Report on Chile – Price Band System, para. 272.

bound the base levels in its Schedule. The Compla inants noted that the European Communities had
neither sought nor received a waiver for the exclus ion of ACP/India equivalent sugar from its WTO
commitments.
4.190 The European Communities responded that a waiver was only necessary if the underlying
situation was inconsistent with a Member's obliga tion. The European Communities pointed out that,
while a waiver may be obtained with the support of only three quarters of the membership of the
WTO, inserting a footnote into a Member's sche dule required the agreement of all WTO Members.
201
In this context, the European Communities cons idered that, by virtue of Article 16 of the Vienna
Convention, the Complainants had consented to be bound by the terms of the treaty footnote
contained in the EC's Schedule, by ratifying the WTO Agreement . Thus, they had agreed to it.
Denying any legal effect to the footnote would amount to finding that part of the WTO Agreement was
inconsistent with another part of that Agreement, ultimately undermining the balance of concessions.
According to the European Communities, this w ould also be contrary to Article 3.2 of the DSU which
stated that dispute settlement "cannot add to or di minish the rights and obligations provided in the
covered agreements."
4.191 The European Communities contended that sch edules were an integral part of the WTO
Agreement by virtue of Article 3.1 of the Agreement on Agriculture, and were therefore subject to the
rules of interpretation of the Vienna Convention . The European Communities' export subsidy
commitments were articulated in two components. The first component served to set the limits which
were subject to reduction, while the second compone nt (the footnote) set a fixed ceiling. The
European Communities contended that, overall, it had reduced its export subsidies on sugar. The first
sentence of the footnote confirmed that exports of an "equivalent" amount of ACP/Indian sugar were
not included in the quantities and outlays reported by the European Communities for the base period
level (1986-1990) which served as a basis for the figures set out in the table. Since the footnote
applied to the entire entry, the European Commun ities continued, it applied to both the base outlays
and base quantities, thus indicating the basis for th e base quantity and outlay levels, in line with the
supporting tables which all participants in the negotiations were required to submit.
202 The first
sentence also served to clarify that exports of th e quantity of ACP/India sugar imported should not be
counted against the commitments made on the base period levels. The second sentence expressed the
"average of export" of ACP/I ndia equivalent sugar in the pe riod 1986-1990, which was the base
period for the reduction commitments, and was not a simple statement of fact or a narration of
particular circumstances.203 It indicated that the European Communities was committing itself, as it
had done for the other component of its exports of s ugar, to limit its exports to a level established on
the basis of the exports made in the base period. The European Communities contended that the
second sentence, therefore, operated in precisely the same way as the other component of the
European Communities' commitments, as it was a limited authorization to provide export subsidies.
4.192 The European Communities further clarified that the first component comprised the
commitment levels expressed in the table on e xport subsidies (which had decreased during the
implementation period of the Agreement on Agriculture and had remained fixed since 2001). The
second component was the commitment level expressed in the Footnote to the EC's Schedule in
respect of ACP/India equivalent sugar, which imposed a ceiling of 1.6 million tonnes (less if the
import entitlement was less than 1.6 million tonnes) and a de facto budgetary limit of 1.6 million
multiplied by the average export refund which could be granted within the first component of the
European Communities' commitments. The Euro pean Communities argued that the combined

201 Appellate Body Report on EC – Computer Equipment, para. 109.
202 Exhibit EC–5.
203 Appellate Body Report on Canada – Dairy, para. 135. According to the European Communities,
the Appellate Body had found that the panel had failed to give meaning to a condition in Canada's goods
schedule which the panel had considered was no more than a "description".

operation of these two components meant that, overa ll, the European Communities had reduced its
export subsidies on sugar, over the implementation period. The European Communities asserted that it
had respected these limits and provided statistical data in support of that argument.204
4.193 Consequently, when properly interpreted, the footnote was consistent with the Agreement on
Agriculture and the European Communities had respected the commitments set out in its Schedule.
According to the European Communities, the Compla inants had misconceived the footnote and their
arguments were premised on the notion that the footnote operated to exclude export subsidies on
ACP/India equivalent sugar from any commitments. The Complainants' arguments on the
consistency of an exclusion from the Agreement on Agriculture were consequently irrelevant. The
European Communities submitted that the articula tion of its export subsidy commitments in two
components was consistent with each of the provisions of the Agreement on Agriculture cited by the
Complainants. Notably, the export subsidies whic h the European Communities provided to sugar had
been subject to reduction commitments in accordance with Article 9.1 (see paragraph 4.186). The
European Communities had acted consistently with Article 8 since it had provided subsidies only in
conformity with the Agreement (see paragraph 4.185 ). Furthermore, the European Communities had
also provided those subsidies within the limits au thorized in its schedule and had thus acted in
conformity with Article 8 and Article 3.3 (see paragraphs 4.182 and 4.185).
4.194 The Complainants submitted that the European Communities' interpretation of the footnote
was inconsistent, and could not be reconciled, with its ordinary meaning. The words "the Community
is not making any reduction commitments" on sugar of ACP or Indian origin, communicated clearly
and unambiguously, in their opinion, that th e European Communities had not assumed any
commitment to reduce export subsidies granted in r espect of sugar of ACP or Indian origin. The
meaning that the European Communitie s attributed to the footnote was thus in direct contradiction to
its text and indeed rendered the words "not maki ng any reduction commitment" ineffective. They
reiterated that, independently of how it was interpreted, the footnote did not constitute a reduction
commitment, nor a commitment limiting subsidization, notably with regard to budgetary outlays. In
their view, the alleged budget ceiling did not cons titute a ceiling commitment as the second sentence
simply contained no normative term expressing a commitment, or a term reflecting the idea of a
ceiling. Australia, in this context, contended that the reference to an average of 1.6 million tonnes
during the base period was not even a factual statement.
205 First, under its own regime, the EC limited
subsidies on exports of sugar of ACP and India or igin to a quantity of 1.3 million tonnes of sugar
derived from cane or beet harvested in those countries. Secondly, the EC had not disputed that the
grater proportion of imports from the ACP countries and India were actually consumed within one EC
member State, and were not exported. Third, in response to Australia's quest ion for clarification of
statistical data, the EC had acknowledged that it had imported less than 1.6 million tonnes from ACP
countries and India during the base period. 206 T h e Complainants thus held that, if the European
Communities had intended to set out in the footno te one component of a reduction commitment, it
would not have used merely descriptive language . Referring to their analysis summarized in
paragraphs 4.182-4.186, they sustained that there was no basis in the Agreement on Agriculture for
the European Communities' claim that it had the right to ma ke "commitments" to retain export
subsidies on a certain quantity of exports, at a ceiling level. As provided for in Article 8 and 3 of the
Agreement on Agriculture , and as indicated in the title of Sec tion II of Part IV of a Member's WTO
Schedules, export subsidy commitments must be reduction commitments on both quantity and
budgetary outlays on scheduled products. The Compla inants asserted that Article 9.2(b)(iv) provided
further context for the nature of the commitments as reduction commitments.

204 Tables 11 and 12 of the European Communities' first written submission.
205 Australia's second oral statement, paras. 47-50.
206 Australia, in this regard, referred to Annex I of EC's second written submission.

4.195 Even if it were accepted that the footnote indicat ed the basis for quantity levels for subsidized
exports of ACP/India equivalent sugar, the Complainants underlined that the footnote was silent about
what values would be multiplied by those quantity levels to arrive at the putative ceiling for budgetary
outlays on subsidies on these exports. Further, the alle ged "ceiling" had several flaws. First, it could
not be found in the text of the footnote or elsewhe re in the EC's Schedule of reduction commitments.
Second, it did not establish a "ceiling" on these outlay s. Third, despite the European Communities'
explanations regarding the determ ination of such ceiling on the b asis of the difference between the
world market price and the EC intervention price, that difference was not a constant factor. Indeed, to
the extent that world market prices have declined over recent years, the average export refund could
increase commensurately. Thus, the "ceiling" sup posedly imposed by the footnote on the European
Communities' budgetary outlays on AC P/India equivalent sugar was not a ceiling at all, but a flexible
cap that could increase or decre ase based on factors outside the Eu ropean Communities' control.
Thus, far from acting as a ceiling, the budgetary outla ys on ACP/India equivalent sugar could be in
excess of the levels of budgetary outlays on such sugar during the base period. In this respect, the
Complainants found that it was no defence for the European Communities to ar gue that it "carefully
managed" the alleged ceiling (see paragraph 4.222).
4.196 The Complainants sustained that the principle of effectiveness did not require the Panel to
endorse an interpretation of the footnote that was devoid of any textual basis.
207 The limits to the
principle of effectiveness had been observed in GATT and WTO jurisprudence 208: insertions in
schedules had repeatedly been declared invalid even though they could have been "interpreted" in a
way that gave them legal effect. The Complainants considered that the av ailable jurisprudence was
sound because panels and the Appellate Body coul d not second-guess negotiators and correct their
omissions. By contrast, there was nothing in the ruling of the Appellate Body cited by the European
Communities to suggest that the principle of effectiveness required panels to go beyond the treaty
language.
 209 Further, an acceptance of the European Communities' effectiven ess argument would
produce, in the Complainants' view, a completely one-sided result bearing no relationship with the
result that reciprocity negotiations would have produced, as the European Communities would
achieve unilaterally in its Schedule what coul d have been achieved only through a negotiated
amendment of the Agreement on Agriculture . The Complainants drew an analogy with Annex 5 of
the Agreement on Agriculture , as in paragraph 4.211, and argued that, if the European Communities
had really wanted to negotiate a similar exemp tion for ACP/India equivalent sugar from its export
subsidy reductions commitments, it could have endeavoured to negotiate with the WTO membership
for a framework210 that could accommodate such a result, making counter-concessions, accepting time
bound limitations, and any conditions safeguarding the interests of other sugar exporters. For reasons
of its own, the European Communities had chosen not to negotiate such an exemption, but had
inserted unilaterally a statement in its Schedule pur porting to exempt it from its obligations under the
Agreement on Agriculture . The Complainants contended that the European Communities was now
requesting the Panel to rule that this unilateral ex emption had the same legal effect as the negotiated
exemptions in the Agreement on Agriculture.

207 R. Jennings and A. Watts (eds.), Oppenheim's International Law, 90th ed. (Longman, 1992), Vol. I,
p. 1281.
208 GATT Panel Report on US – Sugar , para. 5.3; Appellate Body Report on EC – Bananas III ,
paras. 153-158; Appellate Body Report on EC – Poultry, para. 98.
209 Appellate Body Report on Canada – Dairy, para. 134. In that instance, the Appellate Body had
concluded that the particular language contained in Canada's Schedule was not descriptive but defined the scope
of Canada's concession.
210 Thailand noted that no such framework existed, as the Modalities Paper did not permit any
exemptions from export subsidy reduction commitments.

4.197 Thailand also referred to the principle of " contra proferentem " to argue that the European
Communities prepared, and inserted, the foot note in its Schedule for its own benefit. 211 Thailand
explained that, unlike tariff concessions which were inserted in the schedules after a negotiated and
reciprocal exchange of concessions, the export subsidy reductions commitments were inserted in the
schedules unilaterally and their consistency with the guidelines set out in the Modalities Paper was
checked in the verification process. Thus, even if the factual statement about the amount of past
subsidized exports were "interpreted" to constitute a commitment to observe a ceiling on the future
subsidization of those exports, that meaning woul d not be the preferred meaning according to the
"contra proferentem " principle. Thailand held that this principle was a fortiori applicable if the
meaning that was least to the advantage of the party which prepared or proposed the provision was the
meaning which that party had cons istently acknowledged in the past. In this regard, the European
Communities' present position was inconsistent with its prior statements as well as its prior practice.
4.198 The Complainants took issue with the inconsis tency between the interpretation now advanced
by the European Communities and its prior stat ements before the Committee on Agriculture. 212
Before this Panel, the European Communities had stated that "[t]he EC has subjected all subsidies on
sugar to reduction commitments"213, "[i]t is quite clear that export subsidies which the EC provides to
sugar have been subject to reduction commitmen ts in accordance with Article 9.1", and in
paragraph 4.222, the European Communities asserted that it could not distinguish between different
types of sugar. However, the European Communitie s also argued that its commitment with respect to
the ACP/India "equivalent" sugar was a "ceiling", not a "reduction commitment." To the extent that
the European Communities argued that the 1.6 million tons of ACP/India "equivalent" sugar must be
added to the European Communities' actual reduc tion commitments, then the European Communities'
overall reduction of sugar subsidies was inconsistent with Article 9.2(b)(iv).
4.199 The European Communities' present position was al so inconsistent with its practice of not
notifying export subsidies of ACP/India equivalent sugar. If the European Communities had been of
the view that it had assumed export reduction commitm ents in respect of sugar of ACP and Indian
origin, it would have provided statistics on the export of such sugar in its notifications. 214 Assuming
that the interpretation submitted by the European Communities were correct, and that, as stated, it had
sought to ensure compliance with its commitments under the WTO, the Compla inants sustained that
the European Communities had in fact failed to respect those commitments when it invoked the
flexibility of Article 9.2(b) in marketing year s 1997-1998 and 1998-1999. The Complainants noted
that the European Communities had not attempted to reconcile its assertions before the Committee on
Agriculture with the claims it now submitted to the Panel, explaining why it did not notify the exports
of sugar that it claimed to be covered by its reduction commitmen ts, clarifying how it could have
observed the requirements of Article 9.2(b) dur ing the implementation period even if its re-
interpretation were correct. The Complainants noted that the European Communities had not

211 R. Jennings and A. Watts (eds.), Oppenheim's International Law, 90th ed. (Longman, 1992), Vol. I,
p. 1279. Thailand noted that this principle was a supplementary means of interpretation recognized in
international law, according to which, if two meanings are admissible, the meaning should be preferred "which
is least to the advantage of the party which prepared or proposed the provision, or for whose benefit it was
inserted in the treaty.".
212 Exhibit COMP-21, G/AG/R/17, p. 29: "As indicated in footnote 1 of the table on export subsidies
contained in Part IV, Section II of Schedule CXL, the EC is not undertaking any reduction commitment on
exports of ACP or Indian sugar. Consequently, any financial assistance is not reported to the WTO. For
information, these exports amount to approximately 1.6 million tonnes per year."; see also G/AG/R/15, p. 59:
"exports of ACP and India sugar are eligible to receive export refunds. As mentioned in the EC's Schedule no
reduction commitment is made on this category of sugar."
213 European Communities' oral statement at the first substantive meeting of the Panel, para. 31.
214 Exhibit COMP-17 (statement included in the notifications indicating that the EC is not notifying the
export subsidies granted to sugar of ACP and Indian origin); G/AG/R/34 pp. 3-4; G/AG/R/35 pp. 30. See also
footnote 211 above.

submitted any notifications to the Committee on Ag riculture relating to the export of ACP/India
equivalent sugar and indeed had refused to provide this informa tion, notably when requested by
Australia.
4.200 In this context, the Complainants underlined th e approach adopted by the Appellate Body in
Korea – Various Measures on Beef in reaching a conclusion on the interpretation of Korea's Schedule,
"after examining Korea's subsequent statements before the Committee on Agriculture and Korea's
annual notifications to that Committee."
215 In their view, this implied that, in interpreting a
commitment assumed by a Member under the Agreement on Agriculture, a panel could also take into
account the interpretation of that commitment advan ced by the Member in statements before the
Committee on Agriculture or implied in its notifi cations to that Committee. The Complainants
suggested that the Panel rely also, in the pr esent case, on the European Communities' statements
before the Committee on Agriculture, and its annu al notifications, as a supplementary means of
interpretation.
4.201 The Complainants thus considered that the Panel needed to determine the proper
interpretation of the footnote and its implications fo r the resolution of the present dispute. However,
independently of how it was interp reted, the footnote could not have the legal effect of exempting
export refunds granted to ACP and India equi valent sugar from reduction commitments. Any
interpretations would ultimately lead to the same legal result, namely that the export refunds granted
to ACP/India equivalent sugar were inconsistent with the Agreement on Agriculture and the
SCM Agreement. The Complainants sustained that, if the Panel concluded that the footnote purported
to exempt exports of sugar of ACP or Indian or igin from the European Communities' export subsidy
reduction commitments, then the Panel would have to declare the footnote without legal effect
because it diminished the European Communities' obligations under Articles 3.3 and 9 of the
Agreement on Agriculture.
4.202 Thailand noted that, in the alternative, the Panel may conclude that the footnote indicates that
"sugar of ACP or Indian origin" was not to be considered a scheduled product for the purposes of
analysing the European Communities' commitments. This interpretation could be based on the fact
that the footnote qualified the entry "sugar" in the EC 's Schedule. As such it indicated that the term
"sugar" "does not include" the quantity of sugar specified in the footnote. If this included "sugar of
EC origin of a quantity equivalent to the sugar imported from the ACP countries or India" then it
followed that this ACP/India equivalent sugar w as not included in the EC's Schedule (assuming such
a division could be made under the Agreement on Agriculture. For these reasons, the footnote could
also be interpreted to remove this sugar from the EC's Schedule altogether. Thailand noted that this
interpretation would be based on the terms of the f ootnote and would give legal effect to it. Under
Article 3.3 of the Agreement on Agriculture , export subsides listed in Ar ticle 9.1 of the Agreement
may not be granted to an unscheduled agricultural product. If the footnote was interpreted to remove
ACP/India equivalent sugar from the EC's Schedule, export subsidies could not be granted on that
sugar at all. Therefore even on this interp retation, Thailand contended that the European
Communities would be exceeding its export subsidy reduction commitments for sugar.
4.203 Recalling their reasoning in paragraphs 4.181–4.186, the Complainants countered that the
European Communities' interpretation of the footno te conflicted with the di stinct requirements under
the Agreement on Agriculture. Also, there should be no conflict be tween Article 3.3 and Article 8. If
the "commitments as specified" in a Member's Schedule did not conform to the Agreement on
Agriculture, then the Member was not in compliance with the first prong of Article 8. Thus, Article 8
incorporated, in their view, the principle of the US – Sugar Waiver
216 and EC – Bananas III217 into the

215 Appellate Body Report on Korea – Various Measures on Beef, paras. 103-105.
216 GATT Panel Report on US – Sugar Waiver, paras. 5.2-5.3.
217 Appellate Body Report on EC – Bananas III, paras. 153-158.

Agreement on Agriculture, in that it required that Schedules and any footnotes therein conform to the
Agreement, and did not diminish the European Co mmunities' obligations under that Agreement. If
the conflict could not be resolved by way of interpretation through Articles 31 and 32 of the Vienna
Convention, a choice had to be made in such a way that the fundamental, multilaterally negotiated
provisions prevailed over a unilaterally inserted f ootnote to a Member's Schedule. The approach
taken by the Appellate Body and panels, as outlined in paragraph 4.188, served to support this
principle. This principle was equally valid for the market access concessions and commitments for
agricultural products contained in the Schedules annexed to the GATT 1994, and was confirmed by
paragraph 3 of the Marrakesh Protocol. 218 In the Complainants' view, the footnote clearly sought to
diminish specific obligations placed upon the European Communities by Article 9.1 of the Agreement
on Agriculture. Australia underlined that the Uruguay Round schedules were prepared with the full
knowledge of the US – Sugar panel report, which was adopted in June 1989. Thailand noted that
under Article 3.1 of the Agreement on Agricult ure the "domestic support and export subsidy
commitments" contained in Part IV of a Member's Schedule of Commitments are made an integral
part of the GATT 1994. Therefore, the footnote becomes an integral part of the GATT 1994 only to
the extent that it constitutes an "export subsidy co mmitment". For the reasons given above, however,
the footnote does not express an export subsidy reduction commitment.
4.204 The European Communities sustained that its interpretation of the footnote was consistent
with its wording. Further, the Eu ropean Communities had consistently interpreted the footnote in the
same manner since 1995, based on the application of the Vienna Convention rules of interpretation.
The legal effect of the first sentence was to announce that the European Communities had not
included, in the base data on which it would apply the percentage reductions set out in the Modalities
Paper, ACP/India equivalent sugar. In so doi ng, the European Communities had transferred this
portion of its exports from the part of its commitments articulated in the table 219, to the part of its
commitments articulated in the footnote. The fi rst sentence stated that the European Communities
was not taking reduction commitments on ACP/India equivalent sugar, meaning that the European
Communities did not reduce, in annual instalments, th e level of export subsidies on that portion of its
exports. The first sentence therefore had legal effe ct, in the European Communities' view. However,
this did not mean that the European Communities had not undertaken to limit subsidization, or that the
European Communities did not make reduction commit ments, or that the European Communities had
not reduced the maximum scheduled export subsidies on an annual basis in its schedule.
4.205 While the European Communities agreed that the second senten ce was a factual statement, it
disagreed with the view that it contained no normative term expressing a commitment. Rather, it
needed to be interpreted in its context. In this regard, the European Communities regarded two
elements as being relevant context: the EC's Sche dule of export subsidy commitments, to which the
footnote was attached, and which contained several factual statements with, what the European
Communities held was normative effect; and the first sentence of the footnote. Because the European
Communities was not subjecting that portion of its ex ports to the coefficients set out in the Modalities
Paper, the European Communities considered that it did not have to schedule the diminishing
commitment levels, but rather that it was enough to set out the commitment level within which the
European Communities was to limit the volume of exports subsidized. The European Communities
sustained that the second sentence set a limit in th e same way as base periods for all other products.
However, while other base periods were the st arting point from which the maximum level of

218 Appellate Body Report on EC – Bananas III, para. 154.
219 The European Communities indicated that in that table it had set out figures representing the base
period levels, which provided the basis from which the limited authorization to provide export subsidies was
subjected to gradual reduction. The second sentence of the footnote was intended to have an "equivalent" effect,
i.e., to establish the European Communities' commitment level in respect of the separately articulated
commitment on ACP/India "equivalent" sugar.

subsidized exports was reduced, this base was not to be reduced, and was th erefore to act as a fixed
ceiling.
4.206 Turning to the Complainants' contentions regarding the absence of budgetary outlay
commitment in the footnote, the European Commun ities sustained that Article 3.3 incorporated the
export subsidy commitments into the GATT, but di d not prescribe any form for such commitments.
Since the European Communities cons idered that it had respected the commitments it had undertaken
to limit subsidization on A/B sugar and ACP/India e quivalent sugar, it had ac ted consistently with
Article 3.1. Moreover, since the European Communities had not provided export subsidies in excess
of the commitment levels set out in its schedule, it ha d acted consistently with Article 3.3. Here, the
European Communities recalled the operation of its commitments on exports of A/B sugar as
imposing a de facto budgetary limit. Moreover, in the European Communities' opinion, Article 3.3 did
not impose an obligation to have both a budgetary outlay and a quantity commitment level, but merely
referred to the "commitment levels specified ther ein". Article 3.3 only set out the obligation to
provide Article 9.1 listed subsidies in conformity with the commitments specified in a Member's
schedule. The obligation to schedule both types of commitments was only set out in the paragraph 11
of the Modalities Paper, of which, the European Communities recalled, the footnote was a negotiated
departure.
4.207 The European Communities also submitted that participants in the Uruguay Round could
negotiate departures from the reduction formulae agreed in the Modalities Paper, and that the footnote
constituted one such departure. The European Co mmunities contended that in the absence of any
express indication to that effect, such departures could not be presumed. Consequently, it could not be
assumed that, without having being requested to do so by any other Member, the European
Communities undertook voluntarily reduction commitmen ts well in excess of those agreed as part of
the Modalities Paper. In this context, the Eur opean Communities argued that it was not alone in
negotiating such departures. New Zealand did not sp ecify any quantitative limits in its schedule, and
only scheduled reductions in budgetary outlays.
220 Australia had sub-divided the category "other milk
products" into two categories, fats and solid non-fats (which were not listed in the Modalities Paper),
specifying separate quantity commit ments, while indicating a budgetary outlay commitment only on
the general product.221 The European Communities alleged that there was nothing to distinguish such
commitments from the footnote. The European Communities also submitted that the Modalities
Paper explicitly foresaw that it might not be possi ble to schedule quantitative limitations, particularly
in respect of incorporated products. As for the f ootnote, only one set of commitments was scheduled
for these products. Since, in the European Co mmunities' view, the Complainants had failed to
establish that the footnote was inconsistent with the Agreement on Agriculture , consequently, the
footnote itself could not be regarded as inconsistent with Article 8. With respect to Article 9.1, the
European Communities recalled that, because it did not wish to reduce its commitment levels for
sugar, it had negotiated a departure from the Modaliti es Paper in its Schedule, in the form of the
footnote. The European Communities considered , however, that it had subjected the maximum
amount of export subsidies it granted to exports of sugar to reduction commitments over the
implementation period, and that, consequently, it had also acted consistent ly with Article 9.1.
Concerning Article 9.2(b), the European Communities submitted that it was not before the Panel, and
had lapsed (see Section B.1, Terms of reference). It was therefore irrelevant to the matter before the
Panel.
4.208 The European Communities challenged Thailand's invocation of the principle of contra
proferentem, arguing that this principle had seldom been referred to in international law instances

220 See Part IV, Section II of New Zealand's Schedule (XIII).
221 See Part IV, Section II of Australia's Schedule (I).

since the early 1930s222, due to its imprecise nature and scope. That principle could not be used in the
present case since, in particular, doubts had been cast on it. 223 The European Communities raised
questions as to the applicability of this principle to a multilateral treaty, and as to how it fitted into the
Vienna Convention , which was, in the European Communities' opinion, based on the principle of
good faith. The European Communities regarded the principle of in dubio mitius as more appropriate,
since it applied to treaties, had been recognized by the Appellate Body, and required that an
interpretation be preferred which impinged as little as possible on the sovereignty of Members. 224
According to the European Comm unities, in the present case, this would imply interpreting the
footnote as setting a ceiling in order to allow the European Communities to continue to provide export
subsidies on this portion of its exports.
4.209 The Complainants contended that the European Communities had drawn a number of false
analogies in support of its contention that an ex port subsidy commitment needed not contain a
budgetary outlay commitment level. First, Aust ralia's scheduling of milk products involved both
budgetary outlay and quantity reduction commitments, with specific quantity limits set for two sub-
groups of milk product, a form of scheduling which was expressly envisaged by paragraph 8 of Annex
8 of the Modalities Paper. On the other hand, a form of scheduling based on a quantity of the same
product was never envisaged. The specific quantity limits for the product sub-groups served to
impose tighter disciplines on quantities of "particul ar products" which might be exported than an
overall reduction limit for a group of products. Secondly, New Zealand had scheduled the elimination
of all export subsidies on all cove red products by the end of the im plementation period, and actually
eliminated the export subsidies in question in 1994/1995. New Zealand had clarified to the
Committee on Agriculture, in response to a question from the European Communities, that it had not
been possible to identify the product-specific quantiti es of subsidized exports for the base period, as
the historical taxation arrangements were non-product specific. 225 Thirdly, the European
Communities had also drawn a false analogy with the incorporated products category, which
comprised a diverse range of highly processed agricu ltural products and basic products incorporated
into the processed products. Again, paragraph 9 of Annex 8 of the Modalities Paper specifically
envisaged that the reduction commitment for incor porated products could be expressed in terms of
aggregate budgetary outlays. Moreover, the presen t case did not concern export subsides granted to
incorporated products, accordingly the form of export subsidy commitment envisaged under the
Modalities Paper for this type of subsidy was irre levant. The Complainants considered that the
European Communities' novel pro position found no support in the Agreement on Agriculture.
Article 3.3 prohibited granting s ubsidies in excess of budgetary outlay and quantity commitment
levels. Similarly, Articles 9.2(a) and 9.2(b) had been drafted on the assumption that there were both a
budgetary outlay commitment and a quantity commit ment for all scheduled agricultural products.
The Complainants submitted that, if an export subsidy commitment could take any form, these
provisions would have been drafted differently.
4.210 The Complainants held that the European Communities' contention that the footnote
represented a negotiated departure from the Modalities Paper, lacked any foundation. There was no
bargaining over the footnote, and no compensat ion elsewhere in the WTO agreements for the
departure from the European Co mmunities' commitments under the Agreement on Agriculture
allegedly contained in the footnote. Citing Korea – Various Measures on Beef, the Complainants held
that there was no official record that the terms of the footnote were specifically "agreed" to by the

222 The European Communities pointed to the reference to Oppenheim's International Law in
footnote 58 to Thailand's second written submission; and McNair.
223 See Chitty on Contracts, General Principles , 27th Edition, Sweet & Maxwell, London (1994)
12-071 et seq. The European Communities noted that few of the cases cited in Chitty dated from after the
19th Century.
224 Appellate Body Report on EC – Hormones, footnote 154.
225 G/AG/R/2 and G/AG/R/3.

Complainants, or any other WTO Member, prior to the completion of the Uruguay Round, and there
was no record of the nature of the compensation received. Also, by contrast with Korea – Various
Measures on Beef, there was no ambiguity over the ordinary meaning of the European Communities'
footnote. Resorting to negotiating history, or to the Modalities Paper, as suggested by the European
Communities in paragraph 4.193 would therefore serve no purpose.
4.211 Moreover, the Complainants noted that the Eu ropean Communities did not cite the relevant
provision of the Modalities Paper that would have permitted it to adopt a lesser obligation than that
expressed in the language of para graphs 11 and 12 of that text.
226 In their view, the reduction
commitments were multilateral in nature and did not constitute negotiated concessions. Unlike the
market access commitments, they were "self-contained" in regard to the balance of concessions, since
they were not made contingent on concessions in other areas of the agriculture negotiations. 227
Paragraph 7, in particular, did not lend support to the notion that "ACP/India equivalent" sugar might
be distinguished from other quota sugar within a quantitative category. Further, there was no
provision in the Agreement on Agriculture which provided for lesser reduction commitments for
developed WTO Members in respect of any product or sub-category of a product. In the export
competition area, there was no multilateral c over, comparable to Annex 5 of the Agreement on
Agriculture, which was negotiated, and paid for, by additional undertakings, in the market access area.
4.212 The European Communities dismissed the allusion to Annex 5 of the Agreement on
Agriculture as an example of a negotiated exemption as irrelevant. While the footnote was a
departure from the Modalities Paper, it was not a departure from the Agreement on Agriculture .
Annex 5, by contrast, constituted a departure from the Agreement on Agriculture . Further, Annex 5
provided an exemption to the Agreement on Agriculture which had been open to all WTO Members,
whereas the footnote was a negotiated departure from the Modalities Paper specific to one Member.
The European Communities found it therefore logical that a general exemption appeared in the
Agreement, and that specifically negotiated treatment should appear in the schedule of the Member
concerned. The European Communities suggested that the Members who utilized Annex 5 had "paid"
for it in exactly the same way that the European Communities had "paid" for the footnote, i.e. in the
general balance of rights and obligations negotiated in the Uruguay Round.
4.213 In response to the Complainants' analysis summarized in paragraphs 4.181–4.187, the
European Communities submitted that the conclusion regarding the consistency of the footnote with
the Agreement on Agriculture could be reached without creating a conflict between the provisions of
the footnote, or those of the Agreement on Agriculture, as alleged by the Complainants. According to
the European Communities, the Panel was not obliged to declare the footnote, which was part of a
validly concluded treaty, invalid. The Europ ean Communities noted that under general public
international law, one part of a treaty could rarely re nder another part of the same treaty without legal
effect. The WTO Agreement specifically recognized such a possibility: (a) the general interpretative
note to Annex 1A established a hierarchy between the other Annex 1A Agre ements and GATT 1994;
(b) Article XVI.3 of the WTO Agreement established a hierarchy between the WTO Agreement and
the Annex IA Agreements; (c) Article 1.2 of the DSU had a similar logic. Further, the US – Sugar
Waiver case established that, on the basis of the specific wording of Article II.1 of the GATT 1947, its
object and purpose, a GATT Contracting Party coul d not derogate, in its schedule, from other
obligations. The European Comm unities expressed doubt whether that case-law could be transposed
to Article 3 of the Agreement on Agriculture , since the panel had largely based its reasoning on the
terms of Article II.1 of the GATT 1947, involving market access "concessions", as compared to
export subsidy "commi tments". The European Communities al so questioned the basis on which the

226 Exhibit COMP-19.
227 The Complainants pointed out that, in the export competition section of the paper, there were no
counterpart provisions to paragraph 6 dealing with expansion of current access, which allowed for due account
to be taken of reduction commitments in the export competition area.

Complainants would have the Panel derogate from some of the fundamental principles of international
law. The European Communities believed that the Pa nel would not, in any event, need to address this
issue because, when properly interp reted, the footnote could not be considered to conflict with the
Agreement on Agriculture.
3. Application of the footnote to "ACP/India equivalent sugar"
4.214 The Complainants submitted that the terms of the reservation made by the European
Communities in its Schedule of Concession did not c over ACP/India equivalent sugar. By failing to
comply with the text of the footnote, the Eur opean Communities was acting inconsistently with
Articles 3.3, 8 and 9.1 of the Agreement on Agriculture. A finding that the terms of the footnote did
not cover the subsidies at issue would not ensure a fully satisfactory resolution of the dispute. The
issues arising from the terms of the footnote were subsidiary issues that the Panel should address only
if it were to conclude that the footnote was legally valid.
4.215 Referring to the European Communities' contention that the footnote excluded from the scope
of its reduction commitment a quantity of sugar that was merely equivalent to the quantity of sugar
that it imported from ACP countries and India 228, the Complainants submitted that the terms of the
footnote applied exclusively to exports of "sugar of ACP and Indian origin". The footnote thus
contemplated exclusively the re-export of sugar of ACP or Indian origin. In this respect, the
Complainants noted the European Communities' explanations to the effect that it could not distinguish
whether the exported white sugar was produced from the same raw sugar that was imported and that
there were no dedicated facilities for refining this imported sugar. In the Complainants' view, it was
thus clear that the exported sugar was not pro cessed from the imported raw sugar. Moreover, the
footnote did not mention, and could not be interpre ted to cover, "equivalent " exports. Thus, even if
the Panel were to find that Members could exem pt themselves from their obligations under the
Agreement on Agriculture by inserting footnotes in their Schedules of Concessions, the Panel would
have to conclude that the footnote inserted by the European Communities did not exempt it from
those obligations in respect of quantities of sugar equivalent to sugar of ACP and Indian origin.
4.216 The European Communities replied that this issue constituted a separate claim which had
not been properly stated in the panel requests (see Section IV.B above, Terms of reference). As part
of its argumentation on good faith, the European Communities submitted that the footnote covered
refunds on exports equivalent to imports and that th e Complainants were aware of this fact during the
Uruguay Round.
4.217 The European Communities sustaine d that it was well known to all parties, at the time of the
conclusion of the WTO Agreement, that the Eur opean Communities did not grant export refunds only
on the re-export of sugar originally of ACP and Indi an origin, but to a quant ity equivalent to such
exports.
229 According to the European Communities, this was reflected in the drafting of the footnote
which referred to the "average of export" as be ing 1.6 million tonnes. The European Communities
argued that this was a reference to exports which were not ACP/India raw sugar imported, refined,
and subsequently exported, but rather the equiva lent quantity of ACP/India sugar that had been
imported. The European Communities sustained that the term "export" in "average of export" had the
same meaning as "exports" in the first sentence. In the European Communities' view, the footnote

228 Exhibit COMP-1, (2001/C 50/01) pp. 23-24, 27 and 29; Exhibit COMP-21.
229 Report of the Working Party on European Communities – Refunds on Exports of Sugar , adopted on
10 March 1981, BISD 28S/80, para. 35: "As was well known, the EEC imported 1.4 million tons per year or
ACP raw sugar at guaranteed prices and exported an equivalent amount of white sugar." The European
Communities submitted that both Australia and Brazil participated in the Working Party, and that Australia was
clearly aware of the fact that not all imports of ACP/India were re-exported. In para. 34 of the Working Party
report, it is noted that: "The representative of Australia also stated that most ACP sugar went to the United
Kingdom market and was refined and consumed there."

therefore covered refunds on exports equivalent to imports. Second, the European Communities had
made its intentions clear in two letters, when s ubmitting draft schedules and associated documents to
the negotiating group
230, reiterating its objective to have the f ootnote adopted by the other negotiating
parties. Since the footnote was adopted as propo sed, the European Communities submitted that these
cover letters were equally relevant in establishing the meaning of the footnote, i.e. that it covered
exports "corresponding" to imports.
4.218 The Complainants reaffirmed that the scope of appli cation of the footnote was a subsidiary
argument supporting their legal claim that the European Communities was exceeding its export
subsidy reduction commitments. They sustained that the words "ACP and Indian origin" needed to be
interpreted in accordance with the ordinary meanin g of "origin" to mean sugar that came from the
ACP countries or India. They registered the Eur opean Communities' recognition, in paragraph 4.217,
that it exported an amount of sugar "equivalent" to the amount it imported from ACP countries and
India, and that may actually be of domestic origin.
 They noted, however, that the amount of sugar
exported was not equivalent to the amount of sugar imported under the preferential arrangements 231,
but was set at an arbitrary limit based on preferenti al imports plus, presumably, Special Preferential
Sugar (SPS), despite the fact that SPS was not e ligible for export refunds. Even assuming that the
footnote was a legitimate derogation from the Agreement on Agriculture, the Complainants argued
that the export of an "equivalent" amount of EC sugar was not what was provided for.
4.219 Thailand highlighted a discrepancy in the ar guments presented by the European
Communities before the Committee on Agriculture 232, where the European Communities had
confirmed that export subsidies were granted only to processed sugar obtained from ACP and Indian
sugar, and its standpoint in paragraph 4.217 wher e the European Communities interpreted the
footnote as applying to sugar of EC origin that was "equivalent" to s ugar imported from the ACP
countries and India. Referring to the European Communities' arguments with respect to
circumstances supposedly "well-known" to th e participants in paragraph 4.217, the Complainants
considered that what was at issue was treaty text. The arguments presented by the European
Communities were not based on an analysis of the term s of the treaty, considered in light of context
and the object and purpose. The cover letters cited by the European Communities did not
unambiguously support its interpretation, as the letters did not refer to "sugar of EC origin", but rather
to sugar that "corresponds" to imports from ACP countries and India. According to the Complainants,
this phrase could refer to sugar refined from ra w sugar imported from the ACP countries and India
rather than EC quota sugar.
4.220 The European Communities recalled its argumentation that this claim was not within the
Panel's terms of reference. Howe ver, should the Panel find that the question of interpretation of the
terms of the footnote fell within its terms of reference, the footnote should be interpreted as permitting
the export of a volume of subsidized exports "equivalent" to the volume of imports of ACP and Indian
origin. Referring to its explanations relating to th e interpretation of the footnote, and those relating to
the consistency with the Agreement on Agriculture , the European Communities reiterated that the
figure represented by the word "export" in the second sentence of the footnote did not, in the
knowledge of all Members, refer to re-export of ACP or Indian s ugar, but rather to an amount
"equivalent" to the total volume of imports from those countries. To the extent that recourse to
supplementary means of interpretation may be of assistance, the European Communities submitted
that the preparatory work, and the circumstance s of conclusion, confirmed that the European
Communities' interpretation was the meaning intend ed by the parties. The European Communities
had already noted that in the letters transmitting the draft schedule to th e GATT Secretariat, the

230 Exhibit EC-5 and Exhibit EC-6.
231 Article 35 of Council Regulation No. 1260/2001.
232 G/AG/R/15, p. 59.

European Communities had made it clear that it c onsidered that the footnote covered a volume of
exports corresponding to the volume of imports from ACP countries and India.
4.221 The European Communities confirmed that it gr anted export subsidies on exports of sugar
"equivalent" to the amount of imports which could be imported from ACP countries and India, up to a
maximum of 1.6 million tonnes, although both the import entitlement and the actual imports were
frequently substantially more than 1.6 million tonnes. 233 Where the amount of import entitlement was
lower than 1.6 million tonnes, that amount opera ted as the ceiling. The European Communities
submitted statistical data in support of the view that it considered and treated the 1.6 million tonnes as
a cap on the amount of exports which could benefi t from export subsidies as ACP/India equivalent
sugar. 234
4.222 Under Regulation No. 1260/2001, the European Communities continued, the competent
authorities were authorized to grant export refunds only to the extent that there was a difference
between world market and Community prices. They could not distinguish between different "types"
of sugar. The European Communities authorities had limited control over the evolution of the amount
of individual refunds. The Commission verified on a weekly basis that the export refunds granted
remained within the limits set out in the WTO Agreement, by way of a control sheet
235 used to track
the volume of sugar for which export licences had been issued, and establishing a running total of
volume and outlays, and the average export refund. These figures were then compared to the total of
the two component limits of the European Commun ities' export subsidy commitments: its standard
commitments (1,273,500 tonnes and €499,100,000) and its ACP/India equivalent commitments
(1,600,000 tonnes and 1,600,000 multiplied by th e average export refund). Through this tender
system, the European Communities managed its export refunds in order to respect its export subsidy
commitments under the WTO.
4.223 The European Communities reaffirmed that the footnote was a negotiated commitment and
was part of the complex balance of rights and obligations set out in the WTO Agreement , the
individual agreements annexed to it, and the schedules of Members which were an integral part of the
Agreement. The European Communities continued to respect that obligation which required it to
export onto the world market. The European Commun ities sustained that since the early 1980s, it had
consistently argued that the portion of its exports "equivalent" to its imports from ACP and India
should be entitled to differential treatment. This diffe rential treatment, in its view, was articulated in
the footnote, a commitment which the European Co mmunities claimed to have negotiated, and paid
for, in the Uruguay Round negotiations, including w ith the Complainants. The footnote was also a
derogation from the Modalities Paper. The European Communities asserted that its interpretation of
the footnote was consistent with its own objectiv es and those of other WTO Members, in negotiating
the footnote. The European Communities held that the Appellate Body had made it clear that a treaty
interpreter could not lightly assume that a WT O Member projected no demonstrable purpose on a
specific provision.
236
4.224 The European Communities considered that Au stralia, in the documents it had submitted to
the Panel, had admitted that it shared the European Communities' understanding of the footnote. For
instance, the G8 "Record of discussion" eviden ced Australia's understanding of the European
Communities' intention to reduce only that porti on of its export subsidies corresponding to "net

233 Note by the EC: under the ACP Sugar Protocol, the EC-India Agreement on sugar and as special
preferential sugar. Fluctuations are typically brought about by changes to the amount of sugar which can be
imported as special preferential sugar.
234 Table 10 of the European Communities' first written submission.
235 Exhibit EC-16.
236 Appellate Body Report on Canada – Dairy, para. 135.

exports".
237 More explicitly in the European Commun ities' view, the Australian memorandum on
"Issues still requiring settlement" of 31 January 1 994 referred to export subsidies covered by the
footnote as those "corresponding to [the EC's] im ports of sugar from ACP countries and India". 238
Given that Australia was the only Complainant who directly negotiated the footnote with the
European Communities and was the only WTO Member (with the exception of the ACP countries and
India) who discussed the footnote with the Eu ropean Communities, the European Communities
submitted that Australia's understanding of the footno te was highly probative of the parties intentions
in adopting the footnote.
4.225 Australia contested the European Communities' a llegation that it had negotiated special
exceptions from its WTO export subsidy reduction commitments for sugar, and noted that the
European Communities could not cite any provision in the Modalities Paper – let alone any of the
WTO agreements – for what it has described as an entitlement to differential treatment, a treatment
more favourable than that accorded to developing country sugar exporters under the provisions of the
Agreement on Agriculture . There was no document signifying agreement by any participant in the
Uruguay Round that the European Communities should enjoy differential treatment. In signing on to
the Final Act embodying the results of the Ur uguay Round, the European Communities undertook to
ensure the conformity of its laws, regulations a nd administrative procedures with its obligations as
provided in the annexed Agreements to the WTO Agreement239. It also accepted the treaty obligation
that no reservations may be made in respect of any of the provisions of the Multilateral Trade
Agreements, except to the extent provided for in those Agreements 240. There was nothing in the
Agriculture or SCM Agreements that permitted the European Communities to "grandfather" pre-
existing measures inconsistent with its WTO obligati ons for sugar export subsidies. Australia further
confirmed that it had raised this inconsistenc y with the European Communities during the Uruguay
Round, pointing out that the footnote would be open to challenge.241
4. Good faith and estoppel
4.226 The European Communities submitted, in the alternative, that, should the Panel first,
disagree with the European Communities' interpretation of its commitments with respect to ACP/India
equivalent sugar and second, agree with the Complain ants that the footnote constituted an inoperative
exclusion from the European Communities' obligations under the Agreement on Agriculture , that the
Panel should nevertheless reject the Complainants' claims for the following reasons. By agreeing to
the European Communities' proposed treatment of ACP/India equivalent sugar, and bringing this
challenge subsequently, the Complainants would have the European Communities reduce the exports
provided from 1.6 million tonnes to zero, rather than 1,264,000 tonnes, as would have been the case if
the 1.6 million tonnes had been reduced by 21 per cent, effectively requiring the European
Communities to reduce the base quantity of subsidized exports by 60 per cent instead of 21 per cent.
The European Communities therefore submitted that the Complainants exercised unreasonably their
rights, were estopped from bringing this claim, acted inconsistently with the principle of good faith
and Article 3.10 of the DSU, and that they should agree to the correction of the European
Communities' scheduling commitments. The European Communities indicated that the arguments set
out with respect to C sugar applied, mutatis mutandis , to the Complainants' claims in respect of
ACP/India equivalent sugar. (See also paragraph 4.217)
4.227 The European Communities drew an analogy w ith tariff concessions, submitting that export
commitments were the subject of detailed negotiation s, and that the EC commitments represented the

237 Exhibit ALA-3.
238 Exhibit ALA-8.
239 Article XVI:4 of the WTO Agreement.
240 Article XVI:5 of the WTO Agreement.
241 Exhibit ALA-3.

negotiated balance of the varied interests of all participants in the Uruguay Round. The European
Communities submitted that, in challenging the Eur opean Communities' footno te, the Complainants
were trying to alter that balance. 242 The European Communities cons idered that it was only normal
that importing Members defined their offers (and their ensuing obligations) in terms which suited
their needs. On the other hand, exporting Members had to ensure that their corresponding rights were
described in such a manner in the Schedules of im porting Members that their export interests, as
agreed in the negotiations, were guaranteed. A ccording to the European Communities, a special
arrangement was made for this purpose in the Urugu ay Round, and a process of verification of tariff
schedules took place from 15 February through 25 Ma rch 1994, which allowed the participants to
check and control, through consultations with thei r negotiating partners, the scope and definition of
tariff concessions. The fact that Members' Sc hedules were an integral part of the GATT 1994
indicated that, while each Schedule represented the tariff commitments made by one Member, they
represented a common agreement among all Members. The European Communities held that the
claims which the Complainants made in these pr oceedings should have been raised during the
verification process, and if considered valid, the Members concerned could have negotiated a different
balance of concessions.
4.228 According to the European Communities, th e Complainants were aware, by virtue, inter alia,
of the inclusion of the footnote in the European Communities' export subsidy commitments, both in
its draft and final form, of the existence of the European Communities' intended treatment of
ACP/India equivalent sugar. The European Comm unities contended that, in 1981, the Complainants
had argued against ACP equivalent sugar being treated separately from other export refunds on
EC sugar. In 1993 and 1994, the Complainants explicitly agreed to the compartmentalized treatment
of ACP/India equivalent sugar in negotiating and concluding the WTO Agreement. The elements on
which the Complainants based thei r challenge in this dispute were in existence at the time of
conclusion of the Uruguay Round.
4.229 With respect to ACP/India equivalent sugar, the Complainants rejected the European
Communities' claim that they were estopped from br inging their complaint, and that they implicitly
agreed to the footnote in the EC's Schedule. The Complainants indicated that their rebuttal on good
faith and estoppel for C sugar (see Section IV.D.3(b) above) applied mutatis mutandis to the European
Communities' arguments on these matters for ACP/India equivalent sugar.
4.230 According to the Complainants, the European Communities had also mistakenly characterized
the scheduling of export subsidy reduction commitmen ts as being conducted on a bilateral offer and
request basis (see paragraph 4.227). Contrary to the European Communities' assertions, a WTO
Member's Schedule of bound tariff concessions was not analogous to the EC's Schedule of reduction
commitments for export subsidies for agricultura l products. While WTO Members bargained over
their tariff concessions, no similar bargaining or ne gotiation took place over the contents of reduction
commitment schedules. To the extent that any an alogy to the bargaining of tariff concessions could
be found in the Agreement on Agriculture, it was found in the reduction commitment levels provided
in Article 9.2, rather than in the individual Me mber Schedules. A WTO Member that objected to the
content of another Member's Schedule of reduc tion commitments had neither the time nor the
opportunity to negotiate further on the contents of the Schedule. The only recourse would have been
to decline to sign the WTO agreements altogether or to engage in dispute settlement after the signing
of the Uruguay Round Agreements.
4.231 The Complainants argued that the Panel could not give legal effect to a unilateral reservation
like the European Communities' footnote, without reducing the multilatera l agreement on subsidy
reduction commitments contained in the Agreement on Agriculture to a voluntary system of unilateral
concessions. The Complainants considered that this would have severe consequences for future

242 Appellate Body Report on EC – Computer Equipment, para. 109.

negotiations. The closing weeks and days of nego tiations would see a flood of footnotes qualifying
one previously negotiated commitment after another. WTO Members might never sign the
agreements, as they would see negotiated benefits eliminated by footnotes or would simply conclude
that they could not be sure what the agreements meant. According to the Complainants, dispute
settlement would soon be concerned with interpretin g treaty text in light of footnotes, and even one
footnote in light of another (see also arguments with respect to C sugar in Section IV.D.3(b) above).
F. A
RTICLE 3 OF THE SCM AGREEMENT
4.232 The Complainants submitted that the export subsidies granted in respect of exports of quota
sugar243, ACP/India equivalent sugar and C suga r were prohibited subsidies under the
SCM Agreement. More specifically, the Complainants claimed that the EC sugar regime provided
subsidies that amounted to an export subsidy listed in Item (d) of the Illustrative List of Export
Subsidies in Annex I of the SCM Agreement (see Section IV.D.2(a) above) and that the export refund
on exports of quota sugar and ACP/I ndia equivalent sugar amounted to an export subsidy listed in
Item (a) of the same Illustrative List. As such , the European Communities' export subsidies were
prohibited under Article 3.1(a) of the SCM Agreement, and by maintaining and granting prohibited
export subsidies, the European Comm unities violated Article 3.2 of the SCM Agreement.
Furthermore, Australia and Brazil claimed that the EC sugar regime was also otherwise inconsistent
with Article 3.2 of the SCM Agreement.
4.233 The European Communities argued that the SCM Agreement was not applicable to
agricultural products, in casu , sugar. It pointed to, inter alia , Article 21.1 of the Agreement on
Agriculture and claimed that this provision had been interpreted by the Appellate Body as meaning
that the other Annex IA Agreements ap plied "except to the extent that the Agreement on Agriculture
contains specific provisions dealing specifically with the same matter." 244 The European Communities
contended that it was clear that the Agreement on Agriculture contained specific provisions dealing
specifically with the "same matter". For example, it cited the fact that Articles 3, 8, 9, 10 and 11 of the
Agreement on Agriculture set out detailed rules on the provision of export subsidies, thereby
permitted them up to a certain level. Specific rules were also set out on the type of subsidies which
could be granted, and specific mechanisms were defined on how to deal with possible cases of
circumvention. For the Eur opean Communities, applying the SCM Agreement to agricultural export
subsidies (even those granted inconsistently with the Agreement on Agriculture ), and specifically the
prohibition on export subsidies, would undermine the specificity of the agricultural regime, and the
gradual process of reform which all Members signed up to.
4.234 The Complainants interpreted Article 21.1 of the Agreement on Agriculture to mean that the
Agreement on Agriculture and the SCM Agreement applied cumulatively to measures affecting
agricultural products. For them, the chapeau to Article 3 of the SCM Agreement, read together with
Article 21.1 of the Agreement on Agriculture , set out a special exception for those export subsidies
provided in conformity with the Agreement on Agriculture , that is: (a) Article 9.1 listed export
subsidies subjected to reduction commitments; (b ) Article 9.1 listed export subsidies on scheduled
products that were not in excess of the budgetary outlay and quantity commitments specified in the
Schedule; and (c) fulfilment of the individual undertakings of each Member in accordance with
Article 8 of that Agreement. In the view of the Complainants, the Agreement on Agriculture did not
constitute a lex specialis in regard to agricultural products or to measures applied to agricultural
products, whether subsidies or any other obligation subject to WTO disciplines. The Agreement on
Agriculture and the SCM Agreement were separate treaties, creating separate rights and obligations,

243 In this section of the Panel report, it should be noted that Australia's claims under the SCM
Agreement do not involve all quota sugar, rather the "ACP/India equivalent" component of the A and B quota
sugar.
244 Appellate Body Report on EC – Bananas III, para. 155.

and providing for different remedies. A measure c ould be inconsistent with one agreement but not
with the other, or it could be inconsistent with bot h. A finding that a measure was inconsistent with
both, however, would require proof of different elements.
4.235 In this respect, the Comp lainants referred to the US-FSC panels and Appellate Body reports
which analysed export subsidies granted to agricultural products under both the SCM Agreement and
the Agreement on Agriculture . For the Complainants, the relevant provisions of the SCM and the
Agreement on Agriculture needed to be read in context and needed to give meaning to the intent of the
negotiators to integrate – at least partially – agricultural export subsidies into the SCM Agreement.
Here, the Appellate Body had examined the challenged measures under both the Agreement on
Agriculture and the SCM Agreement, without any suggestion that to do so in any way undermined
Article 21.1 of the Agreement on Agriculture.245 The Appellate Body, in both the original proceedings
and the recourse to Article 21.5, found that the s ubsidies in that case were not only prohibited export
subsidies under Article 3.1(a) and 3.2 of the SCM Agreement but also inconsistent with the export
subsidy obligations under Articles 3.3, 8 and 10.1 of the Agreement on Agriculture.246
4.236 The Complainants also cited Article 3.1 of the SCM Agreement, which prohibited export
subsidies, "except as provided in the Agreement on Agriculture ." In Canada – Dairy , the Appellate
Body had said that this clause "indicates that the WTO-consistency of an export subsidy for
agricultural products has to be examined, in the first place, under the Agreement on Agriculture."
247 If
an examination "in the first place" of export subsidies under the Agreement on Agriculture revealed
that these subsidies were not "as provided in the Agreement on Agriculture," then an examination "in
the second place" was required under the SCM Agreement.
4.237 For the Complainants, there was no inconsiste ncy or conflict between the references in
Article 3.1 of the SCM Agreement ("except as provided in the Agreement on Agriculture") and that in
Article 21.1 of the Agreement on Agriculture (that provisions of other ag reements apply "subject to
the provisions of this Agreement"). These two pr ovisions, read together, meant that any subsidy
permitted under the Agreement on Agriculture was not subject to the disciplines of the
SCM Agreement. However, this reading did not compel or even imply the additional inference drawn
by the European Communities that subsidies not permitted under the Agreement on Agriculture were
equally not subject to the disciplines of the SCM Agreement. Nothing in the text or, indeed, the object
and purpose, of either provision supported such a br oad reading of the two provisions. The European
Communities' interpretation of th e relationship between these agreem ents and the limited scope of
application of the SCM Agreement in respect of export subsidies granted to agricultural products
could not be reconciled with the plain wording of the provisions regulating this matter. The meaning
of the terms in the SCM Agreement was unambiguous: "except" where the Agreement on Agriculture
provides otherwise, the disciplines set out in Article 3 of the SCM Agreement apply to subsidies on
agricultural products.
4.238 The European Communities, in response to the Complainants arguments in paragraph 4.235
in relation to the US – FSC dispute submitted that neither the panel nor the Appellate Body had found
that the SCM Agreement applied to agricultural products. The panel had found that the FSC scheme
was inconsistent with the SCM Agreement, "except as provided in the Agreement on Agriculture ".248
The panel, however, did not make a finding that, b ecause the FSC scheme was inconsistent with the
Agreement on Agriculture , it was subject to and inconsistent with the SCM Agreement as far as

245 Appellate Body Report on US – FSC (Article 21.5 – EC), paras. 256-257.
246 Appellate Body Report on US – FSC, paras. 177(a) and (d). See also Appellate Body Report on US
– FSC (Article 21.5 – EC), paras. 256(b) and (d).
247 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US), para. 123
(emphasis added).
248 Panel Report on US – FSC, paras. 7.130 and 8.1.

agricultural products were concerned. Furtherm ore, the panel considered it necessary to make
separate recommendations under the SCM Agreement and the Agreement of Agriculture .
249 T h i s
suggested that the panel considered that the Agreement on Agriculture excluded the applicability of
the SCM Agreement with respect to agricultural products. In determining the level of countermeasures
under Article 4.10 of the SCM Agreement in the Article 22.6 arbitration in the FSC dispute, the
European Communities continued, the Arbitrators took the view that an amount corresponding to the
value of the subsidy to agri cultural goods should be deducted. 250 The panel clearly understood,
therefore, the SCM Agreement as not being applicable to expor t subsidies granted on agricultural
goods.
4.239 The European Communities also noted that there were significant factual differences between
the schemes at issue in the FSC dispute and th e present dispute, which explained why the Agreement
on Agriculture and the SCM Agreement applied concurrently in the FSC dispute, but did not apply
cumulatively, as the Complainants woul d have it in the current dispute 251. As a consequence, the
application of the two agreements concurrently in the FSC dispute, did not mean that the two
agreements could be applied cumulatively in the present dispute.
4.240 The Complainants responded that this interpreta tion was not supported by WTO
jurisprudence and would serve to void the rele vant provisions of the Agriculture and SCM
Agreements of any meaning. The Complain ants reiterated that Article 3.1 of the SCM Agreement
("Except as provided in the Agreement on Agriculture ...") and Article 21 of the Agreement on
Agriculture ("The provisions of GATT 1994 and of [other covered Agreements] shall apply subject to
the provisions of this Agreement") were straightforwardly consistent and complementary. If a subsidy
was permitted or exempted from action under the Agreement on Agriculture, the SCM Agreement did
not apply to that subsidy. If a subsidy was not permitted or exempted from action under the
Agreement on Agriculture, the SCM Agreement did apply. Finally, the Complainants contended that if
the drafters of the SCM Agreement had intended that the SCM Agreement should not apply to
agricultural products at all, it would have been simp le to have inserted a provision to that effect.
However, no such provision existed. On the contra ry, for the limited timeframe of the implementation
period, the Peace Clause of the Agreement on Agriculture indicated that only those export subsidies
that fully conformed to the provisions of the Agreement on Agriculture on export subsidies were
exempted from actions under the SCM Agreement. The logical implication of this provision was that
export subsidies that did not conform fully to the Agreement on Agriculture were not exempted from
actions under the SCM Agreement.
4.241 The European Communities, referring to the Appellate Body in EC – Bananas III 252,
reiterated that the Agreement on Agriculture's provisions on export subsid ies for agricultural products
were "specific provisions dealing specifically with the same matter" as the SCM Agreement
prohibition on export subsidies. Thus, to apply the SCM Agreement to agricultural export subsidies
would undermine the specificity of the agricultura l regime, and the gradual process of reform which
all Members had accepted. It would therefore be inconsistent with the object and purpose of the
Agreement on Agriculture . This would nevertheless not rende r Article 13(c) meaningless because
Article 13 in general, and Article 13(c) in particular, were intended to provide added clarity to the

249 Ibid., paras. 8.3-8.4.
250 US – FSC (Article 22.6 – US), Table A.1.
251 According to the European Comm unities, in the FSC dispute, th e FSC scheme (and its successors)
applied concurrently to exports of both agricultural goods and non-agricultural goods. For that reason, it made
sense for the panel, and the EC as complainant, to argu e that the two Agreements applied concurrently to the
FSC scheme. In the present case; however, the CMO for sugar applied exclusively to agricultural products, and
not to any non-agricultural products. In this case, the Complainants sought to apply the Agreement on
Agriculture and the SCM Agreement not concurrently but cumulatively.
252 Appellate Body Report on EC – Bananas III, para. 155.

relationship between the two agreements during a sp ecific time-period (the nine year implementation
period for Article 13). Given the existence of Article 21.1 of the Agreement on Agriculture, the mere
existence of Article 13(c) of the Agreement on Agriculture was not dispositive of a final conclusion
on the relationship between the two agreements.
4.242 The Complainants submitted that the export subs idies granted in respect of exports of quota
sugar, ACP/India equivalent sugar and C sugar were prohibited subsidies under Article 3.1(a) of the
SCM Agreement. For the Complainants, the use of the term 'including' in Article 3.1 of the
SCM Agreement made it clear that the items listed in the Illustrative List of Export Subsidies in
Annex I of the SCM Agreement constituted subsidies contingent on export performance. Provided a
measure fell within the definitional scope of any item in the Illustrative List, it would constitute a
prohibited export subsidy for the purposes of Article 3.1 and 3.2 of the SCM Agreement. There was
no need to determine whether a measure came within the definition of a subsidy for the purposes of
Article 1.1 of that Agreement or to demonstrate export contingency, as the subsidy and contingency
elements were inherent in the definitions. This had been confirmed by WTO jurisprudence.
4.243 The European Communities agreed with the Complainants but submitted that, nevertheless,
the definition of "export subsidy" in Article 3.1 was still relevant context for interpreting the terms of
the Illustrative List.
4.244 The Complainants argued that the European Commun ities' subsidies on C sugar exports
were prohibited export subsidies within the meaning of Item (d) of the Illustrative List. (See full
description of the Complainants' arguments in rega rd to Item (d) of the Illustrative List in
Section IV.D.2(a)).
4.245 The Complainants also argued that Item (a) of the Illu strative List covered "[t]he provision
by governments of direct subsidies to a firm or an industry contingent upon export performance."
Since the European Communities' direct subsidie s to sugar exporters upon the export of A and B
quota as well as ACP/India equivalent sugar were c ontingent upon export, these subsidies were also
prohibited through the operation of Item (a) of the I llustrative List and Articles 3.1(a) and 3.2 of the
SCM Agreement.
4.246 In addition to its claims concerning Item (a) of the Illustrative List, Brazil argued that export
subsidies granted by the European Communities on the sugar exported in excess of its reduction
commitments were inconsistent with, a nd were prohibited by, Article 3 of the SCM Agreement. In
this regard, Brazil referred to Article 1.1 of the SCM Agreement which defined a subsidy as a
"financial contribution" that confers a benefit. For Brazil, exporters of A and B sugar and ACP/India
"equivalent" sugar received at least two forms of financial contributions, each of which conferred a
benefit within the meaning of Article 1.1 of the SCM Agreement. First, the payments received by
exporters of A and B sugar and of ACP/India equiva lent sugar constituted a "financial contribution"
from the European Communities in the form of a di rect transfer of funds, within the meaning of
Article 1.1(a)(1)(i) of the SCM Agreement.
4.247 Second, a financial contribution within the meaning of Article 1.1(a) of the SCM Agreement
was also made if "there was any form of income or price support in the sense of Article XVI of
GATT 1994". Article XVI:1 of GATT 1994 encompassed "any form of income or price support,
which operates directly or indirectly to increase expor ts of any product from, or to reduce imports of
any product into," the territory of a Member. The EC sugar regime did that. It increased exports of
sugar from the European Communities by subsidiz ing the production of A and B quota sugar in
excess of the amount consumed internally. These fina ncial contributions conferred a benefit on their
recipients within the meaning of Article 1.1(b) of the SCM Agreement because the recipients were, in
the words of the Appellate Body, "'better off' than they would otherwise have been."

4.248 Brazil also argued that the EC price suppor t regime permitted producers to cover a
disproportionate share of their fixed costs through guaranteed high returns on A and B quota beet and
sugar, and also generated the pr oduction of C beet and C sugar. It was therefore a financial
contribution to producers of C beet and C suga r within the meaning of Article 1.1 of the
SCM Agreement. This financial contribution permitted th em to produce and sell C beet and C sugar
below the average total cost of production, thereby benefiting those producers. Since C sugar must be
exported, and the C beet from which it was made was devoted exclusively to the production of
C sugar, the subsidies received by the producers of C beet and C sugar were contingent on exports
within the meaning of Article 3.1(a) of the SCM Agreement. These subsidies were, accordingly,
prohibited by Articles 3.1(a) and 3.2 of the SCM Agreement.
4.249 The Complainants noted that if a panel were to find the measure at issue to be inconsistent
with one of the multilateral trade agreements, such a finding normally would resolve the dispute. The
panel could therefore refrain, on grounds of judicial economy, from making a finding that the measure
was also inconsistent with another multilateral trade agreement. In the specific circumstances of this
complaint, however, this was not the case.
4.250 The Complainants, referring to the text of Article 4.7 of the SCM Agreement, noted that the
requirement to withdraw prohibited subsidies "without delay" had been interpreted by previous panels
to mean that a Member must withdraw the subsid y at issue within 90 days from the date of the
adoption of the panel report by the DSB.
253 They further noted that the Agreement on Agriculture did
not have a similar provision aimed at the prompt withdrawal of subsidies in excess of reduction
commitments. In the case of an inconsistency wi th that Agreement, only the substantially more
lenient remedies set out in Articles 19 to 22 of the DSU applied. Neverthele ss, Article 19.1 of the
DSU did not serve to prevent a panel from making a recommendation in line with the provisions of
Article 4.7 of the SCM Agreement, nor did Article 21.1 of the Agreement on Agriculture prevent a
specific recommendation in line with Article 4.7 of the SCM Agreement.
4.251 According to Article 19 of the Agreement on Agriculture , the Complainants continued, the
DSU applied to disputes under the Agreement on Agriculture . However, Article 1.2 of the DSU
specified that special rules or procedures set out in the covered agreements and listed in Appendix 2
of the DSU "shall prevail" over the general dispute se ttlement rules and procedures set out in the DSU
to the extent that "there is difference" between th e rules and procedures. According to Appendix 2 of
the DSU, Article 4.7 of the SCM Agreement was "a special or additional rule or procedure".
Furthermore, it was one which entailed differences with the rules and procedures of Articles 19 to 21
of the DSU and consequently prevails over Article 19.1 of the DSU in disputes on prohibited
subsidies. (see also paragraph 4.262 below)
4.252 A ruling under the SCM Agreement was, therefore, necessary to preserve the Complainants
procedural right to a recommendation by the DSB that export subsidies prohibited under Agreement
be withdrawn "without delay". If the Panel were to refrain from determining whether or not the
measures at issue were prohibited under the SCM Agreement, the DSB would not be in the position to
make such a decision. As a consequence, the Comp lainants would be deprived of their procedural
right under Article 4.7 of the SCM Agreement. The Complainants noted that the Appellate Body
decided in Australia-Salmon that panels should ma ke the rulings necessary "to enable the DSB to
make sufficiently precise recommendations and rulings so as to allow for prompt compliance" lest
they engage in "false judicial economy". 254 For the Complainants, the Panel would be engaging in

253 See for example, Panel Report on Canada – Aircraft Credits and Guarantees ; Panel Report on
Canada – Autos, para. 11.7; Panel Report on Canada – Aircraft, para. 10.4; Panel Report on Brazil – Aircraft,
254 Appellate Body Report on Australia – Salmon, para. 223.

false judicial economy if it were to refrain from making the substantive rulings necessary to enable
the DSB to make a recommendation to which they are legally entitled.
4.253 The Complainants clarified that they had made a claim under the SCM Agreement because
they believed that the European Communities was ac ting inconsistently with the provisions of that
Agreement and that if the European Communities w as found to be acting inconsistently, the remedy
would follow. Thus, one of the reasons for invoking the SCM Agreement was to secure all of the
rights to which the Complainants were entitled under all of the covered agreements that applied to the
facts of this dispute. To the extent that these agreements provided different remedies, the
Complainants were entitled to those different remedies.
4.254 The European Communities did not agree with the Complainants and, referring to the same
statement made by the Appellate Body in Australia – Salmon, argued that panels were required to
make rulings permitting the DSB to adopt suffici ently precise recommendations and rulings as to
allow prompt compliance. To the extent that Article 4.7 of the SCM Agreement could be read as
permitting partial withdrawal, and subsequent reinstatement of th e same subsidy measure, then a
ruling under the SCM Agreement would add nothing to the ability of the DSB to arrive at sufficiently
precise and detailed rulings and recommendations to permit prompt and full compliance.
4.255 Referring to a previous WTO panel case in which export subsidies were found to be
inconsistent with both the SCM Agreement and the Agreement on Agriculture , the Complainants
noted that the panel in that case, at the request of the European Communities, recommended, pursuant
to Article 4.7 of the SCM Agreement, that the DSB request the withdrawal of the subsidies without
delay to the extent that they were inconsistent with the SCM Agreement.255
4.256 Furthermore, Thailand submitted that the Agreement on Agriculture gave a limited and
clearly delineated authorization to Members to provi de subsidies in respect of agricultural products
that would otherwise not be permitted. Citing Article 13(c)(ii) of the Agreement on Agriculture,
Thailand contended that the logical implication of this provision was that, in respect of export
subsidies that were inconsistent with the Agreement on Agriculture , the remedies set out in the
SCM Agreement were available because it would otherwise not have been necessary to protect
Members against challenges under the SCM Agreement during the implementation period. Thus,
subsidization beyond the limits of that authorizati on, did not merit any protection from the remedies
of the SCM Agreement. Australia and Brazil supported this approach.
4.257 The European Communities assumed that the existence of a specific remedy under
Article 4.7 of the SCM Agreement was the main reason for the Co mplainants' request for a ruling
thereunder. The European Communities reiterated its position that the two agreements should not be
applied cumulatively. In its view, the difficulty to reconcile the two sets of remedies was evidence of
the fact that WTO negotiators never intended th e agricultural export subsidy regime of the Agreement
on Agriculture to apply cumulatively with the SCM Agreement. Under the Agreement on Agriculture,
a Member had a limited authorisation to provide su bsidies up to a specific ceiling, and an obligation
not to provide other subsidies in a manner which could circumvent its commitments.
4.258 The European Communities argued that a finding that exports of C sugar and ACP/India
equivalent sugar had been subsidized in excess of commitment levels would require the European
Communities, in future years, to ensure that its total subsidized exports remained within its
commitments. These would only be inconsistent with the Agreement on Agriculture if they exceeded
the commitment levels. There would be no requi rement, as such, that th e European Communities
remove subsidized exports of C sugar and the export refunds on ACP/India equivalent sugar.

255 See Panel Report on US – FSC, para. 8.8 as confirmed by the Appellate Body report, para. 231. See
also Appellate Body report, US – FSC (Article 21.5 – EC), para. 256(f).

4.259 Thus, for the European Communities, while under the Agreement on Agriculture the measure
providing the subsidy could be maintained (provi ding the relevant commit ments were respected),
under the SCM Agreement the measure providing the subsidy w ould have to be withdrawn without
delay. This would mean that, if the commitments we re exceeded at some point in a future year, the
measure would have to be withdrawn, but that the losing Member would be able to reinstate it at the
beginning of the next year. However, such a situ ation would clearly be ill-matched with the concept
of withdrawal, which implied a perm anent removal of a measure, and with the concept, in the second
sentence of Article 4.7 of the SCM Agreement, that the measure should be withdrawn within a specific
period of time. The European Communities referred to the findings of the panel in Canada – Dairy,
which concluded
256:
"In the Panel's view, it results from Articles 8 and 21.1 of the Agreement on
Agriculture and Article 3.1 of the SCM Agreement that the Panel would not be able
to recommend Canada to 'withdraw' – as interpreted by the Appellate Body –
measures constituting an export subsidy, ex clusively in respect of agricultural
products, both within the meaning of Article 9.1(c) of the Agreement on Agriculture
and Article 3.1 of the SCM Agreement. Under Articles 3.3 and 8 of the Agreement on
Agriculture, Canada has the right to provide export subsidies in respect of products
specified in its Schedule, provided that it does not exceed the budgetary outlay and
quantity commitment levels specified therei n. Accordingly, if Canada has exceeded
its quantity commitment levels, the Panel can only recommend Canada to bring its
measures into conformity with its obligations under the Agreement on Agriculture."
4.260 The European Communities submitted that this reasoning was also applicable here.
4.261 The Complainants reiterated that the recommenda tions under Article 4.7 of the
SCM Agreement differed from those under Article 19.1 of the DSU and referred to the observation of
the Appellate Body in Brazil – Aircraft:
"Article 4.7 [of the SCM Agreement] contains several elements that are different from
the provisions of Articles 19 to 21 of the DSU with respect to recommendations by a
panel and implementation of rulings and recommendations of the DSB."
257
4.262 For the Complainants, there were essentially three differences between the remedy, and the
implementation of recommendations and rulings , provided by Articles 19 to 21 of the DSU and that
provided by Article 4.7 of the SCM Agreement:
• Nature of the remedy : Under Article 19.1 of the DSU, the Panel shall recommend
that the measure at issue be brought into conformity while Article 4.7 of the SCM
Agreement required the recommendation that the prohibited subsidy be withdrawn
• Timeframe: According to Article 21.3 of the DSU, the measure at issue shall be
brought into conformity within "a reasonabl e period of time" while Article 4.7 of the
SCM Agreement required the recommendati on that the prohibited subsidy be
withdrawn "without delay".

256 Panel Report on Canada – Dairy (Article 21.5 – New Zealand and US), panel report, para. 6.99.
257 Appellate Body Report on Brazil – Aircraft , para. 191. See also Panel Report on Australia –
Automotive Leather II (Article 21.5 – US) , paras. 6.41 and 6.42 , where the panel held that "'[w]ithdraw the
subsidy' [in Article 4.7] is … different from 'bring the measure into conformity', the recommendation required
under Article 19.1 of the DSU", and therefore that "to the extent that 'withdraw the subsidy' requires some action
that was different from 'bring the measure into conformity', it was that different action which prevails".

• Procedures: According to Article 21.3(c) of the DSU, the implementation period
shall be determined by binding arbitrati on, while Article 4.7 of the SCM Agreement
assigned the task of determining the implementation period to the panel.
4.263 Of the three differences listed above, the third was of particular importance to the
Complainants in order to avoid further negotiati ons with the European Communities and possibly a
lengthy and complex arbitration procedure to resolv e a matter that could and should be resolved by
this Panel.
4.264 Thailand recognized that the European Communities was entitled to grant export subsidies in
respect of sugar within the limits of its export reduction commitments and that, consequently, the
Panel could not recommend that the DSB requ est the European Communities to withdraw all of its
export subsidies on sugar. In Canada – Dairy (Article 21.5 – New Zealand and US) , the panel
correctly found that such a recommendation coul d not be reconciled with Article 21 of the Agreement
on Agriculture , according to which the provisions of the SCM Agreement applied subject to those of
the Agreement on Agriculture .258 In its first submission, Thailand therefore specifically requested the
Panel to recommend that the DSB request the Europ ean Communities to bring its export subsidies for
sugar into conformity with its obligations under the Agreement on Agriculture by withdrawing the
export subsidies for sugar that were inc onsistent with the Agreement on Agriculture . Thailand thus
requested the recommendation according to Article 4.7 of the SCM Agreement only in respect of the
subsidization that exceeded the European Communities' rights under the Agreement on Agriculture .
Thailand's request was therefore fully consistent with the principle set out in Article 21 of the
Agreement on Agriculture.
4.265 Brazil considered that the Panel should find an inconsistency with both agreements and
recommend both remedies. It could do the latter by recommending that the Member concerned bring
its measure into compliance by withdrawing the prohi bited subsidy without delay. In this regard,
Brazil noted that the purpose of the export subsidy provisions of the Agreement on Agriculture was to
provide a "safe harbour" for those subsidies that complied with the reduction commitment obligations
of the Agreement; it was not to deny Members the remedies to which they were entitled under the
SCM Agreement for export subsidies that did not comply with the requirements of the Agreement on
Agriculture. Australia concurred with this approach a nd recalled that, in the original US-FSC case,
the DSB recommended that the United States bring the FSC measure into conformity with its
obligations under the covered agreements and that the FSC subsidies found to be prohibited export
subsidies within the meaning of the SCM Agreement be withdrawn without delay.
4.266 The European Communities responded that the application of Article 4.7 of the
SCM Agreement would amount to denying the European Communities' right to maintain export
subsidies up to the commitment levels specified in its Schedule and that this was inconsistent with
Article 21.1 of the Agreement on Agriculture which provided that other Annex 1A Agreements only
applied subject to the Agreement on Agriculture ; in other words, the application of the other
Agreements could not nullify the rights of WTO Members under the Agreement on Agriculture.
G. NULLIFICATION OR IMPAIRMENT
4.267 Subsidiarily, the European Communities contended that the claim submitted by the
Complainants with respect to the C sugar regime involved a complaint of the so-called "violation"
type described in Article XXIII.1(b) of the GA TT 1994, which referred to the situation where a
Member considered that a "benefit accruing to it directly or indirectly is being nullified or impaired …
as the result of … the failure of another contracting party to carry out its obligations under this

258 Panel Report on Canada – Dairy (Article 21.5 – New Zealand and US), para. 6.99.

Agreement".
259 Citing Article 3.8 of the DSU, the European Communities submitted that Article 3.8
of the DSU made clear that, while a finding of viola tion of a covered agreement gave rise to a
presumption of nullification or impairment of benef its accruing under that agreement, the defending
party had the possibility to rebut such a presumption.
4.268 The European Communities held that, even if th e C sugar regime resulted in a violation of
Articles 3.3, 8 or 10.1 of the Agreement on Agriculture, such violation would not nullify or impair any
benefits accruing to the complaining parties under those provisions as the Complainants could have
had no reasonable expectations that the European Communities would take any measure to reduce its
exports of C sugar. Those Articles did not confer a right to a certain volume or amount of trade, the
European Communities continued. Rather, the "ben efits" accruing under Articles 3.3, 8 and 10 of the
Agreement on Agriculture consisted of the expectations of improved competitive opportunities which
arose out of the limitations placed on export subsidies by those provisions.
4.269 The European Communities referred in partic ular to the Appellate Body report in India –
Patent (US) in which case the Appellate Body emphasized that the expectations of the complaining
party only become relevant after a violation had been found, as part of the examination of whether
such violation led to nullification or impairment.
260 At the time of the conclusion of the WTO
Agreement, the European Communities continued, and until recently, the Complainants had shared
the European Communities' understanding that the C sugar regime did not pr ovide export subsidies
and, therefore, could have had no expectations that the European Communities would reduce its
exports of C sugar. The European Communities cons idered, therefore, that the Complainants could
not now act as if their expectations were being nullified or impaired by the alleged inconsistency with
Articles 3, 8 or 10.1 of the Agreement on Agriculture.
4.270 The European Communities submitted that, if nevertheless the Panel were of the view that the
Complainants were entitled to expect that the European Communities would reduce its exports of
C sugar such expectations would be limited to a 21 per cent reduction, as envisaged in the Modalities
Paper with respect to all export subsidies, rather th an their complete elimination. Accordingly, the
alleged violation of Articles 3, 8 and 10.1 of the Agreement on Agriculture would nullify or impair
benefits accruing to the Complainants only to the ex tent that the current volume of subsidized exports
exceeded 79 per cent of the quantity of subsidized exports made during the base period.
4.271 Moreover, for the same reasons as for C sugar
261 , the European Communities contended, the
alleged violation in respect of ACP/India equivale nt sugar did not nullify or impair any benefits
accruing to the Complainants, because they could have had no expectations that the European
Communities would reduce the quantity of subsidized exports mentioned therein (see also paragraph
4.283).
4.272 Australia submitted that the European Communities' infringement of its obligations under the
Agreement on Agriculture and the SCM Agreement had resulted in a prima facie case that nullification
and impairment had been suffered by Australia. Aust ralia recalled that, pursuan t to Article 3.8 of the
DSU, the European Communities, as the defending party, had to rebut the presumption of nullification
and impairment.
4.273 Australia considered that the assertion by the European Communities that the Complainants
could have had no expectations of improved competitive opportunities in relation to C sugar and
ACP/India equivalent sugar and that, therefore, no benefits had been nullified or impaired, was a

259 Articles XXII and XXIII of the GATT apply to dispute settlements under the Agreement on
Agriculture pursuant to Article 19 of the latter Agreement.
260 Appellate Body Report on India – Patents (US), para. 40.
261 See in particular Section III.5 of the European Communities' first written submission.

novel argument. Australia contended that this argument did not counter the presumption in
Article 3.8 of the DSU which required the European Communities to establish that its breach of its
WTO obligations has had no "adverse impact" on Australia.
4.274 Referring to the Appellate Body report in EC – Bananas III and its reference to the US –
Superfund case262 with respect to its discussion of the rebu ttal of nullification or impairment, as well
as to the panel report in Turkey – Textiles on the same subject 263, Australia submitted that the
European Communities had not provided any evid ence in this case, to rebut the presumption of
nullification and impairment. The mere fact that the Complainants might have increased exports was
irrelevant to the determination of this issue.
4.275 Contrary to the European Communities' assertions, Australia continued, the relevant
provisions of the Agreement on Agriculture and the SCM Agreement did not merely serve to confer
legitimate expectations in regard to a certain volume of reductions. The Agreement on Agriculture
conferred a right to expect that the European Communities would act in conformity with its
obligations, including that the European Communiti es would subject its export subsidies to reduction
commitments, that it would not provide export subsidies in excess of scheduled commitments and that
it would not circumvent those commitments. The SCM Agreement conferred upon Australia a right
that the European Communities would not grant or maintain export subsidies on sugar except as
provided in the Agreement on Agriculture.
4.276 Responding to the European Communities' arguments in paragraph 4.268-4.269 above, Brazil
submitted that Article 3.8 of the DSU specified that a violation was prima facie evidence of
nullification or impairment. The European Comm unities had introduced no evidence to rebut that
presumption. Moreover, the European Communities' reliance on the Appellate Body's opinion in
India – Patent (US) was, according to Brazil, misplaced as that case involved reliance on expectations
to establish a violation. 264 In this case, it was the violation that nullified or impaired the
Complainants' legitimate expectations. The Complain ants' legitimate expectations of improvement in
the competitive relationship of their sugar and that exported by the European Communities were
nullified or impaired when their sugar competed in the world market with EC sugar that was exported,
with the aid of subsidies, in excess of the European Communities' reduction commitments.
4.277 As concerns the footnote, Brazil submitted th at the points discussed in connection with
C sugar also applied, mutatis mutandis to ACP/India equivalent sugar.
4.278 Thailand contended that the European Communities was putting forward a novel legal theory
according to which a WTO-inconsistent measure di d not nullify or impair benefits accruing under a
covered agreement if it could be expected. Thailand submitted that Article 3.8 of the DSU defined
clearly what the European Communities must establish to rebut the presumption of nullification and
impairment: it must demonstrate that its breach of the rules had not had "an adverse impact" on
Thailand. Thailand considered that the European Communities had not done so.
4.279 The European Communities replied that even if exports of C sugar were found to benefit
from export subsidies and were in excess of th e European Communities' reduction commitments and
even if the Complainants were not barred from bringi ng a claim to that effect by Article 3.10 of the
DSU and the principle of good faith, the alleged viola tion would not, in any event, nullify or impair
any benefits accruing to the Complainants.

262 GATT Panel Report on US – Superfund , BISD 34S/136, para. 5.1.9; Appellate Body Report on
EC – Bananas III, para. 252.
263 Panel Report on Turkey – Textiles, para. 9.204.
264 European Communities' first written submission, para. 147.

4.280 Referring to Brazil's arguments in paragr aph 4.276 above, the European Communities
explained that it relied on India – Patent (US) for the proposition that in this case the existence of
nullification or impairment should be assessed by looking at the legitimate expectations of the
Complainants. The European Communities subm itted that the Brazilian arguments overlooked the
thrust of the European Communities' defence, which was precisely that Brazil could have no
"legitimate expectations" that the European Communities would stop its exports of C sugar. At most,
Brazil could have expected that the European Communities would reduce those exports by 21 per cent
(in quantity) as agreed in the Modalities Paper.
4.281 Responding to Thailand's arguments in para graph 4.278 above, the European Communities
submitted that it had shown that Thailand had suffered no "adverse impact" because the Complainants
had no expectations that the European Communitie s would stop exporting C sugar. The European
Communities considered that the relevance of e xpectations in establishing the existence of
nullification or impairment was not a "novel legal theory".
265 It was confirmed by the case law cited
in the European Communities' first written subm ission, which Thailand did not address. The
European Communities disagreed that it had to sh ow that the alleged violation had had no actual
effect on Thailand's exports in order to establish the absence of an "adverse impact". In the opinion of
the European Communities, that was not required by the ordinary meaning of the term "adverse
impact".
4.282 If the European Communities were to reduce its e xports of sugar by 60 per cent, as requested
by the Complainants, it would be doing much more than removing any "adverse impact" suffered by
them. It would be providing the Complainants with an advantage that none of them expected, nor
could have expected, at the conclusion of the Uruguay Round. The ultimate purpose of dispute
settlement procedures, the European Communities obser ved, was to maintain the agreed balance of
concessions and not to present some Members with a windfall profit at the expense of another
Member. The notion of "nullification and impairme nt" must be interpreted in the light of that
purpose.
4.283 Finally, for the reasons explained in its vari ous submissions with respect to C sugar, the
European Communities recalled that, subsidiarily, in the same sense as there had been no nullification
and impairment in respect of C sugar, there had b een no such nullification and impairment in respect
of ACP/India equivalent sugar.
4.284 Brazil recalled, in response to arguments to the effect that the Complainants' claims would
lead to serious harm to some developing countries, that two of the Complainants, Brazil and Thailand,
were themselves developing countries whose benefits were most certainly being nullified or impaired.
Brazil also recalled the European Communities' arguments that nothing in its sugar regime nullified or
impaired any benefits accruing to Complainants under the Agreement on Agriculture . Referring to a
March 2004 study by Oxfam
266 which had calculated, based on 2002 exports, that the EC sugar
regime caused immediate losses of $494 million for Brazil and $151 million for Thailand in that year
alone, Brazil submitted that that was serious nullifica tion or impairment by any reasonable standard.
Brazil and Thailand were not the onl y developing countries hurt by the European Communities' sugar
regime. Oxfam noted the cost to South Africa a nd a number of other developing countries, and the
Panel had heard directly from Colombia and Paraguay concerning the harm the regime did to them.

265 Thailand's oral statement, first substantive meeting, para. 44.
266 Exhibit ALA-12.

V. ARGUMENTS BY THIRD PARTIES
5.1 The ACP countries267 268 explained that the objectives of the EC/ACP Partnership Agreement
had been in the centre of the EC-ACP relationships since the beginning. These objectives underpinned
all the preferential agreements, including the Sugar Protocol, and had always been in line with GATT
and WTO objectives for positive and effective effo rts towards the sustainable development of
developing and least developed countries. They submitted that they had substantial trade interests and
systemic interests in the present dispute in ensuri ng the proper interpretation and application of the
WTO Agreement on Agriculture so as not to destabilize the balan ce of concessions reached at the end
of the Uruguay Round and which concerned all Memb ers, including the ACP and the Complainants..
They were of the opinion that the upholding of the claims of the complainants would have serious
adverse consequences on the trade and economic be nefits, which they currently derived from the
export of sugar to the European Communities under the ACP/EC trading arrangement on sugar (Sugar
Protocol).
5.2 Exports to the EC market constituted a vital ou tlet for the ACP sugar supplying states. They
noted that they benefited from guaranteed preferential access to the EC market and remunerative
prices for their exports. The obligations of th e European Communities in respect of the Sugar
Protocol had to be fulfilled within the framewo rk of the EC sugar regime and the European
Communities was importing fixed quantities of raw cane sugar, from the ACP countries, at
guaranteed prices equivalent to the EC intervention prices.
5.3 This guaranteed level of prices, they asserted, ensured predictable and stable earnings crucial
for the economic and social development of these developing and least developed countries, for
whose economies sugar represented their life-blood. Th e Sugar Protocol had been a key factor in the
socio-economic development of the ACP countries, en abling them to meet, to a certain extent, the
objectives set out in the Preamble of the Marrakech Agreement, namely raising the standards of
living, ensuring full employment and a steady vol ume of real income. The ACP sugar industries
played a multifunctional role in their respective economies. More specifically, they promoted rural
development, poverty alleviation, social development, social peace, protection of the environment as
well as the tourism industry.
5.4 The ACP countries explained that during th e period 1999-2001, exports under the Sugar
Protocol accounted, on average, for 50.6 per cent of agricultural exports and 13.6 per cent of GDP of
the ACP countries concerned. During the same peri od, the number of persons employed in the sugar
sector was on average 43.8 per cent of the total num ber of persons employed in agriculture. These
figures had to be compared with the very small sh are of the sugar market of the ACP in terms of
world trade: the 1.6 million tonnes exported to the European Communities represented 3.6 per cent of
world trade in sugar. This trade corresponded to 0.18 per cent of global agricultural trade. While
these exports had, they contended, a minute effect on global trade, the same exports were critical to
the economic growth of the ACP countries which included least-developed, net-food importing,
landlocked or island states and single-commodity producers/exporters with specific economic and
social difficulties.

267 Barbados, Belize, Fiji, Guyana, Côte d'Ivoire, Jamaica, Kenya, Madagascar, Malawi, Mauritius,
St. Kitts & Nevis, Swaziland, Tanzania and Trinidad & Tobago presented a joint written submission as well as a
joint oral presentation as ACP Sugar Supplying States (ACP countries). Each of these countries also separately
endorsed the views expressed in paras. 5.1-5.12. Th e distinctive arguments ela borated by each of these
countries presented separately in their own written submissions or oral statements have been briefly reflected
individually.
268 ACP countries benefiting from the Sugar Protocol.

5.5 The preferences granted to the ACP sugar expor ting countries in terms of market access and
the scope of the reduction commitments of the European Communities in the Uruguay Round, the
ACP countries submitted, were to be considered as a whole and not in isolation from the European
Communities' export possibilities. The purpose of Foot note 1 in the EC Schedule, interpreted in the
context of both the Sugar Protocol and the CMO, was, in the opinion of the ACP countries, to allow
for the exportation by the European Communities of quantities corresponding to those imported under
the preferential agreements. The ACP countries were of the view that the Complainants' claim that
the European Communities was not complying with th e terms of the footnote, did not fall within the
terms of reference of the Panel. However, shoul d the Panel decide that there were grounds for
examining this claim, an interpretation in good fa ith, based on the rules of interpretation applying in
the context of the WTO, i.e. Articles 31(1), 31(4) and, if needed, 32 of the Vienna Convention ,
allowed no other reading than what was well known to the Complainants prior to and during the
negotiations, i.e. that the European Communities intended to keep the possibility to grant export
refunds on exports of a quan tity corresponding to the quantities imported under the preferential
agreements concluded with the ACP countries and I ndia. This was a fundamental element of the
balance achieved within the EC sugar regime. Ther efore, the footnote to the EC's Schedule must, and
could only be interpreted to cover corresponding expo rts, based on the ordinary meaning of its terms
and the necessity to give an effet utile to its wording.
5.6 With respect to the interpretation of the footnote, the ACP countries argued that, applying
Article 31(1) of the Vienna Convention
269, the footnote should be interpreted in good faith in
accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the
light of its objects and purpose. Accordingly, they claimed that, as regards the "terms" of the
footnote, based on the necessity to give an effet utile to its wording, " exports of sugar of ACP and
Indian origin" could not mean anything else but exports of white sugar in quantities corresponding to
the quantities of raw cane sugar imported under the EC /ACP and EC/India preferential arrangements.
This would be, they argued, the only interpretation providing the footnote with an operative meaning,
and which would truly reflect the intention of all the parties. 270 Furthermore, the ACP countries
asserted that the Sugar Protocol as well as the EC Regulation on the CMO would allow a proper
understanding of not only the context of the footno te, but also its necessity, and therefore its object
and purpose.
271 In this sense, the ACP countries concluded that the footnote must be interpreted so as
to allow the European Communities to export 1.6 million tons of white sugar, corresponding to its
imports of ACP/Indian raw sugar, with the benefit of export refunds.
5.7 With respect to the Agreement on Agriculture, the ACP countries were of the view that it
primarily defined exports subsidies commitments as a limitation. Accordingly, WTO Members would
enjoy a certain flexibility. Referring to the text of Article 3.1 of the Agreement on Agriculture , they
argued that in Canada – Dairy , the Appellate Body acknowledged the importance of the limitation
concept by describing an export subsidy commitme nt as "an undertaking to limit the quantity of
exports that may be subsidized." 272 The European Communities was th erefore entitled to maintain an
export subsidy on an agricultural product within the limits of its commitments.
5.8 Referring to the Appellate Body report in Korea – Various Measures on Beef 273, the ACP
countries contended that, when taken together, th e two components of the European Communities'
export subsidy commitments indicated that the tota l amount of export refunds granted on exports of
sugar, as a whole, had been declining. Accord ingly, the specific structure of the European
Communities' commitments had been working, de facto , as a limitation of the level of subsidies

269 ACP written submission, para. 78.
270 Ibid., paras. 89-93.
271 Ibid., para. 95.
272 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II), para. 70.
273 Appellate Body Report on Korea – Various Measures on Beef, para.97.

granted on its exports of sugar. Therefore, in the opinion of the ACP countries, the European
Communities had complied with its export subsidy commitments.
5.9 With respect to the US – Sugar Waiver and the EC – Bananas III cases referred to by the
Complainants, the ACP countries assert ed that the issue at stake and the very nature of the legal
provisions under consideration in this case were differ ent. The set of provisions referred to by the
Complainants, i.e. Articles 3, 8 and 9 of the Agreement on Agriculture did not provide for such a
general prohibition but rather for a limited authori zation for Members to provide subsidies up to the
level of the reduction commitments specified in th eir Schedule. In addition, in the case of export
subsidy commitments, the benefits that WTO Member s could expect were based on the improvement
of the competitive environment resulting from th e reduction of subsidization undertaken in
conformity with the commitments and were of a different nature from those resulting from market
access commitments. The Complainants could not have had any reasonable expectation that the
European Communities would reduce the quantities mentioned in the footnote. As a result, no specific
benefits could have been impaired or nullified by the European Communities' exports of 1.6 million
tons with the benefit of export refunds.
5.10 Referring to "estoppel" as "a general principle of international law deriving from the broader
principle of good faith", the ACP countries submitte d that the Complainants were precluded from
bringing a claim against the validity of the footnot e since they had acquiesced to the insertion of the
footnote in the European Communities' Schedule of Commitments and had given assurances of this
acceptance by not raising any formal claims to that e ffect since the conclusion of the Uruguay Round.
The interests not only of the European Communiti es, but also of the ACP countries, would be
substantially prejudiced if the Complainants were allowed to challenge what they previously
acquiesced to. Indeed, should the Panel accept the claims of the Complainants, it would mean that the
Panel would allow them to benefit, de facto, from a reduction of 60 per cent of the quantities on which
the European Communities was entitled to grant export refunds.
5.11 The ACP countries referred to the relevance of the EC – Computer Equipment case in
particular regarding, firstly, the fact that all the schedules of Members represented a common
agreement among all Members, and, secondly, the ob ligations of all participants in respect of
verification.
5.12 The ACP countries endorsed the European Commun ities' position with respect to the C sugar
issue and the SCM Agreement issue.
5.13 Barbados274 added that to understand the full implications of what the likely consequences of
a decision unfavourable to the European Communiti es could mean to the ACP countries, it would be
important to consider the characteristics of the sugar industry within these countries and the critical
role sugar played in their development.
5.14 Barbados noted that it was not a major agricu ltural producer but the sugar industry, which
was more than 300 years old, had maintained its dom inant position within its small agricultural sector
Sugar was still the largest single agricultural export cr op and earned the most foreign exchange in that
sector. Consequently, agriculture generally, and sugar in particular, continued to play a strategic role
as Barbados endeavoured to restructure its econo my in the face of the challenges resulting from
liberalization and globalization. The economic a nd social benefits derived from the production and
export of sugar were evident in a number of ar eas, including contribution to the gross domestic
product ("GDP"), employment, foreign exchange earnings and food security. The sugar industry
accounted for an average of 40 per cent of the agri cultural sector's input to real GDP in the period
1998 to 2002. For the same period, direct employ ment in the industry averaged 1200 persons, while

274 See also ACP statement in paras. 5.1-5.12 above.

indirect employment was significantly higher . The export of bulk raw sugar earned Barbados an
average of US $25 million per year during the same 5-year span.
5.15 Barbados explained that as a small, vulne rable Net Food-Importing Developing Country
(NFIDC) which already imported approximately 75 per cent of its food, food security was a major
concern. Sugar cane was one of the few crops appropriate for large-scale cultivation under the
climatic and agronomic conditions in Barbados and could be fairly regarded as a stabilising factor
within the agricultural sector. The sugar industry th erefore played a major role in helping Barbados
achieve its food security goals by maintaining a significant area of the island's landmass under
agricultural production with a systematic crop rotation process and also by providing a vital source of
foreign revenue.
5.16 Barbados contended that the foreign excha nge earnings from the sugar exports would be
significantly lower without the preferential marg in enjoyed under the ACP/EC Sugar Protocol.
Barbados was therefore deeply concerned about the current dispute and the potentially negative
impact that an adverse decision of this Panel was likely to have on the EC price for ACP sugar.
275
5.17 Belize276 submitted that the multilateral rules-based trading system would only be sustained if
innovative mechanisms existed to provide all Members, even the most vulnerable, with a share in the
growth in international trade commensurate with the needs of their economic development. Belize
was generally categorized as a mono-crop society. It was an import-oriented economy, dependent on
the exports of a few traditional commodities to genera te its revenue: approximately 20 per cent of the
country's population was dependent on the sugar trade. Given its high cost of production of consumer
goods and its small population, it was unable to produ ce most of what it consumed. Further erosion
of its ability to pay for imports would have severe consequences; 33 per cent of the population already
lived below the poverty line. It noted that it contributed less than one per cent 277 to total world sugar
exports, but alterations to the present EC sugar regi me could severely impact the fundamental fabric
of the Belizean society.
5.18 Belize submitted further that a disruption of the pricing mechanism would have an adverse
impact on the preferential arrangement s covered by the Sugar Protocol. It argued that the various
components of the EC sugar regime depended upon each other in so systemic a manner that the
utmost care should be taken in a ttempting to rearrange its mechanism. To dismantle any particular
aspect of the regime would tend to weaken and damage the very fabric of the preferential agreement:
its quota system, its price structure, and its system of compensation. Accordingly, Belize held that the
possible impact of each proposed change shoul d be taken into account in assessing its overall
implications on the world's trading system.
5.19 Belize was of the view that the footnote fully c oncurred with the obligations of the European
Communities, expressing the Members' agreement with respect to what was an appropriate provision
addressing the circumstances of vulnerable small developing countries within the broad rules-based
framework. Belize also considered that the EC C sugar regime , including the exports of refined sugar
with the benefit of export refunds, was an integr al part of the EC sugar regime and, as such,
contributed to its overall balance and stability.
278
5.20 Canada submitted that Article 9.1(c) must be read so as to maintain the distinction between
domestic support and export subsidies. With respect to the three distinct elements of Article 9.1(c),
"payment", "on the export" and "financed by virtue of government action", Canada noted that only the

275 Third party oral statement by Barbados.
276 See also ACP statement in paras. 5.1-5.12 above.
277 Third party oral statement by Belize referring to 1998-2000 FAO Statistics.
278 Third party oral statement by Belize.

first and third of these elements were at issue before the Appellate Body in Canada – Dairy. 279
Therefore, that analysis could not be applied automatically in the present dispute. 280 Canada was of
the view that the Panel should turn to a contextual reading of Article 9.1(c), looking at the whole of
the Article and its place in the Agreement on Agriculture , to provide guidance as to the appropriate
relationship between these elements.
5.21 Canada expressed concern over the suggestion th at the average cost of production would be
the only appropriate benchmark against which to measure "payments". In the light of the Canada –
Dairy decisions and the variety of transactions iden tified by the Complainants, Canada requested
clarification with respect to the systemic meaning of "payments".281 Furthermore, Canada stressed the
importance of ensuring that context-specific benchmar ks or guidelines used in previous disputes were
not confused with legal standards derived directly from the text of the Agreement on Agriculture..282
5.22 With respect to Article 3.1(a) of the SCM Agreement, Canada recalled, the Appellate Body
had held that contingency did not suggest a simple relationship of payment and export. Rather, the
grant of a subsidy must be conditional or dependent upon export performance; it must be "tied to"
export performance.283 Referring to the common interpretation of "export contingent" as found by the
Appellate Body in US – FSC and Canada – Aircraft (Article 21.5 – Brazil) , Canada was of the
opinion that an indirect benefit, i.e., a cross-subsidy, that could result in an unintended or
consequential export, did not lead to a finding that an export subsidy was provided pursuant to
Article 9.1(c). Finally, Canada noted that despite it being true that sugar production in the European
Communities was the subject of a complex regulatory regime; this complexity was not by itself proof
that C sugar benefited from export subsidies.
5.23 Canada also requested clarification with respect to the relation between the various
programmes, measures and transfers alleged by the Complainants to result in export subsidies, and the
governmental actions that ostensibly finance those s ubsidies, i.e. if such financing could occur as a
result of cross-subsidization, where was the th reshold between actions that resulted in cross-
subsidization and actions that did not?
5.24 Canada recalled that the Appe llate Body had explained that the words "by virtue of" defined
the relationship between governmental action and th e financing of payments under Article 9.1(c).
284
That relationship was the link between a given action and the financing of payments "on the export".
Canada asserted that this link did not exist merely by virtue of government measures that permitted
payments to occur; instead, th e words "by virtue of" demanded a demonstrable link between the
governmental action and the payments allegedly financed by that action.285 286
5.25 China submitted, with respect to the question of burden of proof under Article 10.3 of the
Agreement on Agriculture , that the European Communities must establish the "export subsidization
aspect" with respect to claims of violation of Ar ticles 3, 8, 9 and 10 and the consequences of any
doubts about the European Communities' evidence of export subsidization should be borne by the
European Communities. The European Communiti es should therefore fulfil its burden by submitting
evidence sufficient to establish that the disputed measure did not represent an export subsidy , or
benefits were not granted with respect to a quantity of the product in question in excess of its
reduction commitment level, or both. As concerns Article 3.3 of the Agreement on Agriculture, China

279 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US), para. 63.
280 Third party written submission of Canada, para. 10.
281 Ibid., paras. 16-18.
282 Ibid., para. 7.
283 Appellate Body Report on US – FSC (Article 21.5 – EC), para. 111.
284 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II), para. 130.
285 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US), para. 113.
286 Third party written submission, para. 28, and oral statement of Canada.

considered that it did not allow any WTO Member to derogate from the export subsidy commitments
contemplated therein. China recalled the Appellate Body report in US-FSC which explained that both
scheduled and unscheduled agricultural products were subject to export subsidy commitments. With
respect to " scheduled" products, a Member was entitled to provide export subsidies within the
"limited authorization", which specifically referred to the "budgetary outlay and quantity commitment
levels" specified in that Member's Schedule. China contended that sugar fell within the product
coverage under Article 2 and Annex 1 to the Agreement on Agriculture, and had been " scheduled" in
the "Description of products" of the EC's Schedule. Since "C sugar" was neither beyond the product
coverage of the Agreement on Agriculture, nor a separate categorised product description of the
Schedule. Thus, it should be logically deemed as bei ng incorporated into the Schedule and subject to
reduction commitments under Article 3.3 of the Agreement on Agriculture . Should the European
Communities consider C sugar as a product other than a " scheduled" agricultural product, it should as
a consequence be subject to the " prohibition" against provision of export subsidies on " unscheduled"
agricultural products.
5.26 With respect to the role of the Modalities Paper as a relevant element of the historical context
within the meaning of Article 31.1(b) of the Vienna Convention, China recalled that the note by the
chairman of the Market Access Group
287 explicitly precluded the use of the negotiating modalities as a
basis for dispute settlement proceedings under the "M TO" Agreement. Furthermore, China noted that
the Appellate Body in EC – Bananas III 288 observed that the Agreement on Agriculture made no
reference to the Modalitie s document or to any 'common understa nding' among the negotiators of the
Agreement on Agriculture.
5.27 As concerns the notion of the "average tota l cost of production", China saw no reason why
this should not be adopted as the benchmark or objective standard, for the determination of whether
the exports of C sugar involved "payments" under Article 9.1(c) of the Agreement on Agriculture .
Furthermore, recalling the Appellate Body report in Canada – Dairy (Article 21.5 – New Zealand and
US II), China considered that since the higher revenue sales in the EC sugar market effectively
financed part of the lower revenue sales on world ma rkets, "by funding the portion of the shared fixed
costs" of production "attributable to the lower priced products, 289 i.e. C sugar, the demonstrable link
between the EC governmental action and the "financi ng" was well established. The identification of
the "average total costs of production" must be illustrated and objective, by taking into account any
marginal costs of the EC sugar production on an industry-wide basis.
5.28 Referring to the interpretation of the footnote in the EC's Schedule, China recalled290 that the
European Communities had explained, before the WTO Committee on Agriculture, that:
"[A]s indicated in footnote 1 of the table on export subsidies contained in Part IV,
Section II of Schedule CXL, the EC is not undertaking any reduction commitment on
exports of ACP or Indian sugar. Conse quently, any financial assistance is not
reported to the WTO. For information , these exports amount to approximately
1.6 million tonnes per year."291 (emphasis added)
5.29 China submitted that the footnote at issue wa s intended to exempt the European Communities
from " undertaking" any reduction commitment with respect to "any financial assistance" and

287 Modalities for the establishment of specific bindi ng commitments under the reform programme –
Note by the Chairman of the Market Access Group, MTN.GNG/MA/W/24, 20 December 1993.
288 Appellate Body Report on EC – Bananas III.
289 Ibid., para. 98.
290 Ibid., para. 45.
291 Committee on Agriculture, summary report of the meeting held on 17-18 November 1998
(G/AG/R/17, 25 January 1999) p. 29. See also first submission of Thailand, para.95.

notification requirements on exports amounting to approximately 1.6 million tonnes per year of
"ACP/Indian origin" sugar. China was of the view that the European Communities must demonstrate
or establish the legal basis for the exemption of "ACP/India equivalent sugar" from reduction
commitments. Due to the equivocal meanings de rived from the footnote, the European Communities'
"two – parts" interpretation of its subsidy commitments – i.e. "limits" subject to reduction in respect
of "scheduled" sugar and "a fixed ceiling" in respect of "ACP/India equivalent sugar" – could not, in
China's opinion, be justified as representing "a common agreement among all Members".292
5.30 Colombia noted that it was the eighth largest exporter of sugar in the world and had one of
the lowest cost of production levels and highest yiel ds per hectare. Considering that Colombia could
count on an efficient and productive sector, Colomb ia was facing many difficulties participating in
international trade, not only in the European Communities but also in other countries. The distortions
in the price of sugar, in particular those which resulted from the complex regulation of the European
market, were causing problems to the Colombian expor ts not only in the Europe but also in other
markets in which those distortions had been iden tified as the reason for Colombia's limited access.
Therefore, this dispute had both a systemic and commercial importance to Colombia.
5.31 Referring to the legal value of the footnote, Colombia enquired whether there was a legal
basis to exclude a quantity of sugar equivalent to the European Communities' imports from India and
ACP countries from the export subsidies reduction commitments. Colombia was of the view that,
since exceptions in the WTO must be agreed upon through the multilateral procedure provided in
Article IX of the Marrakech Agreement, the possib ility of granting legal value to the footnote would
be unrealistic.
5.32 With regard to the concept of estoppel, Colomb ia noted that it had never been recognised in
the jurisprudence of the WTO and the concept in itself had its application limited to bilateral
relationships. Accordingly, even if the Panel f ound that some Members were aware of the European
Communities' exemption to the reduction commitments , it was unthinkable that such a "bilateral
understanding" could be applied in the multilateral context.
5.33 Colombia considered that there were two ty pes of export subsidy commitment. The first
related to reduction and prohibition as la id down in Articles 8 and 9 of the Agreement on Agriculture.
The combination of agreed disciplines under those Articles implied, according to Colombia, that
subsidies included by Members in their Schedules must be reduced in accordance with multilateral
disciplines. Similarly, in its interpretation, subsidies for which no phasing-out commitments had been
made should be prohibited.
5.34 The second export subsidy commitment, Colombia continued, related to anti-circumvention
and was governed by Article 10.1 of the Agreement on Agriculture . Colombia was of the view that
Article 10.1 applied only to expr essly permitted subsidies. Its objec tive was to discipline the manner
in which those subsidies were applied in order to a void that such application resulted in, or threatened
to lead to, circumvention of export subsidy commitments.
293
5.35 Côte d'Ivoire294 submitted that, by contesting the EC sugar regime, the Complainants put into
question the basis for cooperation between Côte d' Ivoire and the European Communities. If
successful, the Complainants allegations would ha ve serious socio-economic consequences for the
country. Côte d'Ivoire explained that the sugar industry was highly important to the economy of the
country. It started as a bold government policy in the 1970s to diversify agriculture production and
thus create a regional development pole in the north of the country. In the last few years, the sugar

292 Third party written submission and oral statement by China.
293 Third party oral statement by Colombia.
294 See also ACP statement in paras. 5.1-5.12 above.

industry had experienced a clear development as Côte d' Ivoire privatized its sugar industry in 1997.
Today, the industry was represented by two comp anies, Sucaf-Ci and Sucreivoire with sugar
production being the second most important activity after cotton in the north of Côte d'Ivoire.
5.36 In the last five years, €85 million had been i nvested in order to increase the country's sugar
production, which thus went from 120,000 to nnes in 1997 to 170,000 tonnes currently, exceeding
local consumption by some 20,000 tonnes per year. Most of this quantity was exported to the
European Communities under the Sugar Protocol and the SPS arrangements, representing some
15 per cent of the sugar revenues of Côte d'Ivoire.
5.37 The sugar industry, Côte d'Ivoire continued, employed some 2,000 individuals directly and
another 5,000 indirectly which, in the African context represented revenues for the subsistence of
around 200,000 people. On top of the approximately 22,000 hectares industrially planted, some 2,400
hectares were village plantations, a policy recomm ended by the government and which had led to the
reinsertion of some 800 families.
5.38 In conclusion, Côte d'Ivoire, not wishing to see the only efficient international co-operation
arrangement destroyed, hoped that the Panel w ould contribute to put development as an essential
objective at the heart of the discussions.
295
5.39 Cuba noted that sugar was one of its chief expor t items but Cuba was also interested in
averting the erosion of the tariff preferences granted to the ACP States under the EC sugar regime.
Cuba considered that this dispute must be view ed in the light of the basic objectives of the GATT
1994, which included raising standards of livin g and securing the progressive development of
economies, while paying special attention to the fact that the achievement of these objectives was
"particularly urgent" for the least-developed economies.
5.40 Export income, Cuba continued, played a cruc ial role in many underdeveloped economies as
their main source of subsistence and an important fa ctor of economic development. The size of that
income depended on the prices countries paid for essential imported products, the volume of their
exports and the prices they were paid for the produ cts they exported. Ther efore, the preferential
access granted by the European Communities to sugar from the ACP countries was vital to the
economies of those countries and compensated, albeit to a limited extent, for the unfair terms of trade
to which their underdeveloped economies were made subject.
5.41 Cuba, therefore, submitted that the starting point for consideration of this dispute should be
the preambular provision of the Agreement on Agriculture, which states that "... in implementing their
commitments on market access, developed country Members would take fully into account the
particular needs and conditions of developi ng country Members by providing for a greater
improvement of opportunities and terms of access for ag ricultural products of pa rticular interest to
these Members ...". Furthermore, Cuba submitted that the aim of these provisions on preferences was
to foster the development of the ACP States in order to reduce and gradually eliminate poverty in
those countries and integrate them into the main stream of global trade. These objectives were
consistent with WTO aims and principles and with the development dimension concept established at
the Doha Ministerial Conference, which was the basic guideline for the current negotiations.
5.42 Fiji
296 noted that it had a substantial interest in this dispute, being a major producer and
exporter of sugar to the European Communities under th e Sugar Protocol. It explained that Fiji's raw
sugar exports to the European Communities constitu ted 40-50 per cent of its annual agriculture GDP
or 12-15 per cent of its national GDP. Sugar earned between $250 to $300 million annually in foreign

295 Third party oral statement by Côte d'Ivoire.
296 See also ACP statement in paras. 5.1-5.12 above.

exchange for the country. The ACP/EC Sugar Protocol and the more recent Special Preferential
Sugar Agreement (SPS) for the importation of cane suga r, were an integral part of, and were fully
incorporated within, the current EC sugar regime . The total quantity imported by the European
Communities was 1,294,700 metric tons white sugar e quivalent. Fiji's share of this agreed quantity
was 165,348.3 metric tons white suga r equivalent. Some 60 per cent of Fiji's sugar exports were sold
under the Sugar Protocol and the SPS Agreement. In the five preceding years, 1998-2002, sugar
consistently accounted for between 83 per cent and 87 per cent of EC imports from Fiji.
5.43 Fiji claimed that special arrangements like th e Sugar Protocol were specifically permitted
under Article XXXVI (4) of the GATT. Referring to the text of that Article, Fiji was of the view that
the market access and the guaranteed remunerativ e prices received for its sugar exports to the
European Communities were indeed measures designed to assist ACP states, given the fact that they
were dependent on one or two prim ary products, to earn foreign exchange that was critical to their
social and economic development. These special arrangements were specifically permitted under the
above provision of GATT 1994 and s hould be taken into consider ation by the Panel in its
determination of this dispute.
5.44 Referring to the Agreement on Agriculture, Fiji recalled that Article 15(1) specifically
recognized that differential and more favourab le treatment for developing country Members was an
integral part of that Agreement. Furthermore, Fiji also asked the Panel to consider the implications on
non-trade concerns (NTCs), in the terms of Article 20 (c) of the Agreement on Agriculture , that may
result from the decisions the Panel take in this di spute. Fiji submitted that its longstanding trade
preferences with the European Communities as regards its sugar exports under the ACP/EC Sugar
Protocol were precisely the kind of trade preferen ces that should be protected under the multilateral
trading rules of the WTO.
5.45 Fiji stressed that the various elements of the EC sugar regime (the "C" sugar, the intervention
price, the 1.6 million tons of sugar allowed for exportation by the European Communities under the
Uruguay Round, etc) were interlinked. If one aspect were to be undermined, the implications would
spread to other elements. Once this happened, the coherency and the orderly management of the
sugar regime would be lost and the very foundation and the fundamentals of the Sugar Protocol, under
which Fiji sold its sugar to the European Communities, would be lost along with it.297
5.46 Guyana298 emphasized that the various components of the EC sugar regime depended upon
each other in so systemic a manner that the utmost care should be taken in a ttempting to rearrange its
mechanism. To dismantle any particular aspect of the regime might tend to weaken and damage the
very fabric of the preferential agreement: its quot a system, its price structure, and its system of
compensation. The possible impact of each proposed change should therefore be taken into account
in assessing its overall implications in the world's trading system.
5.47 Guyana explained that its economy relied heavil y on international trade. Imports exceeded
the value of GDP, and the level of exports was not significantly lower. Of particular significance,
however, was the fact that by far the greatest pr oportion of the country's exports was dependent upon
preferential markets. Sugar and rice, both of whic h could not be sold comp etitively abroad without
the existence of guaranteed markets and prices, dominated the traditional agriculture sector,
accounting for nearly three-quarters of agricultura l production, and almost one half of the total
economy. Guyana's exports to the European Communities comprised over 90 per cent of the
country's sales outside of the Caribbean, and funda mentally underpinned the nation's sugar industry
and the entire economy of the nation. Twenty pe r cent of Guyana's GDP, and over 50 per cent of its

297 Third party written submission and oral statement by Fiji.
298 See also ACP statement in paras. 5.1-5.12 above.

agricultural product, came from sugar. One out of every five persons in the entire population of
Guyana was dependent upon sugar.
5.48 Guyana submitted that in the event of a su ccessful challenge, the European Communities
might be obliged to reform its sugar regime. Th is could result in a substantial reduction in the
intervention price paid for preferential imports of raw sugar. For several reasons Guyana, like most
ACP countries, would find it well-nigh impossible to enhance its productivity, in order to enable it to
sell competitively in European markets. The remova l or containment of sugar preferences in Guyana
would have a most disastrous influence not only on the rural economies, but on the national economy
as a whole. The collapse of preferences would lead to social and economic disintegration.
299
5.49 India considered that this dispute was of great systemic importance not merely in terms of
clarifying the rights and obligations of parties under the WTO Agreement on Agriculture but also in
terms of its impact on the Doha Round. India noted that the Complainants ha d stated expressly that
they had not raised any issues concerning the preferential access accord ed by the European
Communities to sugar of ACP and Indian origin. It recalled the statement in the preamble of the
Agreement on Agriculture that " …[I]n implementing their commitments on market access, developed
country Members would take fully into account the particular needs and c onditions of developing
country Members by providing for a greater improvement of opportunities and terms of access for
agricultural products of particular interest to th ese Members, including the fullest liberalization of
trade in tropical agricultural products as agreed at the Mid-Term Review…". The preferential access
granted by the European Communities to the suga r of ACP and Indian origin had resulted in
significant economic benefits especially to the AC P countries. India hoped, accordingly, that the
preferential access to the EC market for sugar of ACP and Indian origin would not be undermined as a
result of this dispute. At the same time, India appreciated the importance to the Complainants of
ensuring genuine and speedy liberalization of agricultur al export markets. India noted that rulings of
the Appellate Body and of dispute settlement panels in Canada – Dairy had clarified that the term
"payments" under Article 9.1(c) of the Agreement on Agriculture included both payments-in-kind to
an exporter in the form of inputs that were sold at reduced prices;
 300 and where there was a single line
of production, the financing of below cost-of-production exports through "highly remunerative prices"
in the domestic market that fully covered total fixed costs.301
5.50 Whether a particular payment was financed by governmental action, India continued, must be
assessed in terms of "governmental" action and invo lvement as a whole that permitted a transfer of
resources to an exporting producer. 302 India considered that the critical issue was whether "…
governmental action was instrumental in providin g a significant percentage of producers with the
resources that enabled them to sell at below the costs of production". 303 Further, export contingency
existed because "[o]nly by contracting for export an d effectively exporting [the agricultural product in
question] can producers and processors engage in transactions outside he regulatory
framework…applicable to domestic market…transacti ons…". In such a case, the payment is made
'on the export of an agricultural product'". It was not correct that the above principles would lead to
confusing the distinction between domestic support and export subsidies. In India's view, where there
was a single line of production and the quantities produ ced were to be sold in two separate markets,
domestic support would result also in an export subsidy if two conditions were satisfied: (i) the
regulatory framework ensured, for example, thro ugh domestic price support mechanisms and import
barriers, that the revenue from domestic sales alone was large enough that the entire fixed costs of

299 Third party written submission and oral statement by Guyana.
300 Appellate Body Report on Canada – Dairy, paras. 113-114.
301 Appellate Body Report on Canada – Dairy (Article 21.5 New Zealand and US II) , paras. 139-140
and 145-146.
302 Appellate Body Report on Canada – Dairy, paras. 119-120.
303 Appellate Body Report on Canada – Dairy (Article 21.5 New Zealand and US II), para. 147.

production were covered; and (ii) there were quotas that limited the maximum amount that the
producer could sell on the domestic markets and excess production must be exported.
5.51 If these conditions were satisfied, a rational farm er or processor of an agricultural product
would certainly produce larger quantities of the pr oduct than could be sold on the domestic market
provided that he had an outlet valve for the excess quan tities in terms of exports particularly at prices
that exceeded his marginal cost of production. Only by exporting the excess quantities could the
farmer or the processor capture the entire benefit of this type of subsidy. In the context of this type of
regulatory framework, therefore, Members in e ffect were extending export subsidies that were
camouflaged as domestic support.
5.52 Further, India continued, once an Article 9. 1(c) export subsidy was found to exist, it was
almost inevitable that the foreign buyer of subsidized agricultural products could also be characterized
as receiving a benefit passed on by the exporting producer This did not mean, however, that the
exporting producer had not received an Article 9.1(c) export subsidy.
5.53 With respect to the applicability of the SCM Agreement to subsidies for export of agricultural
products, India stated that Article 13(c)(ii) of the Agreement on Agriculture acknowledged that an
export subsidy that was not cons istent with obligations assumed under the Agreement was actionable
under Articles 3, 5 and 6 of the SCM Agreement. India also considered that, under Article 21.1 of the
Agreement on Agriculture , the provisions of the SCM Agreement applied to an agricultural export
subsidy that was not consistent with the provisions of the Agreement on Agriculture.
304
5.54 Referring to the principle of good faith, India recalled the Appellate Body ruling in EC –
Computer Equipment, in which a Member's schedule ordinarily was treated as part of the Agreement
and the Agreement together with Members' sch edules represented the negotiated balance of
concessions.305 Members often agree to become party to an agreement or to ratify it on the
assumption that their schedules have been accepted by their trading partners in good faith. Therefore,
India held that panels and the Appe llate Body should hesitate to find that a conflict existed between a
schedule and the substantive provisions of a covered agreement.
5.55 India believed that a clear distinction needed to be made under the Agreement on Agriculture
between the following situations: one, where a Me mber made certain budgetary outlay and quantity
commitments in respect of a product in its Schedule but failed to include certain export subsidies; and
two, where a Member expressly specified in its Sche dule, whether by way of a footnote or otherwise,
that it was limiting its reduction commitments in resp ect of certain export subsidies. With respect to
the first situation, by reading Articles 3.3 and 8 of the Agreement on Agriculture, India was of the
view that if a Member made budgetary outlay and quantity commitments but failed to include in its
schedule a particular type of subsidised export, it was prohibited from continuing to maintain such
export subsidies to the extent that these exceeded either the budgetary outlay or quantity commitments
contained in its Schedule. A plea by a Member th at it had made a "scheduling error" based on an
incorrect interpretation of Article 9.1(c) of the Agreement on Agriculture amounted to nothing more
than confessing to a mistake of law. A mistake of la w in turn could never be an excuse for failure to
comply with a substantive treaty obligation. Further, the principle of good faith in public international
law could not apply to excuse a Member who confessed to a mistake of law. Article 3.10 of the the
DSU could also have no application in this situat ion because it only required that a party should
engage in dispute settlement under the DSU in good faith, not that a party's obligations under a
'covered agreement', as defi ned in Article 1.1 of the DSU, must be construed in accordance with its
own mistaken interpretation of a particular provision of a covered agreement.

304 Ibid., para. 6 of India's third party submission.
305 Appellate Body Report on EC – Computer Equipment, para. 109.

5.56 A plea of "scheduling error" attributable to a mistaken interpretation of the provisions of the
Agreement on Agriculture must be distinguished, however, from the second situation referred to at the
beginning of the previous paragraph. India subm itted that a provision in a Member's Schedule,
whether by way of a footnote or otherwise, that limited its export subsidy reduction commitments was
consistent with the provisions of the Agreement on Agriculture. Based on its analysis of the provisions
of the Agreement on Agriculture relevant to export subsidies, i.e. Articles 3, 8 and 9 of the Agreement
on Agriculture, India noted inter-alia that in view of Article 8 a Member was under an obligation not
to provide export subsidies except in conformity with the Agreement on Agriculture and in
accordance with the commitments sp ecified in its Schedule. It further noted that there was no
definition in the Agreement on Agriculture of the term "reduction commitments" or any provision that
specified the extent and scope of reduction commitmen ts in respect of export subsidies that must be
made by a Member for purposes of either Article 3.3 or Article 9.1. India argued that although sub-
paragraph 2(b)(iv) of Article 9 pr ovided for a reduction in a Member's export subsidies, this was only
in the context of exceeding the budgetary outlay or quantity commitment levels specified in a
Member's Schedule for the second through fifth year s of the implementation period. It had no
application where the Member's Schedule limited its export subsidy reduction commitments and did
not undertake budgetary outlay or quantity commitments. Finally, India was of the view that the only
understanding among Members on the extent of the reduction commitments was the "Modalities
document", which in India's opinion, was not a c overed agreement. Therefore, it could not be
enforced through the DSU.
5.57 From this analysis, India inferred that Articles 3.3, 8 and 9.1 would not come into play where
a Member had not made budgetary outlay and quant ity reduction commitments in its Schedule or had
expressly limited its export subsid y reduction commitments. India argued that where a Member had
made budgetary outlay and quantity commitments in its Schedule in respect of export subsidies for a
particular product, Articles 3.3 and 8 certain ly required the Member to abide by these
commitments.
306
5.58 Jamaica307 noted that sugar remained it's most im portant agricultural export, contributing
nearly 40 per cent of income earned from all agricultu ral exports. It continued to be Jamaica's most
integrated agro-industry involving not only the cultiv ation of sugar cane, but also the manufacture of
sugar, rum and molasses. Over 40 per cent of land in permanent agricultural cultivation was in sugar
cane. It was estimated that nearly 200,000 pe rsons or 8 per cent of the Jamaican population of
2.5 million benefited directly and indirectly from the industry.
5.59 The income earned from the export of sugar, primarily to the European Communities, was
approximately US$78 million in the 2002/2003 season. The income earned was an important factor
in Jamaica's interest in this dispute. The pricin g mechanism which was the basis of this income was a
primary element of the Sugar Protocol. A disruption of the pricing mechanism would have an adverse
impact on the preferential arrangements covered by th e Sugar Protocol and could lead to the demise
of the industry causing high unemployment in rural areas, increasing the level of rural to urban
migration and thus leading to serious social and economic dislocation.
5.60 With respect to the legal arguments and Jamaic a's systemic interest, Jamaica noted that the
Complainants and various third parties had argued th at the burden of proof rested with the European
Communities to prove that the amounts of sugar e xported in excess of its reduction commitments had
not been subsidised as required by Article 10.3 of the Agreement on Agriculture . But an analysis of
WTO jurisprudence would show, Jamaica submitted, that this was only one aspect of the issue of
burden of proof. The Complainants had the initial bu rden of proof to demonstrate that the European
Communities' exports of sugar bene fited from export subsidies in contravention of the European

306 Third party written submission and oral statement by India.
307 See also ACP statement in paras. 5.1-5.12 above.

Communities' obligations under the WTO Agreement on Agriculture . According to Jamaica, WTO
case-law required that the party who had the burd en of proof must establish a prima facie case as
discussed in the Appellate Body report on US – Shirts and Blouses308 and had been cited in practically
all subsequent disputes when a burden of proof issue arose.
5.61 Referring to the panel report on India – Autos where it was established that if the party
carrying the burden of proof did not manage to estab lish a prima facie case, the panel had no basis for
a specific ruling on the issue at hand 309, Jamaica submitted that if the European Communities
successfully rebutted the Complainants' arguments or simply provided submissions which balanced
out those made by them, the Panel should rule in favour of the European Communities in line with the
WTO jurisprudence
5.62 With respect to the footnote in the EC Sche dule, Jamaica was of the view that it was an
integral part of the European Communities' comm itments on sugar. Jamaica considered that the
interpretation of the schedule did not form part of the Panel's terms of refere nce, but should the Panel
consider this issue, a proper interpretation of th e footnote in accordance with the general rules of
interpretation of the Vienna Convention would allow the European Communities to export 1.6 million
tons, with the benefit of export refunds, corresponding to its imports of ACP/Indian sugar.310
5.63 Kenya311 noted that it was part of a large block of developing countries under the auspices of
ACP countries whose partnership with the Europ ean Communities was geared towards a long-term
objective of eradicating poverty and supporting deve lopment in the ACP countries. The ACP sugar
exports to the European Communities created the requisite market access and formed part of the
ACP/EC arrangement. Sugar is one of the few major commercial crops grown in Kenya. The
average production area was estimated at 100,000 h ectares, producing 4 million tons per year and
employing over 200,000 small scale farmers. The sugar sector in Kenya was of vital importance as it
contributed directly and indirectly to GDP in terms of employment, source of revenue to the
government, foreign exchange earner, and poverty reduction and rural development.
5.64 The subsidy issue raised by the Complainants contested the very foundation on which the EC-
ACP countries' arrangement was predicated and u ndermined the vision of eradicating poverty in
developing countries such as Kenya. This arrange ment had provided Kenya an assurance of stable
prices and income to small scale farmers, not to mention investment in the sugar industry at a time
when the flow of foreign direct investment have drastically diminished. Referring to Article 3.5 of
the DSU, Kenya contended that the claim of the Compla inants would have a detrimental effect on a
large group of developing countries including Kenya as the Complainants had prima facie neglected
the core principle therein.
5.65 Kenya noted that the European Communities a nd ACP waiver from the obligations of the
European Communities under paragraph 1 of Article 1 of the General Agreement with respect to the
preferential treatment for products originating in ACP states had been granted in good faith by all
WTO members including the Complainants. The prim ary objective of this waiver was to safeguard
the interests of ACP countries whose economies were heavily dependent on export of a few primary
commodities. This, Kenya believed should be taken in to account by the Panel. This waiver was fully
consistent with the 1979 Decision on differential and more favourable treatment, reciprocity and fuller
participation of developing countries in the multilateral trading system.

308 Appellate Body Report on US – Wool Shirts and Blouses, para. 14.
309 Panel Report on India – Autos, paras. 7.231-7.233.
310 Third party oral statement by Jamaica.
311 See also ACP statement in paras. 5.1-5.12 above.

5.66 Kenya recalled that agriculture formed the backbone of most of the ACP third party countries
participating in this dispute. It also stressed th e economic importance of the sugar industry in Kenya,
and indeed in the ACP countries as it formed the cornerstone of the poverty reduction strategy of most
of these countries.
312
5.67 Madagascar313recalled the history of sugar cane production in Madagascar which started in
1917 at the instigation of the French colonial power. Already at that time, the production was export-
oriented and the five production units developed then were the same ones today. These sugar
industries were playing an essential role in the struggle against poverty in the country, constituting a
the driving-force for the socio-economic developmen t of the five regions in which these industries
were situated.
5.68 Madagascar explained that the benefits from cane sugar growing was not limited to sugar
production. Of the 2 million tonnes of cane produced annually, 900,000 tonnes were processed by the
sugar industry; the rest went to the distillery in dustry or for other usages. Moreover, the sugar
industry was a non-negligible employer with 3.82 per cent of the active population and 5.65 per cent
of agriculture employment. The sugar industry assu red also such services as health, education, roads
and electricity since the State often did not have the appropriate budgetary means.
5.69 Recent inventories, Madagascar continued, had shown that the country had enormous
potential in exploitable land for sugar cane pr oduction. Even though Madagascar suffered
periodically from tropical hurricanes, its climate was favourable to sugar cane production, a fact
recognized by foreign investors. Thus, sugar cane production assured not only a multifunctional role
in the economy of Madagascar, but also a vital one. Therefore, Madagascar concluded, as a least
developed country and producer and exporter of sugar, it was very concerned that a Panel decision
would confirm the Complainants allegations. Access to the EC market, at guaranteed prices, was the
key to sustained development of the sugar industry and its "satellites".314
5.70 Malawi315 noted that it was a least developed, landlocked country whose economy was
heavily dependent on commodities such as sugar. It submitted that the sugar industry played a very
vital developmental role by providing employment and other social services such as health, education,
housing, and infrastructure. Furthermore, th e sugar industry had led to the socio-economic
transformation of the rural areas where the sugar industry was located, resulting in the growth of small
townships actively engaged in trading and ot her related activities. Small scale businesses had
developed which provided services to the industry and its employees.
5.71 The economic importance of the sugar industry in Malawi's socio-economic development and
its positive impact in the fight against poverty was demonstrated by the fact that it employed directly
more than 15,000 people in the field and factory ope rations. Directly and indirectly the sugar industry
was responsible for the livelihood of over 95,000 pe ople. Since the introduction of the preferential
treatment under the Sugar Protocol to which Malawi became a beneficiary, sugar had replaced tea to
rank second only to tobacco as a major foreign excha nge earner. The ACP/EC sugar regime provided
the necessary price stability and predictability for attracting investment. The industry ` was now
floated on the local bourse, affording Malawians an opportunity to own shares.
5.72 The foreign exchange revenue from sugar e xports had contributed significantly to the
government budget by broadening both the corporate and income tax base. Needless to say the
industry had become an important contributor to Malawi's GDP.

312 Third party oral statement by Kenya.
313 See also ACP statement in paras. 5.1-5.12 above.
314 Third party oral statement of Madagascar.
315 See also ACP statement in paras. 5.1-5.12 above.

5.73 Malawi noted that it had for a long time de pended on tobacco as the predominant foreign
exchange earner and for its development. Howeve r, tobacco was experiencing a great deal of
problems as a result of the global anti-smoking lobb y. Malawi therefore needed to diversify its
economy and sugar provided the most viable alternat ive. All these were huge challenges for a small
landlocked, commodity dependent LDC. For Malawi to be economically viable and for it to graduate
to the next level of development, it had to continue making huge sacrifices. The outcome of this
challenge could therefore very well determine how Malawi would confront and succeed in its
development efforts amidst these daunting challe nges. Only a positive outcome would guarantee
Malawi's competitiveness in its trade and trade related activities.316
5.74 Mauritius317 explained that the sugar industry had a multifunctional role in Mauritius, having
both an economic impact as well as a socio-economic , energy and environmental impact. Mauritius
noted that 50 per cent of the land area in the country was devoted to agriculture, 90 per cent of which
was used for sugar cane production. Also, 90 pe r cent of agricultural export proceeds came from
sugar exports with gross sugar export earni ngs amounting to some US$330 million or some
20 per cent of all merchandise exports. The net suga r export earnings covered 75 per cent of the food
import bill in a country that had to import nearly all of its food requirements; this food procurement
capacity, Mauritius submitted, was vital for its food security.
5.75 Furthermore, some 200,000 persons were directly or indirectly dependent on the sugar sector
for their livelihood, out of a population of 1.2 milli on, and sugar proceeds were used to provide key
services such as research and insu rance to the industry. Electricity generated by sugar factories or
power plants using bagasse, Mauritius continued, an environment friendly renewable source of
energy, represented 25 per cent of the national produc tion. The use of bagasse in an island devoid of
fossil fuels was a key element of the energy strategy. With respect to the environmental impact of the
sugar industry, Mauritius observed that the can e plant was by far the most important carbon
sequestrator of all cultivated plants. The high yiel d per hectare of cane helped to mitigate the
enhanced greenhouse effect.
5.76 Mauritius had remained largely a single-commodity exporter, not out of choice but as the
result of the inherent constraints the country faced as a small island state located in a cyclonic belt. In
view of the overall importance of the sugar industr y, any disruption of the EC sugar regime would
result in a significant fall in Mauritius export earning s and would severely damage the island's fragile
economy, social fabric and environment.
5.77 Mauritius submitted that the sugar exports of Mauritius or other ACP sugar-supplying states
to the European Communities did not affect the ba lance of interests established between the various
stakeholders under the EC sugar regime. Though the ACP exports to the European Communities have
since 1975 increased from 1.3 million tonnes to 1.6 million tonnes, they could not be deemed to create
any market distortion. The ACP/EC sugar trade ag reement was an important pillar of the EC sugar
regime and any ruling in favour of the Complain ants could only jeopardise the survival of the
economy of Mauritius and of other ACP States.318
5.78 New Zealand referred to the Appellate Body report in Canada – Dairy and argued that in the
context of Article 9.1 (c), "p ayment" included revenue foregone. 319 To determine whether a payment
had been made "requires a comparison between the price actually charged by the provider of the
goods or services… and some objective standard or benchmark which reflects the proper value of the

316 Third party oral statement by Malawi.
317 See also ACP statement in paras. 5.1-5.12 above.
318 Third party oral statement by Mauritius.
319 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US), para. 73.

goods or services to their provider...".
320 The "objective standard or benchmark" identified by the
Appellate Body in Canada – Dairy was the average total cost of production. Accordingly, where a
producer sold a product at less than it cost to produ ce it, there was a "payment" within the meaning of
Article 9.1(c). New Zealand held that the Compla inants had provided factual evidence demonstrating
that the producers of C sugar were charging a price for their exports that was below the average total
cost of production of C sugar and that the Eur opean Communities had produced no evidence to the
contrary. Nor had it sought to provide an alternativ e benchmark to that of the average total cost of
production, as applied in Canada – Dairy . There was, therefore, a "payment" in the context of
Article 9.1(c). The attempt by the European Commun ities to suggest that this conclusion should turn
on whether or not there was an intermediary involved in the export of sugar had no basis in logic, and
no foundation in law.
5.79 New Zealand stressed that, unlike what was ar gued by the European Communities, there was
no need to demonstrate the existence of a "benefit" within the meaning of Article 1.1(b) of the
SCM Agreement in order to satisfy the requirements of Article 9.1(c) of the Agreement on Agriculture
since the terms of Article 9.1(c) established a "sta nd alone" definition of an export subsidy that could
be given effect on its own terms, as it had in the Canada – Dairy dispute. . In any case, even if such a
"benefit" needed to be demonstrated, one clearly exists. Producers can export "C" sugar without
making a loss (indeed in doing so they make a prof it) because they need only cover their marginal
costs, and thus receive a benefit.
5.80 New Zealand concurred with the Complainants that the payments on C sugar were dependent
or conditional upon the C sugar being exported. If the C sugar was not exported, no payments were
made (there was no revenue foregone ). C sugar could only be exported – it could not be sold on the
domestic market. C sugar was also not eligible for Article 9.1(a) export subsidies. Nor could C sugar
viably be exported in the absence of the payment. When the option was exercised of carrying over the
C sugar to the next marketing year where it could be reallocated as 'A' sugar and either sold at the
high domestic price or exported with the benefit of Article 9.1(a) export subsidies, no payment in the
context of Article 9.1(c) would be made.
5.81 New Zealand questioned the European Communities' argument that the requirement of export
contingency applied to the measures that financed the payments, rather than to the payments
themselves.321 In the opinion of New Zealand, Article 9.1( c) requires that it is the "payments" that
must be "on the export" and not the government al action which finances them. Moreover, New
Zealand argued, there was no requirement to show that the operation of the European Communities'
domestic price support mechanisms we re contingent upon the export of C sugar. What was required
and which New Zealand believed had been demonstrated by the Complainants, was that the payments
to C sugar were contingent upon C sugar being exported.
5.82 Finally, New Zealand asserted that if the European Communities were to "remove the
condition" that required C sugar to be exported, then the Article 9. 1(c) export subsidy would indeed
no longer be in place. There would be nothing in such an action requiring the European Communities
to cease supporting its domestic production. Theref ore, New Zealand rejected the European
Communities' claim 322 that the Complainant's interpretation of Article 9.1(c) would blur the
distinction between the disciplines on domestic support and export subsidies..
5.83 With respect to "financed by virtue of gove rnmental action", New Zealand referred to the
reasoning developed by the Appellate Body in the Canada – Dairy dispute, in which it was required
to establish the existence of a demonstrable link between the governmental action at issue and how

320 Ibid., para. 74.
321 European Communities' first written submission, para. 42.
322 European Communities' first written submission, para. 64.

payments were financed.323 New Zealand argued that, as was the case in Canada – Dairy, producers
could cover their fixed production costs through sal es of 'A' and 'B' quota sugar and needed to cover
only the marginal costs of C sugar production on sales in the export market. In this way the domestic
sales of 'A' and 'B' sugar cross-subsidised exports of C sugar that would otherwise not occur or be
made at a loss. New Zealand believed, as demons trated by the Complainants, that governmental
action created both the means and the incentive for th is cross-subsidisation to occur and exports of
C sugar to be made. Governmental action was inherent throughout th e tight regulatory controls that
the European Communiti es exercised over every aspect of sugar production in the European
Communities. Those controls set guaranteed prices for 'A' and 'B' sugar production for the domestic
market. The high domestic prices offset some of the cost of C sugar production, which was further
encouraged by other aspects of the regime. Thus, for New Zealand, there was clearly a "demonstrable
link" between the relevant "governmental action" and the means by which "payments" were financed.
5.84 In the alternative, New Zealand submitted, the European Communities' sugar regime provided
export subsidies not listed in Article 9 resulting in circumvention of the European Communities'
export subsidy commitments contrary to Article 10.1 of the Agreement on Agriculture . New Zealand
considered that the Complainants had demonstrat ed that the EC sugar regime provided an export
subsidy as described in paragraph (d) of Annex I to the SCM Agreement. As the Appellate Body had
confirmed, the Illustrative List in Annex 1 to the SCM Agreement provides a list of practices
considered to be "export subsidies" under the SCM Agreement and thus, if a measure was described in
the Illustrative List it may be characterised as an "export subsidy" within the meaning of Article 10.1.
5.85 As regards the applicability of the SCM Agreement, in New Zealand's view the words "Except
as provided in the Agreement on Agriculture " had the effect of applying the prohibitions on the
subsidies set out in Article 3 of the SCM Agreement except where such subsidies were expressly
permitted by the Agreement on Agriculture . This approach reflected the fact that the Agreement on
Agriculture provided a limited and clearly delineated authorisation to Members to provide subsidies in
respect of agricultural products that would otherwise not be permitted.
5.86 Referring to the European Communities' ar gument with respect to impairment or
nullification324, New Zealand held that the issue in this dispute was whether the benefit accruing to
Members under Articles 3.3, 8 and 10.1 of the Agreement on Agriculture, was adversely impacted by
the European Communities' breach. As r ecognized by the European Communities, 325 Articles 3.3, 8
and 10.1 protect an expectation as to the competitive relationship that would exist between the exports
of one Member and those of another. Accordingl y, there was no reason, in New Zealand's view, to
reach a different conclusion from that reached in US – Superfund that "a change in that competitive
relationship contrary to [the provisions of the Agreement on Agriculture] must consequently be
regarded ipso facto as a nullification or impairment of benefits accruing [under the Agreement on
Agriculture]326. Furthermore, New Zealand did not belie ve there was any requirement to show
"injury", which had a specific meaning in the context of WTO law.
5.87 As concerns exports of ACP/India equiva lent sugar and reduction commitments, New
Zealand sustained that there was no option in the Agreement on Agriculture whereby Members could
cap the volume of an Article 9 export subsidy. T hus, subsidies on the export of 1.6 million tonnes of
ACP/India equivalent sugar could only be provided subject to reduction commitments.327

323 Report of the Appellate Body, Canada – Dairy (Article 21.5 – New Zealand and US), para. 113.
324 European Communities' first written submission, para. 145.
325 Ibid., para. 148.
326 GATT Panel Report on US – Superfund, para. 5.1.9.
327 Third party written submission and oral statement by New Zealand.

5.88 Paraguay considered that the assistance granted by the European Communities to its Member
States was at odds with the multilateral provisions of the SCM Agreement and the Agreement on
Agriculture as well as with the rules of the GATT 1994. For the purposes of this dispute, given that
not only was this assistance distorting international trade, but the distortion was, in the opinion of
Paraguay, particularly damaging to the developi ng countries, Paraguay submitted that there was a
violation of rules and principles as well as adverse effects on trade which were seriously injuring the
economy and development, in this case of Paraguay.
5.89 As regards inconsistency with the Agreement on Agriculture , Paraguay noted the effects on
the export and competitiveness of the product at issu e in the international market, which were, in
Paraguay's opinion, inconsistent with Articles 3. 3 and 8 of the Agreement. Paraguay deemed it
important to consider Article 8 of the Agreement on Agriculture with respect to domestic policies that
jeopardize export competition. That article clea rly lays down the obligation for each Member to
refrain from providing export subsidies otherwise than in conformity with the Agreement and with
commitments as specified in that Member's Schedule.
5.90 Paraguay held that the commitments not to pr ovide export subsidies in accordance with the
conditions set forth in Article 8 of the Agreement on Agriculture assumed that there would be
individual cases in which countries were free to apply domestic support mechanisms (in this case a
subsidy). Such freedom was contingent upon policies to encourage agricultural and rural
development in the developing countries as part of agricultural programm es for low-income or
resource-poor producers. In such cases, develo ping countries were entitled under the WTO not to
reduce their domestic support (Article 6 of the Agreement on Agriculture ). In the case at issue, the
subject of the dispute clearly did not reflect the situ ation described above. This was why, as stated by
the Complaining parties, the European Communities appeared to be violating Articles 3.3 and 8 of the
Agreement on Agriculture. Indeed, in the circumstances described, the granting of the export subsidy
applied to a quantity of sugar that exceeded the level of its support reduction obligations.
5.91 Paraguay explained that it was a country faced w ith an urgent need to increase the volume of
its exports, in particular its ag ricultural exports. The Sugar protocol imposed obstacles or difficulties
in exercising what Paraguay considered as its genuine right of access to larger markets. In this sense,
Paraguay was of the view that the European Comm unities must comply with the provisions of the
Agreement on Agriculture, bearing in mind that the export subsidies granted to the European countries
in question were inconsistent with Articles 3.3 and 9.1 of that Agreement.
328
5.92 St Kitts and Nevis 329 explained that sugar and mol asses accounted for as much as
92.3 per cent of the islands total agricultural e xports as well as for 58.2 per cent of the total number
employed in agriculture, which was indicative of the country's high dependen ce on sugar. St. Kitts
and Nevis was classified as a Small Island Developing State and was the smallest independent State in
the Americas, and also the smallest member both in terms of size, population and volume of trade, of
the WTO.
5.93 St. Kitts and Nevis was also a traditional s ugar exporter with no r ealistic opportunity for
diversification of the agricultural sector which was defined in terms of a single agricultural export –
sugar – to a single export market – the European Communities. St. Kitts and Nevis exported some
15,000 tonnes per year to the European Communitie s. Sugar exports to the European Communities
represented a vital source of foreign exchange, a major source of rural employment and income, and
given the multi-functionality of sugar, it was of gr eat social, economic and e nvironmental importance
to St. Kitts and Nevis. The country was also a net food importing country and agricultural production
on sugar estates helped alleviate this situation.

328 Third party written submission and oral statement by Paraguay.
329 See also ACP statement in paras. 5.1-5.12 above.

5.94 St. Kitts and Nevis submitted that the ACP third party submission and statement had
demonstrated the unique arrangements which comprised the EC sugar regime. This regime was based
on a system of guarantees which were dependent up on each other in so systemic a manner that any
rearrangement or dismantling of any aspect of that re gime would likely lead to a collapse of the entire
system. The EC Sugar Protocol, from which the preferential arrangements derived, had become
enshrined in international treaty obligations and had been sanctioned by WTO rules and laws and,
indeed, St. Kitts and Nevis noted, the Complainants were among the GATT Members which reviewed
the Sugar Protocol and agreed to grant it a waiver from Article I of the GATT. The Complainants
therefore knew or ought to have known that one of the objectives of the Sugar Protocol was the
reduction and eventual eradication of poverty, c onsistent with sustaina ble development and the
gradual integration of the ACP countries into the wo rld economy. St. Kitts and Nevis therefore found
it troubling that at this late stage, the Complainants were trying to claw back benefits that had been
conceded to the ACP.330
5.95 Swaziland331 noted that it was a small and vulnerabl e landlocked developing country heavily
dependent on the production and expor t of sugar, relying on the predictable and stable earnings from
sugar exports to the European Communities under the ACP/EC trading arrangements on sugar for
addressing specific economic and social difficulties and for sustainable economic development in
general. Sugar was the most important pillar of the Swazi economy. With the recent expansion into
smallholder agricultural schemes, it had brought significant relief to the government's policy objective
of poverty reduction and played a key role in supporting key sectors of the economy such as transport,
finance, water and electricity.
5.96 In a normal year, sugar cane production contributed 61 per cent to agricultural output which
in turn was 11 per cent of GDP. Sugar's contribution to agriculture rose to 75 per cent during periods
of drought. For Swaziland, sugar was and would rema in the predominant agricultural activity. But,
due to geography and climate, Swaziland could not become a world class multi-commodity exporter
even in the foreseeable future. Sugar exports pr ovided much-needed foreign exchange earnings for
the Swazi economy. In 2002, export earnings derived from sugar sales accounted for 7 per cent of the
country's total export earnings and 36 per cent of total agricultural export receipts. These export
earnings were used inter-alia to finance development programmes, rationalisation and modernisation
programmes in the sugar industry as well as diversifi cation in other sectors. Sugar exports to the
European Communities represented more than one-t hird of the country's sugar production and. a
much higher proportion of the sugar revenue, divided between millers and growers in accordance with
an agreed formula.
5.97 Furthermore, Swaziland explained, the sugar industry was a major employer, accounting for
more than 9 per cent of the working population. It was estimated that the sugar industry provided
support to about 86,000 people (9 per cent of the tota l population of just over l million). It accounted
for 92 per cent of total agricultural employment. A positive externality that had resulted from the
growth of the sugar industry was its contributi on toward the achievement of the Government's
objectives of poverty reduction through the provision of social services to the population. The Swazi
sugar industry had invested substantially in housing, education (kindergarten, primary and secondary),
health care services, recreational facilities and clean water. These benefits had been extended beyond
the sugar industry's precincts to the surrounding ru ral communities. In addition, the sugar growing
areas had attracted other support businesses such as finance, transport and retail trade.
5.98 Although sugar exports from Swaz iland and other ACP countries comprised an insignificant
amount of global sugar trade and did not affect th e market shares of large sugar exporters like the
Complainants in this dispute, they played considerable roles in their respective economies. Due to the

330 Third party oral statement by St Kitts and Nevis.
331 See also ACP statement in paras. 5.1-5.12 above.

fragile and vulnerable nature of its economy, Swaziland would not be in a position to absorb
precipitous changes without serious disruptions in its socio-economic stability. As a narrowly based
economy, which was difficult to diversify, Swaziland could not absorb changes in the same time scale
as more developed and broadly based economies.
5.99 Swaziland considered that a ruling in favour of the Complainants would be devastating for its
fragile economy. It would result in a drastic reduc tion in the level of economic activity in a country
where two-thirds of the population lived below the poverty line. Swaziland concluded that the
consequences of the ruling in favour of the Complain ants in this dispute would be much against the
spirit of the ACP/EC Partnership Agreements and the objectives set out in the
-Preamble of the
Marrakech Agreement, as well as the objectives of the GATT and WTO.332
5.100 Tanzania333 was of the view the Sugar Protocol was anchored in a moral imperative to create
a special opportunity that could support the devel opment aspirations of ACP countries, among whom
were some of the world's weakest and most vul nerable nations. Unlike Australia, Brazil and
Thailand, Tanzania remained one of the world' s poorest countries classified as LDCs. The economy
was weak, dominated by agriculture which made up about 60 per cent of the GDP, 85 per cent of total
export earnings and employed 90 per cent of the activ e labour force. Over 90 per cent of Tanzania's
agriculture relied on smallholder peasants. Topogr aphy and harsh climatic conditions limited crop
production to less than 4 per cent of the total land area.
5.101 The Industry sector, which accounted for only 10 per cent of Tanzania's GDP, was one of the
smallest in Africa and the world. About 50 per cent of the manufacturing industry was agro-based,
including sugar. Its contribution to exports was small, because of Tanzania's low capacity to
penetrate international markets and compete with big suppliers, including those of sugar. The modest
quantities of sugar that Tanzania did export were actually thanks to the EC/ACP Sugar Protocol.
5.102 Under the EC sugar arrangements, Tanzania explained, it did not only benefit from the
preferential export market and remunerative pri ces, but also derived greater investment and
employment opportunities, which were crucial for the economic and social transformation of the
country. Consequently, after a three-decade peri od of setbacks, sugar production was increasing,
along with exports. Tanzania's sugar production was expected to increase from 190,120 tonnes last
year, to 245,000 tonnes this year. On the other ha nd, sugar exports to the EC markets increased from
22,150 tonnes in 2001/2002, to 22,700 tonnes in 2002/2003. The turnaround had also expanded
employment opportunities to a large number of smallholders and professionals.
334
5.103 Trinidad and Tobago 335 submitted that the European Communities' sugar regime and the
Sugar Protocol were symbiotically linked. An a ttack on any one area of this special arrangement
would have a deleterious effect on the entire struct ure. Trinidad and Tobago was fully cognizant of
the multifunctional role of agriculture particularly in rural communities. For Trinidad and Tobago,
agriculture was more than a trad e activity in which market access w as actively pursued. Agriculture
contributed to the very social and cultural fabric of our communities. The sugar industry promoted
and supported other commercial activ ities, provided infrastructure, and recreational facilities and
more importantly, by its very presence, limited rural exodus through the provision of meaningful
employment. Further, in Trinidad and Tobago, sugar cane cultivation was practised primarily by
small farmers. A loss of market share or preferential access would negatively affect and displace not
only these cane farmers, but also employees, other stakeholders and residents in surrounding

332 Third party oral statement by Swaziland.
333 See also ACP statement in paras. 5.1-5.12 above.
334 Third party oral statement by Tanzania.
335 See also ACP statement in paras. 5.1-5.12 above.

communities where cane farming and production was pr ominent. It was the benefits derived from
preferential access that permitted the continuation of the aforementioned activities.
5.104 In Trinidad and Tobago's view, the two primar y benefits derived from the Sugar Protocol's
preferential quota arrangements were the guaranteed access and the remunerative prices. The Sugar
Protocol had in effect reduced the instability of e xport earnings and had been an important source of
both price stability and sales security for sugar produ cers. Trinidad and Tobago's current quota under
the Sugar Protocol was 45,404 tonnes of raw sugar while that under the Special Preferential System
(SPS) it was 7,385 tonnes. For th e period 1994–2002, Trinidad and Tobago's shipments of Protocol
sugar averaged 38 per cent of the country's total sugar production and 84 per cent of its total sugar
exports. In 2003, according to the provisional figur es provided by Trinidad and Tobago's statistical
authorities, the earnings of the sugar industry were assessed at TT $328 million (approximately US
$52 million). For Trinidad and Tobago, this was a significant sum and it represented approximately
43 per cent of the total earnings of the agriculture sector.
5.105 Trinidad and Tobago had embarked on a path of restructuring and reorganization of its sugar
industry, the intent being that there be less governmental intervention. As a result of the restructuring,
the number of cane farmers and those involved in related activities had been substantially reduced
with its social and economic consequences. Tr inidad and Tobago noted that the preferential
arrangements were one of the pillars on which the restructured industry had been built. Referring to
the preamble of the Marrakech Ag reement Establishing the World Trade Organization, Trinidad and
Tobago was of the opinion that the present challenge to the ACP/EC preferential trading arrangement
on sugar could result in the substantial reduction or complete elimination of Trinidad and Tobago's
sugar industry, i.e. the very opposite of the objectives in the preamble would most likely be
realised.
336
5.106 The United States noted that it took no view as to whether, under the facts of this dispute, the
measures at issue were consistent with the Agreement on Agriculture and/or the SCM Agreement.
However, the question was whether the European Communities was providing export subsidies for C
Sugar, a question that needed to be reso lved by reference to the text of the Agreement on Agriculture
and the SCM Agreement. If the answer was that the European Communities was providing export
subsidies for C sugar, then the question would be whether the European Communities was exceeding
its export subsidy commitments for sugar. And that was a question that needed to be resolved with
reference to the Agreement on Agriculture and the EC's Schedule.337
5.107 In response to the European Communities' argume nts that, first, it was known at the time it
negotiated its Schedule that C sugar did not receive export subsidies and, therefore, it was known that
the European Communities did not include C sugar in the base quantity for calculation of its reduction
commitments; and second, that the modalities guide lines developed during the negotiations supported
the European Communities' position that, if the Pa nel concluded that the European Communities was
exceeding its commitments, the European Communities' commitment levels for sugar export subsidies
should be recalculated, the United States was of the opinion that neither of these arguments could be
used to contradict the text of the WTO Agreement.
5.108 The United States, referring to the European Communities' argument with respect to what was
"known" at the time the European Communities negotia ted its Schedule, considered that this was not
the issue. Members' alleged "knowledge" did not govern the legal inquiry, but rather it was the
Members' agreement, reflected in the text of th e WTO Agreement, that governed. Similarly, the
United States recalled that the modalities guidelines we re not a covered agreement, indeed were not

336 Third party oral statement of Trinidad and Tobago.
337 Third party written submission of the United States, para. 3.

an agreement at all, and did not provide "context" for interpreting the text of the WTO Agreement.
 338
It stressed that the modalities document itself established that it was not a covered agreement.339
5.109 In this respect, the United States recalled the Appellate Body report in EC – Bananas III, in
which the Appellate Body made the observation that the modalities paper was not referred to in the
Agreement on Agriculture.340 The United States also contended th at Members had explicitly rejected
the modalities guidelines as "context" for interpre ting Member Schedules. The United States was
further of the view that it was not necessary, in th is case to have recourse to supplementary means of
interpretation as set out in Article 32 of the Vienna Convention.
5.110 Accordingly, to determine whether the measur es at issue constituted export subsidies for
purposes of the Agreement on Agriculture, it was necessary to refer to the definition of export subsidy
in that Agreement and related provisions. Similarl y, it would be necessary to refer to the definition
and related provisions in the SCM Agreement to determine if the measur es were export subsidies for
purposes of that Agreement. If the measures were export subsidies, the United States continued, and
were in excess of the European Communities' e xport subsidy commitments, then the European
Communities would need to bring its measures into compliance. Additionally, the measures would be
subject to the SCM Agreement disciplines.
5.111 The United States was of the view that, contrary to what the European Communities was
alleging, the FSC dispute showed that subsidies could be analyzed under both the SCM Agreement
and the Agreement on Agriculture . Contrary to the European Communities' assertion, the United
States noted that the Canada-Dairy dispute also di d not stand for the proposition that a measure could
not be analysed under both agreements. This was not to say, however, that the SCM Agreement
applied to all agricultural support or subsidies. Ra ther, the question needed to be approached on a
provision-by-provision, case-by-case basis. Such an interpretation was supported by the language of
Article 3 of the SCM Agreement, which states that certain subsidies are prohibited "except as
provided in the Agreement on Agriculture ". If export subsidies did not fully conform to the
commitments established under Part V of the Agreement on Agriculture, those subsidies were subject
to the SCM Agreement disciplines.
5.112 With respect to export contingency, the United States recalled that in Canada – Dairy, the
panel had found, in a statement not modified by th e Appellate Body, that Canada's payments were
made contingent on the export of the agricultural product at issue. 341 This critical aspect of
government intervention – export contingency – was found because Canada's governmental scheme
mandated that products for which pa yments were received had to be exported. Thus, governmental
intervention requiring export performance was a neces sary part of any analysis of the obligations
under Article 9.1(c) of the Agreement on Agriculture. In the opinion of the United States, this export
contingency requirement applied to both the Agreement on Agriculture and the SCM Agreement.
5.113 With respect to the discussion of the role of international law, particularly concerning the
concept of estoppel, the United States reiterated that Article 1.1, Appendix 1, and Article 3.2 of the
DSU reflected a very conscious choice on the part of WTO Members to limit the use of international
law in WTO dispute settlement proceedings to cust omary rules of interpretation. Members had not
consented to provide for the application of the pr inciple of estoppel in WTO dispute settlement. No
provision of international law as such, the United St ates continued, was a "covered agreement" that

338 Third party written submission of the United States, para. 4.
339 Modalities for the Establishment of Specific Binding Commitments, MTN.GNG/MA/W/24
(20 December 1993) (Exhibit EC-3).
340 See Appellate Body Report on EC – Bananas III, para. 157.
341 See Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II), para. 79.

may be applied in WTO dispute settlement, nor was there any other basis for importing into the WTO
other provisions or obligations of public international law.
5.114 The lack of any textual basis for importing the principle of estoppel, the United States
continued, was further emphasized by the lack of consistent description of the concept when panels
had had occasion to discuss estoppel in the past. In EEC (Member States) – Bananas I , for example,
the panel stated that estoppel can only "result from the express, or in exceptional cases implied,
consent of the complaining parties." 342 In EC – Asbestos and Guatemala – Cement , by contrast, the
panels stated that estoppel was relevant when a party "reasonably relies" on the assurances of another
party, and then suffers negative consequences r esulting from a change in the other party's position. 343
These inconsistencies illustrated the dangers of seeking to identify purportedly agreed-upon legal
concepts beyond the only source all Members had agreed to – the text of the DSU itself.344
VI. INTERIM REVIEW
6.1 On 17 August 2004, pursuant to Article 15.2 of the DSU, Article 16 of the Panel's Working
Procedures and the revised Timetable for Panel Pr oceedings, the parties provided their comments on
the Interim Reports. None of the parties requested a meeting to review part(s) of the Interim Reports.
On 24 August 2004, pursuant to the revised Timeta ble for Panel Proceedings, the parties submitted
further written comments on the comments that had already been provided on the Interim Reports on
17 August 2004.
6.2 In light of the parties' interim comments, th e Panel has reviewed its Findings. Pursuant to
Article 15.3 of the DSU, this section of the Panel Reports contains the Panel's response to the main
comments made by the parties in relation to the Inte rim Reports and forms part of the Findings of the
Panel Reports.
A. EDITORIAL AND OTHER CHANGES
6.3 The parties have suggested a number of ed itorial changes to the Interim Reports and
corrections of typographical errors; parties have also suggested different ways to present their
arguments and have sometimes requested that references be added to specific arguments or specific
exhibits or that factual statements made by the Pa nel be deleted. The Panel has largely accepted these
suggestions and revised its findings accordingly.
B. TERMS OF REFERENCE
6.4 The European Communities considers that its obj ections concerning the scope of the terms of
reference should be dealt with by the Panel separately with respect to each complaining party, taking
into account exclusively what is stated by each co mplaining party in its own panel request and the
arguments/claims made by each of them during the pr oceedings and the moment at which they were
made for the first time by each of them.
6.5 The Panel agrees with the European Communitie s that each of the Complainants' panel
requests must comply with the requirements of Article 6 of the DSU. Moreover, while the three
disputes dealt with the same matter and were joined pursuant to Article 9 of the DSU, Article 9.2

342 See Panel Report on Argentina – Poultry Anti-Dumping Duties, para. 7.38 (quoting EEC (Member
States) – Bananas I.
343 See Panel Report on EC – Asbestos , para. 8.60 (citations omitted); Panel Report on Guatemala –
Cement I, paras. 8.23-8.24.
344 Third party oral statement of the United States, para. 9.

makes clear that in such circumstances the Panel has to ensure "that the rights which the parties to the
dispute would have enjoyed had separate panels examined the complaints are in no way impaired".
6.6 In the Panel's view, although the complaining parties drafted their panel requests using
slightly different terms
345, each of the Complainants' panel requests has identified essentially the same
measures – subsidies accorded under EC Council Regulation 1260/2001 under the so-called EC Sugar
regime – and the same alleged violation - the European Communities exceeds its budgetary outlays
and quantity commitments contrary to Articles 3 and 8 of the Agreement on Agriculture . For this
reason, after noting the specific language of each pa nel request, and in light of the fact that the
Complainants endorsed each other's factual and lega l arguments, the Panel was able to examine the
European Communities' allegations concerning the Panel's terms of reference and whether some of
the Complainants' arguments could be validly invoked in the course of the present proceedings.
6.7 In particular, the European Communities has argued that each payment discussed by the
Complainants constitutes a distinct claim and all these claims (alleged payments) have not been
specifically identified in each of the Complain ants' Panel requests - and for the European
Communities this lacuna cannot be cured by th e allegation during the panel process that all
Complainants endorsed each other's arguments.
6.8 The Panel agrees with the European Communitie s that the Complainant's claims must be
adequately specified in each of the Complainan ts' Panel requests. The legal basis of the
Complainants' claims is Articles 3 and 8 of the Agreement on Agriculture . The Panel is of the view
that a claim under Article 3 (and Article 8) of the Agreement on Agriculture requires allegations that,
first, the European Communities has exported suga r above its commitment levels and, second, that
such exports of sugar were subsidized. In the Pa nel's view, the Complainants have satisfied these
requirements adequately. In their requests for esta blishment of a panel, the Complainants did not
have to detail how and why such exports were being subsidized, only that the commitment levels were
exceeded and that exports were subsidized. Moreove r, the Complainants did indicate some aspects of
the export subsidization of EC sugar in their panel re quests in referring to Article 9.1(a) and 9.1(c) of
the Agreement on Agriculture.
6.9 Therefore, the Panel considers that the Comp lainants' Panel requests complied with the
requirements of Article 6.2 of the DSU in that they adequately identified the measures at issue and the
violations claimed to have occurred, i.e. that th e European Communities' exports of subsidized sugar
exceeded the European Communities' commitment level contrary to Articles 3 and 8 of the Agreement
on Agriculture. They further developed in their written or oral submissions argumentation as to how
and why in their view, exports of C sugar are su bsidized. In the Panel's view, the European
Communities understood these claims from the beginning of the DSU process and articulated its
defence accordingly.
C.
THERE ARE NO "C SUGAR PRODUCERS" AND NO "C BEET GROWERS" AS SUCH
6.10 Australia suggests that the references to "C beet growers" and "C sugar producers" are
inaccurate in that this terminology implies th at there are enterprises engaged solely in the
growing/farming of C beet and enterprises engaged solely in the production of C sugar. Australia
emphasises that the "growers of C beet are also growers of A and B beet" that is, there is no
independent production of C beet. Moreover, the producers of C sugar are the same companies that
produce A and B sugar, that is, there is no independent production of C sugar.
6.11 The Panel is aware of the fact that strictly sp eaking there are no "C sugar producers" as such;
there are no sugar producers that produce only C sugar. C sugar is produced by the producers of A

345 See the full text of the panel requests in Annex D below.

and B sugar. Therefore "C sugar producers" are EC sugar producers who produce C sugar in addition
to A and B sugar. The same is true for C beet. There are no beet farmers who grow only C beet. C
beet is grown by farmers of A and B beet. Therefore "C beet growers" are the EC beet farmers who
also grow C beet, in addition to A and B beet. The Panel has tried to make this clear in footnote 544
of its Panel Reports. In the present dispute, the Panel has had to assess whether the exports of sugar
in amounts exceeding the European Communities' sche duled commitment levels are subsidized. The
Panel understands that the exceeding sugar is composed of C sugar and ACP/India equivalent sugar.
In its assessment of whether exports of C sugar are subsidized, the Panel examines the costs of
growing C beet as well as the costs of processing and producing C sugar. In doing so the Panel refers
to C beet growers and C sugar producers with a vi ew to focussing on the exports of sugar that are
above the European Communities' commitment levels.
D. A
 REFERENCE TO THE EUROPEAN COMMUNITIES' COMMITMENTS FOR BUDGETARY OUTLAYS
6.12 Australia has requested that the Panel clarifies in its conclusions that Footnote 1 to Section II,
Part IV of the European Communities' Schedule do es not enlarge or otherwise modify the European
Communities' specified quantity commitment of 1, 273,500 tonnes per year, nor does it modify or
enlarge the European Communities' specified budgetary outlays.
6.13 The Panel agrees with Australia and has clarified its findings and conclusions so that it is now
clear that the European Communities' annual budge tary outlay and quantity commitment levels for
exports of subsidized sugar are determined with reference to the entries specified in Section II, Part IV
of its Schedule and that the content of Footnote 1, in relation to these entries, is of no legal effect and
does not enlarge or otherwise modify the European Communities' specified commitment levels.
E. PANEL'S EXERCISE OF JUDICIAL ECONOMY OVER THE SCM CLAIMS
6.14 Australia requested the Panel to reconsider its decision to exercise judicial economy in regard
to findings under the SCM Agreement because (1) the European Co mmunities had contested the
claims and arguments of Australia that the SCM Agreement has application to agricultural products
and may apply to the same measures as are at issue pursuant to the Agreement on Agriculture; (2) the
prohibitions in the SCM Agreement have no direct counterpart in the reduction commitment
obligations in the Agreement on Agriculture; (3) the Appellate Body's decision in Australia – Salmon
did not involve claims under the SCM Agreement, Article 4.7 of which imposes a duty on panels to
recommend a time period for withdrawal of a measure; and (4) in the context of Article 19.2 of the
DSU, a decision not to examine claims under the SCM Agreement would diminish the rights of
Australia in regard to the implementation time peri od in the event of its claims proceeding. The
European Communities opposed Australia's request. The Panel has modified paragraph 7.382 and has
added paragraph 7.385 in response to Australia's comments but declines to change its decision to
exercise judicial economy in regard to findings under the SCM Agreement.
6.15 Australia also requested that the Panel recons ider its comments in paragraph 7.386. Although
the Panel does not consider that changes to paragraph 7.386 are necessary, it observes that its
comments should not be taken in any way as a critic ism of the manner in which the parties argued a
highly complex case under tight time constraints. The point is merely that the focus of the dispute
was understandably on the Agreement on Agriculture and that this was an additional consideration
relevant to the Panel's judgement to exercise judicial economy in this case.

VII. FINDINGS
A.
MAIN CLAIMS AND GENERAL ARGUMENTS OF THE PARTIES
7.1 The Complainants' claim 346 that the European Communities has, since 1995, been exporting
quantities of subsidized sugar in excess of its annua l commitment levels, contrary to Articles 3 and 8
of the Agreement on Agriculture . In particular the Complainants claim that in the 2001-2002
marketing year the European Communities exported 4.097 million tonnes of subsidized sugar, well
above the 1.273 million tonnes specified in its Schedule. 347 The Complainants argue that, regardless
of how the sugar is categorized, such subsidized expo rts of sugar were inconsistent with the European
Communities' obligations under Articles 3, 8 and 9, or in the alternative, with Article 10.1 of the
Agreement on Agriculture . Finally, the Complainants also claim that the said measures are
inconsistent with the SCM Agreement.
7.2 The European Communities admits that its exports of sugar have been in excess of the figure
shown in Section II, Part IV of its Schedule 348. The European Communities submits that its export
subsidy commitments for sugar are, in fact, made up of two components: (i) one component which
has been subject to progressive reduction during th e implementation period; and (ii) a second
component, Footnote 1 to Section II, Part IV to its Schedule containing the so-called "ACP/India
sugar Footnote" which, it maintains, is subject to a ceiling of 1.6 million tonnes. 349 Thus, for the
European Communities, its exports of ACP/India equivalent sugar are not in excess of its commitment
level. The European Communities denies that C sugar benefits from subsidies that are inconsistent
with the Agreement on Agriculture or the SCM Agreement. The European Communities argues,
"subsidiarily", that if the Panel concludes that C sugar is subsidized, the only course of action
consistent with the requirement of good faith would be for the Complainants to agree to the correction
of the European Communities' Schedule, in accordan ce with the Modalities Paper when interpreted in
light of the principle of good faith. 350 The European Communities rej ects the Complainants' claims
under Article 10.1 of the Agreement on Agriculture on the grounds that they are outside the Panel's
terms of reference. In the alternative, the Eur opean Communities submits that exports of C sugar do
not benefit from any "other export subsidies" w ithin the meaning of Article 10.1. Finally, the
European Communities contests the applicability of the SCM Agreement to the present dispute.
B. PROCEDURAL ISSUES IN THIS DISPUTE
1. The European Communities' challenges of th e Panel's jurisdiction under its terms of
reference
7.3 The Panel recalls the parties' arguments with r espect to the terms of reference, summarized in
paragraphs 4.10-4.24 above. The European Commun ities has raised various objections to the Panel's
jurisdiction over some of the Complainants' claims under the Agreement on Agriculture . The
European Communities submitted that the Complainan ts' panel requests did not include some of the
claims they subsequently developed in thei r written and oral submissions. The European
Communities also alleged that the Complainants ha ve not always properly identified the measures
subject to challenge.

346 See the Complainants' panel requests in Annex D. The Panel also recalls that the complainants have
accepted as their own the evidence and arguments submitted by the other complaining parties.
347 See para. 4.28 above.
348 European Communities' reply to Panel question No. 9.
349 See also paras. 4.191-4.193 above.
350 European Communities' first written submission, paras. 34, 142 and 192.

7.4 The Panel notes that pursuant to Article 7 of the Understanding on Rules and Procedures
Governing the Settlement of Disputes ( DSU), the mandate and jurisdicti on of a panel are determined
by the complaint of the complaining parties which mu st comply with the requirements of Article 6 of
the DSU. Pursuant to Article 6.1 of the DSU, the establishment of a panel by the Dispute Settlement
Body (DSB) is quasi-automatic and a panel request is normally not subjected to detailed scrutiny by
the DSB. It is therefore "incumbent upon a panel to examine the request for the establishment of the
panel very carefully to ensure its compliance with both the letter and the spirit of Article 6.2 of the
DSU."351
(a) The timing of objections to the Panel's jurisdiction
7.5 In the present dispute, the European Communiti es is not requesting an y preliminary rulings
within the meaning of paragraph 13 of the Panel's Working Procedures. 352 Yet, Australia alleges that
the European Communities refrained from raisi ng these issues until the time of its first written
submission, some six months after the Panel was established and more than two months after the
Panel was composed. Australia notes that the Eu ropean Communities did no t raise any concerns
about the terms of reference at the time of Panel establishment; nor did it attempt to seek a
preliminary ruling at an early stage of the Panel process (which it has done in other recent disputes in
which it was a respondent).
7.6 The WTO jurisprudence is clear that parties s hould bring alleged procedural deficiencies to
the attention of the other party and the Panel at the earliest possible opportunity. 353 Conversely, the
responding Members are required to seasonably and pr omptly bring claimed procedural deficiencies
to the attention of the complaining Member and to the DSB or to the Panel, so that corrections, if
needed, can be made in order that the dispute can be resolved.354 The Panel recalls that the procedural
rules of WTO dispute settlement are designed to promote, not the development of litigation
techniques, but the fair, prompt and effective resolution of trade disputes. 355 In Mexico – Corn Syrup
(Article 21.5 – US ) the Appellate Body went as far as saying that "a Member that fails to raise its
objections in a timely manner, notwithstanding one or more opportunities to do so, may be deemed to
have waived its right to have a panel consider such objections."356
7.7 The Panel also recalls that wh en assessing any procedural objection, the Panel should "take
into account whether the ability of the respondent to defend itself was prejudiced, given the actual
course of the panel proceedings ... ."
357
7.8 The Panel notes that although the European Communities asserted orally at the first and
second meetings of the Panel that it had sustained prejudice, it offered no supporting particulars in its
replies to the Panel's questions, in its submission or at the hearings.

351 Appellate Body Report on EC – Bananas III, para. 142.
352 Paragraph 13 of the Panel's Working Procedures: "A party shall submit any request for a
preliminary ruling not later than in its first submission to the Panel. If the complaining party requests such a
ruling, the respondent shall submit its response to the request in its first submission. If the respondent requests
such a ruling, the complaining party shall submit its response to the request prior to the first substantive meeting
of the Panel, at a time to be determined by the Panel in light of the request. Exceptions to this procedure will be
granted upon a showing of good cause."
353 Appellate Body Report on Mexico – Corn Syrup (Article 21.5 – US), para. 50; US – FSC, para. 166;
and US – 1916 Act, para. 54.
354 See the Appellate Body Report on US – FSC, para. 166.
355 Panel Report on Korea – Various Measures on Beef, para. 797.
356 Appellate Body Report on Mexico – Corn Syrup (Article 21.5 – US), paras. 49-50.
357 Appellate Body Report on Korea – Dairy, para. 127.

7.9 At the same time, the Panel agrees that certain i ssues relating to the "jurisdiction" of a panel
can be raised at any time and even by the panel itself:
"[I]n the interests of due process, parties s hould bring alleged procedural deficiencies
to the attention of a panel at the earliest possible opportunity.

358 (...) At the same
time, however, as we have observed pr eviously, certain issues going to the
 jurisdiction of a panel are so fundamental that they may be considered at any stage
in a proceeding. 359 (emphasis added)"
7.10 The Panel is not convinced that the European Communities raised all its objections at the
earliest possible time. Nevertheless, some of th e European Communities' objections are concerned
with the jurisdiction of this Panel, for which defi ciencies cannot be cured. These objections may thus
be viewed as so fundamental that they could be c onsidered at any stage of the Panel proceeding. In
this event, it is not clear to what extent the challenging Member needs to prove any prejudice.360
7.11 In light of the above rules and with the view to ensuring clarity in the Panel's terms of
reference and the security of this panel process, the Panel turns to exploring the issues of this Panel's
jurisdiction and the European Communities' challenges thereof.361
(b) The Complainants' requests for establishment of a panel362
7.12 Before examining the parties' argumentation on the European Communities' objections to the
Panel's jurisdiction under its terms of reference, the Panel recalls the relevant parts of the panel
requests where the Complainants identified the measur es at issue and the violations claimed to have
occurred.
7.13 For Australia, the measures are:
(a) "The measures that are the subject of this request are the subsidies provided by the EC
in excess of its reduction commitment levels on sugar and sugar containing products
including sugar cane and sugar beet, pr ocessed and unprocessed cane and beet sugar
and chemically pure sucrose in solid form , molasses resulting from the extraction of
refining of sugar, isoglucose, inulin syrup and the other products listed in Article 1 of
Council Regulation (EC) No 1260/2001 of 19 June 2001 on the European
Communities' Common Organization of the markets in the sugar sector (Official
Journal of the European Communities, 30 June 2001, L178/1-45).
The above mentioned subsidies are accorded through the EC sugar regime, which is
contained in a number of EC regulations including Council Regulation No 1260/2001
and related EC regulations, administrativ e policies, rules, decisions and other
instruments including instruments pre-dating the above regulation, and their

358 Appellate Body Report on Mexico – Corn Syrup (Article 21.5 – US), para. 50; US – FSC, para. 166;
and US – 1916 Act, para. 54.
359 Appellate Body Report on US – Carbon Steel, para. 123 referring to the Appellate Body Report on
360 Appellate Body Report on Mexico – Corn Syrup (Article 21.5 – US), para. 36; and US – 1916 Act ,
para. 54.
361 Appellate Body Report on US – Carbon Steel, para. 123.
362 The Complainants' panel requests are attached in Annex D below.

implementation. These various instruments will be referred to as “the EC sugar
regime."363
and the violations are:

(b) "Australia considers that the provision of the above subsidie s and the relevant
elements of the EC sugar regime are incons istent with the EC's obligations under the
following provisions: Articles 3.3, 8, 9.1(a), 9.1(c), and alternatively, 10.1 of the
Agreement on Agriculture;"
in particular Australia adds:
"Australia is particularly concerned at the subsidies provided by the EC for 'C sugar'
exports under the EC sugar regime. Under the regime, producers of C sugar are able
to sell C sugar on the world market at be low the total average cost of production
through cross-subsidisation of C sugar from quota sugar profits. By financing
payments on the export of C sugar, the EC exceeds its export subsidy reduction
commitments under the WTO Agreement on Agriculture.
Australia is also particularly concerned at the provisions of the EC sugar regime
which accord direct subsidies continge nt on export performance for quantities of
approximately 1.6 million tonnes of sugar which are additional to the budgetary
outlays and quantities of subsidised export s notified by the EC to the Committee on
Agriculture under the provisions of Article 18.2 of the Agreement on Agriculture. In
the application of those provisions, the EC significantly exceeds its budgetary outlays
and quantity commitments for e xport subsidies on sugar under the Agreement on
Agriculture."
364
7.14 For Brazil, the measures are:
(a) "The specific measures at issue in this dispute are the subsidies provided and
maintained by the Eu ropean Communities, in excess of the EC's reduction
commitment levels for sugar , under Council Regulation (EC) No. 1260/2001 of
19 June 2001 on the European Communities' common organization of the markets in
the sugar sector 365, and pursuant to all other legislation, regulations, administrative
policies and other instruments relating to the EC regime for sugar, including the rules
adopted pursuant to the procedure referred to in Article 42(2) of Council Regulation
(EC) No. 1260/2001 of 19 June 2001, and any other provision related thereto."
and the violations are:

(b) "The EC provides export subsidies for sugar in excess of its reduction commitment
levels specified in Section II of Part IV of its Schedule of Concessions (Schedule
CXL-European Communities), in violation of the Agreement on Agriculture and the

363 Australia's panel request continues as follows: "In addition to setting down the conditions attaching
to imports of sugar, the EC sugar regime provides conditions attached to the production, supply and exports of
sugar, including domestic support and export subsidies. Sugar is classified into quota and non-quota sugar.
Non-quota sugar is known as C sugar. The sugar regime provides for the reclassification from quota to C sugar
and from C sugar to quota sugar. Sugar classified as C sugar cannot be disposed of in the EC market".
364 See Australia's panel request in Annex D below.
365 Council Regulation (EC) No. 1260/2001 of 19 June 2001 on the common organization of the
markets in the sugar sector, OJ L 178/1-45, 30.6.2001, p. 1.

SCM Agreement. In particular, Brazil is concerned with two categories of subsidized
EC exports:
(i) The EC sugar regime guarantees a high price for the sugar that is produced
within production quotas. This is term ed "A and B sugar". Sugar produced
in excess of these quotas is termed "C s ugar". Sugar classified as C sugar
cannot be sold internally in the year in which it is produced, and must, in
principle, be exported. Payments in the form of high prices provided to
growers and processors by the EC suga r regime finance the production and
export of C sugar at prices below its total cost of production.
(ii) The EC grants export subsidies to an amount of white sugar ostensibly
equivalent to the quantity of raw sugar that the EC imports under its
preferential arrangements. This am ount, reportedly, is approximately
1.6million tons.
 The EC unjustifiably excludes these subs idies from the calculation of the total
amount of export subsidies that it provides for sugar. The amount of sugar thus
subsidized, alone or in combination with other e xport subsidies for sugar provided by
the European Communities, exceeds the export subsidy reduction commitment levels
and, as such, constitutes a violation of the EC 's obligations under Articles 3.3, 8, 9.1
(a) and (c), or, alternatively, Article 10.1 of the Agreement on Agriculture ..."
366

7.15 For Thailand the measures are:
(a) "The measures at issue are the export subsidies for sugar and sugar-containing
products accorded under Council Regulation (E C) No. 1260/2001 of 19 June 2001 on
the common organization of the markets in the sugar sector published in the Official
Journal of the European Communities on 30 June 2001 (L 178/1-45) and related legal
instruments."
and the violations are:

(b) "Under the EC sugar regime, sugar that is produced within production quotas ("A"
and "B" quotas) is guaranteed a high interven tion price. Sugar produced in excess of
those quotas ("C-sugar") must in principle be exported. By virtue of the EC sugar
regime, exporters of C-sugar are able to export such sugar at prices below the average
cost of production. The EC therefore accord s export subsidies to C-sugar in the form
of payments on the export of sugar financed by virtue of governmental action.
Furthermore, under its sugar regime, the EC grants export refunds to an amount of
white sugar that the EC claims to be equi valent to the quantity of raw sugar imported
under preferential import arrangements. The export refunds cover the difference
between the world market price and the hi gh prices in the EC for the products in
question, thus making it possible for those products to be exported. The export
refunds constitute direct subsidies contingent on export performance.
Under the Agreement on Agriculture, the EC undertook budgetary outlay and export
quantity reduction commitments with respect to sugar. In determining its budgetary
outlays for export subsidies for sugar and the quantities benefiting from such
subsidies, the EC does not take into acc ount exports of C-sugar and exports of an

366 See Brazil's panel request in Annex D below.

amount of white sugar equivalent to the quantity of raw sugar imported under
preferential import arrangements.
As a result, the EC provides export subsidies for sugar in excess of its reduction
commitments and consequently acts inconsis tently with its obligations under Articles
3.3, 8, 9.1(a) and 9.1(c) of the Agreement on Agriculture or, alternatively, Article
10.1 of the Agreement on Agriculture. By granting export subsidies within the
meaning of Articles 1.1(a)(1)(i) and (iv), 1.1(a)(2), and 1.1(b) of the SCM Agreement,
that are not permitted by the Agreement on Agriculture, the EC also acts
inconsistently with its obligations under Articles 3.1(a) and 3.2 of the SCM
Agreement."
367
7.16 In sum, for Australia and Brazil the measur es are the "subsidies in excess of the EC's
reduction commitment levels under Council Regula tion No. 1260/2001", while for Thailand the
measures are the "export subsidies accorded under Council Regulation No. 1260/2001" on sugar. The
violations claimed by the Complainants are ess entially the same, that is that the European
Communities is providing export subsidies for sugar in excess of its commitment level and
consequently the European Communities is acting in consistently with its obligations under Articles
3.3, 8, 9.1(a) and 9.1(c) of the Agreement on Agriculture or, alternatively, Article 10.1 of the
Agreement on Agriculture .368 In the Panel's view, although the Complainants drafted their panel
requests using slightly different terms, each of th e complaining parties' panel request has identified
essentially the same measures – s ubsidies accorded under Council Regulation 1260/2001 for the EC
sugar regime - and the same alle ged violation – that the European Communities exceeds its budgetary
outlays and quantity commitments contrary to Article 3 and 8 of the Agreement on Agriculture.
(c) Alleged lack of proper identification of th e "measures" covered by the claims under
Article 10.1 of the Agreement on Agriculture
7.17 In its first submission, the European Communities objected to the Complainants' claims under
Article 10.1 of the Agreement on Agriculture , arguing that they are outside the Panel's terms of
reference. In light of the Panel's decision in pa ragraph 7.357 hereafter to exercise judicial economy
with respect to the Complainants ' claims under Article 10.1 of the Agreement on Agriculture, there is
no need for the Panel to assess that particular obj ection of the European Communities to the Panel's
terms of reference.
(d) Alleged lack of proper identification of "payments" as distinct measures or distinct claims
under Articles 3, 8 (and 9.1(c)) of the Agreement on Agriculture
(i) Arguments of the parties
7.18 The European Communities argued that the Complainants had not properly identified the
measures that were inconsistent with the Agreement on Agriculture . The European Communities
contended that the measures that allegedly violated Articles 3.3 and 8 of the Agreement on
Agriculture were not the "export of sugar" as such, but the export subsidies granted by the European
Communities. According to the European Communities, the Complainants should have identified, in
their panel requests, the specific measures of the Eu ropean Communities' sugar regime which, in their
view, provided the alleged export subsidies app lied by the European Communities in order to
circumvent its reduction commitments. A simple reference to the European Communities' "sugar
regime" or to Council Regulation No. 1260/2001 (which comprises of 51 articles, 6 annexes, and

367 See Thailand's panel request in Annex D below.
368 The Complainants also claim inconsistencies with the SCM Agreement, but these are not concerned
by the European Communities' objections.

covers 45 pages of the Official Journal of the European Communities) was not considered to be
sufficiently "specific" by the European Commun ities. Moreover, the European Communities held
that the "exports of sugar" was a private transac tion, not a government "measure" within the meaning
of Article 6.2 of the DSU, and thus could not be the subject of dispute settlement.
369
7.19 The Complainants countered that they had suffi ciently identified the regulations that were
relevant in the present dispute at various stages in these proceedings and which resulted in excess
production of subsidized sugar contrary to th e European Communities' commitments. They
considered the reference to EC Regulation No. 126 0/2001 to be sufficiently specific to meet due
process requirements. Brazil underlined that while it was theoretically possible that some subsections
of EC Regulation No. 1260/2001 played no role in the provision of the challenged subsidies, Brazil's
failure to identify and expressly exclude any of thos e subsections from its description of the measures
at issue did not mean that Brazil had failed to identify those measures within the meaning of
Article 6.2 of the DSU.
7.20 The European Communities argued that Brazil's "claims" regarding two forms of alleged
payments i.e. those: (i) from EC consumers to EC sugar producers in the form of "artificially high"
domestic prices for A and B sugar; and, (ii) paym ents-in-kind from the beet growers to the sugar
producers in the form of C beet at prices below the minimum prices for A and B beet, had not been
properly stated in Brazil's panel request. 370 In support of its allegation, the European Communities
referred to the Appellate Body report in Canada – Dairy where it is stated that "[t] he second part of
the claim is therefore, that the responding Member must have granted export subsidies with respect to
quantities exceeding the quantity commitment level . There is, in other words a quantitative aspect and
an export subsidization aspect to the claim."371 (emphasis added)
7.21 The European Communities submitted that Article 10.3 of the Agreement on Agriculture
transfers the burden of proof only with respect to the "export subsidization aspect" of the
Complainants' claim to the defending party. Ho wever, the European Communities argued, before
such a transfer of the burden of proof can take pl ace, it is necessary for the Comp lainants to state this
as part of their claims. For the European Commun ities, Brazil's panel request failed to "provide a
brief summary of the legal basis" that is "suffici ent to present the problem clearly": Brazil's panel
request mentioned only one of the "payments" fu rther developed in its argumentation. For the
European Communities, Brazil made no suggestion that there may be other "payments" which may
also pose a "problem", let alone explain how such a "problem" would arise. For the European
Communities, it remained unclear what precisely th e other "payments" alleged by Brazil were, as,
according to the European Communities, the description kept on changing.
7.22 The Complainants refuted the European Commun ities' assertion that their panel requests only
covered certain forms of "payments". 372 In Brazil's opinion, the existence of payments was only one
aspect of the subsidies at issue in the present dispute. 373 Brazil held that complaining Members are
not required, by Article 6.2 of the DSU, to present evidence in their panel requests showing how and
why exports of sugar are subsidized. They are only required to specify the measure at issue and the
treaty provisions violated. Evidence has to be provided in their first written submissions.374

369 See also paras. 4.10-4.13 above.
370 See European Communities' reply to Panel question No. 4; European Communities' second
submission, paras. 5-6.
371 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II), para. 70.
372 Australia's second oral statement, para. 85.
373 Brazil's second oral statement, paras. 22-25.
374 Australia's second oral statement, para. 85; Brazil's second oral statement, paras. 22-25.

7.23 The Complainants also held that, because of the reversal of the burden of proof, it was not
incumbent on them to identify or enumerate th e WTO agreements, provisions, or export subsidy
definitions, that the European Communiti es might choose to invoke in its defence. 375 I t w a s t h e
European Communities' duty to prove that no subsidy of any kind, under any WTO agreement, had
been granted by any EC measure to sugar exports in excess of its reduction commitments.376
(ii) Assessment by the Panel
7.24 The Panel recalls the content of the Complainan ts' Panel requests in paragraph 7.13, 7.14 and
7.15 and in Annex D to this Panel Report where the complaining parties have identified essentially the
same measures and the same alleged violations (thus the same claims).
7.25 In the Panel's view, the Complainants' allegation that exports of C sugar, subsidized through
the operation of EC Regulation No. 1260/2001, ar e in excess of the European Communities'
scheduled commitments and, thus, contravene Articles 3 and 8 of the Agreement on Agriculture , is
sufficiently specific so as to allow the European Communities and the third parties to be "informed of
the legal basis of the complaints".377
7.26 The European Communities argued that the Compla inants have confused the requirements of
Article 6.2 of the DSU with respect to the specificity of pa nel requests and the consequences of the
special rules on the burden of proof of Article 10.3 of the Agreement on Agriculture. Conversely, the
Complainants submitted that it is the European Comm unities that has confused claims and arguments.
The Panel examines these issues in turn.
7.27 In this dispute, the special rules on the reversal of the burden of proof of Article 10.3 of the
Agreement on Agriculture have been invoked by the Complainants. Article 10.3 provides:
"Any Member which claims that any qua ntity exported in excess of a reduction
commitment level is not subsidized must establish that no export subsidy, whether
listed in Article 9 or not, has been grante d in respect of the quantity of exports in
question."
7.28 With respect to the issue of burden of proof and the special rule of Article 10.3, the Appellate
Body in Canada – Dairy (Article 21.5 – New Zealand and US II) determined that there are two
separate parts to a claim under Article 3 of the Agreement on Agriculture and in light of Article 10.3,
a different standard of burden of proof applies to each part.
"In identifying the nature of the special rule , it is useful to analyze the character of
claims brought under these provisions. Pursuant to Article 3 of the Agreement
on Agriculture, a Member is entitled to grant export subsidies within the limits of
the reduction commitment specified in its Schedule. 378 Where a Member claims that
another Member has acted in consistently with Article 3.3 by granting export
subsidies in excess of a quantity commitment level, there are two separate parts to
the claim. First, the responding Member must have exported an agricultural product
in quantities exceeding its quantity commitment level. If the quantities exported do

375 Brazil's first oral statement, para. 51; Brazil's second written submission, paras. 7-15; Australia's
reply to Panel question No. 4.
376 Ibid.
377 Appellate Body Reports on EC – Bananas III , para. 142; Korea – Dairy , paras. 120-131; US –
Carbon Steel, para. 127.
378 ( footnote original ) Under Articles 3.1 and 3.3 of the Agreement on Agriculture , "commitments
limiting subsidization" of exports ar e specified in the Schedule in terms of "budgetary outlay and quantity
commitment levels".

not reach the quantity commitment level, there can be no violation of that
commitment, under Article 3.3. However, merely exporting a product in quantities
that exceed the quantity commitment level is not inconsistent with the commitment.
The commitment is an undertaking to limit the quantity of exports that may be
subsidized and not a commitment to restrict the volume or quantity of exports as
such. The second part of the claim is, ther efore, that the responding Member must
have granted export subsidies with r espect to quantities exceeding the quantity
commitment level . There is, in other words, a quantitative aspect and an export
subsidization aspect to the claim.379 (underlining added)
7.29 Therefore, the Panel is of the view that a claim under Article 3 of the Agreement on
Agriculture requires allegations that, first, the European Communities has exported sugar above its
commitment level and, second, that such exports of sugar were subsidized.
7.30 In the Panel's view, the Complainants have satisfied these requirements adequately. The legal
basis of the Complainants' claims is Articles 3 and 8 of the Agreement on Agriculture . In their
requests for establishment of a panel, the Complain ants did not have to detail how and why such
exports were being subsidized, only that the commitm ent levels were exceeded and that exports were
subsidized. Moreover, the Complainants did indi cate some aspects of the export subsidization of
EC sugar in their panel requests (in referri ng to Article 9.1(a) and 9.1(c) of the Agreement on
Agriculture).
7.31 Contrary to claims, which must be specifically identified in a panel request, parties'
arguments can evolve and develop throughout the proceedings. 380 In advance of the European
Communities' response to their allegations, and to the extent that the European Communities would
deny any subsidization of its exports of sugar, the Complainants developed in their first written
submissions, arguments on why and how, in their view, exports of sugar were indeed subsidized.
They did this in the attempt to further substantia te their claims that the European Communities was
subsidizing exports of sugar in excess of its commitment level.
7.32 While the issue of the specificity of a panel request under Article 6.2 of the DSU can be
determined on the face of the panel request 381, the issue of the burden of proof relates to the

379 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II), para. 70.
380 In EC – Bananas III, at para. 141, the Appellate Body held that "claims" which are to be outlined in
a panel's request for the establishment of a panel are to be distinguished from "arguments" which are to be
addressed at a later stage: "In our view, th ere is a significant difference between the claims identified in the
request for the establishment of a Panel, which establis h the Panel's terms of reference under Article 7 of the
DSU, and the arguments supporting those claims, which are set out and progressively clarified in the first
written submissions, the rebuttal submissions and the first and second Panel meetings with the parties". See also
at para. 143: "Article 6.2 of the DSU requires that the claims , but not the arguments , must all be specified
sufficiently in the request for the establishment of a Pa nel in order to allow the defending party and any third
parties to know the legal basis of the complaint". (underlining added) See also the Appellate Body report on
EC-Hormones, para. 156.
381 In US – Carbon Steel the Appellate Body stated, in para. 127: "As we have said previously,
compliance with the requirements of Article 6.2 must be demonstrated on the face of the request for the
establishment of a panel. Defects in the request for the establishment of a panel cannot be "cured" in the
subsequent submissions of the parties during the panel proceedings. Nevertheless, in considering the sufficiency
of a panel request, submissions and statements made duri ng the course of the panel proceeding s, in particular
the first written submission of the complaining party, may be consulted in order to confirm the meaning of the
words used in the panel request and as part of the assessment of whether the ability of the respondent to defend
itself was prejudiced . Moreover, compliance with the requirements of Article 6.2 must be determined on the
merits of each case, having considered the panel request as a whole , and in the light of attendant
circumstances." (footnotes omitted) (emphasis added).

substantive demonstrations of violations (t hrough evidence and argumentation) taking place during
the entire panel process.382
7.33 Again in Canada – Dairy (Article 21.5 – New Zealand and US II) , the Appellate Body
determined that a different standard of burden of proof applies to each part of a claim under Article 3:
"Under the usual rules on burden of proof, the complaining Member would bear the
burden of proving both parts of the claim. However, Article 10.3 of the Agreement
on Agriculture partially alters the usual rules. The provision cleaves the complaining
Member's claim in two, allocating to different parties the burden of proof with respect
to the two parts of the claim we have described.
Consistent with the usual rules on burden of proof, it is for the complaining Member
to prove the first part of the claim, namely that the responding Member has exported
an agricultural product in quantities that exceed the responding Member's quantity
commitment level."383 (underlining added)
7.34 If the complaining Member succeeds in proving the quantitative part of the claim, and the
responding Member contests the export subsidization aspect of the claim, then, under Article 10.3, the
responding Member " must establish that no export subsidy … has been granted" in respect of the
excess quantity exported. (emphasis added) The langua ge of Article 10.3 is clearly intended to alter
the generally-accepted rules on burden of proof. 384 While the Complainants bear the burden of
proving that the export quantities are above the specifi c commitment level, once they have done so, it
is for the European Communities to prove that such exports of sugar were not subsidized.
7.35 In the Panel's view, the Complainants' panel requests sufficiently in formed the European
Communities what measures the Complainants were ch allenging and what violations were claimed.
This is obviously the case since in its first submission the European Communities stated that if the
Panel considers that exports of C sugar are subsidized, the Panel shoul d assess the situation in light of
what the European Communities' commitment level s hould have been, had C sugar been calculated in
accordance with the Modalities Paper. 385 In the Panel's view, the Complainants' panel requests were
sufficiently detailed "to present the problem clearly".386
7.36 Therefore, the Panel considered that the Co mplainants' panel requests complied with the
requirements of Article 6.2 of the DSU in that they adequately identified the measures at issue and the
violations claimed to have occurred, i.e. that th e European Communities' exports of subsidized sugar
exceeded the European Communities' commitment level contrary to Articles 3 and 8 of the Agreement
on Agriculture.
7.37 Consequently, the Complainants' argumentation that C sugar receives advantages from
various subsidies and payments, within the meaning of Article 9.1(c) of the Agreement on
Agriculture, is not outside the Panel's terms of reference.

382 Panel Report on Thailand – H-Beams, at para. 7.43.
383 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II), paras. 71-73.
384 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II), paras. 71-73.
385 European Communities' first written submission, para. 34.
386 Appellate Body Report on Korea – Dairy, para. 120.

(e) Alleged lack of proper identification of "claims" under Article 9.2(b)(iv) of the Agreement on
Agriculture
(i) Arguments of the parties
7.38 The European Communities also contended that Article 9.2(b)(iv) of the Agreement on
Agriculture was not mentioned in the Complainants' panel requests, nor in their first written
submissions, (only in the first oral statements of Brazil and Thailand).
387 The European Communities
alleged that it had no idea, prior to the first substa ntive meeting, that the Complainants were claiming
that Footnote 1 to Schedule the European Schedule CX L was also inconsistent with Article 9.2(b)(iv)
of the Agreement on Agriculture. 388 Accordingly, even if found to be acting inconsistently with
Article 9.2(b)(iv) of the Agreement on Agriculture , the European Communities contended that this
provision could not form the basis for a finding of inconsistency with any other provision of the
Agreement on Agriculture . Moreover, the European Communiti es believed that the claim that its
export subsidies had not been reduced sufficiently , though still unfounded, is qu ite different, from the
qualitative point-of-view, from the claim that the Eur opean Communities had exceeded its export
subsidy commitment levels.
7.39 The Complainants explained that Article 9.2(b)(iv) of the Agreement on Agriculture was
introduced by them as a counter-argument and in response to arguments made by the European
Communities, and not as a claim of violation requiring specification in their panel requests. 389 The
Complainants referred specifically to Article 9.2(b)(iv) of the Agreement on Agriculture to underline
that accepting the Footnote to the Eu ropean Communities' Schedule as valid, even if interpreted as
imposing a quantity limit, led the European Commun ities to act inconsistently with its reduction
obligations. As a consequence, the European Communities was providing export subsidies in a
manner inconsistent with the Agreement on Agriculture – particularly in violation of Articles 3 and 8
of the Agreement on Agriculture.
(ii) Assessment by the Panel
7.40 As noted by the Panel before, the Complainants' main claim under the Agreement on
Agriculture is that the EC sugar exports are being subsidized above the European Communities'
commitment level in violation of Articles 3 and 8 of the Agreement on Agriculture. In the context of
the parties' arguments and attempts to identify the relevant commitment level for the European
Communities for sugar, the Complainants made referen ce to the provisions of Article 9.2(b)(iv) of the
Agreement on Agriculture, which determines the Members' overall level of commitment at the end of
the annual reduction stages of the implementation period. All parties agree that Members'
commitment levels today are the same as they were at the end of the implementation period.
Therefore, Brazil and Thailand made refe rences to Article 9.2(b)(iv) of the Agreement on Agriculture
as part of the legal context of Articles 3, 8 and 10.3 of the Agreement on Agriculture with a view to
discussing the European Communities' commitment leve ls for exports of sugar since 2001, and in
support of their argument that that commitment leve ls should be determined with reference to the
European Communities' entries in Section II, Part IV of its Schedule.
7.41 The Panel recalls the distinction between claims and arguments. 390 In the Panel's view, a
panel request containing a claim under Article 3 of the Agreement on Agriculture must state that: (i)

387 European Communities' first written submission, paras. 69-70; European Communities' reply to
Panel question No. 28. See also para. 4.19 above.
388 European Communities' reply to Panel question No. 28.
389 Brazil's second oral statement, paras. 82-83. See also para. 4.18 above.
390 See the Appellate Body Reports on EC – Bananas III , paras. 142-143, EC – Hormones, para. 156,

exports of the scheduled products are above commitm ent levels and (ii) su ch exports have been
subsidized. In the Panel's view, the Complainan ts' panel requests comply with these requirements. 391
Subsequently, during the panel process the Compla inants were entitled to further develop their
argumentation that the exceeding exports of sugar had benefited from export subsidies within the
meaning of the Agreement on Agriculture.
7.42 The European Communities submitted that "an ap propriate test for distinguishing "'claims'
from 'arguments' would be to anticipate what wo uld be the consequences of upholding a given
'argument'. If upholding a purported 'argument' lead s to establishing a violation of a legal provision,
but does not render unnecessary the examination of another purported 'argument' made under the
same legal provision, it is because each of th e two 'arguments' involve a distinct 'claim'." 392 The
European Communities added that when this test is applied in the present case, it becomes clear that
each of the "payments" alleged by Brazil is a distinct "claim".
7.43 The Panel does not agree with the European Co mmunities' suggestion. The Panel is of the
view that the European Communities' assertions are contrary to the existing WTO jurisprudence and
to the Panel's discretion to reach a conclusion that a claim of violation is justified on the basis of
arguments not even raised by the parties and, in certain situations, without having to address all the
arguments of the parties. The Panel has already reached the conclusion that the Complainants have
adequately identified the measures at issue and the related violations of the Agreement on Agriculture.
7.44 In the Panel's view, the European Communities' allegation that the Complainants' arguments
and references to Article 9.2(b)(iv) are outside the Panel's terms of reference is thus not founded.
(f) Alleged lack of proper identification of claims in relation to Footnote 1 to the EC's Schedule
(ACP/India sugar)393
(i) Arguments of the parties
7.45 In its first submission, the European Commun ities also observed that the Complainants had
made subsidiary claims that the European Commun ities was not respecting the terms of Footnote 1 to
its Schedule. The European Communities considered that these claims were not sufficiently identified.
The European Communities therefore argued that it could not defend any ( unidentified) measure
which it may have adopted with respect to ACP/Indi a sugar in respect of unidentified provisions of
the Agreement on Agriculture , or provisions which were merely cited without further explanation.
The European Communities contended that these claims were not made in the requests for
establishment of a panel by the Complainants, which a llege an "exclusion" or a failure to "take into
account" exports of ACP/India equivalent sugar in ensuring respect of the European Communities'
export subsidy commitments, and not a failure to respect the terms of the Footnote. Consequently, for
the European Communities, these claims were also outside the terms of reference of the Panel
7.46 The Complainants were of the view that the European Communities was confusing
Footnote 1 with "the measure at issue" and was attempting to redefine the measure at issue as

391 See the Appellate Body Report in Korea – Dairy in para. 120: "(...) The request must: (i) be in
writing; (ii) indicate whether consultations were held; ( iii) identify the specific measures at issue; and (iv)
provide a brief summary of the legal basis of the complaint sufficient to present the problem clearly. In its
fourth requirement, Article 6.2 demands only a summary – and it may be a brief one – of the legal basis of the
complaint; but the summary must, in any event, be one that is 'sufficient to present the problem clearly'. It is
not enough, in other words, that 'the legal basis of the complaint' is summarily identified; the identification must
'present the problem clearly'."
392 European Communities' reply to Panel question No. 4.
393 Footnote 1 to Section II, Part IV of the EC's Sc hedule is hereafter called the "Footnote 1" or the
"ACP/India sugar Footnote", the precise content of which is discussed in paras. 7.167-7.196 hereafter.

Footnote 1 itself. Nowhere in their panel request s did the Complainants cite Footnote 1 as being a
"measure at issue". Rather, the European Comm unities was informed by the Complainants' panel
requests that the exports in excess of reduction commitments arose from the subsidized export of
C sugar and ACP/India equivalent sugar. Austra lia noted that the Eur opean Communities' first
written submission deliberately avoided claims of inconsistency arising fro m the export subsidies
granted to ACP/India equivalent sugar. Inst ead, the European Communities had redefined the
measure as the Footnote, and referred exclusively to Footnote 1 in relation to ACP/India equivalent
sugar. Australia added that in the fourth and fift h paragraphs of its panel request, Australia identified
the measures at issue as the subsidies on sugar in excess of the European Communities' reduction
commitments and elaborates on the nature of the measures in paragraphs 6-7 of that request.
7.47 According to the Complainants, the European Communities is using Footnote 1 as a rebuttal
argument to the Complainants' claims of inconsistency. The Complainants added that it is perfectly in
order for any complainant to anticip ate such an argument in its first written submission or to respond
to such arguments in its rebuttal submission. Su ch issues are not connected to Article 6.2 of the DSU
and to the requests for establishment of a panel. Finally, the Complainants reiterated that the
European Communities is confusing "claims", wh ich must be made in the panel request, and
"arguments", which are developed during the panel proceeding. The Complainants claimed that the
European Communities exceeds its subsidy reduction commitments, inter alia , by granting export
subsidies to ACP/India equivalent sugar. The Co mplainants argued that Footnote 1 does not exempt
the European Communities from its obligations unde r Articles 3.3, 8, 9.1(a) and 9.1(c) of the
Agreement on Agriculture or, alternatively, that it does not apply to the exports of a quantity of
EC sugar that is equivalent to the quantity of sugar imported from the ACP countries and India. The
Complainants' argument regarding the scope of a pplication of Footnote 1 is thus a subsidiary
argument supporting their legal claims that the European Communities is exceeding its export subsidy
reduction commitments.
(ii) Assessment by the Panel
7.48 The Panel recalls the content of the Complainan ts' panel requests and the distinction between
claims and arguments. The Complainants' claim is that the Europ ean Communities is exporting sugar
(C sugar and ACP/India equivalent sugar) in excess of the European Communities' commitment level.
For the Complainants, the Europ ean Communities' commitment level is indicated in Section II,
Part IV of the EC Schedule for sugar, that is 1,273,500 tonnes in 2001 and the following years.
7.49 In the Panel's view, the European Communities is using Footnote 1 as a rebuttal argument to
the Complainants' claims that th e European Communities is acting inconsistently with Articles 3 and
8 of the Agreement on Agriculture . The European Communities is arguing that its level of
commitment includes an additional 1.6 million tonnes of ACP/India equivalent sugar as provided for
in Footnote 1.
7.50 In the Panel's view, what constitutes a Memb er's "commitment level", for the purpose of
Article 10.3, is both an issue of legal interpretation and a matter of evidence. Whether or not an entry
in a Member's schedule, such as the European Communities' Footnote 1, could compose part of that
Member's overall commitment level is a legal issue for which both sides have submitted
argumentation. It is for the Panel to decide whethe r the "commitment level" referred to in Articles 3,
8, 9.2(b)(iv) and 10.3 is exclusively composed of the export subsidies that had to be reduced (in the
case of the EC sugar 1,273,500 tonnes) or whet her Members are also entitled to maintain, for
instance, ad hoc "limitations" on export subsidization.
7.51 The European Communities argues that a correct interpretation of Articles 3, 8 and 9 of the
Agreement on Agriculture and the European Communities' Footnote 1 would lead to the conclusion

that the European Communities' Footnote 1 is a component of its overall export subsidy
commitments. The Complainants disagree.
7.52 In the Panel's view, when the European Co mmunities made reference to Footnote 1 as
evidence and in support of its argument that its level of commitment was not limited to 1,273,500
tonnes but, rather, should include the 1.6 million tonn es mentioned in Footnote 1, the Complainants
had the right to challenge such arguments as well as the scope of the European Communities'
commitment; the Complainants were entitled to use rebuttal arguments to challenge the conclusions
drawn by the European Communities from Footnote 1. Again the Panel recalls that the Complainants'
claims are not that the EC's Schedule contains a WTO inconsistent entry (Footnote 1) or that the
European Communities' categorization of its subsidies is inconsistent with the Agreement on
Agriculture but rather that the European Communities is exporting subsidized sugar in quantities
above the European Communities' scheduled commitment levels specified in Section II, Part IV of its
Schedule. The Panel additionally notes that in th eir panel requests the three complaining parties
mentioned the issue of subsidies to exports of prod ucts either as "equivalent to the quantity of raw
sugar imported under pref erential arrangements"
394, or "for quantities of approximately 1.6 million
tonnes of sugar which are additional to the budgeta ry outlays and quantities of subsidised exports
notified by the EC to the Committee on Agriculture 395 thereby putting the European Communities on
notice of the legal and factual matters at issue.
7.53 For the foregoing reasons, the Panel is of the vi ew that the Complainants' argumentation with
respect to the scope of the European Communities' commitment levels, including those relating to the
nature, legal effect and scope of the European Comm unities' Footnote 1, is within the Panel's terms of
reference.
2. European Communities' allegation that th e Complainants are "estopped" from
pursuing this dispute
(a) Arguments of the parties
7.54 The Panel refers to Section IV:D.3 of the descriptive part for a summary of the parties'
arguments in respect to good faith and estoppel. The European Communities submits that the
violations now alleged by the Complainants would have been flagrant and immediately manifest upon
the conclusion of the WTO Agreement .396 Yet, none of the Complain ants raised any question with
respect to exports of C sugar until this dispute. This is interpreted by th e European Communities to
mean that, for many years after the conclusion of the WTO Agreement, the Complainants continued to
share the European Communities' understanding that exports of C sugar were not subsidized. The
same is true with respect to issues relating to the ACP/India sugar Footnote which have never been
raised in the Committee on Agriculture and have never previously been challenged by the
Complainants.
7.55 For the European Communities, the Complainants' silence may be legitimately construed as a
representation of lack of objections not only wher e there is a "duty to speak", but also in
circumstances where it is reasonable to expect that the other parties will speak. For the European
Communities, it was reasonable to expect that Memb ers would not challenge the fact that it did not
include the additional subsidies of the ACP/India s ugar Footnote and C sugar in its base quantity. On
the basis of what it considers to be its good fait h expectations, the European Communities submits
that the Complainants are estopped from bringing this claim.

394 See Brazil and Thailand's ' Panel requests in Annex D to this Panel Report.
395 See Australia's Panel request in Annex D to this Panel report.
396 See European Communities' first written submission, para. 139.

7.56 The European Communities argues that estoppel is a procedural defence, which precludes one
party from exercising a right vis-a-vis another party, but without modifying the substantive
obligations of that party. It adds that estoppel is a matter of adjectival, rather than substantive, law
and accordingly the effect of a true estoppel is c onfined to the parties. The European Communities
does not contend that its obligations under Article 9.1(c) of the Agreement on Agriculture have been
modified by virtue of the principle of estoppel. Ra ther, the European Communities' contention is that
the Complainants are precluded from bringing a clai m under that provision and, therefore, that the
Panel should reject their claims even if it upheld them in substance.
7.57 For the European Communities, since estoppe l does not alter the substantive rights of
Members under the WTO Agreement, but only the exercise of those rights, it may operate exclusively
between two Members.
397
7.58 The Complainants respond that, as a matter of legal principle, the European Communities
could not infer from silence that other Members sh ared the view that C sugar was not subsidized,
because they did not have a "duty" to object. The Co mplainants submit that even if they had been
silent, their silence on the European Communities' base quantity levels as well as the ACP/India sugar
Footnote does not amount to a clear and unamb iguous representation upon which the European
Communities could rely, especially as there was no legal duty upon the Complainants to do so.398
7.59 For Australia, if the European Communities were permitted to have recourse to estoppel, it
would operate to diminish the rights of the Complainants, contrary to the provisions of Articles 3.2
and 19.2 of the DSU. It is one thing to have a right subj ect to relevant provisions of a covered
agreement, but entirely another to have that right subject to the operation of a principle which is not
recognized in the provisions of the covered agreemen t. Furthermore, Australia argues that it is the
responsibility of the European Communities to ma ke sure it is acting in accordance with the
Agreement on Agriculture and other WTO Agreements.
7.60 Finally, the Complainants argue that even if estoppel could be invoked, the European
Communities does not comply with the basic requirements for invoking estoppel.
399
(b) Assessment by the Panel
7.61 The Panel notes that parties and third-parties to this dispute do not seem to agree on the nature
of the principle on estoppel and its exact parameters.400 Muller and Cottier define it as follows:
"It is generally agreed that the party invoking estoppel 'must have been induced to
undertake legally relevant action or abstain from it by relying in good faith upon clear
and unambiguous representations by the other State'."401
7.62 The Black Law Dictionary defines "silence, estoppel by" as follows:
"Such estoppel arises where person is under duty to another to speak or failure to
speak is inconsistent with honest dealings. Silence, to work 'estoppel', must amount

397 See also paras. 4.167-4.170 above.
398 See also paras. 4.160-4.161 above.
399 See para. 4.159
400 Australia's second submission, paras. 142 and 144; Brazil's second submission, Title G and paras.
80 and 85; Thailand's second submission, para. 114; EC's first submission, paras. 136-138; and see for
example: United States oral statement, paras. 8-9; Colombia's oral statement, para. 8; ACP countries' third
party submission, paras. 9 and 126; and ACP countries' oral statement, para. 8.
401 J.P. Müller and T. Cottier, in Encyclopaedia of Public International Law, Ed. Max Planck Institute,
North Holland, 1992, p. 116.

to bad faith, and, elements or essentials of such estoppel include: change of position
to prejudice of person claiming estoppel; damages if the estoppel is denied; duty and
opportunity to speak; inducing person cl aiming estoppel to alter his position;
knowledge of facts and of rights by pers on estopped; misleading of party claiming
estoppel; reliance upon silence of party sought to be estopped."
402
7.63 In the Panel's view, it is far from clear whether the principle of estoppel is applicable to
disputes between WTO Members in relation to thei r WTO rights and obligations. The principle of
estoppel has never been applied by any panel or the Appellate Body. Estoppel is not mentioned in the
DSU or anywhere in the WTO Agreement.
7.64 If estoppel, as a general principle of law, were applicable to disputes between WTO
Members, Members would still have to comply with the DSU and would thus have to find a way to
comply in good faith with both the provisions of the DSU and those of estoppel. The Panel recalls
that in EC – Hormones , the Appellate Body made clear that even if there were a precautionary
principle in general international law, WTO obligations remained binding on Members: "We
accordingly agree with the finding of the Panel that the precautionary principle does not override the
provisions of Articles 5.1 and 5.2 of the SPS Agreement".403
7.65 If estoppel were considered as a customary rule of interpretation or if it were comprised in the
good faith principle reflected in Article 3.10 of the DSU, such a principle would have to be read
"harmoniously" with the other principles of the WTO dispute settlement system, including the quasi-
automaticity of its process and the fact that the initiation of the dispute settlement mechanism is self-
regulating. On several occasions, the Appella te Body has insisted that it is "the duty of any treaty
interpreter to read all applicable provisions of a treaty in a way that gives meaning to all of them,
harmoniously".404
7.66 The Panel also recalls that the Appellate Body has clearly established that initiation of WTO
dispute settlement procedures does not require the demonstration of any specific legal or economic
interest.405 I n Mexico – Corn Syrup (Article 21.5 – US) 406 the Appellate Body ruled that the first
sentence of Article 3.7 of the DSU:
"… reflects a basic principle that Members should have recourse to WTO dispute
settlement in good faith, and not frivol ously set in motion the procedures
contemplated in the DSU. We recall that, when we examined the language of
Article 3.7 of the DSU in our Report in European Communities – Bananas , we
stated that:
'… a Member has broad discretion in deciding whether to bring a
case against another Member under the DSU. The language of
Article XXIII:1 of the GATT 1994 and of Article 3.7 of the DSU
suggests, furthermore, that a Member is expected to be largely self-

402 Black's Law Dictionary, Sixth Edition, 1991, p. 963.
403 Appellate Body Report on EC – Hormones, para. 125.
404 Appellate Body Report on Korea – Dairy , para. 81. The Appellate Body also referred to the
Appellate Body Report on Argentina – Safeguard Measures on Imports of Footwear , para. 81. See also
Appellate Body Report on US – Gasoline, p. 23; Appellate Body Report on Japan – Alcoholic Beverages II, p.
12; and Appellate Body Report on India – Patents (US), para. 45.
405 Appellate Body Report on EC – Bananas III, para. 142.
406 Appellate Body Report on Mexico – Corn Syrup (Article 21.5 – US), para. 73 citing Appellate Body

regulating in deciding whether any such action would be 'fruitful'.
(emphasis added)' "
407
7.67 Given the "largely self-regulating" nature of the requirement in the first sentence of
Article 3.7, panels and the Appellate Body must presume, whenever a Member submits a request for
establishment of a panel, that such a Member does so in good faith, having duly exercised its
judgement as to whether or not recourse to that panel would be "fruitful".
7.68 This is in line with GATT jurispruden ce on this matter. In the GATT dispute on EEC –
Import Restrictions , the panel concluded that:
"The Panel ... recognized that restrictions had been in existence for a long time
without Article XXIII ever having been invoked by Hong Kong with respect to the
products concerned, but concluded that th is did not alter the obligations which
contracting parties had accepted under GATT provisions. Furthermore the Panel
considered it would be erroneous to interp ret the fact that a measure had not been
subject to Article XXIII over a number of years, as tantamount to its tacit acceptance
by contracting parties ...."408 (emphasis added)
7.69 In the Panel's view, Article 3.7 of the DSU neither requires nor authorizes a panel to look
behind that Member's decision or to question its ex ercise of judgement (unl ess there is evidence of
bad faith).409 Under WTO jurisprudence, the fact that a Member does not complain about a measure
at a given point in time, cannot by itself deprive that Member of its right to initiate a dispute at some
later point in time if that Member considers in good fa ith that it is fruitful to do so. This seems to be
confirmed by the WTO dispute cases such as in EC – Bananas III (Article 21.5 – EC/Ecuador )
410 and
in Guatemala – Cement II."411
7.70 Moreover, assuming arguendo that estoppel could be invoked in WTO dispute settlement
proceedings, the Panel is of the view that the present situation is not one for which estoppel could find
application. The Panel examines hereafter the requirements for its application.
7.71 The conditions for estoppel have been summed up by the panel in Argentina – Poultry:
"[T]he essential elements of estoppel are: '( i) a statement of fact which is clear and
unambiguous; (ii) this statement must be voluntary, unconditional, and authorized;
(iii) there must be reliance in good faith upon the statement … to the advantage of the
party making the statement'."412
7.72 In Guatemala – Cement II, the panel considered that:
"[E]stoppel is premised on the view that wh ere one party has been induced to act in
reliance on the assurances of another party, in such a way that it would be prejudiced
were the other party later to change its position, such a change in position is
'estopped', that is precluded."413

407 Appellate Body Report on EC – Bananas III, para. 135.
408 GATT Panel Report on EEC – Quantitative Restrictions on Certain Products from Hong Kong,
BISD 30S/129, para. 28.
409Appellate Body Report on Mexico – Corn Syrup (Article 21.5 – US) , paras. 72-74.
410 Panel Report on EC – Bananas III (Article 21.5 – EC/Ecuador), para. 4.11.
411 Panel Report on Guatemala – Cement II, para. 5.148.
412 Panel Report on Argentina – Poultry, para. 7.20.
413 Panel Report on Guatemala – Cement II, para. 8.23.

7.73 In the Panel's view, Brazil's and Thailand's silence concerning the European Communities'
base quantity levels as well as with respect to the ACP/India sugar Footnote does not amount to a
clear and unambiguous representation upon which the European Communities could rely, especially
considering that, in the Panel's view, there was no legal duty upon the Complainants to alert the
European Communities to its alleged violations. Fu rthermore, it is not possible to identify any facts
or statements made by the Complainants where they have admitted that the EC measure was WTO
consistent or where they have promised that they would not take legal action against the European
Communities. In the Panel's view the "silence" of some of the Complainants cannot be equated with
their consent to the European Communities' violati ons, if any. Moreover, the Complainants' silence
cannot be held against other WTO Members who, today, could decide to initiate WTO dispute
settlement proceedings against the European Comm unities. In other words, even if the three
Complainants had remained completely silent on this issue, their silence could not be considered a
commitment binding on other Members to the extent that it would contradict the provisions of the
Agreement on Agriculture or which could remove the European Communities' alleged inconsistencies
with its WTO obligations.
7.74 The Appellate Body has clearly established that WTO Members must comply with their WTO
obligations in good faith 414 and that the WTO Agreement must be interpreted in good faith. 415 In the
Panel's view both the European Communities and the Complainants have acted in good faith in the
initiation and conduct of the present dispute procee dings. The European Communities is entitled to
defend its sugar regime and has done so. The Compla inants were entitled to initiate the present WTO
proceedings as they did and at no point in time have they been estopped, through their actions or
silence, from challenging the EC sugar regime which they consider WTO inconsistent.
7.75 In the Panel's view, if it were to conclude that the Complainants are now estopped from
challenging the EC sugar regime or its alleged ex cessive export production of subsidized sugar, the
Panel would be acting contrary to Articles 3.2 and 19.2 of the DSU which provide that panels and the
Appellate Body are prohibited from adding to or diminishing Members' rights and obligations.416
3. The amicus curiae of WVZ
(a) Factual background
7.76 As referred to in paragraph 2.20 above, on 24 May 2004, the Panel received an unsolicited
"amicus curiae " brief from the Wirtschaftliche Vereinigung Zucker (hereafter "WVZ"), the
association of German sugar producers and beet growers, which submitted that C sugar does not
benefit from export subsidies, in essence, because the European Communities' intervention price does
not cover the average total cost of producing A, B and C sugar, in the European Communities.

414 Appellate Body Report on Mexico – Corn Syrup (Article 21.5 – US) , para. 47; Appellate Body
Report on US – Offset Act (Byrd Amendment) , para. 296 (and 298); Appellate Body Report on US – Shrimp ,
415 Appellate Body Report on US – Offset Act (Byrd Amendment) , paras. 296-297 and Appellate Body
Report on US – Hot-Rolled Steel, para. 101 (and 193).
416 Article 3.2 of the DSU is as follows: "The dispute settlement system of the WTO is a central
element in providing security and predictability to the multilateral trading system. The Members recognize that
it serves to preserve the rights and obligations of Me mbers under the covered agreements, and to clarify the
existing provisions of those agreem ents in accordance with customary rules of in terpretation of public
international law. Recommendations and rulings of the DSB cannot add to or diminish the rights and obligations
provided in the covered agreements." Article 19.2 of the DSU is as follows: "In accordance with paragraph 2 of
Article 3, in their findings and recommendations, the panel and Appellate Body cannot add to or diminish the
rights and obligations provided in the covered agr eements." See also the Appellate Body Report on India –
Patents (US), paras. 46-47.

7.77 Following the recommendation of the Appellate Body in US – Shrimp in the context of
amicus curiae briefs that "the exercise of the panel's di scretion could, of course, and perhaps should,
include consultation with the parties to the dispute"
417, and with a view to ensuring due process, the
Panel invited the parties on 27 May 2004 to make comments on the amicus curiae brief of WVZ by
1 June 2004.418
7.78 The Complainants requested in their comments that the Panel reject the document submitted
by WVZ on the grounds of inaccuracy of the facts and analysis advanced by WVZ, late timing of the
document and due process considera tions, and they further contende d that this submission addressed
issues that have already been argued at length by th e parties. In its third communication relating to
the amicus curiae brief, Brazil claimed that there was evid ence that a breach of confidentiality had
occurred (the Panel discusses the issue of the breach of confidentiality in the following section of the
Panel Report). The European Communities informed the Panel that it did not wish to provide
comments.
7.79 In their comments on the amicus brief, the Comp lainants challenged in detail the allegations
made by WVZ as being utterly unfounded, inter alia because producers received much more than the
intervention price and because the calculations made by WVZ were not based on accurate data or the
proper interpretation of the data.
(b) Assessment by the Panel
7.80 First, the Panel wishes to recall that it does not consider that amicus curiae briefs can be taken
into account in a manner that would circumvent the parties' rights and obligations under the DSU, the
Agreement on Agriculture and the WTO Agreement generally.
419
7.81 The Panel notes that the WVZ submission was filed almost two weeks after the Panel's
second meeting with the parties. The Panel, as othe r panels before, considers that the timing of the
amicus curiae submission plays an important role in the acceptance or rejection of amicus curiae
briefs.420 In this regard Thailand argued that in acco rdance with the Working Procedures of the Panel
proceedings, no new arguments or evidence were to be submitted by the parties after the second
meeting. However, the Panel recalls that at th e end of the second meeting the Panel asked additional
legal and factual questions of the parties and the Complainants requested that they be entitled to
comment on each other's replies to the Panel's quest ions. The period within which the Panel could
receive new arguments and evidence was ther efore extended until Wednesday, 2 June 2004.
However, WVZ comments are not related to the Panel's questions or the parties' comments.
7.82 The Panel has decided not to consider further the amicus curiae from WVZ because, inter
alia, it is based on confidential information and is thus evidence of a breach of confidentiality which
disqualifies the credibility of the authors. Brazil informed every authorized recipient of its submission

417 Appellate Body Report on US – Shrimp, para. 107.
418 This position of the Appellate Body would s eem to be supported by Article 12.1 of the DSU
providing that panels need to consult the parties when they decide to add or deviate from the Working
Procedures in Appendix 3 of the DSU. Appendix 3 of the DSU is silent regarding amicus curia e briefs.
Appellate Body Report on US – Shrimp, para. 105.
419 The Appellate Body determined in Japan – Agricultural Products II, that expert advice could be
taken into account but that it did not relieve the complaining party of making a prima facie case of
inconsistency. See Appellate Body Report on Japan – Agricultural Products II , para. 129.
420 See Panel Report on US – Softwood Lumber III , where the panel rejected three unsolicited amicus
curiae briefs because they were presented after th e first substantive meeting, Panel Report on US – Softwood
Lumber III, para. 7.2; and Panel Report on US – Lead and Bismuth II , where the panel chose not to accept the
submission because it had been submitted too late and could have unjustifiably delayed the proceedings; Panel
Report on US – Lead and Bismuth II, para. 6.3.

of the confidential nature of the latter. On 10 June 2004, the Panel therefore requested WVZ to
identify the source of the information used in its amicus curiae brief. WVZ acknowledged that it
"was able to examine" Brazil's exhibit but refused to provide the source of its information: "WVZ is
not in a position to reveal the source of its information regarding the evidence submitted by Brazil."
7.83 The Panel regrets this refusal to cooperate which, regardless of the merits (or lack thereof) of
WVZ submission, undermines not only elemental fairness to the parties, but also compromises the
integrity of the dispute settlement system itself by hindering further openness and the transparency of
the dispute settlement process.
7.84 The WTO dispute resolution confidentiality rules apply to WTO Members, the Panel
members and WTO staff involved in the dispute pro ceedings. Nevertheless, the Panel considers that
if the WVZ, though not a party to the proceedings, want ed to be considered a "friend of the court", it
should have followed an appropriate standard of behaviour towards the Panel and the parties together
with making every possible effort to respect WTO dispute settlement rules, including confidentiality
rules.
7.85 In light of the above, the Panel, having the discretionary legal authority to accept and consider
or not unsolicited amicus curiae briefs submitted by individua ls or organizations, whether
governmental or non-governmental, 421 declines to further consider the amicus curiae brief submitted
by WVZ.
4. Breach of confidentiality
(a) Factual background422
7.86 Brazil informed the Panel on 2 June 2004 that the amicus curiae brief submitted by WVZ, the
association of German sugar producers, disclosed in formation that Brazil had submitted to the Panel
in confidence. Brazil, accordingly, wished to bring the alleged breach of confidentiality to the Panel's
attention and requested that the Panel "investigat e how the breach occurred" and that it take any
further action that it deems appropriate, including "mak[ing] a full report of this incident to the
Dispute Settlement Body." Thailand and Austra lia supported the comments and request made by
Brazil in this regard.
7.87 The Panel noted in a letter to the parties and third parties, dated 4 June 2004, the seriousness
of the matter at issue, and invited them to co mment on Brazil's allegation, and on the appropriate
remedy, "if such a breach had in fact occurred". Such comments were to be submitted by 8 June
2004. The Panel received responses within this timeframe from Australia, Thailand, the European
Communities (parties), and from India (third party).
7.88 The European Communities noted that it attach ed the utmost importance to the strict
observance by all parties and third parties of the confidentiality rules set out in the DSU and in the
Working Procedures of the Panel. It shared the concerns expressed by Brazil, and noted for the record
that it had treated as strictly confidential all information designated as such in these proceedings.
7.89 Australia observed that the cost of productio n data cited by WVZ was also included in a
confidential exhibit submitted by Australia
423 and requested that the Panel undertake an investigation
of the source of the LMC information cited by WVZ. Australia submitted that in the event that the

421 Appellate Body Reports on US – Shrimp, para. 107 and on US – Lead and Bismuth II, para. 41.
422 See paras. 2.21 to 2.28 above.
423 The WVZ quoted LMC figure of costs of production of ***/tonne which is cited in table 2 of
Exhibit ALA-1, p. 8.

Panel establishes a breach of confidentiality on the pa rt of any party to this dispute, specifically in
reference to the LMC data designated as confidential by Brazil and Australia, that the Panel record the
breach of confidentiality in its report, in the context of Article 3.10 of the DSU. Australia further
considered that any unauthorized use or citati on of information which has been designated as
confidential by a party to a dispute should automa tically constitute grounds for rejection of an amicus
submission.
7.90 Thailand supported the comments and requests made by Brazil and Australia.
7.91 On 10 June 2004, the Panel, by letter, request ed information from WVZ "with respect to the
exact source[s] (documents, websites, etc.) used for the data referred to " in its document and a
clarification as to the use of the euro currency in such data.
7.92 The Panel received a response from WVZ on 15 Ju ne 2004 in which WVZ indicated that it
had been "able to examine" an attachment to Braz il's submission. According to WVZ, this document
was not designated as confidential. It also indicat ed that WVZ was "not in a position to reveal the
source of its information regarding the evidence s ubmitted by Brazil." It did not discuss the currency
of such data.
7.93 Comments on the response from WVZ were receive d from Brazil on 18 June 2004 in which
Brazil reiterated its request that the Panel summar ily reject the WVZ amicus brief and report the
incident to the Dispute Settlement Body. Furthermore, Brazil submitted that the cover and every page
of all hard copies of the exhibit in question provided to the Panel, the parties and third parties, were
stamped manually, in block letters, "CONFIDENTIAL". Brazil had stated in its cover letters, that its
submissions, including its two exhib its, were confidential. The recipients of electronic copies were
also put on notice as to the confidential nature of all its submissions. Every authorized recipient of
Brazil's submission was thus made aware of the confidential nature of the documents.
7.94 Brazil also submitted that it had, to the best of its knowledge, confirmed with LMC, that the
total cost of production figures referred to in the amicus curiae brief of WVZ appear only in the LMC
report commissioned by Brazil which, again, were su bmitted to the Panel as a confidential document
in one of its exhibits. Moreover, Brazil noted that the data referred to by WVZ in its amicus curiae
brief do not appear in the December 2003 report referred to in WVZ's footnote 2, or in any other LMC
report, which had been made available to the public.
(b) Assessment by the Panel
7.95 On the issue of confidentiality, the Panel r ecalls that, in addition to its emphasis on the
confidentiality of Members' oral and written subm issions to the panels and the Appellate Body,
Article 18.2 of the DSU provides explicitly that Members must respect the confidentiality of any
information designated as such by another Member in the context of the settlement of a dispute:
"Written submissions to the panel or th e Appellate Body shall be treated as
confidential, but shall be made available to the parties to the dispute. Nothing in this
Understanding shall preclude a party to a di spute from disclosing statements of its
own positions to the public. Members sh all treat as confidential information
submitted by another Member to the panel or the Appellate Body which that Member
has designated as confidential ... ."
7.96 The Panel recalls that the Complainants ha d explicitly designated the said LMC Report as
confidential. The Panel also wishes to r ecall that on a number of occasions throughout the
proceedings of this Panel it strongly emphasized and reminded parties and third parties of the
confidential nature of the DSU proceedings.

7.97 This is not the first time that an amicus curiae brief, submitted in the context of a WTO
dispute settlement proceeding, has cont ained confidential information. In Thailand – H-Beams , an
industry association submitted an amicus curiae brief which cited Thailand's confidential submission.
The Appellate Body on the basis of its own examination of the facts believed that there was prima
facie evidence that the association received, or had access to, the appellant's submission in that appeal
and saw no reason to accept the written brief submitted. The Appellate Body returned the brief to its
sender.
424 Other breaches of confidentiality have also been reported.425
7.98 The Panel has come to the conclusion that a breach of confidentiality did occur in the
framework of these proceedings. The Panel is theref ore concerned and deeply deplores this breach of
confidentiality and the disregard of a requirement imposed by the DSU and the Panel's Working
Procedures. The Panel considers th at it has used its best endeavour s to investigate the alleged breach
of confidentiality. However, the Panel has not been able to determine the source of the breach.
7.99 The Panel hereby reports the incident to the Dispute Settlement Body.
7.100 Having examined the procedural issues releva nt to the present dispute, the Panel now
proceeds to examine the Complainants' substantive claims.
C. ORDER OF ANALYSIS BY THE PANEL
7.101 In light of Article 21.1 of the Agreement on Agriculture , Article 3 of the SCM Agreement426
and the relevant jurisprudence, the Panel shall fi rst examine the consistenc y of the challenged export
subsidies on sugar, an agricultural product, first under the Agreement on Agriculture 427 as the
Complainants have argued their claims under the Agreement on Agriculture first.
7.102 The Complainants have submitted that the Eu ropean Communities is exporting subsidized
sugar in excess of its commitment levels contrary to Articles 3, 8, and 9 of the Agreement on
Agriculture. The parties disagree as to what constitu tes the European Communities' commitment
level. While the Complainants argue that the European Communities' quantity commitment level is to
be determined with reference to its entry in Sec tion II of Part IV of its Schedule, the European
Communities submits that its commitment comprises two components: one component is its entry in
Section II of Part IV of its Schedule and the othe r component includes the additional quantity of 1.6
million tonnes provided for in Footnote 1 (the ACP/Indi a sugar Footnote) to Section II, Part IV of its
Schedule. The Panel must thus determine, fi rst, what constitutes the European Communities'
commitment level for the purpose of Articles 3 and 8 of the Agreement on Agriculture.
7.103 Moreover, the determination of the European Communities' quantity commitment level is
crucial to the operation of the special rule, provided for in Article 10.3 of the Agreement on

424 Appellate Body Report on Thailand – H-Beams, para. 74.
425 See for instance the Panel Report on US – Underwear , para. 6.3; Panel Report on EC – Poultry ,
426 Article 21.1 of the Agreement on Agriculture provides that: "The provisions of GATT 1994 and of
other Multilateral Trade Agreements in Annex 1A to the WTO Agreement shall apply subject to the provisions
of this Agreement." Article 3 of the SCM Agreement provides that: 3.1 Except as provided in the Agreement on
Agriculture, the following subsidies, within the meaning of Article 1, shall be prohibited: (a) subsidies
contingent, in law or in fact, whether solely or as one of several other conditions, upon export performance,
including those illustrated in Annex I; (b) subsidies contingent, whether solely or as one of several other
conditions, upon the use of domestic over imported goods. 3.2 A Member shall neither grant nor maintain
subsidies referred to in paragraph 1."
427 In Canada – Dairy (Article 21.5 – New Zealand and US) , para. 123, the Appellate Body stated that
Article 3.1 of the SCM Agreement "indicates that the WTO-consistency of an export subsidy for agricultural
products has to be examined, in the first place, under the Agreement on Agriculture."

Agriculture, invoked by the Complainants. When Article 10.3 is invoked by a complaining Member,
and it is proven that exports actually exceed the ch allenged Members' commitment level, it is for that
exporting Member to demonstrate that its exports are not subsidized . Based on the Panel's
conclusions on the European Communities' commitm ent level for sugar and the Panel's conclusions
on the application of Article 10. 3, the Panel will then proceed to assess whether the European
Communities' exports of sugar exceed the European Communities' commitment level, inconsistently
with Articles 3 and 8 of the Agreement on Agriculture.
7.104 In Section D.2 below, the Panel examines first whether the ACP/India sugar Footnote relating
to 1.6 million tonnes of sugar can be considered as part of the European Communities' commitment
level. In Section D.3, the Panel addresses the Eur opean Communities' argument that participants in
the Uruguay Round (now Members of the WTO), have "agreed" to the inclusion of Footnote 1 in
Section II of Part IV of the European Communities' Schedule. Finally, once the Panel has determined
the European Communities' commitment level, it will be able, in Section E, to determine whether
Article 10.3 of the Agreement on Agriculture can find application in the present dispute where the
Complainants have claimed violations of Articles 3 and 8 of the Agreement on Agriculture. If this is
the case, the Panel will examine whether the Co mplainants have made a prima facie factual
demonstration of the quantitative aspect of their cl aims, namely that the European Communities has
exported quantities of sugar in excess of its quantity commitment level; if it is so, the Panel will then
determine whether the European Communities has demonstrated, pursuant to Article 10.3 of the
Agreement on Agriculture, that its excess exports of sugar, are not subsidized.
7.105 The Panel recalls the factual description of the EC sugar regime in Section III above.
D. T
HE EUROPEAN COMMUNITIES' EXPORT SUBSIDY COMMITMEN T LEVELS FOR SUBSIDIZED
EXPORTS OF SUGAR
1. Introduction
7.106 The Complainants consider that the Eur opean Communities' commitment levels for
subsidized exports of sugar are as specified in Section II of Part IV of the EC Schedule CXL 428,
entitled:
"Part IV: AGRICULTURAL PRODUCTS: COMMITMENTS LIMITING
SUBSIDISATION (Article 3 of the Agreement on Agriculture)
SECTION II: Export Subsidies : Budgetary Outlay and Quantity Reduction
Commitments."
7.107 Under the line entitled "Sugar" for 2000, the following quantity is specified:
"1,273,500 tonnes"
Besides the term Sugar, a footnote (1) is inscribed and at the bottom of the page one can read:

"Does not include exports of sugar of ACP and Indian origin on which the
Community is not making any reduction commitments. The average of export in the
period 1986 to 1990 amounted to 1,6 mio t."
7.108 The Panel assesses hereafter what the commitment level of the European Communities is with
respect to exports of sugar pursuant to Articles 3, 8 and 9 of the Agreement on Agriculture.

428 See Annex C, also provided as Exhibit EC-1 and Exhibit COMP-16.

2. What is the European Communities' commitment level in light of the ACP/India sugar
Footnote?
(a) Arguments of the parties
7.109 Further to their claims 429, the Complainants underline that, in every marketing year since
1995, the European Communities' total exports of sugar have consistently exceeded its scheduled
commitment levels. In particular, during the ma rketing year 2001-2002, the European Communities
exported 4.097 million tonnes of sugar which was well in excess of the European Communities'
scheduled commitment level for that year, i.e. 1,273,500 tonnes.
7.110 In response, the European Communities submits that its level of reduction commitment is not
1,273,500 tonnes only. 430 The European Communities argues th at a correct interpretation of the
Footnote leads to the conclusion that the Footnote is one of the two components of the European
Communities' export subsidy commitments. 431 For the European Communities, the first sentence
confirms that exports of an "e quivalent" amount of ACP/Indian sugar are not included in the
quantities and outlays reported by the European Communities for the base period level (1986-1990)
which served as a basis for the figures set out in the table. The second sentence, in the European
Communities' view, expresses the "average of export" of ACP/India "equivalent" sugar in the base
period 1986-1990. The second sentence is not a simple statement of fact or a narration of particular
circumstances. Rather, the European Communities c ontends, it operates in precisely the same way as
the other component of the European Communities' commitments: it is a ceiling, or limitation on
subsidization, and a limited authorization to provide export subsidies.
7.111 Consequently, the European Communities submits that it has acted consistently with Article 8
of the Agreement on Agriculture since it has provided subsidies only in conformity with the
Agreement on Agriculture and with the commitments as specified in its schedule. Further, the
European Communities considers th at it has respected the commitments it has undertaken to limit
subsidization on A and B sugar and ACP/India "e quivalent" sugar, and therefore, the European
Communities has acted consistently with Article 3 of the Agreement on Agriculture. Moreover, since
the European Communities has not pr ovided export subsidies in ex cess of the commitment levels set
out in its Schedule, it has acted consistently with Articles 3 and 8.432
7.112 The Complainants counter that all export subsidies under the Agreement on Agriculture are
subject to reduction. The Complainants reason that , as sugar is a product "specified" in the European
Communities' Schedule, the European Communities is under the obligation to reduce its budgetary
outlays and subsidized sugar exports in accordan ce with its scheduled commitments. If Footnote 1
was part of the European Communities' export s ubsidy commitments, export subsidies provided for
by the said Footnote should have been reduced.
7.113 On the other hand, the European Communities c onsiders that, overall, its export subsidies on
sugar have been reduced and it is therefor e complying with Articles 3 and 8 of the Agreement on
Agriculture. The European Communities also argues that Article 3.3 incorporated the export subsidy
commitments into the GATT, but did not prescribe any form for such commitments. In Footnote 1
the commitment has taken the form of a limit on subsid ization in the form of a ceiling level contained
in a footnote to a Member's Schedule.

429 See para. 7.106 above
430 See paras. 4.30-4.31 above.
431 See paras. 4.191-4.192 above.
432 See para. 4.193 above.

7.114 The Complainants submit that Members could not exempt themselves from their obligations
under the Agreement on Agriculture by including reservations in th eir Schedule of Concessions that
would subsequently be accorded the same, or greater weight, than any provision of a WTO Agreement
with which the schedule text might directly conflic t such as with the fundamental provisions of the
Agreement on Agriculture . If the differences between the terms of a schedule and the terms of the
Agreement on Agriculture cannot be reconciled by interpretati on through Articles 31 and 32 of the
Vienna Convention, a conflict exists. The Complainants submit that GATT and WTO jurisprudence
endorsed by the Appellate Body establishes that WTO Members could incorporate in their Schedule
of Concessions only acts yielding rights, not acts di minishing obligations. Therefore the Footnote
was legally invalid. Moreover, to the extent that the European Communities purported to diminish its
obligations under the Agreement on Agriculture , the Footnote, in their view, constituted an
impermissible reservation under international law and WTO law.
7.115 With respect to the Complainants' alleged c onflicts between the ACP/India sugar Footnote
and Articles 3 and 8 of the Agreement on Agriculture , the European Communities responded that
when properly interpreted, the Footnote coul d not be considered to conflict with the Agreement on
Agriculture. For the European Communities, the Panel was not obliged to declare the Footnote,
which was part of a validly concluded treaty, invalid. The European Communities notes that under
general public international law, one part of a tr eaty could rarely render another part of the same
treaty without legal effect.
7.116 Subsidiarily, the Complainants argue that the terms of the Footnote do not mean what the
European Communities intends to draw from this Footnote. The Complainants submitted that the
terms of the Footnote applied exclusively to im ports of raw "sugar of ACP and Indian origin".
433 The
Footnote thus contemplates exclusively the re-export of sugar of ACP or Indian origin. Moreover, the
Footnote does not mention, and could not be interpre ted to cover, "equivalent " exports. Thus, even if
the Panel were to find that Members could exem pt themselves from their obligations under the
Agreement on Agriculture by inserting footnotes in their Schedules of Concession, the Panel would
have to conclude that the footnote inserted by the European Communities did not exempt it from
those obligations in respect of the quantities of sugar equivalent to sugar of ACP and Indian origin.434
7.117 The European Communities replied that it was well known to all parties at the time of
conclusion of the WTO Agreement, that the European Communities did not grant export refunds on
the re-export of sugar of ACP/Indian origin, but rath er to a quantity equivalent to such imports. The
European Communities had made its intentions clear in two letters, when submitting draft schedules
and associated documents to all participants in th e negotiation, reiterating its objective to have the
footnote accepted by the other negotiating parties.435
7.118 The European Communities argued that particip ants in the Uruguay Round could negotiate
departures from the reduction formula agreed in the Modalities Paper, and that the Footnote
constituted one such departure. For the European Communities, the Complainants had agreed to this
Footnote during the Uruguay Round negotiations. In this context, the European Communities
considered that, by virtue of Article 16 of the Vienna Convention,436 the Complainants had consented

433 See para. 4.215 above.
434 See also para. 4.215 above.
435 See also para. 4.217 above.
436 Article 16 of the Vienna Convention reads as follows:

 "Exchange or deposit of instruments of ra tification, acceptance, approval or accession

 Unless the treaty otherwise provides, instruments of ratifi cation, acceptance, approval or
accession establish the consent of a State to be bound by a treaty upon:
 (a) their exchange between the contracting States;

to be bound by the terms of the treaty Footnote cont ained in the European Communities' Schedule, by
ratifying the WTO Agreement.
7.119 The Complainants responded that they did no t "agree" that this Footnote entitled the
European Communities to export an additional 1.6 million tonnes of subsidized sugar. For the
Complainants, even their alleged silence at the time of the conclusion of the Uruguay Round could not
be considered to be an acceptance. They adde d that the European Communities cannot find anything
in the Modalities Paper which would support its argumentation.
(b) Assessment by the Panel
(i) Introduction
7.120 In the present dispute, parties disagree on th e European Communities' commitment level for
exports of subsidized sugar. In light of the par ties' arguments, the Panel n eeds to determine what can
compose a Member's "commitment level" for the purpose of Article 3 of the Agreement on
Agriculture in light of the European Communities' argumen t that its commitment is composed of its
specific entry in Section II, Part IV of its Sche dule (1,273,500 tonnes of sugar) as well as of an
additional 1.6 million tonnes relating to ACP/India s ugar contained in Footnote 1 to the European
Communities' Schedule. The Complainants claim that this Footnote reduces and contradicts, and thus
conflicts with, the European Communities' fundamental obligations under the Agreement on
Agriculture and as such does not modify the EC's commitmen t level specified in Section II, Part IV of
the European Communities' Schedule.
7.121 In the Panel's view, what constitutes a Memb er's "reduction commitment level" for the
purpose of Article 10.3 of the Agreement on Agriculture or the "reduction commitment within the
meaning of Article 9 or the "commitment levels" within the meaning of Article 3.3 or the
"commitment as specified in a Member's schedul e" within the meaning of Article 8 of the Agreement
on Agriculture is an issue of legal interpretation, for which there is no burden of proof as such.437 It is
for the Panel to decide whether the "commitment levels" or the "reducti on commitment levels" are

 (b) their deposit with the depositary; or
 (c) their notification to the contracting States or to the depositary, if so agreed."

437 The Panel recalls the Appellate Body's conclusion in EC – Hormones , para. 156, that "Panels are
inhibited from addressing legal claims falling outside their terms of reference. However, nothing in the DSU
limits the faculty of a panel freely to use arguments submitted by any of the parties - or to develop its own legal
reasoning - to support its own findings and conclusion s on the matter under its consideration. Recently in EC –
Tariff Preferences, para. 105, the Appellate Body clarified that the burden of proof is relevant when dealing
with "evidentiary" issues but not with "legal" interpretatio n. Therefore, it is always for the panel to provide the
appropriate legal interpretation independently of what is put forward by any party.

"Consistent with the principle of jura novit curia (7) it is not the responsibility of the European
Communities to provide us with the legal interpretation to be given to a particular provision in
the Enabling Clause ; instead, the burden of the European Communities is to adduce sufficient
evidence to substantiate its assertion that the Drug Arrangements comply with the
requirements of the Enabling Clause." (footnotes omitted)

FNT 7: " The principle of jura novit curia has been articulated by the International Court of Justice as
follows: It being the duty of the Court itself to ascertain and apply the re levant law in the given
circumstances of the case, the burde n of establishing or proving rules of international law cannot be
imposed upon any of the parties, for the law lies within the judicial knowledge of the Court.
(International Court of Justice, Merits, Case Concer ning Military and Paramilitary Activities in and
against Nicaragua (Nicaragua v. United States of America), 1986 ICJ Reports, p. 14, para. 29 (quoting
International Court of Justice, Merits, Fisheries Ju risdiction Case (United Kingdom of Great Britain and
Northern Ireland v. Iceland), 1974 ICJ Reports, p. 9, para. 17))"

composed exclusively of the commitments for export subsidies that have to be reduced (in the case of
the EC sugar 1,273,500 tonnes) or whether Members are also entitled to maintain, for instance, ad hoc
"limitations" on export subsidization not subject to reduction which would therefore be part of the
overall commitment level of a Member.
7.122 To resolve the issue before it, the Panel w ill therefore have to examine the relationship
between terms of (and commitments contained in) a Me mber's Schedule, in this dispute the content of
Footnote 1 (on ACP/India sugar), and the provisions of the Agreement on Agriculture . In particular,
the Panel needs to assess whether it is possible to interpret harmoniously the terms of the Agreement
on Agriculture together with those of Footnote 1 of Section II, Part IV of the European Communities'
Schedule. If this is not possible, the Panel will have to resolve such a conflict.
7.123 For the Panel to assess whether there is a conflic t between Footnote 1 to Section II of Part IV
of the European Communities' Schedule, and Articles 3, 8 and 9 of the Agreement on Agriculture, the
Panel must first determine the extent and the scope of Members' obligations under those provisions.
Second, the Panel will need to examine what Memb ers are entitled to do in their Schedules and how
terms of Members' Schedules should be interpreted. Thirdly, the Panel will examine the nature of the
commitment, if any
438, included in Footnote 1. The Panel will then discuss the relationship between
the European Communities' obligations under Articles 3, 8 and 9 of the Agreement on Agriculture and
Footnote 1 with a view to assessing whether the two sets of rights and obligations can be read
harmoniously or whether they conflict. The Panel will then be able to conclude on the European
Communities' commitment level for exports of sugar for the purposes of the present dispute.
(ii) The obligations of the Agreement on Agriculture with respect to export subsidies – Articles 3,
8 and 9 of the Agreement on Agriculture
7.124 In order to assess the Complainants' claims that the European Communities exceeded its level
of commitments for exports of subsidized sugar, and the parties' disagreement on the European
Communities' level of commitment for exports of s ubsidized sugar, the Panel interprets first the
provisions of the Agreement on Agriculture dealing with Members' obligations with respect to exports
subsidies on agricultural products.
7.125 The Panel notes first that Article 3 does not define the terms "commitment level", nor do
Articles 9 and 10.3 of the Agreement on Agriculture define the term "reduction commitment" level.
Moreover, Article 8 does not define what can constitu te "commitments as specifi ed in that Member's
Schedule".
7.126 Since, pursuant to Article 31 of the Vienna Convention439, the ordinary meaning of the terms
do not inform the Panel sufficiently, the Panel pr oceeds to the examination of the "context" of
Articles 3, 8, 9 and 10 of the Agreement on Agriculture , so as to allow the Panel to assess what can
comprise a "Member's commitment level" for the purpo ses of Articles 3.3, or a Member's "specified
commitment" within the meaning of Article 8 of the Agreement on Agriculture , and a Member's
"reduction commitment" for the purpose of Articles 9 and 10.3 of the Agreement on Agriculture. The
Panel thus examines Members' obligations with r espect to export subsidies, as reflected in those
provisions.

438 As a subsidiary argument, the Complainants have submitted that a good faith interpretation of
Footnote 1 does not lead to the conclusion that the ACP/India sugar Footnote contains such a limitation or
ceiling on subsidization. Australia's second written submission, paras. 161-162.
439 Article 31.1 and 31.2 of the Vienna Convention provide that: "A treaty shall be interpreted in good
faith in accordance with the ordinary m eaning to be given to the terms of th e treaty in their context and in the
light of its object and purpose. 2. The context for the purpose of the interpretation of a treaty shall comprise, in
addition to the text, including its preamble and annexes (...)" The text of Articles 31, 32 and 33 of the Vienna
Convention can be found in footnote 431 hereafter.

7.127 Article 8 of the Agreement on Agriculture on "Export Competition Commitments" contains a
general prohibition on export subsidies and provides that:
"Each Member undertakes not to provide export subsidies otherwise than in
conformity with this Agreement and with the commitments as specified in that
Member's Schedule."
7.128 The commitments that are specified in Part IV , Section II, of a Member's Schedule describe
for each product or group of prod ucts concerned, the maximum quantities in respect of which export
subsidies, as defined in Article 1(e) of the Agreement on Agriculture, may be provided, as well as the
associated maximum levels of budgetary outlays. These commitments are made an integral part of
the GATT 1994 under Article 3.1 of the Agreement on Agriculture. The products which are subject to
reduction commitments and in respect of which expor t subsidies may be used within the specified
limits are commonly referred to as "scheduled produc ts". Other products, not specified in Schedules,
are referred to as "non-scheduled products".
7.129 The export subsidies listed in paragraph 1 of Article 9 of the Agreement on Agriculture ,
which had also served as the basis for establis hing export subsidy reduction commitments in the
Uruguay Round negotiations, are subject to the following specific prohibitions
 set out in Article 3.3 of
the Agreement on Agriculture, the first of which relates to "scheduled products":
"Subject to the provisions of par agraphs 2(b) and 4 of Article 9 , a Member shall not
provide export subsidies listed in paragr aph 1 of Article 9 in respect of the
agricultural products or groups of products specified in Section II of Part IV of its
Schedule in excess of the budgetary outlay and qua ntity commitment levels specified
therein and shall not provide such subsidies in respect of any agricultural product not
specified in that Section of its Schedule." (emphasis added)
7.130 It may also be noted that the first terms of Article 3.3 of the Agreement on Agriculture make
clear that the final reduction commitment levels are binding beyond the end of the implementation
period referred to in Articles 9.2 and 9.4 of the Agreement on Agriculture . Article 3.3 thus
complements the provisions of Article 9.2.
7.131 The Panel notes also that Article 3.1 of the Agreement on Agriculture provides that "export
subsidy commitments in Part IV of each Me mber's Schedule constitute commitments limiting
subsidization." Article 3.3 of the Agreement on Agriculture requires that, with respect to agricultural
products specified in Section II of Part IV of its schedule, "a Member shall not provide export
subsidies … in excess of the budgetary outlay and quantity commitment levels specified therein."
Article 3.3 of the Agreement on Agriculture makes clear that the commitments are those specified in a
Members' Schedule.
7.132 Article 3.3 of the Agreement on Agriculture requires that the export subsidies listed in
Article 9.1 of the Agreement on Agriculture can only be provided in accordance with a Member's
Schedule. Therefore, a Member must not provide export subsidies on scheduled agricultural products
beyond its budgetary and quantity commitment levels set out in its Schedule and shall not provide
export subsidies on products not specified in its Schedule. As mentioned, Article 8 of the Agreement
on Agriculture similarly provides that Members shall not "p rovide export subsidies otherwise than in
conformity with this Agreement and with the commitments as specified in that Member's Schedule."
7.133 Article 9.1 of the Agreement on Agriculture describes specific types of export subsidies
"subject to reduction commitments" and provides for schedules specifying commitments to reduce
budgetary outlays for subsidies and quantities of e xports receiving subsidies ("The following export
subsidies are subject to reduction commitments under this Agreement"). The Panel also notes that

Section II of Part IV is entitled "Budgetary Outlay and Quantity Reduction Commitments . " I n t h e
Panel's view, Article 9.1 of the Agreement on Agriculture makes clear that in the absence of a specific
exemption contained in that Agreement , all export subsidies coming within the definitions of
Article 9.1(a) – 9.1(f) have to be subject to reduction commitments. Specifically, in accordance with
Article 9.2(b)(iv) of the Agreement on Agriculture , at the end of the implementation period, the
Schedule must provide for budgetary outlay and quantity commitments no greater than 64 and
79 per cent of their respective base period levels.
440 This is the case for Members who took advantage
of the flexibility of Article 9.2(b) whic h was the case of the European Communities. 441 Therefore,
export subsidies contained in Section II, Part IV of a Member's Schedule ought to have been subject
to the reduction commitments provided for in Article 9 of the Agreement on Agriculture.
7.134 In sum, in the Panel's view, Articles 8 and 3 of the Agreement on Agriculture make it clear
that Members may not provide export subsid ies other than in conformity with the Agreement on
Agriculture and - not "or" - Members' Schedules. In pa rticular, Article 3 of the Agreement on
Agriculture provides that export subsidies are only possible for products listed in Section II, Part IV of
Members' Schedules and only for amounts at or be low the maximum level of commitment provided
for in a Member's schedule. Through the appli cation of Articles 3, 9.1 and 9.2(b)(iv) of the
Agreement on Agriculture , all WTO-consistent export subsidi es on scheduled products have been
subject to reduction commitments.
7.135 The Panel notes also that Article 3.3 of the Agreement on Agriculture contemplates that a
Member may exclude an agricultural product entirel y from Part IV, Section II of its Schedule, but
does not contemplate that when an agricultural prod uct is included in its Schedule, subsidies provided
to that product do not have to be reduced.
7.136 In the Panel's view, this is in line with the Preamble of the Agreement on Agriculture – as
legal context to Articles 3, 8 and 9 – which in its third and fourth paragraphs provide:
"Recalling further that 'the above-mentioned long-term objective is to provide for
substantial progressive reductions in agri cultural support and protection sustained
over an agreed period of time, resulting in correcting and preventing restrictions and
distortions in world agricultural markets';
Committed to achieving specific binding commitments in each of the following areas:
market access; domestic support; export competition; and ... "
7.137 In the Panel's view, to comply with Article 3.3 of the Agreement on Agriculture , a Member
that exports a scheduled product must comply with two distinct requirements: (1) its subsidized
exports must be within the quantity limitation specified in its schedule; and (2) its corresponding
budgetary outlays must also be within its commitmen ts. The Panel considers that Article 3.3 (and
Article 9.2(b)(iv)) makes it clear that the level of commitment of export subsidies on specified
products must be scheduled both in terms of quantity and in terms of budgetary outlays, as the level of
reduction of any such export subsidies apply to bot h their quantity and to their budgetary outlays: "a
Member shall not provide export subsidies … in excess of the budgetary outlay and quantity
commitment levels specified [in its Schedule]." (emphasis added).

440 Article 9.2(f) of the Agreement on Agriculture provides that: "In any of the second through fifth
years of the implementation period, a Member may provide export subsidies listed in paragraph 1 above in a
given year in excess of the corresp onding annual commitment levels in re spect of the products or groups of
products specified in Part IV of the Member's Schedule, provided that: (iv) the Member's budgetary outlays for
export subsidies and the quantities benefiting from such subsidies, at the conclusion of the implementation
period, are no greater than 64 per cent and 79 per cent of the 1986-1990 base period levels, respectively. For
developing country Members these percentages shall be 76 and 86 per cent, respectively."
441 See G/AG/N/EEC/20/REV.1, dated 9 March 2000, at p. 2.

7.138 The European Communities counters that export subsidies do not have to be expressed both
in terms of budgetary outlays and quantity. 442 The Panel notes that if the EC's Schedule did not
specify both of these limitations, it could export a subsidized scheduled product in excess of its
commitment level and remain in compliance with Article 3.3 of the Agreement on Agriculture ,
because the challenging Member will be unable to demonstrate that the European Communities'
exports do not exceed either of the two limitations. In the Panel's view, if Article 3.3 of the
Agreement on Agriculture did not impose an obligation to have both a budgetary outlay and a quantity
commitment level, then it would be effectively im possible, after the conclusion of the implementation
period, to ensure that export subsidies never exceed the two levels set out in Article 9.2(b)(iv) of the
Agreement on Agriculture which includes both.
7.139 For the European Communities the obligation to schedule both types of commitments was
only set out in paragraph 11 of the Modalities Pape r, from which, the Members could "negotiate
departures".443 As evidence of such Members' practi ce, the European Commu nities suggests that
Australia and New Zealand negotiated such departures from the Modalities Paper. 444 Australia had
sub-divided the category "other milk products" into two categories, fats and solid non-fats (which
were not listed in the Modalities Paper), specifying separate quantity commitments, while indicating a
budgetary outlay commitment only on the general product. New Zealand did not specify any
quantitative limits but only scheduled reductions in budgetary outlays.
7.140 After examining Australia's Schedule
445, the Panel is of the view that Australia has scheduled
both forms of reduction commitments, budgetary outlay as well as quantity, in respect of a single
product group, i.e. "other milk products", benefiting its sub-category of fats and non-fats. Turning to
New Zealand's Schedule 446, the Panel concludes that Member s which have undertaken reduction
commitments covering all Annex 1 products have scheduled both the budgetary outlay, and the

442 European Communities' second written submission, para. 128. See also European Communities'
reply to the Panel question No. 29.
443 And the European Communities add that Footnote 1 is a negotiated departure.
444 See the Modalities Paper, Exhibit EC-27.
445 The Panel considers that the pr oduct category "other milk pro ducts" has been subjected to a
budgetary outlay commitment, while the volume of "other milk products" has been expressed in terms of its fat,
and solid non fat, content prior to the scheduling of the corresponding quantity reduction commitment. While
the quantity reduction commitments have been expressed taki ng account of fat content, the Panel considers that
they relate to the same product group, i.e. "other milk products". The data and the explanatory notes contained
in Supporting Table 11 of document G/AG/AGST/AUS support the Panel's view. Further, the manner in which
these two forms of reduction commitments are integrated in the scheduling table, as well as in Supporting Table
11, leaves no doubt as to the Panel's conclusion that Australia has scheduled both forms of reduction
commitments, budgetary outlay as well as quantity, in re spect to a single product group, i.e. "other milk
products".
446 The Panel considers that an indication with respect to the quantity commitment level is not missing.
Instead, it is specified as "not applicable" for all impl ementation years, except for th e last year 2000, where the
specified amount is clearly indicated as "0.00", thus implying a 100 per cent reduction of the volume of
subsidized agricultural exports. Further, the reduction commitment relates, not to the individual product
categories identified during the Uruguay Round, but to "all
 agricultural products described in Annex 1 of the
Agreement on Agriculture ". Quite apart from the fact that it may not be feasible, from the statistical point-of-
view, to obtain a single figure expressing a quantity commitment level for all agricultural products, given the
variety of measurement units and conversion factors involved, the Panel appreciates that the nature of the export
incentive schemes reported by New Zealand during the base period did not lend itself to the breakdown required
by the Modalities Paper. Seeking further guidance from the Schedule of the only other Member of the WTO,
Panama, which has undertaken a reduction commitment in Section II of Part IV, on an aggregate basis, the
Panel finds, again, that: (a) the products covered are "todos
sobre la Agricultura"; and that (b) the quantity commitment level is shown as "no aplicable" except for the last
implementation year, 2003, where the amount is clearly specified as "0".

quantity reduction commitments, in a consistent and uniform manner, by clearly specifying a figure
with respect to the last implementation year.
7.141 In the Panel's view, Australia's and New Zeal and's scheduled reduction commitments cannot
be assimilated to examples of "negotiated depart ures" from the Modalities Paper, as claimed by the
European Communities.
7.142 On the basis of the evidence submitted to it, the Panel, therefore, concludes that the European
Communities has not substantiated its assertion that th ere are other situations in which a Member has
undertaken commitments in Section II of Part IV of its Schedule that did not contain both budgetary
outlays and
 quantity commitment levels.
7.143 Therefore the Panel concludes that the Agreement on Agriculture makes it clear that export
subsidies are only possible for products listed in Sec tion II, Part IV of Members' Schedules and only
for amounts at or below the maximum level of co mmitment provided for in a Member's Schedule.
Moreover, all WTO-consistent expor t subsidies must have been speci fied in a Member's Schedule,
both in terms of quantity and in terms of budgetary outlays and all WTO-consistent export subsidies
on scheduled products must have been subject to reduction commitments during the implementation
period.
(iii) The interpretation of terms included in WTO Members' Schedules
7.144 One of the issues before the Panel is whethe r the European Communities' commitment level
with respect to export subsidies on sugar can lega lly include two components: the first component
being the commitment levels expressed in the table on export subsidies (which have decreased during
the implementation period of the Agreement on Agriculture and has remained fixed since 2001); the
second component being the commitment levels expressed in Footnote 1 to the EC's Schedule in
respect of ACP/India sugar. For the Complainan ts, Footnote 1 on ACP/India sugar is inconsistent
with the Agreement on Agriculture and should be ignored when determining the European
Communities' commitment level.
7.145 In order for the Panel to determine the Eur opean Communities' commitment level, the Panel
must assess the legal value and effect of Footnote 1 contained in Section II of Part IV of the EC's
Schedule and to what extent the content of su ch a Footnote can legally modify the European
Communities' obligations under the Agreement on Agriculture with respect to export subsidies. 447
Before assessing the legal value and effect of Footnote 1, the Panel examines how one should
interpret provisions contained in Members' Schedules, in particular when such scheduled provisions
seem to contradict basic obligations contained in a WTO multilateral trade agreement, such as the
Agreement on Agriculture.
Provisions of a Member's Schedule should be interpreted as treaty provisions
7.146 As mentioned above, Article 8 of the Agreement on Agriculture makes it clear that Members
must respect both the provisions of the Agreement on Agriculture and the provisions of their
Schedules. The Panel notes first that scheduled commi tments are made an integral part of the GATT
1994 under Article 3.1 of the Agreement on Agriculture.
7.147 In EC – Computer Equipment , the Appellate Body concluded that provisions of a Member's
schedule must be interpreted as treaty provisions:

447 The Panel notes first that none of the parties have argued that footnotes per se cannot contain
commitments. The Complainants have raised objection to the content of Footnote 1 and the interpretation
thereof provided by the European Communities.

"Tariff concessions provided for in a Me mber's Schedule -- the interpretation of
which is at issue here -- are reciprocal and result from a mutually-advantageous
negotiation between importing and exporting Members. A Schedule is made an
integral part of the GATT 1994 by Article II:7 of the GATT 1994. Therefore, the
concessions provided for in that Schedule are part of the terms of the treaty. As such,
the only rules which may be applied in in terpreting the meaning of a concession are
the general rules of treaty interpretation set out in the Vienna Convention."
448
7.148 Therefore, provisions of a Members' Schedule mu st be interpreted pursuant to Article 3.2 of
the DSU and Articles 31, 32 and 33 of the Vienna Convention.449

448 Appellate Body Report on EC – Computer Equipment, para. 84.
449 Articles 31, 32 and 33 of the Vienna Convention read as follows:

"Article 31 – General rule of interpretation

1. A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the
terms of the treaty in their context and in the light of its object and purpose.

2. The context for the purpose of the interpretation of a treaty shall comprise, in addition to the text,
including its preamble and annexes:

(a) any agreement relating to the tr eaty which was made between all the parties in connection with the
conclusion of the treaty;

(b) any instrument which was made by one or more parties in connection with the conclusion of the
treaty and accepted by the other parties as an instrument related to the treaty.

3. There shall be taken into account, together with the context:

(a) any subsequent agreement between the parties regarding the interpretation of the treaty or the
application of its provisions;

(b) any subsequent practice in the application of the treaty which establishe s the agreement of the
parties regarding its interpretation;

(c) any relevant rules of international law applicable in the relations between the parties.

4. A special meaning shall be given to a term if it is established that the parties so intended.

Article 32 – Supplementary means of interpretation

Recourse may be had to supplementary means of interpretation, including the preparatory work of the
treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the
application of article 31, or to determine the meaning when the interpretation according to article 31:

(a) leaves the meaning ambiguous or obscure; or

(b) leads to a result which is manifestly absurd or unreasonable.

Article 33 – Interpretation of treaties authenticated in two or more languages

1. When a treaty has been authenticated in two or more languages, the text is equally authoritative in
each language, unless the treaty provides or the partie s agree that, in case of divergence, a particular
text shall prevail.

7.149 The primary purpose of treaty interpretation is to identify the common intention of the
parties.
450 Importantly, in EC – Computer Equipment, the Appellate Body clarified that although
unilaterally proposed and bilaterally negotiate d, tariff concessions still represent the common
agreement of all Members and are thus multilateral obligations; it also concluded that "indeed, the fact
that Members' Schedules are an integral part of the GATT 1994 indicates that, while each Schedule
represents the tariff commitments made by one Member, they represent a common agreement among
all Members."451 (underlining added)
7.150 The Panel believes that this is true for all WTO scheduled commitments, whether pure market
access concessions or any other commitments. WTO Members' scheduled commitments, whether
initially negotiated bilaterally or multilaterally, are multilateralized when made part of the WTO
Agreement, and thus, they should be interpreted accordingly.
Effective treaty interpretation
7.151 The requirement that a treaty be interpreted in "good faith" pursuant to Article 31.1 of the
Vienna Convention can be correlated with the principle of "effective treaty interpretation", according
to which all terms of a treaty must be given a meaning. 452 On several occasions, the Appellate Body
has emphasized the importance of the principle of ef fectiveness whereby "an interpreter is not free to
adopt a reading that would result in reducing whole clauses or paragraphs of a treaty to redundancy or
inutile".453
7.152 In Korea – Dairy, the Appellate Body concluded that:
"In light of the interpretive princi ple of effectiveness, it is the duty of any treaty
interpreter to 'read all applicable provisions of a treaty in a way that gives meaning to
all of them, harmoniously .'454 An important corollary of this principle is that a treaty

2. A version of the treaty in a language other than one of those in which the text was authenticated shall
be considered an authentic text only if the treaty so provides or the parties so agree.

3. The terms of the treaty are presumed to have the same meaning in each authentic text.

4. Except where a particular text prevails in acco rdance with paragraph 1, when a comparison of the
authentic texts discloses a difference of meaning which the application of articles 31 and 32 does not
remove, the meaning which best reconciles the texts, having regard to the object and purpose of the
treaty, shall be adopted."
450 See Appellate Body Report on EC – Computer Equipment, at para. 84.
451 The Appellate Body in EC – Computer Equipment stated in para. 109: "Tariff negotiations are a
process of reciprocal demands and concessions, of 'give and take'. It is only normal that importing Members
define their offers (and their ensuing obligations) in terms which suit their needs. On the other hand, exporting
Members have to ensure that their corresponding rights are described in such a manner in the Schedules of
importing Members that their export interests, as agreed in the negotiations, are guaranteed. There was a special
arrangement made for this in the Uruguay Round. For this purpose, a process of verification of tariff schedules
took place from 15 February through 25 March 1994, wh ich allowed Uruguay Round participants to check and
control, through consultations with their negotiating part ners, the scope and definitio n of tariff concessions."
Citing MTN.TNC/W/131, 21 January 1994.
452 See the Appellate Body Report on US – Gasoline , p. 23. See also the Appellate Body Reports on
Japan – Alcoholic Beverages II, p. 12, on US – Underwear, p. 16; on Argentina – Footwear (EC), paras. 81 and
95; on Korea – Dairy , para. 81; on US – Section 211 Appropriations Act , para. 338; and on US – Offset Act
(Byrd Amendment), para. 271.
453 Appellate Body Report on US – Gasoline, at p. 23
454 ( footnote original ) We have emphasized this in Appellate Body Report, Argentina – Safeguard
Measures on Imports of Footwear , WT/DS121/AB/R, circulated 14 December 1999, para. 81. See also
Appellate Body Report, United States – Gasoline, supra, footnote 12, p. 23; Appellate Body Report, Japan –

should be interpreted as a whole, and, in pa rticular, its sections and parts should be
read as a whole."455 (underlining added, footnote omitted)
7.153 In Canada – Dairy , the Appellate Body made it clear ag ain that a treaty interpreter cannot
lightly assume that a WTO Member projected no demonstrable purpose on a specific provision of its
schedule:
"In interpreting the language in Canada's Schedule, the Panel focused on the verb
'represents' and opined that, because of the u se of this verb, the notation was no more
than a ' description' of the 'way the size of the quo ta was determined'. The net
consequence of the Panel's inte rpretation is a failure to gi ve the notation in Canada's
Schedule any legal effect as a 'term and condition'. If the language is merely a
'description' or a 'narration' of how the quantity was arrived at, we do not see what
purpose it serves in being inscribed in the Schedule. The Panel, in other words, acted
upon the assumption that Canada projected no identifiably necessary or useful
qualifying or limiting purpose in inscribing the notation in its Schedule. The Panel
thus disregarded the principle of effectiveness in its interpretive effort ."
456 (emphasis
added)
7.154 The Panel considers, therefore, that in the interpretation of Footnote 1 to Section II, Part IV of
the EC's Schedule it must use its best endeavours to give due meaning to the said Footnote and respect
the principle of effective treaty interpretation.
(iv) The issue of "conflict" between provisions of a Member's Schedule and provisions of the
Agreement on Agriculture
7.155 The Panel recalls that in international law, there is a presumption against conflicts when
treaties have the same membership. 457 This principle has been recognized by the WTO jurisprudence
when dealing with internal conflicts within the WTO Agreement which includes Members' Schedules.
The WTO jurisprudence has maintained the general principle that there is a conflict only when two
provisions are mutually exclusive, that is when only one provision "applies" because it is not possible
for a single measure to be consistent with both provisions.458

Alcoholic Beverages , supra, footnote 41, p. 12; and Appellate Body Report, India – Patents , supra,
footnote 21, para. 45.
455 Appellate Body Report on Korea – Dairy, para. 81.
456 Appellate Body Report, Canada – Dairy, para. 135 (footnote omitted)(emphasis added).
457 "... [T]echnically speaking, there is a conflic t when two (or more) treaty instruments contain
obligations which cannot be complied with simultaneously. ... Not every such divergence constitutes a conflict,
however. ... Incompatibility of contents is an essen tial condition of conflict." (Encyclopedia of Public
International Law (North-Holland 1984), p. 468. See also Ian Sinclair, Vienna Convention, 1984, at p. 97.)" … a
conflict of law-making treaties arises only where simulta neous compliance with the obligations of different
instruments is impossible. ... There is no conflict if the obligations of one instrument are stricter than, but not
incompatible with, those of another, or if it is possibl e to comply with the obligations of one instrument by
refraining from exercising a privilege or discretion accorded by another. For, in such a case, it is possible for a
State which is a signatory of both treaties to comply with both treaties at the same time. (…) The presumption
against conflict is especially reinfo rced in cases where separate agreements are concluded between the same
parties, since it can be presumed that they are meant to be consistent wi th themselves, failing any evidence to
the contrary." (Jenks, Op. Cit,)
458 In the WTO context, see the Panel Report on Indonesia – Automobile at paras.14.29-14.36 and
14.97 to 14.99; the Appellate Body Reports on Guatemala – Cement I at para. 60; on US – Hot Rolled Steel ,
paras. 55-62. Recently in EC – Tariffs Preferences , para. 88, the Appellate Body seems to have expanded the
concept of conflicts to include situations where a provision gives a right while another one gives an obligation.

7.156 The Panel is also aware of the WTO jurispr udence that has established the relationship
between provisions of a WTO agreement and provisions of a Member's Schedule. For instance, the
Appellate Body in EC – Bananas III
459 concluded, as the GATT panel report on US – Sugar460, that:
"The market access concessions for agricultu ral products that were made in the
Uruguay Round of multilateral trade negotiati ons are set out in Members' Schedules
annexed to the Marrakesh Protocol, and are an integral part of the GATT 1994. By
the terms of the Marrakesh Protocol , the Schedules are 'Schedules to the GATT
1994", and Article II:7 of the GATT 1994 provides that "Schedules annexed to this
Agreement are hereby made an integral part of Part I of this Agreement'. With
respect to concessions contained in the Schedules annexed to the GATT 1947, the
panel in United States - Restrictions on Importation of Sugar ("United States - Sugar
Headnote") found that:
... Article II permits contracting parties to incorporate into their
Schedules acts yielding rights under the General Agreement but not
acts diminishing obligations under that Agreement."
7.157 The same principle was reiterated in EC – Poultry
461 and in Chile – Price Band System .462 In
the Panel's view, GATT and WTO jurisprudence indi cate that WTO Members may use entries in their
schedules of concession to clarify and qualify the "concessions" they individually agree to assume in
their Schedules but not to reduce or conflict with the obligations they have assumed under the GATT
or the WTO Agreement, including the Agreement on Agriculture.
7.158 The Panel notes that the jurisprudence cited a bove deals with tariff concessions and this
includes market access commitments within the meaning of Article 1(g) of the Agreement on
Agriculture. The "export subsidy commitments" contain limitations on subsid ization, constituting
exceptions to the Article 8 general prohibition, and are incorporated into the Agreement on
Agriculture through Article 3.1 of the Agreement on Agriculture. The Panel recalls also that contrary
to tariff concessions, export subsidy commitments are not renegotiable under Article XXVIII of the
GATT 1994. Therefore, export subsidy commitment s are different from tariff and other market
access concessions. However, in the Panel's view, the principle that scheduled commitments cannot
overrule or conflict with the basic obligations contained in a WTO multilateral trade agreement,
unless explicitly authorized, remains valid and appl icable to export subsidy commitments scheduled
in Section II, Part IV of Members' Schedules.
7.159 The Panel believes that this same princi ple is recognized in Article 8 of the Agreement on
Agriculture.

459 Appellate Body Report on EC – Bananas III, para. 154.
460 GATT Panel Report on US – Sugar, paras. 5.2-5.3.
461 The Appellate Body Report on EC – Poultry , para. 98 stated: "In United States - Restrictions on
Imports of Sugar , the panel stated that Article II of the GATT permits contracting parties to incorporate into
their Schedules acts yielding rights under the GATT, but not acts diminishing obligations under that Agreement.
In our view, this is particularly so with respect to the principle of non-discrimination in Articles I and XIII of the
GATT 1994. In EC – Bananas, we confirmed the principle that a Member may yield rights but not diminish its
obligations and concluded that it is equally valid for the market access conce ssions and commitments for
agricultural products contained in the Schedules annexed to the GATT 1994. The ordinary meaning of the term
"concessions" suggests that a Member may yield or waive some of its own rights and grant benefits to other
Members, but that it cannot unilaterally diminish its own obligations.".
462 The Appellate Body Report on Chile – Price Band System, para. 272 stated: " We have observed in
a previous case that "[t]he ordinary meaning of the term 'concessions' sugg ests that a Member may yield rights
and grant benefits, but it cannot diminish its obligations". A Member's Schedule imposes obligations on the
Member who has made the concessions."

7.160 In this respect, the Panel notes that Article 8 of the Agreement on Agriculture covers various
types of commitments in the context of the implementation period; commitments limiting
subsidization (Article 3.1), and commitments relati ng to limitations on the extension of the scope of
export subsidization (Article 9.3).
7.161 At the same time, Article 8 makes clear that a Member must at all times comply with the
Agreement on Agriculture (and its Schedule).
463 Therefore, a Members' Schedule cannot provide for
non-compliance with provisions of the Agreement on Agriculture. Provisions in Members' Schedules
relating to commitments authorized by the Agreement on Agriculture may therefore only qualify such
commitments to the extent that the said qualificati on does not act so as to contradict or conflict with
the Members' obligations under the Agreement on Agriculture.
7.162 In US – FSC, the Appellate Body recognized the difference between the rule-based provisions
contained in the Agreement on Agriculture and the more narrow reduction commitments contained in
Members' Schedules.
"The word 'commitments' generally co nnotes 'engagements' or 'obligations'. 464 Thus,
the term 'export subsidy commitments' refers to commitments or obligations relating
to export subsidies assumed by Members under provisions of the Agreement on
Agriculture, in particular, under Articles 3, 8 and 9 of that Agreement. (...)
We also find support for this interpretation of the term "export subsidy commitments"
in Article 10 itself, which draws a distinc tion, in sub-paragraphs 1 and 3, between
'export subsidy commitments' and ' reduction commitment levels '.465 In our view, the
terms 'export subsidy commitments' and 'r eduction commitments' have different
meanings. ' Reduction commitments' is a narrower term than 'export subsidy
commitments' and refers only to commi tments made, under the first clause of
Article 3.3, with respect to scheduled agricultural products. It is only with respect to
scheduled products that Members have undertaken , under Article 9.2(b)(iv) of the
Agreement on Agriculture , to reduce the level of export subsidies, as listed in
Article 9.1, during the implementation period of the Agreement on Agriculture .466
The term 'export subsidy commitments' has a wider reach that covers commitments
and obligations relating to both scheduled and unscheduled agricultural products." 467
(underlining added)
7.163 The Panel is of the view that the "wider" e xport subsidy obligations provided for in the
Agreement on Agriculture cannot be deviated from in a Member's Schedule containing narrower
commitments. Members may include in their Schedules reduction commitments as well as other
specific types of commitments which, by their nature, are narrower and thus cannot be used to
circumvent the broader rule-based export subsidy commitment of the Agreement on Agriculture.
7.164 As discussed in paragraphs 7.127-7.134 above, commitments with respect to export subsidies
are thus strictly regulated under the Agreement on Agriculture . Among other disciplines, Article 3
provides that export subsidies must be expressed bot h in terms of budgetary outlays and in terms of

463 The Panel recalls the wording of Article 8 of the Agreement on Agriculture: "Each Member
undertakes not to provide export subsidies othe rwise than in conformity with this Agreement and with the
commitments as specified in that Member's Schedule." (emphasis added)
464 (footnote original) The New Shorter Oxford English Dictionary, supra, footnote 148, p. 452.
465 (footnote original) The term "reduction commitments" also appears in the chapeau to Article 9.1.
466 (footnote original) Article 9.2(b)(iv) provides that, with respect to scheduled products, the budgetary
outlay and quantity commitment levels must, by the end of the implementation period, not exceed certain
threshold levels, expressed as a percentage of the 1986-1990 base period levels.
467 Appellate Body Report on US – FSC, paras. 144-147.

quantities; moreover, to be consistent with the Agreement on Agriculture , all such export subsidies
must have been subject to reduction commitments pursuant to Articles 3 and 9.1 (and 9.2(b)(iv)).
7.165 Having these guidelines in mind and reca lling the Appellate Body ruling in Korea – Dairy
that it is "the duty of any treaty interpreter to 'read all app licable provisions of a treaty in a way that
gives meaning to all of them, harmoniously'
468"469, the Panel needs to see whether the content of
Footnote 1 of the EC's Schedule on the one ha nd, and the European Communities' obligations
pursuant to Articles 3, 8 and 9 of the Agreement on Agriculture on the other hand, can be read
"harmoniously" or whether the content of Footnote 1 – being inconsistent and conflicting with the
European Communities' basic obligations under the Agreement on Agriculture – should be considered
without any legal effect and would thus not enla rge or otherwise modify the commitment level
specified in Section II, Part IV of the European Communities' Schedule.
7.166 The Panel proceeds first to the interpretation of Footnote 1 to assess whether, as suggested by
the European Communities, it provides for a WTO- consistent limitation of 1.6 million tonnes for
export subsidies corresponding or equivalent to the amount of imports of ACP/Indian origin.
(v) Interpretation of the European Communities' Footnote 1 on ACP/India sugar:
7.167 Footnote 1 to the entry for sugar in the Eu ropean Communities' export subsidy commitments
reads as follows:
"Does not include exports of sugar of ACP and Indian origin on which the
Community is not making any reduction commitments. The average of export in the
period 1986 to 1990 amounted to 1,6 mio t."
7.168 The Panel refers to the European Communities' interpretation of Footnote 1:
"Both sentences of the footnote are relevant in order to fully understand the EC's
commitments. The footnote is numbered (1 ) and is found next to the term 'sugar' in
the column entitled "description of products", thus applying to the full entry. The
first sentence has two elements to it. First, it confirms that exports of an equivalent
amount of ACP/Indian sugar were not incl uded in the quantities and outlays reported
by the EC for the base period level (1986-1990) which served as a basis for the
figures set out in the table. Since the footnot e applies to the entire entry, it applies to
both the base outlays and base quantities. That is, it indicates the basis for the base
quantity and outlay levels. The EC made th is clear in the supporting tables which all
participants in the negotia tions were required to submit.
470 Indeed, Australia
explicitly accepts that ACP equivalent sugar was excluded from the supporting
tables.471 The second element of the first sentence makes it clear that exports of the
quantity of ACP/India sugar imported shall not be counted against the commitments
made on the base period levels (this is the logical concomitant of the non-inclusion of
these exports in the base period).

468 ( footnote original ) We have emphasized this in Appellate Body Report, Argentina – Safeguard
Measures on Imports of Footwear , WT/DS121/AB/R, circulated 14 December 1999, para. 81. See also
Appellate Body Report, United States – Gasoline, supra, footnote 12, p. 23; Appellate Body Report, Japan –
Alcoholic Beverages , supra, footnote 41, p. 12; and Appellate Body Report, India – Patents , supra,
footnote 21, para. 45.
469 Appellate Body Report on Korea – Dairy, para. 81.
470 (footnote original) Exhibit EC–5.
471 (footnote original) Australia's first written submission, Annex 1, paras. 4 and 5.

It is the second sentence which is vital to understanding the footnote (and which is
entirely ignored by the Complainants). It expresses the "average of export" of
ACP/India equivalent sugar in the pe riod 1986-1990. This sentence cannot be
disregarded. It is deprived of meaning if it is considered as merely a statement of fact
or a narration of particular circumstances.
472 The reference to the period 1986-1990
(which was the base period for the reducti on commitments) is telling. If, as the
Complainants would have it, the footnote is simply an exclusion, there would be no
need to insert the second sentence, and no reason to refer to the 1986-1990 base
period. The reference to the base period indicates that the EC was committing itself,
as it had done for the other component of its e xports of sugar, to limit its exports to a
level established on the basis of the exports made in the base period. It operates in
precisely the same way as the other component of the EC's commitments – it is a
limited authorisation to provide export subsidies.
Therefore, according to a proper interpretation of the footnote the EC has articulated
its subsidy commitments in two components. One component sets limits which are
subject to reduction, and the second component (the footnote) sets a fixed ceiling.
Overall, the EC has reduced its export subsidies on sugar."
473
Footnote 1 does not contain any "limitation" on export subsidies of ACP/India sugar
7.169 The Panel does not agree with the European Communities' interpretation of Footnote 1.
Firstly, the ordinary meaning of the terms of th e Footnote does not indicate any "limitation on export
subsidies for sugar" to 1.6 million tonnes. The Panel therefore fails to see any commitment "limiting
subsidization".
7.170 The Complainants highlight a number of in consistencies between: (a) the European
Communities' assertion before this Panel that Foot note 1 in the European Communities' Schedule has
legal effect and constitutes a "commitment", a nd that, overall, the European Communities has
subjected all export subsidies on sugar to reduction commitments 474; and (b) the European
Communities' own notification practice to omit the data relating to export subsidies of ACP/India
"equivalent" sugar, as well as its responses to re quests for clarification, in the Committee on
Agriculture. The Complainants submit that, if th e European Communities had been of the view that
it had assumed export subsidy reduction commitments in respect of sugar of ACP and Indian origin, it
would have provided statistics on the export of such s ugar in its notifications, or explained why it did
not notify the exports of sugar that it claimed to be covered by its reduction commitments.
7.171 The European Communities does not reconcile the inconsistencies highlighted by the
Complainants. Instead, the European Communities su stains that it has consistently interpreted the
Footnote in the same manner since 1995, based on the application of the Vienna Convention rules of
interpretation. The European Communities insists th at it has undertaken to limit subsidization in
respect of ACP/India equivalent sugar and th at it has reduced its overall commitment on export
subsidies on an annual basis.

472 (footnote original) See, for instance, the Appellate Body Report in Canada – Dairy at para. 135. In
that case, the Appellate Body admonished the panel for failing to give meaning to a condition in Canada's goods
schedule which the panel had considered was no more than a "description".
473 European Communities' first written submission, paras. 167-169.
474 European Communities' oral statement at the first substantive meeting of the Panel, para. 31.

7.172 The European Communities s uggests that the evidence
475 demonstrates that it has considered
and treated 1.6 million tonnes as a "cap" on the amount of exports which can benefit from export
subsidies as ACP/India equivalent sugar. For the European Communities, the sugar CMO is managed
in order to respect this limit, which forms an integr al part of the regulatory structure of the regime.
Indeed, since the export refunds are maintained at the difference between the world and the
Community price (and thus the Community authorities have limited control over the evolution of the
amount of individual refunds) the limits imposed by the WTO Agreements are respected through the
control of the quantity of products which may be exported with the benefit of a refund (see Article
27(14) of Regulation 1260/2001). 476 The Commission verifies on a weekly basis that the export
refunds granted stay within the limits set out in the WTO Agreement which permits the Commission
to ensure that export refunds are not grante d which might exceed the EC’s export subsidy
commitments.
7.173 The Panel recalls the Appellate Body's reliance, in Korea – Various Measures on Beef , on
statements and notifications by Memb ers before the Committee on Agriculture 477, as evidence of a
Member's consistent treatment of its commitments under the Agreement on Agriculture.
7.174 The Panel first observes that the EC notifica tions to the Committee on Agriculture do not
suggest that Footnote 1 constitutes a limitation on subsidization. 478 The European Communities,
rather, appears to argue that Footnote 1 exem pts it from any export subsidy reduction commitment
with respect to sugar of ACP and Indian origin. Indeed, since the entry into force of the WTO
Agreement, the European Communities has consistent ly indicated, in Footnote 5 to its Table ES:1
notifications to the Committee on Agriculture, that the information presented:479
"Does not include exports of sugar of ACP and Indian origin on which the
Community has no reduction commitments."
7.175 The Panel also notes that, during the review process (25-26 June 1998 and 17-18 November
1998) undertaken by the Committee on Agri culture pursuant to Article 18 of the Agreement on
Agriculture, the European Communities stated, inter alia, that:
"Exports of ACP and Indian sugar are e ligible to receive export refunds. As
mentioned in the EC's Schedule, no reduc tion commitment is made on this category
of sugar."480
and
"As indicated in footnote 1 of the table on export subsidies contained in Part IV,
Section II of Schedule CXL, the EC is not undertaking any reduction commitment on
exports of ACP or Indian sugar. Con sequently, any financial assistance is not

475 See European Communities' first submission, table 10. The Panel notes that Australia raised the
issue of the statistical inaccu racy of the tables cited by the European Communities, Australia's oral statement at
the first substantive meeting, para. 54 and Australia's oral statement at the second Panel meeting, para. 51.
476 European Communities' first submission, paras. 175-184.
477 Appellate Body Report on Korea – Various Measures on Beef, paras. 103-105.
478 The Panel recalls that the practice of a Member may be relevant in the interpretation of that
Members' schedule. See the Appellate Body report on EC – Computer Equipment, para. 92.
479 Exhibit COMP-17, Footnote (5) to Table ES:1 notifications.
480 See G/AG/R/15, p. 59. See also G/AG/R/17.

reported to the WTO. For information, these exports amount to approximately
1.6 million tonnes per year." 481
7.176 The Panel must assume that the European Communities has been complying with the
notification requirements adopted by the Committee on Agriculture 482, and is thus puzzled by the fact
that the European Communities has not reported the amounts of actual subsidized quantities and
budgetary outlays corresponding to exports of sugar of ACP and Indian origin. In the Panel's view,
therefore, the European Communities' notificati on practice since the entry into force of the WTO
Agreement suggests that the European Communities has not assumed a commitment to limit
subsidization of sugar of ACP or Indian origin . Importantly, this implies that the European
Communities itself has not "treated" the Footnote as a commitment specified in its Schedule. This is
inconsistent with the European Communities' claim that it has indeed assumed ceiling level
commitments, with respect to the volume of subsidized exports of sugar of ACP and Indian origin.483
7.177 Background documents compiled by the Secretar iat on the basis of Members' Schedules and
notifications commented on by Members lend support to the Panel's analysis. 484 No commitment,
whether in the form of budgetary outlays, or quantit y, reduction commitment, has ever been recorded,
or reflected in any way, in relation to sugar of ACP and Indian origin. The European Communities
has not availed itself of the opportunity to update the information contained in such documents in
order to clarify that its export subsidy commitmen ts for sugar were articulated in two distinct
components. Since the fixed ceiling and the fixed quantity commitments have never been accounted
for in the summary tables in respect of EC sugar, th e implications are, in the Panel's opinion, that the
"understanding" of WTO Members, of the Committee on Agriculture, was that the Footnote was not a
commitment assumed by the European Communities. Moreover, the Panel understands that the
European Communities has not reacted, nor objected, to the data presented in the Secretariat papers.
7.178 The Panel, therefore, does not find any eviden ce that the European Communities itself was of
the view, during the entire implementation period, that ACP/Indian sugar was another "component" of
its commitments. Cumulated with the inconsistenc y of the European Communities' statements before
the Committee on Agriculture and this Panel 485; the inconsistency between the information contained
in its notifications and its assertions before the Panel 486; the Panel concludes that the Footnote has
never been "treated" or considered by the me mbers of the Committee on Agriculture, nor by the
European Communities487, as a "commitment" "specified" in the European Communities' Schedule.
7.179 The Panel is of the view that the ordinary m eaning of the terms indicates that the European
Communities is not making a commitment limiting s ubsidization on exports of sugar of ACP/India
origin. On the contrary, the terms of Footnote 1 indicate that the European Communities is making a

481 See G/AG/R/17, p. 29: This reply was provided in response to the US query regarding the
application of internal EC prices less transportation co sts to imported sugar, and a query regarding the prices
applying to imported sugar, which is refined in Europe. The United States sought information as to whether this
financial assistance was reported to the WTO, and as to the magnitude of such financial assistance. After
hearing the EC reply, the United States stated that it assumed that "no reduction commitment" did not mean that
the EC had no commitment at all as regards export subsid ization of agricultural product s. To the extent that
WTO rules exist on the subject, the United States hoped to see more information on sugar exports under the EC
financial support programme in future.
482 See G/AG/2.
483 European Communities', first written submission, paras. 174-186.
484 See documents G/AG/NG/S/5, G/AG/NG/S/5/Rev.1, TN/AG/S/8.
485 Underlined by the Complainants in para. 4.198 above.
486 See para. 4.199 above.
487 Despite the European Communities' assertions to the contrary referred to in paras. 4.204 to 4.207
above.

statement that exports of subsidized sugar of ACP/ Indian origin will not be subject to the reduction
commitments provided for in Articles 3, 9.1 and 9.2(b)(iv) of the Agreement on Agriculture.
Footnote 1 does not provide for any commitment for sugar "equivalent" from ACP/India

7.180 The Panel is also of the view that the ordinary meaning of the terms of Footnote 1 does not
provide that an amount of subsidized sugar "e quivalent" to the amount of sugar imported from
ACP/India will be maintained for export. In the Pa nel's view, the Footnote appears to require that the
sugar exports excluded from export reduction commitments actually be sugar of ACP and Indian
origin, as stated in Footnote 1. Payment of export subsidies on an equivalent amount of sugar sourced
from the European Communities does not come within the terms of the Footnote. For the European
Communities, the second sentence makes it clear that it was dealing with exports and therefore, since
it does not export or re-export ACP/India sugar as such , it could only be exports equivalent to what it
imports from ACP/India. The European Communities adds that Members were aware at the time of
the Uruguay Round that it was exporting a quantity of sugar equivalent to what it imports from those
countries.488 The Panel notes, however, that the Europ ean Communities today considers that it needs
to use wording different from what it used when it scheduled its footnote, and a wording different
from what it used in its cover letter when the EC Ambassador transmitted the said EC's Schedule –
which seems to indicate that the European Comm unities did not choose the most appropriate/clear
wording at the time.489
7.181 The European Communities 490 and some of the third parties 491 referred to the linkages
between the Cotonou Agreement 492 and the Sugar Protocol 493 on the one hand and the EC sugar

488 See European Communities' first written submission, para. 198: "(...) As the EC has already noted, it
was well known to all parties that the EC did not grant ex port refunds only on the re-export of sugar originally
of ACP/Indian origin, but granted export refunds for a quan tity equivalent to such exports. This is reflected in
the drafting of the footnote, which, in the second senten ce, refers to the "average of export" (as opposed to
import) as being 1.6 million tonnes, which is a reference to exports, and certainly not ACP/India raw sugar
imported, refined, and subsequently exported but an equivalent quantity of ACP/India sugar. The term "export"
in "average of export" (in the second sentence) must ha ve the same meaning as "exports" in the first sentence.
Consequently, it is clear that the footnote covers refunds on exports equivalent to imports."
489 See Exhibit EC-6 letter from Ambassador Tran Van-Thinh, EC Permanent Representative to the
GATT to Director-General of the GATT which refers to "sugar corresponding to its imports of sugar from ACP
countries and India." See Australia's reply to Panel question No. 19 where Australia states that the "EC actually
changed the wording from the letters it cites which refer to 'sugar corresponding to its imports of sugar from
ACP countries and India' to the actual wording in the Footnote. See European Communities' first written
submission, paras. 199-201.
490 European Communities' replies to Panel questions Nos. 14 and 19; European Communities' second
written submission, para. 111; European Communities' oral statement, second meeting, paras. 99-104; and
Exhibit EC-7.
491 See para. 5.2 above.
492 The Partnership Agreement between the African, Ca ribbean and Pacific Group of States (ACP) and
the European Communities and its member States signed in Cotonou on 23 June 2000, Official Journal L 320
(23 November 2002).
493 The Sugar Protocol is included in the Cotonou Agreement between the European Communities and
the ACP countries. It was formerly part of the various Lomé Conventions. It covers the agreement between the
European Communities and a number of sugar-producing ACP countries for exports of raw cane sugar by the
latter to the former at fixed quantities (1,294,700 tonnes (white sugar equivalent) and prices guaranteed to be no
lower than the EC intervention price. In 1975, the Euro pean Communities granted a preferential trade regime to
ACP nations within the framework of cooperation agreements. Trade preferences, commodity protocols and
instruments of trade cooperation were part of the four successive Lomé Conventions (1975-2000). Under the
Cotonou Agreement signed in June 200 0, trade preferences were extended for eight further years (until the
beginning of 2008) and the ACP and European Communities agreed on a new trade regime and on the concept
of Economic Partnership Agreements. Four agricultural products, including sugar, were the subject of protocols

regime (including the ACP/India equivalent sugar) on the other hand; they added that Members were
aware since the 1970s that the Footnote related to a quantity of exports equivalent to the quantity of
sugar it imports from ACP countries and India and that this portion of its subsidized exports should be
entitled to differential treatment which is, according to the European Communities, articulated in the
ACP/India Footnote.
7.182 The Panel agrees with the Complainants that, pur suant to the Sugar Protocol and the EC/India
Agreement494, the quantity of sugar to be provided by th e ACP and India is not contingent on export
by the European Communities of that sugar or its equivalent. Moreover, the amount of sugar covered
by the Sugar Protocol is 1,294,700 tonnes while the Footnote refers to 1.6 million tonnes. In addition,
the Sugar Protocol as included in the Cotonou Ag reement, obliges the European Communities to buy
certain quantities of sugar from selected ACP countries and India, but does not oblige the European
Communities to subsidize re-exports of ACP/India equi valent sugar. Finally, in the Sugar Protocol,
the pricing arrangement for purchase of sugar from ACP countries and India is not linked in any way
to exports of "ACP/India equivale nt" sugar, nor, indeed, to the provision of export subsidies by the
European Communities. The Panel is of the view that the Sugar Protocol, even if considered
"context" within the meaning of Article 31.2 of the Vienna Convention for the interpretation of
Footnote 1, does not support the European Communities' argument.
Conclusion
7.183 In sum, the Panel considers that the ordinary meaning of the terms of Footnote 1 does not
indicate any commitment or concessions constituting a limitation on export subsidization or any other
type of commitment authorized by the Agreement on Agriculture which could in any way enlarge or
otherwise modify the European Commu nities' commitment level specified in Section II, Part IV of its
Schedule. Rather, Footnote 1 constitutes a unilate ral statement by the European Communities that,
with regard to exports of ACP/India sugar, it is not making any reduction commitment. Moreover,
Footnote 1, if it were to constitute such a lim itation on subsidization, w ould only benefit sugar of
ACP/Indian origin per se, contrary to the European Communities' suggestion that 1.6 million tonnes
of sugar refer to an amount "equivalent" to the amount imported from ACP countries and India.
7.184 Therefore, the Panel concludes that the ordina ry meaning of the terms of Footnote 1 does not
authorize an additional 1.6 million tonnes of s ubsidized sugar to be exported corresponding or
equivalent to the amount of impor ts from ACP and India. The c ontent of Footnote 1 therefore does
not enlarge or otherwise modify the European Co mmunities' quantity commitment level specified in
Section II, Part IV of its Schedule to be 1,273,50 0 tonnes of sugar per year, or its budgetary outlay
commitment of €499.1 million per year, with effect since marketing year 2000/2001.
Can the ACP/India Footnote be regarded as a second component of the European
Communities' commitment level that would not be subject to reduction per se but that would
form part of the overall European Communities' commitment level which has been reduced?
7.185 Assuming arguendo that the Footnote could be interpreted as providing for a "limitation on
subsidization in the form of a ceiling" for a maxi mum of 1.6 million tonnes, the Panel proceeds now
to determine whether the said Footnote, as interpre ted by the European Communities, could be WTO
consistent and part of the Eur opean Communities' overall commitmen t level with respect to export
subsidies on sugar.

annexed to the Lomé Conventions. The sugar protocol has been maintained as such, without modification,
throughout the four Lomé Conventions and Cotonou Agreement.
494 Agreement between the EEC and the Republic of India on Cane Sugar, Official Journal L 190,
23 July 1975, pp. 36-37.

7.186 The Panel has reached the conclusion that all export subsidies scheduled pursuant to
Articles 3 and 8 of the Agreement on Agriculture must have been subject to reduction commitments.
The European Communities argues that although th e ACP/India sugar Footnote acts as a ceiling on
subsidization and is not subject to any reduction commitment, the European Communities' overall
commitment on export subsidies to sugar has been reduced. According to the European
Communities, export subsidies provided for in its Sche dule are not inconsistent and in conflict with
Article 9.1 and 9.2(b)(iv) of the Agreement on Agriculture, being of the opinion that Article 9.2(b)(iv)
is outside the Panel's terms of reference.
7.187 The Panel disagrees with the European Communities. The Panel recalls that the possibility of
maintaining export subsidies is an exception to the general prohibition against export subsidies
contained in Article 8 of the Agreement on Agriculture . As discussed in paragraphs 7.133-7.135,
WTO-consistent export subsidies that could be maintained if and when scheduled, had to be subject to
reduction commitments. In other words, export s ubsidies that were not subject to any reduction
commitment could not be maintained, and are prohib ited pursuant to Article 8 as interpreted in light
of Articles 3 and 9 of the Agreement on Agriculture.
7.188 Moreover, Article 9.1 defines a nd lists export subsidies which must be subject to reduction.
Article 9.1(a) reads as follows:
"The following export subsidies are subj ect to reduction commitments under this
Agreement:
(a) the provision by governments or their agencies of direct
subsidies, including payments-in-kind, to a firm, to an industry, to
producers of an agricultural prod uct, to a cooperative or other
association of such producers, or to a marketing board, contingent on
export performance."
7.189 In this context, Article 9.1(a) seems to cove r the type of export subsidy provided for in the
ACP/India sugar Footnote. Indeed, the European Communities does not deny that its exports of
ACP/India equivalent sugar benefit from export subs idies; its argument is essentially that the
European Communities is entitled to provide such e xport subsidies. In the Panel's view, if the
European Communities claims that it is entitled to maintain such export subsidies, the said export
subsidies must have been subject to reduction commitments.
7.190 The Panel considers that Footnote 1 to Section II of Part IV of the EC's Schedule attempts to
reduce and modify the European Communities' obligati on pursuant to Articles 3, 8, 9.1 and 9.2(b)(iv)
of the Agreement on Agriculture. In the Panel's view, the content of Footnote 1 is fundamentally
inconsistent with the basic provisions of the Agreement on Agriculture , as Footnote 1, on the one
hand, and Articles 3, 8 and 9 of the Agreement on Agriculture , on the other hand, are mutually
inconsistent. Therefore, the content of Footnote 1 contradicts and conflicts with the European
Communities' basic obligations contained in Articles 9.1, 9.2(b)(iv), 3 and 8 of the Agreement on
Agriculture. Consequently, it is not possible to interp ret harmoniously Footnote 1 and the European
Communities' basic obligations relating to export subsidies contained in the Agreement on
Agriculture.
7.191
 The Panel finds, therefore, that the content of Footnote 1 is of no legal effect and does not
enlarge or otherwise modify the European Comm unities' quantity commitment level specified in

Section II, Part IV of its Schedule to be 1,273,50 0 tonnes of sugar per year, or its budgetary outlay
commitment of €499.1 million per year, with effect since 2000/2001.495
The ACP/India Footnote does not contain any budgetary outlays so it cannot consist of an
export subsidy consistent with the Agreement on Agriculture
7.192 The Panel is also of the view that since the ACP/India sugar Footnote does not contain any
reference to budgetary outlays, it cannot be consid ered as a component of a scheduled export subsidy
commitment. The European Communities is of the view that Article 3.3 does not require that all
export subsidy commitments contain both quantity and budgetary outlays reduction commitments. As
mentioned before, the Panel disagrees with the European Communities in this regard. In
paragraphs 7.137-7.142 the Panel has reached the co nclusion that all export subsidy commitments are
to be expressed both in terms of volume and in terms of budgetary outlays, but the European
Communities' Footnote does not contain any such budgetary outlay commitment.
7.193 The European Communities adds that Footnote 1 contains a " de facto budgetary limit of
1.6 million multiplied by the average export refund which can be granted within the first component
of the EC's commitments" because the refunds for both types of sugar must be the same. In the Panel's
view, what the European Communities describ es as a "budgetary limit" does not arise from a
commitment it has assumed in its Schedule but from its own practice of according the same subsidies
to A and B sugar and to ACP/India equivalent suga r. The European Communities therefore describes
it as a "de facto" limit.496
7.194 The Panel considers that there is nothing in the ordinary terms of the Footnote which
expresses a legally binding commitment that the per unit subsidization of exports of ACP/India
equivalent sugar shall not exceed that for exports of A and B sugar. Moreove r, on this construction,
the budgetary outlay commitment level cannot be pr edicted beforehand. It can only be known in
retrospect once the European Communities has finished granting export refunds for a particular year.
The Panel notes that the purpose of the requirement that reduction commitments be expressed both in
terms of quantity and budgetary outlays is to ensu re transparency so that Members know in advance
what level of export subsidies will be provided on a yearly basis. Limitations resulting from a
Member's own domestic law or practices and unknown future events are therefore not compatible
with the Agreement on Agriculture.
7.195 The Panel also notes that the European Comm unities' Council Regulati on No. 1260/2001 at
issue in this case, explicitly recognizes that "the Agriculture Agreement provides for export support to
be reduced, in terms of both the quantities covered and the level of the subsidies involved."497
7.196 Therefore, the Panel concludes that the ACP/I ndia sugar Footnote cannot be reconciled with
the requirements of Article 3.3 that reduction commitments be expressed both in terms of quantity and
of budgetary outlays. The content of Footnote 1 is thus inconsistent and conflicts with the
requirements of Articles 3 and 8 of the Agreement on Agriculture . Accordingly, the content of
Footnote 1 is of no legal effect and does not enla rge or otherwise modify the European Communities'
quantity commitment level specified in Section II, Pa rt IV of its Schedule to be 1,273,500 tonnes of

495 The Panel agrees with the European Communities that Article 9.2(b)(iv) was not raised as a claim
but as an argument (see para. 4.19 above) but this does not preclude the Panel from referring to
Article 9.2(b)(iv) as context to Article 3.3 and with a view to understanding the scope of the European
Communities' commitment.
496 See also para. 4.192 above.
497 European Communities' Regulation No. 1260/2001, Preamble, recital (10) (emphasis added).

sugar per year, or its budgetary outlay commitment of €499.1 million per year, with effect since
2000/2001.
498
(vi) Conclusion on the legal value and effect of the ACP/India sugar Footnote
7.197 The Panel is therefore of the view that, even if it were to be considered as including a
commitment limiting subsidization to 1.6 million tonn es of ACP/India equivalent sugar, which it does
not, the content of Footnote 1 to Section II, Part IV of the EC's Schedule is inconsistent and conflicts
with Articles 3, 8, 9.1 and 9.2(b)(iv) of the Agreement on Agriculture and as such cannot be read
harmoniously with the provisions of the Agreement on Agriculture : it does not provide for any
budgetary outlays, and subsidies provided to ACP/Indi a equivalent sugar have not been subject to any
reduction. Footnote 1 cannot therefore constitute a second component of the European Communities'
overall commitment level for export subsidies on sugar.
7.198 Consequently, the Panel finds that the content of Footnote 1 is of no legal effect and does not
enlarge or otherwise modify the European Comm unities' quantity commitment level specified in
Section II, Part IV of its Schedule to be 1,273,50 0 tonnes of sugar per year, or its budgetary outlay
commitment of €499.1 million per year, with effect since 2000/2001.
3. Was the European Communities authorized to deviate from the Agreement on
Agriculture's basic obligations through a negot iated departure from the Modalities
Paper?
(a) Arguments of the parties499
7.199 For the European Communities, Footnote 1 is a negotiated departure from the Modalities
Paper. The European Communities insists that export subsidy commitments, like tariff concessions,
were the subject of detailed (and often very di fficult) negotiation during the Uruguay Round. The
European Communities' commitments, while appli cable to its exports, represent the negotiated
balance of the varied interests of all participants in the Uruguay Round. In challenging the Footnote,
the Complainants are trying to unsettle that balan ce. For the European Communities, the claims and
objections which the Complainants make in this proceeding were as available to them during the
verification process as they are now. Had they been raised during the verification process, and
considered valid, the Members concerned could have negotiated a different balance of concessions.
7.200 Moreover, in the context of its claim that the Complainants are acting inconsistently with their
good faith obligation pursuant to Article 3.10 of the DSU, the European Commun ities argues that the
Complainants were undeniably aware, by virtue, inter alia, of the very inclusion of the Footnote in the
European Communities' export subs idy commitments (both in their draft and final form), of the
existence of the European Communities' intended treatment of ACP/India sugar. The European
Communities provides correspondence in which the Eu ropean Communities' Ambassador is allegedly
making clear that the European Communities neve r intended and never undertook any commitment to
reduce its export subsidies of equivalent ACP/I ndia sugar and this was known and accepted by the
other Members. The European Communities adds al so that the Complainants never challenged the
European Communities during the verification proc ess. Although the Complainants may have been
silent at the time, today they deny concluding any such agreements.

498 The European Communities draws a third analogy between the Footnote and the case of
incorporated products, for which only one form of commitment (budgetary) was scheduled, as specifically
envisaged in the Modalities Paper. Moreover, the Panel fails to recognize any similarity between the content of
Footnote 1 and "incorporated products". The only provision of the Agreement on Agriculture dealing with
"incorporated" agricultural products is Article 11, which is of no relevance to the present dispute.
499 See also paras. 4.207 et seq above.

7.201 The European Communities also argues that the Modalities Paper authorized Members to
deviate from the Modalities Paper.
7.202 The Complainants emphasized that the Europ ean Communities does not cite any relevant
provision of the Modalities Paper that would have permitted it to adopt a lesser obligation than that
expressed in the language of paragraphs XI and XII of that text. Nor does the European Communities'
assertion found support in Annexes 7 or 8 of the M odalities Paper. Indeed, the Modalities Paper is
predicated on basic multilateral commitments. The reduction commitments are multilateral in nature
and do not constitute negotiated concessions. Unlike the access co mmitments, they were 'self-
contained' in regard to the balance of concessions.
(b) Assessment by the Panel
7.203 The Panel reviewed the evidence presented by th e parties in the context of the ACP/India
Footnote and notes that at the earlier stages of the negotiations of the EC Schedule, Footnote 1 was
not included in the first drafts and that there was no reference to sugar from the ACP countries and
India.500 In the March 1992 EC Draft Schedule, there was no footnote. 501 In the December 1992 EC
Draft Schedule, a footnote was included but it was not the present ACP/India Footnote. 502 It read:
"the EC reserves the right to maintain flexibilit y of outlay and budgetary commitments." It would
seem that at each stage, contracting parties specif ically rejected the European Communities' exclusion
of ACP/India sugar from its sugar subsidy base as witnessed by the G-8 Technical Discussions on
Agriculture Schedules in 1992 and bilateral meeti ngs between the European Communities and other
countries (including Australia).
503
7.204 The Panel notes that to support its conclusion that Members "did not object" or that they even
"agreed" to the inclusion of the European Commun ities' Footnote, the European Communities relies
on the fact that the cover letter signed by the Eu ropean Communities' Ambassador transmitting the
European Communities' draft schedule underlined the absence of any reduction commitment for
ACP/India sugar. For the European Communities, its intentions were made clear. In a letter of
4 March 1992, providing the suppor ting tables on which the European Communities' export subsidy
commitments were based, the European Communities stated: 504
"On export competition, the Community has not included the volume of sugar
corresponding to its imports of sugar from ACP countries. The Community will not
take commitments on this part of its sugar exports."
7.205 The European Communities pres ented evidence that in December 1993 Australia was asking
whether "ACP [sugar] would still be made without commitments, in relation to export
commitments".
505 In doing so, the European Communities seems to imply that Australia was aware
that ACP sugar would not be subject to reduction commi tments and would therefore have agreed to it.

500 Exhibit EC-5, EC Letter of 4 March 1992; and European Communities' first written submission,
Table 11.
501 Exhibit EC-5, EC Letter of 4 March 1992; and European Communities' first written submission,
Table 11.
502 Exhibit EC-4 on Draft schedule of commitments on 16 December 1992.
503 Exhibit ALA-3, ALA-5, ALA-8, Australia’s Oral Statement to the first substantive Panel meeting,
paras. 60-66, and Australia’s replies to the Panel's questions Nos 16 and 17 and EC-7: List of Bilateral Meeting
EC/other participants: Australia re quests on 17 December 1992 that ACP sugar be included in reduction
commitments.
504 Exhibit EC–5, EC Letter of 4 March 1992; and European Communities' first written submission,
Table 11.
505 Exhibit EC–8, EC Commission: minutes of the meeting with Australia of 3 December 1993.

However, Australia produced evidence that it had subsequently asked the European Communities to
include commitments on all EC export subsidies on sugar.
506
7.206 Soon after, the European Communities reiterated in a letter addressed to the Director General
of the GATT and to the Chairman of the TNC that it did not intend to make commitments with regard
to ACP/India sugar. On 14 December 1993 the European Communities subm itted a revised version
of its Schedule and for the first time inserted a footnote in the draft Schedule to this effect. 507 The
cover letter again contained the statement: 508
"On export competition, the European Communities have not indicated the volume
and the budget outlays for sugar correspondi ng to its imports of sugar from ACP
countries and India. The European Communitie s will not take commitments on this
part of its exports."
7.207 The same Footnote was included in the fina l version of the European Communities'
Schedule.509 The European Communities considers therefore, that since Footnote 1 was adopted as
proposed by the European Communities, without obj ection from the Complainants, it is legally valid
and binding. The European Communities also insi sts on the fact that a first draft Schedule of
commitments on 16 December 1992 and a revised draft on 14 December 1993 were circulated to all
participants in the Uruguay Round. The other participants had ample opportunity to react to these two
drafts and many did so, including the Complainants . None of them, however, raised any question
with respect to Footnote 1 to Section II, Part IV of the EC's Schedule. The European Communities'
Schedule, like those of the other participants , was submitted on 25 March 1994, following a process
of verification which allowed all participan ts to check and control the commitments. 510 Again, none
of the Complainants, or any other participant, formally objected to the said Footnote.
7.208 The Panel examines the evidence produced by Aust ralia and notes that the latter did not seem
to accept this " fait accompli". Australia noted in a summary statement on 31 January 1994 that the
above-mentioned EC offer contained a number of rema ining outstanding items, including the fact that
the EC sugar commitments in the EC's Schedu le did not include export subsidy reduction
commitments for sugar exports subsidized by direct export restitutions (corresponding to imports of
ACP/India sugar). 511 The Panel notes that on 23 Februa ry 1994 Australia and the European
Communities issued a Joint Communiqué from the "Australia-European Commission Ministerial
Consultations"512 which reported on the consultations and which, according to the European
Communities, illustrated that the European Comm unities and Australia had "settled outstanding

506 Exhibit ALA-5, Australia's Letter of 10 December 1993 to EC (page 4). The Panel notes that the EC
submitted the same document in Exhibit EC-24 but the Pane l notes that the page which referred to sugar as an
issue for which Australia was requiring settlement was not reproduced. In its Interim Review comments the
European Communities informed the Panel that this omission was inadvertent.
507 Exhibit EC-6, EC Letter of 14 December 1993 to GATT.
508 Exhibit EC–6, EC Letter of 14 December 1993 to GATT.
509 Exhibit EC–9, Export Subsidy in Schedule LXXX-EC. See also Exhibit EC–1 and Exhibit COMP-
16 on Schedule CXL.
510 See Appellate Body Report on EC–Computer Equipment, paras. 109-110. The Appellate Body
emphasized that tariff commitments "represent a common agreement among all Members" and that "any
clarification of the scope of tariff concessions that may be required during the negotiations is a task for all
interested parties".
511 Exhibit ALA-8, UR-Aus summary statement 31 January 1994 where Australia outlined that the EC
offer of 14 December 1993 has a number of outstanding issues, including that it "does not include subsidies by
direct export restitutions (corresponding to its imports of sugar from ACP countries and India) which is
inconsistent with the Final Act and open to challenge" (page 2).
512 Australia-European Commission Ministerial Consultations, 23 February 1994, Joint Communiqué.

items".513 For Australia, this Press Communiqué does not include all outstanding or settled issues
between the parties and, in any case, this Press Comm uniqué does not have the status of a record of
settlement of negotiations.514
7.209 Then , the European Communities wrote to th e Deputy Director of the GATT in March 1994
that it would make some changes to its Schedul e (though not necessarily all the changes requested by
the contracting parties).515 The European Communities nonetheless continued to include the Footnote
in its Schedule and from 1995 onwards notified to the WTO Committee on Agriculture that the data
on its subsidized exports "does not include exports of sugar of ACP/Indian origin on which the
Community has no reduction commitment."516
7.210 The Panel also examined ev idence produced by the Europ ean Communities arguing that
Australia was aware that ACP/India sugar had not been included in the reduction commitments made
by the European Communities. 517 The Panel considers that the fact that Australia knew and made
public its knowledge that ACP/India sugar had not been made part of the reduction commitments does
not mean that Australia agreed with the situation. The evidence and submissions produced by all
parties show that the Complainants did not agree to any European Communities' deviations from the
Agreement on Agriculture. On the contrary, Australia presented evidence that it had objected to such
exclusion from the very beginning of its bilatera l discussions with the Euro pean Communities, while
the other Complainants assert that they had never agreed to such an insertion and deviation from the
Agreement on Agriculture.
7.211 In this respect, the Panel refers to the findings of the panel in EC – Bananas (Article 21.5 –
EC) stating that silence or failure to challenge a measure by a Member does not create the
presumption that said Member has agreed that th e measure at stake is consistent with the WTO
Agreement. The Panel held:
"We agree with the European Communities that there is normally no presumption of
inconsistency attached to a Member's measures in the WTO dispute settlement
system. At the same time, we also are of the view that the failure, as of a given point
in time, of one Member to challenge another Member's measures cannot be
interpreted to create a presumption that th e first Member accepts the measures of the
other Member as consistent with the WTO Agreement."
518
7.212 In the Panel's view, even assuming that th e participants in the Uruguay Round were
authorized to negotiate departures from the Moda lities Paper which is not clear, such negotiated
departure would only be relevant to the extent th at it is reflected in the European Communities'
Schedule and is WTO consistent. 519 The acknowledgment of the existence of Footnote 1 or the
absence of agreement to the inclusion of said F ootnote does not, for the Panel, equal acquiescence on
the part of the interested parties. The Panel recalls that in Canada – Dairy , the Appellate Body
considered the negotiations which took place with regard to Canada's and the United States' respective

513 European Communities' second oral statement, para. 94.
514 Australia's second written submission, para. 84.
515 Exhibit ALA-7, EC Letter of 25 March 1994 to GATT.
516 See paras. 7.174-7.178.
517 Exhibit EC–12, Australian brochure on July 1994, page 38; and Exhibit EC 14-ABARE Report,
page 39.
518 Panel Report on EC – Bananas III (Article 21.5 – EC), para. 4.13.
519 The Panel recalls inter alia that pursuant to Articles 3.2 and 19.2 of the DSU panels "cannot add to
or diminish rights and obligations provided in the covered agreements".

Schedules and highlighted that though Canada's commitment had been made unilaterally, they were
the result of lengthy negotiations:
520
"In considering 'supplementary means of inte rpretation', we observe that the 'terms
and conditions' at issue were inco rporated into Canada's Schedule after lengthy
negotiations between Canada and the United States , regarding reciprocal market
access opportunities for dairy products. Both Canada and the United States agree that
those negotiations failed to produce any agreement between them."521
7.213 Unlike the situation highlighted by the Appellate Body in Canada – Dairy, the parties to the
present dispute did not negotiate the inclusion of the Footnote and did not agree or come to an
understanding on the value of such exclusion. There is no evidence of any relevant exchanges
between the parties or any other form of negotiation, let alone agreement on this subject matter.
7.214 Moreover, the Panel is also of the view that a departure from the basic obligations of the
Agreement on Agriculture , in the form of a footnote in the EC's Schedule, could not be considered a
"waiver" agreed to by the Uruguay Round participants.
7.215 Under the WTO, waivers are strictly regulated and subject to the procedures of Article IX:4
of the WTO Agreement, including annual reporting to the General Council. This is obviously not the
case with Footnote 1 to the European Communities' Schedule, Section II, Part IV. Already under the
GATT, the panel in US - Sugar Waiver stated:
"The Panel took into account in its examina tion that waivers are granted according to
Article XXV:5 only in 'exceptional circumstan ces', that they waiv e obligations under
the basic rules of the General Agreemen t and that their terms and conditions
consequently have to be interpreted narrowly."
522
7.216 In the Panel's view, the evidence and explanati ons submitted by the Complainants sufficiently
refute the presumption, if any, that silence or l ack of challenge would ha ve amounted to agreement
that Footnote 1 was in conformity with the WTO Agreement or constituted an agreed departure from
the European Communities' basic obligations of the Agreement on Agriculture.
7.217 The Panel bears in mind, as highlighted by the Appellate Body in EC – Hormones , that the
duty to make an objective assessment of the facts under Article 11 of the DSU is, among others, "an
obligation to consider the evidence presented to a pa nel and to make factual findings on the basis of
that evidence" 523 and the fact that according to the Appella te Body it is "generally within the
discretion of the panel to decide which evidence it chooses to utilize in making findings."524
7.218 The Panel has examined all the evidence presented to it and has made use of its discretion. In
doing so, the Panel takes into account that the Co mplainants have maintained their opposition to
Footnote 1 since the inclusion of the Footnote in the EC Schedule, as evidenced by correspondence
and continuous opposition to the EC sugar regime throughout the years. Furthermore, the Panel
considers that Australia and the other Complainan ts, even if they were aware of the purported
exclusion of ACP/India equivalent sugar from the European Communities' reduction commitments
and remained silent, could not in any event have ag reed to such an exclusion on behalf of the WTO

520 In addition, the commitment did not limit access to the quota as such and did not diminish the rights
of the United States. See Panel Report on Canada – Dairy, footnote 530 to para. 7.155.
521 Appellate Body Report on Canada – Dairy, para. 139 (footnotes omitted).
522 GATT Panel Report on US – Sugar Waiver, para. 5.9.
523 Appellate Body Report on EC –Hormones, para. 133.
524 Appellate Body Report on EC – Hormones, para. 135.

membership as it would have nullified or impaired the rights of WTO Members, other than the
Complainants. If the Panel were to sanction su ch a proposition it would be acting contrary to
Articles 3.2 and 19.2 of the DSU which deny panels the authority to "add to or diminish the rights and
obligations provided in the covered agreements".
7.219 The Panel notes finally the distinction between the present dispute and the situation prevailing
in the EC – Bananas III dispute where the WTO-inconsistent measures challenged were "required" by
the Lomé Convention some of which benefited from a WTO waiver. 525 In the present dispute, the
EC/ACP Waiver authorizes the European Communities to adopt measures inconsistent with Article I
of the GATT 1994 in favour of imports of suga r from ACP countries but the Cotonou Agreement or
Sugar Protocol do not require the European Commun ities to subsidize exports of sugar imported from
the ACP countries, even less so if this is inconsistent with the Agreement on Agriculture.
7.220 The Panel concludes therefore that participants in the Uruguay Round and WTO Members did
not agree to the European Commun ities' inclusion of Footnote 1 as an agreed departure to the
European Communities' basic obligations under the Agreement on Agriculture.
4. Conclusion on the European Communities' co mmitment level for exports of subsidized
sugar
7.221 The Panel is therefore of the view that, even if it were to be considered to include a
commitment limiting subsidization for 1.6 million t onnes of ACP/India equivalent sugar, which it
does not, Footnote 1 to Section II, Part IV of the EC's Schedule is inconsis tent and conflicts with
Articles 3, 8 and 9 of the Agreement on Agriculture and as such cannot be read harmoniously with the
provisions of the Agreement on Agriculture . The content of Footnote 1 cannot constitute a second
component of the European Communities' overall co mmitment level for export subsidies on sugar.
Moreover, Footnote 1 cannot constitute an agreed departure from the European Communities' basic
obligations under the Agreement on Agriculture.
7.222 The Panel finds, therefore, that the content of Footnote 1 is of no legal effect and does not
enlarge or otherwise modify the European Comm unities' quantity commitment level specified in
Section II, Part IV of its Schedule to be 1,273,50 0 tonnes of sugar per year, or its budgetary outlay
commitment of €499.1 million per year, with effect since 2000/2001.
E. IS THE EUROPEAN COMMUNITIES EXPORTING SUBSIDIZED SUGAR IN QUANTITIES EXCEEDING
ITS LEVEL OF COMMITMENT CONTRARY TO ARTICLES 3, 8 AND 9 OF THE AGREEMENT ON
AGRICULTURE ?
1. The burden of proof of Article 10.3 of the Agreement on Agriculture
7.223 The Panel recalls that the Complainants have claimed that the European Communities is in
breach of Articles 3 and 8, alleging that the European Communities is subsidizing and exporting a
scheduled product, in casu sugar, in amounts exceeding its scheduled commitment level.
7.224 In this context, the Complainants have i nvoked the application of Article 10.3 of the
Agreement on Agriculture
526
7.225 Article 10.3 of the Agreement on Agriculture provides special rules on burden of proof:

525 Waiver decision WT/MIN(01)/15.
526 See Section IV.C above.

"Any Member which claims that any qua ntity exported in excess of a reduction
commitment level is not subsidized must establish that no export subsidy, whether
listed in Article 9 or not, has been grante d in respect of the quantity of exports in
question."
7.226 With regard to Article 10.3, the Appellate Body in Canada – Dairy (Article 21.5 – New
Zealand and US II) has stated that:
"Consistent with the usual rules on burden of proof, it is for the complaining Member
to prove the first part of the claim, namely that the responding Member has exported
an agricultural product in quantities that exceed the responding Member's quantity
commitment level.
(...) The significance of Article 10.3 is that , where a Member exports an agricultural
product in quantities that exceed its quantity commitment level, that Member will be
treated as if it has granted WTO- inconsistent export subsidies, for the excess
quantities, unless the Member presents adequate evidence to "establish" the
contrary."
527
7.227 Article 10.3 is such that once the Complainan ts have factually proven that the European
Communities is exporting sugar in quantities exceeding its commitment levels, there is a shift in the
burden of proof and it is then for the European Communities to prove that the sugar it exports in
quantities exceeding its commitment level is "not" subs idized. "Article 10.3 thus acts as an incentive
to Members to ensure that they are in a positi on to demonstrate compliance with their quantity
commitments under Articles 3.3 and 8 of the Agreement on Agriculture . This reversal of the usual
rules on the burden of proof obliges the European Communities to "bear the consequences of any
doubts concerning the evidence of export subsidization."
528
7.228 The Panel notes the European Communities' argument that "the [C]omplainants would
impose an impossible task of identifying all the conceivable export subsidies that it does not grant."529
7.229 In the Panel's view, this is not the Europ ean Communities' task. Instead, the European
Communities must provide prima facie evidence that excess exports of sugar are not subsidized. A
respondent (as the European Communities is in the pr esent dispute) should be able to, or may be able
to, make a demonstration that the measure is not caught by one or other of the definitions in
Article 9.1(a) to (f) of the Agreement on Agriculture . The respondent should also be able to
demonstrate that the challenged measure is not a "subsidy contingent upon export performance"
within the meaning of Article 1(e) of the Agreement on Agriculture . The European Communities
should be aware of its obligations under the Agreement on Agriculture and should also be cognisant of
its subsidies programmes. This general principl e is recognized also in Article XVI:4 of the WTO
Agreement which provides that "Each Member shall ensu re the conformity of its laws, regulations
and administrative procedures with its obligations as provided in the annexed Agreements". The
requirements of Article 10.3 of the Agreement on Agriculture are based on the assumption that
Members are aware of the subsidies they provide to their own producers. If there are, in fact, no
subsidies, the European Communities should be able to make this demonstration.

527 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II) , paras. 72
and 74; see also paras. 67 to 75 of the same Appellate Body Report.
528 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II), para. 74.
529 European Communities' reply to the Panel question No. 4.

2. The application of the special rule on the burden of proof to this dispute530
(a) The quantitative aspect
7.230 In the present dispute, the Complainants have provided prima facie evidence that since 1995,
the European Communities has been exporting sugar in quantities exceeding its commitment level. In
particular, while the European Communities' e xport subsidies commitment level was for 1,273,500
tonnes of sugar for the 2000/2001 marketing y ear, its actual sugar exports amounted to 4,097,000
tonnes, that is some 2,823,500 tonnes in excess of its commitment level.531
(b) The subsidization aspects of the claim
7.231 Having reached the conclusion that the Europ ean Communities has exceeded its commitment
level for exports of subsidized sugar every year since 1995 and in particular in the marketing year
2000/2001, the Panel now proceeds to examine the European Communities' argumentation that its
excess exports of sugar are not subsidized. The Pa nel agrees with the Compla inants that the essential
fact is that the total quantity of sugar exported by the European Communities exceeds its commitment
level for sugar. The Panel understands that sugar in excess of the European Communities'
commitment level is essentially composed of AC P/India equivalent sugar and C sugar. The
Complainants argue that ACP/India equivalent sugar, and C sugar, are respectively subsidized within
the meaning of Article 9.1(a) and (c) of the Agreement on Agriculture. The Panel therefore proceeds
to examine the Complainants' arguments in turn.
3. Has the European Communities demonstrated that its exports of ACP/India equivalent
sugar are not subsidized?
(a) Arguments of the parties532
7.232 The Complainants claim that in each of the last five years, the European Communities' total
export of sugar exceeds its commitment levels. For in stance, the Complainants argue that during the
marketing year 2001-2002, the European Commun ities had exported 1,725,100 tonnes of ACP/India
equivalent sugar alone: such subsidized exports were in excess of the European Communities'
scheduled commitment level of 1,273,500 tonnes.
7.233 The Complainants recalled that, if the Europ ean Communities claimed that the exports of
ACP/India "equivalent" sugar were not subsidized, it had the burden of proof, under Article 10.3 of
the Agreement on Agriculture , to establish that no export subsidies applied to such exports. The
Complainants submitted that the European Co mmunities granted export subsidies listed in
Article 9.1(a) of the Agreement on Agriculture to exports of ACP/India equivalent sugar. The export
refunds granted to ACP/India equivalent sugar were the same per unit as the export refunds granted to
A and B quota sugar and thus these payments clear ly constituted "direct subsidies" provided by
government, to firms, to the exporting industry and to producers of sugar, (an agricultural product),
and were "contingent on export performance", w ithin the meaning of Article 9.1(a) of the Agreement

530 See also the parties' arguments with respect to the burden of proof in paras. 4.25-4.35 above.
531 EC sugar commitment levels as stated in Section II of Part IV of the European Communities'
Schedule CXL of the EC-15. Actual export quantities taken from "Notification concerning export subsidy
commitments (Tables ES:1 to ES:3). It is noted that the EC notifications of its commitment levels were
expressed as "white sugar equivalent" and its notified total exports are expressed in "product weight basis". Any
resulting differentiations in variables will not have an ef fect on the Panel's analysis of the EC's commitments
and exportation beyond its commitment levels because the amount of act ual exports will still be well above
commitment levels regardless of any change as a result of any calibration between "white sugar equivalent" and
"product weight basis" figures. See also Annex C.
532 See also paras. 4.175-4.180 above.

on Agriculture . Consequently, the European Communities acted inconsistently with its obligations
under Articles 3.3 and 8 of the Agreement on Agriculture.
7.234 The European Communities does not deny that AC P/India equivalent sugar benefits from the
same level of export refunds per unit as A and B s ugar do. It claims essentially that the amount of
ACP/India equivalent sugar that it exports is incl uded in its commitment level pursuant to Article 3.3
of the Agreement on Agriculture.
(b) Assessment by the Panel
7.235 The Panel recalls that the European Communiti es does not deny the Complainants' allegation
that ACP/India equivalent sugar benefits from the same level per unit of export refunds as A and B
sugar do; the European Communities does not refute either the Complainants' claim that exports of
ACP/India equivalent sugar are subsidized w ithin the meaning of Article 9.1(a) of the Agreement on
Agriculture which reads as follows:
"The following export subsidies are subj ect to reduction commitments under this
Agreement:
(a) the provision by governments or their agencies of direct subsidies, including
payments-in-kind, to a firm, to an industry, to producers of an agricultural product, to
a cooperative or other association of such producers, or to a marketing board,
contingent on export performance."
7.236 The Panel recalls that "a prima facie case is one which, in the absence of effective refutation
by the defending party, requires a panel, as a matter of law, to rule in favour of the complaining party
presenting the prima facie case".
533
7.237 Pursuant to Article 10.3 of the Agreement on Agriculture , the Panel reaches the conclusion
that the European Communities has not demonstrated that its exports of ACP/India equivalent sugar
are not subsidized, as the evid ence indicates that exports of what the European Communities
considers to be ACP/India equivalent sugar r eceive export subsidies within the meaning of
Article 9.1(a) of the Agreement on Agriculture.
7.238 The Panel concludes that since 1995, the Eur opean Communities has been exporting what it
considers to be ACP/India equivalent sugar with export subsidies in quantities exceeding its
commitment level of 1,273,500 tonnes. In doi ng so the European Communities has been acting
inconsistently with Articles 3 and 8 of the Agreement on Agriculture.
4. Has the European Communities demonstrated that its exports of C sugar are not
subsidized?
(a) Introduction
7.239 The Panel recalls that since 1995 the European Communities' total exports of sugar far exceed
its commitment levels. In particular, since the marketing year 2000/2001, the European Communities'
commitment level is for 1,273,500 tonnes of sugar while its total exports of sugar for that same year
were 4,097,000 tonnes (some of which were ACP/ India equivalent sugar already found to be
inconsistent with Articles 3 and 8 of the Agreement on Agriculture.)

533 Appellate Body Report on EC – Hormones, para. 104.

7.240 In Canada – Dairy (Article 21.5 – New Zealand and US II) , the Appellate Body interpreted
Article 10.3 of the Agreement on Agriculture to mean that "where a Member exports an agricultural
product in quantities that exceed its quantity commitment level, that Member will be treated as if it
has granted WTO-inconsistent export subsidies, for the excess quantities, unless the Member presents
adequate evidence to 'establish' the contrary." 534 The Panel has already reached the conclusion that
the European Communities' exports of its ACP/Indi a equivalent sugar are inconsistent with its
obligations under Articles 3 and 8 of the Agreement on Agriculture.535 The Panel examines hereafter
whether the European Communities has proven satisfact orily that its exports of C sugar are not and
were not subsidized in any manner.
(b) Arguments of the parties536
7.241 The Complainants argue that the European Co mmunities has created a legal framework that:
(i) encourages the overproduction of sugar; (ii) seg regates the export market for C sugar completely
from the domestic market by imposing sanctions for fa ilure to export such sugar; and (iii) generates
the profits and capital used to fund the below produc tion cost exports of that sugar. This legal
framework contemplates various payments with in the meaning of Article 9.1(c) of the Agreement on
Agriculture in relation to C sugar produc tion and exports. The Complainants mainly contend that
EC sugar producers receive a payment as evidenced by the fact that C sugar is being exported at
prices that do not reflect its proper value because th e price received does not cover its average total
cost of production. Accordingly, C sugar is receivi ng a payment. The Complainants also refer to
payments by way of below cost of production sales of C beet to C sugar producers. Under the above
analysis, the Complainants argue that C beet, an inpu t in C sugar, priced at below cost of production,
serves as a payment resulting in an export subs idy as defined by Article 9.1(c) of the Agreement on
Agriculture.
7.242 The European Communities responds essentially that C sugar does not involve any payment
within the meaning of Article 9.1(c) of the Agreement on Agriculture . It argues that export sales of
C sugar into the world market is the only form of alleged payment that is brought by the
Complainants before the Panel within the Panel's te rms of reference and finds that cost of production
is not a relevant benchmark for such a payment in this dispute. The European Communities argues
further that world market prices should be the rele vant benchmark in this dispute and, accordingly,
does not find any payments. In addition to arguing that the other forms of alleged payment that the
Complainants have put forward are outside the Pane l's term of reference, the European Communities
claims that the alleged payments do not offer any benefits to EC sugar producers.537
7.243 The Complainants argue that there is a dem onstrable link between the payments and the
governmental action in the present dispute. They argue that the payments that allow C sugar to be
produced below its cost of production arise from gove rnmental action regulating the entire EC sugar
industry. They claim that EC sugar producers can make the below cost of production sales of C sugar
for export by way of their participation in th e government regulated domestic market. The
Complainants argue further that all the payments received for C sugar are on the export since C sugar
is a product that must be exported. The Europ ean Communities responds that the benefits to the
EC sugar industry from the EC sugar regime would exist regardless of the export of C sugar and are
not contingent on the production or exportation of C sugar.

534 Appellate Body on Canada – Dairy (Article 21.5 – New Zealand and US II), para. 73.
535 See para. 7.238 above.
536 See also Section IV.D. of this Panel Report.
537 See paras. 4.44 and 4.51 above.

(c) Assessment by the Panel
(i) The Panel's understanding of the EC sugar regime
7.244 Council Regulation (EC) No. 1260/2001 sets out ru les to promote and protect the EC sugar
industry. One main feature of the EC sugar regi me is the establishment of price support for domestic
sugar including intervention prices fo r sugar, supply controls by way of quotas, domestic market
supply management, import restricti ons and export subsidization. Th e EC sugar regime also sets out
the basic price and the minimum price for beet, import and export licences, levies, export refunds;
quotas and import restrictions; and preferential import arrangements.
7.245 The intervention price (minimum guaranteed price) for sugar is approximately three times the
price of world market prices.
538 The intervention price operates as a safety net that provides for
intervention agencies to purchase EC quota sugar at a guaranteed price if sugar prices on the domestic
market fall below a certain level. Intervention purchasing has occurred only once in 25 years 539 as the
regulatory aspects of the EC sugar regime controllin g the amount of sugar sold in domestic markets
and protection from outside competition enables quot a sugar to be sold at prices well above the
intervention price.
7.246 The EC Regulation provides rules for three different categories of sugar, i.e. A and B quota
sugar and C sugar which is basically excess sugar. A, B and C sugar are produced, respectively, from
A, B and C beet, the latter being used exclusively to produce C sugar.
7.247 A basic price for quota beet of standard quality 540 is derived from the intervention price of
white sugar and has been established at €47.67 per tonne. 541 The Regulation also establishes
minimum prices for A and B beet paid by A and B sugar producers to A and B beet growers. The
minimum price of A beet has been set at €46.72 per tonne and that of B beet at €32.42 per tonne. 542
Sugar producers are required to pay growers at least the minimum price for A and B beet they process
into sugar. The price paid by the producers for C be et is generally lower than that paid for A and B
beet.
543 There is no regulated minimum price for C beet. However, because growers of C beet are
also growers of A and B beet and because C beet can only be used in C sugar, which in turn belongs
to the same production line as A and B quota sugar, the EC sugar regime ensures that the sale of
under-priced C beet to C sugar producers is an inte gral part of the governmental regulation of the
sugar market. Indeed, the production of C beet w ill depend on the needs of C sugar producers (since
C beet can only be used in C sugar) 544. Moreover, to be competitive C sugar must be exported at
world price. Because of the low world price relative to C sugar cost of production, C sugar producers

538 The intervention price valid for standard quality sugar is €63.19/100 kg for white sugar and
€52.37/100 kg for raw sugar. See Article 1 of Council Regulation (EC) No. 1260/2001.
539 Commission of the European Communities: Common Organisation of the Sugar Market
Description, Exhibit COMP-8, p. 5.
540 For the definition of "standard quality" of beet, see Annex II of the Council Regulation (EC) No.
1260/2001.
541 Article 3 of Council Regulation (EC) No. 1260/2001.
542 Articles 4 and 5 of Council Regulation (EC) No. 1260/2001.
543 Article 21 of Council Regulation (EC) No. 1260/2001.
544 The Panel is aware of the fact that strictly speak ing there are no "C sugar producers" as such; there
are no sugar producers that produce only C sugar. C sugar is produced by the producers of A and B sugar.
Therefore "C sugar producers" are EC sugar producers who produce C sugar in addition to A and B sugar. The
same is true for C beet. There are no sugar farmers who grow only C beet. C beet is grown by farmers of A and
B beet. Therefore "C beet growers" are the EC beet farm ers who also grow C beet, in addition to A and B beet.
In the following section since the Panel examines the spec ific costs of growing or farming of C beet as well as
the costs of production of C sugar, the Panel refers to C beet growers or farmers and C sugar producers with a
view to emphasising the Panel's focus on C beet and C sugar.

exercise pressure on C beet growers so that C beet is sold to C sugar producers at reduced prices.
Furthermore, various aspects of the sugar regime provide the beet growers with an incentive to
produce beet beyond their A and B quota levels, as C beet. The discounted prices for C beet below its
cost of production and the incentive for beet grower s to produce C beet serve as an advantage for the
export production of C sugar.
7.248 In accordance with Article 15 of the EC Regulation, a basic production levy is charged to
manufacturers on their production of A and B sugar.
545 The levy charged on A quota sugar is set at
2 per cent while the levy on B quota sugar is set at 37.5 per cent. These levies are used inter alia to
fund export refunds given to exported A and B quo ta sugar under the co-financing principle of the
EC sugar regime.546 The levies charged are split 42 per cent to sugar producers and 58 per cent to beet
farmers.547
7.249 The export refunds under the EC sugar regime cover the difference between the Community
intervention price and the export price of EC quota sugar (that is world price). 548 Export refunds are
high, ranging from €443 per tonne of sugar for th e 2001/2002 marketing year and €485 per tonne of
white sugar for the 2002/3 marketing year. The expo rt refund is well above the world price offered
for exported quota sugar, which the EC Commission reports was €280 per tonne of white sugar in the
marketing year 2001/02.549 Export refunds have been afforded to between 2.5 and 2.6 million tonnes
of white sugar annually.550 The above price controls and restrictions on the domestic market supply by
way of quota assignments, strict import controls and the obligation to export sugar produced in excess
of quotas, as well as export refunds on exports of qu ota sugar, result in delivering increased revenue
to A and B quota holders. Ultimately, the price of A quota sugar is approximately 350 per cent of
world prices and B quota sugar is priced at approximately 250 per cent of world prices.551
7.250 The high rate of export refunds to such a signi ficant amount of exported sugar again adds to
the revenues received by EC sugar producers from quota sugar sales, and may constitute one of the
source of the spill-over effects of the EC sugar regime into the export production of C sugar.
(ii) Article 9.1(c) of the Agreement on Agriculture
7.251 In this dispute the Panel examines whether e xports of C sugar are subsidized within the
meaning of Article 9.1(c) of the Agreement on Agriculture . 552 Article 9.1(c) requires the

545 See paragraph 3 of Article 15 of the Council Regulation (EC) No. 1260/2001.
546 Commission of the European Communities: Common Organisation of the Sugar Market
Description, Exhibit COMP-8, p. 13; levies only partially fund the export refunds for A and B quota sugar.
547 Commission of the European Communities: Common Organisation of the Sugar Market
Description, Exhibit COMP-8, p. 13.
548 Commission of the European Communities: Common Organisation of the Sugar Market
Description, Exhibit COMP-8, p. 20.
549 Commission of the European Communities: Common Organisation of the Sugar Market
Description, Exhibit COMP-8, p. 20.
550 Commission of the European Communities: Common Organisation of the Sugar Market
Description, Exhibit COMP-8, p. 20.
551 "Sugar in the European Union: sugar production costs and cross-subsidies to C sugar exports" by
Roger Rose, Exhibit ALA-1, p. 4
552 Article 9.1(c) of the Agreement on Agriculture reads as follows:

Export Subsidy Commitments

1. The following export subsidies are subject to reduction commitments under this
Agreement: (...)
(c) payments on the export of an agricultural product that are financed by virtue of
governmental action, whether or not a charge on the public account is involved, including

demonstration of three elements. First, it require s that "payments" be made. Second, that those
payments be made "on the export of an agricultura l product". And third, that those payments be
"financed by virtue of governmental action".
7.252 The Complainants point to what they consider to be multiple "payments" which would be
made "on export" and be "financed by virtue of go vernmental action." The Complainants submit that
the EC sugar regime involves a series of payments in cluding: (a) payment in the form of below costs
C beet sales to C sugar producers/exporters; (b) pa yment in the form of cross-subsidization resulting
from the profits made on sales of A and B sugar used to cover the fixed costs of the production/export
of C sugar; (c) payment in the form of exports of C sugar below total costs of production; and
(d) payments in the form of high prices paid by consumers.
553
7.253 The Panel examines two of the payments (a) and (b) mentioned above. For each of the alleged
payments, the Panel first examines whether there is indeed a payment. Then, the Panel discusses
whether the alleged payments are "on export" and l astly, whether they are financed by virtue of
governmental action.
(iii) Does the sale of C beet to C sugar produ cers constitute a payment on export financed by
virtue of governmental action?
Is there a payment?
7.254 The Complainants argue that, as with milk as an input for the production of dairy products in
Canada – Dairy , C beet, as the main input for the production of C sugar, is sold to C sugar
producers/exporters at prices well below the total av erage cost of production of such C beet and,
therefore, through this transaction provides C suga r producers with a payment-in-kind within the
meaning of Article 9.1(c).
7.255 The European Communities does not deny that C beet is sold below the total average cost of
beet growers but does not actually discuss whether sales of C beet to C sugar producers provide a
payment-in-kind or a transfer of economic resource s in favour of C sugar producers. In fact, the
European Communities wrote in its first submission that " Canada – Dairy stands for the proposition
that the provision of an agricultural input belo w its average total costs of production constitute a
"payment" to the processor of that input." 554 Although in response to a question by the Panel, the
European Communities attempts to raise doubts on whet her there is a sufficient "nexus", or degree of
governmental action involved in the sales of C beet , the European Communiti es' main argument is
that the matter is outside the Panel's terms of reference. 555 The Panel has already dealt with the
European Communities' procedural objection in paragr aph 7.24 to 7.37, concluding that the parties
arguments relating to C beet are within its terms of reference.
7.256 The Panel examines therefore whether the sales of C beet to producers of C sugar constitute a
payment within the meaning of Article 9.1(c) of the Agreement on Agriculture.
7.257 As recognized by the Appellate Body in Canada – Dairy (Article 21.5 – New Zealand and
US), Article 9.1(c) does not expressly identify any one criterion to be used in all situations of
determining the existence of payment. The Ap pellate Body in that case established that an

payments that are financed from the proceeds of a levy imposed on the agricultural product
concerned or on an agricultural product from which the exported product is derived.
553 See for instance, Australia’s first written submission, para. 111-113 and Australia’s replies to Panel
questions Nos. 46, 47 and 48; see also para. 4.39 above.
554 European Communities' first written submission, para. 53.
555 See paras. 7.3 and 7.18 above.

examination of whether a measure involves a payment must be determined on a case by case basis and
by scrutinizing "the facts and circumstances of a disputed measure". 556 The Appellate Body decided
there is no one benchmark that would apply to all s ituations and examinations of the existence of a
subsidy.557
7.258 In the first Canada – Dairy dispute, the Appellate Body conc luded that "the word 'payments'
[in 9.1(c)] embraces "payments-in-kind"558 and "specifically contemplates that the export subsidy may
be granted in a form other than a money payment" 559, "including revenue foregone". 560 Revenue or
value may be foregone in instances when the price charged by the producer of the product is less than
the product's proper value to the producer. In determining the proper value to the producer in
assessing whether a transfer of economic resource has taken place, a "payment" analysis "requires a
comparison between the price actually charged by the provider of the goods or services … and some
objective standard or benchmark which reflects the proper value of the goods or services to their
provider ... ."
561 The Appellate Body insisted that the standard to determine whether there is a transfer
of economic resources must be objective and based on "the value of the milk" to the producer.
7.259 In looking for an appropriate benchmark to measure the proper value of commercially
exported milk (CEM milk), the Appellate Body in Canada – Dairy (Article 21.5 – New Zealand and
US) relied on the cost of production of such milk. The Appellate Body determined that if the
producers of milk sell their milk below their total average cost of production, this loss must be
financed from some other sources including by virtue of governmental action.
"Although the proceeds from sales at domestic or world market prices represent two
possible measures of the value of milk to the producer, we do not see these as the
only possible measures of this value. For any economic operator, the production of
goods or services involves an investment of economic resources. In the case of a
milk producer, production requires an investment in fixed assets, such as land, cattle
and milking facilities, and an outlay to meet variable costs, su ch as labour, animal
feed and health-care, power and administration. These fixed and variable costs are
the total amount which the producer must spend in order to produce the milk and the
total amount it must recoup, in the long-term, to avoid making losses. To the extent
that the producer charges prices that do not recoup the total cost of production, over
time, it sustains a loss which must be finan ced from some other source, possibly "by
virtue of governmental action."
562(emphasis added)
7.260 For the Appellate Body, the average total co st of production takes best into account the
"motivations of the independent economic operato r who is making the alleged 'payments'" and the
value of milk to it. 563 If the sale is made at below the to tal cost of production of the domestic

556 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US), para. 76.
557 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US), para. 76.
558 Appellate Body Report on Canada – Dairy, para. 109.
559 Appellate Body Report on Canada – Dairy, para. 109.
560 Appellate Body Report on Canada – Dairy, para. 112. Appellate Body Report on Canada – Dairy
(Article 21.5 – New Zealand and US ), para. 73. Later on in the US – FSC dispute, at para. 108, the Appellate
Body clarified the use of the term "revenue forgone": "We held, in Canada – Milk , that "export subsidies"
under the Agreement on Agriculture may involve, not only direct payments, but also " revenue foregone". We
believe, however, that in disputes brought under the Agreement on Agriculture , just as in cases under
Article 1.1(a)(1)(ii) of the SCM Agreement, it is only where a government foregoes revenues that are "otherwise
due" that a "subsidy" may arise." Since we are in the pr esent dispute referring to the fact that sales do not
represent the proper value to producers, we will use the expression "value foregone".
561 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US), para. 74.
562 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US), para. 87.
563 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US), para. 92.

producers of that product, there is a transfer of economic resources from the producers of the input
product in favour of the processors/exporters of the said product. Hence, the Appellate Body
concluded that the appropriate "benchmark" to determine the proper value of the milk was the average
total cost of production of the subject milk. Hence, the objective sta ndard for identifying the
existence of payments focused on wh ether the CEM milk was priced at below the cost of its
production.
7.261 In the present dispute, similar to that in Canada – Dairy (Article 21.5 – New Zealand and
US), the Panel is examining whether the producers, he re C beet growers, forego a portion of their
proper value by way of the below total costs price charged to the producers of C sugar, or in other
words whether C beet growers transfer economic re sources, discounted C beet, in favour of C sugar
producers/exporters.
7.262 In the Panel's view, the situation regardi ng the sale of milk to dairy processors in Canada –
Dairy (Article 21.5 – New Zealand and US) is quite relevant and similar to the present matter. In that
dispute, the issue was whether sales of CEM milk, se rved as a payment to Canadian dairy processors.
The Appellate Body examined the industry-wide average total cost of production figure for milk and
the price at which CEM milk was being sold by the milk producers to the processors. After
determining the relevant costs and figures, it found that the price at which CEM milk was being sold
to domestic dairy processors was well below the averag e total cost of production of such milk, that is
below the proper value of CEM milk.
564 The Appellate Body therefore concluded that the below cost
of production sales of CEM involved payments on the export to Canadian dairy processors under
Article 9.1(c) of the Agreement on Agriculture .565 The requirement that came along with the
discounted purchase of CEM was that Canadian dairy processors incorporating CEM milk must,
under Canadian law, export the resulting dairy product and divert it from the domestic market.
Accordingly, the Appellate Body concluded that such transactions served as payment-in-kind and
eventually an export subsidy under Article 9.1(c) of the Agreement on Agriculture by way of value
foregone.
566
7.263 In the present dispute, the Complainants are arguing that, as in Canada – Dairy (Article 21.5
– New Zealand and US) and Canada – Dairy (A rticle 21.5 – New Zealand and US II), one of the
types of payment allegedly being made in the EC sugar regime involves domestic inputs sold to sugar
producers at prices that are below the total costs of production of beet growers. The Complainants
argue that C beet (an input) is being sold to suga r producers at prices that do not remotely cover its
cost of production.
7.264 The Panel is of the view that in the present dis pute the total cost of production of C beet is an
appropriate benchmark for determ ining whether the sales of C beet to C sugar producers provide a
"payment" to the producers of C sugar within the meaning of Article 9.1(c) of the Agreement on
Agriculture.
7.265 There is uncontested evidence that C beet is so ld to C sugar producers at prices well below its
cost of production, showing that the price received for C beet – calculated at 58 to 60 per cent of the
price for C sugar – was below the total cost of production of that beet throughout the years 1992/93 to
2002/03.
567 In particular, the Pane l refers to the LMC Data 568, Datagro report "Considerations over

564 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II) , paras. 120
and 121.
565 Appellate Body Report, Canada – Dairy (Article 21.5 – New Zealand and US II), para. 121.
566 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II) , para. 121; see
also Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US), para. 71.
567 In marketing year 1995/1996 the price of C beet per tonne of C sugar equivalent was ***, while its
average total cost of production was *** per tonne of C sugar equivalent. In marketing year 1996/1997 the
price of C beet per tonne of C sugar equivalent was ***, while its average total cost of production was *** per

C sugar Production and Exports in the European Communities" 569, the Report of the Netherlands
Economic Institute "Evaluation of the Common Orga nization of the Markets in the Sugar Sector" 570,
Roger Rose's report "Sugar in the European Uni on; Sugar production costs and cross-subsidies to
C sugar exports"571 and the Oxfam report "The Great EU Suga r Scam: How Europe's sugar regime is
devastating livelihoods in the developing world".572
7.266 The average price received by farmers for C beet during that period ranged from *** to
*** per cent of its average total cost of production. 573 This means that, for at least the 11 most recent
consecutive years, growers of beet failed to recover between *** and *** per cent of their total cost of
producing C beet.
7.267 The European Communities does not contest the cost of production figures and related data
offered by the Complainants. When specifically asked by the Panel for figures related to the cost of
production, the European Communitie s refused, claiming that such fi gures were not related to its
defence and that it did not find it necessary to express any views on the matter.574
7.268 As stated by the Appellate Body in EC – Hormones, "a prima facie case is one which in the
absence of effective refutation by the defending party, requires a panel, as a matter of law, to rule in
favour of the complaining party presenting the prima facie case." 575 In the Panel's view, the
uncontested evidence submitted by the Complainants de monstrates prima facie that C beet is sold at
prices that do not cover its cost of production.
7.269 When C beet is sold to C sugar producers at rat es that are below its total cost of production,
there is, in effect, a payment, i.e. a payment-in-k ind, being made to the C sugar producers to the
extent that the proper value of C beet is not reflected in its price and, hence, involves a "payment"
within the meaning of Article 9.1(c) of the Agreement on Agriculture by way of value foregone.
7.270 The Panel finds, therefore, that the below tota l cost of production sales of C beet to C sugar
producers involves a payment within the meaning of Article 9.1(c) of the Agreement on Agriculture.

tonne of C sugar equivalent. In marketing year 1997/1998 the price of C beet per tonne of C sugar equivalent
was ***, while its average total cost of production was *** per tonne of C sugar equivalent. In marketing year
1998/1999 the price of C beet per tonne of C sugar equivalent was ***, while its average total cost of production
was *** per tonne of C sugar equivalent. In marketing year 1999/2000 the price of C beet per tonne of C sugar
equivalent was ***, while its average total cost of production was *** per tonne of C sugar equivalent. In
marketing year 2000/2001 the price of C beet per tonne of C sugar equivalent was ***, while its average total
cost of production was *** per tonne of C sugar equivalent. In marketing year 2001/2002 the price of C beet
per tonne of C sugar equivalent was ***, while its average total cost of production was *** per tonne of C sugar
equivalent. In marketing year 2002/2003 the price of C beet per tonne of C sugar equivalent was ***, while its
average total cost of production was *** per tonne of C sugar equivalent. The above figures are derived from
the Datagro Report (Exhibit BRA-1, Table 5, p. 29). C beet prices are usually determined based on 58-60% of
C sugar price. The prices set above are based on the high end estimates (60% of C sugar prices) that beet
farmers may receive for C beet. See Commission of th e European Communities: Common Organisation of the
Sugar Market Description, Exhibit COMP-8, p. 10; NEI Report, Exhibit COMP-2, p. 160; Datagro Report,
Exhibit BRA-1, p. 7.

568 LMC Data, Exhibit BRA-2, pp. 23 and 54
569 Datagro Report, Exhibit BRA-1, at pp. 5-7, and Table 5, p. 29.
570 NEI Report, Exhibit COMP-2, pp. 117-121 and 160.
571 "Sugar in the European Union: sugar production costs and cross-subsidies to C sugar exports" by
Roger Rose, Exhibit ALA-1, pp. 1 and 8-12.
572 Oxfam Briefing Paper 27, August 2002, Exhibit COMP-3.
573 LMC Data, Exhibit BRA-2, Table 5.15, pp. 23 and 54; Datagro Report, Exhibit BRA-1, Table 5,
Beet Farming Costs, p. 29.
574 European Communities' reply to Panel's question No. 32.
575 Appellate Body report on EC – Hormones, para. 104.

Is such payment-in-kind through sales of below-costs C beet made "on the export"?

7.271 The Complainants argue that since C beet can only be used in the processing of C sugar,
which in turn must be exported, any payments received by C sugar producers are "on the export".576
7.272 The European Communities does not offer any sp ecific arguments as to C beet and the issue
of whether such payments to C sugar producers through below-costs-C beet are on the export.
Instead, the European Communities focuses on the ge neral argument in regard to C sugar (which
encompasses C beet) that sugar producers are free to choose whether they want to produce C sugar for
export.577 For the European Communities, even if th e relevant EC measures provide an indirect
benefit to C sugar, the governmental action which provides these benefits is not contingent upon the
export of C sugar, since sugar producers may qualify for A and B quota rights and privileges
regardless of whether they produce C sugar for export.578
7.273 The Panel is of the view that the European Communities misinterprets the requirements of
Article 9.1(c) with respect to "on the export". The European Communities focuses on the fact that
C sugar production is not required under the EC Regulation and that th e advantages received by sugar
producers as a result of EC governmental action in regard to A and B sugar would be afforded
whether or not they produce and export C sugar. Bu t in the Panel's view, a payment "on export" does
not need to be contingent upon export. An anal ysis of Article 9.1(c) would put its emphasis on
whether the payment in question received is on the ex port, not on whether, as appears to be the case,
the EC price support as a whole is de facto continge nt upon C sugar being exported. In other words,
when identifying whether a payment is on the export as defined under Article 9.1(c) of the Agreement
on Agriculture , once a payment is identified, the focus is on whether this payment is made on the
export, and not on whether the source of the paym ent is dependent or contingent on export
production.
7.274 The Panel also recalls that in India – Autos the Panel dealt with the expression " on
importation" which, in the Panel's view, has simila rities with the expression "on export" with respect
to the use of the term "on":
"The Panel turns therefore to consider the ordinary meaning of the phrase
'restriction…on importation'. An ordinary meaning of the term ' on', relevant to a
description of the relationship which s hould exist between the measure and the
importation of the product, includes 'with respect to', 'in connection, association or
activity with or with regard to' .579 In the context of Article XI:1, the expression
'restriction… on importation' may thus be appropriately read as meaning a restriction
'with regard to' or 'in connection with' the importation of the product. On a plain
reading, this would not necessarily be limited to measures which directly relate to the
'process' of importation. It might also en compass measures which otherwise relate to
other aspects of the importation of the product."580 (underlining added)
7.275 In the Panel's view a payment "on export" n eed not be "contingent" on export but rather
should be "in connection" with exports.
7.276 The Panel considers that there is a very cl ose link between C beet production and C sugar
production, and in the Panel's view decisions by farmers of C beet whether or not to grow more C beet

576 Brazil's first written submission, para. 57.
577 European Communities' first written submission, para. 45.
578 European Communities' first written submission, para. 44.
579 Webster's New Encyclopedic Dictionary, 1994 ed.
580 Panel Report on India – Autos, at para. 7.257.

is essentially based on the needs of C sugar producers. The Panel recalls that C beet can only be used
in C sugar.581 The Panel is aware that contrary to the situation for A and B beet 582, farmers and sugar
producers are free to negotiate the price for C b eet. Although EC Council Regulation No. 1260/2001
does not prescribe how much farmers should be paid for C beet, it is generally agreed in the intra-
trade agreements between farmers and sugar producer s that farmers receive about 60 per cent of the
price that the sugar producers receive for C sugar. Indeed, contracts for C beet tend to follow the
revenue sharing terms of A and B beet regulated co ntracts, with approximately 58-60 per cent of the
C sugar price going to C beet growers and 42 per cent to sugar producers.583
7.277 Sugar producers are free to decide whether or not to produce C sugar but once produced it
must be exported unless it is carried forward to quota sugar for the following year (for a quantity up to
a maximum of 20 per cent of A quota). 584 Indeed, "C sugar not carried forward under Article 14 may
not be disposed of on the Community's internal market and must be exported". 585 Because C beet may
be processed only into C sugar which in turn ( unless carried forward as quota sugar as mentioned
above) must be exported, payments by way of be low cost of production sales of C beet to C sugar
producers are " on the export ". In other words, the payment by way of discounted C beet is only
afforded to C sugar producers, and ultimately "on the export".
7.278 This is in line with the Canada – Dairy (Article 21.5 – New Zealand and US ) case. The panel
in that proceeding found that discounted CEM milk sold and used for dairy processing was available
to processors only if CEM milk was used for e xported dairy processing. Only by effectively
exporting discounted CEM milk, in the form of pr ocessed dairy products, could producers gain access
to the subsidized or discounted CEM milk. Accordingly, the panel, found that the payment through
discounted milk to the dairy processors is made on the export. 586 These panel findings were not
appealed or otherwise modified by the Appellate Body.587
7.279 The Panel finds, for the foregoing reasons, that the payments to C sugar producers by way of
discounted below total cost of production sales of C beet by C beet growers are on the export within
the meaning of Article 9.1(c) of the Agreement on Agriculture.
Is the payment-in-kind through sales of below-cost-C beet " financed by virtue of
governmental action" ?
7.280 The Complainants submit that the Europ ean Communities' governmental actions are
indispensable to the transfer of resources descr ibed above. The European Communities' actions
thereby finance growers to supply C beet to C suga r producers at prices that do not reflect the average
total cost of production of the beet, and for those pr ocessors, in turn, to provide C sugar to buyers at

581 Commission of the European Communities: Common Organisation of the Sugar Market
Description, Exhibit COMP-8, p. 10 and EC Council Regulation No 1260/2001, Articles 19 and 21.
582 A and B beet farmers are protected via minimum b eet pricing or "basic b eet price". The pricing
system for beet establishes the minimum price at which sugar manufacturers may purchase sugar beet from EC
farmers. This minimum price is set to at least 58 per cent of the intervention price (€366 per tonne of white
sugar). The purpose of the beet (and cane) pricing arrang ements is to ensure a stab le and adequate income to
beet farmers and a proper distribution of income throughout the sugar industry chain.
583 Commission of the European Communities: Common Organisation of the Sugar Market Description
Exhibit COMP-8, p. 10; see also LMC Data, Exhibit BRA-2, pp. 15-16.
584 C sugar may be carried forward in a limited amount to the next marketing year to be estimated
against the following years allocated quota under Article 14(1) of the EC Council Regulation No. 1260/2001.
585 Article 13 of the EC Council Regulation No. 1260/2001.
586 Panel Report on Canada – Dairy (Article 21.5 – New Zealand and US), para. 6.78.
587 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II), para. 79.

world market prices that did not reflect its average total production cost. In its written submissions or
oral statements the European Communities has not addressed this criteria per se.
588
7.281 The Panel recalls that a "demonstrable link" an d "clear nexus" between the "financing of the
payments" and the "governmental action" must be est ablished in order for the payment to qualify as a
payment "by virtue of governmental action". The Appellate Body in Canada – Dairy (Article 21.5 –
New Zealand and US) stated: "The words 'by virtue of ' indicate that there must be a demonstrable link
between the governmental action at issue and the financing of the payments, whereby the payments
are, in some way, financed as a result of, or as a consequence of, the governmental action."589
7.282 The Appellate Body clarified the terms "financed by virtue of governmental action" in the
second recourse on implementation in Canada – Dairy (Article 21.5 – New Zealand and US II) , when
it stated:
"As regards 'governmental action', we held in the first Article 21.5 proceedings that
'the text of Article 9.1(c) does not place any qualifications on the types of
'governmental action' which may be relevant under Article 9.1(c).' 590 Instead, the
provision gives but one example of governmental action that is 'included' in
Article 9.1(c)—however, this example is merely illustrative. 591 Accordingly, we
stated that Article 9.1(c) 'embraces the full-range' of activities by which governments
' 'regulate', 'control' or 'supervise' individuals'. 592 In particular, we said that
governmental action 'regulating the supply a nd price of milk in the domestic market'
might be relevant 'action' under Article 9.1(c). 593 Moreover, the governmental action
may be a single act or omission, or a series of acts or omissions.
We observe that Article 9.1(c) does not require that payments be financed by virtue of
government ' mandate', or other ' direction'. Although the word 'action' certainly
covers situations where government mandat es or directs that payments be made, it
also covers other situations where no such compulsion is involved. 594" 595
7.283 As the Panel discussed in paragraphs 7.247-7.248, the EC sugar regime regulates the prices at
which A and B beet is sold to sugar producers. This is done to ensure a stable and adequate income to
beet farmers and a proper distribution of in come throughout the sugar industry chain. 596 While
Council Regulation No. 1260/2001 requires minimum payments to growers of A and B beet, it

588 See paras. 4.70 to 4.86 to above.
589 Appellate Body Reports on Canada – Dairy (Article 21.5 – New Zealand and US), para. 113 and on
Canada – Dairy (Article 21.5 – New Zealand and US II), para. 130,.
590 ( footnote original ) Appellate Body Report, Canada – Dairy (Article 21.5 – New Zealand and US),
para. 112.
591 (footnote original) The example given is "payments that are financed from the proceeds of a levy
imposed on the agricultural product concerned or on an agricultural product from which the exported product is
derived".
592 ( footnote original ) Appellate Body Report, Canada – Dairy (Article 21.5 – New Zealand and US),
para. 112.
593 (footnote original) Ibid.
594 ( footnote original ) Article 9.1(c) of the Agreement on Agriculture may be contrasted with
Article 9.1(e) of the Agreement on Agriculture , as well as with Article 1.1(a)(1)(iv) of the SCM Agreement,
and items (c), (d), (j), and (k) of the Illustrative List of Export Subsidies (the "Illustrative List") of the
 SCM Agreement. In these provisions, some kind of government mandate, direction, or control is an element of
a subsidy provided through a third party.
595 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II) , paras. 127
and 128.
596 Commission of the European Communities: Common Organisation of the Sugar Market
Description, Exhibit COMP-8, p. 5.

permits processors to buy the beet they use to produce C sugar at prices below these minimums. 597
However, because growers of C beet are also growers of A and B beet and because C beet can only be
used in C sugar, which in turn belongs to th e same production line as A and B quota sugar, the
EC sugar regime ensures that the sale of under-priced C beet to C sugar producers is an integral part
of the governmental regulation of the sugar market . Indeed, the production of C beet will depend on
the needs of C sugar producers (since C beet can only be used in C sugar). Conversely, to be
competitive, C sugar must be exported at the world price. Because of the low world price relative to
C sugar costs of production, C sugar producers will exercise pressure on C beet growers so that C beet
are sold to C sugar producers at reduced prices. As further detailed below, C beet growers can use the
profits made on the sales of A and B beet to cross-subsidize the sale of C beet to C sugar producers at
prices below the total costs of production of C b eet while still making profits. C sugar producers will
therefore be willing to pay C beet growers proportionally to what they receive on the sales of C sugar.
There is evidence that indeed C beet growers usually receive some 60 per cent of the price of C sugar
on the world market (as is the case with A and B beet). Again the EC Council Regulation, through its
complete control over the production and sale of A and B sugar and A and B beet, controls and affects
the production and sales conditions of C beet.
7.284 The Panel also notes that the EC Council Re gulation No. 1260/2001 prescribes a framework
for the contracts to be signed by beet growers and sugar processors. These contracts are known as
inter-trade agreements. The prescriptions of the EC C ouncil Regulation No. 1260/2001 provide
therefore a minimum of protection for the farmer with respect to produc tion and supply conditions
(quotas, supply of seed, beet prices, delivery sched ules, etc.) for which EC member States have a
regulatory role.598 The actual intra-trade agreements are often more detailed than the EC sugar regime
provides.
7.285 In answer to a Panel question, the European Communities submits that the availability and the
cost of C beet may vary greatly between EC regi ons, as well as from one year to another, depending
on a multiplicity of factors, which do not involve "gove rnment action", or at least the type of action at
issue in this dispute. For example, the production of beet may be affected by climatic conditions and
diseases to a much greater extent than the produc tion of milk. Also, the European Communities
argues that beet farmers are much less specialized than milk farmers. As a result, the production of
C beet is as likely to be "financed" by A and B beet as by other alternative crops, and vice versa. The
European Communities argues that what it describ es as the "causal link" between the alleged
"Government action" and the provision of C beet is no t "tight" enough to consider that sales of C beet
are "financed by virtue of Government action".
7.286 The Panel agrees with the Complainants that the European Communities does not provide any
supporting evidence to substantiate its assertions in regard to causal links, such as what the income
from alternative crops might be compared to inco me from price support for A and B beet, what those
crops might be and whether such crops are also receiving governmental price support. Furthermore,
evidence submitted shows that gross margins fo r C beet production in major C beet producing
countries (i.e. France) is higher than the gro ss margin of alternative crops such as wheat. 599 More
importantly, the European Communities fails to explain why large numbers of EC farmers are
engaged in growing C beet if such production onl y serves to deliver losses. Farmers make crop
planting and livestock production decisions on the b asis of expected prices and profits. Within a
season, livestock and crop farmers will often cross-fina nce between different sectors, due to yield and
price movements. This is as true for dairy cattle as for beet growing. However, the European
Communities also fails to explain why farmers woul d maintain, within a mix of farming activities,

597 Article 21(1), EC Council Regulation No. 1260/2001.
598 Point I(b) and Point XIV of Annex III to Regulation 1260/2001 and Annex IV to Regulation
1260/2001.
599 NEI Report, Exhibit COMP-2, pp. 162-164.

any sectoral production for which expect ed revenue is persistently less than the cost of production, in
this case, production of C beet.
7.287 In the Panel's view, the Complainants have submitted prima facie evidence that C sugar
producers provide positive incentives for growers to plan production above (the processor's) quota, by
including an amount of C beet in a grower's beet delivery quota, at an average price, or paying a
higher price of the first slice of over quota beet. As incentives, C sugar producers may cut next year's
beet allocation for those growers who fail to meet the sugar producers' requirements, reallocating its
delivery rights to more reliable growers.
7.288 The Panel recalls that C beet can only be used in C sugar. There is also evidence that C sugar
producers have incentives to produce C sugar so as to maintain their share of the A and B quotas as
well as the ability to profit from sales of C sugar ev en if the prices are below the total cost of
production (fixed costs plus average va riable costs). In the Panel's view, beet growers also have an
incentive to plan production levels above A and B quot a sugar requirements. C beet growers have an
incentive to supply as much as is requested by C sugar producers with a view to receiving the high
prices for A and B beet and their allocated amount of over-quota beet (or C beet). In this context, the
Panel recalls that A, B and C beet are part of the same line of production, although the market for A
and B beet – that is A and B quota sugar – is more lucr ative than that of the C beet – that is C sugar.
C beet producers can therefore sell below costs thr ough the profits they make in selling A and B beet.
600
7.289 As noted by the Panel in paragraphs 7.261-7.263 above, there is a close similarity with the
situation prevailing with CEM milk in Canada – Dairy (Article 21.5 New Zealand and US II) where
the Appellate Body concluded that:
"where sales in the more remunerative market bear more than their relative proportion
of shared fixed costs, sales in the other market do not need to cover their relative
proportion of the shared fixed costs in order to be profitable. Rather, these sales can
be made profitably below the average total cost of production. If the more
remunerative sales cover all fixed costs, sales in the other market can be made
profitably at any price above marginal cost. In these situations, the higher revenue
sales effectively ' finance' a part of the lower revenue sales by funding the portion of
the shared fixed costs attributable to the lower priced products. (...)"
601
7.290 The Panel recalls that since C beet can only be used in C sugar 602, the proportion of C beet
production in relation to total beet production ought to correlate closely to the rate of C sugar
production in proportion to total sugar production. Accordingly, since over the past years C sugar
represents 11 to 21 per cent of the overall production of quota sugar,603 C beet must represent a similar
level of total beet production in the European Co mmunities. Hence, the growing of C beet is not
incidental but rather an integral part of the governmental regulation of the sugar market.
7.291 The Panel is of the view that a significant percentage of farmers of C beet are likely to finance
sales of C beet below the costs of production as a r esult of participation in the domestic market in
selling high priced A and B beet. The Panel considers that, through EC Council Regulation No.
1260/2001, the European Communities controls virtua lly every aspect of domestic beet and sugar
supply and management. In particular, the EC Regulation fixes the price of A and B beet that renders

600 See NEI Report, Exhibit COMP-2, pp. 159-164 fo r discussion on the incentives and intentional
farming of C beet.
601 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II), para. 140.
602 See Article 21 of the EC Council Regulation No. 1260/2001.
603 EC Commission Court of Auditors, Special Report No 9/2003, Exhibit COMP-11, p. 23, para. 38.

it highly remunerative to farmers/growers of C beet. Government action also controls the supply of A
and B beet (and sugar) through quotas. The im position by government of financial penalties on
producers of C sugar that divert C sugar into the domestic market is another element of governmental
control over the supply of beet and sugar. Fu rther, the degree of government control over the
domestic market is emphasized by the fact that the EC Sugar Management Committee overviews,
supervises and protects the EC domestic sugar through, inter alia, supply management.604 In sum, the
European Communities controls both the supply and the price of sugar in the internal market. This
controlling governmental action is "indispensable" to the transfer of resources from consumers and
tax payers to sugar producers for A and B quota s ugar and, through them, to growers for A and B
quota beet.605
7.292 The Panel finds, for the foregoing reasons, that C sugar producers receive payments on export
financed by virtue of governmental action through various governmental actions as specified above,
within the meaning of Article 9.1(c) of the Agreement on Agriculture.
Conclusion
7.293 Therefore, the Panel finds that C sugar produ cers receive payment on export by virtue of
governmental action through sales of C beet below the total costs of production to C sugar producers.
Pursuant to Article 10.3 of the Agreement on Agriculture , the Panel finds that the European
Communities has not demonstrated that exports of C sugar that exceed the European Communities'
commitment levels since 1995 and in particular si nce the marketing year 2000/2001, have not been
subsidized. Consequently, the European Communiti es is acting inconsistently with Articles 3 and 8
of the Agreement on Agriculture.
(iv) Does the cross-subsidization resulting from the EC sugar regime constitute a payment on
exports by virtue of governmental action?
Does the cross-subsidization from the EC regime constitute a payment?
7.294 The Panel notes, in analyzing the alleged payments in this case, that there is an intellectual
challenge stemming from the fact that the producers of A, B and C sugar are the same companies and
that the production of all three classifications of sugar is made in a continuous line of production.
Were the producers of C sugar different from thos e of A and B sugar, and were they receiving
"economic resources" from the producers of A and B s ugar in order to produce C sugar, the analysis
would appear more straightforward. The Panel also notes that any alleged payments in the production
of sugar, wherever they take place, derive fro m the high prices paid for A and B quota sugar on the
EC domestic market. For these reasons, the Panel con centrates its analysis of C sugar on the issue of
cross-subsidization.
7.295 The Complainants submit that the advantages th at exporters of C sugar receive through the
transfer of economic resources that result from the EC sugar regime (which allows them to produce
and export C sugar at above average variable cost but below average total cost of production) are
payments. The Complainants argue that the EC sugar regime's combination of guaranteed
intervention prices, production quotas, export refund s and import restraints all limit the quantity of
quota sugar that may be sold in the internal market and directly results in the high domestic prices for
A and B quota sugar. The Complainants also argue that the EC sugar regime and the high
administered above-intervention price paid for domes tic EC sugar result in an eventual payment to
EC sugar exporters within th e meaning of Article 9.1(c). 606 Specifically, they submit that the high

604 Articles 42 and 43 of the EC Council Regulation No. 1260/2001.
605 Appellate Body Report on Canada – Dairy, para. 120.
606 Brazil's first written submission, para. 45.

prices result in covering the fixed costs to produ ce the exported C sugar, hence, serving as a subsidy
to C sugar producers.
607
7.296 The European Communities argues that some of the measures cited by the Complainants,
such as import tariffs or safeguard measures, ar e not subsidies. Other measures, such as the
intervention price and the production quotas, are i ndeed typical domestic price support mechanisms,
and are already subject to the European Communities' domestic support reduction commitments under
the Agreement on Agriculture . Therefore, the question of whether these measures provided export
subsidies to C sugar does not even arise.
7.297 The Panel acknowledges, as was stated by the Appellate Body in Canada – Dairy
(Article 21.5 – New Zealand and US ), that normal economic operators must cover their total costs of
production and if they do not, this may be evidence that they receive an advantage of some sort:
"For any economic operator, the produc tion of goods or services involves an
investment of economic resources. In the case of a milk producer, production
requires an investment in fixed assets, such as land, cattle and milking facilities, and
an outlay to meet variable costs, such as labour, animal feed and health-care, power
and administration. These fixed and variable costs are the total amount which the
producer must spend in order to produce the milk and the total amount it must recoup,
in the long-term, to avoid making losses. To the extent that the producer charges
prices that do not recoup the total cost of production, over time, it sustains a loss
which must be financed from some other source, possibly "by virtue of governmental
action".
608
7.298 The Panel recalls that in the ordinary course of business, a private business or economic
operator would make the decision to produce and sell a product, not only to recover the total cost of
production, but also with the objective of making profits. The Panel is of the view that export sales
below total cost of production cannot be sustained unless they are financed from some other source,
possibly "by virtue of governmental action".
609
7.299 The Panel recalls that the Appellate Body in Canada – Dairy (Article 21.5 – New Zealand
and US) determined that the appropriate "benchmark" to assess the proper value of the subject good,
considering the facts and circumstances of the disput e, was the average total cost of production of the
CEM milk. In determining the proper value to the producer, a payment analysis "requires a
comparison between the price actually charged by the provider of the goods or services … and some
objective standard or benchmark which reflects the proper value of the goods or services to their
provider...".
610 In that dispute the Appellate Body, in search of an objective standard that would
establish the proper value of milk to the milk produc er, found that the average total cost of production
took best into account the "motivations of the independent economic opera tor who is making the
alleged 'payments'" and the value of milk to it. 611 The Appellate Body used this benchmark as it
answered the "crucial question, name ly, whether Canadian export production has been given an
advantage".612 (emphasis added)

607 The Complainants submit that the subsidy, as defined in Article 9.1(c) of the Agreement on
Agriculture, takes shape by way of the coverage of costs serving as a payment on exports which is the result of
financing by governmental action.
608 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US), para. 87.
609 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US), para. 87.
610 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US), para. 74.
611 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US), para. 92.
612 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US), para. 84.

7.300 The Panel recalls that the Appellate Body in Canada – Dairy (Article 21.5 – New Zealand
and US) looked at why dairy farmers could make such below cost of production sales, and why they
were able to do so without making a loss, indeed while making a profit. In reviewing the Canadian
dairy regime the Appellate Body found that profits from domestic milk were spilling over to allow the
sale of CEM milk at discounted prices – through governmental price controls.613
7.301 The evidence submitted shows that C sugar prices have been well under its average total cost
of production every year, from 1992/1993 to 2002/2003. 614 In marketing year 2000/2001, the price
per tonne of C sugar, based on the London Daily Price 615, was €222.32, while the total cost of
production for that sugar was *** per tonne. 616 617 This data illustrates that the price charged for
C sugar does not even remotely cover its cost of production.618
7.302 Referring to publicly available information, th e European Communities considers that, as a
general rule, sugar producers operate at a profit. 619 In the Panel's view, profits are only possible if

613 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II), paras.136-146.
614 Datagro Report, Exhibit BRA-1, Table 5, p.29 and Table B-15; "Sugar in the European Union:
sugar production costs and cross-subsidies to C sugar exports" by Roger Rose, Exhibit ALA-1, pp. 8-10; LMC
Data, Exhibit BRA-2, Table 5.15, p. 54; Oxfam Briefing Paper 27, August 2002, Exhibit COMP-3, pp. 1, 8-9;
EC Court of Auditors Special Report No 20/2000, Exhibit COMP-1, p. 35; NEI Report, Exhibit COMP-2,
Table 7.3, p. 113.
615 The London Daily Price is a spot price for EC sugar and, hence, may represent a more accurate
indication of the premium that EC sugar receives. See LMC Data, Exhibit BRA-2, p. 23.
616 Ibid.
617 In marketing year 1995/1996 the price per tonne of C sugar was ***, while total cost of production
for that sugar was *** per tonne. In marketing year 1996/1997 the price per tonne of C sugar was ***, while
total cost of production for that sugar was *** per tonne. In marketing year 1997/1998 the price per tonne of
C sugar was ***, while total cost of production of that sugar was *** per tonne. In marketing year 1998/1999
the price per tonne of C sugar was ***, while total cost of production of that sugar was *** per tonne. In
marketing year 1999/2000 the price per tonne of C sugar was ***, while total cost of production of that sugar
was *** per tonne. In marketing year 2001/2002 the price per tonne of C sugar was *** while total cost of
production of that sugar was *** per tonne. In 2002/2003 the price per tonne of C sugar was ***, while the
total cost of production for that sugar was *** per tonne. See Datagro Report, Exhibit BRA-1, Table B. 15.
618 The EC has not contested the Comp lainants' evidence that C sugar is sold at prices that give the
producers a positive contribution to net income even though those prices are approximately *** per cent below
average total cost of production. Accordingly, the eviden ce clearly establishes that a "significant proportion" of
EC producers –and one hundred per cent of those producing C sugar – make export sales of C sugar at prices
below the average total cost of production.
619 European Communities' reply to Panel question 68. The Panel also notes the non-refuted evidence
submitted by the Complainants. Most, if not all, of EC sugar producers operate on a profitable basis,
particularly those companies that operate in the relativ ely more efficient C sugar producing regions. [For
example, reported profits for 2002-03 were €31 million and €315 million for Royal Cosun and Sudzucker,
respectively (a substantial part of Sudzucker's profit would have been earned through its 85 per cent equity in St
Louis Sucre). In the same year, Danisco reported a profit of DKK1017 million. (€139 million). The Associated
British Foods group that includes British Sugar as a subsidiary reported a profit of ₤176 (€264 million).
According to the Financial Times (15 April 2004, p.24) profits for the Associated British Foods subsidiary
appears likely to be higher in 2003-04 than in 2002-03, with high sugar yields accounting for much of an
increase in profit for the firs t half of the year from ₤73 million to ₤85 million. In 2002-03 St Louis Sucre's
profit was €132 million. The most representative measure of return to capital available on a common basis is
the return to shareholders' funds. Profit as a percentage of shareholders funds for 2002-03 was 6.4, 14.2, 7.5 and
36.2 for Royal Cosun, Sudzucker, Danisco and St Louis Sucre, respectively. To the extent that the value of
sugar quotas is included in the reported value of capital, these figures will understate the true contribution of
quota sugar profits to rates of return. Only for St Louis Sucre is the issue addressed specifically for sugar quotas
in the accounts. There, it is stat ed that the value of sugar quotas purchased in company amalgamations is
amortised over 20 years.]

C sugar is being sold above average variable costs despite being sold below its average total cost of
production and its fixed costs are financed through some other way.
7.303 In the Panel's view, payments could occur by virtue of a combination of factors and measures.
The Complainants have submitted extensive evid ence and argumentation as to why and how cross-
subsidization occurs within the EC sugar regime.
620 From the uncontested evidence, the Panel
understands that the European Communities controls the supply of sugar within the European
Communities which has a direct impact on the price of sugar in the domestic market; indeed prices of
A and B sugar are three times higher than the world market price. 621 The primary measures are
controls on the supply of sugar to the domestic ma rket (including restrictions on sales into the
domestic market, import quotas and requirements to e xport designated quantities of sugar) and direct
subsidies for production and export, with interven tion buying as a fallback should the sugar price fall
to the intervention price. While there are no c ontrols on the quantities of C sugar that may be
produced and exported, penalties attach to such s ugar if it is not exported or otherwise carried
forward. In addition, EC controls on alternativ e sweeteners, such as isoglucose, serve to negate
competition from more competitively priced products.
7.304 The Panel recalls that the quantities of sugar th at may be sold on the domestic market are
tightly regulated through import controls and cont rols on the quantities of domestically produced
sugar that may be disposed of within the European Communities, together with subsidized exports, as
a key supply management mechanism designed to avoid intervention buying.
7.305 The EC regime 622 includes mechanisms designed to re gulate the domestic supply of sugar
produced from EC-harvested beet or cane. The main instrument is the system of categorization of
such sugar into A and B quotas and C sugar (surplus to quota). Sugar produced as quota or as C sugar
is reclassifiable under certain circumstances under EC regulatory arrangements. The A quota sugar
(which comprises around 82 per cent of the total quota) is the more valuable quota and is nominally
intended to meet domestic demand. 623 The regime provides for annual A and B sugar production
quotas for each member State, established for a five -year period. Member States are responsible for
assigning the quotas to sugar producers. The quotas constitute the maximum quantities eligible for
domestic price support and direct export subsidies (in EC terminology, 'refunds'). There is no limit on
sugar production above A and B quota but such ex cess sugar (C sugar) has to be exported if not
carried forward. Penalties are provided for when export sugar surplus to A and B quota sugar (C
sugar) is not exported. However, as member States are authorized to reduce quotas, failure to produce
up to maximum quota levels could lead to reductions in the quotas assigned to individual processors.
7.306 There are no limits on the quantity of C sugar that may be produced or exported, but such
sugar cannot be sold on the domestic market and it is not eligible for intervention or export refunds.
There is no independent production of C sugar. Th e manufacture of quota and non-quota sugar is
undertaken by the same enterprises. There is not hing in the regime to prevent producers pooling
subsidies for quota sugar to average out subs idies and charges over total sugar production. 624 In fact,

620 See Australia's first written submission, paras. 42-71; EC Court of Auditors, Special Report No
20/2000, Exhibit COMP-1, p. 35, para. 96; "Sugar in the European Union: sugar production costs and cross-
subsidies to C sugar exports" by Roger Rose, Exhibit ALA-1, pp. 17-27; Datagro Report, Exhibit BRA-1,
pp. 8-27; Oxfam Briefing Paper 27, August 2002, Exhibit COMP-3, pp. 1, 5-6.
621 See LMC Data, Exhibit BRA-2, Table 3.4, p. 22; and Datagro Report, Exhibit BRA-1, Table 8.15
and Table 5, p. 29.
622 See also Factual Aspects in Section III above.
623 Commission of the European Communities: Common Organisation of the Sugar Market
Description, Exhibit COMP-8, p. 9.
624 In 1981, the EC advised a GATT working party: "... that the sugar regime resulted in the pooling of
producers receipts from sales in the internal markets at supported prices, receipts, from exports of B quota sugar

the EC regime is predicated on a single stream of manufacture of quota and non-quota sugar by sugar
quota holders, given that quota and non quota sugar are reclassifiable to a cer tain extent and given
also the conditionality attached to the grant of an export certificate for C sugar. As acknowledged by
the EC Commission, the production of C sugar is directly linked to quota production.625
7.307 Important by-products of this production support are structural surpluses, with EC sugar
production substantially in excess of consumpti on. Consumption averages around 12.5 million
tonnes, whereas production ranges between 15-18 million tonnes. In addition to sugar manufactured
from domestically harvested beet or cane, a furt her 1.8 million tonnes of sugar is manufactured from
raw cane sugar imported mainly from the ACP countries. 626 The regime ensures that domestic
production surplus to consumption is disposed of on export markets. Approximately 20 per cent of all
sugar produced is exported.
7.308 Export subsidies are funded by producer levies, calculated on the basis of quota production by
sugar producers. 627 The EC Commission awards export subsidies through Management Committee
procedures. Export refunds/subsidies to A and B quota sugar may be fixed at regular intervals or by a
tender system the proceeds of which cover the di fference between the EC domestic sugar price and
the world market price for sugar, hence, enabling EC sugar to be exported and sold on the world
market.628 The export refund amounts are significant which indicates that the EC sugar industry needs
a great deal of support or subsidies to competitively sell sugar on the world market.
7.309 When EC consumers pay the regulated high pr ice for domestic sugar (A and B quota sugar),
these domestic transactions generate substantial fi nancial resources and cons titute an "advantage" to
the same producers in their production of C sugar.
7.310 The Panel finds that there is clear evidence th at the relatively high EC administered domestic
market (above-intervention) prices for A and B quota sugar allow the sugar producers to recover fixed
costs and to sell exported C sugar over average vari able costs but below the average total cost of
production. Sugar is sugar whether or not produced under an EC created designation of A, B or
C sugar. A, B or C sugar are part of the same line of production and thus to the extent that the fixed
costs of A, B and C are largely paid for by the profits made on sales of A and B sugar, the EC sugar
regime provides the advantage which allows EC sugar producers to produce and export C sugar at
below total cost of production.
629 For the Panel this cross-subsidization constitutes a payment in the
form of a transfer of financial resources.
7.311 The European Communities submitted that, desp ite the fact that a party derives an
"advantage" from certain "governmental actions", it does not follow necessarily that any provision of
goods made by that party would "t ransfer economic resources" to the recipient of the goods. The
European Communities contends that the "benefit" had to be examined on its own merits, and under
the relevant WTO rules. In the European Comm unities' view, by de-linking the "benefit" from the
"payment" and attaching it to the "governmental action", the Complainants' interpretation of
Article 9.1(c) would extend the application of th e strict rules on export subsidies provided in the
Agreement on Agriculture to virtually any form of government intervention which might have the

and receipts from exports of C sugar" . Source: Report to the [GATT] C ouncil L/5113 of 20 February 1981,
para. 33.
625 EC Commission Court of Auditors, Special Report No 9/2003, Exhibit COMP-11, p. 10, para. 38.
626 Commission of the European Communities: Sugar International Analysis Production Structures
within the EU, Exhibit COMP-7, p. 39.
627 The Panel recalls that the levies only partially fund the export refunds for A and B quota sugar.
628 Commission of the European Communities: Common Organisation of the Sugar Market
Description, Exhibit COMP-8, p. 20.
629 Datagro Report, Exhibit BRA-1, para. 43(a), diagram 11 and Exhibit ALA-1, pp. 21-23.

incidental effect of "financing" sales at a loss. According to the Europ ean Communities, this was
never intended by the drafters of the Agreement on Agriculture.
7.312 The Panel is of the view that Article 9.1(c) of the Agreement on Agriculture does not require
the demonstration of a benefit for a measure to co nstitute a payment within Article 9.1(c) of the
Agreement on Agriculture . The special nature of Article 9.1(c) is such that once an advantage or
payment has been demonstrated, there is no need to prove separately that such an advantage provide
"benefits" to the producers. The only additional requi rements are that the advantage or payment is on
export and is financed by virtue of governmental action.
7.313 Finally, to the European Communities' argument that several of the measures identified by the
Complainants are not subsidies but rather tariffs a nd other types of border measures, the Panel recalls
that in Canada – Dairy (Article 21.5 – New Zealand and US II) , the Appellate Body stated that
governmental action, within the meaning of Artic le 9.1(c) embrace a full-range of activities by
governments and that governmental action may be a single act or omission, or a series of acts or
omissions.
630
7.314 The Panel finds therefore that the cross-subs idization taking place through the cumulative
effect of various measures involved in the operatio n of the EC sugar regime, including high prices
charged to domestic consumers, enables C sugar producers to produce and sell C sugar. In the Panel's
view, there is a payment in the form of transf ers of financial resource s from the high revenues
resulting from sales of A and B sugar, for the expor t production of C sugar, within the meaning of
Article 9.1(c) of the Agreement on Agriculture.
Is the payment on export?
7.315 The Complainants contended that the payments made to C sugar producers were payments
"on the export" of "an agricultural product" w ithin the meaning of Article 9.1(c) of the Agreement on
Agriculture.
7.316 For the European Communities, even if these measures provided an indirect benefit to
C sugar, they were not contingent upon the ex port of C sugar and, therefore, could not be
characterized as "export subsidies". The Europ ean Communities argued that a sugar producer's
eligibility for A and B production quotas did not depe nd on whether it exported any sugar. Likewise,
the right to sell A and B sugar into intervention was not conditional upon whether it exported C sugar
or indeed any sugar at all. In this regard, th e European Communities noted that some sugar producers
did not produce any C sugar at all. The European Communities noted further that according to data
for the most recent marketing year, there were no exports of C sugar from Italy, Greece and Portugal,
while exports from Finland, Spain and Belgium/Luxe mburg represented only a fraction of their total
sugar output.
7.317 As discussed before, an analysis of Article 9.1(c) shows that the focus of the analysis is on
whether the payment received is "on the export" or provides an advantage to the exports, not whether
the whole EC regime, or the cross-benefits resulting from A and B quotas are contingent upon C sugar
being exported.
7.318 The Panel recalls that C sugar, unless carried forward, must be exported, whether it is
exported by the C sugar producer or any other inte rmediary. The European Communities admits that

630 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US I), para. 112.

whether C sugar is exported by C sugar producers or so me other intermediate is of no relevance; what
matters is that C sugar must be exported.631
7.319 Moreover, the Panel notes that the Eur opean Communities has not disputed that all
companies that produce C sugar participate in th e domestic market through production of A or B
sugar, or both. In Canada – Dairy (Article 21.5 – New Zealand and US II ) the Appellate Body held
that it was irrelevant that some producers did not ma ke payments within the meaning of Article 9.1(c)
of the Agreement on Agriculture . It found that Canada would still act inconsistently with its export
subsidy commitments even if some producers never ma ke or participate in the discounted sales. The
requirement is not that every single producer be in volved in receiving or transferring payments but
rather that the system provides for or even encourages such an occurrence.632
7.320 The Panel is of the view that such an occu rrence is not, as suggested by the European
Communities, a mere "incidental effect" of financ ing below cost of productio n of C sugar exports.
The Panel fails to see a mere "incidental effect" in view of the great discrepancy between the cost of
production and the C sugar prices. For instance, the evidence submitted shows that for 2000/2001
C sugar was priced at €222.39 per tonne. But the tota l cost of production for that same sugar in that
marketing year was on average *** per tonne. 633 The evidence submitted also shows that for
2001/2002 C sugar was priced at *** per tonne. But the total cost of production for that same sugar in
that year was on average *** per tonne. 634 Nobody could consider the effects of a product paying for
only *** per cent of its total cost of production in 2000/2001 and *** per cent of its total cost of
production in 2001/2002, or at *** and *** below its co st of production, respectively, as "incidental".
Moreover there is evidence that production of C s ugar represents some 11-21 per cent of the total EC
sugar production.635
7.321 The Panel recalls that C sugar could only be sold for export. If not reclassified, C sugar "may
not be disposed of in the Community's internal market and must be exported without further
processing."
636 Because of that legal requirement, advantages, payments or subsidies to C sugar, that
must be exported, are subsidies "on the export" of that product. It seems clear that if the producer had
a choice to either sell on the EC domestic market or on the world market, the former would be more
attractive, given that the EC regime delivered a dome stic price of some 3.5 times the world price of A
quota sugar and 2.5 times that of B quota sugar. 637 The only reason why producers of C sugar export
C sugar, is because they are prohibited from introduc ing such sugar into the domestic market, facing
heavy penalties pursuant to Article 13 of the EC Re gulation if they do. They decide to produce
C sugar because they are able to export it at pri ces above its average variable costs after covering a
portion of the fixed costs by way of spill-over from sales of A and B sugar.
7.322 The Panel finds that the payment on C sugar prod uction in the form of transfer of financial
resources through cross-subsidization resulting from the operation of the EC sugar regime is on export
within the meaning of Article 9.1(c) of the Agreement on Agriculture.

631 European Communities' reply to Panel question No. 62(b): "However, no meaningful distinction can
be made between the export sales made directly by the sugar companies and those made through trading
companies. The C sugar sold to the tr aders cannot be resold within the EC. Further, in both cases the sugar is
usually delivered by the sugar compan ies FOB at an EC port. Moreover, sometimes the trading companies are
not even established in the EC. Thus, for all practical purposes, sales of C sugar to traders are export sales, just
like the export sales made directly by the sugar companies."
632 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II), para. 152.
633 Datagro Report, Exhibit BRA-1, Table B.15 and Exhibit ALA-1, table 2 on page 8.
634 Datagro Report, Exhibit BRA-1, Table B.15.
635 EC Commission Court of Auditors, Special Report No 9/2003, Exhibit COMP-11, p. 23, para. 38.
636 Articles 13(1) of EC Council Regulation No. 1260/2001
637 See LMC Data, Exhibit BRA-1, Table 3.4, p. 22; and Datagro Report, Exhibit BRA-1, Table B.15
and Table 5, p. 29.

Is this cross-subsidization payment financed by virtue of governmental action?

7.323 The Complainants submit that as in Canada – Dairy, the controlling governmental actions are
"indispensable" to the transfer of resources from c onsumers and tax payers to sugar processors for A
and B quota sugar and, through them, to growers of A and B quota beet.638
7.324 The Panel recalls that the "demonstrable link" and clear "nexus" between the "financing of
payments" and the "governmental action" must be established in order to qualify as a payment "by
virtue of governmental action." 639 In Canada – Dairy (Article 21.5 – New Zealand and US II) , the
Appellate Body stated that "Article 9.1(c) 'embraces the full-range' of activities by which
governments ' 'regulate', 'control' or 'supervise' individuals'. 640 In particular, it said that governmental
action 'regulating the supply and price of milk in th e domestic market' might be relevant 'action' under
Article 9.1(c).641 It added that "Article 9.1(c) does not requi re that payments be financed by virtue of
government ' mandate', or other ' direction'. Although the word 'action' certainly covers situations
where government mandates or directs that payments be made, it also covers other situations where
no such compulsion is involved.642"643
7.325 Of particular relevance in the present dispute is the Appellate Body's discussion of the word
"financed" (by virtue of governmental action) which refers to the "mechanism or process" put in place
by the government: " The word refers generally to the mec hanism or process by which financial
resources are provided to enable 'payments' to be made."644
7.326 The Panel considers that the European Co mmunities' governmental action regulating the
domestic sugar market cross-subsidizes sales of C su gar that otherwise would not be made, or would
be made at a loss. The higher revenue sales for quota sugar in the internal market effectively finances
some or all of the fixed costs of C sugar. C suga r is cross-subsidized through direct subsidies, price
support mechanisms and related mechanisms for quota sugar, all of which are regulatory instruments
of the EC sugar regime. The sales of C sugar ar e profitable at prices that merely exceeds average
variable costs because the higher revenue sales of A and B quota sugar in the internal market
"effectively financed part of the lower revenue sales by funding the portion of the shared fixed costs
attributable to the lower priced products."645
7.327 With respect to market access, the Eur opean Communities recalled that the terms
"governmental action" in Article 9.1(c) en compass a broad range of government measures 646,
including import tariffs. 647 The Complainants' interpretation would imply that, if high import duties
had the incidental effect of "cross-financing" expor ts below the average total cost of production, the

638 Appellate Body Report on Canada – Dairy, para. 120.
639 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II) , para. 130; see
also Appellate Body Report, Canada – Dairy (Article 21.5 – New Zealand and US), para. 113.
640 ( footnote original ) Appellate Body Report, Canada – Dairy (Article 21.5 – New Zealand and US),
para. 112.
641 (footnote original) Ibid.
642 ( footnote original ) Article 9.1(c) of the Agreement on Agriculture may be contrasted with
Article 9.1(e) of the Agreement on Agriculture , as well as with Article 1.1(a)(1)(iv) of the SCM Agreement,
and items (c), (d), (j), and (k) of the Illustrative List of Export Subsidies (the "Illustrative List") of the
 SCM Agreement. In these provisions, some kind of government mandate, direction, or control is an element of
a subsidy provided through a third party.
643 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II) , paras. 127
and 128.
644 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II), para. 132.
645 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II), paras. 139-140.
646 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US), para. 112.
647 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II), para. 144.

Member concerned would have no alte rnative but to lower its import duty levels, even if such duties
were within that Member's tariff bindings.
7.328 The Panel is of the view that the production of C sugar is not incidental. The Panel recalls
that there are no independent producers producin g exclusively C sugar: C sugar production exists
only for producers of A and B quota sugar. The EC sugar regime provides the incentive to EC sugar
producers to produce C sugar. This incentive lies in th e fact that under the EC sugar regime if all the
allocated quota for A and B sugar is not satisfied by the producer, the producer runs the risk that the
quota will be reallocated to another sugar producer . There is evidence that C sugar was initially
intended to secure the full quota for a given year and should amount to approximately 6 per cent of
quota production. 648 Yet, the EC Court of Auditors have stated that, over the past years, C sugar
production has varied between 11 and 21 per cent of quota production. 649 The evidence demonstrates
that one reason for this excessive production of C sugar is that the spill-over of profits from sales of A
and B quota sugar allows C sugar fixed costs to be c overed and, hence, allows it to be sold profitably
above its average variable costs. 650 This is further evidence of the advantage provided to C sugar
producers. Otherwise, C sugar would not be produ ced at such levels if it were only to ensure
satisfaction of quota allocation.
7.329 The Panel recalls that the Appellate Body stat ed that the use of WTO-consistent domestic
support cannot be without limits:
"However, we consider that the distinct ion between the domestic support and export
subsidies disciplines in the Agreement on Agriculture would also be eroded if a
WTO Member were entitled to use domes tic support, without limit, to provide
support for exports of agricultural produc ts. Broadly stated, domestic support
provisions of that Agreement, coupled with high levels of tariff protection, allow
extensive support to producers, as compared with the limitations imposed through the
export subsidies disciplines. Consequent ly, if domestic support could be used,
without limit , to provide support for exports, it would undermine the benefits
intended to accrue through a WTO Member's export subsidy commitments." 651
(underlining added)
7.330 In the Panel's view, the EC sugar regime is such that it creates incentives to breach the
ordinary limits of domestic support by encouragi ng producers to produce more sugar for export in
order to ensure they fulfil their quotas and preven t them from losing access to the preferential quotas.
More importantly though, by vi rtue of the high prices charged to domestic consumers and the
operation of the A and B quotas as well as other featur es of the EC sugar regime, exporters of C sugar
can cover a significant portion of their production costs and make profitable export sales.
7.331 The Panel is thus of the view that EC sugar producers finance sales of C sugar at below cost
of production directly by participating in the dom estic market and making sales internally at high
prices as regulated by the European Communiti es (and from the purchase of discounted C beet as
discussed earlier). The European Communities' govern mental action controls virtually all aspects of
domestic sugar supply and pricing. The Europ ean Communities provides this control through a
combination of guaranteed intervention prices, production quotas and import restraints which limit the
quantity of quota sugar that may be sold in the in ternal market, and the resulting high domestic price
for A and B quota sugar. The domestic sales offer lu crative and attractive returns to producers.
Government action controls the s upply of domestic sugar by way of quotas in pursuit of protecting

648 NEI Report, Exhibit COMP-2, p. 117.
649 EC Commission Court of Auditors, Special Report No 9/2003, Exhibit COMP-11, p. 23, para. 38.
650 NEI Report, Exhibit COMP-2, pp. 117 and 160.
651 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US), para. 91.

high domestic prices well above the intervention price.
652 Additionally, penalties levied against sugar
producers that divert C sugar production into the domestic market are evidence of further
governmental control. The collection of production levies and distribution of export refunds also
contribute to the high degree of EC governmental control. Lastly, the imposition of high import
tariffs illustrates again governmental action in the EC sugar regime.
7.332 Accordingly, the EC sugar regime uses the high profits on A and B quota sugar to cover fixed
costs for C sugar and, most importantly, requires C sugar to be exported and diverted from the
domestic market. Again, the result of the EC s ugar system is not the production of C sugar in
marginal or superfluous amounts simply in the pursuit of ensuring quota fulfilment. Rather, as the EC
Court of Auditors stated, over the past years, C production has varied between 11 and 21 per cent of
quota production, a significant portion of the European Communities' entire sugar production.653
7.333 In the Panel's view, the EC sugar regime and the cross-over benefits that it creates are thus the
direct and foreseeable consequences of actions by the European Communities, within the meaning of
Article 9.1(c) of the Agreement on Agriculture , not merely the decisions of private sugar producers
responding to market incentives.
7.334 Therefore, the Panel finds that the production of C sugar receives a payment, through cross-
subsidization resulting from the operation of the EC suga r regime; there is a payment, in the form of
transfers of financial resources on export financed by virtue of governmental action.
7.335 Pursuant to Article 10.3 of the Agreement on Agriculture , the Panel finds that the European
Communities has not demonstrated that exports of C sugar that exceed the European Communities'
commitment levels since 1995 and in particular since the marketing year 2000/2001, are not
subsidized. Consequently, the European Communiti es is acting inconsistently with Articles 3 and 8
of the Agreement on Agriculture.
5. Overall conclusion
7.336 The Complainants have provided prima faci e evidence that the European Communities'
exports of sugar exceeds its commitment levels sinc e 1995 and in particular since the marketing year
2000/2001.
7.337 The Complainants have also provided prima facie evidence that producers/exporters of
ACP/India equivalent sugar that exceed the Eu ropean Communities' commitment levels receive
subsidies within the meaning of Article 9.1(a) of the Agreement on Agriculture.
7.338 The Complainants have provided prima facie evidence that producers/exporters of C sugar
that exceed the European Communitie s' commitment levels receive payments on export by virtue of
governmental action: (i) through sales of C beet to C sugar producers below their total costs of
production; and (ii) in the form of transfers of financial resources, through cross-subsidization
resulting from the operation of the EC sugar regime, within the meaning of Article 9.1(c) of the
Agreement on Agriculture.
7.339 In light of Article 10.3 of the Agreement on Agriculture, the Panel reaches the conclusion that
the European Communities has not demonstrated that its exports of C sugar and ACP/India
(equivalent) sugar that exceed the European Communities' commitment level are not subsidized.

652 LMC Data, Exhibit BRA-1, Tables 3.1-3.4, pp. 18-22 and Exhibit ALA-1.
653 EC Commission Court of Auditors, Special Report No 9/2003, Exhibit COMP-11, p. 23, para. 38.

7.340 Consequently, the Panel finds that the Europ ean Communities has been acting inconsistently
with its obligations under Articles 3.3 and 8 of the Agreement on Agriculture by providing export
subsidies on sugar within the meaning of Articles 9.1(a) and 9.1(c) of the Agreement on Agriculture,
in excess of the quantity commitment levels specified in Section II, Part IV of its Schedule.
6. The interpretation and correction of the Eu ropean Communities' Schedule in light of
the Modalities Paper
(a) Arguments of the parties654
7.341 The European Communities considers that the Modalities Paper is an agreement reached by
all participants in the Uruguay Round in connection with the conclusion of the Agreement on
Agriculture. As such, the Modalities Paper is relevant as "context" for the interpretation of the
schedules of reduction commitments, in accordance with Article 31.2 (a) of the Vienna Convention.
7.342 For the European Communities, the letter of the Chairman of the Market Access negotiating
group of 20 December 1993 recorded the understandi ng of the Participants "that these negotiating
modalities shall not be used as a basis fo r dispute settlement proceedings under the WTO Agreement".
This means that the WTO Member s cannot bring claims under the DSU based on the violation of the
Modalities Paper. It does not mean, however, that the Modalities Paper is irrelevant for the
interpretation of the Agreement on Agriculture. This is, as mentioned above, a question to be decided
by the Panel having regard to the relevant provisions of the Vienna Convention.
7.343 For the European Communities, the fact that the Modalities Paper is not "legally binding"
does not prevent it from being an "agreement" or from being "context". Thus, Article 31.2 of the
Vienna Convention includes among the "context", the "preamble" of a treaty which, by definition,
imposes no legal obligations. The European Comm unities adds that in any event, the Modalities
Paper was drafted in mandatory terms and purported to be binding. Thus, Article 1 of the Modalities
Paper states that:
"Specific binding commitments in the areas of market access, domestic support and
export competition shall be established in accordance with the modalities set out
hereunder."
7.344 The European Communities submits that the "b ase quantity" included in the EC Schedule is
part of the text of the WTO Agreement. The European Communities asserts that total exports of sugar
during the most recent marketing year for which there is data available (October 2001-September
2002) were 2,443,600 tonnes 655, i.e. 71,100 tonnes below the final commitment level as re-calculated
in paragraph 4.124 above. Thus, the breach of the European Communities' reduction commitments
alleged by the Complainants would result exclusively from a scheduling error.
7.345 Therefore, the European Communities submits that:
"[S]hould the Panel find that the C sugar re gime provides export subsidies in excess
of the reduction commitments, the only course of action consistent with the
requirements of good faith would be for the Complainants to agre e to the correction

654 See also paras. 4.122 et seq. above.
655 Including exports of C sugar, and adjusted for ACP/India sugar which is subject to a 1.6 million
tonnes ceiling (see Section IV).

of the European Communities' scheduling co mmitments so as to include the exports
of C sugar in the base levels and to rectify the annual commitments accordingly."
656
7.346 For the Complainants, the Modalities Paper does not provide "context" as defined in
Article 31.2 of the Vienna Convention as it does not constitute an agreement relating to the Agreement
on Agriculture made in connection with the conclusion of that Agreement. Instead, it constitutes
merely an informal note issued by the Chairman of the Market Access Group on his own
responsibility to assist the participants in the prep aration of specific binding commitments included in
the Schedules associated with the Agreement on Agriculture . In relation to Article 31.2(b) of the
Vienna Convention, the Modalities Paper does not constitute an instrument relating to the Agreement
on Agriculture made in connection with the conclusion of the Agreement. It does not represent an
instrument made by one or more parties and, cr itically, it was a document prepared during the latter
stages of negotiation of the Agreement, not at th e time of its conclusion. While not providing
"context" as defined in Article 31.2 of the Vienna Convention, the Modalities Paper does form part of
the preparatory work, as recognised in Article 32 of the Vienna Convention , of the Agreement on
Agriculture, having been developed as part of the negotiating process.
7.347 For the Complainants, the European Communitie s' arguments that its failure to include
C sugar in its calculation of its base levels constitut es an error that it should be allowed to correct, has
no foundation in the WTO Agreements or in WTO jurisprudence. Moreover, they consider that under
the DSU, the Panel does not have the authority to permit the European Communities to "correct" its
Schedule.657 Furthermore, they contend that the "e rror" of the European Communities is not
"excusable" because "the decision on how to schedule support was one for each Member to take at the
end of the day, based on its own interpretation of th e application of the draft provisions to the regimes
applying in each sector. Any risk in regard to so -called 'under-calculations' of the base period outlays
and quantities was the responsibility of the scheduling Member, in this case the EC."658
(b) Assessment by the Panel
7.348 The Panel recalls first that participants in the Uruguay Round submitted draft schedules
essentially on the basis of the 1991 Draft Final Act Modalities. It also notes that the Modalities Paper
was first issued in 1991 and then revised in December 1993 whereas discussions, among others on the
scope of the Footnote inserted in the EC Schedul e, went on thereafter and even after the European
Communities submitted its final Schedule in Ma rch 1994. The version of the Modalities Paper
(MTN.GNG/MA/W/24) referred to by the par ties was prepared after the 15 December 1993
conclusion of the negotiation for the purpose of verification.
7.349 The Panel further recalls that the Modalities Pa per cannot be the basis for dispute settlement
under the WTO Agreement . The Panel also recalls that in EC – Bananas III the European
Communities emphasized that: "[t]here was no doubt that any guidelines that existed for scheduling in
the agricultural sector were left out of the Agreement on Agriculture on purpose". 659 The Appellate
Body also stated that "We note further that the Agreement on Agriculture makes no reference to the
Modalities document ..."660

656 European Communities' first written submission, para. 142.
657 Brazil's second written submission, para. 4 and Australia’s second written submission,
paras. 126-131.
658 Australia's second written submission, para. 132.
659 Panel Report on EC – Bananas III, para. 4.99.
660 (footnote original) Modalities for the Establishment of Specific Binding Commitments Under the
Reform Programme, MTN.GNG/MA/W/24, 20 December 1993.

7.350 Clearly, the so-called Modalities Paper is not a covered agreement and thus cannot provide
for WTO rights and obligations to Members. None theless, it could be relevant when interpreting the
Agreement on Agriculture, including Members' Schedules.
7.351 The Panel is of the view, that even if, arguendo, the Modalities Paper is to be considered as
"context", within the meaning of Article 31.2 of the Vienna Convention and even if it becomes clear
that the European Communities did not take account of its subsidies to C sugar in the calculation of its
base quantity for export subsidies, this does not necessarily imply that the European Communities is
now entitled to recalculate its base quantity.
7.352 Even if there were clear evid ence that if the European Co mmunities had known that C sugar
was subsidized, it would have increased its base quan tity to include additional subsidies to C sugar,
the fact that the European Communities did not do so at the time, does not in and of itself entitle the
European Communities to claim a correction of its Schedule today. WTO Members were not obliged
to maintain export subsidies, they were only authorized to maintain them as exceptions to the
prohibition in Articles 8 and 3.3 of the Agreement on Agriculture. Even if the interpretation provided
by the Appellate Body in Canada – Dairy was novel as suggested by the European Communities 661,
the fact remains that this Panel is bound by the wording of the WTO treaty and it does not have the
competence to assess whether the Eu ropean Communities at the time mi sinterpreted the scope of its
obligations.
7.353 In the Panel's view, the European Communities' assertion that in light of the circumstances,
the only course of action is for the Complainants to agree to the correction or revision of the European
Communities' Schedule is not a matter for whic h the Panel has any authority as it goes beyond the
scope of a panel recommendation which, according to Article 19.1 of the DSU , should be limited to
recommending that the concerned Member "bring the measure into conformity with the Agreement on
Agriculture".662 The Panel is not authorized, under the DSU, to force the Complainants to agree to
such a correction or revision. of the European Communities' Schedule.
7.354 Therefore, the only recommendation that this Panel can make, is for the European
Communities to bring its measures into conformity with the Agreement on Agriculture. In the Panel's
view this matter is of a multilateral nature and sh ould not be resolved in the context of dispute
settlement. The Panel notes that Members are fr ee to negotiate and agree on a revision to the
European Communities' Schedule or to agree on a waiver in that regard.
F. ARTICLE 10.1 OF THE AGREEMENT ON AGRICULTURE
1. Arguments of the parties663
7.355 The Complainants submitted that should the Panel decide that the exports of C sugar were not
subsidized by payments financed by virtue of governmental action within the meaning of
Article 9.1(c) of the Agreement on Agriculture , the Panel should, in the alternative, address their
claims under Article 10.1 of the Agreement on Agriculture.

661 On the contrary the Appellate Body's interpretatio n of Article 9.1(c) would not seem to be a novel
legal development but a confirmation or clarification of said provision.
662 Article 19.1 of the DSU provides: "Where a panel or the Appellate Body concludes that a measure is
inconsistent with a covered agreement, it shall recomme nd that the Member concerned bring the measure into
conformity with that agreement. In addition to its recommendations, the panel or Appellate Body may suggest
ways in which the Member concerned could implement the recommendations."
663 See Section IV:D.2 above.

2. Assessment by the Panel
7.356 Since the Panel has found that the European Communities is acting inconsistently with
Articles 3 and 8 of the Agreement on Agriculture , in providing producers/exporters of C sugar and
ACP/India equivalent sugar, with payments on expor ts financed by virtue of the EC sugar regime,
within the meaning of Article 9.1(a) and (c) of the Agreement on Agriculture in excess of the
European Communities' commitment level, those subsidies cannot, by definition, be "export subsidies
not listed in paragraph 1 of Article 9" , as required by Article 10.1 of the Agreement on Agriculture.
664
In this respect the Panel refers to the finding of the Appellate Body in Canada – Dairy (Article 21.5 –
New Zealand and US) which held:
"It is clear from the opening clause of Article 10.1 that this provision is residual in
character to Article 9.1 of the Agreement on Agriculture . If a measure is an export
subsidy listed in Article 9.1, it cannot simultaneously be an export subsidy under
Article 10.1."665
7.357 The Panel therefore sees no reason to examine the Complainant's claims under Article 10.1 of
the Agreement on Agriculture.
G. NULLIFICATION OR IMPAIRMENT
1. Arguments of the parties
7.358 The Panel recalls that the parties' argume nts are summarized in paragraphs 4.267-4.284
above.
7.359 Subsidiarily, the European Communities also submitted that even if the export of C sugar and
the ACP/India sugar Footnote resulted in a violation of Articles 3.3, 8 or 10.1 of the Agreement on
Agriculture, such violation would not nullify or impair any benefits accruing to the complaining
parties.
7.360 The European Communities submitted that Article 3.8 of the DSU made clear that, while a
finding of violation of a covered ag reement gave rise to a presumpti on of nullification or impairment
of benefits accruing under that agreement, the de fending party had an opportunity to rebut such
presumption. In the opinion of the European Communities, the ordinary meaning of the term
"adverse impact" in Article 3.8 of the DSU did not require that the defe nding party had to show that
the alleged violation had had no actual effect on th e Complainants' exports to establish the absence of
such impact. The European Communities submitted that it had shown that the Complainants had
suffered no "adverse impact" because they could not have expected that the European Communities
would stop exporting C sugar.
7.361 The European Communities argued that if it were to reduce its exports of sugar by
60 per cent, as requested by the Complainants, it would be doing much more than removing any
"adverse impact". The European Communities submitte d that, if nevertheless the Panel were of the
view that the Complainants were entitled to exp ect that the European Communities would reduce its
exports of C sugar and ACP/India equivalent su gar, such expectations would be limited to a
21 per cent reduction, as envisaged in the Modalities Pape r with respect to all e xport subsidies, rather
than their complete elimination. Accordingly, the alleged violation of Articles 3, 8 and 10.1 of the
Agreement on Agriculture would nullify or impair benefits accruing to the Complainants only to the

664 Appellate Body Report on Canada – Dairy, para. 124.
665 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US), para. 121.

extent that the current volume of subsidized exports exceeded 79 per cent of the quantity of
subsidized exports made during the base period.
7.362 The Complainants considered that the EC's infringement of its obligations under the
Agreement on Agriculture had resulted in a prima facie case th at nullification and impairment had
been suffered by the Complainants. They agreed with the European Communities that, pursuant to
Article 3.8 of the DSU, the European Communities, as the defending party, could rebut the
presumption of nullification and impairment but s ubmitted that in doing so, it must, under Article 3.8
of the DSU, establish that its breach of the rules had not had "an adverse impact" on the
complainant(s).
7.363 Furthermore, the Complainants provided evid ence that the EC sugar regime caused them
losses. The Complainants referred to a March 2004 Oxfam study 666 which had calculated, based on
2002 exports, that the EC sugar regime caused immediate losses of $494 million for Brazil and $151
million for Thailand in that year alone. Brazil submitted that that was serious nullification or
impairment by any reasonable standard. The Compla inants also referred to this report which noted
the cost of the EC sugar regime to South Africa and a number of other developing countries, and
recalled that the Panel had heard directly from Colombia and Paraguay, as third parties, that such
regime hurt them as well.667
7.364 The European Communities responded that th e Complainants' arguments overlooked the
thrust of the European Communities' defence, whic h was precisely that the Complainants could have
no "legitimate expectations" that the European Comm unities would stop its exports of C sugar. At
most, the Complainants could have expected th at the European Communities would reduce those
exports by 21 per cent (in quantity) as agreed in the Modalities Paper.
7.365 All parties agreed that the nullification or im pairment allegedly suffered as a result of the
WTO inconsistencies of the EC sugar regime w ould not differ based on the particular agreement
violated.668 The Complainants clarified, however, that if the elements of a violation under the
Agreement on Agriculture and the SCM Agreement are established, then they are entitled to the
remedies for nullification or impairment established by each agreement, provided there is no overlap
or duplication in any remedies actually imposed.
2. Assessment by the Panel
7.366 The Panel recalls the text of Article 3.8 of the DSU which provides that the prima facie
presumption of nullification and impairment may be rebutted:
"In cases where there is an infringement of the obligations assumed under a covered
agreement, the action is considered prima facie to constitute a case of nullification or
impairment. This means that there is normally a presumption that a breach of the
rules has an adverse impact on other Members parties to that covered agreement, and
in such cases , it shall be up to the Member against whom the complaint has been
brought to rebut the charge." (emphasis added)
7.367 The Panel further recalls that in EC – Bananas III , the Appellate Body observed that the
European Communities, in its appeal, attempted to "rebut the presumption of nullification or

666 Exhibit ALA-12, pages 2 and 28.
667 Brazil's closing statement at the second substantive meeting of the Panel, para. 2, Colombia's oral
668 Parties' replies to Panel question No. 2.

impairment on the basis that the United States h as never exported a single banana to the European
Community, and therefore, could not possibly suffer any trade damage." The Appellate Body stated:
"[W]e note that the two issues of nullification or impairment and of the standing of
the United States are closely related….[T]wo points are made that the Panel may well
have had in mind in reaching its conclusions on nullification or impairment. One is
that the United States is a producer of bananas and that a potential export interest by
the United States cannot be excluded; the other is that the internal market of the
United States for bananas could be affect ed by the EC bananas regime and by its
effects on world supplies and world prices of bananas…. They are…relevant to the
question whether the European Communities has rebutted the presumption of
nullification or impairment.
 (emphasis added)
So, too, is the panel report in United States–- Superfund, to which the Panel referred.
In that case, the panel examined whether measures with 'only an insignificant effect
on the volume of exports do nullify or impa ir benefits under Article III:2 ...'. The
panel concluded (and in so doing, confirmed the views of previous panels) that:
'Article III:2, first sentence, cannot be interpreted to protect
expectations on export volumes; it protects expectations on the
competitive relationship between imported and domestic products. A
change in the competitive relationship contrary to that provision must
consequently be regarded ipso f acto as a nullification or impairment
of benefits accruing under the Gene ral Agreement. A demonstration
that a measure inconsistent with Article III:2, first sentence, has no or
insignificant effects would therefore in the view of the Panel not be a
sufficient demonstration that the benefits accruing under that
provision had not been nullified or impaired even if such a rebuttal
were in principle permitted.'
669
The panel in United States – Superfund subsequently decided 'not to examine the
submissions of the parties on the tr ade effects of the tax differential' on the basis of
the legal grounds it had enunciated. The reasoning in United States – Superfund
applies equally in this case."670 (emphasis added)
7.368 The Panel also notes that in the panel on Turkey – Textiles , Turkey argued that even if its
quantitative restrictions on imports of textile and cl othing products from India were in violation of
WTO law, India had not suffered any nullification or impairment of its WTO benefits within the
meaning of Article 3.8 of the DSU because imports of textile and clothing from India had increased
since the Turkish measures at issue had entered into force. The panel rejected this argument in a
finding not reviewed by the Appellate Body:
"We are of the view that it is not possible to segregate the impact of the quantitative
restrictions from the impact of other factors. While recognizing Turkey's efforts to
liberalize its import regime on the occasion of the formation of its customs union with
the European Communities, it appears to us that even if Turkey were to demonstrate
that India's overall exports of clothing a nd textile products to Turkey have increased
from their levels of previous years, this would not be sufficient to rebut the
presumption of nullification and impairmen t caused by the existence of WTO
incompatible import restrictions. Rather, at minimum, the question is whether

669 (footnote original) GATT Panel Report on US – Superfund, para. 5.1.9.
670 Appellate Body Report on EC – Bananas III, paras. 251-253.

exports have been what they would otherwise have been, were there no WTO
incompatible quantitative restricti ons against imports from India . Consequently, we
consider that even if the presumption in Article 3.8 of the DSU were rebuttable,
Turkey has not provided us with sufficient information to set aside the presumption
that the introduction of these import restrictions on 19 categories of textile and
clothing products has nullified and impair ed the benefits accruing to India under
GATT/WTO." 671 (emphasis added)
7.369 The European Communities cites the fi ndings of the Appellate Body in India – Patents (US)
to conclude that the existence of nullification or impairment should be assessed by looking at the
legitimate expectations of the Complainants. The Pa nel recalls that in that case, the Appellate Body
rejected the panel's conclusion that the protection of "legitimate expectations" is used in GATT acquis
as a principle of interpretation. 672 In this context, the Appellate Body made clear that the "legitimate
expectations of the parties to a treaty are reflected in the language of the treaty itself" and that this
course of action should not include the "imputation in to a treaty of words that are not there or the
importation into a treaty of concepts that were not intended." 673 More importantly, in that dispute, the
panel and the Appellate Body had resorted to reliance on expectations to establish a violation 674,
whereas in this case, the European Communities' argumentation refers to the nullification or
impairment of benefits that may or may not result from an established violation.
7.370 In the Panel's view, the European Commun ities' reliance on the Complainants' general
expectations or lack thereof, is not sufficient to rebut the presumption of nullification of benefits
pursuant to Article 3.8 of the DSU, once a violation has been demonstrated. 675 The Complainants, as
with all Members, had legitimate expectations that the competitive relationship of their sugar would
not be nullified or impaired by the export subsid ies of the European Communities provided in excess
of the European Communities' commitment level. Th e Complainants also had legitimate expectations
that the European Communities would comply with the Agreement on Agriculture , including the
European Communities' obligation not to provide export subsidies above its commitment level.
7.371 The Panel recalls that the flexibilities provided for by Article 9.2(b)(iv) of the Agreement on
Agriculture is an exception to the general prohibiti on against export subsidies provided for in
Article 8 and 3.3 of the Agreement on Agriculture . Therefore, the European Communities had the
right, but was not obliged, to maintain export subsidi es if it had scheduled them and if it respected its
reduction commitment pursuant to Article 9.2(b)(iv) of the Agreement on Agriculture . The
Complainants were entitled to exp ect that the European Communiti es put an end to or reduce its
export subsidies in place prior to the Uruguay Round.

671 Panel Report on Turkey – Textiles, para. 9.204.
672 Appellate Body Report on India – Patents (US), paras. 39-42. The Appellate Body had considered
in that instance that the panel had confused two different concepts from previous GATT practice: (i) the
protection of expectations of contracting parties as to the competitive relationship between their products and
the products of other contracting parties (in the context of violation complaints under Articles III and XI of the
GATT); and (ii) the protection of the reasonable expectations of contrac ting parties relating to market access
concessions (in the framework of non-violation complaints under Article XXIII:1(b) of the GATT).
673 Appellate Body Report on India – Patents (US), paras. 43-45.
674 European Communities' first written submission, para. 147.
675 The Panel recalls that Article 3.8 of the DSU is a codification of GATT practice providing for the
same presumption. The Panel also recalls that such a presumption has never been rebutted, except in the
exceptional panel report on US – Section 301 Trade Act . The panel in US – Section 301 Trade Act recognized
that the United States had rebutted a prima facie presumption because it found that the United States had already
lawfully removed the prima facie violation of Section 304. In that instance, the US Executive Office had made
a "mandatory" promise to render determinations under Section 304 in conformity with its WTO obligations (in
the SAA). This for the panel overrided the prima facie case of violation found earlier on. See Panel Report on
US – Section 301 Trade Act, paras. 7.109-7.113.

7.372 Moreover, the Panel notes that the European Communities has not rebutted the evidence
submitted by the Complainants with regard to the amount of trade lost by the Complainants as a result
of the EC sugar regime. The Panel recalls that "a prima facie case is one which, in the absence of
effective refutation by the defending party, requires a panel, as a matter of law, to rule in favour of the
complaining party presenting the prima facie case".
676
7.373 The Panel is, therefore, of the view that the European Communities has not effectively refuted
the Complainants' allegation that the European Co mmunities' violations nullified or impaired the
benefits to which they are entitled. In par ticular, the European Communities has not submitted
sufficient factual evidence to sugg est that the Complainants did no t suffer an "adverse impact" from
the European Communities' exports of C sugar and ACP/India equivalent sugar provided in excess of
the European Communities' commitment level. The fact that the Complainants did not bring their
claims forward earlier does not relieve the European Communities from adducing sufficient
arguments and evidence to rebut the presumption in Article 3.8 of the DSU.
7.374 Consequently, the Panel finds that the European Communities' violations of the Agreement on
Agriculture nullified or impaired the benefits to wh ich the Complainants were entitled under the
Agreement on Agriculture.
H. ARTICLE 3 OF THE SCM AGREEMENT
1. Arguments of the parties
7.375 The arguments of the parties are summarized in paragraphs 4.232 to 4.266 of this Panel
report.
7.376 The Complainants submit that the export subs idies granted in respect of exports of quota
sugar, ACP/India equivalent sugar and C sugar were prohibited subsidies under the SCM Agreement.
More specifically, the Complainants claimed that the EC sugar regime provided subsidies that
amounted to an export subsidy listed in Item (d) of the Illustrative List of Export Subsidies in Annex I
of the SCM Agreement (hereinafter the "Illustrative List of the SCM Agreement) and that the export
refund on exports of ACP/India "equivalent" sugar amount ed to an export subsidy listed in Item (a) of
the same Illustrative List. Furthermore, Australia and Brazil claimed that the EC sugar regime was
also otherwise inconsistent with Article 3.2 of the SCM Agreement.
7.377 The European Communities argued that the SCM Agreement was not applicable to
agricultural products. It pointed to, inter alia , Article 21.1 of the Agreement on Agriculture and
claimed that this provision had been interprete d by the Appellate Body as meaning that the other
Annex IA Agreements applied "e xcept to the extent that the Agreement on Agriculture contains
specific provisions dealing specifically with the same matter." 677 The European Communities
contended that it was clear that the Agreement on Agriculture contained specific provisions dealing
specifically with the "same matter". 678 For the European Communities, applying the SCM Agreement
to agricultural export subsidies (even those granted inconsistently with the Agreement on Agriculture),
and specifically the prohibition on export subsid ies, would undermine the specificity of the
agricultural regime, and the gradual process of reform which all Members signed up to.

676 Appellate Body Report on EC – Hormones, para. 104.
677 Appellate Body Report on EC – Bananas III, para. 155.
678 For the European Communities, this would neve rtheless not render Article 13(c) meaningless
because Article 13 in general, and Article 13(c) in pa rticular, were intended to provide added clarity to the
relationship between the two agreements during a specific time-period (the nine year implementation period for
Article 13).

7.378 The Complainants reiterated that there were es sentially three differences between the remedy,
and the implementation of recommendations and rulings, provided by Articles 19 to 21 of the DSU
and that provided by Article 4.7 of the SCM Agreement pertaining to the nature of the remedy, the
time-frame and the procedural aspects. Of these differences the last was of particular importance to
the Complainants in order to avoid further nego tiations with the European Communities and possibly
a lengthy and complex arbitration procedure to reso lve a matter that could and should be resolved by
this Panel.
7.379 The European Communities responded that the application of Article 4.7 of the
SCM Agreement would amount to nullifying the rights of WTO Members under the Agreement on
Agriculture.
2. Assessment by the Panel
7.380 The Panel recalls that, in this dispute, it h as followed the order of examination advanced by
the Appellate Body in Canada – Dairy (Article 21.5 New Zealand and US ) in relation to the
Agreement on Agriculture and the SCM Agreement, where the Appellate Body stated that Article 3.1
of the SCM Agreement "indicates that the WTO-consistency of an alleged export subsidy for
agricultural products has to be examined, in the first place, under the Agreement on Agriculture ."679
This approach was supported by all parties to the present dispute.680
7.381 The Panel has already found the EC sugar regi me to be inconsistent with the European
Communities' export subsidy obligations under both Ar ticle 3.3 and Article 8 (through Article 9.1(a)
and Article 9.1(c)) of the Agreement on Agriculture . In principle, therefore, the Panel could also
examine the Complainants claims that the regime, or parts thereo f, constitute an export subsidy
inconsistent with Article 3 of the SCM Agreement, in accordance with the Panel's terms of reference.
The question that arises is whether the Panel should examine these claims, or whether it should rather
apply the principle of judicial economy.
7.382 The Panel recalls that the Appellate Body in Australia – Salmon , referred to earlier by the
parties, clarified when judicial economy can be exercised and cautioned against a panel providing
only a partial resolution of the matter at issue:
"The principle of judicial economy has to be applied keeping in mind the aim of the
dispute settlement system. This aim is to resolve the ma tter at issue and 'to secure a
positive solution to a dispute'. To provide only a partial resolution of the matter at
issue would be false judicial economy. A panel has to address those claims on which
a finding is necessary in order to enable the DSB to make sufficiently precise
recommendations and rulings so as to a llow for prompt compliance by a Member
with those recommendations and rulings 'in order to ensure effective resolution of
disputes to the benefit of all Members'." (emphasis added).
681
Although the Australia – Salmon dispute did not involve a claim under the SCM Agreement , we
believe that the principles it sets forth regarding the exercise of judicial economy are relevant to WTO
dispute settlement generally.

7.383 The Complainants claim that the Panel is entitled to examine the Complainants' export
subsidy claims under Article 3 of the SCM Agreement because the EC sugar regime is inconsistent

679 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US), para. 124.
680 See for example Brazil's second written submission para. 75.
681 Appellate Body Report on Australia – Salmon, para. 223.

with the European Communities' export subsidy commitments under the Agreement on Agriculture.
682
As a matter of logic, therefore, it would appear that the European Communities would, by fully
implementing a recommendation by the DSB to bri ng the European Communities' sugar regime into
conformity with its obligations under the Agreement on Agriculture , also preclude any finding in the
context of a review procedure under Article 21.5 of the DSU that the regime is inconsistent with the
export subsidy disciplines of the SCM Agreement. Accordingly, the Panel's findings under the
Agreement on Agriculture should be sufficient to fully resolve the matter at issue.
7.384 The Complainants appear to be of the view th at the Panel must examine their export subsidy
claims under Article 3 of the SCM Agreement so that they may obtain the benefits of a
recommendation under Article 4.7 of that Agreemen t that the European Communities withdraw the
subsidy "without delay" and the specification of th e time period within which the measure must be
withdrawn. They emphasize in this respect the reference by the Appellate Body in Australia –
Salmon to the need to make such fi ndings as are necessary to ensure prompt compliance. There is
some issue as to whether this Panel is entitled to make such a recommendation and to specify such a
time period in the circumstances before it. 683 In any event, it seems to the Panel that the Appellate
Body's concern in Australia – Salmon was to ensure that a panel's findings be sufficiently complete so
as to inform the Member as to w hat needs to be done, rather than on when it needs to be done. The
Panel doubts that the Appellate Body considered that the application of the normal rules regarding the
timing of implementation, applicable in most WTO disputes, would not constitute "prompt"
compliance, and it does not believe that the Appella te Body's reasoning requires it to decide claims
not necessary to the full resolution of the matter before the Panel merely in order to obtain what might
– but would not necessarily be – more rapid compliance.
7.385 Referring to Article 19.2 of the DSU, Australia contends that a decision to exercise judicial
economy in respect of the Complainants' SCM Agreement claims would diminish its rights under a
covered agreement in regard to the implementation ti me period in the event of its claims succeeding.
The Panel notes that, under Article 4.7 of the SCM Agreement, a panel shall make its
recommendation, including the time period for implementing this recommendation, "[i]f the measure
in question is found to be a prohibited subsidy" . Similarly, Article 19.1 of the DSU provides that a
panel shall make its recommendation "[w]here a pa nel or the Appellate Body concludes that a
measure is inconsistent with a covered agreement" . While these provisions govern the obligations of
panels where they make findings of inconsistency, they do not, in the Panel's opinion, prevent panels
from exercising judicial economy in the appropriate circumstances. Thus, the Panel does not agree
that its decision to exercise judicial economy in th e present case diminishes Australia's rights within
the meaning of Article 19.2 of the DSU
7.386 Finally, the Panel notes that the Complainants' have not set forth their claims under Article 3
of the SCM Agreement in quite as clear and unambiguous a manner as under the Agreement on
Agriculture. Rather, the Complainants have focused on their claims under the Agreement on
Agriculture. Panels depend upon the activ e participation of the parti es to clarify and develop the
issues presented in a dispute. The Panel consider s that the important questions presented under the
SCM Agreement in this dispute would be best decided in a case where they have been further argued
by the parties. In this connection, the Panel especially notes that many of the Complainants'
references to the SCM Agreement were made in the context of their claims under the Agreement on
Agriculture.

682 Brazil's second written submission, title F and paras. 75 and 76; Thailand's first written submission
para. 113 and Australia's first written submission, paras. 189-193 and second written submission, paras. 67-71
and 100-101.
683 See Panel Report on Canada – Dairy (Article 21.5 – New Zealand and US), para. 6.99.

7.387 For these reasons, the Panel exercises judi cial economy and declines to examine the
Complainants' export subsidy claims under Article 3 the SCM Agreement.
VIII. CONCLUSIONS, RECOMMENDATION AND SUGGESTION
A. CONCLUSIONS
8.1 The Panel concludes that:
(a) the European Communities' budgetary outla y and quantity commitment levels for
exports of subsidized sugar is determined with reference to the entry specified in
Section II, Part IV of its Schedule and the content of Footnote 1 in relation to these
entries is of no legal effect and does not enlarge or otherwise modify the European
Communities' specified commitment levels.
(b) the European Communities' quantity commitm ent level for exports of sugar pursuant
to Articles 3.3, and 8 of the Agreement on Agriculture is 1,273,500 tonnes per year,
with effect from the marketing year 2000/2001.
(c) the European Communities' budgetary outlay commitment level for exports of sugar
pursuant to Articles 3.3, and 8 of the Agreement on Agriculture is €499.1 million per
year, with effect from the marketing year 2000/2001”.
(d) the Complainants have provided prima f acie evidence that since 1995 the European
Communities' total exports of sugar ex ceeds its quantity commitment level. In
particular, in the marketing year 2000/ 2001 the European Communities' exported
4,097,000 tonnes of sugar, i.e. 2,823,500 tonnes in excess of its commitment level.
(e) there is prima facie evidence that the European Communities has been providing
export subsidies within the meaning of Article 9.1(a) of the Agreement on Agriculture
to what it considers to be exports of "ACP/India equivalent sugar" since 1995.
(f) there is prima facie evidence that the European Communities has been providing
export subsidies within the meaning of Article 9.1(c) of the Agreement on Agriculture
to its exports of C sugar since 1995.
8.2 In light of Article 10.3 of the Agreement on Agriculture , the Panel concludes that the
European Communities has not demonstrated that its exports of sugar in excess of its commitment
level are not subsidized.
8.3 Therefore, the Panel concludes that the European Communities, through its sugar regime, has
acted inconsistently with its obligations under Articles 3.3 and 8 of the Agreement on Agriculture, by
providing export subsidies within the meaning of Article 9.1(a) and (c) of the Agreement on
Agriculture in excess of (i) its quantity commitment level specified in Section II, Part IV of its
Schedule, which since the marketing year 2000/2001 is for 1,273,500 tonnes of sugar and (ii) its
budgetary outlay commitment level specified in Secti on II, Part IV of its Schedule, which since the
marketing year 2000/2001 is €499.1 million per year.
8.4 Since Article 3.8 of the DSU provides that "[i]n cases where there is an infringement of the
obligations assumed under a covered agre ement, the action is considered prima facie to constitute a
case of nullification or impairment", the Panel c oncludes that – to the extent the European
Communities has acted inconsistently with its obligations under the Agreement on Agriculture – it has
nullified or impaired benefits accruing to Australia under the Agreement on Agriculture.

B.
RECOMMENDATION
8.5 In light of the above conclusions, the Panel recommends that the Dispute Settlement Body
request the European Communities to bring its EC Council Regulation No. 1260/2001, as well as all
other measures implementing or related to the Euro pean Communities' sugar regime, into conformity
with its obligations in respect of export subsidies under the Agreement on Agriculture.

C. SUGGESTION BY THE PANEL
8.6 The Panel is aware of the concerns and in terests expressed, in the context of these
proceedings, by several developing countries, with regard to their continued preferential access to the
EC market for their sugar exports.
8.7 Pursuant to Article 19.1 of the DSU, the Panel suggests that in bringing its exports of sugar
into conformity with its obligati ons under Articles 3.3 and 8 of the Agreement on Agriculture , the
European Communities consider measures to bring its production of sugar more into line with
domestic consumption whilst fully respecting its inte rnational commitments with respect to imports,
including its commitments to developing countries.
8.8 In this regard, the Panel notes the recent statement of the European Communities on
14 July 2004 that the European Communities "fully stands by its commitments to ACP countries and
India" and that with the reform of its sugar re gime, the ACP countries and India will "get a clear
perspective, keep their import preferences and retain an attractive export market."684

684 See "Commission proposes more market-, co nsumer- and trade-friendly regime" dated 14/07/2004.
http://www.europa.eu.int/rapid/pressReleasesAction.do?reference=IP/04/915&format=HTML&aged=0&langua
ge=EN&guiLanguage=en.

ANNEX A

LIST OF EXHIBITS SUBMITTED BY THE PARTIES

EXHIBIT CONFIDENTIAL
(C) FULL TITLE
ALA-1 C Roger Rose, Sugar in the European Union: Sugar Production Costs and Cross
Subsidies to C Sugar Exports, 2004
ALA-2 GATT, AG/W/9, 26 June 1984, Special distribution, Committee on Trade in
Agriculture, Draft Recommendations – Explanatory note by the Secretariat
ALA-3 G8, Technical Discussions on Agriculture Schedules, Geneva, 23 to 26 March
1992 - Record of Discussion
ALA-4 Letter from Trân Van-Thinh, EC Permanent Representative, to Arthur Dunkel,
Director-General, GATT, Chairman of the TNC, 4 March 1992 – agricultural
negotiations – Draft commitments (schedules)
ALA-5 Uruguay Round – Agriculture, 10 D ecember 1993 letter and accompanying
paper, Issues Requiring Settlement – Australia, from Australian Minister for
Trade, Peter Cook, to Mr Steichen EU Commissioner for Agriculture & Rural
Development
ALA-6 14 December 1993 Letter from Trân Van- Thinh EC Permanent Representative,
to Peter Sutherland, Director-General GATT - agricultural negotiations – draft
commitments (schedules)
ALA-7 25 March 1994 Letter from Hervé Jouanjean, Deputy Head of EC Delegation,
to A. Hoda, Deputy Director-General GATT – agricultural negotiations – draft
commitments (schedules)
ALA-8 Uruguay Round – Australia – Summary statement – Issues Still Requiring
Settlement – Brussels, 31 January 1994
ALA-9 Judgment of the Court (Sixth Chamber) - 10 January 2002(1), (Agriculture –
Common organisation of the markets – Sugar – Attribution as C sugar of a
quantity of sugar produced during a given marketing year – Charge payable in
respect of sugar disposed of on the inte rnational market – Levied in the case of
export with an export licence – Export refunds) Case C-101/99.
ALA-10 Opinion of Advocate General Stix-Hackl delivered on 10 September 2003(1)
Case C-329/01 The Queen on the application of British Sugar plc v
Intervention Board for Agriculture Produce, (Reference for a preliminary ruling
from the High Court of Justice of England & Wales, Queen's Bench Division
(Administrative Court)) (Common organisation of the markets in the sugar
sector – Export licence for C sugar – Pr oof of export – Correction of licence –
Principle of proportionality – Penalty)
ALA-11 Official Journal of the European Union - 1.10.2003, Commission Regulation
(EC) No 1739/2003 of 30 September 2003, Reducing, for the 2003/2004
marketing year, the guaranteed quantity under the production quotas for the
sugar sector and the presumed maximum supply needs of sugar refineries under
preferential imports
ALA-12 Oxfam Briefing Paper 61, Dumping on the world - How EU sugar policies hurt
poor countries, March 2004.

EXHIBIT CONFIDENTIAL
(C) FULL TITLE
BRA-1 C Considerations over C Sugar Production and Exports in the European
Communities, report prepared by Plinio M. Nastari, Ph.D., Datagro, Brazil
BRA-2

C LMC Data
COMP-1 European Communities Court of Auditors, Special Report No 20/2000
(pursuant to Article 248, paragraph 4 (2), EC) concerning the management of
the Common Organisation of the Market for Sugar together with the
Commission's replies 2000
COMP-2 Netherlands Economic Institute, Evaluation of the Common Organisation of
the Markets in the Sugar Sector (prepared for the Commission of the European
Communities), September 2000
COMP-3 Oxfam Briefing Paper 27, The Great EU Sugar Scam, How Europe's sugar
regime is devastating livelihoods in the developing world, August 2002
COMP-4 OECD, Working Party on Agricultural Policies and Markets,
Background Information on Selected Po licy Issues in the Sugar Sector,
AGR/CA/APM(2001)32/FINAL, 7 June 2002
COMP-5
EC
Regulations
 A. Commission Regulation (EC) No 38/2004 of 9 January 2004
amending Regulation (EC) No 314/2002 laying down detailed rules for the
application of the quota system in the sugar sector
B. Commission Regulation (EC) No 1159/2003 of 30 June 2003 laying
down detailed rules of application for the 2003/04, 2004/05 and 2005/06
marketing years for the import of cane sugar under certain tariff quotas and
preferential agreements and amending Regulations (EC) No 1464/95 and (EC)
No 779/96
C. Commission Regulation (EC) No 1440/2002 of 7 August 2002
revising the maximum amount for the B production levy and amending the
minimum price for B beet in the sugar sector for the 2002/03 marketing year
D. Commission Regulation (EC) No 1164/2002 of 28 June 2002
amending Regulation (EC) No1646/2001 as regards the setting of the amount
of the adjustment aid and additional basic aid for the sugar refining industry for
the 2002/2003 to 2005/2006 marketing years
E. Commission Regulation (EC) No 314/2002 of 20 February 2002
laying down detailed rules for the application of the quota system in the sugar
sector
F. Council Regulation (EC) No 1260/2001 of 19 June 2001 on the
common organisation of the markets in the sugar sector
G. Commission Regulation (EC) 1520/2000 of 13 July 2000, laying
down common detailed rules for the application of the system of granting
export refunds on certain agricultural products exported in the form of goods
not covered by Annex I to the Treaty, and the criteria for fixing the amount of
such refunds
H. Council Regulation (EC) No 2201/96 of 28 October 1996 on the
common organization of the markets in processed fruit and vegetable products
I. Commission Regulation (EC) No 2315/95 of 29 September 1995
laying down detailed rules for the application of export refunds to certain
sugars covered by the common organization of the market in sugar used in
certain products processed from fruit and vegetables

EXHIBIT CONFIDENTIAL
(C) FULL TITLE
J. Commission Regulation (EC) No 1464/1995 of 27 June 1995 on
special detailed rules for the application of the system of import and export
licences in the sugar sector
K. Council Regulation (EC) No 3 448/93 of 6 December 1993 laying
down the trade arrangements applicable to certain goods resulting from the
processing of agricultural products
L. Commission Regulation (EEC) No 65/82 of 13 January 1982 laying
down detailed rules for carrying forward sugar to the following marketing year.
COMP-6

Commission of the European Communities, Commission Staff Working Paper,
Reforming the European Union's sugar policy – summary of impact
assessment, SEC(2003) September 2003
COMP-7

Commission of the European Communities, Sugar: International Analysis
Production Structures within the EU, 22 September 2003
COMP-8

Commission of the European Communities, Common Organisation of the
Sugar Market, Description
[europa.eu.int/comm./agriculture/markets/sugar/index_en.htm]
COMP-9 European Communities Court of Auditors, Extracts from Annual Report
concerning the financial year 2001 2002/C 295/01, 28 November 2002
COMP-10 Commission of the European Communities, Official Journal L103/1,
24.4.2003, Commission Decision of 20 December 2001 declaring a
concentration to be compatible with the common market and the EEA
Agreement, (Case COMP/M.2530 - Südz ucker/Saint Louis Sucre), (C(2001)
4524)
COMP-11 European Communities Court of Auditors, Special Report No 9/2003 (pursuant
to article 248, (4), second subparagraph, EC) concerning the system for setting
the rates of subsidy on exports of agricultural products (Export Refunds)
together with the Commission's replies, 2003/C 211/01, 5 September 2003
COMP-12 Commission of the European Communities - Commission Responds to Court
of Auditors' report on the sugar market organization, press release BIO/00/214,
9 November 2000
COMP-13 Commission of the European Communities, Commission clears acquisition of
Saint Louis Sucre by Südzucker subject to commitments, press release
IP/01/1891, 20 December 2001
COMP-14 European Communities (EC, EURATOM) , extracts from Preliminary Draft
general budget of the European Communities for the financial year 2004
Volume 1, 13 June 2003
COMP-15 Commission of the European Communities Extracts from 32
nd Financial
Statement concerning the European Agricultural Guidance and Guarantee Fund
EAGGF, Guarantee Section – Financial Year 2002 (presented by the
Commission) 12 November 2003 COM (2003) 680 final
COMP-16 Schedule CXL: European Communities, Extract from Part I : Most-Favoured-
Nation Tariff, Section I – Agricultural Products
Section I – B Tariff Quotas
Part IV – Agricultural Products : Commitments Limiting Subsidization, Article
3 of the Agreement on Agriculture)
Section II : Export Subsidies : Budge tary Outlay and Quantity Reduction
Commitments

EXHIBIT CONFIDENTIAL
(C) FULL TITLE
COMP-17 WTO Committee on Agriculture, notifications concerning export subsidy
commitments (Tables ES:1 to ES:3) received from the delegation of the
European Communities for marketing years 1995/1996 to 2001/2002,
G/AG/N/EEC/5, 11, 20, 23, 32, 36, 44.
COMP-18 WTO Committee on Agriculture, notifications concerning domestic support
commitments, (Table DS:1 and the releva nt supporting tabl es) received from
the delegation of the European Communities for marketing years 1995/1996
through to 1999/2000, G/AG/N/EEC/12, 16, 26, 30, 38

COMP-19 Negotiating Group on Mark et Access - 20 December 1993, Modalities for the
Establishment of Specific Binding Commitments under the Reform
Programme, Note by the Chairman of the Market Access Group,
MTN.GNG/MA/W/24
COMP-20 Blair House Agreement, Exchanges of le tters regarding the oilseeds agreement
between EC Commission Vice-President With Special Responsibility For
External Relations and Commercial Policy and the United States Trade
Representative, 2 and 4 December 1992
COMP-21 WTO Committee on Agriculture, Summary Report of the Meeting held on 17-
18 November 1998, G/AG/R/17, 25 January 1999
COMP-22 WTO Ministerial Conference Fourth Session Doha, 9-14 November 2001,
Summary Record of the Ninth Meeting WT/MIN(01)/SR/9, 10 January 2002

EC-1 Export subsidy commitments in Schedule CXL – EC
EC-2 Draft Final Act Embodying the Results of the Uruguay Round of Multilateral
Trade Negotiations, MTN.TNC/W/FA, 20 December 1991, Section L ("Text
on Agriculture"), Part B ("Agreement on Modalities for the Establishment of
Specific Binding Commitments under the Reform Program2)
EC-3 Modalities for the Establishment of Specific Binding Commitments,
MTN.GNG/MA/W/24, 20 December 1993
EC-4 Draft schedule of commitmen ts submitted on 16 December 1992
EC-5 Letter of 4 March 1992 and Supporting Table 11 attached to that letter
EC-6 Draft schedule of commitmen ts submitted on 14 December 1993
EC-7 List of bilateral meetings between the EC and other participants
EC-8 EC Commission minutes of the mee ting with Australia of 3 December 1993
EC-9 Export subsidy commitments in Schedule LXXX- EC
EC-10 Minutes of the DSB meeting of 18 December 2001, WT/DSB/M/116
EC-11 Minutes of the DSB Meeting of 17 January 2003, WT/DSB/M/141
EC-12 Uruguay Round Outcomes – Agriculture, July 1994, Agriculture Branch, Trade
Negotiations and Organisations Divisions, Department of Foreign Affairs and
Trade, Canberra, Australia
EC-13 Uruguay Round Outcomes – Agriculture provided the basis for the document
Implications of the GATT Uruguay Round for the Sugar Industry, An
Australian Perspective, ABARE Conference Paper 94.19
EC-14 International Policies Affecting Market Expansion, ABARE, 1999

EXHIBIT CONFIDENTIAL
(C) FULL TITLE
EC-15 Effects of the Uruguay Round Agreement on U.S. Agricultural Commodities ,
USDA, March 1994
EC-16 Sample control sheet for export refunds under the sugar CMO, DG
Agriculture, European Commission
EC-17 C Update of Sugar Policy in Selected Countries, LMC International
EC-18 C Protected Domestic Sugar Markets, The Scope for Cross-Subsidising Sugar
Exports, LMC International, March 2003
EC-19 C Review of Sugar Policies in Major Sugar Industries, Transparent and Non-
Transparent or Indirect Policies, LMC International, January 2003.
EC-20 Excerpt from Background Information on Select ed Policy Issues in the Sugar
Sector, OECD, June 2002
EC-21 The Australian Sugar Industry in the 1990s , ABARE, August 1991, The
Australian Sugar Industry, Sweetener Analysis, May 1994, H.R. Bonanno, P.J.
Noble, The Australian Sugar Industry, recent changes and future prospects ,
F.O. Licht, 1993 Yearbook.
EC-22 C Excerpts from the LMC Worldwide Survey of Sugar and HFCS Production
Costs, 2003 Report
EC-23 C Profitability of the export sales of the major sugar exporters, according to LMC
data.
EC-24 Letter dated 10 December 1993 from Mr Peter Cook, Australia's Minister of
Trade to Mr René Steichen, Commission er for Agriculture of the European
Commission
EC-25 Production, carry over and exports of C sugar by French producers
EC-26 Ministerial Communiqué of 23 February 1994.
EC-27 Section II, Part IV of Canada's and Ne w Zealand's schedules of export subsidy
commitments.

ANNEX B

SCHEDULED EXPORT SUBSIDY COMMITMENT LEVELS (QUANTITIES),
AND NOTIFIED TOTAL EXPORTS

Scheduled (1)
implementation period
Scheduled quantity
levels (1)
Commitment level
alleged by the EC685 Notified total exports (2)
Marketing year starting
1October/30 September
Thousand tonnes,
white sugar equivalent
" Annual reduction
commitments + 1.6 million
tons ACP/India equivalent"
Thousand tonnes,
product weight basis
1995/1996 1,555.6 3,155.6 4,544.4 (3)
1996/1997 1,499.2 3,099.2 4,536.0 (3)
1997/1998 1,442.7 3,042.7 5,670.4 (3)
1998/1999 1,386.3 2,986.3 5,116.3 (3)
1999/2000 1,329.9 2,929.9 5,669.0 (3)
2000/2001 1,273.5 2,873.5 6,023.0
2001/2002 1,273.5 2,873.5 4,097.0

(1) Schedule CXL.

(2) Table ES:2 notifications to the WTO Committee on Agriculture (G/AG/N/EEC/5/Rev.1;
EEC/11; EEC/20/Rev.1; EEC/23; EEC/32; EEC/36; EEC/44).

(3) Year starting 1 July to 30 June.

685 See Table 11 of the European Communities' first written submission. The Panel presumes that the
marketing years and the measurement units are identical to those specified in Schedule CXL.

ANNEX C

SCHEDULE CXL – EUROPEAN COMMUNITIES
This Schedule is authentic only in the English language
PART IV – AGRICULTURAL PRODUCTS: COMMITMENTS LIMITING SUBSIDIZATION
(Article 3 of the Agreement on Agriculture)
SECTION II: Export Subsidies: Budgetary Outlay and Quantity Reduction Commitments

Description of products
and tariff item numbers
at HS six digit level

Base
outlay
level

Mio ECU
Calendar/
other
year
applied

Annual and final outlay
commitment levels
1995 – 2000

Mio ECU
Base
Quantity

000 t
Calendar/
other
year
applied

Annual and final quantity
commitment levels
1995 – 2000

000 t
Relevant
Supporting
Tables and
document
reference
1 2 3 4 5 6 7 8
 1995 1996 1997 1998 1999 2000 1995 1996 1997 1998 1999 2000

Sugar (1) 779,9 733,1 686,3 639,5 592,7 545,9 499,1 1.612,0 1.555,6 1.499,2 1.442,7 1.386,3 1.329,9 1.273,5

(*) See Annex
(1) Does not include exports of sugar of ACP and Indian origin on which the Community is not making any reduction commitments. The average of export in the period 1986 to 1990
amounted to 1,6 mio t.

Note: For the purpose of this Panel Report, references to products other than sugar have been deleted from this page of the European Communities' Schedule.

ANNEX D

REQUESTS FOR THE ESTABLISHMENT OF A PANEL

11 July 2003
 (03-3752)
 Original: English

Request for the Establishment of a Panel by Australia

 The following communication, dated 9 July 2003, from the Permanent Mission of Australia to
the Chairman of the Dispute Settlement Body, is circulated pursuant to Article 6.2 of the DSU.

 My authorities have requested me to submit th e following request for the establishment of a
panel on behalf of Australia.

 On 27 September 2002 Australia requested c onsultations with the European Communities
(EC) pursuant to Article 4 of the Understanding on Rules and Procedures Governing the Settlement of
Disputes (DSU), Article XXII:1 of the Genera l Agreement on Tariffs and Trade 1994 (GATT 1994),
Article 19 of the Agreement on Agriculture and Ar ticles 4 and 30 of the Agreement on Subsidies and
Countervailing Measures (SCM Agreement) with r espect to the EC's Common Organization of the
Markets in sugar and its application and implementation. The request was circulated to Members on
1 October 2002 in document number WT/DS265/1. Consultations were held on 21 and 22 November
2002 but unfortunately did not result in resolution of the dispute.

 Consequently, Australia requests that a Panel be established pursuant to Article 4.7 and
Article 6 of the DSU, Article XXIII:2 of GATT 1994, Article 19 of the Agreement on Agriculture and
Article 4.4 and Article 30 of the SCM Agreement.

 The measures that are the subject of this re quest are the subsidies provided by the EC in
excess of its reduction commitment levels on sugar and sugar containing pr oducts including sugar
cane and sugar beet, processed and unprocessed cane and beet sugar and chemically pure sucrose in
solid form, molasses resulting from the extraction of refining of sugar, isoglucose, inulin syrup and
the other products listed in Article 1 of Counc il Regulation (EC) No 1260/2001 of 19 June 2001 on
the European Communities' Common Organization of th e markets in sugar sector (Official Journal of
the European Communities, 30 June 2001, L178/1-45).

 The above-mentioned subsidies are accorded through the EC sugar regime, which is
contained in a number of EC regulations including Council Regulation No 1260/2001 and related EC

regulations, administrative policies, rules, decisi ons and other instruments including instruments pre-
dating the above regulation, and their implementati on. These various instruments will be referred to
as "the EC sugar regime".

 In addition to setting down the conditions attachi ng to imports of sugar, the EC sugar regime
provides conditions attached to the production, supply and exports of sugar, including domestic
support and export subsidies. Sugar is classified in to quota and non-quota sugar. Non-quota sugar is
known as C sugar. The sugar regime provides for the reclassification from quota to C sugar and from
C sugar to quota sugar. Sugar classified as C sugar cannot be disposed of in the EC market.

 Australia is particularly concerned at the subs idies provided by the EC for "C sugar" exports
under the EC sugar regime. Under the regime, producers of C sugar are able to sell C sugar on the
world market at below the total average cost of production through cross-subsidisation of C sugar
from quota sugar profits. By financing payments on the export of C sugar, the EC exceeds its export
subsidy reduction commitments under the WTO Agreement on Agriculture.

 Australia is also particularly concerned at the provisions of the EC sugar regime which accord
direct subsidies contingent on export performance for quantities of approximately 1.6 million tonnes
of sugar which are additional to the budgetary outlays and quantities of subsidised exports notified by
the EC to the Committee on Agriculture under the provisions of Article 18.2 of the Agreement on
Agriculture. In the application of those provisi ons, the EC significantly exceeds its budgetary outlays
and quantity commitments for export subsidies on sugar under the Agreement on Agriculture.

 By granting export subsidies within the meaning of Articles 1.1(a)(1)(i), 1.1(a)(1)(iv),
1.1(a)(2) and 1.1(b) of the SCM Agreement that are not permitted by the Agreement on Agriculture,
the EC also acts inconsistently with its obliga tions under Articles 3.1(a) and 3.2 of the SCM
Agreement.

 Australia considers that the provision of the a bove subsidies and the rele vant elements of the
EC sugar regime are inconsistent with the EC's obligations under the following provisions:

– Articles 3.3, 8, 9.1(a), 9.1(c), and altern atively, 10.1 of the Agreement on Agriculture;

– Articles 3.1(a) and 3.2 of the Agreemen t on Subsidies and Countervailing Measures.

 Australia therefore requests the establishment of a Panel in accordance with Article 7 of the
DSU.

 I would be grateful if you would place this item on the agenda for the next DSB meeting
scheduled for 21 July 2003.

 Original: English

EUROPEAN COMMUNITIES –EXPORT SUBSIDIES ON SUGAR

Request for the Establishment of a Panel by Brazil

 The following communication, dated 9 July 2003, from the Permanent Mission of Brazil to
the Chairman of the Dispute Settlement Body, is circulated pursuant to Article 6.2 of the DSU.

 On 27 September 2002, Brazil requested cons ultations with the European Communities
("EC") pursuant to Article 4 of the Understanding on Rules and Procedures Governing the Settlement
of Disputes ("DSU"), Article XXII:1 of the Ge neral Agreement on Tariffs and Trade 1994 ("GATT
1994"), Article 19 of the Agreement on Agriculture , and Articles 4.1 and 30 of the Agreement on
Subsidies and Countervailing Measures ("SCM Agre ement"), with respect to export subsidies
provided by the EC to its sugar industry. That request was circulated to Members in document
WT/DS266/1,
 G/L/570, G/AG/GEN/53, G/SCM/D48/1, dated 1 October 2002. Consultations were
held in Geneva on 21 and 22 N ovember 2002, with a view to reaching a mutually satisfactory
solution. Unfortunately, these consultations failed to resolve the dispute.

 Therefore, pursuant to Articles 4.7, 6 and 7 of the DSU, Article 19 of the Agreement on
Agriculture, Articles 4.4 and 30 of the SCM Agreem ent, and Article XXIII:2 of the GATT, Brazil
hereby requests the establishment of a panel.

 The specific measures at issue in this dispute are the subsidies provided and maintained by the
EC, in excess of the EC's reduction commitment levels for sugar, under Council Regulation (EC)
No. 1260/2001 of 19 June 2001 on the European Communities' common organi zation of the markets
in the sugar sector
686, and pursuant to all other legislation, regulations, administrative policies and
other instruments relating to the EC regime for sugar, including the rules adopted pursuant to the
procedure referred to in Article 42(2) of Counc il Regulation (EC) No. 1260/2001 of 19 June 2001,
and any other provision related thereto. These are referred to as the "EC sugar regime". The products
at issue are those listed in Article 1 of the Regula tion, including cane or beet sugar and chemically
pure sucrose in solid form, molasse s resulting from the extraction or refining of sugar, isoglucose and
inulin syrup. These products are referred to collectively as "sugar".

 The EC provides export subsidies for sugar in excess of its reduction commitment levels
specified in Section II of Part IV of its Schedule of Concessions (Schedule CXL-European

686 Council Regulation (EC) No. 1260/2001 of 19 June 2001 on the common organization of the
markets in the sugar sector, OJ L 178/1-45, 30.6.2001, p. 1.

Communities), in violation of the Agreement on Agri culture and the SCM Agreement. In particular,
Brazil is concerned with two categories of subsidized EC exports:

(i) The EC sugar regime guarantees a high price fo r the sugar that is produced within production
quotas. This is termed "A and B sugar". S ugar produced in excess of these quotas is termed
"C sugar". Sugar classified as C sugar cannot be sold internally in the year in which it is
produced, and must, in principle, be exported. Payments in the form of high prices provided
to growers and processors by the EC sugar regime finance the production and export of
C sugar at prices below its total cost of production.

(ii) The EC grants export subsidies to an amount of white sugar ostensib ly equivalent to the
quantity of raw sugar that the EC imports unde r its preferential arrangements. This amount,
reportedly, is approximately 1.6 million tons.

 The EC unjustifiably excludes these subsidi es from the calculation of its total amount of
export subsidies that it provides for sugar. The amount of sugar thus subsidized, alone or in
combination with other export subsidies for suga r provided by the EC, exceeds the export subsidy
reduction commitment levels and, as such, constitu tes a violation of the EC's obligations under
Articles 3.3, 8, 9.1 (a) and (c), or, alternatively, Article 10.1 of the Agreement on Agriculture. By
granting export subsidies within the meaning of Articles 1.1(a)(1)(i) and (iv), 1.1(a)(2), and 1.1(b) of
the SCM Agreement, that are not permitted by the Agreement on Agriculture, the EC also acts
inconsistently with its obligations under Articles 3.1(a) and 3.2 of the SCM Agreement.

 Brazil asks that this request for the establishm ent of a panel be placed on the agenda of the
next meeting of the Dispute Settlement Body, which is scheduled to take place on 21 July 2003.

 Original: English

Request for the Establishment of a Panel by Thailand

 The following communication, dated 9 July 2003, from the Permanent Mission of Thailand to
the Chairman of the Dispute Settlement Body, is circulated pursuant to Article 6.2 of the DSU.

 On 14 March 2003, pursuant to Article 4 of the Understanding on Rules and Procedures
Governing the Settlement of Dis putes (the "DSU"), Article XXIII of the General Agreement on
Tariffs and Trade 1994 (the "GATT 1994"), Artic le 19 of the Agreement on Agriculture, and
Articles 4 and 30 of the Agreement on Subsidies and Countervailing Measures (the "SCM
Agreement") the Kingdom of Thailand ("Thailand") requested consultations with the European
Communities (the "EC") with respect to export subsid ies provided by the EC in the sugar sector. The
request was circulated to Members on 20 Marc h 2003 in document WT/DS283/1. The EC and
Thailand held consultations in Geneva on 8 April 2003 with a view to reaching a mutually satisfactory
resolution of the matter, but failed to resolve the dis pute. Pursuant to Articles 4.7 and 6 of the DSU,
Article XXIII:2 of the GATT 1994, Article 19 of the Agreement on Agriculture and Articles 4.4 and
30 of the SCM Agreement, Thailand therefore request s the Dispute Settlement Body (the "DSB") to
establish a panel to examine the following matter.

 The measures at issue are the export subs idies for sugar and sugar-containing products
accorded under Council Regulation (EC) No. 1260/2001 of 19 June 2001 on the common organization
of the markets in the sugar sector published in th e Official Journal of the European Communities on
30 June 2001 (L 178/1-45) and related legal inst ruments. The Council Regulation and the related
legal instruments and administrative actions will be referred to below as the "EC sugar regime". The
products at issue are those listed in Article 1 of the Council Regulation, including cane or beet sugar
and chemically pure sucrose in solid form, molasses resulting from the extraction or refining of sugar,
isoglucose and inulin syrup. These products will be referred to below as "sugar".

 Under the EC sugar regime, sugar that is produced within production quotas ("A" and "B"
quotas) is guaranteed a high intervention price. Sugar produced in excess of those quotas ("C-sugar")
must in principle be exported. By virtue of the EC sugar regime, exporters of C-sugar are able to
export such sugar at prices below the average cost of production. The EC therefore accords export
subsidies to C-sugar in the form of payments on the export of sugar financed by virtue of
governmental action.

 Furthermore, under its sugar regime, the EC gr ants export refunds to an amount of white
sugar that the EC claims to be equivalent to the quantity of raw sugar imported under preferential
import arrangements. The export refunds cover the difference between the world market price and the
high prices in the EC for the products in question, thus making it possible for those products to be
exported. The export refunds constitute direct subsidies contingent on export performance.

 Under the Agreement on Agriculture, the EC undertook budgetary outlay and export quantity
reduction commitments with respect to sugar. In determining its budgetary outlays for export
subsidies for sugar and the quantities benefiting fro m such subsidies, the EC does not take into
account exports of C-sugar and exports of an amount of white sugar equivalent to the quantity of raw
sugar imported under preferential import arrangements. As a result, the EC provides export subsidies
for sugar in excess of its reduction commitments and consequently acts in consistently with its
obligations under Articles 3.3, 8, 9.1(a) and 9.1(c) of the Agreement on Agriculture or, alternatively,
Article 10.1 of the Agreement on Agriculture. By gr anting export subsidies within the meaning of
Articles 1.1(a)(1)(i) and (iv), 1.1(a)(2), and 1.1(b) of the SCM Agreement, that are not permitted by
the Agreement on Agriculture, the EC also acts inconsistently with its obligations under
Articles 3.1(a) and 3.2 of the SCM Agreement.

 I would appreciate it if this request for the establishment of a panel were placed on the agenda
for the meeting of the DSB scheduled for 21 July 2003.