UNITED STATES – SUBSIDIES ON UPLAND COTTON
Document: Recourse to Arbitration by the United States under Article 22.6 of the DSU and Article 4.11 of the SCM Agreement DECISION BY THE ARBITRATOR
Date: 31 August 2009
Document codes: WT/DS267/ARB/1
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 Arbitration by the United States
under Article 22.6 of the DSU
and Article 4.11 of the SCM Agreement

DECISION BY THE ARBITRATOR

I. INTRODUCTION
A. INITIAL PROCEEDINGS
1.1 On 21 March 2005, the Dispute Settlement Body ("DSB") adopted the Appellate Body report1
and the report of the Panel in this case2, as modified by the Appellate Body.
1.2 The Appellate Body upheld the conclusions of th e panel that the Step 2 payments made to
domestic users and those made to exporters were subsidies within the meaning of Article 3.1(b) of the
SCM Agreement (in the case of the former) and Article 3.1(a) of the same Agreement (in the case of
the latter), and were prohibited by those provi sions respectively and granted and maintained
inconsistently with Article 3 of that Agreement. The Appellate Body also upheld the Panel's findings
that the export credit guarantee programmes at i ssue, i.e. GSM 102, GSM 103 and SCGP, constituted
per se export subsidies within the meaning of Item (j) of the Illustrative List of Export Subsidies in
Annex I of the SCM Agreement and therefore were subsidies incons istent with Article 3.1(a) and 3.2
of the SCM Agreement. The Appellate Body also upheld the Panel's conclusion that the effect of
marketing loan programme payments, Step 2 paym ents, market loss assistance payments and counter-
cyclical payments (the "price-contingent subsid ies") was significant price suppression in the same
world market within the meaning of Article 6.3 (c) of the SCM Agreement.3
1.3 As recommended by the original panel under Article 4.7 of the SCM Agreement, the
compliance period for the prohibited subsidies expired on 1 July 2005. In accordance with Article 7.9
of the SCM Agreement, the compliance period for the actiona ble subsidies expired on 21 September
2005, six months after the date on which the DSB adopted the Appellate Body report.4
1.4 On 30 June 2005, the United States Department of Agriculture (the "USDA") announced that
the United States Commodity Credit Corporation (the "CCC") would no longer accept applications for
export credit guarantees under the GSM 103 programme. 5 The USDA also announced that the CCC
would use a new fee structure for the GSM 102 and SCGP programmes.6
1.5 In October 2005, the CCC ceased issuing export credit guarantees under the SCGP.7
1.6 On 1 February 2006, United States Congress adopted legislation repealing the Step 2
payments programme for upland cotton effective as of 1 August 2006.8

1 Appellate Body Report, , WT/DS267/AB/R (hereafter the
"Appellate Body Report").
2 Panel Report, , WT/DS267/R (herea fter the "Panel
Report").
3 See Appellate Body Report, para. 763 (c), (d) and (e).
4 See WT/DS267/21, WT/DS267/26.
5 See Panel Report, para. 3.16 (referring to "USDA announces changes to export credit guarantee
programs to comply with WTO findings", USDA Fore ign Agricultural Service (FAS) Online News Release
of 30 June 2005 (Exhibit Bra-502 submitted by Brazil to the Panel); and "Notice to GSM-103 Program
Participants", USDA FAS Program Announcement of 30 June 2005 (Exhibit Bra-503 submitted by Brazil to the
Panel)).
6 See Panel Report, para. 3.16.
7 See ibid. (referring to United States' first written submission to the Panel, para. 20, and "Summary of
FY 2006 Export Credit Guarantee Programme Activity fo r GSM-102 as of close of business: 9/30/2006"
(Exhibit Bra-513 submitted by Brazil to the Panel)).
8 See Panel Report, para. 3.7 (referring to Section 1103 of the Deficit Reduction Act of 2005, Public
Law No. 109-171 (Exhibit Bra-435 submitted by Brazil to the Panel)).

1.7 On 18 August 2006, Brazil requested the establishm ent of a panel pursuant to Article 21.5 of
the Dispute Settlement Understanding ("DSU") concer ning the alleged failure of the United States to
implement the recommendations and rulings of the DSB. 9 At its meeting of 28 September 2006 the
DSB decided, in accordance with Article 21.5 of the DSU, to refer this matter, if possible, to the
original Panel. The compliance panel report was circulated to Members on 18 December 2007.
1.8 With respect to the export credit guarantees issued under the revised GSM 102 programme
after 1 July 2005, the compliance panel found that the United States had failed to comply with the
DSB recommendations and rulings by acting inc onsistently with Articles 10.1 and 8 of the Agreement
on Agriculture and Article 3.1(a) and 3.2 of the SCM Agreement:
"Regarding GSM 102 export credit guarantees issued after 1 July 2005 the
United States acts inconsistently with Article 10.1 of the Agreement on Agriculture
by applying export subsidies in a manner which results in the circumvention of
US export subsidy commitments with resp ect to certain unscheduled products and
certain scheduled products, and as a result act s inconsistently with Article 8 of the
Agreement on Agriculture. Regarding GSM 102 export credit guarantees issued after
1 July 2005 the United States also acts incons istently with Article 3.1(a) and 3.2 of
the SCM Agreement by providing export subsidies to unscheduled products and by
providing export subsidies to scheduled products in excess of the commitments of the
United States under the Agreement on Agriculture . By acting inconsistently with
Articles 10.1 and 8 of the Agreement on Agriculture and Article 3.1(a) and 3.2 of the
SCM Agreement the United States has failed to comply with the DSB
recommendations and rulings. Specifically, the United States has failed to bring its
measures into conformity with the Agreement on Agriculture and has failed 'to
withdraw the subsidy without delay'."
10
1.9 The compliance panel concluded that "to th e extent that the measures taken by the
United States to comply with the recommendations and rulings adopted by the DSB in the original
proceeding are inconsistent with the obligations of the United States under the covered agreements,
these recommendations and rulings remain operative."11
1.10 On 12 February 2008, the United States notified the DSB of its intention to appeal certain
issues of law covered in the Report of the comp liance panel and certain legal interpretations
developed by the panel and filed a Notice of Appeal. 12 On 25 February 2008, Brazil notified the
DSB, pursuant to Article 16.4 of the DSU, of its in tention to appeal certain issues of law covered in
the Report of the compliance panel and certain legal interpretations developed by the Panel and filed a
Notice of Other Appeal.13
1.11 The Appellate Body report was circulated on 2 June 2008. The Appellate Body upheld the
compliance panel's conclusions with respect to the marketing loan and counte r-cyclical payments as
well as the conclusions on the GSM 102 export credit guarantees issued under the revised GSM 102
programme.14

9 WT/DS267/30.
10 Panel Report, US – Upland Cotton (Article 21.5 – Brazil), para. 15.1(c). (original footnotes omitted).
11 Panel Report, US – Upland Cotton (Article 21.5 – Brazil), para. 15.2.
12 WT/DS267/33.
13 WT/DS267/34.
14 Although the Appellate Body found that the compliance panel failed to make an objective
assessment of the revised GSM 102 programme pursuant to item (j) of the Illustrative List by not considering
certain re-estimated data submitted by the United States , it also found that this did not affect the compliance
panel's conclusion on the revised GSM 102 programme payments.

1.12 The DSB adopted the Appellate Body report a nd the compliance panel report as modified by
the Appellate Body on 20 June 2008.
B. REQUEST FOR ARBITRATION AND ARBITRATION PROCEEDINGS
1.13 On 4 July 2005, Brazil notified the DSB of its "Recourse to Article 4.10 of the
SCM Agreement and Article 22.2 of the DSU" with respect to the prohibited subsidies found to be
inconsistent by the original Panel and the Appellate Body. 15 These prohibited subsidies were
identified as follows: (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 supported under the programmes, and in respect of one scheduled product (rice);
(ii) Section 1207(a) of the Farm Security and Rura l Investment (FSRI) Act of 2002 providing for user
marketing (Step 2) payments to e xporters of upland cotton; and (iii ) Section 1207(a) of the FSRI Act
of 2002 providing for user marketing (Step 2) pa yments to domestic users of upland cotton. Brazil
requested an authorization to take appropriate countermeasures in the amount corresponding: (i) to
the Step 2 payments made in the most recent concl uded marketing year; and (ii) to the total amount of
exporter applications received under GSM 102, GSM 103, and SCGP fo r the most recent concluded
fiscal year. Brazil also requested cross-sector susp ension of obligations under the TRIPS Agreement
and the GATS pursuant to Article 22.3(c) of the DSU.
1.14 On 5 July 2005, Brazil and the United States notified "Agreed Procedures under Articles 21
and 22 of the Dispute Settlement Understanding and Article 4 of the SCM Agreement in the follow-up
to the dispute" ("Agreed Procedures") to the DSB.16
1.15 On 14 July 2005, the United States notified the DSB of its objection "to the appropriateness
of the countermeasures and the level of suspension of concessions or other obligations proposed by
Brazil". The United States also claimed that the pr inciples and procedures set forth in Article 22.3(c)
of the DSU for requesting cross-sector suspensi on of concessions and obli gations had not been
followed by Brazil.17
1.16 On 15 July 2005, at the meeting of the DSB, it was agreed that the matter raised by the
United States in WT/DS267/23 was referred to arb itration as required by Article 22.6 of the DSU and
Article 4.11 of the SCM Agreement. The Arbitrator was constituted on 19 July 2005. It was
composed of the members of the original Panel, namely Mr Darius Rosati as Chairman, and Mr Mario
Matus and Mr Daniel Moulis as Members.18
1.17 On 17 August 2005, the United States and Brazil jointly requested suspension of the
arbitration proceedings according to their "Agr eed Procedures" until Brazil might subsequently
request the resumption or termination of the Arbitr ation. The Arbitrator suspended the arbitration
proceedings on 18 August 2005.19
1.18 On 6 October 2005, Brazil notified to the DSB its "Recourse to Article 7.9 of the
SCM Agreement and Article 22.2 of the DSU by Brazil" with respect to the actionable subsidies found
to be inconsistent by the original panel and th e Appellate Body. The subsidies in question were
identified as marketing loan programme payments, u ser marketing (Step 2) payments, market loss
assistance payments and counter-cyclical paymen ts. Brazil requested the DSB to grant Brazil
authorization to take countermeasures in the annual amount of US$1.037 billion until the

15 WT/DS267/21.
16 See WT/DS267/22.
17 See WT/DS267/23.
18 See WT/DS267/24.
19 WT/DS267/25.

United States withdrew the relevant subsidies or re moved their adverse effects. Brazil also requested
cross-sector suspension of obligations under the TRIPS Agreement and the GATS pursuant to
Article 22.3(c) of the DSU.20
1.19 On 17 October 2005, the United States notified to the DSB its objection to the level of
suspension of concessions or other obligations a nd the countermeasures proposed by Brazil. The
United States contended that the countermeasures proposed were not commensurate with the degree
and nature of the adverse effects determined to exist within the meaning of Article 7.9 of the
SCM Agreement. Further, the United States contended that the level of suspension proposed was not
equivalent to the level of nullifica tion or impairment within the meaning of Article 22.7 of the DSU.
The United States also claimed that the principles a nd procedures set forth in Article 22.3(c) of the
DSU had not been followed by Brazil in reques ting cross-sector suspension of concessions and
obligations.21
1.20 On 18 October 2005, at the meeting of the DSB, it was agreed that the matter raised by the
United States was referred to arbitration. On 18 November 2005, the Arbitrator was constituted. It
was composed of the members of the original Panel, namely Mr Darius Rosati as Chairman, and
Mr Mario Matus and Mr Daniel Moulis as Members.
22
1.21 On 21 November 2005, Brazil and the United States jointly notified the Arbitrator of their
request that the arbitration proceedings be suspende d until either party were to subsequently request
their resumption. The Arbitrator suspended the arbitration proceedings on 7 December 2005.23
1.22 On 25 August 2008, Brazil notified a request of resumption of these arbitration proceedings
(in relation to prohibited subsidies) and also the resumption of the other arbitration proceedings (in
relation to actionable subsidies).24
1.23 On 1 October 2008, due to the unavailability of two members of the Arbitrator upon
resumption of the proceedings, the parties agreed on the following composition of the Arbitrator for
both proceedings:
 Mr Eduardo Pérez-Motta, as Chairman
 Mr Alan Matthews
 Mr Daniel Moulis 25

1.24 An organizational meeting was held on 24 Oc tober 2008 to discuss the proposed working
procedures and timetables for both arbitration pr oceedings. The final working procedures and
timetables were sent to the parties on 29 October 2 008. Brazil requested a further extension of the
deadline for its written submission on 31 October 2008. The Arbitrator, after considering the
arguments of both parties in relation to Brazil's re quest, revised the timetables and sent them to the
parties on 19 November 2008.
1.25 On 31 October 2008, Brazil submitted its Met hodology Paper for the calculation of the
proposed countermeasures. The United States pr ovided a written submission on 9 December 2008.
Brazil provided its written submissi on on 13 January 2009. The Arbitr ator sent written questions to

20 See WT/DS267/26.
21 See WT/DS267/27.
22 See WT/DS267/28.
23 See WT/DS267/29.
24 See WT/DS267/38, WT/DS267/39.
25 See WT/DS267/24/Add.1, WT/DS267/28/Add.1.

the parties on 30 January 2009. The parties provided their replies to these questions on
13 February 2009.
1.26 The Arbitrator met with the parties on 3 March 20 09. After the meeting, the Arbitrator posed
additional written questions to the parties on 6 March 2009 and received their written responses on
20 March 2009. The parties also provided th eir comments on each other's written responses to
questions from the Arbitrator on 31 March 2009. On 20 April 2009, the Arbitrator informed the
parties that in light of the voluminous materials re ceived from parties after the meeting with parties,
and also taking into account the time needed for tran slation of the reports into the other two working
languages, the issuance date of the Arbitrator's Deci sion was delayed. The Arbitrator asked the
parties an additional question on 11 June 2009. On 30 June and 5 August 2009, the Arbitrator
informed the parties of further delays in the ci rculation of the Decision. The Decision by the
Arbitrator was circulated on 31 August 2009.
C. ORGANIZATION OF THE PROCEEDINGS AND PRESENTATION OF THE DECISION
1.27 As described above, two separate arbitrati on proceedings were initiated pursuant to
Article 22.6 of the DSU in this dispute, one in re lation to the prohibited subsidies at issue in the
underlying proceedings, and the other in relation to the actionable subsidies. These proceedings were
conducted in parallel and the same persons served as arbitrators in both proceedings. The parties
presented single submissions in relation to both proceedings.
1.28 The Arbitrator therefore sought the views of the parties whether it should issue a single
decision or two decisions for both proceedings and how it should treat the arguments presented in the
parties' single submissions.
1.29 The United States indicates that there are two arbitration requests and two arbitrations, and
that it therefore expects the Arbitrator to issue a separate decision for each of the two arbitrations.
With respect to the use of submissions, the United States indicates that the sections of the submissions
that are not clearly related to prohibited subsidies or to actionable subsidies may be relevant to either
proceeding.26 Brazil on the other hand argues that the two proceedings should be harmonized as
much as possible and considers that a single decision would be sufficient for the two arbitrations.
Also, Brazil has no objection to the Arbitrator taki ng into account arguments made in the entirety of
Brazil's submissions for the purpose of rendering decisions in either proceeding.
27
1.30 With respect to the treatment of the parties' submissions, the Arbitrator notes that although
each party submitted a single written submission, th e sections on prohibited subsidies are separate
from the sections on actionable subsidies. It is therefore generally possible to distinguish the
arguments relating to the proposed countermeasures against the prohibited subsidies at issue, from
those relating to countermeasures against the actionable subsidies. In addition, some sections of the
submissions, such as the introduction and the sections on cross-retaliation, may be relevant to both
proceedings. The Arbitrator will therefore refer to such arguments in this Decision as appropriate.
1.31 With respect to the presentation of its Decisi on, the Arbitrator notes that the United States
presented two distinct objections to the two distinct requests for countermeasures presented by Brazil.
Although the conduct of the two pr oceedings was harmonized and the parties both provided a single
written submission covering both the prohibited and actionable subsidies at issue, the fact remains that
there are two arbitration proceedings, and that the proceedings against prohibited subsidies are based
on Article 4.10 of the SCM Agreement whereas the proceedings relating to the actionable subsidies in
the same dispute are based on Article 7.9 of the SCM Agreement. Under these circumstances, and in

26 US responses to questions from the Arbitrator, question 2.
27 Brazil's responses to questions from the Arbitrator, question 2.

the absence of an agreement of the parties on th e issuance of a single decision, the Arbitrator
considered it appropriate to issue a separate decision with respect to each of the two proceedings.
D. TREATMENT OF CONFIDENTIAL INFORMATION
1.32 The United States designated one figure in dou ble brackets as confidential information in
footnote 204 of its written submission. Another fi gure in footnote 67 relating to its response to the
Arbitrator's question was designated in the same ma nner. It requests the Arbitrator to treat such
designated information as confidential and not to be disclosed to the public. 28 In response to a
question from the Arbitrator, Brazil argues that Article 18.2 of the DSU is sufficient to deal with the
issue of treatment of confidential information during the proceedings.29
1.33 The Arbitrator recalls that its Working Proce dures provide that "[t]he deliberations of the
Arbitrator and the documents submitted to it shall be kept confidential. This is without prejudice to
the parties' disclosure of statements of their own positions to the public". The Working Procedures of
the Arbitrator also provide that "[t]he Arbitrator will follow the normal working procedures of the
DSU where relevant and as adapted to the circumst ances of the present proceedings". The parties did
not raise the issue of submission of confidential information during the organizational meeting.
However, Article 18.2 of the DSU provides "Me mbers shall treat as confidential information
submitted by another Member to the panel or the Appellate Body which that Member has designated
as confidential." The Arbitrator considers that th e same rule also applies to these arbitration
proceedings. Therefore Members shall treat the information designated by the United States as
confidential, and are under an obligation not to discl ose it to anyone not involved in the proceedings.
The Arbitrator is also under an obligation not to disclose such confidential information in its
Decisions. Ultimately, the Arbitrator did not find it necessary to refer to this information in its
Decisions.
II. OVERALL APPROACH OF THE ARBITRATOR
2.1 The United States has initiated these proceedings pursuant to Article 22.6 of the DSU and
Article 4.11 of the SCM Agreement.
2.2 Article 22.6 of the DSU provides in relevant part:
"When the situation described in paragraph 2 occurs, the DSB, upon request, shall
grant authorization to suspend concessions or other obligations within 30 days of the
expiry of the reasonable period of time unl ess the DSB decides by consensus to reject
the request. However, if the Member con cerned objects to the level of suspension
proposed, or claims that the principles and procedures set forth in paragraph 3 have
not been followed where a complaining pa rty requested authorization to suspend
concessions or other obligations pursuant to pa ragraph 3(b) or (c), the matter shall be
referred to arbitration. Such arbitration sha ll be carried out by the original panel, if
members are available, or by an arbitrat or appointed by the Director-General and
shall be completed within 60 days after the date of expiry of the reasonable period of
time."
2.3 With regard to countermeasures taken in r esponse to violations of Article 3.1 of the
SCM Agreement, Article 4.11 of that Agreement provides the following mandate for the arbitrator:

28 US responses to questions from the Arbitrator, question 1.
29 Brazil's responses to questions from the Arbitrator, question 1.

"In the event a party to the dispute requests arbitration under paragraph 6 of
Article 22 of the Dispute Settlement Unde rstanding ('DSU'), the arbitrator shall
determine whether the countermeasures are appropriate."10
(original footnote) 10 This expression is not meant to allow countermeasures that would be
disproportionate in light of the fact that the subsidies dealt with under these provisions are
prohibited.
2.4 In this proceeding, the United States challeng es two distinct aspects of Brazil's proposed
countermeasures. The United States objects first to the level of suspension of concessions or other
obligations and the countermeasures proposed by Brazil. In addition, the United States claims that the
principles and procedures set forth in Article 22.3 of the DSU have not been followed by Brazil and
therefore the United States requests the Arbitrator to reject Brazil's request to suspend concessions
with respect to TRIPS and GATS. 30 We will therefore consider these two aspects in turn. In light of
the fact that our determination in relation to the level of the proposed countermeasures may have an
impact on our determination in relation to the form of countermeasures to be taken, we consider first
the level of the proposed countermeasures.
2.5 Brazil's requested level of countermeasures, as e xpressed in its request to the DSB, involved
two distinct amounts: an amount corresponding to "t he Step 2 payments made in the most recent
concluded marketing year" and an amount corres ponding to "the total of exporter applications
received under GSM 102, GSM 103, and SCGP for the most recent concluded fiscal year".
2.6 In its Methodology Paper, Brazil subsequent ly limited its request to: (i) one-time
countermeasures in relation to the Step 2 programme, in the amount of the disbursements made by the
United States in Marketing Year ("MY") 2005, which is US$350 million in total 31, and (ii)
countermeasures proportionate to the annual amount of prohibited GSM 102 export credit guarantees
issued for export transactions involving unscheduled products, rice, pig meat and poultry meat, which
amounts to US$1.294 billion for fiscal year ("FY") 2006. We therefore consider Brazil's requested
level of countermeasures relating to these two measures in turn.
III. BRAZIL'S PROPOSED LEVEL OF COUNTERMEASURES IN RELATION TO
STEP 2
3.1 In its request to the DSB, with respect to the Step 2 programme, Brazil indicated that it sought
countermeasures in an amount corresponding to the Step 2 payments made in the most recent
concluded marketing year.
3.2 In its methodology paper, Brazil further expl ains that it seeks one-time countermeasures in
relation to the Step 2 programme, in the amount of the disbursements made by the United States in
Marketing Year ("MY") 2005, wh ich is US$350 million in total.
32 These countermeasures, Brazil
explains, relate to the payments made in the peri od from 1 July 2005, when the United States should
have withdrawn the subsidies at issue, to 30 July 2006, when the United States repealed the Step 2
programme.
3.3 The United States considers, however, that there is no longer any basis for Brazil to impose a
countermeasure based on past payments under Step 2 programmes because the Step 2 measure was
terminated as of August 2006 and because the co mpliance panel did not make any findings on the
Step 2 measure.33 The United States also argues that the DSU and the SCM Agreement require that no

30 WT/DS267/23.
33 US written submission, paras. 226-227.

countermeasure be imposed with respect to the Step 2 subsidy, because there is no disagreement that
the United States has complied with the rulings and recommendations of the DSB in relation to Step 2
payments.34
3.4 We must therefore consider first the legal basis for Brazil to seek "one-time" countermeasures
in relation to the failure by the United States to comply with the recommendations and rulings of the
DSB between 1 July 2005 and 31 July 2006, befo re considering the proposed level of such
countermeasures.
A. IS BRAZIL ENTITLED TO SEEK "ONE-TIME" COUNTERMEASURES IN RELATION TO THE FAILURE
BY THE UNITED STATES TO WITHDRAW THE STEP 2 PAYMENTS BETWEEN 1 JULY 2005 AND
31 JULY 2006?
1. Main arguments of the parties
3.5 Brazil considers that Article 4.10 of the SCM Agreement provides conditions requiring the
DSB to authorize countermeasures when "the recomm endation of the DSB is not followed within the
time period specified by the panel". The time period specified by the original panel was 1 July 2005.
The United States did not withdraw Step 2 until 31 July 2006. Therefore, Brazil argues that the DSB
is under an obligation to author ize appropriate countermeasures according to Article 4.10 of the
SCM Agreement.35 In Brazil's view, the only relevant fact is whether the United States had withdrawn
the subsidies by the end of the implementation period and the fact that the United States repealed the
Step 2 programme after the end of the implementation period is not relevant. 36 S u c h a
countermeasure, in Brazil's view, is not a retroactive remedy.37
3.6 The United States considers that by the time of the compliance panel's findings, Step 2
payments had been eliminated by legislation 38 and that the DSU does not permit countermeasures to
be retroactively applied. 39 The United States points out that Brazil requested findings, during the
compliance panel proceedings, that there was no measure taken by the United States to comply with
the rulings of the DSB during the period between 22 September 2005 and 31 July 2006 since the
Step 2 measure was not repealed during that period of time. However, the compliance panel declined
to make rulings on this request, Therefore, the United States argues that since the compliance panel
has not made rulings on the Step 2 subsidy duri ng the period immediately before it was repealed,
there is no legal basis for Brazil to take countermeasures against the Step 2 subsidy.
40
3.7 The United States also argues that countermeasu res may be authorized only where a Member
has not come into compliance with the DSB recomm endations and rulings. Since the United States
has come into compliance today, there is no measu re, and no WTO inconsiste ncy, which could serve
as the legal basis for a countermeasure with respect to Step 2.41
3.8 Brazil considers the fact that the compliance pa nel did not make rulings on the Step 2 subsidy
to be irrelevant. The original panel and Appellate Body reports already imposed a legal obligation on
the United States to withdraw the subsidy. Be cause the United States has not achieved substantive

34 US responses to questions from the Arbitrator, question 57.
35 Brazil's written submission, paras. 246-249.
38 US responses to questions from Arbitrator, question 4, para. 19.
39 US responses to questions from Arbitrator, question 57, para. 143.
40 US oral statement, paras. 61-62.
41 US comments to Brazil's responses to questions from the Arbitrator, question 107, paras. 119-120.

compliance, Brazil argues that it is entitled to take countermeasures in relation to the Step 2 subsidy
between 1 July 2005 and 31 July 2006.42
3.9 Brazil further argues that while the United States withdrew the Step 2 subsidy in
August 2006, it replaced this subsid y with other prohibited subsidies in the 2008 Farm Bill. Brazil
claims that the 2008 Farm Bill replaced the export subsidy component of the Step 2 programme with
"additional marketing loan subsidies" that co ntinued the competitiveness boost for US cotton
exporters as had the Step 2 programme previous ly, and that it therefore constitutes a subsidy de facto
contingent upon export performance. Also, Brazil cl aims that the 2008 Farm Bill replaced the Step 2
subsidy for domestic cotton users with the "Econom ic Adjustment Assistan ce to Users of Upland
Cotton", which pays US textile mills 4 cents per pound of upland cotton used. Brazil considers that
this component of the subsidy is de facto contingent upon the use of domestic over imported cotton. 43
Brazil argues that the enactment of the 2008 Farm Bill negated the compliance that the
United States had originally achieved, and that th is factor needs to be taken into account by the
Arbitrator when considering the "appropriateness" of the one-time payment countermeasure proposed
by Brazil against the Step 2 subsidy.44
3.10 The United States points out that Brazil is not seeking a countermeasure for measures under
the 2008 Farm Bill since no findings of inconsiste ncy have been made with respect to this new
legislation, but that Brazil makes factual allegati ons about new programmes and asks the Arbitrator to
give certain weight to them in its decision-making. The United States considers that any analysis of
the new programmes would only be speculation, gi ven that no panel has examined these programmes
and made findings on their WTO-inconsistency, a nd that Brazil has not pursued them in these
proceedings. In the view of the United States, a request for the Arbitrator to consider the new
programmes in the new legislation when cons idering the appropriateness of the proposed
countermeasure with respect to the now expired Step 2 subsidy is in essence a request for
countermeasures on these new programmes. Counter measures against these newly enacted measures
would be in contravention of Article 23 of the DSU, and would not have any basis in findings or
recommendations and rulings by the DSB.45
3.11 The United States argues that a Member may only obtain countermeasures where there is a
WTO inconsistency. Otherwise, there is nothing to counter. It contends that the fact the 2008 Farm
Bill was not considered by the compliance panel is a cr itical factor for the Arbitrator. In the view of
the United States, Brazil's request for the Arbitrator to consider the 2008 Fa rm Bill is inconsistent
with Article 23 of the DSU, because Brazil is "seeking redress" concerning the 2008 Farm Bill
without having had recourse to the DSU.
46
3.12 Brazil has clarified that it is not seeking to take countermeasures against the replacement
components of Step 2 subsidy in the 2008 Farm B ill but, rather, is seeking a one-time countermeasure
for the past inconsistency during the 13-month period when the United States was not in
compliance.
47 In response to a question by the Arbitrator , Brazil also clarifies that it does not request
the Arbitrator to make conclusions on whet her these new subsidies under the 2008 Farm Bill are
"measures taken to comply" within the meaning of Article 21.5 of the DSU, nor to make rulings on

42 Brazil responses to questions from the Arbitrator, question 11, paras. 137-139.
43 Brazil's written submission, paras. 262-263.
44 Brazil's written submission, paras. 277and 280.
45 US comments to Brazil's responses to questions from the Arbitrator, question 108, paras. 121-123.
46 US comments to Brazil's responses to questions from the Arbitrator, question 109, para. 124;
question 110, para. 126.
47 Brazil's responses to questions from the Arbitrator, question 108, para. 196.

whether they are prohibited subsidies within the meaning of Article 3 of the SCM Agreement. Such
findings, in Brazil's view, would not be within the mandate of the Arbitrator.48
3.13 However, Brazil argues that the fact of these "new subsidies" can be considered by the
Arbitrator in deciding whether substantive complianc e has been achieved with respect to the Step 2
subsidy.49 It also argues that the Arb itrator can take into account the enactment of the 2008 Farm Bill
in assessing the "appropriateness of countermeasures" and that this would be consistent with the
Canada – Aircraft Credits and Guarantees arbitration decision, where the appropriate level of the
countermeasures was adjusted considering the fact that , at the time the arbitration took place, Canada
had not withdrawn the subsidy concerned.50
3.14 Brazil further argues that, as the parties disagr ee whether there is substantive compliance at
present, Article 22.8 of the DSU does not preven t Brazil from taking countermeasures against the
Step 2 subsidy for the period 1 July 2005-31 July 2006. 51 Brazil considers that Article 22.8 of the
DSU does not apply in these proceedings, as it only ap plies to the time after concessions or other
obligations have been suspended. Even if it does apply, Brazil argues that, presently, substantive
compliance has not been achieved, or that the inc onsistent measure has not been removed, and that
therefore a countermeasure is legally permitted. 52 Brazil relies on the concept of "substantive
compliance" used by the Appellate Body in the US – Continued Suspension dispute, to the effect that
there is no longer substantive compliance since th e enactment of the US 2008 Farm Bill, which
contains two replacement measures with the same effects as the repealed Step 2 measure. 53 Brazil
considers that the phrase "until such time" in Article 22.8 of the DSU has been respected by Brazil in
its one-time countermeasure request, because it has proposed countermeasures based on the amount of
the Step 2 payments made after the end of the im plementation period and before Step 2 was repealed
and/or the subsidy was withdrawn.54
3.15 The United States notes that Brazil requested a countermeasure based on the amount of "the
Step 2 payments made in the most recent conclu ded marketing year" in its original request for
countermeasures.55 However, Brazil adopted a different one-time retroactive payment methodology
during the later proceedings of this arbitration. In the view of the United States, neither of these
approaches can be used to calculate the "appropriate countermeasures" for Step 2, since Step 2 has
been repealed.56
2. Assessment by the Arbitrator
3.16 The expressions "Step 2" and "User Marketing St ep 2 payments" refer to a special marketing
loan provision for upland cotton that had been authorized since 1990 under successive legislation,
including the FAIR Act of 1996 and the FSRI Act of 2002.57
3.17 The original panel made the following findings, inter alia, with respect to Step 2 payments:
"(e) Concerning section 1207(a) of the FSRI Act of 2002 providing for user
marketing (Step 2) payments to exporters of upland cotton:

48 Brazil's responses to questions from the Arbitrator, question 12, para. 141.
49 Brazil's responses to questions from the Arbitrator, question 11, paras. 140-143.
50 Brazil's responses to questions from the Arbitrator, question 108, paras. 197-199.
51 Brazil's responses to questions from the Arbitrator, question 10, para. 136.
52 Brazil's oral statement, paras. 104-108.
53 Brazil responses to questions from the Arbitrator, question 10, paras. 134-135.
55 WT/DS267/21.
56 US comments to Brazil's responses to questions from the Arbitrator, question 106, paras. 117-118.
57 Panel Report, paras. 7.209-7.211.

…
(iii) section 1207(a) of the FSRI Act of 2002 providing for user
marketing (Step 2) payments to exporters of upland cotton is an
export subsidy prohibited by Ar ticle 3.1(a) and 3.2 of the
SCM Agreement.
(f) concerning section 1207(a) of the FSRI Act of 2002 providing for user
marketing (Step 2) payments to domestic users of upland cotton: it is an import
substitution subsidy prohibited by Article 3.1(b) and 3.2 of the SCM Agreement;"
58
3.18 The Appellate Body upheld these conclusions of the original panel.59
3.19 On 18 August 2006, Brazil requested the establishment of a compliance panel. In its request,
Brazil indicated that "[o]n 3 February 2006, the Un ited States Congress approved a bill that repeals
the Step 2 subsidy programme for upland cotton. The bill was signed into law on 8 February 2006,
and took effect on 1 August 2006."60
3.20 During the compliance proceedings, Brazil request ed the compliance panel to consider the
failure of the United States to take measures to remove the adverse effect or to withdraw, inter alia,
the Step 2 programme in the period be tween 22 September 2005 and 31 July 2006. 61 The compliance
panel however declined to consider that failure. 62 Rather, the compliance panel considered the
measures taken to comply as of the date of its est ablishment. On the date of establishment of the
compliance panel, the Step 2 subsidy had been re pealed. While the compliance panel analysed the
impact of the elimination of the Step 2 measures on the existence of significant price suppression in
the world market for cotton within the meaning of Article 6.3(c) of SCM Agreement, it made no
separate finding on the repealed Step 2 payments programme.
63 Brazil did not appeal the compliance
panel's decision not to consider the measures as th ey existed during the period between 22 September
2005 and 31 July 2006.
3.21 It is undisputed that the Step 2 programme, wh ich had been found to be inconsistent with
Article 3 of the SCM Agreement, had not been withdrawn as of the end of the implementation period.
This was the time at which Brazil presented its reque st for authorization to take countermeasures, in
relation to this and other prohibited subsidies in this dispute. However, the measure had been
repealed by the time that the compliance panel was established, and the compliance panel declined to
make any findings on it.
3.22 In these proceedings, Brazil is seeking an author ization to take countermeasures specifically
in relation to the period between the end of the co mpliance period and the repeal of the measure.
Brazil has also claimed that "new prohibited s ubsidies" have recently been enacted by the
United States, which effectively serve the same pur pose as the previous Step 2 payments. Brazil has
made it clear, however, that it is not seeking findings from this Arbitrator on the consistency of these
new measures, and also that it is not asking the Arbi trator to authorize countermeasures in relation to
the application of these new measures. Rather, Brazil is seeking an authorization to apply
countermeasures only in relation to past payments under the now repealed Step 2 programme.

58 Panel Report, para. 8.1
60 This US Bill is referred to as "Deficit Reduction Act of 2005, US Public Law 109-171,
Section 1103", WT/DS267/30. This Act was reproduced in Exhibit Bra-435 during the compliance panel
proceedings. See footnote 20 of the compliance panel report, WT/DS267/RW.
61 Panel Report, US – Upland Cotton (Article 21.5 – Brazil), para. 9.56.
62 Panel Report, US – Upland Cotton (Article 21.5 – Brazil), para. 9.71.
63 Panel Report, US – Upland Cotton (Article 21.5 – Brazil), paras. 10.228-10.239.

3.23 The question before us is, therefore, whethe r Brazil is entitled to seek countermeasures in
relation to past payments under the Step 2 progra mme, notwithstanding the fact that it is undisputed
that this programme has been repealed and that payments have ceased under it, and that there has been
no determination, in the context of the compliance proceedings, that the United States had failed to
comply with the relevant rulings and recommendations of the DSB in relation to this measure.
3.24 In approaching this question, we find it useful to consider first the legal basis for Brazil's
request at the time that it presented it. We will th en turn to the question of Brazil's entitlement to
pursue such authorization in the present circumstances.
(a) Legal basis for Brazil's request for countermeasures in relation to Step 2 payments
3.25 Article 22.1 of the DSU provides that:
"Compensation and the suspension of concessi ons or other obligations are temporary
measures available in the event that the recommendations and rulings are not
implemented within a reasonable period of time."
3.26 Article 22.2 of the DSU further provides that:
"If the Member concerned fails to bring the measure found to be inconsistent with a
covered agreement into compliance ther ewith or otherwise comply with the
recommendations and rulings within the r easonable period of time ..., such Member,
shall, if so requested, and no later than the expiry of the reasonable period of time,
enter into negotiations with any part y having invoked the dispute settlement
procedures, with a view to developing mutually acceptable compensation. If no
satisfactory compensation has been agreed within 20 days after the date of the
reasonable period of time, any party having invoked the dispute settlement
procedures may request authorization from th e DSB to suspend the application to the
Member concerned of concessions or other obligations under the covered agreement."
3.27 Under the terms of these provisions, the suspen sion of concessions or other obligations is
available where there is non-compliance by the expiry of the reasonable period of time ("[i]f the
Member concerned fails to bring the measure found to be inconsistent with a covered agreement into
compliance therewith or otherwise comply with the recommendations and rulings within the
reasonable period of time") and if no compensation agreement is reached within 20 days after the
expiry of the reasonable period of time. In that situation, the original complaining Member may
request authorization from the DSB to suspend c oncessions or other obligations owed to the
respondent under the covered agreements.
3.28 In these proceedings, it is undisputed that the St ep 2 measure found to be inconsistent by the
original panel was unchanged by the expiry of the r easonable period of time set by the original panel
on 1 July 2005. Brazil requested an authori zation to take countermeasures in relation to, inter alia,
the Step 2 payments, on 4 July 2005. The United States challenged Brazil's request and the matter
was therefore referred to arbitration.
3.29 At the time when Brazil requested an authoriza tion to take countermeasures, and when these
arbitral proceedings were first initiated, ther e was therefore a legal basis for seeking such
authorization, to the extent that the Step 2 paymen ts had been found by the original panel, as upheld
by the Appellate Body, to be inconsistent with the SCM Agreement, and it is undisputed that they had
not been withdrawn by the time Brazil made its request.

3.30 In accordance with their "Agreed Procedures" in this case, the parties subsequently jointly
requested the suspension of the arbitration proceed ings on 17 August 2005. Brazil then requested the
establishment of a compliance panel on 18 August 2006. The Step 2 measure had been repealed on
1 August 2006.
3.31 The compliance panel was requested to make findings in relation to "the three price-
contingent upland cotton subsidy programmes under the FSRI Act" (including Step 2) in the period
between 22 September 2005 and 31 July 2006. 64 The compliance panel however declined to make
such findings. Rather, it found that:
"[I]t is not appropriate to make a finding on Brazil's claim that the United States
failed to take any measures to remove the adverse effects or to withdraw the three
price-contingent upland cotton subsid y programmes under the FSRI Act of 2002
between 22 September 2005 and 31 July 2006 a nd that, as a consequence, measures
taken to comply with the adverse effects -related recommendations and rulings of the
DSB did not exist in this period."65
3.32 This finding was not appealed.
3.33 Against this background, the question before th e Arbitrator is whether Brazil is entitled, in
these proceedings, to seek countermeasures in relati on to past payments under the Step 2 programme
during essentially the same period, namely between the end of the implementation period and the
repeal of the measure.
(b) Whether Brazil is entitled to seek countermeasures in relation to past non-compliance with
rulings relating to Step 2 payments
3.34 The United States considers that, since the Step 2 Programme has been repealed, there is no
longer any legal basis for the authorization of count ermeasures with respect to past payments under
that programme.
3.35 Brazil has indicated, and confirmed repeatedly in the course of these proceedings, that it is
seeking "one-time" countermeasures in relation to th e Step 2 programme as it continued to apply in
the period immediately following the end of the implementation period and until its repeal, i.e. from
1 July 2005 to 31 July 2006. In Brazil's view, "the only relevant fact is whether by the end of the
implementation period, the United States had wit hdrawn the subsidies" and the fact that the
United States later repealed the programme is not relevant.
66
3.36 Brazil therefore considers that it is entitled to seek countermeasures with respect to a past
period of non-compliance from the end of the im plementation period to a past point in time,
regardless of subsequent developments, including the removal of the measure at issue.
3.37 As we have seen above, Articles 22.1 and 22.2 of the DSU foresee that the entitlement to seek
countermeasures (or the suspension of concessions or other obligations, as expressed in these
provisions) arises when compliance with the rulings and recommendations of the DSB has not taken

64 We note that Brazil's request in the context of the compliance panel proceedings was in relation to
the US measures under the FSRI Act of 2002 as "price -contingent" measures causing serious prejudice to the
interests of Brazil within the meaning of Article 5 of the SCM Agreement . In the original proceedings, the
Step 2 payments had given rise to rulings under that provision, as actionable subsidies, and also to rulings under
Article 3 of the SCM Agreement , as a prohibited subsidy. Brazil therefore apparently did not seek specific
rulings on Step 2 as a prohibited subsidy in the compliance proceedings.
65 Panel Report, US – Upland Cotton (Article 21.5 – Brazil), para. 9.71.

place by the end of the implementation period. Th is is therefore the first moment at which
countermeasures become available, as remedies. To that extent, we agree with Brazil that the absence
of implementation as of the end of the implementation period gives rise to an entitlement to seek
countermeasures. At the same time, these two provisions do not constitute the entirety of the
applicable legal requirements in respect of su spension of concessions or other obligations (or
countermeasures).
3.38 The suspension of concessions or other obligatio ns is a remedy of an exceptional character,
that allows the Member concerned to temporarily suspend its own obligations toward the responding
party under the covered agreements. This ex ceptional remedy is only available in limited
circumstances and for a limited time period. As observed by the Appellate Body on US – Continued
Suspension, "the authorization to suspend concessi ons is contingent and limited in time".
67 As also
observed by the Appellate Body, the authorizati on to suspend concessions is granted "following a
long process of multilateral dispute settlement in wh ich relevant adjudicative bodies, as well as the
DSB, render multilateral decisions at key stages of the process".68
3.39 In this dispute, following the initial proceedings, compliance proceedings took place, in which
Brazil requested the compliance panel to make a de termination concerning the United States' failure
to comply with the recommendations and rulings of the DSB in the period between 22 September
2005 and 31 July 2006, i.e. the period between the end of the implementation period under Article 7.9
and 7.10 of the SCM Agreement and the time of repeal of the Step 2 programme, prior to the panel's
establishment. However, as noted above, the panel d eclined to make such findings. In considering
Brazil's request, the panel determined in particular that:
"Where a panel makes a finding under Article 21.5 of the DSU that a Member has not
complied with the DSB recommendations and rulings in the original dispute, the
consequence of that finding is that the Me mber remains subject to obligations that
flow from the recommendation issued in the original proceeding and is thus required
to take steps to bring itself into complian ce with that recommendation. A finding by
the panel that the Member also failed to comply with the DSB recommendations and
rulings in the original proceeding at an earlier point in time would have no additional
operative value in terms of the nature of th e obligations of the Member in question.
On the other hand, if a panel under Article 21.5 finds that the Member has brought
itself into compliance with the DSB recomme ndations and rulings as of the time of
the establishment of the panel, such finding logically would supersede and render
irrelevant any finding that the Member was not in compliance with those
recommendations and rulings at an earlier point in time."
69
3.40 The compliance panel thus saw no useful purpose to findings that would address a past period
of non-compliance, when the measure has been repealed and the Member concerned has brought itself
into compliance as of the compliance panel's establis hment. In considering Brazil's request, the panel
also specifically addressed an argument by Brazil to th e effect that such findings were relevant to the
assessment of countermeasures in Article 7.9 and 7.10 of the SCM Agreement, and that it sought "a
multilateral basis for the DSB to authorize counterme asures against the United St ates for its failure to
take any implementation measures by the date required in Article 7.9 of the SCM Agreement".70 The
panel, however, determined that:

67 Appellate Body Report, US – Continued Suspension, para. 303.
68 Appellate Body Report, US – Continued Suspension, para. 317.
69 Panel Report, US – Upland Cotton (Article 21.5 – Brazil), para. 9.67.
70 Panel Report, US – Upland Cotton (Article 21.5 – Brazil), para. 9.68.

"[W]hile a finding ... may be required to provide 'a multilateral basis' for DSB
authorization of countermeasures under Article 7.9 of the SCM Agreement, it does not
logically follow that such a panel must make a finding of non-compliance as of the
end of the six-month period referred to in Article 7.9 of the SCM Agreement."
71
3.41 In light of these considerations, the panel f ound that it was "not appropriate" to make a
finding on Brazil's claim that the United States had fa iled to bring itself into compliance in relation to
the period of time between the expiry of the impl ementation period and the repeal of the measure,
prior to the panel's establishment.
3.42 There has therefore been no multilateral determin ation that the United States has failed to
comply with the recommendations and rulings of th e DSB in respect of Step 2, despite a specific
request by Brazil to make such findings precisely with respect to the same past period of time in
relation to which it now seeks to be authorized to take countermeasures. We consider that this is an
important aspect of the legal situation before us, which we must take into account in these
proceedings.
3.43 Furthermore, we note that, as Brazil has highli ghted consistently in these proceedings, the
purpose of countermeasures under Article 4.10 of the SCM Agreement (and of suspension of
concessions or other obligations under the DSU) is to induce compliance. As expressed by the
arbitrator on EC – Bananas III (US) (Article 22.6 – EC):
"[T]he authorization to suspend concessions or other obligations is a temporary
measure pending full implementation by the Members concerned. We agree with the
United States that this temporary nature indicates that it is the purpose of
countermeasures to induce compliance."
72 (emphasis added).
3.44 Article 22.8 of the DSU further provides that:
"The suspension of concessions or other obligations shall be temporary and shall only
be applied until such time as the measure f ound to be inconsiste nt with a covered
agreement has been removed, or the Member that must implement recommendations
or rulings provides a solution to the nullifi cation or impairment of benefits, or a
mutually satisfactory solution is reached."
3.45 Brazil argues that Article 22.8 is not applicable to the circumstances of this case, because it
concerns the application of countermeasures, not th eir authorization. We agree that this provision
addresses the time during which suspension of concessi ons or other obligations may be applied, once
authorized, rather than the conditions for the authorization per se . Nonetheless, this provision
usefully informs our analysis of the legal basis and purpose of countermeasures. It confirms to us that
the suspension of concessions or other obligations, as a remedy, is available where compliance has not
been achieved, and in order to induce such co mpliance. In other words, the entitlement to
countermeasures arises as of the end of the implementation period, if there has been no compliance by
that moment, and it continues to exist for so long as compliance has not been achieved in relation to
the measure at issue.
3.46 Article 22.1 reinforces the importance of full implementation of recommendations of the
DSB, in preference to compensation or the suspension of concessions or other obligations.
Article 22.1 provides that:

71 Panel Report, US – Upland Cotton (Article 21.5 – Brazil), para. 9.68.
72 Decision by the Arbitrators, EC – Bananas III (US) (Article 22.6 – EC), para. 6.3.

"Compensation and the suspension of concessi ons or other obligations are temporary
measures available in the event that the recommendations and rulings are not
implemented within a reasonable period of time. However, neither compensation nor
the suspension of concessions or other oblig ations is preferred to full implementation
of a recommendation to bring a measure into conformity with the covered
agreements. Compensation is voluntary and, if granted, shall be consistent with the
covered agreements."
3.47 Brazil considers, however, that countermeasur es can be authorized independently of the
existence of any current non-compliance, and that th e role of the Arbitrator is not to consider the
purpose of a determination that it is required to make based on its mandate under Article 4.10
and 4.11 of the SCM Agreement.73 In Brazil's view, "the Arbitrator's role is limited to a determination
of the amount of those countermeasures based on the fact that the United States had failed to
withdraw the Step 2 subsidy for a 13-month period".74
3.48 Brazil seeks a determination in relation to an amount of countermeasures covering "the 13-
month period when the United States was not in compliance" (emphasis added). 75 Brazil has also
made it very clear that it "is not seeking authorization for countermeasures covering the period since
the enactment of these new subsidies [i.e. the ne w subsidies Brazil alleges the United States has
introduced under the 2008 Farm Bill] in 2008".76
3.49 Brazil is therefore seeking an authorization to take countermeasures by reason of a past period
of non-compliance, on the basis of a past measure wh ich has been repealed, and not in relation to a
continuing period of non-compliance that would still be in existence today.
3.50 In light of our determinations above that c ountermeasures are a temporary remedy available
only where compliance has not been achieved and with a view to inducing such compliance, and that
full implementation is preferred to the suspensi on of concessions or other obligations, we do not
consider that there would be a legitimate basis to such countermeasures as requested by Brazil in
relation to past payments made until the repeal of Step 2, in the absence of a multilateral
determination of non-compliance in relation to such payments and independently of any continuing
situation of non-compliance.
(c) Whether the "new measures" under the 2008 Farm Bill should be considered
3.51 As observed above, Brazil has expressly not based its request for countermeasures in relation
to Step 2 payments on any current situation of non-compliance. Brazi l's request is based exclusively
on non-compliance in the period between 1 July 2005 and 30 July 2006.
3.52 Nonetheless, in response to the United States' ar guments that it had complied with the rulings
and recommendations of the DSB with respect to th e Step 2 programme, Brazil has indicated that the
United States has adopted "new prohibited subs idies" under the 2008 Farm Bill that "effectively
replace" Step 2.77 Brazil contends that since the enactment of the 2008 Farm Bill, the United States is
no longer in substantive compliance. Howeve r, Brazil does not seek from the Arbitrator a
determination of consistency of the 2008 Farm Bill per se with the SCM Agreement.

73 Brazil's responses to questions from the Arbitrator, question 109, paras. 200-201.
74 Brazil's responses to questions from the Arbitrator, question 109, para. 201.
75 Brazil's responses to questions from the Arbitrator, question 108, para. 196.
76 Brazil's responses to questions from the Arbitrator, question 108, para. 196.
77 Brazil identifies specifically two components of the 2008 Farm Bill, namely, "the additional market
loan subsidies" and "the Economic Adjustment Assistance to Users of Upland Cotton".

3.53 Brazil "does not request the Arbitrator [to] re ach any definitive conclusions as to whether
these subsidies are 'measures taken to comply' pursuant to Article 21.5 of the DSU or whether they are
prohibited subsidies within the meaning of Article 3.1(a), or (b) of the SCM Agreement." Brazil
considers that "such a finding would not be within the mandate of the Arbitrator". 78 Rather, Brazil
requests that the Arbitrator "take into account th e existence of the new US measures and the facts
surrounding their enactment when determining the amount of appropriate countermeasures".79
3.54 Brazil invites the Arbitrator to consider the ex istence of these measures in the context of its
assessment of whether the proposed countermeasures are "appropriate", as "circumstances and actions
of a subsidizing Member". 80 Specifically, Brazil invites the Arbitrator to take into account inter alia
"whether these new Step 2 replacement measures are c onsistent with an intent to eliminate subsidies
that are both prohibited and geared toward s sustaining significant price suppression". 81 Brazil
believes that "these are relevant questions to consider in determining the amount of one-time
countermeasures for the US lack of compliance".82
3.55 We understand Brazil to be requesting the Arbitrator to take into account the existence of the
measures adopted under the 2008 Farm Bill as a factual circumstance that would be relevant in the
assessment of the "appropriateness" of its proposed amount of countermeasures, and not as a legal
basis for these proposed countermeasur es. However, in light of our de termination above that there is
no basis for Brazil's request for countermeasures in relation to a past period of non-compliance, we
have no basis on which to proceed with a determ ination whether Brazil's proposed countermeasures
are "appropriate" within the meaning of Article 4.10 of the SCM Agreement. Brazil's request that we
take into account the 2008 Farm Bill in this determin ation is therefore without object and we need not
consider it further.
3.56 We take note of the parties' arguments in rela tion to the consistency or inconsistency of the
measures identified by Brazil contained in the 2008 Fa rm Bill. We also take note in this context of
the findings of the Appellate Body in US – Continued Suspension, as cited by Brazil, to the effect that
compliance with the DSB recommendations and rulings would not be considered to be achieved, if
the inconsistent measure is simply removed and subsequently replaced by another inconsistent
measure. Specifically, the Appellate Body has interpreted the words "the measure found to be
inconsistent with a covered agreem ent has been removed" in Article 22.8 of the DSU to mean that
"substantive compliance" must have been achieved in relation to the removal of that measure:
"The issue that arises in this dispute, however, is whether an inconsistent measure
should be considered 'removed' when it is replaced by a new implementing measure.
Taken literally, removal of the inconsis tent measure could mean that the
implementing Member has adopted an act th at formally repeals the inconsistent
measure and replaces it with another measure , regardless of the content of the new
measure and, in particular, of its comp liance with the DSB's recommendations and
rulings. Such a literal interpretation of th e first condition in Article 22.8, however,
does not comport with the other two conditions provided in that provision ...
Reading the first sentence of Article 22.8 as a whole, the 'removal' of 'the measure
found to be inconsistent' should be proper ly understood to require nothing less than
substantive removal of the inconsistent measure. Substantive removal may be
achieved by repealing the inconsistent measure. Where a WTO Member adopts an

78 Brazil's responses to questions from the Arbitrator, question 12, para. 141.
79 Brazil's responses to questions from the Arbitrator, question 111, para. 203.
80 Brazil's responses to questions from the Arbitrator, question 108, para. 197.
81 Brazil's responses to questions from the Arbitrator, question 108, para. 199.
82 Brazil's responses to questions from the Arbitrator, question 109, para. 199.

implementing measure that replaces the inconsistent measure, the implementing
measure must bring about substantive compli ance, that is, compliance with the DSB's
recommendations and rulings and consistency with the covered agreements ... ."83
3.57 The Arbitrator takes note of the fact that, in these proceedings, Brazil and the United States
agreed that the Step 2 subsidy was repealed as of 1 August 2006 and that Brazil is not seeking
countermeasures covering the period since the enactme nt of these new subsidies in 2008. Brazil has
indicated that it "does not do so because there h as not been a multilateral determination of the
WTO inconsistency of the new Step 2 replacement subsidies". 84 We also note that Brazil does not
seek such a determination from us.
3.58 In response to a question from the Arbitrator, Br azil observes that "it is Brazil's position that
the United States is no longer in substantive comp liance with the recommendations and rulings of the
DSB, even if it was in compliance for a brief 23-month period – from 1 August 2006 through
18 June 2008, after the repeal of the Step 2 subsidy".
85 Brazil considers that since the parties disagree
whether the United States is presently in substan tive compliance, "DSU Article 22.8 does not operate
to bar the suspension of concessions for the period 1 July 2005-31 July 2006".86
3.59 At the same time, Brazil "emphasizes that it is not seeking countermeasures in this proceeding
covering the period after enactment of the 2008 Fa rm Bill containing the replacement measures for
Step 2, or covering that 23-month period of tim e (1 August 2006 – 18 June 2008) in which the
United States was in compliance with the recomme ndations and rulings of the DSB. Rather, the
evidence and argument presented by Brazil is relevant to rebut the US assertions that there is no basis
for countermeasures covering the period of 1 July 2005-31 July 2006 because, allegedly, the
United States would presently be in "substantive compliance" as required by Article 22.8 of the
DSU.87
3.60 These statements by Brazil confirm that the only period of non-compliance in respect of
which Brazil seeks to apply countermeasures is the pe riod from 1 July 2005 to 31 July 2006, prior to
the repeal of Step 2. The legal situation arisi ng from the enactment of the new measures in the 2008
Farm Bill has no bearing on the question of whether Br azil is entitled to seek to retaliate in relation to
this past period of non-compliance, and Brazil invokes it only to rebut the argument that the
United States would presently be in compliance with the recommendations and rulings of the DSB.
However, our view that countermeasures cannot be au thorized in relation to this past period of non-
compliance does not depend, and is not based, on a finding that the United States is presently in
compliance with the recommendations and rulings of the DSB.
3.61 The question of whether or not the "new measures" under the 2008 Farm Bill represent
compliance with the recommendations of the DSB in re lation to the Step 2 measures is not before us.
We make no determinations with respect to the le gal status of the measures under the 2008 Farm Bill
identified by Brazil as Step 2 "replacement" measures.
88
3. Conclusion
3.62 In light of our determinations above, we conclude that there is no legal basis for Brazil to seek
countermeasures in relation to the absence of compliance by the United States with the

83 Appellate Body Report, US – Continued Suspension, paras. 304-305.
84 Brazil's responses to questions from the Arbitrator, question 108, para. 196.
85 Brazil's responses to questions from the Arbitrator, question 10, para. 135.
86 Brazil's responses to questions from the Arbitrator, question 10, para. 136.
87 Brazil's responses to questions from the Arbitrator, question 10, para. 136.
88 The Arbitrator does not express any opinion about the ability of an arbitrator to rule on questions of
compliance.

recommendations and rulings of the DSB during the period from 1 July 2005 and 30 July 2006. We
make no determination as to the c onsistency or inconsistency of th e "new measures" applied by the
United States under the 2008 Farm Bill and identifie d by Brazil as "replaceme nt" measures with the
SCM Agreement, and note that Brazil does not seek an aut horization to take countermeasures against
those "replacement" measures.
B. ASSESSMENT OF BRAZIL'S REQUESTED AMOUNT OF COUNTERMEASURES IN RELATION TO
STEP 2 PAYMENTS
3.63 As noted above, Brazil seeks one-time counterme asures in relation to the Step 2 programme,
in the amount of the disbursements made by the United States in Marketing Year ("MY") 2005, which
is US$350 million in total.89
3.64 In light of our conclusion in paragraph 3.62 abov e that there is no legal basis for this request,
we need not consider further the countermeasures requested by Brazil in relation to Step 2 payments.
IV. BRAZIL'S PROPOSED LEVEL OF COUNTERMEASURES IN RELATION TO
GSM 102
A. BRAZIL'S REQUEST
4.1 In its request pursuant to Article 4.10 of the SCM Agreement and Article 22.2 of the DSU,
Brazil seeks an authorization to take appropriate co untermeasures in an amount that corresponds to
"the total of exporter applications received unde r GSM 102, 103, and SCGP for the most recent
concluded fiscal year".90 In that request, Brazil estimated the value of this amount, together with the
amount for Step 2 payment, at a total of US$3 billion, using FY 2004 as reference.91
4.2 In its Methodology Paper, Brazil advanced a different methodology for the amount of
appropriate countermeasures to be determined, name ly "a methodology to calculate countermeasures
proportionate to the annual amount of prohibited GSM 102 export credit guarantees ("ECGs") issued
for export transactions involving unscheduled prod ucts, rice, pig meat and poultry meat. Applying
this methodology to data for FY 2006 results in countermeasures in the amount of
US$1.294 billion".
92
4.3 In the course of the proceedings, the United St ates asked Brazil to clarify whether it was
requesting a fixed amount of annual countermeasures for prohibited subsidies, or a variable amount,
and, in the event that Brazil was requesting a variable amount, in what manner the amount would
vary. Brazil responded, as stated in an earlier res ponse to a question by the Arbitrator, that it had
"proposed a methodology to calculate IRS and add itionality, 'in light of' relevant GSM 102 data
generated and maintained on a fiscal year basis" . Brazil referred to the following response it had
made to a question from the Arbitrator: "By virtue of the United States' failure to withdraw prohibited
GSM 102 export subsidies, Brazil has proposed a formula for the determination of appropriate
countermeasures. In this response, therefore, Brazil explains its choice of FY 2006 data as a reference
to illustrate the application of its formula."93
4.4 The United States took note of Brazil's response, and stated that "arbitrators have usually
awarded a fixed annual amount for countermeasures, but some arbitrators have used a formula", and

90 WT/DS267/21.
91 WT/DS267/21, footnote 1.
93 Brazil's responses to questions from the Arbitrator , question 3, cited in its response to question 1
from the United States.

that where they have used formula, the arbitrators have carefully explained in their awards the content
of that formula, which would be necessary to permit both parties and the DSB to be aware of the
amount the arbitrators deemed justified under that relevant standard. 94 The United States therefore
submitted that, for the sake of transparency, and to en sure that the countermeas ures in each year will
be "appropriate" and "not disproportionate", the Arbitrator's award should "clearly set out any formula
to be used in calculating countermeasures and the so urce of any information for input variables in the
formula each year". 95 The United States also requested that if the Arbitrator does not authorize a
formula approach, this should also be made clear.
4.5 The Arbitrator notes that Brazil's responses indicat e that it is seeking an authorization that
would be variable on an annual basis, depending on "the total of exporter applications received under
GSM 102 ... for the most recent concluded fiscal year". The Arbitrator therefore understands Brazil's
request to be for the Arbitrator to endorse not only the specific amount of countermeasures as it has
calculated it with reference to FY 2006, but also the formula through which this amount is calculated,
such that it could be applied to the "most r ecent fiscal year" elapsed at the time of taking
countermeasures, in order to adjust on an annual b asis the amount of countermeasures to be applied.
The Arbitrator also notes that the United States does not dispute that it would be permissible for the
level of appropriate countermeasures to be determined through a formula, provided that this formula
was sufficiently well defined so as to make it applicab le in a transparent and predictable manner. The
Arbitrator will therefore take these considerations into account in its determinations.
B. M
AIN ARGUMENTS OF THE PARTIES
4.6 Brazil's methodology for the calculation of a ppropriate countermeasures with respect to
GSM 102 payments, as explained in its Methodology Paper, encompasses two elements: (i) the
interest rate discounts secured by creditworthy and non-creditworthy foreign obligors on credits
backed by GSM 102 guarantees and (ii) the estimated additional export sales obtained by
US exporters as a result of these discounts.
96 Brazil refers to the interest rate discounts as the "interest
rate subsidy" and to the additional export sales obtained by creditworthy and non-creditworthy foreign
obligors as "marginal additionality" and "full additionality" respectively.
4.7 Brazil applies this methodology to its estimate of GSM 102 export credit guarantees in
FY 2006 and arrives at an annual countermeasure of US$1.155 billion. This amount can be
subdivided into (i) interest rate subsidy amounti ng to US$237.4 million, (ii) marginal additionality
amounting to US$62.3 million, and (iii) full additionality amounting to US$855 million.
4.8 Brazil explains that "the amount of the subsid y must be based on the legal standard that
values the subsidy in full, which incl udes all "benefits" conferred thereby".97 Brazil indicated that the
legal benefit standard was that provided for under Article 1.1(b) of the SCM Agreement.98
4.9 The United States observes that Article 4.10 of the SCM Agreement provides for
countermeasures that are " 'appropriate' to th e prohibited subsidy finding of the panel". 99 In the view
of the United States, "appropriate connotes th e relationship between countermeasures and the
particular circumstances of a given case". 100 For the United States, "the appropriate countermeasures
are those that have a concrete basis in the specifi c findings adopted by the DSB" and "in this case, the

94 US comments on Brazil's responses to questions from the United States, question 1, para. 2.
95 US comments on Brazil's responses to questions from the United States, question 1, para. 4.
99 US written submission, para. 24.
100 US written submission, para. 24.

adopted findings support only Brazil's theory that th ere was a net cost to the US Government. Both
the original panel and the compliance panel specifica lly refused to reach Brazi l's alternative theory
that there was a subsidy under Articles 1.1 and 3.1( a), namely a financial contribution that provided a
benefit based on export performance. As such, th e appropriate countermeasures are those that are
based on the net cost to the US Government. Any other countermeasures do not have their foundation
in the specific circumstances of this case."101
4.10 The United States further explains that previous ar bitrations have determined that, in the case
of prohibited export subsidies, the amount of th e subsidy is a proper basis upon which appropriate
countermeasures may be calculated, and that, in this particular case, the appropriate methodology is to
use the amount of the subsidy as reflected in net cost to government.102
4.11 The United States thus considers that the amount of countermeasures must be equal to the net
cost to the US Government of the GSM 102 guarantee programme, because the DSB's
recommendations and rulings are based only on fi ndings that the United States conferred export
subsidies via GSM 102 because the programme opera ted at a net cost to the US Government. 103 It
offers to calculate the extent of any prohibite d subsidy based on the net cost of the GSM 102
guarantees to the US Government. In addition, the United States considers that "a reduction must be
made", as "Brazil may only take such countermeasu res with respect to the impact of the alleged
subsidy on itself. If Brazil were permitted to take countermeasures for the entire amount of the
subsidy, it would create a conflict for other Memb ers who may have an interest in the GSM 102
program".104 The United States also claims that Brazil's methodology is based on "numerous and
incorrect assumptions" that result in a figure higher than is appropriate under Article 4.10 of the DSU.
4.12 Brazil responds that the cost-to-government sta ndard used by the compliance panel in the
underlying proceedings represented the lowest comm on denominator that the parties agreed would
establish the existence of a prohibited export subsidy. 105 In contrast, Brazil argues, an assessment of
"appropriate" countermeasures based on the amount of the subsidy may not be based on a legal
standard that constitutes this lowest common denominat or. Brazil states that in this arbitration, the
Arbitrator must determine the amount of the US export subsidies, and although the existence of a
subsidy may be established using any relevant lega l standard, the amount of the subsidy must be
based on the legal standard that values not the lowest common denominator, but the subsidy in full.106
4.13 Brazil further explains that the US position that "appropriate countermeasures" must be
assessed by reference to a breakeven cost-to-gove rnment benchmark under item (j) is premised on
partial implementation, through par tial withdrawal of the export subs idies, and thus is based on an
incorrect interpretation of the term "withdraw". 107 In Brazil's view, the US position is also premised
on an incorrect interpretation of the term "appropriate countermeasures". Brazil, with reference to the
Appellate Body's rulings in the US – Continued Suspension and Canada – Continued Suspension
cases, considers that countermeasures would not serve as an "appropriate" alternative to full
implementation – nor encourage compliance – if they were based on a legal benchmark that involved
less-than-full implementation.
108 Brazil argues this because removal of the cost to the government of
running the GSM 102 programme would not result in withdrawal of the subsidy constituted by the
programme.

101 US written submission, para. 25.
102 US written submission, para. 28.
103 US written submission, para. 16.
104 US written submission, para. 107.

C. MANDATE OF THE ARBITRATOR AND BURDEN OF PROOF
4.14 We recall that Article 4.10 of the SCM Agreement provides as follows:
"In the event the recommendation of the DSB is not followed within the time-period
specified by the panel, which shall commence from the date of adoption of the panel's
report or the Appellate Body's report, the DSB shall grant authorization to the
complaining Member to take appropriate 9 countermeasures, unless the DSB decides
by consensus to reject the request."
(original footnote ) 9 This expression is not meant to allow countermeasures that are
disproportionate in light of the fact that the subsidies dealt with under these provisions are
prohibited.
4.15 In addition, Article 4.11 of the SCM Agreement defines our mandate as follows:
"In the event a party to the dispute requests arbitration under paragraph 6 of
Article 22 of the Dispute Settlement Unde rstanding ('DSU'), the arbitrator shall
determine whether the countermeasures are appropriate.10"
(original footnote ) 10 This expression is not meant to allow countermeasures that are
disproportionate in light of the fact that the subsidies dealt with under these provisions are
prohibited.
4.16 As noted by the arbitrator on US – FSC (Article 22.6 – US) , "these two provisions
complement each other, and the arbitrator's ma ndate in relation to countermeasures concerning
prohibited subsidies under Article 4 of the SCM Agreement is defined, quite lo gically, with reference
to the notion embodied in the underlying provision in Article 4.10". Accordingly, "the expression
"appropriate countermeasures" defines what measur es can be authorized in case of non-compliance,
and our mandate requires us to review whether, in proposing certain measures to take in application of
that provision, the prevailing Member has respected th e parameters of what is permissible under that
provision".
109
4.17 In this case, we must therefore determine wh ether the countermeasures proposed by Brazil in
respect of the GSM 102 payments are "appropriate" within the meaning of Articles 4.10 and 4.11 of
the SCM Agreement. At this stage of our analysis, we c onsider this question exclusively from the
perspective of the proposed level of countermeasures. We will consider the question of the form in
which Brazil proposes to take these countermeasures in Section V below.
4.18 The United States considers that Brazil's pr oposed countermeasures are not "appropriate"
because the terms "appropriate countermeasures" in Article 4.10 of the SCM Agreement require the
countermeasures to be calculated, in the circumst ances of this case, on the basis of the cost to
government of the subsidies at issue, and not on the "benefits", as defined by Brazil in the context of
these proceedings. Brazil considers that this US position rests on an improper interpretation of the
terms "appropriate counterme asures". We must therefore in the fi rst instance clarify the meaning of
the terms "appropriate countermeasure s" under Article 4.10 and 4.11 of the SCM Agreement, in order
to assess whether the United States is correct in argu ing that the approach proposed by Brazil in this
case is inconsistent with the terms of these provisions. The United States has also challenged the
details of the methodology and calculations th rough which Brazil arrives at its proposed
countermeasures.

109 Decision of the Arbitrator, US – FSC (Article 22.6 – US), para. 4.3.

4.19 The United States agrees that, as the party cha llenging the proposed countermeasures, it bears
the burden of demonstrating that the countermeasur es proposed by Brazil are not "appropriate" within
the meaning of Article 4.10 of the SCM Agreement.110
4.20 The United States observes, however, that Braz il is obligated to provide the evidence to
support the facts it advances in support of its argu ments and to provide the relevant facts for the
Arbitrator to fulfil its mandate.111
4.21 We note that the arbitrator on Brazil – Aircraft (Article 22.6 – Brazil) found that the party
objecting to the proposed countermeasure bears the burden to establish a prima facie case or
presumption that the countermeasures are not "appr opriate" within the meaning of Article 4.11 and
that it is then up to the party proposing the countermeasures to rebut that case or presumption.112 This
allocation of the burden of proof has been confirme d in subsequent proceedings under Article 22.6 of
the DSU and Article 4.10 of the SCM Agreement.113
4.22 We therefore find that the United States b ears the initial burden of establishing the
countermeasures are not "appropriate". If that initia l burden is discharged, Brazil will then have an
opportunity of rebutting the conclusion that the countermeasures are not appropriate.
4.23 This allocation of burden of proof does not a lleviate the burden on each party to establish the
facts that it alleges during the proceedings. As observed by the Arbitrator in US – FSC (Article 22.6 –
US), "it is generally for each party asserting a fact, whether complainant or respondent, to provide
proof thereof".114 Accordingly, it is also for Brazil to pr ovide evidence in support of the facts that it
advances. The Arbitrator will consider all the evidence and arguments provided by both parties
(United States and Brazil) to determine whether th e proposed countermeasures are "appropriate", in
line with the principles we have set out concerning burden, and the evidence.
4.24 The United States further considers that if it meets its burden of proof, and the
countermeasures as proposed by Brazil are found not to be appropriate, the Arbitrator is then not
limited to agreeing or disagreeing with an approach or a calculation that has been submitted by either
of the parties. Rather, the Arbitrator's task is to determine, in the case of prohibited subsidies,
"appropriate countermeasures". 115 Brazil also observes that, if the United States succeeds in
establishing that Brazil's formula does not meet the applicable legal standard, the Arbitrator can
consider adjustments to Brazil's formula, or if none are possible, alternative formulae. 116 Brazil
further notes that, while the Arbitrator enjoys flex ibility to make adjustments to Brazil's formula,
Brazil expects that in the interest of due process, the Arbitrator would offer the parties the opportunity
to comment on any material departures it wishes to explore.117
4.25 We agree that, in the event that we find that Brazil's proposed countermeasures are not
"appropriate" within the meaning of Article 4.10 of the SCM Agreement, we would be required also to
determine what would constitute "a ppropriate" countermeasures. This would enable the complaining
party to seek an authorization consis tent with our decision, as foreseen in Article 22.7 of the DSU. In

110 US responses to questions from the Arbitrator, question 41, para. 49.
111 US responses to questions from the Arbitrator, question 41, para. 50.
112 See Decision by the Arbitrators, Brazil – Aircraft (Article 22.6 – Brazil), paras. 2.8-2.9.
113 See Decisions by the Arbitrator, US – FSC (Article 22.6 – US) , para. 2.8 and Canada – Aircraft
Credits and Guarantees, para. 2.5.
114 Decision by the Arbitrator, US – FSC (Article 22.6 – US), para. 2.11.
115 US responses to questions from the Arbitrator, question 70, para. 3.
116 Brazil's responses to questions from the Arbitrator, question 70, para. 6.
117 Brazil's responses to questions from the Arbitrator, question 70, para. 8. See also the US comments

order to fulfil this part of our mandate, we may be required to adopt an approach or methodology that
differs from those proposed by the parties.
4.26 We now turn to a consideration of the terms of the applicable legal standard for the review of
Brazil's countermeasures, before considering Brazil's proposed countermeasures in light of these
determinations.
D. T
HE NOTION OF "APPROPRIATE COUNTERMEASURES " UNDER ARTICLE 4.10 OF THE
SCM AGREEMENT
4.27 We first turn to the interpretation of the term s "appropriate countermeasures", as contained in
Articles 4.10 and 4.11 of the SCM Agreement.118
4.28 As noted above, Article 4.10 of the SCM Agreement provides, with respect to prohibited
subsidies, that:
"[T]he DSB shall grant authorization to th e complaining Member to take appropriate 9
countermeasures ..."
(original footnote ) 9 This expression is not meant to allow countermeasures that are
disproportionate in light of the fact that the subsidies dealt with under these provisions are
prohibited.
4.29 The same terms are reflected in Article 4.11, which defines the mandate of the Arbitrator
under Article 22.6 of the DSU in relation to re quests for countermeasures concerning prohibited
subsidies.
4.30 Article 4.10 of the SCM Agreement is a "special or additional rule" identified in Appendix 2
of the DSU. Article 1.2 of the DSU provides that "t o the extent that there is a difference between the
rules and procedures of this Understanding and the special or additional rules and procedures set forth
in Appendix 2, the special or additional rules and procedures in Appendix 2 shall prevail".
4.31 The terms of Article 4.10 of the SCM Agreement, as a "special or additional rule and
procedure", should be interpreted on their own terms. It is clear th at the terms may embody different
rules, which would prevail in case of conflict. Nonetheless, Article 22.6 of the DSU remains relevant,
as the general legal basis under which the proceedi ngs are conducted. Indeed, Article 4.11 of the
SCM Agreement refers expressly to Article 22.6 of the DSU as the legal basis for arbitral proceedings
concerning countermeasures in relation to prohibited subsidies.
4.32 We note that the terms of Article 4.10 of the SCM Agreement have been interpreted in three
previous cases, and we will refer to these rulings as appropriate. Nonetheless, given the centrality of
this question to our analysis, and in light also of the fact that the parties' different views as to Brazil's
proposed countermeasures stem in part from diverg ing interpretations of the terms "appropriate
countermeasures", we find it necessary to clarify from the outset our interpretation of these terms.
4.33 The terms of Article 4.10 of the SCM Agreement, like other provisions of the WTO covered
agreements, should be interpreted in accordance with the customary rules of interpretation of public
international law. In particular, as reflected in Article 31.1 of the Vienna Convention on the Law of
Treaties (the "Vienna Convention"), "a treaty shall be interpreted in good faith in accordance with the
ordinary meaning to be given to the terms of the tr eaty in their context and in the light of its object

118 Throughout this Section of the Decision, re ference is made to the terms "appropriate
countermeasures" as containe d in Article 4.10 of the SCM Agreement. It is understood that these terms are
assumed to have the same meaning also in Article 4.11 of the SCM Agreement.

and purpose". For the sake of clarity, it is useful to start the analysis with the terms of the provision
first, and to then turn to its context, object and purpose.
1. The terms "appropriate countermeasures" and the terms of footnote 9
(a) "countermeasures"
4.34 We note at the outset that the term "counterm easures" is used to designate retaliatory
measures in the WTO Agreement only in the SCM Agreement. This contrasts with the terms of
Article 22 of the DSU, which refers to the "sus pension of concessions or other obligations".
However, it is not argued by either party in these proceedings that the term "countermeasures" would
designate, in the SCM Agreement, anything other than a temporary suspension of certain obligations,
and this is what we understand the term to refer to.
4.35 The prefix "counter-" can be defined as meaning "against, in return". 119 The Oxford English
Dictionary further cites the term "counter-measure" as an illustration of a situation in which this prefix
is used to indicate something that is "[d]one, directed, or acting against, in opposition to, as a
rejoinder or reply to another thing of the same kind already made or in existence". Another dictionary
defines the term "countermeasure" as an "action or device designed to negate or offset another".120
4.36 Brazil draws attention to the fact that the te rm "countermeasures" refers to measures taken
"against" something, to "counteract" something. In the context of Article 4.10 of the SCM Agreement,
Brazil notes, the term refers to "retaliatory action that counters a respondent's failure to " withdraw" a
"prohibited" subsidy".121 The United States appears to agree with this basic premise.122 In light of the
definitions noted above, we also agree that "count ermeasures" are, in essence, measures taken to
"counteract" something, and specifically, in the context of Article 4.10 of the SCM Agreement,
measures taken to act against, or in response to, a failure to withdraw a prohibited subsidy within the
required time period.
4.37 In Brazil's view, the dictionary meanings of this term further indicate that it refers to
retaliatory action that goes "beyond the mere rebalancing of trade interests". 123 The United States, on
the contrary, highlights that definitions of the term "counter" include notio ns of balance and of
duplication, so that an appropriate countermeasu re would be one that would "balance out the
inconsistency or duplicate the loss of concessions resulting from the breach".124
4.38 We are not convinced that the use of the te rm "countermeasures" necessarily connotes, in and
of itself, an intention to refer to retaliatory ac tion that "goes beyond the mere rebalancing of trade
interests"125, as Brazil suggests. As noted above, the term indicates that the action is taken in response
to another, in order to "counter" it. This does not necessarily connote, in our view, an intention to "go
beyond" a rebalancing of trade interests. Indeed, we are not convinced that the dictionary meanings
of the term, in and of themselves, provi de any compelling guidance as to the exact level of
countermeasures that may be permissible under Article 4.10 of the SCM Agreement. We note that the
term "countermeasures" is also used in Article 7.9 of the SCM Agreement, where the permissible level
of countermeasures is defined with reference to the adverse effects of the violating measure.

119 Oxford English Dictionary, at www.oed.com.
120 Merriam Webster Dictionary, at www.merriamwebster.com.
122 See US responses to questions from the Arbitrator, question 43, para. 56: "the "countermeasures"
are to "counter the inconsistency with the SCM Agreement."
124 US responses to questions from the Arbitrator, question 43, para. 56.

4.39 Brazil also refers to the use of the term "c ountermeasures" in public international law, as
reflected in the Draft Articles on State Responsibility of the International Law Commission (ILC)126,
as an "additional interpretative consideration", to highlight that, "under the ILC Articles,
countermeasures are taken with the goal of encouragin g – 'inducing' – the responsible State to comply
with its obligations, without making it impossible to comply, and without punishing the
respondent".
127
4.40 We note that the term "countermeasures" is the general term used by the ILC in the context of
its Draft Articles on State Responsibility , to designate temporary measures that injured States may
take in response to breaches of obligations under international law.128
4.41 We agree that this term, as understood in public international law, may usefully inform our
understanding of the same term, as used in the SCM Agreement.129 Indeed, we find that the term
"countermeasures", in the SCM Agreement, describes measures that are in the nature of
countermeasures as defined in the ILC's Draft Articles on State Responsibility.
4.42 At this stage of our analysis, we therefore find that the term "countermeasures" essentially
characterizes the nature of the measures to be authorized, i.e. temporary measures that would
otherwise be contrary to obligations under the WT O Agreement and that are taken in response to a
breach of an obligation under the SCM Agreement. This is also consistent with the meaning of this
term in public international law as reflected in the ILC Articles on State Responsibility.
4.43 As to the permissible level of countermeasures that may be authorized under Article 4.10 of
the SCM Agreement, this is, in our view, primarily define d through the term "appropriate" and the
wording of footnote 9.
(b) "appropriate"
4.44 Article 4.10 of the SCM Agreement requires the countermeasures th at may be authorized in
response to the absence of timely withdrawal of a prohi bited export subsidy to be "appropriate". This
term is in turn informed by footnote 9, which clarifies that "this expression ['appropriate
countermeasures'] is not intended to allow countermeasu res that would be disproportionate in light of

126 The International Law Commission was established by the UN General Assembly for the promotion
of the progressive development of international law and its codification. The Commission adopted in 2001 a set
of draft articles on responsibility of States for interna tionally wrongful acts consistin g of 59 articles as well as
commentaries thereto. The General Assembly, in re solution 56/83 of 12 December 2001, as recommended by
the Commission, took note of the articles on responsibility of States for internationally wrongful acts, the text of
which was annexed to the resolution, commended them to the attention of Governments without prejudice to the
question of their future adoption or other appropriate action. See http://www.un.org/law/ilc/.
128 See http://untreaty.un.org/ilc/texts/instruments/english/commentaries/9_6_2001.pdf.
129 We also note however that, by their own terms, the Articles of the ILC on State Responsibility do
not purport to prevail over any specific provisions relating to the areas it covers that would be contained in
specific legal instruments. We note in particular the following Commentary of the ILC:

In common with other chapters of these artic les, the provisions on countermeasures are
residual and may be excluded or modified by a special rule to the contrary (see article 55).
Thus, a treaty provision precluding the suspension of performance of an obligation under any
circumstances will exclude countermeasures with respect to the performance of the obligation.
Likewise, a regime for dispute resolution to which States must resort in the event of a dispute,
especially if (as with the WTO dispute settlemen t system) it requires an authorization to take
measures in the nature of countermeasures in response to a proven breach.

the fact that the subsidies at issue are prohibited". We will first consider the term "appropriate",
before turning to how it is informed by the terms of footnote 9.
4.45 Dictionary definitions of the adjective "appropria te" include: "Specially fitted or suitable,
proper"130 and "especially suitable or compatible: fitting".131 "Fitting", in turn, can be defined as "of a
kind appropriate to the situation". The terms "fit, suitable, meet, proper, appropriate, fitting, apt,
happy, felicitous" are further identified as synonyms that mean "right with respect to some end, need,
use, or circumstance".132
4.46 These definitions suggest that the adjective "a ppropriate" conveys the notion of something
being "adapted" or "suited" to the particular situa tion at hand. This very general indication does not
provide explicit guidance as to the exact parameters that legitimately may be taken into account in
assessing the "appropriateness" of countermeasures in the context of Article 4.10 of the
SCM Agreement. Rather, the term suggests that countermeasures should be "adapted" to the particular
circumstances, and thus that there may be a de gree of legitimate variability in what may be
"appropriate", depending on the circumstances of the case. To that extent, we agree with the
United States that the term "appropriate" "connotes the close relationship be tween countermeasures
and the particular circumstances of a particular case".
133
4.47 Brazil, for its part, likens the term "appropriate" to the term "reasonable", in that it "similarly
involves 'a degree of flexibility'", and that "the word requires the treaty interpreter to consider all of
the circumstances of a particular case in assessing whether the respondent has demonstrated that
proposed countermeasures are inappropriate". 134 Leaving aside for now the question of the burden to
be discharged by the responding Member in arbitral proceedings, we agree that the term "appropriate"
suggests that "all of the circumstances of a part icular case" should be taken into account in assessing
the "appropriateness" of proposed countermeasures, a nd that it also suggests a degree of flexibility in
what might be considered "appropriate" in a given case.
4.48 With these general considerations in mind, we must now determine what types of
considerations may be relevant in assessing what might constitute "appropriate" countermeasures in
the circumstances of a particular case, as inferred from the terms as used in Article 4.10 of the
SCM Agreement.
4.49 The United States argues that the appropriate count ermeasures are those that have "a concrete
basis in the specific findings adopted by the DSB". In this case, in the United States' view, the
appropriate countermeasures are those based on the net cost of government and "any other
countermeasures do not have their foundation in the specific circumstances of this case". 135 Brazil
considers that "in the absence of a prescribed standa rd, what is "appropriate" must be defined with
respect to the situation envisaged in Article 4 – namely the non-compliant Member's failure to
withdraw a prohibited subsidy". 136 For Brazil, "in assessing whet her proposed countermeasures are
"appropriate", the treaty interpreter must take into account that they involve retaliatory action against,
and in opposition to, the responding Member's failure to withdraw an act expressly characterized as
per se prohibited".137

130 "appropriate, ppl. a. and n.", Oxford English Dictionary, at www.oed.com, definition 5.
131 www.merriam-webster.com.
132 www.merriam-webster.com.
133 US written submission, para. 24.
135 US written submission, para. 25.

4.50 Brazil further argues that the appropriateness of the countermeasures must also be considered
in light of the particular characteristics of the su bsidy to be withdrawn: its prohibited nature, its
amount, its terms and conditions of grant, its beneficial impact on the respondent's exports, and
whether it is still being granted despite th e DSB's recommendations and rulings requiring
withdrawal.138 Finally, Brazil considers that the circ umstances of the dispute also include the
respective situations of the prevailing and the non-compliant Member: 139 "Countermeasures are
economic measures taken by one Member in response to another Member's failure to implement the
DSB's recommendations and rulings. The individual and the relative situations of the two Members
are, therefore, pertinent in assessing whether countermeasures are fitting and suitable in the
circumstances."140
4.51 We agree that a number of the circumstances identified above may, a priori, be pertinent to
an assessment of whether proposed countermeasures are "appropriate". However, we must consider
further how the circumstances of a given case should be taken into account. For this purpose, we find
it useful to consider the context in which countermeasures arise.
4.52 The imposition of countermeasures provides temporary redress to the successful complaining
Member for the situation arising from the continued violation of the covered agreements, pending full
implementation of recommendations a nd rulings of the DSB. As observed by the Appellate Body in
US – Continued Suspension, "the suspension of concession[s] is the last resort available to a Member
who has successfully challenged the consistency with the covered agreements of another Member's
measure".141 This remedy is "contingent and limited in time".142
4.53 The essence of the task of determining what might constitute "appropr iate countermeasures"
under Article 4.10 of the SCM Agreement is to seek to quantify the countermeasures that a
complaining Member is entitled to take in response to the continued existence of a prohibited subsidy.
This response will take the form of a suspension of concessions or other obligations otherwise owed
to the violating Member under the covered agreements. In other words, the complaining Member will
be authorized to take certain measures adversel y affecting the trade opportunities of the violating
Member, in response to an illegal measure taken by that Member, which has adversely affected its
own trade opportunities.
4.54 These circumstances define importantly, in our view , the elements to be taken into account in
determining what may constitute "a ppropriate countermeasures" in a given case. This question must
necessarily be understood with reference to the par ticular dispute at issue. The question is what
countermeasures will be "appropriate" for that complainant in the specific dispute at hand. This
implies that it is appropriate to take into account not only the existence of the violation in itself, but
also the specific circumstances that arise from the breach for the co mplaining party seeking to apply
countermeasures. This is consistent with the or dinary meaning of the term "appropriate", which
implies a degree of variability in the level of count ermeasures according to th e circumstances, rather
than a fixed quantum.
4.55 As the arbitrator on US – FSC (Article 22.6 – US) noted, the existence of a prohibited export
subsidy granted and maintained inconsistently with the SCM Agreement "has, in itself, the effect of

139 Brazil explained later in response to a question from the Arbitrator that it had not taken these
specific aspects into account in its assessment of its proposed level of countermeasures, but rather in its
determination of the form in which it would seek to re taliate. See Brazil's responses to Questions from the
Arbitrator, Question 16(b), para. 165.
141 Appellate Body Report, US – Continued Suspension, para. 317.
142 Appellate Body Report, US – Continued Suspension, para. 303.

upsetting the rights and obligations between the par ties, irrespective of what might be, as a matter of
fact, the actual trade effects on the complainant".143
4.56 In addition, the continued maintenance of a prohibited export subsidy is likely to have a trade-
distorting impact. It is in the very nature of an export subsidy that it is likely to distort trade in favour
of the exporters of the subsidizing Member. Although such trade-distorting effects need not be
established in order to find a violation of the relevant provisions of the SCM Agreement, it is precisely
the high likelihood of such trade-distorting effects arising from the granting of export subsidies that
explains their prohibition under the SCM Agreement.
4.57 The actual economic consequences of the breach may vary significantly from case to case. In
particular, the trade-distorting impact of a prohibited export subsidy may vary depending on the
nature and design of the subsidy as well as various other economic factors. The trade of other WTO
Members can be affected, and usually is affected, to varying degrees as a result of the granting and
maintenance of illegal subsidies. The extent to wh ich the complaining party is adversely affected by
the trade-distorting impact arising from the illegal subsidy may accordingly vary from case to case.
4.58 The trade-distorting impact of the prohibited subsidy at issue on the complaining Member
effectively reflects the manner in which the economi c position of the complaining party to the dispute
has been disrupted and harmed by the illegal measure. This provides a measure of the extent to which
the balance of rights and obligations between th e parties has been upset by the granting and
maintenance of the prohibited subsidy at issue. This is necessarily, in our view, a central
consideration in determining what may constitut e "appropriate countermeasures" to be applied
between such two parties.
4.59 We also note that this interpretation also tak es into account the "partic ular characteristics of
the prohibited subsidy that should have been w ithdrawn, including terms and conditions", which
Brazil argues should be taken into account.
144 The trade effects that arise from the subsidy directly
reflect the manner in which the subsidy operates on the market, and therefore its particular
characteristics.
4.60 We further note that an interpretation that would not take due account of the extent to which
the complaining Member has been affected by the illegal measure would lead to the result that
countermeasures could in principle be identical, irre spective of whether the Member at issue has been
significantly affected or not at all by the measure at issue. This would not be consistent, in our view,
with the ordinary meaning of the term "appropriate ", which implies a degree of variability according
to the circumstances. In our view, this would not be respected, if a situation where the complaining
Member suffers significant trade-distorting impact as a result of the measure were a priori to be
considered to be identical to a situation where it suffers no trade-distorting impact.
4.61 Brazil emphasizes the fact that the prohibition of export subsidies is a per se prohibition that
does not require a demonstration of adverse effects.
145 It considers that it is the prohibited nature of
the subsidy rather than the harm to the complainant that is the focus of "appropriate" countermeasures
under Article 4.10 of the SCM agreement.146
4.62 In our view, the fact that it is not necessary to determine the extent to which the complaining
Member is adversely affected by a subsidy in orde r to find that such subsidy is prohibited does not

143 See Decision by the Arbitrator, US – FSC (Article 22.6 – US), para. 5.23.
144 Brazil's responses to questions from the Arbitrator, question 16(a), para. 164.
145 See Brazil's written submission, para. 40.
146 See Brazil's responses to questions from the Arbitrator, question 15, para. 158.

imply that this question is not relevant to a dete rmination of the level of countermeasures that would
be "appropriate" for that complaining Member to apply in the circumstances of the case.
4.63 The initiation of dispute settlement proceedings in relation to a prohibited subsidy is not
conditioned on the demonstration, by the complainin g Member, of adverse trade effects (on itself or
on other Members). Under the terms of Article 4 of the SCM Agreement, "whenever a Member has
reason to believe that a prohibited subsidy is bei ng granted or maintained by another Member, such
Member may request consultations with such other Member". This does not imply, however, that the
manner in which the complaining party is affected by the breach is not relevant to dispute settlement
proceedings, or that it should not be an importa nt consideration in determining the level of
countermeasures that may be applied by the complain ing Member, if the dispute reaches the stage of
authorizing such countermeasures.
4.64 In fact, this distinction is found in dispute settlement proceedings under the DSU generally.
The notion of "nullification or impairment of benefits" accruing to Members under the covered
agreements underlies the initiation and conduct of dispute settlement proceedings throughout the
DSU, but a quantification of the level of nullification or impairment arising from a measure
determined to be inconsistent w ith a covered agreement (in other words, the adverse impact arising
from the inconsistent measure) only becomes necessar y at the stage of authorizing a suspension of
concessions or other obligations in case of non-compliance.
4.65 Under the terms of Article 3.3 of the DSU:
"The prompt settlement of situations in wh ich a Member considers that any benefits
accruing to it directly or indirectly under the covered agreements are being impaired
by measures taken by another Member is es sential to the effective functioning of the
WTO and the maintenance of a proper balan ce between the rights and obligations of
Members."
4.66 Article 3.8 of the DSU further provides that when a violation has been determined to exist,
this is considered prima facie to constitute a case of nullification or impairment, so that "there is
normally a presumption that a breach of the rules has an adverse impact on other Members parties to
that covered agreement".
147
4.67 A demonstration of the level of nullification or impairment arising from the inconsistent
measure for the complainant is therefore not a sep arate requirement to establish the existence of a
violation. This question only becomes relevant in the context of determination of the level of
countermeasures to be authorized in case of non- compliance, as such countermeasures are required
not to exceed the level of nullification or impairment, under Article 22.4 of the DSU.
4.68 Under the terms of Article 30 of the SCM Agreement, both Article XXIII (which contains the
initial reference to nullification or impairment of benefits accruing to a Member as the basis for the
initiation of dispute settlement proceedings) and the DSU are applicable to dispute settlement
proceedings under the SCM Agreement, except as otherwise specifically provided in that Agreement.
4.69 We note in this respect the determination of the original panel in this case that:
"Under Article 3.8 of the DSU, in cases where there is an infringement of the
obligations assumed under a covered agreemen t, the action is considered prima facie
to constitute a case of nullification or impair ment. We conclude that, to the extent

147 Article 3.8 of the DSU.

that the United States has acted inconsiste ntly with the covered agreements, it has
nullified or impaired benefits accruing to Brazil under these agreements."148
4.70 This makes it clear that the findings of violation in this dispute gave rise to a presumption that
benefits accruing to Brazil under the SCM Agreement have been nullified or impaired by the breach.
The question of the manner in which Brazil's in terests have been adversely affected by the
inconsistent measure is therefore not absent fro m the initial stages of the proceedings, but the
existence of the breach is a sufficient consideration, at that stage, to conclude that Brazil's benefits
under the agreements have been nullified or impaired . In other words, it is assumed from the very
existence of the breach that Brazil's interests ar e adversely affected, but it is not necessary to quantify
this for the purposes of determining that a violation exists and recommending that the Member
concerned withdraw the inconsistent measure.
4.71 However, when the dispute reaches the st age of authorizing countermeasures and of
quantifying the level at which the complaining pa rty should be entitled to suspend concessions or
other obligations otherwise owed to the responding Member, the question of the extent to which the
interests of the complaining Member have been af fected becomes directly pertinent. As observed
above, the extent to which the complaining Member has been adversely affected by the inconsistent
measure provides a measure of the extent to which the balance of rights and obligations between the
two parties has been upset by the offending measure.
4.72 There is therefore no inconsistency between the fact that a prohibited subsidy is " per se "
prohibited and our determination that the trade-dist orting impact of that measure on the complaining
party provides a basis from which to assess the a ppropriateness of proposed countermeasures in a
given case. On the contrary, it seems to us that it follows logically from the sequence of procedural
steps leading to the authorization to suspend concess ions or other obligations that a consideration of
the manner in which the complaining Member is a dversely affected by the illegal measure, which
does not need to play a central role in establishing the existence of a violation, would become a
central consideration in assessing the level of countermeasures that such complaining Member would
be entitled to take in the absence of timely implementation.
4.73 At this stage of the proceedings, it is the ve ry essence of the assessment to determine a level
at which it would be "appropriate" for the comp laining party to adversely affect the trade
opportunities of the violating Member through the suspension of certain obligations under the covered
agreements. A consideration of the extent to whic h that complaining party has itself been adversely
affected by the measure against which the counterm easures will be applied is manifestly pertinent to
this question.
4.74 We fully recognize that Article 4.10 of the SCM Agreement is a special or additional rule that
sets out a specific legal standard for the level of permissible countermeasures in cases relating to
export subsidies. We are therefore not limited by the terms of Article 22.4 of the DSU to a level of
countermeasures that would be "equivalent to the le vel of nullification or impairment". Rather, we
must consider the level of proposed countermeasure s on the basis of the legal standard contained in
Article 4.10 of the SCM Agreement, in terms of whether the proposed countermeasures are
"appropriate" within the meaning of this provision.
4.75 As we have observed above, it is the ordinary meaning of the term "appropriate" itself which
calls for attention to be given to the circumstances of the case and directs us to consider the trade-
distorting impact of the prohibited subsidy on th e complaining Member as a central aspect of these
circumstances. This does not mean, however, that th e legal standard contained in Article 4.10 of the

148 Panel Report, para. 8.2.

SCM Agreement is identical to that contained in Article 22.4 of the DSU. We recognize that there are
significant differences between the two standards, which we will address in the next section.
4.76 We find further confirmation for our interpre tation in the fact that, under GATT 1947, the
terms "appropriate in the circumstances", which ar e used in Article XXIII of GATT to define the
permissible suspension of concessions or other obliga tions, were interpreted ha ving regard to "the
equivalence to the impairment suffered" by the complaining party as a result of the measures at issue:
"2. The Working Party was instructed by the CONTRACTING PARTIES to
investigate the appropriateness of the measure which the Netherlands Government
proposed to take, having regard to the equivalence to the impairment suffered by the
Netherlands as a result of the United States restrictions.
3. The Working Party felt that the appr opriateness of the measure envisaged by
the Netherlands Government should be cons idered from two points of view: in the
first place, whether in the circumstances, the measure proposed was appropriate in
character, and secondly, whether the extent of the quantitative restriction proposed by
the Netherlands Government was reasonable, having regard to the impairment
suffered."149 (emphases added).
4.77 In our view, this confirms that the term "appr opriate", in the context of a provision defining
the level of permissible countermeasures to be app lied by one Member against another in response to
a situation of continued violation, invites a consider ation of the level of impairment or injury suffered
by the complaining Member as a result of the inconsistent measure.
4.78 We further note the following observations of the arbitrator on EC – Bananas III (US)
(Article 22.6 – EC):
"In our view, in light of the explicit refere nce in paragraphs 4 and 7 of Article 22 of
the DSU to the need to ensure the equivalence between the level of proposed
suspension and the level of the nullification or impairment suffered, the standard of
appropriateness applied by the 1952 working party has lost its significance as a
benchmark for the authorization of the suspension of concessions under the DSU.
However, we note that the ordinary meaning of ' appropriate', connoting 'specially
suitable, proper, fitting, attached or belonging to' 150, suggests a certain degree of
relation between the level of the proposed suspension and the level of nullification or
impairment, where as we stated above, the ordinary meaning of ' equivalent' implies a
higher degree of correspondence, identity or st ricter balance between the level of the
proposed suspension and the level of nullifi cation or impairment. Therefore, we
conclude that the benchmark of equivalence reflects a stricter standard of review for
Arbitrators acting pursuant to Article 22.7 of the WTO's DSU than the degree of
scrutiny that the standard of appropriateness, as applied under the GATT of 1947
would have suggested."151 (emphasis added)
4.79 We agree with the arbitrator in that di spute that "the ordinary meaning of " appropriate",
connoting "specially suitable, proper, fitting, attached or belonging to" 152, suggests a certain degree of

149 GATT Working Party Report, US – Suspension of Obligations.
150 ( original footnote ) The New Shorter Oxford English Dictionary on Historic Principles (1993),
page 103.
151 Decision of the Arbitrator, EC – Bananas III (US) (Article 22.6 – EC), paras. 6.4 and 6.5.
152 The New Shorter Oxford English Dictionary on Historic Principles (1993), p. 103.

relation between the level of the proposed suspensi on and the level of nullification or impairment".
We also agree that, by contrast with the terms of Article 22.4 of the DSU, the term appropriate
suggests "a certain degree of relation" rather than exact identity between the two.
4.80 With these determinations in mind, we must now consider what further guidance is provided
by the terms of footnote 9 of the SCM Agreement, in order properly to understand the meaning of the
expression "appropriate countermeasures".
(c) Footnote 9
4.81 Footnote 9 of the SCM Agreement provides that:
"This expression is not meant to allow countermeasures that are disproportionate in
light of the fact that the subsidies dealt with under these provisions are prohibited."
4.82 In Brazil's view, "footnote 9 explains that the unlawful nature of the measure itself,
irrespective of the effects that measure may have on a prevailing Member, informs the interpretation
of the terms "appropriate" and not "disproportionate"; "appropria te countermeasures" counter a
subsidy that is unlawful in and of itself under the SCM Agreement and are not confined to countering
only the impact of that unlawful act on a prevailing Member".
153 Brazil considers that an assessment
of proportionality under footnote 9 needs to take into account "at the very least, all of the commercial
and economic advantages that are conferred by a subsidy".154
4.83 The United States "does not argue that a countermeasure is punitive every time it is even
slightly greater than the adverse effects suffered by the complainant". 155 However, it considers, at the
same time, that the requirement that the countermeasures not be "disproportionate" "links this
provision to trade effects because the nullification or impairment caused by the measures (the metric
used under Article 22 of the DSU) provides the b asis against which to judge whether the proposed
countermeasures are disproportionate." 156 The United States indicates that it "has serious concerns
with those awards that would enable a Member to impose countermeasures in excess of the effect of
the subsidy on that Member".157
4.84 The terms "not ... disproportionate in light of th e fact that the subsidies dealt with in these
provisions are prohibited" either inform the mean ing of the expression "appropriate countermeasures"
in Article 4.10, or qualify that meaning. Whether it "informs" or "qualifies" is ultimately a difference
in perception which will not, in our view, affect our consideration of the expression.
4.85 The very formulation of the footnote, i.e. "this expression is not meant to allow
countermeasures that are disproportionate" (emphasis added) indicates, in our view, that it serves to
guard against an interpretation of the terms "appropr iate countermeasures" that would allow measures
that are "disproportionate". We therefore unders tand this proportionality requirement to be a
protection against excessive countermeasures. In other words, while the expression "appropriate
countermeasures" allows a degree of flexibility in assessing what may be "appropriate" in the
circumstances of a given case, this flexibility is not unbounded. As observed by the arbitrator on
US – FSC (Article 22.6 – US) , "footnote 9 further confirms that, while the notion of "appropriate

153 Brazil's responses to questions from the Arbitrator, question 75, para. 36.
154 Brazil's responses to questions from the Arbitrator, question 80, para. 53.
155 US responses to questions from the Arbitrator, question 82, para. 24.
156 US responses to questions from the Arbitrator, paras. 26 and 32.
157 US responses to questions from the Arbitrator, question 90, para. 34.

countermeasures" is intended to ensure sufficient fl exibility of response to a particular case, it is a
flexibility that is distinctly bounded."158
4.86 As noted earlier, countermeasures are an excepti onal, "last resort", remedy within the WTO
dispute settlement system. Footnote 9, in our view, invites us to exercise caution and to ensure that
the response is "measured" and that the countermeas ures to be authorized do not result in a greater
disruption in the trade relations among Members and in the application of the WTO agreements than
is warranted by the circumstances of the case at hand.
4.87 This requirement confirms us in our view that countermeasures, in order to be "appropriate",
should bear some relationship to the extent to wh ich the complaining Member has suffered from the
trade-distorting impact of the illegal subsidy. Countermeasures are in essence trade-restrictive
measures to be taken in response to a Member's application of a trade-distorting measure that has been
determined to nullify or impair the benefits ac cruing to another Member. Countermeasures that
would ensure a relationship of proportionality between the extent to which the trade opportunities of
the Member applying the counterme asures has been affected and th e extent to which the trade
opportunities of the violating Member will in turn be adversely affected would notionally restore the
balance of rights and obligations arising from the c overed agreements that has been upset between the
parties. This would ensure a proper relationship between the level of the countermeasures and the
circumstances out of which the dispute arises.
4.88 At the same time, we note that the terms "not ... disproportionate", like the term "appropriate",
do not require exact identity between the trade-dist orting impact of the measure and the level of
countermeasures to be authorized. The term "appr opriate" suggests a degree of flexibility, according
to the circumstances, and the negative requirement that countermeasures "not" be "disproportionate"
similarly suggests that a less than exact correspondence is sufficient.
4.89 Although footnote 9 does not expressly state in relation to what the countermeasures should
not be "disproportionate", it indicates that the countermeasures should not be disproportionate "in
light of the fact the subsidies dealt with under these provisions are prohibited".
4.90 As we have noted above, the existence of a pr ohibited subsidy which has not been withdrawn
by the responding Member is the very reason for th e authorization of countermeasures. The question
we must consider is the relevance of the unlawful character of the subsidy, as such, to our assessment
of the appropriateness of countermeasures under Article 4.10 of the SCM Agreement, in light of the
terms of footnote 9. In this respect, we agree with the arbitrator on US – FSC (Article 22.6 – US) that:
"[T]his emphasis on the unlawful character of export subsidies invites ... a
consideration of the impact which this unl awful character may have, in itself. We
note in this respect that the maintenan ce of the unlawful measure by the Member
concerned – in violation of its obligations – has, in itself, the effect of upsetting the
balance of rights and obligations between th e parties, irrespective of what might be,
as a matter of fact, the actual trade effect s on the complainant. We recall, in this
regard, that the prohibition on export subsidies is a per se obligation, not itself
conditioned on a trade effects test. Members are entitled to trade without other
Members resorting to export subsidies. In our view, the second part of the footnote
directs that this is in itself a required consideration when it comes to assessing
whether countermeasures are not disproportionate within the meaning of
Article 4.10."
159

158 Decision by the Arbitrator, US – FSC (Article 22.6 – US), para. 5.19.
159 Decision by the Arbitrator, US – FSC (Article 22.6 – US), para. 5.23.

4.91 We agree with this characterization of the second part of the footnote, which suggests that the
prohibited nature of the subsidy at issue, in othe r words the existence of a breach of an obligation not
to provide such subsidies, is a consideration to be taken into account in assessing the "proportionality"
or lack of "disproportion" in the proposed countermeasures.
4.92 In light of these determinations, we consider that countermeasures would be
"disproportionate" if they were excessive, having rega rd to the extent to which the trade between the
parties in dispute has been affected. In othe r words, countermeasures that do not have a proper
relationship to the extent to which the interests of the complaining Member have been adversely
affected by the measure would be "disproportionate".
4.93 At the same time, we bear in mind also that the footnote highlights "the fact that the subsidies
dealt with in these provisions are prohibited", and in so doing asks us to take that factor into
consideration. This reminds us of the determinati on that the maintenance of the violating measure has
had the effect of upsetting the balance of rights and obligations between the parties.160
4.94 In light of these considerations, we fi nd that, in considering whether proposed
countermeasures are "appropriate" and "not ... dispropo rtionate" within the meaning of Article 4.10, it
is legitimate to give consideration also to the prohi bited nature of the subsidy, in itself. In this
context, it is permissible that the assessment of the overall trade impact on the complaining Member
not be precise, nor that the countermeasure should be directly equivalent to that impact. The amount
of the countermeasure must at least be within a range of permissibly "appr opriate" amounts, and its
assessment can take into account a variety of fact ors which flow from the failure to withdraw the
subsidy and are relevant to the trade impact on th e complaining Member. Such a consideration would
therefore legitimately be an integral part of an assessment of whether pr oposed countermeasures are
"appropriate" within the meaning of Article 4.10 of the SCM Agreement.
2. The terms of Article 4.10 of the SCM Agreement in their context
4.95 Article 4.10 of the SCM Agreement contains the legal standard for the level of
countermeasures in cases concerning prohibite d subsidies, while Article 7.9 of the SCM Agreement
contains the standard in relation to actionable s ubsidies, and Article 22.4 of the DSU contains the
legal standard for the level of suspension of con cessions or other obligations in relation to other
WTO-inconsistent measures. These latter two provisions therefore provide the Arbitrator with useful
context for understanding the terms of Article 4.10 of the SCM Agreement.
4.96 Brazil notes that Article 4.10 and 4.11 of the SCM Agreement must be contrasted with
Article 22.4 of the DSU, which requires that action in response to non-compliance be "equivalent to
the level of nullification or impairment". 161 Brazil highlights that "unlike the phrase 'equivalent to the
level of nullification or impairment' in Article 22.4 of the DSU, the drafters did not prescribe a precise
quantitative or qualitative benchmark for desi gning 'countermeasures' under Articles 4.10 and
Article 4.11".162
4.97 We agree that the term "appropriate", by contr ast to the terms "equivalent to the level of
nullification or impairment", does not require us to engage in an exact exercise to work out the
correspondence between the level of countermeasures to be authorized and a specific benchmark such
as the level of nullification or impairment of benefits suffered by the complainant. We agree that this
difference in wording must be given meaning. The term "appropriate" in Article 4.10 of the

160 See para. 4.55 above.

SCM Agreement suggests a degree of flexibility and adaptation to the circumstances of the case that is
not found in Article 22.4 of the DSU.
4.98 Similarly, within the context of the SCM Agreement, the terms of Article 4.10 contrast with
those of Article 7.9, which foresees, in rela tion to actionable subsidies, countermeasures
"commensurate with the degree and nature of the adve rse effects determined to exist". Here too, the
terms of Article 7.9, through this reference to the "degree and nature of the adverse effects determined
to exist", point to a single specific benchmark as reference, and require the countermeasures to be
"commensurate" with this benchmark, which is car efully defined in relation to the specific adverse
effects that form the basis of the underlying fi ndings. These elements distinguish the terms of
Article 7.9 from the terms of Article 4.10. This difference can be understood in the broader context of
the SCM Agreement, where actionable subsidies may only be ch allenged to the extent that they result
in certain enumerated adverse effects for other WT O Members. By contrast, prohibited subsidies are
prohibited independently of any demonstration of adverse effects. In such cases, no specific "adverse
effects" will have been "determined to exist" prior to the request for authorization to apply
countermeasures, and therefore there are none that could be referred to.
4.99 The contrast between the formulations of Article 4.10 of the SCM Agreement and Article 22.4
of the DSU and Article 7.9 of the SCM Agreement respectively is informative for the purposes of
further clarifying the meaning of the terms "appropriate countermeasures" in their context.
4.100 First, the different choice of terms, including within the SCM Agreement itself, highlights that
the lack of reference to a specific benchmark by which the level of countermeasures must be
measured, and the flexibility that this affo rds, are specific to Article 4.10 of the SCM Agreement. A
conscious decision has been made, in drafting the SCM Agreement and the DSU, to treat
countermeasures in relation to prohibited subsidies in a way that differs from other countermeasures.
4.101 Secondly, we also note that the two specific benchmarks reflected in Article 22.4 of the DSU
and Article 7.9 of the SCM Agreement both define the level of permissible countermeasures with
express reference to the trade effects of the measure at issue, while Article 4.10 of the
SCM Agreement does not. We see no reason to assume that the drafters, in choosing the more flexible
terms "appropriate countermeasures", would have intended to endorse a more restrictive standard than
those reflected in the other two provisions em bodying other standards within the WTO Agreement
fulfilling a comparable function. In particular, in li ght of the fact that, as highlighted by footnote 9,
"the subsidies dealt with under these provisions are prohibited", it may be expected that the remedy
foreseen with respect to such subsidies would be at least as encompassing as that foreseen with
respect to actionable subsidies that are not prohibite d but that have demonstrated adverse effects on
other WTO Members.
4.102 The notion of "appropriate countermeasures" must therefore, in our view, be understood to
permit countermeasures that would at least reflect th e level of any adverse effects incurred by the
complaining Member as a result of the granting and maintenance of the prohibited subsidy at issue.
Countermeasures under Article 4.10 of the SCM Agreement would be "appropriate ", and could not be
considered to be "disproportionate" within the meani ng of that provision, if they were proportionate,
or at least not disproportionate, to the adverse e ffects suffered by the complaining Member as a result
of the prohibited subsidy at issue.
4.103 Brazil highlights the specificities and the "more st ringent" character of the dispute settlement
provisions under the SCM Agreement for prohibited subsidies. 163 In Brazil's view, "adopting a
benchmark tied to the "economic disadvantage" suffe red by a prevailing Member, or in other words,
the "impact" or "effect" of a prohibited subsidy on th at Member, would be fundamentally inconsistent

163 See Brazil's written submission, para. 40.

with a proper interpretation of Articles 4.10 and 4.11 of the SCM Agreement".164 In Brazil's view,
these provisions, unlike Article 22.4 of the DSU, do not limit countermeasures to the "economic
disadvantage" suffered by a complaining Me mber. Instead, the countermeasures must be
"appropriate" and not "disproportiona te" in light of, for example, the nature of the prohibited
subsidy".165
4.104 We agree that "appropriate countermeasures" would entitle a complaining Member to
countermeasures that do not exactly reflect the adverse effects of the inconsistent measure on itself. It
is clear also that the terms "appropriate counter measures" and footnote 9 contain no requirement of
exact equivalence or "commensurateness" betw een such adverse effects and the level of
countermeasures. Furthermore, as we have de termined above, the terms of the footnote to
Article 4.10 of the SCM Agreement make it clear that it would be legitimate to specifically take into
account the prohibited nature of the subsidy, as such , in an assessment of th e permissible level of
countermeasures. At the same time, as we have determined above, we are not persuaded that this
implies that countermeasures under Article 4.10 of the SCM Agreement should bear no relationship to
such effects, or could be "disproportionate" to th em, taking into account also the prohibited nature of
the subsidy.
4.105 Both parties highlight the fact that Article 4.10, by contrast with Article 7.9 of the
SCM Agreement, is concerned with subsidies that are prohi bited in themselves, so that it is that
subsidy itself, and not only its adverse effects, th at are of concern. Thus, Brazil argues that "in
determining whether proposed countermeasures are "appropriate", the prohibited nature of the subsidy
is an important factor". 166 Brazil emphasizes the fact that footnote 9 clarifies that the assessment of
"appropriate countermeasures" and "p roportionality" is to be made "i n light of" the nature and legal
status of the measure at issue. 167 Drawing also on footnote 9, the United States observes that
"'appropriate countermeasures' cannot be 'disproportionate' in light of the fact that the subsidies dealt
with are prohibited – in other words, it is not just the adverse effects caused by the subsidies that are
of concern, as it is under Article 7. Rather, the subsidies themselves are of concern".168
4.106 In our view, the use of the term "appropriate" rather than a strict quantitative benchmark, the
reference in footnote 9 to the prohibited status of th e subsidy at issue, as well as the contrast between
the terms of Article 4.10 of the SCM Agreement and other comparable provisions, confirm that
"appropriate countermeasures" are not limited to a stri ct quantification of the adverse trade effects on
the complainant, and can take into account the entir ety of the situation at hand, including the gravity
of the breach. 169 At the same time, we are not convinced that the absence of express reference in
Article 4.10 of the SCM Agreement to the level of nullification or impairment or to the adverse effects
arising from the prohibited subsidy necessarily implies th at considerations relating to the trade effects
of the subsidy cease to be relevant in a determinati on of the level of countermeasures to be authorized
under Article 4.10 of the SCM Agreement. Rather, as we have determined above, we would expect
these considerations to be a central element of what is pertinent in an assessment of "appropriateness".

164 Brazil's responses to questions from the Arbitrator, question 75, para. 34.
165 Brazil's responses to questions from the Arbitrator, question 75, para. 35.
167 Brazil's responses to additional questions from the Arbitrator, question 75, para. 36.
168 US responses to questions from the Arbitrator, question 43, para. 55.
169 Exactly calculating such effects is difficult, if not impo ssible, and is not what Article 4.10 calls for.
A range of factors can be presented to an arbitrator, together with a number of calculation methods. The
arbitrator need not calculate direct equivalence, but instead may accept what th e arbitrator feels to be within the
bounds of what is appropriate in the circumstances of the case. However, the legal approach must emanate from
the terms of the SCM Agreement, the economic principles applied must be logical and unified, and the claims
concerning the trade effects must be relevant and reasonable.

4.107 We therefore read the difference in wording between Articles 4.10 of the SCM Agreement and
Article 22.4 of the DSU and Article 7.9 of the SCM Agreement respectively, and the use of the term
"appropriate" in Article 4.10 of the SCM Agreement, to imply that an appropriate countermeasure is
not limited to exact equivalence with the level of its adverse trade effects on the complaining
Member. Nonetheless, the considerations that ar e at the heart of determinations under these other
provisions are not irrelevant under Article 4.10 of the SCM Agreement. Rather, we read the terms of
Article 4.10 of the SCM Agreement as allowing greater flexibility in the context of countermeasures
involving prohibited subsidies to take into account the specificities of the situation at hand, but always
having regard to the impact of the illegal measure on the complaining Member.
3. Object and purpose
4.108 Brazil emphasizes that a purpose of countermeasures under Article 4.10 of the
SCM Agreement is to induce compliance. In Brazil's vi ew, "countermeasures are 'appropriate' and not
'disproportionate' to the extent they provide [an] in centive [to reconsider its refusal to withdraw the
subsidy]".170 The United States, for its part, considers that the objective of countermeasures is to
"rebalance rights and obligations" and concludes th at the proportionality of countermeasures must be
assessed having regard to the adverse effects of the measure on the complainant.
4.109 We note that the objective of "inducing complia nce" in relation to retaliatory measures was
first recognized in the context of proceedings un der Article 22.4 of the DSU. The arbitrator on EC –
Bananas III (US) (Article 22.6 – EC) thus found that:
"[T]he overall objective of compensation or the suspension of concessions or other
obligations as described in Article 22.1:
'Compensation and the suspension of concession or other obligations
are temporary measures available in the event that the
recommendations or rulings are not implemented within a reasonable
period of time. However, neither compensation nor the suspension of
concessions or other obligations is preferred to full implementation of
a recommendation to bring a measure into conformity with the
covered agreements. Compensation is voluntary and, if granted, shall
be consistent with the covered agreements.'
Accordingly, the authorization to suspe nd concessions or other obligations is a
temporary measure pending full implementation by the Member concerned. We
agree with the United States that this temporary nature indicates that it is the purpose
of countermeasures to induce compliance. But this purpose does not mean that the
DSB should grant authorization to suspend concessions beyond what is equivalent to
the level of nullification or impairment. In our view, there is nothing in Article 22.1
of the DSU, let alone in paragraphs 4 and 7 of Article 22, that could be read as a
justification for counter-measures of a punitive nature."
171
4.110 As the cited passage makes clear, the arbitrator in that dispute did not consider that the
objective of "inducing compliance" implied that this constituted the benchmark by which retaliatory
measures may be quantified. Rather, the objective of inducing compliance defined the purpose of
suspension of concessions or other obligations, while the benchmark (in that case, Article 22.4 of the
DSU) required that the level of suspension of concessions or other obligations should be in line with
the trade effects of the illegal measure on the complainant.

170 Brazil's responses to questions from the Arbitrator, question 76, para. 41.
171 Decision by the Arbitrators, EC – Bananas III (US) (Article 22.6 – EC), para. 6.3.

4.111 This objective of suspension of concessions or other obligations under Article 22.4 of the
DSU has been recently confirmed by the Appellate Body in US – Continued Suspension .172 P r i o r
arbitrators have also found that the objective of countermeasures under Article 4.10 of the
SCM Agreement is to "induce compliance".
173
4.112 We agree that countermeasures under Article 4.10 of the SCM Agreement serve to "induce
compliance". However, it seems abundantly clear that this purpose does not, in and of itself,
distinguish Article 4.10 from the other comparable provisions in the WTO Agreement. "Inducing
compliance" appears rather to be the common pur pose of retaliation measures in the WTO dispute
settlement system, including in the context of Article 22.4 of the DSU. The fact that countermeasures
under Article 4.10 of the SCM Agreement serve to induce compliance does not in and of itself provide
specific indications as to the level of countermeasures that may be permissible under this provision.
4.113 This distinction is also found under general rules of international law, as reflected in the ILC's
Articles on State Responsibility, which have been referred to by Brazil in these proceedings.
Article 49 of these Draft Articles defines "inducing compliance" as the only legitimate object of
countermeasures, while a separate provision, Article 51, addresses the question of the permissible
level of countermeasures, which is defined in relation to proportionalit y to the injury suffered, taking
into account the gravity of the breach.
174
4. Conclusion
4.114 In conclusion, we have found that the terms "appropriate countermeasures", as informed by
footnote 9 of the SCM Agreement, entitle the complaining party to countermeasures that are suited to
the circumstances of the case. This can lead to a c ountermeasure being authorized at a level that is
within the range of the trade-distorting impact that can fairly be said to arise for the complaining
Member from the failure to withdraw the illegal measu re. We have also determined that footnote 9
further invites us to ensure that the countermeasures to be authorized are not excessive, having regard
to the extent to which the trade of the complain ing party has been affected, and taking into account
also the prohibited nature of the subsidy.
4.115 Our interpretation, in our view, takes due account of the circumstances arising from the
dispute at hand, including not only the prohibited nature of the subsidy at issue as such, but also the
manner in which that illegal measure adversely affects the interests of the complaining Member. We
wish to emphasize that this in no way modifies the f act that the Member concerned is required by the
recommendations and rulings of the DSB to withdraw fully the subsidy at issue, which has been
determined to be prohibited.
4.116 It might be suggested that our Member-specific measurement of the trade-distorting impact of
prohibited subsidies when assessing a countermeasure under Article 4.10 of the SCM Agreement
limits the extent of countermeasu res which can be imposed and du lls the effectiveness of such
measures thereby making them less powerful for th e purpose of inducing compliance. However we
are in no doubt that this is the correct interpretati on of Article 4.10, for all of the reasons we have
mentioned. Whilst an authorized countermea sure addressing only the impacts on a complaining
Member will always be of a lesser quantum than the one which would address the impacts on all
Members, this does not mean that authorized count ermeasures will not be effective or will not induce
compliance. The degree of the impact on the complaining Member might be quite significant, and the

172 See Appellate Body Report, US – Continued Suspension, para. 309.
173 See Decision by the Arbitrator, US – FSC (Article 22.6 – US) , para. 5.57; Decision by the
Arbitrator, Canada – Aircraft Credits and Guarantees (Article 22.6 – Canada), paras. 3.11 and 3.47.
174 See http://untreaty.un.org/ilc/texts/instruments/english/commentaries/9_6_2001.pdf.

countermeasure itself might be quite powerful de pending on the trade relati onship of the parties
concerned.
4.117 We also note that it is open to all Members who consider that their interests are affected by
the violating measure to initiate dispute settlement proceedings and ultimately, if the dispute should
reach that stage, to seek "appropriate" count ermeasures that would take due account of the
circumstances in that dispute. We note in this respect the terms of Article 4.11 of the DSU, which
provides that a Member whose request to be joined in consultations initiated by another Member has
been declined, and who considers that benefits accruing to it are being nullified or impaired, may
initiate its own consultations. We also note the possibility of several Members presenting multiple
complaints about the same factual situation as for eseen in Article 9 of the DSU. In the event of
multiple complaints, the levels of "appropriate" countermeasures that could be attained would
accordingly increase, thereby increasing the contri bution that the countermeasures can make to
"inducing compliance".
E. ASSESSMENT OF BRAZIL'S PROPOSED COUNTERMEASURES
4.118 Having clarified the meaning of Article 4.10 of the SCM Agreement and what constitutes
"appropriate countermeasures" under this provision, we now turn to an examination of the
countermeasures proposed by Brazil in relation to the GSM 102 programme.
4.119 In approaching this determination, we reca ll our finding in paragraph 4.22 above that the
burden rests on the United States to demonstrate th at the countermeasures proposed by Brazil are not
appropriate. We also recall our findings in paragraph 4.107 above that the terms of Article 4.10 of the
SCM Agreement allow a degree of flexibility in the appreciation of what may constitute "appropriate
countermeasures" within the meaning of Article 4. 10. We have also determined that the terms
"appropriate countermeasures", as informed by footnote 9 of the SCM Agreement, entitle the
complaining party to countermeasures that are suite d to the circumstances of the case, and that this
may at least counter the level of trade of the compla ining Member that is being adversely affected by
the illegal measure. We have also determined that th e footnote further invites us to ensure that the
countermeasures to be authorized are not excessive, ha ving regard to the extent to which the trade of
the complaining party has been affected, and taking into account also the prohibited nature of the
subsidy.
4.120 With these determinations in mind, we now tu rn to a consideration of Brazil's proposed
countermeasures in relation to the GSM 102 programme.
1. Main arguments of the parties
4.121 Brazil describes its methodology for the calcu lation of its proposed countermeasures in
relation to the GSM 102 programme as a methodology to "calculate countermeasures proportionate to
the annual amount of prohibited GSM 102 export credit guarantees issued for export transactions
involving unscheduled products, rice, pig meat and poultry meat". Brazil's methodology encompasses
two elements: (i) the interest rate discounts secu red by creditworthy and non-creditworthy foreign
obligors on credits backed by GSM 102 guarantees ("in terest rate subsidy" or IRS); and (ii)
estimating the additional export sales obtained by US exporters as a result of these discounts 175
("additionality").
4.122 Brazil has described this methodology as basi ng the amount of appropriate countermeasures
on the quantum of certain "benefits" flowing from prohibited GSM 102 subsidies. 176 I n B r a z i l ' s

175 Brazil's written submission, para. 74 and Brazil's Methodology Paper, para. 5.
176 Brazil's responses to questions from the Arbitrator, question 13, para. 145.

words, its methodology "captures two distinct benefits conferred by GSM 102 ECGs – the preferential
interest rates granted to foreign purchasers of US goods and the additiona l exports generated by
US exporters as a result of the preferential financing enabled by the US Government guarantee".177
4.123 Brazil applies this methodology to its estimate of GSM 102 export credit guarantees in
FY 2006 and arrives at annual countermeasures e qual to US$1.155 billion. This amount can be
subdivided into: (i) interest rate subsidy amounti ng to US$237.4 million, (ii) marginal additionality
amounting to US$62.3 million, and (iii) full additionality amounting to US$855 million.
4.124 In the United States' view, Brazil's methodol ogy cumulates, without sufficient evidence,
"multiple alleged "benefits" (supposed interest rate subsidy and additional trade resulting from the
purported interest rate subsidy)". The United St ates argues that "this collection of benefits is
speculative, and (particularly in li ght of the lack of evidence on add itionality and pass through) it is
not at all clear these are results of the "wrongful act" of the United States in providing the subsidy".178
4.125 The United States considers that the only basis for calculating appropriate countermeasures in
the circumstances of this case is the "net cost to Government". At the same time, the United States
also considers that this amount must then be adju sted to reflect the impact of the measure on Brazil. 179
In the United States' view:
"The amount of the subsidy may be used as a proxy for trade effects of the subsidy, in
the context of applying the special and additi onal rule of Article 4.11. However, both
methods to the amount of the subsidy put fo rward in this proceeding – the cost to
government approach previously used by the DSB and detailed by the United States
and the erroneous benefits-plu s-additionality approach by Brazil – estimate the total
subsidy amount for the guarantees at issue fo r the entire program for the particular
products at issue. Thus, both approaches result in an amount that serve as proxy for
the program's effects on the entire world, without regard for whether Brazil is
affected by the subsidy.
Accordingly, and consistent with the notion that a breach of WTO rules results in
nullification or impairment of benefits accruing to a Member, a method of reducing
the total subsidy amount to only the portion affecting Brazil is necessary."180
4.126 In effect, the United States asks the Arbitrator to use the amount of the subsidy as the
principle that should be applied to working out th e quantum of the countermeasure; that the quantum
is the net-cost to government; and that the net-cost then needs to be broken down further still so that
the only part of the net cost that is measured fo r the purposes of the quantum is that which affects
Brazil. The United States therefore proposed a two- stage approach, first based on the "amount of the
subsidy" and then its "trade effects".
2. Analysis by the Arbitrator
4.127 Brazil has presented a methodology that it describes as intending to reflect the "amount of the
subsidy". The United States does not disagree with the choice of the "amount of the subsidy" as a
starting point for the calculations. However, it e ffectively considers that Brazil's approach to
calculating the amount of the subsidy is flawed. Specifically, it considers that Brazil's approach,
which proceeds on the basis that the amount of th e subsidy should be based on the calculation of

178 US responses to questions from the Arbitrator, question 43, para. 61.
180 US responses to questions from the Arbitrator, question 104, paras. 86-87.

certain "benefits" arising from the GSM 102 programme , in fact cumulates various "benefits" in a
speculative manner. The United States also argue s that amounts claimed by Brazil are not, indeed,
"benefits" under Article 1.1(b) of the SCM Agreement, contrary to Brazil's claim that they can be so
considered. In the United States' view, the proper approach to a calculation of the "amount of the
subsidy" should be, instead, the "net cost" to th e US Government of granting the GSM 102 subsidies,
because that is the legal basis on which the underlying findings in this case were made. Furthermore,
the United States considers that this amount should then be adjusted, in order to reflect only that part
of the net cost which impacted on Brazil.
4.128 We recall our earlier determination that our ma ndate requires us to consider whether the
countermeasures proposed by Brazil are "appropriate " within the meaning of Article 4.10 of the
SCM Agreement. We also recall that the United States, as the party challenging these proposed
countermeasures, bears the burden of demonstrating that they are not appropriate. The starting point
for our analysis will be to explain the countermeasu res as proposed by Brazil. Having done that, we
will then consider the United States ' argument that Brazil's proposed "benefits" approach in fact does
not accurately reflect the "amount of the subsidy" as Brazil argues.
4.129 Should we determine that the United St ates has established that Brazil's proposed
countermeasures as presented (or any element of th em) would not be "appropr iate", then we would
need to determine whether the United States proposal was itself "appropriate", or whether a different
methodology for that purpose is required to wo rk out what would constitute "appropriate
countermeasures" in the circumstances of this case.
(a) Brazil's proposed "benefits" approach
4.130 Brazil has described its methodology for calcu lating its proposed countermeasures as being
based on a calculation of the "amount of the subsid y". The United States does not disagree with this
approach as a starting point for the calculation of proposed countermeasures, although it considers
that this amount should be sub sequently adjusted for the impact of the subsidy on Brazil alone.
However, the United States also considers that Brazil's methodology for the calculation of the
"amount of the subsidy" does not correctly reflect this amount.
4.131 In addressing this issue, we find it useful to cl arify first the notion of "amount of subsidy"
upon which both parties rely in their arguments as a basis for the calculation of "appropriate
countermeasures" under Article 4.10 of the SCM Agreement. We will then consider the US challenge
to Brazil's proposed approach to the determination of the "amount of the subsidy".
(i) The "amount of the subsidy" as a basis for the calculation of appropriate countermeasures
4.132 In the three prior cases in which count ermeasures under Article 4.10 of the SCM Agreement
have been considered, the arbitrators had recourse to the "amount of the subsidy" as the basis for the
calculation of "appropriate countermeasures".181 This is also the principle on which Brazil purports to
calculate the level of "appropriate countermeasu res" in these proceedings. The United States, as
already noted above, does not disagree, as a matter of principle, with the use of the amount of the
subsidy as a starting point for the Arbitrator's analysis in this case.

181 In Brazil – Aircraft (Article 22.6 – Brazil), the full payments made under the programme were used
a basis for the calculation. In US – FSC (Article 22.6 – US) , the calculation was based on the annual
expenditure by the US Government. Finally, in the Canada – Aircraft Credits and Guarantees (Article 22.6 –
Canada) case, the amount of the subsidy was calculated on the basis of the benefit conferred by the loan, which
was found to correspond to "the difference between the amount Air Wisconsin pays on the loan from EDC and
the amount Air Wisconsin would pay on a comparable commercial loan which that company could actually
obtain on the market" (Deci sion by the Arbitrator, Canada – Aircraft Credits and Guarantees (Article 22.6 –
Canada), para. 3.60).

4.133 The use of the "amount of the subsidy" in prior cases does not imply, however, that the
arbitrators in these earlier cases neces sarily considered that the "amount of the subsidy" was the only
basis on which "appropriate countermeasures" might have been calculated. In fact, as we understand
it, the arbitrators in these cases took into account the fact that the legal standard embodied in
Article 4.10 of the SCM Agreement allows greater flexibility than those under Article 22.4 of the DSU
or Article 7.9 of the SCM Agreement to tailor the countermeasures to the specific circumstances of the
case at hand, but did not exclude trade effects as a re levant consideration. In fact, in these decisions,
some form of consideration was given to the trade effects of the measure on the complaining
Member.182 As the United States has acknowledged in these proceedings, "while prior arbitrators
considering requests for countermeasures for prohib ited subsidies have used an "amount of the
subsidy" approach, they also have acknowledged the "trade effects" approach".183
4.134 Subsidies may operate in a variety of ways, a nd, depending on the design of the subsidy, as
well as its actual operation on the market, the tr ade effects of the subsidy may be complex to
establish. This is well illustrated by the Canada – Aircraft Credits and Guarantees (Article 22.6 –
Canada) and the US – FSC (Article 22.6 – US) cases. As we have observed above, the terms of
Article 4.10 of the SCM Agreement allow some flexibility in the manner in which "appropriate
countermeasures" might be calculated.
4.135 This Arbitrator is not convinced, however, that an "amount of subsidy" approach, of itself and
without adjustment, will always be consistent with the legal standard embodied in Article 4.10 of the
SCM Agreement. Actually, we think that in most cases such an approach will not be "appropriate",
notwithstanding its convenience, from a calculation perspective, and its literal attraction, from a
"withdraw the subsidy" perspective. As we ha ve determined above, a consideration of the

182 In Brazil – Aircraft (Article 22.6 – Brazil), both parties suggested that the calculation could be based
on the amount of the subsidy. The arbitrator considered that this was "appropriate". The arbitrator however
also noted that it was of the view that "a calculation ba sed on the level of nullification or impairment would, as
suggested by the calculation of Canada based on the harm caused to its industry, produce higher figures than one
based exclusively on the amount of the subsidy" (Decision by the Arbitrators, Brazil – Aircraft (Article 22.6 –
Brazil), para. 3.54.)
In US – FSC (Article 22.6 – US) , the requesting Member sought an authorization to take
countermeasures based on the amount expended by the subsidizing Member (the United States) in granting the
subsidy. The arbitrator, having previously dete rmined that the terms of Article 4.10 of the SCM Agreement did
not constrain countermeasures to trade effects, first considered the proposed countermeasures in relation to the
prohibited subsidy, and considered that the counterm easures proposed by the European Communities could be
considered "appropriate" within th e meaning of Article 4.10 of the SCM Agreement, "on the basis of their
relation to the initial violating measure". The arbitrator nonetheless then continued its analysis and considered
the proposed countermeasures on the basis of their relatio n to the trade effects of th e subsidy on the European
Communities, recalling its earlier findings that it had not interpreted Article 4.10 "to preclude a Member from
taking countermeasures that are tailored to counter the ad verse effects it has suffered as a result of the illegal
measure" and that "the expression 'appropriate counte rmeasures', in [its] view, would entitle the complaining
Member to countermeasures which would at least counte r the injurious effect of the persisting illegal measure
on it."
In Canada – Aircraft Credits and Guarantees (Article 22.6 – Canada) , the Arbitrator first considered
the approach proposed by th e requesting Member (Brazil), based on th e adverse trade effects of the subsidy on
Brazil on the basis of lost sales/competitive harm. It was only after determining that the assumptions underlying
the methodology proposed by the requesting Member were not valid and that this proposed methodology did not
justify the level of countermeasures, that the arbitr ator turned to a calculation of the "appropriate"
countermeasures based on the amount of the subsidy. As we understand the ruling of the arbitrator in that case,
it did not exclude, a priori, that a calculation based on the trade effects could be the basis for "appropriate
countermeasures". Rather, it is only because it was not persuaded that the actual cal culation of trade effects
proposed by the requesting Member accurately reflected these trade effects, that it discarded the approach based
on trade effects as proposed by the requesting Member.
183 US responses to questions from the Arbitrator, question 71, para. 5.

"appropriateness" of countermeasures, and in partic ular the requirement for the countermeasures not
to be "disproportionate", suggests that there should be a degree of relations hip between the level of
countermeasures and the trade-distorting impact of the measure on the complaining Member.
4.136 As noted above, we do not exclude that, in particular circumstances, the complaining Member
could perhaps rightly claim that a countermeasu re in the amount of the subsidy would be
"appropriate". However, in most cases, the trade- distorting impact of the subsidy on one or several
other Members would not necessarily bear any particul ar relationship to the amount of the subsidy.
As observed by previous arbitrators, the amount of the subsidy may in fact be lower than its trade
effects, and apportioning it would ordinarily exacerbate that likelihood.184 This amount therefore does
not seem to us to be a priori appropriate, nor is it necessarily propor tionate to the extent to which the
trade of the Member concerned is adversely aff ected. In these circumstances, it cannot be assumed
that the total amount of the subsidy is an appropriate measure of its trade effects, or even that it is
necessarily a relevant "proxy" for those effects.
4.137 Complaining Members do have choices with resp ect to the amount of countermeasures they
seek to impose, and it is the task of an arbitrat or to determine whether the choice leads to an
appropriate outcome which is cons istent with the rights and obliga tions spelt out in the covered
Agreements, the nature of the subsidy concerned a nd the remedy which is offered, and the balance
struck between the rights of all Members. We recall in this context our interpretation of
"appropriateness" in the case of countermeasures agains t prohibited subsidies, in particular its less
precise quantitative constraints. In particular, we note our previous observation that a range of factors
can be presented to an arbitrator, together with a number of calculation methods. The arbitrator need
not calculate direct equivalence, but instead may accept what the arbitrator feels to be within the
bounds of what is appropriate in the circumstance s of the case. The legal approach must emanate
from the terms of the SCM Agreement, the economic principles applied must be logical and unified,
and the claims concerning the trade effects must be relevant and reasonable.
4.138 Notwithstanding these observations, in light of the fact that Brazil has proposed basing its
countermeasures on the principle that the amount of the subsidy is an "appr opriate" benchmark, and
that the United States does not challenge this as a st arting point for the calculation, we now examine
Brazil's proposed methodology for the actual calculation of the amount of the GSM 102 subsidy.
(ii) Brazil's "benefits" approach to the calculation of the "amount of the subsidy"
4.139 Brazil purports to apply countermeasures on th e basis of the amount of the subsidy.
According to Brazil, that amount comprises two subsidy "benefits" within the meaning of
Article 1.1(b) of the SCM Agreement:
185 (i) the interest rate subsidies ("IRS") and (ii) the additional
sales resulting from the GSM 102 payments.
4.140 In response to a question from the Arbitrator, Brazil has explained that "the amount of a
subsidy is the monetary value of the benefits, or in the Appellate Body's words, 'advantages',
conferred by a financial contribution" and that it "proposes a formula that calculates the 'amount of
the subsidy', based on two distinct 'benefits' or 'adva ntages', from 'financial co ntributions' in the form
of GSM 102 guarantees". Thus, "in these proceedings, Brazil's use of the term 'amount of the subsidy'

184 See Decision by the Arbitrators, Brazil – Aircraft (Article 22.6 – Brazil) , para. 3.54: "given that
export subsidies usually operate with a multiplying effect, (a given amount allows a company to make a number
of sales, thus gaining a foothold in a given market with the possibility to expand and gain market shares), we are
of the view that a calculation based on the level of nu llification or impairment would, as suggested by the
calculation of Canada based on the harm caused to its industry, produce higher figures than one based
exclusively on the amount of the subsidy". This passage is also cited by the arbitrator in US – FSC (Article 22.6
– US), at footnote 88 of its Decision.

is intended to be interchangeable with the cumu lative amount of these two advantages or 'benefits …
conferred' by GSM 102 guarantees."186
4.141 According to Brazil, "using the terms of this provision", the "amount of the subsidy" can be
calculated for the purposes of this case on the basis of the two "benefits" it identifies. 187 Brazil relies
on the interpretation of the notion of "benefit" under Article 1 of the SCM Agreement by the Appellate
Body, and highlights in particular the fact that the Appellate Body has defined the term "benefit" as an
"advantage" and that, in the words of the Appellate Body, "there can be no "benefit" to the recipient
unless the "financial contribution" makes the recipien t "better off" than it would otherwise have been,
absent any contribution".188 Brazil concludes that the relevant question therefore is "to what extent is
the recipient "better off" than it would have been absent the financial contribution?"189
4.142 Brazil considers that the two "benefits" that it identifies in relation to GSM 102 guarantees
reflect advantages that the beneficiaries would not have secured in the marketplace in the absence of
the US Government's financial contribution. With r espect to the "IRS" component of its calculations,
Brazil explains that "through GSM 102 guarantees, discounted financing is provided, on terms that are
better than could otherwise have been obtained. I ndeed, in some cases, no financing could have been
obtained in the marketplace, because the foreign obligor is not creditworthy. These are valuable and
measurable commercial and economic advantages that constitute a 'benefit'." 190 Brazil further
explains how the "additionality" component of its proposed countermeasures also constitutes a
"benefit": "through GSM 102 guarant ees, US exporters are able to export greater ('additional')
quantities of agricultural commod ities than they would have exported in the absence of those
guarantees. Again, these are valuable and measurable commercial and economic advantages that
constitute a 'benefit'."
191
4.143 The United States argues that Brazil's "collection of benefits" is "speculative" and that it is not
at all clear these are the results of the "wrongful act" of the United States in providing the subsidy. 192
The United States notes that Brazil's arguments sugg est that any "benefit" that results from a subsidy
can be called a benefit. In the United States' view, "for the purposes of this proceeding, it is necessary
to be more precise because of the importance of these concepts in identifying a principle for an award
of countermeasures. "Benefits" are those conferred by the governmental financial contribution. Other
results, such as trade effects, may occur. But th ese are not "benefits" within the meaning provided by
the SCM Agreement".193
4.144 The United States considers that what Brazil has described as "benefits" does not actually
represent such "benefits" within the meaning of the SCM Agreement. We therefore consider whether
the two "benefits" described by Brazil in its me thodology for the calculation of the amount of the
subsidy do in fact constitute such "benefits" within the meaning of the SCM Agreement, as Brazil
argues.
4.145 Article 1.1 of the SCM Agreement defines the term "subsidy". 194 Under this provision, a
subsidy exists if there is a "f inancial contribution by a government" and "a benefit is thereby
conferred" within the meaning of Article 1.1(b). The Appellate Body has clarified that benefit is

186 Brazil's responses to questions from the Arbitrator, question 85, para. 74.
187 Brazil's responses to questions from the Arbitrator, question 88, para. 97.
188 Brazils' responses to questions from the Arbitrator, question 86, para. 76.
189 Brazil's responses to questions from the Arbitrator, question 86, para. 77.
190 Brazil's responses to questions from the Arbitrator, question 86, para. 78.
191 Brazil's responses to questions from the Arbitrator, question 86, para. 79.
192 US responses to questions from the Arbitrator, question 43, para. 61.
193 US comments on Brazil's responses to questions from the Arbitrator, question 90, para. 68.
194 Brazil's responses to questions from the Arbitrator, question 88, para. 97.

"identified by determining whether the recipient h as received a 'financial contribution' on terms more
favourable than those available to the recipient in the market".195
4.146 The parties disagree on the precise nature of the subsidization at issue in this proceeding.
Brazil invites us to adopt a specific understanding of the term "amount of the subsidy" for the
purposes of these proceedings, based on the notion of "benefits" contained in Article 1.1(b) of the
SCM Agreement, and encompassing two distinct "benefits " in the form of the IRS and of
"additionality". According to the United States, ther e is no basis for finding that any additional sales
made by US exporters constitute "benefit" w ithin the meaning of Article 1.1(b) of the
SCM Agreement.
4.147 The basic premise behind Brazil's argument is th at IRS and additionality are separate benefits
conferred by the same financial contribution, i.e. the GSM 102 guarantee. 196 Benefit is established in
the first instance 197 by reference to the terms on which a fi nancial contribution is provided to the
recipient. This is consistent with the contex tual guidance afforded by Article 14 of the
SCM Agreement, which provides guidelines for calculating the amount of a subsidy in terms of the
benefit to the recipient. The relevant financia l contribution in the present instance is the GSM 102
loan guarantee. Consistent with the contextu al guidance afforded by Article 14(c) of the
SCM Agreement, which deals specifically with loan guaran tees, Brazil says that the amount of benefit
conferred by the GSM 102 loan guarantee is the "difference between the amount that the firm
receiving the guarantee [i.e. the recipient] pays ... and the amount that the firm [i.e. the recipient]
would pay on a comparable commercial loan absent the government guarantee." We note that Brazil
determined the amount of IRS by reference to "the present value of the spread between (i) the interest
rate at which those obligors would have been ab le to borrow in the absence of GSM 102 ECGs, and
(ii) the subsidized interest rate enabled by those ECGs."
198 In our view, this is broadly consistent with
the approach outlined in Article 14(c) of the SCM Agreement, in the sense that it calculates the
amount of interest rate subsidy to the recipient of the GSM 102 guarantee (noting that the recipient in
the first instance is a foreign obligor, and not a party in the United States itself).
4.148 Having calculated the amount of benefit confe rred by the GSM 102 guarantees consistently
with Article 14(c) of the SCM Agreement, we do not see any other basis on which Brazil might
calculate some additional benefit conferred by those guarantees, as this term is defined for the
purposes of Article 1.1 of the SCM Agreement. Since benefit is established in the first instance by
reference to the recipient of a financial contribution, it is with regard to the recipient of the GSM 102
guarantees, i.e. the foreign obligors, that the ex istence of any benefit conferred by the GSM 102
guarantees must be established. Thus, having calcula ted the benefit conferred on the foreign obligors,
Brazil has effectively exhausted the potential for establishing benefit conferred by those financial
contributions.
199

195 Appellate Body Report, Canada – Aircraft, para. 157.
196 See, for example, para. 10 of Brazil's responses to questions ("IRS and additionality are ... both
"benefit[s] ... conferred" by a "financial contribution" in the form of a GSM 102 guarantee").
197 As discussed below, benefit may also be established, in the second instance, by virtue of the concept
of "pass-through".
199 Brazil has referred to the findings of the panel in Brazil – Aircraft (Article 21.5 – Canada II ) in
support of its argument that GSM 102 guarantees confer an additional benefit on US exporters. That was a case
in which the Brazilian Government provided export cred its through interest rate equalisation payments to
entities financing exports of regional aircraft. Such pa yments enabled the lenders to offer better export credit
terms than they would otherwise have been able to make available. Brazil relies in particular on the following
extract from that panel's report:
"We note that PROEX III payments are made in support of export credits extended to the
purchaser, and not to the producer, of Brazilian regional aircraft. In our view, however, to the

4.149 Accordingly, we reject Brazil's argument that the additional sales resulting from the GSM 102
payments constitute "benefit" within th e meaning of Article 1.1(b) of the SCM Agreement that should
be included within the amount of the GSM 102 guarantee subsidies in addition to the IRS benefit.
Although such additional sales may ultimately be generated by GSM 102 guarantees, they are
properly viewed as trade effects that fall outside the definition of subsidy set forth in Article 1.1 of the
SCM Agreement, and are not part of the "amount of the subsidy" for our purposes.
4.150 In support of that proposition, we also note that both Article 1.1(a) and (b) cumulatively
define what a "subsidy" is for the purposes of the SCM Agreement. It is not possible to determine that
a subsidy exists unless a financial c ontribution is made, being the criteri a referred to in Article 1.1(a).
Thus it is not enough for Brazil to argue that additiona lity is a "benefit" in order for it to be taken up
in the calculation of the amount of the subsidy constituted by the GSM 102 guarantee. The Arbitrator
notes that the income from additional sales is not a financial contribution from a government (i.e. the
US Government), nor are foreign importers entrus ted or directed to make those payments (i.e.
payments in respect of their purchases of products exported from the United States).
4.151 Having determined that the basis upon which Brazil's methodology relies for the calculation
of its countermeasures is more than the amount of the subsidy, because it considers "benefits" which
extend outside the meaning of Article 1.1 of the SCM Agreement, we find that the United States has
met its burden of proof. The principle advanced by Brazil for the calculation of its proposed
countermeasures is flawed. Although advanced on an "amount of subsidy" basis, it also includes
elements that do not constitute "benefits" within the meaning of Article 1.1(b) and instead reflects

extent Canada can establish that PROEX III pa yments allow the purchas ers of a product to
obtain export credits on terms more favourable than those available to them in the market, this
will, at a minimum, represent a prima facie cas e that the payments confer a benefit on the
producers of that product as well, as it lowers the cost of the product to their purchasers and
thus makes their product more attractive relative to competing products." (Panel Report, Brazil
– Aircraft (Article 21.5 – Canada II), footnote 42 (emphasis in original)).
Although this extract does indeed refer to a benef it being conferred on producers, we do not consider
that, when viewed in its proper context, it provides any basis for finding that the additionality identified by
Brazil constitutes "benefit" independent of, and additional to, the IRS benefit redounding to the foreign obligor.
Rather, Brazil – Aircraft (Article 21.5 – Canada II) concerns the case of benefit co nferred, in the first instance,
on the recipient of the financial contribution, "passing through", in the second instance, to other entities. Thus,
prior to the abovementioned extract, the Brazil – Aircraft (Article 21.5 – Canada II) panel had noted that:
"As the SCM Agreement is an Annex 1A agreement on trade in goods, and as this case relates
to alleged export subsidies in respect of a particular good -- Brazilian regional aircraft -- it is
incumbent upon Canada to establish that the benefit derived from PROEX III payments is not
retained exclusively by the lender but rather is passed through in some way to producers of
regional aircraft."
 (Panel Report, Brazil – Aircraft (Article 21.5 – Canada II), footnote 41
(emphasis added)).
In other words, because the SCM Agreement only imposes subsidy disciplines in respect of trade in
goods, and not trade in (financial) services, it was incu mbent on Canada "to establish that the benefit derived
from PROEX III payments is passed through in some way to producers of regional aircraft" (emphasis added).
In this regard, the panel found that evidence that PROE X III payments "allow the purchasers of a product to
obtain export credits on terms more favourable than thos e available to them in the market ... will represent a
prima facie case that the payments confer a benefit on the producers of that product as well ..." (Panel Report,
Brazil – Aircraft (Article 21.5 – Canada II), footnote 42 (emphasis in original)). This does not mean that the
benefit to the producers of regional aircraft was consider ed to be separate from, and in addition to, the benefit
conferred in the first instance on the recipients of the financial contribution. Rather, the benefit conferred on the
producers was simply part of the benefit conferred in the first instance on the recipients of the financial
contribution that had passed-through, in the second instance, to the producers. In other words, the benefit
conferred on the producers was fundamentally the same bene fit that had initially been conferred on the lenders,
simply viewed from a different perspective. Thus, although the IRS benefit conferred on foreign obligors might
be found to pass-through, in the second instance, to US exporters, the total amount of benefit conferred by the
GSM 102 guarantees would not increase.

certain trade effects of the measure as well. Thus, even if we were convinced that the "amount of the
subsidy" approach was an a ppropriate benchmark for adjudgi ng the appropriateness of the
countermeasure sought by Brazil, we could not agree that Brazil's approach actually does measure that
amount, as a matter of legal principle.
4.152 We also note that Brazil's principle does not ad mit of the need for the amount of the subsidy
to be apportioned such that it only captures that pa rt of the subsidy which is responsible for the
nullification or impairment felt by Brazil. If Brazil's "benefits"-based approach had been an
appropriate starting point, we still would have had to determine whether the entirety of the "amount of
the subsidy" could be the amount of the counterme asure in circumstances where the impacts of the
subsidy were felt by more Members than only Brazil. Nonetheless we do not reach such a
determination, either in considering whether th e United States has met its burden or in our own
assessment of what can be "appropriate" in the circumstances of this case, and the point is moot.
4.153 Accordingly, we find that the United States has discharged its burden of proving that the
countermeasure proposed by Brazil was inappropriate, in the way it was advanced to the Arbitrator.
Accordingly we must now turn to the question of determining what would constitute a proper basis for
the calculation of "appropriate countermeasures" in this case. We consider first whether the
alternative approach proposed by the United States is "appropriate".
(b) The United States' proposed alternative "net cost to government" approach
4.154 In this case, in the United St ates' view, the appropriate countermeasures are those based on
the net cost to government and "any other c ountermeasures do not have their foundation in the
specific circumstances of this case".200 At the same time, the United States considers that this amount
should then be adjusted to reflect the impact of the subsidy on Brazil only.
4.155 The United States asserts that, because the origin al and compliance panel findings were based
in relevant part on item (j) of the Illustrative List , that provision constitutes the only appropriate basis
for determining the amount of counter measures to be authorized. The United States contends that it
would not be appropriate to authorize countermeasures on the basis of the "benefit" standard proposed
by Brazil.
4.156 In the United States' view, this approach is consistent with that of the Appellate Body,
because the underlying findings in this case were ba sed on item (j) of the Illustrative List of Export
Subsidies under the SCM Agreement, and the Appellate Body has e xplained that "the measure of
value under item (j) is the overall cost to government, as the service provider, of providing the
service."
201 The United States proposes to determine the "cost to the Government" of the GSM 102
programme on the basis of the net present value approach followed by US Government agencies for
all credit guarantee and direct loan programs.
4.157 The United States refers to previous arbitrati ons in support of its proposition that the amount
of the subsidy as reflected in its net cost to government is "the" appropr iate methodology for the
determination of the quantum of "appropriate c ountermeasures" in this case. The United States
explains that "previous arbitrations, several of which have also involved export financing or export
credits, have determined that, in the case of prohibi ted export subsidies the amount of the subsidy is a
proper basis upon which "appropriate countermeasures" may be calculated. In this particular case, the

200 US written submission, para. 25.
201 US written submission, para. 26.

appropriate methodology is to use the amount of the subsidy as reflected in net cost to
government."202
4.158 For the reasons set forth below, we are unable to accept the United States' position.
4.159 First, we note that, although the relevant findi ngs of the original and compliance panels were
based on item (j), the United States was actually found to be in violation of Article 3.1(a) of the
SCM Agreement. Article 3.1(a) prohibits "subsidies" that are contingent on export performance. It is
the failure of the United States to withdraw such subsidies that has given rise to Brazil's right to
impose countermeasures. Furthermor e, the compliance panel agreed w ith the United States that the
cost-to-government standard in item (j), and the be nefit standard in Article 1.1(b), were merely
"alternative arguments " that could be examined in assessi ng whether the revised GSM 102
programme constituted an export subsidy.203
4.160 Secondly, item (j) was relied on in the origin al and compliance proceedings to determine the
existence of prohibited subsidies. It was not used to calculate the amount of those subsidies. In the
present case, the United States proposes item (j) as the only appropriate means of calculating the
amount of the GSM 102 subsidies. In our view, item (j) is not the only appropriate, or necessarily the
most appropriate, basis for doing so.
4.161 Thirdly, we do not consider that there is any legitimate basis for us to accept the a contrario
interpretation of item (j) proposed by the United States. Item (j) is illustrative of a situation in which
the provision by governments of export credit guara ntee programmes constitutes an export subsidy.
In particular, item (j) specifies that export cred it guarantee programmes constitute export subsidies
when premium rates are inadequate to cover the long-term operating costs and losses of the
programme. It does not necessarily follow, though , that an export credit guarantee programme may
never constitute a (prohibited expor t) subsidy if the premium rates are adequate to cover long-term
operating costs and losses. As a matter of law, it is possible that an item (j)-consistent export credit
guarantee programme might still be found to confer a "benefit", on the basis of the standard set forth
in Article 14(c) of the SCM Agreement.
4.162 Finally, a related point is that amending the relevant premium rates to make GSM 102
subsidies consistent with item (j) will not necessarily ensure full withdrawal 204 of the prohibited
export subsidy. As noted above, the mere fact th at the GSM 102 is rendered consistent with item (j)
does not exclude that the programme might neverthel ess continue to confer a "benefit" on the basis of
the standard set forth in Article 14(c). Sinc e Brazil would be entitled to continue to apply
countermeasures until the full benefit of the GSM 102 programme has been withdrawn, we do not
consider it appropriate to exclude consideration of the full amount of benefit when considering the
initial matter of the quantitative scope of such countermeasures.
4.163 We therefore do not consider that the "net cost to government" approach proposed by the
United States would provide a sound basis for the calculation of the "amount of the subsidy".

202 US written submission, para. 28.
203 Panel Report, US – Upland Cotton (Article 21.5 – Brazil), para. 14.51.
204 In US – FSC (Article 21.5 – EC II), the Appellate Body confirmed fu ll withdrawal of the subsidy is
required.:
"[The] recommendation under Article 4.7 remain s in effect until the Member concerned has
fulfilled its obligation by fully withdrawing the prohibited subsidy. Where a Member
withdraws a prohibited subsidy only in part, it has failed to comply fully with its WTO
obligation and the Article 4.7 recommendation con tinues to be in effect with respect to the
part of the subsidy that has not been withdrawn. "
(Appellate Body Report, US – FSC (Article 21.5 – EC II), para. 83 (original emphasis)).

4.164 In summary, at this stage of our analysis, we have determined that Brazil's methodology,
which it describes as representing th e "amount of the subsidy" in the form of "benefits" within the
meaning of Article 1.1.(b) of the SCM Agreement, does not in fact represent such "benefits". We have
also determined that the United States proposed alte rnative calculation based on "cost to government"
would not constitute an appropriate basis for the ca lculation of the "amount of the subsidy" in the
circumstances of this case. We do not reach th e second stage of the approach advocated by the
United States, which is to adjust the "amount of the subsidy", so as to reflect the effects of the subsidy
only on Brazil, and make no determination in that respect.
4.165 Having thus determined that neither of the pa rties' proposed approaches is satisfactory, we
must consider further what would constitute "appr opriate countermeasures" in the circumstances of
this case. In approaching this determination, we consider that we are not bound by the approaches
presented by the parties and are entitled, as n ecessary, to develop our own assessment and
methodology for the purposes of determining what would constitute "appropriate countermeasures".205
4.166 Before we proceed with this assessment, however, we wish to make some general
observations on the approaches proposed by the parties in this case.
4.167 Both parties have described their proposed approaches to the calculation of "appropriate"
countermeasures as being based on the "amount of the subsidy". Brazil considers that this amount is
properly reflected in the "benefits" of the IRS a nd "additionality", while the United States proposes to
base the countermeasures on the cost to the governme nt of the subsidy, and to then "adjust" it to
reflect only the effects of the subsidy on Brazil.
4.168 However, we are not persuaded that either party's approach was in fact purely based on the
"amount of the subsidy". As we have determined above, Brazil's calculation of "benefits" includes
not only an amount that can be properly character ized as the "benefit" under Article 1.1 of the
SCM Agreement (the IRS), but also an amount that may be more accurately described as reflecting the
"trade effects" of the GSM 102 payments (additiona l sales having accrued to US exporters as a result
of the GSM 102 payments). In fact, Brazil itself al so describes the two elements of its calculation as
reflecting "economic consequences" of the GSM 102 paym ents. This is not the same, in our view, as
the "amount of the subsidy".
4.169 The United States, for its part, proposes to use the amount of the subsidy as a starting point,
but considers that this should then be adjusted to reflect only the effects on Brazil. In response to a
request for clarification from the Arbitrator, the Unite d States has explained that its approach is based
both on the "amount of the subsidy" and on the "trade effects" approach. The United States has also
explained that it uses the amount of the s ubsidy as a "proxy" for its trade effects.
206 However, as we
have explained above, we see no pa rticular reason to assume that the amount of the subsidy would
constitute a relevant proxy for the total trade effects of the subsidy. As was noted by the arbitrator on
US – FSC (Article 22.6 – US) , "the proxy approach proposed by the United States is based on no
particular economic rationale. It simply assumes a one-to-one correspondence of dollar of subsidy to
dollar of trade impact. This is manifestly arbitrary."207
4.170 In short, it seems to us that, while purporting to apply an approach based primarily on the
"amount of the subsidy", both parties have in fact in corporated in their analysis elements that aim to
capture the trade effects of the measure, rather th an its "amount". Brazil addresses these effects in
terms of quantifying the "additional sales" accruing to the United States as a result of the subsidy,

205 See paras. 4.24 and 4.25 above.
206 See US responses to questions from the Arbitrator, questions 104 and 105.
207 Decision by the Arbitrator,US – FSC (Article 22.6 – US), para. 6.39.

while the United States invites us to adjust the amount of the subsidy to capture only the impact of the
subsidy on Brazil.
4.171 Both parties have therefore notionally relied on the notion of "amount of the subsidy" as a
starting point, but have de facto then proceeded to include a consideration of other elements. This
confirms us in our view that there is no particular basis for assuming, a priori, that the amount of the
subsidy alone adequately reflects the relevant circumstances, for the purposes of calculating
"appropriate" countermeasures. The reference to the "amount of the subsidy" as the basis of an award
in these conditions seems somewhat artificial to us, in the absence of a specific reason to approach the
question in these terms in the dispute at hand. This also further comforts us in our view that a
consideration of the trade-distorting impact of the subsidy, which both parties have de facto relied on
in their respective approaches (albeit in different forms), constitutes the most pertinent expression of
the consequences arising from the violation, for the purposes of quantifying "appropriate"
countermeasures.
4.172 With these observations in mind, we now proceed with our own assessment of what may
constitute "appropriate countermeasu res" consistent with the requirements of Article 4.10 of the
SCM Agreement, as we have interpreted it in Section IV.D above.
(c) Approach of the Arbitrator
4.173 In the event that we find that they are not cumulatively "benefits" within the meaning of
Article 1.1 of the SCM Agreement, Brazil considers that the IRS and "additionality" could nonetheless
be used together as the basis for the calculation, as "distinctly measurable and valuable consequences
of GSM 102 guarantees". In Brazil's view, this would be appropriate "in light of the nature and legal
status of those guarantees". Brazil suggests that, as well as being tailored to the specific
characteristics of the GSM 102 programme, this approach may encourage the United States to
reconsider its refusal to "withdraw the subsidy".
208
4.174 The United States considers that Brazil's s uggestion "that an award could include both
amounts corresponding to the alleged amount of the subsidy and trade effects finds no support in
previous arbitrations. Arbitrator s have relied on the principle of "trade effects" or, in the case of
prohibited subsidies, "amount of the subsidy" as th e basis for calculations. They have not added two
sets of results of calculations as Brazil would do. Where arbitrators have considered two approaches,
it has clearly been "an 'either/or' choice".209
4.175 The United States argues that there would be no basis for adding the two elements of Brazil's
calculations as it suggests, i.e. the "amount of the s ubsidy" and its "trade effects". The United States
observes that "Brazil's approach would permit both components to be included in an award because
they both may exist and be measured as a matter of economic theory." The United States observes
that "the fact that different components may exis t is not a principle upon which the Arbitrator may
award countermeasures. If that were the case, a party might accumulate multiple features of a subsidy
(e.g. cost to government, benefit to the recipient, effects on exports) and include them all in the
calculation of countermeasures, without regard to whether they are 'appropriate' according to a
principle such as 'amount of the subsidy' or 'trade effects'."
210

208 Brazil's responses to questions from the Arbitrator, question 71, para. 13.
209 US comments on Brazil's responses to questions from the Arbitrator, question 71, para. 15.
210 US comments on Brazil's responses to questions from the Arbitrator, question 72, para. 17.

4.176 The United States also considers that to set an amount of countermeasures based on both
components would not be "appropriate" because that amount would be "disproportionate" to the level
of nullification or impairment suffered by Brazil.211
4.177 We agree that the amount of "appropriate countermeasures" may not be based simply on an
addition of various economic values representing different aspects of the situation that would not have
any particular underlying logic. Article 4.10 of the SCM Agreement both requires and allows
countermeasures to be appropriate to the circumstances at hand, and this may legitimately involve a
consideration of various aspects of these circumstance s. Nonetheless, there must be some principled
and justifiable reason for basing the countermeasur es on a particular approach, in light of these
circumstances.
4.178 We have determined in our inte rpretation of Article 4.10 of the SCM Agreement above that
the requirement that countermeasures not be "dis proportionate" cannot be e quated to a requirement
that these countermeasures be exactly equivalent to the level of nullification or impairment suffered
by the complaining Member, and that the standard of "appropriate countermeasures" entails some
additional flexibility. Nonetheless, we are mindful that we are required, under Article 4.10 of the
SCM Agreement, to ensure that the countermeasures are not "disproportionate" within the meaning of
footnote 9, and that this assessment should take into account the adverse effects of the subsidy on the
trade of the complaining Member, having regard also to the prohibited nature of the subsidy.
4.179 In light of these considerations, we must determine whether, in the circumstances of this case,
there would be any particular rationale to usin g the IRS and "additionality" components of Brazil's
approach as the basis for a determination of "appropriate countermeasures" as Brazil suggests.
4.180 Brazil describes its calculations as representing "distinctly measurable and valuable
consequences of GSM guarantees", that could be the basis for an award of countermeasures. We do
not agree that "valuable" consequences of the gua rantees is a proper concept to apply, from Brazil's
perspective, when attempting to work out the trad e distorting impacts of the guarantees. However the
advantages accruing to a subsidising Member may have a relationship to the trade distorting impacts
on other Members, and therefore in economic terms it is useful to analyse them more closely.
4.181 We therefore consider whether the two elements of Brazil's calculation, i.e. the IRS and
"additionality", may provide an appropriate starting poi nt for measuring the trade-distorting impact of
the GSM 102 programme, and thus provide a b asis for the calculation of "appropriate
countermeasures" consistent with the terms of Article 4.10 of the SCM Agreement, as we have
interpreted them in Section IV.D above.
(i) The trade effects of the GSM 102 programme
4.182 We recall our determinations above that the IRS can be properly characterized as the amount
of the GSM 102 subsidy, while "additionality" refl ects rather its trade effects. Brazil divides
additionality, in turn, into full a dditionality (sales to non-creditworthy foreign obligors that simply
otherwise would not have been possible) and margin al additionality (sales to creditworthy borrowers
where the IRS acts like a sales discount to foreign obligors).
4.183 To elucidate the trade effects of the GSM 102 programme, we note that it operates as an
export subsidy albeit a targeted one: it is not a ge neralized subsidy on all US exports. Nonetheless,
like any export subsidy, it can be expected to aff ect both the volume of trade and the price at which

211 US comments on Brazil's responses to questions from the Arbitrator, question 71, para. 16.

trade takes place. 212 The GSM 102 programme can potentially stimulate additional US exports and
influence the price of those exports in the target markets. This illegally subsidized competition has
adverse effects on producers and exporters in the rest of the world. The question before us is how to
measure these adverse effects and whether the IRS and additionality concepts proposed by Brazil are
helpful in this respect. We first assess this ques tion in abstract terms before turning to the specific
circumstances of this case.
Trade-distorting impact of GSM 102 on the volume of trade
4.184 Brazil has defined additionality to mean "additio nal economic activity for US exporters that
would not otherwise have occurred". 213 Brazil allows that some US exports made with the support of
a prohibited GSM 102 export subsidy would have occu rred in the absence of the GSM 102 guarantee.
In response to a question from the Arbitrator, Br azil states that: "Indeed for creditworthy foreign
obligors, Brazil's additionality approach recognizes th at some US exports made with the support of a
prohibited GSM 102 export subsidy would have occurred in the absence of the GSM 102
guarantee".214
4.185 But this also implies that some of the exports would not have occurred in the absence of the
export credit guarantees. With respect to these other exports, there will be trade-distorting impacts on
Brazil since the same economic forces would operate . A subsidy is conferred, which passes through
to a lower effective sourcing price for US agricultural goods, resulting in trade-distorting impacts on
producers in the importing country or rest of the wo rld exporters selling to the importing country. In
Brazil's view, the only difference is that, for the same amount of GSM 102 transactions, the trade-
distorting impact of the transaction will be smaller if the obligor is creditworthy because some of it
would have occurred in the absence of the subsidies.
4.186 In fact, using its 'marginal additionality model', Brazil argues that all GSM-backed sales even
to creditworthy foreign obligors are attributable to the IRS.
215 The economic intuition behind this is
Brazil's assumption that the demand curve facing US exporters with a small market share is
essentially horizontal. Without the subsidy "if the United States were to withdraw its GSM 102
subsidies …, US exporters would forfeit th eir price edge and, consequently, lose all GSM-backed
transactions to their worldwide competitors"(emphasis added). 216 We review later whether we find
this a credible conclusion or not.
4.187 We have considered the United States' argumen t that additionality means the net addition to
world demand as a result of the export credit guarantee subsidy. 217 In our view, a key problem with
the United States' definition is that it ignores increas ed US sales in the target markets due to trade
diversion.218 Therefore, for the purposes of our analysis, Brazil's definition of additionality as

212 We judge it appropriate to assess the economic damage to a complainant by the potential amount
and value of trade which might be affected by the policy intervention that is the subject of the complaint. We
recognize that economists also evaluate the impact of a policy measure in we lfare terms, i.e. in terms of how
much better or worse off the policy makes the country under investigation. Trade effects arise in response to the
reallocation of resources between alternative uses in response to a policy intervention. Since the
countermeasures to be authorized will be in terms of the suspension of a pa rticular amount of trade, we believe
we are justified in trying to calculate the allocation effects of the GSM 102 subsidies and not their welfare
effects in assessing the appropriate level of countermeasures.
214 Brazil's responses to questions from the Arbitrator, question 26, para. 311.
215 Annex I to Brazil's written submission ("Sumner-Sundaram Statement"), paras. 1-2.
216 Annex I to Brazil's written submission ("Sumner-Sundaram Statement"), para. 3.
217 See especially Section II of Exhibit US-93.
218 "Any attempt to use additionality as a justificati on for export credits in a multilateral context must
limit the definition to only those cases where the expansio n in demand is global, with no reallocation in favour

additional US sales that would not otherwise have occurred is a more appropriate measure of the
adverse consequences of the GSM programme. We concur with Brazil that GSM 102 subsidies
enable transactions that simply would not otherwise have been possible.219
4.188 Nonetheless, there are three issues in using Br azil's concept of additionality as a measure of
the trade-distorting impact of the GSM 102 pr ogramme on other countries which merit further
consideration. The first is the possibility that GS M-supported sales to a target market simply displace
commercial US exports to that market, implying th at these sales do not result in additional economic
activity for US exporters. Where "net" additiona l US sales are less than the gross value of
GSM-backed transactions, then the adverse trad e effects on other countries are reduced. The
United States points out that the theoretical absence of the GSM 102 programme would not
necessarily mean that the export transaction itself woul d not have occurred. It recalls that it is the
foreign bank, not the importer, that is the recipient of the GSM 102 financing, and that in the absence
of the programme importers coul d still shop around and obtain financ ing from a different bank, or
indeed the same bank, to facilitate the transaction. 220 Brazil responds to this criticism by considering
creditworthy and non-creditworthy borrowers separat ely. In the case of creditworthy borrowers,
Brazil accepts that, in principle, some displace ment of commercial US exports could occur and
proposes its "marginal additionality model" to calculate this. We evaluate its use of this model below.
In the case of the non-creditworthy borrowers , it emphasizes the targeted nature of the
GSM programme. It provides extensive documentati on of the statements by USDA and FAS and of
regulations governing the GSM 102 programme. Under the rules of the scheme, export credit
guarantees are only made available to finance exports that would not otherwise occur. Brazil says it is
relevant that the GSM regulations provide that "the programs are operated in a manner intended not to
interfere with markets for cash sales". 221 Because of these segmented markets, there is thus no
inconsistency in observing US commercial and GSM exports to the same country. Where markets are
segmented, the Arbitrator accepts that it is reasonabl e to assume that it is not commercial US exports
that are displaced by GSM exports but rather third country exports and domestic production.
4.189 Even if the GSM-supported sales to a particular market are indeed additional (i.e. they would
not have taken place in the absence of the prog ramme), a second criticism is that they may not
represent additional US export sales if these sales are simply diverted from commercial US sales to
another market. We note that Brazil accepts this possi bility. It states: "… it is reasonable to attempt
to gain some insight about the magnitude of the offset caused by the indirect impact of GSM 102 on
the US exports destined for n on-eligible market segments".
222 Brazil goes on to provide a
methodology for doing this, but concludes "that the o ffsetting displacement of commercial exports is
likely to be small". 223 However, the calculation depends cr ucially on the figure assumed for the
domestic price increase in the United States as a result of GSM guarantees, and we have no firm
evidence on the appropriate value for this.

of one country. This definition omits those programmes which benefit a particular exporter partly at the expense
of other countries' exports.". (Exhibit US-92, p. 4, quoting the OECD study in Exhibit US-93, para. 42).
219 Joint statement by Professor Daniel Sumner an d Rangarajan Sundaram regarding the United States'
critique of Brazil's approach to "marginal additionality", para. 9.
220 US comments on Brazil's responses to questions from the Arbitrator, question 93, paras. 76-82.
222 Brazil's responses to questions from the Arbitrator, question 92, para. 123.
223 Brazil's responses to questions from the Arbitrator, question 92, para. 132. Using quite a high value
for the price effect of GSM export credit guarantees on US producer prices (0.5 per cent), it calculates a possible
value for net additional US exports, it calculates that additional US exports for the ten commodities might
amount to US$870 million (if the price effect were smaller, this value would also be smaller). As the value of
GSM transactions in 2006 was about US$1 billion, this would indeed suggest rather limited reshuffling of
US exports.

4.190 In our view, however, it is not necessary to ta ke account of this effect when assessing the
trade-distorting effects of the prohibited subsidy. It may be true that, in some other markets, there is
less competition from US commercial exports becau se these have been reallocated to supply the
GSM markets. However, Brazil makes a strong rebuttal that it is not legitimate or consistent with
WTO practice to offset trade-distorting impacts wh ich are found by some possible positive effects in
other markets. The Arbitrator finds it useful to quo te Brazil in full on this point in its response to one
of the questions from the Arbitrator:224
"One benefit that Brazil measures is the additional US trade flows generated by
GSM 102. Other arbitrators have also measured trade flows, in particular in assessing
the value of the complainant's lost exports in quantifying nullification and
impairment. In these arbitrations, arbitrat ors have never taken into account the fact
that goods not exported to the respondent's market could have been diverted to
alternative markets …. Thus, in previous arbitrations, the valuation of trade flows
affected by WTO-inconsistent measures was not diminished by potentially mitigating
factors, such as opportunity costs. Brazil considers that this approach is correct."
4.191 The third issue concerns the treatment of add itional demand in the target countries as a result
of GSM-supported sales. Additional demand arises because of the price effect of the subsidized
exports as discussed in the next section. The subsid ized exports lower domestic prices in the target
markets and may lead to increased consumption as consumers move down the demand curve. It might
be argued that because this increased consumption is truly additional, the additional quantity does not
contribute to adverse effects on either domestic produ cers or third country exporters. In general, we
believe that this additional consum ption (which will be a function of the size of the price effect and
the elasticity of demand) will be relatively small relative to the overall size of GSM 102 transactions
in these markets, but to the extent that it occurs, Brazil's measure of additi onality will overstate the
displacement of domestic production and exports due to the programme.
4.192 Despite this caveat, if we focus on the trade-dist orting effects of the subsidy, we find that in
the target markets, there is displacement of bot h domestic production and th ird country exports by
US GSM-supported exports, and that this is broa dly what is captured by Brazil's calculation of
additionality. Bearing in mind the latitude we have as the Arbitrator to determine an "appropriate"
level of countermeasures, and the f act that we are dealing with a prohibited subsidy, we have decided
that it is appropriate to use Brazil's measure of additionality as a measure of the market volume loss to
other producers and exporters, while recognizing that it may be an overestimate of the actual loss.
The price effects of the GSM 102 programme
4.193 In addition to these volume effects, there will also be price effect s in the target markets. We
note that, from the point of view of the United States , the increase in import demand as a result of the
GSM export credit guarantee subsidy is represented by a shift in the import demand curve that it
faces, because it represents increased demand at the same world price. Here, it is useful to distinguish
between the cost of the commodity to the importe r (the world price, ignoring freight and handling
charges) and the total cost of importing, which includes the cost of financing. 225 B e c a u s e o f t h e
interest rate subsidy, for creditworthy borrowers the total cost of importing may be lower as a result of
the guarantee ('sales discount'), even though there is no change to the world price of the commodity.
For uncreditworthy borrowers, the guarantee can lead to a relaxation of a credit or liquidity constraint

224 Brazil's responses to questions from the Arbitrator, question 28, para. 366.
225 This distinction is drawn in the US written submi ssion, para. 212. Brazil agrees with this and calls
the total cost of importing the "effective sourcing price" (Brazil's written submission, para. 217).

which enables transactions that would not otherwise occur. 226 Both situations are appropriately
represented as a shift in the import demand curve facing US exports.
4.194 In the target market, however, there is a drop in price. The reason for this is that the subsidy
does not alter the purchasing power nor relax any li quidity constraint among domestic consumers, nor
does it affect the production costs of domestic producers, so there is no shift in either domestic supply
or demand curves as a result of the GSM guarantee. Therefore, in order to absorb the additional sales,
there will be greater competition on the domestic market, domestic prices will drop, some third
country exports will be squeezed out and domestic producers will be adversely affected even while
domestic consumers increase their quantity demanded.
4.195 We recall that the design and operation of the GS M 102 subsidy is such that the recipient of
the IRS, i.e. the obligor, is a service provider, whose services serve to guarantee an export sales
transaction relating to certain goods. Ultimately, it is the export of those goods that is being
facilitated through the granting of the subsidy, and it is the trade in these goods that is affected by the
granting of the subsidy.
4.196 The effect of the IRS is to lower the financing cost, and therefore the effective sourcing price,
of US imports in the target markets. We note th at the GSM programme provides subsidized credit to
foreign obligors who are in all cases banks. These banks pass on these favourable credit terms to the
ultimate purchasers of the US exports. If there is no change in the credit conditions facing the ultimate
purchasers, there can be no additional US sales ( nor additionality in the US sense of additional
demand). The United States points out, correctly, that Brazil assumes 100 per cent pass-through of
the interest rate subsidy in its calculations.
227 However, while it raises a doubt about the validity of
this assumption, it does not demonstrate conclusively that it is an unreasonable assumption to make.228
4.197 Under particular circumstances, the revenue loss due to the price effect will be exactly equal
to the IRS as defined by Brazil. The first require ment is that the export guarantee programme has no
effect on the world market price. Both Braz il and the United States agree that the GSM 102
programme does not affect the world market price. 229 The other requirements are that the
GSM-supported sales substitute on a one-to-one basis for either domestic production or unsubsidized
imports and that the supply curve of other suppli es and the demand curve are perfectly inelastic and
not responsive to price. In general, the price eff ect in the target market will be a function of the
quantity of additional GSM-supported sales and of the elasticities of other supplies and domestic
demand. In particular, as the sum of the other supply and demand elasticities approaches infinity, the
price effect approaches zero.
4.198 To accurately assess the price effect for each GSM-supported commodity in each target
market would therefore require information on all the relevant domestic supply and demand
elasticities as well as the share of GSM sales in total supplies on each market. As we have seen in
other aspects of this dispute, these can be highly contested parameters. Bearing in mind the latitude
we have as the Arbitrator to determine an "appropriat e" level of countermeasures, and the fact that we
are dealing with a prohibited subsidy, we have d ecided that it is appropriate to use the IRS as a
measure of the global revenue loss to non-US producer s and exporters due to the price effect, while
recognizing that it may be an overestimate of the actual loss.

226 Brazil notes that "the GSM program operates solely in circumstances in which credit would not
otherwise be available to finance the export of US agricultural goods" (Brazil's written submission, para. 208).
227 It discusses the reasonableness of this assumption in Section IV of Exhibit US-92.
228 Brazil provides a rebuttal of th e US argument in Annex 1 to its written submission ("Summer-
Sundaram Statement"), footnote 10.
229 See paras. 4.259 and 4.263 of this Decision.

Apportionment
4.199 In light of the above, the Arbitrator believes th at it is appropriate to use Brazil's methodology
to calculate the trade-distorting impact of GSM 10 2 exports. However, given that we have also
determined that countermeasures should be linked to, if not necessarily equivalent to, the trade-
distorting impact of the measure on Brazil, the amount of additionality and the IRS must be
apportioned to Brazil's share of the market.
4.200 In apportioning the amount of additionality to Brazil's share of the market, we have to
distinguish between the trade-distorting impact that occurs in Brazil's domestic market as a result of
the GSM 102 transactions involving Brazilian obligors, and the trade-distorting impact that occurs in
non-Brazilian markets. Apportionment will be necessar y for those trade-distorting impacts that occur
in non-Brazilian markets since the damage to Brazil's interest is linked to how large a share Brazil has
of those markets. In this apportionment, the Arbitr ator has used Brazil's share of world exports of the
GSM 102 products, which is on average 11.7 per cent (see Table 1).
230 We have used Brazil's share of
the world export market of GSM 102 products rath er than its share of imports plus domestic
production in the target countries. We use the world market rather than the target market share of
GSM 102 products because of our belief that the ob served share of non-US imports in these countries
has been depressed by the existence of the GSM 1 02 subsidized competition and is thus not an
appropriate coefficient to apply. We are also awar e that some of the adverse effects in the target
markets would be absorbed by domestic producers ra ther than by non-US exporters such as Brazil.
Nonetheless, it is more likely that it is non-US imports that bear the brunt of the subsidised
competition because they will be more sensitive to the price effects of the subsidy (since trade
elasticities are typically larger in magnitude than demand and supply elasticities), and thus Brazil's
share of world exports is an appropriate indicator to use for the apportionment.
Table 1: Brazil's Share of World Trade in GSM 102 Products
1, 2006

GSM 102 Product Brazil Exports 2 World Exports 3 Brazil Share
Cotton 341,275,226 9,280,297,827 3.7%
Oilseeds 5,689,902,478 21,519,800,311 26.4%
Protein meals 2,440,792,339 16,945,389,808 14.4%
Feed Grains 481,894,034 12,987,102,389 3.7%
Corn Products (Starch) 8,781,310 406,633,699 2.2%
Hides/ Skins 2,693,441 4,257,484,051 0.1%
Tallow 19,710,974 3,606,485,104 0.5%
Rice 59,872,132 10,158,656,158 0.6%

230 The share is based on data submitted by Brazil from UN Comtrade, which is contained in
Exhibit Bra-815, and additional data on world exports of GSM 102 products from the same source. The
additional data were extracted from UN Comtrade on 16 June 2009. The definition of GSM 102 products, in
the Harmonised System (HS), is taken from Exhibit Bra-814.

GSM 102 Product Brazil Exports 2 World Exports 3 Brazil Share
Poultry Meat 3,038,988,127 12,121,810,169 25.1%
Pig Meat 1,010,288,388 20,653,942,499 4.9%
TOTAL 13,094,198,449 111,937,602,015 11.7%
Notes:
1. Definition of GSM 102 products, in the Harmonised System (HS), is from Exhibit Bra-814.
2. Data sourced by Brazil from UN Comtrade and found in Exhibit Bra-815.
3. Data sourced from UN Comtrade (extracted on 16 June 2009).

4.201 However, no apportionment will be necessary for th e trade-distorting impact which occurs in
Brazil's domestic market since the effect is felt in its entirety by its domestic producers or third
country exporters. We accept that to the extent that some of the trade-distorting impacts are borne by
third country exporters, this procedure may overs tate the damage suffered by Brazil alone but we
believe that the importance of third country exports to Brazil is small relative to the value of domestic
production, and thus this is a reasonable latitude to take in defining "appropriate countermeasures".
4.202 Similar to the case of full additionality and ma rginal additionality, the IRS provided to non-
Brazilian obligors must also be apportioned while th e IRS that flows to Brazilian obligors will not be
so apportioned.
3. Calculations
(a) Brazil's methodology
4.203 Brazil's methodology involves determining the interest rate discounts secured by creditworthy
and uncreditworthy foreign obligors on credits backed by GSM 102 guarantees and estimating the
additional export sales obtained by US exporters as a result of these discounts. Brazil refers to the
interest rate discounts as the "interest rate subsidy" and to the additional export sales generated by the
interest rate subsidy as "additionality". It distin guishes between the additional export sales that come
about through guarantees to creditwor thy and uncreditworthy foreign ob ligors, referring to the former
as "marginal additionality" and to the latter as "full additionality".
4.204 Using its methodology, Brazil arrives at est imated annual countermeasures equal to
US$1.122 billion. This amount ca n be subdivided into: (i) interest rate subsidy amounting to
US$211 million, (ii) marginal additionality amountin g to US$94 million, and (iii) full additionality
amounting to US$817 million.
231
4.205 The United States claims that Brazil's methodol ogy is based on "numerous and incorrect
assumptions" that result in a figure higher th an is appropriate under Article 4.10 of the
SCM Agreement. The particular problems, including genera l critiques and specific examples, that the
United States finds with Brazil's methodology fo r calculating the interest rate subsidy, full
additionality, and marginal additionality are taken up in the succeeding sections.
4.206 Prior to doing so, we note that Brazil had initia lly applied the methodology to its estimates of
the value of transactions supported by GSM 102 export credit guarantees on a foreign obligor-specific
basis, based on publicly available data. This w as because it did not have access to the internal USDA
data. Subsequently, however, and in response to a request from the Arbitrator, the United States

231 Brazil's oral statement, para. 100 and Exhibit Bra-794.

agreed to provide its data on GSM 102 export credit guarantees in FY 2006. 232 Brazil consequently
applied its methodology for calculating the IRS and additionality to this data.233
4.207 Secondly, Brazil's initial calculations did not consider whether the volumes and budgetary
outlays of scheduled products exceeded their WT O export subsidy commitments. The United States
correctly notes that circumvention of the US expor t subsidy commitments occu rs for these scheduled
products only to the extent that the export subsid ies exceed the volumes and budgetary outlays set out
in the US reduction commitments. 234 The United States argues that "the finding that the GSM 102
programme conferred an export subsidy extended to the programme as a whole, but any calculation of
an amount of prohibited subsidy in this case must necessarily make allowance for permitted export
subsidies pertaining to scheduled products". 235 Brazil has accepted this argument and adjusted its
calculations accordingly.236
(i) Interest rate subsidy
4.208 Brazil defines the interest rate subsidy as the pr esent value of the spread between the interest
rate at which foreign obligors would have been able to borrow in the absence of GSM 102 export
credit guarantees and the subsidized interest rate enabled by those guarantees. Specifically, Brazil
calculates the subsidy by measuring, over the tenor of the guaranteed loan , the difference between a
specific borrower's discounted payment stream unde r the conditions secured with a GSM 102 export-
credit guarantee, and the counterfactual discounted payment stream that could have been secured
without the GSM 102 export credit guarantee, net of programme fees.237
4.209 Brazil applies the "Ohlin formula" to calculate the subsidy rate for each foreign obligor. The
Ohlin formula computes a borrower's present value of the interest rate difference owing to the terms
of the GSM 102 loan guarantee, net of guarantee fees, using a counterfactual market interest rate as
the discount factor. 238 Brazil claims that the Ohlin formula is widely used for present value
calculations in agricultural economics.239 This is computed as follows:
fGTr
a
r
a
r
r
gS
aTaG
−
⎟⎟
⎟
⎟
⎟
⎟
⎟
⎠
⎞
⎜⎜
⎜
⎜
⎜
⎜
⎜
⎝
⎛
−
+
−
+
−−= )(
)1(
1
)1(
1
1*)1(*100
where:
S = subsidy rate, i.e., present value of the interest rate spread between guaranteed and market
conditions;
T = term of guarantee (in years), i.e., tenor or maturity;
G = grace period (in years);

232 US responses to questions from the Arbitrator, question 50, para. 100. See also Exhibit US-78.
233 Brazil's oral statement, para. 100. See also Exhibit Bra-794.
234 US written submission, para. 20.
235 US written submissions, para. 86.
236 Brazil written submission, para. 118. See also Exhibit Bra-794.
239 Brazil's Methodology Paper, fn 13.

f = exporter fee (in % of the GSM 102 export credit guarantee);
a = installments (in payments per year);
g = interest rate (in %) with a GSM 102 export credit guarantee;
r = annual discount rate (market interest rate, i.e., importers' risk-adjusted rate).

4.210 As can be seen from the formula, this requir es Brazil to estimate the counterfactual market
interest rate that would have been demanded by commercial lenders from foreign obligors in the
absence of a GSM 102 export credit guarantee.
4.211 In Brazil's methodology, the market interest rate is comprised of a risk-based premium and
the risk-free baseline interest rate which is based on the London Interbank Offered Rate ("LIBOR").240
It describes four intermediate steps to determining the market interest rate: (i) identify a methodology
for deriving market interest rates; (ii) sep arate creditworthy from non-creditworthy obligors,
(iii) identify credit risk ratings for rated foreig n obligors and use a methodology to assign credit risk
ratings to unrated foreign obligors; and (iv) calculate the market interest rate to credit classes of
borrowers.241
4.212 According to Brazil, the methodology that it uses to calculate the market interest rate is one
used by the United States Department of Comme rce ("USDOC") in countervailing duty proceedings.
It states that the USDOC approach proceeds from th e premise that a lender's expected return on all
loans should be equal.242 This means that the market interest ra te will be greater the higher the risk of
the borrower. In addition, Brazil states that the approach requir es distinguishing between two risk
groups: creditworthy borrowers and uncreditworthy borrowers.243
4.213 Wherever a foreign obligor has received a cred it rating, Brazil simply uses that rating to
assign the obligor to the corresponding credit risk gr oup. However, not every foreign obligor has a
rating from the credit-rating institutions. For unrated foreign obligors from countries in which at least
one CCC-approved obligor has been rated, Brazil treats unrated foreign obligors as being, on average,
one notch below the worst-rated obligor in that country. For foreign obligors from those countries in
which not a single CCC-approved foreign obligor has received a credit rating, Brazil imputes credit
ratings.
4.214 The imputation proceeds first by determining country-specific credit-risk averages for those
countries that host at least one rated foreign obl igor. Brazil compiles the average probability of
default in each country by (i) adding up the defa ult probability of each rated and unrated foreign
obligor and (ii) dividing the result by the tota l number of CCC-approved obligors for that country.
This average default probability is matched back to the relevant credit risk group on the numerical
credit scale of 1-18 to arrive at a country-specific average obligor credit risk.
4.215 In a second step, Brazil estimates the default probability of foreign commercial banks in
unrated-obligor countries, using information of specifi c commercial risk in countries that host at least
one rated foreign obligor. Brazil determines the credit risk differen tial between average rated-bank
risks and country risk for each country that has at l east one rated obligor. Brazil claims that the data
shows that a rated bank is, on average, three credit -risk "notches" below the sovereign risk of the
country in which it is domiciled. Consistent with its previous approach that, if evaluated, non-rated

foreign obligors would on average receive a credit rating that is one notch below the worst-rated
obligor in a country, Brazil treats unrated obligors in unrated countries as having a credit rating that is
four notches below sovereign risk.
4.216 To separate uncreditworthy borrowers from cr editworthy borrowers, Brazil uses credit rating
information from Fitch, Moody's and S&P found in Bankscope. Brazil explains that Bankscope is not
itself a ratings agency, but combines data from different ratings agencies. 244 It uses this ratings
information to rank companies and sovereign States along a scale of 18 steps, with a numeric ranking
of one for the lowest credit risk and 18 for the high est credit risk. It uses as a threshold between
creditworthiness and uncreditworthiness a credit-rating of "10" on the 18-point numerical rating scale.
Brazil classifies borrowers with a rating of 11 (co rresponding to credit ratings of BB+ or Ba1 on the
scales of S&P and Moody's, respectively) or worse as uncreditworthy.
4.217 Brazil justifies the use of this threshold by sta ting that borrowers with a rating of 11 or worse
are usually referred to as "below investment grade". It states that the conventional threshold between
creditworthiness and uncreditworthiness is a credit- rating of ten on the 18-point numerical rating
scale. It claims that Moody's distinguishes between "investment grade" and "non-investment" ("junk",
or "speculative") grade and uses a numerical rating of ten as the threshold.245
4.218 Brazil uses this information to calculate the mark et interest rate that will be assigned to the
different credit classes of borrowers. This market inte rest rate is made up of a risk-free interest rate
and a risk premium. For FY 2006, Brazil uses a risk -free interest rate of 5.18 per cent. In Brazil's
methodology, the risk premium depends on the probab ilities of default of the foreign obligors. Brazil
takes the cumulative default probabilities from a Moody's study of corporate historical default rates of
corporate bond issuers in the period 1983-2005. Brazil subdivides the group of creditworthy obligors
to reflect the credit risk of each individual cred itworthy borrower. Instead of imputing the same
market interest rate for all creditworthy borrowers , Brazil breaks down creditworthy obligors into ten
separate groups to reflect the actual credit risk of each individual creditworthy borrower. However,
for those obligors that it classifies as uncreditwor thy, Brazil applies a si ngle default probability
corresponding to the group with a rating of 18.
4.219 The result of applying Brazil's methodology is an estimate of the interest rate subsidy of
US$211 million for FY 2006. The estimated subsidy ra te by obligor ranges from a low of 0 per cent
(for the Korean banks) to a high of 29.24 per cent for a Mexican obligor, with a weighted average
(with the share by each obligor of the total value of GSM 102 transactions as weights) of 21.2 per cent
for all obligors.
Arguments of the parties

4.220 The United States claims that Brazil's methodol ogy for imputing risk to foreign obligors
omits a reasonable inquiry into the obligors and r esults in exaggerated estimates of risk. The
United States objects to the reliance solely on ratings from credit rating agencies as the basis for
classifying the riskiness of various foreign obligors. It also calls into question Brazil's method for
assigning ratings to unrated foreign obligors. As a result of these incorrect imputations of risk, it
claims that this makes the interest rate subsid y estimate, and calculations of marginal and full
additionality, far too high. The United States goes on to cite examples of foreign banks, which were
classified as uncreditworthy by Brazil's methodolog y (a numerical rating worse than 10), but which
were able to secure credit in ordinary credit markets.246

245 Brazil's Methodology Paper, fn 35.
246 US written submission, paras. 151-153.

4.221 The United States disputes Brazil's claim that it was following the USDOC methodology to
calculate the interest rate subsidy. Instead, the United States alleges that Brazil had misconstrued and
misapplied the USDOC approach. According to the United States, the Department of Commerce
applies the expected return formula to construct a counterfactual market interest rate only if the
particular firm under examination is first determined to be "uncred itworthy" after a detailed analysis
of financial statements.247 The Department of Commerce's defin ition of "uncreditworthy borrower" is
not all borrowers with less than an investment -grade credit rating but is a borrower that the
Department determines, after a detailed analysis of the borrower's financial health and ability to
service debt obligations, cannot secure financin g from conventional commercial sources. The
Department's creditworthiness determination is based on a number of factors, including the receipt of
any commercial long-term loans, the present and past fi nancial health of the firm, the firm's ability to
meet its costs and fixed financial obligations, and evidence of the firm's future financial position.
248
4.222 In contrast, the United States says that Brazil has made no attempt to discern any comparable
commercial loans taken out by any of the obligor s during the relevant time period, nor has it
attempted to consider national average interest rate s in its assertion that obligors are uncreditworthy.
Instead, Brazil assumes that any borrower with a numer ic rating of ten or wor se is uncreditworthy.
But, according to the United States, the set of borrowers who cannot secure financing from
conventional commercial sources is fundamentally different from the set of borrowers who can secure
financing from conventional commercial sources, but just not at investment-grade rates. The
borrowers in the latter set are creditworthy by definition; they are just not investment-grade
creditworthy.249 It states that Brazil's own written submission recognizes that "non-investment grade"
or "speculative grade" is not synonymous with "unc reditworthy" and that capital markets therefore do
not ascribe the same meaning of absolute uncre ditworthiness as Brazil to a credit rating worse
than ten.250
4.223 Finally, the United States claims that its re view of the academic literature on export credit
guarantees show that Brazil's methodology is not su pportable. While Brazil's methodology relies on
an interest rate subsidy of more than 20 per cent, the range of possible interest rate subsidies in the
literature described in Exhibit US-92 starts at nearly zero and has a maximum of less than
eleven per cent.251
4.224 Brazil defends its method for imputing risks to the foreign obligors who made use of
GSM 102 export credit guarantees in FY 2006. It not es that the United States offers no criticism of
the Ohlin equation and has itself employed the formula. 252 It justifies its use of information from
credit rating agencies – Fitch, Moody's and S&P – to determine the credit quality of individual foreign
obligors. These are rating agencies which are r ecognized by the US Securities and Exchange
Commission as Nationally Recognized Statistical Rating Organizations. 253 In forming their opinions
of the credit quality of a particular obligor, the cr edit rating agencies employ analysts and models to
assess the obligor's financial condition, operating performance, funding sources, asset quality, risk
management strategies, and policies.254
4.225 Brazil maintains that the assumptions informing its assignment of ratings (i) to unrated
obligors in "rated-obligor countries" and (ii) to unrated obligors in "unrated-obligor countries" are

247 US written submission, para. 157.
248 US responses to questions from the Arbitrators, question 53, para. 128.
249 US responses to questions from the Arbitrators, question 53, para. 128.
250 US responses to questions from the Arbitrators, question 51, para. 107.
251 Exhibit US-92.
253 Brazil's written submission, fn 126.
254 Brazil's responses to questions from the Arbitrator, question 25, para. 271.

justified. Brazil argues that ratings are solicited by the banks themselves. A strong bank would like
its financial strength to be made pub lic or signalled to the investor and creditor populations at large.
If a bank chooses not to use a credible quality-signa lling device when one is available, a prudent
creditor, in gauging credit risk, will treat that bank as less creditworthy than a bank that has chosen to
so signal. Since it will not know why the unrated ba nk has decided not to secure a rating, the prudent
creditor will assume the worst: that the unrated ba nk fears it would receive a disadvantageous credit-
rating vis-à-vis its competitors. Under these circum stances, its use of a single notch differential
between unrated banks and the worst-rated CCC- approved bank in a country does not lead to
countermeasures that are inappropriate or disproportionate. 255 It also defends its approach to the
situation in which an unrated obligor is from a country in which there are no rated CCC-approved
foreign obligors. In this case, the obligor is rate d four "notches" below the sovereign but this arises
from taking what Brazil describes as "objective steps".256
4.226 Brazil explains its choice of the numerical rati ng of ten to distinguish between creditworthy
and uncreditworthy obligors as a practice that is widely applied in the capital markets. 257 Brazil cites
literature provided by the ratings agencies, Fitch, Moody's and S&P, which purport to show how the
agencies distinguish between "inv estment grade" from "speculative grade" bonds and other debt
securities.258 Brazil explains that the term "investment gr ade" historically referred to bonds and other
debt securities that bank regulators and market par ticipants viewed as suitable investments for
financial institutions. Now the term is broadly used to describe issuers and issues with relatively high
levels of creditworthiness and credit quality. In contrast, the term "non-investment grade," or
"speculative grade," generally refers to debt secur ities where the issuer curre ntly has the ability to
repay but faces significant uncertainties, such as adverse business or financial circumstances that
could affect credit risk. 259 Based on these references, Brazil determines that "investment grade"
would refer to numerical ratings of ten or bette r and that "speculative grade" would correspond to
numerical ratings of 11 and worse.
4.227 Brazil rejects the charge that it is misapplying the USDOC methodology. First, it argues that
the fact that the USDOC applies its methodology for calculating a counterfactual market interest rate
only for uncreditworthy foreign obligors does not establish that using the methodology for
creditworthy obligors leads to inappropriate and disproportionate countermeasures.260
4.228 Second, it objects to the United States' argumen t that Brazil should have used some element
of the USDOC methodology to make assessments of creditworthiness of foreign obligors based on a
detailed analysis of financial statements and on wh ether the obligor could have secured loans without
government guarantees. It provides several reasons fo r this. First, employing financial information
from the balance sheets of the borrowing financial in stitution will not reveal whether that borrower
has been able to secure credit that is comparable to GSM 102. 261 Brazil describes credit under the
GSM 102 programme as US-dollar denominated, un secured, and long-term with maturities of
3 years.262 It claimed to have analysed 24 examples give n by the United States and showed that for
none of the applicable examples could a truly comparable loan be found. 263 Second, Brazil argues
that the ability to secure a single lo an does not make an uncreditworthy obligor creditworthy. It cites
the USDOC itself as stating that the fact that a resp ondent has taken out a single commercial loan is

258 Brazil's written submission, fn 152.
259 Brazil's written submission, fn 152.
261 Statement by Professor Rangarajan K. Sundaram concerning GSM 102, Exhibit Bra-793, para. 43.
262 Statement by Professor Rangarajan K. Sundaram concerning GSM 102, Exhibit Bra-793, para. 42.
263 Statement by Professor Rangarajan K. Sundaram concerning GSM 102, Exhibit Bra-793, para. 58.

not dispositive evidence that the firm was creditworthy. 264 Finally, unlike an investigating authority in
a US countervailing duty proceeding which may have the power to demand information from
respondents to enable a review of their individual borrowings (as well as the power to adopt adverse
inferences if its requests are not complied with), Br azil says it does not have the ability to secure the
relevant information from foreign obligors in preparing its methodology.265
4.229 At the same time Brazil claims that its approach is flexible and that the Arbitrator can make
appropriate adjustments to the calculation of the interest rate subsidy.266 The method by which market
interest rates facing creditworthy borrowers are dete rmined can be adjusted if reliable interest-rate
information is available from a different sour ce. The threshold for distinguishing between
creditworthy and uncreditworthy obligors can be ad justed, for example, choosing a threshold of
14 instead of ten. Unrated borrowers can be rate d on par with the worst-rated CCC-approved bank in
the country. Finally, the method could be adjusted, if necessary, to include a "scaling" of the full
additionality calculation, so as to adjust the imp act of the creditworthiness assessment for unrated
obligors assigned a credit rating at or inferior to 11.267
4.230 Finally, Brazil disputes the conclusions reached by the United States regarding the empirical
literature on interest rate subsidy. First, it sugg ests that the United States is comparing "apples and
oranges". Brazil's interest rate subsidy analys is concerns data from a single and recent year
(FY 2006), while the studies cited by the United States use very different time periods, most
terminating by the mid-1990s.268 It claims that using a different time period fundamentally drives the
results, because the risk-free interest rate varied c onsiderably over the last three decades. Moreover,
Brazil's interest rate subsidy calculations are made at an obligor-specific level, whereas all of the
studies cited by the United States use sovereign-level in formation. Brazil's application of its interest
rate methodology to FY 2006 data concerns obli gors in 17 countries, while two studies reviewed by
the United States deal with only five and six import ma rkets, respectively. Second, Brazil claims that
the United States is mistaken in its assertion that no previous study has found subsidy rates of the
magnitude of Brazil's. As counterexamples, it ci tes five studies that find interest rate subsidy
estimates comparable to or greater than what it calculates.269
Analysis by the Arbitrator
4.231 We begin our analysis by reiterating that the in terest rate subsidy is an approximation of the
price effects of the GSM 102 export credit guarant ees. Our purpose in establishing, with some
precision, the magnitude of the IRS is to allow us to ascertain the size of the price effects of the export
credit guarantees in Brazilian and non-Brazilian markets for GSM 102 products.
4.232 Under Brazil's methodology, the interest rate subsidy is calculated as the difference between
the CCC rate and a counterfactual market interest, ta king into account the different tenor of the loans
and the fees charged. The loans guaranteed by GSM 102 vary in maturity. For the 91 obligors in
Brazil's sample, 55 have loan maturities of three y ears; 25 obligors have average loan maturities of
two years; and 11 have average loan maturities of one year. This means that the different payment
streams have to be made comparable, i.e., discounted to their present value, and for this Brazil uses
the Ohlin formula. The Arbitrat or notes that while the United States objects to many aspects of
Brazil's methodology for calculating the interest rate subsidy, it does not criticize the Ohlin formula.

266 Statement by Professor Rangarajan K. Sundaram concerning GSM 102, Exhibit Bra-793, para. 49.
267 Brazil's responses to questions from the Arbitrator, question 25, para. 291.
268 Brazil's responses to questions from the Arbitrator, question 94, para. 159.
269 Brazil's responses to questions from the Arbitrator, question 94, para. 164.

4.233 Brazil's methodology requires calculating the count erfactual market interest rate that the
borrower would have had to pay a private lender in the absence of GSM 102. This requires Brazil to
find a method for determining the credit risk of various foreign obligors since the counterfactual
market interest will vary with the riskiness of the bor rower. This feature of the credit market follows
from rational behaviour by lenders who will need to charge higher risk borrowers a higher interest
rate to compensate for the risk that the lender has to bear. More precisely, the risk-neutral lender will
price credit to each borrower so that the expected return made on each borrower or loan is equal. This
pricing rule is a necessary requirement for the lender to maximize his expected profits. This rule also
underlies the USDOC method for determining the count erfactual market interest rate, although it is
applied only to those obligors that the USDOC dete rmines to be uncreditworthy. The United States
has in fact taken Brazil to task for applying the USDOC method also to creditworthy obligors. But
the pricing rule has a far general application than that since it will be followed by expected profit
maximizing lenders. The Arbitrator therefore agrees with Brazil that there is no reason why the
USDOC method for determining the counterfactual market interest rate cannot be applied to
creditworthy obligors.
4.234 For the Arbitrator, the key question in relation to Brazil's methodology for calculating the
interest rate subsidy is whether its imputation of risk to foreign obligors is accurate and therefore
leads to the correct estimate of the interest rate subsidy.
4.235 To a large extent, Brazil's methodology for impu ting risk relies on the credit ratings available
from international credit ratings agencies – Fitch, Moody's and S&P. Out of the 91 obligors included
in Brazil's calculations, 56 have ratings from international credit rating agencies. The Arbitrator notes
that Fitch, Moody's and S&P are established credit ratings firms that are relied upon by credit markets
for assessing the riskiness of debtors. Issuers of de bt pay for the services of these agencies to rate
their creditworthiness. The Arbitrator finds a great advantage in this approach since the assignment of
risks to foreign obligors relies on the decisions made by third-party specialists who are in the business
of determining the riskiness of debt issuers.
4.236 The United States has argued for an approach that determines the riskiness of foreign obligors
based on a detailed analysis of financial statemen ts and on whether the obligor could have secured
loans without government guarantees. This argument a ppears to be directed at the issue of how to
distinguish uncreditworthy from creditworthy obligors, an issue to which the Arbitr ator turns to later.
But the argument could as well be applied to th e more general question of how to determine the
counterfactual market interest rate. Brazil's expert has testified to the difficulty of obtaining the
information needed to conduct this assessment from ba lance sheet or financial statements of financial
institutions.270 The Arbitrator concurs with this evalua tion. The loans taken out by the financial
institution need to be comparab le to that available under GSM 102, namely, dollar-denominated,
unsecured and long-term. Only then can the interest rate on those loans serve as a market benchmark
for the loans obtained with a GSM 102 guarantee. But there does not appear to be a way in which this
could be done systematically for all the obligor s in Brazil's sample based on publicly available
financial information.
4.237 Not all the assignment of the credit risk of fore ign obligors is taken from the ratings agencies.
Out of the 91 obligors included in Brazil's calculati ons, only 56 have ratings from international credit
rating agencies while 36 are unrated. But in order for Brazil to undertake the interest rate subsidy
calculation, ratings for these obligors must be impu ted. The approach outlined by Brazil requires
judgements to be made. As described earlier, fo r countries where at least one CCC-approved obligor
was rated (rated-obligor countries), Brazil adopts a decision rule which assigns unrated obligors a
ranking equal to one notch below the worst rated ob ligors in the country. This affects 35 of the

270 Statement by Professor Rangarajan K. Sundaram concerning GSM 102, Exhibit Bra-793,
paras. 41-44 and Appendix to the Exhibit.

36 unrated obligors. For obligors in countries in which no CCC-approved foreign obligor was rated
(unrated-obligor countries), Brazil's decision rule assigns a rating that is four notches below the
sovereign rating. This affects only one unrated obligor from Peru.
4.238 The Arbitrator concurs with Brazil's explanation for these decision rules. In the Arbitrator's
view, a credit rating is a "signalling" device for the obligor to credibly signal its credit quality to the
market. If the obligor chooses not to do so, when the signalling device is available, it would be
prudent to treat that obligor as less creditworthy than other obligors serving the same marketplace that
have chosen to obtain a rating. Thus, the decision rule adopted by Brazil for "rated-obligor countries"
of assigning a credit rating that is one notch than the worst rated obligors in that country is both
reasonable and prudent. With respect to obligors in unrated-obligor countries, the Arbitrator views
this step as an extension of the approach taken by Brazil with respect to obligors in rated-obligor
countries. Brazil asks: what is the average diffe rence in credit rating between the sovereign and the
worst rated obligor in rated-obligor countries? Th e answer turns out to be equal to three credit
ratings. Since unrated foreign obligors would on av erage receive a credit rating that is one notch
below the worst-rated obligor in a country, Brazil treats unrated obligors in unrated countries as
having a credit rating that is four notches below sovereign risk.
4.239 The second major issue arising from the imputation of risk is the classification of the obligors
into creditworthy and uncreditworthy borrowers. The Arbitrator notes that this differentiation of the
borrowers is also made in the USDOC methodology. What concerns the Arbitrator is whether the
credit rating threshold chosen by Brazil to differe ntiate creditworthy from uncreditworthy obligors is
the right one. Brazil defends this threshold level of creditworthiness by claiming that international
credit rating agencies distinguish between "investment grade" and "non-investment" grade. This
would imply a numerical rating of ten as the th reshold between creditworthy and uncreditworthy
borrowers.
4.240 But based on the description provided by Brazil, and as the United States has also pointed
out
271, non-investment grade refers to "debt securities where the issuer curren tly has the ability to
repay but faces significant uncertainties, such as adverse business or financial circumstances that
could affect credit risk." 272 The description certainly does not app ear to be synonymous with Brazil's
characterization of uncreditworthy obligors as "those borrowers that could not otherwise have secured
credit at market at all" 273 or as "those foreign obligors that w ould not have been able to secure
comparable credit – that is, a 24-36 month, non-co llateralized loan in foreign currency – in the
absence of a GSM 102 guarantee". 274 Another way of reflecting on the appropriateness of this
threshold is to consider the default probabilities cal culated by Moody's for bo rrowers with different
credit risk ratings (see Table 2). These default probabilities are an important component of Brazil's
method for calculating the counterfactual market inte rest rate. For borrowers with a numerical rating
of 11 (who will be classified as uncreditworthy if Brazi l's threshold of ten is adopted), the three-year
default probability is 3.567 per cent. (The analys is could be applied to the two-year and one-year
default probabilities as well but loans with three-year maturities are the most common.) This means
that over the three-year life of the loan, there is a one in 28 chances that the borrower will default. In
contrast, the default probability for the worst rated borrowers (those with a numerical rating of 18) is
43.498 per cent. This implies that over the three- year life of a loan taken out by these borrowers,
there is a one in two chances that they will default. In the Arbitrator's view, this is a significant
difference in default probabilities. Adopting a threshol d of ten will likely lead to too high an estimate
of the interest rate subsidy since Brazil's methodol ogy requires obligors with ratings of 11 and worse
to be assigned default probabilities equal to the worst rated obligor.

271 US responses to questions from the Arbitrators, question 96, para. 41.
272 Brazil's written submission, fn. 152.
274 Brazil's comments on US responses to questions from the Arbitrator, question 96, para. 120.

Table 2: Cumulative Default probabilities (Moody's)275

Rating Cumulative Default Probabilities
Letter Numerical 1-Year 2-Year 3-Year
AAA 1 0.000 0.000 0.000
AA+ 2 0.000 0.000 0.000
AA 3 0.000 0.011 0.048
AA- 4 0.019 0.040 0.078
A+ 5 0.003 0.091 0.241
A 6 0.026 0.082 0.224
A- 7 0.037 0.175 0.358
BBB+ 8 0.166 0.449 0.794
BBB 9 0.161 0.466 0.883
BBB- 10 0.335 0.965 1.680
BB+ 11 0.753 2.006 3.567
BB 12 0.780 2.297 4.309
BB- 13 2.069 5.749 10.151
B+ 14 3.223 8.701 14.360
B 15 5.457 12.511 18.535
B- 16 10.460 19.782 28.532
CCC+ 17 20.982 33.367 43.498
CCC-C 18 20.982 33.367 43.498
Source: Exhibit 36 of Hamilton, David, Praveen Varma, Sharon Ou, and
Richard Conato, "Moody's Special Comment on Default and Recovery
Rates of Corporate Bond Issuers, 1920-2005", released January 2006,
revised March 2006 (Exhibit Bra-699 (Moody's special report (Hamilton,
Varma, Ou, Conator 2006))).

4.241 To ensure that the imputation of risk does not lead to an inflated estimate of the interest rate
subsidy, the Arbitrator has decided to change th e threshold to 14. The Arbitrator notes that a
borrower rated one notch lower than this thre shold has a three-year default probability of
18.535 per cent. This translates into about a 1 in 5 chances of a default over a period of three years,
which is appreciably closer to that of the worst ra ted borrowers. In making this change, the Arbitrator
notes that Brazil has in several instances emphasized the flexibility of its methodology, which would
allow the Arbitrator to modify certain of the assump tions to values that the Arbitrator considers more
appropriate.276 This change results in 52 of the 91 foreign obligors being deemed creditworthy,
compared to just ten of the 91 foreign obligors when the threshold was ten.
4.242 Finally, the Arbitrator turns to the economic literature on estimates of the interest rate subsidy
cited by Brazil and the United States. The United States claims that this literature does not support
the calculation of the interest rate subsidy by Brazil since its survey of the literature suggests that the
interest rate subsidy ranges between 0 and 11 per cen t. Brazil has disputed the relevance of these
studies to its estimates arguing that they cover diff erent periods in time, different credit guarantee
programmes and are not calculated at the obligor leve l. For its part, Brazil cites five studies that it
claims arrive at estimates of the interest rate s ubsidy equal to or greater than what it estimates for
GSM 102.277 However, the United States also disputes the relevance of these studies since they cover

275 Table 2 is taken from Exhibit Bra-794.
276 Statement by Professor Rangarajan K. Sundaram concerning GSM 102, Exhibit Bra-793, para. 57.
277 Brazil's responses to questions from the Arbitrator, question 94, para. 164.

different periods in time, some of the programme s evaluated are not credit guarantee programmes and
some do not employ the Ohlin formula.278
4.243 In the Arbitrator's assessment, the review of the literature conducted by the parties while
informative is not determinative of the specific question before the Arbitrator, which is whether
Brazil's methodology for calculating the interest rate subsidy results in an inflated estimate of the
interest rate subsidy. The main difficulty of draw ing any firm conclusion from the literature review is
the "apples and oranges" comparison, which both parties have in fact highlighted. The studies cited
by the parties use different methods for calculating the interest rate subsidy; they have been conducted
at different periods of time; they cover different countries, different product sectors, and different
guarantee programmes.
4.244 Given that the price effect (as reflected, for the purposes of our calculations, in the interest
rate subsidy) is part of the trade-distorting im pact on Brazil, based on the principles set out in
paragraphs 4.193 to 4.198 above, and based on our analysis of the arguments and evidence provided
by the parties regarding Brazil's methodology for calcu lating the interest rate subsidy, we determine
that the trade-distorting impact to Brazilian producers and exporters as reflected in the IRS amounts to
US$25.27 million
. It is comprised of two parts. The first part, equalling US$12.64 million,
represents those impacts in the Brazilian domestic ma rket. In addition, we determine that there are
trade-distorting impacts in non-Brazilian markets, worth US$108 million, as a result of the export
credit gurantees received by non-Brazilian obligors. However, only a certain share of that amount
represents trade-distorting impacts on Brazil. Cons equently, this second amount must be apportioned
using Brazil's share of world trade in GSM 102 prod ucts, which was 11.7 per cent in year 2006. This
leads to an additional estimate of trade-distorti ng impact on Brazil of US$12.63 million. The detailed
calculations are shown in Annex 1.
(ii) Full additionality
4.245 Brazil claims that GSM 102 export credit guarantees confer a particular advantage on
US exporters in that it generates additional expor ts for the United States that would not otherwise
have occurred.
279 Brazil clarifies that this could result from new demand or come from diversion from
sellers in other markets. The sales that Brazil's method does not account for are those US exports that
would have occurred even without the GSM 102 export credit guarantees.280
4.246 This additionality is of two forms: full a dditionality accruing to uncreditworthy obligors and
marginal additionality which accrues to creditworthy obligors. 281 With respect to those foreign
obligors that it has classified as uncreditworthy, Brazil claims that credit could not have been obtained
without GSM 102 at any viable price; thus, export transactions would not have occurred in the
absence of GSM 102. For uncreditworthy borrowe rs, economic activity occurs due solely to
GSM 102. So, whenever a GSM 102 export cred it guarantees is extended to uncreditworthy
borrowers, the entire volume of the exports constitut es the advantage conferred on US exporters. Full
additionality is hence calculated as the entire value of GSM 102-backed transactions involving
uncreditworthy foreign obligors. 282 Brazil estimates the amount of full additionality in FY 2006 at
US$817 million based on its numerical threshold of 10.
4.247 Brazil agrees that the relevant additionality be nefit to be considered is that of "net
additionality". A calculation of net additionalit y accounts for the negative revenue effect that

278 US comments on Brazil's responses to questions from the Arbitrator, question 94, paras. 89-91.
280 Statement by Professor Daniel Sumner concerning GSM 102, Exhibit Bra-797, para. 3.

GSM 102 subsidies have on those US commercial exports that are not eligible for GSM 102. 283
Because the rate of the IRS is relatively large and the market share of the GSM 102-backed exports is
very small as compared to other exports, Brazil's methodology finds that, if the GSM 102 subsidy
were withdrawn, the United States, for most products and in most foreign obligor markets, would lose
all the exports that had formerly been made under GSM 102.
284
Arguments of the parties
4.248 The United States contends that the notion of full additionality as presented by Brazil is
"entirely speculative". In its view, it would account fo r an additional, indirect element to the interest
rate subsidy that Brazil asserts is the first component for countermeasures.285
4.249 Furthermore, full additionality hinges entirely on Brazil's determination of uncreditworthiness
which the United States has argued relies on a "fatally flawed" calculation of interest rate subsidy,
particularly with respect to treatment of uncreditworthy obligors.286
4.250 Based on its view of the economic literature, the United States argues that there is no support
for the claim that exports would not occur in the absence of GSM 102 guarantees. It argues that a
useful perspective for thinking about additionality is whether the export credit guarantee is able to
expand global demand for the product that is the subject of the subsidy.
287
4.251 Brazil defends full additionality by referring to the design and application of the GSM 102
programme. It refers to statements by USDA and FAS, which operates GSM 102 in cooperation with
the CCC, that it alleges confirms that GSM 102 is used to facilitate credit for the purchase of
US exports, in instances where a foreign obligor, without a GSM 102 export credit guarantee, could
not secure financing at all.
288 It claims that US regulations expressly provide that the GSM 102
programme operates solely in circumstances in wh ich credit would not otherwise be available to
finance the export of US agricultural goods. 289 Specifically, it claims that the regulations provide that
GSM 102 operates "in cases where credit is necessary to increase or maintain US exports to a foreign
market and where US financial institutions woul d be unwilling to provide financing without CCC's
guarantee."290 Hence, in its view calculating full additionality for GSM 102-supported exports
involving uncreditworthy foreign obligors is wholly consistent with the way in which USDA and FAS
have characterized the programme in their regulations and elsewhere.291
4.252 With respect to the empirical studies cited by the United States, Brazil claims that these
studies have empirical flaws and provide limited gui dance about the precise magnitude of impacts of
GSM 102 subsidies on US exports. Further, Brazil professes that some of the econometric analysis
presented actually supports Brazil's positions.
292 For example, Brazil quotes an extract from one of
these studies cited by the United States to the effect "that a 1 per cent increase in the interest rate
subsidy from a GSM 102 guarantee results in a 3 per cent increase in US export value".293

283 Brazil's responses to questions from the Arbitrator, question 92, para. 121.
284 Brazil's responses to questions from the Arbitrator, question 92, para. 120.
285 US written submission, para. 197.
286 US written submission, para. 196.
287 Exhibit US-92.
290 Brazil's responses to questions from the Arbitrator, question 25, para. 275.
292 Statement by Professor Daniel Sumner concerning GSM 102, Exhibit Bra-797, para. 17.
293 Statement by Professor Daniel Sumner concerning GSM 102, Exhibit Bra-797, para. 20.

Analysis by the Arbitrator
4.253 In the Arbitrator's judgement, part of the trade-distorting impact of GSM 102 supported
exports is its displacement of Brazilian production in its home mark et and Brazilian exports in third
country markets. While full additionality is not an equivalent measure of this displacement effect
arising from export credit guarantees issued to uncreditworthy obligors, it is not an inappropriate basis
for calculating this effect. Again, to the extent that we can make the calculation of full additionality
more precise, the closer we can arrive at the amount of Brazilian production and exports that are
displaced by the export credit guarantees.
4.254 The Arbitrator has determined that the thres hold level for uncreditworthy obligors is 14 so
that those obligors with ratings worse than 14 are deemed uncreditworthy. Out of the 91 obligors
with GSM 102 transactions in FY 2006, 39 will be classified as uncreditworthy based on this
threshold. This group represents 43 per cent of the to tal number of obligors. Collectively, this group
accounts for a similar percentage of all GSM 102 tran sactions in FY 2006. The interest rate subsidy
for uncreditworthy obligors is 24.3 per cent. Th is means that absent th e GSM 102 export credit
guarantees, uncreditworthy foreign obligors would ha ve been charged an average of 24.3 per cent
more by the market.
4.255 The Arbitrator therefore determines that the displacement effect on Brazilian production and
exports of export credit guarantees issued to uncre ditworthy obligors, and for which we use full
additionality as an approximation, amounts to US$80.8 million
. This is comprised of two parts. The
first is the displacement effect in Brazil's dome stic market which amounts to US$36.3 million. The
second part is the trade-distorting impacts in no n-Brazilian markets worth US$380.6 million. But
only a share of that amount represents displacement of Brazilian exports and so must be apportioned
to Brazil's share of world trade in GSM 102 products, which was 11.7 per cent in 2006. This
apportioned amount is equal to US$44.5 million. The detailed calculations are shown in Annex 2.
(iii) Marginal additionality
4.256 With respect to creditworthy obligors, Brazil estimates the additionality from
GSM 102-subsidized transactions by applying a "but -for" counterfactual that calculates the reduction
in sales volume in a given fiscal year that US exporters would have incurred if the United States had
withdrawn the GSM 102 programme.294
4.257 Brazil relies on a formal model to calculate the amount of marginal additionality. It uses a
partial equilibrium linear displacement model of impo rt demand and export supply, specified in linear
difference form, to simulate the relative effects of the withdrawal of the GSM 102-induced interest
rate subsidy on US exports, relative to a situation in which GSM 102-related interest rate subsidies are
in place. This actual situation is then compared with the counterfactual in which GSM 102 for all
relevant commodities are permanently withdrawn. The methodology considers three markets, the
United States, an import market which benefits fro m the GSM 102 interest subsidies and the rest of
the world. Brazil's calculation of marginal additionality results in estimated benefits of
US$93.8 million to US exporters.

Arguments of the parties
4.258 The United States brings two arguments to bear on the marginal additionality calculations by
Brazil.
4.259 First, it argues that the methodology assumes that the subsidy from the export credit guarantee
will pass through completely to the world price. 295 It questions the justification for the assumption
that as a result of GSM 102 guarantees, importers w ill be able to purchase these products at the world
price minus the full subsidy. It argues that the proposition that the price of the relevant commodity
export under a GSM 102 programme is affected at a ll by the export credit guarantee is not supported
by economic research.296
4.260 It notes that the total cost of an import can be seen as a sum of the price of the commodity
plus the financing cost. It acknowledges that the fi nancing cost may be reduced by the export credit
guarantee because the guarantee is assumed to provide fo r an interest rate that is lower than what the
importer could have received in the market without the guarantee. The total cost of importing may
then be lower as a result of the guarantee, but that is due entirely to the interest rate subsidy, not to a
change in the price of the commodity.297
4.261 Second, the United States criticizes the formal model used by Brazil to calculate marginal
additionally. It questions what it implies is an ad hoc step employed by Brazil to adjust the results of
its formal model. The United States points to a part of Brazil's model (Equation E now modified by
Brazil to Equation E') which calculates additiona l US exports as a result of GSM 102 export credit
guarantees. Brazil assumes that additional US e xports can range between 0-100 per cent of the
amount of GSM 102 transactions. But Brazil's simulati ons are such that the results are always greater
than 100 per cent.298 In the view of the United States, this outcome means that the model overstates
the effects of GSM 102 on US exports. It claims that eventually Brazil i gnores the simulation result
and caps the elasticity to one (100 per cent).299
4.262 Also related to its criticism of the formal mode l, the United States questions the value of the
cotton elasticities used by Brazil in the marginal add itionality analysis. It points out that these are
different from the elasticities used in the cotton model 300 to analyse the adverse effects of marketing
loans and countercyclical payments. 301 It argues that the elasticities employed may be appropriate in
the context of basic supply and demand responses to small changes in volumes and prices but not in
scenarios where Brazil is assuming the full pass-through of the GSM 102 interest rate subsidy to the
US export price with sometimes large price swings.302
4.263 Brazil has advanced a defence of its methods ag ainst the criticism of the United States. It
rejects the first criticism of the United States that it assumes a 100 per cent pass through of the interest
rate subsidy to world prices. Brazil clarifies that in fact it assumes that world markets for the
agricultural commodities at issue are highly competitive, and the demand curve facing US exporters is
horizontal.303 In its view, exporters worldwide, including US exporters, are, "price takers" so that
there is no substantial pass through.

295 US written submission, para. 211.
296 US written submission, para. 212.
297 US written submission, para. 212.
298 US written submission, para. 215.
299 US written submission, para. 217.
300 Brazil's Methodology Paper, paras. 72-139 and Exhibit Bra-704.
301 US written submission, paras. 222-223.
302 US written submission, para. 221.

4.264 It argues that the basis for US exports of the subsidized commodities in the target markets lies
in the effective price rebate afforded to forei gn obligors in the form of GSM 102 interest rate
subsidies.304 Brazil distinguishes between what it te rms "effective sourcing prices" and "world
prices". It defines the effective sourcing price as the "cost of the commodity plus the interest costs in
financing the purchase". 305 It claims that the interest rate subsidy from GSM 102 export credit
guarantees effectively lowers effective sourcing prices but the world prices of the commodities in
question are not substantially affected by GSM 102 subsidies.306
4.265 Brazil claims that it is not ignoring its ow n simulation results when it places a cap on the
additional US exports that arise from GSM 102 guarantees. 307 Brazil explains that it formulates
equation (E'), as a "but-for" methodology that effectively asks: "What is the fraction of each
GSM 102-backed transaction to a specific foreign obligor that the US exporter would forego if the
United States were to withdraw its prohibited GSM 102 export subsidies in a given fiscal year?"
308
To yield relevant results, it contends that the fa ctor must lie between zero and 100 per cent of the
GSM 102-backed transaction value, which explains the cap of 100 per cent. Brazil explains that it
then applies a standard partial-equilibrium displacem ent model, specified in linear difference form, to
find reliable estimates for the adjustment factor th at is to be used as input into equation (E').
309 I t
argues that the results of that approximation, if left uncapped, answers an entirely different
counterfactual than that posed in its equation E'. Brazil claims it is not asking how a specific obligor
generally reacts to changes in effective sourcing pric es offered by the United States, but rather how it
does so for the limited transactions made under GSM 102. 310 Since, logically, not more than the
entire fraction (100 per cent) of each GSM 102-subsidized US sale can be foregone due to an
elimination of the sales discount facilitated by the interest rate subsidy, Brazil maintains that a
100 per cent cap is necessary to answer meaningfully the question before the Arbitrator.
4.266 Finally, Brazil defends its choice of the elasticity values by arguing that they must be
calibrated to suit the policy scenario at issue.
311 It claims that in its marginal additionality analysis,
withdrawal of GSM 102 subsidies affects a small fr action of total US export transactions for a range
of crops. In its view, this scenario requires a set of supply and demand responses that are tailored to
policy shocks which are not significant enough to sh ift US domestic or world prices, and thus too
small to cause large-scale supply or demand responses in the United States and elsewhere.
312 I n
contrast, it considers the relevant counterfactua l underlying the cotton simulation model in the
actionable subsidies case to require supply and de mand elasticities that reflect a large, permanent
withdrawal of US marketing loans and countercyclical payments for upland cotton, while other
programme crops remained eligible for subsidies.
313
Analysis by the Arbitrator
4.267 In our analysis of full additionality, we made clear that we saw it as an approximation of the
displacement of Brazilian production and exports because of export credit guarantees issued to

304 Brazil's written submission, Annex I (Joint Statement by Professor Daniel Sumner and Rangarajan
Sundaram), para. 2.
305 Brazil's written submission, Annex I (Joint Statement by Professor Daniel Sumner and Rangarajan
Sundaram), para. 28.
307 Brazil's written submission, Annex I (Joint Statement by Professor Daniel Sumner and Rangarajan
Sundaram), para. 39.

uncreditworthy obligors. Similarly, we note that while marginal additionality is not an equivalent
measure of the displacement effect on Brazilian pr oduction and exports from export credit guarantees
issued this time to creditworthy obligors, it is not an inappropriate basis for calculating this effect.
Furthermore, to the extent that we can make th e calculation of marginal additionality more precise,
the nearer we shall be to determining the am ount of Brazilian production and exports that are
displaced by the export credit guarantees.
4.268 On the issue of the pass through, we reiterate our concurrence with Brazil's position that the
interest rate subsidy obtained by obligors reduces the combined purchase price of US agricultural
exports. We have explained our reasoning in the previous sub-section (see paragraph 4.193).
4.269 The United States' criticism of th e elasticities used in Brazil's marginal additionality model is
basically a claim that Brazil is "cherry picking" the elasticities. Brazil's argument that different policy
simulations call for different elasticities could lend itself easily to the United States' interpretation.
But even if one accepts Brazil's argument that different policy simulations call for different
elasticities, the introduction of a cap in Brazil's marginal additionality model raises a significant
concern about its internal consiste ncy. To consider this matter mo re carefully, the Arbitrator has
conducted a set of exercises using the model.
4.270 For the first exercise, the Arbitrator requested Brazil to use its marginal additionality model
without the cap to calculate the amount of additiona l US exports arising from interest rate subsidies
received by obligors deemed creditworthy by Brazil. 314 The Arbitrator recalls that based on the
threshold of ten adopted by Brazil for distin guishing between creditwor thy and uncreditworthy
obligors, Brazil's methodology finds only ten obligors creditworthy. Of these only three obligors (two
from Panama and one from Trinidad and Tobago) ha ve positive interest rate subsidies. The other
seven Korean obligors have been found not to enjoy any interest rate subsidies from GSM 102. For
the three obligors, Brazil confirms that without the cap, its marginal additionality calculations yield
large multiples of the GSM 102 transaction value and the obligor-specific IRS.
315 In other words,
even if the obligors had been cl assified by Brazil's methodology as creditworthy, the application of
the marginal additionality model without the cap generated additionality that exceeded the amount
that would have been calculated if they had been classified as uncreditworthy.
4.271 Another way of looking at this is simply to take summary statistics of the uncapped
elasticities calculated by Brazil's marginal additionality model. 316 Excluding the seven Korean
obligors, the uncapped elasticities range from a minimum of 6.17 to a maximum of 107 million. The
simple (weighted) average of the uncapped elasticities is 3.4 million.
4.272 For the second exercise, the Arbitrator consider ed the other seven obligors (all of whom are
Korean banks) deemed creditworthy by Brazil's meth odology. Brazil had further determined that the
receipt of GSM 102 export credit guarantees by these seven obligors involved no interest rate subsidy.
That is, Brazil's methodology concluded that these seven obligors could have obtained financing at
the risk-free market rate even without the GSM 102 guarantees. Because no interest rate subsidy was
involved, the methodology showed that there wa s no marginal additionality for these obligors.
Imports of US agricultural goods into the Republic of Korea would have taken place even in the
absence of GSM 102 export credit guarantees.
4.273 The second exercise conducted by the Arbitrat or involved ascertaining how much of an
interest rate subsidy would be needed in the case of these Korean obligors for Brazil's methodology to
generate additionality. This exercise allows Brazil' s cap to be maintained. If the introduction of a

314 Questions from the Arbitrator, question 30.
315 Brazil's responses to questions from the Arbitrator, question 30, para. 389.
316 See Worksheet "'Marg add. rate 2006" of Exhibit Bra-794.

small interest rate subsidy results in a sudden change in the result s so that full additionality ensues,
then it calls Brazil's marginal additionality model into further question. Furthermore, the smaller the
interest rate subsidy required to generate additionality, the more su spect the model becomes. This
second exercise showed that even a very small interest rate subsidy equal to 1/10 305 basis points 317
produced full additionality for the Korean obligors. The quantity 10 305 is one followed by 306 zeros.
Its reciprocal, 1/10305, is therefore an "infinitesimally" small number.
4.274 Brazil's marginal additionality model appears to generate inflated results, with large multiples
resulting from the first exercise with the cap removed, and with infinitesimally small interest rate
subsidies required to generate additionality in the second exerci se with the cap maintained.
Nevertheless, the Arbitrator is of the view that, ev en in the case of creditworthy obligors, the interest
rate subsidy they receive lead to trade-distor ting impacts on Brazilian producers and exporters that
must be accounted for. While they are not necess arily equal to the value of GSM 102 transactions,
they are also not zero.
4.275 To determine this amount, we begin by noting th at the riskiness of even creditworthy obligors
will have a bearing on the magnitude of the marginal additionality from GSM 102 transactions
entered into by creditworthy obligors. In the ab sence of the GSM 102 programme, the more risky an
obligor is (the closer its rating is to the threshold of 14) the smaller the amount of trade financing of
US agricultural goods that it would have been involve d in, all things being equal. The less risky the
obligor, the greater the likelihood that it woul d have been financing the same amount of
US agricultural exports even in the absence of the programme.
4.276 Building on this notion, we employ the data on cumulative default probabilities that have
been provided by Brazil. Recall that we have determined that obligors rated 15 and worse are
uncreditworthy, which implies a dditionality equal to the entire value of the GSM 102 transactions
they enter into. We shall assume that the only a fraction of the GSM 102 transaction that is entered
into by a creditworthy obligor, which receives an interest rate subsidy, represents additionality.
318
More specifically, we shall assume that this frac tion, for a creditworthy obligor with a numerical
rating of i and an average loan maturity of n, is equal to the ratio of default probabilities of a
creditworthy obligor and of an obligor rated 15. More formally:
 (1) n
n
in
i
D
dt = , i =1, ..., 14 and n = 1, 2, 3

where:

n
it is the proportion of the GSM 102 transaction invo lving a creditworthy obligor with a numerical
rating of i and an average loan of maturity n that results in additionality;

n
id is the cumulative default probability of a creditw orthy obligor with a rating of i and an average
loan maturity n; and

nD is the cumulative default probability of an ob ligor with a rating of 15 for an average loan
maturity n.

317 One basis point is equal to 0.01 per cent (one hundredth of a per cent).
318 It should be noted that, based on Brazil's IRS methodology, seven of the creditworthy obligors do
not receive any interest rate subsidy. Thus, equation (1) does not apply to them.

4.277 Based on this, we determine that the displace ment effect on Brazilian production and exports
of export credit guarantees issued to creditwort hy obligors, and for which we use marginal
additionality as an approximation, amounts to US$41.3 million. Again, this can be decomposed into
the trade-distorting impact in Brazil's domes tic market and in non-Brazilian markets. The
displacement of Brazilian production because of GSM 102 transactions involving creditworthy
Brazilian obligors amounts to US$18.7 million. The trade-distorting impact in non-Brazilian markets
as a result of the transactions of creditworthy, non-Brazilian obligors amounts to US$193 million.
However, only a certain share of that represents di splacement of Brazilian exports. In keeping with
our framework of analysis, the second amount must be apportioned to Brazil's share of world trade in
GSM 102 products, which was 11.7 per cent in 2006. The trade-distorting impact to Brazil in non-
Brazilian markets therefore equals US$22.6 million. The detailed calculations are shown in Annex 3.
(iv) Conclusion
4.278 The Arbitrator determines that the amount of US$1.122 billion proposed by Brazil will not
result in appropriate countermeasure s. The Arbitrator has consequently made modifications to the
calculation of the interest rate subsidy and additio nality in order to more accurately calculate the
trade-distorting impact of the GSM 102 programme on Brazil. Based on these modifications and in
the light of other determinations above, we find that the amount of countermeasures which can be
authorized as being appropriate, based on the amount of GSM 102 transactions in FY 2006, is
US$147.4 million

4.279 The Arbitrator has taken note of Brazil's request for an amount of countermeasures
authorization that would be variable on an annu al basis, depending on "the total of exporter
applications received under GSM 102 ... for the most recent concluded fiscal year". The Arbitrator
has also noted that the United States does not disput e that it would be permissible for the level of
appropriate countermeasures to be determined thro ugh a formula, provided that this formula was
sufficiently well defined so as to make it applicable in a transparent and predictable manner. We have
therefore decided to authorize an amount of count ermeasures that would be variable on an annual
basis and that would depend on, among other things , the total amount of GSM 102 transactions in the
most recent concluded fiscal year. The terms of this variable amount of countermeasures are
contained in Annex 4.
V. BRAZIL'S REQUEST TO APPLY COUNTERMEASURES UNDER THE
TRIPS AGREEMENT AND THE GATS
5.1 In its request to the DSB, Brazil requests au thorization to suspend concessions or other
obligations in the annual amount of approximate ly US$3 billion with respect to the prohibited
subsidies at issue in this dispute. In its view, given the amount, it is neither practicable nor effective
for Brazil to suspend concessions only on imports of US goods and the circumstances are serious
enough to justify the suspension of concession or obl igations under other covered agreements. Brazil
therefore proposed to suspend obligations under GATT 1994, and also under the GATS and
TRIPS Agreement under Article 22.3(c) of the DSU.319
5.2 The United States challenges this request, arguing that Brazil had not followed the procedures
and principles of Article 22.3 of the DSU. The United States argues that given the size and diversity
of the Brazilian economy, Brazil cannot justify and demonstrate its claim that applying
countermeasures with respect to goods is not practicable or effective. 320 In these proceedings,
however, Brazil argued that the provisions of Artic le 22.3 of the DSU do not apply, and that its
request must be considered on the basis of Article 4.10 of the SCM Agreement only.

319 WT/DS267/21.
320 US written submission, paras. 318-319.

5.3 In light of the parties' disagreement as to the applicable legal standard for this part of our
assessment, we must first consider whether the principles and procedures of Article 22.3 of the DSU
apply, before we can proceed with an assessment of Brazil's request on the basis of the applicable
legal standard.
A. DO THE PRINCIPLES AND PROCEDURES OF ARTICLE 22.3 OF THE DSU APPLY TO BRAZIL'S
REQUEST?
1. Arguments of the parties321
5.4 Brazil argues in its Methodology Paper that th e countermeasures proposed by Brazil, which
include the suspension of concessions or other obliga tions not only with respect to trade in goods but
also under TRIPS and GATS, are "appropriate" and "c ommensurate with the degree and nature of the
adverse effects determined to exist", within the meaning of Articles 4.10 and 7.9 of the
SCM Agreement. Brazil argues that the countermeasures it proposes, both in their quantitative and in
their qualitative aspects, must be assessed solely ag ainst the requirements of Articles 4.10 and 7.9 of
the SCM Agreement.322 Brazil considers that these are the only standards against which the
countermeasures must be assessed.323
5.5 Brazil also argues that the United States, as th e party objecting to the proposed requests for
countermeasures bears the burden of proving that th e type of the countermeasures proposed by Brazil
is such as to render them not "appropriate" in the meaning of Article 4.10 of the SCM Agreement.
Likewise, with respect to the actionable subsidies, Brazil argues that the United States has the burden
of proving that the type of the countermeasures pr oposed by Brazil is such as to render them not
"commensurate with the degree and nature of the a dverse effects determined to exist" as required by
Article 7.9 of the SCM Agreement. Brazil argues that the United States failed to discharge its burden
since it merely asserts that DSU Article 22.3 applies to the SCM Agreement. In Brazil's view,
Articles 4.10 and 7.9 of the SCM Agreement provide for countermeasures that are different from those
available under the DSU.324
5.6 Brazil argues that Articles 4.10 and 7.9 of the SCM Agreement provide for "countermeasures"
and such countermeasures can well encompass the suspension of concessions or obligations under
sectors or agreements other that in which a violation was found. 325 Citing Article 49 of the Draft
Articles on Responsibility of States for Internationally Wrongful Acts , Brazil argues that the purpose
of a "countermeasure" as stated in that article is to induce the offending state to comply with its
obligations. Therefore, Brazil advocates that there is nothing in public international law to support the
notion that a countermeasure has to be taken in the same area or under the same agreement in which a
violation is found.326 Brazil is of the view that Articles 4.10 and 7.9 are "special or additional rules"
within the meaning of Article 1.2 of the DSU, a nd that they address both the level and the type of
countermeasures that may be imposed by the original complaining Member in sharp contrast to
Article 22.4 and 22.3 of the DSU. 327 Brazil contends that the Arb itrator should apply the standards

321 In this section, the arguments of the parties are reflected as they were presented by the parties in
their submissions, i.e. with reference both to the prohi bited subsidies addressed in this Decision and to the
actionable subsidies addressed in the separate Decision in WT/DS267/ARB/2. In the subsequent assessment by
the Arbitrator in section 2 below, only the arguments relating to the prohibited subsidies at issue in these
proceedings are addressed.
324 Brazil's written submission, paras. 452-453.
326 Brazil's written submission, paras. 458-459.
327 Brazil's written submission, paras. 464-465.

under the SCM Agreement, not the principles and procedures under Article 22.3 of the DSU. 328 The
mandate of the Arbitrator is solely to determ ine whether countermeasures are "appropriate" or
"commensurate".329
5.7 With respect to the issue whether SCM Agreement and Article 22.3 of the DSU can be read as
complementing each other, Brazil argues that "if a special or additional rule or procedure does not
provide additional requirements that are to be met together with the corresponding provisions of the
DSU – so as to effectively complement them without negatively affecti ng their legal integrity – the
two sets of provisions cannot be applied together." Brazil continues to argue that if they cannot be
applied together it is because there is a differe nce between them. In such case, Brazil argues the
special or additional rule or procedure must prevail over the corresponding DSU provisions.330
5.8 Brazil considers that Article 22.3 of the DS U establishes a legal standard based on the
consideration by the Member concerned of the practicability and effectiveness of suspension of
concessions and sets out a number of elements that have to be considered, whereas Articles 4.10
and 7.9 of the SCM Agreement contain no restrictions on the type of countermeasures that may be
taken. Articles 4.10 and 7.9 of the SCM Agreement grant to the Member concerned a margin of
appreciation that is broader than the one reflecte d in the requirements of Article 22.3 of the DSU.
They cannot be applied together.331
5.9 The United States argues that DSU discip lines concerning suspension of concessions,
including Article 22.3, apply to the SCM Agreement.332 In its view, the fact that the SCM Agreement
does not provide for rules relating to cross-sector suspension of concessions independent of DSU
Article 22.3, when special rules for other i ssues were carved out, suggests the disciplines on
cross-sector suspension of concessions remain securely tied to the existing DSU rules and
procedures.333
5.10 The United States also argues that Brazil itself explicitly invoked Article 22.3 of the DSU in
its request for countermeasures for prohibited subsidi es and in its request for actionable subsidies.
Therefore, in the United States' view, Brazil has act ually conceded that its requests are subject to
Article 22.3 of the DSU. The United States also argues that the fact that Article 22.3(g) cross-
references the agreements to which it applies, including the SCM Agreement, also indicates that
Article 22.3 of the DSU applies to requests for countermeasures under the SCM Agreement.334
5.11 The United States argues that given the general ru le for suspension of concessions within the
same sector under the DSU and the absence of any rule to the contrary in Articles 4.10 and 7.9 of the
SCM Agreement, there is no conflict in applying both the SCM Agreement and Article 22.3 of the
DSU. Thus, the better interpretation – and one that allows Articles 4.10 and 7.9 of the
SCM Agreement to be applied in a complementary fashi on with Article 22.3 of the DSU – is that
Articles 4.10 and 7.9 deal with the amount of count ermeasures, while Article 22.3 of the DSU sets
forth rules for determining when countermeasures can be applied on a cross-sector basis. To the
extent there is conflict between them, it is in re gard to the assessment of quantity, or the amount, of
the suspension of concessions. With regard to "t ype" or "form", the United States argues that the
silence of the SCM Agreement as to cross-agreement or cross-sec tor countermeasures mean that there

330 Brazil's responses to questions from the Arbitrator, question 40, para. 460.
331 Brazil's responses to questions from the Arbitrator, question 40, paras. 461-462.
332 US written submission, para. 320.
333 US written submission, para. 323.
334 US oral statement, para. 67.

is no "difference" in the meaning of Article 1.2 of the DSU that would require ignoring the carefully
articulated, hierarchical test under Article 22.3.335
2. Assessment by the Arbitrator
5.12 The question before us relates to the definiti on of our mandate, as well as to the substantive
legal standard that is applicable to the imposition of cross-retaliation under the SCM Agreement. Both
aspects are closely related, in that the nature an d scope of our mandate is logically tied to the
applicable substantive requirements, the application of which we must review.
5.13 The parties essentially disagree about the extent to which the provisions of Article 22.3 of the
DSU, which set out specific principles and procedur es for the authorization of cross-retaliation in
dispute settlement proceedings under the DSU, ar e applicable in the context of proceedings
concerning prohibited subsidies under the SCM Agreement, which contains specific provisions
relating to countermeasures.
5.14 As a starting point, we need to consider the terms of the relevant provisions of the
SCM Agreement and of the DSU. We recall that Article 4.10 of the SCM Agreement specifically
addresses the question of the coun termeasures that may be author ized in relation to prohibited
subsidies, and Article 4.10 addresses the mandate of the arbitrator in relation to such countermeasures,
in the event that an arbitration is requested unde r Article 22.6 of the DSU in relation to prohibited
subsidies. Article 4.10 requires countermeasures in relation to prohibited subsidies to be
"appropriate", and footnote 9 further informs this expression. Article 4.11, in turn, provides that, in
the event that a party to the dispute requests arb itration under paragraph 6 of Article 22 of the DSU,
the arbitrator shall determine whether the countermeasures are "appropriate".
5.15 Article 22.6 of the DSU, in turn, provides that:
"When the situation described in paragraph 2 occurs, the DSB, upon request, shall
grant authorization to suspend concessions or other obligations within 30 days of the
expiry of the reasonable period of time unl ess the DSB decides by consensus to reject
the request. However, if the member con cerned objects to the level of suspension
proposed, or claims that the principles and procedures set forth in paragraph 3 have
not been followed where a complaining part y has requested authorization to suspend
concessions or other obligations pursuant to pa ragraph 3(b) or (c), the matter shall be
referred to arbitration."
5.16 Paragraphs 10 and 11 of Article 4 of the SCM Agreement constitute "special or additional
rules" under Appendix 2 of the DSU. In accordance w ith Article 1.2 of the DSU, "to the extent that
there is a difference between the rules and pro cedures of this understanding and the special or
additional rules and procedures set forth in Appendix 2, the special or additional rules and procedures
in Appendix 2 shall prevail".
5.17 The Appellate Body has clarified the circumstances in which such a "difference" would exist:
"[I]t is only where the provisions of the DS U and the special or additional rules and
procedures of a covered agreement cannot be read as complementing each other that
the special or additional provisions are to prevail. A special or additional provision
should only be found to prevail over a provision of the DSU in a situation where
adherence to the one provision will lead to a violation of the other provision, that is,
in the case of a conflict between them. An interpreter must, therefore, identify an

335 US responses to questions from the Arbitrator, question 67, para. 185.

inconsistency or a difference between a provision of the DSU and a special or
additional provision of a covered agreement before concluding that the latter prevails
and that the provision of the DSU does not apply."336
5.18 The question before us in this case is whethe r Article 22.3 of the DSU and Article 4.10 and
4.11 of the SCM Agreement can be read as complementing each other, or whether adherence to the
principles and procedures contained in Article 22.3 of the DSU would lead to a violation of
Article 4.10 or 4.11 of the SCM Agreement, such that there is a conflict between the two provisions.
In other words, we must clarify whether the special or additional rules of Ar ticle 4.10 and 4.11 of the
SCM Agreement constitute the entirety of the applicable rules relating to the type and level of
countermeasures that may be authorized in relation to prohibited subsidies, or whether the principles
and procedures of Article 22.3 of the DSU and these provisions may be read as complementing each
other in defining the rules applicab le to the suspension of concessions or other obligations in relation
to prohibited subsidies.
5.19 We first note that paragraphs 10 and 11 of Ar ticle 4, and more generally the provisions of
Article 4 of the SCM Agreement concerning "remedies", are closely tied to the terms and procedures
of the DSU itself. Indeed, the arbitration that is addressed in Article 4.11, which defines the mandate
of the arbitrator with reference to the terms of Article 4.10, is defined as an arbitration requested
"under paragraph 6 of Article 22 of the DSU". It is clear from the use of this cross-reference, that the
arbitral proceedings at issue, even though they are in relation to prohibited subsidies under the
SCM Agreement, are initiated under Article 22.6 of the DS U. The primary legal basis for such
proceedings is therefore Article 22.6 of the DSU, as well as Article 4.10 of the SCM Agreement.
5.20 Under the terms of Article 22.6 of the DSU, the Member concerned may challenge two
distinct aspects of a request for authorization to suspend concessions or other obligations. The
Member concerned may object to "the level of su spension proposed", or it may "claim that the
principles and procedures set forth in paragraph 3 (of Article 22) have not been followed" where a
complaining party has requested authorization to su spend concessions or other obligations pursuant to
paragraph 3(b) or (c). If either of these two clai ms is made, then "the matter shall be referred to
arbitration". The reference to an arbitration requ ested "under paragraph 6 of Article 22 of the DSU"
in Article 4.11 of the SCM Agreement, therefore, on its face, refers to the existence of (1) an objection
to the "level of suspension proposed" and/or (2 ) a claim that the principles and procedures of
Article 22.3 of the DSU have not been followed, which are to be referred to arbitration.
5.21 In the case of an arbitration carried out under th e DSU alone, the mandate of the arbitrator is
further defined in Article 22.7, which provides in its first sentence that "the arbitrator acting pursuant
to paragraph 6 shall not examine the nature of th e concessions or other obligations to be suspended
but shall determine whether the leve l of such suspension is equivalent to the level of nullification or
impairment". This is in line with the terms of Article 22.4, which provides that the level of the
suspension shall be "equivalent to the level of nulli fication or impairment". This is comparable, in
structure, to the terms of Article 4.11 of the SCM Agreement, which provides that the arbitrator "shall
determine whether the countermeasures are appropria te", which is in line with the terms of
Article 4.10, which provides that the DSB sha ll grant authorization to take "appropriate"
countermeasures.
5.22 The provisions of Article 22.7 of the DSU and Article 4.11 of the SCM Agreement differ, in
that Article 22.7 of the DSU further articulates that , if the matter referred to the arbitrator includes a
claim that the principles and procedures have not b een followed, the arbitrator shall examine that
claim, whereas Article 4.11 of the SCM Agreement contains no exact equivalent. The question
therefore arises as to how the mandate of the arbitr ator should be understood in a situation where a

336 Appellate Body Report, Guatemala – Cement I, para. 65.

claim that the principles and procedures of Article 22.3 of the DSU have not been followed is referred
to arbitration in accordance with Article 22.6 of the DSU, in relation to prohibited subsidies.
5.23 In order to give useful meaning to all the terms of the treaty, including those of Article 22.3 of
the DSU and the reference to Article 22.6 of the DSU in Article 4.11 of the SCM Agreement, we must
a priori read the terms of that provision as envisaging that the principles and procedures of
Article 22.3 of the DSU apply, including in cases re lating to prohibited subsidies, and that a claim
may be made in relation to these principles and pro cedures. In accordance with the principle that the
special or additional rules listed in Appendix 2 of the DSU would only prevail in the event of a
"difference" (i.e. if it were not possible to apply bo th simultaneously), it is only in the event that we
determine that there is a conflict or incompatib ility between such a reading and the terms of
Article 4.11 of the SCM Agreement, that we should conclude otherwise.
5.24 It appears to us that such a conflict or inco mpatibility would arise between the application of
the principles and procedures in Article 22.3 of the DSU and the terms of Article 4.10 and 4.11 of the
SCM Agreement only if the terms "appropriate countermeasure s" in these provisions are interpreted to
define not only the permissible le vel of countermeasures in the case of prohibited subsidies, but also
the type of countermeasures that may be authorized, so that the principles and procedures of
Article 22.3 of the DSU would be inoperative in cases relating to prohibited subsidies.
5.25 We are not persuaded that this is the case. As was discussed in detail in Section IV.D above,
it is undisputed that the expression "appropriate co untermeasures" defines the permissible level of
countermeasures in relation to prohibited subsidies. In our view, it does not do more than that. The
term "appropriate", as informed by footnote 9, whic h clarifies that this expression is not meant to
allow countermeasures that would be "disproportionate", necessarily addresses the level of suspension
that may be authorized. This is suggested by th e use of the term "disproportionate", which can only
be understood with reference to the level of countermeasures. By contrast, it is not clear that these
terms provide any guidance as to the type of countermeasures that may be authorized.
5.26 In light of the level of detail in which the matt er of cross-sectoral retaliation is addressed in
the DSU, one would have expected the drafters of the SCM Agreement to provide express guidance to
this effect, if they had intended to address diffe rently the question of the type of permissible
countermeasures, as well as their level. In fact, th is would have been especially necessary in light of
the fact that Article 22.6 of the DSU, which is expressly referred to in Article 4.11 of the
SCM Agreement, foresees that a challenge to proposed susp ension of concessions or other obligations
may be based either on the level of suspension proposed, or on a claim "that the principles or
procedures of paragraph 3 (of Article 22 of the DSU) have not been followed".
5.27 While the expression "the level of proposed suspension" does not in itself prejudge the
standard upon which such "level" might be review ed, and thus allows th is standard to differ
depending on the type of measure at issue, the reference to the "principles and procedures" of
Article 22.3 of the DSU leaves no doubt as to the relevant legal standard. This part of the reference to
Article 22.6 of the DSU in Article 4.11 of the SCM Agreement would have to be read out of the
provision in order to conclude that the principl es and procedures of Article 22.3 of the DSU do not
apply in the context of proceedings relating to prohibited subsidies. In light of our analysis above, we
see no basis to do so. We also note that, as treaty inte rpreters, we are required to "read all applicable
provisions of a treaty in a way that gives meaning to all of them, harmoniously". 337 The only manner
in which we can give full meaning to all the term s of the treaty harmoniously in this context is to
understand the terms of Artic le 4.10 and 4.11 of the SCM Agreement as meaning that the mandate of
the arbitrator as defined in Article 4.11 of the SCM Agreement relates to the determination of the level

337 See for example Appellate Body Report, Canada – Dairy , para. 133, and Appellate Body Report,
US – Upland Cotton, para. 549.

of countermeasures, while the terms of the arbitr ator's mandate in relation to a claim that the
procedures and principles of Article 22.3 of the DSU have not been followed are contained in
Article 22.6 of the DSU.
5.28 This interpretation is also consistent, in our view, with the context in which these provisions
arise. The various paragraphs under Article 4 of the SCM Agreement may not be read in isolation
from the DSU. Rather, we understand the terms of Article 4 of the SCM Agreement as providing
specific additional rules on specifi c aspects of dispute settlement proceedings relating to prohibited
subsidies, which replace the equivalent rules of the DSU only to the extent that they differ from and
are incompatible with such rules.
5.29 In Article 4.11 of the SCM Agreement, it was not necessary for the drafters to clarify that, in
relation to a claim that the principles and proce dures of Article 22.3 have not been followed, the
arbitrator would review that claim, since the terms of Article 22.7 of the DSU, which generally define
the terms under which an arbitration under Article 22.6 is to be carried out, already address this point.
Only to the extent that the mandate of the arbitrator differed from that set forth in Article 22.7 of the
DSU, was it necessary to explicitly define it in Article 4.11 of the SCM Agreement, in order to ensure
that the mandate of the arbitrator in relation to the proposed level of countermeasures would be
consistent with the manner in which the perm issible level of countermeasures is defined in
Article 4.10 of the SCM Agreement for prohibited subsidies. Indeed, Article 22.7 of the DSU sets out
a number of other aspects relating to arbitration pr oceedings pursuant to Ar ticle 22.6 of the DSU,
which are not replicated in Article 4.11 of the SCM Agreement, but which nonetheless are clearly
relevant and applicable to such proceedings. In particular, the last two sentences of Article 22.7
provide that:
"The parties shall accept the arbitrator's decision as final and the parties concerned
shall not seek a second arbitration. The DS B shall be informed promptly of the
decision of the arbitrator and shall, upon request, grant authorization to suspend
concessions or other obligations where the re quest is consistent with the decision of
the arbitrator, unless the DSB decides by consensus to reject the request."
These important provisions are clearly relevant to arbitral proceedings in relation to prohibited
subsidies under the SCM Agreement.

5.30 Finally, we consider that our interpretation is faithful also to the object and purpose of dispute
settlement proceedings in the WTO and to their integrated nature. Th e DSU provides the common
framework under which dispute settlement proceedings are initiated in the WTO, and brings together
all the covered Agreements. This is the overall framework in which the question of the possibility of
seeking suspension of obligations under another sector , or another covered Agreement than that under
which the violation has been found, arises, and this is logically addressed in the context of the DSU.
5.31 We are mindful that we must give full meaning to all the terms of the treaty, including the
special or additional rules identified in Appendix 2, and that such special or additional rules may
legitimately prevail over any relevant DSU rules and procedures. However, we are not persuaded that
there is a conflict, such that the principles a nd procedures of Article 22.3 of the DSU would be
inapplicable in the case of disputes relating to prohibited subsidies under the SCM Agreement.
5.32
 In light of all the above, we conclude that th e principles and procedures of Article 22.3 of the
DSU apply to the claim before us and that we must review the United States' claim that these
principles and procedures have not been followed by Brazil.

B. MANDATE OF THE ARBITRATOR AND BURDEN OF PROOF
5.33 Having determined that the principles and pro cedures of Article 22.3 of the DSU apply to
Brazil's request and that we are required to revi ew the United States' claim that Brazil has not
followed these principles and procedures, we need to clarify further what our mandate is, in relation to
this claim, and what burden of proof applies to it.
1. Main arguments of the parties
5.34 The United States considers that the drafter' s intention was that suspending concessions
across sectors and agreements was the exception rather than the rule. In the United States' view,
Article 22.3 establishes a hierarchy of suspension: Members must first try to suspend concessions
within the same sector, and if that is not practicab le or effective, can then request permission to
suspend in a different sector. This distincti on is important in the GATS and TRIPS Agreements
where there are multiple sectors, but does not apply with respect to goods. The bar for suspending
concessions under other agreements is higher still. The United States adds that not only does the
suspension within the agreement have to be neither practicable nor effective, but the violation must be
serious enough to warrant cross-agreement suspension.338
5.35 The United States further considers that the discip lines of Article 22.3 are an integral part of
the dispute resolution process a nd the rebalancing of concessions. The United States cites the
statement of the arbitrator on EC – Bananas III (US) (Article 22.6 – EC) , that "the basic rationale of
these disciplines is to ensure that the suspension of concessions or other obligations across sectors or
across agreements (beyond those sectors or agreem ents under which a panel or the Appellate Body
has found violations) remains the exception and do es not become the rule". The United States
therefore considers it necessary for the Arbitrat or to determine whether Brazil has objectively
followed these procedures. The United States also cont ends that Brazil is entitled to a certain margin
of appreciation in making this de termination, but the Arbitrator also has an oblig ation to judge
whether Brazil has objectively reviewed the facts and has reached a plausible conclusion.339
5.36 The United States argues that for a party to request cross-agreement suspension of
concessions, it must find that:
(a) it is not practicable or effective to susp end concessions or other obligations with
respect to other sectors under the same agreement; and
(b) that the circumstances are serious enough to warrant cross-agreement suspension of
concessions.
5.37 It considers that, when analysing these requirement s, the party must take into account: (i) the
trade in the sector or under the agreement under which the panel or Appellate Body has found a
violation or other nullification or impairment, and the importance of such tr ade to that party, and
(ii) the broader economic elements related to the nullification or impairment and the broader
economic consequences of the suspension of concessions or other obligations. The complaining party
must further explain how it has reached the c onclusion that cross-agreement suspension of
concessions is warranted.340
5.38 Brazil notes the arbitrator's "plausib ility" standard as enunciated in the US – Gambling
(Article 22.6 – US) arbitration. This standard calls for an objective assessment of the facts and a

338 US written submission, para. 325.
339 US written submission, para. 326.
340 US written submission, para. 327.

plausible conclusion on the issue of whether it is "pr acticable or effective" to seek countermeasures in
the same sector and on whether th e circumstances are serious enough. 341 Brazil considers, however,
that the Arbitrator should be limited to examining wh ether Brazil has in fact considered the principles
set forth in Article 22.3 of the DSU, not whether Brazil's considerations are plausible. 342 Brazil notes
the United States position, in the DSB meeting on the adoption of the EC – Bananas III (US)
(Article 22.6 – EC) arbitration report, that arbitrators are not supposed to "second guess" the
conclusions reached by the Member who considers that it is not practicable or effective to suspend
concessions or other obligations under the same agre ement, and that the circumstances are serious
enough within the meaning of Article 22.3.343
5.39 Brazil also argues that the United States bears the burden of proving that Brazil has not
followed the principles laid out in Article 22.3, sp ecifically, (i) that it is both "practicable" and
"effective" for Brazil to suspend concessions only in the goods sector, or (ii) that the circumstances
are not "serious enough" to justify applying coun termeasures under another covered agreement. With
respect to Article 22.3(d), Brazil argues that the United States has to prove that in selecting
countermeasures, Brazil did not take into account the elements indicated in items (d)(i) and (ii).344
2. Approach of the Arbitrator
5.40 Article 22.3 sets out certain principles and pro cedures to be followed by a complaining party
seeking to suspend concessions, as to the sector(s) an d/or covered agreement in which the suspension
can take place, which the United States claims that Brazil did not follow.
5.41 We recall our earlier determination that these principles and procedures apply to Brazil's
request, and that Article 22.7 of the DSU provides th e basis for our mandate to review this claim.
Article 22.7 provides that "if the matter referred to arbitration includes a claim that the principles and
procedures set forth in paragraph 3 have not been fo llowed, the arbitrator shall examine that claim"
and that "[i]n the event the arbitrator determines that those principles and procedures have not been
followed, the complaining party shall apply them consistent with paragraph 3".
5.42 We are therefore required to examine the United States' claim that Brazil has not followed the
principles and procedures of Article 22.3 of the DSU.
5.43 As a general principle, Article 22.3(a) of th e DSU provides that suspension of concessions or
other obligations should first be sought in the same sector as that in which a violation was found.
Article 22.3 provides in relevant part that:
"In considering what concessions or other obligations to suspend, the complaining
party shall apply the following principles and procedures:
(a) the general principle is that the complaining party should
first seek to suspend concessions or other obligations with
respect to the same sector(s) as that in which the panel or
Appellate Body has found a violation or other nullification or
impairment."

5.44 Subparagraphs (b) and (c) of Article 22.3 furthe r specify the principles and procedures to be
followed by a complaining party wishing to seek su spension in another sector, or another agreement,
than that in which a violation was found:
"(b) if that party considers that it is not practicable or effective for it to suspend
concessions or other obligations with respect to the same sector(s), it may
seek to suspend concessions or other obligations in other sectors under the
same agreement;
(c) if that party considers that it is not practicable or effective to suspend
concessions or other obligations with respect to other sectors under the same
agreement, and that the circumstances are serious enough, it may seek to
suspend concessions or other obligations under another covered agreement."
5.45 In addition, subparagraph (d) of Article 22.3 provides that:
"(d) in applying the above principles, that party shall take into account:
(i) the trade in the sector or under the agreement under which
the panel or the Appellate Body has found a violation or
other nullification or impairment, and the importance of such
trade to that party;
(ii) the broader economic elements related to the nullification or
impairment and the broader ec onomic consequences of the
suspension of concessions or other obligations."
5.46 Two prior arbitrators have considered the mandate of the arbitrator set out in Article 22.7 of
the DSU with respect to the principles and procedures set forth in Article 22.3, and we find it useful to
refer to their findings in clarifying the terms of our own mandate.
5.47 The arbitrator on EC – Bananas III (Ecuador) (Article 22.6 – EC) , in determining the scope
of its authority to review the principles and procedures relating to requests for suspension of
concessions or other obligations under subparagraphs (b) and/or (c), cons idered that "the fact that the
powers of arbitrators under subparagraphs (b)-(c) ar e explicitly provided for in Article 22.6 implies
a fortiori that the authority of Arbitrators includes th e power to review whether the principles and
procedures set forth in these subparagraphs have be en followed by the Member seeking authorization
for suspension".
345
5.48 The arbitrator also considered the terms of Ar ticle 22.3, including the fact that a certain
margin of appreciation is left to the complaining part y in arriving at conclusions in respect of certain
factual elements (i.e. "if that party considers" in subparagraphs (b) and (c)) as well as the fact that the
party concerned is required to apply th e principles of Article 22.3 (i.e. " shall apply the following
principles and procedures" in the introductory clause of Article 22.3). On the basis of that textual
analysis, the arbitrator determined that:
"[T]he margin of review by the Arbitrat ors implies the authority to broadly judge
whether the complaining party in ques tion has considered the necessary facts
objectively and whether, on the basis of these facts, it could plausibly arrive at the
conclusion that it was not practicable or eff ective to seek suspen sion within the same

345 Decision by the Arbitrators, EC – Bananas III (Ecuador) (Article 22.6 – EC), para. 50.

sector under the same agreements, or only under another agreement provided that the
circumstances were serious enough."346
5.49 The arbitrator in that dispute also considered more broadly the terms of Article 22.3 and noted
that "these provisions imply a sequence of steps towards WTO-consistent suspension of concessions
or other obligations which respects both a margin of appreciation for the complaining party as well as
a margin of review by Arbitrators, if a request for suspension under Article 22.2 is challenged under
Article 22.6".347
5.50 Like the arbitrator on US – Gambling (Article 22.6 – US), we agree with these determinations.
We agree that the principles and procedures set fort h in Article 22.3 of the DSU, which require the
complaining party to make certain determinati ons, imply "a margin of appreciation" for the
complaining party in making these determinations. At the same time, Article 22.3 sets out specific
principles and procedures that the complaining party must follow, and we understand the role of the
arbitrator acting pursuant to Article 22.7 of the DSU to involve a review of whether those principles
and procedures have been followed. It would not be sufficient for a complaining party to have
considered those principles and procedures solely fro m the viewpoint of being able to say that it did
so. The consideration must be a substantive a nd reasoned one, and a claim to be entitled to impose
countermeasures outside the relevant sector, and then outside the relevant agreement, must arise from
that consideration.
5.51 We also agree with the arbitrator on EC – Bananas III (Ecuador) (Article 22.6 – EC) that this
mandate includes a determination of "whether the complaining party in question has considered the
necessary facts objectively" and also "whether, on the b asis of these facts, it could plausibly arrive at
the conclusion that it was not practicable or effec tive to seek suspension within the same sector under
the same agreements, or only unde r another agreement provided that the circumstances were serious
enough".
5.52 In addition, should we determine that Brazil has not followed these procedures or principles,
we believe it to be both necessary and appropriate fo r us to articulate how the analysis could properly
take place to the extent necessary to ensure that Brazil is in a position to apply these procedures and
principles "consistent with paragr aph 3" and present a request "cons istent with the decision of the
arbitrator" in a subsequent phase of these disput e settlement proceedings, as foreseen in Article 22.7
of the DSU.
5.53 We note in this respect that Article 22.7 provides in relevant part that:
"[I]f the matter referred to arbitration includes a claim that the principles and
procedures set forth in paragraph 3 have not been followed, the arbitrator shall
examine that claim. In the event the arbitrator determines that those principles and
procedures have not been followed, the complaining party shall apply them consistent
with paragraph 3. The parties shall accept the arbitrator's decision as final and the
parties concerned shall not seek a second arbitration. The DSB shall be informed
promptly of the decision of the arbitrator and shall upon request, grant authorization
to suspend concessions or other obligations where the request is consistent with the
decision of the arbitrator, unless the DSB decides by consensus to reject the request."
(emphasis added)
5.54 This approach is consistent with the objectiv e of prompt and positive settlement of disputes.
This approach is also consistent with the prac tice of arbitrators acting under Article 4.10 of the

346 Decision by the Arbitrators, EC – Bananas III (Ecuador) (Article 22.6 – EC), para. 52.
347 Decision by the Arbitrators, EC – Bananas III (Ecuador) (Article 22.6 – EC), para. 55.

SCM Agreement and/or Article 22.6 of the DSU, of proceeding with a calculation of the permissible
level of countermeasures in the event that they find the proposed countermeasures not to be in
accordance with the applicable legal standard.348
5.55 In terms of burden of proof, we consider that it is for the United States, as the party
challenging Brazil's determinations , to demonstrate that Brazil has not followed the principles and
procedures of Article 22.3 of the DSU. At the same time, it is essential that Brazil provides us with
explanations on how it made this dete rmination, in order for us to be in a position to review it, and to
determine whether Brazil has, in making its de terminations, "considered the necessary facts
objectively" and whether it could plausibly reach the conclusions that it did.
5.56 The United States also asks the Arbitrator to indicate in its decision, if necessary, the
maximum amount up to which Brazi l would be permitted to impose cross-agreement suspension of
concessions.349 The United States requests the Arbitrator to issue separate awards, one in relation to
the prohibited subsidies and one concerning actionabl e subsidies so that, in case the United States
brings one subsidy into compliance with the DSB recommendations and rulings before it is able to
comply with the other, the separate awards provide a legal basis to ensure that countermeasures are
still consistent with the legal standards of the SCM Agreement and the DSU in that situation.350
5.57 We first recall that two separate decisions are being issued, one in relation to the prohibited
subsidies (this Decision) and one concerning ac tionable subsidies (in WT/DS267/ARB/2), as the
United States requests.351
5.58 We agree that, to the extent that we might determine that Brazil may impose part of the
proposed countermeasures in another sector or agre ement, we would need to indicate clearly the
amount of countermeasures in respect of which it would be entitled to suspend concessions or other
obligations in such other sector or agreement.
5.59 We do not consider it necessary, however, to determine in this Decision what our conclusion
might have been, in the event that the United States s hould, at some future point in time, comply with
the DSB's recommendations and rulings in rela tion to the measures covered by the other
proceedings.352 This is a hypothetical matter on which it would not be appropriate for us to speculate.
Rather, we base our assessment on the situation as it ex ists at the time of our determination, which
includes the fact that the United States has not comp lied with two separate asp ects of the underlying
recommendations and rulings in this dispute and that this gives rise to an entitlement for Brazil to take
countermeasures in relation to both aspects.
5.60 At the same time, we recall that our determinations in these proceedings relate only to Brazil's
request in relation to the prohibited subsidies at issue. Our determinations on Brazil's request for
cross-retaliation take into account the factual ci rcumstances arising from the separate proceedings
relating to the actionable subsidies also ruled on in the underlying proceedings, but no entitlement
arises from this Decision for Brazil to take countermeasures in relation to such subsidies.

348 See for example Decision by the Arbitrators, EC – Hormones (US) (Article 22.6 – EC), para. 12.
349 US responses to questions from the Arbitrator, question 134, para. 165.
350 US comments on Brazil's responses to questions from the Arbitrator, question 134, para. 171.
351 See Section I.C above, at paras. 1.27-1.31.
352 See WT/DS267/ARB/2.

C. BRAZIL'S DETERMINATION THAT IT IS NOT PRACTICABLE OR EFFECTIVE TO TAKE
COUNTERMEASURES WHOLLY IN TRADE IN GOODS AND THAT THE CIRCUMSTANCES ARE
SERIOUS ENOUGH
1. The principles and procedures of Article 22.3 of the DSU
5.61 Article 22.3 of the DSU, as we have observed earlier, foresees certain "procedures and
principles" to be followed by the complaining pa rty, in order to seek to suspend concessions in
another sector or another agreement than that in which the violation was found.
5.62 As observed by the arbitrator on US – Gambling (Article 22.6 – US):
" '[T]hese provisions imply a sequence of steps towards WTO-consistent suspension
of concessions or other obligations'. 353 In other words, as Antigua has expressed it,
Article 22.3 of the DSU provides a 'hierarchy' of remedies that a complaining party
must follow in determining in which sector s or under which agreements suspension
of concessions or other obligations can be sought, namely (1) seek to suspend in the
same sector in the same agreement, (2) seek to suspend within the same agreement
and (3) seek to suspend under another agreement."354
5.63 In this case, the initial violation was found in relation to trade in goods, and this is the "sector"
(as defined in subparagraph (g) of Article 22.3) in which Brazil woul d normally be expected to apply
countermeasures under subparagraph (a). Subparagr aph (b) affords the possibility of seeking to
suspend concessions or other obligations "in othe r sectors under the same agreement". For the
purposes of this provision, all the agreements on tr ade in goods contained in Annex 1A of the WTO
Agreement "taken as a whole" are considered to be an "agreement", and a sector is defined, with
respect to goods, as "all goods".
5.64 Therefore, recourse to subparagraph (b) would in principle allow Brazil to seek to suspend
concessions or other obligations in all goods, under the Agreements on trade in goods. Brazil seeks to
apply countermeasures under the TRIPS and GATS Agre ement. This would constitute suspension of
concession or other obligations "under another agreem ent" within the meaning of subparagraph (c) of
Article 22.3.
5.65 Accordingly, Brazil will have followed the principles and procedures of Article 22.3 if it has
determined, in accordance with the terms of subparagraph (c), that :
(a) "it is not practicable or effective" to seek suspension under the same agreement (i.e.
under the agreements on trade in goods); and
(b) "the circumstances were serious enough".
5.66 In addition, in applying these principles, Braz il is required to have taken into account the
factors identified in subparagraph (d) of Article 22.3.
5.67 As we have determined above , our mandate is to review whether, in making these
determinations, Brazil has considered the necessar y facts objectively and whether, on the basis of
these facts, it could plausibly arrive at the conclusi on that it was not practicable or effective to seek
suspension under the same agreement and that the circumstances were serious enough. In order to

353 (original footnote) Decision by the arbitrators, EC – Bananas III, (request by Ecuador), para. 55.
354 Decision by the Arbitrator, US – Gambling (Article 22.6 – US), para. 4.19.

conduct this assessment, we must first clarify the te rms of these requirements, as well as the role of
the elements referred to in subparagraph (d).
5.68 At the outset, we note that the two requirements within subparagraph (c) are cumulative,
i.e. the complaining Member must consider that "it is not practicable or effective" to seek suspension
of concessions or other obligati ons under the same agreement and that "the circumstances are serious
enough". The additional requireme nt, under subparagraph (d), to take into account certain
considerations, further qualifies the manner in whic h the principles contained in subparagraph (c) are
to be applied.
(a) First requirement under subparagra ph (c): a determination that it is "not practicable or
effective" to suspend concessions or other oblig ations with respect to other sectors under the
same agreement
5.69 In order to seek to suspend concessions or ot her obligations under another agreement, the
complaining party must in the first instance consider that it is "not practicable or effective" to seek
suspension under the same agreement. Brazil c onsiders that it does not need to meet both the
"practicable" and "effective" criteria, and that it is sufficient to satisfy one of the two conditions.355
5.70 We agree that the wording of the provision imp lies that the complaining party may consider
either that it is "not practicable" or that it is "not effective" to seek suspension under the same
agreement, and that it need not conclude that same-agreement suspension is both "not practicable" and
"not effective", in order to reach the conclusion that it is "not practicable or effective".356
(i) "practicable"
5.71 In Brazil's view, the standard of "practicability " under Article 22.3 refers to the availability
for application in practice of the suspen sion of concessions only in the goods sector. 357 In Brazil's
view, "practicability" refers to whether susp ension in the same sector or agreement is available for
application in practice, as well as suited for being used in a particular case . If it is not a real option
or it is not suited to be used in the circumstances, it will be not practicable. 358 This is how the
arbitrators on EC – Bananas III and US – Gambling understood this term, and we agree with this
determination.
5.72 As Brazil describes it, and as the arbitrator on EC – Bananas III (Ecuador) (Article 22.6 –
EC) put it, a consideration of whether suspension in a given sector or agreement is "practicable"
relates primarily to whether it is actually "available in practice" to the complaining party. We find the
example used by the arbitrator on EC – Bananas III (Ecuador) (Article 22.6 – EC) helpful in
clarifying the types of considerations that may be pertinent in such a determination:
"To give an obvious example, suspension of commitments in service sub-sectors or in
respect of modes of service supply which a particular complaining party has not
bound in its GATS schedule is not available for application in practice and thus
cannot be considered as practicable."
359
5.73 There may be a range of situations in wh ich the suspension of concessions or other
obligations in relation to a certain sector or agreemen t is not "available in practice". In our view, the

355 Brazil's responses to questions from the Arbitrator, question 8, para. 127.
356 See Decisions by the Arbitrator, US – Gambling (Article 22.6 – US) , para. 4.29 and EC – Bananas
358 Brazil's responses to questions from the Arbitrator, question 8, para. 126.
359 Decision by the Arbitrators, EC – Bananas III (Ecuador) (Article 22.6 – EC), para. 71.

essence of a consideration of "practicability" of susp ension is that it relates to its actual availability
and feasibility. The impracticability could be either a legal one, as postulated in the example given in
EC – Bananas III (Ecuador ) (Article 22.6 – EC) , or a factual one, such as might arise if the
countermeasure exceeds the total amount of the trade available to be countered.
(ii) "effective"
5.74 Citing the EC – Bananas III (Ecuador) (Article 22.6 – EC) arbitrator, Brazil argues that the
"effectiveness" standard encourages the offending st ate to comply with WTO obligations, in other
words, to induce compliance 360 and allows the party seeking suspensi on to ensure that the impact of
that suspension is strong and has the desired result, namely to induce compliance. Brazil considers
that "the countermeasures that are best tailored to provide such a response are those that can maximize
the likelihood of compliance".361
5.75 In the United States' view, the likelihood of compliance is not a factor that the DSU provides
in assessing the appropriate level or nature of the countermeasure. 362 The United States considers that
the DSU authorizes rebalancing of trade concessions in case a Member does not comply with its trade
obligations. While the ultimate political goal of the DSU is to promote compliance, the legal
standards for assessing countermeasures are the effects of nullification and impairment and these are
two separate issues in the United States' view.
363
5.76 The United States considers that the word "eff ective" means that a Member should not be
prevented from imposing countermeasures of the intende d weight as a result of the limitation of those
countermeasures to the same sector/agreement. The in tended "weight" is what is authorized based on
the applicable standard, including where special or additional rules apply. Thus, a Member should be
able to take the "appropriate" amount of countermeasures with respect to prohibited subsidies and, for
subsidies causing adverse effects, a Member should be able to take countermeasures commensurate
with those effects.364
5.77 Dictionary definitions of the term "effective" include "producing a decided, decisive, or
desired effect"365 and "powerful in effect; producin g a notable effect; effectual". 366 The arbitrator on
EC – Bananas III (Ecuador) (Article 22.6 – EC) relied on comparable definitions to conclude that
"the thrust of this criterion empowers the party seeki ng suspension to ensure th at the impact of that
suspension is strong and has the desired result, name ly to induce compliance with DSB rulings within
a reasonable period of time". 367 That arbitrator further elaborat ed on the types of circumstances in
which a complaining party might consider that su spension in a given sector or agreement would not
be "effective":
"One may ask whether this objective [of i nducing compliance] may ever be achieved
in a situation where a great imbalance in terms of trade volume and economic power
exists between the complaining party seek ing suspension and the other party which
has failed to bring WTO-inconsistent meas ures into compliance with WTO law. In
such a case, and in situations where the complaining party is highly dependent on
imports from the other party, it may happen that the suspension of certain concessions

360 Brazil's written submission, para. 511. EC – Bananas III (Ecuador) (Article 22.6 – EC), para. 72.
362 US written submission, para. 337.
363 US written submission, paras. 339 and 341.
364 US responses to questions from the Arbitrator, question 137, para. 177.
365 In Merriam-Webster Online Dictionary . Retrieved 4 June 2009, from http://www.merriam-
webster.com/dictionary/effective.
366 Oxford English Dictionary, at www.oed.com.
367 Decision by the Arbitrators, EC – Bananas III (Ecuador) (Article 22.6 – EC), para. 72.

or certain other obligations entails mo re harmful effects for the party seeking
suspension than for the other party. 29 In these circumstances, a consideration by the
complaining party in which sector or under which agreement suspension may be
expected to be least harmful to itsel f would seem sufficient for us to find a
consideration by the complaining party of th e effectiveness criterion to be consistent
with the requirement to follow the principles and procedures set forth in
Article 22.3."
368
(original footnote) 29 Of course, suspension of concessions or other obligations is always
likely to be harmful to a certain, limited extent also for the complaining party requesting
authorization by the DSB.
5.78 We do not share the view of the arbitrator on EC – Bananas III (Ecuador) (Article 22.6 – EC)
that a consideration by the comp laining party of the sector or ag reement in which suspension would
be "least harmful" to itself would necessarily be pertin ent. As we read the terms of subparagraphs (b)
and (c), a consideration of the "effectiveness" cr iterion under these provisions involves an assessment
of the effectiveness – or lack thereof – of suspension in the same sector or under the same agreement ,
rather than an assessment of the relative effectiven ess of such suspension, as compared to suspension
in another sector or agreement. In other words, the procedures and principles under Article 22.3 do
not entitle a complaining party to freely choose the most effective sector or agreement under which to
seek suspension. Rather, it entitles the complaining pa rty to move out of the same sector or same
agreement, where it considers that suspension in that sector or agreement is not "practicable or
effective".
5.79 We agree with the arbitrator on EC – Bananas III (Ecuador) (Article 22.6 – EC), however,
that the question of whether "the suspension of certa in concessions or certain other obligations entails
more harmful effects for the party seeking suspension than for the other party" would be pertinent to a
consideration of the "effectiveness" of the said suspension. Indeed, as the arbitrator on EC – Bananas
III (Ecuador) (Article 22.6 – EC) notes, there may be situations in which, for example, the
complaining party is heavily dependent on imports from the other party, to such an extent that it may
cause more harm to itself than it would to the other party, if it were to suspend concessions or other
obligations in relation to these imports. In such a situation, where the complaining party would cause
itself disproportionate harm, such that it would in fact be unable to use the authorization, there would
be a basis for concluding that such suspension would not be "effective".
5.80 It may well be that the suspension of concessions or other obligations "i s always likely to be
harmful to a certain, limited extent also for the co mplaining party" applying it. However, this does
not, in our view, imply that a consideration of su ch harm may not be relevant for the purposes of
assessing the "effectiveness" of suspension in a gi ven sector or agreement. In foreseeing that the
complaining party may consider that same-sector or same-agreement suspension is "not practicable or
effective", the drafters of the DSU have preci sely acknowledged and recognized the possibility of
circumstances in which suspension of certain obligations would not be effective, and they have sought
to allow the complaining party the possibility of ensuring that it nonetheless has at its disposal an
effective remedy in such circumstances, i.e. a re medy that may produce its intended effects. This
includes, in our view, situations in which the harm that may arise from same-sector or same-
agreement suspension would be so significant for the complaining party as to deter it from having
recourse to it.
5.81 This is consistent with the objective of inducin g compliance, in that this provision seeks to
ensure that the complaining party will be in a po sition to actually have recourse to the authorized
remedy, and thus enable it to contribute to induci ng compliance, as is its legitimate purpose. At the

368 Decision by the Arbitrators, EC – Bananas III (Ecuador) (Article 22.6 – EC), para. 73.

same time, we agree with the United States that the "likelihood of compliance", as such, is not at issue
in this determination. Rather, what is at issue is the ability of the complaining party to make effective
use of the awarded countermeasures in order to induce such compliance.
(b) The second element under subparagraph (c): a de termination that "the circumstances are
serious enough"
5.82 As noted by the arbitrator on US – Gambling (Article 22.6 – US) , the text of Article 22.3(c)
provides no specific guidance on how the terms "the circumstances are serious enough" are to be
understood. The elements of subparagraph (d) do, however, provide useful guidance in this respect.
5.83 We therefore consider that the trade at issue, and its importance to the complaining party, as
well as the broader economic elemen ts relating to the nullification or impairment and the economic
consequences of the suspension, may all be re levant in assessing whether the "circumstances are
serious enough" in a given case.
5.84 At the same time, we consider that these terms inherently imply a degree of flexibility in
assessing what "circumstances" may be pertinent in a given case, so that these may not be the only
relevant considerations in such an assessment. We agree, in this respect, with the following
determinations of the arbitrator on US – Gambling (Article 22.6 – US):
"We also consider, more generally, that this aspect of the determination, which relates
to "circumstances", is of necessity an as sessment to be made on a case-by-case basis,
and that the circumstances that are relevant may vary from case to case. We note
however, that these circumstances should be serious "enough", which suggests that it
is only when the circumstances reach a certain degree or level of importance, that
they can be considered to be serious enough."
369
(c) The elements under subparagraph (d) of Article 22.3
5.85 Subparagraph (d) of Article 22.3 directs the complaining party to take into account two
specific considerations, in applying the principles under the previous subparagraphs:
(a) the trade in the sector or under the agreem ent under which the panel or the Appellate
Body has found a violation or other nullifi cation or impairment , and the importance
of such trade to [the complaining] party; and
(b) the broader economic elements related to the nullificati on or impairment and the
broader economic consequences of the suspension of concessions or other
obligations.
5.86 The first element, the "trade in the sector or under the agreement under which the panel or the
Appellate Body has found a violation" is to be understood with reference to the definitions of the
terms "sector" and "agreement" contained in subparagr aph (g) of Article 22.3. As the arbitrator on
US – Gambling (Article 22.6 – US) observed:
"[I]n order to determine whether suspension is practicable or effective in a certain
sector, it is appropriate to take into account all the trade in that sector and its
importance to the complaining party. This also appears to us consistent with the

369 Decision by the Arbitrator, US – Gambling (Article 22.6 – US), para. 4.108.

purpose of this provision, which is to provi de certain objective parameters to guide
the conduct of such determination."370
5.87 In the circumstances of this case, this means that what is to be taken into account is "the
trade" in all goods under the trade in goods agreem ent, that is, trade in goods generally, and its
importance to Brazil.
5.88 The second consideration required to be taken into account is the "broader economic elements
related to the nullification or impairment" and the "broader economic consequences of the suspension.
We agree with the determinations of the arbitrator on EC – Bananas III (Ecuador) (Article 22.6 –
EC), as endorsed also by the arbitrator on US – Gambling (Article 22.6 – US), that:
"The fact that the former criterion relates to 'nullification or impairment' indicates in
our view that this factor primarily concer ns 'broader economic elements' relating to
the Member suffering such nullification or impairment, i.e. in this case Ecuador.
We believe, however, that the fact that the latter criterion relates to the suspension of
concessions or other obligations is not necessarily an indication that "broader
economic consequences" relate exclusively to the party which was found not to be in
compliance with WTO law, i.e. in this case the European Communities. As noted
above, the suspension of concessions may not on ly affect the party retaliated against,
it may also entail, at least to some extent, adverse effects for the complaining party
seeking suspension, especially where a great imbalance in terms of trade volumes and
economic power exists betw een the two parties such as in this case where the
differences between Ecuador and the European Communities in regard to the size of
their economies and the level of socio-economic development are substantial."371
5.89 Accordingly, the "broader economic elements related to the nullification or impairment" to be
taken into account in this case are those relating to the nullification or impairment arising for Brazil
from the subsidies at issue, while the broader economic consequences of the suspension may include a
consideration of the economic consequences of the suspension both for Brazil and for the
United States.
5.90 The terms of subparagraph (d), which require these elements to be taken into account in
applying the principles of subparagraph (c), make it clear that an assessment of whether same-sector
or same-agreement suspension is "not practicable or effective" and of whether "the circumstances are
serious enough" may legitimately, and indeed should, take into consideration not only the trade to
which the suspension would apply, but also the economic consequences arising from the suspension.
5.91 With these considerations in mind, we now turn to consider whether a plausible determination
that it is not practicable or effective to suspend ob ligations in trade in goods alone could be made in
this case, and that the circumstances are serious enough, so that an authorization to suspend
concessions or other obligations also under the TRIPS Agreement and the GATS could be given.
2. Factual assumptions
5.92 As we have found above, our mandate requires us to consider whether Brazil has followed the
procedures and principles of Article 22.3 of the DSU, in determining that it is not practicable or

370 Decision by the Arbitrator, US – Gambling (Article 22.6 – US), para. 4.34.
371 Decision by the Arbitrators, EC – Bananas III (Ecuador) (Article 22.6 – EC), paras. 85-86. See also
Decision by the Arbitrator, US – Gambling (Article 22.6 – US), para. 4.35.

effective to suspend concessions in trade in goods and in the agreements of Annex 1A and that the
circumstances are serious enough.
5.93 In making its determinations, Brazil assumed that the countermeasures would be in the
amount that it had requested, namely, a total of US$1.644 billion in relation to the prohibited
subsidies at issue in these proceedings (Step 2 pl us GSM 102). We have determined, however, that
countermeasures in an amount of US$147.4 million annually372 would be "appropriate" in this case.
5.94 In addition, our determination in these proceed ings takes place against the background of
another arbitration proceeding concerning actiona ble subsidies, in which Brazil had requested
countermeasures in the amount of US$1.037 billion annuall y. The arbitrator in those proceedings has
determined that countermeasures in the amount of US$147.3 million would be "commensurate with
the degree and nature of the adverse effects determined to exist" within the meaning of Article 7.9 of
the SCM Agreement.373
5.95 These circumstances raise two questions for our consideration. First, we must consider
whether, for the purposes of our assessment, we mu st take into account the cumulated amount of
countermeasures resulting from both proceedings or only the amount arising from this Decision.
Secondly, we must consider what are the implications of the fact that Brazil has assumed, in making
its determination, an amount of countermeasures si gnificantly in excess of the amount that has been
determined to be permissible.
(a) Whether it is appropriate to consider the cu mulated amount of countermeasures arising from
both proceedings
5.96 Although the arbitral proceedings relating to the prohibited and actionable subsidies
respectively were conducted in parallel, they relate to different aspects of the DSB's findings in this
dispute and are legally distinct. In both cases, Br azil has requested an authorization to apply the
proposed countermeasures in the form of suspen sion of obligations under the GATS and the TRIPS
Agreement, as well as under trade in goods. The ques tion therefore arises as to the extent to which
the Arbitrator in these proceedings must take into ac count the determinations of the arbitrator in the
other proceedings, in assessing whether Brazil h as followed the principles and procedures of
Article 22.3 of the DSU.
5.97 Brazil considers that the amount of counterm easures on prohibited subsidies and the amount
of countermeasures for actionable subsidies should be cumulated in considering whether suspension
of concessions or obligations in the goods sector is practicable or effective. Brazil observes that the
total amount of countermeasures is part of the objective reality in which the Member operates and in
which it undertakes its consideration of the prac ticability or effectiveness of the countermeasures
under Article 22.3 of the DSU.
374
5.98 The United States argues that, since the Arbitrator should issue two separate reports to reflect
the two separate arbitration proceedings, sep arate assessments of Brazil's requests for
countermeasures under the GATS and the TRIPS Agreement would be needed. 375 However, the
United States also considers that the Arbitrator in each proceeding may consider the circumstances of
the other proceeding. Consequently, the Arbitrator in one proceeding may take account of
countermeasures awarded in the other proceeding in determining if the total of the countermeasures in

372 We recall that this is not a fixed amount, so it may vary over time. However, at this stage of our
analysis, we find it appropriate to rely on the amount that we have calculated in relation to FY 2006.
373 See WT/DS267/ARB/2, para. 4.195.
374 Brazil's responses to questions from the Arbitrator, question 9, para. 133.
375 US responses to questions from the Arbitrator, question 9, para. 47.

the two proceedings together would justify suspending concessions under another sector or
agreement.376
5.99 We first take note of the parties' agreement th at, even in the context of separate assessments
under the two proceedings, the Arbitrator in each pr oceeding would be entitled, in the circumstances
of this case, to take account of the amount of countermeasures awarded in the other proceedings.
5.100 The determinations arising from this Decision are only in relation to the countermeasures
concerning the subsidies covered by these proceedi ngs, namely Brazil's proposals in relation to the
Step 2 and GSM 102 payments. At the same time, we agree that it is appropriate for us to take into
account the amount of countermeasures to which Braz il is entitled to under the other proceedings. As
Brazil has expressed it, the amount of countermeasures determined in the other proceedings is "part of
the objective reality in which the Member opera tes". We assume that both amounts would be
applicable at the same time and that the two amounts of countermeasures would potentially be applied
cumulatively by Brazil. This circumstance may ha ve an impact on an assessment of whether it is
"practicable or effective" to seek countermeasures in the same sector or the same agreement and
whether "the circumstances are serious enough". As observed above, the parties agree that we can
adopt a cumulative approach in this case.377
5.101 We will therefore take into account the cumula ted level of countermeasures arising from both
decisions, which amounts to US$294.7 million annually, in reviewing whether Brazil has followed the
principles and procedures of Article 22.3 of the DS U in determining that it is not practicable or
effective to seek to suspend concessions or other ob ligations in trade in go ods alone and that the
circumstances are serious enough.
(b) Implications of the difference between the le vel of countermeasures requested by Brazil and
the level determined to be permissible
5.102 The amount of the countermeasure is a central aspect, possibly the most critically important
aspect, of the consideration required to be undert aken by a complaining Member in following the
principles and procedures of Article 22.3 of the DSU.
5.103 In these proceedings, Brazil has assumed, in applying the procedures and principles of
Article 22.3, that it would be entitled to a to tal amount of countermeasures in the amount of
US$2.681 billion (US$1.644 billion in relation to the prohibited subsidies plus US$1.037 billion in
relation to the actionable subsidies). However, as we have determined a bove, the cumulated amount
of countermeasures to which Brazil is entitled to is US$294.7 million.
5.104 In this case, the amount of countermeasures that we have determined to be permissible is
significantly lower than the amount assumed by Brazil in its request, and this fact alone compels a
finding that the complaining party has not followed the principles and procedures of Article 22.3. We
must therefore find that in adopting the assumption of a total of US$2.681 billion of countermeasures
as the central "fact" underlying its consideration of Article 22.3, it did not properly consider, or cannot
be taken to have properly considered, "the necessar y facts objectively". Consequently, it cannot have
properly applied the princi ples and procedures of Article 22.3 on the basis of these facts. Therefore
our finding must be that Brazil has not followed the principles and procedures as laid out in that
Article.
5.105 It is not possible to go "back in time" for Braz il to rectify its request for the purposes of these
proceedings, taking into account our determina tion relating to the permissible amount of

376 US responses to questions from the Arbitrator, question 9, para. 48.
377 See para. 5.94.

countermeasures.378 However, Brazil will have the right to present a request for countermeasures to
the DSB at the level determined in this Decision. Thus it would be both unreasonable and
uninstructive to say nothing more about the way in which the principles and procedures should be
applied to the lower countermeasure calculated by the Arbitrator.
5.106 We recall in this context our determination in paragraph 5.52 above that, should we determine
that Brazil has not followed these procedures or pr inciples, we should articulate how the analysis
could properly take place to the extent necessary to en sure that Brazil is in a position to apply these
procedures and principles "consistent with paragra ph 3" and present a request "consistent with the
decision of the arbitrator" in a subsequent phase of these dispute settlement proceedings, as foreseen
in Article 22.7 of the DSU.
5.107 In light of these considerations, and notwithst anding our determination that Brazil has not
followed the principles and procedures of Article 22.3 because it based its determination on an
amount of countermeasures which is significantly in excess of the amount we have authorized, we
thus now proceed to describe how, in our view, Artic le 22.3 should be applied in the context of a
countermeasure in the amount of US$294.7 million.
5.108 In conducting this analysis, we will take into consideration the elements and arguments that
have been presented to us by Brazil and the Unite d States in these proceedings. We recognize that
Brazil applied these arguments to a significantly larg er amount of countermeasures. What we aim to
determine in our examination of this issue, is whether the considerations that Brazil has brought
forward to explain why it considered that it is not practicable or effective to suspend concessions or
other obligations solely in trade in goods to th e level that it assumed it w as entitled to, would justify
the same conclusion when applied to the level of co untermeasures that we have determined would be
"appropriate".
3. Whether it is practicable or effective for Brazil to suspend concessions in trade in goods
5.109 Although Brazil considers that the countermeasures must be assessed exclusively against the
requirements of Article 4.10 of the SCM Agreement, Brazil claims that it has, in any event, followed
the principles and procedures of Article 22.3 of the DSU. Specifically, Brazil considers that it is not
practicable or effective to suspend concessions or other obligations exclusively under trade in goods,
and that the circumstances are serious enough to justify suspension of concessions or other obligations
under TRIPS and GATS.
379 Brazil also argues that it considered the elements under Article 22.3(d) of
the DSU.380
5.110 The United States argues that the text of the DSU does not explicitly define what
countermeasures are "practicable or effective", but th e negotiators were clear in their intention that
this be a high bar. Brazil does not reach this bar. In the United States' view, Brazil advances a claim
for cross-agreement and sector suspension of con cessions that is contrary to the Article 22.3
disciplines.381 The United States therefore requests the Arbitr ator to reject Brazil's request to suspend
concessions with respect to TRIPS and GATS for the reason that Brazil does not meet the
requirements of Article 22.3.
382

378 This is not to say that a Member could not base its consideration on a range of possible
countermeasure amounts, in order to come before an arbitrator in Article 22.6 proceedings and validly say that it
did use a range of assumed facts, and arrived at the same or different outcomes in relation to cross-retaliation.
In these proceedings that did not happen.
381 US written submission, para. 329.
382 US written submission, para. 342.

(a) Main arguments of the parties
5.111 Brazil states that it does not consider it adequa te to suspend concessions "by creating barriers
to Brazilian imports of US goods and thereby imposing additional costs on the Brazilian economy in
general."383
5.112 The United States considers that this claim runs head long into the thoughtful and purposeful
design of the DSU system. According to the United States, the treaty negotiators specifically created
a system where Members had to first resort to suspension of concessions within the relevant
agreement. Suspension of concessions with respec t to goods always entails creating barriers to
another Member's goods and thereb y imposing additional costs on the sanctioning state's economy.
The United States argues that the negotiators of the DSU were well aware that suspension of
concessions with respect to goods would be pain ful for both the sanctioned government and the
sanctioning government.384 In the United States' view, if the me re fact of additional costs on Brazil's
domestic economy were sufficient for suspension of c oncessions in the same sector to be not practical
or effective, it could be argued th at any and all violations with re spect to goods would warrant cross-
agreement suspension of concessions. The United Stat es argues that this approach is not compatible
with the fact that designers of the DSU chose to impose disciplines on suspension of concessions.385
5.113 The United States considers that it can demonstrate that Brazil can effectively and practicably
suspend concessions with respect to goods, and that any request by Brazil to suspend concessions
across sectors or across agreements is not a reas onable and objective assessment of the conditions
established by Article 22.3.386 The United States points out that Brazil imports a sufficient amount of
goods from the United States to provide practicab le and effective suspension of concessions.
Between 2005-2007, Brazil importe d between US$15.3 billion to US$24.6 billion annually in
US goods.387 In consumer goods, excluding food a nd automotive goods, Brazil imported between
US$1.125 billion and US$1.676 billion annually in the same time period. Including food and
automotive goods in the consumer goods categor y, the level of imports jumps to between
US$1.826 billion and US$2.717 billion annually.
5.114 According to the United States, the level of bilateral trade between the United States and
Brazil is thus sufficient to provide for suspensi on of concessions with respect to goods alone.
Moreover, given Brazil's large and diverse ec onomy and the actual level of nullification and
impairment incurred by the US policies at issu e, suspension in consumer goods alone should be
effective and practicable. 388 In the United States' view, the ec onomic size and the diversity of the
economy makes it possible for Brazil to suspend con cessions in the goods sector without resort to
exceptional cross-sector countermeasures. 389 In the past, Brazil has proposed suspension of
concessions in the amount of US$3.36 billion only in the goods sector in the Canada – Aircraft
Credits and Guarantees (Article 22.6 – Canada) dispute. In the United States' view, it is difficult to
understand why it was practicable and effective to suspend concessions in the goods sector in that
dispute while Brazil considers it is not practicable or effective to suspend concessions in the goods
sector in this case.390

384 US written submission, para. 329.
385 US written submission, para. 330.
386 US written submission , para. 335.
387 Exhibit US-62, US-ITC Export Data to Brazil.
388 US written submission, para. 336. The Arbitrator takes note that these US arguments are made in
the context of Brazil's requested amount of countermeasur es, i.e., US$1.644 billion, for prohibited subsidies
and US$ 1.037 billion for actionable subsidies respectively.
389 US responses to questions from the Arbitrator, question 135, paras. 168-170.
390 US oral statement, para. 71.

5.115 Citing the EC – Bananas III (Ecuador) (Article 22.6 – EC) arbitration, the United States
argues that if a developing country, even one with a relatively small and undiversified economy such
as Ecuador, has sufficient bilateral trade in consumer goods to impose suspension of concessions, then
it must do so. Only where the government lacks the capacity to suspend concessions in the same
agreement does the DSU permit the cross agreement suspension of concessions.391
5.116 Brazil explains that it would not be feasible or reasonable to apply countermeasures on capital
goods, intermediate goods and other essential inputs to the Brazilian economy, which it says comprise
95 per cent of Brazil's imports from the United States . The costs involved in switching suppliers are
normally prohibitive for capital goods and intermediate goods. In addition to prices, decisions on the
purchase of capital or intermediate goods are conditioned by several factors that severely constrain the
ability of producers to switch suppliers. These f actors include: (i) long-term contracts cannot be
terminated easily or without heavy pecuniary penalties; (ii) capital goods in particular are tailor-made
to respond to the specific needs of the producer and are ordered many months or even years in
advance; (iii) in most industries, inputs must have the exact technical specifications that match the
requirements of the machinery in place. These specifications will be di fferent depending on the
brand, origin, age etc. of the machinery that equips assembly lines. As a result, theoretically similar
products are not substitutable; (iv) intellectual property protection and intra-company trade determine
purchase decisions and curb the ability of producers to change suppliers.
392
5.117 Moreover, Brazil says that its imports of c onsumer goods from the United States amount to
US$1.27 billion. Of that amount, almost US$1.1 b illion, or 86 per cent, correspond to medical and
educational supplies, food, automotive goods and arms, sectors where, according to Brazil, any
raising of barriers would entail serious and unreasonable costs to the Brazilian economy.393 In Brazil's
view, the profile of Brazilian imports of consum er goods from the United States leaves very little
room of manoeuvre for Brazil to adopt countermeasures that target such goods.394
5.118 However, Brazil also considers that of the US$1.27 billion of annual imports of consumer
goods from the United States (in 2007), approximately US$28.5 million, or 2.2 per cent, can be
considered as luxury goods, in relation to which, arguably, the imposition of countermeasures would
not be disproportionately costly to Brazil. In Brazil's view, these luxury goods are consumed by a
very small share of Brazil's population and an increa se in the costs of their importation is likely to
generate limited impacts on the Brazilian economy in general.
395
5.119 The United States observes that Brazil has failed to explain why, given the availability of
alternative sources of supply, the suspension of co ncessions in the goods sector is not practicable or
effective. Rather, the United States argues, Braz il simply takes a broad category of goods out of
consideration based on mere assertion. 396 The United States considers that the goods sector is "all
goods", and that while it may be appropriate to ex amine the negative impact on particular goods that
are necessities, where goods are not necessities or wh ere alternative sources of supply are available,
there is no basis to assert that suspension of concessions for those goods is not practicable or
effective.397
5.120 Brazil considers that the United States bears th e burden of proving that it is practicable and
effective for Brazil to change suppliers when ta king countermeasures in the goods sector alone, and

391 US written submission, para. 333.
392 Brazil's responses to questions from the Arbitrator, question 140, para. 334.
393 Brazil's responses to questions from the Arbitrator, question 140, para. 336.
396 US responses to questions from the Arbitrator, question 135, para. 171.
397 US responses to questions from the Arbitrator, question 135, para. 166.

that merely identifying that alternative sources of supply exist for some products is not sufficient. 398
In this regard, Brazil considers that the United St ates failed to demonstrate that countermeasures in
the goods sector alone is "practicable" and "effective".399
5.121 Brazil considers that the crucial question is not whether alternative sources of supply exist,
but whether it would be feasible and sensible for Braz il, in practice, to force its economic agents to
switch to other suppliers. Such analysis would ha ve to take into account, among other factors, the
US share in Brazil's total imports; the price levels of alternative suppliers; technical specifications and
product differentiation; intellectual property and in tra-company trade restrictions; and the economic,
welfare and inflationary costs resulting from the disruption of production and supply chains. 400 Brazil
considers that the burden is on the United States to explain why and how the US imports can be
replaced by imports from other sources, so that it is practicable for Brazil to take countermeasures
only in the goods sector.401
5.122 The United States comments that Brazil focuses on an even narrower scope of products than
the arbitrator on EC – Bananas III (Ecuador) (Article 22.6 – EC) did. In that dispute, the arbitrator
looked at the category of consumer goods because the suspension of concessions on these goods could
not cause any direct adverse effects on Ecuador's domestic manufacturing and processing industries.
The United States says that there is no reason to ex clude such end use products as "books" and "food"
(which Brazil indicates as necessity commodities) fr om the products for applying countermeasures.
Also, the United States considers that the potential co st of changing suppliers is not unusual, but an
expected result of suspension of concessions. The United States' main point is that Brazil is not
constrained to the narrow range of choices of goods as it suggests given that it is one of the world's
largest economies and it has many sources of supply.402
5.123 Brazil further argues that within the very lim ited scope of consumer goods that Brazil has to
target, the costs and welfare-reducing effects resulting from the adoption of countermeasures
exclusively in that sector would render such an a lternative not practicable. In Brazil's view, the
additional costs generated by these measures would a dd to inflationary pressures – at a time when
increasing prices have pointed to a worrying inflationary scenario – and would limit access of
Brazilian consumers to these impor ted goods, negatively affecting Brazil's economy and the welfare
of its population.
403
5.124 Furthermore, in Brazil's view, any measures that are contrary to the objectives of a developing
country to ensure steady and sustainable development; to pursue high growth rates; to fight poverty;
and to promote the increased welfare of its popul ation within a stable macroeconomic environment
will necessarily be costly and impracticable by definition.
404 Brazil also contends that the
significantly unbalanced nature of the trade relati ons between Brazil and the United States, and the
considerable economic differences between the tw o countries, render the suspension of concessions
and other obligations under trade in goods alone ne ither practicable nor effective as a response to the
United States' failure to comply with its obligations.405

398 Brazil's responses to questions from the Arbitrator, question 140, para. 337.
399 Brazil's responses to questions from the Arbitrator, question 140, para. 349.
400 Brazil's responses to questions from the Arbitrator, question 140, para. 337.
401 Brazil's comments on US responses to questions from the Arbitrator, question 135, para. 394.
402 US comments on Brazil's responses to questions from the Arbitrator, question 140, paras. 179-181.
403 Brazil's written submission, paras. 517-519.

5.125 In Brazil's view, countermeasures that are simply most likely to add to those costs and effects
are not practicable, as the Brazilian Government does not consider that they could be employed in
practice.406
5.126 Brazil also considers that countermeasures restri cted solely to trade in goods may not have
sufficient political influence to press for the United St ates' withdrawal of the billions in US dollars
annually paid subsidies or to remove their adverse effects. Therefore, such countermeasures are not
"effective" for the purpose of encouraging compliance.407
5.127 Brazil submits that, at the very least, it "could plausibly arrive at the conclusion that it was not
practicable or effective for it to suspend con cessions and other obligations" in respect of the
importation of goods alone.408 Brazil reiterates that, besides being authorized to take countermeasures
under trade in goods, it needs to have the option to suspend concessions or other obligations under
TRIPS and GATS. In this regard, Brazil is seeking to take countermeasures that "produce the greatest
likelihood of compliance with minimal damage to its own economy", as commented by the United
States itself in a DSB meeting adopting the arbitration report in EC – Bananas III (Ecuador)
(Article 22.6 – EC).409
(b) Analysis by the Arbitrator
5.128 We recall our determination above that Braz il cannot be taken to have applied a proper
consideration of the principles and procedures of Article 22.3, because the amount of the
countermeasure it assumed was much greater than the countermeasure determined by the Arbitrator.
Nonetheless we have proceeded further, to give gui dance whether, on the basis of the level of the
countermeasures authorized under this Decision, and in the circumstances of the trade between the
two Members involved, an objective and plausible conclusion could be reached that it is "not
practicable or effective" to seek suspension in tr ade in goods alone and that "the circumstances are
serious enough".
5.129 We also recall that, as we have explained in our preliminary observations above, we will take
into account in our review of Brazil's determinati ons the amount of countermeasures that we have
determined that Brazil is entitled to, in relation to the ML and CCPs (US$147.3 million), as well as
the amount of countermeasures determined to be "app ropriate" in the separate proceedings relating to
the prohibited subsidies at issue in the underlying dispute (US$147.4 million). The total amount of
countermeasures in relation to which we cons ider Brazil's determinations is therefore
US$294.7 million.
(i) Initial observations
5.130 Brazil observes at the outset that it would not be adequate to suspend concessions "by
creating barriers to Brazilian imports of US goods and thereby imposing additional costs on the
Brazilian economy in general". The United States responds that suspension of concessions with
respect to goods always entails creating barrier s to another Member's goods and thereby imposing
additional costs on the sanctioning state's economy, and that the DSU negotiators were "well aware
that suspension of concessions with respect to goods would be painful for both the sanctioned
government and the sanctioning government". If the me re fact of additional cost on Brazil's domestic
economy were sufficient for suspensi on of concessions in the same sector not to be practical or

409 Brazil's written submission, para. 527; WT/DSB/M/78, paras. 44-45.

effective, the United States observes, then it could be argued that "any and all violations with respect
to goods would warrant cross-retaliation".
5.131 We agree with the United States that "the mere fact of additional cost on Brazil's domestic
economy" would not be sufficient, in and of itself, to conclude that suspension of concessions or other
obligations is "not practicable or effective" within the meaning of Article 22.3 of the DSU. To the
extent that the imposition of a barrier to trade on certain imports inherently generates economic costs
on the Member imposing them, the suspension of co ncessions on trade in goods may always have the
potential to cause some harm to the economy of th e Member imposing the barriers. To assume that
this inherently would justify recourse to cross-re taliation would amount to reading out of Article 22.3
the principle contained in subparagraph (a). Rather , subparagraphs (b) and (c ) of Article 22.3 set out
the specific circumstances in wh ich a complaining Member may be entitled to seek to suspend
concessions in another sector or another agreement, whatever the sector in which the violation was
found.
5.132 At the same time, as we have observed in our analysis of the terms "not practicable or
effective" above, it is quite possible that the pot ential costs associated with the suspension of
concessions or other obligations in a given sector or under a certain agreement would precisely be of
such an extent and magnitude that such suspension is "not practicable or effective". The fact that
subparagraph (d) requires a consideration of the "b roader economic consequences of the suspension"
further confirms, in our view, that it is appropriate and legitimate for the complaining party to take
into account the potential costs that may be associated with the suspension, and not simply the legal
feasibility of that suspension, in a determination of whether it is "practicable or effective".
5.133 In short, a consideration of the economic costs associated with the suspension is legitimate,
but it is not just any economic costs associated with the suspension of concessions or other obligations
in a given sector or agreement that would justify a conclusion that such suspension would be "not
practicable or effective". Rather, the costs at issue would have to be of such extent and magnitude as
to render the suspension "not practicable or effective".
5.134 In these proceedings, Brazil has provided general explanations as to the profile of its trade
with the United States, which in its view affect its ability to suspend concessi ons or other obligations
in trade in goods, as well as specific explanations wh y it considers that it would not be practicable or
effective to seek to suspend obligations with respect to certain categories of imports of goods from the
United States, so that the range of imports that it can actually target is very limited. Finally, Brazil
also argues that, even within the range of produc ts that it could target, suspension would not be
"practicable or effective", for various reasons. We consider these three aspects in turn.
(ii) Overall profile of US imports of goods to Brazil
5.135 Brazil argues that there is a great imbalance of trade between Brazil and the United States,
and that its imports account for only a small sh are 1.7 per cent (or US$18.7 billion) of total
US exports (US$1.16 trillion) Hence an increase in tariffs imposed on this trade would not
sufficiently affect the United States and therefore w ould be an ineffective response to the continued
violation of its obligations in this dispute.410
5.136 In Brazil's view, it would be much easier for the United States to redirect 1.7 per cent of its
exports to other destinations than for Brazil to fi nd suitable alternative sources for its imports. Brazil
is much more dependent on imports from the Un ited States. Brazil indicates that among the top
20 products in the list of Brazil's imports from th e United States, the United States accounts for more
than 50 per cent of total Brazilian imports in 12 cases, and greater than 90 per cent of Brazilian

410 Brazil written submission, para. 514.

imports in five of these products. 411 Brazil also presented an exhibit showing that out of the
30 HS chapters in value of imports that represen ts 96 per cent of total Brazil's imports from the
United States in 2007, the US share was above 10 pe r cent in 26 cases. This share was higher than
20 per cent in 20 cases and above 30 per cent in eight cases.412
5.137 The United States responds that the difference be tween the percentage of US imports into
Brazil and the percentage of Brazil's imports into th e United States is not the question. The question
is whether, within trade from the Un ited States that does occur, it would be practicable or effective to
impose countermeasures in goods. The United Stat es considers that Brazil, in fashioning its
countermeasures, could take into account the difficu lty of finding substitute goods from other sources
(e.g., focusing on luxury goods to the extent possibl e, where increased costs would have little impact,
and then exploring other goods wher e substitute goods are available). 413 Given the size and diversity
of the Brazilian economy, and the availability of goods from other countries or from Brazil itself,
Brazil has many tools at its disposal to apply countermeasures within the goods sector.414
5.138 The United States further observes that Brazil is an important market for the United States,
which exported between US$15.3 a nd US$24.6 billion annually to Br azil between 2005 and 2007. If
Brazil suspends concessions in the goods sector, it would deprive the United States of access to the
important Brazilian market. At a time of economic ch allenges, loss of this large market would lead to
a serious economic cost.415
5.139 We take note of the fact that the total annua l value of trade in goods from the United States
represents more than 15 per cent of Brazilian impor ts overall, and that this represents less than
2 per cent of total US exports of goods. We are no t persuaded, however, that this "imbalance" that
Brazil describes in its trade in goods from the Unite d States would in itself be a sufficient basis to
conclude that a suspension of c oncessions or other obligations in re lation to such goods would be "an
ineffective response", as Brazil argues. In order to arrive at the conclusion that suspension in a given
sector or agreement is not "practicable or effectiv e", a more detailed consideration of the possibilities
for suspension of concessions or obligations within the range of imports that could potentially be
targeted is appropriate, especially where the total level of imports is not insignificant and greatly
exceeds the level of permissible countermeasures to which the complaining party is entitled.
5.140 We note that the total value of Brazil's impor ts of goods from the United States, as estimated
by Brazil, is US$18.7 billion. The United States estimates these imports at between US$15.3 and
US$24.6 billion annually. Brazil's estimation of th e value of its total imports of goods from the
United States is therefore within the range cited by the United States.
5.141 These figures suggest that, in principle, Braz il has at its disposal a total value of
US$18.7 billion of US exports that could potentially be subjected to suspension of concessions or
other obligations. The question we must now c onsider is whether Brazil could plausibly have
considered that, from those imports, it is not practic able or effective to suspend concessions or other
obligations under the agreements on trade in goods alone, to a level of US$294.7 million. We are
aware that Brazil, in making its determination, w as assuming that it would be entitled to a total level
of suspension significantly in excess of this figure an d we have already outlined why it is that we are
reviewing the application of the principles and pr ocedure of Article 22.3 despite that supervening
obstacle to Brazil's claim in the circumstances of this case (i.e. that it did not actually undertake the
consideration that it would have had to have done in order to argue its position before the Arbitrator).

413 US responses to questions from the Arbitrator, question 68, paras. 202-203.
414 US responses to questions from the Arbitrator, question 68, para. 206.
415 US oral statement, para. 69.

5.142 We recall our determination above that whether suspension in a given sector or agreement is
"practicable" essentially relates to whether it is availa ble or feasible in practice. This question is in
part answered by a consideration of the total leve l of trade, to which suspension of concessions or
other obligations could be applied. To the extent th at the total level of imports from the United States
exceeds the total value of imports to which suspen sion could apply, such suspension is at least
available in principle. We also recall our determin ation that whether suspension in a given sector or
agreement is "effective" relates more directly to the question of whether the complaining party could
effectively make use of the authorization, and that this may in particular depend on the extent to
which that party would cause itself significant harm in suspending concessions on the imports
concerned, to such an extent that the suspension would not be effective.
5.143 Bearing in mind these general considerations, we now consider Brazil's arguments to the
effect that it only has, in fact, limited scope to seek suspension in relation to its imports of goods from
the United States.
(iii) Detailed profile of US imports to Brazil and ava ilability of suspension in relation to various
categories of imports
5.144 Among its US$18.7 billion of annual imports from the United States, Brazil indicates that
95 per cent is composed of imports of intermed iate goods, capital goods, and other essential inputs
into Brazil's economy. Brazil argues that the costs involved in switching suppliers are normally
prohibitive for capital goods and intermediate goods. Brazil further argues that, of the
US$1.27 billion of annual imports of consumer goods from the United States, almost US$1.1 billion,
or 86 per cent, correspond to medical and educa tional supplies, food, automotive goods and arms,
sectors where any raising of barriers would enta il serious and unreasonable costs to the Brazilian
economy.
416 We consider in turn Brazil's determinatio n relating to capital, intermediate and other
input goods, and its determination in relation to consumer goods.
Capital goods, intermediate goods and other goods constituting inputs into Brazil's economy
5.145 Brazil observes that in addition to prices, decisi ons on the purchase of capital or intermediate
goods are conditioned by several factors that sever ely constrain the ability of producers to switch
suppliers, including long-term cont racts that cannot be terminated easily or without heavy pecuniary
penalties, the fact that capital goods in particular are tailor-made to respond to the specific needs of
the producer and are ordered many months or even year s in advance, the fact that in most industries,
inputs must have the exact technical specifications that match the requirements of the machinery in
place, as well as the fact that intellectual prope rty protection and intra-company trade determine
purchase decisions and curb the ability of producers to change suppliers.417
5.146 The United States does not specifically comment on Brazil's assessment that suspension of
concessions in relation to capital, intermediate or other input goods would not be practicable or
effective. The United States generally considers, however, that Brazil takes a broad category of goods
out of consideration based on mere assertion, and th at "while it may be appropriate to examine the
negative impact on particular goods that are ne cessities, where goods are not necessities or where
alternative sources of supply are available, there is no basis to assert that suspension of concessions
for those goods is not practicable or effective".
5.147 We note that the arbitrator on EC – Bananas III (Ecuador) (Article 22.6 – EC) considered a
comparable argument in relation to "primary goods and investment goods". In approaching this
question, the arbitrator made the following assumption:

416 Brazil's responses to questions from the Arbitrator, question 140, para. 336.
417 Brazil's responses to questions from the Arbitrator, question 140, para. 334.

"[W]e presume that the suspension of c oncessions on imports by Ecuador from the
European Communities of those types of goods and the imposition of additional
tariffs would increase the cost of domestic production in the absence of alternative
sources of supply at a similar price".418
5.148 The arbitrator in that dispute then cons idered whether the European Communities had
provided sufficient information and evidence to dem onstrate that alternative sources of supply existed
for these products at a similar price. It ultimatel y concluded that the European Communities had not
succeeded in rebutting Ecuador's argument that switching to other than EC sources of supply would
involve transitional costs of adjusting to those sources of supply, which Ecuador considered were
relatively significant for it as a developing country.
5.149 We first note, as the arbitrator on EC – Bananas III (Ecuador) (Article 22.6 – EC) did in
relation to "primary goods and investment goods", that suspension of concessions in relation to
capital, intermediate or other input goods, which constitute direct inputs into domestic production, has
the potential to be damaging to economic operato rs domestically. We also note the arguments
presented by Brazil to explain why, in relation to such goods specifically, it may be especially
difficult to have recourse to alternative suppliers without significantly upsetting the supply chain.
5.150 We see merit in this argument particularly in relation to capital and intermediate goods,
although we consider it may have less force in re lation to primary goods which are more homogenous
in character. It could be expected that a signi ficant proportion of imports of goods constituting inputs
for manufacturing or processing are in the form of such primary goods, for which alternative sources
of supply may be more readily available than for certain other more differentiated products.419
5.151 However, the United States has not specifically addressed this question or attempted to rebut
Brazil's arguments by identifying such imports. Although the United States has presented a number
of examples of products in relation to which Brazil could, in the view of the United States, easily find
alternative suppliers, none of these examples appear to relate to capital, inte rmediate or input goods
(except arguably computers, discussed below). 420 We also note the acknowledgement, by the United
States, that it could be appropriate to consider the negative impact of suspension of concessions in
relation to goods that are "necessities".
5.152 There remains a question of definition of the scope of capital goods, as far as computers are
concerned. Brazil considers that computers, in relation to which the United States argues that Brazil
has the opportunity to import from other sources than the United States, are capital goods, in relation
to which it would be harmful to retaliate. The United States has not specifically responded to this
assertion. The United States has also not indicated what level of imports computers represent.421
5.153 In light of the elements presented to us, a nd in the absence of any sufficiently specific
argument of the United States to the effect that suspension in relation to capital goods, intermediate

418 Decision by the Arbitrators, EC – Bananas III (Ecuador) (Article 22.6 – EC), para. 91.
419 We note, in this context, that with respect to agricultural goods specifica lly, Brazil's experts state
that: "Agricultural goods are largely undifferentiated, relatively homogeneous and therefore highly fungible."
(Annex 1 to Brazil's written submission (the "Sumner-Sundarm Statement", para. 8).
420 See US oral statement, paragraph 70. The Unite d States identifies the fo llowing product categories
as examples of goods for which alte rnative sources of supply can be found easily: passenger cars, antibiotics,
computers, salmon. See also Brazil's responses to questions from the Arbitrator, question 140, para. 344.
421 We note in this respect that Exhibit US-109, presented by the United States for the purposes of
illustrating the US share of imports to Brazil in various product categories, was contested by Brazil, who stated
that this table was in fact erroneous and represented th e share of that HS chapter in Brazil's imports from the
United States, rather than the US share in Brazil's total imports. See Brazil's oral statement, paras. 122-123. The
United States did not present alternative figures.

goods or other inputs into the Brazilian economy would be practicable or effective, we accept, for the
purposes of our determination, Brazil's position that it would not be practicable or effective to seek to
suspend concessions or other obligat ions in relation to imports of capital, intermediate and other
essential inputs into Brazil's economy.
Consumer goods
5.154 Brazil further argues that, of the US$1.27 billi on of annual imports of consumer goods from
the United States, almost US$1.1 billion, or 86 per cent, correspond to medical and educational
supplies, food, automotive goods and arms, sectors wh ere any raising of barriers would entail serious
and unreasonable costs to the Brazilian economy.422
5.155 The United States provides different figures for Brazilian imports of consumer goods from the
United States. It states that, including food a nd automotive goods in the consumer goods category,
Brazil imported between US$1.826 billion and US$2.717 billion annually from the United States
between 2005-2007.423 Excluding food and automotive goods, the United States estimates that Brazil
imported between US$1.125 billion and US$1.676 billi on in consumer goods annually in the same
time period. In the United States' view, given Brazi l's large and diverse economy and the actual level
of nullification and impairment incurred by the US policies at issue, suspension in consumer goods
alone should be effective and practicable.424
5.156 Neither party provides an explanation for th e significant differences in values that they
present concerning Brazil's imports of consumer goods from the United States. Apart from the fact
that Brazil uses import data and the United States relies on export data, the most likely explanation for
the difference is that the parties do not have the same definition of consumer goods. However, it is
not possible to confirm this since the United States has provided only an aggregate figure and does not
provide a listing of the individual tariffs lines (as Br azil does) of what it cons iders to be consumer
goods.
425
5.157 In light of these elements, and given that th e United States has not explained why Brazil's
classification of consumer goods would be incorrect and provides no detailed list of its own, the
Arbitrator assumes, for the purposes of its analysis, that Brazil's figures in respect of consumer goods
(as found in Exhibit Bra-754) reflect an adequate classification of such goods (see Table 3). At the
same time, we take note of the fact that there is a very significant difference between the two sets of
figures presented, and that Brazil's total figure for imports of consumer goods from the United States
is more than 50 per cent lower than those presente d by the United States, for the same categories of
products.
5.158 This means that, in principle, assuming that Braz il's figures are accurate, it has at its disposal
a total value of at least US$1.127 billion worth of US imports of consumer goods to which suspension
of concessions or other obligations could in principle be applied.

422 Brazil's responses to questions from the Arbitrator, question 140, para. 336.
423 US written submission, para. 336 and Exhibit US-62.
424 US written submission, para 336.
425 The only specific product category, the classification of which the parties have discussed, is
"computers". In response to an argument that Brazil has alternative sources of supply for computers, Brazil has
responded that computers are "capital goods", in relation to which it would not be appropriate to suspend
obligations. It is therefore possible that the United States classifies computers as "consumer goods", while
Brazil has classified them as "capital goods". However, we are not in a position to determine what impact this
difference in classification has, in the absence of fu rther information on the level of Brazilian imports of
computers from the United States.

5.159 We also note at the outset the followi ng observations of the arbitrator on EC – Bananas III
(Ecuador) (Article 22.6 – EC):
"Suspension of concessions with respect to consumer goods cannot cause any direct
adverse effects on Ecuador's domestic manufacturing and processing industries. Thus
Ecuador's main argument with respec t to investment goods and primary goods
referred to above cannot apply with respect to consumer goods. It is also true that
resulting price increases resulting from the suspension of concessions on consumer
goods could cause welfare losses to end-c onsumers in the country suspending
concessions."426
5.160 Similarly, in these proceedings, it cannot be assu med that the types of economic costs that we
have accepted would be likely to arise as a result of a suspension affecting capital goods, intermediate
goods and other goods constituting inputs into Brazi l's economy would be e qually relevant to
consumer products. While some welfare costs to end-consumers might arise in the event that the
suspension leads to price increases, this would only o ccur if no alternative substitute is available at a
comparable price.
5.161 In light of the fact that the value of Br azil's annual imports of consumer goods from the
United States (at least US$1.273 billion) significan tly exceeds the total level of countermeasures that
it is entitled to take (US$294.7 million), it would th erefore in principle be possible for Brazil to
suspend concessions or other obligations entirely in relation to imports of consumer goods from the
United States.
5.162 However, Brazil suggests that, out of the US $1.273 billion of consumer goods that it imports
from the United States, a total of only US$182.8 million would potentially be available for suspension
of concessions or other obligations, once the sectors where raising of barriers would entail "serious
and unreasonable costs to the Brazilian economy" are deducted.
Table 3: Total Consumer Goods imports from the United States

(in US$millions) 2007
Total Consumer Goods Imports from the United States 1,273.1 (=)
Tag* Description
Medical Medicines and other medical or safety products 909.5 (-)
Food Food Products 88.7 (-)
Books Books, teaching material and related products 28.9 (-)
Arms Arms and ammunition 0.6 (-)
Autos Automobiles and related goods 62.6 (-)
Total minus selected groups of products 182.8 (=)
Source: Exhibit Bra-754

5.163 The United States considers, however, that Braz il has simply taken broad categories of goods
out of consideration based on mere assertion, and that, while it may be appropriate to examine the
negative impact on particular goods that are ne cessities, where goods are not necessities or where
alternative sources of supply are available, there is no basis to assert that suspension of concessions
for those goods is not practicable or effective. The United States observes that Brazil's economy is
sufficiently diversified, that it could easily turn to other sources of supply, and that the key question is
whether alternative sources of supply exist.

426 Decision by the Arbitrators, EC – Bananas III (Ecuador) (Article 22.6 – EC), para. 100.

5.164 Brazil considers that the crucial question is not whether alternative sources of supply exist,
but whether it would be "feasible and sensible for Braz il, in practice, to force its economic agents to
switch to other suppliers". Brazil identifies a number of considerations that would be relevant to such
an assessment: "the US share in Brazil's total im ports; the price levels of alternative suppliers;
technical specifications and product differentiati on; intellectual property and intra-company trade
restrictions; and the economic, welfare and inflat ionary costs resulting from the disruption of
production and supply chains".427
5.165 We agree that the question of whether suspensi on of concessions or other obligations is
"practicable or effective" is not strictly limited to whether alternative sources of supply exist, but
involves a broader consideration of whether it would be feasible, in practice, for Brazil to require its
economic agents to switch to other operators, taking into account the ra nge of factors that may have a
bearing on this question.
5.166 Bearing this general observation in mind, we now consider Brazil's arguments to the effect
that suspension of concessions or other obligati ons on imports of medica l and food products, books,
arms and automobiles would entail "serious and un reasonable costs". In doing so, we recall that
Brazil accepts that in relation to "other" cons umer goods, the costs of suspension would not be
excessive. This represents an amount of US$182.8 million of imports of consumer goods from the
United States, in relation to which it is undisputed th at it would be practicable or effective to suspend
concessions or other obligations. The margin betw een this figure and the amount of authorized
countermeasures is small, in relative terms.
5.167 The first category of consumer goods for which Br azil considers that the costs of suspension
concessions would be "serious and unreasonable" is " medicines and other medical or safety
products." This category, according to Brazil, represents a value of US$909.5 million in annual
imports (2007).428 The United States observes that medical sterilizers exported by Brazil exceed the
imported amount from the United States in 2007 (U S$4.6 million in exports, US$1.5 million in
imports). The United States further notes that both China and Korea exported about twice as much
antibiotics into Brazil as the United States in 20 08, by value, and that China and Korea both
substantially increased their share of exports to Brazil from the prior year (19.4 per cent to 33 per cent
for China and 13 per cent to 31 per cent for South Korea). Brazil responds that a "big share" of
purchases of antibiotics is made by the Ministry of Health after arduous price negotiations and
following the rules of public procurement. Theref ore, Brazil argues, finding other suppliers is not
easy, and there are sometimes no alternatives at all. Moreover, Brazil argues, increasing the costs of
health care provision will affect the welfare of the people.
5.168 We see merit in Brazil's argument with respect to the specificities of the market and
purchasing practices for certain pharmaceutical produc ts, which may make it difficult to freely switch
suppliers with respect to such products. We also note that, even within a given category of medicines,
such as "antibiotics", products are not necessarily freely interchangeable. Brazil has not provided
exact indications, however, as to what proportion of its imports of "medicines and other medical or
safety products" is subject to such purchasing practi ces or requirements, such that would allow us to
ascertain what proportion of such imports would be a dversely affected in the event of a suspension of
concessions in this sector.
429

427 Brazil's responses to questions from the Arbitrator, question 140, para. 337.
428 See Exhibit Bra-754, reproduced above as Table 3.
429 We observe that even within this sub-category of consumer go ods, there are items where the
US share of imports is less than 20 per cent. If one adds up the value of these imports of medical goods, where
the US share was below 20 per cent in 2007, the total amounted to US$193.7 million. The import share is not
the only relevant consideration in evaluating the ease of sourcing alternative supplies, as domestic producers

5.169 Brazil also excludes imports in the "food" and "books" categories from the range of consumer
products that could be considered for suspension of concessions. The United States considers that
there is no reason to exclude such end use pr oducts from the range of products to which
countermeasures could be applied.
5.170 With respect to food products, where US imports represent a total value of US$88.7 million,
the United States notes for example that US$1.8 million of sugarless chewing gum is imported. The
United States also indicates that under the "food" category, US$10.071 million of pears and quinces
were imported from the United States in 2007, but imports from Argentina jumped from
US$73 million in 2007 to US$98 million in 2008. Brazil argues that more Brazilians have sufficient
income today to buy food items than before and that such social and economic development should be
preserved at all costs. However, Brazil accepts that certain items classified as food, could be
considered luxury products, though the amount and value of such products is rather limited.
5.171 Brazil therefore essentially argu es that, except for a limited range of foods that can be
considered as luxury products, food products as a whole should not be targeted because "more
Brazilians have sufficient income" than in the p ast to buy food and this should be preserved.
Naturally, if the suspension of concessions or othe r obligations were to deprive consumers of the
opportunity to purchase food, it could legitimately be concluded that such suspension would not be
"practicable or effective". However, this would only be the case if there was no opportunity to source
the same or substitutable goods from other domestic or imported sources. Brazil has not explained,
however, why this would be the case with respect to the entire category of food products.
430
5.172 With respect to books, for which it estimates the total value of imports from the United States
at US$28.9 million, Brazil observes that increased ta riffs would be highly detrimental to the policy
goal of increased access to education and the improvement of education standards. Also,
Article 150 VI (d) of the Federal Constitution exempts printed publications from import taxes, so that
it is not practicable to take countermeasure on books . We note that books, almost by definition, are
totally differentiated products, such that it may not be possible to assume that one title could easily be
substituted for another. However, we also note that many books have a primarily entertainment rather
than educational purpose.
5.173 Brazil also considers that the automotive sector (for which imports from the United States
amount to US$62.6 million annually) should not be targeted. The United States observes that it
accounts for less than 2 per cent of imports to Br azil of passenger cars in 2007-2008, and that auto
parts, similarly, range from about 6 to about 8 per cent. Brazil responds that many limitations,
including intra-company restrictions, apply to auto parts, making it virtually impossible or extremely
costly for this industry to change suppliers. With respect to passenger cars, the main characteristic of
trade in this sector, Brazil argues, is intra-comp any trade. Countermeasures on cars of "General
Motor do Brasil", and "Ford do Brasil", for exampl e, are unlikely to be well received by these
subsidiaries and will affect their operations in Br azil. Moreover, imports of vehicles from the
United States rely on long-established networks of authorized retailers and maintenance services,
which make it virtually impossible for importers to easily switch suppliers. In addition, Brazil
observes, car sales in Brazil fell more than 40 pe r cent in December 2008, and given the present crisis

may also be potential suppliers. However, neither party has given us information on the US share of the market
including domestic products.
430 We note that Brazil's imports of food from the United States in 2007 accounted for only 10 per cent
of its entire imports of food. Adding up the value of those food imports where the US share was below
20 per cent in 2007 gives an amount of US$33.2 million. As noted above, the impot share is not the only
relevant consideration in evaluating the ease of sourcing alternative supplies, as domestic producers may also be
potential suppliers. However, neither party has given us information on the US share of the market including
domestic products.

affecting the car industry worldwide, the Brazilia n Government has adopted several measures to
improve the car market conditions including reduc ing the rates of federal tax on industrialized
products. Brazil considers that it is therefore not viable to adopt measures that will distort the car
market and prevent consumers from reaping the bene fits of such incentives. Finally, Brazil notes that
it wishes to maintain the conditions of competiti on and prices prevailing in Brazilian car market. 431
We note that the US share of Brazil's imports in the automotive sector is only 2 per cent, which
suggests that only limited competitive pressure could be exerted through such imports. However, we
see merit in Brazil's arguments relating to the struct ure of trade in the automotive sector being such
that a suspension could be harmful to Brazilian subs idiaries importing the cars. We also agree that
auto parts from different manufacturers are not necessar ily substitutable for each other. In light of
these elements and in the absence of specific ar guments from the United States disputing Brazil's
description of the situation on the automotive market in Brazil, we accept Brazil's position that
suspension in this sector would entail "serious and unreasonable costs".
5.174 In the arms category (annual value of imports from the United States estimated at
US$0.6 million), the United States observes that Braz il has not indicated the extent to which these
imported goods are to be used by the police, military , or others in the public service. In response,
Brazil indicated that "a very high percentage" of imports are to be used by the police or military and
the level of imports of these products is very low as shown by Exhibit Bra-754. 432 This very general
indication, however, expressed only in terms of "a very high percentage" does not allow us to
ascertain exactly what amount of imports would fall into this category. The total annual value of
imports from the United States is in any event very small.
5.175 The United States also observes that exports of computers from China to Brazil continue to
outpace those from the United States, at 36.7 per cent in 2008 compared to 18.5 per cent. Brazil
considers, however, that computers are in the category of "capital goods", and that it would be
unreasonable and very costly to impose additi onal hurdles on the importation of information
technology products, as increased costs of informat ion technology products would have widespread
effects on the whole economic structure and would have a direct negative impact on the welfare of
Brazil's population.
433 Since the United States has not sufficiently rebutted Brazil's classification of
consumer goods, we do not consider the treatment of computers under this category.
Conclusion
5.176 Overall, in light of the above, we are not convi nced that Brazil could plausibly conclude that
suspension of concessions or other obligations woul d entail "serious and unreasonable costs" in the
entirety of these various sectors. At best, Brazil ha s plausibly explained why suspension in relation to
some imports within these categories of consumer goods might not be practicable or effective.
5.177 We are therefore not convinced that Brazil c ould plausibly determine, on the basis of the
elements presented to us in these proceedings, that it is not practicable or effective to seek to suspend
concessions or other obligations in relation to the entirety of the broad range of consumer products
that it proposes to exclude from consideration, in particular in the areas where the US share of imports
is relatively small.
5.178 In light of the elements presented to us as discussed above, we can accept Brazil's
determinations, on the whole, in re lation to books and the automotive sector. However, in relation to
the categories of medical products, food and arms, we are not persuaded that Brazil could plausibly

431 Brazil's responses to questions from the Arbitrator, question 140, paras. 345-347.
432 Brazil's comments on US responses to questions from the Arbitrator, question 135, paras. 395-397.
433 Brazil's responses to questions from the Arbitrator, question 140, paras. 342-344.

determine, on the basis of the elements that it has presented to us alone, that suspension would entail
"serious and unreasonable costs" in relation to the entire range of products in these sectors.
5.179 We find it useful, in this context, to consider the extent to which it may be expected that
Brazil would in fact have alternative sources of supply at its disposal for these remaining product
categories, as a further indication of whether Brazil could plausibly determine that it is not practicable
or effective to suspend concessions or other obligations on such imports.
5.180 We recognize that within the broad categori es of "medicines" and "food", certain products
may not be readily substitutable. In particular, we recognize that some medicines, including those
that are subject to proprietary rights, may need to be sourced from a specific supplier. We also recall
our determination above that we see merit in Braz il's argument that certain medicines, such as
antibiotics, are sourced through public procurement in such a manner that a change in supplier may be
impracticable. We also note, however, that medical products and food, as a whole and taken together,
represent the vast majority of Brazil's consumer goods imports from the United States and that they
both contain a very broad range of products. Th e category "[m]edicines and other medical or safety
products" thus include, for example, items such as "[t]ooth brushes, incl. dental-plate brushes". 434 In
these circumstances, we find that the US share of imports in these product categories as a whole may
provide a useful indicator of the likelihood of other sources of supply being available, and thus of the
level of substitutability on the market, for these product categories.
5.181 While there is no exact mathematical precision to this determination, we consider that, for the
purposes of our assessment in these proceedings, a US share of imports of 20 per cent constitutes a
reasonable threshold by which to estimate the extent to which Brazil may be able to find alternative
sources of supply for these three remaining categories of consumer goods imports. This does not take
into account the fact that the actual market shar e of US products might be smaller if domestic
competition were to be included also, but we have not been provided any figures that would have
allowed us to estimate that. In selecting this indi cative threshold, we also bear in mind our earlier
determinations in relation to other categories of imports. In particular, we recall that we have
accepted Brazil's broad assertion that all capital goods , intermediate goods and other inputs to the
Brazilian economy should be excluded from considera tion. We have also accepted Brazil's overall
classification of consumer goods, including the excl usion of computers from this category. At the
same time, in future arbitrations of this nature , a Member arguing against the plausibility of another
Member's determination of the practicality and e ffectiveness of taking countermeasures only within
the goods sector might present a more detailed and sci entific rebuttal of the determination made by
that other Member. In applying a benchmark of 20 per cent, this Arbitrator is not intending to signal
that this is the appropriate percentage to use in this kind of analysis in all cases.
5.182 The table below (Table 4) reflects the results of this assessment. It calculates the amount of
Brazil's imports of consumer goods from the Un ited States that could be the subject of
countermeasures. It is based on data at the 8-digi t level of the tariff headings within the relevant
consumer good categories, as reflec ted in Brazil's own submission.
435 The calculations proceed as
follows. First, it excludes the value of imports of books and autos from the United States reflecting
Brazil's determination that suspension of con cessions in these sectors would entail "serious and
unreasonable costs". Second, it includes imports of "other" consumer goods, which amount to
US$182.8 million, reflecting Brazil's acceptance that in relation to "other" consumer goods, the costs
of suspension would not be excessive. Finally, for food, pharmaceutical products and arms, it
includes only the import value of those tariff lines wher e the US share in Brazil's imports is less than
20 per cent. For illustrative purposes, the table also includes the results of the same calculation for a
10 per cent and 30 per cent threshold.

434 Tariff line 9603.21.00, Exhibit Bra-823.
435 Exhibit Bra-823.

Table 4: Amount of Brazil's imports of consumer goods from the United States
that could be the subject of countermeasures
(Millions of dollars)

Threshold Applicable to Food, Medical Products and Arms
Item
10% 20% 30%
 – Food $11.0 $33.2 $48.8
 – Medical products $15.3 $193.7 $333.1
 – Arms $0.0 $0.0 $0.0

 – Books $0.0* $0.0* $0.0*
 – Autos $0.0* $0.0* $0.0*

 – Others $182.8** $182.8** $182.8**
All Consumer goods $209.1 $409.7 $564.6

 * In respect of Books and Autos, no amount is included, to take into account our determination that we
accept Brazil's position that suspension in these sectors would entail "serious and unreasonable costs".

 ** In respect of the "Others" category, the total amount of imports from the United States is included,
as Brazil accepts that suspension in these sectors would not entail "serious and unreasonable costs".

 Sources: Exhibit Bra-754 and Exhibit Bra-823.

5.183 Using the 20 per cent benchmark for the shar e of the US imports (and not taking into
consideration the availability of dom estic products that also can substitu te imports), the results of this
calculation suggest that, even if we were to assume that Brazil would choose not to suspend
concessions in any category of imports of capital go ods, intermediate goods and other inputs into its
economy, and that it would also not suspend concess ions in books or the automotive sector, it would
still have at its disposal imports of other consumer goods from the United States amounting to a total
value of at least US$409.7 million, from which to su spend concessions or other obligations. This
would therefore still leave a value of US imports of consumer goods significantly in excess of
US$294.7 million, to which suspension could be applied.436
5.184 We also recall that, of these US$409.7 m illion of consumer goods imports from the
United States, Brazil itself concedes that the costs would not be "serious and unreasonable", up to a
level of US$182.8 million. This means that Brazil would only in fact need to find an additional
amount of imports of other goods from the United States to a total value of US$112.1 million to
which to apply the suspension of concessions or othe r obligations, in order to apply the full level of
suspension that it is entitled to, on imports of goods from the United States.
5.185 We further observe that the above calculation is made on the basis of the arguments and
information provided by the parties. For the purposes of the calculation, we have accepted Brazil's

436 We also note that Brazil accepts that suspension of concessions in relation to certain items that
could be considered luxury products, amounting to a total of US$28 million, would probably not lead to
excessive costs on the Brazilian economy. This amount may partially overlap with other categories, so we have
not added it to the figures considered in this section.

determinations in relation to capital goods, intermediate goods and other inputs into the economy, and
also in relation to various categories of consumer goods. However, our analysis does not imply that
Brazil necessarily has to retaliate in the categories in question. It would in fact remain entitled to
apply the suspension to any imports of goods that it chooses to target for suspension. Keeping in
mind that the overall amount of imports from the Un ited States to Brazil is US$18.7 billion, and that
imports of consumer goods alone represent at least US$1.273 billion in total, we are confident that, on
the basis of what was put before us in these proceedings and at current levels, Brazil has at its disposal
a sufficient level and variety of imports from the United States, to which it could apply the suspension
that it is entitled to, without incurring "serious or unreasonable costs" to its economy.
(iv) General considerations
5.186 Even in relation to the range of imports in re lation to which Brazil considers that it could in
principle be practicable to retaliate (which it estimates at US$182.8 million) 437, Brazil also argues that
such suspension would not be practicable or effective, due to its potential adverse welfare effects in an
inflationary environment and also because any meas ures contrary to Brazil's development objectives
should be avoided. Brazil also generally argues th at the trade imbalance between the parties would
render such suspension ineffective. We therefore now consider these aspects.
General economic and welfare costs
5.187 Brazil considers that "within the very limited scope of consumer goods that it has to target,
the costs and welfare-reducing effects resulting fro m the adoption of counter measures exclusively in
that sector would render such an alternative not practicable".
5.188 As we have observed in para graph 5.133 above, a consideration of the economic costs
associated with the suspension is legitimate, but it is not just any economic costs associated with the
suspension of concessions or other obligations in a given sector or agreement that would justify a
conclusion that such suspension would be "not practi cable or effective". Rather, the costs at issue
would have to be of such extent and magnitude as to render the suspension "not practicable or
effective". We have also already considered in detail Brazil's specific arguments relating to the
economic and welfare costs of the suspension of concessions and other obligations on various
categories of US imports. Even considering cons umer goods alone, our determinations above suggest
that, at current levels, Brazil has at its disposal a total value of at least US$409.7 million of imports of
goods from the United States, to which it could apply a suspension.
5.189 This confirms to us that, in principle, Brazil has at its disposal sufficient imports of goods
from the United States and elsewhere in order to allow it to suspend concessions on a total value of
US$294.7 million of imports from the United States without incurring significant costs to its
economy. We further emphasize that nothing w ould compel Brazil to apply the suspension of
concessions or other obligations "exclusively in that sector". As we have observed in paragraph 5.185
above, Brazil would be entitled to apply the suspensi on to any imports of US goods that it chooses to
target for suspension. As we also observed above, keeping in mind that the overall amount of imports
from the United States to Brazil is of US$18.7 billi on, and that imports of consumer goods alone
represent at least US$1.273 billion, we are confident th at, on the basis of what was put before us in
these proceedings and at current levels, Brazil has at its disposal a sufficient level and variety of
imports from the United States, to which it could apply the suspension that it is entitled to, without
incurring "serious or unreasonable costs" to its economy.

437 Based on Exhibit Bra-754.

Inflationary pressure
5.190 Brazil also argues that the adoption of counter measures exclusively in the small range of
consumer goods that it has to target would add to inflationary pressures at a time when increasing
prices have pointed to "a worrying inflationary scenario" and would limit access of Brazilian
consumers to these imported goods, negatively affec ting Brazil's economy and the welfare of its
population.
438
5.191 As evidence of the threat of inflation, Brazil, points out that all its price monitoring agencies
have recorded rising inflation in 2008, whichever measuring standard is used. As an example, it
claims that the annualized change in the Broad C onsumer Price Index (IPCA), which is used as the
standard inflation index by the Brazilian Central Bank, reached 5.9 per cent in 2008. 439 Brazil
contends that this surpassed the inflation target of 4.5 per cent set by the Central Bank.
5.192 As a result of these strong inflationary pressures, it claims that the Brazilian Central Bank has
been compelled to consistently raise basic interest rates since the beginning of 2008. After four
consecutive increases, yearly basi c interest rates reached 13.75 per cent in September 2008, making
Brazil one of the countries with the highest real interest rates in the world.440
5.193 The United States does not dispute that there are co sts, including the risk of inflation, from
imposing countermeasures on merchandise goods. But it argues that countermeasures are by
definition counter to WTO disciplines. Furthermore, given the size and diversity of Brazil's economy,
and the availability of goods from other sources or from Brazil itself, it claims that Brazil has many
tools at its disposal to apply countermeasures within the goods sector.441
5.194 Brazil has provided sufficient evidence to show that the threat of inflation seriously concerns
Brazilian policymakers. The United States has not dis puted the magnitude of the inflation rate in the
country nor of the successive steps taken by the Ce ntral Bank to increase the interest rate. However,
we believe that while the risk of price incr eases from applying countermeasures on merchandise
goods exist, it does not rise to a level where Br azil has no room to apply countermeasures on
merchandise goods.
5.195 The size of the countermeasures, at current le vels, is not large relative to the value of
consumer goods imports from the United States. We also note that the inflation index is based on
domestic consumption, which is made up predominantly of dom estically-produced goods. This
suggests that countermeasures on merchandise goods imports may only have a limited impact on
inflation given the composition of the basket of good s that enter into the calculation of the inflation
index.
Development objectives, imbalance in trade relations and political influence
5.196 Brazil further argues that any measures that are contrary to the objectives of a developing
country to ensure steady and sustainable developmen t will necessarily be costly and impracticable by
definition, and that the significantly unbalanced na ture of the trade relations between Brazil and the
United States, and the considerable economic di fferences between the tw o countries, render the
suspension of concessions and other obligations un der trade in goods alone neither practicable nor
effective as a response to the US failure to comply with its obligations.

441 US responses to questions from the Arbitrators, question 68, para. 206.

5.197 Finally, Brazil also argues that suspension in the area of trade in goods alone may not have
sufficient political influence to press for the United States' withdrawal of the billions of dollars it pays
annually in subsidies or to remove their adverse effe cts, and that, therefore, they are not "effective"
for the purpose of encouraging compliance.
5.198 We agree that a complaining Member seeking to suspend concessions or other obligations
should not be required to act against its own intere sts in applying such suspension. However, our
findings above suggest to us that Brazil has at its disposal a sufficient range of imports of goods,
including consumer goods, from the United States, so as to enable it to suspend concessions in the
area of trade in goods alone, without causing itself such economic harm as to render such suspension
"not practicable or effective". In the absence of other specific detailed arguments as to why such
suspension would otherwise adversely affect Brazil's interests, we conclude that, on the basis of the
elements presented to us and at current levels, Br azil could not conclude that suspension in trade in
goods alone would not be "practicable or effec tive". Further, Brazil's insistence that its
countermeasures must have "sufficient political infl uence" from the perspective of the United States
to press for the withdrawal of the subsidies and the removal of their adverse effects is misplaced.
"Effectiveness" relates to the ability of a Member to have recourse to the authorized remedy, such that
it can serve to induce compliance. However, the pr eference of a Member for a particular type of
countermeasure, because it would constitute a more powerful form of persuasion in a political sense,
is not a relevant consideration for an arbitrator in these proceedings.
5.199 Our conclusion is not modified by the "signifi cantly unbalanced nature of the trade relations
between Brazil and the United States". As we have observed above, the elements presented to us do
not suggest that Brazil's dependence on US imports is such that it could not find at least
US$294.7 million worth of imports of goods from the United States in relation to which it would have
sufficient alternative domestic or imported sour ces of supply at its disposal, so as to suspend
concessions effectively. In addition, the fact that exports to Brazil only represent a very small
proportion of US exports generally does not, in itsel f, necessarily imply that countermeasures applied
to some of these goods would not be "effective" for the purposes of inducing compliance. It would be
up to Brazil to identify those US exports in relation to which it would apply the suspension, and to do
this in a manner that would make such measures as effective as possible within the limits of the
permissible level of countermeasures. In light of th e fact that the total value of imports to Brazil from
the United States, at current levels, significantly ex ceeds the level of permissible countermeasures, we
see no reason to assume that this would not provide a sufficient margin or discretion for Brazil to
target accordingly the specific products to which suspension would be applied.
(v) Overall conclusion
5.200 In light of all the above, we conclude that, on th e basis of the elements presented to us and at
current levels, Brazil could not plausibly have reac hed the conclusion that it is not practicable or
effective to suspend concessions or other obligations in trade in goods alone, even if it had considered
the "necessary facts", i.e. taking into account a level of permissible countermeasures not exceeding
US$294.7 million.
5.201 We recall, however, that the level of counter measures that we have determined to be
permissible in these proceedings is variable. We ha ve based our determinations above on the level of
countermeasures as calculated on the basis of FY 2006 and on the basis of Brazil's imports of
consumer goods in the year 2007. Given the volume and composition of Brazil's imports of consumer
goods in the year 2007, we determined that there was at least US$409.7 million worth of Brazil's
imports of consumer goods from the United States that could be the subject of countermeasures
("threshold"). However, in the event that the level of countermeasures that Brazil would be entitled to

in a given year 442 should increase to a level that would ex ceed this threshold, updated for the same
year in a manner described in Section V.C.6 below to account for the change in Brazil's total imports
from the United States, then, we find that it woul d be concluded, on the basis of the elements
presented to us, that the suspension of concessions or obligations applied to trade in goods alone
would not be "practicable or effective" within the meaning of Article 22.3(c) of the DSU.
5.202 In light of this determination, we must cons ider further Brazil's determination that "the
circumstances are serious enough" within the mean ing of Article 22.3 and its consideration of the
elements of subparagraph (d) of Article 22.3.
4. Whether "the circumstances are serious enough"
(a) Main arguments of the parties
5.203 Brazil says that, with respect to prohibited s ubsidies, the granting or maintenance of such
subsidies constitutes in itself, at the very least, a strong indication that "circumstances are serious
enough". In addition, the seriousness of the breach in the present case is compounded by the specific
characteristics of the subsidy at issue. Th e GSM 102 programme and the guarantees granted
thereunder constitute recurrent export subsidies, granted year after year in connection with billions of
dollars in agricultural exports in violation of US WTO obligations. Brazil notes that these subsidies
have been granted since 1981 and have been dist orting international markets on a continuous and
cumulative basis for the whole period covered by this dispute (from 1999 up to 2009). The statutory
framework of the programme ensures that it is of fered continuously and requires that billions of
dollars in guarantees be made available every year. Brazil argues that the subsidies are particularly
pernicious in light of their stated objective and pe rformance measure, to open high risk markets to US
commodities and establish the dominance of US exporters by means of prohibited export subsidies, to
the detriment of competing exporters. In a single day, on 6 October 2008, the USDA received
applications for ECGs worth US$3.5 billion. Acco rding to a director of CoBank, this enormous
amount of applications is a result of "the credit markets seizing up".
443
5.204 With respect to the actionable subsidies, Br azil considers that the sheer amount of the
subsidies granted under the ML and CCP progra mmes, which have been found to cause adverse
effects in the form of significant price suppression in the world market; the repeated refusal of the
United States to comply, since 2005, with the ruli ngs and recommendations adopted by the DSB; and
the concrete expectation, confirme d in the 2008 Farm Bill, that the same design and structure for the
granting of the same subsidies will be maintain ed in the future also demonstrate that the
circumstances are serious enough to justify the types of countermeasures proposed by Brazil.444
5.205 Brazil says that these subsidies provide a pern icious predictability for US producers and
exporters – who may take for granted that they will enjoy an artificial competitive advantage vis-à-vis
other competitors every year – and for producers of the other Members – who have their production
and investment decisions negatively affected in the long term by the chilling effect caused by the
permanent availability of the US subsidies. Braz il argues that these subsidies constitute a structural
element of the world markets for the wide range of products they support, and that the current credit
crisis only heightens their distorting effects. Producers and exporters all over the world, who are
struggling to find credit for their operations, have to compete with US producers and exporters that
are cushioned from the effects of the crisis by the unlawful subsidies, as the US$5.5 billion worth of

442 It is understood that this amount is to be calcu lated taking into account the entirety of the level of
countermeasures that Brazil is entitled to at that point in time, arising both from the application of the formula
identified in paragraph 6.5(a) and from the Decision by the Arbitrator contained in WT/DS267/ARB/2.

ECGs under the GSM 102 available in FY 2008 strikingly reminds us. In Brazil's view, these features
render the circumstances certainly no less than serious enough.445
5.206 In Brazil's view, the fact that the United St ates has revived in the 2008 Farm Bill, under a
slightly different disguise, the only subsidy it had eliminated as part of its implementation of the
recommendations and rulings of the DSB in the pr esent case – the "Step 2" programme – constitutes
additional indication that the circumstances are serious enough.446
5.207 The United States argues that "'circumstances ar e serious enough' may refer to the potential
consequences for the Member of suspending concessi ons in the same sector and agreement, or the
potential consequences of forgoing the right to suspend concessions". 447 In the circumstances of this
dispute, where Brazil's proposal for countermeasur es does not substantiate any adverse effect on
Brazil from the measure at issue, it is not clear, in the United States' view, what consequences these
would be or whether they would be serious at all. 448 In the United States' view, Brazil's agricultural
sector, and its cotton producers in particular, have been effective competitors worldwide even with the
existence of GSM 102, marketing loan payments and countercyclical payments and without any
countermeasures, and Brazil's cotton exports have reached record levels in recent years.449
5.208 Brazil responds that the United States' erroneous legal analysis first equates the meaning of
"circumstances" with that of "potential conseque nces" and then moves on to argue that "potential
consequences" means trade damage to Brazil. In Brazil's view, however, there is no legal basis to
argue that in selecting the type of countermeasures Brazil must show "any adverse effect on Brazil
from the measures at issue" to enab le an assessment of whether circ umstances are serious enough. In
any event, Brazil argues, as regards actionable subs idies, the existence of adverse effects of the
measures at issue has already been determined by two panels and the Appellate Body. Brazil notes
that with respect to the GSM 102 subsidies, the tw o panels and the Appellate Body found that they
constitute prohibited subsidies – arguably the most egregious violation of WTO disciplines, as can be
inferred from the special rules applicable to them – and that they should have been withdrawn without
delay. Hence, Brazil argues, even under the US flawed and convoluted logic, circumstances would be
serious enough because the consequences of maintaini ng the subsidies in place could not be anything
less than serious, as is made clear by the findings, rulings and recommendations of the panels and the
Appellate Body in this dispute.450
5.209 Brazil considers that Article 22.3(c) of the DSU can encompass the impact on Brazil of
applying countermeasures under trade in goods alone, as well as broader circumstances which
surround Brazil's consideration of retaliatory action ag ainst the United States' failure to comply with
the DSB's recommendations and rulings in this disp ute, such as the demonstrated lack of willingness
of the United States to comply.451
5.210 In the view of the United States, the circum stances surrounding potential countermeasures in
services and intellectual property are also a factor . Brazil has not detailed how it might impose such
countermeasures; and in fact it is not obligated to do so at this time. Effectively, the United States
argues, if Brazil is authorized to impose c ountermeasures under these other Agreements it would

447 US responses to questions from the Arbitrator, question 136, para. 174.
448 US responses to questions from the Arbitrator, question 136, para. 174.
449 US responses to questions from the Arbitrator, question 136, para. 175.
450 Brazil's comments on US responses to questions from the Arbitrator, question 136, paras. 401-402.
451 Brazil's comments on US responses to questions from the Arbitrator, question 136, para. 403.

cause an additional layer of uncertainty fo r these sectors, with potentially devastating
consequences.452
5.211 Brazil welcomes the United States' acknowledgement that Brazil "is not obligated" to detail
how it might impose countermeasures with respect to services and intellectual property rights. 453
Brazil also notes that the United States, by refe rring to "potentially devastating consequences", 454
seems to agree with Brazil's view that count ermeasures under the TRIPS Agreement and the GATS
would be much more effective within the meaning of Article 22.3 of the DSU than countermeasures
under trade in goods alone.455
(b) Analysis by the Arbitrator
5.212 Under Article 22.3(c) of the DSU, in order for suspension of obligations to be permissible, the
complaining party is required to have determined that "the circumstances are serious enough", in
addition to having determined that suspension unde r the same agreement is "not practicable or
effective".
5.213 We recall our determination in paragraph 5.84 above that an assessment of whether "the
circumstances are serious enough" is necessarily a case-by-case assessment depending on the specific
circumstances of the case.
5.214 The United States argues that "'circumstances ar e serious enough' may refer to the potential
consequences for the Member of suspending concessi ons in the same sector and agreement, or the
potential consequences of forgoing the right to suspend concessions". 456 In Brazil's view,
Article 22.3(c) of the DSU can encompass the impact on Brazil of applying countermeasures under
trade in goods alone, as well as broader circum stances which surround Brazil's consideration of
retaliatory action against the United States' failure to comply with the DSB's recommendations and
rulings in this dispute, such as the demonstrated lack of willingness of the United States to comply.
5.215 As we have determined in paragraph 5.83 a bove, an assessment of whether circumstances are
"serious enough" would legitimately include a c onsideration of the elements identified in
subparagraph (d) of Article 22.3, namely the trade in the sector in which a violation has been found
and its importance to the complaining party (in th is case, trade in goods, including trade in cotton and
other products affected by the measures at issue), as well as "the broader economic elements related to
the nullification or impairment and the broader ec onomic consequences of the suspension". At the
same time, the assessment is not limited to these factors, and may include other elements, depending
on the specific "circumstances" of the case. We ther efore agree with Brazil that a determination of
whether "the circumstances are serious enough" may in principle encompass both the impact on Brazil
of applying countermeasures under trade in goods (i.e . "the broader economic consequences of the
suspension") and "broader circumst ances which surround Brazil's consid eration of retaliatory action"
against the US failure to comply with the DSB's recommendations and rulings.
5.216 Brazil considers that a number of elements rende r the circumstances "serious enough" in this
case, including the granting or maintenance by the United States of the prohibited subsidies, the
fourfold increase in the transactions supported by the GSM 102 programme in 2009; the continued
granting of actionable subsidies and the enactment of 2008 Farm Bill. In Brazil's view, these facts
show that the United States has no intention of complying with the DSB recommendations and

452 US responses to questions from the Arbitrators, question 136, para. 176.
453 US response to questions from the Arbitrators, question 136, para. 176.
454 US response to questions from the Arbitrators, question 136, para. 176.
455 Brazil's comments on US responses to questions from the Arbitrator, question 136, para. 399.
456 US responses to questions from the Arbitrator, question 136, para. 174.

rulings. Brazil further argues that the design and struct ure of the subsidies at issue is such as to create
"an artificial competitive advantage for US operators vis-à-vis other competitors every year" to the
detriment of producers of other Members "who ha ve their production and investment decisions
negatively affected in the long term by the chilling effect caused by the permanent availability of the
US subsidies". Brazil argues that these subsidies constitute "a structural element of the world markets
for the wide range of products they support", and that the current credit crisis only heightens their
distorting effects. Brazil further considers that th e conditions that render the circumstances "serious
enough" also include the potential effects on Braz il if countermeasures are confined to the goods
sector, which will lead to disproportionate costs to the Brazilian economy and to the welfare of its
population.
457
5.217 In our view, Brazil's determination that the circumstances are serious enough within the
meaning of Article 22.3(c) of the DSU is reasonable in light of the circumstances of the case.
5.218 In this regard, we recall some salient aspects of the findings of the original and compliance
panels and of the Appellate Body in relation to the subsidies concerned:
"As we have just indicated, several of the United States subsidies are directly linked
to world prices for upland cotton, thereby numbing the response of United States
producers to production adjustment decisions when prices are low . We have readily
available information on the record showing us that the price-contingent subsidies in
question involve very large amounts of Un ited States government money benefiting
United States upland cotton. In our view, the collective operation of these subsidies
was akin to a very large, counter cyclical, deficiency payment laced with additional
enhancements. We believe that the structure, design and operation, particularly of the
price-contingent subsidies, constitutes st rong evidence supporting a finding of price
suppression."458 (emphasis added)
"Given that in most recent years actual mark et prices have been lower than expected
market prices at the time of planting and th at the adjusted world price has been below
the marketing loan rate, the Panel considers that it is reasonable to conclude that the
fact that US cotton producers know that th ey will receive marketing loan payments
whenever the adjusted world price is below the marketing loan rate continues to be an
important factor affecting the level of acreag e planted to cotton (and thus the level of
production), even when, as in MY 2006, the expected market price for upland cotton
at the time of planting is higher than the ma rketing loan rate. The Panel also notes in
this regard that accordi ng to FAPRI and USDA data, the projected amount of
marketing loan payments in MY 2006 is very significant. "459 (emphasis added,
footnote omitted)
"First, we recall that the original panel noted that the CCC has access to funds from
the US Treasury and benefits from the fu ll faith and credit of the US Government.
This is still the case, and were the GSM 102 programme to incur massive losses, it
would have access to additional funds from the US Treasury ."460 (emphasis added,
footnote omitted)
"The Panel considers, in light of the appr oach taken by the pa nel and Appellate Body
in the original proceeding, that in determining whether the magnitude of the subsidies

457 Brazil's comments on US responses to questions from the Arbitrator, question 136, paras. 404-405.
459 Panel Report, US – Upland Cotton (Article 21.5 – Brazil), para. 10.81.
460 Panel Report, US – Upland Cotton (Article 21.5 – Brazil), para. 14.110.

at issue in this proceeding supports a findi ng that the effect of these subsidies is
significant price suppression, it is necessary to examine this factor in relation to other
factors. Thus, the relevance of the magnitude of the subsidies in this connection must
also be assessed in light of our analysis above of the structure, design and operation
of the subsidies. We recall, in this re spect, our conclusion regarding the important
revenue-stabilizing effect of these mandatory, price-contingent subsidies. In the latter
regard, the evidence before us indicates th at marketing loan and counter-cyclical
payments play a significant role in stabilizing the revenues of US upland cotton
producers. The share of marketing loan payments and counter-cyclical payments in
total revenues of US upland cotton producers was 35 per cent in MY 2004 and 27 per
cent in MY 2005."
461 (emphasis added, footnotes omitted)
"Table 6B shows market revenue from cotton lint, total costs (less ginning costs) and
the difference between market revenue a nd total costs on a per acre basis in MY
2002-2006. Over the period examined, US cotton producers' market revenue
exceeded total costs of production twice, in MY 2003, when cotton prices were at
their highest since MY 1997, and also in the year immediately following that. In
other marketing years, total costs of pr oduction exceeded market revenue, at times by
very huge margins. In MY 2002, for example, total costs exceeded market revenue
by 84 per cent. Data provided by Brazil for MY 2006 suggests that total costs will
continue to exceed market revenue. The gap is expected to be about 56.25 dollar per
acre, which would be equivalent to about 14.7 percent of US cotton producers' market
revenue in that marketing year. Cumulated over the five marketing years 2002-2006,
US cotton farmers' costs of production have exceeded market revenues by an average
of 227.49 dollars per acre."
462 (emphases added)
"In conclusion, the Panel finds that there exists a significant gap between the total
costs of production of US upland cotton producers and their market revenue. The
Panel considers that this gap between costs and revenue, when analyzed in
conjunction with the magnitude of the mark eting loan and counter-cyclical subsidies
and their importance as a share of the revenue of US cotton producers, supports the
proposition that the marketing loan and counter-cyclical payments are an important
factor affecting the economic viability of US upland cotton farming . The Panel
therefore also considers that without these subsidies the level of US upland cotton
acreage and production would be considerably lower." 463 (emphasis added, footnotes
omitted)
"We do not see a contradiction between the fact that United States shares of world
production and exports of upland cotton have remained stable at consistently high
levels between MY 2002 a nd MY 2007 and the Panel's findings of substantial
proportionate influence of the United States in the world market for upland cotton.
This is because stable high United States shares of world production and exports of
upland cotton could be seen as evidence of the fact that the United States continued to
exert a substantial proportionate influence in the period examined by the Panel, just
as it had during the period examined by the original panel. We also observe that the
Panel specifically noted that this element supported its finding of significant price
suppression when "analysed in the light of the totality of the evidence". Therefore, we
do not consider that the Panel erred in finding that the United States exerts a

461 Panel Report, US – Upland Cotton (Article 21.5 – Brazil), para. 10.111.
462 Panel Report, US – Upland Cotton (Article 21.5 – Brazil), para. 10.190.
463 Panel Report, US – Upland Cotton (Article 21.5 – Brazil), para. 10.196.

substantial proportionate influence on the world market for upland cotton ."464
(emphasis added, footnotes omitted)
5.219 We are not persuaded that, as Brazil argues, the very granting of the subsidies at issue would
be sufficient to conclude that the circumstances are "s erious enough". It is inherent in the situation at
hand that a violation has taken place and that comp liance has not been achieved in a timely manner.
This circumstance alone, which is common to all ca ses in which suspension of obligations is sought
under the DSU, would not in our view justify the conclusion that the circumstances are "serious
enough". However, we agree with Brazil that the specific design and structur e of the subsidies at
issue, as they have been maintained over a signifi cant period of time, is such as to have created an
artificial and persisting competitive advantage for US producers over all other operators, and that this
has a significant trade-distorting impact, not just on the US domestic market, but on the world market
in these products.
5.220 The United States responds that Brazil has in fact remained very competitive in the
agricultural sector, including cotton, even w ith the US subsidies in place and without
countermeasures. We are not persuaded, however, th at this consideration alters the essence of the
situation. The fact that Brazil may have remain ed competitive in spite of the trade-distorting
conditions arising from the granting and maintenanc e of the subsidies at issue does not in essence
modify the fact that these subsidies have a trade- distorting impact on the world market for cotton and
the other products affected by them. Given the st ructure and design of the programmes at issue, and
in light of the time period over which they have been in place, these distortions are virtually, as Brazil
puts it, a "structural" element of the world market for the affected products, including cotton, as long
as they remain available. Our earlier determin ations in relation to the level of permissible
countermeasures suggest that these trade-distorting e ffects are not insignificant, including on Brazil.
Furthermore, these impacts are felt not only on the US market but on other markets for the products at
issue. In addition, as Brazil observes, in times of credit crisis, this trade-distorting impact will be
further amplified, at least in so far as the GSM 102 programme is concerned. These considerations, in
our view, support the conclusion that "the circumstances are serious enough".
5.221 In addition, Brazil observes that the dispropor tionate adverse impact of the suspension of
concessions or other obligations on its economy, if a pplied only to trade in goods, also contributes to
the "circumstances" being "serious enough". We agree that this may also be a relevant consideration
in such determination.
465 We have considered extensively Brazil's arguments concerning the potential
adverse impact on its economy of a suspension applie d to trade in goods alone, in reviewing whether
it is "practicable or effective" for Brazil to seek su spension in trade in goods alone. In this context,
we concluded that, to the extent that the level of countermeasures that Brazil would be entitled to take
would exceed a certain threshold, such suspension would be "not practicable or effective". These
considerations also inform the determination of whether "the ci rcumstances" would be "serious
enough" to justify cross-agreement suspension. If the threshold were reached, such that suspension of
concessions or other obligations under the same sect or or agreement would not be practicable or
effective for Brazil, this would also directly contri bute to the circumstances being "serious enough" to
justify recourse to suspension under another agreement.
5.222 In light of all the above, and on the basis of the elements pr esented to us, we find that Brazil
could reasonably determine that "the circumstan ces are serious enough" within the meaning of
Article 22.3(c) of the DSU.

464 Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil), para. 446.
465 We note in this respect the observation of the arbitrator on US – Gambling that the circumstances
that justified a determination that "the circumstances ar e serious enough" in that case could be "directly related
to the practicability and effectiveness of suspension under the agreement in which the violation was found (in
that case, the GATS). See Decision by the Arbitrator, US – Gambling (Article 22.6 – US), para. 4.115.

5.223 In light of our determinations in the previ ous section above, we note that the two conditions
foreseen in Article 22.3(c), i.e. a determination th at "it is not practicable or effective" to seek
suspension under the same agreement and a determination that "the circumstances are serious enough"
would only be met simultaneously in this case when ever the threshold identified in paragraph 5.201
above would be exceeded.
5.224 The United States has suggested that the potential implications of a suspension of obligations
under the TRIPS Agreement is also a consideration to be taken into account, in light of the "layer of
uncertainty" that may arise from such suspensi on in the sectors concerned and the "potentially
devastating consequences" of such suspension. We recognize that there may be legitimate
considerations to which the complaining Member should be attentive in applying any suspension of
obligations under the TRIPS Agreement. 466 We are not persuaded, however, that this is a relevant
consideration for us to take into account in revi ewing the question of whether the "circumstances are
serious enough" to justify suspension of obligations u nder that agreement. We first note that there is
no general hierarchy in the DSU as between susp ension in various sectors or under various WTO
Agreements, such that we should assume that a suspension of obligations under the TRIPS Agreement
would be inherently more detrimental to the respond ing Member than another. The only hierarchy to
be found in the DSU in this respect is relative to the sector and agreement in which the violation has
been found (thus, in a case involving a TRIPS viola tion, same-sector suspension would have to be
sought first under the TRIPS Agreement). We also not e that the level of suspension authorized will be
the same whatever sector or agreement it may apply to. We further note that, as the United States
itself has observed in these proceedings, Brazil is not ob ligated at this time to explain in detail how it
might impose such countermeasures. This question is , in our view, beyond the scope of this enquiry,
and it is not for us to speculate how a suspensi on of certain obligations under the TRIPS Agreement
might be applied by Brazil or to assume that it wo uld have more detrimental consequences than a
suspension in another sector or agreement. In fact the United States itself does not explain what
"devastating consequences" it is referring to.
5.225 We make no determination in relation to th e United States' willingness or unwillingness to
comply with the recommendations and rulings at issue. We assume that the United States intends in
good faith to promptly comply with these recommendati ons and rulings. We have also not based our
findings on Brazil's arguments relating to the adopti on of the 2008 Farm Bill, as such, in relation to
which we have made no specific determinations.
5. Brazil's consideration of the elements under subparagraph (d) of Article 22.3
5.226 Subparagraph (d) of Article 22.3 of the DSU requires the complaining party to "take into
account", in applying the principles of subparagraphs (a) to (c), two elements:
"(i) the trade in the sector or under the ag reement under which the panel or Appellate
Body has found a violation or other nullifi cation or impairment , and the importance
of that trade to [the complaining] party
(ii) the broader economic elem ents related to the nullification or impairment and the
broader economic consequences of the suspension of concessions or other
obligations".
5.227 As we have determined in Section V.C.1(c) above, in the circumstan ces of this case, this
means that what is to be taken into account is "the trade" in all goods under the trade in goods
agreement, that is, trade in goods generally, and its importance to Brazil, as well as "the broader
economic elements" relating to the nullification or impairment arising for Brazil from the subsidies at

466 See para. 5.233.

issue and the broader economic consequences of th e suspension, including a consideration of the
economic consequences of the suspension.
5.228 As we have discussed extensively in the pr eceding sections above, Brazil's determinations
that it was not practicable or effective for it to seek to suspend obligations in trade in goods alone and
that the circumstances are serious enough, were based importantly on a consideration of the
importance to its economy of its trade in goods with the United States, and of the potential
consequences of the proposed suspension, which it considers would be disproportionately detrimental
to its economy if applied solely to trade in goods. In addition, Brazil has also taken into account the
economic impact of the measures on the market of the products affected by the measures at issue.
5.229 In light of these elements, we are satisfied th at Brazil has taken into account the relevant
elements under subparagraph (d) of Article 22.3 in accordance with the requirements of that
provision.
6. Conclusion
5.230 In light of our determinations above, we find that in the event that the level of
countermeasures that Brazil would be entitled to in a given year 467 should increase to a level that
would exceed the threshold identified in paragraph 5.201 above, updated for the same year in a
manner described in the next paragraph to account for the change in Brazil's total imports from the
United States, then Brazil would be entitled to suspend certain obligations under the TRIPS
Agreement and/or the GATS as identified in its request pursuant to Article 4.10 of the
SCM Agreement and Article 22.2 of the DSU 468, with respect to any amount of permissible

467 It is understood that this amount is to be calcu lated taking into account the entirety of the level of
countermeasures that Brazil is entitled to at that point in time, arising both from the application of the formula
identified in paragraph 6.5(a) and from the Decision by the Arbitrator contained in WT/DS267/ARB/2.
468 See WT/DS267/21. Brazil identifies the following obligations in its request:

With respect to the TRIPS Agreement:

"The following sections of Part II of the Ag reement 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."

With respect to the GATS:

"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 Related Engineering Services
 4. Distribution Services
 7. Financial Services
 9. Tourism and Travel Related Services
 11. Transport Services"

countermeasures applied in excess of that figure. In any subsequent year where the level of
countermeasures that Brazil would be entitled to falls below this threshold, updated to account for the
change in Brazil's total imports from the Unite d States, Brazil would be entitled to suspend
concessions or other obligations only in trade in goods.
5.231 As stated in the previous paragraph, in or der to determine whether suspension of certain
obligations under the TRIPS Agreement or the GATS is permissible in a given year, the threshold
should be updated to account for the change in Br azil's total imports from the United States. For
year 2008, for example, the updated amount of the threshold would be equal to US$409.7 million
multiplied by (1 + g 2008), where g 2008 is the percentage change in the value of Brazil's total imports
from the United States between the years 2007 and 2008, or in the absence of the trade data for years
2007 and 2008, the percentage change in the value of Brazil's total imports from the United States
based on the last available annual trade statistics. 469 In general, the following difference equation and
initial condition shall determine the updated amount of the threshold:
 (2) )1(* 11 ++ += ttt gTT , T 2007 = US$409.7 million
where:
Tt+1=threshold value in year t+1;
Tt =threshold value in year t;
gt+1 = percentage change in the value of Brazil's to tal imports from the United States between the
years t and t+1, or in the absence of the trade data for years t and t + 1, the percentage change in the
value of Brazil's total imports from the United States based on the last available annual trade
statistics.
5.232 The "same" year shall mean that the amount of countermeasures, calculated based on
GSM 102 transactions in, for example, fiscal year 2008 (1 October 2007 to 30 September 2008) and
the fixed amount from the Decision by the Arbitrator contained in WT/DS267/ARB/2, shall be
compared to the value of the threshold in year 2008 (1 January 2008 to 31 December 2008).
5.233 In light of our determination that Brazil, ma y, in application of the above, be entitled to
suspend certain obligations under the TRIPS Agreement and the GATS, we note the remarks made by
the arbitrators on EC – Bananas III (Ecuador) (Article 22.6 – EC), with respect to the suspension of
obligations under the TRIPS Agreement470, which were also noted by the arbitrator on US – Gambling
(Article 22.6 – US) .471 We consider these remarks to be releva nt also to this case, in that the same
considerations will be pertinent to the manner in which Brazil might implement a suspension of its
obligations under the TRIPS Agreement in this case.
5.234 In light of the fact that the level and form of permissible countermeasures may vary over time,
we urge Brazil, if and when it submits a revised request for authorization to suspend concessions or
other obligations to the DSB in accordance with this Decision, to be as specific as possible about the
terms of the measures to be adopted, so as to promote transparency and predictability in this process.

469 Brazil shall use UN Comtrade data for the purpose of calculating the percentage change of its total
imports from the United States.
470 Decision by the Arbitrators, EC – Bananas III (Ecuador) (Article 22.6 – EC) , Section V,
paras. 139-165.
471 Decision by the Arbitrator, US – Gambling (Article 22.6 – US), para. 5.11.

5.235 We also take note of the undertaking by Br azil in its request under Article 4.10 of the
SCM Agreement and Article 22.2 of the DSU, that:
"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."472
5.236 Finally, like previous arbitrators 473, we also note that the United States may have recourse to
the appropriate dispute settlement procedures in the event that it considers that the level of
concessions or other obligations suspended by Br azil exceeds the level of countermeasures we have
determined to be "appropriate" in this case.
VI. CONCLUSIONS AND AWARD
6.1 For the reasons set out above, the Arbitrator de termines that the annual level of "appropriate
countermeasures" in relation to the GSM 102 payments is as described in pa ragraphs 4.231-4.244,
4.253-4.255 and 4.267-4.277 above (also see Annex 4 ). For FY 2006, this amounts to
US$147.4 million.
6.2 We have also determined that Brazil has not followed the principles and procedures of
Article 22.3 of the DSU in determining that it is not practicable or effective to suspend concessions or
other obligations in trade in goods and that, at cu rrent levels, it could not ha ve plausibly determined
that it is not practicable or effective to suspend c oncessions or other obligations in trade in all goods
under the Agreements contained in Annex 1A of the WTO Agreement. We have also found,
however, that, in the event that the level of countermeasures that Brazil would be entitled to in a given
year474 should increase to a level that would exceed a threshold, as identified in paragraph 5.201
above, updated for the same year in a manner described in paragraphs 5.231-5.232 to account for the
change in Brazil's total imports from the United Stat es, then, it could be reasonably concluded that it
is not practicable or effective for Brazil to susp end concessions or other obligations on trade in goods
alone. We have also determined that the ci rcumstances are serious enough and that Brazil has
complied with the requirements of subparagraph (d) of Article 22.3.
6.3 In light of these findings, we find that Brazil w ould be entitled to suspend certain obligations
under the TRIPS Agreement and/or the GATS, w ith respect to any amount of permissible
countermeasures applied in excess of the threshold identified in paragraph 5.201 above, updated for
the same year in a manner described in paragraphs 5.231-5.232 to account for the change in Brazil's
total imports from the United States. In any subse quent year where the level of countermeasures that
Brazil would be entitled to falls below this threshol d, updated to account for the change in Brazil's
total imports from the United States, Brazil woul d be entitled to suspend concessions or other
obligations only in trade in goods.
6.4 We have also found that, in determining whether the level of countermeasures that Brazil
would be entitled to has increased to an amount th at would allow it to suspend certain obligations
under the TRIPS Agreement and/or the GATS, the data in Table 4 shall be updated to reflect the
amount of imports in the same year, as described in paragraph 5.232 above.

472 WT/DS267/21.
473 Decisions by the Arbitrators, EC – Hormones (US) (Article 22.6 – EC), para. 82; US – 1916 Act
(EC) (Article 22.6 – US ), para. 9.2; US – Offset Act (Byrd Amendment) (EC) (Article 22.6 – US), para. 4.27;
and US – Gambling (Article 22.6 – US), para. 5.12.
474 It is understood that this amount is to be calcu lated taking into account the entirety of the level of
countermeasures that Brazil is entitled to at that point in time, arising both from the application of the formula
identified in paragraph 6.5(a) and from the Decision by the Arbitrator contained in WT/DS267/ARB/2.

6.5 Accordingly, the Arbitrator determines that:
(a) Brazil may request authorization from th e DSB to suspend concessions or other
obligations under the Agreements on trade in goods in Annex 1A, at a level not to
exceed the value of US$147.4 million for FY 2006, or, for subsequent years, an
annual amount to be determined by applying the methodology described in Annex 4.
(b) In the event that the total level of counter measures that Brazil would be entitled to in
a given year
475 should increase to a level that would exceed the threshold described in
paragraph 5.201, updated to account for the change in Brazil's total imports from the
United States, then, Brazil would also be entitled to seek to suspend certain
obligations under the TRIPS Agreement and/or the GATS, as identified in
footnote 468, with respect to any amount of permissible countermeasures applied in
excess of that figure.

ANNEX 1

Trade-distorting impact (price effect)
(Millions of dollars)
1. in Brazil's domestic market $12.64
2. in non-Brazilian markets $12.63
Total $25.27

Exports of GSM 102 products
(Billions of dollars)
 Year 2006
Brazil 13.1
World 111.9
Share 11.7%
Sources: Exhibit Bra-815 and UN Comtrade.

IRS by individual average obligor
Country/Obligor
ECGs
issued by
country/
obligor in
FY 2006
Transaction
value
secured by
ECGs in FY
2006
Obligor
rating
(average
over all
obligors for
country)
Maturity of
the credit
Cumulative
default
probability
Benchmark
interest rate
Payments
per year
CCC risk-
based fee
Subsidy rate
S (Ohlin
formula)
Interest rate
subsidy
(IRS)
 (mUSD) (mUSD) (numerical) (years) (%) (%) (%) (%) (mUSD$)
Jamaica
Bank of Nova Scotia Jamaica
Ltd., Jamaica 4.80 4.894 16 1 20.982 33.11 2 0.924 16.20 0.793
Capital Credit Merchant Bank
Ltd 4.90 5.000 16 3 43.498 27.23 1 0.924 29.05 1.453
Trinidad & Tobago
RBTT Bank Limited, T&T 28.57 29.155 10 3 1.68 5.78 1 0.637 0.45 0.131
Costa Rica
Banco BAC San Jose, Costa
Rica 0.94 0.960 12 3 4.309 6.74 1 0.688 2.11 0.020
Banco BCT, Costa Rica 3.83 3.909 13 3 10.151 9.00 1 0.688 5.94 0.232
Banco Cuscatlan de Costa
Rica, Costa Rica 2.94 3.000 13 3 10.151 9.00 1 0.688 5.94 0.178
Banco HSBC, Costa Rica 1.32 1.344 13 3 10.151 9.00 1 0.688 5.94 0.080
Banco Improsa S.A. 2.29 2.341 13 3 10.151 9.00 1 0.688 5.94 0.139
El Salvador
Banco Agricola, El Salvador 0.19 0.193 12 3 4.309 6.74 2 0.799 1.70 0.003
Banco de America Central
(BAC), El Salvador 5.13 5.232 13 3 10.151 9.00 1 0.799 5.83 0.305
Banco Uno S.A., El Salvador 1.67 1.701 13 3 10.151 9.00 1 0.799 5.83 0.099
Banco HSBC, El Salvador 10.75 10.973 12 3 4.309 6.74 1 0.799 2.00 0.219
Guatemala
Banco Agromercantil de
Guatemala, Guatemala 2.81 2.871 14 1 3.223 8.68 2 0.799 1.68 0.048
Banco de la Republica,
Guatemala 1.61 1.643 14 3 14.36 10.76 2 0.799 7.71 0.127
Banco G and T Continental,
S.A., Guatemala 2.62 2.672 13 3 10.151 9.00 1 0.799 5.83 0.156
Banco Industrial,
S.A.,Guatemala 10.48 10.697 13 3 10.151 9.00 1 0.799 5.83 0.624

Country/Obligor
ECGs
issued by
country/
obligor in
FY 2006
Transaction
value
secured by
ECGs in FY
2006
Obligor
rating
(average
over all
obligors for
country)
Maturity of
the credit
Cumulative
default
probability
Benchmark
interest rate
Payments
per year
CCC risk-
based fee
Subsidy rate
S (Ohlin
formula)
Interest rate
subsidy
(IRS)
 (mUSD) (mUSD) (numerical) (years) (%) (%) (%) (%) (mUSD$)
Banco Reformador,
Guatemala 2.00 2.041 14 3 14.36 10.76 1 0.799 8.64 0.176
Banco SCI 0.45 0.459 14 1 3.223 8.68 1 0.799 2.42 0.011
Panama
BAC International Bank, Inc.,
Panama 22.50 22.959 10 3 1.68 5.78 1 0.799 0.29 0.066
Banco Aliado, Panama 4.30 4.385 13 3 10.151 9.00 1 0.799 5.83 0.256
Banco Cuscatlan de Panama
(Formerly Banca
Panamericano) 3.83 3.910 13 3 10.151 9.00 1 0.799 5.83 0.228
Banco General, Panama 40.81 41.646 10 3 1.68 5.78 1 0.799 0.29 0.119
Global Bank Corporation,
Panama 10.38 10.588 13 3 10.151 9.00 1 0.799 5.83 0.618
Multi Credit Bank, Inc.,
Panama 9.22 9.405 13 3 10.151 9.00 1 0.799 5.83 0.549
Primer Banco del Istmo
(BANISTMO), Panama 39.28 40.078 11 3 3.567 6.46 1 0.799 1.51 0.606
Kazakhstan
Alliance Bank, Kazakstan 37.60 38.370 13 2 5.749 8.34 2 0.747 2.90 1.111
Bank Caspian, Kazakstan 13.51 13.787 14 2 8.701 10.08 2 0.747 4.81 0.663
Bank CenterCredit, Kazakstan 0.46 0.467 13 1 2.069 7.40 2 0.747 0.84 0.004
Nurbank, Kazakstan 9.17 9.355 15 2 33.367 28.85 2 0.747 22.05 2.063
Temirbank, Kazakstan 2.69 2.741 16 2 33.367 28.85 2 0.747 22.05 0.605
Ukraine
Bank Forum, Ukraine 9.87 10.073 16 2 33.367 28.85 2 0.806 21.99 2.215
Bank Nadra, OJSC, Ukraine 11.77 12.008 16 2 33.367 28.85 2 0.806 21.99 2.641
Ukrsotsbank, Ukraine 13.98 14.261 16 2 33.367 28.85 2 0.806 21.99 3.136
Finance and Credit Bank 7.35 7.505 15 2 33.367 28.85 2 0.806 21.99 1.650
JSC Vseukrainsky
Aktsionerny Bank-VA Bank 6.44 6.567 16 2 33.367 28.85 2 0.806 21.99 1.444

Country/Obligor
ECGs
issued by
country/
obligor in
FY 2006
Transaction
value
secured by
ECGs in FY
2006
Obligor
rating
(average
over all
obligors for
country)
Maturity of
the credit
Cumulative
default
probability
Benchmark
interest rate
Payments
per year
CCC risk-
based fee
Subsidy rate
S (Ohlin
formula)
Interest rate
subsidy
(IRS)
 (mUSD) (mUSD) (numerical) (years) (%) (%) (%) (%) (mUSD$)
Mexico
Monex Financiera, S.A. de
C.V. 2.94 3.000 12 3 4.309 6.74 1 0.637 2.16 0.065
Russia
Absolut Bank, Russia 3.06 3.125 16 2 33.367 28.85 2 0.747 22.05 0.689
B.I.N. Bank, Russia 25.67 26.194 16 2 33.367 28.85 2 0.747 22.05 5.776
Far Eastern Bank, Russia 9.47 9.662 18 2 33.367 28.85 2 0.747 22.05 2.131
International Bank of St.
Petersburg, Russia 3.96 4.045 17 2 33.367 28.85 2 0.747 22.05 0.892
International Industrial Bank
(IIB), Russia 42.57 43.442 15 2 33.367 28.85 2 0.747 22.05 9.580
NOMOS Bank, Russia 34.04 34.734 15 2 33.367 28.85 2 0.747 22.05 7.660
MDM Bank, Russia 38.42 39.207 14 2 8.701 10.08 2 0.747 4.81 1.885
Orgresbank, Russia 7.44 7.593 16 2 33.367 28.85 2 0.747 22.05 1.674
Probusinessbank, Russia 1.84 1.876 16 2 33.367 28.85 2 0.747 22.05 0.414
RosEvrobank, Russia 12.13 12.377 18 2 33.367 28.85 2 0.747 22.05 2.729
UralSib Bank (formerly Ural
Siberian Bank), Russia 6.07 6.191 15 2 33.367 28.85 2 0.747 22.05 1.365
ZAO Raiffeisenbank 9.37 9.561 18 2 33.367 28.85 2 0.747 22.05 2.108
Brazil
Banco BBM S.A., Brazil 26.07 26.606 17 3 43.498 27.23 1 0.799 29.18 7.763
Banco BMC, Brazil 4.41 4.500 16 3 43.498 27.23 1 0.799 29.18 1.313
Banco Bradesco, Brazil 2.88 2.940 13 3 10.151 9.00 1 0.799 5.83 0.171
Banco do Estado de Sao Paulo
(BANESPA), Brazil 5.11 5.210 17 3 43.498 27.23 1 0.799 29.18 1.520
Banco Fibra, Brazil 11.93 12.170 14 3 14.36 10.76 1 0.799 8.64 1.051
Banco Industrial E Comercial
(BICBanco), Brazil 11.32 11.550 13 3 10.151 9.00 1 0.799 5.83 0.674
Uniao de Bancos Brasileiros
(Unibanco), Brazil 2.43 2.475 13 3 10.151 9.00 1 0.799 5.83 0.144

Country/Obligor
ECGs
issued by
country/
obligor in
FY 2006
Transaction
value
secured by
ECGs in FY
2006
Obligor
rating
(average
over all
obligors for
country)
Maturity of
the credit
Cumulative
default
probability
Benchmark
interest rate
Payments
per year
CCC risk-
based fee
Subsidy rate
S (Ohlin
formula)
Interest rate
subsidy
(IRS)
 (mUSD) (mUSD) (numerical) (years) (%) (%) (%) (%) (mUSD$)
Colombia
Banco Colpatria Red
Multibanca, Colombia 9.78 9.977 13 3 10.151 9.00 1 0.688 5.94 0.593
BanColombia, Colombia 15.11 15.414 12 3 4.309 6.74 1 0.688 2.11 0.325
Peru
Banco Financiero del Peru,
Peru 3.74 3.820 15 3 43.498 27.23 1 0.924 29.05 1.110
Philippines
Allied Bank, Philippines 9.57 9.767 17 1 20.982 33.11 1 0.799 20.18 1.971
Development Bank of the
Philippines, Philippines 31.06 31.692 13 3 10.151 9.00 1 0.799 5.83 1.849
Export and Industry Bank,
Philippines 6.45 6.580 17 1 20.982 33.11 1 0.799 20.18 1.328
Philippine Bank of
Communications, Philippines 10.35 10.564 17 1 20.982 33.11 1 0.799 20.18 2.132
Rizal Commercial Bank,
Philippines 22.32 22.776 15 3 43.498 27.23 1 0.799 29.18 6.646
United Coconut Planter Bank,
Philippines 16.40 16.730 17 1 20.982 33.11 1 0.799 20.18 3.377
South Korea
Hana Bank 1.91 1.953 8 1 0.166 5.35 2 0.637 0.00 0.000
Kookmin Bank 11.50 11.737 7 1 0.037 5.22 2 0.637 0.00 0.000
Korea Development Bank 14.10 14.388 7 3 0.358 5.31 1 0.637 0.00 0.000
Korea Exchange Bank 4.15 4.230 9 2 0.466 5.43 2 0.637 0.00 0.000
National Agricultural
Cooperative Federation 1.54 1.571 7 1 0.037 5.22 2 0.637 0.00 0.000
Shinhan Bank 30.53 31.148 8 2 0.449 5.42 2 0.637 0.00 0.000
Woori Bank 21.48 21.919 9 2 0.466 5.43 2 0.637 0.00 0.000
Romania
Credit Europe Bank
(Romania) SA 1.82 1.859 14 3 14.36 10.76 2 0.799 7.71 0.143

Country/Obligor
ECGs
issued by
country/
obligor in
FY 2006
Transaction
value
secured by
ECGs in FY
2006
Obligor
rating
(average
over all
obligors for
country)
Maturity of
the credit
Cumulative
default
probability
Benchmark
interest rate
Payments
per year
CCC risk-
based fee
Subsidy rate
S (Ohlin
formula)
Interest rate
subsidy
(IRS)
 (mUSD) (mUSD) (numerical) (years) (%) (%) (%) (%) (mUSD$)
Turkey
Akbank 2.66 2.718 13 3 10.151 9.00 1 0.799 5.83 0.159
Asya Katilim Bankasi AS 14.22 14.511 15 3 43.498 27.23 1 0.799 29.18 4.234
Bank Pozitif Kredi ve
Kalkinma Bankasi 3.43 3.499 17 3 43.498 27.23 1 0.799 29.18 1.021
Denizbank, Turkey 3.61 3.681 13 3 10.151 9.00 1 0.799 5.83 0.215
Fortis Bank A.S, Turkey 6.44 6.576 17 3 43.498 27.23 1 0.799 29.18 1.919
Finansbank, Turkey 15.30 15.614 13 3 10.151 9.00 1 0.799 5.83 0.911
Garanti Bankasi, Turkey 29.03 29.621 13 3 10.151 9.00 1 0.799 5.83 1.728
GSD Yatrim Bankasi 2.28 2.327 17 3 43.498 27.23 1 0.799 29.18 0.679
Halkbank 10.88 11.100 13 3 10.151 9.00 1 0.799 5.83 0.648
HSBC Bank A. S., Subsidiary 1.47 1.505 12 2 2.297 6.41 1 0.799 0.90 0.014
Is Bankasi, Turkey 11.71 11.951 13 3 10.151 9.00 1 0.799 5.83 0.697
Sekerbank 3.37 3.439 16 3 43.498 27.23 1 0.799 29.18 1.004
Tekfenbank 4.96 5.064 17 3 43.498 27.23 1 0.799 29.18 1.478
Tekstilbank 8.57 8.747 15 3 43.498 27.23 1 0.799 29.18 2.552
Turk Ekonomi Bankasi 10.31 10.518 13 3 10.151 9.00 1 0.799 5.83 0.614
Vakiflar Bankasi 11.74 11.983 13 3 10.151 9.00 1 0.799 5.83 0.699
Yapi Ve Kredi Bankasi,
Turkey 10.29 10.500 15 3 43.498 27.23 1 0.799 29.18 3.064
ING Bank A.S. 23.17 23.644 17 3 43.498 27.23 1 0.799 29.18 6.899
Turklandbank 0.85 0.867 17 3 43.498 27.23 2 0.799 27.13 0.235
Total 977.69 997.64 120.62

ANNEX 2

Trade-distorting impact (displacement effect of uncreditworthy obligors)
(Millions of dollars)
1. in Brazil's domestic market $36.32
2. in non-Brazilian markets $44.52
Total $80.84

Exports of GSM 102 products
(Billions of dollars)
 Year 2006
Brazil 13.1
World 111.9
Share 11.7%
Sources: Exhibit Bra-815 and UN Comtrade.

Full additionality by individual average obligor
Country/Obligor Obligor rating ECGs issued by
country/obligor in FY 2006
Transaction value secured by
ECGs in FY 2006
Full additionality (applicable
solely to credit groups "15"
and worse)
 (numerical) (mUSD) (mUSD) (in USD million)
Jamaica
Bank of Nova Scotia Jamaica Ltd., Jamaica 16 4.796 4.894 4.894
Capital Credit Merchant Bank Ltd 16 4.900 5.000 5.000
Trinidad & Tobago
RBTT Bank Limited, T&T 10 28.572 29.155 0.000
Costa Rica
Banco BAC San Jose, Costa Rica 12 0.941 0.960 0.000
Banco BCT, Costa Rica 13 3.831 3.909 0.000
Banco Cuscatlan de Costa Rica, Costa Rica 13 2.940 3.000 0.000
Banco HSBC, Costa Rica 13 1.317 1.344 0.000
Banco Improsa S.A. 13 2.295 2.341 0.000
El Salvador
Banco Agricola, El Salvador 12 0.189 0.193 0.000
Banco de America Central (BAC), El Salvador 13 5.127 5.232 0.000
Banco Uno S.A., El Salvador 13 1.667 1.701 0.000
Banco HSBC, El Salvador 12 10.753 10.973 0.000
Guatemala
Banco Agromercantil de Guatemala, Guatemala 14 2.813 2.871 0.000
Banco G and T Continental, S.A., Guatemala 13 2.618 2.672 0.000
Banco Industrial, S.A.,Guatemala 13 10.483 10.697 0.000
Banco Reformador, Guatemala 14 2.000 2.041 0.000
Banco SCI 14 0.450 0.459 0.000
Panama
BAC International Bank, Inc., Panama 10 22.499 22.959 0.000
Banco Aliado, Panama 13 4.297 4.385 0.000
Banco Cuscatlan de Panama (Formerly Banca
Panamericano) 13 3.832 3.910 0.000
Banco General, Panama 10 40.813 41.646 0.000
Global Bank Corporation, Panama 13 10.376 10.588 0.000
Multi Credit Bank, Inc., Panama 13 9.217 9.405 0.000
Primer Banco del Istmo (BANISTMO), Panama 11 39.277 40.078 0.000

Country/Obligor Obligor rating ECGs issued by
country/obligor in FY 2006
Transaction value secured by
ECGs in FY 2006
Full additionality (applicable
solely to credit groups "15"
and worse)
 (numerical) (mUSD) (mUSD) (in USD million)
Kazakhstan
Alliance Bank, Kazakstan 13 37.603 38.370 0.000
Bank Caspian, Kazakstan 14 13.511 13.787 0.000
Bank CenterCredit, Kazakstan 13 0.457 0.467 0.000
Nurbank, Kazakstan 15 9.168 9.355 9.355
Temirbank, Kazakstan 16 2.686 2.741 2.741
Ukraine
Bank Forum, Ukraine 16 9.872 10.073 10.073
Bank Nadra, OJSC, Ukraine 16 11.767 12.008 12.008
Ukrsotsbank, Ukraine 16 13.976 14.261 14.261
Finance and Credit Bank 15 7.354 7.505 7.505
JSC Vseukrainsky Aktsionerny Bank-VA Bank 16 6.435 6.567 6.567
Mexico
Monex Financiera, S.A. de C.V. 12 2.940 3.000 0.000
Russia
Absolut Bank, Russia 16 3.063 3.125 3.125
B.I.N. Bank, Russia 16 25.670 26.194 26.194
Far Eastern Bank, Russia 18 9.469 9.662 9.662
International Bank of St. Petersburg, Russia 17 3.964 4.045 4.045
International Industrial Bank (IIB), Russia 15 42.573 43.442 43.442
NOMOS Bank, Russia 15 34.040 34.734 34.734
MDM Bank, Russia 14 38.423 39.207 0.000
Orgresbank, Russia 16 7.442 7.593 7.593
Probusinessbank, Russia 16 1.839 1.876 1.876
RosEvrobank, Russia 18 12.129 12.377 12.377
UralSib Bank (formerly Ural Siberian Bank), Russia 15 6.068 6.191 6.191
ZAO Raiffeisenbank 18 9.370 9.561 9.561

Country/Obligor Obligor rating ECGs issued by
country/obligor in FY 2006
Transaction value secured by
ECGs in FY 2006
Full additionality (applicable
solely to credit groups "15"
and worse)
 (numerical) (mUSD) (mUSD) (in USD million)
Brazil
Banco BBM S.A., Brazil 17 26.074 26.606 26.606
Banco BMC, Brazil 16 4.410 4.500 4.500
Banco Bradesco, Brazil 13 2.881 2.940 0.000
Banco do Estado de Sao Paulo (BANESPA), Brazil 17 5.105 5.210 5.210
Banco Fibra, Brazil 14 11.927 12.170 0.000
Banco Industrial E Comercial (BICBanco), Brazil 13 11.319 11.550 0.000
Uniao de Bancos Brasileiros (Unibanco), Brazil 13 2.426 2.475 0.000
Colombia
Banco Colpatria Red Multibanca, Colombia 13 9.778 9.977 0.000
BanColombia, Colombia 12 15.106 15.414 0.000
Peru
Philippines
Allied Bank, Philippines 17 9.571 9.767 9.767
Development Bank of the Philippines, Philippines 13 31.058 31.692 0.000
Export and Industry Bank, Philippines 17 6.449 6.580 6.580
Philippine Bank of Communications, Philippines 17 10.353 10.564 10.564
Rizal Commercial Bank, Philippines 15 22.321 22.776 22.776
United Coconut Planter Bank, Philippines 17 16.395 16.730 16.730
South Korea
Hana Bank 8 1.914 1.953 0.000
Kookmin Bank 7 11.502 11.737 0.000
Korea Development Bank 7 14.101 14.388 0.000
Korea Exchange Bank 9 4.146 4.230 0.000
National Agricultural Cooperative Federation 7 1.539 1.571 0.000
Shinhan Bank 8 30.525 31.148 0.000
Woori Bank 9 21.481 21.919 0.000
Romania
Credit Europe Bank (Romania) SA 14 1.822 1.859 0.000

Country/Obligor Obligor rating ECGs issued by
country/obligor in FY 2006
Transaction value secured by
ECGs in FY 2006
Full additionality (applicable
solely to credit groups "15"
and worse)
 (numerical) (mUSD) (mUSD) (in USD million)
Turkey
Akbank 13 2.664 2.718 0.000
Asya Katilim Bankasi AS 15 14.221 14.511 14.511
Bank Pozitif Kredi ve Kalkinma Bankasi 17 3.429 3.499 3.499
Denizbank, Turkey 13 3.608 3.681 0.000
Fortis Bank A.S, Turkey 17 6.445 6.576 6.576
Finansbank, Turkey 13 15.302 15.614 0.000
Garanti Bankasi, Turkey 13 29.029 29.621 0.000
GSD Yatrim Bankasi 17 2.280 2.327 2.327
Halkbank 13 10.878 11.100 0.000
HSBC Bank A. S., Subsidiary 12 1.474 1.505 0.000
Is Bankasi, Turkey 13 11.712 11.951 0.000
Sekerbank 16 3.371 3.439 3.439
Tekfenbank 17 4.963 5.064 5.064
Tekstilbank 15 8.572 8.747 8.747
Turk Ekonomi Bankasi 13 10.308 10.518 0.000
Vakiflar Bankasi 13 11.743 11.983 0.000
Yapi Ve Kredi Bankasi, Turkey 15 10.290 10.500 10.500
ING Bank A.S. 17 23.171 23.644 23.644
Turklandbank 17 0.850 0.867 0.867
Total 977.692 997.645 416.933

ANNEX 3

Trade-distorting impact (displacement effect of creditworthy obligors)
(Millions of dollars)
1. in Brazil's domestic market $18.72
2. in non-Brazilian markets $22.57
Total $41.29

Exports of GSM 102 products
(Billions of dollars)
 Year 2006
Brazil 13.1
World 111.9
Share 11.7%
Sources: Exhibit Bra-815 and UN Comtrade.

Marginal additionality by individual average obligor
Country/Obligor
ECGs issued
by
country/oblig
or in FY 2006
Transaction
value secured
by ECGs in FY
2006
Obligor
rating
(average over
all obligors
for country)
Maturity
of the
credit
Cumulative
default
probability
Creditowrthy
Obligor
IRS is
Positive di
n Dn ti
n Marginal
Additionality
 (mUSD) (mUSD) (numerical) (years) (%)
Jamaica
Bank of Nova Scotia
Jamaica Ltd., Jamaica 4.80 4.894 16 1 20.982 0 1
Capital Credit Merchant
Bank Ltd 4.90 5.000 16 3 43.498 0 1
Trinidad & Tobago
RBTT Bank Limited, T&T 28.57 29.155 10 3 1.68 1 1 1.68 18.54 0.09 2.64
Costa Rica
Banco BAC San Jose, Costa
Rica 0.94 0.960 12 3 4.309 1 1 4.31 18.54 0.23 0.22
Banco BCT, Costa Rica 3.83 3.909 13 3 10.151 1 1 10.15 18.54 0.55 2.14
Banco Cuscatlan de Costa
Rica, Costa Rica 2.94 3.000 13 3 10.151 1 1 10.15 18.54 0.55 1.64
Banco HSBC, Costa Rica 1.32 1.344 13 3 10.151 1 1 10.15 18.54 0.55 0.74
Banco Improsa S.A. 2.29 2.341 13 3 10.151 1 1 10.15 18.54 0.55 1.28
El Salvador
Banco Agricola, El Salvador 0.19 0.193 12 3 4.309 1 1 4.31 18.54 0.23 0.04
Banco de America Central
(BAC), El Salvador 5.13 5.232 13 3 10.151 1 1 10.15 18.54 0.55 2.87
Salvador 1.67 1.701 13 3 10.151 1 1 10.15 18.54 0.55 0.93
Banco HSBC, El Salvador 10.75 10.973 12 3 4.309 1 1 4.31 18.54 0.23 2.55
Guatemala
Banco Agromercantil de
Guatemala, Guatemala 2.81 2.871 14 1 3.223 1 1 3.22 5.46 0.59 1.70
Banco de la Republica,
Guatemala 1.61 1.643 14 3 14.36 1 1 14.36 18.54 0.77 1.27
Banco G and T Continental,
S.A., Guatemala 2.62 2.672 13 3 10.151 1 1 10.15 18.54 0.55 1.46
Banco Industrial,
S.A.,Guatemala 10.48 10.697 13 3 10.151 1 1 10.15 18.54 0.55 5.86
Banco Reformador,
Guatemala 2.00 2.041 14 3 14.36 1 1 14.36 18.54 0.77 1.58
Banco SCI 0.45 0.459 14 1 3.223 1 1 3.22 5.46 0.59 0.27

Page 138 Country/Obligor
ECGs issued
by
country/oblig
or in FY 2006
Transaction
value secured
by ECGs in FY
2006
Obligor
rating
(average over
all obligors
for country)
Maturity
of the
credit
Cumulative
default
probability
Creditowrthy
Obligor
IRS is
Positive di
n Dn ti
n Marginal
Additionality
 (mUSD) (mUSD) (numerical) (years) (%)
Panama
BAC International Bank,
Inc., Panama 22.50 22.959 10 3 1.68 1 1 1.68 18.54 0.09 2.08
Banco Aliado, Panama 4.30 4.385 13 3 10.151 1 1 10.15 18.54 0.55 2.40
Banco Cuscatlan de Panama
(Formerly Banca
Panamericano) 3.83 3.910 13 3 10.151 1 1 10.15 18.54 0.55 2.14
Banco General, Panama 40.81 41.646 10 3 1.68 1 1 1.68 18.54 0.09 3.77
Global Bank Corporation,
Panama 10.38 10.588 13 3 10.151 1 1 10.15 18.54 0.55 5.80
Multi Credit Bank, Inc.,
Panama 9.22 9.405 13 3 10.151 1 1 10.15 18.54 0.55 5.15
Primer Banco del Istmo
(BANISTMO), Panama 39.28 40.078 11 3 3.567 1 1 3.57 18.54 0.19 7.71
Kazakhstan
Alliance Bank, Kazakstan 37.60 38.370 13 2 5.749 1 1 5.75 12.51 0.46 17.63
Bank Caspian, Kazakstan 13.51 13.787 14 2 8.701 1 1 8.70 12.51 0.70 9.59
Bank CenterCredit,
Kazakstan 0.46 0.467 13 1 2.069 1 1 2.07 5.46 0.38 0.18
Nurbank, Kazakstan 9.17 9.355 15 2 33.367 0 1
Temirbank, Kazakstan 2.69 2.741 16 2 33.367 0 1
Ukraine
Bank Forum, Ukraine 9.87 10.073 16 2 33.367 0 1
Bank Nadra, OJSC, Ukraine 11.77 12.008 16 2 33.367 0 1
Ukrsotsbank, Ukraine 13.98 14.261 16 2 33.367 0 1
Finance and Credit Bank 7.35 7.505 15 2 33.367 0 1
JSC Vseukrainsky
Aktsionerny Bank-VA Bank 6.44 6.567 16 2 33.367 0 1
Mexico
Monex Financiera, S.A. de
C.V. 2.94 3.000 12 3 4.309 1 1 4.31 18.54 0.23 0.70

Country/Obligor
ECGs issued
by
country/oblig
or in FY 2006
Transaction
value secured
by ECGs in FY
2006
Obligor
rating
(average over
all obligors
for country)
Maturity
of the
credit
Cumulative
default
probability
Creditowrthy
Obligor
IRS is
Positive di
n Dn ti
n Marginal
Additionality
 (mUSD) (mUSD) (numerical) (years) (%)
Russia
Absolut Bank, Russia 3.06 3.125 16 2 33.367 0 1
B.I.N. Bank, Russia 25.67 26.194 16 2 33.367 0 1
Far Eastern Bank, Russia 9.47 9.662 18 2 33.367 0 1
International Bank of
St. Petersburg, Russia 3.96 4.045 17 2 33.367 0 1
International Industrial Bank
(IIB), Russia 42.57 43.442 15 2 33.367 0 1
NOMOS Bank, Russia 34.04 34.734 15 2 33.367 0 1
MDM Bank, Russia 38.42 39.207 14 2 8.701 1 1 8.70 12.51 0.70 27.27
Orgresbank, Russia 7.44 7.593 16 2 33.367 0 1
Probusinessbank, Russia 1.84 1.876 16 2 33.367 0 1
RosEvrobank, Russia 12.13 12.377 18 2 33.367 0 1
UralSib Bank (formerly Ural
Siberian Bank), Russia 6.07 6.191 15 2 33.367 0 1
ZAO Raiffeisenbank 9.37 9.561 18 2 33.367 0 1
Brazil
Banco BBM S.A., Brazil 26.07 26.606 17 3 43.498 0 1
Banco BMC, Brazil 4.41 4.500 16 3 43.498 0 1
Banco Bradesco, Brazil 2.88 2.940 13 3 10.151 1 1 10.15 18.54 0.55 1.61
Banco do Estado de Sao
Paulo (BANESPA), Brazil 5.11 5.210 17 3 43.498 0 1
Banco Fibra, Brazil 11.93 12.170 14 3 14.36 1 1 14.36 18.54 0.77 9.43
Banco Industrial E
Comercial (BICBanco),
Brazil 11.32 11.550 13 3 10.151 1 1 10.15 18.54 0.55 6.33
Uniao de Bancos Brasileiros
(Unibanco), Brazil 2.43 2.475 13 3 10.151 1 1 10.15 18.54 0.55 1.36
Colombia
Banco Colpatria Red
Multibanca, Colombia 9.78 9.977 13 3 10.151 1 1 10.15 18.54 0.55 5.46
BanColombia, Colombia 15.11 15.414 12 3 4.309 1 1 4.31 18.54 0.23 3.58
Peru
Banco Financiero del Peru,
Peru 3.74 3.820 15 3 43.498 0 1

Page 140 Country/Obligor
ECGs issued
by
country/oblig
or in FY 2006
Transaction
value secured
by ECGs in FY
2006
Obligor
rating
(average over
all obligors
for country)
Maturity
of the
credit
Cumulative
default
probability
Creditowrthy
Obligor
IRS is
Positive di
n Dn ti
n Marginal
Additionality
 (mUSD) (mUSD) (numerical) (years) (%)
Philippines
Allied Bank, Philippines 9.57 9.767 17 1 20.982 0 1
Development Bank of the
Philippines, Philippines 31.06 31.692 13 3 10.151 1 1 10.15 18.54 0.55 17.36
Export and Industry Bank,
Philippines 6.45 6.580 17 1 20.982 0 1
Philippine Bank of
Communications,
Philippines 10.35 10.564 17 1 20.982 0 1
Rizal Commercial Bank,
Philippines 22.32 22.776 15 3 43.498 0 1
United Coconut Planter
Bank, Philippines 16.40 16.730 17 1 20.982 0 1
South Korea
Hana Bank 1.91 1.953 8 1 0.166 1 0
Kookmin Bank 11.50 11.737 7 1 0.037 1 0
Korea Development Bank 14.10 14.388 7 3 0.358 1 0
Korea Exchange Bank 4.15 4.230 9 2 0.466 1 0
National Agricultural
Cooperative Federation 1.54 1.571 7 1 0.037 1 0
Shinhan Bank 30.53 31.148 8 2 0.449 1 0
Woori Bank 21.48 21.919 9 2 0.466 1 0
Romania
Credit Europe Bank
(Romania) SA 1.82 1.859 14 3 14.36 1 1 14.36 18.54 0.77 1.44

Country/Obligor
ECGs issued
by
country/oblig
or in FY 2006
Transaction
value secured
by ECGs in FY
2006
Obligor
rating
(average over
all obligors
for country)
Maturity
of the
credit
Cumulative
default
probability
Creditowrthy
Obligor
IRS is
Positive di
n Dn ti
n Marginal
Additionality
 (mUSD) (mUSD) (numerical) (years) (%)
Turkey
Akbank 2.66 2.718 13 3 10.151 1 1 10.15 18.54 0.55 1.49
Asya Katilim Bankasi AS 14.22 14.511 15 3 43.498 0 1
Bank Pozitif Kredi ve
Kalkinma Bankasi 3.43 3.499 17 3 43.498 0 1
Denizbank, Turkey 3.61 3.681 13 3 10.151 1 1 10.15 18.54 0.55 2.02
Fortis Bank A.S, Turkey 6.44 6.576 17 3 43.498 0 1
Finansbank, Turkey 15.30 15.614 13 3 10.151 1 1 10.15 18.54 0.55 8.55
Garanti Bankasi, Turkey 29.03 29.621 13 3 10.151 1 1 10.15 18.54 0.55 16.22
GSD Yatrim Bankasi 2.28 2.327 17 3 43.498 0 1
Halkbank 10.88 11.100 13 3 10.151 1 1 10.15 18.54 0.55 6.08
HSBC Bank A. S.,
Subsidiary 1.47 1.505 12 2 2.297 1 1 2.30 12.51 0.18 0.28
Is Bankasi, Turkey 11.71 11.951 13 3 10.151 1 1 10.15 18.54 0.55 6.55
Sekerbank 3.37 3.439 16 3 43.498 0 1
Tekfenbank 4.96 5.064 17 3 43.498 0 1
Tekstilbank 8.57 8.747 15 3 43.498 0 1
Turk Ekonomi Bankasi 10.31 10.518 13 3 10.151 1 1 10.15 18.54 0.55 5.76
Vakiflar Bankasi 11.74 11.983 13 3 10.151 1 1 10.15 18.54 0.55 6.56
Yapi Ve Kredi Bankasi,
Turkey 10.29 10.500 15 3 43.498 0 1
ING Bank A.S. 23.17 23.644 17 3 43.498 0 1
Turklandbank 0.85 0.867 17 3 43.498 0 1
Total 977.69 997.64 211.69

Cumulative Default probabilities (Moody's)
Rating Cumulative Default Probabilities
Letter Numerical 1-Year 2-Year 3-Year
AAA 1 0.000 0.000 0.000
AA+ 2 0.000 0.000 0.000
AA 3 0.000 0.011 0.048
AA- 4 0.019 0.040 0.078
A+ 5 0.003 0.091 0.241
A 6 0.026 0.082 0.224
A- 7 0.037 0.175 0.358
BBB+ 8 0.166 0.449 0.794
BBB 9 0.161 0.466 0.883
BBB- 10 0.335 0.965 1.680
BB+ 11 0.753 2.006 3.567
BB 12 0.780 2.297 4.309
BB- 13 2.069 5.749 10.151
B+ 14 3.223 8.701 14.360
B 15 5.457 12.511 18.535
B- 16 10.460 19.782 28.532
CCC+ 17 20.982 33.367 43.498
CCC-C 18 20.982 33.367 43.498
Source: Exhibit Bra-794

ANNEX 4

FORMULA FOR CALCULATING ANNUAL COUNTERMEASURES

1. This Annex explains the formula to be used to calculate the amount of countermeasures that
Brazil is authorized to take on an annual basis a nd describes the data required to apply it. At the
outset it should be made clear that the Arbitrat or could have chosen the methodology used in
Annexes 1, 2 and 3 of this Decision. This methodology required calculating the price and
displacement effects of the e xport credit guarantees. However, given the complexity of the
methodology and the likely need to periodically upd ate the information on which it was based (risk-
free interest rate, default probabilities, credit risk ratings of obligors, etc.), the Arbitrator was aware of
the potential risk of disputes between the parties. As a consequence, the Arbitrator has modified the
methodology in a way that substantially reduces this risk. While the current formula is a
simplification, it hews to the principle that countermeasures should be appropriate and not
disproportionate by making the size of future countermeasures depend on the magnitude of GSM 102
transactions and Brazil's share of world exports in GSM 102 products.

2. The amount of countermeasures shall depe nd on the transaction value secured by GSM 102
export credit guarantees obtained by Brazilian and non-Brazilian obligors, Brazil's share of world
exports of GSM 102 products (corn products, cotton, feed grains, hides and skins, oilseeds, pig meat,
poultry meat, protein feed, rice, and tallow) and a set of parameters. This is expressed in the
following equation:

 (1)
))(()(1
NB
tt
B
tt GSMshareGSMCM βα +=+

where:

1+tCM is the amount of countermeasures in year t +1 that Brazil is authorized to apply;
B
tGSM is the transaction value secured by GSM 102 ex port credit guarantees in fiscal year t obtained
by Brazilian obligors (adjusted for US export subsidy commitments);
NB
tGSM is the transaction value secured by GSM 102 export credit guarantees in fiscal year t
obtained by non-Brazilian obligors (adjusted for US export subsidy commitments);
tshare is Brazil's share of world exports of GSM 102 products in calendar year t;
α is the parameter that relates the transaction value secured by GSM 102 export credit guarantees
obtained by Brazilian obligors to their trade-distorting impact on Brazil; and
β is the parameter that relates the transaction value secured by GSM 102 export credit guarantees
obtained by non-Brazilian obligors to their trade-di storting impact on Braz il (apportioned to Brazil's
share of world exports of GSM 102 products).

3. The values of the parameters α and β are derived from data on GSM 102 transactions in
FY 2006 and the calculated trade distorting impacts on Brazil of those guarantees. They result in
values of the parameters: α = 1.033947 and β = 0.731148.1

1 The transaction value secured by GSM 102 export credit guarantees obtained by Brazilian obligors
was US$65.45 million while the trade-distorting impact on Brazil attributable to th e export credit guarantees
was US$67.67 million. This produces a value of α equal to 1.033947. The transaction value secured by
GSM 102 export credit guarantees obtained by non-Br azilian obligors was US$932.19 million, Brazil's world

4. The transaction value secured by GSM 102 export credit guarantees is defined as the amount
of GSM 102 transactions divided by the factor 0.98.2

5. The United States shall provide the most recent fiscal year data on GSM 102 transactions.
The data on GSM 102 transactions by commodity and by obligor shall be supplied in the exact format
(and software) as Exhibit US-78. Should the United States not be able to provide the most recent
fiscal year data on GSM 102 transactions, Brazil shall use the data from the last available fiscal year.

6. The formula shall be applied to scheduled pr oducts (pig meat, poultry meat and rice) only to
the extent that the export subsidies provided to volu mes of exports of the products are in excess of US
quantity or budgetary outlay reduction commitments. This shall require a deduction to be made to the
transaction value secured by GSM 102 export credit guara ntees issued for a particular fiscal year, so
that only export subsidies that exceed US WTO commitments are included. To determine the
reduction, the United States' quantity reduction commi tment for pig meat, poultry meat and rice shall
be multiplied by the US export prices of the thr ee scheduled commodities. The United States shall
provide the most recent data on US e xport prices of the scheduled products. 3 Should the United
States not be able to provide this inform ation, Brazil shall use US export unit values 4 of the scheduled
products based on data obtained from the UN Commodity Trade Statistics Database (Comtrade).

7. The trade data to be used to calculate Brazil's share of world exports of GSM 102 products
shall be obtained from UN Comtrade. Brazil sh all use the harmonised system codes of GSM 102
products in Exhibit Bra-814 for this purpose. Brazil shall ensure that the period covered by the trade
data corresponds to the fiscal year of the GSM 102 da ta, i.e. if GSM 102 data of fiscal year 2008 is
used, trade data of calendar year 2008 shall be employed.

market share of GSM 102 products was 11.7 per cent, whil e the trade-distorting impact on Brazil attributable to
the export credit guarantees was US$79.73 million. This produces a value of β equal to = 0.731148.
2 Under the GSM 102 programme, the transaction risk is divided 98:2 between the Commodity Credit
Corporation and the exporter, i.e., 98 per cent of the tr ansaction is backed by the CCC via the export credit
guarantees, while the exporter bears the risk on the remaining two per cent of the transaction. Thus, the total
value of US exports that could be secured by the GSM 102 transaction is greater by a factor of 1/(0.98).
3 The period covered by the data on US export pr ices must correspond to the fiscal year of the
GSM 102 data, i.e. if GSM 102 data of fiscal year 2008 is used, data on US export prices for calendar year 2008
shall be employed
4 The US export unit value of a scheduled product i is defined as UV i = V i/Qi, where UV i is the US
export unit value of scheduled product i, V i is the total dollar value of US exports of scheduled product i and Q i
is the total volume of US exports of scheduled product i. Brazil shall use the harmonised system codes of the
scheduled products in Exhibit Bra-814 for the purpose of calculating the US export unit values.