UNITED STATES – SUBSIDIES ON UPLAND COTTON
Document: Recourse to Article 4.10 of the SCM Agreement and Article 22.2 of the DSU by Brazil
Date: 5 July 2005
Document codes: WT/DS267/21
Complainant: Brazil
Respondent: U.S.
Third parties: Argentina, Australia, Benin, Canada, Chad, China, Taiwan, EU, India, New Zealand, Pakistan, Paraguay, Venezuela, Japan, Thailand
Dispute stage: Mutually Agreed Solution
Agreements cited: Art. 3, 5, 6  Subsidies and Countervailing Measures (SCM)Art. 3.3, 7.1, 8, 9.1, 10.1  AgricultureArt. III:4, XVI  GATT 1994

UNITED STATES – SUBSIDIES ON UPLAND COTTON

Recourse to Article 4.10 of the SCM Agreement and Article 22.2 of the DSU by Brazil

 The following communication, dated 4 July 2005, from the delegation of Brazil to the
Chairman of the Dispute Settleme nt Body, is circulated pursuant to Article 4.10 of the
SCM Agreement and Article 22.2 of the DSU.

 Brazil requests that a special meeting of the Dispute Settlement Body (the "DSB") be held on
15 July 2005 to consider the following agenda item:

 Recourse to Article 4.10 of the Agreemen t on Subsidies and Countervailing Measures and
Article 22.2 of the Understanding on Rules a nd Procedures Governing the Settlement of
Disputes by Brazil

Background

 Both the Panel and the Appellate Body in th is dispute found some of the US measures under
review to violate Article 3 of the Agreemen t on Subsidies and Countervailing Measures (the
"SCM Agreement"). On 21 March 2005, the DSB adopted the Appellate Body report and the report of
the Panel, as modified by the Appellate B ody. The resulting DSB recommendations and rulings
include the recommendation that the United States withdr aw, by at the latest within six months of the
date of adoption of the Panel report by the Disput e Settlement Body or 1 July 2005 (whichever is
earlier), the following prohibited subsidies: (i) the export credit guarantees under the GSM 102,
GSM 103 and SCGP export credit guarantee programmes in respect of exports of upland cotton and
other unscheduled agricultural products supporte d under the programmes, and in respect of one
scheduled product (rice); (ii) Section 1207(a) of the Farm Security and Rural Investment (FSRI) Act
of 2002 providing for user marketing (STEP2) pa yments to exporters of upland cotton; and
(iii) Section 1207(a) of the FSRI Act of 2002 provi ding for user marketing (STEP2) payments to
domestic users of upland cotton.

Adoption of appropriate countermeasures under Article 4.10 of the SCM Agreement

 The period of compliance expired on 1 July 2005. At the meeting of the DSB on 15 July
2005, Brazil will request authorization from the DSB to take appropriate countermeasures pursuant to
Article 4.10 of the SCM Agreement and Article 22. 2 of the Dispute Settlement Understanding (the
"DSU"), until such a time when the United States withdraws the prohibited export subsidies identified
by the Panel and the Appellate Body, in an amount that corresponds:

 (i) to the STEP2 payments made in the most recent concluded marketing year; and

 (ii) to the total of exporter applicati ons received under GSM 102, GSM 103, and SCGP
for the most recent concluded fiscal year.

 In principle, these countermeasures would take the form of suspension of tariff concessions
and related obligations under the GATT 1994 by m eans of the imposition of additional import duties
on a list of products imported from the United States, to be defined by Brazil.

 However, Brazil considers that it is not prac ticable or effective to suspend concessions or
other obligations with respect to the same sector /agreement as that in which the Panel and the
Appellate Body have found the violations. Brazil also considers that the circumstances are serious
enough to justify the suspension of concessions or obligations under other covered agreements. These
considerations are further explained below.

Suspension of concessions and obligations under Article 22.3(c) of the DSU

 The suspension of concessions and other obligations corresponding to a value of
approximately US$3 billion
1 wholly applied to the importation of US goods – which amounted to
US$11.3 billion in calendar year 2004 – is neither practicable nor effective for at least two reasons.

 First, the imposition of additional import duti es affects the costs of inputs and capital goods
that are essential to productive chain of the Brazilia n industry. As a developing country, Brazil cannot
place itself at disadvantage when competing with foreign products both in the domestic and
international markets. Second, the rise in impor t costs will inevitably have a significant negative
impact on current efforts to control inflationary pressures. Given the asymmetries between the two
economies, additional import duties would have a mu ch greater negative impact on Brazil than on the
United States.

 Finally, in Brazil's view, the circumstances are serious enough to justify the imposition of
appropriate countermeasures under other covered agre ements. First, the gravity of the violation;
namely, prohibited subsidies which Brazil estimat es to amount to approximately US$3 billion per
year. Continuing non-compliance renders the circ umstances serious enough to make a case of
imposition of appropriate countermeasures under anothe r Agreement. Brazil recalls the Arbitrator's
words in US – FSC (Article 22.6) : "as we interpret Article 4.10 of the SCM Agreement, a Member is
entitled to act with countermeasures that properly ta ke into account the gravity of the breach and the
nature of the upset in the balance of rights and obligations in question."
2 In addition to this,
circumstances must be considered serious given the fact that Brazilian producers of upland cotton will
continue to suffer serious losses while the United States does not withdraw the measures at issue.

Summary of countermeasures

 For the reasons given above, Brazil intends to take appropriate countermeasures in the form
of the suspension of tariff concessions and rela ted obligations under the GATT 1994 by imposing
additional customs duties on a list of products imported from the United States, to be defined by
Brazil.

 Given that Brazil considers that it is not pr acticable or effective to exclusively apply
additional import duties, and considering that the circumstances are serious enough, Brazil may resort,
to the extent necessary, to countermeasures in th e form of suspension of obligations under the

1 STEP 2 payments estimated for marketing year 200 4-2005 and total amount of applications received
for export credit guarantees under GSM 102, GSM 103, and SCGP during fiscal year 2004.
2 US – FSC, recourse to arbitration under Article 22.6 of the DSU, para. 3.48.

following sections of Part II of the Agreement on Trade-Related Aspects of Intellectual Property
Rights:

 Section 1: Copyright and related rights
 Section 2: Trademarks
 Section 4: Industrial designs
 Section 5: Patents
 Section 7: Protection of undisclosed information.

 Likewise, Brazil may also suspend horizontal and/or sectoral concessions and obligations for
all sectors contained in Brazil's Schedule of Specific Commitments (GATS/SC/13) under the General
Agreement on Trade in Services. Those sectors are:

 1. Business Services
 2. Communication Services
 3. Construction and Rela ted Engineering Services
 4. Distribution Services
 7. Financial Services
 9. Tourism and Travel Related Services
 11. Transport Services

 Every year, Brazil will notify to the DSB th e amount and the form of the suspension of
concessions and other obligations in the light of data concerning the operation of the identified
programmes in the most recent concluded marketing and fiscal year, as applicable.