Document: RESPONSES OF BRAZIL TO THE PANEL'S SECOND SET OF QUESTIONS (2 April 2007) TABLE OF CONTENTS Page LIST OF ABBREVIATIONS 270 TABLE OF CASES   271
Date: 2 April 2007
Document codes: WT/DS267/RW
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

LIST OF ABBREVIATIONS

AMS Aggregate Measurement of Support
Arrangement OECD Arrangement on Offi cially Supported Export Credits
AWP Adjusted World Price
CCC U.S. Commodity Credit Corporation
CCPs Counter-Cyclical Payments
CVD Countervailing Duty
DSB Dispute Settlement Body
DSU Understanding on Rules and Procedures Governing the Settlement of Disputes
ECG Export Credit Guarantee
FAIR Act Federal Agricultural Impr ovement and Reform Act of 1996
FAPRI Food and Agricultural Policy Research Institute
FAS USDA's Foreign Agriculture Service
FCRA Federal Credit Reform Act
FSRI Act Farm Security and Rural Investment Act of 2002
FY Fiscal Year
GATT General Agreement on Tariffs and Trade
GAO Government Accountability Office
GSM 102 General Sales Manager 102
GSM 103 General Sales Manager 103
MPRs Minimum Premium Rates
MY Marketing Year
NCC National Cotton Council of America
NPV Net Present Value
OECD Organization for Economic Co-operation and Development
SCGP Supplier Credit Guarantee Program
SCM Agreement Agreement on Subsidies and Countervailing Measures
SPS Agreement Agreement on Sanitary and Phytosanitary Measures
TBT Agreement Agreement on Technical Barriers to Trade
U.S. United States
USDA U.S. Department of Agriculture
WTO

TABLE OF CASES

Short Title Full Case Title and Citation
Argentina –
Footwear
Appellate Body Report, Argentina – Safeguard Measures on Imports of Footwear,
, adopted 12 January 2000, DSR 2000:I, 515
Brazil – Aircraft
(21.5 II)
Panel Report, Brazil – Export Financing Programme for Aircraft – Second
Recourse by Canada to Article 21.5 of the DSU , , adopted
23 August 2001, DSR 2001:X, 5481
Canada – Aircraft Appellate Body Report, Canada – Measures Affecting the Export of Civilian
Aircraft, , adopted 20 August 1999, DSR 1999:III, 1377
Canada – Aircraft
(21.5)
Appellate Body Report, Canada – Measures Affecting the Export of Civilian
Aircraft – Recourse by Brazil to Article 21.5 of the DSU , WT/DS70/AB/RW,
adopted 4 August 2000, DSR 2000:IX, 4299
Canada – Aircraft
Credits and
Guarantees
Panel Report, Canada – Export Credits and Loan Guarantees for Regional
Aircraft, WT/DS222/R and Corr.1, adopted 19 February 2002, DSR 2002:III,
849
Canada – Dairy
(21.5 I)
Appellate Body Report, Canada – Measures Affecting the Importation of Milk and
the Exportation of Dairy Products – Reco urse to Article 21.5 of the DSU by
New Zealand and the United States , WT/DS103/AB/RW, WT/DS113/AB/RW,
adopted 18 December 2001, DSR 2001:XIII, 6829
Dominican Republic
– Import and Sale of
Cigarettes
Appellate Body Report, Dominican Republic – Measures Affecting the
Importation and Internal Sale of Cigarettes , WT/DS302/AB/R, a dopted 19 May
2005
EC – Asbestos
Appellate Body Report, European Communities – Meas ures Affecting Asbestos
and Asbestos-Containing Products , WT/DS135/AB/R, adopted 5 April 2001,
DSR 2001:VII, 3243
EC – Bed Linen
(21.5)
Appellate Body Report, European Communities – Anti-Dumping Duties on
Imports of Cotton-Type Bed Linen from India – Recourse to Article 21.5 of the
DSU by India, WT/DS141/AB/RW, adopted 24 April 2003, DSR 2003:III, 965
EC – Chicken Cuts
Appellate Body Report, European Communities – Customs Classification of
Frozen Boneless Chicken Cuts , WT/DS269/AB/R, WT/DS286/AB/R, and
Corr.1, adopted 27 September 2005
EC – CVDs on
DRAMs
Panel Report, European Communities – Countervailing Measures on Dynamic
Random Access Memory Chips from Korea , WT/DS299/R, adopted 3 August
2005
EC – Hormones
Appellate Body Report, EC Measures Concerning Meat and Meat Products
(Hormones), WT/DS26/AB/R, WT/DS48/AB/R , adopted 13 February 1998,
DSR 1998:I, 135
EC – Sardines Appellate Body Report, European Communities – Trade Description of Sardines,
WT/DS231/AB/R, adopted 23 October 2002, DSR 2002:VIII, 3359
EC – Selected
Customs Matters
Appellate Body Report, European Communities – Selected Customs Matters ,
WT/DS315/AB/R, adopted 11 December 2006
Japan – Alcohol II Appellate Body Report, Japan – Taxes on Alcoholic Beverages , WT/DS8/AB/R,
WT/DS10/AB/R, WT/DS11/AB/R, adopted 1 November 1996, DSR 1996:I, 97
Korea – Commercial
Vessels
Panel Report, Korea – Measures Affecting Tr ade in Commercial Vessels ,
WT/DS273/R, adopted 11 April 2005

Short Title Full Case Title and Citation
Korea – Various
Measures on Beef
Appellate Body Report, Korea – Measures Affecting Imports of Fresh, Chilled and
Frozen Beef , WT/DS161/AB/R, WT/DS169/AB /R, adopted 10 January 2001,
DSR 2001:I, 5
Mexico – Corn Syrup
(21.5)
Appellate Body Report, Mexico – Anti-Dumping Inves tigation of High Fructose
Corn Syrup (HFCS) from the United States – Recourse to Article 21.5 of the DSU
by the United States , WT/DS132/AB/RW, adopted 21 November 2001,
DSR 2001:XIII, 6675
U.S. – CVDs on
Certain EC Products
Appellate Body Report, United States – Countervai ling Measures Concerning
Certain Products from the European Communities , WT/DS212/AB/R, adopted
8 January 2003, DSR 2003:I, 5
U.S. – CVDs on
Certain EC Products
Panel Report, United States – Countervailing Measures Concerning Certain
Products from the European Communities , WT/DS212/R, adopted 8 January
2003, modified by Appellate Body Report, WT/DS212/AB/R, DSR 2003:I, 73
US – FSC Appellate Body Report, United States – Tax Treatment for "Foreign Sales
Corporations", WT/DS108/AB/R, adopted 20 March 2000, DSR 2000:III, 1619
U.S. – FSC (21.5 II)
Panel Report, United States – Tax Treatment for "Foreign Sales Corporations" –
Second Recourse to Article 21.5 of the DSU by the European Communities ,
WT/DS108/RW2, adopted 14 March 2006, upheld by Appellate Body Report,

U.S. – OCTG Sunset
Reviews
Appellate Body Report, United States – Sunset Reviews of Anti-Dumping
Measures on Oil Country T ubular Goods from Argentina , WT/DS268/AB/R,
adopted 17 December 2004, DSR 2004:VII, 3257
U.S. – Softwood
Lumber IV
Appellate Body Report, United States – Final Countervailing Duty Determination
with Respect to Certain Softwood Lumber from Canada , WT/DS257/AB/R,
adopted 17 February 2004, DSR 2004:II, 571
U.S. – Softwood
Lumber IV
Panel Report, United States – Final Counterva iling Duty Determination with
Respect to Certain Softw ood Lumber from Canada , WT/DS257/R and Corr.1,
adopted 17 February 2004, modifi ed by Appellate Body Report,
WT/DS257/AB/R, DSR 2004:II, 641
U.S. – Softwood
Lumber IV (21.5)
Appellate Body Report, United States – Final Countervailing Duty
Determination with Respect to Certain Softwood Lumber from Canada –
Recourse by Canada to Article 21.5 of the DSU , WT/DS257/AB/RW, adopted
20 December 2005
U.S. – Softwood
Lumber V
Appellate Body Report, United States – Final Dumping Determination on
Softwood Lumber from Canada , WT/DS264/AB/R, adopt ed 31 August 2004,
DSR 2004:V, 1875
U.S. – Softwood
Lumber VI (21.5)
Appellate Body Report, United States – Investigation of the International Trade
Commission in Softwood Lumber from Canada – Recourse to Article 21.5 of the
DSU by Canada, WT/DS277/AB/RW, adopted 9 May 2006
U.S. – Upland
Cotton
Appellate Body Report, United States – Subsidies on Upland Cotton ,
WT/DS267/AB/R, adopted 21 March 2005
U.S. – Upland
Cotton
Panel Report, United States – Subsidies on Upland Cotton , WT/DS267/R, and
Corr.1, adopted 21 March 2005, modifi ed by Appellate Body Report,
WT/DS/267/AB/R

TABLE OF EXHIBITS

Upland Cotton Prices, March 2007. Exhibit Bra-673
Cotton Marketing Weekly, 23 Ma rch 2007, accessed March 2007 at
http://www.cottonexperts.com/solutions/cottonmktweekly.html.
Exhibit Bra-674
Updated Program Crop Comparison, March 2007. Exhibit Bra-675
USDA Cotton and Wool Outlook, 12 March 2007, accessed March 2007 at
http://usda.mannlib.cornell.edu/usda/current/CWS/CWS-03-12-2007.pdf.
Exhibit Bra-676
Cotton Marketing Weekly, 9 March 2007, accessed March 2007 at
http://www.cottonexperts.com/solutions/cottonmktweekly.html.
Exhibit Bra-677
Cotton Marketing Weekly, 16 February 2007, accessed March 2007 at
http://www.cottonexperts.com/solutions/cottonmktweekly.html.
Exhibit Bra-678
"US Cotton Industry To Face Challenges In Global Market," 2006
AgWeb.com, accessed March 2007 at
http://www.cattlenetwork.com/content.asp?contentid=103318.
Exhibit Bra-679
"NCC urges disaster assistance for cotton producers," High Plains / Midwest
AG Journal, 15 March 2007, accessed March 2007 at
http://www.hpj.com/archives/2007/mar07/mar19/NCCurgesdisasterassistanc
ef.cfm?title=NCC%20urges%20disaster%20assistance%20for%20cotton%2
0producers.
Exhibit Bra-680
Upland Cotton Direct and counter-cycli cal Payment Program and Marketing
Assistance Loans, Farm Se rvice Agency Fact Sheet,
March 2006, accessed March 2007 at
http://www.fsa.usda.gov/FSA/printapp?fileName=pf_20060301_insup_en_
cottdcp06.html&newsType=prfactsheet.
Exhibit Bra-681
Risk Management, 2007 Farm Bill Theme Paper, May 2006, accessed
March 2007 at http://www.usda.gov/documents/Farmbill07riskmgmtsum1.doc.
Exhibit Bra-682
Marketing Loan Subsidies and Average AWP. Exhibit Bra-683
CoBank presentation, accessed March 2007 at
http://www.cottoninc.com/2005EFSConferencePresentationsSingapore/Finan
cingUSACottonImportsUnderGSM/.
Exhibit Bra-684
USDA FAS publication, "Will you get paid for the sale you just made",
accessed March 2007 at http://www.fas.usda.gov/excredits/LOANS.PDF.
Exhibit Bra-685
Statement of Professor Sundaram. Exhibit Bra-686
Cash Basis Accounting Worksheet. Exhibit Bra-687

A. S
COPE OF THIS PROCEEDING

Questions to both parties

44. The European Communities argues in respect of the preliminary objection raised by the
United States regarding the claims of Brazil relating to export credit guarantees for pig meat and
poultry meat under the GSM 102 programme that "the important issue is the nexus or the degree of
interrelatedness or interdependence between different elements of the measure". (Oral Statement of
the European Communities, para. 6) The European Communities submits in this regard that:

"the Panel should examine the original meas ure at issue and the 'measures taken to
comply', and, with particular reference to the 'elements of the measure' that the United
States argues are outside the Panel's terms of reference, enquire into the extent to
which these are inter related or inter dependent with measures or 'elements of
measures' that the United States accepts are within the Panel's terms of reference".
(Oral Statement of the European Communities, para. 11)
 Do the parties agree with the approach suggest ed by the European Communities and with the
considerations in paragraph 13 of the Oral Statement of the European Communities?

1. The compliance Panel asks Brazil to co mment on the "EC's suggested approach for
addressing the United States' objection regarding Brazil's claims concerning the use of GSM 102
export credit guarantees ("ECGs") to circumvent U.S. export subsidy commitments for pig meat and
poultry meat. The EC's approach for addressing the U.S. objection is based on an assessment of the
"nexus" between the original measure and the measur e taken to comply, with particular reference to
the "elements" of the measure that the United St ates argues are not within the Panel's terms of
reference.
1

2. Brazil agrees that the nexus between a measure allegedly taken to comply and the original
measure may, in certain circumstances, be relevant is assessing the scope of Article 21.5 proceedings.
This approach was adopted by the Appellate Body in U.S. – Softwood Lumber IV (21.5) in assessing
whether a periodic review was a measure taken to comply with DSB recommendations to an original
determination.2 The Appellate Body relie d on the panels' findings in Australia – Salmon (21.5) and
Australia – Leather (21.5) in support of this approach.

3. Brazil does not believe that it is necessary to employ this approach to resolve the U.S.
objection, however. As far as Brazil understands, the United States ' objection is premised on the
view that there are separate ECG measures that apply on a product-specific basis, e.g., to pig meat,
and to poultry meat. The United States conte nds that the separate ECG measures for these
two products are not "measures taken to comply".

4. The United States is incorrect in assuming that different ECG measures apply to different
products. The ECG measure taken to comply is the amended GSM 102 program, which applies in
precisely the same way to a range of products, incl uding pig meat and poultry meat. Thus, a single
amended subsidy program applies ge nerally to numerous products. (In paragraph 13 of its Opening
Statement, the EC itself notes that there is a si ngle subsidy program, with a single revised guarantee
fee schedule.)

5. Contrary to the United States' arguments in its 16 March comments, the measures taken to
comply are not the individual ECGs granted to pig meat and poultry meat pursuant to the amended

2 Appellate Body Report, U.S. – Softwood Lumber IV (21.5), paras. 79, 80-93.

GSM 102 program. 3 Unlike the revised GSM 102 fee sche dule, the guarantees issued under the
amended program were not adopt ed to implement the Dispute Settlement Body's ("DSB")
recommendations. Rather, guarantees issued by the Commodity Credit Corporation ("CCC")
represent simply the routine, day-to-day opera tion, of the amended program in response to
applications from U.S. exporters. The fact that the measure taken to comply is the amended GSM 102
program does not mean that the measure is chal lenged "as such" because, under Article 10 of the
Agreement on Agriculture, the issue is the application of the amended program.

6. Moreover, although the United States admits that it chose to change the guarantee fee
schedule for all eligible products, it seeks to evade the consequences of that choice.
4 An
implementing Member must ensure that the chang es it makes to WTO-inconsistent measures comply
fully with all of the Member's WTO obligations. 5 Article 21.5 proceedings are the appropriate forum
for examining whether a Member has done so.

7. Under Article 10 of the Agreement on Agriculture , Brazil's claim is that this measure is
applied in a manner that circumvents the United States' export subsidy commitments regarding certain
agricultural products, including pig meat and pou ltry meat. Although Brazil made claims regarding
these products in the original proceedings, these clai ms were not definitively resolved, and are not
therefore excluded in these proceedings. In sum, therefore, Brazil makes product-specific claims
regarding the application of a general subsidy measure – the amended GSM 102 program.

8. The United States appears to acknowledge th at the amended GSM 102 program constitutes a
"measure taken to comply". In these circumstances, it does not appear to be necessary for the Panel to
rely on a nexus-based approach to establish that the amended GSM 102 program is covered by these
compliance proceedings. Instead, the Panel must decide whether the amended GSM 102 program
applies in the same way to all eligible products, in cluding pig meat and poultry meat. If so, the Panel
must decide whether there is any limit on the claims that Brazil can make regarding these products.

9. Despite asserting that there are separate ECG measures for pig meat and poultry meat, the
United States has not contradicted Braz il's arguments that the amended GSM 102 program applies in
the same way to all eligible products. The Un ited States has, therefore, failed to establish a
fundamental element of its objection; namely, that there are separate ECG measures applicable to pig
meat and poultry meat. For this reason alone, the compliance Panel must reject the United States'
objection.

45. Could the parties comment on the observati ons made by the Eu ropean Communities in
paras. 15-24 of its Oral Statement on the issue of whether the marketing loan and counter-cyclical
payment programmes are within the scope of the Panel's proceeding?

10. Brazil agrees, generally, with the EC's comment s in paragraphs 15-24 of its Oral Statement.
However, as stated in its answer to question 78 be low (as well as in paragraph 114 of its 26 February
answers to questions), Brazil also agrees with the United States' observation in EC – Selected Customs
Matters that certain claims under the covered agreements are "not readily classifiable in the categories
of 'as such' and 'as applied.'"
6 An "as such" claim is typically understood to involve an examination of
a general rule or norm in the abstract. However, as the original panel found, an examination of the
"effects" of the general statutory and regulatory provisions establishing a subsidy program " cannot be
conducted in the abstract" because they must be considered in li ght of the market-based effects of the

3 U.S. 16 March Comments on Brazil's Response to Question 6, paras. 10-17.
4 U.S. 16 March Comments on Brazil's Response to Question 6, paras. 22-26.
5 Appellate Body Report, Canada – Aircraft (21.5), paras. 41 and 42.
6 Appellate Body Report, EC – Selected Customs Matters, para. 165.

measures.
7 Thus, Brazil considers that serious prej udice claims are among those that cannot be
readily classifiable as "as such" and "as applied."

11. Brazil also agrees, generally, with the EC's comments in paragraphs 16-18 of its Oral
Statement. As explained in other submissions, Brazil's present serious prejudice claims, and the
original panel's rulings, covered both the Step 2, marketing loan and counter cyclical subsidy
programs and subsidy payments mandated by those programs.
8 The original panel's approach was,
therefore, appropriately based on the design, stru cture and operation of the programs, as well as the
general magnitude of the payments made under the programs during a reference period adopted by the
panel as a tool to examine the evidence.

12. In its 16 March comments, the United States suggests that the original panel's findings of
present serious prejudice pertained solely to subsidy payments made in MY 1999-2002 – although the
United States' table in paragraph 60 of its 16 Marc h comments actually states that the findings related
to " programs". The United States' arguments mischaracterize the original panel's findings from
beginning to end.

13. First, in describing the measures at issue in para graph 8.1 of the original panel report, the
United States, in the table at paragraph 60 of its 16 March comments, wrongly assumes that "U.S.
subsidies" does not include the legislative a nd regulatory provisions – the subsidy programs –
mandating the subsidy payments. In fact, the origin al panel said expressly that the measures at issue
included the " legislative and regulatory provisions currently providing" for the subsidy payments.
9
The United States suggestion that this reference merely included the " application" of these provisions
makes no sense. 10 The "application" of these "provisions" is the payments, which were already
separately listed as measures. Thus, there was no n eed to refer again to the "application" of the
"provisions". Moreover, the "legislative and regulatory provisions" were separately identified
without any limiting reference to their "application".

14. Second, the United States' arguments also mischaract erize the original panel's examination of
the measures at issue. According to the United States, the "subsidies" are the payments, not the
programs. Moreover, it contends that the operati on of the programs was examined merely to assess
the effects of the payments. However, the original panel stated that it would "undertake an analysis of
the existence and nature of the subsidies in question by examining their structure, design and
operation with a view to discerning their effects."
11 However, it is programs, not individual
payments, that have "design, structure and operation" . Thus, the original panel's use of the word
"their" indicates that the "subsidies in question" included the programs. Consistent with this view, the
original panel found that "the structure, design and operation of the marketing loan programme has
enhanced production and trade-distorting effects".12

15. With respect to both the marketing loan and Step 2 programs, the original panel found that
"the structure of the measure , directly linked to A-index, affects the world market generally."
13 The
only "measure" that includes a direct link to the A-Index is the Farm Security and Rural Investment
Act ("FSRI Act") of 2002. Individual payments themselves do not have "structure", and do not
include references to the A-Index. Thus, the original panel again refers to the subsidy programs as
among the "measures" at issue.

7 Panel Report, U.S. – Upland Cotton, para. 7.1198.
8 See, in particular, Brazil's 26 February response to question 11.
9 Panel Report, U.S. – Upland Cotton, para. 7.1107.
10 U.S. 16 March comments on Brazil's response to question 11, para. 68.
11 Panel Report, U.S. – Upland Cotton, para. 7.1194.
12 Panel Report, U.S. – Upland Cotton, para. 7.1295.
13 Panel Report, U.S. – Upland Cotton, paras. 7.1296 and 7.1300.

16. In examining causation, the original panel al so refers to the "design, structure and operation
of these three measures ".14 The "three measures" must be the three (marketing loan, Step 2 and
counter-cyclical) subsidy programs because there are precisely three of these. In contrast, if the
individual payments alone were the measures, there would obviously be many more than "three
measures".

17. Third, if there were any doubt that the subsid y measures includes the three programs, these
are removed by the original panel's statements in de clining to examine a threat of serious prejudice.
The original panel found that Brazil's claims of present serious prejudice findings "pertain to
measures in force and
 subsidies granted from MY1999 – MY 2002"; it added, "our finding of
'present' serious prejudice thus pertain[s] also to measures in force and subsidies paid in MY 2002".
Individual instances of payment are not "measures in force"; only statutory and regulatory provisions
have the normative qualities of "measures in force". This statement, therefore, distinguishes between:
(1) the subsidy programs ("measures in force") " and" (2) the subsidy payments ("subsidies granted"
and "subsidies paid"). Significantly, the original pa nel stated unambiguously that Brazil's claims, and
its findings, "pertain[ed] to" both categories of measures.

18. Almost immediately afterwards, the original panel declared that its present serious prejudice
findings "include findings of inconsistency that deal with the FSRI Act of 2002 and
 subsidies granted
thereunder in MY 2002". Again, therefore, the pa nel stated that its findings pertained to two
categories of measures: (1) the FSRI Act (i.e. the "measures in force") "and" (2) payments.

19. Because the original panel's findings "pertain ed to", and "deal with", the three programs set
forth in the FSRI Act of 2002, it found that the United States "was obliged to take action concerning
its present statutory and regulatory framework as a result of our 'present' serious prejudice finding." 15
This is not idle speculation as to how the United States could implement, as the United States might
wish.16 It is a statement of the United States " oblig[ations]" flowing from the panel's present serious
prejudice findings that "pertain[ed] to the measures in force" – that is, the "statutory and regulatory
framework" – as well as to payments in MY 1999-2002.

20. Also, the original panel's decision not to exam ine the "as such" claims, which pertained to the
"measures in force" alone, can only be explained on the ground that the present serious prejudice
findings already dealt with those measures. If th e present serious prejudice findings had dealt with
payments alone, the dispute concerning the measures in force would not have been resolved. In those
circumstances, it would have been necessary for th e panel to address the "as such" claims. Yet,
because of the present serious prejudice findings – whic h pertained also to the measures in force – the
panel found that it was not necessary to examine the "as such" claims.
17

21. The United States is, therefore, attempting to rewrite the panel's findings to eliminate the
obligation to reform the "statutory and regulatory framework".

22. With respect to the EC's comments in pa ragraph 19, Brazil agrees that, where a program
mandates that payments be made when the recipien t fulfils certain conditions which are within the
control of the recipient, there is a stronger nexus between the program and the payments than where a
program authorizes payments to be made at the disc retion of the granting authority. In the former
case, Brazil also agrees that panels may treat the program and payments as, essentially, indivisible in
examining the effects of the subsidies. In this di spute, the marketing loan and the counter cyclical
programs mandate payments when the recipient fulfills certain factual conditions. In this situation,

14 Panel Report, U.S. – Upland Cotton, para. 7.1349.
15 Panel Report, U.S. – Upland Cotton, para. 7.1501.
16 U.S. 16 March Comments on Brazil's Answer to question 11, para. 73.
17 Panel Report, U.S. – Upland Cotton, para. 7.1511.

the original panel's reasoning and findings correctly analyzed the programs and mandatory payments
together.

23. As regards the EC's comments in paragraphs 20 and 21, Brazil agrees that the original panel
found that a bundle of subsidies cause adverse effects. As the EC observes, the United States' action
in withdrawing the Step 2 program confirms that the bundle of subsidies found to be WTO-
inconsistent included the contested subsidy progra ms. That bundle also included the marketing loan
and the counter-cyclical subsidy programs. Because the United States was obliged to take action to
withdraw the subsidy programs or remove their adverse effects, those two programs are properly
within the compliance Panel's terms of reference.

24. In the alternative, Brazil has argued that, if the compliance Panel rules that the programs are
not within its terms of reference, there is a suffici ent nexus between the payments found to be causing
adverse effects in the original proceedings, and the payments subject to Brazil's adverse effects claims
in these proceedings, for the new payments to be subject to these proceedings.
18 In that regard, Brazil
also agrees with the EC that, where payments are mandated by a program, there is a sufficient nexus
between the payments and the programs for both to be part of compliance proceedings.

25. Generally, Brazil agrees with the EC's comme nts in paragraphs 22 and 23. However, in
Brazil's view, the scope of compliance proceedings is decided by the compliance Panel and is not, as
the EC may be suggesting, determined by "what the Parties agree is w ithin the scope of the
compliance panel".
19

46. In its Oral Statement, the European Communities characterizes Brazil's and the
United States' respective approaches as the "measure m odel" and the "element of the measure model"
(Oral Statement of the European Communities, para. 7). Please discuss whether you agree with this
characterization and whether, in your view, the applic ation of a measure alleged to be a subsidy to
different agricultural products relates to a "measure" (or elements thereof) or if, rather it relates to a
"claim". Would it be permissible for a complia nce panel to examine a "claim" that relates to
subsidies (granted as part of measures taken to comply) provided to agricultural products to which
the "initial measure" did not apply?

26. In its 26 February reply to question 6, Brazil set forth its understanding on the scope of
Article 21.5 proceedings. In Brazil's view, the compliance Panel must determine, first, whether the
measures challenged by Brazil fall within the scope of these proceedings. In Brazil's view, the
marketing loan and the counter cyclical programs, and payments made under them, are part of these
proceedings because they are subject to the DSB's recommendations in the original proceedings and
are identified in Brazil's panel request in these pro ceedings. This compliance Panel may, therefore,
examine whether these unchanged programs, and the mandatory payments made under them, continue
to cause adverse effects. Brazil does not consider that it would be appropriate to parse the programs
into different "elements", because Brazil's claim re lates to the effects of these programs in their
totality.

27. Brazil also considers that the amended GSM 102 program, as a whole, is within the scope of
these proceedings. The United States has revised the original program, and maintains a new
GSM 102 program. Brazil sees no need for the complia nce Panel to parse the amended program into
sub-elements, and to rule that the measure at issue c onsists solely of certain elements of the program.
Brazil's approach is consistent w ith the Appellate Body's finding in Canada – Aircraft (21.5) that the

18 See Brazil's 26 February answers, paras. 145-150.

measure at issue was the revised TPC program, even though not all elements of the program had been
changed.20
28. Second, having identified the compliance measures at issue, a panel must consider the claims
made with respect to these measur es. Brazil recognized in its 26 February reply to question 6 that
certain panels have ruled that no new claims can be made with respect to unchanged elements of the
original measure; equally, the same claim cannot be made with respect to unchanged elements of the
measure if that claim was rejected in the original proceedings.

29. These limitations do not apply in these proceedi ngs. With respect to the marketing loan and
the counter cyclical programs, which are unchanged, Brazil makes the same cl aim of adverse effects
that was upheld in the original proceedings pr ecisely because the WTO-inconsistent programs have
not been "withdrawn". As regards ECGs, Brazil clai ms that the revised guarantee fee schedule of the
amended GSM 102 program involves prohibited export s ubsidies. This claim can be made because it
relates to a new element of the amended measure.

30. The compliance Panel asks whether the app lication of a subsidy program to "different
agricultural products" relates to the measure or the clai ms at issue. The questio n of the application of
a subsidy program to specific products relates to the scope of the measure at issue: does the measure
apply to a given product as a matter of munici pal law? As the Appellate Body noted in EC – Chicken
Cuts, "it is the measure at issue that gene rally will define the product at issue".
21 In this dispute, the
amended GSM 102 program applies to a wide range of products, including pig meat and poultry meat.

31. Although a measure may apply to a wide range of products, a complainant may limit the
claims made regarding that measure to specified produc ts. For example, in this dispute, Brazil's panel
request limits the claims made regarding the amended GSM 102 program relate to specified scheduled
agricultural products – pig meat, poultry meat a nd rice – and to all unscheduled agricultural
products.22

32. The compliance Panel also asks whether it w ould be "permissible for a compliance panel to
examine a 'claim' that relates to s ubsidies (granted as part of a measure taken to comply) provided to
agricultural products to which the 'initial measure' did not apply". Brazil is not certain which products
the compliance Panel has in mind that were not elig ible to receive ECGs under the original GSM 102
program, but that are now eligible under the amended program.

33. Brazil has made claims regarding three speci fied scheduled agricultural products, pig meat,
poultry meat and rice.
23 These three products were all eligib le to receive ECGs under the original
GSM 102 program, and all remain eligible under the new program.

34. Assuming that a subsidy "measure taken to comply" applies to products that were not eligible
to receive subsidies under the original measure, a compliance panel is permitted to examine a claim
relating to the newly eligible products. In that ev ent, the new product scope of the "measure taken to
comply" is a changed element of the original measure. In Article 21.5 proceedings, there are no limits
on the claims that a Member can bring regarding changed elements of the compliance measure. In EC
– Bed Linen (21.5) , the Appellate Body recognized that "a 'measure taken to comply' may be
inconsistent with WTO obligations in ways different from the original measure." 24 Accordingly, the
claims and arguments made in the original proceed ings do not limits the claims and arguments that

20 Appellate Body Report, Canada – Aircraft (21.5), paras. 41-42.
21 Appellate Body Report, EC – Chicken Cuts, para. 165.
22 See also Brazil's response to question 50, below.
23 Brazil's claims also concern GSM 102 ECGs for unscheduled products.
24 Appellate Body Report, EC – Bed Linen (21.5), para. 79 (original emphasis).

can be made regarding the revised measure.
25 This ensures that the compliance measure complies
with all of a Member's WTO obligations.

Questions to the United States

47. The United States has raised a preliminary objection regarding Brazil's claims of (threat of)
serious prejudice in respect of the marketing loan and counter-cyclical payment programmes. Is the
Panel's understanding correct that, apart from this preliminary objection regarding programmes, the
United States also considers that the issue of whether payments made under the marketing loan and
counter-cyclical payment programme after 21 September 2005 cause serious prejudice to the interests
of Brazil is not properly within the scope of this proceeding?

48. How does the United States address the argument of Brazil that "[i]f the United States were
to prevail on its view that subsequent mandat ory and price-contingent marketing loan and CCP
payments are not properly before this Panel, the grant of annual recurring subsidies becomes
'a moving target that escape from [the WTO subsid y] disciplines'"? (Closing Statement of Brazil,
para. 4)

49. Could the United States comment on the argument of the European Communities that the text
of Article 21.5 of the DSU does not limit the temporal scope of that provision in the manner suggested
by the United States? (para. 29 of the Oral Statement of the European Communities)

Question to Brazil

50. Does Brazil maintain its claims with respect to the three unscheduled products (lyocell,
lysine, wood products) identified by the United Stat es as falling outside the scope of the Agreement
on Agriculture? (see paragraph 83 of the United States' Rebuttal)

35. Brazil maintains its claims unde r Articles 3.1(a) and 3.2 of the SCM Agreement with respect
to GSM 102 ECGs for lyocell, lysine and wood pr oducts. To the extent that these products fall
outside the scope of the Agreement on Agriculture, the compliance Panel need not, before addressing
Brazil's prohibited subsidy claims under the SCM Agreement , address whether the provision of
GSM 102 ECGs for these products circumvents U.S. agricultural export subsidy commitments.

B. C
LAIMS OF BRAZIL REGARDING PRESENT SERIOUS PREJUDICE

1. Significant price suppression - Article 6.3(c) of the SCM Agreement

Questions to both parties

51. The parties disagree on whether or not th e marketing loan and counter-cyclical payments
have more than minimal effects on production of upland cotton. Could each party explain how its
approach to the analysis of the impact of these pay ments on production of upl and cotton is supported
by the provisions of Articles 5 and 6 of the SCM Agreement and by any other relevant WTO
provisions?

36. Articles 5-7 of the SCM Agreement, and Article XVI of GATT 1994 are the only legal bases
governing actionable subsidy claims. Article 5 of the SCM Agreement states that the focus of the
analysis is on "any subsidy referred to in paragraphs 1 and 2 of Article 1." Articles 6.3(a)-(d) speak to
the "effect of the subsidy." Similarly, Article 7.1 provides that consultations with a subsidizing

25 Appellate Body Report, EC – Bed Linen (21.5), para. 79; Appellate Body Report, Canada – Aircraft
(21.5), paras. 40–42.

Member can be requested regarding "any subsidy referred to in Article 1, granted or maintained by
another Member." Finally, Article XVI:1 also refers to "any subsidy."
37. The only exception to bringing any actiona ble subsidy challenges under Part III of the
SCM Agreement was Article 13 of the Agreement on Agriculture . Yet, the exceptions in Part III of
the SCM Agreement referring to Article 13 of the Agreement on Agriculture (i.e., Article 5,
Article 6.9, and Article 7.1 of the SCM Agreement) lapsed following the expiration of that provision
in 2003. Consequently, any domestic support or export subsi dy supporting or benefiting the
production of an agricultural good covered by Annex 1 of the Agreement on Agriculture is properly
the subject of a claim under Articles 5 and 6 of the SCM Agreement. In sum, the right to challenge the
effects of any subsidy, no matter how great or small its effect on production, is now unlimited.

38. The marketing loan and counter-cyclical subsid ies fall within the category of "any subsidies,"
within the meaning of Articles 5 and 7 of the SCM Agreement . They are also both "the subsidy"
referred to in Articles 6.3(c) and (d) and Articles 7.8 and 7.9 of the SCM Agreement. As such, each of
these subsidies are properly measures which Br azil claims collectively cause significant price
suppression and an increase in the U.S. world market share of upland cotton.

39. There is no provision in the SCM Agreement or any other WTO Agreement that precludes
WTO panels from examining the effects of subsidies with no more than minimal effects on
production. The United States has referred in va rious of its arguments to Annex 2 of the Agreement
on Agriculture. The chapeau of that Annex states that "[d]omestic support measures for which the
exemption from reduction commitments is claimed sha ll meet the fundamental requirement that they
have no, or at most minimal, tr ade distorting effects, or effects on production." The text of the
chapeau to Annex 2 sets out a "fundamental requirement" to determine whether particular types of
domestic support should – or shoul d not – be tabulated as part of measures exempted from domestic
support reduction commitments set out in Articles 6 and 7 of the Agreement on Agriculture . This is
an entirely separate question of whether actionabl e subsidy claims can be asserted against such
subsidies. Indeed, the drafters contemplated that actionable subsidy claims could be asserted against
subsidies properly covered by Annex 2 since they found themselves compelled to include a specific
provision into the "due restraint" peace clause – Article 13(a) of the Agreement on Agriculture.

40. Whether "domestic support" subsidies are – or are not – exempt from the separate reduction
commitments relating to the Aggregate Measurement of Support ("AMS") for domestic support under
the Agreement on Agriculture has no bearing on either (i) the type of measure that can be challenged
or (ii) the claims that can be brought against such measures under the SCM Agreement. The text of
Articles 5 and 6 of the SCM Agreement is unrestricted – all measures meeting the definition of a
subsidy are subject to challenge. Thus, there is no basis to for a subsidizing Member to claim that a
subsidy is exempt from an actionable subsidy cha llenge because the challenged subsidies are exempt
from reduction commitments under the Agreement on Agriculture.

41. From an evidentiary point of view, it is also irrelevant that domestic support subsidies might
be exempt from total AMS reduction commitments under Annex 2 of the Agreement on Agriculture .
Articles 5 and 6 of the SCM Agreement require a panel examining the effects of different forms of
domestic support subsidies to be color-blind. It is irrelevant whether the subsidies examined are
amber, blue, or green. All subsidies are actionable. All subsidies have at least the potential to cause
adverse effects. Whether any subsidy causes adverse effects or not involves a detailed factual
examination of its nature, magnit ude and prevailing conditions of co mpetition – not whether it is the
type of subsidy that is or is not exempt from total AMS reduction commitments.

42. To the extent that the compliance Panel' s question also addresses Brazil's approach of
establishing that the effect of the challenged U.S. subsidies is "significant price suppression," Brazil
refers the Compliance Panel to its responses to qu estions 62-74, below. In response to these
questions, Brazil explains its count erfactual approach and the evidence supporting the existence of a

"genuine and substantial relationship of cause and e ffect" between the subsidies and significant price
suppression. Brazil establishes that but for these s ubsidies, U.S. acreage would be lower. Lower
acreage results in lower U.S. production and supply into the world market – either in the form of
exports or in the form of increased temporary st ocks of upland cotton building up before they will
eventually exported. Basic rules of supply and de mand indicate that supply that is higher than it
would be but for the subsidies results in lower pri ces. The assessment of the "effect of the subsidy"
that is required by Article 6.3 is necessarily a fact -specific, effects-based assessment that must be
tailored to the product and markets at issue and th at involves assessing the economic impact of these
subsidies.

52. In its Third Party Submission New Zealand observes:

"Marketing loan payments are amber box measures, the category in which are
included the non-prohibited measures with the most trade distorting effect on
production and trade." (para. 5.19)
 Do the parties consider that the fact that under the Agreement on Agriculture a subsidy is
included in the "amber box" is relevant to the anal ysis of the subsidy's consistency with Articles 5
and 6 of the SCM Agreement?

43. For the reasons set forth in Brazil's response to question 51, Brazil considers that the "amber
box" nature of a subsidy has no significant relevance to the analysis of its consistency with Articles 5
and 6 of the SCM Agreement. Brazil, therefore, agrees with the original panel's assessment that "the
fact that the United States notifies the marketi ng loan programme as 'amber box' support under the
Agreement on Agriculture may not necessarily be determinativ e for the purpose of our 'adverse
effects' analysis under Part III of the SCM Agreement."
26 Finally, Brazil notes that counter-cyclical
subsidies, like marketing loan subsidies, are "amber box."

Questions to the United States

53. The United States argues that Brazil has not provided evidence of "actual production
inducing" effects of marketing loan and counter- cyclical payments and that Brazil "purports to
demonstrate indirect production effects through its claim that the US planting, production, and
exports are not responsive to prices" . (Opening Statement of the United States at the meeting of the
Panel with the parties, paras. 62 and 69, emphasis in original)

a) Could the United States explain further the distinction between what it terms "actual
production inducing effects "and "indirect production effects"? Could the
United States also elaborate on how this distin ction is legally relevant in the context
of Articles 5 and 6 of the SCM Agreement?

b) What is the response of the United States to the argument that the fact that "U .S.
upland cotton producers know that their overa ll revenue will always be protected by
marketing loans and counter-cyclical payments ... plays a major role in their planting
decisions"? (Rebuttal of Brazil , para . 185; see also Third Party Submission of
New Zealand, paras 5.20-5.21)

 c) In its Opening Statement at the meeting of the Panel with the Parties , Brazil
observed:

"...we have demonstrated that these subsidies stabilized cotton
producers' revenue despite wildly fl uctuating market prices, thereby

26 Panel Report, U.S. – Upland Cotton, footnote 1401.

insulating and numbing acreage response to market price signals.
These subsidies also cover the huge long-term gaps between market
returns and total costs of production. Both effects are closely
interrelated." (para.55)
Is the United States only arguing that Braz il has not empirically substantiated that
these two "effects" have actually occurred or is it also the position of the United
States that these effects are in any event le gally irrelevant to an analysis of whether a
subsidy causes significant price suppre ssion within the meaning of Article 6 .3 (c) of
the SCM Agreement?

54. Could the United States explain whether, and, if so, why, it is of the view that this Panel
should not rely on the findings and analysis by the original Panel regarding the effects of marketing
loan and counter-cyclical payments on production a nd exports? Please comment in particular on
paras. 7.1291, 7.1295, 7.1302, 7.1349, 7.1353 of the Panel Report.

55. Can the United States confirm that the fi gures "$868 million" and "$838 million" Brazil cited
in para. 40 of its Opening Statement are correct figures if one uses the "Brazil's methodology" and the
"Cotton-to-Cotton methodology"? (Please note that the Panel is not
 asking whether the US agrees
with these methodologies.)

56. The United States has cited new empirical research on the production effects of counter-
cyclical payments. How does the United States ad dress Brazil's criticism that none of this research
has dealt specifically with the effects of c ountercyclical payments under the FSRI Act of 2002 on
upland cotton? (Rebuttal Submission of Brazil, para. 120)

57. The United States has offered the Lin and Dismukes (Exhibit US-34) and Westcott (US-35)
studies as examples of new empirical research on the production effects of countercyclical payments.

a) Is it not more accurate to characterize th e Lin and Dismukes study as a simulation of
the possible effect of countercyclical pay ments on production rather than a study on
the actual impact of the payments since it do es not statistically estimate the effect of
the actual payments (which began only in 2002) on crop production? (Please refer to
pages 9-12 of the paper which describe the data , covering the period 1991-2001 ,
used for the study).

b) How does the United States deal with Brazil's characterization of the Westcott study
as offering no new empirical evidence , and instead , being a qualitative discussion ,
much like that presented to the original panel (see para 128 of Brazil's rebuttal)?

58. The Unites States stated that the key consid eration in assessing a farmer's decision to grow
upland cotton is whether the farmer has been coveri ng his variable costs of production. In this
connection, it presented upland cotton costs and returns estimates for marketing years 1999-2005
(Exhibit US-47). Brazil has disputed the absence of certain items – land, labour and capital recovery
costs - in the US calculations of variable costs. In response, the United States has referred to the
Commodity Costs and Returns Estimation Handbook (Exhibit US-88) prepared by a Task Force of the
American Agricultural Economics Association as the basis for leaving out these items in its
calculations. However, the Task Force which authored the Hand book does not use the categories
"fixed" or "variable" costs and in fact recommends that the microeconomic concepts of fixed and
variable costs not be used in preparing and reporting cost and return estimates. Page 2-67 of the
Handbook states:

The Task Force therefore recommends that costs should be categorized only as to
whether they are associated with expendable factors or the services of capital assets.

The division of costs into categories such as fixed and variable should generally be
avoided in preparing CAR estimates. For the purpose of preparing CAR estimates for
specific enterprises, the Task Force recommends that all the costs of all expendables
be allocated to the generic group OPER ATING COSTS and that all other costs be
allocated to the group ALLOCATED OVERHEAD.
 Would the United States clarify whether th e categories "operating costs" and "allocated
overhead" correspond to the economic concepts of fixed and variable costs? In particular , are
"operating costs" variable costs or not? Would the United States please indicate whether , and if so ,
where, the Handbook makes these clarifications or distinctions.

59. In discussing the impact of long-term costs of production (and hence long-term profitability)
of upland cotton production on farmers' decisions to exit cotton farming, the United States argues that
income from other crops and off-farm income must be into account. Why does the United States
consider these issues relevant given the original Panel's decision that "off farm income" is not a
legally relevant consideration. (Panel Report, para. 7.1354, footnote 1470) Please respond to
Brazil's arguments on this matter in paragraphs 249-253 of its Rebuttal Submission.

60. In its Rebuttal Submission, the United States argues that Prof. Sumner's description of the
model that appeared in a recent CATO publication is not "appropriate" for use in a WTO dispute
involving claims of serious prejudice. Professo r Sumner has since introduced "more empirical and
institutional detail" to the model used in th is dispute. These changes are described in
paragraphs 111-117 of Br azil's Opening Statement. Does th e United States view these changes as
being sufficient to make the model appropriate for u se in a WTO dispute involving claims of serious
prejudice? If not, what modifications does the United States think should have been made to the
model?

61. With respect to marketing year 2006, the Unite d States has provided some data on upland
cotton exports (Exhibit US-113), planted and harvest ed area and cotton production (Exhibit US-114),
as well as a copy of the National Cotton Council's survey of planting intensions (Exhibit US-115).
The data, all of which have been collected through the first half of marketing year 2006, are variously
qualified as "estimates" or "projections" or projected".

a) Please clarify , as completely as possible , what these various terms mean as they
apply to US upland cotton exports, acreage and production.

b) Would the United States be able to pr ovide the Panel with some information , based
on the average of the past six marketing years or so, of how final marketing year data
on these variables, would differ from preliminary estimates , projections and the like ,
taken at the end of February of the relevant marketing year?

c) Finally , would the United States be able to update that part of Exhibit US-83 dealing
with futures prices so as to provide the pane l with as complete as possible average
January to March 2007 New York futures prices for upland cotton?

Questions to Brazil

62. How does Brazil rebut the argument of the United States that the fact that marketing loan and
counter-cyclical payment programmes provide income support when prices are low is not the key
question before this Panel and that while, like any other payments to producers, marketing loan and
counter-cyclical payments could affect production, Br azil has not provided any evidence of actual
production-inducing effects? (Rebuttal Submission of the United States, paras. 222, 287-291;
Opening Statement of the United States at the meet ing of the Panel with the parties, paras. 62-75;

Comments of the United States on Brazil's 'Oral' Presentation in the meeting with the Panel,
paras. 42-57).
44. The price-contingent nature of market ing loan and counter-cyclical subsidies, i.e., the fact that
payments are made when prices fall below set trigger prices, is one of the key aspects of the structure,
design and operation of these subsidies. It also is one of the fundamental facts supporting Brazil's
adverse effects claims. Contrary to the U.S. argu ments, whether the price-contingent marketing loan
and counter-cyclical subsidies are labell ed as "price support" or "income support" 27 is irrelevant for
purposes of a panel's fact-specific assessment of the effects of these subsidies under Articles 5 and 6
of the SCM Agreement.
28

45. The strong link between these price-con tingent subsidies and upland cotton acreage,
production and exports as well as suppressed prices h as been recognized by the original panel 29, the
Appellate Body30, U.S. Department of Agriculture ("USDA") 31, and all independent economists. 32 In
a review of studies on the world cotton market, th e UN Food and Agricultural Organization observed
that "all of the recent studies unambiguously demonstrate that the removal of domestic subsidies in
industrialized countries reduces cotton productio n in and exports from these countries." 33 Even the
National Cotton Council ("NCC") acknowledged that many of its members would go bankrupt
without these subsidies.34 Bankrupt farmers do not produce upland cotton.

46. As price-contingent subsidies, marketing loan and counte r-cyclical subsidies are mandated to
be made to U.S. upland cotton farmers when prices fall below levels designed with U.S. producers'
costs of production in mind. Every U.S. upland co tton farmer knows that marketing loan subsidies
will be paid if the adjusted world price ("AWP") falls below 52 cents per pound and that U.S. counter-
cyclical payments will be paid if the average farm price falls below 65.73 cents per pound. And every
U.S. upland cotton farmer knows that the AWP re mained consistently below 52 cents per pound over
the past 10 years (with only limited exceptions) and is expected to remain below 52 cents.
35 This is
shown in Figure 1, below, which updates Figure 7 in Brazil's First Written Submission:

27 See, e.g., Article 1.1(a)(2) of the SCM Agreement, Article XVI of GATT 1994, Articles 6 and 7 as
well as Annex 2 of the Agreement on Agriculture.
28 See Brazil's response to question 51, above.
29 Panel Report, U.S. – Upland Cotton, paras. 7.1291, 7.1294, 7.1295 and 7.1349.
30 Appellate Body Report, U.S. – Upland Cotton, paras. 445 and 450.
31 See Brazil's Rebuttal Submission, Annex I, para. 10 citing Lin, W., P.C. Westcott, R. Skinner,
S. Sanford and D.G. de la Torre Ugarte, "Supply Response Under the 1996 Farm Act and Implications for the
U.S. Field Crops Sector,." Technical Bulletin No. 1888, Sep 2000, United States Department of Agriculture,
Economic Research Service, available at http://www.ers.usda.gov/publications/tb1888/
 and Adams, Gary.
"Acreage Response Under the 19 96 FAIR Act?" Speech presented at Economic Research Service,
U.S. Department of Agriculture seminar series on Supply Response Under the 1996 Farm Act. June 24, 1996.
32 See, e.g., Exhibit Bra-579 ("Cotton: Impact of Support Policies on Developing Countries – Why Do
the Numbers Vary?" FAO Trade Policy Br ief, p. 1, accessed December 2006 at
ftp://ftp.fao.org/docrep/fao/007/y5533e/y5533e00.pdf); Brazil's Rebuttal Submission, Annex I, para. 10 citing
Adams, Gary "Acreage Response Under the 1996 FAIR Act?" Speech presented at Economic Research Service,
U.S. Department of Agriculture seminar series on Supply Response Under the 1996 Farm Act. June 24, 1996,
and Exhibit US-56 ("Documentation of the FAPRI Modelling System," FAPRI-UMC Report No. 12-04,
December 2004).
33 Exhibit Bra-579 ("Cotton: Impact of Support Policies on Developing Countries – Why Do the
Numbers Vary?" FAO Trade Policy Brie f, p. 1, accessed December 2006 at
ftp://ftp.fao.org/docrep/fao/007/y5533e/y5533e00.pdf).
34 Exhibit Bra-109 (Testimony (Full) of Robert McLendon, Chairman, NCC Executive Committee,
Before the House Agricultural Committee. National Cotton Council (NCC)).
35 See Brazil's response to question 89, below.

Figure 1 – Marketing Loan Subsidy
36
0
10
20
30
40
50
60
70
Au
g-99
Jan-0
0
Jun-00
Nov-00
Apr-01Sep-01Feb-02
Jul-02
De
c-02
May-
03
Oct-
03
Mar-04Aug-04Jan
-05
Jun
-05
Nov-05
Apr-
06
Sep
-06
Feb-07
cents per pound
Marketing Loan Payments
Loan Rate
AWP

47. Whether futures market prices are high or low at the time of planting is relevant for U.S.
upland cotton producers' planting intentions. However, U.S. upland cotton producers know that
expected prices based off the futures market price will not necessarily constitute real prices during the
following marketing year and they plant upland cotton in the knowledge that the support provided by
marketing loan and counter-cyclical subsidies will guarantee profitable levels of revenue – regardless
of the actual farm price. The Appellate Body full y recognized this in finding that "U.S. farmers were
aware that if actual prices were ultimately lower, they would be 'insulated' by government support,
including not only marketing loan program payments but also counter-cyclical payments, which were
based on a target upland cotton price of 72.4 cents per pound."
37 Thus, the revenue- and income-
stabilizing role played by marketing loan and co unter-cyclical payments insulates producers from low
prices. This is key evidence fo r the compliance Panel to find acrea ge, production, exports and world
market price-suppressing effects from the U.S. marketing loan and counter-cyclical subsidies.

48. A fundamental question in this dispute, as be fore the original panel, is what would U.S.
planted acreage, production, and exports be if there were no marketing loan subsidies and no counter-
cyclical subsidies? (Brazil notes that in response to question 63, below, it explains that it is irrelevant
to this counterfactual assessment whether these subsidies " induce" additional production.) In
assessing the significant level of the effects of the s ubsidies, the views of their recipients constitute
particularly relevant evidence. In fact, the N CC representing U.S. upland cotton producers repeatedly
stated that these subsidies are crucial to avoid th e financial failure of many upland cotton farmers. 38
Bankrupt farmers could not produce upland cotton.

36 Exhibit Bra-673 (Upland Cotton Prices, March 2007).
37 Appellate Body Report, U.S. – Upland Cotton, para. 445.
38 Panel Report, U.S. – Upland Cotton, footnote 1471 referring to Exhibit Bra-109 (Testimony (Full) of
Robert McLendon, Chairman, NCC Exec utive Committee, Before the Hous e Agricultural Committee. National
Cotton Council (NCC)). See also Exhibit Bra-324 (NCC Chairman's Report by Kenneth Hood, 24 July 2002,
p. 2).

49. These admissions by the recipients of upl and cotton marketing loan and counter-cyclical
subsidies are supported by Figure 8 of Brazil's First Written Submission (reproduced also as Figure 6
in Brazil's Rebuttal Submission). Based exclusivel y on USDA data, this figure show that marketing
loan and counter-cyclical subsidies protect upland cotton producers from low market prices, ensuring
them a high level of revenue per pound of upland cotton produced. Wh ether this is termed "income
support,"
39 "price support," or "insulation from low prices," the effects are the same.

50. Figures 1-6 in Brazil's Opening Statement and Figures 7 to 12 in Brazil's Comments on the
U.S. Oral Statements, based largely on USDA a nd Food and Agricultural Policy Research Institute
("FAPRI") data, also constitute proof of the crucia l role played by these two subsidies in allowing
farmers to continue to plant upland cotton. These figures show the role played by the subsidies in
covering huge and sustained losses based solely on market revenue. They also show how upland
cotton marketing loan and counter-cyclical subsidies keep farmers in the production of upland cotton
when, absent the subsidies, it would be much more profitable to grow soybeans or corn.

51. In assessing the supply effects of U.S. subsidies on world market prices, the compliance
Panel, like the original panel, must take account of basic principles of supply and demand. The
impact of subsidy-fuelled U.S. upland cotton supply in suppressing U.S. and world market prices of
upland cotton is reflected day-in and day-out in upland cotton markets. Consider the following
statement from market expert A.O. Cleveland, dated 23 March 2007:

For now, the sheer volume of U. S. cotton stocks held in the CCC loan program, and
the 600,000 plus bales of certificated stocks will keep a heavy lid on the market. …
USDA will release it March planting intentions report on Friday of next week. U.S.
upland acreage could have an 11 in front of it, but will likely be a very low 12
something. Look for about 12.2 million acres of upland cotton to be planted.
Certainly any total acreage number belo w 12.5 million acres will be bullish. The
lower the intended plantings the higher the price rally.
40
52. Thus, marketing loan and counter-cyclical s ubsidies "insulate" U.S. upland cotton producers
from market price signals, thereby "numbing" their reac tion to market prices signals. They results in
higher U.S. acreage, production, exports or stocks , and lower world market prices than would exist
otherwise. As O.A. Cleveland states in the mo st basic supply and demand terms, "the lower the
intended [U.S.] plantings, the higher the price rally ." Brazil refers the compliance Panel to its
response to question 69, below, where Brazil ou tlines the extensive evidence it has submitted to
demonstrate this point in its written submissions and its oral statements.

53. In addition, the original panel made num erous findings with respect to the production-
enhancing effects of unchanged marketing loan and counter-cyclical subsidies. The original panel
found that

[S]everal of the United States subsidies – marketing loan programme payments, the
user marketing (Step 2) payments … [and] CCP payments – are directly linked to
world prices for upland cotton, thereby in sulating United States producers from low
prices. We believe the structure, design and operation of these three measures
constitutes evidence supporting a causal link with the significant price suppression we
have found to exist.
41

39 Brazil notes that Article 1.1(a)(2) of the SCM Agreement specifically identifies "any form of income
or price support" as a form of financial contribution.
40 Exhibit Bra-674 (Cotton Marketing Weekly, A.O. Cleveland, 23 March 2007) (emphasis added).
41 Panel Report, U.S. – Upland Cotton, para. 7.1349.

The further the adjusted world price dr ops, the greater the extent to which
United States upland cotton producers' re venue is insulated from the decline,
numbing United States production decisions from world market signals.
42
We have no doubt that [marketing loan] pa yments stimulate production and exports
and result in lower world market prices.43
[T]he structure, design and operation of the marketing loan programme has enhanced
production and trade-distorting effects.44
[Marketing Loan payments] accounted for more than half of the difference between
the adjusted world price and the marketing loan rate (and thus of United States upland
cotton producer revenue).45
54. On appeal, the United States challenged all of these findings. The Appellate Body rejected all
the U.S. appeals in making the following findings:

We note, based on the evidence provided by the United States, that for four of the
five upland cotton crops between 1999 and 2003, the expected harvest price at the
time of making planting decisions was alwa ys substantially higher than the actual
price realized at the time of harvest of the crop. This suggests that although farmers
had expected higher prices in making their planting decisions, they were also aware
that if actual prices were ultimately lower, they would be "insul ated" by government
support, not only marketing loan program payments, but also counter-cyclical
payments, which were based on a target upland cotton price of 72.4 cents per
pound.
46
With respect to the marketing loan program payments, the Panel found that "[t]he
further the adjusted world price drops, the greater the extent to which United States
upland cotton producers' revenue is insulated from the decline." As a result, during
the 1999-2002 marketing years, United States production and exports remained stable
or increased, even though prices of United States upland cotton decreased. … The
United States contends that the Panel's anal ysis of the price-contingent subsidies was
"deficient." However, the Panel found that the price-contingent subsidies stimulated
United States production and exports of upland cotton and thereby lowered United
States upland cotton prices. This seems to us to support the Panel's conclusion that
the effect of the price-contingent subsidies is significant price suppression.
47
55. As the Appellate Body found, U.S. upland cotton producers know that their overall revenue
will always be protected by marketing loans and counter-cyclical subsidies. This plays a major role in
their planting decisions, which result in continue d and sustained higher levels of production and
exports than would exist but for these two subsidies. Indeed, these two subsidies were found to be an
important factor in "insulating" and "numbing" U.S. cotton producers from low prices.

56. Finally, the U.S. argument that direct payments under the FSRI Act of 2002 also provide
support to upland cotton producers 48 does not support a conclusion that marketing loans and

42 Panel Report, U.S. – Upland Cotton, para. 7.1294.
43 Panel Report, U.S. – Upland Cotton, para. 7.1291.
44 Panel Report, U.S. – Upland Cotton, para. 7.1295.
45 Panel Report, U.S. – Upland Cotton, para. 7.1294.
46 Appellate Body Report, U.S. – Upland Cotton, para. 445 (footnote omitted).
47 Appellate Body Report, U.S. – Upland Cotton, para. 450 (footnote omitted).
48 U.S. Comments on Brazil's Oral Statement, paras. 42 and 49.

counter-cyclical payments are not production distor ting. Under Article 21.5 of the DSU, Brazil is
precluded from challenging, in these proceedings, the production effects of direct payments.
However, this does not mean that direct payments do not have any production – or price-suppressing
– effects. The Appellate Body recognized that non-price contingent subsidies, such as direct
payments, can have production effects a nd contribute to significant price suppression.
49 Indeed,
Figures 1-6 in Brazil's Opening Statement show the key role played by, in particular, direct payments
in allowing many upland cotton farmers to achieve a healthy "profit" from growing upland cotton.
Such profits play an important role in maintain ing upland cotton production over the longer term by
increasing the "wealth" of the producers.50

57. Indeed, USDA recently proposed to increase dire ct payments to beginning farmers "to better
prepare beginning farmers to face the initial fina ncial burdens associated with entering production
agriculture."51 Further, a survey of U.S. farmers by Goodw in and Mishra revealed that 68 percent of
farmers would use direct payments on the farm, 34 percent would use direct payments for farm
operating costs, 16 percent for farm capital expendi tures, 9 percent to pay down farm debt and 9
percent to buy farmland. 52 This evidence confirms that direct payments play an important role in
agricultural production.

63. Could Brazil explain whether or not it considers that whether marketing loan and counter-
cyclical payments increase acreage is not relevant to the inquiry of whet her these payments cause
significant price suppression within the meaning of Ar ticle 6.3 (c) of the SCM Agreement? (para. 56
of the Opening Statement of Brazil) Could Brazil comment on the points made by the United States in
footnote 72 of the Comments of the United States on Brazil's 'Oral' Presentation in the meeting with
the Panel?

58. Brazil considers that the question whether marketing loan or counter-cyclical payments
increase acreage is not the relevant inquiry that the compliance Panel is tasked to undertake.

59. Article 6.3 of the SCM Agreement does not compel a complaining Member to produce
evidence that the challenged subsidies result in a steady increase in production or acreage. This is
particularly true where a subsidizing Member ha s supported such production or acreage with massive
subsidies for many decades. Where acreage, pr oduction and conditions of competition within a
subsidizing Member are distorted – but have achieved a relatively stable subsidized status quo – a
complaining Member does not have the burden to establish yet additional distortions in order to
succeed in demonstrating that the subsidies cause adve rse effects to the inter ests of the complaining
Member.

60. The nature of the enquiry in an Article 6.3( c) claim is necessarily counterfactual, as more
fully explained in response to question 74, below. This requires an assessment of the extent to which
U.S. upland cotton acreage – and the resulting U.S. upland cotton supply in terms of production,
exports and stocks – would be lower
 but for the U.S. marketing loan and counter-cyclical subsidies,
and whether world market prices for upland cotton would be significantly higher.

61. The counterfactual proposed by Brazil i nvolves examining the acreage and resulting
production that would have occurred if the United St ates had eliminated marketing loan and counter-
cyclical subsidies for MY 2005. In such a counterfactual, the typical U.S. upland cotton farmer would

49 Appellate Body Report, U.S. – Upland Cotton, footnote 589.
50 See Brazil's 16 March Comments on the U.S. Answers to question 32, paras. 64-67.
51 Exhibit Bra-671 (U.S. Departme nt of Agriculture's 2007 Farm Bill Proposal, p. 16, accessed
March 2007 at http://www.usda.gov/documents/07finalfbp.pdf).
52 Exhibit US-41 (Goodwin B.K. an d Mishra A. "Another Look at Decoupling: Additional Evidence
on the Production Effects of Direct Payments." American Journal of Agricultural Economics 87(5):1200-1210
(2005), Table 3 at p. 1206).

have suffered significant losses based on low expect ed upland cotton revenue, as indicated by futures
prices in early 2005.
53 This is illustrated by Figure 1 to Brazil's Opening Statement set out below:

Figure 2 – Expected Returns and Total Costs of Growing Cotton, Corn
or Soybeans on a Base Acre of Cotton in MY 200554

Corn
Soybeans
Cotton
No Subsidies
ML
ML, Cotton CCP
ML, Cotton CCP & DP
-$200
-$150
-$100
-$50
$0
$50
dollars per acre

62. The "no subsidies" counterfactual shows th e economic irrationality of planting upland cotton
in the spring of 2005 without marketing loan and co unter-cyclical subsidies. With many U.S. upland
cotton farmers not even expecting to cover their variable costs 55, there is no basis for the U.S.
assumption that planted acreage would remain stab le. Rather, the only r easonable conclusion given
these facts is that acreage would decline signifi cantly. Yet, because the United States finds no
production effects from either marketing loan or counter-cyclical subsidies, it assumes that a non-
subsidized world would look like the status quo and show the same levels of acreage. Under this
flawed logic, the United States also asserts that only increases in acreage would represent the effects
of subsidies, with the implication that a finding under Article 6.3(c) would necessarily have to include
a finding of increasing market share, possibly within the meaning of Article 6.3(d).

63. Brazil has explained how the introduction of market loss assi stance payments in 1998, the
entry into force of the FSRI Act of 2002 (and its b asket of subsidies) and the market condition in
MY 1998-2002 resulted in a significant increase in subsidies in the period MY 1998-2002 compared
to the relatively low levels of subsidies in the MY 1996-1997 period. 56 While the original panel's
causation finding was based, in part, on various temporal correlations, the original panel did not

53 See Brazil's Oral Statement, paras. 63-65 and Br azil's Comments on the U.S. Oral Statement,
paras. 18-19. See also Exhibits Bra-634 (Analysis of Planting Decisions Based on Expected Returns) and
Exhibit Bra-665 (Analysis of Planting Decisions Based on Expected Returns and Cash Costs).
54 Exhibit Bra-634 (Analysis of Planting Decisions Based on Expected Returns).
55 See Brazil's Comments on the U.S. Oral Statement, para. 19, Figure 7.
56 Brazil's Rebuttal Submission, paras. 235-236 and 351-352.

believe, however, that the 12 percent drop in planted acreage between MY 2001 and 2002 was
relevant.57 In spite of the U.S. argument that such a drop in acreage would suggest a "negative"
correlation between subsidies and acreage effects, this drop in acreage in MY 2002 did not prevent the
original panel from finding a strong causal link be tween MY 2002 price-contingent subsidies and
significant price suppression in MY 2002.58

64. As discussed more fully in response to questi ons 69 and 70, the factual situation before the
compliance Panel in MY 2002 reflects the status quo of market conditions distorted by very high
mandated and price-contingent subsidies under the FSRI Act of 2002. The average level of U.S.
support between MY 2003-2006 has not changed signi ficantly from the very high levels of support
existing in MY 2002, the first year of the FSRI Act of 2002. 59 T h e v e r y stability of the acreage
despite large price fluctuations throughout the application of the FSRI Act of 2002 is a key correlation
factor that highlights the effects of price-contingent marketing loan and counter-cyclical subsidies. In
other words, there is a broad temporal coincide nce or correlation between the receipt of these
subsidies, continued low market prices, the high cost s of production, and the c ontinued high levels of
planted acreage.60

65. With respect to footnote 72 of the U.S. Co mments on Brazil's Oral Statement referenced in
the question, Brazil refers the compliance Panel to its response to questions 51, 52 and 62. In
response to these questions, Brazil explains that, inter alia, the notion of "coupled" and "decoupled"
support in the Agreement on Agriculture , relied on by the United States, is not relevant for the
assessment of the effects of subs idies under Articles 5 and 6 of the SCM Agreement. Brazil further
refers the compliance Panel to its responses to questions 64 and 65 addressing the literature on the
effect of counter-cyclical subsidies. This literature is consistent with Brazil's arguments that upland
cotton counter-cyclical payments have significant effects on U.S. acreage and contribute to significant
price suppression. Brazil also recalls that counte r-cyclical subsidies for different crops can have
different effects on planting decisions, depending on whether they are consistently paid and their
necessity to cover production costs, among others.

66. To the extent that footnote 72 of the U.S. Opening Statemen t addresses the inquiry relevant
for assessing whether the challenge d subsidies cause significant price suppression, Brazil agrees with
the U.S. characterization of its claim that these s ubsidies "affect the planting decision, causing U.S.
producers to plant more than they otherwise woul d and that this ultimately leads to oversupply and
suppressed world market prices."
61

64. Given that Brazil has criticized the new empi rical research cited by the United States because
it does not deal specifically with the effects of countercyclical payments on upland cotton production,
why does Brazil consider that the McIntosh, Shogren & Dohlam study (Rebuttal Submission of Brazil,
para. 140) is particularly relevant to this case? Could Brazil comment on the arguments of the
United States in paragraphs 248-249 of the Rebuttal Submission of the United States?

67. At the outset, Brazil notes that there are no peer-reviewed empirical studies that have
examined the specific effect of counter-cyclical s ubsidies (or market loss assistance) on upland cotton
production. Thus, like the study cited by the United States on counter-cyclical payments (Lin and

57 Exhibit Bra-447 (Upland Cotton Supply and Use, October 2006).
58 Panel Report, U.S. – Upland Cotton, paras. 7.596 and 7.1351. See also the original panel's
description of the reasons for the introduction of market loss assistance payments in MY 1998-2001 and their
institutionalization for MY 2002-2007 as counter-cyclical payments in the FSRI Act of 2002. Id., paras. 7.216-
7.217, 7.223-7.226 and 7.1301.
59 See Brazil's First Written Submission, Figure 8.
60 Brazil's Rebuttal Submission, paras. 180-194, 226-231; see also Brazil's response to question 69,
below.
61 U.S. Comments on Brazil's Oral Statement, footnote 72.

Dismukes), the study by McIntosh, Shogren and Do hlman does not specifically address the effects of
upland cotton counter-cyclical payments. However, there are certain features of this study, which
make its analytical results more applicable to the assessment that the compliance Panel is tasked with
than the study by Lin and Dismukes, or other studies that examine direct payments (Goodwin and
Mishra 2005) or market loss assistance (Goodwin and Mishra 2006).

68. First, the study by McIntosh, Shogren and D ohlman focuses on key mechanisms through
which counter-cyclical payments affect production decisions
62 and excludes extraneous factors that
can distort results. 63 The authors explain the advantages of their approach by noting that
"experimental methods can provide rapid feedback to policy makers about issues that are not easily
teased out with observed data."64 Indeed, work by Lin and Dismukes and Goodwin and Mishra (2005
and 2006) confirm that it is difficult to empirically "tease out" the effect of specific subsidy programs
from survey data.65 The use of a laboratory experiment mitigates many of these problems.

69. Second, the study by McIntosh, Shogren and Dohlman is not confined to examining the
acreage response to counter-cyclical payments in non-upland cotton producing regions of the
United States – as is the case with the empirical st udies cited by the United States. Rather, it assesses
supply responses based on a laboratory experiment that reflects the economic conditions faced by
U.S. upland cotton producers. Studies by Lin and Dismukes and Goodwin and Mishra examine the
supply response of corn, wheat and soybean acreage in the mid-West of the United States to direct
and counter-cyclical payments. These areas are known for exhibiting small supply responses that are
certainly smaller than the supply response of upland cotton.
66 This greatly exaggerates the problem of
applying the results of those studies to upland cotton.

70. In sum, while the study by McIntosh, Shogren and Dohlman may not be tailored to the exact
circumstances of this proceeding, it is far more re levant than the empirical literature cited by the
United States.

71. The United States criticizes the study by McIn tosh, Shogren and Dohlman because it is based
on a laboratory experiment.
67 As explained by Professor Sumner 68, this criticism is without merit.

62 These mechanisms include reducing price variability and the perceived possibility of a base acre
update.
63 McIntosh, Shogren and Dohlman note that "farmers have other risk management tools at their
disposal; large and less risk-averse farms tend to dominate production of program crops; and other programs
such as marketing loan provisions already offer price protection. These factors underscore the difficulty of
separating the effects of CCPs from other influences in observed annual production data, a difficulty reduced
when using experimental methods." See Exhibit Bra-565 (McIntosh, Christopher R., Jason F. Shogren and Erik
Dohlman, "Supply Response to Counter-Cyclical Payments and Base Acre Updating under Uncertainty: An
Experimental Study," Forthcoming paper in the American Journal of Agricultural Economics, November 2006,
p. 16-17).
64 Exhibit Bra-565 (McIntosh, Christopher R., Jason F. Shogren and Erik Dohlman, "Supply Response
to Counter-Cyclical Payments and Base Acre Upda ting under Uncertainty: An Experimental Study,"
Forthcoming paper in the American Journal of Agricultural Economics, November 2006, p. 17).
65 Many of the regression coe fficients in these studies are not statistically significant. See Exhibit
US-85 (Lin, William and Dismukes, Robert. "Supply Resp onse Under Risk: Implications for Counter-Cyclical
Payments' Production Impacts," Review of Agricultural Economics-Volume 29, Number 1, 64-86, p. 78). See
also Exhibit US-41 (Goodwin B.K. and Mishra A. "Another Look at Decoupling: Additional Evidence on the
Production Effects of Direct Payments," American Journal of Agricultural Economics 87(5):1200-1210 (2005)).
66 For instance, Goodwin and Mishra find that corn and wheat prices have no impact on corn and wheat
production. Exhibit US-41 (Goodwin B.K. and Mishra A. "Another Look at Decoupling: Additional Evidence
on the Production Effects of Direct Payments." American Journal of Agricultural Economics, 87(5):1200-1210
(2005)). See also Exhibit Bra-659 (Statement of Professor Sumner Concerning Various U.S. Arguments,
para. 23).
67 U.S. Rebuttal Submission, paras. 248-249.
68 Exhibit Bra-659 (Statement of Professor Sumner Concerning Various U.S. Arguments, paras. 36-37).

The study applies established tools of behavioral economics and, as noted above, is made more
valuable by its experimental nature. Tools of la boratory experiments have become well established in
general economics as well as in agri cultural economics over the past 30 years. Vernon Smith's Nobel
Prize in 2002 recognized the development of the field. 69 Roth's initial survey paper in the 1995
Handbook of Experimental Economics provides a summary of the tool, which has developed
substantially in the last decade.70 Indeed, in his USDA-sponsored prestigious Waugh lecture, Shogren
surveyed the importance of using experiments to measure and test economic parameters in
agricultural and resource economics.71 Against this background, the U.S. attempt to discredit research
findings in economics because they derive from controlled experiments lacks any basis.

72. The United States further quotes a portion of the study where the authors offer caveats to their
findings. Specifically, the authors note that the model does not address two features: (i) the fact that
counter-cyclical payments are made with respect to only 85 percent of base acres, and (ii) the
exclusion from the model of the marketing loan program. However, these abstractions to ease
modelling may only temper the magnitude of the effects found by the study. They do not change their
underlying conclusion, which the authors summarize as follows:

[o]ur results support some of the critic isms of CCPs and base acre updating. We find
that with CCPs , laboratory decision makers increase d their investment in the base
crop relative to the baseline case . Adding updating and policy uncertainty, they
continued to rely relatively more on the base crop than under a more policy-neutral
environment. The implications of increased base acre plantings are several: lower
potential income to producers who choose to reduce their revenue risk; decreased
efficiency of crop markets due to distorte d allocation decisions; depressed base crop
prices, which further reduces income; and an increased likelihood of subsidy
payments.
72
73. In sum, the McIntosh, Shogren and Dohlman study provides valuable insights into the
significant effects of counter-cyclical payments on production of U.S. upland cotton. While it is
based on a controlled laboratory experiment, it anal yzes more closely the effects of counter-cyclical
payments on the production decisions of U.S. upland cotton farmers than results of empirical studies
that analyzed the somewhat different economics imp licated by corn, wheat or soybean production in
the mid-West of the United States.

65. The United States has cited new empirical research on the production effects of counter-
cyclical payments. Could Brazil explain why the fa ct that these studies do not deal specifically with
upland cotton should preclude the Panel from considering the studies as being highly probative?

74. The United States has cited one empirical study on the production effect of counter-cyclical
payments, Lin and Dismukes (2007)
73, to support its arguments that counter-cyclical subsidies do not

69 See Exhibit Bra-659 (Statement of Professor Sumner Concerning Various U.S. Arguments,
paras. 36-37).
70 See Exhibit Bra-659 (Statement of Professor Sumner Concerning Various U.S. Arguments,
paras. 36-37).
71 See Exhibit Bra-659 (Statement of Professor Sumner Concerning Various U.S. Arguments,
paras. 36-37).
72 Exhibit Bra-565 (McIntosh, Christopher R., Jason F. Shogren and Erik Dohlman, "Supply Response
to Counter-Cyclical Payments and Base Acre Upda ting under Uncertainty: An Experimental Study,"
Forthcoming paper in the American Journal of Agricultural Economics, November 2006, p. 2-3) (emphasis
added).
73 The United States cited a draft of this stud y in its First Written Submission, para. 210.
The United States cites the published version in its Rebuttal Submission, paras. 229-234.

significantly impact upland cotton production. The other empirical study cited by the United States,
Goodwin and Mishra (2005)
74, examines direct payments, not counter-cyclical payments.

75. At the outset, Brazil notes that these studies do not even support the U.S. position. Viewed in
their proper context, both studies confirm that co unter-cyclical subsidies can significantly impact
production.
75 Nevertheless, the studies are not highly pr obative to these proceedings for a number of
reasons.76 This is in part due to their failure to address the specific effect of upland cotton counter-
cyclical subsidies on upland cotton production.

76. Of the counter-cyclical subsidies provided for major U.S. program crops
77, those for upland
cotton are likely to have some of the largest effects on production because of (i) the size of the
subsidy, (ii) the frequency with which it is paid, (iii) the regions where upland cotton is grown,
and (iv) the assertions of upland cotton producer associ ations such as the NCC that such subsidies are
essential to avoid bankruptcy for its members. Each reason is discussed below.

77. First, the maximum per-acre counter-cyclical payment for upland cotton is among the largest
of the nine major "program crops" in the FSRI Act of 2002. In absolute terms, the maximum counter-
cyclical payment for upland cotton results in an average per-acre payment of approximately $75. 78
The maximum counter-cyclical subsidy for the crops examined by Lin and Dismukes results in much
smaller per-acre payments, approximately $10 for soybeans, $39 corn and $20 for wheat. 79 T h e
maximum upland cotton counter-cyclical payments is also one of the largest in relative terms,
accounting for 19 percent of the upland cotton target price 80, or the institutional price set by
U.S. Congress.

78. The evidence before the compliance Panel dem onstrates that the vast majority of upland
cotton producers grow upland cotton on farms with upland cotton base acres.
81 This planting pattern
reflects the high cost of production for upland cotton compared to other crops. The high average
$75 per-acre payment for upland cotton is essential for upland cotton producers to meet their costs of
production.82

74 U.S. First Written Submission, para. 213. See also U.S. Rebuttal Submission paras. 235-236.
75 The 2005 version of the Lin and Dismukes study finds that soybean counter-cyclical subsidies would
increase soybean acreage if the average soybean farm pri ce was below the loan rate. The study also finds that
the "effect of CCPs may go beyond their short-run effect s on farmers' acreage decisions; in the longer term
there may be structural implications to the extent that these payments keep farmers in business. In addition to
commodity loan programs, CCPs are another safety net measure that protects farmers from adverse effects of
weak market prices. To farmers who are financially distressed, CCPs could provide help necessary for them to
remain in farming." ( see Exhibit US-34 (Lin, William and Robert Dismukes, "Supply Response Under Risk:
Implications for Counter-Cyclical Payments' Productio n Impact," Selected Pape r, American Agricultural
Economics Association, July 2005, p. 24-25)). Goodwin and Mishra (2005) contains the results of a survey of
U.S. farmers, showing that counter-cyclical payments are important to U.S. farmers and that direct payments are
largely used for on-farm expenditures.
76 For a critique of Lin and Dismukes (2006/2007), see Brazil's Rebuttal Submission, paras. 124-127
and Exhibit Bra-659 (Statement of Professor Sumner Concerning Various U.S. Arguments, paras. 18-21). For a
critique of Goodwin and Mishra (2006), see Brazil's Rebuttal Submission, paras. 135-137 and Exhibit Bra-659
(Statement of Professor Sumner Concerning Various U.S. Arguments, paras. 22-27).
77 These include wheat, corn, soybeans, rice, upland cotton, oats, barley, sorghum and peanuts.
78 Exhibit Bra-675 (Updated Program Crop Comparison, March 2007).
79 Exhibit Bra-675 (Updated Program Crop Comparison, March 2007).
80 Exhibit Bra-675 (Updated Program Crop Comparison, March 2007).
81 See Brazil's Rebuttal Submission, paras. 153-165; Brazil's Oral Statement, para. 40 and Brazil's
Comments on U.S. Answer to Question 29, paras. 46-51.
82 Brazil's First Written Submission, paras. 156-164; Brazil's Rebuttal Submission, paras. 245-283 and
Brazil's Oral Statement, paras. 54-91.

79. Second, counter-cyclical subsidies are paid more frequently for upland cotton than for other
program crops. For two of the three crops exam ined by Lin and Dismukes (wheat and soybeans),
counter-cyclical subsidies have never been paid. The following chart, which was presented in Brazil's
First Written Submission 83, shows the actual amount of counter-c yclical payments provided to crops
relative to the theoretically possible maximum amount. The "fill rate" for upland cotton was
82 percent.

Figure 3 – Actual Counter-Cyclical Payments as a Percent of Theoretical Maximum84

0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Peanu
ts
Upland
Cotto
n
Sorghum
Rice Corn
Barley Oats Wheat
Soybeans

80. Third, the two empirical studies cited by the Unite d States examine the effect of direct and
counter-cyclical payments on corn, soybeans and wheat acreage in the mid-West of the United States.
As Brazil has explained previously, one would expect low supply elasticities in these regions for these
crops.85 Farmers in the corn belt and north central region grow almost entirely soybeans and corn,
and sometimes wheat. By contrast, upland cotton is grown in regions where a number of other
substitute crops, including soybeans, rice, corn, sorghum, peanuts, fruits and vegetables, are grown.

81. Fourth, the two empirical studies cited by the United States are contrary to the numerous
statements in the record reflecting the view of the NCC and its upland cotton producing members that
counter-cyclical subsidies are essen tial to cover their costs of pr oduction and to avoid bankruptcy.
Representatives of the NCC testified to the U.S. Co ngress that "during the past three years, many
cotton farmers have avoided bankruptcy only becau se Congress has authorized emergency relief to
supplement the FAIR Act's in adequate fixed payments."
86 This statement refers to market loss

83 Brazil's First Written Submission, para. 276.
84 Exhibit Bra-493 (Counter-Cyclical Payments Analysis).
85 Exhibit Bra-659 (Statement of Professor Sumner Concerning Various U.S. Arguments, para. 20).
86 Panel Report, U.S. – Upland Cotton, footnote 1471 referring to Exhibit Bra-109 (Testimony (Full) of
Robert McLendon, Chairman, NCC Exec utive Committee, Before the Hous e Agricultural Committee, National
Cotton Council (NCC)).

assistance payments, which are the predecessor to counter-cyclical subsidies under the FSRI Act
of 2002. Representatives of the NCC have also tes tified that they need U.S. subsidies generally to
"avoid bankruptcy,"
87 "to make ends meet" 88 and basically to "exist." 89 Leaders of the upland cotton
industry confirm that counter-cyclical subsidies are the next most important government program for
upland cotton farmers besides the marketing loan program. 90 None of the studies cited by the United
States focus on the loss-making situation that would confront many upland cotton farmers if counter-
cyclical payments were eliminated.

82. In sum, the new literature cited by the Unite d States, consisting of one empirical study on the
effect of counter-cyclical subsidies and one empirica l study on the effect of direct payments, is not
highly probative in this proceeding. In any event, for reasons discussed in prior written submissions
91,
the literature largely supports Brazil's arguments th at counter-cyclical subsidies significantly impact
production. It also supports the conclusion that direct payments affect production.

66. Can Brazil explain the differences between the figures for the amount of counter-cyclical
payments allocated to upland cotton provided by Br azil at the meeting of the Panel with the parties
(Opening Statement of Brazil, para. 40 and Exhibit Bra 625) and the figures in Table 5 of Brazil's
Rebuttal Submission?

83. The figures in Table 5 of Brazil's Rebutta l Submission constitute upland cotton counter-
cyclical subsidies allocated acco rding to the "Cotton-to-Cotton" methodology. The Cotton-to-Cotton
methodology matches each planted acre of uplan d cotton with one upland cotton base acre, if
available on the same farm. Thus, if a farm has more upland cotton base acres than upland cotton
planted acres, or no upland cotton planted acres at all, these excess upland cotton base acres are
excluded from the calculation. Similarly, if a fa rm plants more upland cotton than it holds upland
cotton base, no payments are allocated for each acre in excess of the upland cotton base available on
the farm.

84. By contrast, the figure in paragraph 40 of Brazil's Opening Statement is based on an
allocation of counter-cyclical payments in MY 2005 to upland cotton under "Brazil's Methodology."
92
This methodology allocates certain non-upland cotton counter-cyclical payments to planted acres of
upland cotton for which no upland cotton base acre is available on the farm. Since the United States
provided the data necessary for this calculation so lely for MY 2005, Brazil's figures are similarly
limited to MY 2005.

85. Brazil recalls that the original panel f ound Brazil's "allocation of support delivered under
these programmes to one covered commodity appropriate, because it combines elements of the way in
which the payments are calculated with the volume of upland cotton which recipients plant."
93

87 Exhibit Bra-109 ("Testimony (full) of Robert E. McLendon, Chairman, NCC Executive Committee,
Before the House Ag Committee", February 15, 2001, p. 2).
88 Exhibit Bra-324 (NCC Chairman's Report by Kenneth Hood, 24 July 2002, p. 2).
89 Exhibit Bra-3 (Roger Thurow / Scott Kilman, "U.S. Subsidies Create Cotton Glut That Hurts Foreign
Cotton Farms," The Wall Street Journal, 26 June 2002, p. A1).
90 See Brazil's Oral Statement, para. 35 quoting Southwest Farm Press, 17 January 2007, accessed
February 2007 at http://southwestfarmpress.com/news/011707-farm-bill/index.html , in Exhibit Bra-624
(Updated Market News and Market Reports About Cotton) ("Status quo for 2007 farm bill good for cotton
growers").
91 For a critique of Lin and Dismukes (2006/2007), see Brazil's Rebuttal Submission, paras. 124-127
and Exhibit Bra-659 (Statement of Professor Sumner Concerning Various U.S. Arguments, paras. 18-21). For a
critique of Goodwin and Mishra (2006), see Brazil's Rebuttal Submission, paras. 135-137 and Exhibit Bra-659
(Statement of Professor Sumner Concerning Various U.S. Arguments, paras. 22-27).
92 Panel Report, U.S. – Upland Cotton, Table A-6 at para. 7.642.
93 Panel Report, U.S. – Upland Cotton, para. 7.646.

67. Please confirm whether or not th e Panel's understanding is correct:

• "Table 6" in Brazil's First Written Submi ssion was produced using the so-called
"Brazil's method" using USDA data.

86. Brazil can confirm that the compliance Pane l's understanding is correct. Brazil notes,
however, that the United States had not provided USDA data for MY 2003-2005 at the time of
Brazil's First Written Submission. Absent that data , Brazil applied the ratio of total upland cotton
counter-cyclical payments to counter-cyclical paym ents allocated to upland cotton under "Brazil's
Methodology" for MY 2002, based on data that the Un ited States provided to the original panel and
including in the report of the original panel.
94 Brazil applied this ratio to the actual amount of total
upland cotton counter-cyclical pa yments made in MY 2003-2005. 95 In its Opening Statement, Brazil
updated the figures for MY 2005 based on USDA data that the United States provided only for
MY 2005.
96

• "Table 5" in Brazil's Rebuttal Submission wa s produced using the so-called "cotton-
to-cotton" methodology using USDA data.

87. Brazil can confirm that the compliance Panel' s understanding is correct. Brazil also notes that
the figures in Table 5 of Brazil's Rebuttal Submission were calculated using the data in the table in
paragraph 224 of the U.S. First Written Submission and average national payment rates and yields.97

• The figures cited in para. 40 of Brazil' s opening statement (i.e. "$868 million and
$838 million) are produced with the "Brazil' s method" as well as the "cotton-to-
cotton" methodology, using the data provided by the United States in exhibit US-64.

88. Brazil can confirm that the compliance Pane l's understanding is correct. Brazil notes that
Exhibit Bra-625 contains the detailed calculations from which these figures were derived.

68. Please comment on the following statement by the US:

"The United States understands that Braz il intends the counter-cyclical payment
figures shown in 'Table 5' of Brazil's re buttal submission to supersede the counter-
cyclical payment figures shown in 'Table 6' of its first written submission." (US
89. The United States is incorrect in its unders tanding. Brazil refers the Panel to Brazil's
comment on the U.S. answer to question 4.
98 The figures in Table 6 of Brazil's First Written
Submission are based on the ratio of counter-c yclical subsidies under "Brazil's allocation
methodology" to total counter-cyclical subsidies in MY 2002. 99 By contrast, the figures in Table 5 of
Brazil's Rebuttal Submission are based on the "Cotton-to-Cotton Methodology." 100 Brazil does not
intend that the figures in Table 6 of its First Wr itten submission be superseded by the figures in
Table 5 of its Rebuttal Submission.

69. How does Brazil address the argument of the Unite d States that "the only evidence that Brazil
has submitted purporting to examine the price effects of marketing loan and counter-cyclical

94 Panel Report, U.S. – Upland Cotton, Table A6 at para. 7.642 and Table 2 at para. 7.596.
95 Brazil's First Written Submission, paras. 116-118.
96 See Brazil's response to question 66, above.
98 Brazil's 16 March Comments on U.S. Answers to Question 4, para. 15.
99 Brazil's First Written Submission, para. 116-118.
100 Panel Report, U.S. – Upland Cotton, para. 7.642.

payments specifically are the results of the mode lling exercise that it has conducted for purposes of
this proceeding"? (Opening Statement of the United States, para. 76)

90. The United States' argument incorrectly ignores the hundreds of exhibits and the
circumstantial evidence presented by Brazil in th e original proceeding and in this compliance
proceeding. Below, Brazil provides a concise resume of that evidence.
 101 Professor Sumner's
modelling analysis that specifically quantifies the price-suppressing effects of the U.S. marketing loan
and counter-cyclical subsidies simply confirms extensive other evidence of significant price
suppression in view of the effects of these subsid ies on U.S. acreage, production, and export, as well
as the dominant role played by the United States in the discovery of world market prices for upland
cotton. Professor Sumner's model is the "icing" on the cake, not the cake itself.

91. Brazil – and the compliance Panel – live in the real world characterized by decades of heavily
subsidized U.S. upland cotton production and export s. Brazil cannot unilaterally remove the U.S.
subsidies to present direct evidence of what w ould actually happen to U.S. acreage, production,
exports, and world prices without those subsidies. Only the United States can do so. It has chosen
not to despite the recommendations and rulings of th e DSB. To the extent that the United States
believes that the only credible "empiric al evidence" is that showing what actually happens without
marketing loan and counter-cyclical subsidies, then the United States is exclusiv ely in control of that
evidence.

92. To assist the compliance Panel in appreciating th e baseless nature of the U.S. allegations that
Brazil presented "no evidence" of significant pr ice suppression except the analysis of Professor
Sumner
102, Brazil summarizes below the many hundreds of pages of arguments in its submissions and
hundreds of exhibits. However, this summary canno t substitute for a full review of Brazil's evidence
in its Written Submissions, Oral Statements and Re sponses to Questions. Some of that evidence is
referenced in the footnotes attached to the summaries of the evidence, below.

93. The most basic facts concerning the U.S. subs idies at issue and the conditions of competition
in the world market for upland cotton suffice to establish a causal link between the subsidies and
significant price suppression in the world market. It is undisputed that there is a world market for
upland cotton. Heavily subsidized U.S. upland cott on competes directly in that world market with
upland cotton from Brazilian and other third country producers.
103 It is undisputed that U.S. upland
cotton is "like" Brazilian upland cotton as well as like upland cotton produced by many other
countries.104 The price of U.S. upland cotton, like that of other upland cotton producers, is reflected in
a world market price, the A-Index. 105 It is also undisputed that there is a closely integrated world
market for upland cotton in which U.S. supply account s for a very large world market share and in
which it exercises a substantial proportionate influe nce on the discovery of the world market price. 106
All of these facts were established by the original pa nel and affirmed by the Appellate Body. In view
of the updated evidence provided by Brazil, they remain valid today.

94. In particular, Brazil has established the following facts:

• The legislative and regulatory provisions of the marketing loan program and the
counter-cyclical payment programs have not been altered since the original

103 Brazil's First Written Submission, Section 7.4.
104 Brazil's First Written Submission, Section 7.4.
105 Brazil's First Written Submission, Section 7.4; Br azil's Oral Statement, para. 148 and Declaration
by Andrew Macdonald, Brazil's First Written Submission, Annex II, para. 18.
106 Panel Report, U.S. – Upland Cotton, paras. 7.1285, 7.1311.

proceeding and, like the payments made thereunder, continue to constitute
subsidies107;

• U.S. upland cotton, therefore, continues to be heavily subsidized by marketing loan
and counter-cyclical subsidies108;

• Subsidized U.S. upland cotton competes with and is "like" other upland cotton
produced in various parts of the world109;

• The United States maintains a 40 percent world export market share and accounts for
20 percent of total world production resulting in a substantial proportionate influence
on the world market price of upland cotton110;

• The world market for upland cotton identified by the original panel still functions on
the same basis as found by the original panel111;

• Market participants perceive the A-I ndex as the world price of upland cotton 112 and
ICAC113 and USDA114 refer to the A-Index as the world price of upland cotton;

• Upland cotton prices from spot markets in the United States and Brazil are among the
constituent price quotes of the A-Index 115, and U.S., Brazilian, A-Index and futures
prices continue to move broadly in parallel.116

95. These undisputed facts, combined with the undis puted fact that massive price-contingent U.S.
marketing loan and counter-cyclical subsidies represent a 40 percent ad valorem subsidization rate
over the lifetime of the FSRI Act of 2002, alone are sufficient for the compliance Panel to find that
these subsidies cause significant price suppression in the world market for upland cotton.

96. Billions of dollars of "specific" marketi ng loan and counter-cyclical subsidies received by
thousands of U.S. upland cotton farmers are not spent in clinical isolation within the United States.
Instead, the vast majority of U.S. upland cotton pr oduction that would not exist but for these billions
in U.S. subsidies is exported to almost every third country market in the world.
117 The most basic
laws of supply and demand compel a finding that huge subsidies benefiting the production of a

107 Brazil's First Written Submission, Section 7.3.
108 For details, see Brazil's First Written Submission, Sections 7.8-7.9; Brazil's Rebuttal Submission,
Section 2.3.2; and Brazil's Oral Statement, Sections 2.2-2.3.
109 Brazil's First Written Submission, Section 7.4.
110 Exhibit Bra-559 ("Potential Challenges to U.S. Fa rm Subsidies in the WTO: A Brief Overview,"
Congressional Research Service Report for Congress, 25 October 2006, p. 5).
111 Brazil's First Written Submission, Section 7.4.
112 Brazil's Oral Statement, para. 148 and Declara tion by Andrew Macdonald, Brazil's First Written
Submission, Annex II, para. 18.
113 Exhibit Bra-445 (Cotton This Month, ICAC, 1 June, 2006, pp. 1-2).
114 The USDA's Economic Research Service refers to the A-Index as the "world price." Exhibit
Bra-436 (Cotton and Wool Outlo ok, USDA, 13 March 2006, p. 4, accessed October 2006 at
http://usda.mannlib.cornell.edu/usda/ers/CWS//2000s/2006/CWS-03-13-2006.pdf).
115 Brazil's First Written Submission, Section 7.4.
116 Brazil's First Written Submission, Section 7.6.
117 Exhibit Bra-676 (USDA Cotton an d Wool Outlook, 12 March 2007, p. 17, accessed March 2007 at
http://usda.mannlib.cornell.edu/usda/current/CWS/CWS-03-12-2007.pdf). Brazil notes that market reports
show a declining U.S. domestic mill use and an increas e in imports. If production stays high, the resulting
excess supply will increase exports and stocks ev en more, thereby negatively impacting prices. See, e.g.,
Exhibit Bra-676 (USDA Cotton and Wool Outlook, 12 March 2007, p. 4, accessed March 2007 at
http://usda.mannlib.cornell.edu/usda/current/CWS/CWS-03-12-2007.pdf).

fungible commodity product result in higher producti on and exports, and prevent upland cotton prices
from being as high as they otherwise would be in an integrated world market. In other words, this
evidence is sufficient to establish significant pri ce suppression amounting the serious prejudice to the
interests of Brazil, within the meaning of Articles 5(c) and 6.3(c) of the SCM Agreement.

97. Yet, as detailed below, Brazil has presente d much more evidence demonstrating that the
effects of these two price-contingent subsidies is significant price suppression in the world market.
Brazil presented evidence of actual market conditions th at are distorted by the effects of the subsidies,
as well as evidence allowing the compliance Panel to determine the general magnitude of what U.S.
acreage, production, exports, and world market prices would be but for U.S. marketing loan and
counter-cyclical subsidies. Brazil also presented information regarding the large gap between U.S.
upland cotton producers costs of production and market revenues.

98. Brazil's evidence covers the MY 2005 referenc e period is supplemented by evidence covering
the period MY 2003-2006, as well as the reference pe riod 1999-2002 assessed by the original panel.
The evidence demonstrates that U.S. planted acreage was generally stable despite low and fluctuating
market prices and huge losses based only on market revenue.
118 These facts strongly support the
conclusion that U.S. acreage and supply would be lower but for the effects of U.S. subsidies. The
evidence also shows that production and exports of upland cotton actually increased significantly
from MY 2004 to 2005. The evid ence also suggests that but for the U.S. subsidies, such increases
would not have taken place.119

99. Ultimately, the totality of the data and ev idence provided by Brazil allows the compliance
Panel to assess the various key elements 120 highlighted by the original panel as relevant in
determining the effects of the subsidies and the existence of significant price suppression caused by
the subsidies. Brazil has established the following:

• The nature of the marketing loan and counter-cyclical subsidies remains price-
contingent and production- and trade-distorting, as they have not been modified to
comply with the recommendations and rulings of the DSB
121:

¾ Above all, mandated price triggers for payments are significantly above prices
throughout the lifetime of the FSRI Act of 2002 and thus guarantee constant
payments
122;

¾ The original panel affirmed it had "no doubt that the [marketing loan]
payments stimulate production and exports and result in lower world market
prices."
123 For counter-cyclical subsidies, the panel found that "due to their
market-price contingency, CCPs may influence production decisions
indirectly"124;

¾ The original panel considered it "axioma tic that the nature of a given subsidy
may play an important role in determining its effects." 125 The Appellate Body

118 Brazil's First Written Submission, Section 7.9; Brazil's Rebuttal Submission, para. 211.
120 These elements were assessed by the original panel. See, e.g., Panel Report, U.S. – Upland Cotton,
paras. 7.1347-7.1355.
121 Brazil's Rebuttal Submission, Sections 2.3.1.2-2.3.1.3 and Brazil's Oral Statement, Sections 2.2-2.3.
122 Brazil's First Written Submission, Section 8.4.
123 Panel Report, U.S. – Upland Cotton, para. 7.1291. The panel examin ed effects of marketing loan
subsidies at paragraphs 7.1290-7.1297.
124 Panel Report, U.S. – Upland Cotton, para. 7.1302.
125 Panel Report, U.S. – Upland Cotton, para. 7.1191.

confirmed the importance of this factor when it held that "a large subsidy
closely linked to prices of the relevant product is likely to have greater impact
on prices than a small subsidy that is less closely linked to prices"
126; and

¾ Studies on subsidy effects 127 and Professor Sumner's analysis 128 confirm the
production-enhancing effects of marketing loan and counter-cyclical
payments.

• The magnitude of the subsidies continues to be significant:

¾ Marketing loan subsidies were $1,269 million in 2005 129, an increase of
41 percent compared to MY 2002130;

¾ Counter-cyclical subsidies for MY 2005 were almost identical to the MY 2002
payments, amounting to a total of $868 million.131

¾ Recent marketing loan and counter-cyclical subsidies are, thus, higher than in
MY 2002 for which the original panel found significant price suppression132;

¾ Marketing loan and counter-cyclical subsidies for upland cotton exceeded
subsidies to other crops133; and

¾ The Appellate Body held that "a large subsidy closely linked to prices of the
relevant product is likely to have greater impact on prices than a small subsidy
that is less closely linked to prices."134

• Marketing loan and counter-cyclical pa yments cover the gap between producer
revenue and production costs .135 In other words, th ey stabilize upland cotton
producers' revenue in the face of fluctuating market prices:

¾ USDA data on actual production costs and market returns shows a significant
gap between production costs and market returns, which is filled by U.S.

126 Appellate Body Report, U.S. – Upland Cotton, para. 461.
127 With respect to counter-cyclical payments, Brazil presented studies in Section 2.3.2.3.1 of Brazil's
Rebuttal Submission and further discussed them in Exhibit Bra-659 (Statement of Professor Sumner Concerning
Various U.S. Arguments). With respect to marketing loan payments , see USDA's studies in Exhibit Bra-79
("U.S. Farm Program benefits: Links to Planting Decision and Agricultural Markets") and in Exhibit Bra-222
("Analysis of the U.S. Commodity Loan Program with marketing Loan Provisions").
128 See Analysis of Effects of U.S. Upland Cotton Subsidies on Upland Cotton Prices and Quantities by
Dan Sumner, Brazil's First Written Submission, Annex I; Statement by Professor Daniel Sumner in
Section 2.5.2 of Brazil's Oral Statement.
129 Brazil's 16 March Comments on U.S. Answer to Question 4, para. 14.
130 Marketing loan subsidies were $898 million in MY 2002, see Brazil's First Written Submission,
Table 6 at para. 111. In its Oral Statement, Brazil erroneously referred to "29 percent." See Brazil's Oral
Statement, paras. 29 and 31.
131 Based on Brazil's methodology. See Brazil's Oral Statement, para. 40.
132 Brazil's First Written Submission, Sections 7.8-7.9; Brazil's Rebuttal Submission, Section 2.3.2 and
Brazil's Oral Statement, Sections 2.2-2.3.
133 Brazil's First Written Submission, Sections 7.7 and 8.4.
134 Appellate Body Report, U.S. – Upland Cotton, para. 461.
135 When considering a divergence between revenue and costs, the original panel found significant
Brazil's evidence that "the ef fect of the subsidies was to allow the United States producers to sell upland cotton
at a price lower than would otherwise have been n ecessary to cover their total costs." Panel Report, U.S. –
Upland Cotton, para. 7.1353.

subsidies.
136 In particular, USDA data indicates that upland cotton farmers
lost on average $837 per planted acre over the past seven years (MY 1999-
2005).
137 Projections of production costs and market returns indicate that this
gap between market revenue and cost of production will continue to exist. 138
Brazil asks the compliance Panel why U.S. producers decide to plant upland
cotton in the fact of collective losses of $12.4 billion over the past 7 years? 139
The obvious answer is that, no matter what happens to market prices, U.S.
price-contingent marketing loan and counter-cyclical subsidies bail out U.S.
upland cotton producers.

¾ The prospect of receiving subsidies affects producers' planting decisions, as
the Appellate Body recognized. 140 Data on expected returns from growing
competing crops shows that it is no t economically rational to continue
growing upland cotton and that, but for these subsidies, growers would switch
to other crops. 141 Yet, due to the challenged subsidies, U.S. upland cotton
producers are insulated from and do not respond to market price signals.
Instead, they continue to plant in anticipation of subsidy payments.
142 B o t h
the graphs provided with Brazil's Oral Statement based on total cost of
production
143, as well as the graphs provided by Brazil in its Comments on the
U.S. Opening Statement based on variable costs 144 demonstrate this reality;
and

¾ The original panel found that "United States upland cotton producers rely on
… subsidies to cover their cost of production." 145

• There continues to be a temporal coincidence between price suppression and U.S.
price-contingent marketing loan and counter-cyclical subsidies. 146 F o r e x a m p l e ,
contrary to the planting decisions of non- U.S. producers who must meet their costs
based solely on market revenue, U.S. upland cotton acreage does not react to
expected futures prices fluctuations.
147 Consequently, U.S. planted acreage remained
relatively stable while increased yields on subsidized acreage resulted in increased
production and exports over the lifetime of the FSRI Act of 2002, despite market
prices that were low by historical standards.148

136 See Brazil's First Written Submission, Figure 13 in Section 7.11.
138 Brazil's First Written Submission, Figure 28 in Section 8.6.
140 The Appellate Body found that U.S. upland cotton producers were "aware that if actual prices were
ultimately lower, they would be 'insulated' by government support, including not only marketing loan program
payments but also counter-cyclical payments, which were based on a target upland cotton price." Appellate
Body Report, U.S. – Upland Cotton, para. 445.
141 Brazil's Rebuttal Submission, Sections 2.2.2 and 2.3.6 and Brazil's Oral Statement, Section 2.4.
142 Brazil's First Written Submission, Section 7.11; Brazil's Rebuttal Submission, Sections 2.2.2
and 2.3.6; Brazil's Oral Statement, Section 2.4.
143 Brazil's Oral Statement, Figures 1 to 6.
144 Brazil's Comment on the U.S. Opening Statement, Section 4.
145 Panel Report, U.S. – Upland Cotton, footnote 1471.
146 For more details on this discussion, see Brazil's response to question 70, below.
147 See Brazil's Rebuttal Submission, Figure 9.
148 Brazil's First Written Submission, Section 7.5 and Brazil's Rebuttal Submissi on, Section 2.3.3.2.
The United States recognized this fact. See U.S. First Written Submission, para. 285.

100. In addition to actual data, Brazil provided analysis from institutions such as the World
Bank149, the Food and Agricultural Organization 150, and the Overseas Development Institute 151 to
demonstrate the supply-enhancing and price-suppr essing effects of marketing loan and counter-
cyclical subsidies.

101. The abundant and diverse evidence provided by Brazil shows the significant effect that U.S.
marketing loan and counter-cyclical subsidies ha ve on U.S. upland cotton plantings. The resulting
extra supply, whether in the form of exports or te mporary stocks, in turn affects the world market
price for upland cotton, which is determined by th e equilibrium between supply and demand. Prices
fall when the amount of supply exceeds demand and rise when demand exceeds current levels of
supply. As changes in both supply and demand affect price levels, a supply-enhancing subsidy
evidently impacts prices negatively.
152 Recent market reports confirm this. O.A. Cleveland stated
that prices "struggle under the pressure of excessive carryover stocks into 2008. … For now the
potential for a nine million bale carryover will keep a lid on the market"153 and that "with prospects of
ending stocks rising to 8.2 to 8.5 million bales come July 31, 2007, both old crop and new crop prices
have little possibility of moving higher."154

102. Moreover, the factors cited by the original panel in assessing significance
155 continue to exist
for MY 2003-2005. 156 As the original panel explained, significance can be assessed in light of the
market and product at issue. 157 The size of the fungible U.S. upland cotton supply results in a
substantial proportionate influence on world market pr ices. In the world market for upland cotton,
even price effects much smaller th an those established by Brazil would be "significant" in light of the
large volume of upland cotton traded and the ge nerally small profit margins of upland cotton
producers.158 Professor Sumner 159, Andrew Macdonald 160 and other market analysts confirm that the
subsidies still have a significant price-suppressing e ffect. Professor Sumner's 2006 model, consistent
with USDA studies relied upon by the original panel, found for MY 2005 that marketing loan and
counter-cyclical subsidies sustained about 2.5 million acres of upland cotton resulting in over
4 million bales of surplus production and exports a nd caused world market prices to be 6 cents per

149 Brazil's First Written Submission, Section 7.12.2 and Brazil's Rebuttal Submission, Section 2.3.7
referring to Exhibit Bra-481 (Anderson, Kym and Valenz uela, Ernesto "WTO's Doha Cotton Initiative: A tale
of Two Issues," Development Research Group, World Bank, February 2006).
150 Brazil's Rebuttal Submission, Section 2.3.7 referring to Exhibit Bra-55 (Poonyth, Daneswar,
Alexander Sarris, Ramesh Sharma, and Shanguan Shui, "The impact of Domestic and Trade Policies on the
World Market," FAO Commodity and Trade Policy Research Working Paper No. 8).
151 Brazil's Rebuttal Submission, Section 2.3.7 referring to Exhibit Bra-578 (Gilson, Ian et al .,
"Understanding the Impact of Cotton Subsidies on Developing Countries," ODI).
152 For details on the functioning of the world market for upland cotton, see statements of Andrew
Macdonald Statements in Brazil's Further Submission before the original panel, Annex II; Brazil's First Written
Submission, Annex II; Brazil's Oral Statement, Section 2.8.
153 Exhibit Bra-677 (Cotton Ma rketing Weekly, 9 March 2007, accessed March 2007 at
http://www.cottonexperts.com/solutions/cottonmktweekly.html).
154 Exhibit Bra-678 (Cotton Mark eting Weekly, 16 February 2007, accessed March 2007 at
http://www.cottonexperts.com/solutions/cottonmktweekly.html).
155 Panel Report, U.S. – Upland Cotton, paras. 7.1316-7.1333.
156 Brazil's First Written Submission, Section 7.13; Brazil's Oral Statement, Section 2.6.
157 Panel Report, U.S. – Upland Cotton, para. 7.1329.
158 Brazil's Closing Statement, Section 7.
159 Analysis of Effects of U.S. Upland Cotton S ubsidies on Upland Cotton Prices and Quantities by
Dan Sumner, Brazil's First Written Submission, Annex I and Section 7.12.1.
160 Statement by Andrew Macdonald in Brazil's Oral Statement, para. 150.

pound lower.
161 Thus, the challenged U.S. subsidies (1) increase acreage and the resulting production,
stocks and exports, and (2) significantly suppress prices.
103. In sum, Brazil's evidence estab lishes that marketing loan and counter-cyclical subsidies, in
view of their nature and magnit ude and in light of the prevaili ng conditions of competition in the
world market for upland cotton significantly suppr ess the world market prices for upland cotton.
While the failure of the United States to implement fully the recommendations and rulings of the DSB
prevents Brazil and the compliance Panel from di rectly observing how much prices are suppressed,
such price suppression can be measured through a counterfactual but for analysis such as the one
conducted by the original panel. As the United States has not taken any measures to amend or change
marketing loan and counter-cyclical payment program s, this compliance Panel should adopt the same
conclusions as the original panel and Appellate Body.

104. Indeed, the original panel did not have any "smoking gun" empirical evidence in which the
United States admitted that its subsidies cause si gnificant price suppression in the world market for
upland cotton. Instead, in Sections VII:G.3(j) ("Is there price suppression in the same world
market?") and VII:G.3(k) ("The effect of the subsi dy" and "Is there a causal link") of its report, the
original panel examined a wide variety of circumst antial evidence. Brazil's evidence and argument in
these proceedings similarly demonstrate significant price suppression through a wide variety of
updated evidence that continues to support many of the findings by the original panel. They,
therefore, can and should be adopted by the compli ance Panel. Indeed, there is no legal or factual
basis for this compliance Panel to accept the various U.S. attempts to have it effectively reverse the
original panel's findings that were affirmed by the Appellate Body and adopted by the DSB.
162
Brazil's significant price suppression argumentation a nd evidence adopt the approach taken by the
original panel, although it has done so by establishing causation in a "unitary" format.163

105. Finally, Brazil notes that it has presented cons iderable evidence that Step 2 subsidies, and
their removal, did not have the effect of di minishing, or cancelling out, the significant price
suppression"
164 caused by marketing loan and counter-cyclical subsidies.165 Brazil established that the
removal of the Step 2 subsidies will actually increase counter-cyclical subsidies and only very
minimally reduce marketing loan subsidies. 166 Brazil also established th at the repeal of Step 2
subsidies has not eliminated or reduced the pressure on world prices from excess U.S. production,

161 See Brazil's Oral Statement, para 37. See also Analysis of Effects of U.S. Upland Cotton Subsidies
on Upland Cotton Prices and Quantities by Dan Sumn er, Brazil's First Written Submission, Annex I and
Section 7.12.1.
162 Many of the panel's findings appealed by the Un ited States were rejected by the Appellate Body.
See Appellate Body report, U.S. – Upland Cotton, paras. 419-484. As underlined by the Appellate Body in
U.S. – Softwood Lumber VI (21.5), "Article 21.5 panels can be expected to refer to their original panel reports,
in particular, when matters before them are closely relate d to the matters before the original panel. […] doubts
could arise about the objective nature of an Article 21.5 panel's assessment if, on a specific issue, that panel
were to deviate from the reasoning in the original panel report in the absence of any change in the underlying
evidence in the record and explanation" (paras. 103-105). Or, in the United States' words, in para. 180 of the
United States' First Written Submission, "[T] the findings in the original proceeding formed the basis for the
compliance by the United States with the DSB recommendatio ns and rulings. […] those findings are taken as a
given purpose of this Article 21.5 proceeding. Brazil cannot declare those findings of the original panel to be
wrong or of no effect."
163 Brazil's First Written Submission, paras. 55-63.
164 Panel Report, U.S. – Upland Cotton, para. 7.1350. See Brazil's response to question 74, below.
165 Brazil First Written Submission, paras. 191-209; Brazil Rebuttal Submission, paras. 48-90; Brazil's
Oral Statement, paras. 135-144 and 156-162; Brazil's Closing Statement, paras. 9-14 and Brazil's Comments on
the U.S. Oral Statement, paras. 5-9.
166 Brazil's First Written Submission, paras. 197-198, Brazil's Rebuttal Submission, paras. 57-65 and
Brazil's Oral Statement, paras. 136-140.

stocks, and exports generate d by marketing loan and counter-cyclical subsidies. 167 Nor does the
removal of Step 2 result in any significant or lo ng-term reduction of U.S. exports. Indeed, the
Vice-President of the NCC recently predicted that U.S. exports would increase significantly in
MY 2007 over MY 2006 exports. 168 Brazil demonstrated that 2005 exports exhibit distorted data as a
result of an unusually high surge of exports just prior to the termination of the Step 2 program. 169
Thus, the United States'. claims that exports in MY 2006 fall because of the repeal of Step 2 subsidies
are unfounded.

106. In sum, Brazil's arguments and evidence dem onstrate "without doubt" that the U.S. marketing
loan and counter-cyclical subsidies cause significan t price suppression in the world market for upland
cotton.

70. How does Brazil respond to the United States' re buttal that Brazil has not even established a
temporal correlation between payment of subsidi es and significantly suppressed prices during the life
of the FSRI, that is from marketing year 2002 to 2005? More specifically, please address the
United States' claim of the stability of US plantings, US share of world production, US share of world
exports and the world price of cotton during this period.

107. A temporal "coincidence" between the paymen t of subsidies, increased U.S. exports, and a
drop in world prices during the period MY 1999-MY 2002 was one of many factors and evidence that
the original panel examined and found relevant for its causation findings.
170 In updating evidence that
the original panel relied on, Brazil demonstrated th at, as in MY 1999-2002, there was also a temporal
coincidence in the period MY 2002-2005 between th e payment of massive marketing loan and
counter-cyclical subsidies and contin ued high levels of planted acreage. 171 Brazil further
demonstrated a temporal coincidence between conti nued high levels of U.S. subsidized acreage in
MY 2002-2005 (generating record high yields) and abso lute levels of U.S. production that increased
by 41 percent and exports that surged by 55 percent. 172 Brazil also demonstrated the temporal
coincidence between the payment of massive mark eting loan and counter-cyclical subsidies and
stubbornly low world market prices during MY 2002-M Y 2005 that remained 20 percent below their
1980-1998 average.173

108. Thus, as a factual matter, the U.S. asserti on that there were not "coincidences" between
(a) increased U.S. production and exports and (b) large U.S. marketing loan and counter-cyclical
subsidies is wrong. It is fact that, over the lif etime of the FSRI Act of 2002, U.S. exports increased
55 percent and U.S. production incr eased 41 percent. And it is fact that at the same time, U.S.
marketing loan and counter-cyclical subsidies increased by 21 percent in MY 2005 compared to

167 Brazil's Oral Statement, para s. 157-162, Brazil's Closing Statement, paras. 9-14 and Brazil's
Comments on the U.S. Oral Statement, paras. 10-12.
168 Exhibit Bra-679 ("US Cotton Indu stry To Face Challenges In Gl obal Market," 2006 AgWeb.com,
accessed March 2007 at http://www.cattlene twork.com/content.asp?contentid=103318) quoting Garry Adams,
Vice President of the National Cotton Council, ("Looking to the 2007-08 marketing year, however, Adams said
the NCC sees U.S. exports recovering to 16.22 million bales as foreign mill use increases.").
169 Brazil's Rebuttal Submission, paras 77-79; Brazil's Oral Statement, para. 143 and Brazil's Closing
Statement, paras. 11-14.
170 See, e.g., Panel Report, U.S. – Upland Cotton, paras. 7.1260-7.1303, 7.1380-7.1333
and 7.1339-7.1363.
171 See Brazil's response to question 63, above.
172 Exhibit Bra-447 (Upland Cotton Supply and Use, October 2006).
173 The average A-Index price during MY 1980-1998 was 73.36 cents per pound. The average A-Index
price during MY 2002-2005 was 58.92 cents per pound. See Exhibit Bra-673 (Upland Cotton Prices,
March 2007).

MY 2002, and by 54 percent between MY 2002 and MY 2004.
174 Brazil further demonstrated that
while there were higher yields during MY 2002-2005, these yields took place on planted acreage that
benefited from massive subsidies, and that but for these subsidies, U.S. production and acreage would
have been lower.175

109. These temporal "coincidences," in isolation, suggest a relationship between the massive
marketing loan and counter-cyclical subsidies and suppressed U.S. and suppressed world market
prices.

110. Such coincidences, in and of themselves, ar e of course not sufficient to establish causation.
Nor did the original panel base its analysis even pr imarily on such coincidences. Rather, it saw the
coincidences – two facts occurring at the same ti me – as another piece of evidence suggesting that
subsidies significantly suppress world market prices.
176

111. Brazil now turns to the United States' assertion that the U.S. share of world upland cotton
production, and share of world exports did not increase and that this would be evidence of a lack of
causation. This argument is without merit. One key flaw in the U.S. argument is that it ignores the
fact that absolute levels of U.S. upland cotton production and absolute levels of U.S. upland cotton
exports increased substantially despite low market pr ices and despite the fact that U.S. upland cotton
producers have among the highest production costs in the world.
177 It was only in light of these
considerable increases in production and exports that the United States was able to maintain its market
shares at times when worldwide demand for and pr oduction of upland cotton increased considerably.
These continued high market shares occurred at the sa me time that U.S. price-contingent subsidies
increased covering massive losses of U.S. upland co tton producers. So, contrary to the U.S.
argument, the stable share of U.S. production and exports does not demonstrate the absence of a
temporal coincidence. Rather, the large absolute increases in production and exports establish the
existence of a very strong coincidence.

112. Further, the United States claim that the stab ility of U.S. acreage demonstrates the lack of any
"temporal coincidence" (and hence causation) is al so without merit. Brazil refers the compliance
Panel to its response to question 63, above, where th e issue of stable acreage is addressed in more
detail. Brazil also notes that the original panel did not find that U.S. acreage increased during the
reference period of MY 1999-2002. In fact, U.S. acreage declined by 6 percent between
MY 1999-2002.
178 And the original panel also found that U.S. "production may have been driven
upward by high yields" during that time. Yet, these two "negative" coincidences did not prevent the
original panel from finding a "strong temporal coin cidence between the Unite d States subsidies and
the drop in United States prices, the drop in – an d suppression of – world market prices, the increase
in United States exports."179

113. Moreover, contrary to the situ ation before the original panel, planted acreage did not decline
between MY 2002-2005. Instead, it increased by 2 percent.
180 This is an even stronger "coincidence"
(or relationship) between planted acreage and subsid ies than existed before the original panel.
Further, the original panel placed considerable we ight on the fact that A-Index prices were 29.5

174 Brazil's First Written Submission, Table 6 at para. 111, as amended by updated marketing loan
subsidy amounts ( see Brazil's 16 March Comments on U.S. Answer to Question 4, para. 14) and an updated
counter-cyclical subsidy amount in MY 2005 (see Brazil's Oral Statement, para. 40).
175 Brazil's First Written Submission, para. 175; Brazil's Rebuttal Submission, paras. 226-231.
176 Panel Report, U.S. – Upland Cotton, paras 7.1351-7.1352.
177 Brazil's First Written Submission, para. 162. See also Exhibit Bra-480 (Survey of the Cost of
Production of Raw Cotton, ICAC, November 2004).
178 Exhibit Bra-447 (Upland Cotton Supply and Use, October 2006).
179 Panel Report, U.S. – Upland Cotton, para. 7.1352.
180 Exhibit Bra-447 (Upland Cotton Supply and Use, October 2006).

percent lower in MY 1999-2002 on average than during the period between MY 1980-1998. This
same "coincidence" existed during the period MY 2002-2005, with A-Index prices 20 percent lower
than during the period MY 1980-1998.181

114. An examination of changes in U.S. acreage relative to changes in planting period futures
prices further supports the existence of a temporal coincidence between U.S. marketing loan and
counter-cyclical subsidies and suppressed worl d market prices. As shown by Brazil
182, in five out of
the last eight years, changes in U.S. acreage ha ve moved in different directions from changes in
futures prices, although one would expect – everything else being equal – that market-based producers
adjust planting in line with cha nges in expected prices. Noticeab ly, changes in non-U.S. acreage and
futures prices have moved in the same direction in seven out of eight years.183

115. Finally, while the United States claims that farm ers' price expectations at the time of planting
are the key factor in establishing causation, it ignores one of the most important "temporal
coincidences" in the record. In the spring of 2005, New York futures prices predicted the second
lowest harvest time prices in 10 years. U.S. producers responded by increasing planted acreage by
4.2 percent.
184 These same producers had received more than $2.5 billion in marketing loan and
counter-cyclical subsidies just the year befo re and received more than $2 billion in MY 2005. 185 By
contrast, the Brazilian producers responded to pr edicted lower upland cotton prices in 2005 by
planting 27 percent fewer acres. 186 Similarly, non-U.S. acreage de clined by 5 percent in MY 2005 as
compared to MY 2004. 187 These temporal coincidences are important pieces of evidence suggesting
the strong effects of the U.S. subsidies in suppressi ng world market prices. The effect of the price-
contingent subsidies in "insulating" U.S. produ cers from and in "numbing" their reaction to market
price signals in MY 2005 was a record amount of U.S. production. This results were predictable in
light of the supply and demand dynamics in an integrated world cotton market for a fungible,
commodity product – low world market prices.
188

116. In sum, the United States' repeated assertion that Brazil has not provided evidence of relevant
temporal coincidences is simply wrong. Brazil refers the compliance Panel to its response to
question 69, above, and also notes that it provided data covering these various coincidences during
MY 2002-2005 in its Written Submis sions and Opening Statement – evidence which remains largely
undisputed.189

71. In the original case, the Panel concluded t hat the analysis covering "the six-year period from
1997-2002 ... lends itself to an assessment of the medium- to longer-term examination of
developments in the United States upland cotton indu stry" (see para. 7.1354 of the original panel
report). Thus, total costs of production were the costs considered appropriate by the Panel. Would
total costs of production continue to be relevant should the compliance Panel decide to use only

181 The average A-Index price during MY 1980-1998 was 73.36 cents per pound. The average A-Index
price during MY 2002-2005 was 58.92 cents per pound. See Exhibit Bra-673 (Upland Cotton Prices,
March 2007).
182 Brazil's Rebuttal Submission, Table 9 at para. 224.
183 Brazil's Rebuttal Submission, Table 9 at para. 224.
184 Brazil's Oral Statement, paras. 62-67; Exhibit Bra-447 (Upland Cotton Supply and Use); Exhibit
Bra-621 (Upland Cotton Expected Marketing Loan Payments Based on Futures Prices).
185 Brazil's First Written Submission, Table 6 at para. 111, as amended by updated marketing loan
subsidy amounts ( see Brazil's 16 March Comments on U.S. Answers to Question 4, para. 14) and an updated
counter-cyclical subsidy amount in MY 2005 (see Brazil's Oral Statement, para. 40).
186 Exhibit Bra-629 (Brazilian Harvested Acreage, Producer, Supply & Distribution Database, FAS,
USDA).
187 Exhibit Bra-570 (Producer, Supply & Distribution Database, FAS, USDA).
188 For details, see Brazil's Oral Statement, para. 62.
189 Brazil's First Written Submission, Sections 7.4- 7.6 and 7.9-7.10; Braz il's Rebuttal Submission,
Section 2.3.5 and Brazil's Oral Statement, Sections 2.2-2.4 and 2.6-2.7.

marketing year 2005 as the reference period for analysis? Or would variable costs of upland cotton
farming in marketing year 2005 now be the relevant information to consider?

117. Brazil considers that total costs continue to be highly relevant. Brazil urges the compliance
Panel to adopt one of the primary findings of the orig inal panel's causation analysis relating to "total
cost of production." The original panel found as follows:

[The] divergence between the United States producers' total costs of production and
revenue from sales of upland cotton si nce 1997 … supports the proposition that
United States upland cotton producers would not have been economically capable of
remaining in the production of upland cotton had it not been for the United States
subsidies at issues and that the effect of the subsidies was to allow United States
producers to sell at a price lower than would otherwise have been necessary to cover
their total costs. … We believe that th e existence of this gap between upland cotton
producers' total production costs and market revenue, on the one hand, and the effect
of the subsidies, on the other hand, was to sustain a higher level of output than would
have occurred in the absence of the United States subsidies at issue.
190
118. There have been no fundamental changes in the conditions of competition or any other
relevant factor that would compel this complianc e Panel to reject these findings and conclusions.
Long-term total costs were, and continue today, to be highly relevant for assessing the present effects
of subsidies.

119. Further, as the original panel found, "[c]ons ideration of developmen ts over a period longer
than one year, while not necessarily required (at least in Articles 5(c) and 6.3(c)) provides a more
robust basis for a serious prejudice evaluation than merely paying attention to developments in a
single recent year."
191 The original panel further noted that "having found that the subsidies exist and
have been provided over a longer period of time than one year, it would be inappropriate to look at
trends only in the last year to arrive at an y conclusion on serious prejudice [because] … the market
may well already be distorted in a given year due to subsidies."192

120. Thus, even if the compliance Panel uses onl y MY 2005 as a reference period, both variable
and longer-term total costs would be relevant information to consider. In examining the effects of
marketing loan and counter-cyclical subsidies in the MY 2005 reference year, the compliance Panel
cannot conduct its counterfactual analysis in a vacuum. Over the long term, i.e., over several years,
the "typical" upland cotton farmer must meet his or her total costs of production or go out of business.
When deciding what to plant in MY 2005, the typical farmer must make planting decisions to
generate sufficient revenue to meet full variable costs, as well as to make sufficient payments to
creditors demanding ongoing payment of long-term costs. Assuming no marketing loan and counter-
cyclical subsidies had been received between MY 2000-2005, the typical U.S. upland cotton farmer in
production since MY 2000 had a $663 per acre deficit.
193

121. Thus, in the counterfactual, a farmer has two di fferent, but related cost concerns at the time of
planting in MY 2005: first, to meet the full variable costs of producing the crop such as seed, land,
fertilizer, labor, and energy costs; and second, ensuring that sufficient funds were available to service
fixed costs such as mortgage and equipment. W ithout generating sufficient revenues to meet this
second set of costs, there would be no facilities or equipment to grow upland cotton in the first place.
Thus, the U.S. assertion that farmers' only concer n in MY 2005 was to cover variable costs ignores
the reality of an ongoing long-term cost deficit th at, at a minimum, would have be financed each and

190 Panel Report, U.S. – Upland Cotton, para. 7.1354.
191 Panel Report, U.S. – Upland Cotton, para. 7.1199.
192 Panel Report, U.S. – Upland Cotton, para. 7.1199 (emphasis added).
193 Brazil's First Written Submission, para. 158.

every year. Of course, with marketing loan and counter-cyclical subsidies, upland cotton farmers not
only covered their costs, they also achieved a healthy profit.194

122. Whichever cost measurement is used, a comparison of expected market returns and
production costs in MY 2005 suggest that much less cotton would have been produced but for
marketing loan and counter-cyclical subsidies. In its Rebuttal Submission, Brazil showed that the
average acre planted to upland cotton in MY 2005 was able to cover its variable cost of production by
1 cent per pound.
195 Considering the wide range of cost structures for various types of upland cotton
producers, this means that a large minority of upland cotton producers were unable to cover their
variable costs of production in MY 2005. Moreover , considering that futures prices were predicting
even lower prices than those achieved in MY 2005, ev en more producers did not expect to be able to
cover their variable costs of production.196

123. Even for farms that are able to cover their variable costs, the elimination of upland cotton
marketing loan and counter-cyclical subsidies would result in significantly less production, even if the
compliance Panel's reference period was confined to MY 2005. As explained by Professor Sumner in
Brazil's Oral Statement, "the supply equations [Professor Sumner's] model, FAPRI's acreage
allocation equations, USDA's supply models and statistical analysis of crop supply are all consistent
with the principle that acreage of a crop declines when expected revenue falls relative to costs."
197

72. Brazil has argued that the adjustment in cotton stocks should not be included in the
simulation of a large and permanent reduction in subsidies to cotton. Please respond to the following
argument:

If the simulation were a comparative static analysis in which a baseline is compared
to a counterfactual outcome in some l ong-run state, modelling such adjustments
would be unnecessary. But such adjustments should be taken into account given that
the model is used to simula te the average impact on the world price of cotton (among
other variables) on specific periods of ti me (MY 2002-05 or MY 2006-08) and not in
the long run.
124. For the specific time periods mentioned in the question, the demand-side question of
Professor Sumner's simulation analysis is the fo llowing: how would the quantity of upland cotton
demanded have responded to a fully anticipated a nd permanent removal of the upland cotton subsidy
programs at issue. To properly assess this question, the modeller must specify the appropriate
elasticity of demand for upland cotton that is applicable to this specific counterfactual situation.

125. Upland cotton market prices and stocks fluctu ate for many reasons. For the purposes of the
assessment relevant to this dispute, the demand el asticity includes those reductions in stocks that
would have occurred in response to the permanent and expected price increase caused by the removal
of the subsidy programs at issue. Under this questio n, even for a particular time period, upland cotton

194 Brazil's Oral Statement, paras. 54-91.
195 Brazil's Rebuttal Submission, para. 269. Measurement of variable costs includes operating, land
and labour costs because a fa rmer can choose to incur them on an a nnual basis, while capital recovery costs,
which are variable to some degree, are not included.
196 Brazil's Rebuttal Submission, para. 274. Braz il notes that in its Comments on Brazil's Oral
Statement, the United States asserts th at upland cotton producers expected to be able to cover their variable
costs of production every year during MY 2002-2007. To reach this conclusion, the United States excluded
variable costs associated with land an d labor, used yields that were far higher than what farmers could have
possibly expected (for instance, in MY 2002, the United States asserts that farmers expected to achieve an
average yield of 723 pound per planted acre, approximately five percent higher than the all-time record high
yield at the time) and used futures pr ices adjusted for a 5 cent cash basis th at is not supported by the data ( See
Exhibit US-139).

exporters and mill users would not reduce their stock to the extent that they would if a price increase
was not fully anticipated and thought to be tempor ary. Significant short-run adjustments in stocks
occur when price shocks are part of the normal fluc tuations in the market and may occur if the policy
change were expected to be temporary. It is this sort of response in stocks to changes in prices that
are measured by econometric analysis of hist orical data. These responses concern the natural
tendency to reduce stock during temporarily high pr ices and to build stocks during temporarily low
prices.

126. Thus, even though the simulation is being applie d to a counterfactual analysis of a particular
time period, measured responses of stocks to temporary price swings do not represent changes in
quantity demanded that should be added to demand response to a permanent and anticipated
reduction in subsidies.

127. By contrast, if subsidies were expected be removed for a few years and then reinstated, the
price increase would be expected to be temporar y and stockholders would have great incentive to
reduce stocks while prices were high and build back stocks after prices fell again.

73. How does Brazil respond to the argument made by the United States in paragraph 79 of its
Opening Statement that:

"to the extent a counterfactual assessment is undertaken, it is only to assess what the
price equilibrium would be at present if marketing loan and counter-cyclical
payments had been lower, different or did no t exist. Article 6.3(c) does not ask what
prices will look like in the short-run adjustment period if the marketing loan and
counter-cyclical payments are suddenly e liminated... Brazil's argument that it is
necessary to look at the short-run effects of total elimination of the programs cannot
be accurate as a textual matter."
 More specifically:

a) Why did Brazil not consider it appropriate to include simulations that involve
reductions rather than elimination of the subsidy programmes?

128. Brazil does not consider that an assessment of reductions of the marketing loan rate or a
reduced target price for counter-cyclical subs idies would be appropriate in these compliance
proceedings to resolve Brazil's claims of inco nsistency pursuant to Articles 5 and 6.3 of the
SCM Agreement. When the United States finally amended the basket of price-contingent measures on
1 August 2006, it did not partially reduce marketing loan payments or counter-cyclical payments.
Had it done so, the compliance Panel would properly examine whether such reduced marketing loan
rates or reduced target price for counter-cyclical payments were sufficient to eliminate fully the
serious prejudice claimed by Brazil. It is not Brazil's role – or that of the compliance Panel – to
theorize or investigate what levels of reductions of ta rget price, loan rates, or other eligibility criteria
for receiving such subsidies the United States should or should not make to eliminate fully the serious
prejudice caused to Brazil. Rather, in this compliance proceeding, the compliance Panel must
examine the serious prejudice caused by the non -reduced marketing loan and counter-cyclical
subsidies. These subsidies are the measures before the compliance Panel – not some modified or
reduced form of these subsidies.

129. Article 6.3 requires a counterfactual examination of effects but for "the subsidy." This does
not involve assessing effects of a "lower" or "changed" subsidy, but "effects" of "the subsidy," i.e., the
measure at issue. An assessment of a reduced subsidy woul d not enable the compliance Panel to
determine whether the full "effect of the subsidy" amounts to serious prejudice or adverse effects to
the interests of the complaining Member. It woul d simply reveal fewer effects than are actually
caused by the subsidy at issue.

130. An assessment of the full effects of the subsidy is consistent with the findings of the original
panel and the Appellate Body, which assessed the eff ects of the full amount of all price-contingent
subsidies. It is also consistent with the count erfactual "but for" approach adopted by the panel Korea
– Commercial Vessels. Specifically, that panel held as follows:

[T]he text of Article 6.3(c) implies a "but for" approach to causation in respect of
price suppression/depression. Price suppression is the situation where prices have
been restrained by something, and price depression is the situation where prices have
been pushed down by something. So the question to be answered is whether the
"something" is subsidization. Looki ng at a counterfactual situation, i.e., trying to
determine what prices would have been in th e absence of the subsidy, seems to us the
most logical and straightforward way to answer this question.
198
131. Further, the counterfactual assessment must determine what the effect of removing the
subsidy would be today – not years from today. Article 6.3 of the SCM Agreement requires the
assessment of whether "the effect of the subsidy," "is " "significant price suppression." 199 F r o m a
textual point of view, this requires assessing how the challenged subsidy causes present "significant
price suppression" under market conditions during the reference period. The analysis does not
involve examining the serious prejudice that may exist years later over a sufficiently long time for any
shock to result in a new equilibrium. This assessm ent necessarily is of a short-term, not long-term
nature.

132. These general principles are even more appli cable in Article 21.5/Article 7.8 proceedings.
Any Member that retains or amends the challenged subsidy measure (or "basket of measures") still
maintains "the subsidy." Articles 7.8 and 7.9 of the SCM Agreement require the full removal of all
adverse effects (assuming no withdrawal of the subs idy) within only six months. This short time
period exists to protect the complaining Member that has already endured years of market distortions
through adverse effects. As a textual matter, it is , thus, entirely appropriate for this compliance Panel
to examine the adverse effects of "the subsidy" through a counterfactual analysis that assesses the
present effects of eliminating the entire subsidy.

133. With these principles in mind, Brazil emphasi zes that Professor Sumner's model is fully
appropriate for the question at issue before the compliance Panel.

b) If simulations of such scenarios are performed , would the current values of the
elasticities chosen (particularly the supply el asticities) to simulate the elimination of
marketing loan and counter-cyclical programmes continue to be appropriate?
Please kindly provide an explanation for the chosen answer.

134. The parameters in Professor Sumner's m odel were specified for cases of permanent and
anticipated elimination of subsidies. The full remova l of subsidies is the most appropriate use of the
model in this dispute. Yet, the model can also be used to assess less than full removal.

135. Generally, Professor Sumner's model was devel oped to apply the same elasticity parameters
to subsidy reductions rather than subsidy elimination. There is no strong evidence that responses are
not proportional to the amount of price change or change in revenue caused by permanent and
expected changes in policy incentiv es. Naturally the model would show that price increases from
partial removal of subsidies will be smaller than the price increase from full subsidy removal.
However, the model's assumption that responses are proportional to the price increase would still be
valid. Quantity demanded and foreign quantity supplied both respond to endogenous increases in
market price. Constant elasticity models are traditional in this context.

198 Panel Report, Korea – Commercial Vessels, para. 7.612.
199 See Brazil's Closing Statement, paras 17-20.

136. That said, the U.S. supply elasticity may be even larger for partial subsidy removal for
two reasons.

137. First, farmers may interpret a partial removal of subsidies as an indicator that further
reductions are more likely in the near future. In that case growers would face more policy uncertainty
and begin the process of full adjustments by disinv estments in machinery, shifting additional land to
alternative crops and otherwise anticipating more changes to come.

138. Second, in some regions of the United States ther e are quantitative limits to the amount of
land and other resources that are likely to shift out of upland cotton. A partial elimination of subsidies
may be enough to encourage all upland cotton land in a region that has feasible alternatives to make
the shift to other uses. In that case, full subsid y elimination would not cause any more land to shift
out of upland cotton. These two reasons suggest that it would be useful to explore using a larger
supply elasticity under simulations of partial subsidy removal.

74. Brazil's view is that the data that the P anel must consider for its claim of present serious
prejudice should be that covering the latest mar keting year for which complete information is
available, MY 2005, and where credible, evidence after 31 July 2006. Since in MY 2005, payments
under Step 2 continued to be made by the United States (payments which the original Panel found to
have contributed to adverse effects) how shall the Panel ascertain that any adverse effects observed in
marketing year 2005 are due solely to the two subsid y measures which are the subject of the present
serious prejudice claim – marketing loan and counter-cyclical payments?

139. Consistent with the approach taken by all prior panels exam ining the effects of subsidies
under Articles 5 and 6 of the SCM Agreement , the compliance Panel should examine whether
marketing loan and counter-cyclical subsidies cause significant price suppression by means of a
counterfactual analysis. As in the original proceed ing, this counterfactual analysis involves assessing
whether any factors (other than the challenged subs idies) "would have the effect of attenuating this
causal link, or of rendering not 'significant' the effect of the subsidy."
200 In these implementation
proceedings, Step 2 subsidies in MY 2005 constitute such a non-attribution factor. 201 With respect to
the Step 2 subsidy, the question is whether it had "the effect of diminishing, or cancelling out, the
significant price suppression"
202 caused by marketing loan and counter-cyclical subsidies.

140. In other words, the compliance Panel must assess whether other factors, including the Step 2
subsidy, operate to diminish, cancel out or render in significant the effects of U.S. marketing loan and
counter-cyclical subsidies. This is very similar to the analysis that the original panel performed with
respect to direct payments and crop insurance subsidies. 203 Indeed, the fact that both price-contingent
subsidies and non-price contingent subsidies were provided in the same marketing year (MY 2002)
did not prevent the original panel from focusing its significant price suppression analysis only on the
effects of the price-contingent subsidies.

141. Brazil asks this compliance Panel to adopt the same analytical approach that the original
panel adopted with respect to MY 2002. This involves focusing on only the effects of marketing loan
and counter-cyclical subsidies in MY 2005, and assessing whether the effects of other subsidies,
including Step 2, attenuate the causal link.

142. Brazil has suggested that the compliance Pane l conduct this analysis by using many of the
same factors examined by the original panel in finding significant price suppression and causation by

200 Panel Report, U.S. – Upland Cotton, para. 7.1356.
202 Panel Report, U.S. – Upland Cotton, para. 7.1350.
203 Panel Report, U.S. – Upland Cotton, para. 7.1350.

means of a "unitary" analysis. 204 The original panel found that "it is important for the establishment
of 'current' serious prejudice that such prejudice w ould be established to exist up to, and including, a
recent point in time." 205 Brazil emphasizes that the appropria te reference period to conduct the
counterfactual is MY 2005. This is the marketing y ear for which complete data is available. The
original panel considered that complete data w as required for its assessment when it stated that:
"MY 2002 is a relevant year for our serious prejudi ce inquiry. It represents a recent period for which
essentially complete data exists."206

143. Brazil recognizes that because of the repeal of Step 2 on 1 August 2006, it is also appropriate
to set forth relevant evidence con cerning the effects of marketing loan and counter-cyclical subsidies
after that date. However, given the importance of comparing full year data, the compliance Panel
should place primary emphasis on complete MY 2005 data . In isolating the effects of marketing loan
and counter-cyclical subsidies, it should assess if other subsidies such as the effects of Step 2, direct
payments, crop insurance, and export credit guarantee subsidies, among other factors such as China's
demand and India's exports break the causal li nk between the subsidies and significant price
suppression.

144. Indeed, Brazil has focused a considerable portio ns of its evidence on isolating the effects of
marketing loan and counter-cyclical subsidies.
207 This evidence, which is primarily focused on
MY 2005, but also includes data from MY 2006, is more than sufficient to allow the compliance
Panel to have a firm evidentiary basis for concludi ng that the collective effect of marketing loans and
counter-cyclical subsidies is significant price suppression and an increase in the U.S. world market
share.

145. Brazil has also demonstrated that the effects of Step 2 subsidies in MY 2005 were modest
compared to
 the effects of the two challenged subsid ies – marketing loan and counter-cyclical
payments.208 Brazil provided considerable data for the pe riod after the repeal of Step 2 that shows
that marketing loan and counter-cyclical subsidi es continue to significantly suppress world market
prices for upland cotton. 209 Brazil has also demonstrated that the fundamental conditions of
competition in the world market for upland cotton have not significantly change d since the repeal of
the Step 2 subsidy – upland cotton continues to be a fungible commodity and the United States
continues to exercise a substantial proportionate influence on the world market price for upland
cotton.210 Before the original panel as well as befo re this compliance Panel, Brazil also presented
evidence simulating the effects of subsidies on the world market for upland cotton.211

146. Further, the compliance Panel has the benefit of the original panel's "non-attribution" analysis
in which it addressed the various factors other than th e price-contingent subsidies. The original panel
made the following conclusion:

[A]lthough some of these factors may have contributed to lower, and even
suppressed, world upland cotton prices during MY 1999-2002, they do not attenuate

204 Brazil's First Written Submission, Section 7.2.
205 Panel Report, U.S. - Upland Cotton, para. 7.1198.
206 Panel Report, U.S. - Upland Cotton, para. 7.1198.
207 Brazil's First Written Submission, Sections 7.4-7.13; Brazil's Rebuttal Submission, Sections 2.2.2-
2.3.8; Brazil's Oral Statement, Sections 2.2-2.8; Brazil's Closing Statement, Sections 4-7 and Brazil's
Comments on the U.S. Oral Statement, Sections 2-5.
208 Brazil's First Written Submission, Section 7.14; Brazil's Rebuttal Submission; Section 2.2 and
Brazil's Oral Statement, Section 2.7.
209 Brazil's Rebuttal Submission, Sections 2.2.1, 2.2.4 and 2.3; Brazil's Oral Statement, Sections 2.4
and 2.6.
210 Brazil's Oral Statement, Sections 2.7-2.8; Brazil's Closing Statement, Section 4 and Brazil's
Comments on the U.S. Oral Statement, Section 2.
211 Brazil's First Written Submission, Section 7.12.

the genuine and substantial causal link that we have found between the United States
mandatory price-contingent subsidies at i ssue and the significant price suppression.
Nor do they reduce the effect of the mandato ry price-contingent subsidies to a level
which cannot be considered "significant".
212
147. Brazil has demonstrated that factors such as Step 2, direct payments, Chinese demand and
supply, and Indian exports have not attenuated th e genuine and substantial relationship of cause and
effect between marketing loan and counter-cyclical subsidies and significant price suppression in the
world market for upland cotton. 213 Variations in Chinese demand, Indian exports, or the repeal of
Step 2 may well be responsible for certain price mo vements in the world market for upland cotton.
But fluctuations in the world market price of upland cotton are irrelevant to Brazil's claim of
significant price suppression. The focus of the analysis is on determining whether world market
prices would be higher without the two challenged subsidies, regardless of whether those world
market prices rise or fall.

148. Finally, Brazil references the summary of its evidence and arguments set out in its response to
question 69, above, and in its prior submissions.

2. Increase in world market share - Article 6.3(d) of the SCM Agreement

Questions to the United States

75. Could the United States explain further the textual basis of its argument that "Article 6.3(d) is
not concerned with absolute market share and wheth er or not in any given year a member's market
share would have been lower if subsidies were remo ved"? (Rebuttal Submission of the United States,
para. 401)

Questions to Brazil

76. What is the view of Brazil on the argument of the United States that an inquiry under
Article 6.3(d) of the SCM Agreement requires two di stinct elements: first, a demonstration of an
increase in the world market share of a Member as compared to the average share it had during the
previous period of three years, and, second, a demons tration that this increase in world market share
compared to the average share the Member had during the previous period of three years is part of a
consistent trend over a period when subsidies ha ve been granted? (Rebuttal Submission of the
United States, para. 399)

149. Brazil disagrees with this new interpretation of "consistent trend" in Article 6.3(d) of the
SCM Agreement, as recently advanced by the United States. There is no textual basis for the U.S.
argument that "the data must show that a Member 's market share is consistently increasing over the
previous three-year average."
214 Article 6.3(d) provides as follows:

(d) the effect of the subsidy is an increase in the world market share of the
subsidizing Member in a particular s ubsidized primary product or commodity as
compared to the average share it had during the previous period of three years and
this increase follows a consistent trend over a period when subsidies have been
granted.215

212 Panel Report, U.S. – Upland Cotton, para. 7.1363.
213 Brazil's First Written Submission, Section 7.15; Brazil's Rebuttal Submission, Sections 2.2.4
and 2.3.8.
215 Emphasis added.

150. Contrary to its previous arguments in both the original proceeding 216 and in its First Written
Submission217, the United States now claims that the final element of a "consistent trend" in
Article 6.3(d) requires proof that there have been increases in every year since the subsidies have been
granted. Such increases are to be measured, acco rding to the United States, on a three-year rolling
average.218 This new claim has no legitimate textual basi s. Indeed, the United States attempts to read
the separate element of a three-year average into the element of a "consistent trend." However, the
separate element of a three-year average solely serv es to determine the data against which to compare
the market share of the year for which the assessment is made.

151. The proper assessment of a claim under Article 6. 3(d) begins, first, with the determination of
whether there has been an increase in the world market share. Su ch a determination necessarily must
be conducted with reference to a particular year. The requirement for an "increase" (or reference)
year follows from the requirement to compare market share with the average share a Member had
over the "previous period of three years." With resp ect to the first element, the analysis ends here.
Article 6.3(d) does not contemplate a series of "i ncrease," or reference, years for which multiple
increases have to be demonstrated. It requires only an increase for the year at issue. In this case,
MY 2005 is the "increase," or reference, year and marketing years 2002-2004 are the previous period
of three years used to assess whether there is an increase in the U.S. market share in MY 2005.

152. The key elements in the text of Article 6.3(d) relevant to the U.S. argument is the term "an
increase" in the first line, and the phrase "this increase" in the next to last line. The "increase"
referred to in both instances in the text is the same, i.e., an increase in world ma rket share in the most
recent year (the reference period of MY 2005, in th is dispute). Other than determining whether there
is an increase, the text of Article 6.3(d) does not require quantification of the increase.

153. The final step of the Article 6.3(d) assessment includes a consistent trend. Contrary to the
U.S. argument, this step involves determining whet her the increase in the worl d market share follows
a "consistent trend" over a period in which th e subsidies have been granted. This is different from a
consistent increase. Brazil notes that the phr ase "this increase follows" immediately precedes the
phrase "a consistent trend." The requirement that an "increase" follow a "consistent trend" is by no
means identical to the requirement the increase be an uninterrupted "consistent increase" every single
year that subsidies have been granted, as argued by the United States. A "trend" implies that there
will be periods in which market share may increase or decrease. What is important is the overall
direction of the trend, i.e., that it increases.

154. The ordinary meaning of the text of Article 6.3(d) does not require an annual increase in the
three-year rolling average for a finding of a "consis tent trend." Indeed, the United States offers no
reason why the drafters would explicitly state that there should be "an increase … compared to the
average share it had during the previous period of three years" and then implicitly impose the
requirement for an additional increase based on a rolling three-year average for every year. Under the
U.S. theory, it is not enough to show an increase in the most recent year compared to the previous
three-year average. Instead, under the U.S. interp retation, there must be an increase for every year
since the initiation of the subsidies. The U.S. in terpretation makes the actual textual requirement of

216 None of the earlier U.S. arguments relating to Artic le 6.3(d) in this or the original proceeding
asserted that the concept of a "consis tent trend" required proof of an increase measured by a three-year rolling
average. Rather, the U.S. argued that there was a requ irement for an annual incr ease compared to the prior
year's actual world market share. See, e.g., U.S. Further Submission, September 30, 2003, para. 101 ("In two of
five years, the U.S. share of world ex port trade has decreased rather than increased; in a third year, the share
was stable. Thus, Brazil has failed to make a prima facie case of inconsistency with Article 6.3(d)").
217 U.S. First Written Submission, paras. 337-343 (w hich do not indicate the U.S. view that the
"consistent trend" requires assessment of a rolling three year average).
218 U.S. Rebuttal Submission, para. 403 ("In other words, to make a claim under Article 6.3(d), the data
must show that a Member's market share is consistently increasing over the previous three-year average.").

showing an increase in the most recent year a nullity. This is because the increase would have to exist
for every year since the subsidy was granted. It wo uld have been easy for the drafters to impose this
requirement directly, for example by using the following language:

the effect of the subsidy is an increase in the world market share of the subsidizing
Member in a particular subsidized primary product or commodity for every year in
which the subsidies have been granted as measured by a moving three-year average
market share.
 Of course, no such text exists in Article 6.3(d).
155. Contrary to the new U.S. arguments, the "consis tent trend" referred to in Article 6.3(d) does
not require proof that a Member's market share is consistently increasing over the previous three-year
average. The three-year average in th e text of Article 6.3(d) is relevant only to determine whether
there is an increase in the market share in a reference year ( i.e., MY 2005 in this case). There is no
basis in the text to transform this single three-year average into a rolling three-year average back to
the time of the initial provision of subsidies. Indeed , there is no basis to read this language into the
notion of a "consistent trend" in the first place. As noted above, negotiators could easily have drafted
such text. But they did not. Only a single three-year average is provided for in the text.

156. The invalidity of the U.S. argument is furt her supported by the fact that Article 6.3(d)
addresses only the limited category of "primary prod ucts or commodities." Commodities or primary
products are particularly susceptible to fluctuati ons in production, based on weather-related factors,
which will significantly impact the world market share of a subsidizing Member. The use of the word
"consistent trend," as opposed to U.S.-imposed s ubstitute phrase "consistent increase," reflects the
drafters appreciation of this reality. The United States interpretation, on the other hand, would make
Article 6.3(d) non-operational even where massive price-contingent subsidies are provided so long as
subsidizing Member's market share falls for one year during a much longer period over which
subsidies have been granted. This is contrary to the object and purpose of Article 6.3(d), which is to
ensure that adverse effects are not caused by subsidies for primary products or commodities.

157. Finally, Brazil notes that it demonstrated why 1998 is a proper year to begin the analysis of
whether the trend has been "consistent,"
219 and why the overall increase of the trend since 1998 meets
the "consistent trend" test. Such proof is prope r evidence of a "consistent trend," as required by
Article 6.3(d).

77. In this connection, could Brazil respond to the argument of the United States that Brazil has
not shown that either of these elements are me t with respect to the marketing loan and counter-
cyclical payment programs"? (Rebuttal Submission of the United States, paras. 399-403)

158. Brazil disagrees with the United States for the reasons set forth in its answer to question 76
above, as well as for the reasons set forth in para graphs 346-358 of Brazil's Rebuttal Submission and
paragraphs 214-236 of Brazil's First Written Submission.

C. C
LAIM OF BRAZIL REGARDING THREAT OF SERIOUS PREJUDICE

Questions to both parties

78. Could both parties comment on the statements of Canada that "(a)t issue is whether these
programmes....threaten to cause serious prejudice si mply by virtue of their existence" and that
"(c)ertain subsidy programs, by their very nature, gi ve rise to a constant likelihood of support that
results in a permanent threat of serious prejudice"? (Third Party Submission of Canada, paras. 9-10)

219 Brazil's First Written Submission, paras. 227-229.

159. In Brazil's view, it may be possible that, as a theoretical matter, certain types of subsidy
programs simply due to their nature and existence cause a "permanent threat of serious prejudice." As
Articles 5 and 6 of the SCM Agreement focus on effects of subsidies and not on the existence (as
would be the case for, e.g., prohibited subsidies), however, as a practical matter, additional proof of
threat of serious prejudice would be required. This evidence must show a significant likelihood that
the subsidy causes serious prejudice in the future. For example, in addition to the nature and
existence of a statutory and regulatory instruments, such evidence could include facts regarding the
subsidizing Member's producers established history of significant production and/or exports of the
subsidized product, or that without the subsidies, producers would not be able to cover their long-term
costs of production.
220

160. In this dispute, Brazil has challenged th e marketing loan and counter-cyclical payment
programs under the FSRI Act of 2002 and the mandat ory and price-contingent payments thereunder
as causing a threat of serious prejudice. 221 In its First Written Submission, Brazil argued, inter alia,
that:

The FSRI Act of 2002 contains no limits on the amount of upland cotton that can be
produced by upland cotton farmers receivi ng marketing loan and counter-cyclical
payments. The mandatory nature of these large trade-distorting subsidies, coupled
with the commanding U.S. share of world production and exports, creates a
permanent and structural threat of serious prejudice to the interests of other Members,
including Brazil. This threat will continue until the expiry or substantial alternation
of the FSRI Act of 2002, as it applies to upland cotton.
222
161. In this dispute, Brazil does not claim that the mere "existence" of the marketing loan and
counter-cyclical payment programs under the FSRI Act of 2002 causes a threat of serious prejudice.
For example, Brazil argued that th e "structure, design and operation, i.e., the very nature, of the U.S.
marketing loan and counter-cyclical programs provide evidence
 that these subsidies cause a
significant threat of serious prejudice …." 223 In paragraph 260 of its First Written Submission, Brazil
set out the criteria that it believes are relevant to a ssess claims of a threat of serious prejudice. It
applies these criteria by providing evidence in its First Written Submission. This evidence includes
the provisions of the FSRI Act of 2002 providing for mandatory and price-contingency marketing
loan and counter-cyclical payments, along with ev idence of projected payments, costs of production,
price effects, and the commanding U.S. share of world production and exports. The evidence
collectively supports a finding that the subsidies cause a threat of serious prejudice.
224

162. Finally, Brazil would note its agreemen t with the United States' observation in EC – Selected
Customs Matters that certain claims under the covered agreem ents are "not readily classifiable in the
categories of 'as such' and 'as applied.'"
225 Brazil's threat of serious prejudice claim in this dispute is
not labeled either as a "per se" or "as applied" clai m. Rather, Brazil challenges subsidies that have
not been changed during the implementation period and that cause, and will continue to cause,
adverse effects to the interests of Brazil.

79. Could the parties state their views on th e analysis of the ordinary meaning of the term
"threat" in paras. 15-28 of the Third Party Submission of Canada?

220 See Panel Report, U.S. – Upland Cotton, paras. 1495-1497.
221 Brazil's First Written Submission, paras. 237-314.
222 Brazil's First Written Submission, para. 242.
223 Brazil's First Written Submission, para. 262 (emphasis supplied).
224 Brazil's First Written Submission, paras. 237-314.
225 Appellate Body Report, EC – Selected Customs Matters, para. 165.

163. Brazil agrees with the well-reasoned analysis of Canada concerning the appropriate legal
considerations for assessing a threat in the context of a serious prejudice claim, as set forth in
paragraphs 15-28 of its Third Party Submission. Th is analysis complements Brazil's analysis of the
appropriate legal standard for threat of serious pr ejudice claims, as set forth in paragraphs 246-261 of
the First Written Submission of Brazil.

Questions to the United States

80. How does the United States address the argument of Japan that in view of the different
purposes of Parts III and V of the SCM Agreement th e standard for determining threat of material
injury in Article 15.7 of the SCM Agreement is an inappropriate standard for determining the
existence of a threat of serious prejudice under Pa rt III of the SCM Agreement? (Third Party
Submission of Japan, paras. 8-12.) '

81. How does the United States respond to the argument of Australia that "it is beside the point
for the United States to argue that the progr ammes under consideration are due to expire in
late 2007"? (Third Participant Oral Statement of Australia, para. 13)

82. Could the United States comment on the proj ections of marketing loan and counter-cyclical
payments in Table 26 of Brazil's First Writte n Submission and on the projections of prices and
subsidy payments in Table 27 of Brazil's First Wr itten Submission? Could the United States explain
how the data in these Tables support its argument that producers are likely to expect low or no
marketing loan payments in MY 2007? (Rebuttal Submission of the United States, para. 418)

Questions to Brazil

83. How does Brazil address the argument of th e United States that footnote 13 of the
SCM Agreement "does not indicate that where a pane l finds that a Member is causing present serious
prejudice through the use of a subsidy, the panel automatically also finds that the Member is
threatening to cause serious prejudice in the future th rough the use of the same subsidy"? (Rebuttal
Submission of the United States, footnote 624)

164. Brazil notes that the United States has not properly understood Brazil's arguments concerning
the relationship between "present" serious prejudice and "threat" of serious prejudice occurring in the
future. Brazil does not argue that, by virtue of footnote 13 of the SCM Agreement , a finding of
"present" serious prejudice necessarily "includes" a finding of a threat of serious prejudice in the
future. Indeed, Brazil's First Written Submission quot ed the original panel's analysis in which it
stated that "[w]e believe that 'threat' of serious prejudice refers to something distinct from serious
prejudice."
226 It also quoted the original panel's statement that "present serious prejudice would more
often be preceded in time by a prejudice that threatens to become serious, and serious prejudice would
be the realization of a threat of serious prejudice." 227 With respect to the future, as opposed to past
threat, Brazil's position is that a finding of "present" serious prejudice (as distinguished from "threat"
of serious prejudice) caused by marketing loan and counter-cyclical subsidies for upland cotton is
compelling evidence that a serious prejudice will conti nue to be caused by the same subsidies in the
future.

165. Brazil does wish to take this opportunity to clarify a statement made in paragraph 241 of its
First Written Submission which appears to have generated some confusion.
228 To the extent that

226 Brazil's First Written Submission, para. 238 quoting Panel Report, U.S. – Upland Cotton,
para. 7.1495.
227 Panel Report, U.S. – Upland Cotton, para. 7.1497.
228 The sentence is as follows: Brazil notes that it withdraws this contingency in case the compliance
Panel were to not agree with the original panel that its present serious prejudice findings includes a finding of

Brazil suggested in the first part of the second senten ce of paragraph 241 that the original panel found
that its present serious prejudice finding includes a finding of threat of serious prejudice in the future,
that is not correct. Accordingly, Brazil withdraw s the following statement in paragraph 241 of its
First Written Submission: "… the compliance Panel were to not agree with the original panel that its
present serious prejudice finding includes a finding of threat of serious prejudice in the future …." In
this regard, Brazil refers the Panel to its response to question 84, below.

84. Could Brazil confirm that its claim of threat of serious prejudice is submitted on a contingent
basis i.e., that it does not request the Panel to make a finding on this claim if the Panel make a finding
of present serious prejudice? How is the contingent character of this "threat of serious prejudice"
claim reflected in Brazil's request for the establishment of a panel?

166. Brazil's intention in raising a "contingent" threat of serious prejudice claim was to signal that
the Panel could exercise judicial economy on this claim if it made a finding of "present" serious
prejudice. However, this compliance Panel is empowe red to make determinations with respect to any
and all claims asserted by Brazil that the Panel believes are necessary to secure a positive solution to a
dispute pursuant to Article 3.7 of the DSU. I ndeed, Brazil's request for establishment of a panel
includes a threat of serious prejudice claim without an y limitations or contingencies. Thus, the stated
contingency as set out in paragraph 241 of Braz il's First Written Submission does not limit the
compliance Panel's terms of reference. Moreover, Brazil has requested that the compliance Panel
make all necessary findings of fact regarding Brazil's threat of serious prejudice claim in the event of
an appeal. In view of these factors and notwithsta nding the previously articulated contingency, Brazil
requests that the compliance Panel make a determina tion with respect to Brazil's threat of serious
prejudice claims if it considers that resolution of such claims will contribute to a positive solution to
this dispute.

85. Could Brazil explain its request that the Panel "make factual findings with respect to its
'threat of serious prejudice' claim to allow the Ap pellate Body to complete the analysis, in case it
were to disagree with the compliance panel's int erpretation"? (First Written Submission of Brazil,
para. 241) What are the precise "factual findings" which Brazil requ ests the Panel to make in this
regard?

167. Brazil refers the compliance Panel to its answer to question 84 above. It notes, first, that, to
the extent that the compliance Panel were to make a determination with respect to Brazil's threat of
serious prejudice claims, Brazil's request in pa ragraph 241 of Brazil's Fi rst Written Submission
regarding factual findings would not be necessary.

168. Second, to the extent that the compliance Pa nel were to exercise judicial economy regarding
Brazil's threat of serious prejudice findings, Braz il requests that the compliance Panel nevertheless
make factual findings that would allow the Appell ate Body to make a threat of serious prejudice
finding. These factual findings would be necessary in the event that the Ap pellate Body were to
determine that the compliance Panel has erred (for whatever reason) in making a finding that the
marketing loan and counter-cyclical subsidies cause "present" (as opposed to "threat of") serious
prejudice.

169. Brazil requests the compliance Panel to make the factual findings summarized in
paragraph 244 of Brazil's First Written Submission, as amplified a nd supported by the evidence
referenced in Sections 8.3-8.9 (as well as S ection 7) of Brazil's First Written Submission,
Sections 2.2-2.3.8 of the Rebuttal Submission of Brazil, Sections 2.2-2.8 of the Brazil's Opening
Statement, Sections 3-7 of the Brazil's Closing Statement, Sections 2-5 of Brazil's Comments on
U.S. Oral Statements, and in Brazil's Answers to the questions 89, 69 and 70.

threat of serious prejudice in the future or that its present serious prejudice findings do not require changes to the
statutory provisions setting up these subsidy programs.).

86. How does Brazil address the argument of the Unite d States that the definition of "threat" of
injurious effects in Article 15.7 of the SCM Ag reement and Article 4.1(b) of the Agreement on
Safeguards "in terms of their close proximity in time and their high probability of occurring" reflects
the ordinary meaning of the word "threat" and that, as such, Article 15.7 of the SCM Agreement and
Article 4.1(b) of the Agreement on Safeguards provide "useful contextual guidance" for the
interpretation of "threat" of serious prejudice?

170. In Brazil's view, it is not appropriate to import into Part III of the SCM Agreement the "clearly
foreseen and imminent" standard of Articles 15.7 of the SCM Agreement and Article 4.1(b) of the
Agreement on Safeguards . Brazil's First Written Submission set forth in detail its concern with
importing the threat standard from Article 15.7 of the SCM Agreement into Part III of the
SCM Agreement.

171. Article 4.1(b) and 2 of the Agreement on Safeguards as well as Article 15.7 of the
SCM Agreement deal primarily with the threat posed by a potential surge of imports. For example, a
key focus for investigating authoriti es in investigating a threat of injury pursuant to the provisions of
Article 15.7(ii) is whether there is a "significan t rate of increase of subsidized imports", and
Article 15.7(iii) requires examination of increased capacity "indicating the lik elihood of substantially
increased subsidized exports to the importing Member's market …."

172. By contrast, Articles 5(c) and 6.3 as well as footnote 13 of the SCM Agreement deal with the
likelihood of adverse effects – not subsidized im ports – occurring sometime in the future. The
original panel found that "[t]he text of Articles 5 and 6 of the SCM Agreement support the conclusion
that it is the effects of United States subsidies – not th e effects of the 'subsidized product' – that are at
issue in a claim of price suppression under Article 6. 3(c)" and that the "references in Articles 5(c)
and 6.3(c) to the 'effect of the subsidy' contr ast with the language used in countervailing duty
provisions in Part V of the Agreement."
229

173. Unlike a situation involved in an Article 15.7 of the SCM Agreement or Article 4.1 of the
Agreement on Safeguards investigation, where goods may be sitting in a warehouse ready to be
shipped across borders, the effects of subsidies in causing "adverse effects" may take much longer to
materialize. For example, a subsidy provided today to build a factory that would triple the world's
supply of a particular good may not yet generate quan tities of output or exports that are sufficient to
cause displacement or impedance until three years late r. The adverse effects of such a subsidy,
however, may be able to be "foreseen." Yet, as they may not occur until three years later, they would
fail the "clearly foreseen and imminent" standard in a countervailing duty ("CVD") investigation.
Similarly, subsidies mandated to be granted for fu ture deliveries of large capital goods with a long
production lead-time may result in a threat that is "clearly foreseen," but would not be "imminent"
because the subsidies would not be paid until delivery of the good two or three years later.

174. Another important reason explaining that the "threat" standard in Part III of the
SCM Agreement should be different from the "threat" standard in Article 15.7 of the SCM Agreement
and Articles 4.1(b) and 2 of the Agreement on Safeguards is the distinct nature of the remedies
involved. Articles 15.7(ii) of the SCM Agreement and Articles 4.1(b) and 2 of the Agreement on
Safeguards provide rules governing the unilateral impos ition of remedies following domestic national
proceedings – not challenges to subsidies in multilateral WTO dispute settlement. Countervailing
duty and safeguard rules also discipline investig ating authorities' imposition of provisional limited
actions to stem the imminent surges of imports. 230 These provisional remedies provided for in the
rules allow domestic authorities expeditiously to stop goods at the border. Correspondingly, the rules
require that future surges of imports be "clearly foreseen and imminent." This makes perfectly sense

229 Panel Report, U.S. – Upland Cotton, para. 7.1227.
230 Article 6 of the Agreement on Safeguards and Articles 17.1(b) and 15.7 in connection with
footnote 45 of the SCM Agreement.

in light of the rapid nature of the remedy that may be unilaterally imposed. If CVD or safeguard
investigations by domestic authorities were governed by anything less than an "imminent" standard,
the rapid and unilateral nature of the remedy could significantly restrict the flow and import of goods.

175. By contrast, multilateral dispute settlement ac tions challenging subsidies under Part III of the
SCM Agreement offer no immediate remedy to resolve the a dverse effects caused or threatened by
subsidies. Complaining Members, such as Brazil in this dispute, are forced to wait years before
subsidizing Members causing adverse are required to make changes to their subsidy measures under
Article 7.8 of the SCM Agreement.

176. Correspondingly, the threat standard under Part III of the SCM Agreement should not prevent
a non-subsidized Member from seeking protection until a competing subsidized good from another
Member is just about to be prod uced, exported, or imported. The threat standard for CVD measures
of "clearly foreseen and imminent" in Article 15.7 and the associated CVD remedy provide precisely
the type of unilateral immediate relief that does not exist in Part III of the SCM Agreement. In view of
the length of a multilateral proceeding, imposition of a "clearly foreseen and imminent" standard will
effectively guarantee that Members will be forced to suffer serious prejudice before they are able to
obtain any relief.

177. The original panel recognized this problem in noting that "[i]f a Member were unable to bring
[a threat] action against subsidies until they were actually paid, this would undermine the object of
preventing adverse effects to its interests."
231 This rationale suggests that a threat claim should be
able to be brought even before a subsidy is paid – let alone before a subsidized good is produced and
about to be exported. But that right of self-protection in a multilateral proceeding under Part III of the
SCM Agreement would become empty if a "clearly foreseen and imminent" standard were adopted for
threat of serious prejudice claims.

178. The length of time it takes to pursue WTO dis pute settlement requires a more flexible threat
standard such as a "significant likelihood" of threat – not an " imminent likelihood" of threat. Such a
standard would be consistent with both the slower pace of WTO dispute settlement procedures and of
the associated remedies, as well as with the time it ta kes for effects of certain types of subsidies to
materialize.

179. Further, as Brazil has explained in detail in its First Written Submission, there is yet another
reason that the "clearly foreseen and imminent" standard from Article 15.7 should not be imported
into Part III of the SCM Agreement . This is because it would be inappropriate to require a
complaining Member to demonstrate a "change in circumstances" that was "clearly foreseen and
imminent."232 Many subsidy programs, such as the mark eting loan and counter-cyclical subsidies,
continue without any "changes" year after year. Nor do the fundamental aspects of conditions of
competition in many commodity markets change over the short to medium term. Yet, such subsidies,
when coupled with appropriate conditions of competition in the relevant market, may cause a threat of
serious prejudice without there necessarily being a "change in circumstances."

180. Thus, the concept of "threat" must be exam ined within the particular context of each
WTO Agreement in which it is found. It is not a ppropriate to simply import into Part III of the
SCM Agreement, which provides remedies for the effects of subsidies, an elaborated meaning of threat
that is applicable to imminent surges of imports in the context of the Agreement on Safeguards or
Part V of the SCM Agreement . Threat of adverse effects need not necessarily be "imminent" or
"clearly foreseen" in the same very short term, as suggested by the United States. The threat of
adverse effects caused by subsidies may well be of a distinctly more qualitative nature than the threat
of injury posed by goods literally waiting to be shipped across a border. Instead, the ordinary

231 Panel Report, U.S. – Upland Cotton, para. 7.191.
232 Brazil's First Written Submission, paras. 254-258.

meaning of the term "threat" could similarly enco mpass the concept of a signi ficant "likelihood" that
adverse effects will occur in the future as Brazil has argued.
233

181. Brazil emphasizes that it is not asking the comp liance Panel to adopt a standard that would
require panels to base threat findings on allegation, conjecture or remote possibility. In paragraph 260
of its First Written Submission, Brazil proposed criteri a that ensure that any finding of threat with
respect to the type of annual agricultural subsidi es at issue in this dispute will be based a firm
evidentiary basis. However, the effects of subsid ies demonstrated by this evidence necessarily have a
longer time-frame than the effects from a shipment of subsidized goods at issue in a unilateral
Article 15.7 proceeding. Thus, for the reasons set forth above and those already articulated by Brazil
(and Canada in its Third Party Submission), Brazil does not believe that the standards of either
Article 15.7 of the SCM Agreement or Article 4.1(b) of the Agreement on Safeguards should be
imported into an assessment of threat of serious prejudice in Part III of the SCM Agreement.

87. Could Brazil comment on the argument of the United States that the standard of "significant
likelihood" is without support in the text of the SCM Agreement or in the GATT/WTO dispute
settlement reports cited by Brazil? (Rebuttal Submission of the United States, paras. 406, 410,413)

182. Brazil acknowledges that the term "si gnificant likelihood" is not found in the SCM Agreement
or any other WTO Agreement. However, this does not prevent the compliance Panel from adopting
the interpretation advanced by Brazil. Indeed, there are many terms and descriptions for legal
standards and concepts developed by panels and the Appellate Body that are not found explicitly in
the text of the WTO Agreements but are inherent to the interpretive task under Article 3.2 of the DSU.

183. One relevant example is the "genuine and substantive relationship of cause and effect"
causation standard.234 Moreover, with respect to actionable subsidy claims under Article 6.3 of the
SCM Agreement , panels have described many standards that are not found in the text of Part III,
including the concept of a "reference period," 235 a "but for" or "counterfactual" causation analysis 236,
"nature" and "magnitude" of the actionable subsidies standard237, and "non-attribution."238

184. Examples from other WTO Agreements include the "rational basis" standard 239 for
interpreting the term "base on" in 3.1 of the SPS Agreement , the words "shall use as a basis" 240 in
Article 2.4 of the TBT Agreement, the "total average cost of production" test 241 in Article 9.1(c) of the
Agreement on Agriculture , the "sudden, sharp, and recent" standard 242 for assessing imports under
Article 2.1 of the Agreement on Safeguards , the use of a market benchmark for benefit 243 under
Article 1 of the SCM Agreement , the like product criteria of physi cal characteristics, consumer
perceptions, end use 244, the "design structure and architecture" standard 245 in Article III:2 of
GATT 1994, and the "necessity" 246 and "least trade restrictive measure" 247 standards of
Articles XX(b) and XX(d) of GATT 1994, among others.

233 Brazil's First Written Submission, paras. 246-261.
234 Appellate Body Report, U.S. – Softwood Lumber VI (21.5), para. 132.
235 Panel Report, U.S. – Upland Cotton, para. 7.1195.
236 Panel Report, Korea – Commercial Vessels, paras 7.613-7.616.
237 Appellate Body Report, U.S. – Upland Cotton, para.467.
238 Panel Report, Korea – Commercial Vessels, para. 7.617.
239 Appellate Body Report, EC – Hormones, paras. 160-166.
240 Appellate Body Report, EC – Sardines, para. 245.
241 Appellate Body Report, Canada – Dairy (21.5 I), para. 88.
242 Appellate Body Report, Argentina – Footwear, para. 131.
243 Appellate Body Report, Canada – Aircraft, para. 157.
244 Appellate Body Report, EC – Asbestos, paras. 101-102.
245 Appellate Body Report, Japan – Alcohol II, section H.2(c).
246 Appellate Body Report, Korea – Various Measures on Beef, paras. 161-162.
247 Appellate Body Report, Dominican Republic – Import and Sale of Cigarettes, para. 54.

185. As discussed in Brazil's response to questi on 86 above, the U.S. arguments do not address the
sui generis nature of "effects"-based claims under Part III of the SCM Agreement . Indeed, the
United States entirely ignores the "effects"-based nature of these claims by simply importing an
"imminent" "changes in circumstances" threat standa rd designed to discipline actions by investigating
authorities regarding restrictions on imports of goods. Brazil believes that the appropriate concept of
threat in an Article 6.3 claim is captured in the phrase "significant likelihood" that serious prejudice
will occur in the future. This phrase – or some ot her similar term – is better suited to capture the
threat caused by the longer-term and slowly materializing effects of many subsidies. Brazil invites
the compliance Panel to use or articulate another phrase or description of the applicable standard if it
captures the special nature of the effects-based enquiry of Article 6.3 of the SCM Agreement.

88. Does Brazil agree or disagree with the propos ition advanced by the United States that "[a]
panel may consider the ordinary meaning of a term as reflected in a particular provision to interpret
the same term in another provision (especially of the same agreement) without the need for an express
cross-reference." (Rebuttal Submission of the United States, para. 411, footnote 635)

186. In the particular context of Part III of the SCM Agreement , Brazil disagrees with the U.S.
argument that the absence of a cross-reference to Article 15.7 of the SCM Agreement in Footnote 13 is
irrelevant. The U.S. argument assumes that the natu re, object and remedy of the assessment of threat
in Article 15.7 are identical or substantially sim ilar to the nature, object and remedy of threat in
Article 6.3 of the SCM Agreement . Brazil has demonstrated in its responses to questions 86-87,
above, and in its First Written Submission, that this is not the case. Therefore, the absence of a cross-
reference is important to reveal the intent of negotiators to treat a multilateral claim of threat of
serious prejudice differently from a unilateral countervailing duty remedy.

187. The United States incorrectly compares the absence of a cross-reference in footnote 13 to
Article 15.7 with the absence of a cr oss-reference to the term "export s ubsidy" in Article 3.1(a) of the
SCM Agreement to Article 1(e) of the Agreement on Agriculture.
248 While there was no explicit cross
reference between these two provisions, the Appellate Body's decision in U.S. – FSC focused on the
identical phrase "contingent upon export pe rformance" in Article 1(e) of the Agreement on
Agriculture and Article 3.1(a) of the SCM Agreement.249 The Appellate Body found that "[a]lthough
there are differences between the export subsid y disciplines established under the two Agreements,
those differences do not, in our view, affect the common substantive requirement relating to export
contingency. Therefore, we think it appropriate to apply the interpretation of export contingency that
we have adopted under the SCM Agreement to the interpretation of export contingency under the
Agreement on Agriculture."250

188. By contrast, there are substantive differen ces between Article 6.3 and Article 15.7 of the
SCM Agreement that do affect the common substantive requirement relating to "threat." Brazil has
explained those differences in its answers to questions 86-87, above. In addition, the original panel
emphasized that there were many aspects of the disciplines in Part V of the SCM Agreement that were
not able to be imposed into Part III of the SCM Agreement.251 These differences are many, but among
the most important identified by the original panel were the different remedy provisions and the fact
that the focus of an Article 6.3 claim was on the ef fects of subsidies – not the effects of subsidized
imports.252

248 U.S. Rebuttal Submission, para 411, footnote 653.
249 Appellate Body Report, U.S. – FSC, para 141.
250 Appellate Body Report, U.S. – FSC, para. 141.
251 Panel Report, U.S. – Upland Cotton, paras. 7.1167-7.1177, 7.1179-7.1181 and 7.1189.
252 Panel Report, U.S. – Upland Cotton, paras. 7.1170 (differences in remedies) and 7.1227 (effects v.
subsidized imports).

89. Brazil argues that marketing loan and c ounter-cyclical payments for upland cotton are
designed "in such a manner that payments would be made in consistently large amounts".
(First Written Submission of Brazil, para. 270)

a) Could Brazil in this regard discuss the data in Table 27 of Brazil's First Written
Submission that show an increase in the projected farm price and AWP over the
period MY 2006 - 2010 and a decline in projected marketing loan payments?

189. The data in Figure 27 of Brazil's First Written Submission reflect deterministic projections of
outlays (also known as point estimates). As explaine d by USDA, "deterministic projections, by their
nature, tend to underestimate outlays."
253 A comparison of the most up to date (February 2007)
USDA deterministic and stochastic projections of upland cotton budget outlays shows that this
underestimation is very significant. For instance, while the point projection of marketing loan
subsidies falls to zero in MY 2009 , the stochastic estimate remain s at $468 million. The respective
U.S. government data is shown in Table 2 below:

Table 4 – USDA Projections of Upland Cotton Marketing Loan
and Counter-Cyclical Subsidies254

 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
 million dollars
Point $757 $238 $21 $0 $1 $24 $72 $166 $169 $266ML Stochastic $757 $798 $515 $468 $477 $542 $592 $729 $732 $875
Point $1,376 $1,075 $875 $774 $774 $875 $975 $1,075 $1,075 $1,175CCP Stochastic $1,376 $1,028 $860 $769 $769 $860 $947 $1,028 $1,075 $1,175
Point $2,132 $1,313 $895 $774 $775 $898 $1,047 $1,241 $1,244 $1,441Total Stochastic $2,132 $1,826 $1,376 $1,237 $1,246 $1,403 $1,540 $1,756 $1,807 $2,050

190. In addition to showing that deterministic projections underestimate subsidy outlays, the above
table is important in at least two other respects. First, it shows that even the point estimates of
marketing loan subsidies are expected to incr ease after 2009, through the end of the baseline in
MY 2015. This suggests that USDA expects the AWP to be below the loan rate of 52 cents per pound
after 2009. Second, and most important, USDA projects marketing loan and counter-cyclical
subsidies to be well in excess of $1 billion indefi nitely. This confirms Brazil's assertion that
marketing loan and counter-cyclical subsidies are designed "in such a manner that payments would be
made in consistently large amounts."
255

191. Brazil notes that no other program crop is projected to receive significant amounts of
marketing loan or counter-cyclical payments in future years. A recent USDA statement by USDA
fully supports this conclusion:

While program crop prices are generally expected to remain firm or increase over the
next few years, upland cotton is an exception
. The combination of increases in
upland cotton yields per acre and declini ng U.S. upland cotton textile production is

253 Exhibit Bra-460 (Explanatory Notes for Stochastic Budget Outlay Estimates, Farm Service Agency,
accessed October 2006 at http://www.fsa.usda.gov/Internet/FSA_File/msrexplain.doc).
254 Exhibit Bra-639 (Commodity Estimates Book for FY 2008 President's Budget, pp. 52, 71, 74-75,
79-80, 82, 84, 87 and 92, accessed February 2007 at
https://www.ccc2.net/ccc2app/2008PresBud/PresBud2008.htm). Brazil notes that projected CCP subsidies are
not allocated.
255 Brazil's First Written Submission, para. 270.

expected to limit price gains and result in substantial cotton program expenditures,
compared to other commodities.256
192. Brazil agrees with USDA's most recent assessment. This ev idence supports the conclusion
that year after year, upland cotton subsidies ar e essential to supplement significantly the average
farmer's market revenue. Indeed, the NCC recently urged Congress to provide for disaster assistance
to U.S. upland cotton producers arguing that "'[a] large number of U.S. cotton producers have dealt
with crop disasters in either or both of the 2005 and 2006 crop years.' … 'With production costs
expected to remain high, many U.S. cotton producer s will need assistance in order to maintain their
operations.'"
257 The evidence suggests that what has been true in the past will remain so in the future.

193. Finally, it is important to recognize that the magnitude of the marketing loan subsidies, which
reflects total payments over the particular marketing year, are but one of the key aspects of the nature
of these subsidies. Of course, total marketing lo an payments are important evidence because they
demonstrate how year after year, the marketing loan subsidies play a crucial role in maintaining the
revenue and financial well-being of high-cost U.S. upland cotton producers. But even if overall
marketing loan payments are relatively low in a particular year, this does not mean that such subsidies
have not had an important influence on U.S. upland cotton producers' planting decisions.

194. This is because there is a separate and equally important aspect of marketing loan subsidies
that contributes to significant U.S. upland co tton acreage, production and exports. This aspect
involves the expectations of future marketing loan (and counter-c yclical payments) that farmers have
at the time of planting. Brazil has demonstrated ho w the expectations of low upland cotton prices at
the time of harvest (based on February prices of the December futures contract price) in many
marketing years, such as MY 2005 and 2006, have not led to cutbacks in acreage.
258 The reason is
that explained by the Appellate Body – upland co tton producers know that even if expected prices
stay low, their revenue will be protected fully by the marketing loan and counter-cyclical payments.259

b) How does Brazil respond to the argument of the United States that "by MY 2008 , the
projection is of no marketing loan payment at all"? (Rebuttal Submission of the
United States, para. 419).

195. It is remarkable that the Un ited States claims that there will be "no marketing loan payment at
all" when projections by the U.S. government itself ( see Table 4 above) show marketing loan
subsidies of $758 million in MY 2007 and $515 million in MY 2008. 260 The United States assertion
that "by MY 2008, the projection is of no market ing payments at all," is based on deterministic
estimates of world prices in future years. As e xplained above, "deterministic projections, by their

256 Exhibit Bra-671 (U.S. Departme nt of Agriculture's 2007 Farm Bill Proposal, p. 14, accessed
March 2007 at http://www.usda.gov/documents/07finalfbp.pdf).
257 Exhibit Bra-680 ("NCC urges disaster assistan ce for cotton producers," High Plains / Midwest
AG Journal, 15 March 2007, accessed March 2007 at
http://www.hpj.com/archives/2007/mar07/mar19/NCCurgesdisasterassistancef.cfm?title=NCC%20urges%20dis
aster%20assistance%20for%20cotton%20producers).
258 Brazil's First Written Submission, paras.137-143; Brazil's Rebuttal Submission, paras. 214-225;
Brazil's Oral Statement, paras 60-81 and Brazil's Comments on the U.S. Oral Statement, paras.18-27.
259 Appellate Body Report, U.S. – Upland Cotton, para. 445. See also, Brazil's response to question 62,
above.
260 Exhibit Bra-639 (Commodity Estimates Book for FY 2008 President's Budget, pp. 52, 71, 74-75,
79-80, 82, 84, 87 and 92, accessed February 2007 at
https://www.ccc2.net/ccc2app/2008PresBud/PresBud2008.htm).

nature, tend to underestimate outlays."
261 It is for this reason that USDA, FAPRI and the U.S.
Congressional Budget Office all use stochastic projections to estimate budget outlays.262

196. Indeed, USDA's MY 2006 estimate of $757 million in marketing loan payments appears to be
low based on the current adjusted world price AWP. The current AWP for upland cotton is 43.5 cents
per pound
263 and the average AWP for the first seven months of MY 2006 is 43.7 cents per pound. 264
This implies an average marketing loan subsidy of 8.3 cents per pound in the first seven months of
MY 2006, or $836 million in total.265 Marketing loan payments of $836 million are roughly similar to
the $898 million in marketing loan payments made in MY 2002 266 that were considered by the
original panel.

197. However, based on past experience and US DA data, $836 million is even conservative.
Under the marketing loan program, farmers are able to choose when to exercise their marketing loan
payment.267 Because of this flexibility and the obvi ous incentive of farmers to maximize their
marketing loan payments, marketing loan subsidi es on a per-pound basis are usually larger than the
per-pound difference between the loan rate and the average annual AWP. USDA explains that "the
loan program may overcompensate when production is marketed at prices above the level used to lock
in the loan benefit." 268 In fact, since MY 1999, actual upland cotton marketing loan payments have
been, on average, 3.8 cents larger that the di fference between the average AWP and loan rate. 269
Therefore, marketing loan subsidies in MY 2006 are likely to be significantly larger than
$836 million.

D. EXPORT CREDIT GUARANTEES

1. Outstanding export credit guarantees

Questions to the United States

90. The United States states, in para. 50 of its Opening Statement, that:

 ... nothing in the SCM Agreement provides that "withdrawing" a "subsidy" allegedly
"taking the form of a program" "includes an obligation to abstain from performing on
commitments outstanding under that program as of the deadline for implementation."
That argument improperly equates "perfo rming on commitments under the program"
with the "subsidy" itself. Such an equation was appropriate in Brazil – Aircraft
(21.5), where Brazil continued to issue new WTO-inconsistent bonds even after the
period of implementation on the basis that it had pre-existing contractual obligations

261 Exhibit Bra-460 (Explanatory Notes for Stochastic Budget Outlay Estimates, Farm Service Agency,
accessed October 2006 at http://www.fsa.usda.gov/Internet/FSA_File/msrexplain.doc).
262 Exhibit Bra-460 (Explanatory Notes for Stochastic Budget Outlay Estimates, Farm Service Agency,
accessed October 2006 at http://www.fsa.usda.gov/Internet/FSA_File/msrexplain.doc).
263 For the week of 23 March 2007, see http://www.fsa.usda.gov/Internet/FSA_File/cotton_rates.htm.
264 Exhibit Bra-673 (Upland Cotton Prices, March 2007).
265 USDA's estimate of U.S. production in MY 2007 has been revised upward to 20.973 million bales,
the third largest amount in history. 20.973 million bales * 480 pounds per bale * 0.08 dollars per pound =
$836 million.
266 Brazil's First Written Submission, Table 6 at para. 111.
267 See Brazil's First Written Submission, paras. 65-67. See also Exhibit Bra-681 (Upland Cotton
Direct and counter-cyclical Payment Program and Marketing Assistance Lo ans, Farm Service Agency Fact
Sheet, March 2006, acce ssed March 2007 at
http://www.fsa.usda.gov/FSA/printapp?fileName=pf_20060301_insup_en_cottdcp06.html&newsType=prfactsheet).
268 Exhibit Bra-682 (Risk Manageme nt, 2007 Farm Bill Theme Pape r, May 2006, p. 2, accessed
March 2007 at http://www.usda.gov/documents/Farmbill07riskmgmtsum1.doc).
269 Exhibit Bra-683 (Marketing Loan Subsidies and Average AWP).

to do so. However, it is not accurate here, where the guarantees are not themselves
prohibited subsidies.
 Would the United States please clarify what it meant in the underlined sentence?

91. In paragraph 342 of its First Written Submissi on, Brazil indicates that the total amount of
guarantees under the GSM 102, GSM 103 and SCGP programs outstanding on 1 July 2005 amounted
to $8.5 billion.

 (a) Does the United States agree with the figure provided by Brazil?

(b) Please indicate what proportion of that amount concerns exports of unscheduled
products? (please distinguish between principal and interests)

(c) Please indicate what proportion of t hat amount concerns exports of scheduled
products, and in particular rice (please dis tinguish, in each case, between principal
and interest).

Questions to Brazil

92. Is it of any relevance to the Panel's assessme nt of Brazil's claims concerning "outstanding"
export credit guarantees that what was at issue in Brazil – Aircraft (21.5) was the issuance, after the
implementation date, of new
 bonds, and that bonds which had been issued prior to the implementation
date could be redeemed for a number of years therea fter (see para. 46 of the US' Opening Statement
at the panel meeting).

198. In Brazil – Aircraft (21.5) , Canada did not claim that Brazil was precluded from making
future payments with respect to PROEX bonds issu ed prior to the implementation date. Rather,
Canada claimed that the obligation in Article 4.7 of the SCM Agreement prevented Brazil from
issuing new PROEX bonds after the end of the im plementation period purs uant to letters of
commitment concluded prior to that date. Both the panel and the Appellate Body ruled that Brazil
could not issue new bonds after the implementation da te because this amounted to the continued grant
of prohibited subsidies, contrary to Articles 3.1(a), 3.2 and 4.7 of the Agreement. The parallel in this
dispute, with respect to ECGs outstanding on 1 July 2005, is at a more abstract level – the obligation
to abstain from performing on commitments outstanding under a program as of the deadline for
implementation.

199. This obligation flows from the text of the SCM Agreement . Under Article 3.2 of the
SCM Agreement, "[a] Member shall neither grant nor main tain" prohibited subsidies. The obligation
in Article 4.7 of the Agreement to withdraw a subsidy, therefore, extends to both the "grant" of new
subsidies and the "maintenance" of existing s ubsidies. As the Appellate Body held in U.S. – FSC
(21.5 II) , the obligation to "fully" withdraw a prohib ited subsidy is not achieved if the Member
"leaves the entirety or part of the original prohibited subsidy in place".
270

200. In this dispute, the United States has "le[ft ] the entirety" of the outstanding prohibited ECGs
"in place" after the implementation date. On the Un ited States' view, it is entitled to "maintain" the
prohibited ECGs throughout the life of the loan that is guaranteed. Thus, following the end of the
implementation period, and at any time during the remaining life of the loan, the United States could
make payments pursuant to a prohibited subsidy. By continuing to perform on its commitments under
the prohibited subsidies, the United States "maint ains" them unchanged. The United States has,
therefore, failed to comply fully with its obligation under Article 4.7 to withdraw these subsidies.

270 Appellate Body Report, U.S. – FSC (21.5 II), para. 84.

201. Brazil reiterates that its claim is entirely pr ospective in nature. In essence, Article 4.7
prevents the United States from taking any prospective action , after the implementation date, to
perform on its commitments under prohibited subsidies that it maintains unchanged.

93. The Panel notes that Exhibit Bra-516 indicat es outstanding amounts for GSM 5 as of 30 June
2006
 rather than as of 30 June 2005 as indicated in footnote 523 of Brazil's First Written Submission.
Please explain.

202. Instead of Exhibit Bra-516, the correct e xhibit, which includes data as of 30 June 200 5, is
Exhibit Bra-586. Brazil apologizes for this inadve rtent error, which has no material impact on
Brazil's claim. As corrected, footnote 523 of Brazil's First Written Submission should read as
follows:

523 The exact amount, including interest arrears of USD 50.7 million, is
USD 8,543,477,674. See Exhibit Bra-515 (Total Exposure under P.L. 480 Title 1 &
GSM Programs as of June 30, 2005). Brazil notes, however, that this figure includes
USD 41.5865 million of ECGs under a program titled "GSM 5". Brazil notes that if
outstanding GSM 5 ECGs (including interest arrears) are excluded, the exact amount
of GSM 102, GSM 103 and SCGP ECGs outstanding on 30 June 2005 was
USD 8,501,899,803
28,537. See Exhibit Bra-586516 (Commodity Credit Corporation
Guarantee Loan Program Summary for FAS as of June 30, 2005).
2. Legal Bases for Brazil's export subsidies claims

Question to the United States

94. The United States has noted that the orig inal Panel's findings (that the export credit
guarantees at issue constituted prohibited export subsidies) were based on item (j). The United States
has also asserted that it has based itself on item (j) in implementing the DSB recommendations with
respect to export credit guarantees. Please clarify whether the Panel should understand the United
States' argument in this respect as an argument concerning the scope of the present proceeding.

3. "Benefit" under Articles 1.1 and 3.1(a) of the SCM Agreement

Questions to both parties

95. Brazil has taken the position that "different parties to a transaction involving a GSM 102
ECG derive different benefits from the GSM 102 ECG, each of which is potentially subject to
assessment under Article 1.1(b) of the SCM Agreemen t" and has indicated that it is, in this
proceeding, "primarily concerned" with the benefit received by the US exporter in the form of below-
market fees (para. 404, Brazil's Rebuttal). The United States has challenge d Brazil's approach of
focusing on fees to the exclusion of other elements of the total cost of the loan. Please explain,
referring to the provisions of the SCM Agreement and WTO jurisprudence (if any applicable), your
position as to whether: (1) export credit guarantees and other types of subsidies may involve more
than one type of benefit and/or recipient; (2) whet her it is up to the complaining Member to decide
which benefit it chooses to challenge.

203. In this question, the compliance Panel asks whether (i) ECGs and other types of subsidies
may involve more than one type of benefit and/or r ecipient; and, (ii) if so, whether the complainant
can choose which benefit/recipient to challenge. Th e background to this question appears to be the
United States' argument that it is not sufficient for Brazil to prove that a benefit is conferred on the
U.S. exporter through the provision of a loan guar antee on better-than-market terms. Instead, it

argues that Brazil must prove that this guarantee also resulted in a benefit to a foreign bank by
lowering the "total costs of funds" involved in the transaction.271

204. Under Article 1.1, a "subsidy" exists when a "f inancial contribution" confers "a benefit". The
word "a" indicates that it is sufficien t that any form of benefit is conferred. Further, in terms of the
wording of the "benefit" requirement in Article 1. 1(b), it suffices that "a benefit" is conferred on any
entity in connection with goods produced by the granting Member.
272 Thus, a subsidy is proved to
exist if a government provides goods or services to a producer or exporter on better-than-market
terms. It is not necessary for the complainant to pr ove that a government's financial contribution also
confers "a benefit" on other entiti es, including foreign entities. No r is it necessary to prove that the
cumulative impact of the financial contribution is to confer a benefit on all entities affected by the
contribution.

205. Although it suffices to prove that "a benefit" is conferred on one entity, Article 1.1 does not
require that "a benefit" be conferred exclusively on one entity. Instead, the language of sub-
paragraph (b) is sufficiently open-ended to accommoda te the possibility that a financial contribution
confers a benefit on several entities.

206. There are many situations in which a financ ial contribution confers a benefit on more than
one entity. A financial contribution may reduce a company's costs of producing and selling goods, for
example, costs of research, inputs, production, marketing, or transport. The benefit conferred by such
financial contributions may be passed through, in whole or in part, to downstream producers and
consumers through lowered prices. This is specifi cally recognized in the rules governing the price
effects of subsidies in Article 6 of the SCM Agreement.

207. There are several examples in the case-law of a single financial contribution that benefits
more than one recipient. In Brazil – Aircraft (21.5 II) , Brazil was found to provide subsidies to
purchasers of Brazilian civil aircraft in the form of in terest rate buy-downs that lowered the financing
costs on the export of Brazilian products. The purch aser was found to benefit from reduced interest
charges. Additionally, the financial contribution benefited the Brazilian producer of civil aircraft,
which was able to export its produc ts with improved financing. Fu rther, a benefit accrued to the
lenders that provided the financing in question.
273

208. In that dispute, the compliance panel consid ered that the crucial enquiry was whether the
Brazilian producer of the goods benefited from the financial contribution. 274 The evidence showed
that the lender received the payments under the bonds. Lenders might, as a result, offer improved
financing terms to purchasers which, in turn, mi ght benefit the Brazilian producer. However, there
was no evidence that lenders, in fact, offered improved credit terms to purchasers and, thus, no
evidence that the bonds resulted in overall reduced finance costs for purchaser s. Instead, the panel
assumed that it was " very unlikely that lenders will not pass on at least part" of the financial
contribution to purchasers through better credit terms. 275 Otherwise, it said, "borrowers could simply

271 U.S. First Written Submission, para. 138.
272 Appellate Body Report, Canada – Aircraft, para. 154 ("Logically, a 'benefit' can be said to arise
only if a person, natural or legal, or a group of persons, has in fact received someth ing.") and Appellate Body
Report, U.S. – CVDs on Certain EC Products, para. 108 (Characterizing paragraph 154 of its report in Canada –
Aircraft, the Appellate Body stated that "when referring to 'a recipient' in Canada – Aircraft, we did not exclude
the possibility that 'a recipient' could include both a firm and its owner. A 'group of persons' could include a
group of 'natural persons', or a group of 'natural and legal persons', or a group exclusively of 'legal persons'.").
273 See generally Panel Report, Brazil – Aircraft (21.5 II), paras. 5.27-5.29.
274 Panel Report, Brazil – Aircraft (21.5 II), para. 5.27.
275 Panel Report, Brazil – Aircraft (21.5 II), footnote 44.

choose other lenders".
276 The panel also assumed that there was a prima facie case that producers
benefited from the payments if purchasers of the aircraft benefited.277

209. In U.S. – Softwood Lumber IV , Canada provided standing timber to timber harvesters. In a
countervailing duty investigation, the United States found that all of this subsidy was provided to
processed lumber products, even though some of the lumber processors were not harvesters of
standing lumber. Both the panel and the Appe llate Body held that the United States acted
inconsistently with the SCM Agreement by failing to establish whether, in fact, the lumber processors
benefited from the financial cont ribution given to the harvesters.
278 Further, the entire premise of the
U.S. investigation was that the benefit could pass-th rough to yet another recipient, the U.S. consumer
of Canadian lumber products, through lower lumber prices.

210. In U.S. – CVDs on Certain EC Products , the panel and Appellate Body held that, in a
privatization transaction, the benefit under Article 1.1(b) from a subsidy provided to a state-owned
company may pass through to the priv atized company, if the price paid for the company is below fair
market value or the transaction is not at arm's length.
279 In that event, a benefit would also be
bestowed on the shareholders of the privatized co mpany, which paid less for the company's equity
than its fair market value.

211. In each of these situations, the SCM Agreement contemplates that a single financial
contribution could provide different types of "benefit" to multiple recipients. However, in order to
demonstrate the existence of a subsidy, it suffi ces to show that the initial recipient received a
"benefit". Moreover, where that party receives a "b enefit", it is not necessary to examine whether the
"benefit" is subsequently passed through or extinguished as a result of other transactions. Nor is it
necessary to assess the cumulative impact of the financial contribution on all entities affected by it.

212. Indeed, even if the entire "b enefit" passes through from an initial recipient to other recipients,
a subsidy is still granted to the initial recipient. For example, in U.S. – Softwood Lumber IV , even if
the entire benefit had passed from the harvesters to the lumber producers, a complainant can still
prove that "a benefit" was conferred on harvesters under Article 1.1(b) of the SCM Agreement. If the
initial grant of that subsidy had been continge nt upon export performance, the subsidy would be
prohibited, regardless of whether the benefit subsequently passed through to other recipients.

213. In this dispute, the situation is similar. As the CCC has itself recognized, the provision of
cheap ECGs through the GSM 102 program provides bene fits to several different commercial parties.
USDA's Foreign Agricultural Service ("FAS") notes that "[p]rogram benefits are shared between U.S.
exporters and bankers and foreign importers and bankers. To work effectively, all parties must derive
some benefit or they will not use the program."
280 Moreover, in a publication regarding GSM ECGs,
under the title "Benefits to Participants," FAS notes that "[u]nder the GSM credit guarantee programs
all participants can benefit. … The GSM export credit guarantee programs are designed for everyone
to benefit."
281

276 Panel Report, Brazil – Aircraft (21.5 II), footnote 44.
277 Panel Report, Brazil – Aircraft (21.5 II), footnote 42.
278 Appellate Body Report, U.S. – Softwood Lumber IV, paras. 146-147 and Panel Report, U.S. –
Softwood Lumber IV, paras. 7.91 and 7.93-7.99.
279 See generally Appellate Body Report, U.S. – CVDs on Certain EC Products and Panel Report, U.S.
– CVDs on Certain EC Products.
280 Exhibit Bra-588 (Agricultural Export Credit Guarantee Program s Assessment, ExpectMore.gov,
Section 1.5, accessed January 2007 at
http://www.whitehouse.gov/OMB/expectmore/detail.10002020.2005.html

281 Exhibit Bra-589 (FAS Online, Keys to Successful Trade, section regarding "Benefits to
Participants," accessed January 2007 at http://www.fas.usda.gov/excredits/videotxt.html).

214. Most importantly, as the United States h as acknowledged in these proceedings, the CCC
provides a service to the U.S. producer/exporter th rough the provision of an ECG in a situation where
no commercial operator is willing to provide the same service.282 This shows the existence of a per se
"benefit" in that transaction between the U.S. gove rnment and the producer/exporter. Further, the
price of the ECG is below the price charged by the United States' own Export-Import Bank for
comparable products.283 This confirms the existence of a benefit in the initial transaction. As a result,
by providing a financial contribution to U.S. pr oducers/exporters on better-t han-market terms, the
United States grants a subsidy to these producers/e xporters. That subsidy is prohibited because it is
contingent upon export performance.

215. As noted above, in Brazil – Aircraft (21.5 II), the compliance panel considered that the crucial
issue was whether the Brazilian producer received a benefit. The existence of a benefit to other
parties was considered unimportant. In this disput e, Brazil has proved that the U.S. producer/exporter
receives a benefit from the provision of a financial service on better-than-market terms. That suffices
to demonstrate the existence of a subsidy.

216. In addition to the U.S. producer/exporter rece iving a benefit, the U.S. government explains
that, in the usual course of events, the grant of a GSM 102 ECG to the exporter bestows benefits on
other parties that are engaged in separate transactions involving the exported U.S. goods:

• FAS states that the U.S. bank is able to pr ovide a loan to a foreign bank on profitable
terms with virtually no risk because the loan is backed by the U.S. Government.284

• FAS also notes that the foreign bank secures f unds from the U.S. bank on, at the very
least, better credit terms than would otherwise be available because the loan is backed
by the U.S. Government.285 Finally, FAS states that the importer obtains credit 286, on
terms better than could otherwise be secured 287; the largest participant in the GSM
program characterizes the "benefit" to an importer as "better financing terms!!!"288

282 U.S. 9 March Comments on Brazil's Oral Statement, para. 29 ("[E]xport credit guarantees and other
similar loan guarantees are now and have always been instruments provided predominantly – if not exclusively
– by governments and international financial institutions, as opposed to purely private banking institutions.").
283 Brazil's First Written Submission, paras. 381-406. See also Id., Annexes III (Statement of Professor
Rangarajan Sundaram) and IV (Methodology for Comparison of GSM 102 Fees with Fees for ExIm Bank
Products), and Exhibits Bra-536 and Bra-537.
284 Exhibit Bra-589 (FAS Online, Keys to Successful Trade, section regarding "Benefits to
Participants," accessed January 2007 at http ://www.fas.usda.gov/excredits/videotxt.html). ("The U.S. bank's
risk of loss is reduced, and the banks profit from letter of credit and loan servicing fees.").
285 Exhibit Bra-588 (Agricultural Export Credit Guarantee Program s Assessment, ExpectMore.gov,
Section 1.1, accessed January 2007 at
http://www.whitehouse.gov/OMB/expectmore/detail.10002020.2005.html). (GSM ECGs "make commercial
credit available at a reduced cost to higher risk markets.") (emphasis added). See also Exhibit Bra-589 (FAS
Online, Keys to Successful Trade, section regarding "Benefits to Part icipants," accessed January 2007 at
http://www.fas.usda.gov/excredits/videotxt.html) ("The importer's bank benefits from the competitive cost of
capital on its dollar borrowing, by being able to provide a service to its customers, and from earning fees on
letters of credit and other services."). In fact, the GS M 102 regulations provide that the benefit is even more
dramatic, since the program "operate[s] in cases where credit is necessary to increase or maintain U.S. exports to
a foreign market and where U.S. financial institutions would be unwilling to provide financing without CCC's
guarantee." Exhibit Bra-519 (7 C.F. R. § 1493.10(a)(2), GPO Access Onlin e, January 2006, accessed July 2006
at http://www.gpoaccess.gov/cfr/index.html).
286 Exhibit Bra-589 (FAS Online, Keys to Successful Trade, section regarding "Benefits to
Participants," accessed January 2007 at http ://www.fas.usda.gov/excredits/videotxt.html) ("The importer
benefits by obtaining U.S. agricultural products, most likely with deferred payment.") (emphasis added).
287 Exhibit Bra-588 (Agricultural Export Credit Guarantee Program s Assessment, ExpectMore.gov,
Section 1.1, accessed January 2007 at

217. In Brazil – Aircraft (21.5 II) , the panel found that it was "very unlikely" that payments to the
lender did not also benefit the purchaser because, otherwise, the purchaser would simply go to a
different lender. In this dispute also, the fo reign obligors have a choice of CCC-approved U.S.
banks
289, and can, therefore, ensure that the guarantee results in lower finance costs that would be
available commercially. Indeed, USDA's FAS states that the ECG programs "make commercial credit
available at a reduced cost to higher risk markets 290, clarifying the U.S. government's view that the
U.S. bank passes along to the foreign obligor at least a portion of the reduced cost of borrowing
enabled by the GSM 102 ECG. FAS separately confirms that benefits of a CCC ECG are indeed
passed along from the U.S. bank to the foreign bank, as well as from the foreign bank to the
importer.
291

218. From the perspective of the U.S. government , the specific terms and conditions attaching to
the other transactions are of no importance at all, pr ovided only that they occur. In other words, the
U.S. government neither verifies nor controls the fi nancing costs of the loan transactions that it
guarantees. In Brazil – Aircraft (21.5 II) , the panel attached importance to the fact that the granting
Member, Brazil, did not place any "limitation" on the terms of the underlying financing between the
lender and purchaser to prevent the PROEX payments from conferring a benefit. 292 Similarly, far
from limiting the financing terms of the other transactions, the United States is wholly ignorant of the
details surrounding them. Its exclusive interest is to provide the U.S. producer/exporter with a service
that facilitates the exportation of U.S. agricultural products, and it provides that service on terms that
are highly preferential, if not unique.

219. From the perspective of the U.S. producer/e xporter, the specific terms and conditions of the
other transactions are also irrelevant. Its sole inte rest is to ensure that the importer buys its U.S.
products. To that end, it purchases a guarantee from the U.S. government that enables the importer to
obtain funding to purchase U.S. goods. The U.S. pr oducer/exporter is not involved in the negotiation
of the separate transactions between the importer a nd the foreign bank, and between the foreign bank

http://www.whitehouse.gov/OMB/expectmore/detail.10002020.2005.html). (GSM ECGs "make commercial
credit available at a reduced cost to higher risk markets.") (emphasis added).
288 Exhibit Bra-684 (CoBank presenta tion, p. 7, accessed March 2007 at
http://www.cottoninc.com/2005EFSConferencePresentationsSingapore/FinancingUSACottonImportsUnderGSM/).
The deal flow chart on page 11 of this presentation confirms that the reference on page 7 to "your company" is a
reference to the importer. Brazil notes that CoBank's vi ews on this matter are well-informed, as it enjoys "60%
market share of GSM loans globally". See Id., p. 2.
289 See Exhibit Bra-525 ("U.S. Financial Institutions Approved To Be Assignees Under CCC's Export
Programs," USDA FAS Online, accessed October 2006 at http://www.fas.usda.gov/excredits/USbanks.html).
290 Exhibit Bra-588 (Agricultural Export Credit Guarantee Program s Assessment, ExpectMore.gov,
Section 1.2, accessed January 2007 at http://www.whitehouse.gov/OMB/expectmore/detail.10002020.2005.html)
(emphasis added). See also Exhibit Bra-685 (USDA FAS publication, "Will you get paid for the sale you just
made", p. 4, accessed March 2007 at h ttp://www.fas.usda.gov/excredits/LOANS.PDF) (Characterizes a benefit
from the ECG programs as the ability of foreign banks to "share the benefits of longer terms and lower rates"
with importers; if the foreign bank itself did not get lower rates from the U.S. bank, it would have nothing to
"share" with the importer).
291 See Exhibit Bra-685 (USDA FAS publication, "Will you get paid for the sale you just made", p. 4,
accessed March 2007 at http://www.f as.usda.gov/excredits/LOANS.PDF) (Characterizes a benefit from the
ECG programs as the ability of foreign banks to "share the benefits of longer terms and lower rates" with
importers; if the foreign bank itself did not get lower rates from the U.S. bank, it would have nothing to "share"
with the importer.). Importers also have choices when considering which foreign bank to use. See
Exhibit Bra-526 (GSM Program Foreign Bank Oblig ors, USDA FAS Online, accessed September 2006 at
http://www.fas.usda.gov/excredits/foreignbanks.html).
292 Panel Report, Brazil – Aircraft (21.5 II), para. 5.32 ("PROEX III payments may, in the absence of
some limitation placed by Brazil on the degree of concessionality of export credits supported by interest rate
equalization, be expected to allow purchasers … to obtain export credits on terms more favourable than those
available to them in the commercial market.") (emphasis in original).

and the U.S. lending bank. Its interests are not affect ed, in the least, by the foreign obligors' costs of
funds.

220. In this dispute, Brazil has focused on the initial transaction between the U.S. government and
the U.S. producer/exporter regarding the purchase of financial services to facilitate exportation of U.S.
agricultural products. To the extent that the U.S. producer/exporter receives a financial contribution
from the U.S. Government on better-than-market te rms, the United States confers a benefit on that
producer/exporter under Article 1.1(b), regardless of whether that transaction also confers a benefit on
third parties in separate transactions that are facilitated by the first transaction.

221. Brazil's focus on the terms and conditions of the initial transaction between the U.S.
government and the U.S. producer/exporter is fully consistent with the requirement in Article 1.1(b) to
prove that "a benefit" is conferred. It is not n ecessary for Brazil to prove, in addition, that the U.S.
government also conferred a consequential benef it on a foreign borrower through reduced finance
costs.

96. The parties differ as to whether different types of loans can be compared as long as they have
the same "average life." What support (economic literature, etc. ) exists for your position on this
issue?

222. In his statement at the Panel meeting, Pr ofessor Sundaram offered a simplified example to
illustrate the lack of comparability, in terms of cred it risk, between the bullet loan in the single valid
data point offered by the United St ates, and credit extended under GSM 102.
293 The U.S. assertion of
comparability hinges on the bullet loan's "average lif e" being sufficient to capture its riskiness.
Professor Sundaram's example demonstrates that the U.S. "average life" argument is incorrect.

223. In sum, Professor Sundaram demonstrated that two loans do not become equivalent in their
credit-riskiness simply because they have the same average lives; patterns of default must be taken
into account. The compliance Panel will recall that the U.S. example involves a two-year bullet loan,
while a GSM 102 loan is a three-year amortizing loan. One reason differing risks of default must be
taken into account is that at any point in time, the principal exposures between the two-year bullet
loan and the three-year amortizing loan can be different. The amortizing loan will have a lower
principal exposure than the bullet loan between years one and two, and a higher principal exposure
between years two and three. The United States wo uld have the Panel believe that if one "averages"
out the lives of these two loans, the higher and lower exposures will offset one another. As
Professor Sundaram explained, this is not necessar ily so, because the likelihood of default in the
two periods (between years one and two, on the one hand, and between years two and three, on the
other) may be different. For example, while a co mpany may be solvent and pose relatively low risk
of default in the short term, its long-term prospects might be uncerta in, and thus its risk of default
enhanced.

224. The compliance Panel asks for support for this explanation – more specifically, support for
the conclusion that two-year bullet loans and thr ee-year non-amortizing loans are not equivalent, and
that averaging out the lives of the two loans does not make them so, in light of the varying risks of
default. As the compliance Panel can appreciat e, the finance and economics literature does not
generally contain references to negatives; that is , it does not state and prove "non-theorems". Thus,
while there are a number of instruments to which spreads on bullet loans are not
 equivalent –
amortizing loans with "average lives" being one of them – the literature generally focuses instead on
theorems addressing instruments to which spreads on bullet loans are equivalent.

225. To respond to the Panel's question, theref ore, Professor Sundaram prepared an expert
statement attached as Exhibit Bra-686 to these r esponses. Professor Sundaram's statement first

293 Brazil's Oral Statement, paras. 212-214 and 219-222.

explains graphically why at any point in time, the principal exposures between the two-year bullet
loan and the three-year amortizing loan can be di fferent, which in turn illustrates why the two loans
pose potentially differing risks of default. With references to the finan ce and economics literature on
pricing, Professor Sundaram then employs the funda mental valuation principle of "risk-neutral
valuation" to derive exact equations conn ecting spreads on bullet and amortizing bonds,
demonstrating that the two are not equivalent.

Questions to the United States

97. Assuming that the Panel accepts the United St ates' argument that "benefit" is to be assessed
on the basis of the "total costs of funds", what do you consider Brazil must establish in order to meet
its burden of proof in that respect? Must Brazil pr ove that a benefit is conferred in all instances (all
transactions and all recipients)? In most instances?

98. Does the United States dispute the accura cy of Brazil's comparison of GSM 102 fees with
Exim Bank fees? Does the United States agree that ExIm Bank and GSM 102 guarantees are (at least
in certain circumstances) similar or comparable?

99. Please comment on Brazil's argument that th e GSM 102 fees are not sufficiently scaled to
take into account country risk (i.e. they vary only mi nimally according with country risk) (see, inter
alia, paras. 410-412 Brazil's First Written Submission).

Questions to Brazil

100. Assuming the Panel were to agree with the United States that the proper benchmark to
determine "benefit" is the "total cost of funds" of the transactions, what elements of evidence has
Brazil provided the Panel in this respect (oth er than evidence from the Regulations that the
programme targets situations where no credit would be available on the market)? In answering,
please address the United States' argument at para. 133 of its First Written Submission that "Brazil
has made no attempt to provide such specific in formation on individual loan costs and fees or to
identify comparable commercial loans and their terms".

226. The United States asserts that to implement its rigid "total cost of funds" approach to
Article 14(c)
294, Brazil would need to provide data regardi ng "individual loan costs and fees" and "to
identify comparable commercia l loans and their terms". 295 Brazil is not in the position of an
investigating authority in a countervailing duty proceeding, with the powers provided by Part V of the
SCM Agreement to secure, through questionnaires and verifi cation visits, this type of data. The
United States itself does not know the rates at which lending is secured with and without GSM 102
ECGs, as it noted in the original proceedings 296, and as evidenced in these pr oceedings by its need to
invoke second- or third-hand knowledge of alleged lending from third parties. 297 (This alone
illustrates the severable nature of the transaction between the CCC and the U.S. exporter – the only
terms of which the U.S. government is aware ar e those associated with the purchase of the GSM 102
ECG.)

294 U.S. First Written Submission, para. 138.
296 See, e.g., Panel Report, U.S. – Upland Cotton, Annex I-8 (U.S. 22 December 2003 Answers to Panel
Questions, para. 109 ("CCC has no role in the arrangements between the foreign bank issuing the letter of credit
and the importer, which is typically the account party under the letter of credit.")).
297 See U.S. [[ ]] examples at paragraphs 119-130 of the United States' First Written Submission.
[[ ]] interest in cooperating with the United States in this dispute might be motivated by the fact that its
lending business would be substantially impacted by the findings Brazil seeks. [[ ]].
Exhibit Bra-[[ ]] [[ ]].

227. Indeed, no complaining Member in a dispute under Part II of the SCM Agreement enjoys such
authority or such unfettered access to data. This is likely one reason why Article 14 does not, as a
matter of law, apply directly to a dispute under Part II of the SCM Agreement .298 E v e n i n
countervailing measures disputes, the Appellate Bo dy has limited the rigid application of the
quantification "guidelines" in Article 14. In U.S. – Softwood Lumber IV, the Appellate Body relied on
the term "guidelines" to inject flexibility into the provision.

228. In that dispute, the Appellate Body agreed with the United States "that the use of the term
'guidelines' in Article 14 suggests that paragraphs (a) through (d) should not be interpreted as 'rigid
rules that purport to contemplate ever y conceivable factual circumstance'."
299 Thus, according to
settled case-law, Article 14 does not prescribe hard and fast rules, even in countervailing measure
disputes, to which the provision is explicitly applicable.

229. Outside the context of countervailing measure disput es, this flexibility is just as important to
preserve. The original panel's analysis is telling in this regard. Although recognizing the need to
appreciate the "general order of magnitude" of the subsidies at issue for the purposes of assessing their
adverse effects in a dispute under Part III of the SCM Agreement
300, the original panel, citing the
"unilateral" nature of countervaili ng duty investigations, forcefully rejected the United States' request
that it transfer the "quantitative focus and more deta iled methodological obligations of Part V into the
provisions of Part III of the SCM Agreement."301

230. Preserving this flexibility is even more important in disputes under Part II of the
SCM Agreement (unlike in a dispute under Part V, where a duty must be calculated), where the
amount of benefit need not be determined with precision. Rather, a showing of some benefit suffices.
In a dispute under Part II, only the existence of a "b enefit" under Article 1.1(b) must be established,
and not the quantity of that benefit. The origin al panel considered that imposing the "quantitative
focus and more detailed methodological obligations of Part V" of the SCM Agreement on disputes
preceding under Part III of the Agreement was not appropriate, even where assessing the "magnitude"
of the subsidy was required. 302 For a dispute under Part II of the Agreement, where no assessment of
the "magnitude" of the subsidy is required, there is no basis whatsoever to impose the "quantitative
focus and more detailed methodological obligations of Part V …. " 303

231. Moreover, the "factual circumstances" 304 in these proceedings under Part II of the
SCM Agreement are such that a "particularized showing"305, utilizing data concerning "individual loan
costs and fees" or "comparable commercial loans and their terms" 306, is not necessary. Proof of some
"benefit" can be established under Article 1.1(b) of the SCM Agreement in this dispute without the
type of evidence on which the United States insist s. In proceedings involving claims against
government guarantees under Parts II and V of the SCM Agreement, panels have already ruled twice

298 Appellate Body Report, U.S. – Softwood Lumber IV, para. 92. See also U.S. First Written
Submission, para. 132 ("… Article 14(c) applies, by its terms, only 'for the purposes of Part V' of the
SCM Agreement …"). For Brazil's views on the proper interpreta tion of Article 14(c) in a dispute under Part II
of the SCM Agreement, see Brazil's Rebuttal Submission, paras. 400-413; Brazil's Oral Statement,
paras. 193-208; Brazil's Closing Statement, paras. 28-29 ; Brazil's 6 March Answers to Questions, paras. 54-57
and Brazil's 16 March Comments on U.S. Answers, paras. 120-122.
299 Appellate Body Report, U.S. – Softwood Lumber IV, para. 92.
300 Panel Report, U.S. – Upland Cotton, para. 1194.
301 Panel Report, U.S. – Upland Cotton, para. 1177. See also Id., para. 1167.
302 Panel Report, U.S. – Upland Cotton, para. 1177. See also Id., para. 1167.
303 Panel Report, U.S. – Upland Cotton, para. 1177. See also Id., para. 1167.
304 Appellate Body Report, U.S. – Softwood Lumber IV, para. 92.
305 U.S. 6 March Response to Question 41, para. 80.

that evidence of the type insist ed on by the United States is not necessary to show that a benefit
exists.
307

232. In this response, Brazil demonstrates that even if "the proper benchmark to determine 'benefit'
is the 'total cost of funds' of the transactions", th ere is sufficient evidence of record, relevant to the
"factual circumstances"
 308 at hand or otherwise, sufficient to prove a "benefit" under Article 14(c) of
the SCM Agreement.

 a. Recipient of a GSM 102 ECG does not secure credit

233. Even assuming the relevance of the Article 14 guidelines to a dispute under Part II of the
Agreement, it is not at all clear that Article 14(c) applies in the case of a GSM 102 ECG.

234. Article 14(c) presupposes that "the firm re ceiving the guarantee" is also "the firm that
borrows funds and "pays on a loan". As the Un ited States has reminded the Panel, however, a GSM
102 ECG is provided to and paid for by the U.S. exporter, and not "the firm" that seeks or secures
credit.
309 The benefit to the U.S. exporter is severab le, and measurable by the degree to which GSM
102 fees are below relevant benchmarks.310 As a factual matter, therefore, Article 14(c) is not directly
applicable to GSM 102. While rigidly following an Article 14(c) approach might be appropriate in
some circumstances, doing so here would mask an im portant "benefit" to a U.S. exporter, risking that
"the subsidy disciplines in the SCM Agreement … could be undermined or circumvented."
311

 b. GSM 102 foreign obligors could not otherwise secure credit

235. The panel in EC – DRAMs agreed that a government guarantee confers a "benefit" per se if
without the guarantee, commercial lendi ng would not have been available. 312 Brazil has
demonstrated, using official, normative statements by the U.S. government concerning GSM 102, that
the program enables financing that could not otherw ise be secured at market. Specifically, the GSM
102 regulations state that GSM 102 operates "where U.S. financial institu tions would be unwilling to
provide financing without CCC's guarantee " and "where the guarantee is necessary to secure
financing of the export."313 USDA FAS' self-assessment of the program states that the program is for
use where "obligors are too risky for the private sector, but are marginally creditworthy." 314 FAS'
self-assessment goes on to characterize GSM 102 as targeting countries that are "not considered to be
investment grade."315

307 Panel Report, EC – CVDs on DRAMs, para. 7.189; Panel Report, Canada – Aircraft Credits and
Guarantees, para. 7.345.
308 Appellate Body Report, U.S. – Softwood Lumber IV, para. 92.
310 Brazil's Oral Statement, paras. 205-208; Brazil's Rebuttal Submission, paras. 402-413.
311 Appellate Body Report, U.S. – Softwood Lumber IV, para. 100.
312 Panel Report, EC – CVDs on DRAMs, para. 7.190.
313 Exhibit Bra-519 (7 C.F. R. § 1493.10(a)(2), GP O Access Online, January 2006, accessed July 2006
at http://www.gpoaccess.gov/cfr/index.html) (emphasis added).
314 Exhibit Bra-588 (Agricultural Export Credit Guarantee Program s Assessment, ExpectMore.gov,
Section 1.1, accessed January 2007 at
http://www.whitehouse.gov/OMB/expectmore/detail.10002020.2005.html) (emphasis added).
315 Exhibit Bra-588 (Agricultural Export Credit Guarantee Program s Assessment, ExpectMore.gov,
Section 1.5, accessed January 2007 at
http://www.whitehouse.gov/OMB/expectmore/detail.10002020.2005.html) (emphasis added). See also Id.,
Section 2.1 ("The GSM-102/103 programs are primarily targeted to non-investment grade countries (ICRAS
grades D-E).") (emphasis added). See also Exhibit Bra-685 (USDA FAS publication, "Will you get paid for the
sale you just made," p. 4, accessed March 2007 at http://www.fas.usda.gov/excredits/LOANS.PDF) (Quoting a
U.S. bank as saying that "[t]he GSM programs help us accommodate the financing of U.S. agricultural exports

236. In other words, GSM 102 ECGs are used wh ere commercial lending would not otherwise be
available on any terms. In these factual circumstances, as in EC – DRAMs, no quantitative assessment
under the standard in Article 14(c) is required to show that a "benefit" is conferred on a foreign
obligor. Where official, normative statements by the U.S. government demonstrate that GSM 102
ECGs secure credit for foreign obligors that woul d otherwise not be available, those ECGs, by
definition, lower the "total cost of funds"
316 involved in the transaction.

237. Commentators have noted that, in such cases, the evidence demanded by the United States to
implement its rigid "total cost of funds" approach to Article 14(c) is not obtainable:

In some cases … it may be difficult to dete rmine the rate of interest which would
have been paid in the absence of the gu arantee … especially in those instances in
which the program in question is initiated to resolve a market failure, or in cases in
which the program has supplanted a private sector market.
317
 Interest rates charged for U.S. dollar-denomin ated "comparable commercial loans", within the
meaning of Article 14(c), are not "observable" for the simple reason that, according to the
United States' own evaluation, such loans are not ava ilable. Outside the context of this litigation, the
United States has repeatedly confirmed that without a GSM 102 ECG, target foreign obligors could
not secure commercial credit.

 c. The US acknowledges that GSM 102 ECGs reduce borrowing costs

238. Official, normative statements by the U.S. government outside the context of this litigation
confirm that GSM 102 ECGs reduce foreign obligors' borrowing costs.

239. The compliance Panel will recall that from the perspective of the U.S. bank, a GSM 102 ECG
means that a foreign obligor is essentially risk-free; the GSM 102 ECG means that the foreign obligor
carries the same credit rating as the U.S. government. This enables the U.S. bank to offer the foreign
obligor better credit terms than it would or coul d without the GSM 102 ECG, for the simple reason
that a better credit rating enables a cheaper loan.

240. Official, normative statements by the U.S. govern ment demonstrate that this is precisely what
happens. USDA's FAS states that "[t]hese programs make commercial credit available at a reduced
cost to higher risk markets." 318 In other words, the U.S. government considers that the U.S. bank
passes along to the foreign obligor at least a portion of the reduced cost of borrowing enabled by the
GSM 102 ECG. In other publications, FAS has conf irmed that U.S. banks pass along benefits to
foreign obligors. 319 The largest participant in the GSM program, CoBank, also characterizes the

to emerging markets which, without the USDA guarantee, would be off limits for most banks and exporters.")
(emphasis added).
316 U.S. First Written Submission, para. 138.
317 Towe, Christopher M. "Government Contingent Li abilities and the Measurement of Fiscal Impact",
IMF Working Paper, 1990. This paper is available at:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=884863.
318 Exhibit Bra-588 (Agricultural Export Credit Guarantee Program s Assessment, ExpectMore.gov,
Section 1.2, accessed January 2007 at
http://www.whitehouse.gov/OMB/expectmore/detail.10002020.2005.html
) (emphasis added).
319 See Exhibit Bra-685 (USDA FAS publication, "Will you get paid for the sale you just made", p. 4,
accessed March 2007 at http://www.f as.usda.gov/excredits/LOANS.PDF) (Characterizes a benefit from the
ECG programs as the ability of foreign banks to "share the benefits of longer terms and lower rates" with
importers; if the foreign bank itself did not get lower rates from the U.S. bank, it would have nothing to "share"
with the importer).

"benefit" to an importer as "better financing terms!!!"
320 If the U.S. bank fails to pass a portion of the
"benefit", the list of CCC-approved U.S. banks is long 321, and the foreign obligor will go to another
CCC-approved U.S. bank to secure the savings enab led by the GSM 102 ECG. (Even without the
type of official, normative statements cited above , Brazil was subjected to a similar pass-through
assumption in Brazil – Aircraft (21.5 II).322)

 d. GSM 102 fees are below relevant benchmarks

241. In Canada – Aircraft Credits and Guarantees, a case under Part II of the SCM Agreement, the
panel concluded that where government guarantee f ees are not market-based, it is "safe to assume"
that the government guarantee lowers the cost of co mmercial credit, or in the United States' terms,
that the guarantee lowers the "total cost of funds" involved in a transaction.
323 The panel did not insist
on a rigid application of Article 14(c) with evidence to prove that the total cost of funds was, in fact,
reduced by cheap guarantees.

242. In these proceedings, Brazil has demonstrated , on a country-by-country, tenor-by-tenor basis,
that GSM 102 fees are dramatically below fees for similar products offered by the U.S. ExIm Bank.
324
Unlike the comparison the United States asks the compliance Panel to require, the ExIm Bank
exercise undertaken by Brazil identified financial in struments that approached as closely as possible
the characteristics of GSM 102 ECGs, both in terms of the structure of the underlying loans and the
effects of the coverage. The fees for these instru ments could be calculated in a transparent manner,
and the parameters for such calculation could be set so as to parallel exactly the characteristics of the
GSM 102 ECGs. The Panel, the United States and any other observer can readily replicate Brazil's
comparison, without the need to issue countervailing duty questionnaires or conduct verifications.

243. For a number of reasons, Brazil's ExIm Bank comparison is likely overly generous to the
United States.
325 Nonetheless, it offers a useful referen ce point for the Panel in assessing the benefit
to U.S. exporters from GSM 102 ECGs. For that refe rence point to be useful, the Panel need not, as
the United States curiously asserts, "assume that Ex-Im Bank guarantees are provided at below-
market rates."
326 For the purpose of these particular proceed ings, the Panel can assume that the ExIm
Bank products used in Brazil's comparison exercise are consistent with market.327

320 Exhibit Bra-684 (CoBank presenta tion, p. 7, accessed March 2007 at
http://www.cottoninc.com/2005EFSConferencePresentationsSingapore/FinancingUSACottonImportsUnderGSM/).
The deal flow chart on page 11 of this presentation confirms that the reference on page 7 to "your company" is a
reference to the importer. Brazil notes that CoBank's vi ews on this matter are well-informed, as it enjoys "60%
market share of GSM loans globally". See Id., p. 2.
321 See Exhibit Bra-525 ("U.S. Financial Institutions Approved To Be Assignees Under CCC's Export
Programs," USDA FAS Online, accessed October 2006 at http://www.fas.usda.gov/excredits/USbanks.html).
322 See Panel Report, Brazil – Aircraft (21.5 II), para. 5.31 (footnote 44) ("Neither party has suggested
that lenders might not, in response to the offer of PR OEX III support, offer improved terms of conditions for
export credits offered to buyers of Brazilian regional aircra ft. We consider that it is very unlikely that lenders
will not pass on at least part of the PROEX III payments in the form of better credit terms. Otherwise,
borrowers could simply choose other lenders.").
323 Panel Report, Canada – Aircraft Credits and Guarantees, para. 7.345.
324 Brazil's First Written Submission, paras. 381-406. See also Id., Annex III (Statement of
Professor Rangarajan Sundaram); Annex IV (Methodology for Comparison of GSM 102 Fees with Fees for
ExIm Bank Products), and Exhibits Bra-536 and Bra-537.
325 See Brazil's First Written Submission, paras. 382- 385, 389, 391-392, Annex III (Statement of
Professor Rangarajan Sundaram, paras. 17-24), Annex IV (Methodology for Comparison of GSM 102 Fees with
Fees for ExIm Bank Products, paras. 6-8, 10-12).
326 U.S. 16 March Comments on Brazil's Answer to Question 41, para. 145.
327 See Brazil's Oral Statement, para. 183. With respect to paragraph 146 of the United States'
16 March comments on Brazil's Answer to Question 41, if the United States considered that in undertaking its
ExIm Bank comparison exercise, Brazil had benchmarked to instruments "with the highest fees", the

244. The ExIm Bank fee comparison is sufficient to discharge Brazil's burden in a dispute under
Part II of the SCM Agreement, under the interpretation of Article 14 (c) set out by the Appellate Body
in U.S. – Softwood Lumber IV 328, and the panels in Canada – Aircraft Credits and Guarantees 329 and
EC – DRAMs.330

245. The conclusion by the panels in Canada – Aircraft Credits and Guarantees and EC – DRAMs
that below-market guarantee fees translate into lo wer costs for commercial credit, and thus a lower
total cost of funds, is rooted in basic financia l economics. The U.S. pos ition – that below-market
GSM 102 fees might not translate into lower costs for commercial credit – runs counter to these basic
principles of financial economics. To explain, Brazil reveals the absurdity of the U.S. position.

246. The Panel will recall that according to th e United States, a complainant in a dispute
challenging government guarantees must prove that the total cost of financing, including the premium
and interest charges on a guaranteed loan, is less than the total cost of financing either (i) with a
commercial guarantee or (ii) without any guarantee.

247. In the first of these two situations, the United St ates argues, in essence, that the interest that
the lender charges on a loan guaranteed by the U.S. government could be higher than the interest it
charges on a loan guaranteed by a commercial enterpri se. Thus, for the United States' argument to be
correct, a cheap U.S. government premium must be o ffset by higher loan charges, as exemplified in
the table below:

 CCC Guarantee Commercial Guarantee
Premium 5 15
Interest Charges 95 85
Total Cost 100 100

248. In this example, identically-situated borro wers obtain similar guarantees, one from the U.S.
government, and the other from a commercial entity. With the backing of these guarantees, funds are
borrowed from the same commercial bank on the same terms, except for interest charges. The U.S.
government guarantee is markedly cheaper than its mark et counterpart. As a result, for the total cost
of funds to be equal, the lending bank must charge more for a loan backed by the U.S. government
than for a loan backed by a commercial entity.

249. This is an absurd argument because, irr espective of the credit rating of the commercial
guarantor, a loan backed by the U. S. government will present a lower risk to the lending bank – the
U.S. bank in the GSM 102 scenario. As a result, th at bank will inevitably charge the foreign obligor a
reduced cost of borrowing on a loan that presents a lower risk. As not ed above, if the bank does not
do so, the foreign obligor will simply go to anot her lender to secure the savings enabled by the
government guarantee (at least in the case of GSM 1 02, where the list of CCC-approved U.S. banks is

United States had many opportunities over the course of this dispute, subsequent to Brazil's First Written
Submission, to propose comparable instruments with lower fees. Although the United States suggests
otherwise, this situation is not unique to the current proceedings; a defending Member is always free to
challenge the representativeness of a benchmarking instrume nt, if it is willing to take on the burden of doing so
and does so within the timeframe required by a panel's working procedures.
328 Appellate Body Report, U.S. – Softwood Lumber IV, para. 92.
329 Panel Report, Canada – Aircraft Credits and Guarantees, para. 7.345.
330 Panel Report, EC – CVDs on DRAMs, para. 7.189 ("[i]f the government charges less than a market
fee for its guarantee in light of the specific circumstances of the case, there would be a benefit to the recipient.").

long
331). Thus, if the U.S. government guarantee is priced better-than-market, the total cost of
financing for the guaranteed loan will almost certainly also be better-than-market.332

250. The existence of a benefit in the second s ituation indicated above, where there is no
guarantee, can be illustrated by assuming that ExIm Bank guarantees do not confer benefits under
Article 14(c) because they are priced at their "market" value and do not alter the total cost of funds –
i.e., ExIm Bank's fees precisely offset the interest savings resulting from ExIm Bank's guarantee.
333

251. On that generous assumption, the financing co sts in the "no guarantee" situation are the sum
of the ExIm Bank premium and the interest charged by the lending bank on a loan guaranteed by
ExIm Bank. Because CCC and ExIm Bank guarant ees are both provided by the U.S. government, the
risk to the lending bank of loans backed by each of these guarantees is identical, and the interest
charges on the loans would also be identical.

252. Because GSM 102 fees are considerably lowe r than their ExIm Bank counterparts, and
because the interest charges on loan s backed by these two guarantees ar e the same, the total cost of
funds in a CCC-guaranteed transaction must be lower th an the total cost of funds in an ExIm Bank-
guaranteed transaction. Assuming that ExIm Bank f ees are equal to the Article 14(c) benchmark, the
total cost of funds in a CCC-guaranteed transaction mu st also be lower than the cost of funds in a
transaction without any guarantee, as illustrated by the table below:

 CCC
Guarantee
ExIm Bank
Guarantee
No Guarantee
Premium 5 15 0
Interest Charges 85 85 100
Total Cost 90 100 100

253. This explains why previous panels have regarded guarantee fees as an appropriate benchmark
for determining the existence of a "benefit", without enquiring into the "total cost of funds". For these
reasons, it is "safe to assume" that a government guara ntee lowers the cost of commercial credit, or in
the United States' terms, that th e guarantee lowers the "total cost of funds" involved in a
transaction
334, where Brazil has demonstrated that GSM 102 fees are below relevant benchmarks.

 e. GSM 102 repayment terms are below market

254. Relevant jurisprudence provides that where government guarantee fees are not consistent with
market, it is "safe to assume" that the government guarantee lowers the cost of commercial credit. 335
This principle can be extended to other elements of a government guarantee that are below-market,
such as repayment terms.

331 See Exhibit Bra-525 ("U.S. Financial Institutions Approved To Be Assignees Under CCC's Export
Programs," USDA FAS Online, accessed October 2006 at http://www.fas.usda.gov/excredits/USbanks.html).
332 See Panel Report, Brazil – Aircraft (21.5 II), para. 5.31 (footnote 44) ("Neither party has suggested
that lenders might not, in response to the offer of PR OEX III support, offer improved terms of conditions for
export credits offered to buyers of Brazilian regional aircra ft. We consider that it is very unlikely that lenders
will not pass on at least part of the PROEX III payments in the form of better credit terms. Otherwise,
borrowers could simply choose other lenders.").
333 With reference to paragraphs 145-146 of the United States' 16 March Comments on Brazil's
Answers to Questions, Brazil notes that the results of its analysis do not change if one assumes that ExIm Bank
guarantees are provided at market rates, and not below market rates. As explained in Brazil's First Written
Submission, this assumption is likely to be too generous to the United States.
334 Panel Report, Canada – Aircraft Credits and Guarantees, para. 7.345.
335 Panel Report, Canada – Aircraft Credits and Guarantees, para. 7.345.

255. The benefit from a financial instrument must be assessed not only with reference to interest
rates or fees, but also with reference to the repa yment terms extended the borrower to service its debt.
As Brazil noted in its First Written Submission, not even other U.S. government entities offer credit
protection instruments for agricultural export tr ansactions with tenors exceeding 180 days or,
exceptionally, 360 days. 336 In contrast, GSM 102 ECGs are available for agricultural export
transactions with repayment terms stretching out to three years.337

256. This difference involves a considerable benefit relative to the market. The Chairman of the
Board of CoBank stated in Congressional testimony that GSM 102's three-year tenor "is critical to the
program's success," and that the program "provides for tenors that are typically unavailable in the
market and this is a crucial strength of the program." 338 In the absence of GSM 102, such long
repayment terms would be unavailable, even if th e U.S. exporter turned to ExIm Bank for similar
protection (in which case, of course, the U.S. exporte r would also have to pay considerably higher
fees).

257. Added to the evidence concerning the inadequ acy of GSM 102 fees, the below-market nature
of GSM 102 repayment terms gives the Panel yet fu rther grounds to conclude that it is "safe to
assume"
339 that a GSM 102 lowers the cost of commercia l credit, or in the United States' words,
lowers the "total cost of funds" involved in a transaction.

 f. GSM 102 fees are insufficient to cover long-term costs

258. Once again, as noted above, the jurispruden ce holds that where government guarantee fees are
not consistent with market, it is "safe to assume" that the government guarantee lowers the cost of
commercial credit. 340 In these proceedings, making that assumption is particularly safe, since the
record includes ample evidence demonstrating that GSM 102 fees are not even high enough to meet
the program's costs over the long term.

259. For example, the record includes evid ence that GSM 102 fees are below the minimum
premium rates ("MPRs") provided in the Organization for Economic Co-operation and Development's
("OECD") Arrangement on Officially S upported Export Credits (the "Arrangement")
341, in which the
United States is a Participant.342 Citing item (j) of the Illustrative List of Export Subsidies, the OECD
explains that the Arrangement's benchmark rates, in cluding MPRs, are set "to ensure that Participants
to the Arrangement charge premium rates in addition to interest charges that … are not inadequate to
cover long-term operating costs and losses asso ciated with the provision of export credits." 343 The

336 Brazil's First Written Submission, paras. 391-392. See also Brazil's Rebuttal Submission,
paras. 434-436.
337 Brazil's First Written Submission, paras. 334 and 355.
338 See Exhibit Bra-528, ("GSM Programs Benefit U.S. Agriculture and the Rural Economy."
Testimony of Otis Molz, Chairman of the Board of CoBank, to the U.S. Senate Committee on Agriculture,
Nutrition and Forestry, 18 July 2000 (em phasis added), accessed November 2006 at
http://agriculture.senate.gov/Hearings/Hearings_2000/Untitled/00718mol.htm

339 Panel Report, Canada – Aircraft Credits and Guarantees, para. 7.345.
340 Panel Report, Canada – Aircraft Credits and Guarantees, para. 7.345.
341 Exhibit Bra-546 (OECD document TD/PG(2005)38/FINAL, 5 December 2005, Arrangement on
Officially Supported Export Credits – 2005 Revision, accessed November 2006 at
http://webdomino1.oecd.org/olis/2005doc.nsf/43bb6130e5e86e5fc12569fa005d004c/23013c0293535d25c12570
cf003e35ed/$FILE/JT00195558.PDF).
342 See Exhibits Bra-548 and Bra-549. See also Brazil's First Written Submission, paras. 438-440.
343 Exhibit Bra-547 (OECD document TD/PG(2004)10/FINAL, 6 July 2004, para. 1, Premium and
Related Conditions: Explanation of the Premium Rules of the Arrangement on Officially Supported Export
Credits (the Knaepen Package), accessed November 2006 at
http://webdomino1.oecd.org/olis/2004doc.nsf/43bb6130e5e86e5fc12569fa005d004c/a2c08162302d3415c1256e
c9003919f1/$FILE/JT00167196.PDF).

Arrangement's MPRs are on average 106 percent greater than GSM 102 fees, meaning that GSM 102
fees are strikingly "inadequate to cover long-term operating costs and losses associated with the
provision of export credits".

260. This fact is not only relevant to the assessment of GSM 102 under item (j). It is also relevant
to whether GSM 102 ECGs confer benefits. The Pa nel will recall that the CCC borrows from, and is
backed by the full faith and credit of, the United States Treasury. 344 As a result, it enjoys a cost of
funds significantly lower than that borne by a mark et-based financial institution. Yet as the OECD
MPR analysis demonstrates, GSM 102 fees are not even high enough for the CCC to turn a "profit" on
the low cost of funds it enjoys as a U.S. government agency backed by the full faith and credit of the
United States Treasury.345

261. To survive over the long term, a market-based entity would need to charge fees high enough
to do more than simply break even – it would need to make a profit on costs higher than those faced
by GSM 102, and the profit would have to offer a suffi cient return to attract capital from investors.
Proof that GSM 102 fees are too low to cover the U.S. government's already-low cost base over the
long term is further proof that those fees are also below market.

262. Brazil has also offered other evidence regardi ng the failure of GSM 102 to meet its costs over
the long term. In particular, Brazil notes CCC's forward-looking assessment of the amount by which
costs and losses for the "cohorts" of GSM 102 ECGs newly issued in FY 2006, FY 2007 and FY 2008
will, over the long term, exceed fees, penalties and recoveries. 346 Using the same methodology,
CCC's 2006 financial statements record its conclu sion that when ECGs outstanding on 31 September
2006 are closed, the CCC expects to suffer a net loss of USD 220 million. 347 The original panel relied
on the same evidence for an earlier period.348

 g. Conclusion

263. In conclusion, Brazil respectfully submits that it would be contrary to the text of Article 14 of
the SCM Agreement, as interpreted by the Appellate Body and two panels, as well as to the original
panel's rejection of the United States' attempts to transfer the "quantitative focus and more detailed
methodological obligations of Part V" to other Parts of the SCM Agreement 349, to "agree with the
United States that the proper benchmark to determin e 'benefit' is the 'total cost of funds' of the
transactions,"350 without taking account of the "factual circumstances" 351 at hand. Prior adopted panel
and Appellate Body reports crea te "legitimate expectations" amo ng WTO Members, and should be
taken into account by panels when they are relevant to the resolution of a dispute.352

264. If the compliance Panel nonetheless adopts a "rigid" 353 interpretation of Article 14(c)
embodying the "total cost of funds" approach advocat ed by the United States to arrive at a precise
amount of "benefit" conferred, Brazil believes that , consistent with the Panel's duty to make an
objective assessment of the matter and to assist th e parties in achieving a positive solution to this
dispute354, the Panel should make factual findings re garding the various "factual ci rcumstances"355

344 Panel Report, U.S. – Upland Cotton, para. 7.858.
345 Panel Report, U.S. – Upland Cotton, paras. 7.857-7.858.
346 Brazil's First Written Submission, paras. 433-437. See also Exhibit US-71.
347 Exhibit Bra-585 (Audit Report, Commodity Credit Corporation's Financial Statements for Fiscal
Years 2005 and 2006, Report No. 06401-21-FM, November 2006).
348 Panel Report, U.S. – Upland Cotton, paras. 7.842-7.843 and 7.855.
349 Panel Report, U.S. – Upland Cotton, para. 1177. See also Id., para. 1167.
350 Question 100 from the Panel.
351 Appellate Body Report, U.S. – Softwood Lumber IV, para. 92.
352 Appellate Body Report, U.S. – Softwood Lumber V, para. 111.
353 Appellate Body Report, U.S. – Softwood Lumber IV, para. 92.
354 See Articles 3.7 and 11 of the DSU.
355 Appellate Body Report, U.S. – Softwood Lumber IV, para. 92.

noted by Brazil in these proceedings and summari zed above, including factual findings regarding
Brazil's ExIm Bank comparison exercise. In case of an appeal, this would enable the Appellate Body
to complete the analysis in the event that it reverses an erroneous interpretation of Article 14(c).

101. Brazil argues that "[w]here guarantees are res erved for circumstances in which credit would
not otherwise be available, there is no "com parable commercial loan absent the government
guarantee," within the meaning of Article 14(c) of the SCM Agreement." (Brazil First Written
Submission, para. 375). The Panel understands th is argument of Brazil to focus on the foreign
obligor. Brazil elsewhere indicates that it is prin cipally concerned, in this proceeding, with the
benefit to the US exporter (fees). Are these two arguments at tension?

265. The arguments offered by Brazil and cited by th e compliance Panel are not in tension. Brazil
has satisfied the "export subsidy" elemen t of its claim under Article 10.2 of the Agreement on
Agriculture in a number of ways. As noted in Brazil's response to question 95 and as indicated in the
Panel's question, however, Brazil's "principal[] concer n[]" is with, and the bulk of its evidence on this
element of its claim relates to, the benefit confe rred by GSM 102 on a U.S. exporter. Nonetheless, as
described in its response to question 100, Brazil has also offered evidence to demonstrate that a
benefit is conferred on fo reign obligors. These arguments speak to different benefits attendant to a
GSM 102 ECG, and neither contradict or undermine one another. In this sense, they are not "in
tension".

4. Item (j) of the Illustrative List

Questions to both parties

102. What, in your view, explains the different results achieved by the two methods advocated, on
the one side, by the United States in paragraphs 87-89 of its First Written Submission and by Brazil in
Exhibit Bra-613 (other than the United States' cr iticism that Brazil has not taken recoveries
corresponding to pre-1992 guarantees into account in its "cash basis" accoun ting calculations, of
which the Panel is already aware)?

266. Exhibit Bra-613 uses a retrospective, cash-basis accounting methodology. Although the
starting point for the methodology used to arrive at the results in paragraphs 87-89 of the U.S. First
Written Submission is a forward-looking projection of future results, discounted back to present value
terms, application of re-estimates effectively converts the process to a re trospective, cash-basis
accounting methodology.

267. The differing results are likely due to the fact that Exhibit Bra-613 tracks cash results over the
entire ECG portfolio on a fiscal year basis ( i.e., cash results on all ECGs issued post-1991 are
combined), while the data in paragraphs 87-89 of the U.S. First Written Submission reflect results
broken down on a cohort-by-cohort basis.
268. In principle, application of re-estimates to initial estimates of long-term results on the cohort
of ECGs actually issued in a given year should even tually converge on cash basis results. This will
only be the case, however, if all cohorts subject to the analysis are closed. This is because the
re-estimates, while intended to "'ta ke into account all factors that may have affected the estimate of
each component of the cash flows, including prepayme nts, defaults, delinquencies, and recoveries,' to
the extent that those factors have ch anged since the initial estimate was made,"
356 are not definitive
until a cohort is "closed". Only two of the cohorts included in the chart at paragraph 87 of the U.S.
First Written Submission were, at the time of filing, closed (1994 and 1995). Data for the remaining
12 open cohorts do not reflect final cash results, a nd instead continue, particularly for more recent

356 Panel Report, U.S. – Upland Cotton, para. 7.843.

cohorts, largely to reflect a forward-looking projection of future results, discounted back to present
value terms.

269. As in the original proceedings, the United States argues to the comp liance Panel that every
cohort will eventually show a profit when final re -estimates are made, the cohort closed, and cohort-
specific cash results effectively posted. This argument was rejected in the original proceedings. As in
the original proceedings, not all of the cohorts (including some relatively "old" cohorts, such as 1997
and 1998) are currently showing a profit.
357 Indeed, six of the 14 cohorts tracked by the United States
are not showing profits. As noted by the original panel, the evidence does not establish "that cohort
reestimates over time, will necessarily not give rise to a net cost to the United States government."
358

270. Moreover, militating against the U.S. positi on are CCC's 2006 financial statements, which are
audited by the global accounting firm KPMG LLP. Employing the same net present value ("NPV")
methodology used to generate the estimate and re-es timate data tracked in paragraph 87 of the U.S.
First Written Submission, the financial statements record the CCC's conclusion that when ECGs
outstanding on 31 September 2006 are closed, the CCC expects to suffer a net loss of USD 220
million.359

103. To what extent is evidence pertaining to guarantees issued under the three programmes
(GSM 102, GSM 103 and SCGP) under the prior fee sche dule relevant to the Panel's analysis of the
revised GSM 102 programme under item (j)?

271. Brazil believes that evidence related to the past performance of the three CCC ECG programs
is of limited relevance to an ass essment of the adequacy of the amended GSM 102 fee schedule. In
the present case, evidence about the structure and design of the GSM 102 program, and forward-
looking or future-oriented assessments of th e GSM 102 program's performance on its own, are
particularly important.

272. In this regard, Brazil recalls CCC's predicti on that the "cohorts" of GSM 102 ECGs issued in
FY 2006 and FY 2007 (and thus unde r the amended GSM 102 fee sche dule) will suffer losses over
the long term. Specifically, using the net present value methodology required by the Federal Credit
Reform Act ("FCRA"), CCC projects losses of USD 125 million and USD 114 million, respectively,
for GSM 102 ECGs issued in FY 2006 and FY 2007 (before accounting for the costs of administering
the program); these projected losses amounted to 5.05 percent of the value of GSM 102 ECGs to be
issued in FY 2006, and 4.48 percent of the value of GSM 102 ECGs to be issued in FY 2007.
360

273. This evidence is GSM 102 specific. The F CRA NPV calculation used to arrive at these
projections of losses on ECGs actually issued in a given year is critical, whether or not re-estimates
are made over time. U.S. law requires NPV projections because they "measure more accurately the
costs of Federal credit programs" than does cash-basis accounting.
361

274. Brazil has offered other evidence, using both NPV and cash-basis accounting methodologies,
that are not restricted to GSM 102. Although data for GSM 103 and SCGP are included in these
analyses, the contribution of these two programs is not likely to change the results; the Panel will

357 See chart at paragraph 87 of the U.S. First Written Submission.
358 Panel Report, U.S. – Upland Cotton, paras. 7.853 (and note 1028).
359 Exhibit Bra-585 (Audit Report, Commodity Credit Corporation's Financial Statements for Fiscal
Years 2005 and 2006, Report No. 06401-21-FM, November 2006).
360 Brazil's First Written Submission, paras. 433-437.
361 Exhibit Bra-545 (2 U.S.C. § 661(1)).

recall that as of 1 July 2005, GSM 102 ECGs accounted for 93 percent of all outstanding CCC
ECGs.362
275. Under the first such analysis, Brazil referre d to the CCC's 2006 financial statements, audited
by the global accounting firm KPMG LLP, whic h demonstrate that the CCC does not anticipate
covering the costs and losses of the ECG programs across all outstanding cohorts of ECGs issued
since the inception of FCRA accounting. In its audited 2006 financials, the CCC has concluded that
when ECGs outstanding on 31 September 2006 are closed, the CCC expects to suffer a net loss of
USD 220 million.363 Brazil recalls that the original panel used the comparable figures from the CCC's
earlier financial statements as support for its finding that the ECG programs met the terms of
item (j).364 In short, this is not a "profitable" program.

276. Under a second analysis, Brazil employed cash results of GSM 102, GSM 103 and SCGP to
show that the programs are not breaking even. As shown in Exhibit Bra-613, Brazil replicated the
approach relied upon by the original panel, upda ting the results of its cash basis accounting
methodology to include data for FY 2003-2005. Over the period FY 1993-2005, this analysis
demonstrates program receipts of USD 2.9 billion, against program disbursements of USD 3.6 billion,
for a net loss of over USD 689 million. This shows that, in terms of historical performance, CCC's
ECG programs did not break even over the long term.

277. In spite of its limited direct relevance, su ch data suggests that a revised schedule under which
fees have increased 46 percent
365 but still remain below a statutoril y-enforced one-percent cap is not
likely to make the programs break even in the long term, much less turn them into the profitable
enterprise alleged by the United States.

278. A simplified exercise demonstrates this conclu sion. If the figures in the column "Premiums
collected" in Exhibit Bra-613 are replaced with the same numbers multiplied by 1.46 (to reflect the
average fee increase of 46% effected by the U. S. measures taken to comply, as asserted by the
United States), the result would still be a net loss of over USD 574 million. If the trade-weighted
increase of 23% calculated by the United States
366 is used instead, the net loss would have been
approximately USD 632 million.367 These figures do not depart significantly from the losses incurred
with the fees actually charged over the period covered in Exhibit Bra-613.

104. Must a risk-based fee necessarily take into account foreign obligor risk? Please discuss and
provide any relevant support for your position. Can foreign obligor risk be treated differently than
country risk in this respect, and if so, why?

279. As stated in paragraphs 496-498 of Brazil's Rebuttal Submission, as long as a foreign obligor
receives a credit rating inferior to that of its s overeign, the GSM 102 fee for a transaction involving
that foreign obligor should include a premium above and beyond that associated with country risk.
Brazil notes that none of the CCC-approved foreign banks enjoys a credit rating superior to that of its

362 See Brazil's Rebuttal Submission, paras. 14-15 and Brazil's First Written Submission, para. 339.
363 Exhibit Bra-585 (Audit Report, Commodity Credit Corporation's Financial Statements for Fiscal
Years 2005 and 2006, Report No. 06401-21-FM, November 2006).
364 Panel Report, U.S. – Upland Cotton, para. 7.855.
365 U.S. First Written Submission, paras. 7 and 74.
366 U.S. First Written Submission, paras. 7 and 74.
367 Exhibit Bra-687 (Cash Basis Accounting Worksheet). In these calculations, the corrected figure of
USD 21 million for premiums co llected in FY 2005 is used. See U.S. Rebuttal Submission, para. 96,
footnote 145.

sovereign.
368 As such, foreign obligor risk not only "[c]an … be treated differently than country risk,"
as noted in the Panel's question, but must be treated as additional to country risk.
280. Commercial banks could not a fford to ignore these risks in se tting the fee structure for their
products. Brazil notes that even ExIm Bank – another arm of the U.S. government – takes the cost of
this additional risk factor into account, as reflected in the "transaction risk increment" of its fee
calculator.369 In contrast, any additional risk associated with a below-sovereign rating for a particular
foreign obligor does not translate into an additional GSM 102 fee increment. Accordingly, GSM 102
is not structured or designed to account fully for the risks involved in GSM 102-supported
transactions or, ultimately, to meet the program's long-term costs and losses.

281. While the United States argues that it can full y account for the riskiness of individual foreign
obligors by implementing GSM 102 exposure limits for each foreign obligor
370, it offers no evidence
of the way in which it does so. What little it does of fer is not encouraging. The United States refers
to "the non-sovereign rating for [a foreign bank's] country". 371 This reference suggests that in setting
exposure limits, the CCC does not account for differ ing ratings between individual non-sovereign
foreign obligors in a country; rather, it applies a single rating (" the … rating") for all non-sovereign
foreign obligors within that country.

282. In any event, controlling for borrower risk solely through exposure limits, and not also
through fees, is not sufficient, even if exposur e limits are implemented properly. Prudent fiscal
management compels commercial banks to take varying borrower risk into account not only via
exposure limits, but also through fees. In other words, managing risk requires a commercial bank to
adopt both strategies; one is not a substitute for the other, as the United States suggests. Commercial
lenders must control their exposure to concentrations of risk (in other words, they must diversify)
using exposure limits, and, at the same time, they must accurately price all applicable risks with
respect to the exposure that they do take on.
372 A principal shortcoming of the GSM 102 program is
its failure to adjust its guarantee fees to take account of material risks; that failure is not cured by
diversifying its portfolio of inaccurately-priced guarantees. CCC's failure to take account of
individual foreign obligor risk in setting GSM 102 fees means that its fee schedule is not truly "risk-
based," and is not designed to cover the long-term costs and losses of the program, regardless of its
exposure-based diversification policies.

368 Brazil's First Written Submission, para. 416 and Exhibit Bra-540 (Standard and Poor's Credit
Ratings).
369 See http://www.exim.gov/tools/fee_calc.cfm . See also http://www.exim.gov/tools/calchelp.cfm ,
which includes an explanation of the "transaction risk in crement" field, noting that transaction risk increment 0
is for "(1) sovereign risk transactions; and (2) any non-s overeign risk (public or private) transactions deemed to
be no riskier than the sovereign in a specific country. Transaction risk increments 1 through 5 are for all other
non-sovereign (public or private) risk transactions."
370 U.S. First Written Submission, paras. 78-79.
371 U.S. First Written Submission, para. 78 (note 120) (emphasis added).
372 Exhibit Bra-615 (Paul Bennett, "Applying Portfolio Theory to Global Bank Lending," 8 Journal of
Banking and Finance 153-169, 163-164 (1984)). In the context of modelling how each borrower's role in the
portfolio's overall risk could be taken into account, Bennett observes that:
Based on each credit's original risk ratin g, a certain standard markup over the
cost of funds is specified. This standard markup is intended to compensate for the
borrower's own default risk (and accordingly it rises in increasingly large steps as ratings
decline). Contributions to portfolio risk should be reflected in deviations of actual
pricing from these standard markups. For example, if a particular borrower adds a
sizable amount of portfolio risk, then he should be charged more than just the standard
markup.

105. What considerations must gui de the Panel's decision to a ccept or refuse new evidence or
arguments on issues that were addressed by the or iginal Panel? Please discuss in light of the
following:

a. The original Panel found that original subsidy estimates , while not reflecting "actual"
figures, nevertheless provide a reliable measure of the United States government's
own assessment of the profitability of the export credit guarantee programmes. Is the
United States asking the Panel to revisit that conclusion (see paras 108 ff . of the
United States' First Written Submission).

b. The United States presents evidence which , it argues , demonstrates that the three
programmes examined by the original panel w ere operated at no net cost to the US
government. Is there any issue as to wheth er the Panel can or should accept the
United States' evidence in this respect?

283. Parts (a) and (b) of the compliance Panel' s question are intimately related, and Brazil
therefore answers them together. However, in the final paragraph of this response, Brazil offers an
additional response that is specific to part (b) of the Panel's question.

284. Despite the adoption of an amended GSM 102 fee schedule, the CCC predicts that costs and
losses for the "cohorts" of GSM 102 ECGs newly issu ed in FY 2006, FY 2007 and FY 2008 will,
over the long term, exceed fees, penalties and recoveries.
373

285. The original panel relied on this very same evidence for earlier cohorts. Taking a forward-
looking or future-oriented approach to its assess ment of the CCC ECG programs under item (j) of the
Illustrative List, the original panel reviewed U. S. government projections concerning the long-term
cohort-specific costs of the programs. Those projections, issued each year for the cohort of ECGs
newly issued in that year, employ a statutorily-mandated NPV methodology considered by U.S. law to
"measure more accurately the costs of Federal credit programs".
374

286. During the original proceedings in this dis pute, the United States argued throughout its many
submissions to the panel and Appellate Body that these projections are not appropriate for assessing
the performance of an ECG program under item (j), because they do not refl ect actual, cash-basis
results of the ECG programs calculated on a retrospective basis
375, and because they do not utilize
ECG program-specific parameters.376

373 Brazil's First Written Submission, paras. 433-437. See also Exhibit US-71.
374 Exhibit Bra-545 (2 U.S.C. § 661(1)).
375 The United States appealed this specific element of the original panel's analysis. U.S. Appellant's
Submission in U.S. – Upland Cotton, paras. 407 and 410-413 (and note 419), available at
http://www.ustr.gov/assets/Trade_Agreements/Monitoring_Enforcement/Dispute_Settlement/WTO/Dispute_Set
tlement_Listings/asset_upload_file938_5598.pdf. For U.S. arguments before the original panel, see U.S.
11 July 2003 First Written Submission, paras. 176-178 ; U.S. 11 August 2003 Answers to Panel Questions,
paras. 157, 159, 170 and 173; U.S. 22 August 2003 Rebuttal Submission, paras. 161-162, 167, 171; U.S.
30 September 2003 Further Submission, para. 151; U.S. 18 November 2003 Further Rebuttal Submission,
paras. 196-199; U.S. 22 December 2003 Answers to Panel Questions, paras. 86, 90, 91-95, 96-99, 100-101,
103, 117-121 and U.S. 11 February 2004 Answers to Further Panel Questions, para. 21.
376 U.S. 30 September 2003 Further Submission, paras. 144 and 147 (emphasizing that estimates are
reached under "government-wide accounting rules", "with out regard to the actual experience specific to the
CCC export credit guarantee programs "); U.S. 18 November 2003 Further Rebuttal Submission, para. 196
("estimates are compelled by government-wide accounting rules for credit programs ….") and U.S. 3 December
2003 Closing Statement, para. 10 (e mphasizing that CCC is subject to " government-wide requirements" for the
calculation of estimates and re-estimates).

287. The original panel and the Appellate Body re jected the United States' arguments, accepting a
forward-looking approach to the assessment of the ECG programs under item (j).
377 As the original
panel noted, although these projections are "initial estimates" 378, "[t]hey are not … mere random
guesses as to the amount of possible, but highly unlikely, costs to the government." 379 To the original
panel, these initial estimates of long-term losses we re probative because they are calculated with a
"methodology used and relied upon by the United States government to assess the estimated long-
term net cost to the United States government of export credit guarantees."380

288. Addressing the United States' argument that the statutorily-imposed NPV methodology was
not sensitive enough to adjust for CCC-specific experi ence with the ECG programs, the original panel
found it particularly significant that the estimat es were based on CCC's historical experience
 with
country and borrower markets, presumably because th at experience underscored the reliability of the
estimates as indicators of long-term cost.381

289. Concluding its analysis, the original panel noted that the CCC's initial estimates

indicate to us that the United States government believes, based on its own
assessment, that it may not, even over the l ong term, be able to operate the export
credit guarantee programmes without some net cost to the government.
382
290. These adopted findings concerning the probity of the CCC's initial estimates should, in
principle, be followed by subsequent panels and, specifically, by this compliance Panel. In its 26
February answer to question 2, Brazil explained th at prior adopted panel a nd Appellate Body reports
create "legitimate expectations" among WTO Members, and should be taken into account by panels
when they are relevant to the resolution of a dispute. 383 Further, where the issues before a panel are
the same as those previously examined by the Appe llate Body, it is "not only appropriate," but to "be
expected," that the panel would follow the Appellate Body's earlier conclusions.384

291. With respect to compliance proceedings, in particular, the Appellate Body has stated that
"Article 21.5 proceedings do not occur in isolation but are part of a ' continuum of events .'"385 The
Appellate Body observed that "doubts could arise about the objective nature of an Article 21.5 panel's
assessment if, on a specific issue, that panel were to deviate from the reasoning in the original panel
report in the absence of any change in the underlying evidence."386

377 Appellate Body Report, U.S. – Upland Cotton, paras. 763-764 and Panel Report, U.S. – Upland
Cotton, paras. 7.842-7.843. See also Id., para. 7.835 ("[T]he item (j) analysis need not be a purely retrospective
one ….").
378 The use of the term "initial" means cohort-specific estimates of long-term losses on the value of
ECGs actually issued in a given fiscal year (rather than the value of ECGs bu dgeted or projected to be issued).
The United States attempts to mislead the compliance Panel by erroneously stating that CCC initial estimates of
long-term losses for GSM 102 are nothing more than the result of "an historically overly-optimistic projection of
actual use of the program." U.S. First Written Submi ssion, paras. 103 and 104. Brazil demonstrated the
erroneous basis for this U.S. assertion in its Rebuttal Submission. See Brazil's Rebuttal Submission,
paras. 506-511.
379 Panel Report, U.S. – Upland Cotton, para. 7.843.
380 Panel Report, U.S. – Upland Cotton, para. 7.843.
381 Panel Report, U.S. – Upland Cotton, para. 7.843 ("Actual historical experience is a 'primary factor'
on which estimates are based.").
382 Panel Report, U.S. – Upland Cotton, para. 7.843.
383 Appellate Body Report, U.S. – Softwood Lumber V, para. 111.
384 Appellate Body Report, U.S. – OCTG Sunset Reviews, para. 188.
385 Appellate Body Report, U.S. – Softwood Lumber IV (21.5), para. 103 (emphasis added) citing
Appellate Body Report, Mexico – Corn Syrup (21.5), para. 121. See Brazil's First Written Submission,
para. 28.
386 Appellate Body Report, U.S. – Softwood Lumber VI (21.5), para. 103 (emphasis added).

292. Notwithstanding these principles, in these Artic le 21.5 proceedings, the United States asks the
compliance Panel to ignore the original panel and the Appellate Body's findings on the relevance of
the CCC's initial estimates of long-term program losses. The United States asks the compliance Panel
to abandon the original panel and Appellate Body's adoption of a forward-looking, future-oriented
assessment under a methodology "used and relied upon by the United States government to assess the
estimated long-term net cost to the United States government of export credit guarantees," 387 in favor
of a purely retrospective assessment of program performance.

293. The United States' bases its re quest for the Panel to ignore the original panel and Appellate
Body's reliance on initial estimates on two related arguments.

294. First, the United States argues that using an NPV methodology to assess costs does not
represent "actual losses".
388 Converting the NPV methodology into a retrospective, cash-basis
accounting methodology by taking account of re-estimates, the United States argues that the original
panel erred in relying on a forward-looking assessme nt using the NPV methodology that is "used and
relied upon"
389 by the U.S. government to estimate the cost of the GSM 102 program.390

295. In short, the United States is suggesting th at the compliance Panel should discard the initial
estimates of long-term losses, because when the "l ong-term" arrives, those estimates do not always
turn out to have been accurate.

296. The original panel considered this U.S. objection and rejected it.
391 The original panel
accepted that a forward-looking assessment of the ECG programs under an NPV methodology was a
solid basis on which to make findings under item (j), despite that fact that NPV calculations are by
definition projections of future
 results, discounted back to present value terms.

297. U.S. law has not changed in this respect since the original panel visited this question. U.S.
law continues to require long-term, forward-looking projections of program performance using a net
present value methodology because the results of th is methodology "measure more accurately the
costs of Federal credit programs" than cash-basis methodologies.392

298. The U.S. government is not alone in this appr oach. The NPV calculati on used to arrive at
initial projections of losses on ECGs actually issued in a given year is critical, whether or not re-
estimates are made over time, and without regard to those re-estimates. Bank regulators all over the
world use projections of default probabilities and losses-given-default – the core of net present value
methodology – to gauge the adequacy of a bank's capital.
393 Forward-looking assessments of long-
term costs are "used and relied upon"394 by the U.S. government for the same reason they are used and
relied upon by the private banking sector – they dictate how a program, or a bank, should structure
fees, exposure limits, capital reserves and the like to achieve a return on investment (or in the case of
a government program, in the very least to break even).
299. Second, the United States argues that even if a fo rward-looking approach involving estimates
is an acceptable basis for an assessment under item (j), the NPV methodology applied by the U.S.

387 Panel Report, U.S. – Upland Cotton, para. 7.843.
389 Panel Report, U.S. – Upland Cotton, para. 7.843.
390 U.S. First Written Submission, paras. 85-94.
391 Panel Report, U.S. – Upland Cotton, para. 7.843.
392 Exhibit Bra-545 (2 U.S.C. § 661(1)).
393 See "Internal Ratings-Based Approach" of the Basel Committee on Banking Supervision", described
at http://www.bis.org/publ/bcbs128.htm.
394 Panel Report, U.S. – Upland Cotton, para. 7.843.

government to assess the long-term costs of GSM 102 ECGs is inappropriate, as it entails assumptions
that are not specifically-tailored to the GSM 102 program, making it unreliable.
395

300. The compliance Panel should reject the U.S. reproach of the original panel and Appellate
Body's approach. The process by which the CCC arri ves at initial estimates of long-term program
performance has not changed since the original proceedings; nor have the criteria used by the CCC to
make this assessment.

301. Once again, the United States is asking the Panel to revisit the original panel's findings,
despite the fact that the original panel rejected th e U.S. argument, and the fact that now, as in the
original proceedings, the NPV methodology "used and relied upon"
396 by the U.S. government is
sufficiently tailored to generate reliable estimates of the long-term costs of the GSM 102 program.

302. USDA's own "Agriculture Fi nancial Standards Manual" – not an agency far removed from the
GSM 102 program, as the United States asserts
397 – states that expected loss rates, or estimated default
costs, are based on "loan performance experience". 398 If historical experience truly established that
the NPV methodology required by U.S. law overstated the risk of default, the U.S. government would
have adjusted it for the purpose of calculating future projections on new GSM 102 commitments.
Those adjustments have been made; FAS' self-as sessment of the program states that the "credit
models used to calculate the subsidy for the gua ranteed credits were revised in FY2001 and FY2003
and currently provides reliable estimates
", and identifies the model applied specifically as "[t]he
USDA model".399 These "reliable estimates" show, as they have in every year since the inception of
net present value accounting by the U.S. govern ment for credit accounts in 1992, that the
CCC anticipates losses on the cohort of GSM 102 ECGs issued under the amended fee schedule in
FY 2006, FY 2007 and FY 2008.400

303. In the face of the evidence described above, the United Stat es has not advanced any new,
credible arguments to support its assertion th at a forward-looking assessment of the GSM 102
program based on loss estimates calculated under th e NPV methodology used and relied upon by the
U.S. government is no longer reliable. There is, th erefore, no basis for this Panel to accept the United
States' arguments that the estimates are unreliable. These arguments were considered, and rejected, in
the original proceedings in this dispute. To fi nd now that the estimates are unreliable would involve a
significant departure from the findings in the original proceedings, with no valid basis for that change.
It would also involve a violation of the principle of res judicata , because the reliability of the
estimates has been definitively resolved for purposes of this dispute, and indeed verified by USDA's
FAS.401 The United States is not entitled to re-litigate an issue that has been de finitively resolved for
purposes of this dispute.

395 U.S. Rebuttal Submission, paras. 108-125.
396 Panel Report, U.S. – Upland Cotton, para. 7.843.
398 Exhibit Bra-616 (U.S. Department of Agriculture, Office of the Chief Financial Officer, Credit,
Travel, and Accounting Division, Agriculture Financial Standards Manual (May 2004), p. 121, accessed
December 2006 at http://www.ocfo.usda.gov/reports/index.htm) ("In estimating default costs, the following risk
factors are considered: (1) loan performance experience ….").
399 Exhibit Bra-588 (Agricultural Export Credit Guarantee Program s Assessment, ExpectMore.gov,
Section 3.CR2, accessed January 2007 at http://www.whitehouse.gov/OMB/expectmore/detail.10002020.2005.html)
(emphasis added).
400 See evidence cited in Brazil's Oral Statement, para. 253. See also Exhibit US-71.
401 Exhibit Bra-588 (Agricultural Export Credit Guarantee Program s Assessment, ExpectMore.gov,
Section 3.CR2, accessed January 2007 at http://www.whitehouse.gov/OMB/expectmore/detail.10002020.2005.html)
(The "credit models used to calculate the subsidy fo r the guaranteed credits were revised in FY2001 and
FY2003 and currently provides reliable estimates.") (emphasis added).

304. Brazil concludes with a final thought on part (b ) to the Panel's question. As noted above, the
United States is essentially asking the compliance Pa nel to revisit the original Panel and Appellate
Body's conclusion that an NPV measure of long-term costs is appropriate to this dispute, because
projected losses might not always materialize for every cohort. 402 In this sense, Brazil believes that
parts (a) and (b) of the Panel's question are in timately related; the response offered above
demonstrates why the United States request should be rejected.

305. Alternatively, the United States might be aski ng the compliance Panel, effectively, to reverse

the findings and conclusions of the original pane l that the original measures – the ECG programs
before they were amended on 1 July 2005 – were oper ated at a loss and, therefore, to conclude that
they did not involve export subsidies under item (j). Those findings and conclusions were upheld on
appeal, and the DSB's recommendation are based upon them. This Panel may not depart from the
findings made in the original dispute on this issue, for two reasons.

306. First, as we are reminded by the United States' requests for preliminary rulings, the
compliance Panel's terms of reference extend solely to "measures taken to comply". The amended

GSM 102 program is a measure taken to comply ; the original GSM 102, GSM 103 and SCGP
programs are not.

307. Second, under the principle of res judicata, the United States is not entitled to re-litigate an
issue that has been definitively resolved for purposes of this dis pute. The United States' request
should be rejected.

106. The parties disagree as to whether Brazil should include recoveries for pre- 1992 guarantees
in its cash basis accounting formula (Exhibit Bra- 613). Is the Panel correct in understanding that
Brazil's formula does not includes amounts for (1) claims paid after 1992 under pre-1992 guarantees;
(2) fees paid on pre-1992 guarantees? If so, pl ease explain the relevance or non-relevance of
including recoveries under pre-1992 guarantees in light of the non-inclusion of costs and other
revenues related to the same guarantees.

308. The compliance Panel's understanding that Brazil's cash basis accounting formula does not
include costs and revenues associated with pre-1992 gua rantees is correct. In Brazil's view, it would
not be appropriate to include recoveries under pr e-1992 guarantees in the accounting analysis if all
costs and other revenues related to the same guarantees are left out. If the United States believes that
recoveries for guarantees issued prior to FY 1992 shou ld be included in the formula, then the formula
should be extended back to the years before FY 1992 so that claims and other expenses associated
with those guarantees are also accounted for (which means including not only claims paid after 1992,
as the United States did in its Rebuttal Submission, but also before that date). Otherwise, the results
for the post-1991 cohorts demonstrated in Brazil' s analysis as shown in Exhibit Bra-613 should be
sufficient for a long-term cash basis analysis of the programs.

309. An approximate indication of the results that would be obtained if guarantees issued in fiscal
years prior to 1992 were to be included in the analysis can be given on the basis of information
provided in the General Accounting Office ("GAO") report previously submitted as Exhibit Bra-584.

310. GAO points to claims of USD 6.5 billion fo r the period 1980-1994. If one subtracts
approximately USD 1.0 billion in claims paid out in connection with post-1991 cohorts (as indicated
in Exhibit Bra-613), and adds the claims paid from FY 1995 onwards (USD 692 million, according to

402 See U.S. Rebuttal Submission, paras. 93-94, 98 ("[T]hese financial results showing that the
programs charged premium rates more than adequate to cover the long-term operating costs and losses of the
programs were generated by the export credit guarantee programs as previously configured and examined by the
original panel.") (italics in original; underlining supplied).

the liquidating account data shown in footnote 150 of United States' Rebuttal Submission), one is left
with approximately USD 6.2 billion in claims for those pre-1992 guarantees.

311. On the recovery side, GAO reports approxi mately USD 600 million recovered in the period
1980-1994. Subtracting recoveries associated with post-1992 cohorts (USD 470 million) and adding
recoveries registered in the liquidating account from FY 1995 onwards (approximately
USD 5.06 billion), the result is USD 5.2 billion. Leaving aside interest revenue and expenses and
administrative costs
403, a gap of USD 1 billion would have to be covered by the collection of ECG
fees.

312. Assuming an "average" fee of 0.6% for the period 1980-1992 (equal to the ratio between fees
collected and guarantees issued in the period consid ered by the original panel during the period
FY 1993-2002 – respectively, USD 186.5 million and USD 32.9 billion
404), noting GAO's statement
that USD 51.1 billion in guarantees were issued in the period 1980-19 94, and subtracting from that
amount the guarantees issued in FY 1993 and 1994 (U SD 7.1 billion), the estimated amount of fees
would be 0.006 times 44.0, i.e., USD 264 million.

313. This is insufficient to cover the above-m entioned gap of USD 1 billion. Therefore,
consideration of pre-1992 cohorts would, if anything, add a loss of approximately USD 750 million to
the negative results already shown for the post-1991 cohorts.

Questions to the United States

107. What can explain the discrepancy between th e "credit guarantee liability" recorded in the
CCC's financial statements (which suggest that the program is provided at a net cost to the US
government) and the evidence presented by the US in para. 87 of its First Written Submission?

108. Please explain why the "liability" figure in the CCC's financial statements should not be
considered by the panel to provide, if not the amount of actual losses, at least a reliable estimate of
the CCC's own perception of the cost to the government of the programmes since their inception. Is
the Panel wrong in understanding that a "credit guarantee liability
" in this context means that the
CCC considers that the programmes will not cover their costs and losses in the long term?

109. Please indicate to the Panel whether there have been occurrences of reschedulings prior to
the occurrence of defaults and the payment of claims by the CCC.

110. Is it possible to calculate the "subsidy estimate net of reestimates" for GSM 102 alone
(similar to what the US has done for all three progra mmes in para. 87)? If so, please provide a table
recording the results of this exercise.

111. In paragraph 7.853, the original Panel stated that it "disagree(d) with the United States that
we should "eliminate" the data for certain, more recent , cohorts in our analysis." Is the United States
asking that this Panel eliminate such data for the most recent cohorts (the table at para. 87 of the
United States' First Written Submission includes data up to 2005 only). Why should this Panel do
what the original refused to do? What would be the result of the United States "re-estimates" exercise
if the original subsidy estimate for the 2006 and 2007 cohorts were included?

403 Brazil notes that interest revenue and expenses shown in table 3 of the original panel report indicate
that, for the 10-year period 1993-2002, interest expenses exceed interest revenue by over USD 100 million.
Therefore, the assumption in the above analysis is conservative, and if anything is highly likely to be in the
United States' favour.
404 For the amount of guarantees issued, see Exhibit US-7.

112. Please explain whether and how the CCC lim its risks or control costs of the GSM 102
programme as regards foreign banks' individual credit ratings.
113. Please explain whether and how CCC country risk categories correspond to ICRAS ratings.
Question to Brazil

114. Brazil argues that "(t)hat the United States has , on one view of the data, beaten the odds and
met its costs and losses over a series of years does not mean that ECG programs are structured and
designed to do so" (para. 503, Brazil's Rebuttal). Is Brazil arguing that evidence regarding the actual
operation and "profitability" of the programme (i.e . retrospective evidence) is irrelevant to the
Panel's analysis under item (j)?

314. Brazil is not arguing that retrospective eviden ce regarding cash results of an ECG program is
irrelevant to the Panel's analysis under item (j). Brazil has demonstrated that on a review of
retrospective evidence regarding the cash results of the ECG programs – either including ( see Brazil's
response to question 106, above) or not including ( see Exhibit Bra-613) pre-1992 ECGs – the
programs are operating at a loss.

315. However, Brazil is mindful of the original pa nel's finding that "the item (j) analysis need not
be a purely retrospective one," but instead "also appropriately takes into account elements of the
structure, design and operation of the measure …."
405

316. Forward-looking evidence regarding the structure, design and operation of the GSM 102
program is particularly relevant in these proceed ings. Much as the "long term" qualification in
item (j) is meant to smooth out aberrant losses suff ered by an otherwise cost-neutral ECG program,
breaking even against the odds does not take an ECG program that is not structured or designed to
meet long-term costs and losses beyond the reach of item (j).

317. In short, avoiding losses by good fortune is not the same as designing a program to meet its
long-term costs and losses. As Brazil has previously noted, the U.S. view of item (j), which deems
relevant only retrospective evidence of cash results, n ecessarily means that an ECG program could
charge no fees whatsoever, and be excluded from item (j) if program administrators were lucky
enough not to suffer any defaults in a given period. Leaving administrative costs aside, the U.S. view
is that this program would then have "broken even" in that period. In Brazil's view, it could hardly be
maintained that this program is structured and designed to meet its long-term costs and losses,
however. The original panel agreed; it recognized that a purely retrospective approach was overly-
simplistic, and would fail to account for serious st ructural flaws in an ECG program's fiscal
management.

318. It is important to note that undertaki ng a forward-looking assessment of GSM 102 does not
mean foregoing a quantitative assessment of program performance . As noted in response to
question 105, above, despite the adoption of th e amended GSM 102 fee schedule, the CCC offers
quantitative assessments of the amount by which costs and losses for the "cohorts" of GSM 102 ECGs
newly issued in FY 2006, FY 2007 and FY 2008 will, over the long term, exceed fees, penalties and
recoveries.406 These forward-looking estimates are derived with a statutorily-mandated net present
value ("NPV") methodology heralded by U.S. law as "measure[ing] more accurately the costs of
Federal credit programs". 407 Using the same NPV methodology, CCC's 2006 financial statements
record its conclusion that when ECGs outstanding on 31 September 2006 are closed, the CCC expects

405 Panel Report, U.S. – Upland Cotton, para. 7.835.
406 Brazil's First Written Submission, paras. 433-437. See also Exhibit US-71.
407 Exhibit Bra-545 (2 U.S.C. § 661(1)).

to suffer a net loss of USD 220 million.
408 The original panel relied on this very same evidence for
earlier cohorts.409

319. Comparing GSM 102 fees to OECD Arrangement MPRs, as discussed in response to
question 100, also facilitates a forward-looking, quantitative assessment of the program. The Panel
will recall the OECD's explanation that the Arrange ment's benchmark rates, including MPRs, are set
"to ensure that Participants to the Arrangement ch arge premium rates in addition to interest charges
that … are not inadequate to cover long-term opera ting costs and losses associated with the provision
of export credits."
410 The Arrangement's MPRs are on average 106 percent greater than GSM 102
fees, meaning that GSM 102 fees are strikingly "inadequate to cover long-term operating costs and
losses associated with the provision of export credits".

408 Exhibit Bra-585 (Audit Report, Commodity Credit Corporation's Financial Statements for Fiscal
Years 2005 and 2006, Report No. 06401-21-FM, November 2006).
409 Panel Report, U.S. – Upland Cotton, paras. 7.842-7.843, 7.855.
410 Exhibit Bra-547 (OECD document TD/PG(2004)10/FINAL, 6 July 2004, para. 1, Premium and
Related Conditions: Explanation of the Premium Rules of the Arrangement on Officially Supported Export
Credits (the Knaepen Package), accessed November 2006 at
http://webdomino1.oecd.org/olis/2004doc.nsf/43bb6130e5e86e5fc12569fa005d004c/a2c08162302d3415c1256e
c9003919f1/$FILE/JT00167196.PDF).

TABLE OF EXHIBITS

Exhibit US- Title
140 NASS Prospective Plantings Report (March 30, 2007)
141 7 U.S.C. 5622
142 7 C.F.R. 1493 (Subparts A and B)
143 The New Shorter Oxford English Dictionary at 793, Volume 1, (2005 Edition)
144 Economic Research Service, Commod ity Costs and Returns available at
http://www.ers.usda.gov/data/CostsandReturns/
145 Comparisons of USDA February Projections to Final Estimates
146 Comparison of NCC Planting Intentions Report Data to Final NASS Acreage Data
147 Updated Cotton, Corn, and Soybean Futures Data for 2007 (Year To Date)
148 The New Shorter Oxford English Dictionary at 1350, Volume 1, (2002 Edition)
149 The Handbook of Fixed Income Securities , 6 th ed. (2001), Fabozzi, Frank J.
(McGraw-Hill Professional), pp. 588-592
150 Marshall, John F. "Futures Versus Swaps: Some Considerations for the Thrift
Industry," Review of Business; Winter 1990/1991; 12, 3, pp. 15-23
151 BSC Bond Street Capital; Credit Tenant Lease Loans - Minimum $10,000,000.
http://www.bisonfinancial.com/loans/bsc_ctl.html
152 Glennon, Dennis and Nigro, Peter; "Measuring the Default Risk of Small Business
Loans: A Survival Analysis Approach," Journal of Money, Credit, and Banking ,
Vol. 37, No. 5 (October 2005), pp. 923-947
153 Notice to GSM-102 Program Participants: USDA Clarifies Method for Computing
Interest Coverage Under GSM-102 Program (15 July 2005)
http://www.fas.usda.gov/scriptsw/PressRelease/pressrel_dout.asp?PrNum=0105-05
154 Wall St. Journal prime rates from Februa ry, 2000 to the present, available at
http://www.hsh.com/indices/prime00s.html (accessed 20 March 2007)
155 Comparison of interest rate coverage of CCC GSM-102 export credit guarantees and
Ex-Im Bank Letter of Credit Insurance for Banks (1 July 2005 - 1 March 2007)
156 26-week T-bill rates as provided by the U.S. Department of Treasury for the period 1
July 2005 - 20 March 2007, available at http://treasurydirect.gov/RI/OFAuctions
157 Remarks by Ben S. Bernanke, Chairman of the United States Federal Reserve Board,
"Modern Risk Management and Banking Supe rvision" (12 June 2006) available at
http://www.federalreserve.gov/boardDocs/speeches/2006/200606123/default.htm
158 Overview: US Standard General Ledger available at
http://www.fms.treas.gov/ussgl/about.html
159 Standard General Ledger cover; Treasury Financial Manual Transmittal
Letter No. S2 06-02 (14 July 2006), which immediately follows the cover,
and pages III-146 and III-151 of the Ledger.
http://fms.treas.gov/ussgl/tfm_releases/06-02/ussgl_06-02.pdf (Pages 972, 977)
160 Office of Management and Budge t Circular A-136 available at
https://max.omb.gov/maxportal/pdf/circular_a136_section_6.1.pdf

Exhibit US- Title
161 2008 U.S. Government Budget Appendix : CCC Export Loans Program Account,
pp. 104-106
162 Federal Reserve Board Supervis ory Letter SR 94-12 available at
http://www.federalreserve.gov/BOARDDOCS/SRLETTERS/1994/SR9412.HTM
163 "Applying the CAMEL Framework", As ian Development Bank available at
http://www.adb.org/Documents/Guidelines/Financial part060302.asp
164 Government Accountability Office Report No. GAO-04-531

1. The United States submits below responses to th e Panel's questions directed at either both
parties or the United States alone. Before turni ng to those questions, the United States notes that
important new data has become available since th e meeting with the Panel providing even further
support for the U.S. arguments that marketing loan and counter-cyclical payments do not "numb" the
planting decisions of the U.S. farmers. As the Pa nel may recall, in the meeting with the Panel, the
United States submitted the recently-issued survey of MY 2007 upland cotton planting intentions,
showing that U.S. producers intended to pull back on their upland cotton plantings in MY 2007 by
approximately 14 percent in response to such factors as the relatively more attractive prices for corn
and the poor performance of U.S. exports since August 2006 (at which time the Step 2 program was
eliminated). This evidence clearly contradicted Brazil's claims that U.S. farmers do not respond to
market signals and continue to plant upland cotton in situations where – without marketing loan and
counter-cyclical payments – they would not do so.

2. Brazil has attempted to dismiss this eviden ce asserting that "[i]f marketing loan and CCP
subsidies did not exist, and if U.S. cotton farmers would have to react to market price signals, far
more than 14 percent of cotton acreage predicte d by the NCC would switch to substitute crops."
1
Brazil has not substantiated that assertion, nor explained how a projected 14 percent year-over-year
decline in planted acreage is consistent with the proposition that U.S. cotton farmers' planting
decisions are numbed and do not react to market signals. Moreover, recent data published by USDA
show that, in fact, "far more than 14 percent of co tton acreage" is projected to switch to other crops in
the upcoming crop year. According to the "Prosp ective Plantings" report published by the National
Agricultural Statistics Service ("NASS") based on su rveys conducted by USDA in the first two weeks
of March from a sample of more than 86,000 farm operators across the United States, "upland cotton
acreage is expected to total 11.9 million, down 21 percent from last year and the lowest since 1989."
2
The magnitude of the acreage shift is even more remarkable when one considers regional responses.
According to the NASS report, "due to the increased demand and higher prices of crops used for bio-
fuels," acreage is expected to decline dramatically in every single area in which upland cotton is
grown. These shifts are so substantial that, in ma ny cases, planted acreage is at historically low
levels; levels lower than they were in years well before either the marketing loan or counter-cyclical
payments came into effect3:

• Upland growers in the Delta States (Arkan sas, Louisiana, Mississippi, Missouri, and
Tennessee) are expecting the largest decre ase in acreage. Producers intend to plant
2.91 million acres, a 31 percent decrease from the previous year.

• Farmers in Mississippi expect to plant 740,000 acres, 40 percent less than last year
and the lowest acreage since 1983.

• In Louisiana producers intend to plant 380,000 acres, the lowest since 1975.

• In the Southeastern States (Alabama, Florida, Georgia, North Carolina, South
Carolina, and Virginia) growers intend to plant 2.55 million acres, a decrease of
24 percent from last year.

• The planted area in North Carolina is expected to decline 570,000 acres, 34 percent
less than 2006.

• Producers in Texas, Oklahoma, Kansas, and New Mexico intend to plant 6.01 million
acres, a 13 percent decrease from last year.

2 NASS Prospective Plantings Report, p. 1 (March 30, 2007) (Exhibit US-140).
3 See NASS Prospective Plantings Report, pp. 28-29 (March 30, 2007) (Exhibit US-140).

• Texas producers expect to plant 5.70 million acres, down 700,000 acres from last
year.

• Upland planted acreage in California and Ar izona is expected to total 390,000 acres,
down 18 percent from last year.

• California producers intend to plant 210,000 acres, the lowest since USDA began
tracking upland cotton acreage intentions in 1941.

3. In other words, there is no longer any question of " if U.S. cotton farmers would have to react
to market price signals." The ev idence proves definitively that, ev en under Brazil's arguments, U.S.
cotton farmers do react to market price signals and othe r planting and production signals (such as
considerations of weather, pests, and good agronomi c practices). This is a matter of fact. And no
amount of econometric gymnastics performed by Brazil for purposes of this proceeding – which
appears, increasingly, to be the main evidentiary basis for its claims – detracts from it.

4. As a large number of the Panel's questions deal with the question of the effect of marketing
loan and counter-cyclical payments on planti ngs, production and exports , the above data are
particularly important in reviewing the U.S. and Brazilian responses.

A. S
COPE OF THIS PROCEEDING

Questions to both parties

44. The European Communities argues in resp ect of the preliminary objection raised
by the United States regarding the claims of Brazil relating to export credit
guarantees for pig meat and poultry meat under the GSM 102 programme that "the
important issue is the nexus or the degree of interrelatedness or interdependence
between different elements of the measure." (Oral Statement of the European
Communities, para. 6) The European Communities submits in this regard that:

"the Panel should examine the original measure at issue and the
'measures taken to comply,' and, with particular reference to the
'elements of the measure' that the United States argues are outside
the Panel's terms of reference, en quire into the extent to which
these are interrelated or interdependent with measures or 'elements
of measures' that the United States accepts are within the Panel's
terms of reference." (Oral Statement of the European
Communities, para. 11)
Do the parties agree with the approach suggested by the European Communities
and with the considerations in paragraph 13 of the Oral Statement of the European
Communities?

1. The United States does not agree with the appr oach suggested by the European Communities.
Nor does the United States agree that the "factors" listed in paragraphs 13 of the EC Oral Statement
support expanding the scope of this proceeding to include GSM 102 export credit guarantees provided
for exports of pig meat and poultry meat.

2. The scope of matters that are properly review ed in an Article 21.5 proceeding are established
by Article 21.5 of the DSU. That Article provides that:

Where there is disagreement as to the ex istence or consistency with a covered
agreement of measures taken to comply with the recommendations and rulings such
dispute shall be decided through recourse to these dispute settlement procedures. . . .
3. Two things about this language indicate the proper approach to determining the measures that
are properly within the scope of an Article 21.5 proceeding:

• First, the text provides for dispute se ttlement procedures for the resolution of
disagreements regarding "measures taken to comply with the recommendations and
rulings [of the DSB]."

• And, second, the text does not provide for "measures taken to comply with the
recommendations and rulings" of the DSB and any other "interrelated" or
"interdependent" measures.

4. By the terms of Article 21.5, the touchstone for determining what is a "measure taken to
comply" is the recommendations and rulings of the DSB. It is these recommendations and rulings
that – necessarily and logically – drive what measur es are taken to comply and, thus, what measures
are properly the subject of a "compliance" proceedi ng under Article 21.5 of the DSU. Considerations
of "interrelatedness" or "interdependence" may be implicated in resolving as a factual matter what the
measure taken to comply is in a particular dispute. However, the "interrelatedness" or
"interdependence" that is relevant in th at context is between elements of the new measure taken to
comply (e.g., EC – Bed Linen (21.5) )
4 or multiple new measures that may not all be declared by a
responding Member as being taken to comply w ith the DSB's recommendations and rulings but
nonetheless are properly deemed measures taken to comply given the particular recommendations and
rulings in the original proceeding and the facts of the dispute (e.g., Softwood Lumber (21.5), Australia
Leather II (21.5), and Australia – Salmon (21.5)).5

5. Moreover, it is not "interrelatedness" or "inter dependence" in the abstract that is important
but, rather, such a connection vis-a-vis the DSB's recommendations and rulings . Thus, if the DSB's
recommendations and rulings distinguish between di fferent elements of a measure or different
measures then that distinction is determinative for purposes of the compliance proceeding as well.
There is no fresh test of "interrelatedness" or "i nterdependence" applied under Article 21.5 of the
DSU such as the one the European Communities now espouses that would allow any measure deemed

4 In EC – Bed Linen (21.5) a question raised was whether a ll elements of the new dumping
redetermination on imports from India should be considered part of one indivisible measure such that even those
elements that had not changed since the original proceeding and had not been subject to any recommendations
and rulings therein should be subject to renewed challeng e in the Article 21.5 proceeding. The Appellate Body
explained that:
we are of the view that the investigating au thorities of the European Communities were not
required to change the determination as it related to the "effects of other factors" in this
particular dispute. Moreover, we do not see wh y that part of the redetermination that merely
incorporates elements of the original determin ation on "other factors" would constitute an
inseparable element of a measure taken to co mply with the DSB rulings in the original
dispute. Indeed, the investigating authorities of the European Communities were able to treat
this element separately. Therefore, we do not agree with India that the redetermination can
only be considered "as a whole new measure."
5 The Australia – Salmon (21.5) , Australia – Leather (21.5) , and U.S. – Softwood Lumber IV (21.5)
disputes all dealt with situations in which two new measures were taken close in time – one that was declared to
achieve compliance – and another that the complaining party alleged "undid" the compliance achieve by the
first. In those disputes, the panels assessed the conn ectedness of the new measures to determine whether they
should both be considered "measures taken to comply" such that compliance is examined by reference to both.

to be "interrelated" or "interdepe ndent" with a measure taken to comply to be swept into the scope of
a compliance proceeding.

6. In the present dispute, the DSB's recommenda tions and rulings clearly distinguish "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) "
6 from other export credit guarantees
under those programs. This is because the original panel found that Brazil had only made its case
under Articles 10.1 and 8 of the Agreement on Agriculture and Articles 3.1(a) and 3.2 of the
SCM Agreement with respect to export credit guarantees pr ovided in respect of exports of rice and
unscheduled products.7

7. By contrast, the original panel found that "[i]t has not been established . . . that such actual
circumvention has resulted in respect of the tw elve other United States scheduled commodities."
8
According to the original panel, "in these ci rcumstances, and as Brazil has also not made a prima
facie case before this Panel that the programmes do not conform fully to the provisions of Part V of
the Agreement on Agriculture, this Panel must trea t them as if they are exempt from actions based on
Article XVI of the GATT 1994 and Article 3 of the SCM Agreement in this dispute."9

8. Whether one understands the original panel's finding to have been made with respect to
guarantees or the export credit guarantee programs that provided for the guarantees, what is
indisputable is that the original panel drew a clear distinction between some of the measures (or
aspects of measures) and others. And as a result of that distinction, neither all export credit
guarantees (nor the entirety of the programs) were su bject to findings of WTO-inconsistency or to the
DSB's recommendations and rulings on their basis. Pu t another way, the original panel and Appellate
Body did not consider export credit guarantees in resp ect of exports of pig meat, poultry meat, or any
of the other twelve scheduled products to be so "interrelated" to, or "interdependent" with, export
credit guarantees in respect of unscheduled products and rice that they found themselves unable to
make separate findings of WTO-c onsistency with respect to the two. The original panel and
Appellate Body did not consider the two to be so "interrelated" or "interdependent" that the same
implementation obligations had to be extended to both. Indeed , Brazil does not contest the fact that
"there is no adopted finding that the original GSM 102 program is applied in a manner that
circumvents the United States' commitments with respect to pig meat and poultry meat."
10 Moreover,
Brazil admits that "[d]uring implementation, the Un ited States could have taken steps to amend the
GSM 102 program exclusively with respect to the terms and conditions applicable to rice and
unscheduled products."
11

9. In short, the original panel distingui shed between the different guarantees, the
DSB's recommendations and rulings distinguished between the different guarantees, and the U.S.
obligations only applied to – a nd could have been implemented by – action only with respect to
certain of the guarantees. Under these conditions , there is no reason why all guarantees under the
GSM 102 program – or the program itself – must be considered one "indivisible" measure for
purposes of this compliance proceeding as the European Communities has suggested.

10. Moreover, this is true regardless of the fact that the United States chose to make the same
improvements vis-a-vis all guarantees under the program. The European Communities' own
arguments in EC – Bed Linen (21.5) – and the compliance panel's adoption of those arguments and the

6 Upland Cotton (Panel), para. 8.1(d) (emphasis added).
8 Upland Cotton (Panel), para. 7.881.
9 Upland Cotton (Panel), para. 8.1(d)(ii).
10 Brazil Responses to Panel Section A-C Questions, para. 14 (February 26, 2007).
11 Brazil Responses to Panel Section A-C Questions, para. 15 (February 26, 2007).

resulting DSB rulings – are instructive on this issue. In that dispute, the original panel made – and the
Appellate Body upheld – a finding that the Eur opean Communities acted inconsistently with the
AD Agreement by, inter alia , "determining the existence of marg ins of dumping on the basis of a
methodology incorporating the practice of zeroing."
12 The European Communities was asked to bring
the measure at issue – a dumping order on imports of bed linens from India – into conformity with its
obligations under the AD Agreement.13 Although the only measure subject to the recommendations
and rulings was the order as it applied to Indian imports, the European Communities chose to make a
redetermination of dumping, without applying any "methodology incorporating the practice of
zeroing," with respect to all imports under the order, including imports from Pakistan and Egypt.14 As
a result of this redetermination, the European Communities found that imports from Pakistan and
Egypt had not been dumped. 15 That, in turn, necessitated a re assessment of injury to determine
whether imports of bed linens from India alone caused injury (and the EC found that they did).

11. In the Article 21.5 proceeding that followed, India challenged not only the redetermination of
dumping with respect to imports from India but also the redetermination of dumping with respect to
imports from Pakistan and Egypt as well as the redetermination of injury with respect to imports from
India alone. India argued that these other redetermin ations were so "closely connected to the Panel
and Appellate Body reports in the original dispute" that they were properly within the scope of the
Article 21.5 proceeding.
16 The European Communities disagreed, arguing that "[n]ot all the measures
that are somehow 'connected' to the measure in dispute in the origin al panel proceedings qualify as
measures 'taken to comply.'"17 According to the European Communities:

The EC considers that since there were no rulings by the DSB concerning the
anti-dumping measures agains t imports from Egypt and Pakistan, there was nothing
for the EC to "comply" with, and no obliga tion to undertake any reassessment of the
original findings. Therefore, the EC maintains that Regulation 160/2002
[(redetermination of dumping with respect to imports from Pakistan and Egypt)]
cannot be considered as a measure "ta ken to comply" within the meaning of
Article 21.5. Similarly, the EC asserts that the injury redetermination in
Regulation 696/2002 was rendered necessary by the decision of the EC authorities to
re-examine the findings of dumping for Pakistan and Egypt, which decision was not
itself a measure "taken to comp ly" with the DSB's recommendation. Thus, the
EC asserts this measure was also independent, and not a measure "taken to comply."
In the EC's view, India's claims against these two measures can only be heard in the
context of a new dispute.18
12. The panel agreed with the Eur opean Communities. It noted that:

[N]either the Panel nor the Appellate Body found any violation with respect to the
anti-dumping measures concerning imports from Egypt or Pakistan. As a
consequence, the DSB's rulings cannot have touched upon these anti-dumping
measures. Nor could the DSB have recommended that the EC bring into conformity

12 EC – Bed Linen (Panel), para. 7.2(g).
13 EC – Bed Linen (Panel), para. 7.5; see also EC – Bed Linen (AB) , para. 86(1) ("upholds the finding
of the Panel in paragraph 6.119 of the Panel Report that the practice of "zeroing" when establishing "the
existence of margins of dumping", as applied by the European Communities in the anti-dumping investigation at
issue in this dispute, is inconsistent with Article 2.4.2 of the Anti-Dumping Agreement.")
17 EC – Bed Linen (Panel) , Annex D-3 (Oral Statement of the European Communities, para. 5
(September 10, 2002)).

with its obligations measures as to which th ere was no finding of violation. Thus, the
EC was under no legal obligation to do anything with respect to the anti-dumping
measures on imports from Egypt and Pakistan.
The EC chose, at its own volition, to open the determinations of dumping with respect
to imports from Egypt and Pakistan so as to apply to those determinations the
conclusion of the adopted Reports finding the pr actice of "zeroing" to be inconsistent
with the AD Agreement. While this deci sion on the part of the EC may have been
prudent, and is commendable, it was not re quired by the DSB's recommendation in
the original dispute, which was to bring the measure at issue, viz., the antidumping
measure on imports of bed linen from India, into conformity with the EC's obligations
under the AD Agreement.
19
13. The Panel found, on this basis, that the re determination of dumping for imports from Egypt
and Pakistan were not properly the subject of th e Article 21.5 proceeding. Further, even though the
redetermination of injury applied in respect of imports from India, the panel found that it was not
within the scope of the proceeding because it was not alleged to " undo the compliance effectuated by
the [measure asserted to be taken to comply ( i.e., the redetermination of dumping with respect to
imports from India)]." 20 In this way, the panel distinguished the facts of EC – Bed Linen (21.5) as
being "fundamentally different" 21 from the facts of Australia – Leather (21.5) , in which "the
complaining Member . . . argued that Australia had taken two measures, the first of which was
purported to implement the DSB's ruling, while the second measure undid the purported
compliance."
22 While the Australia – Leather (21.5) panel considered that it was appropriate to deem
the second new measure a "measure taken to comply " under the circumstances of that dispute, the
same reasoning did not apply under the facts of EC – Bed Linen (21.5).

14. The analysis in EC – Bed Linen (21.5) confirms that there is no blanket test of
"connectedness" or "interrelatedness" that applies in Article 21.5 proceedings. Moreover, the mere
fact that improvements have been made to more than just the original measure s subject to findings of
WTO-inconsistency and DSB recommendations and rulings does not render all changed measures
"measures taken to comply." Where the improvements are made to measures that were in existence at
the time of the original panel proceeding and that were nonetheless not subject to any DSB
recommendations and rulings, the compliance proceeding must respect the fact that the DSB's
recommendations and rulings do not apply to the measures.

15. Here, if the United States had not made any changes with respect to guarantees for exports of
pig meat and poultry meat, Brazil could not – in th e European Communities' words – "have requested
an Article 21.5 panel to complain about the absence of implementation measures."
23 The right to
make such a complaint does not arise merely becau se the United States decided not to wall off those
guarantees from all other guarantees in applying the positive changes it was making to bring the other
guarantees into compliance with the DSB's recommenda tions and rulings with respect to the latter.
That just means that the United States went beyond its implementation obligations. Voluntary
improvements such as these by Members are "prudent" and, in the view of the EC – Bed Linen (21.5)

19 EC – Bed Linen (Panel), para. 6.18-6.19 (emphasis added).
22 EC – Bed Linen (Panel) , para. 6.16. The panel similarly distinguished Australia – Salmon (21.5) ,
which also involved two measures, one notified to the DSB and another not so notified that might have
undermined the measure taken to comply.
23 EC – Bed Linen (Panel) , Annex D-3 (Oral Statement of the European Communities, para. 9
(September 10, 2002)).

panel, "commendable."
24 They do not transform all measures subject to the changes into measures
taken to comply with the recommendations and rulings of the DSB.25

16. Finally, the United States notes that the European Communities references U.S. – Softwood
Lumber IV (21.5) in connection with its arguments. However, the facts and reasoning of U.S. –
Softwood Lumber IV (21.5) are inapposite. Indeed, U.S. – Softwood Lumber IV (21.5) simply built on
the reasoning in Australia – Leather II (21.5) and Australia – Salmon (21.5) in clarifying when the
scope of a compliance proceeding may be expanded to include a new measure that is issued at
approximately the same time as the one declared to be the measure taken to comply and that is alleged
to "undo" the compliance achieved by th e declared "measure taken to comply."
26 Because EC – Bed
Linen (21.5) did not involve any such situation, the EC – Bed Linen (21.5) panel found the facts
before it to be "fundamentally different" from the facts in Australia – Leather II (21.5) and Australia
– Salmon (21.5) and declined to apply the reasoning from those disputes. Precisely the same factual
difference exists here between the facts of this dispute and those in U.S. – Softwood Lumber IV (21.5).

45. Could the parties comment on the observations made by the European
Communities in paras. 15-24 of its Oral Statement on the issue of whether the
marketing loan and counter-cyclical payme nt programmes are within the scope of
the Panel's proceeding?

17. The United States disagrees with a number of the European Communities' observations in
paragraph 15-24 of its oral statement.

(1) There is no basis for the Euro pean Communities' suggestion that
statutory/regulatory provisions authoriz ing payments and individual payments
thereunder can be conflated "for the purposes of a compliance panel" if the
statutory/regulatory provisions set out the conditions under which payments are
to be made.

18. The United States disagrees with the Eur opean Communities' suggestion that where
"entitlement to payment is conditional . . . onl y upon certain essentially factual requirements,
essentially in the hands of the recipient" the dis tinction between the statutory/regulatory provisions
authorizing the payments and particular payments thereunder "may be less clear" than in other
circumstances, "and there may be a degree of nexus or interrelatedness of interdependence between
the (for example, fiscal) programme and payments unde r it, such as might justify their treatment as
indivisible for the purposes of a compliance proceeding."
27 Moreover, the United States considers
that the suggestion has no application here.

19. First, the present situation is not one in whic h "entitlement to payment is conditional . . . only
upon certain essentially factual requirements, essen tially in the hands of the recipient." 28 Payments
under the Step 2, marketing loan, and counter-cyclical payment programs are conditional upon, inter
alia, certain price conditions prevailing. Whet her or not these price conditions prevail is not a matter
within the hands of any potential recipients. In fact, the recipients cannot even know whether they
will, in fact, receive such payments at the time that planting decisions must be made. Thus, the
European Communities' suggestion that it is permi ssible to conflate the statutory and regulatory
provisions authorizing payments and the payments themselves where "entitlement to payment is

24 EC – Bed Linen (Panel), para. 6.18-6.19 (emphasis added).
25 EC – Bed Linen (Panel), para. 6.18-6.19 (emphasis added).
26 See e.g., U.S. – Softwood Lumber IV (21.5), para. 74.
27 Oral Statement of the European Communities, para. 19.
28 Oral Statement of the European Communities, para. 19.

conditional . . . only upon certain essentially factua l requirements, essentially in the hands of the
recipient"29 simply has no application here.

20. Second, even leaving aside the lack of rele vance, the premise that a compliance panel may
conflate two distinct measures – the statutory and regulatory provisions authorizing payments and the
payments themselves – where the former set out par ticular circumstances in which the payments are
to be made is arbitrary and without basis.
30 Not surprisingly, the Eu ropean Communities does not
provide a single citation to support this assertion. It identifies no provision of the WTO agreement
that justifies it. Nor does the European Comm unities articulate any rationale that would support
simply disregarding in the asserted circumstance s that the statutory and regulatory framework
authorizing payments and particular paymen ts made thereunder are distinct measures as a matter
of fact.

21. The distinction between "a measure of genera l and prospective application" – the epitome of
which is a statutory/regulatory provision – and individual instances of its application is well-
established in WTO dispute settlement. Indeed, the European Communities acknowledges that very
distinction.
31 The United States is not aware of any basi s in the DSU or in WTO dispute settlement
practice for the suggestion that statutory/regula tory provisions cease to be measures distinct from
individual instances of their application solely because of what the statutory/regulatory
provisions say.

22. A statutory or regulatory provision does not cease to be "a measure of general and prospective
application" if it identifies conditions under which pa yments are to be made. And the considerations
that underpin the distinction between such measures and particular instances of their application are
no less applicable in those circumstances.

23. Specifically, where a complaining Member challenges statutory/regulatory provisions and
other measures of general and prospective application themselves, they "by definition" assert:

that a Member's conduct—not only in a particular instance that has occurred, but in
future situations as well— will necessarily be inconsistent with that Member's WTO
obligations. In essence, complaining parties br inging "as such" challenges seek to
prevent Members ex ante from engaging in certain conduct. The implications of such
challenges are obviously more far-reaching than "as applied" claims.
32
 Because of this, the Appellate Body underscore d the "seriousness" of as such claims against
measures of general and prospective application.33

24. The European Communities has provided no r eason why challenges to statutory/regulatory
provisions should be considered any less serious, or any less far-reaching than "as applied" claims if
the provisions set out particular c onditions under which payments are to be made. This is especially
true where, as here, the asserted WTO-inconsistency relates to the effects of subsidies under specific
market conditions. The fact that particular pa yments may have caused adverse effects under the
particular market conditions prevailing in one marketing year, does not necessarily mean that if
payments are made "in future situations . . . [they] will necessarily be inconsistent with that Member's

29 Oral Statement of the European Communities, para. 19.
30 Oral Statement of the European Communities, para. 19.
31 Oral Statement of the European Communities, para. 17 ("[t]he European Communities agrees with
the United States that there is a distinction betw een a subsidy programme within the meaning of the
SCM Agreement (which may be a measure at issue) and instan ces of a subsidy under such programme (each of
which may also be a measure at issue). . . .These measures should not normally be conflated.")
32 U.S. – Oil Country Tubular Goods from Argentina (AB), para. 172 (emphasis added).
33 U.S. – Oil Country Tubular Goods from Argentina (AB), para. 172.

WTO obligations."
34 While a Member is certainly free to argue that will be the case, if it does so, the
complaining Member bears the burden of proving its cl aims. This is no different in a situation where
a statute sets out the conditions when payments are to be made.

25. Indeed, Brazil's arguments confirmed precisely th is point in the original proceeding. There,
in the case of its "as such" challenge to the prov isions of the 2002 FSRI Act and the 2000 ARP Act
providing for Step 2, marketing loan, and counter-cyclical payments, Brazil argued that:

[T]he Panel needs to evaluate whether the U.S. subsidies will necessarily threaten to
cause serious prejudice at price levels below the trigger prices of the U.S. subsidies.
Second, the Panel needs to consid er whether the U.S. subsidies threaten to cause
serious prejudice even at price levels at which only crop insurance subsidies and
direct payments are made."
35
 Moreover, Brazil asked the Panel "to find that the mandatory provisions of the 2002 FSRI Act
and the 2000 ARP Act together with their implementing regulations, as listed above, cannot be
applied in a WTO consistent manner."36

26. In addition, the EC has provided no reason why the well-established distinction between the
statutory/regulatory provisions providing for paym ents and particular paym ents provided thereunder
is any less important "for the purposes of a compliance panel." In U.S. – Countervailing Measures on
Certain EC Products , the panel articulated succinctly the limited purpose of "compliance"
proceedings pursuant to Article 21.5 of the DSU: "[t]he purpose of Article 21.5 is to provide an
expeditious procedure to establish whether a Member has properly implemented the DSB
recommendations and rulings."
37 Moreover, it noted many of the attendant limitations on the
applicable procedures:

[T]here is no provision for a "reasonable period" to implement the ruling in an
Article 21.5 dispute. Thus, an Article 21. 5 panel ruling . . . may immediately give
rise to rights for compensation or suspension of concessions under Article 22 DSU.
Moreover, the parties do not have the same opportunity to present evidence and
arguments in Article 21.5 proceedings. [I]mportant facts and issues . . . [may]
continue[] to surface quite late into the Ar ticle 21.5 proceedings, proceedings that are
already abbreviated. . . . Finally, the shorter timeline significantly limits both the
panel's opportunity to interact with the par ties and the panel's time to deliberate. The
panel typically has only one opportunity to meet with the parties, unlike the normal
proceedings where two substantive meetings take place.
38
27. It is precisely in these circumstances that maintaining the well-established distinction between
the statutory/regulatory provisions providing fo r payments and particular payments provided
thereunder would seem all the more important, especially given the seriousness of "as such" claims
underscored by the Appellate Body in U.S. – Oil Country Tubular Goods from Argentina.39

34 U.S. – Oil Country Tubular Goods from Argentina (AB), para. 172 (emphasis added).
35 Brazil Further Submission, para. 426 (9 September 2003) (emphasis added).
36 Brazil Further Submission, para. 435-436 (9 September 2003) (emphasis added). As the Panel
declined to address Brazil's claims against the "2002 FSRI Act and the 2000 ARP Act together with their
implementing regulations," however, the Panel neither conducted the requested evaluations, nor made any
findings along the lines requested by Brazil.
37 U.S. – Countervailing Measures on Certain EC Products (Panel) , para. 7.74. This panel report was
not appealed.
38 U.S. – Countervailing Measures on Certain EC Products (Panel), para. 7.75, n. 294.
39 U.S. – Oil Country Tubular Goods from Argentina (AB), para. 172.

28. Third, the European Communities' arguments are again based on the untenable premise that
there is a blanket test of "interrelatedness" or "interdependence" under Article 21.5 of the DSU such
that even measures not found to be WTO-inconsiste nt in an original proceeding may nonetheless be
swept into the scope of an Article 21.5 proceeding if they nonetheless are deemed to be "interrelated"
to, or "interdependent" with, the measures found to be WTO-inconsistent. As discussed above, that
premise is unfounded. In the European Commun ities' own words in a dispute in which it was the
responding party, "[n]ot all the measures that are somehow 'connected' to the measure in dispute in the
original panel proceedings qualify as measures 'taken to comply.'"40

29. The EC's new assertion of a blanket "interrelate dness" or "interdependence" test is not only
unfounded, it makes little sense, especially in the cont ext of this dispute. The EC has not offered any
reason why a measure should be considered "indivi sible" from another "for purposes of a compliance
panel" where the measures were not "indivisible" for purposes of an original proceeding. Indeed, this
was a critical consideration in resolving a second scope question in EC – Bed Linen (21.5). There the
Appellate Body rejected an attempt by India to have the scope of an Article 21.5 proceeding expanded
to include an element of a measure taken to comply (the "other factors" analysis in an antidumping
redetermination) that was identical to an element that had been found to be WTO-consistent in an
original measure. India argued that the element was an inseparable part of the measure taken to
comply. But the Appellate Body disagreed, expl aining that "we do not see why that part of the
redetermination that merely incorporates elements of the original determination on 'other factors'
would constitute an inseparable element of a measu re taken to comply with the DSB ruling in the
original dispute. Indeed, the investigating authorities were able to treat this element separately ."
41
Similarly here, Brazil, the United States, and th e original panel all were able to treat the
statutory/regulatory provisions providing for pa yments separately from particular payments
thereunder in the original proceeding. There is no reason why those measures should be treated as
inseparable in this compliance proceeding.

(2) There is no basis to the EC's argument that "if there is sufficient nexus between
payments and programme for one programme; and if there is sufficient nexus
between all payments; this in turn suggests a sufficient nexus between all three
programs, such that the whole new bundle can and should be treated as
indivisible for the purposes of this compliance proceeding."
42

30. The United States disagrees with EC's argument that "if there is sufficient nexus between
payments and programme for one progr amme; and if there is sufficient nexus between all payments;
this in turn suggests a sufficient nexus between all three programs, such that the whole new bundle
can and should be treated as indivisible for the purposes of this compliance proceeding."
43

31. First, the EC argument again assumes incorrec tly that original measures never found to be
WTO-inconsistent may be within the scope of an Article 21.5 proceeding simply because they are
deemed to have some "nexus" either with orig inal measures or measures taken to comply with
recommendations and rulings of the DSB. This is patently incorrect, for the reasons discussed above.
Indeed, the EC argument would effectively make Article 21.5 proceedings an "open season" for
complaining parties to challenge measures "as such" that had either not been challenged or had been
challenged unsuccessfully in orig inal proceedings. There will always be a "nexus" between statutory
and regulatory provisions and individual instances in which they are applied. If the EC argument
were credited, a complaining party could simply challenge one instance of the application of a
statutory/regulatory provision in an original proceeding and save any claims against the

40 EC – Bed Linen (Panel) , Annex D-3 (Oral Statement of the European Communities, para. 5
(September 10, 2002)).
41 EC – Bed Linen (AB) (21.5 – India), para. 86.
42 Oral Statement of the European Communities, para. 21.
43 Oral Statement of the European Communities, para. 21.

statutory/regulatory provisions themselves until a compliance proceeding where "there is no provision
for a 'reasonable period,'" and "the parties do not have the same opportunity to present evidence and
arguments" as in an original proceeding.
44 The negotiators of the DSU never agreed that compliance
proceedings could be used (some could argue "abused") in this way.

32. Second, the fact that the original panel cumu lated the effects of the Step 2, marketing loan,
and counter-cyclical payments made in MY 19 99-2002 in assessing whether they caused "present"
significant price suppression does not mean that tho se measures became one "indivisible" measure for
purposes of WTO dispute settlement. That argument bears no connection to reality. Payments under
the three programs are distinct measures as a matter of fact and as a matter of WTO dispute
settlement, regardless of whether th eir effects can be added together in assessing whether there is
sufficient "price suppression" to meet the standard of "significant price suppression" for purposes of
Article 6.3(c) of the SCM Agreement.

33. Third, the unreasonableness of the approach suggested by the Europ ean Communities here is
especially apparent when one considers that the European Communities argued – successfully – in EC
– Bed Linen (21.5) that an analysis of "other factors" did not share a sufficient "nexus" with the other
parts of the same determination to be deemed one "indivisible" measure. In other words, even though
they were all part of a single antidumping redetermination that was part of a single EC regulation
involving imports of bed linens from India and fo rmed an integral and necessary basis for the
imposition of a single antidumping order, the EC argued (and th e panel agreed) the "other factors"
analysis should not be considered an "inseparable" part of the redetermination. Yet, here, for some
reason, the European Communities suggests that entirel y distinct payments made to entirely different
recipients under entirely different conditions a nd under entirely different statutory/regulatory
provisions must somehow be considered one indivisible measure for purposes of this compliance
proceeding simply because their effects were examin ed cumulatively in the original dispute. The
United States submits that this is an entirely untenable argument.

34. Moreover, the Appellate Body has clarified th at the "measure" identified as being subject to
WTO claims cannot "vary depending on the subs tance of the legal provision invoked by a
complainant and the interpretation that a panel might give to that provision."
45 The European
Communities' suggestion that what is a "measu re" depends on how effects were examined for
purposes of Articles 5(c) and 6.3(c) of the SCM Agreement is not consistent with the Appellate Body's
clarification and should be rejected on that basis as well.

(3) The European Communities is mistaken in its suggestion that the United States
has argued that "the fact that somethin g has not changed . . . necessarily means
that it is outside the scope of a compliance proceeding."
46

35. The European Communities appears to misunders tand the U.S. arguments. The United States
has never suggested that "the fact that something has not changed necessarily means that it is outside
the scope of a compliance proceeding." 47 The United States fully agrees that where the "something"
that "has not changed" is a measure that was subject to DSB recommendations and rulings, it is
possible – although not always – that a compliance proceeding could determine that no measure taken
to comply exists.

36. The United States has simply argued that where a measure is not one that was subject to DSB
recommendations and rulings, and where it is not a measure taken to comply (evidence of which is the

44 U.S. – Countervailing Measures on Certain EC Products (Panel), para. 7.75, n. 294.
45 EC – Customs (AB), para. 132.
46 Oral Statement of the European Communities, para. 22.
47 Oral Statement of the European Communities, para. 22.

fact that it has not changed), that measure is not properly within the scope of a compliance
proceeding.

(4) The European Communities' argument that "claims of present serious prejudice
and threat of serious prejudice are closely interrelated, such that a threat claim
in an original panel may inevitably give rise to a claim of present serious
prejudice in a compliance panel"
48 is illogical.

37. The United States notes a number of flaws in the European Communities' argument that:

Finally, and significantly, the European Communities observes that there is support in
the case law for the view that claims of present serious prejudice and threat of serious
prejudice are closely interrelated, such that a threat claim in an original panel may
inevitably give rise to a claim of present serious prejudice in a compliance panel.49
38. First, despite the asserted "significance" of the point, the European Communities fails even to
identify the alleged "support in the case law." 50 Indeed, there is not a single citation provided by the
European Communities; the point is entirely unsupported.

39. Second, this assertion is not logical. The claims that a Member makes in an original
proceeding do not limit the claims that it makes in a compliance proceeding so long as, in the
compliance proceeding, the claims apply with respect to a measure taken to comply. In contrast, if
there are no measures taken to comply then only one claim is available – that no measures taken to
comply exist.

40. Here, the marketing loan program and count er-cyclical payment programs are not original
measures subject to any finding of WTO-inconsistenc y. "As a consequence," in the words of the EC
– Bed Linen (21.5) panel, "the DSB's rulings cannot have touched upon these [programs]. Nor could
the DSB have recommended that the [United States ] bring into conformity with its obligations
measures as to which there was no finding of viola tion. Thus, the [United States] was under no legal
obligation to do anything with respect to the [mar keting loan program and counter-cyclical payment
programs]."
51 In these circumstances, there is obviously no basis for Brazil to claim that the
United States failed to bring those measures in to conformity with any (non-existent) DSB
recommendations and rulings.

41. Moreover, the marketing loan program a nd counter-cyclical payment programs are not
measures taken to comply with any recommendations and rulings in respect of other measures
(i.e., measures that were found to be WTO-inconsistent). The Appellate Body has explained before
that "[i]n our view, the phrase 'measures taken to comply' refers to measures which have been, or
which should be, adopted by a Member to bring about compliance with the recommendations and
rulings of the DSB ."
52 Neither the marketing loan program, nor the counter-cyclical payment
program, nor any marketing loan payments or count er-cyclical payments, nor some combination of
these measures was "adopted by [the United St ates] to bring about compliance with the
recommendations and rulings of the DSB." In fact , these measures were in existence and were even
at issue in the original proceeding. And, as Br azil acknowledges, they have not been changed since
that proceeding to implement any DSB recomme ndations and rulings or for any other reason. 53 Thus,

48 Oral Statement of the European Communities, para. 23.
49 Oral Statement of the European Communities, para. 23.
50 This is aside from the fact that there is no such thing in the WTO as "case law." The WTO is not a
common law system.
51 EC – Bed Linen (Panel), para. 6.18-6.19 (emphasis added).
53 Brazil Submission Regarding U.S. Requests for Preliminary Rulings, para. 35.

under the express terms of Article 21.5 of the DSU, those measures cannot be the subject of any
claims of inconsistency "with a covered agreement" – whether or "present" serious prejudice, "threat"
of serious prejudice or anything else – in this compliance proceeding.

46. In its Oral Statement, the European Communities characteri zes Brazil's and the
United States' respective approaches as the "measure model" and the "element of
the measure model" (Oral Statement of the European Communities, para. 7).
Please discuss whether you agree with this characterization and whether, in your
view, the application of a measure alleged to be a subsidy to different agricultural
products relates to a "measure" (or elements thereof) or if, rather it relates to a
"claim". Would it be permissible for a compliance panel to examine a "claim"
that relates to subsidies (granted as part of measures taken to comply) provided to
agricultural products to which the "initial measure" did not apply?

42. With respect to the first of the Panel's qu estions, the United States does not agree with the
European Communities regarding the characterization of the parties' views, the appropriateness of
framing the question of the scope of Article 21.5 proceedings through an elaborate construct of
"models" that is not found anywhere in the text (but instead has been made up by the EC for purposes
of this proceeding), or the necessity of any such c onstruct in resolving the question of whether or not
GSM 102 export credit guarantees in respect of exports of pig meat and poultry meat are within the
scope of this proceeding.

43. The United States recalls that the Members ha ve expressly agreed in Article 3.2 of the DSU
that the WTO dispute settlement system "serves to preserve the rights and obligations of Members
under the covered agreements, and to clarify the existing provisions of those agreements in
accordance with customary rules of interpretation of public international law." The United States
does not see "element of measure model," "measur e model" or any other similar language in
Article 21.5 of the DSU. What the United States do es find, instead, is the following language, which
identifies both the measures that are properly within the scope of Article 21.5 proceedings and the
claims that can be made therein:

Where there is disagreement as to the ex istence or consistency with a covered
agreement of measures taken to comply with the recommendations and rulings such
dispute shall be decided through recourse to these dispute settlement procedures. . . .
44. This language makes clear that only measure s "taken to comply" with the recommendations
and rulings of the DSB are properly before a comp liance panel. Where the DSB's recommendations
and rulings are limited to partic ular things – regardless of whether those things are measures or
elements of a measure – it follows that the focus of a compliance proceeding is whether those things
have been brought into compliance consistently with the DSB's recommendations and rulings and
with the provisions of the WTO Agreement cited by the complaining party. There can be no
presumption that the responding Member's measures ta ken to comply are inconsistent with its WTO
obligations; the burden is on the complaining party to prove inconsistency.

45. Applying that logic in the present dispute, the same result obtains whether one understands
GSM 102 guarantees as elements of the GSM 102 progr am or as individual measures themselves; the
latter being the correct understanding, in the U.S. view for the reasons explained previously.
54 I n
either case, the fact is that the original pane l found that Brazil had only established its case with
respect to export credit guarantees in respect of exports of rice and unscheduled products. 55 Neither
the original panel nor the Appellate Body found that Brazil had proven its case with respect to
guarantees provided in respect of the twelve othe r scheduled products (export credit guarantees in

54 U.S. Comments on Brazil's Answers to First Set of Panel Questions, paras. 9-17.
55 Upland Cotton (Panel), para. 8.1(d)(i).

respect of exports of wheat, coarse grains, vegetabl e oils, butter and butter oil, skim milk powder,
cheese, other milk products, bovine meat, pigmeat , poultry meat, live dairy cattle, or eggs). 56 As the
original panel clearly distinguished between these different guarantees, there is no basis for either
ignoring the fact that it did so or suggesting that no such distinction can be drawn in this compliance
proceeding. Indeed, given the abbreviated and expedited nature of compliance proceedings, discussed
above, it is all the more important that Brazil not be permitted to eliminate such distinctions here.

46. Turning to the Panel's second question – whether "the application of a measure alleged to be a
subsidy to different agricultural pr oducts relates to a 'measure' (or elements thereof) or if, rather it
relates to a 'claim'" – the United States considers that the fact that a measure is applied to particular
products (or is applied generally to all products) is necessarily relevant to understanding the nature
and scope of the measure. However, it may also be relevant in assessing the particular claim being
made. In the case of Brazil's claims against the export credit guarantees, it was relevant to both.
Consider the following examples:

• Section 1207 of the Farm Security and Ru ral Insurance Act ("FSRI Act") of 2002 –
the Step 2 program – that Brazil challenged, as such, for providing prohibited export
and import substitution subsidies in the orig inal proceeding was limited by its terms
only to upland cotton.
57 This fact was relevant to understanding the nature and scope
of the measure being challenged in the origin al proceeding. However, the fact that
Section 1207 applied with respect to upland cotton was not an important
consideration in assessing the prohibited subsidy claims that Brazil made.

• By contrast, Sections 1201-1205 of the 2002 FSRI Act – the marketing loan program
– provides for non-recourse loans and loan deficiency payments with respect to a
number of different products. 58 Brazil challenged separately (a) the provisions
themselves to the extent that they applied to upland cotton and (b) individual
instances of their application (payments made in MY 1999-2002 and payments
allegedly "mandated" to be made in MY 2003-2007). The particular product to which
the measure applied was important, in bot h cases, in understanding the nature and
scope of the measure(s) challenged.

However, the fact that Section 1201-1205 applied with respect to upland cotton was
also relevant to the claims made by Brazil under Articles 5 and 6 of the
SCM Agreement because the claims required the identification of a "subsidized
product" and an examination of the effects of payments under the programs on the
"subsidized product."
59 Brazil could only prevail on its claims against these measures
if it could show the requisite effects with respect to the "subsidized product."

• Similarly, Section 202 of the Agricultural Trade Act of 1978 allows the Commodity
Credit Corporation ("CCC") to guarantee the "repayment of credit made available to
finance commercial export sales of agricultural commodities." 60 To avoid the
application of the mandatory-discretionary principle – which would have been fatal to
any "as such" claim given that these provi sions clearly do not even mandate the
provision of guarantees, let alone the provision of export subsidies – Brazil argued

56 Upland Cotton (Panel), para. 8.1(d)(ii).
57 See 2002 Farm Security and Rural Investment Act (Exhibit BRA-29).
58 See 2002 Farm Security and Rural Investment Act (Exhibit BRA-29). The United States does not
include the counter-cyclical payment program in this discussion because it does not provide for payments in
respect of any particular product. It simply authorizes payments in respect of historical base acres.
59 See Articles 6.3(c) and 6.3(d) of the SCM Agreement.
60 7 U.S.C. 5622 (Exhibit US-141). See also , implementing regulations in 7 C.F.R. 1493
(Exhibit US-142), which maintain the same product scope.

that its claims of actual circumvention under the Agreement on Agriculture were "akin
to . . . 'as applied' claim[s]" with respect to the export credit guarantees.
61 However,
Brazil did not initially limit its challenge to the provision of guarantees to any subset
of eligible products. The original pane l therefore considered whether Brazil had
proven its claims of circumvention with respect to all guarantees in respect of all
eligible products.

Nonetheless, Brazil was only successful in proving that the provision of export credit
guarantees to exports of rice and unsch eduled products resulted in actual
circumvention under the Agreement on Agriculture or in breach of any obligations
under the SCM Agreement. Therefore, the products to which the guarantees applied
were important in defining the scope of me asures that were subject to any finding of
WTO-inconsistency, DSB recommendations and rulings, or any implementation
obligation on the part of the United States. This is no different, for example, than if
Brazil had challenged, under Articles 5 and 6 of the SCM Agreement, the marketing
loan program not only as it applied to upla nd cotton but all other products eligible for
payments thereunder. If, in those circumst ances, it had been ab le to make its case
only in respect of upland cotton, that fact would have been important in understanding
both the scope of U.S. implementation obliga tions and the scope of measures taken to
comply. The same is true in the case of the export credit guarantees.

47. This brings us to the third question presente d by the Panel – whether it would be "permissible
for a compliance panel to examine a 'claim' that rela tes to subsidies (granted as part of measures taken
to comply) provided to agricultural products to which the 'initial measure' did not apply." The
United States recalls, again, that by the very terms of Article 21.5, the touchstone of any analysis of
"measures taken to comply" is the recommendations and rulings of the DSB and the consideration of
whether or not a challenged measure is properly understood to have been "taken to comply" with
those recommendations and rulings. The Panel's question appears to assume that critical
consideration since it asks whether subsidies that are "part of measures taken to comply" may be
subject to claims in a compliance proceeding. It is difficult – in the abstract – to conceive of why a
Member would comply with DSB recommendations a nd rulings relating to subsidies provided to one
product by providing subsidies in respect of other products.

48. That is, in any event, an entirely different s ituation than the one before this Panel. Here,
Section 202 of the Agricultural Trade Act of 1978
62 and its implementin g regulations permit
guarantees to be made to the exact same group of agricultural products as before. The question is
whether the United States – through the various ch anges it has made – has brought into conformity
with the DSB's recommendations and rulings and with any provisions of covered agreements cited by
Brazil those guarantees that were found to have been provided in a WTO-inconsistent manner by the
original panel. The guarantees provided in respect of exports of pig meat and poultry meat are not
measures taken to comply with any recommendations and rulings of the DSB, nor are they part of any
measures taken to comply with any recommendations and rulings of the DSB.
63

61 Brazil's Answers to Additional Questions Follo wing Second Panel Meeting, paras. 11, 37
(20 January 2004).
62 7 U.S.C. 5622 (Exhibit US-141).
63 As discussed above, the mere fact that they were subjected to the same improvements as the
guarantees that were subject to the DSB's recommendations and rulings do not render them measures taken to
comply or elements of any measures taken to comply.

Questions to the United States

47. The United States has raised a preliminary objection regarding Brazil's claims of
(threat of) serious prejudice in respect of the marketing loan and counter-cyclical
payment programmes. Is the Panel's understanding correct that, apart from this
preliminary objection regarding programmes, the United States also considers that
the issue of whether payments made under the marketing loan and counter-cyclical
payment programme after 21 September 2005 cause serious prejudice to the
interests of Brazil is not properly within the scope of this proceeding?

49. Yes. As depicted in the chart below, the or iginal panel (a) made a finding of "present" serious
prejudice only with respect to payments made under the Step 2, marketing loan and counter-cyclical
payment program in MY 1999-2002; (b) declined to make any finding of "threat" of serious prejudice
with respect to payments allegedly "mandated" to be made in MY 2003-2007; and (c) declined to
make any find of "threat" of serious prejudice with respect to the Step 2, marketing loan, and counter-
cyclical payment programs themselves (which would have implicated all payments under the
programs). In these circumstances, the only measur es subject to any finding of WTO-inconsistency,
and DSB recommendations and rulings based there on, or any implementation obligations were
payments made under the Step 2, marketing loan and counter-cyclical payment program in MY 1999-
2002 ( i.e., through July 31, 2003). Thus, unless Brazil we re to establish that payments made after
September 21, 2005 were measures taken to comply with the recommendations and rulings of the
DSB – and, for the reasons explained in the U.S. comments on Brazil's response to Question 15 in the
first set of questions from the Panel, the United St ates does not consider that Brazil has presented any
basis to make such a finding – those payments are not properly within the scope of this Article 21.5
proceeding.

Measure
Challenged
Claim
Made
Resolution by
Original Panel
Paragraph in
Panel Report
"U.S. subsidies
provided during
MY 1999-2002"
"Present" serious prejudice
under Articles 5(c) and 6.3(c)
of the SCM Agreement
Finding of WTO-inconsistency against
Step 2, marketing loan, and counter-
cyclical/market loss assistance programs
7.14168.1(g)(i)
"U.S. subsidies
provided during
MY 1999-2001"
"Present" serious prejudice
under Articles 5(c) and
6.3(d) of the SCM Agreement
Rejected for failure to make prima facie
case
7.14658.1(g)(ii)
"U.S. subsidies
provided during
MY 1999-2002"
"Present" serious prejudice
under Articles XVI:1 and
XVI:3 of the GATT 1994
Declined to address, inter alia, because
of finding of inconsistency with
Articles 5(c) and 6.3(c) of the
SCM Agreement
7.1476
"U.S. subsidies"
allegedly
"mandated" to be
provided during
MY 2003-2007
"Threat" of serious prejudice
under Articles 5(c) and 6.3(c)
of the SCM Agreement
Declined to address in light of finding
of inconsistency with Articles 5(c)
and 6.3(c) and 3.1(a) and 3.2 of the
SCM Agreement
7.1503
"U.S. subsidies"
allegedly
"mandated" to be
provided during
MY 2002-2007
"Threat" of serious prejudice
under Articles 5(c)
and 6.3(d) of the
SCM Agreement
Rejected for failure to make prima facie
case
7.1504
"U.S. subsidies"
allegedly
"mandated" to be
provided during
MY 2003-2007
"Threat" of serious prejudice
under Articles XVI:1 and
XVI:3 of the GATT 1994
Declined to address, inter alia, because
of finding of inconsistency with
Articles 5(c) and 6.3(c) of the SCM
Agreement
7.1505

Measure
Challenged
Claim
Made
Resolution by
Original Panel
Paragraph in
Panel Report
"selected
provisions of the
FSRI Act of 2002
and the ARP Act
of 2000"
"Threat" of serious prejudice
under Articles 5(c) and 6.3(c)
of the SCM Agreement
Declined to address in light of findings
regarding export subsidies, import
subsidies, "present" serious prejudice,
and "threat" of serious prejudice
7.1511
"selected
provisions of the
FSRI Act of 2002
and the ARP Act
of 2000"
"Threat" of serious prejudice
under Articles 5(c) and
6.3(d) of the SCM Agreement
Same as above 7.1511
"selected
provisions of the
FSRI Act of 2002
and the ARP Act
of 2000"
"Threat" of serious prejudice
under Articles XVI:1 and
XVI:3 of the GATT 1994
Same as above 7.1511

48. How does the United States address the argument of Brazil that "[i]f the
United States were to prevail on its view that subsequent mandatory and price-
contingent marketing loan and CCP payme nts are not properly before this Panel,
the grant of annual recurring subsidies beco mes 'a moving target that escape from
[the WTO subsidy] disciplines'"? (Closing Statement of Brazil, para. 4)

50. As the United States explained in its comments on Brazil's response to Question 15 in the first
set of questions from the Panel, the United States does not consider this to be a valid argument.
Under the reasoning of the original panel, not hing prevents Members from challenging present
adverse effects of past or current payments, threat of serious prejudice of past, current, or future
payments, or present adverse effects or threat of serious prejudice from payment programs as such.
Indeed, Brazil availed itself of many of those opportu nities in the present dispute. The obligations of
a responding Member depend on what the outcome is of those challenges. Where, as here, a
complaining Member only prevails on one claim – that of "present" serious prejudice with respect to
particular payments made in particular year s – the Member is bound by that outcome. The
complaining Member cannot seek to avoid that outcome either through post hoc attempts to rewrite
the original panel report, or by complaining that its remedy is more limited that it would have been
had the original panel's findings of WTO-inconsistency been made with respect to a different and
broader set of measures.

51. Nor is this a situation where Brazil had no reme dy under the original panel's findings. Brazil
has itself expressly recognized otherwise. Before the Appellate Body, Brazil argued that subsidies
provided in MY1999-2002 must be found to be capable of having "present" effects at the time of the
appeal (i.e., in late 2004 to 2005) in order for it to have any remedy in the dispute. Brazil argued,
specifically, that if the U.S. arguments to the c ontrary were credited "Brazil will have no remedy
under Article 7.8 of the SCM Agreement for its ser ious prejudice, since it is allegedly legally
impossible for the MY 2002 price-contingent recurri ng subsidies to have any adverse effects after
31 July 2003 (the close of MY 2002)."
64 The Appellate Body agreed, finding that "the effects of a
'recurring' subsidy may continue after the year in which it is paid."65

52. Under Brazil's own arguments, then, it would have had "a remedy unde r Article 7.8 of the
SCM Agreement for its serious prejudice" even in years after the MY 1999-2002 subsidies were

64 Upland Cotton (AB), para. 529.
65 Upland Cotton (AB), para. 484.

provided. This not only confirms that the U.S. measures were not, in fact, "a moving target" but that
Brazil specifically understood the limited scope of the original panel's findings. Had the findings
been with respect to the programs themselves and/ or all future payments as Brazil alleges, there
would have been no basis for Brazil to allege that "Brazil will have no remedy under Article 7.8 of the
SCM Agreement for its serious prejudice" since the findings of serious prejudice found by the original
panel would have extended beyond MY 2002 to all times in the future in which Step 2, marketing
loan, and counter-cyclical payments were to be made.

53. At the same time, it is clear that claims of serious prejudice under the SCM Agreement have a
temporal scope. This is established by the text of the agreement, for example the distinction between
present and "threat of" serious prejudice. The fa ct that the negotiators specifically agreed on
obligations that have a temporal scope means th at a Member is not free in dispute settlement
proceedings to complain that the temporal scope constrains their remedies.

49. Could the United States comment on the argument of the European Communities
that the text of Article 21.5 of the DSU does not limit the temporal scope of that
provision in the manner suggested by the United States? (para. 29 of the Oral
Statement of the European Communities)

54. It is unclear from the oral statement of the European Communities what it means by
"limit[ing] the temporal application [of Article 21. 5] in the manner advocated by the United States."
66
In any event the European Communities' arguments do not appear to respond to the arguments that the
United States has actually made.

55. Specifically, the United States has argued that Brazil has not identified any textual basis that
requires the Panel to make findings regarding compliance as of the end of the six-month period set out
in Article 7.9 of the SCM Agreement rather than as of the date of panel establishment pursuant to
Article 21.5 of the DSU. Contrary to Brazil's suggestions, neither Article 21.5 of the DSU nor
Article 7.9 of the SCM Agreement require this. Moreover, prior panels in EC – Bed Linen (21.5) and
U.S. – Shrimp (21.5) have properly assessed compliance as of the date of establishment of the panel.

56. The European Communities' assertion that there is no temporal limitation in Article 21.5 of
the DSU is, thus, fully consistent with the U.S. argument. Indeed, in EC – Bed Linen (21.5) , the
European Communities made precisely this point, no ting that the absence of a temporal limitation
applicable to compliance proceeding supported its argument that "the relevant date for assessing the
consistency of the measures 'taken to comply' with the covered agreements is the date of
establishment of the panel, and not that of the end of the 'reasonable period of time.'"
67 Specifically,
the European Communities argued there that:

As noted by the panel in US – Shrimps (Ar ticle 21.5), "the DSU is silent as to the
date on which the existence or consistenc y of the implementing measure must be
assessed". The same panel went on to find that:
… it should take into account all the relevant facts occurring until the
date the matter was referred to it. By applying this approach, an
Article 21.5 panel can reach a decision that favours a prompt
settlement of the dispute. Indeed, it avoids situations where
implementing measures allowing for compliance with the DSB
recommendations and rulings would be disregarded simply because
they occur after the end of the reasonable period of time. The Panel,

66 Oral Statement of the European Communities, para. 29.
67 EC – Bed Linen (21.5) , Annex A-2, First Written Submission of the European Communities,
para. 35.

while mindful of the obligation of the United States to bring its
legislation into conformity by the end of the reasonable period of
time, considers that it is consistent with the spirit of Article 3.3 of the
DSU to take into account any relevant facts until the date on which
the matter was referred to the Panel.
. . . .[T]he EC submits that the relevant date for assessing the consistency of the
measures "taken to comply" with the covere d agreements is the date of establishment
of the panel, and not that of the end of the "reasonable period of time".
Of course, the EC is not suggesting th at the implementing Member is under no
obligation to implement the DSB's ru lings and recommendations within the
"reasonable period of time". That obligation, however, does not flow from
Article 21.5, but instead from Article 21.3 of the DSU, which states in pertinent part
that
If it is impracticable to co mply immediately with the
recommendations and rulings, the Me mber concerned shall have a
reasonable period to comply.
It is obvious, nevertheless, that a finding that a Member has violated Article 21.3 of
the DSU by implementing late the DSB's recommendations and rulings would be
necessarily declaratory, since there is nothi ng that such Member could do in order to
correct that violation. In any event, as discussed below, in the present case India did
not state in its panel request any claims based on Article 21.3 of the DSU.
68
57. When India clarified in EC – Bed Linen (21.5) that it was looking for two findings – one
regarding compliance as of the end of the reasonabl e period of time and one as of the date of
establishment of the panel, the European Communities again forcefully argued that the former was not
within the compliance panel's terms of reference:

The EC has requested the Panel to make a ru ling to the effect that the relevant date
for assessing the consistency of the measure s "taken to comply" with the covered
agreements is the date of establishment of the Panel.
India agrees with that request. Neverthel ess, it argues that, in addition, the Panel
should assess the consistency of the measures "taken to comply" also as of the date of
expiry of the "reasonable period of time".
India's request is not within the Panel's term s of reference. The obligation to comply
within the "reasonable period of time" do es not arise from Article 21.5, but from
Article 21.3 of the DSU. Yet, India has not cited Article 21.3 in its panel request.
In any event, the ruling requested by India would serve no useful purpose and would
complicate unnecessarily the Panel's task. If the Panel found that the EC did not
comply as of end of the 'reasonable period of time', but did so as of the date of
establishment of the panel, there would be nothing else that the EC could do in order
to remedy that temporary lack of compliance.
. . . . While it may be true that no Member has ever invoked a violation of
Article 21.3 in Article 21.5 proceedings, th is does not prove that it is unnecessary to

68 EC – Bed Linen (21.5) , Annex A-2, First Written Submission of the European Communities,
paras. 34-37.

state that claim separately. Rather, it seems more likely that no Member has ever
bothered to invoke a violation of Article 21.3 because a ruling that the implementing
Member has complied late would be declaratory and devoid of practical
consequences.
69
58. In response to questions, the European Co mmunities clarified its view that "the position
expressed in paragraph 35 of the EC's First Written Submission" – i.e., that "the relevant date for
assessing the consistency of the measures 'taken to co mply' with the covered agreements is the date of
establishment of the panel, and not that of the end of the 'reasonable period of time'" – did not depend
on the particular terms of reference of a panel but, rather, "is valid with respect to all Article 21.5
disputes."70

59. There is no basis for the European Communities to argue that the analysis should somehow be
different here. In particular, the United States notes the European Communities' argument now that
"whether or not Brazil's request would ever be capab le of having any practical utility is a different
matter that this Panel does not need to address, being essentially a matter for Brazil, exercising its
judgement in good faith."71 This would appear diametrically opposite to its argument that the panel in
EC – Bed Linen (21.5) should review compliance as of the da te of establishment because "the ruling
requested by India would serve no useful purpose and would complicate unnecessarily the Panel's
task. If the Panel found that the EC did not comply as of end of the 'reasonable period of time', but
did so as of the date of establishment of the panel, there would be nothing else that the EC could do in
order to remedy that temporary lack of compliance."
72

60. While the European Communities' position ma y differ depending on whether or not its own
measures are at issue, the fact remains that the panel in EC – Bed Linen (21.5) considered the
reasoning identified by the European Communities in EC – Bed Linen (21.5) to be persuasive and
proper and applied it to dismiss India's request. The panel explained:

It appears India considers that we must make two decisions on the existence or
consistency of measures taken to comply – one as of the end of the reasonable period
of time, and one as of the date of establishment of the Panel. We do not consider that
it would be either necessary or appropriate, as a matter of judicial economy, to first
examine whether compliance had occurred as of the end of the reasonable period of
time, and second consider compliance as of the later date.
73
61. This mirrored the reasoning of the U.S. – Shrimp (21.5) panel invoked by the European
Communities and set out above. The United States recalls – and agrees with – the European
Communities' argument that the reasoning underpin ning this result "is valid with respect to all
Article 21.5 disputes."74 The same result is certainly valid here.

Question to Brazil

50. Does Brazil maintain its claims with respect to the three unscheduled products
(lyocell, lysine, wood products) identified by the United States as falling outside the

69 EC – Bed Linen (21.5) , Annex D-3, Rebuttal Submission of the European Communities,
paras. 12-19.
70 EC – Bed Linen (21.5), Annex E-3, Answers of the European Communities to Questions from India,
para. 3.
71 Oral Statement of the European Communities', para. 29.
72 EC – Bed Linen (21.5), Annex D-3, Rebuttal Submission of the European Communities, paras. 18.
73 EC – Bed Linen (Panel) (21.5 – India), para. 6.28.
74 EC – Bed Linen (21.5), Annex E-3, Answers of the European Communities to Questions from India,
para. 3.

scope of the Agreement on Agriculture? (see paragraph 83 of the United States'
Rebuttal)
B. C
LAIMS OF BRAZIL REGARDING PRESENT SERIOUS PREJUDICE

1. Significant price suppression - Article 6.3(c) of the SCM Agreement

Questions to both parties

51. The parties disagree on whether or no t the marketing loan and counter-cyclical
payments have more than minimal effects on production of upland cotton. Could
each party explain how its approach to the analysis of the impact of these payments
on production of upland cotton is supported by the provisions of Articles 5 and 6 of
the SCM Agreement and by any other relevant WTO provisions?

62. Brazil makes two claims of "present" serious prejudice under Article 5(c) of the
SCM Agreement, one alleging significant price suppression unde r Article 6.3(c) and the other alleging
a comparative increase in world market share w ithin the meaning of Article 6.3(d) of the
SCM Agreement. In either case, the key consideration is what "the effect of the subsidy is" at present
(i.e., for purposes of this dispute, MY 2006). 75 The use of the present tense -- "is" – is important not
only because it helps to identify the proper period for examination of the effects but also confirms that
the effects that are important are those that exist in fact – not any potential or speculated effects that
may or may not arise under different market circumstances. "Is" means, inter alia, "that which exists,
that which is; the fact or quality of existence." 76 "Is" comes from the verb "to be," which itself
means, inter alia, "have place in the realm of fact, exist, live" "be the case or the fact; obtain."77

63. That the concern of Articles 6.3(c) and 6.3(d) is with "effects that exist in fact" is further
confirmed by the ordinary meaning of "effect" which is, inter alia, "something accomplished, caused
or produced; a result, a consequence" and "reality, fact as opp[osed] to appearance."
78 Thus, to prove
its claims under Articles 5(c) and 6.3(c) or 6.3(d), Brazi l's must show that the effects that exist in fact
of marketing loan and counter-cyclical payments are either significant price suppression or an
increase in world market share as, respectively, contemplated under those provisions.

64. Brazil has argued that effects of marketing loan and counter-cyclical payments on production
of upland cotton are a key element of the alleged causal link between the payments and significant
price suppression/increase in world market share. According to Brazil, marketing loan and counter-
cyclical payments induce U.S. farmers to plant upland cotton in circumstances where, without (or "but
for") the marketing loan and counter-cyclical paymen ts they would not have done so. Brazil asserts
that this allegedly subsidy-induced level of planti ng leads to overproduction, which leads to increased
exports (under Brazil's theory pre-Panel meeting) – or unsold stocks (under Brazil's theory as of the
Panel meeting) – and, ultimately, to the adverse e ffects with respect to price/market share claimed by
Brazil.

65. To examine whether marketing loan and count er-cyclical payments have these alleged effects
on the production of upland cotton, it is necessary to look at the particular decision matrix of U.S.
producers and the factors that they actually consider as they decide whether and what to plant.
Moreover, it is important to look at the way that the marketing loan and counter-cyclical payment
programs actually operate and interact with production deci sions. These considerations underpin the

75 This was the marketing year in effect at the time this Panel was established on September 28, 2006.
See Minutes of Meeting, para. 49 WT/DSB/M/220 (circulated November 2, 2006).
76 The New Shorter Oxford English Dictionary at 1421, Volume 1, (1993 Edition) (Exhibit US-129).
77 The New Shorter Oxford English Dictionary at 195, Volume 1, (1993 Edition) (Exhibit US-130).
78 The New Shorter Oxford English Dictionary at 793, Volume 1, (2005 Edition) (Exhibit US-143).

U.S. approach to examining the effects of ma rketing loan and counter-cyclical payments on
production in this proceeding.

66. By the same token, the United States submits that for Brazil's arguments regarding planting
decisions – to be given any weight – must be consistent with, at the very minimum, the basic facts of
upland cotton production and with how the market ing loan and counter-cyclical payment programs
operate. This means, for example, that the argument s cannot be inconsistent with the fact that in each
year when a farmer sits down to decide whether to plant cotton, he does not know:

• whether the weather will cooperate and how much cotton will ultimately be produced,
what the demand and consumption situation will look like at the time of harvest, and
what price cotton will ultimately fetch on the market at harvest,

• what the supply, demand, and price situation will be for other competing crops,

• whether the adjusted world price (or "AWP") will be below 52 cents so that he might
receive a marketing loan payment with resp ect to upland cotton that he decides to
grow (or whether he might receive a marketing loan payment for a competing crop),

• what his variable costs will ultimately be if he decides to grow upland cotton (versus
some other crop or versus putting his land to some other use), and

• (while it does not depend on whether he pl ants upland cotton or not) if the season-
average farm price for the marketing year to come will ultimately be below the
threshold at which he might receive a count er-cyclical payment with respect to any
upland cotton or other crop base acres that he holds.

67. The farmer's planting decision must be made on the basis of expectations about, inter alia,
weather, supply, demand, prices, government paymen ts, and variable costs both with respect to
upland cotton and competing crops. Whether or not his expectations ultimately turn out to be correct
or incorrect is not a relevant factor in his planting decision; he cannot rewind time and make different
production decisions based on how things actually turn out. Brazil has conceded this both in this
proceeding
79, and in the original proceeding. 80 Moreover, this is the general approach underlying
Brazil's modeling efforts both in this and the original proceeding.81

68. The United States has shown that much of the evidence and arguments presented by Brazil
fails to withstand scrutiny when examined in the light of these basic facts of upland cotton production.
For example:

79 See Brazil First Written Submission, Annex I, para. 36 ("U.S. cotton producers respond to the
expected prices and expected rates of subsidy that apply at the time planting and other key decisions are made in
the production cycle") (emphasis added) and Brazil First Written Submission, Annex I, para. 58 ("[t]he
magnitude of the impact on incentives to produce cotton is equal to the expected difference between the loan
rate, which is known at planting time, and the grower's expectations at the time of planting about the AWP for
cotton that will apply when the grower makes that ma rketing loan transaction.") (emphasis added). Brazil
80 US – Upland Cotton (AB) , para. 440 ("Brazil counters that farmers decide what to plant based on
expected market prices as well as expected payments under the challenged subsidy programs, such that planted
acreage responds to both these factors.")
81 Brazil First Written Submission, Annex I, para. 4 ("U.S. producers respond to revenue they expect to
receive from market prices and expect ed government subsidies, where releva nt expectations are those that are
held around the time that planting and other key production decisions are made. U.S. producers do not know
with certainty what actual prices and subsidies will turn out to be as they unfold during the marketing year.
Therefore, as in reality, the model assumes that actual pr ices or subsidies in a marketing year do not affect
cotton growers' behavior in that marketing year.")

• Brazil has repeatedly attempted to show effects on upland cotton production in
MY 2006 (or MY 2005, under Brazil's preferred approach) based on the actual prices
received and/or actual payments received in those years, effectively assuming that
production decisions were made on the basis of facts that do not even materialize until
many months after planting decisions are made
82;

• Brazil has repeatedly ignored the fact that U.S. farmers consider net revenue, planting
conditions and other relevant factors for competing crops vis-a-vis upland cotton –
and not just such factors as they relate to upland cotton in isolation – in determining
what to plant83;

• Brazil has repeatedly attempted to establish production effects with reference to actual
levels of production in a particular year, wh ich are affected substantially by factors
entirely out of the farmer's control (such f actors as pests, weather, and technological
changes), rather than with respect to effects on planting ( i.e., the actual production
decision within the hands of the farmer)84;

• Brazil denies in the face of fact that the use of genetically-improved varieties in the
United States and elsewhere have resulted in a dramatic increase in yields that has
changed substantially the cost structure of upland cotton farmers in the United States
and other countries (for example, India)
85;

• Brazil repeatedly attempts to frame productio n decisions by reference to costs other
than the variable (or operating) costs actua lly considered by U.S. farmers in their
decision matrix86; and

• Brazil fails to take into account or distinguish in its analysis the effects on price that
are the result of factors on the demand side of the economic balance, including,
importantly, the influence of China's upla nd cotton trade on world market prices.
These are effects confirmed by the very evidence Brazil submits, including a report
by the International Cotton Advisory Committee ("ICAC") showing the strong
correlation between Chinese supply and demand and the A-Index
87, the fact that the
A-Index itself has been changed to refl ect the influence of Chinese trade on the
upland cotton market, as well as market reports observing the role of China's trade in
"prevent[ing] a significant price increase in 2005/2006."88

69. Brazil's theories about the allegedly significant effects that marketing loan and counter-
cyclical payments are having on production, exports (or, under the latest theory, unsold stocks), and
ultimately world market prices are divorced from r eality and are, instead, heavily dependent on the
modeling exercise it has commissioned precisely for the purposes of showing significant price effects.
As the United States has shown, that modeling exerci se is flawed in its structure and operation as well

82 See e.g. , Brazil First Written Submission, paras. 127, 144-145; Brazil Rebuttal Submission,
83 See e.g., Brazil First Written Submission, para. 142, Brazil Rebuttal Submission, paras. 221-224.
84 See e.g., Brazil First Written Submission, paras. 93, 96, 124.
85 See e.g., Brazil Comments on U.S. Oral Statement, para. 32.
86 See e.g., Brazil First Written Submission, paras. 159-164, Brazil Rebuttal Submission,
paras. 245-253, Oral Statement of Brazil, paras. 63-78.
87 See ICAC "Review of the World Market Situation" for May-June 2006 at p. 8 (Exhibit BRA-485).
88 U.S. First Written Submission, para. 315-316 (citing, for example, "Cotton: Review of the World
Situation", International Cotton Advisory Committee at 7 (May-June 2006) (BRA-485)).

as in the parameters and assumptions upon which it rests. 89 Indeed, to get the most exaggerated
results possible, Brazil has attempted to di scredit its own earlier modeling as "unnecessarily
complicated and cumbersome" and "not directly appropriate to the issue at hand." 90 Brazil has
submitted in its stead a model that its own creator (B razil's economist in this dispute) described as a
"simple model" that "does not represent the depth of analysis that would be appropriate to support a
trade remedy proceeding or a serious prejudice claim before a WTO panel."91 Not only this but Brazil
has systematically adjusted virtually each and every parameter in order to produce even greater
impacts on production and prices than would have obta ined had it used even the elasticities employed
in its original modeling exercise (which were themselves often overstated).92

70. In short, the United States submits that a lthough Brazil bears the burden of proof of proving
its claims under Articles 5(c)/6.3(c) and 5(c)/6.3(d) of the SCM Agreement, it has failed to show that
marketing loan and counter-cyclical payments are having the kind and degree of effects on planting
and production that it has alleged. Under Brazil's own theory that is a critical first step in establishing
a causal link between the payments and the adverse effects alleged to exist.

71. What the data do show – instead – is that for the entire period MY 2002-2007, U.S. cotton
farmers expected to meet or exceed their variable costs of planting cotton. Moreover, compared to
key competing crops, upland cotton was the most attractive option from the standpoint of costs and
revenue in at least three of the years (MY 2003, MY 2004, and MY 2006). In two of the other three
years (MY 2002 and 2007), where cotton was not the most attractive option, upland cotton plantings
declined substantially consistent with the signals from the market. And in the single year (MY 2005)
in which acreage shifts did not line up with th e different relative attractiveness of cotton and
competing crops, other factors were clearly respons ible (most importantly, a shift away from soybean
acreage due to concerns about an outbreak of Asian soybean rust at the end of MY 2004).
93 Thus,
U.S. upland cotton farmers' planting decisions are en tirely consistent with the decisions that they
would have made had there been no marketing lo an and counter-cyclical payments, and are fully
consistent with both market signals and other planting and production considerations.

72. The fact that U.S. upland cotton production in these years was both economically rational and
consistent with market and planting/production consid erations is further confirmed by the fact that
U.S. production has been generally stable as a perc entage of world production throughout the entire
period that U.S. marketing loan and counter-cyclical payments have been made and for a great many
years before that as well. This evidence shows that – contrary to Brazil's assertions – marketing loan
and counter-cyclical payments have not been indu cing U.S. farmers to plant, produce, and export
where market signals would cause their foreign counter parts to pull back. The stable share of U.S.
production and exports over this period indicates that whatever signals the "world market" is sending,
U.S. producers are receiving it clearly and responding to it in much the same way as their foreign
counterparts.

73. The independent studies that the United States has submitted – which, unlike Brazil's
modeling exercise, were not commissioned for the pu rposes of this proceeding – lends further support
for the argument that the challenged payments are not having effects on production that are likely to
lead to "significant" price suppression. These studies show, in particular, that counter-cyclical
payments likely have minimal effects on acreage and hence production and that a substantial part of

89 U.S. First Written Submission, Annex I; U.S. Rebuttal Submission, Annex I, U.S. Oral Statement,
Statement of Dr. Glauber.
90 Brazil Rebuttal Submission, Annex I, para. 4.
91 Daniel A. Sumner. "Boxed In: Conflicts Be tween U.S. Farm Policies and WTO Obligations."
Center for Trade Policy Studies, The Cato Institute, December 2005. (Exhibit US-108)
92 Of course, many of the elasticities in the model us ed for purposes of the original proceeding were
already overstated.
93 See U.S. Comments on Brazil's "Oral" Presentation, paras. 70-72.

counter-cyclical payments paid are capitalized into higher land rents and land values. Moreover, data
regarding the planted acreage and base acreage show th at U.S. farmers do, in fact, use the planting
flexibility afforded by the direct and counter-cyc lical payment programs (indeed, even before the
dramatic decline in expected cotton planted acres for the upcoming marketing year, the data show that
U.S. cotton farmers holding cotton base acres are planting approximately 40 percent less upland
cotton than they planted at the time base acres were set). In addition, a significant – and growing
percentage – of cotton is gr own on farms that do not hold any upland cotton base acreage or on
planted acreage that is in excess of the upland cotton base acreage held by a farm. That is, for these
cotton farmers, there can be no link – even allege d – between cotton base counter-cyclical payments
and upland cotton production because these farmers are growing cotton on acreage beyond any cotton
base acreage.
94

74. This data reinforces other evidence submitte d by the United States; for example, data
regarding cost of production shows that for most U.S. production (at least 92 percent) market revenue
not only covers variable costs of production but also all costs of production. As discussed further
below in response to Question 59, this is highly significant because the "total" costs of production
reported by USDA include imputed economic opportunity costs. These are not even actual cash costs
for many – if not most – upland cotton farmers and, thus, may not ever need to paid out. The data
show, therefore, that the vast majority of U.S. farmer s are not only able to meet their variable costs of
producing upland cotton – the costs that are important from a short-run perspective – they are able to
meet their total cash costs of producing upland cotton and they are able to meet economic opportunity
costs that are, for the most part, not even real expe nditures that need to be made in order for the farm
to stay in business. When one considers this togeth er with the fact that whole-farm decisions about
whether or not to close down operations are made on the basis of whole-farm costs and revenue – not
just the costs and revenue relating to individual crop s – it is clear that U.S. upland cotton farming in
the United States is an entirely economically rational business and one that does not depend on
marketing loan and counter-cyclical payments for its continued financial viability.

75. Finally, consistent with the evidence befo re the Panel showing that marketing loan and
counter-cyclical payments do not have the kind of "major" production enhancing effects that Brazil's
claims assume, Brazil's own modeling exercise reflects minuscule price effects when the modeling
parameters are re-adjusted to mo re realistic levels (that is, even without adjusting the model itself for
the many fundamental flaws in its structure a nd operation). Any possible price suppression would
only be in the range of 1 to 1.5 percent in the re-calibrated run of the Sumner II model for MY 2006-
2008. Even though this result is overstated, it translates into a less than one cent per pound impact on
world market prices at present A-Index levels.
95 Brazil has provided no evidence to establish that
such an impact – exaggerated as it is – nonetheless constitutes "significant" price suppression of the
world market price for upland cotton. Indeed , Brazil's approach would effectively equate any effect
on prices with significant price suppression and, thereby, write "significant" out of Article 6.3 of the
SCM Agreement altogether. Neither that approach – nor the specific arguments made by Brazil as to
production effects – is supported by the text of Articles 5 and 6 of the SCM Agreement.

52. In its Third Party Submission New Zealand observes:

"Marketing loan payments are am ber box measures, the category
in which are included the non-prohibited measures with the most
trade distorting effect on production and trade." (para. 5.19)
Do the parties consider that the fa ct that under the Agreement on
Agriculture a subsidy is included in the 'amber box' is relevant to

94 See U.S. First Written Submission, paras. 220-225; U.S. Rebuttal Submission, 263-266.
95 The average A-Index for January 2007 was 60.44 cents/lb.

the analysis of the subsidy's consistency with Articles 5 and 6 of the
SCM Agreement?
76. No. The fact that a measure is notified as an amber box measure does not indicate that it is
causing adverse effects within the meaning of Article 5(c) of the SCM Agreement. The "amber box"
is simply a catch-all category that refers to " domestic support measures in favour of agricultural
producers" that do not fit within the so-called "green" 96 (measures that Members agree are non- or
minimally-trade distorting) or "blue" (direct payments under production limiting programs) boxes. 97
While "amber box" measures may not meet all th e requirements necessary to be deemed non- or
minimally-trade distorting for purposes of the "boxes" set out in the Agreement on Agriculture , this
does not mean that they are causing any of the adverse effects identified in Article 5 of the
SCM Agreement.

77. To the contrary, the different effects discussed above simply serve to illustrate that there is a
spectrum of effects that support measures may have , with no or minimal effects on one end of the
spectrum and adverse effects on the other. Articles 5 and 6 of the SCM Agreement are only concerned
with measures that are at the latter end of the spect rum. Those provisions are not concerned with the
non- or minimally-trade distortive measures within the "green box," or with any "amber box"
measures that – while they might have somewhat greater effects on trade than green box measures –
are not causing any adverse effects within the meaning of Articles 5 and 6.

78. This spectrum of effects is a relevant consideration in assessing Brazil's claims that
effectively any degree of price suppression must be considered to be "significant" price suppression
for the purposes of the present dispute. Brazil's ar guments ignore the fact that some amount of trade
distortion is expected and tolerated for domestic s upport measures and that it is only when the trade
distortion is found to rise to the level of significant price suppression, or one of the other adverse
effects identified in Articles 5 and 6 the SCM Agreement that the obligation to either withdraw the
measure or eliminate the adverse effects thereof arises under Article 7.8 of that agreement.

Questions to the United States

53. The United States argues that Brazil has not provided evidence of 'actual
production inducing' effects of marketin g loan and counter-cyclical payments and
that Brazil 'purports to demonstrate indi rect production effects through its claim
that the US planting, production, and exports are not responsive to prices.'
(Opening Statement of the United States at the meeting of the Panel with the
parties, paras. 62 and 69, emphasis in original)

(a) Could the United States explain further the distinction between what it
terms "actual production inducing effects "and "indirect production
effects"? Could the United States also elaborate on how this distinction is
legally relevant in the context of Articles 5 and 6 of the SCM Agreement?

79. The United States does not intend to draw a distinction between "actual production effects"
and "indirect production effects." In the paragra phs of the U.S. Oral Statement listed above, the
United States argues two different things.

80. First, the United States argues that Brazil' s own theory of causation under Articles 5(c)
and 6.3(c) – and the ordinary meaning of the treat y terms therein – require an examination of the

96 See Article 6.1 and Annex 2 of the Agreement on Agriculture.
97 Article 6.5 of the Agreement on Agriculture. Certain reduction commitments apply to "amber box"
measures unless they are covered by the de minimis or agricultural and rural development provisions of the
Agreement on Agriculture. See Article 6.4 and 6.2 of the Agreement on Agriculture, respectively.

actual effects that marketing loans and counter-cyc lical payments are having on U.S. farmers'
planting decisions.
98 In the U.S. view, this requires that any evidence be consistent with the
fundamental facts of how planting/production decisions are made by upland cotton farmers. These
facts are discussed above in response to Question 51 . As discussed therein, much of the data that
Brazil submits is not consistent with these facts and, thus, sa ys little about the effects of marketing
loan and counter-cyclical payments on U.S. farmers' planting decisions.

81. Second, the United States addresses Brazil's arguments that a link between payments under
the marketing loan and allegedly artificially high U.S. planted acreage, production, and exports can be
gleaned indirectly by what it has asserted is the absence of a "link" between "prices, on the one hand,
and [U.S.] planted acreage, production, and exports, on the other hand. . . ."
99 According to Brazil's
argument, if it can show that there is no link be tween prices for upland cotton and U.S. planting,
production, and exports, this means that marketing loans and counter-cyclical payments must have
somehow "insulated" U.S. producers' planting, pr oduction and exports from market signals. The
United States submits that this reasoning is flawed at its inception because U.S. planting, production,
and exports react to factors other than just the pri ce of upland cotton (and, in terms of prices, respond
to expected not actual prices). For example, as discussed above, the decision to plant upland cotton
results from considerations including of expected net revenue for upland cotton and competing crops,
expected planting and production conditions, and other su ch factors. It is, therefore, unrealistic to
suggest that there should be a one-to-one link between upland cotton planting, production, and exports
and upland cotton prices.

82. Moreover, the comparisons that Brazil has atte mpted to make to demonstrate the absence of a
"link" are inconsistent with the very facts of upland cotton production discussed by the United States
above. For example, recall that Brazil has argued th at there is no link between U.S. upland cotton
production in each year and U.S. farm prices. As th e United States has explained this ignores the fact
that (a) planting decisions cannot be explained through an examination of cotton prices alone, (b) U.S.
farmers base planting decisions on expected not actual prices and (c) "producers do not decide on
production, but on plantings. Ultimate production is affected by weather and other factors affecting
yields."
100

83. Indeed, the same alleged "absence" of a "li nk" between absolute production levels and prices
is apparent when one compares foreign production to movements in the A-Index.
101 So, either all
producers are cut off from market signals – applyi ng Brazil's reasoning – or, in fact, the evidence
submitted by Brazil does not in fact support its assertions of market insulation. The United States
submits that the latter is the more logical conclusion.

98 See Upland Cotton (AB) , para. 97 ("Brazil explains that United States upland cotton farmers base
planting decisions on expected net retu rns, meaning expected market prices together with expected government
support."); Brazil First Written Submission, Annex I, para. 36 ("U.S. cotton producers respond to the expected
prices and expected rates of subsidy that apply at the time planting and other key decisions are made in the
production cycle") (emphasis added) and Brazil First Wr itten Submission, Annex I, para. 58 ("[t]he magnitude
of the impact on incentives to produce cotton is equal to the expected difference between the loan rate, which is
known at planting time, and the grower's expectations at the time of planting about the AWP for cotton that will
apply when the grower makes that marketing loan transaction.") (emphasis added). Brazil Further Submission,
Annex I, para. 17-18.
101 The United States uses the A-Index because the U. S. farm price is not th e price for foreign-grown
cotton. However, given that Brazil considers that there are "broad similarities" between the U.S. farm price and
the A-Index, it presumably considers the comparison of U.S. and foreign production to the A-Index to be
analogous to the comparison Brazil makes above between U.S. production and farm prices. Brazil First Written
Submission, para. 97.

84. Similarly, Brazil has also attempted to comp are annual U.S. upland cotton export levels and
the average farm price for the marketing year to show the alleged absence of a link between exports
and prices. However, there again, Brazil's evidence ignores the reality – readily recognized by its own
cotton industry outside this dispute – that U.S. exports have reacted to a drama tic decline in U.S. mill
use and the contemporaneous increase in foreign consumption.102 It is those market conditions, rather
than marketing loan and counter-cyclical payments that explain U.S. export behavior in the years
prior to the FSRI Act coming into effect. Since the Act came into effect, U.S. export behavior has
been entirely consistent with that of foreign counterparts.

85. Brazil has also presented a third set of compar isons purporting to show that planting decisions
in a marketing year do not correlate to the prices for upland cotton that prevail many months later
103
or to the futures prices of upland cotton alone.104 Here, too, Brazil's analysis fails to account for the
actual bases on which planting decisions are made; in particular, the fact that planting decisions are
made on the basis of expectations about net revenues not only for cotton but for competing crops (as,
revealingly, reflected in Brazil's own economic model in this dispute) . Moreover, the analysis that
Brazil presents in this regard – flawed as it is – actually undermines Brazil's claims. For example,
Brazil's analysis of shifts in U.S. versus fore ign harvested acreage compared to futures prices for
upland cotton shows U.S. harvested acreage shifting c onsistently with harvested acreage in the rest of
the world in most years. However, where the two di verge, it is because U.S. harvested acreage reacts
more conservatively than foreign acreage to increasing futu res prices for upland cotton (as in
MY 2003 and 2006). 105 Indeed, the only year since the FSRI Act came into effect in which U.S.
harvested acreage shifts were less conservative was MY 2005, and that difference is easily explained
when one takes into account such factors as (a) th e shift in acreage from soybeans to upland cotton in
the Delta and Southeast regions of the United States due to fears of another soybean rust outbreak;
and (b) exceptionally good growing conditions resulting in low abandonment.

86. In short, the United States submits that Brazi l has not substantiated its argument that U.S.
planted acreage does not react to market, planting and production signals. The data show, instead,
that U.S. production and exports shift consistently with producti on and exports elsewhere in the
world. This – and an examination of changes in U.S. planted acreage in light of expected revenues
and other factors both for upland cotton and competing crops – confirms that U.S. producers receive
and react to market signals in an economically ra tional manner that is entirely consistent with the
behavior of their foreign counterparts.

(b) What is the response of the United States to the argument that the fact that
"U.S. upland cotton producers know that their overall revenue will always be
protected by marketing loans and counter-cyclical payments ... plays a major role in
their planting decisions"? (Rebuttal of Brazil, para. 185; see also Third Party
Submission of New Zealand, paras 5.20-5.21)

87. The United States submits that any eligible recipient of income support knows that he or she
will receive some income protection due to paymen ts under the income support program. That is the
very nature and intent of income support programs – to ensure that producers receive some income
that they would not otherwise get on the market. This is true for payments under the direct payment
program, payments under the counter-cyclical paym ent program, payments under the marketing loan
program, and for any other income support program of any Member (for example, those supporting
elderly or low-income recipients) . This is preci sely the point that Brazil illustrates in the graph it
submits purporting to show that not only marketing loan and counter-cyclical payments but also direct

102 See e.g., U.S. First Written Submission, para. 249.
103 See e.g., Brazil First Written Submission, paras. 144-145.
104 See e.g., Brazil First Written Submission, paras. 142-143 and Brazil Rebuttal Submission.
paras. 221-224.
105 See U.S. Rebuttal Submission, para. 306.

payments, crop insurance payments, and cottonsee d payments provide revenue support to U.S.
producers.
106

88. The mere fact that income support programs provide income support to agricultural producers
does not, however, mean that the payments have "m ajor" effects on planting or cause any of the
adverse effects listed in Articles 5 and 6 of the SCM Agreement. If that were true, income support
could not be listed as one of the types of so-called "green box" measures listed in Annex 2 of the
Agreement on Agriculture , which by definition only have "no, or at most minimal, trade-distorting
effects or effects on production."

89. Whether or not marketing loans and counter-cyclical payments are in fact having "major"
effects on planting and causing U.S. producers to pl ant upland cotton where they would not otherwise
do so is a question of fact and one that Brazil must prove in the affirmative through evidence of how
upland cotton farmers actually make their prod uction decisions and how the programs actually
operate. Moreover, the question is not merely proving any effect on production. As the United States
has noted before, most economists agree that any type of payment to a producer of agricultural
products will have some effect on risk and wealth a nd that this may, in turn, have some effect on
production. In fact, the Agreement on Agriculture contemplates that even "green box" payments –
measures that Members considered may be freel y provided without limitation by domestic support
reduction commitments – may have minimal effects on production. The question is whether Brazil
has shown that the risk, wealth, or production eff ects rise to the level that they cause – under existing
market conditions – the significant price suppression that Brazil has alleged to exist in the present
proceeding. The United States submits that for th e reasons above a nd explained in the prior U.S.
submissions, Brazil has not so shown.

(c) In its Opening Statement at the meeting of the Panel with the Parties, Brazil
observed:

"...we have demonstrated that these subsidies stabilized cotton
producers' revenue despite wildly fluctuating market prices, thereby
insulating and numbing acreage response to market price signals.
These subsidies also cover the huge long-term gaps between market
returns and total costs of production. Both effects are closely
interrelated." (para.55)
Is the United States only arguing that Brazil has not empirically substantiated that
these two "effects" have actually occurred or is it also the position of the
United States that these effects are in any event legally irrelevant to an analysis of
whether a subsidy causes significant price suppression within the meaning of
Article 6.3 (c) of the SCM Agreement?

90. The United States is arguing two things in respect of this assertion. First, the very purpose of
income support programs is to add to the income of recipients. Therefore, Brazil's assertion that it has
"demonstrated" that payments under the marketi ng loan and counter-cyclical payment programs
"stabilize" the income of eligible producers is not remarkable. There is no need for an elaborate graph
to "demonstrate" this – it is clear from the very formula for payment under the marketing loan and
counter-cyclical payment programs that payments are made when prices fall below certain thresholds.

91. The fact that upland cotton farmers may end up receiving marketing loan and counter-cyclical
payments in a year in which prices are below the applicable thresholds does not mean, however, that
the payments have had the effect of "insula ting and numbing acreage response to market price

106 See Brazil First Written Submission, para.133, Figure 8 and Brazil Rebuttal Submission, para. 189,
Figure 6.

signals," as Brazil asserts. 107 For one, planting decisions are made in light of expectations about
revenue and other factors at the time of planting, not the actual revenue ultimately received or other
factors that actually come about much later on when the marketing year actually starts. Moreover, the
question of whether expectations of income s upport under the marketing loan and counter-cyclical
payments actually cause U.S. producers to plant mo re upland cotton than they otherwise would based
on market, planting, and production signals alone is a question of fact. And the evidence does not
support Brazil's assertion of such substantial planting/production effects.

92. Again, it is indisputable that decisions on whether to plant upland cotton are made many
months before a single penny is paid out under the marketing loan and counter-cyclical payment
programs. In making these decisions, an upland cotton fa rmer eligible for payments is likely take into
account the fact that he will receive a payment under the marketing loan and counter-cyclical payment
programs if market prices fall below the level at wh ich such payments are made. The key question is
whether this fact will cause him to plant upland cotton where he otherwise would not have done so
based solely on market signals and whether this will result in such substantial excess planting and
production that there will be significant suppression of world market prices within the meaning of
Article 5(c) and 6.3(c) of the SCM Agreement . The answer depends on a comparison of what he
would do based on market signals vis-a-vis what he does when one adds in the possibility of receiving
payments under the marketing loan and counter-cyclical payment programs.

93. In the case of the counter-cyclical payment programs, there is no reason for the farmer to
plant upland cotton to receive any payments. He w ill receive that payment regardless of whether he
chooses to plant upland cotton, a competing crop (such as soybeans or corn), or decides to let the land
sit idle. Thus, the rational farmer would plant th e crop that he is best able to plant (based on
expectations about weather, pests, his own experti se etc.) and that he expects will obtain the highest
revenue for him on the market. While the expect ation that he may receive payments under the
counter-cyclical program may have indirect effect s on production by making him less risk averse, the
research suggests that such effects are li kely to be minimal and not crop-specific.
108 So, it is highly
unlikely that – even if the farmer expects to receive paymen ts under the counter-cyclical payment
program – these expectations will induce him to plant upland cotton to any substantially greater extent
than if he was simply responding to signals from the market. And consiste nt with this economic
analysis, independent studies and empirical data show that counter-cyclical payments likely have had
minimal effects on acreage and hence production.109

94. In the case of marketing loan payments, the an alysis is somewhat different because there the
farmer does have to decide to plant upland cotton in order to get payments under the program. The
question is whether he will do so where he otherw ise would not have based on market signals (and
other planting/production signals) alone. The data show, however, that in every single marketing year
since the FSRI Act came into effect, it would ha ve been economically rational for upland cotton
farmers to plant upland cotton rather than allowing th eir land to sit idle because the farmers expected
that, even without any payment from the governme nt, market revenue for upland cotton was more
than sufficient to cover variable costs. In some of these years, however, it would have been more
economically rational (using average U.S. price expectations and costs) to plant a competing crop (for
example, corn in MY 2002 and MY 2007). Consistent with that analysis, in those years, the acreage
data show a corresponding drop in U.S. upland cotton plantings. Indeed, the only year there was not
such a corresponding shift in acreage was MY 2005, a nd the data also show precisely why that was

107 Brazil Opening Statement, para. 55.
108 See e.g., Paul A. Westcott, "Counter-Cyclical Payments Under the 2002 Farm Act: Production
Effects Likely to be Limited" at 203 (Exhibit US-35), Lin, William and Dismukes, Robert. "Supply Response
Under Risk: Implications for Counter- cyclical Payments' Production Impacts ," Review of Agricultural
Economics–Volume 29, Number 1–Pages 64-86, (Spring 2007), p. 81 (Exhibit US-85).
109 See e.g., U.S. First Written Submission, paras. 203-276; U.S. Rebuttal Submission, paras. 226-267,
282-295.

the case – namely, shifts in acreage away from soyb eans to cotton in the Southeast and Delta regions
due to fears of another outbreak of Asian soyb ean rust and other planting/production-related
considerations.

95. In other words, in each of the years under FSR I Act, shifts in U.S. planted acreage were
consistent with what one would expect if there we re no marketing loan payments or counter-cyclical
payments and U.S. farmers were basing their planting decisions solely on market price signals and
other considerations relevant to planting and production. This is true regardless of whether the
particular year was one in which expected pri ces were at levels at which farmers believed both
marketing loan payments and counter-cyclical pa yments were likely (such as MY 2002 and 2005) or
one in which expected prices were higher and the e xpectations were that marketing loan payments
were unlikely (such as MY 2003, MY, 2005, and MY 2006).

96. This brings us to the third U.S. argument re lating to Brazil's assertion that marketing loan and
counter-cyclical payments allegedly "cover the huge long-term gaps between market returns and total
costs of production." As discussed in response to Questions 51 and 59, Brazil's assertion of "huge
long-term gaps" and their alleged significance make improper use of the "total cost" figures published
by USDA. To illustrate the fallacy in the "total co st" approach that Brazil advances, recall that, in its
"oral" presentation to the Panel, Brazil submitted charts comparing total costs of producing cotton,
corn, and soybeans to total gross re venue earned in respect of the crop.
110 Brazil claimed that this
proved the "economically irrational business of growing cotton in the United States without marketing
loan and CCP subsidies."111 What it showed, however, was the unreasonableness of Brazil's analysis.

97. According to Brazil, U.S. farmers would have lost money across the board producing any of
these crops (or would have expected to do so) in any of the years in examined. In fact, if one were to
apply Brazil's flawed reasoning more broadly, on e would obtain similar results for virtually all major
field crops in the United States. Thus, for exampl e, according to Brazil's theory, producers of every
single major field crop except for soybeans would have lost money in MY 2005 and, even for
soybeans, U.S. farmers would have eked out no more than $1/acre.

Total Gross Value of Production/Acre v. Total Costs/Acre
for Major Field Crops (MY 2005)

 Cotton
(USD)
Corn
(USD)
Wheat
(USD)
Rice
(USD)
Sorghum
(USD)
Barley
(USD)
Oats
(USD)
Sugarbeet
(USD)
Peanut
(USD)
Soybean
(USD)
Total gross value
of production
483 285 121 469 118 148 142 880 564 265
Total Costs 544 402 203 703 282 255 154 965 665 264
Total Value -
Total Costs
-87 -117 -82 -235 -164 -107 -25 -85 -101 1

98. In other words, Brazil's analysis of "rati onal" farming behavior would require the Panel
accept that none of the 434 million acres of cropland in the United States should have been planted to
any major field crop in MY 2005. Under Brazil's approach no upland cotton, corn, wheat, rice,
sorghum, barley, oats, sugarbeet, or peanuts should have been grown. And any evidence that they
were in fact grown must be accepted as evidence of the production effects of the marketing loan and
counter-cyclical payments.112

110 Brazil Oral Statement, para. 57 and paras. 57-91.
111 Brazil Oral Statement, para. 57 and paras. 57-91.
112 Notably, no payments were made in respect of wheat or soybeans in MY 2005 (and have never been
made in respect of those crops).

99. The absurdity of these results confirms that Brazil's "total cost" approach is a fundamentally
erroneous approach to assessing the planting decisi ons of U.S. farmers. Rather, any proper
assessment of the "economic rationality" of upland cotton farming must look to, inter alia , the
variable costs of production. Indeed, the fact that variable costs are the relevant consideration in
planting decisions is well-accep ted in agricultural economics
113, and has been recognized by the
Appellate Body. 114 It is also evidenced by the fact that there is no economic model of which the
United States is aware that uses total costs in its supply response equations (that is, to examine the
planting decision).

100. The "total costs" that Brazil uses to assert the existence of "long-term gaps between market
returns and total costs of production" can neither be used to examine planting decisions, nor do they
permit a proper assessment of the long-term viability of U.S. upland cotton farmers. As discussed in
response to Question 59, Brazil's argument on the b asis of these alleged "gaps" that U.S. farmers
would close down their operations if marketing loan and counter-cyclical payments were not available
is simply wrong.

54. Could the United States explain whether, and, if so, why, it is of the view that this
Panel should not rely on the findings and analysis by the original Panel regarding
the effects of marketing loan and counter-cyclical payments on production and
exports? Please comment in particular on paras. 7.1291, 7.1295, 7.1302, 7.1349,
7.1353 of the Panel Report.

101. The question decided by the original panel was what effect the marketing loan, counter-
cyclical payment, and Step 2 payments made in MY 1999-2002 were having in that period (and
whether that effect amounted to "significant" price suppression with the meaning of Article 5(c)
and 6.3(c) of the SCM Agreement). The question Brazil presses before this Panel is a different one; it
is whether the marketing loan and counter-cyclical payments are causing "present" serious prejudice
(i.e., under the marketing conditions prevailing in the current marketing year in the absence of the
Step 2 program).

102. Under Article 11 of the DSU, the Panel is tasked with, inter alia , making "an objective
assessment of the matter before it, including an obj ective assessment of the facts of the case." The
Appellate Body has explained before that the task of a compliance panel is to examine the evidence
and arguments presented to it in the compliance pr oceeding, even in situations where the factual
situation is precisely the same one that had examin ed in the original proceeding (e.g. the assessment
by an administering authority of the effects of the same exports in the same period on the same
industry).
115 The obligation is, clearly, all the more impo rtant where the factual situation presented is
a different one ( i.e., where the measures, the time period, a nd the market conditions are all different
from those examined in the original proceeding). This – and the fact that Brazil is obligated to prove

113 See e.g. , U.S. Further Rebuttal Submission in th e Original Proceedin g, paras. 117-122
(18 November 2003); Cecil Davison and Brad Crowder, "Northeast Soybean Acreage Response Using
Expected Net Returns" Northeastern Journal of Agriculture and Resource Economics , April 1991, pp. 33-41
(Exhibit US-137) and Duncan M. Chembezi and Abner W. Womack, "Regional Acreage Response for
U.S. Corn and Wheat: The Eff ects of Government Programs", Southern Journal of Agricultural Economics ,
July 1992, pp 187-198 (Exhibit US-138).
114 US – Upland Cotton (AB) , para. 453 ("We agree with the general proposition of the United States
that variable costs may play a role in farmers' decision-making as to whether to plant upland cotton or some
alternative crop, and how much of each crop to plant . From a short-term perspective, variable costs may be
particularly important.") (emphasis added).
115 U.S. – Softwood Lumber (21.5) , para. 101 (Noting that Canada's arguments "seem to assume that a
panel is required to evaluate the facts in an Article 21.5 proceeding in exactly the same way as it evaluated those
facts in the original panel proceedings, and to hold an investigating authority making a redetermination to the
inferences that it drew from the same evidence in the orig inal determination. . . . [W]e do not see why the Panel
would be bound by the findings of the original panel.") (emphasis in original).

its claims in this proceeding – means that there is no basis to automatically adopt for purposes of this
proceeding the same factual conclusions drawn by the original panel about the effects of the
marketing loan, counter-cyclical payment, and St ep 2 payments in a different period. Those
conclusions are appropriate here only if Brazil pr oves that the same reasoning is valid and supported
by the arguments and evidence before this Panel. For the reasons set out in the U.S. submissions and
presentations to date, the United States submits that Brazil has not so proven.

103. With this in mind, the United States addresses the particular conclusions in the paragraphs
identified by the Panel above:
104. Paragraphs 7.1291 and 7.1295: Paragraphs 7.1291 and 7.1295 of the original panel report
speak about marketing loan payments. The origin al panel states in both these paragraphs that it
considers that payments under the marketing lo an program "stimulate production and exports and
result in lower world market prices than would prev ail in their absence." However, the discussion of
the reasoning underpinning the panel's conclusion to this effect is very limited.

105. The original panel states, in support of its conclusion, that "[w]e concur with Brazil, who
cited certain USDA economists in support, that th e structure, design and operation of the marketing
loan programme has enhanced production and trade-distorting effects."
116 The USDA economists
cited by the original panel, however, simply ac knowledge that payments under the marketing loan
program may have effects on production based on farmers' expectations about revenues from the
market and the market loan program.117 Moreover, the footnote to this statement by the original panel
notes that "[t]he fact that the United States notif ies the marketing loan programme as 'amber box'
support under the Agreement on Agriculture may not necessarily be determinative for the purpose of
our 'adverse effects' analysis under Part III of the SCM Agreement." 118 Read together, the United
States understands the original panel to be noting that the particular design and operation of the
marketing loan program is such that it may have mo re than non- or minimally-trade distorting effects
given the particular market conditions that prevail. The United States does not disagree.

106. Whether – under the particular market conditions in any particular year – payments under the
marketing loan program do in fact have such effect s and whether the effects give rise to such a degree
of overproduction and export of excess production th at "significant" price suppression result is a
question of fact. That question requires an examination of the expectations of the upland cotton
farmer about prices, payments, variable costs, yiel ds, weather and other such factors. The evidence
and arguments before this Panel that examine these expectations and the reactions of U.S. farmers to
those expectations do not support a finding that ma rketing loan payments are having substantial
effects on production, exports, and prices under th e prevailing market conditions. Rather, the
evidence shows that shifts in U.S. planted acreage are consistent with the shifts one would expect if
U.S. farmers were basing their planting decision s solely on market price signals and other
considerations relevant to planting and production.

107. Paragraphs 7.1302: Paragraphs 7.1302 of the original panel report address counter-cyclical
payments. The original panel makes two main observa tions here. The first is that "[w]e agree with
the view of USDA economists that, due to their market-price contingency, CCPs may influence
production decisions indirectly by reducing total and per unit revenue risk associated with price
variability in some situations" and the second is that there is an allegedly "strong positive relationship
between upland cotton (base acre) producers recei ving annual payments and upland cotton
production." The United States does not disagree with the former observation. However, the very
USDA economists whose views the original panel has noted have conducted further analysis and

116 Upland Cotton (Panel), para. 7.1295.
117 See e.g., "Analysis of the U.S. Commodity Loan Program with Marketing Loan Provisions," USDA,
AER 801 (BRA-222).

explained that the degree of any such production eff ects is likely to be minimal and mitigated by a
number of factors. For example, Westcott notes in this regard that:

(a) where prices are expected to be ab ove maximum threshold – counter-cyclical
payments behave just like the fixed direct payments
119;

(b) "cross-commodity effect[s] suggest[] that CCPs may provide a general reduction in
revenue risks rather than a crop-specific effect. Net returns among alternative crops
would remain the primary consideration underlying production choices;"120

(c) "while a number of studies indicate that farmers are risk averse (Chavas and Holt,
1990, 1996, for example), other risk reduction instruments already exist to manage
risks. Thus, with revenue risk reducti on now provided by CCPs as part of farm
programs, farmers may adjust their use of these other farm and nonfarm risk
management strategies;"
121 and

(d) "a large portion of output in the U.S. agricultural sector is produced by a small share
of large producers. . . . Evidence that risk aversion decreases as income rises (Chavas
and Holt, 1990, 1996) suggests that risk av ersion may also tend to decline as the size
of farms increases. Thus, with larger farms that account for most production being
less averse to facing risk, this lowers potential production effects of CCPs due to risk
reduction. And while smaller farms may be mo re risk averse in their farm enterprise,
off-farm income may reduce the overall level of household income risk."
122

108. On the basis of these and other factors, West cott concludes that "there are several mitigating
factors which suggest that overall production effect s of CCPs through revenue risk reduction are
likely to be limited."
123 The United States agrees with that assessment. Other studies submitted by
the United States – for example, a 2007 study by Lin & Dismukes in which the authors found that
"[t]he effect of CCPs on producers' planting decisions . . . appears to be very negligible – an increase
in the acreage of major field crops of less than 1% . . . ."
124 – confirm that the effects of the counter-
cyclical payments are, in fact, likely to very limited. These studies are important because – as
discussed below – the counter-cyclical payment program had just come into effect at the time of the
original panel proceeding. Accordingly, the studi es available to the original panel were necessarily
forward-looking and did not have much or any actual experience with the operation of program itself.
The more recent studies incorporate deeper expe rience with, and understanding of, how the program
operates in practice.

109. Regarding the second observation, as the Un ited States has explained in response to
Question 29 of the first set of questions from the Panel
125, the United States does not disagree that

119 Paul A. Westcott, "Counter-Cyclical Payments Under the 2002 Farm Act: Production Effects
Likely to be Limited" at 203 (Exhibit US-35).
120 Paul A. Westcott, "Counter-Cyclical Payments Under the 2002 Farm Act: Production Effects
Likely to be Limited" at 204 (Exhibit US-35).
121 Paul A. Westcott, "Counter-Cyclical Payments Under the 2002 Farm Act: Production Effects
Likely to be Limited" at 204 (Exhibit US-35).
122 Paul A. Westcott, "Counter-Cyclical Payments Under the 2002 Farm Act: Production Effects
Likely to be Limited" at 204 (Exhibit US-35).
123 Paul A. Westcott, "Counter-Cyclical Payments Under the 2002 Farm Act: Production Effects
Likely to be Limited" at 205 (Exhibit US-35).
124 Lin, William and Dismukes, Robert. "Supply Resp onse Under Risk: Implications for Counter-
cyclical Payments' Production Impacts ," Review of Agricultural Economic s–Volume 29, Number 1–Pages 64-
86, forthcoming, p. 83 (Exhibit US-85) (emphasis added).
125 U.S. Answers to Parts D-E of First Set of Panel Questions, paras. 14-23.

many holders of upland cotton base acres produce some amount of upland cotton. However, the
United States submits that this does not support the conclusion that payments under the
counter-cyclical payment program cause U.S. farmers to produce upland cotton. To the contrary, the
data show that:

• On farms that have upland cotton base acr es (and thus may receive cotton counter-
cyclical payments), the ratio of cotton planted acres to total upland cotton base acres
was only 60 percent in MY 2002-2005. In other words, U.S. upland cotton farmers
were planting only approximately 60 percent of the cotton acres that they planted in
the historical period used to calculate base acres.

• Second, a significant portion of U.S. upland cotton planted acreage (over MY 2002-
2005, an average of about 17 percent) is on farms with cotton planted acreage that
exceeds cotton base acres, or, indeed, on farms with no cotton base acres at all.

110. In the view of the United States, these facts confirm that U.S. farmers do, in fact, use the
planting flexibility afforded by the direct and counte r-cyclical payment programs. This is consistent
with the fact that U.S. farmers base their produc tion decisions on market signals and are not somehow
induced to plant upland cotton simply because they hold upland cotton base acreage. Moreover, the
data above show that a significant – and growing percentage – of cotton is grown on farms that do not
hold any upland cotton base acreage or on planted acreage that is in excess of the upland cotton base
acreage held by a farm. That is, for these cotton farmers, there can be no link – even alleged –
between cotton base counter-cyclical payments and current production because these farmers are
growing cotton on acreage beyond their cotton base acreage, if any. These are the facts that the
United States considers to be the most relevant because they focus on the level of upland cotton
planting and production and the relationship that these bear – if any – to payments. Brazil's claim
focuses on precisely this same relationship.

111. By contrast, the fact that many holders of upland cotton base acres produce some amount of
upland cotton is hardly remarkable. This just show s that upland cotton is of ten still produced on land
that was historically planted to upland cotton ( i.e., at the time base acres were established). Upland
cotton is grown in a limited number of areas in th e United States, primarily in a few southern and
western states, where the weather and other conditions are ideal for upland cotton production. Upland
cotton was grown in these areas well before the c ounter-cyclical payment program came into effect
and continues to be grown there now. Continued pl anting of upland cotton on this farmland is not the
effect of any government payment; it is a function of the fact that upland cotton can be grown easily
in these areas but cannot be grown in others. As th e United States has shown, cotton is grown in the
same states and – in large part – the same counties in 2005 as it was in 1992, well before the counter-
cyclical payments came into effect. The same woul d be true if one were to go back even decades
earlier in time. Many of the same farms produce some upland cotton today for the same reasons that
they did so at the time that base acres were enro lled and even in years before that – for example,
farmers may have experience and expertise growin g upland cotton in those areas and know they can
grow upland cotton with good results given the par ticular growing conditions in the region. The
continuity noted by the original panel does not s upport any finding that counter-cyclical payments are
inducing U.S. farmers to plant upland cotton to any significant degree.

112. Paragraphs 7.1349 and 7.1353: These two paragraphs deal with the collective effects of the
Step 2, marketing loan, and counter-cyclical paymen ts made in MY 1999-2002. As that question is
not before this Panel, the analysis therein is not directly applicable here. Nonetheless, the United
States addresses the general reasoning in those paragr aphs. In paragraph 7.1349, the original panel
explains that "[w]e agree with the United States that 'the question is one of the nature of the subsidy
examined and the degree of any predicted effect, wh ich could range from significant to negligible.'
These price-contingent subsidies were, in our view, sufficient to cause the significant price
suppression that we have found to exist in the same world market." By contrast, here, Brazil has not

even provided empirical substantiation that ther e is presently any significant price suppression let
alone that marketing loan and counter-cyclical payments are the cause thereof. Moreover, the
evidence discussed above regardi ng how the marketing loan and counter-cyclical payments are
actually operating at present and under the prevailing market conditions indicates that, contrary to
Brazil's assertions, these payments are not having substantial effects on production, exports, or
significant price suppressive effects on prices.

113. In paragraph 7.1353, the original panel expl ains that it considers "the divergence between
United States producers' total costs of production a nd revenue from sales of upland cotton" to be a
relevant consideration as to whether there are e ffects on production in the medium- to long-term."
The original panel explains that " [f]ixed and variable costs are the total amount which the producer
incurs in order to produce the product and the total amount it must recoup, in the long-term, to avoid
making losses. To the extent that the producer ch arges prices that do not recoup the total cost of
production, over time, it sustains a loss which must be financed from some other source, or else the
producer simply has to close down his business."
126

114. The United States does not disagree that total costs of production are a relevant consideration
and that over the long-term, farmers must recoup both fixed and variable costs. As discussed below,
in response to Question 59, however, the data indica te that the vast majority of U.S. upland cotton
production is economically viable in both the short- and the long-term without the marketing loan and
counter-cyclical payments programs. The vast majo rity of U.S. farmers met or exceeded their total
fixed plus variable cash costs in almost each year since the FSRI Act came into effect. Moreover,
cumulatively, over the long term, the U.S. fa rmers generated a cash surplus, not a deficit. 127 T h e
cumulative returns over the period 2000-2005 were a positive return of $161 per acre. Moreover, for
MY 2000-2006, the cumulative net returns are an (estimated) positive $133 per acre.128 These farmers
were not, therefore, "sustain[ing] a loss" that they would have had to finance using marketing loan and
counter-cyclical payments or other sources of income "or else . . . close down [their] business[es]."129

115. Indeed, while Brazil again asserts the kind of "d ivergence" that the original panel noted, the
fact is that this "divergence" has been created by Brazil by using the "total cost" data published by
USDA. As discussed below in response to Question 59, these "total" costs were never intended to be
used as an indicator of the long-term viability of upland cotton producers. The data simply provide a
stylized snapshot of one crop on a hypothetical fa rm to which USDA attributes not only average
actual operating/variable costs of production but al so an allocated value for fixed cash costs and –
even beyond that – an allocated value for economic opportunity costs that, for the large part, do not
ever have to be paid out. Therefore, it is simply inaccurate to suggest that a farmer would – in the
absence of marketing loan and counter-cyclical payments – be forced to "close down [their]
business[es]"
130 if they were not able to meet the "total" co sts reflected in the USDA data. This is not
only because of the nature of the data but because of the fact that whether or not farmers will "close
down [their] business[es]" 131 depends on the overall cost-revenue balance of the farm, not one
enterprise of that farm.

116. Nonetheless, even despite the conceptual flaws in conducting an single-crop-specific
assessment of "total costs"for purposes of assessing th e financial viability of an entire farm – let alone
an entire sector of the agricultural economy ( i.e. upland cotton farmers) – the data indicate that the
vast majority of U.S. upland cotton farmers are meeting not only their variable costs of producing

127 This analysis considers those items in the published USDA figures that are true cash costs (i.e. fixed
and variable).
128 See U.S. Comments on Brazil's "Oral" Statement, para. 77.
129 Upland Cotton (Panel), para. 7.1353.
130 Upland Cotton (Panel), para. 7.1353.
131 Upland Cotton (Panel), para. 7.1353.

upland cotton, but they are generating e nough additional market revenue to cover both fixed cash
costs and enough excess that they could – if they had to do so ( quad non) – cover the kind of imputed
economic costs that Brazil has attempted to include in its calculations. These issues are addressed in
further detail below in response to Question 59.

55. Can the United States confirm that the figures "$868 million" and "$838 million"
Brazil cited in para. 40 of its Opening Statement are correct figures if one uses the
"Brazil's methodology" and the "Cotton-to-Cotton methodology"? (Please note
that the Panel is not asking whether the US agrees with these methodologies.)

117. These figures appear consistent with the so -called "Brazil methodolog y" and the "Cotton-to-
Cotton" methodology, respectively.

56. The United States has cited new empirical research on the production effects of
counter-cyclical payments. How does th e United States address Brazil's criticism
that none of this research has dealt specifi cally with the effects of countercyclical
payments under the FSRI Act of 2002 on up land cotton? (Rebuttal Submission of
Brazil, para. 120)

118. The United States believes the recent research regarding counter-cyclical payments is highly
relevant to an assessment of the economic effects of such payments. Recall that when the panel made
its original findings, the counter-cyclical payment program had just come into effect. Thus, few
studies were available based on empirical analysis or practical experience with the program to help
the original panel in assessing the effects of payments therenunder.

119. Since that time, there have been a number of studies conducted regarding the effects of the
program. Much of research has, not surprisingly, been focused on those crops that account for most
of the U.S. planted area – corn, soybeans, and wh eat. But there is no reason to believe that the
payments under the counter-cyclical program in re spect of upland cotton base acres would affect
planting incentives in any materially differently way than would counter-cyclical payments in respect
of other base acres. To the contrary, studies such as the 2005 Westcott analysis – which Brazil asserts
"largely reaffirms his earlier qualitative findings" that the original panel considered relevant – agree
that any possible effect is likely to be "indirect " and only through "reduci ng revenue risk associated
with price variability in some situations."
132 Westcott has explained that "cross-commodity effect[s]
suggest[] that CCPs may provide a general reducti on in revenue risks rather than a crop-specific
effect."133 This indicates that counter-cyclical paymen ts may have general revenue risk effects
regardless of the base acres in respect of which the payments are made and regardless of the crop that
is ultimately selected for planting. Notably, while Brazil has criticized other aspects of the Westcott
analysis – despite citing his earlier analysis itself in its first written submission 134 – it has not
challenged this aspect of the Westcott reasoning. 135 Nor has Brazil submitted any other evidence or
studies to show that the counter-cyclical payments in respect of upland cotton base acreage would
necessarily have different effects with respect to upland cotton production than counter-cyclical
payments in respect of base acreage for any other crop.

120. In any event, the United States has submitted this research to provide a more robust basis –
deriving from tested and reviewed economic me thods – for understanding the operation of the
counter-cyclical payment program and what the eco nomic effects on planting/production might be as
a result of payments thereunder. Especially in the absence of any specific analysis on counter-cyclical

132 Brazil Rebuttal Submission, para. 129.
133 Paul A. Westcott, "Counter-Cyclical Payments Under the 2002 Farm Act: Production Effects
Likely to be Limited" at 204 (Exhibit US-35).
135 Brazil Rebuttal Submission, paras. 128-133.

payments made with respect to upland cotton base acres and upland cotton production, this research is
important in providing context and guidance for ass essing the effects of counter-cyclical payments.
As Brazil has provided no upland cotton-specific studies itself, it has no basis to criticize the United
States in this regard. The research that has become available since the original panel, whatever its
limits, fills an important gap in the understa nding and assessment of the counter-cyclical payment
program and supports a conclusion that the effects on cotton production of counter-cyclical payments
are likely to be minimal.
57. The United States has offered the Lin and Dismukes (Exhibit US-34) and Westcott
(US-35) studies as examples of new empirical research on the production effects of
counter-cyclical payments.

(a) Is it not more accurate to charact erize the Lin and Dismukes study as a
simulation of the possible effect of countercyclical payments on production
rather than a study on the actual impact of the payments since it does not
statistically estimate the effect of th e actual payments (which began only
in 2002) on crop production? (Please refer to pages 9-12 of the paper
which describe the data, covering the period 1991-2001, used for the study).

121. The United States agrees that the Lin and Dismukes study aims to estimate the likely effects
of the counter-cyclical payments. As the United St ates recognized in its rebuttal submission, "Lin &
Dismukes (2007) addressed the possible production impacts of counter-cyclical payments for
the 2005 crop."
136

122. With respect to the data used by the Li n and Dismukes study, however, the United States
submits one clarification. Specifically, while the Lin and Dismukes study uses "state-level data for
the North Central during 1991-2001 . . . cover[ing] ma jor field crops in this region" – corn, soybeans,
and wheat – to estimate the "acreage response equations,"
137 the authors note that they "accurately
reflect major characteristics of CCPs in analyzing the payments' potential production impact in the
simulation analysis."138 Thus, the study takes into account the actual operation of the counter-cyclical
payment program in assessing effects. For ex ample, the authors use 2003 base acres and program
yields for Illinois corn, soybeans, and wheat to determine a possible per-acre or per-unit counter-
cyclical payment (based on actual data). Moreov er, the study takes into account recent market
conditions (for example, "new crop futures prices in mid February 2005 after adjusting for basis to
arrive at the farm price equivalents") in assessing production effects.139

123. Indeed, the authors state that their "[a]nalysi s . . . seeks to answer the following question:
'Given the market price scenario for major field crops perceived by producers at planting decision
times, how would CCPs have affected the plantings of 2005 major field crops in the North Central
region?"
140 They submit that the use of input data from 1991-2001 – rather than more recent years –

137 Lin, William and Dismukes, Robert. "Supply Response Under Risk: Implications for
Counter-cyclical Paymen ts' Production Impacts ," Review of Agricultural Ec onomics–Volume 29, Number 1–
Pages 64-86, forthcoming, p. 68 (Exhibit US-85).
138 Lin, William and Dismukes, Robert. "Supply Response Under Risk: Implications for
Counter-cyclical Paymen ts' Production Impacts ," Review of Agricultural Ec onomics–Volume 29, Number 1–
Pages 64-86, forthcoming, p. 68 (Exhibit US-85) (emphasis added).
139 Lin, William and Dismukes, Robert. "Supply Response Under Risk: Implications for
Counter-cyclical Paymen ts' Production Impacts ," Review of Agricultural Ec onomics–Volume 29, Number 1–
Pages 64-86, forthcoming, p. 83 (Exhibit US-85).
140 Lin, William and Dismukes, Robert. "Supply Response Under Risk: Implications for
Counter-cyclical Paymen ts' Production Impacts ," Review of Agricultural Ec onomics–Volume 29, Number 1–
Pages 64-86, forthcoming, p. 81 (Exhibit US-85).

is reasonable because, inter alia, more recent input data to estimate the acreage response equations
would likely not have "yield[ed] different results from those in the simulation analysis for the 2005
crop."
141

(b) How does the United States deal with Br azil's characterization of the Westcott study
as offering no new empirical evidence, and instead, being a qualitative discussion,
much like that presented to the original panel (see para 128 of Brazil's rebuttal)?

124. The United States agrees that the Westcott study does not present a quantitative assessment.
It may be said to examine from a qualitative sta ndpoint how counter-cyclical payments operate and
what effects they might have at different expected price levels. While that study is similar to the
Westcott analysis presented to the original panel, it benefits from having had experience with the
actual operation of the counter-cyclical payment program.

125. The United States recalls that the first Westcott study, which provided only a hypothetical
assessment of the effects of the counter-cyclical payments, in the absence of any studies reflecting
experience with the program itself, was the only evidence about the economic effects of counter-
cyclical payments presented by Brazil before the original panel.
142 The United States has now
submitted a range of studies and re views, quantitative as well as qualita tive, to assist the Panel in
assessing the effects of payments under the program. As these studies and reviews show, the
consensus view that is forming about the effects of counter-cyclical payments is that the payments
have no effects on crop-specific production decisions and minimal effects on overall production. The
United States submits that this is a highly relevant consideration in assessing the present effects of the
counter-cyclical payments on upland cotton production.

58. The Unites States stated that the key co nsideration in assessing a farmer's decision
to grow upland cotton is whether the farmer has been covering his variable costs of
production. In this connection, it presen ted upland cotton costs and returns
estimates for marketing years 1999-2005 (Exhibit US-47). Brazil has disputed the
absence of certain items – land, labour and capital recovery costs - in the US
calculations of variable costs. In res ponse, the United States has referred to the
Commodity Costs and Returns Estimation Handbook (Exhibit US-88) prepared by
a Task Force of the American Agricultural Economics Association as the basis for
leaving out these items in its calcula tions. However, the Task Force which
authored the Handbook does not use the categories "fixed" or "variable" costs and
in fact recommends that the microeconomi c concepts of fixed and variable costs
not be used in preparing and reporting cost and return estimates. Page 2-67 of the
Handbook states:

The Task Force therefore recomm ends that costs should be
categorized only as to whether they are associated with expendable
factors or the services of capital a ssets. The division of costs into
categories such as fixed and vari able should generally be avoided
in preparing CAR estimates. For the purpose of preparing CAR
estimates for specific enterprises, the Task Force recommends that
all the costs of all expendables be allocated to the generic group
OPERATING COSTS and that all other costs be allocated to the
group ALLOCATED OVERHEAD.

141 Lin, William and Dismukes, Robert. "Supply Response Under Risk: Implications for
Counter-cyclical Paymen ts' Production Impacts ," Review of Agricultural Ec onomics–Volume 29, Number 1–
Pages 64-86, forthcoming, p. 69 (Exhibit US-85).
142 See e.g., Upland Cotton (Panel), para. 7.1302

Would the United States clarify whether the categories "operating costs" and
"allocated overhead" correspond to the eco nomic concepts of fixed and variable
costs? In particular, are "operating cost s" variable costs or not? Would the
United States please indicate whether, an d if so, where, the Handbook makes these
clarifications or distinctions.

126. In presenting their analyses of costs, both the United States and Brazil have used the cost of
production data published by the U.S. Department of Agriculture's Economic Research Service
("ERS"). As ERS states on its website, "[t]he co sts and returns estimation program uses surveys
conducted about every 4-8 years for each commod ity as part of the annual Agricultural Resource
Management Survey (ARMS), and methods that conform to standards recommended by the American
Agricultural Economics Association (AAEA)."143

(A) "Operating Costs" or "Variable Costs"

127. ERS uses the term "operating costs" to describe those costs that are "expendable."

"Expendable factors of production are raw materials, or produced factors that are
completely used up or consumed during a single production period. Common
examples of these factors that lose their id entity with a single use are seed, fuel,
lubrication, some pesticides and fertilizer, feed, and feeder animals."
144
128. The United States has used the ERS operating cost data, but has at times referred to this data
interchangeably as "variable cost" data, another comm only-used term. To be clear the United States
has not used this term to denote "variable costs, " as that terms is defined by the AAEA Handbook.
Rather, it has used the term to simply refer to the operating cost data published by ERS.

129. As explained in the U.S. rebuttal submission, however, there are two items with respect to
which the U.S. categorization of "operating" (or "variable") costs has differed from that used by
ERS.145 First, the United States has included hired labor as an operating cost. This item raises several
conceptual issues and even the ERS data have not treated the item consistently over the years.
Therefore, to be conservative, the United States included hired labor as an operating cost, not as an
item of allocated overhead. And, second, to isol ate the costs and revenues for the "subsidized
product" that is the subject of Brazil's claims under Articles 5 and 6 ( i.e., upland cotton lint), the
United States has adjusted both ginning costs and cottonseed revenue. As the latter are ordinarily
simply covered by proceeds gained by the gin fro m sales of cottonseed, the United States adjusted
ginning costs to account for costs not covered by the revenue from cottonseed.146

130. Despite having relied on the ERS data and cat egorization throughout this dispute, Brazil
attempts in its rebuttal submission to bring in a new definition of "variable cost" that differs from the
one used by ERS (and therefore also differs from "ope rating costs" within the terminology used in the
AAEA handbook).147 Specifically, Brazil has attempted to include as "variable" or "operating" costs,
costs that are not in fact "expendable in a single defined period" including land, unpaid labor, and
capital recovery costs. There is no support in the ER S approach to cost of production data nor in the
AAEA Handbook nor in the agricultural economics lite rature for Brazil's argument that these are

143 Economic Research Service, Commodi ty Costs and Returns available at
http://www.ers.usda.gov/data/CostsandReturns/ (Exhibit US-144).
144 Commodity Costs and Returns Estimation Handbook , updated 09/30/2005, A Report of the AAEA
Task Force on Commodity Costs and Returns, pp. 2-7 (Exhibit US-88).
145 See U.S. Rebuttal Submission, paras. 326-343.
146 See U.S. Rebuttal Submission, paras. 338-343
147 Brazil Rebuttal Submission, paras. 254-283.

"variable" or "operating" costs. Nor is there an y support for Brazil's suggestion that farmers actually
consider those costs in making year-to-year planting decisions regarding whether and what to plant.

 (B) "Fixed Costs" and "Allocated Overhead"

131. The concept of "allocated overhead" is more co mplicated than the concept of operating costs.
As a review of the AAEA Handbook makes clear, it is mu ch broader than the con cept of fixed costs.
Allocated overhead includes both allocated (fixed) cash costs and imputed costs. The latter are not
actually expenditures that must be made but rath er are costs imputed b ased on the concept of
economic opportunity cost. It is this data regard ing "allocated overhead" (plus "operating"/"variable"
costs) that Brazil has referred to as "total costs" and that Brazil has used to attempt to show an alleged
gap between U.S. farmers costs and revenue.
148

132. Neither "fixed costs" nor "allocated overhead" affect farmers' decisions regarding what to
plant in each year. As Brazil has acknowledged, if a "farmer would not be able to cover even variable
costs, he or she would not plant an ything at all to minimize losses."
149 Conversely, where the farmer
is covering his variable costs, it is economically rational for him to plant something. The question is
then what to plant. And that decision is made taking into account which crop will get the highest
return after netting out variable/operating costs.

59. In discussing the impact of long-term costs of production (and hence long-term
profitability) of upland cotton production on farmers' decisions to exit cotton
farming, the United States argues that income from other crops and off-farm
income must be into account. Why do es the United States consider these issues
relevant given the original Panel's decision that "off farm income" is not a legally
relevant consideration. (Panel Report, para. 7.1354, footnote 1470) Please
respond to Brazil's arguments on this ma tter in paragraphs 249-253 of its Rebuttal
Submission.

133. The United States considers that the questi on of "off-farm income" is important because it
goes to Brazil's ability to prove one of the key facts that it asserts in this proceeding; namely, that
without marketing loan and counter-cyclical pa yments, U.S. producers would exit the business of
upland cotton farming altogether or, in the original panel's words, be forced to "close down [their]
business[es]."
150

134. The United States recalls that it is a "generally and consistently accepted and applied . . . rule
that the party who asserts a fact . . . is responsible for providing proof thereof."
151 To "prove" that
U.S. upland cotton farmers would be forced to "close down [their] business[es]" 152 in the absence of
marketing loan and counter-cyclical payments, Brazil has presented a simple comparison of "total
costs of production" for upland cotton – which comprise all operating costs, fixed cash costs, and
imputed economic opportunity costs for capital, labor and land – to market revenue. Brazil asserts
that there is a gap between these two figures which, allegedly, proves the "economic irrationality" of
producing upland cotton in the United States without marketing loan and counter-cyclical payments.
Citing to the original panel report, Brazil asserts th at this shows that "upland cotton producers would
have lost money over the longer term if they were involved in upland cotton production alone."
153

148 Brazil Rebuttal Submission, para. 249.
149 Brazil Oral Statement, para. 67.
150 Upland Cotton (Panel), para. 7.1353.
151 U.S. – Shirts and Blouses (AB), p. 14.
152 Upland Cotton (Panel), para. 7.1353.

135. This evidence does not, however, prove the point s asserted. The flaw is both in the nature,
type, and amount of the costs that Brazil includes in its total cost analysis but also in Brazil's analysis
on the basis of those costs; in particular, its flawed assumptions about how farmers make decisions
about whether to stay in or go out of business. The issue of off-farm income and income from other
commodities is relevant to the latter.

136. The United States will discuss the factual a nd conceptual problems in Brazil's arguments
momentarily. As a threshold matter however – and in response to the question from the Panel – the
United States notes that whether or not a party proves the facts it asserts is always a "legally relevant"
consideration. It is no less true here. Moreove r, as discussed above in response to Question 51,
Brazil's claim in this case is under, inter alia, Article 6.3(c) of the SCM Agreement which, by it terms,
requires an examination of the actual effects that the challenged subsidies have on the world market
price of the allegedly subsidized product. Since Brazil has alleged that the challenged measures cause
significant world market price suppression by, inter alia , keeping U.S. upland cotton farmers in
business who otherwise would have closed down their operations, it is imperative for Brazil to show
that U.S. upland cotton farmers would actually ha ve done so absent marketing loan and counter-
cyclical payments. The fact that U.S. upland co tton farmers actually make their decisions about
whether or not to close their operations based on the total costs and revenues for the farm as a whole –
including revenue from all crops as well as from off-farm sourc es – is necessarily a relevant and
important consideration.

137. The original panel's suggestion to the contra ry – and Brazil reiteration of that suggestion in
this proceeding – appears to be based on the mist aken premise that there is some inconsistency
between (a) the reference to "subsidized product" and "like product" in Article 6.3(c) of the
SCM Agreement and (b) and examination of the total cos t/revenue balance for a farm in assessing
whether farmers would in fact cease their operati ons if they did not receive marketing loan and
counter-cyclical payments. There is no such inconsiste ncy. The fact is that the effect that Brazil is
attempting to attribute to marketing loan and c ounter-cyclical payments – permitting the farmer to
avoid exit or bankruptcy – is itself a farm-wide, not an crop-specific, effect.

138. To the extent that marketing loan and counter-cyclical payments do have this kind of effect of
keeping the farm in business, there is a conseque nt effect on the "subsidized product" only because
upland cotton farming is one of the enterprises on the farm that continues on. Any such effect with
respect to the "subsidized product" – if proven – may be a valid consideration for purposes of the
analysis under Article 6.3(c) of the SCM Agreement . However, by using a proper analysis that
focuses on whole farm revenue versus costs, the analysis tracks the actual decision matrix of farmers,
rather than assuming incorrectly that all upland cotton farms are single-crop farms that are devoted
full-time to upland cotton production.

139. This brings us to the flaws in Brazil's approach . Brazil attempts to paint a striking picture in
which U.S. upland cotton farmers would have suffere d billions of dollars in losses – and widespread
bankruptcies – if it had not been for marketing lo an and counter-cyclical payments under the FSRI
Act. To make this dramatic point Brazil, howev er, ignores fundamental facts about cotton farming in
the United States and puts "total" cost data pub lished by USDA to a use for which it was never
intended and is inappropriate. As discussed above, Brazil's flawed approach based on "total costs"
would show that U.S. farmers of most – if not a ll – fields crops were losing money year and after
year. Brazil's reasoning would have the Panel accept that almost 500 million acres of U.S. cropland –
over 10 percent of the entire U.S. land mass – is be ing kept in production solely by marketing loan
and counter-cyclical payments (even where a number of the crops do not even receive those
payments). The United States submits that these are absurd conclusions and ones that underscore
perfectly the conceptual weakness in Brazil's appr oach – using the "total" costs published by USDA
are simply not an appropriate means of assessing the financial viability of farms let alone of an entire
agricultural sector.

140. For one, the "total" cost data is an averag e across all U.S. farms, ranging from very small
retirement and residential farms to large non-family owed farms with sales in the millions of dollars.
By presenting a single average for all such farms, the data obscures the fact that the vast majority of
U.S. production occurs on farms that are highly profitable. As the United States has explained, the
USDA survey data show that, in MY 2003, fully 92 percent of U.S. production was on farms on
which total revenue exceeded not only all variable costs actually reported in response to the survey
but also the cash costs allocated to upland cotton by USDA and – indeed – even the items of
economic opportunity cost included in "total" costs published by USDA. The latter are, for the most
part, not even actual expenditures that must be paid out.
154

141. Not surprisingly, Brazil asks the Panel to simp ly ignore this data on the basis that it reflects
costs/revenue for a marketing year – MY 2003 – in which U.S. upland cotton prices were high. While
it is true that prices in MY 2003 were high, however, that does nothing to undermine either the
validity or the usefulness of this data. Importantly, there is a substantial spread between the total cost
figures and the market revenue figures for the lo w- and mid-cost producers that made up the
92 percent figure. In the case of the former , U.S. producers' market revenue was almost double (or
29 cents/lb more than) the "total" costs reflected in the USDA data. For the mid-cost producers, the
difference is almost 10 cents/lb. While prices di d fall in MY 2004 and MY 2005 this would simply
have had the effect of lowering or eliminating the excess above the "total" costs reflected in the
USDA data. It does not mean that substantially less production would be shown to be meeting all
possible costs. Moreover, Brazil fails to take into account that with yields increasing in later years,
costs also were likely to have fallen for these produ cers in those years. Thus, there is no basis to
assume that the results would have been substantially different in later years.

Costs of Production for Cotton, by Cost Group, 2003
Item Low-cost Mid-cost
Operating costs 1/ ($/acre) 197.07 256.23
Total costs ($/acre) 356.29 446.24
 Operating costs ($/lb.) 0.20 0.33
 Total costs ($/lb.) 0.35 0.57
 Harvest month price ($/lb.) 0.64 0.67
 Actual yield (lb per acre) 1,009 781
 Share of production (%) 39 53
1/ Includes hired labor. Data on cottonseed value are not available. Using the average 2003 cottonseed revenue
as a share of total value (13 percent), cottonseed value is assumed to account for 13 percent of total value of
production. Ginning costs are then adjusted as described below.
Source: USDA155

142. What this means is that, even if Brazil's arguments about "total cost" were true, they would
only relate to a small fraction of U.S. production. Nonetheless, Brazil's arguments – even about this
small percentage of U.S. production – are actually not conceptually sound.

143. First, by using the crop-specific cost data published by USDA to reach conclusions about the
financial viability of upland cotton fa rmers generally, Brazil's analysis assumes in effect that all U.S.
upland cotton farmers produce nothing but upland cotton. The fact is, however, that for agronomic
and risk management reasons farmers in the United States would rarely, if ever, rely solely on the
production of one crop, year after year. A farmer manages his farm in a manner to maximize net

154 See U.S. Oral Statement, paras. 72-74.
155 Exhibit US-93 (WTO-CONFIDENTIAL).

revenue from the entire operation, which could in clude producing various crops and livestock, and
providing other agricultural services (such as custom harvesting) to other producers. A producer
manages his or her farm in a manner to maximize net revenue from the entire operation, which could
include producing various crops and livestock, a nd providing other agricultural services (such as
custom harvesting) to other producers. 156 The USDA cost of production data – and other similar cost
data – do not purport to show the financial viability of a farm growing upland cotton that also relies
on many other sources of income and incurs other costs. Rather, it provides a stylized, abstract view
of one single crop or livestock enterprise that an individual producer of upland cotton can look at as a
kind of general benchmark to compare against his ow n costs and revenues. The use of this data to
extrapolate about the financial viability of upland cotton farmers generally or the entire U.S. upland
cotton sector is simply not appropriate.

144. For example, the "total" cost figures used by Brazil include all the items under "allocated
overhead," which are either not specific to upland cotton (in which case they are allocated expenses
over all the crops and enterprises on a farm) or are not actual cash outlays (in which case they are
economic costs arrived at through imputed values).
157 The AAEA Handbook explains at length the
difficulties in concepts and methods of measuring a llocated costs such as general farm overhead. For
example:

The third category [general farm overhead] is usually referred to as general farm or
business overhead and typically includes items for which it is difficult or impossible
to determine the impact of the input on eith er output or cost for a specific enterprise .
For example, it is difficult to determine the impact of buying a new set of Allen
wrenches on the average corn yield per acr e or the impact of attending pesticide
applicator training on cucumber gross returns.
158
145. And further:

"General overhead costs associated with operating a business are usually incurred at
the total farm level, across all enterprise s, although in some instances these costs can
be assigned to groups of products. Examples include liability insurance, subscriptions
and dues, accounting and legal fees, shop tools, equipment storage, road maintenance,
and so forth. Allocation of these shared costs to individual enterprises is often
difficult or impossible in anything but an arbitrary manner."159
146. While the USDA makes such allocations fo r purposes of presenting the published costs and
returns data, there is no "allocation" of actual co sts on farms. These costs are simply incurred and
aggregated; and they and must be paid in th e long-term using whatever net aggregate revenue
remains after variable/operating costs are paid. The assumption that U.S. farmers would "close down
[their] businesses" based on a narrow crop-by-crop or enterprise-by-enterprise assessment of allocated
overhead is unrealistic.160

147. The conceptual flaw in using the total cost data published by USDA to assess financial
viability of farms and – more generally an entire secto r – are magnified by the fact that they include
imputed opportunity costs. For the most part, th ese are costs that have been calculated by USDA to

156 See e.g., U.S. Answers to Parts A-C of First Set of Panel Questions, para. 12 showing that only on
average 47% of total farm revenue on upland cotton farms was from cotton.
157 See U.S. First Written Submission, paras. 293-295 (December 15, 2006).
158 Commodity Costs and Returns Estimation Handbook , updated 09/30/2005, A Report of the AAEA
Task Force on Commodity Costs and Returns, p. 9-1 (Exhibit US-88).
159 Commodity Costs and Returns Estimation Handbook , updated 09/30/2005, A Report of the AAEA
Task Force on Commodity Costs and Returns, p. 9-1 (Exhibit US-88).
160 Upland Cotton (Panel), para. 7.1353.

attribute some value to unpaid labor and owned land . For example, if a farmer-operator has the skill
to serve as a manager in a bank, the prevailing wage for that job might be attributed as the
"opportunity cost" of working on the farm. Similarly, if a farmer owns his own land, the "opportunity
cost" of using the land may be the value of rentin g it to some other operator. There are inherent
difficulties in valuing such items for which there is no market transaction or cash outlay.
161
148. More importantly, however, these are not necessaril y costs that must be paid off in order for
farmers to avoid having to "close down [their] business[es]." 162 A farmer who owns his land does not
have to pay anybody an imputed economic cost to acc ount for that fact. According to available data
from USDA's Agricultural Resource Management Survey, an estimated 66 percent of all farmland
operated in 2003 was on owned land.
163 This means that – for this percentage of farmland – the
attribution of an imputed economic cost (and the trea tment thereof as a kind of cash cost that must be
paid on pains of closing down one's business) is simply not accurate.

149. Nor is it reasonable to suggest that farmers are behaving in an economically irrational way if
they do not choose to close down their businesses simp ly because the total revenues – while sufficient
to meet all the operating/variable and fixed cash costs – do not meet these hypothetical imputed
economic costs. This ignores important factors, including that farm owners may reasonably anticipate
that their equity investment will gain in value and provide long-term returns. That equity investment,
therefore, has a value in addition to the annual returns of the commodities planted on the farm.
Moreover, 98 percent of all farms in the United States are family farms and, in many cases, the farm
is also home to the operators.
164 Given all of these realities, there is simply no reason to believe that a
farmer will "close down [his] business" if he were m eeting his variable costs and even his total cash
costs over the long-run but nonetheless could – theoretically – make more money by renting or
selling his land and taking some other job (e.g., as a teller in a nearby town).
165 Nor is reasonable to
extrapolate such reasoning out to suggest that an entire agricultural sector is not economically viable
without marketing loan and counter-cyclical payments.

150. In sum, the use of the "total cost" data to extrapolate about the financial viability of an upland
cotton farms generally or the entire U.S. upland co tton sector does not itself withstand scrutiny. Nor
does the reasoning underpinning that analysis; in particular, the assumption that farmers make
decisions about their farm based on narrow crop-by-crop or enterprise-by-enterprise analyses of the
"total" costs published by USDA (variable costs plus some allocation of fixed cash costs plus some
hypothetical imputed economic costs).

151. The flaw in Brazil's reasoning is not only in its use of the crop-specific "total costs" as
reflected in the USDA data in assessing the financial viability of upland cotton farmers but in its
disregard of off-farm income – and income from ot her crops – that are an important part of his
revenue. For example, the United States has provi ded data showing that in MY 2002-2005, on
average, only 47% of total farm revenue on upland cotton farms was from cotton. That is, the
majority of farm revenue (not even taking o ff-farm revenue into account) was coming from other
production. Off-farm revenue adds substantially to that. As the United States explained in its

161 For example, the AAEA Handbook notes that "[w]hen a market transaction is not available to value
a given expendable factor or capital service, methods th at will approximate the opport unity cost of the service
are used. These methods are not as reliable as direct market valuation ." Commodity Costs and Returns
Estimation Handbook , updated 09/30/2005, A Report of the AAEA Task Force on Commodity Costs and
Returns, p. 2-11 (Exhibit US-88).
162 Upland Cotton (Panel), para. 7.1353.
163 Hoppe, Robert and David Banker. "Structure and Finances of US Farms: 2005 Family Farm
Report." Economic Research Service Economic Information Bulletin No.12, May 2006. (Exhibit US-67)
164 Hoppe, Robert and David Banker. "Structure and Finances of US Farms: 2005 Family Farm
Report." Economic Research Service Economic Information Bulletin No.12, May 2006. (Exhibit US-67)
165 Upland Cotton (Panel), para. 7.1353.

first written submission166, in a study of changes in U.S. farm structure over the 20 th century, Dmitry
et. al. (2005) noted that:

[A]bout a third of farm operators worked off the farm for at least 100 days in 1930. . .
By 1970, more than half of farms had o ff-farm income, and by 2000, 93 percent of
farms earned off-farm income. Off-farm work has played a key role in increased farm
household income; while farm household income was once below the national
average, in 2002 it exceeded the national average by nearly $8,000.
167
152. Examining specifically the role of off-farm income in farm exits, Hoppe & Korb (2006)
explained that:

Off-farm work has become important to farm operators. About on e-third of farmers
have worked off the farm at least 200 days per year —essentially full-time—since
1978. Off-farm work could hypothetically a ffect exits in two ways. First, off-farm
work may be the first step in an exit from farming, which would be reflected in higher
exits for farms the operators of which work off-farm. Second, off-farm work might
lower the probability of exit by providi ng farm operator households with another
source of income.168
153. To date, Brazil has not submitted any literatu re, study, report, or empirical evidence to
contradicts the evidence submitted by the United St ates regarding the consideration of whole-farm
costs and revenues. Nor has Brazil provided any evidence taking into account whole-farm costs and
revenues that show that, absent the marketing lo an and counter-cyclical payment program, U.S.
upland cotton producers would have exited upland cotton farming.

154. When use of USDA's published "total" costs is matched with disregard of an important source
of income for the farm
169, the picture that emerges of the financial viability of U.S. farmers is
completely and thoroughly distorted. It results in the attribution to marketing loan and counter-
cyclical payment "effects" that they are not in fact having. Such improper at tribution is inconsistent
with Article 6.3(c) of the SCM Agreement and cannot support a finding under that provision.

60. In its Rebuttal Submission, the United States argues that Prof. Sumner's
description of the model that appeared in a recent CATO publication is not
"appropriate" for use in a WTO dispute involving claims of serious prejudice.
Professor Sumner has since introduced "more empirical and institutional detail" to
the model used in this dispute. These changes are described in paragraphs 111-117
of Brazil's Opening Statement. Does the United States view these changes as being
sufficient to make the model appropriate for use in a WTO dispute involving claims
of serious prejudice? If not, what modifications does the United States think
should have been made to the model?

166 U.S. First Written Submission, paras. 295-297.
167 Dimitri, Carolyn et. al., The 20th Century Transformation of U.S. Agriculture
and Farm Policy. Economic Information Bulletin Number 3. June 2005, pg. 2-3 (Exhibit US-45).
168 Hoppe, Robert A. and Korb, Penni. Understanding U.S. Farm Exits. Economic Research
Report 21. June 2006, p. 20 (Exhibit US-46).
169 Dimitri, Carolyn et. al., The 20th Century Transformation of U.S. Agriculture
and Farm Policy. Economic Information Bulletin Number 3. June 2005, pg. 2-3 (Exhibit US-45) ("[A]bout a
third of farm operators worked off the farm for at least 100 days in 1930. . . . By 1970, more than half of farms
had off-farm income, and by 2000, 93 percent of farms earned off-farm income. Off-farm work has played a key
role in increased farm household income; while farm household income was once below the national average,
in 2002 it exceeded the national average by nearly $8,000").

155. The United States clarifies that it is Dr. Sumn er who has argued in his CATO publication that
his model presented therein – which is virtually iden tical to the one Brazil presents here – "abstract[s]
from many complexities that would be important to ge t more precise estimates" and that "[t]he simple
model laid out here does not represent the depth of analysis that would be appropriate to support a
trade remedy proceeding or a serious prejudice claim before a WTO panel."
170 The United States has
simply agreed with Dr. Sumner.
156. Although Brazil now alleges that Dr. Sumner has made substantive improvements to the
original CATO model, the model itself continues to "abstract from the many complexities" that
exaggerate substantially the estimates obtained. Th ese are factors that Brazil considered sufficiently
important to include and tout in the FAPRI-based model used in the original proceeding. For
example, Dr. Sumner's model does not explicitl y address the acreage decision with appropriate
modeling of the incentives to plant cotton relative to competing crops. While the model analyzes a
range of years, it does not incorporate any year-to-year market dynamics in its reported impacts. The
United States has addressed these and other fund amental problems with the model in its prior
submissions as well as in its oral presentation to the Panel, including that the model:

• lacks cross-commodity impacts and cross- price elasticities, potentially leading to
biased price effects;

• is static with no explicit re lationships for changes in cott on stock levels and no stocks
equation;

• contains foreign supply elasticities that are different from FAPRI that underestimate
the response of foreign producers to changes in world prices;

• treats production flexibility payments and direct payments differently even though
they operate in the same way;

• incorporates Step 2 payments directly into the producer revenue function as fully
coupled payment; and

• appears to ignore statutory parameters, for example by including counter-cyclical
payment rates in each of the various pri ce expectations that sometimes exceed the
statutory maximum.

157. These structural and operational flaws are further compounded by the flawed econometric
parameters used by the Sumner II model, resultin g in even greater exaggeration of any possible
effects on prices. As the United States demonstrat ed, between the original panel proceeding and this
Article 21.5 panel proceeding, Brazil's economist changed every single elasticity estimate in the
modeling exercise, except one (U.S. mill demand elasticity) to subs tituted an elasticity that would
produce even greater impacts on production and pr ices than would even the elasticities used for
purposes of the original modeling exercise.
171

170 Daniel A. Sumner. "Boxed In: Conflicts Be tween U.S. Farm Policies and WTO Obligations."
Center for Trade Policy Studies, The Cato Institute, December 2005. (Exhibit US-108)
171 Of course, many of the elasticities in the model us ed for purposes of the original proceeding were
already overstated.

Supply and Demand Elasticities Used in Sumner I and II

Parameter
Effects of change to Sumner II
elasticity (impact on world
price due to removal of
marketing loans and counter-
cyclical payments)
Sumner I (FAPRI) Sumner
II(CATO)
U.S. cotton supply elasticity INCREASED IMPACT 0.361 - 0.466 0.80
ROW cotton supply elasticity INCREASED IMPACT 0.30 0.20
US mill demand elasticity no change -0.20 -0.20
US stocks demand elasticity INCREASED IMPACT -1.40* no
ROW mill demand elasticity INCREASED IMPACT -0.25 -0.20
ROW stocks demand elasticity INCREASED IMPACT -0.463* no
*Parameter estimate not presented in original Sumner model; estimates drawn from FAPRI model
documentation discussed in Annex I to the US Rebuttal Submission, paras 23-25. (Exhibit US-56,
Exhibit US-109, Exhibit US-65)

158. United States has also explained that Brazil applies a long-run elasticity for U.S. supply
response while imposing very conservative short-r un elasticities for international supply and demand
response. If the analysis is to be performed in the long run – and the United States considers that it
must for the reasons explained at the meeting with the Panel and in response to the panel's questions –
then long-run elasticities must be assumed throughout the model. There is no basis for the kind of
mix-and-match approach that Brazil has adopted in an effort to exaggerate any possible effects of the
marketing loan and counter-cyclical payments.

159. Another key source of bias in Dr. Sumner's analysis is the fact that it does not incorporate,
either explicitly or implicitly, any stock behavior.
172 Yet, stock adjustments may have important
effects on overall price movements in the short-run. As future prices increase relative to current
prices, warehouses will tend to carry more inventory, choosing to sell their cotton in future periods
when prices are higher. Likewise, if current prices are high relative to futures prices, sellers find it
more attractive to market their cotto n rather than holding it for sale in the future. In this way, stocks
act to buffer prices. If prices fall, potential sellers will sell less and hold more in stock, thus
potentially bolstering prices. If prices rise, inve ntory holders will sell st ocks, thus potentially
dampening the increase. Ignoring stockholding behavior in the kind of predominantly short-run
assessment that Brazil attempts to conduct exacerbat es any possible effects of removal of marketing
loans and counter-cyclical payments on world price.

160. In sum, the evidence and arguments before th e Panel show that the Sumner II model lacks the
rigor or detail to address the complexities of the global fiber market. Brazil's claims that Dr. Sumner
has introduced "more empirical and institutional deta il" to the model used in this dispute does not
alter the fact that it continues to "abstract from many complexities that would be important to get
more precise estimates" and "does not represent the de pth of analysis that w ould be appropriate to
support a trade remedy proceeding or a serious prejudice claim before a WTO panel."
173

172 The absence of such an analysis is especially remarkable given Brazil's new theory that it is stocks –
not exports – that are suppressing world market prices.
173 Daniel A. Sumner. "Boxed In: Conflicts Be tween U.S. Farm Policies and WTO Obligations."
Center for Trade Policy Studies, The Cato Institute, December 2005. (Exhibit US-108)

61. With respect to marketing year 2006, the United States has provided some data on
upland cotton exports (Exhibit US-113), planted and harvested area and cotton
production (Exhibit US-114), as well as a copy of the National Cotton Council's
survey of planting intensions (Exhibit US-115). The data, all of which have been
collected through the first half of mark eting year 2006, are variously qualified as
"estimates" or "projections" or "projected."

(a) Please clarify, as completely as possi ble, what these various terms mean as
they apply to US upland cotton exports, acreage and production.

161. The data presented in Exhibit US-113, the Weekly Export Sales Reporting Data constitute
neither a forecast nor a projection. They are best described as monitoring data. Specifically, U.S.
exporters are required to provide information to USDA's Foreign Agricultural Service ("FAS") on the
quantity of their sales transactions, the type and class of commodity, the marketing year of the
shipment and the ultimate destination. They also report any changes in previously reported
information, such as cancellations or changes in d estinations. FAS compiles the data and publishes a
weekly report. These reports provide a snapshot, on a continuing basis, of the level of U.S. export
sales and commitments and allow interested partie s to assess export performance, compared to USDA
or other export projections.

162. The data provided in Exhibit US-114 is from the USDA's World Agricultural Supply and
Demand Estimates (WASDE) report, which provid es USDA's comprehensive forecasts of supply and
demand for major U.S. and global crops and U.S. li vestock. The report gathers information from a
number of statistical reports published by USDA and other government agencies, and provides a
framework for additional USDA reports. Data for U.S. area and production are provided by USDA's
National Agricultural Statistical Service, and are based on periodic surveys. The WASDE typically
provides data for 3 marketing years, including production and exports.

163. The terms "projections and projected" – both of which mean the same thing – reflect a lower
degree of certainty inasmuch as most numbers in the balance sheet are not yet "estimates.' In May of
each year, when the WASDE switches to the new marke ting year, the term "estimate" is then applied
to the previous year's projections even though these numbers, for most crops, are not yet "final." This
is because the previous marketing year is not yet over. For example, in May the wheat marketing year
is nearly over while the marketing years for cotton and other spring planted crops have three to five
months remaining. For simplicity, and to avoid a crop by crop explanation, the numbers in the
balance sheet are referred to as "estimates."

164. The term "estimate" reflects a higher degree of certainty. However, "estimates" and even
"final estimates" are subject to change pending better or more complete information. Some estimates
may be changed many years after the initial "final estimate" is published.

165. Data for the current marketing year (MY 2006) are labeled as projections because final data
for most variables covered are not yet available. Data for the previous marketing year (MY 2005) are
mostly final (for example, beginning stocks, acreag e, and production) but some data may not be
complete (for example, exports and ending stocks). Therefore, these data are still labeled estimates.
Data for the prior year (MY 2004) are not labeled est imates or projections a nd are considered final,
but they could still be revised. Because the data in the WASDE come from a variety of sources and
could a multitude of products and variables, they ar e always subject to change and revision. In May
of this year (MY 2006), the figures for MY 2005 will become "final," the figures for MY 2006 will
become "estimates," and new figures for MY 2007 will be "projected" (or deemed "projections").

166. The National Cotton Council's (NCC) planting intentions is a projection for the upcoming
season based on a survey sent to approximately 40 per cent of U.S. cotton farmers. In mid-December

through early January, farmers are surveyed regard ing their acreage for cotton and primary competing
crops in the previous year and their intended plantings in the upcoming year.
(b) Would the United States be able to provid e the Panel with some information, based
on the average of the past six marketing years or so, of how final marketing year
data on these variables, would differ from preliminary estimates, projections and
the like, taken at the end of February of the relevant marketing year?

167. The requested data, showing the February projections for the current marketing year
compared to the final numbers, are provided in Exhibit US-145.

168. The United States notes that each monthly version of the WASDE provides a reliability
assessment of projections for that month compared to the final estimate, based on 25 years of data.
For example, for U.S. cotton exports for February 2007, the difference between the February
projection and the final estimate has averaged 500,000 bales, or 7.1 percent. The February projection
has been below the final estimate 13 times and above the final 11 times.
174

169. For the NCC survey, percent differences from the final acreage numbered have ranged
between a low of 1.1 percent and a high of 8.5 percent. The average error over the past six years in 1.7
percent.175

(c) Finally, would the United States be able to update that part of Exhibit US-83
dealing with futures prices so as to provide the panel with as complete as possible
average January to March 2007 New York futures prices for upland cotton?

170. A spreadsheet containing the most recent futures data for the December 2007 upland cotton
contract is provided in Exhibit US-147. Corn a nd soybean futures data are also provided in this
exhibit.

Questions to Brazil

62. How does Brazil rebut the argument of the United States that the fact that
marketing loan and counter-cyclical pay ment programmes provide income support
when prices are low is not the key question before this Panel and that while, like
any other payments to producers, marketing loan and counter-cyclical payments
could affect production, Brazil has not pr ovided any evidence of actual production-
inducing effects? (Rebuttal Submission of the United States, paras. 222, 287-291;
Opening Statement of the United States at the meeting of the Panel with the parties,
paras. 62-75; Comments of the United States on Brazil's 'Oral' Presentation in the
meeting with the Panel, paras. 42-57)

63. Could Brazil explain whether or not it considers that whether marketing loan and
counter-cyclical payments increase acreage is not relevant to the inquiry of whether
these payments cause significant price suppression within the meaning of
Article 6.3 (c) of the SCM Agreement? (p ara. 56 of the Opening Statement of
Brazil) Could Brazil comment on the points made by the United States in
footnote 72 of the Comments of the United States on Brazil's "Oral" Presentation
in the meeting with the Panel?

64. Given that Brazil has criticized th e new empirical research cited by the
United States because it does not deal specifically with the effects of countercyclical

174 See February 9, 2007 WASDE (Exhibit US-114)
175 See Exhibit US-146.

payments on upland cotton production, why does Brazil consider that the
McIntosh, Shogren & Dohlam study (Rebuttal Submission of Brazil, para. 140) is
particularly relevant to this case? Coul d Brazil comment on the arguments of the
United States in paragraphs 248-249 of the Rebuttal Submission of the
United States?

65. The United States has cited new empirical research on the production effects of
counter-cyclical payments. Could Brazil explain why the fact that these studies do
not deal specifically with upland cotton should preclude the Panel from considering
the studies as being highly probative?

66. Can Brazil explain the differences between the figures for the amount of counter-
cyclical payments allocated to upland cotto n provided by Brazil at the meeting of
the Panel with the parties (Opening Statement of Brazil, para. 40 and Exhibit
Bra 625) and the figures in Table 5 of Brazil's Rebuttal Submission?

67. Please confirm whether or not the Panel's understanding is correct:

"Table 6" in Brazil's First Written Submi ssion was produced using the so-called
"Brazil's method" using USDA data.

"Table 5" in Brazil's Rebuttal Submission was produced using the so-called
"cotton-to-cotton" methodology using USDA data.

The figures cited in para. 40 of Brazil's opening statement (i.e. "$868 million and
$838 million) are produced with the "Braz il's method" as well as the "cotton-to-
cotton" methodology, using the data provided by the United States in
exhibit US-64.

68. Please comment on the following statement by the US:

"The United States understands that Brazil intends the counter-
cyclical payment figures shown in 'Table 5' of Brazil's rebuttal
submission to supersede the counter-cyclical payment figures
shown in 'Table 6' of its first written submission." (US response to
question 4 at para. 15)
69. How does Brazil address the argument of the United States that "the only evidence
that Brazil has submitted purporting to exam ine the price effects of marketing loan
and counter-cyclical payments specifically are the results of the modelling exercise
that it has conducted for purposes of this proceeding"? (Opening Statement of the
United States, para. 76)

70. How does Brazil respond to the United States' rebuttal that Brazil has not even
established a temporal correlation between payment of subsidies and significantly
suppressed prices during the life of the FSRI, that is from marketing year 2002
to 2005? More specifically, please address th e United States' claim of the stability
of US plantings, US share of world production, US share of world exports and the
world price of cotton during this period.

71. In the original case, the Panel conclude d that the analysis covering "the six-year
period from 1997-2002 ... lends itself to an assessment of the medium- to longer-
term examination of developments in the United States upland cotton industry"
(see para. 7.1354 of the original panel report) . Thus, total costs of production were

the costs considered appropriate by the Pa nel. Would total costs of production
continue to be relevant should the complia nce Panel decide to use only marketing
year 2005 as the reference period for analysis? Or would variable costs of upland
cotton farming in marketing year 2005 now be the relevant information to
consider?

72. Brazil has argued that the adjustment in co tton stocks should not be included in the
simulation of a large and permanent reduc tion in subsidies to cotton. Please
respond to the following argument:

If the simulation were a comparative static analysis in which a
baseline is compared to a counterfactual outcome in some long-run
state, modelling such adjustments would be unnecessary. But such
adjustments should be taken into account given that the model is
used to simulate the average impact on the world price of cotton
(among other variables) on specific periods of time (MY 2002-05 or
MY 2006-08) and not in the long run.
73. How does Brazil respond to the argument made by the United States in
paragraph 79 of its Opening Statement that:

"to the extent a counterfactual assessment is undertaken, it is only
to assess what the price equilibrium would be at present if
marketing loan and counter-cyclic al payments had been lower,
different or did not exist. Article 6.3(c) does not ask what prices
will look like in the short-run adjustment period if the marketing
loan and counter-cyclical payments are suddenly eliminated...
Brazil's argument that it is n ecessary to look at the short-run
effects of total elimination of the programs cannot be accurate as a
textual matter."
More specifically:

(a) Why did Brazil not consider it appropr iate to include simulations that
involve reductions rather than elimination of the subsidy programmes?

(b) If simulations of such scenarios a re performed, would the current values of
the elasticities chosen (particularly the supply elasticities) to simulate the
elimination of marketing loan and counter-cyclical programmes continue
to be appropriate? Please kindly provide an explanation for the chosen
answer.

74. Brazil's view is that the data that th e Panel must consider for its claim of present
serious prejudice should be that covering the latest marketing year for which
complete information is available, MY 2005, and where credible, evidence after
31 July 2006. Since in MY 2005, payments under Step 2 continued to be made by
the United States (payments which the original Panel found to have contributed to
adverse effects) how shall the Panel ascertai n that any adverse effects observed in
marketing year 2005 are due solely to th e two subsidy measures which are the
subject of the present serious prejudice claim – marketing loan and counter-
cyclical payments?

2. Increase in world market share - Article 6.3(d) of the SCM Agreement

Questions to the United States

75. Could the United States explain further the textual basis of its argument that
"Article 6.3(d) is not concerned with absolute market share and whether or not in
any given year a member's market share wo uld have been lower if subsidies were
removed"? (Rebuttal Submission of the United States, para. 401)

171. As the United States noted in its paragraph 401 of its rebuttal submission, the question under
Article 6.3(d) is whether "the effect of the subsidy is an increase in the world market share of the
subsidizing Member . . . as compared to the averag e share it had during the previous period of three
years and this increase follows a consistent trend over a period when subsidies have been granted."
The first part of Article 6.3(d) requires a showing of an increase – i.e., "the action, process, or fact of
making or becoming greater."
176 This makes clear that what it at issue is movement, not something
static like the absolute level of market share in a pa rticular year. The concern of Article 6.3(d) is the
movement from one thing – specifically, "the aver age share [the allegedly subsidizing Member] had
during the previous period of three years" – to anothe r, the level in the year that is the subject of the
claim. If upward movement – i.e., "increase" or "growth" – is involved in getting from the former to
the latter, and the upward movement is itself proven to be "the effect" of a challenged subsidy – the
first element of Article 6.3(d) is satisfied. The qu estion then is whether such an "increase" – again,
that is shown to be caused by the subsidy – "follo ws a consistent trend ove r a period when subsidies
have been granted."

172. By its terms, Article 6.3(d) does not address situations where a Members' market share is
merely alleged be higher than it would be "but fo r" subsidies, as Brazil assumes in some of its
arguments.
177 That is not "the effect" with which Article 6.3(d) is concerned.

Questions to Brazil

76. What is the view of Brazil on the argument of the United States that an inquiry
under Article 6.3(d) of the SCM Agreement requires two distinct elements: first, a
demonstration of an increase in the world market share of a Member as compared
to the average share it had during the previous period of three years, and, second, a
demonstration that this increase in world market share compa red to the average
share the Member had during the previous period of three years is part of a
consistent trend over a period when subsidies have been granted? (Rebuttal
Submission of the United States, para. 399)

77. In this connection, could Brazil respond to the argument of the United States that
Brazil has not shown that either of these elements are met with respect to the
marketing loan and counter-cyclical payment programs"? (Rebuttal Submission of
the United States, paras. 399-403)

176 The New Shorter Oxford English Dictionary at 1350, Volume 1, (2002 Edition) (Exhibit US-148).
177 See U.S. Rebuttal Submission, para. 401 (responding to Brazil's argument that, according to its
model, removal of the marketing loan and counter-cyclical payment programs would have resulted in lower
U.S. market share in MY 2005).

C. C LAIM OF BRAZIL REGARDING THREAT OF SERIOUS PREJUDICE

Questions to both parties

78. Could both parties comment on the statements of Canada that "(a)t issue is
whether these programmes....threaten to cause serious prejudice simply by virtue of
their existence" and that "(c)ertain subsidy programs, by their very nature, give
rise to a constant likelihood of support th at results in a permanent threat of serious
prejudice"? (Third Party Submission of Canada, paras. 9-10)

173. The United States does not consider Canada's as sertion of "the issue" to be accurate. Brazil
has asserted that "the appropriate standard of threat in Part III [of the SCM Agreement] is one in which
there is a significant likelihood, based on the nature of subsidies and particular conditions of
competition, that serious prejudice will occur in the future."
178 While the United States disagrees that
the "significant likelihood" is the appropriate sta ndard for assessing "threat" for the reasons set out in
the U.S. rebuttal submission179, the United States has understood Brazil to be arguing that the question
of threat must be determined on the basis of whether there is a significant likelihood of actual serious
prejudice coming about given the particular market conditions and other factors in the future. The
United States has not understood Br azil to be arguing that marketing loan and counter-cyclical
payment programs "by their very nature, give rise to a constant likelihood of support that results in a
permanent threat of serious prejudice," as Canada now argues.

174. To the extent that Brazil now asserts that such a question is "at issue," however, the
United States notes the remarkable nature of the claim. In effect, Brazil would be asserting that
certain programs are "by their very nature" inconsistent with Article 6.3(c) of the SCM Agreement.
The United States notes that the SCM Agreement does not establish any such a category of measures.
If drafters had agreed that there were such measur es, they could certainly provided for them, in much
the same way that they did in Article 3.1(a) (m easures that are contingent upon export performance)
and Article 3.1(b) (measures that are contingent on use of domestic over imported goods). The fact
that they did not do so in the case of measures that a llegedly "by their very nature" give rise to threat
of significant price suppression indicates that they did not consider – and did not agree – that such
measures exist.

175. In any event, the question is one of fact. If a Member considers that another Member's
measures "by their very nature" give rise to threat of significant price suppression, the burden is on the
complaining Member to prove it. And – given the remarkable nature of the assertion (i.e., that certain
measures are "by their very nature" WTO-inconsiste nt – the bar is high. The complaining Member
must prove that, even if no subsidies are likely to be provided under the program and regardless of the
amount if any that are provided – and regardless of what the market conditions are likely to be like in
the future – the responding Member's program necessar ily "give[s] rise to a constant likelihood of
support that results in a permanent threat of" signi ficant price suppression. Even if Brazil were to
have made such an claim, it has offered no empirical basis for such an extraordinary finding here.

79. Could the parties state their views on the analysis of the ordinary meaning of the
term "threat" in paras. 15-28 of the Third Party Submission of Canada?

176. Before responding to the Panel's question, the United States notes that Canada's arguments are
in support of the assertion that "'threat' may be anal yzed both as a temporal concept as in Article 15.7,
and as a probability of occurrence."
180 However, it appears from a plain reading of Article 15.7 of the
SCM Agreement that the meaning of "threat" therein incorporates not only a temporal concept

178 Brazil First Submission, para. 253 (emphasis added).
179 U.S. Rebuttal Submission, paras. 406-413.
180 Third Party Submission of Canada, para. 10.

("imminent") but also a concept of the probability of occurre nce ("clearly foreseen"). Indeed, the
United States has submitted that this simply reflect s the ordinary meaning of "threat," which includes
"an indication of the approach of something unwelcome or undesireable"
181 and "a person or thing
regarded as a likely cause of harm."182 The meaning of "approach," in turn, is, inter alia, "a drawing
near in time or circumstances" "be nearly equal to ""[b]e so situated or arranged that the parts lie
successively nearer to" 183 and, as such, reflects a similar no tion of close proximity as the term
"imminent." The United States has, therefore, argued that the both concepts are important in
assessing "threat of serious prejudice" under Article 5 of the SCM Agreement.

177. Canada appears to argue that in the case of "threat of serious prejudice" under Article 6.3(c),
one must ignore the temporal aspect of "threat" alt ogether and – instead – consider some concept of
probability alone. Yet Canada offers no explanation for why this key aspect of the term must ignored.
Indeed, even its own articulation of the ordi nary meaning of "threat" – "an indication of something
coming" – includes the same notion of "drawing near in time or circumstances"and "be[ing] nearly
equal to""[b]e[ing] so situated or arranged that the parts lie successively nearer to"
184 that is reflected
in the use of the term "immin ent" in Articles 15.7 of the SCM Agreement , Article 3.7 of the
Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade
("AD Agreement"), and Article 4.1(b) of the Agreement on Safeguards in describing the meaning of
the term "threat."

178. To support its argument that there is no temporal aspect to the term "threat of serious
prejudice" in Article 6.3(c), Canada asserts that such a concept would be inconsistent with the
"opening phrase of Article XVI:1 of the GATT 1994."
185 According to Canada, that article "makes
clear, it is not only the actual grant of a subsidy that allows for serious prejudice to be found. Merely
maintaining a program that mandates payments deemed to be a subsidy causing adverse effects may
therefore cause serious prejudice . . . ."
186 Canada appears to be confusing two distinct issues. The
first issue is whether a program itself ( i.e., the legislation/regulations providing for payments) may be
deemed to constitute a subsidy for purposes of the SCM Agreement such that the "grant" or
"maintenance" of it may be found to cause or threaten serious prejudice. The second issue is whether
or not the definition of "threat" of serious prejudice in Article 5(c)/footnote 13 requires a showing that
the serious prejudice being "threatened" is not only like ly but also is soon to come. The latter is the
question that is at issue here in the interpretati on of the legal standard in Articles 5 and 6 of the
SCM Agreement.

179. Canada also argues that "standard for thr eat of serious prejudice should [not] be imported
from Article 15.7" of the SCM Agreement because "[w]here a standard from another article or other
agreement is to be used, the SCM Agreement identifies that standard." Canada incorrectly assumes
that the United States has asked the Panel to "i mport" the standard from Article 15.7 of the
SCM Agreement. The United States has not done so and, in fact, has expressly clarified this in its
rebuttal submission.
187 Rather, the United States has argued that the ordinary meaning of "threat" of
certain injurious effects – as reflected in Article 15.7 of the SCM Agreement , Article 3.7 of the
AD Agreement, and Article 4.1(b) of the Agreement on Safeguards – provides important contextual

181 The New Shorter Oxford English Dictionary at 3290, Volume 2, (1993 Edition) (Exhibit US-104).
Brazil appears to agree that this is ordinary meaning of "threat." Brazil First Submission, para. 247 ("The term
'threat' can refer to 'an indication of the approach of something unwelcome or undesireable' . . . .").
182 The New Shorter Oxford English Dictionary at 3291, Volume 2, (1993 Edition) (Exhibit US-105)
(emphasis added).
183 The New Shorter Oxford English Dictionary at 102, Volume 1, (1993 Edition) (Exhibit US-106).
184 The New Shorter Oxford English Dictionary at 102, Volume 1, (1993 Edition) (Exhibit US-106).
185 Third Party Submission of Canada, para. 18.
186 Third Party Submission of Canada, para. 18.

guidance in interpreting "threat" of serious prejudice in Article 5(c)/footnote 13 of the
SCM Agreement.

180. As the United States has explained, interpreti ng the meaning of "threat" in this way is not
only the proper approach under customary rules of treaty interpretation
188, but it makes sense given
that all three provisions serve a similar function – they identify the same narrow circumstance in
which it may be appropriate to discipline a Member's measures notwithstanding that the measures are
not prohibited per se and are not necessarily causing any injurious effects or prejudice. Under all of
these provisions, the Member's measure can be subj ected to discipline only if there nonetheless a
proper showing of "threat" of injurious effects or se rious prejudice sufficient to justify the application
of a remedy (whether it is multilateral, in the case of a WTO claim based on Article 5(c)/footnote 13,
or unilateral, in the case of an antidumping or coun tervailing duty or safeguard investigation). The
elaboration of "threat" in the latter three contexts – specifically, underscoring the sense of probability
and proximity in time, consistent with its or dinary meaning – is undoubtedly important in
understanding the use of the same term in the former context.

181. Canada has not explained why – in the context of this proceeding – the customary rules of
treaty interpretation should not apply. Nor has Ca nada explained why a panel must wait for an
express cross-reference in order to consult, as contex t, the meaning of the same term as it is reflected
in other provisions of the same agreement as well as in provisions of other agreements, all of which
deal with analogous questions involving the "threat of material injury" and "threat of serious injury."
To the contrary, what Canada's own arguments make clear is that a cross-reference is used in the
SCM Agreement where a term is given a special meaning in one place – for example, "injury to the
domestic industry" in Part V of the SCM Agreement, "nullification or impairment" in the GATT 1994,
and "serious prejudice to the interests of anot her Member" in Article XVI:1 of that GATT 1994 –
such that it is necessary to clarify when the term is used "in the same sense" elsewhere.

182. By contrast, a panel may consider the ordinary meaning of a term as reflected in one
provision to interpret the same term in another pr ovision (especially of the same agreement) without
the need for an express cross-refere nce. Indeed, if a panel could not do so, this Panel would err (as
the original panel also would have done) by co nsidering the definition and requirements for an
"export subsidy" finding in the SCM Agreement as contextual guidance in interpreting the term
"export subsidy" in the Agreement on Agriculture . There is certainly no "cross-reference" in either
agreement that expressly authorizes a panel to cons ider the former as contextual guidance for the
latter, yet no Member has argued that this prevents the Panel from doing so.

183. Indeed, it is curious that while Canada asserts that "one must look to the specific language
and context of an agreement to determine the standard to be applied to a given analysis," it asserts that
the appropriate analog for "threat" in Article 5(c)/footnote 13 is in Article 10.1 of the Agreement on
Agriculture, a provision that deals with circumvention of bound export subsidy commitments, not any
sort of injurious or adverse effect.
189 Unlike the circumvention provisions in Article 10.1 of the
Agreement on Agriculture, all four of the provisions mentioned above – threat of serious prejudice in
Article 5/footnote 13 of the SCM Agreement , threat of material injury in Article 15.7 of the
SCM Agreement, threat of material injury in Article 3.7 of the AD Agreement, and threat of serious

188 For example, that treaty terms are to be interpre ted "in accordance with the ordinary meaning to be
given to the terms of the treaty in their contex t and in the light of its object and purpose." See United States –
Gasoline (AB) , p. 17 (noting that "[this] general rule of interpretation [codified in Article 31 of the Vienna
Convention on the Law of Treaties ] has attained the status of a rule of customary or general international law.
As such, it forms part of the 'customary rules of interp retation of public internationa l law' which the Appellate
Body has been directed, by Article 3(2) of the DSU, to apply in seeking to clarify the provisions of the General
Agreement and the other 'covered agreements' of the Marrakesh Agreement Establishing the World Trade
Organization. . . .)
189 Third Party Submission of Canada, para. 23.

injury Article 4.1(b) of the Agreement on Safeguards – deal with threat of adverse or injurious effects.
Given Canada's own assertion that it is important to consider the language and context of the
provision in ascertaining the meaning, it is not clear why the analysis of "threat of circumvention"
under the Agreement on Agriculture should be more important contextual guidance than these closely
analogous provisions of the SCM Agreement itself , the AD Agreement , and the Agreement on
Safeguards.
190

184. Finally, the United States notes Canada 's assertion that two GATT reports from 1979
and 1980 support the finding that the "meaning of threat is flexible" such that a "permanent source of
uncertainty in world sugar markets . . . gave rise to a threat of serious prejudice in the sense of
Article XVI:1."
191 The United States does not agree. There is no discussion whatsoever of the legal
standard for "threat" of serious prejudice in e ither of the two GATT reports cited by Canada ( EC –
Sugar (Australia) and EC – Sugar (Brazil))192, let alone any assessment of whether there is a temporal
aspect of that term (as clearly indicated by its ordinary meaning). Nor – obviously 193 – is there any
assessment of the meaning of the term given the particular context (i.e., looking to the use of that term
in Article 5/footnote 13 of the SCM Agreement in the light of the term threat of material injury in
Article 15.7 of the SCM Agreement, threat of material injury in Article 3.7 of the AD Agreement, and
threat of serious injury in Article 4.1(b) of the Agreement on Safeguards ). Indeed, the analysis in
those reports appears to depend on certain assumptions about Members' obligations to prevent the
sanctioned thing from occurring 194, obligations that the Appellate Body has since clarified are not an
intrinsic part of "threat." 195 The analysis in those reports – what little of it there is – provides little to
no guidance in assessing the questions of threat implicated by Brazil's claims in this proceeding.

190 Canada's further assertion that "very object and purpose" of the SCM Agreement "demonstrates that
the standard for threat of serious prejudice may be distinct from that of threat in the case of material injury" does
not appear logical. Third Party Submission of Canada, para. 25. The United States is not arguing, of course,
that "the standard for threat of seriou s prejudice" is the same as "that of th reat in the case of material injury."
Nonetheless, even leaving that as ide, one would assume that the sa me "object and purpose" of the
SCM Agreement applies to all of its parts. Therefore, if – as Canada asserts – "the object and purpose of the
SCM Agreement is the establishment of multilateral disciplines 'on the premise that some forms of government
intervention distort international trade, [or] have the potential to distort [international trade]," one would expect
that this would apply to both Part III and Part V of the SCM Agreement. It is, therefore, unclear how the same
object and purpose establishes a different "standard" for threat in the two contexts.
191 Third Party Submission of Canada, para. 24.
192 Third Party Submission of Canada, para. 24 (citing to EC – Sugar (Australia) , BISD 26S/290,
para. (h) of conclusion and EC – Sugar (Brazil), BISD 27S/69, at para. (g) of conclusion.
193 Those reports predate these agreements.
194 For example, emphasizing the absence of "pre-established effective limitations on in respect of
either production, price, or the amounts of export refunds," the panel in EC – Sugar (Brazil) found that
"[n]either the system not its application would prevent the European Communities from having more than an
equitable share of world export trade in sugar. The Panel, therefore, concluded that the Community system and
its application constituted a permanent source of uncertainty in world sugar markets and therefore constituted a
threat of serious prejudice in terms of Article XVI:1." EC – Sugar (Brazil) , BISD 27S/69, at para. (g) of
conclusion (emphasis added).
195 Rejecting Brazil's arguments that a program that allegedly provided "unlimited" subsidies
necessarily posed a "threat" within Article 10.1 of the Agreement on Agriculture, the Appellate Body explained
that
[W]e are [not] prepared to accept Brazil's suggestion that the concept of 'threat' in Article 10.1
should be read in a manner that requires WTO Members to take 'anticipatory or precautionary'
action. The obligation not to apply exports subsidies in a manner that 'threatens to lead to'
circumvention of their export subsidy commitments does not extend that far. There is no basis
in Article 10.1 for requiring WTO Members to ta ke affirmative, precautionary steps to ensure
that circumvention of their export subsidy reduction commitments does not occur"
Upland Cotton (AB), para. 707.

Questions to the United States

80. How does the United States address the argument of Japan that in view of the
different purposes of Parts III and V of the SCM Agreement the standard for
determining threat of material injury in Article 15.7 of the SCM Agreement is an
inappropriate standard for determining the existence of a threat of serious
prejudice under Part III of the SCM Agreem ent? (Third Party Submission of
Japan, paras. 8-12.)

185. The United States understands Japan's argument to be that there are allegedly different objects
and purposes of Parts III and V of the SCM Agreement and that these preclude the Panel from
considering the ordinary meaning of "threat" of certain injurious effects, as reflected in Article 15.7 of
the SCM Agreement , Article 3.7 of the AD Agreement , and Article 4.1(b) of the Agreement on
Safeguards as important contextual guidance in interpreting "threat" of serious prejudice in
Article 5(c)/footnote 13 of the SCM Agreement. The United States does not agree.

186. First, the obligation to interpret treaty term s "in accordance with the ordinary meaning to be
given to the terms of the treaty in their context and in the light of its object and purpose" as codified in
Article 31(1) of the Vienna Convention "forms part of the 'customary rules of interpretation of public
international law' which the Appellate Body [and pane ls] ha[ve] been directed, by Article 3(2) of the
DSU, to apply in seeking to clarify the provisions of the General Agreement and the other 'covered
agreements' of the Marrakesh Agreement Esta blishing the World Trade Organization. . . ."
196 T h e
Appellate Body has explained that:

[i]t is well accepted that the use of the si ngular word 'its' preceding the term 'object
and purpose' in Article 31(1) of the Vienna Convention indicates that the term refers
to the treaty as a whole; had the term ' object and purpose' been preceded by the word
'their', the use of the plural would have indicated a reference to particular 'treaty
terms'. Thus, the term 'its object and purpose' makes it clear that the starting point for
ascertaining 'object and purpose' is the treaty itself, in its entirety."
197
187. Japan's analysis does not attempt to interp ret "threat" in Article 5/footnote 13 of the
SCM Agreement "in accordance with the ordinary meaning to be given to the terms of the treaty in
their context and in the light of [the] object and purpose" of the treat itself, in its entirety . Rather,
Japan appears to ascribe a different "object and purpose" to different parts of the treaty. In this case, it
asserts that the object and purpose of Part V, in general – and Article 15, in particular – is to "limit the
discretion of national authorities and guarantee agai nst misuse." Japan does not specify what the
object and purpose of Part III is, but indicates that it is different from that of Part V. According to
Japan, "Part III issues are completely devoid of conc erns relating to limiting the discretion of national
authorities to prevent misuse thereof in the conduct of domestic CVD investigations [as] no national
authority is involved." Japan asserts that this a lleged difference in the object and purpose of these
parts of the treaty requires the Panel to disregard the "ordinary meaning" of the term threat as
reflected in Article 15.7 of the SCM Agreement, Article 3.7 of the AD Agreement, and Article 4.1(b)
of the Agreement on Safeguards and the contextual guidance provided by those provisions in
interpreting "threat" of serious prejudice in Article 5(c)/footnote 13 of the SCM Agreement . The

196 United States – Gasoline (AB), p. 17.
197 EC – Chicken Classification (AB) , para. 238. The Appellate Body has explained that it may be
possible to consider the "the object and purpose of particular treaty terms" but only "if doing so assists the
interpreter in determining the treaty's object and purpose on the whole" and the focus is on "ascertaining the
common intentions of the parties." EC – Chicken Classification (AB) , para. 238-239. As noted above, Japan
does not even discuss "the treaty's object and purpose of the whole," let alone how the different purposes it
ascribes to the parts of the SCM Agreement relate to that "object and pu rpose of the whole" or how the
interpretation of "threat" in Articles 5(c)/footnote 13 and 15.7 of the SCM Agreement follow from there.

United States submits that this constitutes a serious misapplication of the customary rules of treaty
interpretation.

188. Second, Japan has provided no basis for its assertion that the object and purpose of
Article 15.7 is to "limit the discretion of nationa l authorities and guarantee against misuse" and that,
as a result, the meaning of "threat" in that context is necessarily different from the meaning of "theat"
in Article 6.3(c). The United States sees nothing in Article 15.7 that suggests that Members assumed
that national authorities would necessarily "misuse" their discretion and that they therefore infused the
language in Article 15.7 with special meaning that is not relevant elsewhere. To the contrary, both
Article 5/footnote 13 and Article 15.7 of the SCM Agreement appear, to the United States, to be
consistent with the Appellate Body's explanation of the "object and purpose of the SCM Agreement,
which is to strengthen and improve GATT discip lines relating to the use of both subsidies and
countervailing measures, while, recognizing at the sa me time, the right of Members to impose such
measures under certain conditions."
198 This recognizes the fact that SCM Agreement strikes a balance
between the right to maintain subsidies in some circumstances and the right to discipline them in
others. Article 5/footnote 13 and Article 15.7 of the SCM Agreement both function to establish such a
balance. There is no basis for understanding the sam e terms in the two provisions to have different
meanings based on an assumption that national authorities are necessarily prone to "misusing" their
discretion whereas WTO panels are not.

189. Third, Japan asserts in support of its argument that "[t]he original Panel in this proceeding
properly recognized that ASCM Part V, for a va riety of reasons, may not be proper context for
interpreting and applying Part III."
199 However, the paragraph of the original panel report to which
Japan cites provides exactly the opposite. It states e xpressly that "[o]n the basis of the text of Part III,
and for the reasons that follow, we are of the view that, while they may provide contextual – and
general conceptual – guidance , the more precise quantitative concepts and methodologies found in
Part V of the SCM Agreement are not directly applicable in our examination of Brazil's actionable
subsidy claims under Part III of the SCM Agreement."200 This is precisely what the United States has
argued – that the ordinary meaning of the term "threat" as reflected in Article 15.7 of the
SCM Agreement, Article 3.7 of the AD Agreement, and Article 4.1(b) of the Agreement on Safeguards
is important contextual guidance in interp reting "threat" of serious prejudice in
Article 5(c)/footnote 13 of the SCM Agreement.

190. The fact that it is appropriate to consult that ordinary meaning has not only been confirmed by
the original panel but even by Japan itself. I ndeed, shortly following the paragraph noted above in
Japan's third party submission, Japan argues that Br azil's preferred "significant likelihood" standard –
found nowhere in the text of the SCM Agreement – "is incomplete as it does not include an explicit
evidentiary requirement. An explicit evidentiary requirement such as that set forth in the first
sentence of ASCM Article 15.7 is a crucial component of any 'threat' standard."201 It is unclear why –
if Article 15.7 cannot provide contextual guidance in interpreting "threat" under Article 5/footnote 13
– Japan would note the fact that there is an "e xplicit evidentiary requirement" included in that
provision. Japan's reasoning appears to recognize th at an evidentiary requirement is an important
aspect of any claim of threat, and that the requirements set out in Article 15.7 provide important
contextual guidance in determining the evidentiary requirements that must apply in the case of
"threat" claims under Article 5/footnote 13. The ap proach is virtually the same for understanding the
ordinary meaning of "threat" in those provisions.

198 U.S. – Lumber CVDs Final (AB), para. 95.
199 Third Party Submission of Japan, para. 10 and n. 12(citing Upland Cotton (Panel), para. 7.1167).
200 Upland Cotton (Panel), para. 7.1167 (emphasis added).
201 Third Party Submission of Japan, para. 13.

81. How does the United States respond to the argument of Australia that "it is beside
the point for the United States to argue that the programmes under consideration
are due to expire in late 2007"? (Third Participant Oral Statement of Australia,
para. 13)

191. The United States strongly disagrees with Australia's argument that, in assessing threat of
serious prejudice, "it is beside the point for the United States to argue that the programmes under
consideration are due to expire in late 2007. The programmes have not expired. There is no guarantee
that they will not be rolled over or maintained in another form with adverse effect."
202

192. First, Australia's observation that "the progr ammes have not expired" misses the point. If
they had already expired, Brazil would simply have no basis for any claim with respect to those
measures in the present compliance proceeding; those programs would already been withdrawn.

193. Second, the Panel's mandate is to address th e "matter" before it – namely, to address Brazil's
claims with respect to any measures that are m easures taken to comply and properly identified in
Brazil's request for panel establishment. To the ex tent that the marketing loan and counter-cyclical
payments can be deemed "measures taken to comp ly" with the recommendations and rulings of the
DSB
203, the question for the Panel is whether Brazil has proved its claims of "threat of serious
prejudice" with respect to the measures as identified in Brazil's request for panel establishment. The
Panel's mandate does not extend to speculating about whether there may or may not be new measures
in place after the marketing loan program and counter-cyclical payment programs in the FSRI Act
expire, what the form of those new measures may or may not be, or whether any such other measures
may or may not cause adverse effects under market cond itions that may or may not exist in the future.
Indeed, the original panel explained that where a measur e is not in existence at the time that a panel is
established, there is no basis for a complaining party to include it in its request for panel establishment
and, therefore, it cannot form part of a Panel's terms of reference:

The 'matter' referred to the DSB by Braz il in document WT/DS267/7 consisted of the
measures and claims set out in that documen t which was dated 6 February 2003. On
that date, the Agricultural Assistance Act of 2003 did not exist, had never existed and
might not subsequently have ever come into existence. Brazil anticipated adoption of
that Act in its panel request and its claim in respect of that Act was entirely
speculative. Therefore, Brazil could not refer it to the DSB at that time and it does
not form part of the Panel's terms of reference.
204
194. Third, the original panel explained that "[w]e consider it axiomatic that the nature of a given
subsidy may play an important ro le in determining its effects." 205 The fact that no subsidies may be
granted because the program authorizing them is itself due to expire as of a date certain is
undoubtedly important in assessing whether "the eff ect" of the challenged subsidies is threat of
serious prejudice as claimed by Brazil. Indeed, to the extent that Brazil's challenge extends to the
programs and payments in the future, that fact goes to an even more fundamental question of whether
there will even be a "subsidy" in the time period at issue.

195. For the reasons above, Australia's assertion that 'it is beside the point for the United States to
argue that the programmes under consideration are due to expire in late 2007" is without merit.
206

203 And for the reasons set out in the U.S. submissions the United States does not consider that they can
be so defined.
204 Upland Cotton (Panel), para. 7.158.
205 Upland Cotton (Panel), para. 7.1191.

82. Could the United States comment on the projections of marketing loan and
counter-cyclical payments in Table 26 of Brazil's First Written Submission and on
the projections of prices and subsidy paymen ts in Table 27 of Brazil's First Written
Submission? Could the United States explain how the data in these Tables support
its argument that producers are likely to expect low or no marketing loan payments
in MY 2007? (Rebuttal Submission of the United States, para. 418)

196. As the United States explained in its para graph 419 of its rebuttal submission, an ICAC
market report released on February 1, 2007, projects the A-index at 59 cents/lb in MY 2006
and 66 cents/lb in MY 2007. This would be almost the same level achieve d in MY 2003, and higher
than the 20-year average for upland cotton.
207 At these price levels, any marketing loan payments – if
any – are likely to be small. The United States noted that new Congressional Budget Office
projections estimate that "there will be no more than a 2 cents/lb marketing loan payment [in
MY 2007] (and by MY 2008, the projection is of no marketing loan payment at all)."
208

197. The projections of prices and payments by FAPRI – shown in Table 27 of Brazil's First
Written Submission – are entirely consistent with the figures cited by the United States and its
analysis on the basis thereof. In fact, FAPR I projects an adjusted world price ("AWP") of
51.4 cents/lb, which would result in a marketing loan payment of only 0.6 cents/lb. However, because
it provides stochastic projections, FAPRI reports proj ected marketing loan payments of 1.9 cents/lb –
figures virtually identical to the CBO projections used by the United States.

198. Table 26 provides aggregate projections for all marketing loan payments; it does not show
how much of a payment per acre U.S. farmers might receive. Although the aggregate figures shown
for MY2007 are higher than those projected by FAPR I and CBO, it is not clear why this is – whether
it is because of differences in projected prices, differences in projected plantings, differences in
projected yields or some other factor. It is, therefore, difficult to fit these projections in with the
others noted above in discussing the expectations of farmers (whose expectati ons are developed with
respect to their own crops, not an aggregate national figure).

199. To put the CBO and FAPRI projections of at most a 2 cents/lb marketing loan payment in
perspective, it is useful to consider what marketing loan payments were in the period considered in the
original proceeding (MY 1999-2002). There, the orig inal panel considered si gnificant the fact that
marketing loan payments had been made that – in some periods – accounted for close to 30 cents per
pound, or almost the same amount as revenue receive d from the market. The situation here – with
marketing loan payments projected at, at most, 2 cents/lb for MY 2007 against a backdrop of prices
that are expected to be at very high levels – is substantially different.

Questions to Brazil

83. How does Brazil address the argument of the United States that footnote 13 of the
SCM Agreement "does not indicate that where a panel finds that a Member is
causing present serious prejudice through the use of a subsidy, the panel
automatically also finds that the Member is threatening to cause serious prejudice
in the future through the use of the same subsidy"? (Rebuttal Submission of the
United States, footnote 624)

84. Could Brazil confirm that its claim of threat of serious prejudice is submitted on a
contingent basis i.e., that it does not request the Panel to make a finding on this
claim if the Panel make a finding of present serious prejudice? How is the

207 Cotton This Month, ICAC, p. 4 (February 1, 2007) (Exhibit US-107).
208 CBO January 2007 Baseline for CCC & FCIC (January 22, 2007) (Exhibit US-91).

contingent character of this "threat of serious prejudice" claim reflected in Brazil's
request for the establishment of a panel?

85. Could Brazil explain its request that the Panel "make factual findings with respect
to its 'threat of serious prejudice' claim to allow the Appellate Body to complete the
analysis, in case it were to disagree with the compliance panel's interpretation"?
(First Written Submission of Brazil, para. 241) What are the precise "factual
findings" which Brazil requests the Panel to make in this regard?
86. How does Brazil address the argument of the United States that the definition of
"threat" of injurious effects in Article 15.7 of the SCM Agreement and
Article 4.1(b) of the Agreement on Safeguar ds "in terms of their close proximity in
time and their high probability of occurring" reflects the ordinary meaning of the
word "threat" and that, as such, Article 15.7 of the SCM Agreement and
Article 4.1(b) of the Agreement on Safeguards provide "useful contextual
guidance" for the interpretation of "threat" of serious prejudice?

87. Could Brazil comment on the argument of the United States that the standard of
"significant likelihood" is without support in the text of the SCM Agreement or in
the GATT/WTO dispute settlement reports cited by Brazil? (Rebuttal Submission of
the United States, paras. 406, 410,413)

88. Does Brazil agree or disagree with the proposition advanced by the United States
that "[a] panel may consider the ordinary meaning of a term as reflected in a
particular provision to interpret the same term in another provision (especially of
the same agreement) without the need fo r an express cross-reference." (Rebuttal
Submission of the United States, para. 411, footnote 635)

89. Brazil argues that marketing loan and counter-cyclical payments for upland cotton
are designed "in such a manner that paymen ts would be made in consistently large
amounts". (First Written Submission of Brazil, para. 270)

90. Could Brazil in this regard discuss th e data in Table 27 of Brazil's First Written
Submission that show an increase in the projected farm price and AWP over the
period MY 2006 - 2010 and a decline in projected marketing loan payments?

91. How does Brazil respond to the argument of the United States that "by MY 2008,
the projection is of no marketing loan pay ment at all"? (Rebuttal Submission of
the United States, para. 419).

D.
EXPORT CREDIT GUARANTEES

1. Outstanding export credit guarantees

Questions to the United States

92. The United States states, in para. 50 of its Opening Statement, that:

... nothing in the SCM Agreement provides that "withdrawing" a
"subsidy" allegedly "taking the form of a program" "includes an
obligation to abstain from performing on commitments outstanding
under that program as of the deadline for implementation." That
argument improperly equates "performing on commitments under
the program" with the "subsidy" itself. Such an equation was

appropriate in Brazil – Aircraft (21.5), where Brazil continued to
issue new WTO-inconsistent bonds even after the period of
implementation on the basis that it had pre-existing contractual
obligations to do so. However, it is not accurate here, where the
guarantees are not themselves prohibited subsidies.
Would the United States please clarify what it meant in the underlined sentence?

200. In the underlined sentence, the United States is referring to the fact that providing an export
credit guarantee does not per se equate to providing an export subsidy. Rather, a "subsidy" is only
"deemed to exist" under Article 1 of the SCM Agreement if there is (a) a financial contribution and
(b) a benefit is thereby conferred. Moreover, th e subsidy is an "export" subsidy only where it is
contingent on export performance within the meaning of Article 3.1(a). Item (j) of the Illustrative List
clarifies how this definition applies in the case of export credit guarantees. Specifically, with respect
to those measures, an export subsidy exists wh ere the premiums charged under the guarantee program
are inadequate to cover the long-term costs and losses of the program.

201. Where, as here, steps are taken so that export credit guarantees are provided at premium rates
that are more than adequate to cover the l ong-term costs and losses of the program, no export subsidy
is being provided, even though export credit guarantees may still be being provided.

91. In paragraph 342 of its First Written Submission, Brazil indicates that the total
amount of guarantees under the GSM 102, GSM 103 and SCGP programs
outstanding on 1 July 2005 amounted to $8.5 billion.

(a) Does the United States agree with the figure provided by Brazil?

202. Yes.

(b) Please indicate what proportion of that amount concerns exports of
unscheduled products? (please distinguish between principal and interests)

203. The United States does not maintain data rela ted to rescheduled amounts, claims outstanding,
or interest arrears by commodity. Based on figur es for contingent liability, and estimating from the
experience of the administrators of the programs, the United States estimates that approximately 56
percent of the outstanding $8.5 billion was associated with unscheduled products. The United States
does not maintain and, therefore, is unable to provide a break-down of principal and interest.

(c) Please indicate what proportion of that amount concerns exports of
scheduled products, and in particular rice (please distinguish, in each case,
between principal and interest).

204. As noted above, the United States does not maintain data related to rescheduled amounts,
claims outstanding, or interest arrears by commod ity. Based on figures for co ntingent liability, and
estimating from the experience of the administrators of the programs, the United States estimates that
approximately 44 percent of the outstanding $8.5 billion was associated with scheduled products. The
United States does not maintain and, therefore, is unable to provide a break-down of principal and
interest.

Questions to Brazil

92. Is it of any relevance to the Panel's a ssessment of Brazil's claims concerning
"outstanding" export credit guarantees that what was at issue in Brazil – Aircraft
(21.5) was the issuance, after the implementation date, of new bonds, and that

bonds which had been issued prior to the implementation date could be redeemed
for a number of years thereafter (see para. 46 of the US' Opening Statement at the
panel meeting).
93. The Panel notes that Exhibit Bra-516 in dicates outstanding amounts for GSM 5 as
of 30 June 2006 rather than as of 30 June 2005 as indicated in footnote 523 of
Brazil's First Written Submission. Please explain.

2. Legal Bases for Brazil's export subsidies claims

Question to the United States

94. The United States has noted that the original Panel's findings (that the export
credit guarantees at issue constituted prohibited export subsidies) were based on
item (j). The United States has also asserted that it has based itself on item (j) in
implementing the DSB recommendations with respect to export credit guarantees.
Please clarify whether the Panel should understand the United States' argument in
this respect as an argument concerning the scope of the present proceeding.

205. The U.S. argument does not relate to the sc ope of the present proceeding except in the sense
that the scope of an Article 21.5 proceeding is a ffected by the nature of the recommendations and
rulings by the DSB.

3. "Benefit" under Articles 1.1 and 3.1(a) of the SCM Agreement

Questions to both parties

95. Brazil has taken the position that "diff erent parties to a transaction involving a
GSM 102 ECG derive different benefits fr om the GSM 102 ECG, each of which is
potentially subject to assessment under Artic le 1.1(b) of the SCM Agreement" and
has indicated that it is, in this proceedin g, "primarily concerned" with the benefit
received by the US exporter in the form of below-market fees (para. 404, Brazil's
Rebuttal). The United States has challenged Brazil's approach of focusing on fees
to the exclusion of other elements of the total cost of the loan. Please explain,
referring to the provisions of the SCM Agreement and WTO jurisprudence (if any
applicable), your position as to whether: (1) export credit guarantees and other
types of subsidies may involve more than one type of benefit and/or recipient;
(2) whether it is up to the complaining Member to decide which benefit it chooses to
challenge.

206. The United States notes, as a threshold matter, that there is a provision in the SCM Agreement
that deals with the precise issue of when – in the judgment of Members – export credit guarantees
would constitute export subsidies within the meaning of Articles 1.1 and 3.1(a) of the
SCM Agreement. This is item (j) of the Illustrative List. Moreover, there is a provision in the
SCM Agreement that describes precisely what – in the j udgment of Members – constitutes a "benefit"
within the meaning of Article 1 of the SCM Agreement . That is Article 14(c) of the
SCM Agreement.
209

209 The latter – while expressly provided for countervailing duty investigations – has been relied upon
in virtually every subsidy dispute involving guarantees (even where they have not been loan guarantees) and has
been recognized as important context in interpreting "benefit." See e.g., Canada – Aircraft (Panel), para. 7.397
("In considering precisely what Brazil must show in order to demonstrate the existence of a 'benefit,' we note the
findings of the panel and Appellate Body in Canada – Aircraft. We therefore consider that IQ loan guarantees

207. The Panel's question necessarily turns on what significance these provisions have. Can these
provisions simply be ignored by a complaining party? Can the complaining party decide to challenge
an export credit guarantee on the basis of an alleged "benefit" that is not provided in either provision
and that – in fact – would undermine the logic of treating loan guarantees as distinct types of subsidies
in Article 14?
210 The United States submits that there is no b asis to do so. The fact that the drafters
went to the trouble of specifically setting out wh at constitutes an "export subsidy" in the case of
export credit guarantees and what constitutes a "benef it" in the case of loan guarantees must have
some meaning. They cannot have drafted these precise provisions simply so complaining parties
could overlook them at will.

208. Indeed, the questions of what constitutes a "benefit," "subsidy," or "export subsidy" are not
abstract questions that may be answered by a complaining party however it chooses. These are
questions that the Members agreed must be asked to identify particular measures about which they
shared certain concerns of trade distortion. In the case of export subsidies, the concern – as reflected
in the focus on export contingency in Article 3.1(a) – is of providing inducements to export because of
the structural characteristic that subsidies are made conditional on expor t. Members agreed that these
measures had a structure and nature that trade dist orting effects could simply be presumed to exist
(and therefore would not need to be proven by the complaining party). When the Members set out
how to examine a "benefit" for various types of me asures in Article 14, these considerations of trade
distortion necessarily informed what they drafted.

209. In the case of Article 14(c), they properly r ecognized that a loan guarantee is made for the
sole purpose of supporting a loan transaction; the guarantee becomes an integral part of that
transaction and has no value beyond it. The particular fee assessed for a guarantee is affected by the
terms of the underlying loan transaction, who the pa rties are to the underlying loan transaction, the
nature of the goods being purchased and sold, and any nu mber of other factors. In turn, the terms of
the underlying loan transaction and the costs and fees associated with that financing may be affected
by the fees assessed. Therefore, they expressly provide d that "a loan guarantee by a government shall
not be considered as conferring a benefit, unless there is a difference between the amount that the firm
receiving the guarantee pays on a loan guaranteed by the government and the amount that the firm
would pay on a comparable commercial loan abse nt the government guarantee. In this case the
benefit shall be the difference between these two am ounts adjusted for any differences in fees." In

will confer a "benefit" to the extent that they are ma de available to Bombardier customers on terms more
favourable that those on which such Bombardier custom ers could obtain comparable loan guarantees in the
market. In applying this standard, we are guided by Article 14(c) of the SCM Agreement, which provides
contextual guidance for interpreting the term."); EC-DRAMs, para. 7.190; see also U.S. Lumber CVDs Final
(Panel), para. 7.49, n. 128 ("Articles 14 (b) and 14 (c) SCM Agreement concern the government's provision of a
loan and a loan guarantee. In both cases, the benchmark to be used for the calculation of benefit is the
'comparable commercial loan' and the 'comparable commercial loan absent the government guarantee'").
Indeed, the article of which it is part – Article 14 – was one of the main bases for the Appellate Body's
reasoning in Canada – Aircraft , that the term "benefit" in Article 1.1(a) generally refers to a benefit to a
recipient, rather than a cost to the government. See Canada – Aircraft (AB), para. 155.
210 As the United States explained in its oral presen tation before the Panel, in the case of government
services, Article 14(d) applies and provides that a "benefit" may be calculated only where "the provision [of the
service] is made for less than adequate remuneration" which "shall be determined in relation to prevailing
market conditions for the . . . service in question in the country of provision (including price, quality,
availability, marketability, transportation and other conditions of purchase. . .)." In that context, a comparison
of fees for a government service against the fees charge d in the market for a compar able service is the proper
approach. However, Article 14(c) specifically precludes such an approach for loan guarantees. It provides that
a government loan guarantee shall not be considered as conferring a benefit, unless is a difference between the
amount that the firm receiving the guarantee pays on a lo an guaranteed by the govern ment and the amount that
the firm would pay on a comparable commercial loan absent the government guarantee." Brazil argues that this
provision deals solely with the measurement of benefit. However, by its terms, it also addresses the conditions
under which a guarantee may be deemed to be "conferring" a benefit – mirroring the language in Article 1.1(a)
of the SCM Agreement.

other words, they expressly recognized that an ass essment of the total costs of the transaction is
necessary to assess whether a "benefit" is actually conferred by the guarantee.

210. The approach of the drafters makes sense not only from a practical standpoint –
i.e., considering how guarantees operate and why a comparison of the fee charged for the issuance of
one loan guarantee to the fee charged for another may provide an incomplete and distorted picture –
but also from the standpoint of the object and purpose of the SCM Agreement itself. In particular, one
of the main aims of the SCM Agreement is the discipline of trade distor tion caused by subsidies. In
the case of export credit guarantees, Members recogni zed that the potential for distortion occurs if a
government-provided guarantee permits credit to be pr ovided on terms better than would be available
on the market. It is that which would have the poten tial to increase U.S. exports. It is difficult to see
how there could be concerns about similar trade distortion where the same credit could be obtained on
the market even without the government guarantee.
211 And, indeed, Article 14(c) reflects that very
reasoning. The United States submits that this reasoning must be respected.

211. A separate example may help to put the issu e in perspective. Suppose that a complaining
party wishes to challenge the provision by the govern ment of a particular good that is of a higher
quality than other goods offered by private actors but for which the government charges a premium
that fully accounts for the higher quality. Item (d) of the Illustrative List may apply if the claim is of
an export subsidy. And Article 14(d) of the SCM Agreement may be relevant if the claim is
otherwise. Both indicate that a proper analysis in determining whether a subs idy exists will examine
the price at which the product is provided, taking into account such other relevant factors as quality.
212
For example Article 14(d) expressly recognizes that this should take into consideration the "prevailing
market conditions . . . (including price, quality)." The United States submits that a complaining party
could not, under these conditions, assert that the high er quality of the government-provided product is
a "severable benefit" on the basis of which a subs idy should be found to exist. The United States
considers that the situation is analogous here.

96. The parties differ as to whether different types of loans can be compared as long as
they have the same "average life." What support (economic literature, etc.) exists
for your position on this issue?

212. The United States has explained that the averag e life of a loan is the average number of years
that principal is outstanding.
213 In a GSM-102 transaction, CCC requires principal to be payable at
least annually. Consequently, on the first anniversary, one-third of principal is paid. After two years,
two-thirds is paid. The final payment occurs on the third anniversary. Such a simple declining
balance yields an average life of two years for this loan. To put it differently, this is the average
amount of time in the loan that the obligor pays interest on a dollar of principal and the lender earns
interest on a dollar of principal.

213. The United States does not understand Brazil to disagree either with th is definition of the
average life of a loan or with the fact that a GSM- 102 guaranteed loan, to the extent it is a three-year
amortizing loan with annual repayment of pr incipal, has an average life of two years.
214 T h e
United States also does not understand Brazil to di sagree that a two-year bullet loan also has an
average life of two years.215

211 Adjusting for the fees paid for the government guarantee, of course, in the comparison.
212 Item (d) talks about this in terms of the "terms or conditions" of sale and Article 14(d) talks about it
in terms of "adequate remuneration."
213 U.S. First Written Submission, para. 123.

214. Brazil contends, however, that a two-year bu llet loan and a GSM-102 guaranteed 3-year loan
are not comparable because "the patterns of cred it risk to which the lender is exposed are very
different in these two cases."
216 Brazil asks the compliance panel to "suppose" – without foundation –
with respect to the particular examples offered by the United States "that the borrowing bank's credit
outlook is sufficiently positive in the short-term that there is a very low default likelihood perceived in
the first two years. But suppose as well that there is more uncertainty about, and a greater likelihood
of default in, the third year."217 In other words, Brazil asks the compliance panel to ignore the overall
risk reduction arising from the first-year repaym ent of one-third of principal in the GSM-102
guaranteed transaction 218, adopt Brazil's "assumptions," and conclude that the credit risk on this
transaction will be "much higher."219 Brazil's argument is devoid of logic.

215. The concept of average life is commonly used for price comparability of investments and debt
instruments of varying terms. "Average life is commonly used as the measure of investment life for
[mortgage-backed securities (MBS)] and the yield of an MBS is typically compared against a
Treasury with maturity close to the average life of the MBS." 220 Similarly, "swap dealers routinely
price the fixed rate side of an interest rate swap as a spread over United States Treasuries of a similar
average life."221

216. As a further example, an offer to invest in credit tenant lease loans extends to a portfolio of
loans of "up to 25 years."
222 With loans of varying terms, the i nvestment is indexed to "U.S. Treasury
or Swap Index correlating to the average life of the remaining lease term."223 This is without regard to
the extended term of particular loans: "15/15 deal has 9 year average life; use interpolated 9-year
U.S. Treasury or interpolated 9-year Swap Rate i ndex. 20/20 deal has 12-year average life; use
interpolated -year U.S. Treasury or interpolated 12- year Swap Rate index. 25/25 deal has 15-year
average life; use interpolated 15-year U.S. Treasury or interpolated 15-year Swap Rate index."224

217. Finally, the United States notes that Brazil asks the compliance panel to "assume" "much
higher" risk in year 3 of the GSM-102 transaction. Brazil offers no basis in fact for this assumption
with respect to the examples offered by the United States. Brazil's "assumption" is not even sound as
a theoretical matter. In a study of medium-ter m, U.S. government-guaranteed loans, the authors
found that "as the medium-maturity loans season the likelihood of default increases initially, peaks in
the second year after origination, and declines thereafter."
225 "[I]n general, the hazard curve is a
concave function of time: increasing initally, then falling off toward zero as the loans season. The

216 Rebuttal Submission of Brazil, para. 429; see also, Oral Statement of Brazil, para. 219; Brazil's
Comments on U.S. Answers, para. 140
218 Brazil asserts without basis that early repayment of one-third of principal shows that "the patterns of
exposure in these two types of loans are different,"and therefore supports its position. Brazil's Comments on
U.S. Answers, p. 140. To the contrary, it shows only that one-third of the principal is paid fully one year before
any principal is paid in the bullet loan. Solely from a risk perspective, more paid sooner can only be better.
220 The Handbook of Fixed Income Securities , 6 th ed. (2001), Fabozzi, Fr ank J. (McGraw-Hill
Professional), p. 589 (Exhibit US-149).
221 Marshall, John F. "Futures Versus Swaps: Some Considerations for the Thrift Industry," Review of
Business; Winter 1990/1991; 12, 3, p. 17 (Exhibit US-150).
222 BSC Bond Street Capital; Credit Tenant Lease Loans - Minimum $10,000,000.
http://www.bisonfinancial.com/loans/bsc_ctl.html (Exhibit US-151).
223 BSC Bond Street Capital; Credit Tenant Lease Loans - Minimum $10,000,000.
http://www.bisonfinancial.com/loans/bsc_ctl.html (Exhibit US-151).
224 BSC Bond Street Capital; Credit Tenant Lease Loans - Minimum $10,000,000.
http://www.bisonfinancial.com/loans/bsc_ctl.html (Exhibit US-151).
225 Glennon, Dennis and Nigro, Peter; "Measuring the Default Risk of Small Business Loans:
A Survival Analysis Approach," Journal of Money, Credit, and Banking , Vol. 37, No. 5 (October 2005), p. 945
(Exhibit US-152).

general shape of the hazard, and the time dependency of default implied from this result, is consistent
with the expected effect of loan seasoning."226

218. The initial hazard of default early in the loan belies Brazil's "assumption" of "very low default
likelihood perceived in the first two years."
227 This study also contradicts Brazil's further
"assumption" of "much higher risk" in the last year of the GSM guaranteed transaction. Under
Brazil's theory, risk would apparently increase over time . This study examined 7-year loans. As the
study indicates, however, for these loans, with a tenor 4 years longer than the GSM-102 transactions,
defaults "fell off toward zero" as the loans seasoned.

Questions to the United States

97. Assuming that the Panel accepts the United States' argument that "benefit" is to be
assessed on the basis of the "total costs of funds," what do you consider Brazil
must establish in order to meet its burden of proof in that respect? Must Brazil
prove that a benefit is conferred in all instances (all transactions and all
recipients)? In most instances?

219. Brazil bears the burden of proving its claims with respect to every one of the measures it
challenges. The United States notes that Brazil cont inues to equivocate on the question of whether or
not it is challenging the GSM 102 export credit guarantee program itself or particular guarantees
thereunder.
228 Whatever measure Brazil is challenging, it cannot escape its burden of proof in that
regard.

220. If Brazil is challenging the GSM-102 program as such – whether it challenges the entire
program or parts of it – it must prove that the program itself (or the challenged part) mandates a
breach. As the panel explained in Korea – Ships in addressing an analogous challenge against the
Advance Purchase Refund Guarantee (or "APRG") program under the SCM Agreement , the panel
stated that "[t]he issue before us . . . is whet her or not the APRG programme mandates the conferral
of a benefit by requiring the provision of APRGs on terms more favourable than Korean shipyards
could obtain on the market."
229 That panel found that "[n]either Article 18 of the KEXIM Act nor
Article 23(1) of the KEXIM Operating Manual even refer to the terms on which KEXIM shall offer
APRGs, let alone require below-market guarantees." 230 For this reason, the panel rejected the
EC's claim that the APRG program mandated a breach of the export subsidy provisions of the
SCM Agreement. The same reasoning applies here. Neith er the statutory nor regulatory provisions
providing for export credit guarantees even mandate that guarantees be provided, let alone that they
be provided under conditions in which they would confer export subsidies.

221. If Brazil is challenging par ticular guarantees under the GSM-102 program – e.g., guarantees
that the United States has provided in respect of exports of rice and unscheduled products – it bears

226 Glennon, Dennis and Nigro, Peter; "Measuring the Default Risk of Small Business Loans: A
Survival Analysis Approach," Journal of Money, Credit, and Banking , Vol. 37, No. 5 (October 2005), p. 935
(Exhibit US-152).
228 For example, in its rebuttal submission, Brazil claims that it does not "assert that the GSM 102
program itself circumvents the United States' export subsidy commitments, within the meaning of Article 10.1
of the Agreement on Agriculture" or, presumably, that the GSM 102 program as such provides prohibited export
subsdiies under the SCM Agreement . Brazil Rebuttal Submission, para. 378. But, thereafter, Brazil has
indicated that it does not even consider individual guarantees to constitute measures. Brazil Answers to
Sections A-C of First Set of Questions, para. 29. Theref ore, it remains entirely unclear what measures Brazil is
even purporting to challenge.
229 Korea – Ships (Panel), para. 7.121.
230 Korea – Ships (Panel), para. 7.121.

the burden of showing that each of the guarantees is an export subsidy. In the U.S. view, the proper
consideration in this regard is item (j) of the SCM Agreement and there is no "other" standard for what
constitutes an export subsidy in the case of export cr edit guarantees. Nonetheless, even if there were
some "other" such standard in Articles 1 and 3.1(a) of the SCM Agreement, as Brazil alleges, Brazil
would bear the burden of proving that each guarant ee provides a (a) financial contribution that (b)
confers a benefit, and the "subsidy" thereby provi ded is (c) contingent upo n export performance.
Brazil has failed to make such a showing on the basis of a consideration of total costs for any
guarantees, let alone for all the guarantees in respect of exports of rice and unscheduled products.
Therefore, even under its own theory of an "alte rnative" standard under Articles 1 and 3.1(a), its
export subsidy-related claims fail.

98. Does the United States dispute the accu racy of Brazil's comparison of GSM 102
fees with Exim Bank fees? Does the United States agree that ExIm Bank and
GSM 102 guarantees are (at least in certain circumstances) similar or comparable?

222. The United States does not believe that guarantees of the Export-Import Bank of the
United States and those of the GSM 102 program ar e similar or comparable. Brazil has proposed a
comparison with two particular products of Ex-Im Bank. These are (1) the Ex-Im Bank Letter of
Credit Insurance for Banks ("LCI") and (2) the Ex-Im Bank Medium-Term Export Credit Insurance
("MTI").
231

223. The United States notes, as a threshold matter, th at MTI is available exclusively in respect of
capital goods and services. 232 As such, this product and its fee structure are subject to the
Organization for Economic Co-ope ration and Development ("OECD") Arrangement on Officially
Supported Export Credits ("OECD Arrangement"). As Japan has noted 233and Brazil has
acknowledged234, the OECD Arrangement does not apply to agricultural products. As Japan has also
noted, the minimum premium rates under the OECD Arrangement are for repayment terms of two
years or more. 235 Under the GSM-102 program, hundreds of GSM-102 transactions, totaling
hundreds of millions of dollars are in fact for terms of less than 2 years. 236 Therefore, there are
important factual distinctions between the guarantees that render them not comparable.

224. These distinctions for relevant for purposes of the subsidy analysis. Recall that – typically –
the comparison that is made to determine whether or not there is a "benefit" is to what the recipient
"could obtain on the market."
237 Here, an exporter who would obtain a GSM 102 guarantee simply
could not obtain a MTI guarantee from Ex-Im Bank, because those guarantees are not made in respect
of agricultural products and also because the transact ion at issue may have short (less than two-year)

232 ExIm Bank export credit insurance product description, accessed October 2006 at
http://www.exim.gov/products/insurance/index.cfm (Exhibit BRA-533) and ExIm Bank Medium-Term Export
Credit Insurance, ExIm Bank online, accessed October 2006 at
http://www.exim.gov/products/insurance/medium_term.html. (Exhibit BRA-535).
233 Third Party Submission of Japan, para. 25
235 Third Party Submission of Japan, para. 25
236 Specifically:
 FY 2003: 191 guarantees: $185,296,721
 FY 2004: 259 guarantees: $222,967,376
FY:2005: 230 guarantees: $165,350,477
FY:2006: 185 guarantees: $176,414,190
FY:2007 (as of 5 March 2007): 43 guarantees: $46,584,911
237 See e.g., Korea – Ships (Panel) , para. 7.121 ("The issue before us, therefore, is whether or not the
APRG programme mandates the conferral of a benefit by requiring the provision of APRGs on terms more
favourable than Korean shipyards could obtain on the market.")

repayment terms. Therefore, those guarantees are not an appropriate benchmark of what an exporter
of agricultural products "could obtain on the market."

225. Equally important, however, is what Brazil has omitted from its comparisons to the Ex-Im
Bank products. Brazil asserts that "Brazil's country-specific comparison methodology [] takes
account of all of the variables that GSM 102 and ExIm Bank take into account in pricing their
products."
238 In fact, Brazil has failed to address at least two highly significant components.

226. The most significant of these is interest c over. Under Ex-Im's MTI product the obligor is
required to use a form of promissory note promul gated by Ex-Im, and Ex-Im covers "100 percent of
the rate provided in the note."
239 Under Ex-Im's LCI product, "the in sured interest rate is generally
prime rate minus 0.5% or the rate stated in the credit agreement, whichever is less. Ex-Im Bank uses
the prime rate published in the Wall Street Journal, under the table 'Money Rates.'"240

227. In contrast, under the GSM-102 program, CCC cove rs eligible interest, which is calculated as
follows: "the per annum rate to be used to calculate eligible interest shall be the lesser of the interest
rate specified between the U.S. bank (or exporter) a nd the foreign bank or 55 percent of the average
investment rate of the most recent Treasury 26-week bill auction as announced by the Department of
Treasury prior to the date the eligible interest rate is established or adjusted."
241

228. A comparison of the interest cover of the LCI product
242, which coverage is less than that of
the MTI product, with the interest cover under th e GSM-102 guarantee shows that the LCI interest
cover greatly exceeds that of the GSM-102 guarantee.

229. The United States provides in Exhibit US-155 a comparison of the CCC interest cover (55%
of the applicable 26-week T-bill rate
243) with the LCI interest cover (Wall St. Journal prime
minus 0.5%). As of March 1, 2007, Ex-Im interest coverage is 491 basis points higher than the CCC
interest coverage (7.75% v. 2.839%). This is an enormous difference, which can be illustrated by a
simple example. Assume an export transaction in which ten million dollars is financed at
7.75 percent. Upon default of payment on the anniversary of the credit, Ex-Im would cover the full
interest amount of $775,000. CCC, however, would only c over $283,900 of interest. This effect of
course multiplies with each year of outstanding unpaid interest.

230. Since July 1, 2005, using the rates in eff ect on the first business day of each month, the
difference in cover has been as much as 499 basi s points (October 2, 2006) and never less than
374 basis points (August 1, 2005).
244 As the MTI interest cover is 100 percent of the stated rate in the
note, one can only infer that the disparity between CCC interest cover and that product is even greater.

238 Brazil Rebuttal Submission, para. 434 (emphasis in original).
239 ExIm Bank Medium-Term Export Credit Insuran ce, ExIm Bank online, accessed October 2006 at
http://www.exim.gov/products/insurance/medium_term.html. (Exhibit BRA-535)
240 ExIm Bank Letter of Credit Insurance for Banks, ExIm Bank online, accessed October 2006 at
http://www.exim.gov/products/insurance/loc.html (Exhibit BRA-531).
241 Notice to GSM-102 Program Participants: US DA Clarifies Method for Computing Interest
Coverage Under GSM-102 Program (15 July 2005)
http://www.fas.usda.gov/scriptsw/PressRelease/pressrel_dout.asp?PrNum=0105-05 (Exhibit US-153).
242 Exhibit US-154 provides the Wall St. Journal prime rates from February, 2000 to the present.
http://www.hsh.com/indices/prime00s.html (accessed 20 March 2007).
243 Exhibit US-156 sets out 26-week T-bill rates as pr ovided by the U.S. Department of Treasury for
the period 1 July 2005 - 20 March 2007 available at http://treasurydirect.gov/RI/OFAuctions.
244 Comparison of interest rate coverage of C CC GSM-102 export credit guar antees and Ex-Im Bank
Letter of Credit Insurance for Banks (1 July 2005 - 1 March 2007) (Exhibit US-155).

231. Interest cover is a very significant com ponent of a guarantee or insurance product and
commensurately affects the fee such products can command. Brazil, however, has made no attempt to
include this factor in its comparisons.

232. In addition, with respect to principal cove rage, MTI covers 100 percent of the financed
portion.
245 The GSM-102 only covers 98 percent. Ex -Im also allows, under the LCI product, that
"the insured may arrange recourse or 'pass back' to a third party of all or an y part of any uninsured
amount."246 This is not permitted under the GSM-102 pr ogram. Upon default the claimant must
subrogate to CCC the claim to the entire amount in default, not just the guaranteed portion. 247 CCC
then has the right to recover from the obligor all moneys in default. 248 Unlike the LCI product, the
holder of the GSM-102 guarantee is therefore unable to sell the unguaranteed portion of the obligation
to another party to insulate himself from any expos ure to principal default. Under the MTI product,
the holder is similarly insulated from any risk b ecause of the full 100 percent coverage. Inferior
coverage of principal relative to the Ex-Im produc ts renders the GSM-102 guarantee less desirable,
which is reflected in the price parties are willi ng to pay. Brazil has also not accounted for the
difference in "pass back" policies of the programs in its comparisons.

99. Please comment on Brazil's argument that the GSM 102 fees are not sufficiently
scaled to take into account country risk (i.e. they vary only minimally according
with country risk) (see, inter alia, paras. 410-412 Brazil's First Written
Submission).

233. The United States disagrees with Brazil's assertions as a matter of fact. GSM 102 fees are
scaled to take into account country risk and th e current GSM-102 fees vary greatly based on this
factor. Brazil has offered no basis in the text for its assertion that this scaling is "insufficient."
Indeed, the United States is not aware of any provision of the SCM Agreement that establishes what
constitutes "sufficient" scaling. The only express discussion of sufficiency in the SCM Agreement
pertains to the adequacy of premia to cover th e long-term operating costs and losses of export credit
guarantee programs under item (j) of the Illustrative List. This is the standard that the original panel
appropriately applied in assessi ng the consistency of the export credit guarantee programs with the
export subsidy provisions in Articles 3.1(a) and 3.2 of the SCM Agreement.

234. It was in assessing that broader question that the original panel considered the issue of
country risk to be relevant. Specifically, the orig inal panel explained that "in order objectively to
assess premiums in relation to long-term operating costs and losses, we believe it is also appropriate
for us to take into account aspects of the structur e, design and operation of the measure before us."
249
In so doing, however, the original panel was quite cl ear that it was not looking at individual fees or
differences among fees, but rather whether "the tota l of all premiums would be likely to cover the
total of all operating costs and losses under the program." 250 Therefore, neither in the text of the
SCM Agreement nor in its application in the present pro ceeding, is there any independent issue of
"sufficient scaling" to take into account country ri sk. The only question is whether the structure,
design and operation of the program – including any sca ling – when taken as a whole indicate that the
premia are inadequate to cover the long-term costs and losses of the program. The evidence before
this Panel clearly show the adequacy of the premia charged for GSM 102 guarantees.

245 Ex-Im Bank Medium-Term Export Credit Insuranc e, ExIm Bank online, accessed October 2006 at
http://www.exim.gov/products/insurance/medium_term.html (Exhibit BRA-535).
246 ExIm Bank Letter of Credit Insurance for Banks, ExIm Bank online, accessed October 2006 at
http://www.exim.gov/products/insurance/loc.html (Exhibit BRA-531).
247 7 CFR Section 1493.110(b)(4) (Exhibit US-142).
248 7 CFR Section 1493.130(a) (Exhibit US-142).
249 Upland Cotton (Panel), para. 7.805.
250 Upland Cotton (Panel), para. 7.805.

235. The changes to make fees responsive to count ry risk confirm the adequacy of the premia.
Under the old fee structure, fees varied "only by the guaranteed dollar value of the transaction, the
repayment period, and the principal repa yment interval (annual or semi-annual)." 251 The premia were
not risk-based at all, and the original panel noted in this regard that "a country's risk classification has
no impact on the premiums payable under the United States export credit guarantee programs." 252 By
contrast, under the current fee schedule, the differe nce in premia for the same tenor between the least
risky countries and the most risky countries is in all cases between 81.5 percent and 100.6 percent. 253
Moreover, the 22 highest risk countries that were pr eviously eligible are now entirely ineligible and
cannot receive a GSM 102 guarantee at any pri ce. This, and other evidence submitted by the
United States show that the "the total of all pr emiums" cover the "total of all operating costs and
losses under the program."254

Questions to Brazil

100. Assuming the Panel were to agree with the United States that the proper
benchmark to determine "benefit" is the "tot al cost of funds" of the transactions,
what elements of evidence has Brazil provided the Panel in this respect (other than
evidence from the Regulations that the programme targets situations where no
credit would be available on the market)? In answering, please address the
United States' argument at para. 133 of its First Written Submission that "Brazil
has made no attempt to provide such specific information on individual loan costs
and fees or to identify comparable commercial loans and their terms".

101. Brazil argues that "[w]here guarantees are reserved for circumstances in which
credit would not otherwise be available, there is no "comparable commercial loan
absent the government guarantee," within the meaning of Article 14(c) of the
SCM Agreement." (Brazil First Written Submission, para. 375). The Panel
understands this argument of Brazil to focus on the foreign obligor. Brazil
elsewhere indicates that it is principally concerned, in this proceeding, with the
benefit to the US exporter (fees). Are these two arguments at tension?

4. Item (j) of the Illustrative List

Questions to both parties

102. What, in your view, explains the di fferent results achieved by the two methods
advocated, on the one side, by the United States in paragraphs 87-89 of its
First Written Submission and by Brazil in Exhibit Bra-613 (other than the
United States' criticism that Brazil has not taken recoveries corresponding to
pre-1992 guarantees into account in its "cash basis" accounting calculations, of
which the Panel is already aware)?

236. As a threshold matter, it is important to understand what Brazil's cash-basis methodology in
Exhibit Bra-613 purports to show. It attempts to depi ct on a strictly chronological basis, for a finite
period of time (FY 1993-2005), cash flows in and out related to the export credit guarantee programs.

251 Upland Cotton (Panel), para. 7.820
252 Upland Cotton (Panel), para. 7.861
253 GSM-102 Guarantee Fee Rate Schedule, US DA FAS Online, accessed September 2006 at
www.fas.usda.gov/excredits/gsm102fees.html (Exhibit BRA-505). Compare GSM 102 Premia, Annual
Payment of Principal, 36 month tenor, risk category 0 ($0.561 per US$100 of coverage) and risk category 6
($1 per US$100 of coverage) and 30 day tenor, risk category 0 ($0.161) and risk category 6($0.323).
254 Upland Cotton (Panel), para. 7.805.

As Brazil – not the original panel – did in the original proceeding with respect to the finite
period 1993-2002, it nets "program receipts against program disbursements on a fiscal year basis."
255

237. It is also important to note that the cred it reform approach was developed and imposed to
avoid precisely the kind of anomalies that arise unde r the strict cash-basis ap proach that Brazil now
advocates. Indeed, as Brazil articulated before the or iginal panel: "[p]rior to passage of the [Credit
Reform Act of 1990], loan guarantees were recorded on a cash basis, which distorted their costs.
[R]ecording guarantees on a 'cash basis distorted th e timing of when costs would actually be
incurred.'"
256 Accordingly, Brazil championed credit reform accounting as:

an ideal basis on which to determine whet her the CCC's export credit loan guarantee
programs are offered at premium rates that are inadequate to cover the long-term
operating costs and losses of the programs, within the meaning of item(j) of the
Illustrative List of Export Subsidies. It functions as a more sophisticated alternative
to constructed cost formulas, and thoroughly accounts for all of the premium and
operating cost and loss elements required by item(j). Moreover, it has the virtue of
serving as the actual, real-world calculation used by the U.S. Congress, the President
of the United States, and federal agencies lik e the CCC to "measure more accurately
the costs of Federal credit programs."
257
238. Brazil never proposed to the original panel th at its cash-basis methodology supplant the credit
reform approach. To the contrary, "Brazil em phasizes that it does not intend for this revised
constructed formula to replace the formula used by th e U.S. government itself to track the costs of the
CCC guarantee programs pursuant to the U.S. Federal Credit Reform Act."258

239. The United States believes that the disparity between Brazil's approach and the United States
approach is largely explained by the fact that the United States' credit reform methodology fully
accounts for the net present value of reschedulings, and Brazil's approach only includes cash received.
As explained below, the current total net present va lue of remaining cashflows for cohorts 1992-2005
is $590 million.
259 Exhibit BRA-613 purports to show a cash deficit (loss) of $689,144,000 through
fiscal year 2005. The U.S. first written submission (table at paragraph 87) shows a profit through
cohort 2005 of $166,549,780. The difference between those two figures is $855,693,780. Although
$590 million does not fully explain the disparity, it approaches the appropriate order of magnitude.

240. The re-estimation process under credit reform accounting projects cashflows to and from the
government over the life of the cohort, including defaults and recoveries. For the GSM 102,
GSM 103 and SCGP programs, Table 1 below sets forth the net present value of the remaining cash
flows for each of the cohorts 1992-2005. To the exte nt any remaining scheduled debt exists, the last
fiscal year in which payment is projected for such rescheduled debt is indicated. The net present
value of the cashflow is calculated as required under credit reform accounting.
260

241. The annual reestimate process takes into consid eration the estimated net present value of cash
flows over the life of the cohort. In contrast, th e Brazilian approach only takes into account the cash
transactions that have actually transpired to date.

255 Brazil Rebuttal Submission, para. 485.
256 Statement of Brazil - First (Original) Panel Meeting (22 July 2003), para. 128 (emphasis added).
257 Statement of Brazil - First (Original) Panel Meeting (22 July 2003), para. 129.
258 Brazil's Answers to Questions Posed by the Pane l Following the First Substantive Meeting of the
Panel, para. 164 (Question 77) (11 August 2003) (emphasis in original)
259 $589,947,000.
260 The United States hastens to note that this does not reflect or adopt th e cash-basis approach to
rescheduling rejected by the original panel. See, Upland Cotton (Panel), paras. 7.846, 7.847, and 7.851.

Cohort Debt Rescheduled Until
FY
NPV of Remaining
Cashflows ($000)
GSM 102
1992 2012 $161,655
1993 2012 205,798
1996 2025 57,936
1997 2025 105,664
1998 2007 1,871
1999 2007 1,035
2000 2007 28
2001 2014 110,901
2002 2014 187
2003 2007 -1,787
2004 2008 -31,556
2005 2009 -49,367

 Total GSM 102 $562,365

GSM 103
1992 2012 $10,572
1993 2012 15,885
2000 2008 -122
2001 2008 -241
2003 2010 -155
 Total GSM 103 $25,939

 Supplier Credit
2003 2010 $1,643
Total: $589,947

242. For each of the past three fiscal years, actual repayments under rescheduled debt have
outperformed the estimates by 226%, 180% and 363% for FY 2004, 2005 and 2006 respectively. The
amounts projected under rescheduled agreements and the actual amounts collected are shown in
Table 2. For each subsequent reestimate, sche duled payments under rescheduled agreements (from
which the repayments are projected) are reduced to reflect amounts already collected.

Table 2 – Projected versus actual recoveries on rescheduled debt

 Projected ($) Actual ($) Variance (%)
2003 reestimate -- 2004 projected and actual 89,772,079 202,970,637 226%
2004 reestimate -- 2005 projected and actual 133,267,525 240,208,256 180%
2005 reestimate -- 2006 projected and actual 139,280,938 505,481,067 363%

103. To what extent is evidence pertaini ng to guarantees issued under the three
programmes (GSM 102, GSM 103 and SCGP) under the prior fee schedule relevant
to the Panel's analysis of the revised GSM 102 programme under item (j)?

243. The evidence pertaining to guarantees issu ed under the prior fee schedule for the three
programs (GSM 102, GSM 103, and SCGP) is useful because it helps to put in context the findings
and recommendations of the original panel, the b ases for such findings and recommendations, and the
measures the United States has taken to comply. Mo reover, evidence of the adequacy of premiums
charged under those programs is relevant in this proceeding becau se the United States has improved
the ability of the single remaining program – GSM 102 program – to meet its long-term operating
costs and losses. To the extent that premia were charged that were adequate to cover the long-term

costs and losses of the programs even before the United States implemented changes to increase fees
and lower possible long-term costs and losses, this is a highly relevant fact. It supports the U.S.
argument that premia charged under the revised fe e schedule for GSM 102 guarantees are more than
adequate to cover the long-term costs and losses of the program.

244. While disaggregated figures for the three export credit guarantee programs before the 2005
cohort are not available, the aggregated figures are still very helpful in an assessment of the GSM 102
program alone.
261 Historically, the GSM 102 program has been by far the largest of the three export
credit guarantee programs. Brazil has noted th at export credit guarantees issued under GSM 103
accounted for only 2.36 percent (by transaction valu e) of all CCC guarantees, and in FY 2004 and
2005, no guarantees were issued under GSM 103. 262 Indeed, no GSM 103 guarantees have been
issued since FY 2003.263

245. Similarly, since the inception of SCGP in FY1996
264, total guarantees under SCGP were
$2.777 billion. In contrast, total GSM 102 guar antees issued in the same period were for $30.633
billion.265 GSM-103 guarantees during that time totaled onl y $396.2 million. As a result, looking at
the period since the inception of SCGP, GSM-102 guarantees comprised 90.6 percent of the total
value of all CCC export credit guarantees issued. In li ght of this order of magnitude and the fact that
the net lifetime reestimate for every GSM-102 cohort since 1992 is negative, it stands to reason that
the relative profitability reflected in the budget data is, at a minimum, proportionately allocable to
GSM-102, and that the increase in fees can only enhance that position.

104. Must a risk-based fee necessarily take into account foreign obligor risk? Please
discuss and provide any relevant support for your position. Can foreign obligor risk
be treated differently than country risk in this respect, and if so, why?

246. Item (j) of the Illustrative List is the only provision of the SCM Agreement that deals
specifically with export credit guarantees. That provisions simply provides that export credit
guarantees are subject to discipline where the premia charged are inadequate to cover the long-term
costs and losses of the program. Other than this, neither that provision, an y other provision of the
SCM Agreement , the Agreement on Agriculture , or any other covered agreement dictates how a
provider of guarantees must calibrate particular fees according to particular risks.

261 Such disaggregation appeared for the first time in the President's 2007 budget, released in
February, 2006. See response to Question 110, below.
262 Brazil First Written Submission, para. 339. Nor were any GSM 103 guarantees issued in FY 2002.
See, Summary of Export Credit Guarant ee Program Activity in FY 1991-1998 (Exhibit US-41 in the original
proceedings) (Exhibit BRA-509). Only $7.6 million were issued in FY 2003. See Summary of FY 2003 Export
Credit Guarantee Program Activity, USDA FAS Online, Septembe r 2003, accessed November 2006 at
http://www.fas.usda.gov/excredits/Monthly/2003/03_09_30.pdf (Exhibit BRA-518).
264 Upland Cotton (Panel) , para. 7.833; Summary of Export Credit Guarantee Program Activity in
FY 1991-1998 (Exhibit US-41 in the original proceedings) (Exhibit BRA-509).
265 Summary of Export Credit Guarantee Program Ac tivity in FY 1991-1998 (Exhibit US-41 in the
original proceedings) (Exhibit BRA-509); Summary of FY 2004 Export Credit Guarantee Program Activity,
USDA FAS Online, September 2004, accessed October 2006 at
http://www.fas.usda.gov/excredits/Monthly/2004/04_09_30.pdf (BRA-510); Summary of FY 2005 Export
Credit Guarantee Program Activity, USDA FAS Online, Septembe r 2005, accessed October 2006 at
http://www.fas.usda.gov/excredits/Monthly/2005/05_09_30.pdf (BRA-511); Summary of FY 2006 Export
Credit Guarantee Program Activity, USDA FAS Online, Septembe r 2006, accessed October 2006 at
http://www.fas.usda.gov/excredits/Monthly/2006/06_09_30.pdf (BRA-513); and Summary of FY 2003 Export
Credit Guarantee Program Activity, USDA FAS Online, Septembe r 2003, accessed November 2006 at
http://www.fas.usda.gov/excredits/Monthly/2003/03_09_30.pdf (Exhibit BRA-518).

247. For GSM-102 guarantees, CCC imposes gra duated fees based on both tenor and the
applicable country risk. In addition, CCC imposes strict limits on exposure to individual bank
obligors. Brazil dismisses this in arguing that the only way to achieve "prudent fiscal management" is
to do it in the exact manner Brazil dictates, requiring not only the tight exposure limits that CCC
employs, but also different fees for different bank s. Brazil provides no basis in the text for the
obligation it asserts.

248. Private sector creditors have individual methodologies for risk-rating and pricing of their
products. And there is no reason to assume that the discretion of Members has been eliminated in this
regard, especially in the absence of express obligations in the covered agreements to this effect.
Indeed, to illustrate the myriad vehicles for risk management available to lenders, the United States
provides in Exhibit US-157 the June 12, 2006 re marks of Ben Bernanke, the Chairman of the
United States Federal Reserve Board on "Modern Risk Management and Banking Supervision." CCC
chooses to manage its risk by setting the fee base d on country risk and the relative repayment risk
presented over time (tenor risk). To address the pot ential risk of default from the obligor bank, CCC
opts instead to constrain its total potential exposure by establishing rigid limits for each particular
obligor.
266 Brazil has provided no basis to reject these choices by the United States.

105. What considerations must guide the Pa nel's decision to accept or refuse new
evidence or arguments on issues that were add ressed by the original Panel? Please
discuss in light of the following:

(a) The original Panel found that original subsidy estimates, while not
reflecting 'actual' figures, nevertheless provide a reliable measure of the
United States government's own assessment of the profitability of the
export credit guarantee programmes. Is the United States asking the Panel
to revisit that conclusion (see paras 108 ff. of the United States' First
Written Submission).

(b) The United States presents evidence which, it argues, demonstrates that the
three programmes examined by the original panel were operated at no net
cost to the US government. Is there an y issue as to whether the Panel can
or should accept the United States' evidence in this respect?

249. The United States assumes that the Panel's question above relates to the arguments set out in
paragraphs coming before – not af ter – paragraph 108. The response that follows is based on this
assumption.

250. First, the United States does not find any limitation in the DSU on the evidence and
arguments that parties may submit in a complian ce proceeding. This makes sense given that
"Article 21.5 proceedings involve, in principle, not the original measure, but rather a new and
different measure which was not before the original panel."
267 The question is simply one of the
weight to be given to the evidence and arguments that are presented to the compliance panel. The
United States has explained its views on that matter be fore in response to Question 2 in the first set of
questions from the Panel and again under Questi on 54 above. Specifically, under Article 11 of the
DSU, the Panel is tasked with, inter alia , making "an objective assessment of the matter before it,
including an objective assessment of the facts of th e case." In doing so, the panel is not bound by the
findings of the original panel. Indeed, according to the Appellate Body, "the relevant facts bearing
upon the 'measure taken to comply' may be different from the relevant facts relating to the measure at

266 In this respect, CCC applies the CAMEL approach to its financial analysis, discussed in the
response to Question 112, below

issue in the original proceedings."
268 Moreover, "the claims, arguments and factual circumstances
which are pertinent to the 'measure taken to co mply' will not, necessarily, be the same as those which
were pertinent in the original dispute."269 The Appellate Body has, therefore, clarified that:

the utility of the review envisaged under Article 21.5 of the DSU would be seriously
undermined if a panel were restricted to examining the new measure from the
perspective of the claims, arguments and factual circumstances that related to the
original measure, because an Article 21.5 panel would then be unable to examine
fully the 'consistency with a covered agreem ent of the measures taken to comply,' as
required by Article 21.5 of the DSU.
270
251. Nonetheless, the Panel may well consider that the reasoning of the original panel to be
persuasive on points that are apposite. 271 This would be true, for exam ple, where the evidence before
this Panel confirms that the same reasoning is appropriate in this proceeding.

252. In the case of export credit guarantees, however, it is especially important to consider the data
that is becoming available regarding the actual perfo rmance of the programs. Much of this evidence
was simply not available at the time of the original panel proceeding. And, in fact, the limited nature
of the data available at that point constrained th e conclusions that could be reached. There is no
reason why this Panel should be similarly cons trained even though fuller and more accurate
information about the performance of the programs is now available.

253. Second, with respect to the original panel's findings regarding the original subsidy estimates,
the United States notes that the original panel c onsidered the significance of "original subsidy
estimates" principally in the context of assessing th e past performance of the programs. The original
panel recognized that these are "initial estimates," s ubject to "re-estimations over the lifetime of the
guarantees involved."
272 The original panel then proceeded to examine numerous other elements of
the evidence on the record, all of wh ich, in the original panel's view, buttressed a determination that
the programs in fact did result in a net cost to the Un ited States. This included, in significant respect:
(1) the arguments of the parties concerning re-scheduled debt 273, (2) the cumulative re-estimates on a
cohort-specific basis that then still showed a positive subsidy of a pproximately $230 million 274, and
(3) the credit guarantee liability figure in the CCC financial statements. 275 Consideration of those
factors together led the original pa nel to conclude that the three pr ograms before it were "run at a net
cost to the United States government." 276 In that context, the role of the "original subsidy estimates"
was but one factor among an array of factors that, in the aggregate, led the original panel to reach its
final conclusion about the profitability of the programs.

254. The facts now before the compliance panel ar e different and show a clearer and different
picture of profitability. Two of the three programs th at were at issue before are no longer operational,
and the fee schedule and eligibility conditions for the GSM-102 program have been substantially
modified. More significantly, as the United States has demonstrated, the subsidy estimate net of

271 United States – Shrimp (21.5 – Malaysia) (AB), para. 108 (citing Japan – Alcoholic Beverages (AB)
at 108).
272 Upland Cotton (Panel), para. 7.843
273 Upland Cotton (Panel), paras. 7.847, 7.851.
274 Upland Cotton (Panel), para. 7.852.
275 Upland Cotton (Panel), para. 7.855.
276 Upland Cotton (Panel), para. 7.856.

reestimate reflects a profit for the programs for all cohorts 199 2-2006 of $403,714,701.277 T h e
original panel did not have – indeed, could not ha ve had – this evidence before it as context in
assessing whether not the original subsidy estimates provide a reliable measure of the United States
government's assessment of the profitability of the export credit guarantee programmes. The
United States has explained that they do not (and why they do not).278 The evidence now fully bears
out the U.S. explanations.

255. In any event, in the original panel's conc lusions, the original subsidy estimates were not
dispositive on the question of whether the three export credit guarantee programs met the test of
item(j). It was but one factor in the original pa nel's analysis. The original panel, however, also
recognized the significance and relevance of re- estimation and the resulting net subsidy figure,
whether positive or negative. An objective assessmen t of the facts before the compliance panel now
indicates that premia under the GSM-102 program are adequate to cover the long-term operating costs
and losses of the program.

106. The parties disagree as to whether Brazil should include recoveries for pre- 1992
guarantees in its cash basis accounting formula (Exhibit Bra-613). Is the Panel
correct in understanding that Brazil's formula does not includes amounts for
(1) claims paid after 1992 under pre-1992 guarantees; (2) fees paid on pre-1992
guarantees? If so, please explain the relevance or non-relevance of including
recoveries under pre-1992 guarantees in light of the non-inclusion of costs and
other revenues related to the same guarantees.

256. The Panel is correct in understanding that Brazil's formula does not include amounts for
(1) claims paid after 1992 under pre-1992 guarantees and (2) fees paid on pre-1992 guarantees.

257. Regarding Brazil's cash basis approach, the United States recalls again what the methodology
purports to do – namely, to depict on a strictly chronological basis, for a finite period of time
(FY 1993-2005), cash flows in and out related to th e export credit guarantee programs. As Brazil –
not the original panel – did in the original dispute with respect to the finite period 1993-2002, the
methodology nets "program receipts against program disbursements on a fiscal year basis."
279 To the
extent Brazil's approach is abandoning the credit re form approach and reverting to a strict cash-in,
cash-out approach, it would be internally consistent and highly relevant to account for all of the cash
in and all of the cash out during the specified finite period. To that end, in addition to the cash
numbers presented by Brazil, the United States has noted the additional cash received and the
additional cash out during the same time frame (FY1993-2005).
280

258. The United States also recalls that the U.S. credit reform approach was developed and
imposed to avoid precisely the kind of anomalies th at arise under the strict cash-basis approach that
Brazil now advocates. Indeed, as Brazil articulated be fore the original panel: "[p]rior to passage of
the [Credit Reform Act of 1990], loan guarantees were recorded on a cash basis, which distorted their
costs. [R]ecording guarantees on a 'cash basis distorted the timing of when costs would actually be
incurred.'"281

259. Brazil championed credit reform accounting, instead, as:

277 See Answer of the United States to Question 111 below, updating the table in paragraph 87 of the
U.S. First Written Submission.
278 See e.g., U.S. First Written Submission, paras. 100-104; U.S. Oral Statement, paras.22-23.
279 Brazil Rebuttal Submission, para. 485
280 U.S. Rebuttal Submission, para. 98 and fn. 150.
281 Statement of Brazil - First (Original) Panel Meeting (22 July 2003), para. 128

an ideal basis on which to determine whet her the CCC's export credit loan guarantee
programs are offered at premium rates that are inadequate to cover the long-term
operating costs and losses of the programs, within the meaning of item(j) of the
Illustrative List of Export Subsidies. It functions as a more sophisticated alternative
to constructed cost formulas, and thoroughly accounts for all of the premium and
operating cost and loss elements required by item(j). Moreover, it has the virtue of
serving as the actual, real-world calculation used by the U.S. Congress, the President
of the United States, and federal agencies lik e the CCC to "measure more accurately
the costs of Federal credit programs."
282
260. Again, Brazil never proposed to the origin al panel that its cash-basis methodology supplant
the credit reform approach. To the contrary, "Brazil emphasize[d] that it does not intend for this
revised constructed formula to replace the formula used by the U.S. government itself to track the
costs of the CCC guarantee programs pursuant to the U.S. Federal Credit Reform Act."283

261. With respect to the cash-basis methodol ogy that Brazil advan ces, Brazil accuses the
United States of presenting a "skewed picture of the CCC's performance," because it allegedly does
not take into account "defaults, write-o ffs or other losses on the same ECGs."
284 However, as an
initial matter, the United States notes that it has ne ver suggested that Brazil's methodology is an
appropriate approach to examining the question at issue. It is Brazil that has championed the
approach of examining cash flows from 1992 forwar d; the United States has simply identified the
flaws in Brazil's analysis. 285 Therefore, it is inexplicable – and entirely disingenuous – that Brazil
criticizes the United States for not including reco veries received before 1992 (indeed as far back
as 1980).286 The methodology is Brazil's preferred approach. The United States considers it to
inappropriate in toto.

262. Second, Brazil's accusation that the United Stat es has not addressed "write-offs or unspecified
'other adjustments'"
287 is simply without merit. For example, in its oral statement, Brazil mentions
specifically a $2 billion write-off in FY 2005 and s uggests that the United States has not addressed
this. Brazil is wrong. As is clear from the c itation that Brazil provides, the cash-basis picture
presented by the United States fully accounts for this figure. Brazil cites to "the U.S. Budget, CCC
ECG Liquidating Account, FY 2007, p. 118, line 2364." 288 The $2 billion figure is shown as a net
downward adjustment in the "Status of Guaranteed Loans." This item reflects a write-off of the
outstanding receivable in the amount of approximately $2 billion owed from Iraq. This is not a cash
expense. Indeed, the corresponding cash expense ha d already been accounted for in the $2 billion in
claims that CCC paid and which were previously re flected in the "default claims" line 00.01, referred
to in Exhibit Bra-613. The write-off of the receivable pertains to the reduction in value of an asset on
the balance sheet of CCC. It has no bearing on th e cash accounting that Brazil advances. The other
two examples Brazil cites in footnote 290 of its Oral Statement are similar instances of a reduction in
a receivable, not a cash outlay or expense.289

282 Statement of Brazil - First (Original) Panel Meeting (22 July 2003), para. 129
283 Brazil's Answers to Questions Posed by the Pane l Following the First Substantive Meeting of the
Panel, para. 164 (Question 77) (11 August 2003) (emphasis in original)
285 Brazil Rebuttal Submission, para. 133.
288 See Oral Statement of Brazil, para. 263, n.290.
289 Line 2361 in the 1996 budget explicitly states that it shows "write offs of loans receivable"

Questions to the United States

107. What can explain the discrepancy between the "credit guarantee liability" recorded
in the CCC's financial statements (which suggest that the program is provided at a
net cost to the US government) and the evidence presented by the US in para. 87 of
its First Written Submission?

108. Please explain why the "liability" figure in the CCC's financial statements should
not be considered by the panel to provide, if not the amount of actual losses, at least
a reliable estimate of the CCC's own perception of the cost to the government of the
programmes since their inception. Is the Panel wrong in understanding that a
"credit guarantee liability" in this context means that the CCC considers that the
programmes will not cover their costs and losses in the long term?

263. As Questions 107 and 108 are closely relate d, the United States addresses both together.

264. The "credit guarantee liability" figure record ed in the CCC's financial statements and the
evidence presented by the United St ates in paragraph 87 of its first written submission represent two
very different things:

• The "negative subsidy estimate net of re-estimates" in paragraph 87 of the U.S. first
written submission represents profit. 290 Brazil has recognized that negative subsidy
amounts reflect overall profitability of the program.291

• The "credit guarantee liability" figure, on th e other hand, does not reflect either profit
or loss. It is a balance sheet entry of liability for which there is an offsetting balance
sheet entry of an asset. It does not reflect or suggest a "net cost" or "net profit" to the
U.S. government. Similarly, as a credit guara ntee liability is only on one side of a
balance sheet, it does not purport to be an estimate of the ability of CCC to have
adequate revenue to cover the costs and losses of the program in the long-term.

265. The U.S. Standard General Ledger provid es a uniform chart of accounts and technical
guidance to be used in standardizing federal agency accounting.
292 The U.S. Government Standard
General Ledger sets forth instructions for all U.S. Government account transactions, including those
for the CCC. The particular instruction applicab le to credit guarantee liability is instruction C428. 293
That instruction prescribes how "to record loans and interest receivable from non-Federal sources for
defaulted guaranteed loans." The instruction di rects that upon the occurrence of a default on a
guaranteed loan, the government agency is to reco rd a credit for "loan guarantee liability" and an
offsetting debit for loans receivable. 294 Instructions for treatment of "loan guarantee liability" are
peppered throughout the Standard Ge neral Ledger, but each instruction directs an offsetting entry on
the opposite side of the ledger.

290 U.S. First Written Submission, para. 83, fn. 126, and citations therein.
291 U.S. First Written Submission, para. 96, fn. 158, and citations therein.
292 Overview: US Standard General Ledge r http://www.fms.treas .gov/ussgl/about.html
(Exhibit US-158).
293 Exhibit US-159 reproduces the Standard General Ledger cover; Treasury Financial Manual
Transmittal Letter No. S2 06-02 (14 July 2006), which immediately follows the cover, and pages III-146
and III-151 of the Ledger. The Standard General Ledger its elf is 1354 pages in length and is available in full in
pdf format at: http://fms.treas.gov/ussgl/tfm_releases/06-02/ussgl_06-02.pdf
Pages III-146 and III-151 correspond to pages 972 and 977, respectively, in that format.
294 In addition, it directs the agency to record a credit for "allowance for subsidy" and a debit for
interest receivable. For each defaulted loan the total debits of interest receivabl e and loans receivable should
equal the total credits of allowance for subsidy and loan guarantee liability.

266. In addition, each agency of the United States government, including CCC, has financial
reporting requirements. The Office of the Mana gement and Budget ("OMB") issues guidance and
requirements in respect of financial reporting that are applicable throughout the federal government.
295
OMB Circular A-136 sets forth the required form and content of agency financial statements,
including the CCC financial statements.296

267. Section 9 of the Circular sets forth the para meters for "Notes to the Financial Statements." 297
Note 8 of Section 9 specifically addresses Note Di sclosures for "Direct Loans and Loan Guarantees,
Non-Federal Borrowers" and the format of that note. 298 This is the portion of the required financial
reporting requirements directly applicable to the "credit guarantee liability" figure.299

268. Consistent with the approach reflected in th e Standard General Ledger, the instructions for
Circular A-136 direct,"for each program with post- 1991 Loan Guarantees, report gross receivables
from defaulted guaranteed loans assumed for direct collection [] in column 2 [of Section I]." 300
Column 2 of Section I (Defaulted Guaranteed Loans from Post-1991 Guarantees) is entitled
"Defaulted Guaranteed Loans Receivable, Gross". 301 The sum of the amounts reported in Section I
"shall equal the amount reported on the Balance Sheet as loans receivables [sic] and related foreclosed
property, net."302 These are receivables on the asset side of a balance sheet.

269. On the liability side of the balance sheet is Section K: "Liability for Loan Guarantees."
303
The instructions for Section K state: "For each program with post-1991 loan guarantees, report in
column 3 [of Section K] the present value of the estimated net cash flows (outflows less inflows) to be
paid by the entity as a result of the loan guarantees." 304 This figure is then reported in the "total
liabilities for loan guarantees (column 4 [of Section K])."305

270. Consequently, every federal government agency, including CCC, is required to reflect on its
financial statements for each defaulted guaranteed loan: (1) an asset of a "gross receivable from
defaulted guaranteed loan assumed for direct coll ection" and (2) an offsetting "credit guarantee
liability."

271. Turning to the Panel's question as to whether the liability figure may be considered a loss, the
United States notes the original panel's explanation th at a "liability" is defined as "... a probable future
outflow or other sacrifice of resources as a result of past transactions or events."
306 The United States
considers that this is an accurate and proper defini tion of liability. The or iginal panel specifically

295 Office of Management and Budget Circular A-136 (Exhibit US-160).
296 Office of Management and Budget Circular A-136, Overview, pp. 1-2 (Exhibit US-160).
297 Office of Management and Budget Circular A-136, pp.63-105 (Exhibit US-160).
298 Office of Management and Budget Circular A-136, p. 70-84 (Exhibit US-160).
299 Compare CCC Notes to Financial Statements, p. 26 (Exhibit BRA-585) with Office of Management
and Budget Circular A-136, Schedule for Reco nciling Loan Guarantee Liability Balances, p.77
(Exhibit US-160).
300 Office of Management and Budget Circular A-136, pp. 82, 74 (Exhibit US-160). Analogously,
"when the reporting entity has made payments on beha lf of borrowers which should be collected from the
borrowers, the resulting receivables sha ll be reported in the same column as loans receivable for either direct
loans or defaulted guaranteed loans." Office of Management and Budget Circular A-136, p. 79
(Exhibit US-160).
301 Office of Management and Budget Circular A-136, p. 74 (Exhibit US-160).
302 Office of Management and Budget Circular A-136, p. 82 (Exhibit US-160).
303 Office of Management and Budget Circular A-136, pp. 82, 75 (Exhibit US-160).
304 Office of Management and Budget Circular A-136, p. 82 (Exhibit US-160).
305 Office of Management and Budget Circular A-136, p. 82 (Exhibit US-160).
306 Upland Cotton (Panel), para. 7.855

noted that such a "probable future ou tflow" does not equate with "loss." 307 Citing the Federal
Accounting Standards Advisory Board Statements of Federal Financial Accounting Concepts and
Standards, the panel noted that the definition of "los s," in contrast, is "any expense or irrecoverable
cost, often referred to as a nonrecurring charge, an expenditure from which no present or future
benefit may be expected." 308 CCC clearly has an expectation of recovery on the receivable it has
obtained in exchange for its payment for a default on a guaranteed loan. Therefore, the receivables
are not properly considered to be "losses."

272. The United States notes in this regard that Brazil has attempted to characterize the credit
guarantee liability figure as a "new cumulative lo ss figure of $220 million" for all export credit
guarantees issued after fiscal year 1991.
309 This is simply inaccurate. As discussed above, the credit
guarantee liability figure does not in any way depict or purport to depict a retrospective cumulation of
loss.

273. On the question of whether or not to consider the credit guarantee liability figure to be some
indicator of the U.S. government's perception of th e cost of the programmes since their inception, the
United States considers that it is not such an indi cator for the reasons just explained – namely, it
represents only one side of the equation. The orig inal panel appeared to ascribe such significance to
it
310 on the understanding that the credit guarantee liability represented a prospective estimate of
anticipated experience under the program. 311 While it does provide such an estimate, it cannot be
viewed alone without considering the offsetting entries on the asset side, arising from the expectation
of recovery on loans receivable as a result of CCC's subrogated position to collect on such loans
following default.

109. Please indicate to the Panel whether th ere have been occurrences of reschedulings
prior to the occurrence of defaults and the payment of claims by the CCC.

274. To the best of the U.S. knowledge, the CCC has never rescheduled any obligations guaranteed
under the export credit guarantee programs prior to the occurrence of default.

110. Is it possible to calculate the "subsidy estimate net of reestimates" for GSM 102
alone (similar to what the US has done for all three programmes in para. 87)?
If so, please provide a table recording the results of this exercise.

275. The United States has only maintained a nd published disaggregated figures for each of
GSM 102, GSM 103, and SCGP as of the budget for fiscal year 2007. Before that time the three
programs were grouped together for purposes of calcu lation of the subsidy estimate net of reestimate
reflected in paragraph 87 of the U.S. first written s ubmission. To calculate this figure specifically for
each cohort of the GSM 102 guarantees would require an original subsidy estimate for each such
GSM 102 cohort. Unfortunately, the United States do es not have such data for any cohorts before
FY 2005. The table below reflects the data for GSM-102 cohorts 2005 and 2006.

307 Upland Cotton (Panel), para. 7.855
309 Brazil Rebuttal Submission, para. 484.
310 Upland Cotton (Panel), para. 7.855.
311 U.S. Answers to (Original) Panel's Question 227 Following Second Panel Meeting (22 December
2003)

GSM-102 Export Credit Guarantee Program
Subsidy Estimates and Reestimates by Cohort
FY 2005 and 2006 Cohorts
(Dollars in Thousands)

Cohort Original Subsidy
Estimate
 Total Lifetime
Reestimates a/
Subsidy Estimate Net of
Reestimates
2005 $142,000 b / -$92,209 $49,791
2006 71,000 c / -18,324 52,676
a/ 2008 U.S. Government Budget Federal Credit Supplement: Table 8 – Loan Guarantees: Subsidy
Reestimates; p. 45 (Exhibit US-74)
b/ 2007 U.S. Government Budget Appendix: CCC Export Loans Program Account line 233001; p.116
(Exhibit BRA-544)
c/ 2008 U.S. Government Budget Appendix: CCC Export Loans Program Account line 233001; p.105
(Exhibit US-161)

276. Although the subsidy estimate net of reestimat es for these very recent cohorts is currently
positive, it is important to note the precipitous dec line in the subsidy estimate for both cohorts in only
the short time that has elapsed si nce the issuance of these cohorts. The United States has explained
why original subsidy estimates are routinely too high. 312 The United States will not repeat its
arguments here, but will simply note that the consid erations reflected in the U.S. submissions are
equally applicable to the 2005 and 2006 cohorts of GSM-102 guarantees. In this context, the
United States also refers the Panel to the response of the United States to Question 102 above.

111. In paragraph 7.853, the or iginal Panel stated that it "disagree(d) with the
United States that we should 'eliminate' the data for certain, more recent, cohorts
in our analysis." Is the United States asking that this Panel eliminate such data for
the most recent cohorts (the table at para. 87 of the United States' First Written
Submission includes data up to 2005 only). Why should this Panel do what the
original refused to do? What woul d be the result of the United States
"re-estimates" exercise if the original subsidy estimate for the 2006 and 2007
cohorts were included?

277. The United States has not asked this Panel to el iminate data for the most recent cohorts. The
data in the table at paragraph 87 of the U.S. First Written Submission includes data up to 2005 only
because, as Brazil has noted, that was the most r ecent year for which full data was available.
313
Enough time has elapsed now to include data for FY 2006. This data is reflected in the table below.
As FY 2007 is still on-going, reestimates for that year are not yet available.

312 U.S. First Written Submission, paras. 102-104; U.S. Rebuttal Submission, paras. 108-126.

GSM-102/GSM-103/Supplier Credit Guarantee Programs
Subsidy Estimates and Reestimates by Cohort

Cohort Original Subsidy
Estimate
 Total Reestimates
a/
Subsidy Net of
Reestimates
1992 $267,426,000 -$783,477,474 -$516,051,474
1993 171,786,000 -364,465,718 -192,679,718
1994 122,921,000 -133,746,048 -10,825,048
1995 113,000,000 -160,155,549 -47,155,549
1996 328,000,000 -390,121,131 -62,121,131
1997 289,000,000 -287,071,897 1,928,103
1998 301,000,000 -290,034,778 10,965,222
1999 158,000,000 -181,797,405 -23,797,405
2000 195,000,000 -210,481,742 -15,481,742
2001 103,000,000 -175,810,225 -72,810,225
2002 97,000,000 -95,302,249 1,697,751
Subtotal
1992-2002

2,146,133,000

-3,072,464,216

-926,331,216

2003 170,000,000 -111,539,816 58,460,184
2004 457,000,000 -199,652,868 257,347,132
2005 152,000,000 2,133,680 154,133,680
2006 71,000,000 b / -18,324,481 52,675,519
Subtotal
2003-2006

850,000,000

-327,383,485

522,616,515

Total 2,996,133,000 -3,399,847,701 -403,714,701
a/ 2008 U.S. Government Budget Credit Supplement: Table 8 – Loan Guarantees: Subsidy Reestimates;
p. 45 Exhibit US-74
b/ 2008 U.S. Government Budget Appendix: CCC Export Loans Program Account line 00.02; p. 105.
(Exhibit US-161)

278. Indeed, the numbers are now even more favorab le than as set forth in the U.S. First Written
Submission. For cohorts 1992-2002, examined by th e original panel, the negative subsidy net of
reestimates (i.e., profit) is now $926,331,216 (up from $762,676,594). For all cohorts 1992-2006, the
negative subsidy net of reestimates has improve d from a profit of $166,549,780 to a profit of
$403,714,701.

112. Please explain whether and how the CCC limits risks or control costs of the
GSM 102 programme as regards foreign banks' individual credit ratings.

279. Under the GSM-102 program, CCC limits its risk of exposure to default by obligor banks by
establishing a particular credit limit for each bank. CCC will not issue credit guarantees in respect of
a particular bank beyond its applicable credit limit. In conducting its analysis of individual banks to
establish such credit limits, CCC maintains a ma trix indicating the correspondence of CCC's
categorization of bank risk with that used by va rious external rating agencies such as Fitch Ratings,
Moody's Investor Services, Standard and Poors, and Capital Intelligence. Such external ratings are
used as a comparative tool in the establishment of the CCC ratings. Most of the banks for which CCC
has established credit limits are not rated by all of th ese external rating agencies. Some banks, in fact,
may not be rated by any of these external rating agencies.

280. In addition, CCC takes the applicable country risk rating into account. In general, the bank
does not receive a more favorable rating than the country in which it is domiciled.

281. CCC also conducts an independe nt financial and risk analysis of each bank as part of the
process to establish a risk rating for su ch bank. To the extent they ex ist, external agency ratings are
an important component of the overall analysis and assessment.

282. CCC uses the traditional CAMEL approach in its analysis.
314 This approach analyzes capital
adequacy (C), asset quality (A), management (M), ear nings (E), and liquidity (L) of the particular
bank. Other factors, such as franchise value, mark et risk, and operational risk are also taken into
consideration.

283. CCC further uses another matrix to assure th at credit limits as a percentage of net worth
reflect the bank's risk rating - a bank with a bette r risk rating can have a higher credit limit as a
percentage of net worth than a bank with a lower risk rating.

113. Please explain whether and how CCC co untry risk categories correspond to ICRAS
ratings.

284. Eligible countries for CCC export credit gua rantees are graduated in seven CCC risk grades
enumerated 0 through 6.
315 ICRAS provides two risk ratings for each country – a sovereign rating and
a non-sovereign rating. Each country is rated on an 11-category scale. 316 ICRAS country risk grades
are a significant component in the development of CCC country risk grades.

Question to Brazil

114. Brazil argues that "(t)hat the United States has, on one view of the data, beaten the
odds and met its costs and losses over a series of years does not mean that ECG
programs are structured and designed to do so" (para. 503, Brazil's Rebuttal). Is
Brazil arguing that evidence regarding the actual operation and "profitability" of
the programme (i.e. retrospective evidence) is irrelevant to the Panel's analysis
under item (j)

314 See, e.g., Federal Reserve Board Supervisory Letter SR 94-12
http://www.federalreserve.gov/BOARDDOCS/SRLETTERS/1994/SR9412.HTM (Exhibit US-162); "Applying
the CAMEL Framework", Asian Development Bank h ttp://www.adb.org/Documents/Guidelines/Financial
part060302.asp (Exhibit US-163).
315 GSM-102 Guarantee Fee Rate Schedule, US DA FAS Online, accessed September 2006 at
www.fas.usda.gov/excredits/gsm102fees.html (Exhibit BRA-505).
316 For further information see Government Accountability Office's report #GAO-04-531
(Exhibit US-164).