Document: COMMENTS OF THE UNITED STATES ON THE ANSWERS OF BRAZIL TO FURTHER QUESTIONS FROM THE PANEL TO THE PARTIES FOLLOWING THE SECOND PANEL MEETING (28 January 2004) A.  Terms of Reference
Date: 28 January 2004
Document codes: WT/DS267/R/Add.2
Complainant: Brazil
Respondent: U.S.
Third parties: Argentina, Australia, Benin, Canada, Chad, China, Taiwan, EU, India, New Zealand, Pakistan, Paraguay, Venezuela, Japan, Thailand
Dispute stage: Mutually Agreed Solution
Agreements cited: Art. 3, 5, 6  Subsidies and Countervailing Measures (SCM)Art. 3.3, 7.1, 8, 9.1, 10.1  AgricultureArt. III:4, XVI  GATT 1994

ANNEX I-14

COMMENTS OF THE UNITED STATES ON THE ANSWERS OF
BRAZIL TO FURTHER QUESTIONS FROM THE PANEL TO
THE PARTIES FOLLOWING THE SECOND PANEL MEETING

(28 January 2004)

A. Terms of Reference

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

1. Brazil’s answer conflates two issues: the me asures a Panel is to examine and the evidence a
Panel may examine. As stated in the US response, Brazil has challenged certain statutory measures
"as such"; Brazil has also challenged certain "payment s" as measures. With respect to payments, it is
only those payments made through panel establishmen t that can be "specific measures at issue"
between the parties. Payments made after panel establishment necessarily had not been made as of
the time of establishment; therefore, those "measures" did not exist and cannot have been within the
Panel’s terms of reference as set out by the DSB.

2. The situation here is different from that in Chile – Price Bands
1 where the question was
whether an amendment made to a measure that both parties agreed were within the panel’s terms of
reference had altered the "essence" of the measure such that it was no longer a measure within the
panel’s terms of reference. Here, the question concerns measures (payments) that it is without dispute
did not exist at the time of panel establishment. Accordingly, the request for a panel could not have
"identified" non-existent measures, nor could Br azil have consulted on measures "affecting" (present
tense) the operation of a covered agreement. To fi nd these measures to be within the Panel’s terms of
reference would therefore be in contravention of Ar ticles 4 and 6 of the DSU. It was Brazil’s choice
to request establishment of the Panel part way thro ugh marketing year 2002; thus, Brazil’s timing sets
the parameters for what payments are properly before the Panel. 2 In this connection, we note that
Brazil has finally conceded the corr ectness of the US view that this Panel’s terms of reference cannot
expand beyond their scope of the date of panel establishment. In its answer to the Panel’s
Question 247 (paragraph 149), Brazil states: "Thus, the ‘matter’ before the Panel has not changed
(and cannot ) since the establishment of the Panel" (em phasis added). Brazil should of course also
have acknowledged that, despite this statement, it has in fact attempted to change the matter before
the Panel.

3. This is not to say that a Panel may not examine evidence that is developed after panel
establishment.
3 In fact, the United States would largely ag ree with Brazil’s statement that "to the
extent that ‘payments’ made since 18 March 2003 are evidence, the Appellate Body and panels have

1 WT/DS207/AB/R.
2 Past panels have examined measures subject to a dispute as they exist on the date of panel
establishment. See, e.g., Panel Report, India -- Quantitative Restrictions on Imports of Agricultural, Textile and
Industrial Products, WT/DS90/R, adopted 22 September 1999, paras. 5.159-5.163.
3 See, e.g. , Japan – Measures Affecting the Importation of Apples , WT/DS245/R, para. 4.15
(15 July 2003) (rejecting Japan’s preliminary ruling request to strike certain affirmative evidence developed and
submitted after the date of panel establishment but no later than during the first panel meeting).

repeatedly found that evidence generated after the esta blishment of the panel can be used by [panels]
in their objective assessment of the facts under DSU Article 11." 4 The Panel should carefully
consider the import of this statement by Brazil, gi ven the existence of three telling pieces of evidence
that Brazil has sought to minimize or neglected:

 • First, Brazil largely ignores the undisputed fact that no marketing loan payments have
been made since 19 September 2003; thus, given expected prices, US outlays will be
dramatically lower in marketing year 2003.

 • Second, Brazil seeks to minimize the fact that futures prices indicate that the market
expects cotton prices to remain high through marketing years 2003 and 2004.

 • Third, and perhaps most disconcerting, Braz il has neglected to inform the Panel that, with
respect to its preferred baseline appro ach, FAPRI has produced a (preliminary)
November 2003 baseline that revises projected prices significantly upwards as compared
to the outdated baseline on which Mr. Sumner’s economic analysis relies.

4. The first piece of evidence demonstrates not only that marketing loan payments will be
sharply lower in marketing year 2003 than in prev ious years, but fatally undercuts Brazil’s economic
analysis. The Panel will recall that in Brazil’s economic analysis, the marketing loan programme
alone accounted for almost 43 per cent of the effect of removal of all challenged US subsidies. Given
that no marketing loan payments are being made and that futures prices and the November 2003
FAPRI baseline suggest that no marketing loan pa yments will be made over the remainder of
marketing year 2003, the evidence does not support Br azil’s argument that US marketing loans for
upland cotton create a threat of serious prejudice.

5. The second piece of evidence is that futures pr ices indicate that the market expects cotton
prices to remain high through marketing years 2003 and 2004. The table below shows settlement
prices on 27 January 2004, for contracts through marketing year 2004.

New York Cotton Exchange, Cotton No. 2, 27 January 2000
5
Contract Settlement (cents per pound)
March 2004 73.76
May 2004 75.06
July 2004 75.90
October 2004 68.25
December 2004 69.05
March 2005 71.05
May 2005 71.70
July 2005 72.40

6. The following table of futures prices for December 2004 upland cotton contracts further
demonstrates that price expectations have risen over time, and market participants expect cotton
prices to remain high through December 2004.

4 Brazil’s Answer to Question 194, para. 5.
5 Exhibit US-142.

Futures Prices for December 2004 Cotton

Month
ending
Open for the
Month
High for the
Month
Low for the
Month
Close for the
Month
Average Close
for the Month
12/31/2002 60.63 62.20 60.49 60.50 61.34
1/31/2003 61.25 62.50 60.50 62.70 61.69
2/28/2003 62.90 63.00 61.30 62.87 62.53
3/31/2003 62.90 63.25 61.70 62.45 62.57
4/30/2003 62.40 64.00 62.00 62.45 62.69
5/31/2003 62.50 64.00 60.58 60.75 62.60
6/30/2003 60.50 64.60 59.00 65.25 62.55
7/31/2003 66.90 66.90 63.32 62.85 65.29
8/31/2003 62.90 63.25 60.70 63.68 61.95
9/30/2003 63.95 66.95 62.20 66.25 64.99
10/31/2003 65.75 71.00 64.80 68.85 67.72
11/30/2003 68.85 70.00 62.50 65.65 67.54
12/31/2003 67.50 68.45 63.25 68.28 65.60
1/22/2004 68.40 69.70 67.62 69.62 68.78

 Source: New York Board of Trade, NY Cotton Exchange

7. Third, Brazil has not provided the Panel w ith any information relating to the most recent
FAPRI November 2003 baseline. This prelimin ary baseline further undermines Brazil’s economic
analysis, which was predicated on projections of continued low cotton prices. As noted with respect
to the cessation of marketing loan payments and hi gh futures prices, that low-cotton-price projection
on which Mr. Sumner relies has proven to be dr amatically off-base. The November 2003 baseline
now recognizes that fact.

• For example, the FAPRI November 2002 b aseline used by Mr. Sumner projected an
A-index of 50.7 cents per pound for marketing year 2003.

• The actual A-index in 2004 (through 22 Ja nuary) has varied between a low of 75.45 cents
per pound on 2 January to a high of 76.95 cents per pound on 22 January 2004 – that is,
roughly 50 per cent higher than the FAPRI November 2002 projection.

8. The price outlook for cotton has improved considerably since publication of the
November 2002 FAPRI baseline used by Dr. Sumner to estimate the effects of subsidies on US cotton
production. The table below shows that projecti ons for the Adjusted World Price are as much as 54.1
per cent higher , or 20 cents per pound, for marketing year 2003 in the November 2003 baseline as
under the November 2002 baseline.

FAPRI’s Upwards Revisions to Adjusted World Price Baseline Projections

Year Adjusted World Price (cents/lb)
 Nov 2002
(Sumner)
Jan 2003 Nov 2003 1/ Increase from Sumner Nov02
baseline to Nov03
2003/04 37.22 44.8 57.36 54.1 %
2004/05 39.83 45.4 50.96 27.9 %
2005/06 41.94 46 50.82 21.2 %
2006/07 43.6 46.7 50.35 15.5 %
2007/08 45.48 48 49.24 8.3 %
 Average 41.61 46.18 51.75 24.4 %

 1/ Source: FAPRI Baseline, November 2003 (Exhibit US-132)

 The chart below sets out the same data gra phically, showing how much FAPRI’s projections
have been revised upwards since the November 2002 baseline on which Mr. Sumner’s analysis relies.

9. As a result of this large upwards revision in FAPRI’s projected adjusted world price, FAPRI’s
estimated marketing loan gains have been reduced considerably.

• Under the November 2003 baseline, the estimated marketing loan gain for marketing
year 2003 is now zero, compared to almost 15 cents per pound under the November 2002
baseline used by Dr. Sumner.

• For marketing year 2004, the estimated marketing loan gain under the November 2003
baseline is 1.04 cents per pound, a reduction of 91.5 per cent from the 12.17 cents per
pound estimated marketing loan gain in the November 2002 baseline used by Dr. Sumner.

• In fact, over the five-year period from marketing year 2003 to marketing year 2007, the
average marketing loan gain is estimated in the November 2003 baseline as 1.32 cents per
pound, 87.3 per cent lower than the 10.39 cents per pound average using the
November 2002 baseline on which Dr. Sumner relied.

FAPRI’s Downwards Revisions to Its Marketing Loan Gain Baseline Projections

Year Estimated marketing loan gain1/ (cents/lb)
 Nov 2002
(Sumner)
Jan 2003 Nov 2003 2/ Decrease from Sumner Nov02
baseline to Nov03
2003/04 14.78 7.2 0 100.0 %
2004/05 12.17 6.6 1.04 91.5 %
2005/06 10.06 6 1.18 88.3 %
2006/07 8.4 5.3 1.65 80.4 %
2007/08 6.52 4 2.76 57.7 %
Average 10.39 5.82 1.32 87.3 %

 1/ The estimated marketing loan gain is the difference, if positive, between the loan rate (52 cents per
lb) and the Adjusted World Price.

 2/ Source: FAPRI Baseline, November 2003 (Exhibit US-132)

10. Recall that the marketing loan programme accounted for more than 42 per cent of the
estimated effects of removing all US subsidi es over MY 1999-2007 on production under the model

developed by Dr. Sumner.
6 Thus, updating the model to the N ovember 2003 baseline would virtually
eliminate the estimated effect of the marketing loan programme and significantly reducing the overall
estimated effect on production. Any remaining effect s would largely be attributed to direct payments
under Dr. Sumner’s flawed model, with which we strongly disagree.

11. In addition, the FAPRI baseline from Nove mber 2002 projected 50.7 cents per pound for the
A-Index for marketing year 2003 and the January 2003 baseline projected 58.4 cents per pound for the
A-index for marketing year 2003. The FAPRI November 2003 projection for the MY2003 A-Index is
70.9 cents per pound, 40 per cent higher than the FAPRI November 2002 projections used by
Dr. Sumner. Even this revision could be low as the actual A-index for January 2004 (through
22 January) has varied between a low of 75.45 cents per pound on January 2 to a high of 76.95 cents
per pound on 22 January 2004. We also note th at FAPRI’s November 2002 projections that
Dr. Sumner employed did not show, through marketing year 2012, the A-Index ever rising as high as
current prices.

FAPRI Baseline Projections for A-Index (cents per pound)

A-Index Nov 2002
(Sumner)
Jan 2003 Nov 2003 1/
Increase from Sumner
Nov02 baseline to Nov03
2003/04 50.7 58.4 70.9 39.8%
2004/05 53.4 58.8 64.5 18.9%
2005/06 55.8 59.4 64.3 15.2%
2006/07 57.6 60.1 63.8 10.8%
2007/08 59.6 61.5 62.7 5.2%

 1/ Source: FAPRI Baseline, November 2003 (Exhibit US-132)

12. The current high cotton prices and market expectations of continued high prices are crucially
relevant because, as mentioned, marketing loan pa yments will not be made if cotton prices are above
the loan rate of 52 cents per pound and, further, co unter-cyclical payments will not be made if the
season average farm price is above 65.73 cents per pound (the target price of 72.5 cents minus the
direct payment rate of 6.67 cents). The weighted average farm price for August-November was 62.4
cents per pound, as reported by USDA on 11 January 2004.7

13. Without even referencing the US critique of the modelling used by Brazil with respect to the
challenged US measures, this evidence relating to pr ices indicates that Brazil’s economic analysis is
founded on price projections that are almost 40 per cent below actual prices; thus, the economic
analysis put forward by Brazil does not support a findi ng of threat of serious prejudice. Furthermore,
we recall that Brazil has argued that the 2002 Act increased the support provided to upland cotton
producers, threatening continued high levels of production, exports, and pri ce suppression. And yet,
US acreage declined in both MY2002 and MY2003, a nd prices have steadily recovered from their
MY2001-2002 trough to five-year highs. Market par ticipants expect those high prices to continue.
Thus, the evidence does not support the view that the effects of challenged US subsidies are
significant price suppression.

6 See Brazil’s Further Submission, Annex I, table 1.4.
7 World Agricultural Supply and Demand Estimates, USDA, WAOB, WASDE-406, 11 January 2004.

B. ECONOMIC DATA

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

14. In its reply, Brazil makes several unfounded accu sations and misrepresentations of fact. In
this comment, the United States attempts to disentangle fact from fiction for the Panel.

15. Brazil asserts that through its December 18, 2003 letter, "the United States has finally
confirmed – after asserting the contrary repeatedly to Brazil and then to the Panel – that it has
collected complete planted acreage, contract base acreage, contract yields, and even payment data that
would allow it to calculate with relative precision th e amount of direct and counter-cyclical payments
made to current producers of upla nd cotton in MY 2002." There are several errors in this passage.
First, the United States recalls that it was the Un ited States itself at the second session of the first
panel meeting that brought to the Panel’s and Br azil’s attention the planting reporting requirement
that was introduced by Section 1105 of the 2002 Act (7 USC 7915). Thus, the United States did not
"finally confirm[]" the maintenance of planting data on 18 December.

16. Second, the United States never asserted th at it did not have contract base acreage and
contract yield information. The United States expl ained that it did not track decoupled payments by
recipients’ production and thus did not maintain information on the payments made for upland cotton
base acres to upland cotton producers. That statem ent remains true today. In fact, while Brazil’s
statement asserts that "planted acreage, contract b ase acreage, contract yields, and . . . payment data"
can be used to calculate the amount of decoupled payments "made to current producers of upland
cotton," this information would allow the calculati on of decoupled payments made to farms that
reported planting upland cotton. As stated, the United States does not collect information relating to
whether a farm produces upland cotton. Therefore, the data referenced by Brazil would allow
calculation of payments made to upland cotton "pla nters," and in fact the United States has provided
the contract data to perform this calculation on 18 and 19 December 2003.

17. Brazil claims that it "cannot calculate dir ect payment and counter-cyclical payment figures"
because it was not provided (ignoring that Brazil bears the burden of proof in this dispute)
"farm-specific identifying numbe rs, thus rendering any matching of farm-level information on
contract payments with information on farm-speci fic plantings impossible." This statement was
indecipherable to the United States until the Pane l insisted that Brazil explain its proposed
methodology for calculating those payments in Qu estion 258. The United States comments on this
proposed methodology, which lacks any basis in the Subsidies Agreement, any WTO agreement, or in
economic logic, in its comment on Brazil’s answer to Question 258.

18. It is, of course, ironic to read Brazil’ s suggestion that only the "unique farm number (or a
substitute number protecting the a lleged confidentiality of farmers) would allow any matching" since
the United States expressly asked Br azil at the second panel meeting whether it could act to protect
the privacy interests of US cotton producers , perhaps by obscuring farm numbers. The Panel
Chairman also inquired of Brazil whether obscuring the farm numbers would be acceptable, but Brazil
refused to agree to any such step, insisting that all of the information, including farm numbers, be
provided as set out in Exhibit BRA-369 . Thus, it is Brazil that refused to allow "a substitute number
protecting the . . . confidentiality of farmers" – or any other step to maintain farmer confidentiality –
to be used. The United States again notes Brazil’s reference to "a private US citizen making a simple
FOIA request," who was in fact a member of Brazil’s delegation, and reminds Brazil for the third time
of the US request for assistance in curing the breach of privacy that resulted from providing that
planting information.

19. We also note that in Brazil’s response, Brazil references several payments that were not
included in the Panel’s question, namely, crop insu rance payments, cottonseed payments, and "other
payments." Brazil does not state for what year these payments apply.

20. With regards to crop insurance payments
8, we note that the data provided by Brazil for crop
insurance net indemnities with respect to upland cotton in 2002 is incorrect. 9 However, the only crop
insurance payments within the scope of Brazil’ s panel request are payments to "upland cotton
producers, users, and exporters." 10 Thus, Brazil is once again attemp ting to broaden the scope of this
dispute to measures beyond its panel request, and the Panel should reject that effort.

21. With respect to cottonseed payments, the Un ited States recalls the panel’s communication of
8 December 2003 in which it stated that "[t]he Pane l intends to rule that cottonseed payments made
under the Agricultural Assistance Act of 2003 are not w ithin its terms of reference." Thus, Brazil’s
citation to the amount of cottonseed payments made under this Act are not only outside the scope of
the question but also outside the scope of this di spute. With respect to "other payments," the
United States recalls its preliminary ruling request that these payments are not with the Panel’s terms
of reference.11

22. With respect to direct and counter-cycli cal payments, Brazil continues to put forward
erroneous figures before the Panel. Brazil fails to make any adjustment in the amount of payment to
reflect the proportion of cotton planted acreage that is rented or owned. However, those "subsidies" to
cotton producers that are the subject of Brazil’s panel request must "benefit" producers.12 Brazil itself
has conceded that land rental ra tes as of marketing year 1997 – that is, one year after introduction of
the decoupled production flexibility contract payments – reflect the capture of more than one-third of
the subsidy by landowners. Finally, Brazil has not allocated these decoupled payments that are not
tied to the production, use, or sale of any product ac ross the total value of the recipient’s production,
the only allocation methodology set out in the Subsid ies Agreement and, in fact, applied by Brazil
itself for countervailing duty purposes.13

8 We also note that Brazil has insi sted that crop insurance premium payments are "specific" subsidies
within the meaning of Article 2 of the Subsidies Agreement because th e crop insurance statute precludes
coverage of livestock. See, e.g., Brazil’s Further Rebuttal Submission, para. 163. At one time there was such an
exclusion, but as we have previously pointed out, it was removed. In fact, Brazil simply and repeatedly
misquotes its own exhibit, which does not contain the "excluding livestock" language of the old statute. See
Exhibit BRA-30, at 1-44 to 1-45 (extending coverage to enumerated products and "any other agricultural
commodity, excluding stored grain, determined by the Bo ard, or any one or more of such commodities, as the
context may indicate").
9 Total indemnity payments paid to upland cotton producers in 2002 was $400,686,555. Total upland
cotton premiums were $317,610,012 of which the government provided premium subsidies of $194,111,641 and
$123,498,371 was paid by producers. Thus, net indemnities (that is, indemnities minus producer-paid
premiums) paid to upland cotton producers in 2002 was $277,188,184 ($400,686,555 minus $123,498,371), not
$298.3 million as reported by Brazil.
10 See WT/DS267/7, at 1 ("The measures that are th e subject of this request are prohibited and
actionable subsidies provided to US producers, users and/or exporters of upland cotton.").
11 US Further Written Submi ssion, Section II. The United States al so recalls its point above, namely
Brazil has conceded the correctness of the US view that this Panel’s terms of reference cannot expand beyond
their scope of the date of panel establishment. In its answer to the Panel’s Question 247, Brazil states: "Thus,
the ‘matter’ before the Panel has not changed (and cannot) since the establishment of the Panel." Brazil should
also have acknowledged that, despite this assurance, it has in fact attempted to change the matter before the
Panel.
12 See Panel Report, United States – Imposition of Countervailing Duties on Certain Hot-Rolled Lead
and Bismuth Carbon Steel Products Originating in the United Kingdom , WT/DS138/R, adopted 7 June 2000,
paras. 6.65 and 6.66 (quoting and agreeing with Canada – Aircraft panel: "’A "benefit" does not exist in the
abstract, but must be received and enjo yed by a beneficiary or a recipient. Logically, a "benefit" can be said to
arise only if a person . . . has in fact received something.’").
13 See US Comment on Brazil’s Answer to Question 258 from the Panel.

23. With respect to the export credit guarantee programmes, Brazil "estimates the amount of
payments using the ‘guaranteed loan subsidy’ estimate FY 2003." 14 This figure is of course not a
payment at all, but merely a prospective budgetary estimate calculated under the Federal Credit
Reform Act of 1990. As the United States noted in its answer, for all cotton for fiscal year 2003
(October 2002 - September 2003), outstanding clai ms are $280,898, less than one-tenth of one per
cent of the value of registrations – further evid ence, specific to cotton export credit guarantees in
particular, that premiums are more than sufficient to cover operating costs and losses.

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

24. With respect to the explanations of Brazil of the A-Index, we note that the A-Index is not a
price for a "world market" for purposes of Article 6.3(c). As Brazil’s answer puts it, the A-Index is an
"average price," a "composite of quotations from the major producing regions around the world, much
like a poll" (para. 11). The A-Index is also not a "price" in a "world market"; it is a Northern
Europe-delivered price quote. We note the statemen t in paragraph 16 of Brazil’s answer that "the
average A-index price" in the week of export "would only be an estimate and would not necessarily
reflect the price received by the US producers, or the prices received by the exporters." Finally, we
note that there are 16 different quotes, and the A-Index consists of the average of the lowest 5. The
fact that the prices differ also indicates that there is not one "world market" price. There is also a
B-Index composed of upland cotton price quotes of lower quality growths, again suggesting that the
A-Index is not a "world market price."

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

25. Brazil asserts that US producers are largel y unresponsive to market price movements and
cites a chart provided in their oral statement of December 2 that showed cotton future prices and
planted cotton acreage. However, using a simple cotton price is inappropriate to measure price
responsiveness. Prices for cottons alternatives al so fell from 1999 to 2002. A farmer cannot just
consider cotton prices but must instead consider the opportunity cost at the time of planting.
Operating costs being covered (as the United States has already shown the farmer expected to do in
each year), he must decide which crop to plant, an d this requires looking at the cotton price relative to
alternatives. In fact, this is the approach taken by FAPRI and Dr. Sumner in considering net returns
of cotton versus other crops.
15

26. When one considers movements of cotton fu tures versus the price of a substitute like
soybeans, a far different picture emerges than the one promoted by Brazil in its response to question
200. The graph below uses the same planted area numbers and time period as Brazil. It shows
planted area is price responsive when judged against the more appropriate ratio of cotton to soybeans
harvest season futures prices at the time of planting.16

27. In the US Comments Concerning Brazil’s Econometric Model , we point out that the
correlation between planted acreage and the ratio of cotton futures to soybean futures is 0.69 over the
1996 to 2002 period. This compares to a correlati on of 0.40 for lagged prices to planted acreage, and
a negative correlation using Dr. Sumner’s expected net return calculation and planted acreage. Thus,

14 Brazil’s Answer to Question 196 from the Panel, para. 9.
15 Indeed, our objections to their approach focuses on the use of lagged prices rather than futures prices
as a proxy for producer price expectations.
16 The cotton-soybeans futures price ratio is drawn from the US answer to question 175 from the Panel,
paragraph 118.

in contrast to statements by Brazil that futur es prices are poor predictors of planted acreage, the
correlation data suggest that the futures price ratio s are better predictors of planted acreage than the
arbitrary net return calculations as constructed by Dr. Sumner.

28. In conclusion, the United States has dem onstrated that because the harvest season cotton
futures price at planting was above the marketing loan rate (in MY99-01), farmers were planting for
the market, not the loan rate. But it is simplistic for Brazil to put compare cotton plantings to futures
and judge US farmers not to be price responsive. The United States has never claimed (nor would it)
that cotton futures are the only variable that matters for purposes of planting decisions. The
correlation data on cotton planted acres to the cott on / soybeans futures ratio shows that competing
crops must be factored into any planted acreage analysis. Thus, if Brazil had been interested in
presenting an accurate analysis to the Panel, it coul d have presented such data, or even incorporated
alternative crops besides soy from each relevant gr owing region. Brazil preferred to put forward an
analysis that could only serve to obscure the issue.

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

29. As was pointed out in the US response to qu estion 201, cotton producers’ use of futures and
option markets is high relative to other crops. Based on survey data from the 1996 USDA Agricultural
Resource Management Study, it is estimated that between 35 and 57 per cent of cotton farmers used a
hedging instrument in 1996. (The ranges reflect a 95 per cent confidence interval.) In addition, an
estimated 63 to 89 per cent of cotton farms used cash forward contracts in 1996.
17 These survey
results suggest that even seven years ago a larg e proportion of cotton farmers either directly or
indirectly priced their cotton off of organized futures and options markets.

30. Moreover, futures markets provide producers information regarding the future price outlook
even if they do not hedge directly on the exchange . For example, the 16 January 2004 newsletter by
cotton market analyst O.A.. Cleveland states:

With December [futures contract price] exhibiting signals of breaking away from old
crop prices, hedging of new crop has increased . Now above 69 cents, December will
need to move higher to prevent acreage loss to both soybeans and corn. A
soybean/cotton ratio of 9.5 to 1 is enough to begin moving some land from cotton to
soybeans (November soybeans to December cotton). A 10 to 1 ratio accelerates the
switch. A September corn ratio of 4 to 1 over December cotton takes more cotton
acreage. With both management and capital risk greatly reduced for both of these
crops, relative to cotton, significant cotton acreage can be loss if cotton becomes less
favourable. With world cotton carryover at a decade low, the new crop December
must maintain its tie to the grain/oilseed complex instead of the old crop cotton
contracts.
18
Note that Dr. Cleveland refers not just to cotton fu tures but to the cotton to soybean ratio and the ratio
between cotton futures and corn futures. He confir ms not just the importance of cotton futures prices
in guiding cotton planted acreage decisions but, more significantly, the relationship of cotton futures
prices to the futures prices of competing crops like soybeans and corn.

17 A forward contract is defined as a cash market tran saction in which two parties agree to buy or sell a
commodity or asset under agreed-upon conditions. For example, a farmer agrees sell, and a ginner or
warehouse agrees to buy, cotton at a specific future time for an agreed-upon price or on the basis of an agreed
on pricing mechanism (such as a futures or options market). See Exhibit US-121, page 22.
18 O.A. Cleveland Newsletter, January 16, 2004. Exhibit US-133.

31. Brazil has presented no evidence that any farmer ever planted based on "lagged prices" (or its
"estimated adjusted world price"). Despite Brazil’ s criticisms of looking at December futures prices
to gauge producer price expectations, farm publica tions are full of references (like that by O.A.
Cleveland, above) to the use of December futur es for upland cotton planting and hedging purposes.
Consider USDA’s "Weekly Cotton Market Review" of 9 January 2004.19 It reported:

• "Most producers [in southeastern markets] have turned their focus to marketing the
remainder of their 2003 crop and to making initial preparations for planting the 2004
crop. Some producers inquired about fo rward contracts on 2004-crop cotton . These
inquiries were preliminary and no cotton was booked. Merchants offered contracts in
Georgia at 350 to 400 points off NY December futures" (emphasis added).

Two weeks later, the most recent "Weekly Cotton Market Review" reported:
20

• "Producers in Georgia booked a very light volume of 2004-crop cotton at 275 to 300 basis
points off NY December futures."

• "Merchants continued to offer contracts in Georgia at 300 to 375 points off NY December
futures."

• "Contracts in North Carolina were o ffered at 450 to 475 points off NY December
futures."

• "Merchants offered forward contracts at 350 points off NY December futures [in south
central markets]."

That is, as the United States has explained, produ cers are beginning to make planting decisions for
MY2004 and are using the December futures price as a guide to their expected returns from planting
cotton. A farmer in Georgia can currently lock in a price for the 2004 crop of approximately 65-66
cents per pound (27 Jan. 2004 December futures price of 69.05 cents per pound less 300 to 375
points), and farmers have begun to do just that . Thus, Brazil asserts that the US methodology of
looking to the December futures price to gauge producer price expectations is far less valid than using
the (outdated November 2002) FAPRI baseline, but cotton producers
 disagree. In the final analysis, it
is producer decisions – and not FAPRI’s nor Dr. Sumner’s decision to use "lagged prices" – that must
drive the Panel’s analysis of the effect of removal of marketing loan payments.
21

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

32. The United States agrees with Brazil’s general characterization of FAPRI as a preeminent
research institution focused on providing comprehensive analysis of the food and agricultural system.
As noted by Brazil in its answer, the United States takes issue with the modifications of the FAPRI
model by Dr. Sumner. These differences are outlined in detail in the US Comments Concerning

19 USDA, Weekly Cotton Market Review at 1-2 (January 9, 2004) (Exhibit US-139)
20 USDA, Weekly Cotton Market Review at 1-2 (Jan. 23, 2004) (Exhibit US-140).
21 We also note an argument by Brazil in paragraph 19 that farmers generate a combined revenue from
the market and the marketing loan pr ogram that exceeds 52 cents per pound . Brazil’s analysis is once again
partial. The premise is that a farm er is able to sell when prices have increased relative to the price on the date
they claimed the marketing loan gain. However, in reality , there is no guarantee that prices will have increased.
It is equally possible that prices will fall below the price on the date when the claim was made. As Exhibit
US-126 demonstrates, the margin fluctuates from month to month, with the value in several months even
negative, implying that a farmer that did not sell his cr op at the time he received the marketing loan payment
earned less than the marketing loan rate.

Brazil’s Econometric Model of 22 December 2003. Chief among these differences is that manner in
which Dr. Sumner modelled the effects direct a nd counter-cyclical payments. FAPRI allows for
modest effects of direct payments on all crop acreage. Their result is consistent with the literature on
decoupled payments, showing no or minimal effects on production.
22 By contrast, Dr. Sumner has
included an arbitrary and completely ad hoc formulation that exaggerates the effects of these
payments on acreage decisions. As compared to FAPRI’s modelling, Dr. Sumner assumes and then
finds effects some 50 times larger.23

33. The differences between the FAPRI baseline a nd Dr. Sumner’s model were highlighted as
well by Dr. Bruce Babcock, the economist who assisted Dr. Sumner in preparing the Annex I results.
In a letter to Dr. Glauber, Dr. Babcock states, th at the analysis of Dr. Sumner was "in no way an
official FAPRI analysis and if FAPRI had done the analysis, FAPRI would have come up with
different estimates of the effects of US cotto n subsidies on world prices." Thus, to cloak
Dr. Sumner’s analysis in the reputation of "the award-winning FAPRI model" is grossly misleading.
The differences between FAPRI and the Brazil analysis reflected in Annex I are substantial and, as
detailed in the US Comments of 22 December, lead to the biased results presented by Brazil.

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

34. In this answer on "support to upland cotton," Brazil makes reference to "contract payments
from base acreage other than upland cotton" and the "allocation of these payments".
24 This answer
makes clear that Brazil proposes that such payments with respect to non-upland cotton base acres can
be "support to upland cotton." The United States comments on the methodology proposed by Brazil
for allocating such payments, which lacks any basis in the Subsidies Agreement, any WTO
agreement, or in economic logic, in its comment on Brazil’s answer to Question 258. Here, we take
issue with Brazil’s attempt to amend this Panel’s terms of reference to include such payments, and to
do so at such a late stage in this proceeding.
25

35. Nowhere in Brazil’s consultation request or request for the establishment of this Panel does
Brazil reference these payments under programmes unr elated to upland cotton. Accordingly these
payments are not within this Panel’s terms of refe rence. Moreover, Brazil’ s attempt to raise these
payments at the very end of this proceeding depr ives the United States of fundamental rights of due
process. The United States, as well as all WTO Members, had a right, as of the date of Brazil’s
request for the establishment of this Panel, to know the " specific" measures at issue in this dispute.
26
Brazil cannot make vague allegations of "support" and then change at will the measures that it is
challenging as its own position changes and to suit its convenience.

36. Brazil’s own submissions to this Panel de monstrate that Brazil did not consider these
payments to be measures within the Panel’s terms of reference. In particular, the measures Brazil has
alleged are "support to upland cotton" govern both Brazil’s serious prejudice claims as well as its
Peace Clause analysis. That is , the same measures that are "support for upland cotton" under Brazil’s
subsidies claims must be the me asures that Brazil claims are "support to a specific commodity" for
purposes of the analysis under Article 13(b)(ii) of the support that current measures grant versus the
support decided during the 1992 marketing year. However, by seeking to allocate to upland cotton

22 See US Further Rebuttal Submission, paras. 81-82 (reviewing literature, which finds less than one
per cent effect on production, even making unrealistic assumptions on wealth effects).
23 See US Comments on Brazil’s Economic Model, para. 20.
24 Brazil’s Answer to Question 204, para. 27.
25 As previously noted, Brazil’s answers to the Panel’s questions contain an important concession: in
its answer to the Panel’s Question 247, Brazil states: "Thus, the ‘matter’ before the Panel has not changed (and
cannot) since the establishment of the Panel."
26 See DSU, Article 6.2.

"contract payments from base acreage other than upland cotton," Brazil directly contradicts the
arguments it set forth in the Peace Clause phase of this dispute. For example, in response to
Question 41 from the Panel, Brazil wrote:

The only US domestic support measures that Br azil is aware of that would meet the
test of being ‘support to upland cotton’ are those that it listed for purposes of
calculating the level of Peace Clause support in its First Written Submission. In the
view of Brazil, these non-green box domestic support measures are the measures that
constitute "support to" upland cotton for the purpose of Article 13(b).
27

The footnote to the first quoted sentence cited pa ragraphs 144, 148, and 149 of Brazil’s first written
submission. These paragraphs, in turn, contain the tables in which calculated that budgetary outlays it
alleged were support to upland cotton; crucially , these tables list production flexibility contract
payments, market loss assistance payments, dir ect payments, and counter-cyclical payments for
upland cotton base acres only.28

37. Similarly, in response to Question 19, in wh ich the Panel asked Brazil to identify "the
measures . . . in respect of which Brazil seeks relief," Brazil wrote:

The first type of domestic support "measure" is the payment of subsidies for the
production and use of upland cotton. . . . . Brazil has tabulated the different types of
payments (i.e., the measures) made under these legal instruments in paragraphs 146-
149 of its First Submission.
29
Again, the referenced paragraphs list production flex ibility contract payments, market loss assistance
payments, direct payments, and counter-cyclical payments for upland cotton base acres only.30

38. Further, in explaining to the Panel why it did not allocate any portion of other payments
notified by the United States to the WTO as non-product-specific, "some of which" (in the Panel’s
words) "presumably deliver support to upland co tton (e.g. state credit programmes, irrigation
subsidies etc)," Brazil explained:

None[] of these other measures notified by the United States as non-product specific
had any upland cotton specific link in terms of historic, updated, or present upland
cotton acreage, present upland cotton production or prices, or upland cotton groups of
insurance policies or any other specific upland cotton provisions.
31

Of course, the same analysis applies to decoupled income support payments made with respect to base
acres for wheat, corn, soy, oats, sorghum, barley, fl ax, sunflower, safflower, rice, rapeseed, mustard,
canola, crambe, and sesame. None of these payments has any "upland cotton specific" link in terms of
upland cotton acreage, production, prices, or "any other specific upland cotton provisions." Indeed,
these other payments are related to acreage historically planted to these other crops and may be (in the
case of counter-cyclical payments) related to current prices of these other crops, not upland cotton. It
is for that reason, presumably, that Brazil did not identify any of these payments among the measures
it challenged.

39. Indeed, an important element in Brazil’s argument that the decoupled income support
measures it challenged were not non-product-specific – and thus constitute "support to a specific

27 Brazil’s Answer to Question 41 from the Panel, para. 58 (footnote omitted) (italics added).
28 See Brazil’s First Written Submission, paras. 144, 148, 149.
29 Brazil’s Answer to Question 19 from the Panel, para. 15.
30 See Brazil’s First Written Submission, paras. 146-49.
31 Brazil’s Answer to Question 41 from the Panel, para. 57 (italics added).

commodity" – was that the challenged measures contained upland cotton-specific parameters. For
example, with respect to counter-cyclical payments, Brazil wrote:

For the purpose of calculating AMS, counter-cyclical payments (CCP) are
‘product-specific’ support for two main reasons: (i) they are not "support provided
in favour of agricultural producers in general," and (ii) they are directly linked to
upland cotton-specific parameters (current prices and historical acreage and
yield).
32

Brazil similarly argued that other d ecoupled income support measures were product-specific support
in favour of upland cotton because they allegedly contain upland cotton-specific parameters.33

40. We also note that Brazil’s request to the Panel to make rulings and recommendations does not
reference any decoupled payments made with respec t to non-upland cotton base acres. In fact, Brazil
specifically stated that its "as such" challenge to "Sections of the 2002 FSRI Act and the referenced
regulations thereto," including provisions relating to counter-cyclical payments and direct payments,
were only made "to the extent that they relate to upland cotton."34

41. In sum, Brazil’s arguments on the Peace Clause explicitly limite d its claims with respect to
decoupled income support measures to payments made with respect to upland cotton base acres. In
fact, Brazil relied on the notion that such measures contained "upland cotton-specific" parameters to
support its argument that those measures were "support to upland cotton" rather than
non-product-specific support.

42. Under its serious prejudice claims, however , Brazil now seeks to expand the challenged
measures to include decoupled income support measures with respect to non-upland cotton base
acres
35, despite repeatedly arguing that the challenged US subsidies provided $12.9 billion in support
over marketing years 1999-2002, a figure based on payments made under specific programmes,
including decoupled income support with respect to upland cotton base acres only. 36 Decoupled
payments made with respect to non-upland cotton base acres would not be within the terms of
reference of this dispute; Brazil as complaini ng party cannot unilaterally expand the terms of
reference at the conclusion of a dispute and claim that additional programmes, other than those at
issue throughout the dispute, are now also challenged measures providing "subsidies to upland
cotton
."37

32 Brazil’s Answer to Question 44 from the Panel, para. 61 (italics added).
33 See, e.g. , Brazil’s First Written Submission, para. 60 ("Between MY 1998-2001, upland cotton
producers thereby received an additional amount of mo ney, which was calculated based on their respective
share of total upland cotton base times the amount of budgetary outlays allocated for upland cotton.").
34 Brazil’s Further Submission, para. 471(vii).
35 The United States notes that Brazil does not appear to seriously believe that these measures are
within the Panel’s terms of reference since Brazil has not presented the 1992 levels of support that would
include these additional payments, which Brazil would have had to do to make the Peace Clause comparison.
36 We note that Brazil seeks to have it both ways. That is, it now argues that decoupled payments made
with respect to non-upland cotton base acres can be allo cated to, and become support to, upland cotton, yet at
the same time, when it suits its purposes, it continues to argue that decoupled payments are support to upland
cotton because of their alleged upland cotton-specific parameters. See, e.g. , Brazil ’s Opening Statement at
Second Panel Meeting, para. 60 ("[T]he 72.4 cent target price triggers CCP payments when cotton prices are
lower – not corn, or soybeans prices – but cotton.").
37 Indeed, although Brazil attempted to argue at the second panel meeting that it sought information on
payments made with respect to non-upland cotton base acres through the Annex V procedure that the DSB did
not agree to initiate, Brazil itself stated in its fi rst written submission that its Annex V request was limited to
upland cotton base acres : "Brazil requested the United States during the Annex V procedure to provide
information on the amount of the total upland cotton base acreage and yield under the CCP (and DP)
program." Brazil’s First Written Submission, para. 68 (italics added). If so, this would be consistent with

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

43. We note that Brazil acknowledges that a comparison of "planted to planted" area would be
best. Harvested area can only be used as a proxy fo r planted area, and as indicated by the US data in
the US Opening Statement of 2 December 2003, th e two measures can diverge significantly. This
divergence is especially important to note in light of Brazil’s answer to Panel Question 210.

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

44. After noting in its response that consistent world-wide planting data for upland cotton are not
available, Brazil continues to insist that world-wi de harvested area data are a good proxy for planted
area. Brazil offers a theoretical justification fo r using harvested area as a proxy for planted area
(annual abandonment will average out over all cott on producing countries and be relatively stable
over time). But Brazil has no empirical evidence to support the theory and continues to mix "apples
and oranges" in its charts. For example, we note the chart at paragraph 33 of Brazil’s answers is
misleading: it is not a chart of "Per cent Change in Planted Acres" as labelled. Rather, it compares
changes in US planted area for upland cotton with changes in non-US harvested area. This
comparison is not appropriate.

45. As noted in the US answers to Question 209 from the Panel, US planted and harvested area
generally move in the same direction but occasiona lly move in opposite directions. We note that,
once again, Brazil has relied on a period that begins with marketing year 1998 to present a biased
analysis. The period 1998 - 2000 that Brazil focuses on in para. 33 was an unusual period for US
cotton because of weather. As noted in the US Opening Statement of December 2 (para. 6),
abandonment was especially high in 1998 and area rebounded sharply in 1999. The year 2000 was a
year when US planted and harvested area moved in opposite directions.

US Planted and Harvested Upland Cotton Acres (1,000 acres)

Crop year Planted acres Harvested acres
1998 13,064 10,449
1999 14,584 13,138
2000 15,347 12,884

 Source: USDA, National Agricultural Statistics Service, Acreage, various issues, as submitted
in the US Opening Statement of December 2 (para. 6).

46. Because foreign planted area data are not av ailable, it is not possible to observe whether
foreign planted and harvested area similarly diverged in these years. Therefore, using US planted area
and foreign harvested area is a misleading comp arison. Brazil uses its mislabelled chart to
simplistically conclude that whenever US plante d area moves in a divergent direction from foreign
harvested area, the only reason must be because US subsidies insulate US upland cotton producers.
That conclusion ignores any other possible factors that may affect area planted – for example, weather
or competing crop prices – and is not supported by the data.

Brazil ’s Peace Clause argumentation in this dispute th at only payments on upland cotton base acres could be
product-specific support for upland cotton.

47. In para. 34, Brazil again complains that the US chart in the US Opening Statement of 2 Dec.
(para. 6) is inappropriate. Brazil has it completely backwards. The US chart is the only appropriate
comparison. We agree that a comparison of plante d area data would be the best method, but the data
are not available. Therefore, Brazil’s conclusions based on a "planted versus harvested" comparison
are not valid.

48. We again present a comparison of changes in US harvested area for upland cotton with
changes in harvested area for the rest of the world. (These data are found in Exhibit US-63, but 2002
data are updated and estimated data for 2003-04 are in cluded.) We note again the anomalous years of
1998 and 1999 for the US, where harvested area wa s sharply below planted area in 1998 because of
severe adverse weather but then planted (and harv ested) area increased sharply in 1999 in reaction
both to the previous year’s high abandonment and to favourable prices relative to competing crops.
For the years 2000 - 2002 harvested area in the US and the rest of the world moved in tandem –
declining in 2000, rising in 2001, and declining again in 2002. Brazil’s claim of "distinctly different
reactions"
38 are not supported by the data.

49. Brazil further claims that US area should ha ve declined during the period 1999 - 2002. In
fact, it is hard to discern any trend in US (or fore ign) harvested area during this period. But since
1999, an admitted high year because of unique weather factors and favourable cotton prices relative to
competing crops, US upland cotton area has genera lly declined. The new data provided for 2003
reinforce this conclusion: US area declined while the rest of the world, including Brazil, increased.

Harvested Area for Upland Cotton (1,000 hectares and per cent change from previous year)

Crop year 1998 1999 2000 2001 2002 2003(p)

US area 4,324 5,433 5,282 5,596 5,030 4,881
Foreign area 28,559 26,955 26,904 28,308 25,470 28,090
Brazil area 685 752 853 748 735 940

US (% change) -20.3 25.6 -2.8 5.9 -10.1 -3.0
Foreign (% change) 0.5 -5.6 -0.2 5.2 -9.9 10.3
Brazil (% change) -10.5 9.8 13.4 -12.3 -1.7 27.9

 Sources: USDA, Foreign Agricultural Service, Production, Supply, and Distribution Database; World
Agricultural Supply and Demand Estimates, World Agri cultural Outlook Board, USDA, 11 January 2004.
Exhibit US-63, with 2003 added.

50. The data show that US harvested cotton area m oves consistently with the rest of the world,
when there are not abnormal weather events. Braz il conceded as much (in para. 36) that US acreage
movements were relatively consistent with the rest of the world. How could that be if US producers
are insulated from price movements because of subs idies? In marketing year 2003, US cotton area
declined 3 per cent while the rest of the world rose 10 per cent. These divergent results again suggest
that cotton area around the world is affected by di fferent factors and these need to be accounted for
carefully. But a decline in US harvested acreage in marketi ng year 2003, following a decline in
marketing year 2002, is certainly not consistent w ith Brazil’s theory that the United States increased
support in the 2002 Act and that these "higher" paym ents will result in US overproduction of cotton,
threatening to cause serious prejudice.

38 Brazil’s Answer to Question 210 from the Panel, para. 35.

51. In discussing how producers react to price signa ls, we would note recent trends in Brazil’s
cotton area. In MY2002, Brazil’s harvested area de clined about 2 per cent while the US and foreign
cotton area dropped 10 per cent. In MY2003, Brazil’ s cotton area is estimated to have increased
28 per cent while US cotton area fell 3 per cent. In fact , since the collapse in Brazil’s cotton area in
1996, Brazil’s cotton area has shown a much more cons istent upward trend than US or foreign cotton
area. We also note that in marketing years 1998, 1999, 2000 and 2001, Brazil’s harvested area moved
in the opposite direction from non-US cotton area. Those different responses, in absolute values,
ranged from 11 per cent in MY1998 to 17.5 per cent in MY2001. In MY2002, Brazil’s harvested area
declined much less than the (non-US) rest of the world (1.7 per cent versus 9.9 per cent), and in
MY2003 Brazil’s harvested area is forecast to expand by far more than the (non-US) rest of the world
(27.9 per cent versus 10.3 per cent). Thus, it woul d appear that, in terms of changes in harvested
acres, Brazil deviates far more from the non-US rest of the world than does the United States.

52. Finally, in paragraph 35, even when Brazil’ s misleading data do show a consistent decline
between US planted and non-US harvested area, Brazil does not accept that US cotton producers were
responding to market signals. Brazil simply claims that US cotton area should have declined more
than it did.
39

53. Brazil has tried to explai n away similarities in acreage movements by asserting that
Dr. Sumner’s analysis suggests that US cotton acreage should have even been lower. Not only do we
disagree with that analysis, but we note that it fails to explain why US and non-US harvested acreage
moves commensurately from 1997-2002. If US produ cers were insulated from price movements, as
Brazil claims, one would not expect US acreage to be highly correlated with acreage movements in
the rest of the world. In fact, the data suggests the opposite; i.e., that US producers respond in similar
fashion with cotton producers around the world.

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

54. Brazil points out that the statistical estimati on literature in agricultural economics has used a
variety of proxies for anticipated prices and reve nue for the upcoming season. These include rational
expectations in which many sources of information available to decision makers are combined and the
expectations are consistent with the conditional fo recasts of the model. Such models have strong
theoretical grounding but have been impractical in most estimation situations.

55. Models such as used by FAPRI, USDA and the Congressional Budget Office has been
developed not for retrospective analysis but for prospective analysis. If one wants to project out over
a period for which futures prices are not available, it makes sense to rely on lagged prices since the
models will produce prices for a given year that ca n then be used as the price expectation for the
following year.

39 In paragraph 35, Brazil again tries to buttress its claims by arguing that US exports increased during
a period when the US dollar was appreciating in value. The exchange rate analysis put forward by Brazil is
incomplete and inadequate. Brazil has ignored the fact that cotton is a raw material for apparel and textile
products. The increase in foreign demand for raw cotton dr ove an increase in US expor ts. For example, with a
strong US dollar, imported cotton textile and apparel b ecame relatively cheaper, thereby increasing demand for
such products. Increased textile and apparel demand in the United States from the higher dollar resulted in
increased demand for raw cotton by foreign textile and ap parel manufacturers. Foreign use of cotton increased
from 80.8 million bales in MY 1999 to 91 million bales in MY 2002. Foreign production, however, remained
basically the same, 70.5 million bales in MY 1999 to 70.8 million bales in MY2002. Therefore, US exports
were responding to demand that was not met by foreign production. Source: Cotton and Wool Situation and
Outlook Yearbook, Economic Research Service, USDA, November 2003, pg. 32.

56. Nonetheless, the use of lagged prices may resu lt in biased results. Over the long term, where
there is reasonable stability in markets, lagged prices function adequately as a proxy for price
expectations. However, in those years, as in th e period Brazil has pointed to here, when unexpected
exogenous shocks such as China dumping stocks (late 1990s) and unexpected yields worldwide due to
good weather conditions such as 2001, lagged prices ar e poor predictors of expected prices. Future
prices, by contrast, are more efficient because th ey are based on more current information.
Moreover, as we have argued elsewhere (see comments to question 200 and 201 above), producers
base acreage decisions on futures markets. Where futures prices diverge from lagged prices, there is
reason to believe that planted acreage decisions w ill diverge from forecast acreage from models based
on lagged prices.

57. For example, during marketing years 2000, 200 1, 2002, and 2003, lagged prices significantly
understate the harvest season prices expected by producer s as seen in the futures prices at the time of
planting. The use of lagged prices thereby inflate the e ffect of the marketing loan rate. In fact, those
lagged prices would have to be increased by 8-25 per cent, depending on the year, to equal the harvest
season price actually expected by producers as indicated by the futures price.
40

• For the period MY 1999-2003, when futur es prices are used to gauge producer price
expectations, only in MY 2002 were expected cash prices below the marketing loan rate.

• However, over that same period, when lagge d prices are used as expected prices, the loan
rate is higher than the expected price in every year over this period except MY1999.

Thus, it is a significant error for Brazil and Dr. Su mner to use lagged prices instead of the futures
prices Brazil’s own expert explained to be the more accurate gauge of farmers’ price expectations. In
fact, despite the hundreds of exhibits it has filed, Brazil has provided not one single piece of evidence
that any farmers use or have ever used lagged prices to make planting decisions.

58. While the United States would agree with Braz il that it is impossible to know precisely what
individual farmers’ price expectations are, the United States (and Brazil’s expert, Mr. McDonald)
believe that futures prices provide the most current expectations of market participants. As such,
futures prices incorporate the views of numerous market participants, including producers, regarding
expectations of future market conditions. The United States disagrees with the approach used by
Brazil in its analysis to rely solely on lagged pri ces and ignore information provided by futures prices.
While it may be impractical to include futures pr ices in some models, modelling convenience is no
justification to ignore these objective, market-based price expectations. The Panel cannot rely on
Brazil’s economic analysis that uses a proxy for expected prices that would have to be increased by up
to 25 per cent to accurately reflect futures prices, the only objective data on the record reflecting
actual price expectations of market participants. The biased results from using lagged prices do not
assist the Panel in making an objective assessment of what is the effect of the US marketing loan
programme.

59. Brazil ignores the fact that expected cash pri ces based on futures prices were above the loan
rate from MY1999-2001, whereas the lagged price was be low the loan rate for 2000-2002. That is,
withdrawal of the marketing loan would not ha ve greater acreage impacts because producers are
planting for market prices, not loan rate.

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

40 US Further Rebuttal Submission, paras. 164-65.

60. In the US response to question 211 (b), we demonstrate that market returns have exceeded
variable costs for cotton producers in every year but one (2001) over the period of investigation.
Brazil continues to argue that producers require direct payments to cover total costs of production, but
this ignores the evidence that significant acreage is planted to cotton by cotton producers who have no
cotton base acreage and hence are ineligible for cotton direct payments.

61. Brazil claims US producers will continue to plant upland cotton because they face no revenue
risk, but this argument ignores the substantial evid ence on record of huge acreage shifts, both on state
level and within three categories of farms (i.e., t hose who plant cotton with cotton base; those who do
not plant cotton but have cotton base; those farm s who planted cotton but have no cotton base).
Moreover, Brazil ignores the decline in plantings over last two years as other commodities have
become more attractive and expected cotton prices l ess so. Finally, the claim that direct and counter
cyclical payments remove risk of revenue loss r uns contrary to theory on decoupled payments.
Farmers will plant the crop that maximizes their exp ected revenue since the decoupled payment will
be made whether they plant or not.

62. Brazil’s argument that direct payments have significant effects on production runs counter to
the empirical literature as well as running counter to the estimated effects from the FAPRI model that
they purport to use. As pointed out in Dr. Glauber’s literature review 41 and in the US discussion of
direct payments in the US further submission a nd further rebuttal submission, empirical studies
suggest that direct payments have only minimal ef fects on production. Indeed, as pointed out in the
US Comments Concerning Brazil’s Econometric Model of 22 December, the FAPRI baseline model
(that is, the original FAPRI model as distinct fro m the model modified by Dr. Sumner) suggests that
the effect of direct payments on cotton acreage is less than one per cent.

63. It is only when Dr. Sumner explicitly modifies the FAPRI model to include an ad hoc
production specification for direct payments that Brazil obtains the tautological result that direct
payments have a significant effect on cotton production.

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

64. In this answer the matter addressed has to do with base issues and whether farmers could or
could not update their bases in the period that foll owed 1985. In our 22 December response we gave
a full answer on that topic. We would note that in the US answer it is indicated that under the 1990
Act the running base provisions for cotton called for a fi ve-year running average. This was an error.
The running base period was a five-year period for other programme crops, but cotton and rice used a
three-year period.

65. Brazil’s contention that the United States has a base building policy is belied by Brazil’s own
recitation that there has been only one chance to a dd base cost-free (that is, without loss of benefits);
that was in the 2002 Act, in which new crops we re added to the program me mix, necessitating a
recalculation. There is no guarantee nor any reason to believe that this will ever happen again. Brazil
is simply speculating on the likelihood that updating could occur. What could happen in some cases
is programme termination, such as that which occurr ed with the elimination of peanut quotas in the
2002 Act.

66. Brazil further speculates that some farmers could be upset by the new programme because
they did not plant as much as they could have over 1998-2001 and that such farmers will now plant
more than they would otherwise ha ve. Brazil’s speculation is devoid of any facts. In fact, the United
States has pointed to planting data (for example, that submitted on December 18 and 19, 2003) that

41 Exhibit US-23.

demonstrates just the opposite – that is, cotton planti ngs are declining. Further, Brazil’s own scenario
suggests that there was no such understood polic y of base building – otherwise, why would any
farmer be surprised? Farmers will always speculate on the shape of the futu re, but these speculations
(for which Brazil has presented no evidence) cannot drive determinations of consistency or
inconsistency of measures with WTO obligations.

67. Finally, to the extent that Members would wish to limit the ability of Members to choose a
new "defined and fixed base period" for purposes of paragraph 6(a) of Annex 2 to the Agreement on
Agriculture, they may do so as a result of the current Doha negotiations. However, no such limitation
currently appears in the text, and Brazil is acting in contravention of Article 3.2 of the DSU in seeking
to have a panel "add to or diminish" the rights and obligations of Members through dispute settlement.
The United States would also note that Brazil’s r esponse to this question appears to assume that
Members will not accept the US proposal for signi ficant reductions in domestic support under the
Doha negotiations. The overall AMS reduction commi tment would be relevant for the amount of
support, including base acres, that a Member would provide.

D. EXPORT CREDIT GUARANTEES

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

68. Brazil’s response to this question demonstrat es that Brazil continues to ignore the text of
Article 10.2 itself. Article 10.2 is clear that once disciplines are internationally agreed, then Members
undertake "to provide export credits, export cred it guarantees or insurance programmes only in
conformity therewith." No "amendment" to Artic les 9 or 10 would be needed. Article 10.2 has
already specified the obligations once the negotiations are completed. In this sense, Article 10.2 goes
further than, for example, Articles XIII:2 and XV:1 of the GATS, which also call for negotiations to
develop additional disciplines but do not on thei r face already commit Members to abide by the
results of those negotiations.

69. Brazil mischaracterizes the views of the United States with respect to the role of the OECD
and the interpretation of Article 10.2 of the Agreement on Agriculture. Brazil stated that "some
participants [in the Uruguay Round negotiations ] may have been seeking additional obligations
regarding notification, consultation and informa tion exchange, like those included in the OECD
Arrangement on Officially Supported E xport Credits for industrial products".
42 Brazil alluded to no
other potential disciplines available under the OE CD Arrangement. In its Closing Statement of
3 December 2003, the United States responded that Brazil minimizes the significance of Article 10.2
as reflecting:

merely a banal compromise to accommoda te potential ‘additional obligations
regarding notification, consultation, and in formation exchange.’ Brazil implausibly
asserts that the obvious transition between the language of the Draft Final Act that
would have imposed significant substan tive disciplines on export credit guarantees
and the absence of such language in the Ar ticle 10.2 ultimately adopted can be fully
explained as reflecting merely an agreement to work on such pedestrian disciplines as
information exchange".
43
70. Brazil, however, mischaracterizes the US statem ent as a dismissal of other disciplines that
Brazil itself never mentioned: "permitted excep tions, matching of der ogations, non-conforming
non-notified items, and terms granted by countries that are not parties to the OECD Arrangement."44

42 Opening Statement of Brazil, 2 December 2003, para. 74
43 Closing Statement of the United States, 3 December 2003, para. 3.
44 Answers of Brazil (22 December 2003), Question 220, para. 54.

71. Ironically, the United States – not Brazil – h as emphasized the significance of the OECD in
the interpretation of Article 10.2. During the Uruguay Round, WTO Members did not agree on
disciplines to be applicable to export credit gua rantee programmes and therefore opted "to work
toward the development of internationally agreed disciplines," as contemplated by the text of
Article 10.2, in the appropriate forum of the OECD to achieve such disciplines. As the United States
has pointed out, the OECD was the logical forum for such negotiations because of the institutional
experience of that organization in the development of disciplines on officially supported export credits
in the industrial sector.45 Six years of negotiations continued there until 2001.

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

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

72. Brazil quotes selective excerpts of 1998 tes timony of then- General Sales Manager
Christopher Goldthwait but misconstrues them to draw the absurd proposition that export credit
premia cover only administrative expenses of the programme. These excerpts on their face not only
do not say what Brazil claims - they contradict Brazi l’s claim. Both Brazil and the United States have
noted that administrative expenses of the pr ogramme are between $3 and 4 million per year.
46 Premia
collected, of course, consistently far exceed that amount.47

73. Moreover, Mr. Goldthwait’s testimony does not state that premia cover only administrative
expenses (even in the excerpt quoted by Brazil he tw ice says that the money collected is "more" than
the amount of administrative expenses), and the act ual figures for premia reveal the inaccuracy of
Brazil’s claim.

74. The testimony in Exhibit Bra-87 in fact supports the argument of the United States that it
exercises considerable discretion in the administrati on of the programme and that contrary to Brazil’s
repeated mischaracterizations, CCC can "stem[], or otherwise control, the flow of" CCC export credit
guarantees.
48

75. Then Undersecretary August Schumacher stated:

 "On GSM we are continually revising the changing creditworthiness of these
overseas buyers. We are extremely prudent in the use. We follow this very, very

45 US First Written Submission (11 July 2003), paras. 155-160
46 See, e.g., Oral Statement of Brazil (22 July 2003), para. 132.
47 Exhibit US-128.
48 The most recent invocation of Br azil’s misapplied mantra appears in Brazil’s Answer to Additional
Question 257(c) (20 January 2004), para. 38

carefully. Without the [International Monetary Fund], we would be very reluctant to
operate and allocate these GSM programmes as required by the Agricultural Trade
Act of 1978.
"Actual credit packages are subject to intera gency review. Overall, we will continue
to achieve balance between our twin objec tives of promoting US agricultural exports
and operating Federal programmes such as the GSM with fiduciary responsibility to
the taxpayers and to you in Congress."
49
76. Further testimony not quoted by Brazil included the following:

 Congressman Minge:

"I would like to ask if you could explain to us why you feel that this programme is
one that will not expose the American taxpayer or the US Treasury to a loss,
particularly if private sector lenders are competing with the Federal Government for
repayment of their loans and these countries in Southeast Asia find their financial
condition further deteriorates? Is this a risk that we are creating for the US Treasurer,
or is this something you feel we are adequately protected on?"

 Mr. Goldthwait:

"We developed our programme allocations by beginning with a country risk analysis.
It is very much the same sort of analysis that a private bank will do in setting its . . .
confirmation line for transactions with a particular foreign country.
"We . . . evaluate very carefully the financ ial situation of the country and the banks
involved and the letters of credit that we will eventually guarantee in determining
exactly how far further we can go and s till remain prudent with the taxpayers’
money."
 Congressman Minge: "So you do not expect any gr eater exposure to loss here than you have
had historically in the operation of the programme?"

 Mr. Goldthwait: "We do not".
50

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

77. Brazil asserts that "premium rates for the th ree CCC guarantee programmes are not subject to
regular review". 51 This is incorrect. As the United States noted in its response to this question,
premium rates are reviewed annually. They may or may not increase in any given year as a result of
such annual review.

78. To avoid any potential misunderstanding the United States would also point out that the
statutory cap on premia of one per cent applies onl y to GSM-102. Brazil correctly notes this in

49 Exhibit Bra-87, page 10.
50 Id., page. 12.
51 Answers of Brazil to Question 223 of the Panel (22 December 2003), para. 63.

paragraph 66 of its December 22 answ ers, but paragraph 64 could be in terpreted to imply that the cap
similarly applies to GSM-103, which it does not.

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

79. In addition to its own response to this qu estion from the Panel, the United States would
reiterate that the $411 million figure is an estimate and the "results of the reestimate process".
52 In
addition, the $770 million in the ‘subsidy allowance’ is not an uncollectible amount. It is merely a
loan loss allowance based on annual re-estimates reflected in the budget. It is obviously not an
amount deemed uncollectible, because from 2001 to 2002, as reflected in the very next line of the
financial statement, the number itself declined from $1.043 billion to $770 million. 53 Similarly, the
figure applicable to pre-1992 credit guarantees in the column "allowance for uncollectible accounts"
is itself only a prospective allowance, which may or may not ultimately correspond to actual
uncollectability. As with the subsidy allowance noted above, in this case, too, the allowance declined
from 2002 to 2003 by $389 million.54

80. Office of Management and Budget Circ ular A-11 defines "allowance" as follows:

"Allowance means a lump-sum included in the budget to represent certain
transactions that are expected to increase or decrease budget authority, outlays, or
receipts but that are not, for various reasons, reflected in the programme details. For
example, the budget might include an allowance to show the effect on the budget
totals of a proposal that would affect many accounts by relatively small amounts, in
order to avoid unnecessary detail in the presentations for the individual accounts.
The President doesn’t propose that Congress enact an allowance as such, but rather
that it modify specific legislative measur es as necessary to produce the increases or
decreases represented by the allowance."
55
228. What accounting principles should the Pane l use in assessing the long-term operating
costs and losses of these three programmes? For example, if internal US Government
regulations require costs to be treated differently to generally accepted accounting principles, is
it incumbent on the Panel to conduct its analysis in accordance with that treatment? BRA, USA

81. Brazil incorrectly asserts that "US government ’s own accounting principles lead to a
conclusion that premium rates are inadequate to m eet the long-term operating costs and losses of the
CCC guarantee programmes".56 To the contrary, under current GAAP for Federal Entities, including
the application of such principles related to th e Federal Credit Reform Act of 1990, the programme
reflects profitability for all of the first five cohor ts (1992-1996). In additi on, the cohort for 1999 is
already showing profitability. 57 Exhibit US-128 also reflects the long-term profitability of the
programmes.

52 Rebuttal Submission of Brazil (22 August 2003), para. 109; US Further Submission
(30 September 2003), fn. 94; See Exhibit Bra-158, Notes to Financial Statement, page 19.
53 See Exhibit Bra-158, Notes to Financial Statement, p. 14.
54 See Exhibit US-129, Notes to 2003 Financial Statement, p. 15.
55OMB Circular A-11 (2003), Section 20.3, p. 20-2.
http://www.whitehouse.gov/omb/circulars/a11/current_year/s20.pdf
56 Answers of Brazil to Panel Question 228 (22 December 2003), para. 68.
57 See Exhibit Bra-182 and US Answers to Panel Question 221(b) (22 December 2003, paras. 83-86.

82. The United States has every reason to believe th is trend will continue with respect to more
recent cohorts. Contrary to the assertions of Brazil, the United States is not "carefully selecting" or
"cherry-picking" years that "did not lose money".
58 For the reasons set forth in US answers to Panel
Questions 221(f), (g), (h), and (i) 59, chronologically more recent – not "carefully selected" – years are
reflected unnecessarily negatively in the US budget.

E. SERIOUS PREJUDICE

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

83. Brazil states that "[t]he phrase ‘one or several’ must be read according to its ordinary
meaning" and reads this phrase to mean "at least one." Brazil then states that it "disagrees with the
possibility that the words one or several indicate that one of the Article 6.3 paragraphs may not be
sufficient to establish serious prejudice".
60 However, Brazil’s answer simply neglects to read all of
"the words" quoted in the Panel’s question (drawn from the chapeau of Article 6.3) according to their
ordinary meaning: "What is the meaning of the words ‘may arise in any case where one or several of
the following apply" (emphasis added) in Article 6.3 of the SCM Agreement ?" Crucially, Brazil
simply neglects to read the words "may arise" according to their ordinary meaning. 61 The ordinary
meaning of "may" is "have ability or power to; can" 62 and "to express possibility, opportunity, or
permission".63 Therefore, the ordinary meaning of the ch apeau to Article 6.3 (that is, including the
phrase "may arise" as well as "one or several") would be that there is a "possibility" or "opportunity"
for serious prejudice in the sense of Article 5(c) to "a rise" where one or more of the effects listed in
Article 6.3 is found.64

84. Thus, when Brazil "disagrees w ith the possibility that the words one or several indicate that
one of the Article 6.3 paragraphs may not be suffi cient to establish serious prejudice," Brazil is not
reading the chapeau of Article 6.3 according to th e ordinary meaning of all of the words in the
provision. Such a selective approach fails to read the treaty text according to the customary rules of
interpretation of public international law. Indeed, if Article 6.3 had been intended to mean that any
one of the subparagraphs would necessarily suffice to show serious prejudice, the text would have
used obligatory language in favour of a finding of serious prejudice (such as, "serious prejudice . . .
shall arise in any case where at least one of the following apply").65

85. Brazil’s discussion of various provisions of the Antidumping Agreement and Subsidies
Agreement that contain language that no one factor can necessarily "give decisive guidance" towards
a pertinent finding is inapt. That is, simply because the "may arise" la nguage in the chapeau of
Article 6.3 does not necessarily preclude a finding of serious prejudice where the effect in only one
subparagraph has been demonstrated does not convert the "possibility" or "opportunity" that serious

58 See, e.g., Answer of Brazil to Panel Question 228 (22 December 2003), para. 73.
59 US Answers to Panel Questions (22 December 2003), paras. 91-104.
60 Brazil’s Answer to Question 229 from the Panel, paras. 76-77.
61 See Brazil ’s Answer to Question 229 from the Panel, paras. 79-80 (setting forth no interpretation of
"may arise" according to its ordinary meaning).
62 The New Shorter Oxford English Dictionary, vol. 1, at 1721 (1993 ed.).
63 The Random House Dictionary of the English Language, Unabridged Edition at 886 (1983).
64 See US Answer to Question 149 from the Panel, paras. 71-75.
65 Indeed, Article 6.1 demonstrates that Members knew how to create a presumption of serious
prejudice: they did so by explicitly stating that, in certain cases, "[s]erious prejudice . . . shall be deemed to
exist" (italics added). Article 6.2, while providing a means to rebut that presumption, does not by its terms
establish that serious prejudice "shall be deemed to exist" if one of the effects in Article 6.3 exists.

prejudice arise into an obligation to find serious prejudice. Rather, serious prejudice "may arise" or it
may not, for example, where a panel concludes that one or more subparagraphs is technically met but
the effect is not sufficient to cause serious prejudice.

86. Finally, we note Brazil’s new argument that the "may arise" language "is necessary because
while the facts may demonstrate that the effects of the subsidies may create the one, two, or three
enumerated types of serious prejudice, these effects may not be actionable".
66 Brazil’ s argument
misunderstands the nature of the serious prejudice an alysis. As stated above, the plain language of
Article 6.3 establishes that demonstrating one or sev eral of the effects of the subparagraphs does not
necessarily suffice to demonstrate serious prejudice. Thus, it is not the case that "serious prejudice"
will arise where one of the effects is demonstrated but an "exemption" (in Brazil’s words) in Article 6
applies; rather, the "exemptions" cited by Brazil preclude the very finding of "serious prejudice."

• For example, Brazil argues that the effect in Article 6.3(d) (an increase in world market
share) may be demonstrated but may "not be actionable" because multilaterally agreed
rules exist within the meaning of footnote 17. But the effect of footnote 17 is to remove
certain primary products or commodities subject to such rules from the 6.3(d) analysis
altogether.67 Thus, no finding of "serious prejudice" for such a product would be
possible.

• Neither does Article 6.7 support the conclusion that serious prejudice "may arise" but
may not be actionable. Rather, that pr ovision establishes that "[d]isplacement or
impediment resulting in serious prejudice shall not arise under paragraph 3 where any one
of the following circumstances exist"; that is, even where the effect of displacement or
impediment is demonstrated under Article 6.3, a finding of serious prejudice is precluded
("shall not arise").

• Finally, Brazil points to Article 6.9 and cl aims that this provision "exempts serious
prejudice that exists even where the require ments of Article 6.3 are fulfilled because the
subsidies are exempt from action by virtue of the peace clause." Article 6.9 does not
"exempt[] serious prejudice that exists," however. The text reads: " This Article does not
apply to subsidies maintained on agricultural products as provided in Article 13 of the
Agreement on Agriculture" (emphasis added) . Because the entire "Article does not
apply," no finding of "serious prejudice" is possible.
68

87. Finally, we note that Brazil’s argument that the "may arise" language is "necessary" because
certain circumstances may exist in which a finding of serious prejudice is precluded would suggest
that whenever an exception exists to a "shall" ob ligation, that obligation should be expressed using
"may". For example, because there is an ex ception to the prohibition on export subsidies in
Article 3.1 of the Subsidies Agreement, presumabl y Brazil would consider that the provision should
have been written: "Except as provided in the Ag reement on Agriculture, the following subsidies,
within the meaning of Article 1, [may] be prohibite d." The use of "may" in place of "shall," however,

66 Brazil’s Answer to Question 229, para. 80.
67 Footnote 17 to Article 6.3(d) follows the words "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" and reads:
"Unless other multilaterally agreed specific rules apply to the trade in the product or commodity in question."
68 Brazil’s argument echoes its erroneous interpretati on of the "exempt from actions" language of the
Peace Clause. Indeed, as the United States has pointed ou t, Brazil has never explained how it is that the Panel,
if it ultimately determines that US measures are "e xempt from actions" based on Articles 5 and 6 of the
Subsidies Agreement, could nonetheless make findings on those claims without resulting in the DSB making
rulings and recommendations with respect to those claims and measures. Given the automaticity in adoption of
panel and Appellate Body reports, the only means by which Peace Clause-compliant US measures may be
"exempt from actions" is for the Panel to decline to reach Brazil’s claims based on those provisions specified in
the Peace Clause.

changes the meaning of that provision from mandatory to permissive. Similarly, the use of "may"
instead of "shall" in Article 6.3 means that ther e is a "possibility" or "opportunity" for serious
prejudice to arise where one or more of the effects liste d in Article 6.3 is found, rather than a certainty
or necessity that serious prejudice have arisen.

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

88. Causation is a key issue in this dispute, a nd Brazil continues to gloss over this issue. The
United States is interested to see Brazil argue that an econometric analysis by definition satisfies the
causation requirements under the WTO.
69 Brazil’s position in this dispute is at odds with its position
in other disputes, such as Steel. Brazil appears to change its view on the correct approach to causation
depending on whether it bears the burden or not. Fo r example, Brazil now argues in its response to
this question: "But the record shows that there is no legitimate basis to conclude that "other" supply
and demand factors collectively (a) accounted for all of the declines in prices during the period of
investigation or (b) meant that prices went as high as they would have even if no US subsidies had
been provided." In other words, Brazil appears to claim that it is entitled to a finding in its favour on
causation unless someone else (not Brazil) shows that other factors accounted for all the effects, rather
than that Brazil must show that it is not attributing to the US measures at issue effects that are due to
other factors. This is in error.

89. Brazil must establish that effect of th e challenged subsidies was "significant price
suppression" or an increase in world market share. Brazil has not established that it has accounted for
"the effect of" other factors at play, even though it concedes that "[t]his wo rld market share is the
result of several key factors including US subsidies, weather effects in many countries, and exchange
rate effects" (italics added). How then can Br azil claim that the effect of the subsidies is
"significant"? That is, if Brazil itself argues that US subsidies were only one of "several key factors,"
its analysis must allow the Panel to distinguish the effects of these other factors. Brazil has not even
attempted to explain what those effects were, nor did Brazil dem onstrate that its economic model
accounted for these factors.

90. Brazil did not answer the Panel’s question abou t what relevant factors should be taken into
account nor did it respond to the question about ho w this should be done. Brazil simply claims,
through Dr. Sumner ’s analysis, that it has taken various other factors into account. Until forced to
respond to the US Further Submission of 30 Se pt., Brazil had not acknowledged that any factor
besides US subsidies had any effect on world cotton markets.

91. In paragraph 82, we find it curious that Brazil refers to the material on other factors presented
by the United States
70 as covering "only" weak cotton demand, flat retail consumption, falling world
incomes, increasing US textile imports, and China’s re leasing of stocks. Brazil also errs in referring
to these as all "demand-related". For example, China’ s release of stocks affects the supply of cotton.
(The US Further Submission also included an analys is of the effects of the strong US dollar on cotton
prices.) These six factors were the "only" ones presented because they, in fact, provide a compelling
explanation of the factors driving down world cotton prices at that time and encouraging the shift in
US cotton use from domestic processing to export markets.

92. The Panel asks how it should take into account the effect of other factors. In paragraph 85,
Brazil argues that but for the effect of US subsidies, world cotton prices would have been significantly
higher. One could just as easily analyze and claim but for the effect of China’s releasing 11.6 million

69 Brazil’s approach would certainly simplify the causation discussion in numerous other disputes.
70 US Further Submission, paras. 22 - 44.

bales of subsidized cotton onto world markets between 1999-2001 world prices would have been
significantly higher. In other words, Dr. Sumner can claim his analysis accounts for various factors
because he calibrated his model to actual data fo r the recent past, but Brazil’ s analysis has not
provided an explanation of the various events and actions at play that would allow the Panel to form a
reasoned conclusion that the effects of US subsidies are not in fact the effects of these other factors.

93. Finally, in paragraph 87, Brazil’s repeats oft-stated arguments about the presumed
revenue-cost gap faced by US cotton producers using total costs of production. Brazil has not replied
to US counter arguments that using total average costs is misleading and inappropriate. We refer the
panel to the US further rebuttal submission, paras. 116-41, and the US answer to Question 211(b). As
for Brazil’s exchange rate argument, we refer the panel to the US answer to Question 210 above.

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

94. In this answer, Brazil continues to make serious interpretive errors with respect to
Article 6.3(c). In addition, the evidence and argum ents made by Brazil with respect to each of the
"markets" it identifies do not satisfy the requirements of Article 6.3(c). The United States treats each
of these issues in turn.

Brazil Misinterprets Article 6.3(c) and Fails to Bring Forward Evidence and Arguments to
Establish Its Claims

95. The United States is gratified that in this an swer Brazil finally appears to recognize that the
"in the same market" language of Article 6.3(c) requires that Brazil make claims with respect to
markets in which both Brazilian and US upland cotton are found.
71 This follows from the use of the
words "same" and "market." "Market" means "[a] place or group with a demand for a commodity or
service".72 "Same" means "[i]dentical with what has been indicated in the preceding context" and
"previously alluded to, just mentioned, aforesaid".73 In the context of Article 6.3(c), the market that is
"[i]dentical with what has been indicated in the preceding context" would be that market in which
there is "significant price undercutting by the subsid ized product as compared with the price of a like
product of another Member" (the phrase immediately preceding the phrase on significant price
suppression, depression, or lost sales). Thus, Brazil may only advance claims with respect to those
markets in which US upland cotton and Brazilian cotton are both found .

96. Brazil continues to argue that there is a "world market" for upland cotton in which it may
demonstrate significant price suppression, depression, or lost sales. However, the text and context of
Article 6.3(c) do not support the view that Brazil ma y assert a generalized "world" price effect. First,
the significant price suppression, depression, or lost sales must be "in the same market." As explained
above, this "same market" would be the market in which both Brazilian and US cotton are found and
there is significant price undercutting. In asserting th at a "world" market can be this "same" market,
Brazil renders the "same market" phrase inutile si nce the products of both the complaining and
responding parties will always be in the "world." C onsider that one of the effects under Article 6.3(c)
is "lost sales in the same market ." Brazil’s interpretation would mean that a complaining party could
advance a claim with respect to a lost sale anywhere in the "world," even if the responding party did
not export to the market in which the lost sale occu rred. Again, such a result would render the "in the
same market" language meaningless.

71 See, e.g. , Brazil’s Answer to Question 233 from the Panel, para. 113 ("[T]hese indices are
benchmarks for prices in those ‘same markets’ where US and Brazilian cotton were exported . . . .") (emphasis
added).
72 The New Shorter Oxford English Dictionary, vol. 1, at 1699 (1993 ed.).
73 The New Shorter Oxford English Dictionary, vol. 2, at 2678 (1993 ed.).

97. Brazil’s interpretation also does not make sen se of important context for Article 6.3(c).
Article 6.6 states that "[e]ach Member in the market of which serious prejudice is alleged to have
arisen shall . . . make available . . . all relevant info rmation . . . as to the changes in market shares of
the parties to the dispute as well as concerning prices of the products involved " (emphasis added). If
the "world" could be a "market" for purposes of Article 6.3, which WTO Members should provide
market data? Read literally, Article 6.6 would seemingly oblige every WTO Member to provide data
on market share and prices since every Member woul d be a "Member in the market of which serious
prejudice is alleged to have arisen." Annex V similarly suggests that the "same market" must be an
actual market, be it that of the subsidizing Member or a third-country. For example, where Article 7.4
has been invoked "any third-country Member concerned" – for example, any Member in whose
market significant price suppression is alleged to have occurred – "shall notify to the DSB" the
organization responsible for responding to informa tion requests and the procedures to be used to
comply.
74 Furthermore, the information gathered during the information-gathering process "should
include, inter alia, data concerning the amount of the subsidy in question (and, where appropriate, the
value of total sales of the subsidized firms), prices of the subsidized product, prices of the
non-subsidized product, prices of other suppliers to the market , changes in the supply of the
subsidized product to the market in question and changes in market shares".75 Again, these provisions
suggest (as does Article 6.6) that Article 6.3(c) is directed at particular markets where competition
exists between Brazilian and US upland cotton.

98. Because Brazil must demonstrate price suppressi on by US imports of Brazilian imports in the
same market, Brazil must bring forward evidence and arguments on import volumes and prices. In
numerous instances, Brazil has simply failed to present prices for Brazilian cotton and US cotton in an
identified market, much less import volumes relating to the parties or other suppliers. This failure to
present, inter alia , prices for each market sufficient to demonstrate price suppression is fatal to
Brazil’s claim with respect to each such market. The necessity of presenting price information for
each market is suggested by the fact that each "s ame market" in which significant price suppression is
alleged to occur is a market in which there is signi ficant price undercutting. Article 6.6 refers to each
Member "in the market of which serious prejudice is alleged to have arisen" providing the "prices of
the products involved," also suggesting that prices for both Brazilian and US cotton must be
examined. Further, Annex V, paragraph 5, st ates that a panel should examine "prices of the
subsidized product, prices of the non-subsidi zed product, [and] prices of other suppliers to the
market."

There is No "World Market Price" for Upland Cotton that Can Be Significantly Suppressed

99. The preceding legal interpretation that the "sam e market" means a particular market in which
competition between Brazilian and US cotton imports occurs is confirmed when one considers that
nature of the "world price" that Brazil claims is significantly suppressed. This "world market price"
turns out not to be a price at all but several "benchma rks" or indicia of prices. As Brazil states: "The
record establishes that there is a "world market" for upland cotton and that the prices for that market
are reflected in the New York futures prices and in the A-index prices" .
76 That is, this alleged
"market" does not have or set any price for US and Brazilian upland cotton; rather, this "price" is
"reflected" in not one, but two price indices, the NY futures price and A-index price.

100. Brazil must argue that the "world market price" is "reflected" in the NY futures and A-index
because neither of these relates to an abstract "world market."

76 Brazil’s Answer to Question 233 from the Panel, para. 91.

• Rather, the NY futures price relates to a New York-based exchange trading in contracts
for future delivery with various physical delivery points in the United States: Galveston,
Houston, New Orleans, Memphis, or Greenville/Spartenburg (South Carolina).
77

Indeed, Brazil concedes that "[w]hile the New York futures prices play a major role in influencing
markets, the short term volatility of the futures mark et makes comparison with monthly or annual
export prices more difficult".78

• The A-index "price" reflects delivery to Northern Europe of upland cotton with certain
quality specifications (Middling,1-1/32 inch staple length). Further, the A-index is not a
"price" but an average of the five lowest price quotes obtained by Cotlook, a private
organization based in London, from various merchants of 15 cotton growths.

101. Thus, the A-index reflects price offers but does not reflect actual prices in Northern Europe of
either Brazilian or US (or any other) upland cotton. The A-index relates to the Northern European
market, not to the "world" market. In fact, th e A-index, with its disparate price quotes from around
the world, demonstrates that prices differ around th e world, not that there is a uniform, harmonious
"world" market price. The fact that Brazil points to two disparate price indices, which deviate
significantly.79 also demonstrates that there is not a "world market price" for upland cotton. Thus,
neither the NY futures price nor the A-index are a "world market price" for upland cotton.

Brazil Cannot Demonstrate Significant Price Suppression in the United States Because There
Were No Brazilian Imports

102. Brazil also identifies the US market as a "s ame market." However, Brazil does not advance
any arguments nor evidence establishing that there were any Brazilian imports into the United States
in marketing years 1999-2002. In fact, our informat ion is that there have not been any imports of
Brazilian cotton to the United States since marketing year 1996. 80 Neither (and perhaps for that
reason) does Brazil present any arguments or eviden ce on Brazilian cotton prices in the United States.
Thus, Brazil has failed to establish that the United States is a "same market" for purposes of
Article 6.3(c).

Brazil’s Effort to Expand the Scope of Its Claims and Arguments to 40 Third-Country Markets
is Untimely

103. Brazil belatedly attempts to argue that it is alleging "significant price suppression" in 40
third-country markets; for only seven of these ha d Brazil previously even attempted to make
argument. Brazil has not attempted to justify presen ting this new affirmative evidence at this late
stage in the proceeding, contrary to the Pane l’s working procedures. To do so prejudices the
United States, which has necessarily participated in this dispute on the basis of the claims and
arguments Brazil has previously set out, and woul d circumvent the notification obligations of the
complaining party. For example, we note that in its request to the DSB to initiate the Annex V
information-gathering process, which the DSB was not able to agree to in light of the Peace Clause
issue, Brazil did not notify these 40 WTO Members that they were markets in which serious prejudice
was alleged to have occurred. By not naming these markets at the outset of the dispute, but seeking to

77 See www.nybot.com (search No. 2 Cotton Futures Contract Specifications).
78 Brazil’s Answer to Question 233 from the Panel, para. 93 (italics added).
79 See Brazil ’s Answer to Question 233 from the Panel, para. 93 ("[P]rice oscillations of the A and
B-index are much less pronounced than the futures market, but in the longer term they accompany the signs and
trends coming from the futures market.").
80 See US Department of Agriculture trade statis tics at www.fas.usda.gov/ustrade (search on
Imports/HS-4 for Brazil).

name them now, Brazil would preclude these Memb ers from fulfilling their notification obligations
under paragraph 1 of Annex V.

104. We also note that none of these 40 markets ar e listed in Brazil’s request for rulings and
recommendations from the Panel. That request, in pe rtinent part, reads: "The US subsidies provided
during MY 1999-2002 caused and continue to cause serious prejudice to the interest of Brazil by
suppressing upland cotton prices in the US, world and Brazilian markets for upland cotton in
violation of Articles 5(c) and 6.3(c) of the SCM Agreement".
81 The United States is entitled to rely on
Brazil’s representations with respect to the scope of its claims and arguments.

105. Even in the markets that Braz il has raised in a timely manner, there are other suppliers into
that market, and Brazil has failed to explain why any price suppression should be attributed to US
sales rather than to sales from other countries. On e cannot presume that US sales are the only factor
that could cause any price suppression. Thus, with respect to these markets, Brazil has failed to
establish a prima facie case on its claims.

Brazil Incorrectly Argues that Significant Price Suppression in All Markets Can Be Shown
Through Suppression of "World Market Prices"

106. The foregoing considerations are dispositive of Brazil’s claims with respect to significant
price suppression in the same market. In this portion of its comment, the United States further
examines the evidence and arguments Brazil has brought forward and points out that they do not
establish the elements necessary to demonstrate a claim under Article 6.3(c).

107. Brazil argues that the US suppression of "world market prices" is transmitted to all markets as
evidenced by the fact that price movements in indivi dual markets are similar to the general trends of
the A-index. Brazil alleges that the proof of the US suppression of the A-index is the results of Dr.
Sumner’s analysis and studies by USDA economists. The United States has already explained in
great detail to the Panel the conceptual flaws of Dr. Sumner’s analysis and will not repeat those here.
Additionally, the USDA studies provided by Brazi l to the Panel did not address impacts on the
A-index or futures prices, but the impact of US programmes on US prices. While interesting
academic exercises, moreover, those studies do not analyze the question before the Panel.
82

108. As a factual matter, the United States has pr ovided evidence that disproves Brazil’s allegation
that the United States suppresses the A-index. Exhibit US-46 demonstrates that the low US quote
(either Memphis or California) for the A-Index has rarely been one of the 5 low bids. If both US
quotes are always above (but for one month) the 5 lowest quotes used in the A-Index, the
United States cannot be suppressing the A-Index. Nevertheless, even if one were to follow the
Brazilian approach, the data provided by Brazil does not provide evidence of price suppression by the
United States.

109. As set out above, a generalized claim of price suppression is not contemplated by
Article 6.3(c), which requires price suppression "in the same market" – that is, that market in which
there is "significant price undercutting by the subs idized product as compared to the price of a like
product of another Member." Thus, we proceed here to examine Brazil ’s evidence with respect to
those "same markets" identified in its answer.

Comparison based on Export Unit Values

110. Brazil begins its analysis by comparing US and Brazilian export unit values in various
markets to the A-index. It should be noted that the proper analysis would be US and Brazilian market

81 Brazil’s Further Submission, para. 471(i).
82 See US Answer to Question 212 from the Panel, paras. 48-55.

prices in the market in question. The export pri ce does not represent the final selling price in the
market in question. Given the short time the Unite d States had to review all of this new data, the
discussion here will focus on those countries included in the main text of the Brazilian response. To
the extent that Brazil has provided data in its exhi bits on various markets that it does not examine or
explain, we do not consider that Brazil has adva nced arguments with respect to such markets
sufficient to carry its burden of establishing a prima facie case, and we ask the Panel to so find.

111. The fact that US or Brazil export prices to the seven markets, Argentina, China, India,
Indonesia, Philippines, Portugal, and South Korea ge nerally may have had movements similar to the
A-Index does not demonstrate price suppression by the United States. In fact, Brazil does not in its
main text show comparisons of US and Brazilia n export unit values in each market (this is only
provided in Exhibit BRA-386), much less other relevant market information, such as import prices
from other suppliers or import volumes. This ab sence of relevant argument alone demonstrates that
Brazil has not met its burden of establishing its pri ce suppression claims. However, the United States
has updated the Brazilian export unit value graphs to include data through November 2003 in order to
set out a cursory analysis of each "same market" for the Panel.
83 On the whole, we find that it is the
Brazilian price that undercuts the US price to these markets.

112. Brazil alleges price suppression in the Argentin e market due to the United States. The data,
however, does not support such a claim. As can be seen in the graph, the United States is an
infrequent supplier to the Argentine market. For t hose time periods when no US imports were found
in Argentina, there could be no price suppression by the US subsidized product of the prices of
Brazilian cotton "in the same market." Of th e 15 periods that both are in the market, the
United States’ export price was greater than Brazil’s export price 8 times, below Brazil 6 times, and
the same once.

113. Comparing US and Brazilian export unit va lues to China does not demonstrate price
suppression by the United States. Brazil is not a frequ ent participant in the China market. For those
time periods when no Brazilian imports were found in China, there could be no price suppression by
the US subsidized product of the prices of Brazilia n cotton "in the same market." From August 1999
to June 2003, Brazil only shipped to China in 13 months. Of these 13 months, Brazil’s export unit
value was below the US export unit value 8 times, above the US price 4 times, and the same once.
Evidence of Brazilian price undercutting the US pri ce is inconsistent with the argument that the
United States suppresses Brazilian prices to the China market.

114. India was one of the few markets Brazil discussed in which there were a good number of
months in which both parties supplied cotton. Of the 25 months in which both provided cotton, the
US price was narrowly below the Brazil price in 12 months, was above Brazil in 12 months, and at the
same level in 1 months. The time during which the US price was below the Brazil price was during
the period April 2001 to December 2001, in which th e high yields of MY2001 influenced. However,
during August 2000 to January 2001 period, US unit va lues were high and were consistently undercut
by Brazil by a large margin. This Brazilian undercut ting led to a plunge in US unit values. We also
note that US unit values appear to increase when Br azilian cotton is not in the market. Brazilian unit
values, on the other hand, show very little change; this lack of price movement is not consistent with
price suppression since the Brazilian price is unresponsiv e. As the graph shows, there is no systemic
relationship between the US and Brazilian unit values to indicate that the United States is suppressing
Brazilian prices to this market.

115. Indonesia also was another country in whic h both the United States and Brazil were active
participants, and each had the low price about an e qual number of times. However, the majority of
times the US had a lower price occurred during MY2001, a period in which the United States had
higher than expected yields which reduced US un it values while Brazil had lower than normal yields,

83 Exhibit US-134.

driving up the price for Brazilian cotton. In MY200 2, Brazil returned to general undercutting of US
unit values, failing to follow US price increases in ear ly 2003. There does not seem to be any support
for price suppression in this market as the move ments between the US and Brazilian export unit
values are not the same. For example, during th e period October 2000 to January 2001, US export
unit values increased, whereas Braz il’s export unit values declined. Again in the period December
2001 to June 2002, the wide swings in the Brazil price relative to the steady US movements
demonstrate that US prices are not suppressing Brazil’s.

116. Philippines is a market in which Brazil had sporadic shipments over the period. For those
time periods when no Brazilian im ports were found in Philippi nes, there could be no price
suppression by the US subsidized product of the pr ices of Brazilian cotton "in the same market."
There were 19 months in which both parties supplied the Philippines. Part of the difference in price
is probably due to the shipment sizes. As Exhi bit BRA-383 reports, the quantities shipped are quite
different between Brazil and the United States. Smaller shipments typically have higher per unit
costs. Many of the months in which Brazil exhi bited higher export unit values to the Philippines was
during MY 2001, a year in which the US had highe r than expected yields, driving down its price
while Brazil had lower than expected yields, increasing its price.

117. Brazil and the United States overlapped in the Portuguese market in 27 months, a good
number of samples. In all instances except for N ovember 2003, the US unit value was greater than
the Brazilian unit value, generally by a large margin. The fact the US unit value was greater than the
Brazilian unit value is not consistent with price s uppression by the United States. Even if there was a
quality difference between the two, the spread be tween the two should be relatively constant.
However, the movements of unit values do differ. When the US had big swings in the late 2000 and
late 2001 early 2002, Brazil saw only modest chang es in unit values. Since MY2003, US prices first
increased and have slightly declined whereas Brazilia n prices first declined and have been increasing
slightly. The fact that the price movements are not consistent would weaken arguments that the
United States is causing or threatens to cause price suppression to Brazil.

118. The final country market discussed directly in Brazil’s response was South Korea. As the
graph depicts, Brazil only supplied cotton to this market in one month. Since no Brazilian imports
were found in South Korea over the complained of period, during those times there could be no price
suppression by the US subsidized product of the prices of Brazilian cotton "in the same market."

Comparing Import Values ("Import Prices") to A-Index

119. Brazil continues its analysis by comparing av erage import prices to specific markets with the
A-Index. As with the "export prices" these import prices are not the prices at which the product were
sold but its value at the border of the importing country. Again a proper analysis would not use
border valuation of the pro duct but the actual market prices the pr oduct was sold. Also it is not clear
how averaging import prices from the different source s would provide evidence that the United States
has caused price suppression. In fact the various graphs provided by Brazil put in doubt their theory of
world price transmission.

120. The yearly import price data in paragraphs 106-108 is too general to be of any assistance.
Looking at the various graphs of monthly indivi dual country import prices against the A-Index
(paragraphs 106-107) also shows discrepancies between markets. For example, looking at the graph of
Japan’s prices against the A-Index, it is notable that their import prices never fell below 48 cents even
though the A-Index fell to as low as 38 cents and th at the gap between import prices and the A-Index
were quite large when prices were falling but mini mal when prices were rising. A similar pattern
seems to have been present in Ecuador. On the face of it, these graphs would seem to imply that some
mechanism was at work to impede the transmissi on of declining "world market prices." This
undermines Brazil’ s assertion that price suppress ion can be shown in all third-country markets
through alleged effects on a "world market price." The Hong Kong graph is exactly opposite in these

respects from the Japanese and Ecuador graphs. This could mean that Hong Kong is less protected
from world prices, but the great deal of inconsiste ncy both within and between all of these graphs
indicates the uncertainty surrounding Brazil’s claims that "all these third country markets are heavily
influenced by the A-Index and New York futures prices".

Comparison of Domestic Prices and the A-Index

121. Brazil then compares for a few countries in whic h it could get domestic prices, those domestic
prices to the A-index. Again their analysis conc ludes that the A-index influences domestic prices in
these markets and therefore, the United States is guilty of price suppression. We have explained that a
claim of significant price suppression requires that US and Brazilian cotton be found "in the same
market." In addition, there are problems with the connection between the A-Index and domestic
prices as presented by Brazil. To demonstrate the problems with Brazil’s analysis, the United States
will look at the analysis on China.

122. We agree that China’s domestic prices have al ways been significantly above the A-index and
tracked it rather well. Indeed we include a full ser ies below including all the data currently available
to us. This starts September, 1999 and runs th rough April 2003 (Southern China prices as reported by
East-West Inc. a Beijing agricultural consulting group) . It is consistent with Brazil’s data although
Brazil’s only starts in January 2001. These data reveal that China’s domestic prices are not consistent
with China’s export and import prices.

123. China’s export prices, as can be seen in Exhibit US-141, are well below the A-index during
most of the time China exported heavily (MY 1999 through the first half of MY 20001, and the last
quarter of MY 2001 through the third quarter of MY 2002). Contrary to Brazil’s assertion in
paragraph 113 that export prices from all suppliers move with the A-Index, more often than not
China’s export price did not, staying relatively flat during the periods from August 1999 to
January 2001 and from February 2 002 to July 2003. What is mo re, as can be seen from the China
Prices graph in Exhibit US-141, China’s export prices were significantly lower than the Chinese
domestic price when China was exporting heavily.

124. The imports are different but still problematic . During those times when China has imported
heavily, from the beginning of MY 2002 until the presen t, prices have tracked A-Index prices fairly
well.

125. These data, not presented or explained by Braz il, show that Chinese domestic prices have
some connection to the A-index but hardly the "heavily influenced" and "consistent" relationship
Brazil asserts. As noted in the US further submi ssion, the Chinese Government during this time had
the goal of reducing their massive, undisclosed cotton stocks in a way that would insulate there cotton
producers and processors from changes in prices. The aim was to maximize cotton prices received by
Chinese farmers while still insuring their cotton te xtile exports were competitive in world export
markets. China sold as much as it could on the wo rld market as long as the A-Index stayed at or
above a trigger price around 50 cents a pound – hence the flat export price line until the stock
situation was finally resolved in late MY 2002.

Conclusion

126. Brazil has not done a proper analysis to s upport its price suppression claims. To demonstrate
significant price suppression that leads to serious prejudice, Brazil must provide evidence showing
that US prices in a given market are suppressing Brazilian prices in that market. Brazil has not
presented and explained evidence on actual market prices of US and Brazilian cotton in third-country
markets. Thus, Brazil has not established a prima facie case with respect to its price suppression
claims. In fact, the market-by- market data presented above does not support a finding of significant
price suppression by US cotton.

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

127. Brazil’s interpretation that whether price s uppression is "significant" can only "be assessed
with reference to the quality of the impacts of whatever level of price suppression exists on the
producers of the like product" raises concerns. Br azil provides the example that even where "large
amounts of price suppression" have been demonstrated, this might not be "significant" if the
producers of the complaining party "had de minimis production, or no exports, and/or that the total
value of lost revenue from suppressed prices was minimal".
84 The United States believes that the
conditions of the producers of the complaining party would not enter into an analysis of whether a
given level of price suppression is "significant." Br azil’s interpretation would create, out of one legal
standard ("significant price suppression"), different th resholds that would appl y to different Members
depending on their financial well-being. For exam ple, a Member with a strong position in a given
third-country market might not be able to utilize Article 6.3(c) (for significant price undercutting or
significant price suppression or depression") simply on the basis that "the total value of lost revenue
from suppressed prices was minimal" even if the le vel of price suppression was large. Conversely, a
Member with a nascent exporting industry might not be able to utilize Article 6.3(c) if it "had de
minimis production, or no exports," despite a desire to increase both production and exports. Neither
scenario appears to fit with the text of Article 6.3(c).

128. In addition, Brazil fails to explain how the two different terms in the text of Article 6
("serious prejudice" and "significant price suppression" ) result in there being only one and the same
test for both terms. This would appear to render one of the terms superfluous, contrary to customary
rules of treaty interpretation.

129. Finally, we note Brazil’s reference to the impacts on "complaining party producers" of the
like product. We take this to mean that, contrary to its earlier position, Brazil has now conceded that
"adverse effects" to other Members are irrelevant fo r Brazil’s claims. This follows from the text of
the Subsidies Agreement. Under Article 5(c), no Member is to cause "serious prejudice to the
interests of another Member ," and a request for consultations under Article 7.2 "shall include a
statement of available evidence with regard to . . . serious prejudice caused to the interests of the
Member requesting consultations."

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

130. Brazil’s answer to Question 235 does not refu te the US evidence that Brazilian cotton prices
undercut US prices from 1999-2002. Brazil does not go so far as to claim the United States undercut
Brazil’s prices – except in the Brazilian market, an argument that is based on prices that are not
directly comparable, as will be discussed later. Instead Brazil argues that US and Brazilian prices
exhibited an "absolute closeness" with Brazil’s export prices sometimes higher and sometimes lower
than US prices.

131. Except for their own market, Brazil does not pr ovide data or analysis on country markets.
Instead they examine aggregate data for forty ma rkets that both the United States and Brazil exported
to in MY1999 to MY 2002. As the United States explained in our comments on Question 233, this
aggregate approach is not the proper method of analysis for price suppression claims under
Article 6.3(c). However, even if we accept the Braz il approach, close analysis of the aggregated data
presented in Brazil’s response further supports the US claim of Brazilian undercutting by showing

84 Brazil’s Answer to Question 234 from the Panel, para. 114.

that consistently and on average Brazilian [un it values] prices were lo wer than those of the
United States, even though there were periods when factors not related to subsidies led to lower US
unit values.

Average Unit Value Comparison

132. First, Brazil in the graph following paragraph 121 compares the average unit values of
Brazilian and US exports. It is this graph that Br azil uses to support its claim of "absolute closeness"
between the two countries ’ export prices and the absence of Brazil undercutting, but it simply does
not do this. Of the 45 months when both the US an d Brazil were exporting, Br azil prices were lower
25 months as opposed to the United States’ 20. Fu rther eight of the United States low-price months
were in MY 2001, when good weather allowed the United States to realize record yields as opposed to
sub-par yields for Brazil. The US yield of 790 kgs./hectare was 6 per cent above the five year average
for MY 1999 to 2003.
85 Brazil’s 1073/kgs/hectare for MY 2001 was 5 per cent below its 1999-2001
average.86 Also Brazil planting half a year later than the United States saw a much different price
signal as cotton prices dropped sharply and soybean prices, the main alternative crop for both
countries, rose slightly from February to August 2001. 87 The United States increased planted area by
6 per cent but Brazil reduced planted area by 12 pe r cent. US production consequently rose 18 per
cent to 20.3 million bales in MY 2001, whereas Brazil’ s dropped to 18 per cent to 3.5 million bales.
This naturally drove US export prices down compared to Brazil’s. Brazilian prices followed the US
prices down in the last half of MY 2001 and have stayed equal to or below US prices ever since.

133. Setting aside MY1999 and MY 2001 for the mome nt, two years that are not representative of
normal conditions, Brazil prices undercut US prices in 18 of the 24 months for MY 2000 and MY
2002.88 This is consistent with Brazilian production ch anges in the two years. In MY 2000 Brazil
production increased 34 per cent while US barely 1 per cent from the year earlier. In MY 2002,
Brazil production fell 2 per cent while US production fell 15 per cent. 89 So, even using Brazil’s own
methods we can see that Brazil undercut the United States in 2 of the 3 relevant marketing years and
in that third year lower US prices are clearly related to yield and normal market price signals

134. The same conclusions are apparent when l ooking at the graph following paragraph 118 where
Brazil looks at the aggregated weighted average of the 8 countries originally analyzed by the
United States. Looking at the data available in this graph for MY 1999-2002, in 16 of 37 months
when both countries exported to these countries, the United States price was higher 21 times as
opposed to only 16 for Brazil. Six of the 16 periods when Brazil was higher came in MY 2001,
consistent with the analysis above, and 6 came in MY 1999 when results were distorted because the
volume of total Brazil exports was extremely small.

Looking at All US and Brazil Exports

135. To better look at the issue of Brazil’s undercu tting of US prices, it is appropriate to expand
Brazil’s analysis. Although Brazil emphasizes the closely interconnected world market, as noted
before, their analysis looks only at data from countries to which Brazil and the United States both

85 Exhibit US-135.
86 Exhibit US-135.
87 The relevant futures prices ratio of cotton to soybean for Brazil in August 2001 was the May 2002
cotton and May 2002 soy which was 8.63. The relevant ratio for US farmers in February 2001 was the
Dec 2001 cotton to Nov 2001 soybean which was 12.55. (New York Board of Trade and Chicago Board of
Trade).
88 In MY 1999, Brazil only exported 12,000 bales of cotton compared to an average of 438,000 bales in
MY 2000, MY 2001, and MY 2002. (See Exhibit US-135) As discussed in the preceding paragraph, MY 2001
was a year of atypical yields for both Brazil and the United States.
89 Exhibit US-135 (Production data )

exported. The graph below looks at unit values for the entirety of US and Brazilian exports during this
period, which Brazil would argue is appropriate if in fact there is a "world pr ice" that is transmitted
with little interference to all cotton markets. Th e graph presents data obtained directly from the
Foreign Agricultural Service/USDA web site
90 and Brazilian customs data provided through the
World Trade Atlas, a for-fee service that collects an d enters in an easily accessible database official
data from Brazil and numerous other countries ( produ ced by Global Trade Information Service Inc.)
showing value, quantity and unit values. 91 It also expands Brazil’s data by incorporating data through
November 2003.

136. This graph reenforces what was discussed above regarding Brazil’s 40-same-markets data. In
this case though, Brazil export unit values are lower than the United States in all but one of the
24 months in MY 2000 and MY2002. Although very si milar to Brazil’s graph, it is even clearer here
that Brazil’s export prices were consistently an d often significantly lower than those of the
United States. As the graph depicts, Brazil unde rcuts the United States during MY 2000, resulting in
a decline in US unit values. In MY2001, both continue d to decline because of record yields and slack
demand. But at the beginning of MY2002, US export values rebound whereas Brazil’s remain low,
undercutting the US export values. In the start of MY 2003, US prices begin a sharp increase, but
Brazilian prices decline slightly before making a s light increase resulting in an increased spread
between the United States and Brazil.

Cumulative Average Values Using all the Data

137. Going further and looking at the cumulative weighted price as Brazil did in paragraph 120,
but again using the entirety of US and Brazilian exports, the average US price for MY 1999-2002 was
47.59 cents per pound for the United States as compared to an average for Brazil of 44.70 (Brazil
calculation was almost exactly the same at 44.65). This means the United States average export value
during the period was 2.89 cents per pound (6 per cent) higher than that of Brazil. Looking at just the
40 markets, Brazil still found US prices were higher but by only 0.68 cents. This is an important
point in itself when addressing the question of Brazil’s price undercutting. This means the increased
spread between average US and Brazilian prices when lo oking at all exports – as compared to just the
40 countries identified by Brazil – was due almost en tirely to United States exporters being able to
charge higher prices in markets where Brazil was not competing. This is clearly consistent with
Brazil undercutting.

138. Looking at the cumulative averages fo r the atypical MY 2001 when there were
weather-related reasons for low US prices, Brazil’s method showed a cumulative US average export
price lower than Brazil’s by 5.22 cents (44.05 for Brazil and 38.83 for the United States). Looking at
the entirety of exports, the difference was only 3. 65 cents (44.14 for Brazil and 40.49 for the United
States). In addition, a distortion in Brazil’s cumulative analysis magnifies the importance of
MY2001. Nearly 45 per cent of Brazil’s exports during this 4-year period came in MY 2001.
92 By
contrast, the United States only exported 30 per cent of its 4-year total in MY 2001. 93 This means the
difference between the unit average values is even further skewed. Looking at the difference in
average unit values for years other than MY2001 (that is, in MY1999, MY2000 and MY2002
combined), the average unit value for the Un ited States is 50.83. In Brazil it is 45.15. US prices are
higher by 5.68 per cent or almost 12 per cent.

90 Exhibit US-136 (FAS US trade data)
91 Exhibit US-137 (WTA Brazilian trade data)
92 Exhibit US-135.
93 Exhibit US-135.

Prices in the Brazil Market

139. It is also misleading for Brazil to claim as th ey do in paragraph 130 that US cotton imported
into Brazil undercuts domestic Br azilian cotton. This claim is based on comparing US FOB export
prices to Brazil domestic prices. That is, it ignores Brazil’s tariff on cotton imports as well as
transportation and other costs incurred shipping co tton to Brazil, which would raise the US price
significantly. The Brazilian tariff was 8 per cent in 1999 and 2000, 8.5 per cent in 2001, 10 per cent
in 2002 and 9.5 per cent in 2003. 94 In all years except 1999, the difference between Brazil domestic
and US export prices fell well short of even coveri ng the tariff. In 1999 the difference of 10.27 per
cent only exceeded the tariff by 2.27 per cent. Rece nt trader price quotes for transportation to Brazil
exceed 10 cents a pound, more than offsetting the diffe rence. In sum, Brazil’s use of non-comparable
prices cannot support a finding of price suppression, much less significant price suppression.

Price Suppression

140. Even using Brazil’s method of looking at the average unit value of exports, rather than actual
third-country domestic prices, strong evidence of Br azilian price undercutting exists – contrary to
Brazil’s arguments. Brazil’s second line of argument is that price undercutting is irrelevant, arguing
that it is not a question of undercutting but price suppression and that the global marketplace
instantaneously translates subsidy-induced lower prices in the United States into lower prices
world-wide. Brazil further contends that "prices in each of those 40 third country markets as well as
the Brazilian and US market were already suppr essed before any cotton was shipped by US or
Brazilian exporters" (paragraph 131).

141. The price mechanism in cotton is relativel y sophisticated, but Brazil’s explanation is
unrealistic. It says essentially that everyone in th e market has perfect knowledge of the market and
can adjust instantly. If over the period when US subsidies increased, they had a significant
suppressing effect on world markets, this would have been manifested in the United States continually
lowering prices to take more market share with ot her suppliers being forced to follow. It is
implausible to assume that this would have occurred without some time lag between US and Brazilian
prices that would have been evident in monthly export data – and yet, no such dynamic can be seen in
the price data.
95

142. The fact that, other than in MY2001, US prices generally stayed above Brazilian prices
indicates that is was not US subsidies, but other factors that drove down prices. The textile market
was extremely competitive during this period. Ch ina’s industry, operating in a tightly controlled
market with access to cheap government stocks w as pushing down prices. Also a sluggish world
economy kept consumption growth in the same 1.5 to 1.75 per cent annual growth range it had been
in the previous 4 years despite ma rkedly lower cotton prices. Processo rs of raw cotton, other than
those in China, demanded lower prices from supplie rs in order to remain competitive with the
Chinese. At the same time, the US textile and a pparel industry was faced with increasing textile and
apparel imports, domestic raw cotton use fell sharpl y, and US cotton growers and merchants had to
turn to exports. The fact that US stocks grew significantly during this time also indicates that US

94 Source: Various USDA/FAS Attache Reports (available at: www.fas.usda.gov (search on Attache
Reports, Brazil, Cotton, 1999-2003)).
95 Prices take time to adjust. Suppliers are hesitant to lower prices particularly when they have not seen
a reduction in their own costs and cannot be sure the prices will stay lower. They will be willing to allow stocks
to build until the need to drop prices is inevitable. Similarly, customers will not immediately switch since
changing to a new unfamiliar supplier has costs particularly if the new lower prices do not continue.
Additionally, as put forth by Brazil in its response to question 233 (para. 104), even if Brazilian suppliers and
their customers had through the global pricing system perfect knowledge of US prices and their future direction,
they would still have contractual commitments at higher prices that must be met and thus would delay the
transmission of declines in price movements. Brazil, however, in its discussion ignored that this delayed
transmission due to contracts also could bound a supplier to a lower price although spot prices are increasing.

suppliers were the price takers and not the price setters in this market.
96 Further, the shift in raw
cotton consumption from the United States to other c ountries (much of which is shipped back to the
United States in the form of cotton apparel) expl ains why US cotton exports increased as the US
world market share was unchanged.

143. The point is reinforced by looking at the A-Index and the corresponding quotes for the
United States and Brazil. Again one would expect that a US cotton industry with subsidized excess
production to dispose of on export markets would ha ve been consistently pricing below the average
represented by the A-Index (the 5 lowest price quot es obtained by Cotlook CIF Northern Europe).
But this is not the case as can be seen in the graph below of the A-Index and the US Memphis and
California / Arizona A-Index quotes.

• At no point during MY1999-2003 to date wa s the California / Arizona quote below the
A-Index.

• Only once during MY1999-2003 to date, Se ptember 2002, was the Memphis quote below
the A-Index.

144. Consistent with what was discussed before, a tightening of the gap between the A-Index and
US quotes is apparent in MY 2001. However, Br azil aside, a number of countries had good weather
and significantly increased area in that year so that US prices were still above the average as measured
by the A-Index.

145. A parallel analysis can be made by comp aring the US and Brazilian A-Index quotes (data
from Brazil Exhibit 242). This graph is the same as that used by Brazil in paragraph 128 (although
the last 3 data points are not in the exhibit). Again, US price quotes are well above Brazil quotes in
marketing years 1999, 2000, 2002, and 2003 to date . In MY 2001 quotes grew closer, and for a few
months the Memphis quote fell below the Brazilian.

 • At all other times, the evidence demonstr ates that Brazilian exporters were offering cotton
at prices well below the US A-index quote.

146. Indeed, looking at the graph below compar ing the A-Index to the Brazilian A-index quote,
there are considerable periods, particularly in MY 2000, when Brazil was consistently quoting below
the A-Index. This evidence of low price quotes by Br azilian exporters is consistent with the view that
Brazilian price undercutting exerted downward pressure on prices.

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

147. Although not entirely clear from Brazil’s answer, Brazil appears to assert that as long as there
is an increase in a Member’s world market share ove r the preceding three-year average, the fact that
the Member’s world market share remains at approximately the same level could be compatible with a
finding of an "increase" following a "consistent trend" within the meaning of Article 6.3(d). We
would disagree. A flat world market share over a three-year period followed by a one-year increase
would not demonstrate that the last year’s "inc rease follows a consistent trend over a period when
subsidies have been granted" (in the words of Artic le 6.3(d)). A flat "consistent trend" would not
suffice since an "increase" could not "follow[] a [fla t] consistent trend." In that situation, the
"increase" would be deviating from, not following, the flat "consistent trend."

96 Exhibit US-135.

148. From a statistical standpoint, we would agree with Brazil’s comment in paragraph 137 that
due to the limited number of observations it is diff icult to calculate a trend that is statistically
significant. However, the United States strongly disagrees with the analysis presented by Brazil in the
graphs accompanying paragraph 139. Note that if the trend line were calculated between 1986 and
2000 or 1996 to 2000, the trend line would be flat or slightly negative. As we have argued in the
Second Submission to the Panel, the change in export share is due primarily to the decline in the US
textile industry which resulted in almost two-thirds of US cotton being exported in 2002 compared to
almost two-thirds milled domestically in 1998.

149. Indeed, if we observe the trend in the US market share as presented in our Second Submission
to the Panel and in the Concluding statements to the panel of 8 October, the share of the world market
for upland cotton supplied by US cotton has been flat over the period from marketing year 1999-2002.
And of course Article 6.3(d) is talk ing about "the effect of the subsidy" which requires that it be the
same subsidy at issue for each year of the "consistent trend".

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

150. USDA did not require handlers of cottonseed to report their payments to producer, rather the
payments went to first handlers. Handlers were allowed to settle up with their producers as they saw
fit. The programme, however, ipso facto , did give the producers a basis for possible complaint
against handlers who had effectively moved low seed pr ices back to their producers. If so, the remedy
was lay in whatever civil remedies might be available in a particular jurisdiction.

151. It would appear that to the extent that the cost of low cottonseed prices were charged against
the producer so as to create a duty for the handler to pass on the payment to the producer, the recovery
by the producer would have been simply for higher ginning costs paid by the producer. That is, the
producer would have suffered the loss to the exte nt the ginner charged more for ginning because the
return to the ginner from the seed was too low.

152. Payments here are disaster- like in that the cost that was suffered and passed through to
producers, to the extent that it was passed throug h, was after the fact. The season was long over and
thus payments could not have induced the planting of the crop. In short, if there was a pass through, it
was a wash to reflect higher ginning costs. Those costs were not associated with the marketing of
upland cotton, but of cottonseed.

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

153. Brazil and the United States agree that green box subsidies may not be taken into account in
considering the effects of non-green box subsidi es in an action based on Articles 5 and 6 of the
Subsidies Agreement. Article 13(a)(ii) of th e Agreement on Agriculture states that green box
measures are "exempt from actions based on Article XVI of GATT 1994 and Part III of the Subsidies
Agreement." We recall that previously in this dispute Brazil asserted that the phrase "exempt from
actions" did not preclude the Panel from considering Brazil’s serious prejudice claims but only from
imposing remedies.
97 Nonetheless, in its answer, Brazil appears to have read this "exempt from

97 Brazil’s Brief on Preliminary Issue Regarding the "Peace Clause" of the Agreement on Agriculture,
para. 2 (5 June 2003) (interpreting "exempt from actions" to mean that "a co mplaining Member cannot receive
authorization from the DSB to obtain a remedy against another Member’s domestic and export support
measures that otherwise would be subject to the disciplines of certain provisions of the Agreement on Subsidies
and Countervailing Measures . . . or Article XVI of GATT 1994") (emphasis added).

actions" phrase to " prohibit . . . the effects of these subsidies being included along with other effects
of non-green box subsidies in assessing Brazil’s actionable subsidies claims" .
98 Thus, Brazil here
appears to read this phrase according to its ordinary meaning – that is, "not exposed or subject to" a
"legal process or suit" or the "taking of legal steps to establish a claim or obtain a remedy". 99 This is
the definition that the United St ates has advanced in this dispute, and the Panel should consider
Brazil’s answer to this question an endorsement of that definition.

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

154. Brazil errs when it claims in its response to th is question that "the Panel is required to take
into account all non-green box subsidies, including prohibited subsidies in assessing Brazil’s Article 5
and 6 claims under the SCM Agreement." The Panel has discretion in assessing Brazil’s claims. The
United States would note, for example, that Article 6.3(c) and (d) each refer to the "effect of the
subsidy," which clearly permits the Panel to examine the effect of each subsidy individually.

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

155. The United States does not disagree that facts arising after the date of panel establishment
may be taken into account, for example, in analyzin g Brazil’s threat of serious prejudice claim. As
we have explained, as market prices have r ecovered strongly over marketing year 2003 (continuing
their upwards trend since the trough reached in marketing year 2001), Brazil has jettisoned its
proposed legal standard that the Panel examine wh ether there is a clearly foreseen and imminent
likelihood of future serious prejudice. One could speculate that it has done so because the facts are no
longer favourable – that is, high cotton prices will result in significantly lower budgetary outlays for
two price-based measures (marketing loan payments and counter-cyclical payments) in marketing
year 2003 than seen in previous years.

156. Brazil describes the task for the Panel "in an Article 5 and 6 claim" is to "assess[] whether
present or threatened effects presently exist".
100 We would agree but note that Brazil has provided no
basis to conclude that past subsidies, such as pa yments made for the 1999-2001 marketing years, that
were fully expensed in past years could have "pr esent . . . effects [that] presently exist." To the
contrary, to the extent that these subsidies are not allocated to future production – and the Panel will
recall that Brazil itself has both expensed these paym ents for purposes of its Peace Clause calculation
as well as recognized that these r ecurring subsidies payments would be expensed for countervailing
duty purposes – no lingering effects can exist becau se the subsidies themselves are deemed to have
been used up. Thus, the question before the Panel is whether present subsidies – that is, those made
for marketing year 2002 through the date of pa nel establishment – were causing certain adverse
effects to presently exist and whether the US laws and regulations in existence as of the date of
establishment of the Panel threaten serious prejudice. Any payments not in existence as of the date of
establishment are not measures within the Panel’ s terms of reference.101

157. We also note that Brazil cites two reports in support of its arguments: Argentina Footwear
and Argentina Peaches . Those citations are misplaced for several reasons. First, Brazil entirely
ignores that both reports interpreted the Agreement on Safeguards , not the Subsidies Agreement, and

98 Brazil’s Answer to Question 245 from the Panel, para. 145.
99 See, e.g. , Comments of the United States of Ameri ca on the Comments by Brazil and the Third
Parties on the Question Posed by the Panel, paras. 8-10 (June 13, 2003).
100 Brazil’s Answer to Question 247 from the Panel, para. 150.
101 We recall once again that Brazil now admits that the matter before the Panel cannot change after
establishment. Answer to Panel Question 247.

that the two agreements have different texts. Brazil compounds the problem by failing to mention that
the paragraphs it quotes in both reports dealt not with the issue of threat of injury, but with the issue of
whether imports had "increased" (within the meani ng of the Safeguards Agreement). Finally, while
Brazil does acknowledge the existence of the Appellate Body report in US Lamb, it fails to point out
that, in the context of a discussion of threat of ser ious injury under the Safegua rds Agreement, in that
report the Appellate Body made a finding that undercuts Brazil’s position dramatically:

Like the Panel, we note that the Agreement on Safeguards provides no particular
methodology to be followed in making determ inations of serious injury or threat
thereof. However, whatever methodology is chosen, we believe that data relating to
the most recent past will provide comp etent authorities with an essential, and,
usually, the most reliable, basis for a determin ation of a threat of serious injury. The
likely state of the domestic industry in the very near future can best be gauged from
data from the most recent past. Thus, we agree with the Panel that, in principle,
within the period of investigation as a whol e, evidence from the most recent past will
provide the strongest indication of the likely future state of the domestic industry.
102

158. The strong recovery in market prices and futur es prices demonstrate that there is no clearly
foreseen and imminent likelihood of future serious prejudice. As we have previously seen with
respect to the December 2004 future contract, price recovery has been sustained and steady; the
contract average monthly close was 61.34 cents per pound in December 2002, and the current (as of
22 January 2004) monthly average close is 68.78 cents per pound. As a result of higher prices, US
outlays are markedly down, with no marketing loan payments being made. In addition, the
expectation of continuing high prices embodied in current future price suggests that no further
marketing loan payments will be made this marketi ng year and that counter-cyclical payments will be
dramatically lower.

159. In assessing the credibility of Brazil’s argumen t that the baseline projections of FAPRI are
more probative than futures prices, the Panel s hould recall the "testimony" of Brazil’s own economic
expert, Mr. MacDonald. Brazil has presented no ev idence or analysis to suggest that FAPRI’s
baselines are more accurate price projections th an what the NY futures indicates; in fact, the
United States has put before the Panel evidence show ing that FAPRI’s baseline projections have been
far off the mark.

160. For corroboration, the Panel need only co nsider the marketing year 2003-2008 baseline
projections made by FAPRI in November 2002, January 2003, and November 2003. The price
outlook for cotton has improved considerably since publication of the November 2002 FAPRI
baseline used by Dr. Sumner in his Annex I estim ate of the effects of US subsidies on US cotton
production.

• The table below shows that FAPRI’s pr ojections for the MY2003 Adjusted World Price
(used for calculating the marketing loan payments) are as much as 20 cents per pound, or
54 per cent, higher in the November 2003 baseline as under the November 2002 baseline.

• Even so, FAPRI’s November 2003 projected Adjusted World Price is still almost 6 cents
per pound lower than the current Adjusted World Price.
103

161. As a result of these revisions, FAPRI’s estimated marketing loan gains (the difference
between the marketing loan rate and the estimated Adjusted World Price) are reduced considerably.

102 Appellate Body Report, United States – Safeguard Measures on Imports of Fresh, Chilled or Frozen
Lamb Meat from New Zealand and Australia , WT/DS177/AB/R, WT/DS178/AB/R, adopted 16 May 2001,
para. 137 (footnote omitted).
103 The Adjusted World Price for January 23-29, 2004, is 63.25 cents per pound.

• Under the November 2003 baseline, the estimated marketing loan gain for 2003/04 is
zero, compared to almost 15 cents per pound under the November 2002 baseline used by
Dr. Sumner.

• Over the five-year period 2003/04 to 2007/08, the average marketing loan gain under the
November 2003 baseline is estimated to be only 1.32 cents per pound . This is compared
to 10.39 cents per pound using the November 2002 baseline used by Dr. Sumner.

FAPRI’s Revised Price and Marketing Loan Gain Baseline Projections

Year Adjusted World Price (cents/lb) Est. marketing loan gain 1/ (cents/lb)
 Nov 2002 Jan 2003 Nov 2003 2/ Nov 2002 Jan 2003 Nov 2003 2/
2003/04 37.22 44.8 57.36 14.78 7.2 0
2004/05 39.83 45.4 50.96 12.17 6.6 1.04
2005/06 41.94 46 50.82 10.06 6 1.18
2006/07 43.6 46.7 50.35 8.4 5.3 1.65
2007/08 45.48 48 49.24 6.52 4 2.76
 Average 41.61 46.18 51.75 10.39 5.82 1.32

 1/ The estimated marketing loan gain is the difference, if positive, between the loan rate (52 cents per
lb) and the Adjusted World Price.

 2/ Source: FAPRI Baseline, November 2003 (Exhibit US-132)

162. We also note the New York Cotton Exchange closing prices for 23 January 2004, showed the
March 2004 contract at 75.94 cents, the May 2004 contract at 77.02 cents, and the July 2004 contract
at 77.90 cents. Based on these futures prices, the latest (although preliminary) FAPRI baseline still
appears to have projected near-term future cotton prices too low.

163. The marketing loan programme contributes to over 42 per cent of the estimated effects of
removing subsidies on production under th e model developed by Dr. Sumner.
104 A s t h e
November 2002 baseline projected significant marke ting loan payments through 2008 whereas the
November 2003 baseline projects no or minimal ma rketing loan payments, updating Dr. Sumner’s
model to the November 2003 baseline would significan tly reduce the overall estimated effect of US
payments on production. Any remaining effects woul d largely be those incorrectly attributed to
decoupled income support payments under Dr. Sumner’s flawed model.

164. Finally, in paragraph 154 of its answer, Brazil again tries to muddy the waters by referencing
the wholly arbitrary "expected adjusted world pri ce first mentioned in its opening statement at the
second substantive meeting of the Panel with the pa rties. There, Brazil attempted to provide an
alternative to the US futures analysis. Brazil’s alternative was that farmers look to an "expected
adjusted world price" when making planting decisi ons since the marketing loan programme benefits
are ultimately determined by the Adjusted Worl d Price. Whereas the United States has provided
references to numerous sources that demonstrate farm ers look to the futures prices in making planting
decisions.
105 Brazil has not provided any evidence to support its assertion that farmers look to an
"expected adjusted world price" in making planting decisions.

104 See Brazil’s Further Submission, Annex I, table 1.4.
105 See US Answers to Questions 200 and 201.

165. Without any sources to back up its assertion, Brazil implied that farmers could readily
calculate an "expected adjusted worl d price" in making planting decisions. 106 According to Brazil, a
farmer at planting time for MY 1999 would take the December 1999 futures price and subtract
18.5 cents to get the "expected adjusted world price" (which would then be compared to the marketing
loan rate). Why 18.5 cents? For each of MY 1996-MY2002, Brazil calculated the difference between
the December futures price and the average adjusted world price for th at marketing year. Brazil then
calculated the average of the differences for these 7 years as 18.5 cents.

166. As with Brazil’s lagged price calculation, how ever, this formula has never been, nor could it
ever be, applied by a farmer in real-life. First, calculating the "average adjusted world price" for a
given year – say, MY 1999 – requires knowledge of the adjusted world prices that actually result in
that year. Thus, a farmer making a planting deci sion for MY 1999 (that is, in January-March 1999)
has no way of calculating the "average adjusted world price" for marketing year 1999 (1 August 1999
– 31 July 2000). Moreover, the same farmer making a planting decision for MY 1999 could not
possibly know the December futures prices for MY 2000 - MY2002; nor could that farmer know the
"average adjusted world price" for MY2000 - MY2002. Thus, that farmer could not have calculated
the 18.5 cents per pound average for the "average adju sted world price," nor could he have calculated
the "expected adjusted world price"
107 as set out by Brazil. 108 Thus, Brazil’s critique of the US
futures price approach to planting decisions is not only incorrect but grossly misleading.

167. Brazil’s assertions relating to "lagged prices," "average adjusted world prices," and "expected
adjusted world prices" are utterly irrelevant to an analysis of the effect of the marketing loan
programme because they are simply not knowable by the farmer at the time of planting. In fact, the
only parts of Brazil’s spurious methodology that are objectively knowable at the time of planting –
and undisputed facts on the record of this dispute – are (1) the December futures price at the time of
planting and (2) the marketing loan rate. These ar e precisely the elements that make up the US
analysis of the effect of the marketing loan programme.

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

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

168. In response to Brazil’s statement that Step 2 "payments are conditional upon proof of
export,"
109 the United States would simply remind the Panel that such payments are made to users of
upland cotton upon demonstration of the use of cotton. Such use can be manifest either by opening
the bale of cotton or by export. The programme is indifferent to whether recipients of the benefit of
this subsidy are exporters or pa rties that open bales for the manufacture of raw cotton into cotton
products. Indeed, to the extent a consumer that had intended to export instead opens the bale, then
that consumer could still obtain the payment upon submission of the requisite documentation. This
subsidy is therefore not contingent on expor t performance and is not an export subsidy. 110 T h e
situation here is analogous to that in the Ad No te to Article III of the GATT 1994 which makes clear

106 The methodology is set out in Brazil’s opening statement at the second panel meeting and in
Exhibits BRA-356 and BRA-357.
107 December futures - 7-year average of "average adjusted world price".
108 See Brazil’s Opening Statement at the Second Panel Meeting, paras. 44-47; Exhibit BRA-356, -357,
-358; Brazil’s Answer to Question 247, para. 154.
109 Answers of Brazil to Question 249(a) (22 December 2003), para. 163.
110 See, e.g., US First Written Submission (11 July 2003), paras. 127-135.

that just because a measure that covers all produc ts evenly is applied in the case of imports (here
exports) at the border, does not change it to a border measure.

169. As was pointed out in the Opening Statement of the United States of America at the Second
Session of the First Meeting of the Panel with the Parties , Brazil’s analysis of Step 2 payments
exaggerates the effect of Step 2 payments on world prices. Because demand for cotton is more price
responsive than supply, the incidence of processor s ubsidies like Step 2 accrue to supply rather than
demand. That is, producers gain through higher prices paid to producers while world prices are
relatively unaffected. This is consistent with a prev ious analysis of Step 2 by FAPRI in 1999 (Exhibit
US-61). In that study, FAPRI estimated an average Step 2 payment of 5.3 cents per pound. (By way
of contrast, the Step 2 payment rate in effect fo r January 23 - 29, 2004, is 1.62 cents per pound.)
These payments resulted in an increase of the spot price of US cotton by 4 cents and a fall in the
world cotton price of less than 0.5 cents.

170. While it is true as Brazil points out that the margin of difference that is required between the
relevant delivered US price and the A index has b een adjusted slightly by the 2002 farm bill, the
Brazil answer shortchanges several aspects of th e continued limitations on Step 2 payments. The
statute continues to allow payments only when the de livered US price in Northern Europe is higher
than the going local Northern European price, a nd only when that difference has existed for four
weeks straight, and only when the prevailing local Northern European price (adjusted for price and
location) is not more than 134 per cent of the US loan rate of 52 cents per pound. That figure, 134 per
cent of the loan rate, would be about 69.6 cents, a nd the current adjustment for location and quality is
about 13 cents per pound. This means that where the prevailing local N.E. price was more than about
82 cents, there would be no Step 2 payments irrespective of the amount of difference in the two prices
that are otherwise compared to determine whether Step 2 payments are made. Also missing in the
Brazil answer is a reference to reflect that th e relief from the additional 1.25 cent differential is
temporary as under current law that 1.25 cents will return on 1 August 2006.
111

G. REMEDIES

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

171. In Brazil’s answer, it states that it does not seek relief "under . . . Article XVI of GATT 1994"
in respect of "the legal instruments cons isting of the 1996 US Farm Bill providing, inter alia , for
production flexibility contract payments, as well as various emergency a ppropriation Acts in
1998-2001 providing, inter alia, for market loss assistance payments." However, Brazil also clarifies
that "Brazil’s claims under Artic les 5(a) and 6(c) of the SCM Agreement do include the adverse
effects today and in the future of subsidies provided under these expired legal provisions".
112 Brazil’s
answer points out the difficulty in its approach to actionable subsidies.

172. As Brazil acknowledges, "a panel may not make a recommendation to the DSB that a
Member bring a measure into conformity with its WT O obligations if that measure no longer exists."

111 We have sought additional information on whether producers in the capacity of manufacturers or
exporters ever receive Step 2 payments. As we indicated, this would only occur with ve ry large producers, if at
all. We have examined recent Step 2 payment lists, and th ey indicate that at the very best any such payments
would be highly isolated. Cooperatives would not, in this sense, be considered "producers" since a cooperative
does not, as such, have a risk in the crop during the growing season. Step 2 payments are never paid more than
once for the same cotton and absent export are only paid in connection with the manufacturing process for
breaking open bundles. A producer who simply bundled cotton just to break the bundle would not be eligible
for the payment.
112 Brazil’s Answer to Question 250 from the Panel, para. 164 (emphasis added).

Simply put, if a measure does not exist at the time of panel establishment, then that "measure" is not
part of the "matter" referred to the panel and ca nnot be within the panel’ s terms of reference.
Furthermore, there is nothing to be brought into conformity. In this dispute, recurring subsidies
"provided" (in Brazil’s words) with respect to past years and fully expensed to those years no longer
exist once a new marketing year, for which new re curring subsidies are paid, commences. Thus, not
only did these measures (subsidies) for past marketing years (1999-2001) not exist at the time Brazil’s
panel request was filed and the panel established ( during marketing year 2002), they do not exist
today (half way through marketing year 2003) and ca nnot be the subject of any recommendation to be
brought into conformity.113

173. For this reason, Brazil’s insistence that its serious prejudice "claims . . . do include the
continuing adverse effects today and in the future of subsidies provided under these expired legal
provisions" is troubling. Were the Panel to consid er that expired subsidies have some continuing
effect (and we note that Brazil has never explained how long those effects could be deemed to last nor
how they would be distinguished from the present effect s of current subsidies), "include" them as part
of its analysis of Brazil’s serious prejudice clai ms, and render a finding of present serious prejudice,
the Panel could not recommend that these expired measu res be brought into conformity. On the other
hand, a recommendation that the adverse effects be removed would be of questionable use since those
"effects" would have included the effects of expired measures. Thus, Brazil’s claims of present
serious prejudice should be limited to those measures that currently existed at the time of Brazil’s
panel request and panel establishment.

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

174. The United States disagrees with Brazil’s answer. There is no recommendation made
"pursuant to Article 7.8 of the SCM Agreement." Ra ther, there is an obligation under Article 7.8 on a
Member granting or maintaining a subsidy inconsis tently with Article 5 to "remove the adverse
effects or . . . withdraw the subsidy" after adoption of the relevant reports "in which it is determined
that any subsidy has resulted in adverse effects to the interests of another Member." Article 19.1 of
the DSU addresses the entirely separate ques tion of what recommendations should be in the
report.
1141 We also note the contrast between Subsidies Agreement Articles 4.7 and 7.8 in that the
text of Article 4.7 specifically authorizes the Pa nel to take an action ("shall recommend that the
subsidizing Member withdraw the subsidy without delay") while Article 7.8 does not.

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

175. In its answer, Brazil sets forth no considera tions that could guide the Panel in making a
recommendation under Article 4.7 relati ng to the relevant period of time, other than to say that the
period should be 90 days. The United States understa nds that different time periods have been set by
panels that have made findings of prohibited subsidies given the natu re of the measure in question.

113 This is so for all the reasons we have given earlie r in this dispute, as well as for the reason that
Brazil gives: the matter before a Panel "cannot" cha nge after establishment. Brazil’s Answers to Panel
Question 247.
114 DSU Article 19.1 ("Where a panel or the Appellate Body concludes that a measure is inconsistent
with a covered agreement, it shall recommend that the Member concerned bring the measures into conformity
with that agreement.") (emphasis added; footnote omitted).

For example, in several disputes in which it app ears that solely administrative action would be
necessary to withdraw the measure, it appears that panels have set 90-day periods. In the
United States – FSC dispute, the panel found that withdrawal of the measure would require legislative
action and provided an appropriate period of time. The time for appeal and adoption would also be a
relevant consideration. The United States has explained on several occasions the intricacies of the US
legislative process and the time needed to enact legi slation, including in submissions to arbitrators
acting under Article 21.3(c) of the DSU. No such ar bitrator has ever concluded that a period as short
as 90 days is a reasonable period of time for the United States to complete implementation of the
DSB’s recommendations and rulings where legislative action is needed.
115

176. Brazil has challenged Step 2 payments, th e export credit guarantee programmes, and FSC
benefits to upland cotton as prohibited subsidies. Brazil has also asserted that these measures are
"mandatory," such that officials have no discreti on to implement the measures in a WTO-consistent
fashion. While the United States does not accept Br azil’s assertion, the United States would suggest
that the 90-day period given with respect to measures requiring only administrative fixes would not be
appropriate.

177. With respect to the FSC legislation, should th e Panel find this to be inconsistent with US
obligations under Article 3.2 of the SCM Agreem ent, it is not a practical possibility that the
United States could withdraw the subsidy within 90 days, given that legislative action would be
required. However, the United States notes that there already are bills before both houses of Congress
that would repeal the FSC and that have been re ported out of their respective committees. In the
event of a prohibited subsidy finding, the United Stat es should be given until the end of this year to
complete the legislative process and enact this legislation into law.

H. MISCELLANEOUS

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

178. The United States provides comments on the mandatory / discretionary analysis in its
comments on Brazil’s answer to question 257.

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

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

115 The Panel may wish to refer, inter alia , to the 21.3(c) arbitrations conducted in the dispute
United States – Continued Dumping and Subsidy Offset Act of 2000 (WT/DS217/14, WT/DS234/22, award
circulated 13 June 2003), to which Brazil was a party. Other such arbitrations include United States -
Anti-Dumping Measures on Certain Hot-Rolled Steel Products From Japan and United States - Antidumping
Act of 1916.

179. Brazil’s response to question 257 begins w ith a general discussion of the Appellate Body
report in United States – Sunset Review. 116 As reflected in the US answer to the same question, the
United States agrees with the view expressed in para graphs one and two of Brazil’s response that the
United States – Sunset Review report has no significant impact on this dispute and that the Appellate
Body in United States – Sunset Review in fact undertook an analysis of whether the measure at issue
in that dispute was mandatory based on a traditi onal "mandatory / discretionary" analysis. The
language cited in the Panel’s question was drawn from a separate section of the United States – Sunset
Review report addressing the preliminary jurisdictional issue of what is a measure, and that question is
not present here.

180. While the United States agrees that the US–Sunset report is not relevant to the analysis in this
dispute, the United States nevertheless disagrees with Brazil’s further characterizations of that report.

181. For example, in paragraph three of Braz il’ s answer, Brazil addresses the Appellate Body
discussion on the interpretation of a Member’s domestic law. In its statement at the 9 January 2004,
meeting of the DSB at which the report was adopted (attached as Exhibit US-138), the United States
placed the Appellate Body statement which Brazil c ites in its proper context, which is that the
meaning of a domestic law must be determined based on applicable domestic legal principles of
interpretation. It is simple error to conclude that a measure mandates behaviour by government
officials of a Member if, under the domestic law of that Member, the behaviour is not mandated.
Thus, Brazil’s speculations in paragraph four of its answer that it is permissible to examine whether
"the operation of a measure" creates requireme nts for government officials to act in a
WTO-inconsistent manner is both groundless and mean ingless. US officials are required to do what
US laws require, and there is no principle of US law indicating that a law’s "operation" requires
anything.

182. Brazil elaborates on its discussion of the "ope ration of a measure" with a reference to the
Appellate Body’s discussion of "normative" requirements. However, the United States notes, as it did
in its answer to Question 257(d), that the Appellate Body’s discussion of an instrument’s "normative"
character came in the context of its analysis of wh ether an instrument can be a measure, and not the
separate question of whether a measure mandates a br each of any WTO obligation. It is only this
latter question that is before this Panel.

183. Likewise, the Appellate Body statement on protecting future trade which Brazil cites in
paragraph five of its answer and analyzes in para graph six came in the context of the Appellate
Body’s discussion of why certain instruments should be considered measures, and not in the Appellate
Body’s separate analysis of whether that measure mandates a WTO breach. Again, it is not disputed
that the measures at issue in this case are "measures." Thus, as Brazil itself notes, the Panel "need not
examine whether the subsidy measures that Braz il has challenged are mandatory as a preliminary
jurisdictional matter," but should do so only in th e context of determining whether the measures
breach US obligations.
117

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

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

116 Appellate Body Report, United States – Sunset Review of Anti-Dumping Duties on Corrosion
Resistant Carbon Steel Flat Products from Japan, WT/DS244/AB/R (adopted 9 January 2004) ("United States –
Sunset Review").
117 See Brazil’s Answer to Question 257 from the Panel, para. 2.

184. Brazil has challenged Section 1207(a) of th e 2002 Act providing for Step 2 payments as both
a prohibited export subsidy under Subsidies Agr eement Article 3.1(a) and an import-substitution
subsidy under Subsidies Agreement Article 3.1(b).
118 Brazil argues that the statute mandates
payments inconsistent with WTO obligations and therefore is per se WTO inconsistent.119

185. The United States – Sunset Review Appellate Body report did not analyze or alter the
mandatory/discretionary analysis that has been u sed in past WTO disputes. Thus, for purposes of
Brazil’s per se challenge to Section 1207(a) of the 2002 Ac t, the relevant issue is whether that
measure mandates a violation of the WTO Agreement. 120 It does not, and therefore Brazil’s per se
claim must fail.

186. The United States has explained that "subject to the availability of funds (that is, the
availability of CCC borrowing authority), Step 2 paym ents must be made to all those who meet the
conditions for eligibility."
121 That is, the United States may not arbitrarily deny payment to eligible
recipients when the price conditions for payment have been met. However, the absence of discretion
given these conditions does not mean the measure manda te a violation of Articles 3.1(a), 3.1(b), and
3.2 of the Subsidies Agreement.

187. Brazil states that "US government officials are not provided with any flexibility under Section
1207(a) of the 2002 FSRI Act" and therefore "the Act violates Articles 3.3 and 8 of the Agreement on
Agriculture, and Articles 3.1(a) a nd 3.1(b) of the SCM Agreement".
122 Whether or not US
government officials have flexibility with regard to administration of the Step 2 programme, Step 2
subsidies can violate Articles 3.3 and 8 of the Agr eement on Agriculture only if they constitute export
subsidies. For the reasons summarized in the US Comment to Brazil Answer to Panel Question 249,
Step 2 subsidies are not export subsidies.

188. The Step 2 subsidy payments are included in the Total Aggregate Measurement of Support
reported by the United States. The United States has also remained within its domestic support
reduction commitments as set forth in Part IV of its Schedule. Pursuant to Article 6.3 of the
Agreement on Agriculture and Paragraph 7 of Annex 3 of that Agreem ent, the United States therefore
"shall be considered to be in compliance with its domestic support reductio n commitments." Under
Article 6.3 a Member may choose to provide "amber box" support in any direct or indirect manner so
long as that Member’s "Current Total AMS does not exceed the corresponding annual or final bound
commitment level specified in Part IV of the Memb er’s Schedule." Furthermore, the first words of
Article 3 of the SCM Agreement render that artic le subject to the terms of the Agreement on
Agriculture. The terms of Articles 3.1(a) and 3.1(b) of the SCM Agreement apply "except as
provided in the Agreement on Agriculture".
123 Therefore, without regard to flexibility in operation of

118 Brazil’s First Written Submission, para. 235 ("The measure Brazil challenges as a per se violation
of the Agreement on Agriculture and the SCM Agreement is the Step 2 expor t payment program as set forth in
Section 1207(a) of the 2002 FSRI Act."); id., para. 331("The measure Brazil challenges is therefore
Section 1207(a) of the 2002 FSRI Act, which mandates the payment of Step 2 domestic payments.").
119 Brazil’s First Written Submission, para. 250 (" Section 1207(a) of the 2002 FSRI Act mandates
Step 2 export payments that are prohibited export subsidies within the meaning of SCM Agreement
Article 3.1(a)."); id., para. 341 ("The programme also constitutes a per se violation of ASCM Articles 3.1(b) and
3.2, because payments are mandatory under US law. Section 1207(a) of the 2002 FSRI Act gives no discretion
to the US Secretary of Agriculture to apply the measure in a WTO consistent manner.").
120 Appellate Body Report, US – Anti-Dumping Act of 1916 , WT/DS136/AB/R, para. 88 (adopted
26 September 2000).
121 US Answer to Question 109 from the Panel.
122 Brazil’s Answers to Question 257(a)(i) (20 January 2004), para. 8.
123 See US First Written Submission (11 July 2003), paras. 138-145. See also, Answers of the
United States to Panel questions 111-116 (22 August 2003), paras. 222-226; US Further Submission
(30 September 2003), paras. 165-176.

the Step 2 programme, to the extent the United St ates has not exceeded its domestic support reduction
commitments, the Step 2 programme and its authorizing legislation do not constitute a per se violation
of Article 3.1(a) or 3.1(b) of the Subsidies Agreement.124

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

189. With respect to export credit guarantee progr ammes, the United States will not reiterate its
myriad points regarding the carve-out conferred by Article 10.2 of the Agreement on Agriculture and
the data indicating that, in any event, premia ar e sufficient to cover long-term operating costs and
losses.125 We do note that, as Brazil recognizes, the programmes are currently below the 1 per cent
cap on premiums. Because the United States has di scretion to raise the fees to the cap, which along
with other elements of discreti on over provision of actual guarantees, creates a "discretionary" aspect
to the programme that does not "mandate" WTO inconsistent measures.

190. However, the United States notes the disingenuous response of Brazil, in paragraph 16 of its
response to Question 257(a)(i). On the one hand Braz il claims to have "looked at historical data
concerning premiums collected and costs and loss es incurred" to allege dly make its case under
item(j), but in the very same paragraph it states th at "Brazil does not agree with the United States that
item(j) necessarily ‘requires a certain retrospection.’" Brazil literally uses retrospection in an effort to
make its case on this very poin t: "Brazil has demonstrated that, retrospectively [italics added], costs
and losses incurred by the programmes exceeded premiums collected over a 10-year period". 126 The
United States of course disagrees with the factual pr emise of the statement, but Brazil cannot credibly
disagree that "a certain retrospection" is necessary for a proper analysis under item(j).

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

191. Brazil’s answer does not explain the significance of assigning the "mandatory" label to
challenged measures for purposes of its serious prejudice claim. Brazil has challenged certain
statutory and regulatory provisions as per se inconsistent with Articles 5( c) and 6.3(c) and (d) of the
Subsidies Agreement and Article XVI:1 and :3 of GATT 1994.
127 Brazil’s challenge to these
measures is "as such". 128 As explained above with respect to Section 1207(a) of the 2002 Act, under
Brazil’s per se challenge, the relevant issue is whether the challenged measures mandate a violation of
the WTO Agreement.129 They do not.

124 Step 2 payments are available to all users of domestic upland cotton within the United States, be
they domestic users or exporters. Thus, payment is not contingent upon export performance, and
Section 1207(a) does not mandate the grant or maintenance of a prohibited export subsidy within the meaning of
Article 3.1(a).
125 In the view of the United States, the relevant analysis under the Subsidies Agreement whether
export credit guarantees are export subsidies could only be the cost-to-government approach set out in item (j)
of the Illustrative List of export subsidies.
126 Brazil’s Answer to Question 257(c) (20 January 2004), para. 40.
127 Brazil’s Further Submission, para 413 ("Brazil challenges as per se violations of Articles 5(c),
6.3(c), and 6.3(d) of the SCM Agreement, and Article XVI:1 and 3 of GATT 1994 selected mandatory
provisions of the 2002 FSRI Act and the 2000 ARP Act, as they cause a threat of se rious prejudice within the
meaning of those provisions.").
128 Brazil’s Further Submission, para. 471(vii) ("The following Sections of the 2002 FSRI Act and the
referenced regulations thereto violate, as such, Ar ticles 5(c), 6.3(c), 6.3(d) of the SCM Agreement and
Articles XVI: 1 and 3 of GATT 1994 to the extent that they relate to upland cotton.").
129 Appellate Body Report, US – Anti-Dumping Act of 1916 , WT/DS136/AB/R, para. 88 (adopted
26 September 2000).

192. Both Brazil and the United States agree that , given certain conditions such as price levels,
these challenged measures would be "mandatory" in the sense that the United States could not
arbitrarily decline to provide them. However, for purposes of a mandatory / discretionary analysis, no
WTO-inconsistency is mandated by those measures because serious prejudice does not necessarily
result, even where there is no discretion not to provide payment.

• For example, a finding of serious prejudice based on Article 6.3(d) requires that there be
an increase in the world market share of the subsidizing Member in a subsidized primary
product and the increase follow a consistent trend over a period when subsidies have been
granted. This finding cannot be made in the abstract but depends upon real-world
conditions, such as the current and recent sh ares of the world market for upland cotton
held by the United States.

• Similarly, a finding of serious prejudice ba sed on Article 6.3(c) requires that there be
"significant price suppression" in the "same market" where imports of both the
complaining and responding party are found. Th is finding also cannot be made in the
abstract but requires an examination of actual prices, import levels, and an analysis of the
effects of challenged subsidies.

Thus, that certain US measures "mandate" payments given certain conditions (such as price levels)
does not establish that these measures mandate a WTO-inconsistency under a mandatory /
discretionary analysis of Brazil’s per se serious prejudice claim.

193. With respect to Brazil’s threat of serious prejudice claims "that do not involve claims
regarding the ‘per se’ validity of the statutes," Brazil colloqu ially describes the 5 US subsidies in the
Panel’s question as "mandatory," but the mandatory / discretionary analysis is inapplicable to this
threat claim. In this context, it is significant th at certain of the challenged payments are not mandated
if price conditions are not met. Thus, in evaluati ng the threat of serious prejudice resulting from these
measures, the likelihood that price conditions will be satisfied must be taken into account. (For
example, the price conditions have not been met for marketing loan payments since September 2003,
and none are currently being made. Furthermore, farm prices have risen to the point that the
counter-cyclical payment for marketing year 2003 is projected at one-third or less of its statutory
maximum.)

194. Brazil argues that "a threat of serious prej udice under Articles 6.3 and 5(c) will be more likely
to exist if the subsidies are mandatory" and that "there are no provisions in US law limiting the
payments, and, thus, limiting the threat of prejudice. " Putting aside the fact that the "circuit breaker"
provision could serve to "limit[] the payments,"
130 Brazil’s argument rests on the flawed notion that
the absence of a "legal mechanis m to limit the amount of potential subsidies that could be paid"
necessarily creates a threat of serious prejudice. This proposed standard does not withstand scrutiny.

195. As the United States has noted 131, Brazil looks to the Appellate Body report in United States –
FSC, but that report involved the "threat of circ umvention" of export subsidies standard of
Article 10.1 of the Agreement on Agricultu re. Because agricultural export subsidies are subject to
volume and value limits, it may be appropriate in that particular circumstance to conclude that the
absence of a mechanism to control the flow of s ubsidies could threaten circumvention of those
absolute commitment levels. However, the commitment in the case of Articles 5(c) and 6.3 is not to

130 Although the trigger for the circuit breaker pr ovision is compliance with the United States’ AMS
commitments, the Secretary would appear to have discretion over what "adjustments in the amount of such
expenditures" would be made. That is, the Secretary could determine to make adjustments in expenditures for
one product or multiple products or decoupled income supports.
131 See, e.g., US Opening Statement at the Second Panel Meeting, paras. 83-85.

threaten serious prejudice – that is, not threaten a particular form of adverse effect. Whether a
particular type and level of subsidy could threaten that effect necessarily depends upon a
fact-intensive examination of, inter alia , the subsidy, the relevant ma rket or markets, supply and
demand factors, etc. Thus, the FSC standard for claims of "threat of circumvention" of export subsidy
commitments is not relevant in this context.

196. Brazil’s continued reliance on EC – Sugar Export Subsidies is misplaced. In that dispute, the
panel found that as there was no legal mechanism to control the EC’s sugar export subsidies, the
subsidy constituted a permanent thre at of instability. That panel, however, provided no basis for
selecting that standard, which is not reflected in the text of the Subsidies Agreement or GATT 1994
Article XVI:1.132 We further note that Brazil itself, when it first presented this report to the Panel,
commented that "[t]he panel’s conclusion was based on several key factual findings". 133 Thus, even
that GATT panel report’s finding of threat was based on the particular factual circumstances it
reviewed, and that report would not support an abstract standard that the lack of a legal mechanism to
control the flow of subsidies suffices to create a threat of serious prejudice.

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

197. Given the way in which Brazil structured its answer, the United States directs the Panel’s
attention to its comment on Brazil’s answer to question 257(a)(ii). We do note, however, that Brazil
has not commented on or rebutted that portion of th e US oral statement referred to in the Panel’s
question. There, we pointed out that Brazil had asser ted that in either of two price circumstances, the
United States is required to act in a manner incons istent with US WTO obligations. The first price
circumstance is that "both USDA’s and FAPRI’s baseline expect marketing loan and counter-cyclical
payments to be made during the lifespan of the 2002 FSRI Act, i.e., through MY 2007. Thus, the
circumstances that will exist during the lifespan of the 2002 FSRI Act are such that all of the five
mandatory subsidies will be paid until MY 2007 and that they will threaten to cause serious
prejudice".
134 Brazil avoids discussing the fact that market price developments during marketing year
2003 have already superseded this analysis by Brazil.

198. The second price circumstance Brazil posits is when prices are sufficiently high that only
direct payments and crop insurance payments ar e made. Brazil has provided no analysis of the
estimated effects of direct payments and crop insura nce payments at such high market price levels –
that is, its economic analysis is made using baseline prices that are not sufficiently high that only
direct payments and crop insurance payments ar e made. Neither has Br azil responded to this
criticism.

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

132 Indeed, the GATT panel’s conclusion 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" does not clarify any standard to distinguish subsidies that threaten serious prejudice
from those that do not since any subsidy that has some production effect could be deemed to "constitute[] a
permanent source of uncertainty." See GATT Panel Report, EC – Sugar Exports II(Brazil), L/5011, 27S/69,
part V(g).
133 Brazil’s Further Submission, paras. 296-97.

199. As explained in the US answer to questi on 257(d), the Appellate Body’s discussion of the
"normative character and operation" of an instrument came in the context of its explanation of how to
determine whether an instrument is a "measure" subject to challenge in dispute settlement. The
Appellate Body distinguished this question from the separate question of whether the instrument, if a
measure, mandates a breach of a WTO obligation unde r a "mandatory/discretionary" analysis. Since
there is no dispute that the cited legal and regul atory provisions are "measures," the "normative"
character of those measures is not at issue. Indeed , Brazil recognizes this in stating that, "[a]s used by
the Appellate Body, the term ‘normative’ includes as a subcategory the group of measures that are
mandatory, within the meaning of the traditi onal mandatory/discretionary distinction".
135 In other
words, "normative" measures may or may not ma ndate a WTO-breach, as analyzed based on the
"traditional mandatory / discretionary distinction."

200. Brazil further notes correctly that "[t]he focu s for deciding whether a measure is mandatory or
discretionary is on whether it provides government officials with the discretion to implement the
measure in a WTO-consistent manner".
136 However, discretion is only one reason why a measure
may not be found to mandate a breach of a WT O obligation. Here, Brazil’s challenge is
fact-dependent. There is no basis for presuming the existence of a particular set of facts, and hence no
basis for presuming that measures mandate a breach of WTO obligations. Brazil erroneously denies
the relevance of the conditions attached to payments.
137 For example, if, when those conditions are
met, only some of the elements which establish a breach have been shown to exist, then there is no
breach.

201. The United States has explained that, given th e existence of certain conditions (for example,
in the case of marketing loan payments, an adjusted world price less than 52 cents per pound), the five
sets of measures Brazil challenges on a per se basis would mandate that payments be made.
However, as set out in the US comment on Brazil ’s answer to question 257(a)(ii), these measures do
not mandate any inconsistency with the obligati on not to cause serious prejudice because payment
alone is not sufficient to establish a breach of th e obligation. Even if all the conditions mandating
payment have been met, one cannot simply presume that serious prejudice will result; it must also be
demonstrated that the effect of the subsidy is one or more of the effects listed in Article 6.3 of the
Subsidies Agreement and that serious prejudice results from such effect(s). Moreover, it cannot be
disregarded that when those conditions ha ve not been met, those payments will not be made and
therefore cannot cause serious prejudice.

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

202. With respect to Brazil’s arguments relating to its threat of serious prejudice claims, the
United States refers the Panel to its comment on Braz il’s answer to question 257(a)(ii). We do find it
revealing that, as in its further rebuttal submissi on and its statements at the second panel meeting,
Brazil makes no reference to the "clearly foreseen a nd imminent" standard it set forth in its further
submission.
138 The absence is even more striking when one considers Brazil’s argument that,
"[h]aving established the existence of present se rious prejudice from the actionable subsidies,

135 Brazil’s Answer to Question 257(b), para. 24.
136 Brazil’s Answer to Question 257(b), para. 27.
137 Brazil’s Answer to Question 257(b), para. 29.
138 See, e.g., Brazil’s Further Submission, para. 292 ("Prior to addressing the specifics of these three
claims, Brazil sets forth two legal standards that could be used to analyze the threat of serious prejudice. The
first is the standard established by the GATT Panels in EC – Sugar Exports I (Australia) and EC – Sugar
Exports II (Brazil) of a "permanent source of uncertainty" requiring a demonstration that guaranteed subsidies
by a large exporter have no effective production or expor t limitations. The second standard includes the same
elements necessary to demonstrate pr esent serious prejudice focusing on the likely effects of the subsidies in
suppressing world prices and in increasing and maintaining a high level of world export market share.").

demonstrating that such prejudice is ‘clearly foreseen and imminent’ from the effects of the same and
even larger subsidies is not difficult".139

203. We would suggest that to argue that "suc h prejudice is ‘clearly foreseen and imminent’"
became much more difficult for Brazil as upland cotton prices recovered over the course of marketing
year 2003. That is, the increase in prices had the simultaneous effect of reducing current outlays (for
example, no marketing loan payments have been made since September and projected
counter-cyclical payments have been reduced by two-thirds) and invalidating Brazil’s (flawed)
economic analysis for marketing years 2003-2007, which was based on an ou tdated FAPRI baseline
projection that understates the MY2003 AWP by 54 pe r cent and overstates the estimated marketing
loan gain by nearly 15 cents per pound (or 100 per cent). The 5-year high prices reached in marketing
year 2003, and the high futures prices for th e remainder of marketing years 2003 and for the
marketing year 2004 crop, also severely undercut Brazil’s rhetorical linking of the large amount of
outlays in past marketing years with the extremely low prices experienced.

• That is, if US subsidies caused "significant price suppression" in marketing years
1999-2001, and Brazil claims that support under the 2002 Act has " significantly
increased" from those levels
140, then how can prices have rebounded to 5-year highs?

Thus, Brazil has good reason not to focus the Pane l’s attention on actual market developments 141,
which demonstrate that there is no "clearly for eseen and imminent" likelihood of future serious
prejudice. To the contrary, there is a clearly foreseen and imminent likelihood of record cotton
plantings in Brazil142 and of continued high cotton prices in marketing year 2004.

204. With respect to Brazil’s arguments relating to the export credit guarantee programmes, the
United States refers the Panel to its comment on Brazil’s answer to question 257(a)(i). In additions to
those observations, the United States further notes th at Brazil has not explained why premium rates at
any particular level, let alone if they were significantly increased to the one per cent rate of GSM-102,
will necessarily not be sufficient to cover long-term operating costs and losses. The United States has
numerous mechanisms, such as evaluation of cred itworthiness of particular countries and the
establishment of individual bank limits, to insula te itself from "credit risks and meet costs". 143 Brazil
does not suggest a "magic bullet" rate that would under all circumstances necessarily cover long-term
operating costs and losses because it cannot, nor does it explain why the flexibility inherent in the
operation of the export credit guarantee programme is necessarily less effective than some unknown
rate.

205. With respect to Brazil’s threat of circ umvention claim against the CCC programmes "as
such," this claim cannot stand. Assuming arguendo that Article 10.2 of the Agreement on Agriculture
contrary to its terms did not obligate Members to work towards internationa lly agreed disciplines on
export credit guarantees and thereafter provide e xport credits only in conformity with such
disciplines, then the only way to judge whether the export credit guarantee programmes provide an

140 See Brazil’ s Further Submission, para. 309 ("The 2002 FSRI Act, along with the 2000 ARP Act,
create a legal structure guaranteeing and mandating the payment of significantly increased levels of spending for
the production, use and export of US upland cotton beyond the 1996 FAIR Act and special appropriation bills in
1998-2001.") (emphasis added).
141 See Brazil’s Further Submission, para. 308 ("The evidence presented by Brazil below is based on
facts regarding the mandated and unlimited nature of the US subsidies, as well as on actual market conditions
demonstrating the present and likely fu ture effects of the US subsidies.") . As the Panel will have noted,
subsequent to Brazil’s further submission, Brazil focused on the first half of this passage and sought to minimize
the latter half.
142 Exhibit US-131 ("Brazil’s Mato Grosso to tr iple winter cotton area," Reuters, 2004-01-20
("Increased winter cotton planting will result in a record overall area.")).
143 Brazil’s Answer to Question 257(c) (20 January 2004), para. 40.

export subsidy – and hence either circumvent US export subsidy reduction commitments or threaten
to – is to look to item (j) of the Illustrative List. Under item (j), the relevant inquiry examines whether
premiums are sufficient to cover long-term operating costs and losses. That is, it is the operating
experience of the programmes that would matter. Thus, the programmes "as such" could not threaten
circumvention.

206. Brazil argues in paragraph 39 that the expor t credit guarantee programmes themselves "confer
‘benefits’ per se ." The United States has previously noted Article 10.2 provides the appropriate
analysis for claims against export credit guarant ee programmes for agricultural products. Were the
Subsidies Agreement relevant to such programmes, th e relevant test would be that of item(j) of the
Illustrative List of Export Subsidies; the Unite d States has shown that the export credit guarantee
programmes meet that test. Further, we would note that Brazil has not demonstrated that any benefit
is conferred by these programmes; in fact, Brazil h as conceded that it "is not in a position to quantify
the benefit to the recipients that has arisen from the application of the GSM 102 export credit
guarantee programme to exports of US upland cotton between MY 1999-2002.
144 Neither has Brazil
attempted to quantify any alleged benefit to reci pients of export credit guarantees for any other
agricultural products. Thus, Brazil may not obtain findings under Articles 1.1 and 3.1(a) of the
Subsidies Agreement by virtue of Articles 10.2 and 21.2 of the Agreement on Agriculture, nor has
Brazil established any per se inconsistency with Article 1.1 and 3.1(a).

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

207. The Panel’s question highlights Brazil’s failure to provide its methodology prior to this late
stage of the proceedings. The United States is gratified that the Panel’s question has finally
compelled Brazil to come forward and explain its methodology for allocating decoupled income
support payments. Brazil states that it "appreciates the opportunity to describe to the Panel" this
methodology, but Brazil needed no invitation to do so. In fact, as the complaining party alleging that
certain decoupled income support payments are support to upland cotton for purposes of
Article 13(b)(ii) of the Agreement on Agriculture and actionable subsidies for purposes of Articles 1,
5(c), 6.3, and 7 of the Subsidies Agreement, it has always been Brazil’ s burden to make claims and
arguments with respect to these measures. Rath er, Brazil’s answer demonstrates that Brazil’s
proposed methodology lacks any basis in the Subs idies Agreement, any WTO agreement, or in
economic logic. Thus, the Panel should find that Brazil has not made a prima facie case of WTO
inconsistency with respect to these measures.

208. Furthermore, Brazil’s response demonstrates th at it is attempting to add new measures to its
claims in this proceeding, an attempt that is in consistent with the Panel’s terms of reference.
Payments for programmes other than upland cotton are not within the terms of reference and are to be
excluded from Brazil’s claims. Brazil cannot now alter the terms of reference to add programmes for
base acreage for other crops. As Brazil itself has admitted (in its response to question 247): "Thus,
the ‘matter’ before the Panel has not changed ( and cannot ) since the establishment of the Panel"
(emphasis added).

Brazil’s Proposed Methodology is not Based on Any Text, Nor Does It Adequately Deal with
Fundamental Subsidies Issues

209. By way of introduction, we recall the proper approach to attributing a non-tied (or decoupled)
subsidy to particular products. The United States ha s explained that a complaining party in a serious
prejudice dispute must demonstrate which product or products benefit from the challenged subsidy.
145

144 Brazil’s Answer to Question 140, para. 82.
145 See, e.g., US Further Rebuttal Submission, paras. 6-17.

This requirement flows from several sources. Fi rst, Article 6.3 and pr ovisions explaining it
specifically identify certain effects – for example, displacement or impediment, significant price
undercutting, suppression, or depres sion, and increase in world market share) – caused through a
"subsidized product".146 Thus, to determine whether "the effect of the subsidy" is one of those listed
in Article 6.3 requires a finding that upland cotton is a "subsidized product" with respect to that
subsidy.

210. Second, a "subsidy" does not exist within the meaning of Article 1 of the Subsidies
Agreement if a "benefit" is not conferred. 147 As Brazil is asserting the existence of serious prejudice
with respect to upland cotton, the challenged subsid y must actually "benefit" cotton and not any other
crop.

211. With respect to decoupled income support, a recipient need not produce upland cotton in
order to receive payment. In fact, the recipient n eed not produce anything at all – hence, the support
is "decoupled" from production requirements. Si nce decoupled income support payments do not, on
their face, provide a "benefit" to upland cotton, the question of what products benefit from the subsidy
arises.

212. Brazil now answers this question by inven ting a methodology by which "excess" base acres –
that is, base acres of a crop historically grown on the farm in excess of the planted acres of that crop
in a given year – are allocated to other crops wi th "excess" planted acres (but only if they are
"programme crops") – that is, planted acres in exce ss of the base acres of that crop historically grown
on the farm. It is ironic to recall that Brazil criticized the US approach to this issue by writing that the
"alleged requirement" to allocate untied subsidies acro ss the total value of production on a recipient’s
farm "lacks any textual basis".
148

• In fact, the Panel will search Brazil’s answer to question 258 in vain for a single citation
to a WTO provision that sets out or even indirectly supports its proposed allocation
methodology.

213. The methodology explained by the United States, on the other hand, is rooted in the text and
context of the Subsidies Agreement. As set out a bove, to establish that the effect of a subsidy is
serious prejudice with respect to upland cotton, Brazil must identify the subsidized products – that is,
the products that benefit from the payment and th e portion of those payments that benefit upland
cotton. Annex IV provides useful context in its methodology for calculating an ad valorem
subsidization rate. An ad valorem subsidy rate is the quotient of a numerator (subsidy amount) and a
denominator (value of the subsidized product). Thus, to perform the calculation, one must know what
the subsidized product is.

146 For example, for purposes of a claim under Article 6.3(c) of the Subsidies Agreement, the "effect of
the subsidy" must be "significant price undercutting" or "significant price suppression, price depression, or lost
sales" caused by " the subsidized product ." Article 6.5 confirms that price undercutting includes "any case in
which such price undercutting has been demonstrated through a comparison of prices of the subsidized product
with prices of a non-subsidized like product supplied to the same market." Similarly, under Article 6.3(d) "the
effect of the subsidy" must be an increas e in world market share "in a particular subsidized primary product or
commodity." Finally, under Articles 6.4 and 6.3(b), pursuant to which Brazil is not claiming serious prejudice,
the "change in relevant market shares " involves an examinati on of the "relative shares of the market" of the
non-subsidized like product and "the subsidized product."
147 See Panel Report, United States – Imposition of Countervailing Duties on Certain Hot-Rolled Lead
and Bismuth Carbon Steel Products Originating in the United Kingdom , WT/DS138/R, adopted 7 June 2000,
paras. 6.65 and 6.66 (quoting and agreeing with Canada – Aircraft panel: "‘A "benefit" does not exist in the
abstract, but must be received and enjo yed by a beneficiary or a recipient. Logically, a "benefit" can be said to
arise only if a person . . . has in fact received something.’").
148 Brazil’s Further Rebuttal Submission, para. 103.

• Paragraph 2 of Annex IV provides that " the value of the product shall be calculated as the
total value of the recipient firm’s sales in the most recent 12-month period, for which
sales data is available, preceding the period in which the subsidy is granted" (footnotes
omitted & italics added).

• Paragraph 3 of Annex IV modifies the genera l principle of paragraph 2, providing that
"[w]here the subsidy is tied to the production or sale of a given product , the value of the
product shall be calculated as the total value of the recipient firm’s sales of that product
in the most recent 12-month period, for which sales data is available, preceding the period
in which the subsidy is granted" (italics added).

Thus, "[w]here the subsidy is [not] tied to the production or sale of a given product," the general
methodology of paragraph 2 applies. Because the "v alue of the [subsidized] product" is the "total
value of the recipient firm’s sales," it follows that the subsidized product is the entirety of what the
recipient sells. To determine the share of the subsid y that is attributable to upland cotton, one would
multiply the value of the payment by the share of the total value of production accounted for by
upland cotton. Brazil does not deny that both th e EC and Brazil apply this very methodology for
purposes of their domestic countervailing duty procedures
149, nor that Brazil has proposed that
Members adopt this very methodology as a "guideline" on calculating the amount of the subsidy.150

214. Brazil can only assert that the allocation methodology set out in Annex IV of the Subsidies
Agreement and applied by Brazil itself and th e EC for purposes of their countervailing duty
procedures "are irrelevant to Article 6.3 claims". 151 And yet, some allocation methodology for
purposes of Article 6.3 is necessary to deal with non-tied (decoupled) payments – to assert otherwise
is to deny the relevance of the "subsidy" definition of Article 1 as well as those provisions of Article 6
contingent on the existence of a "subsidized produc t". However, Brazil’s proposed methodology is
not even based on a Subsidies Agreement text, nor based on its own procedures for determining the
subsidized product that benefits from a non-tied (decoupled) payment. One could reasonably ask how
Brazil’s own countervailing duty procedures could d eal with non-tied subsidies in one way while
Brazil proposes a contradictory approach for purposes of its serious prejudice claims, given that both
situations are faced with the same issues of whether a subsidy benefits a particular product.

215. In judging the credibility of Brazil’s proposed methodology in comparison to the
methodology explained by the United States, the Panel may wish to compare the sources that Brazil
and the United States, respectively, have drawn upon:

Comparison of Allocation Methodologies for Non-Tied (Decoupled) Payments
Party Methodology Interpre tive and Other Sources
Brazil Payments for base acres for historically grown crop are
attributed to current plantings of that crop, if any; payments
for base acres in excess of plantings are attributed to all
crops planted in excess of base acres for that historically
grown crop by the proportion of a crop’s excess planted
acres to total excess planted acres
None
152

149 See Brazil’s Opening Oral Statement at the Second Panel Meeting, para. 4.
150 Paper by Brazil, Countervailing Measures: Illustrative Major Issues, TN/RL/W/19, at 6
(7 October 2002) ("If the benefit of a subsidy is limited to a particular product, the denominator should reflect
only sales [production/exports] of that product. If this is not the case, the denominator should be the recipient’s
total sales.").
151 Brazil’s Opening Statement at the Second Panel Meeting, para. 4.
152 See Brazil’ s Answer to Question 258, paras. 43-55.

Comparison of Allocation Methodologies for Non-Tied (Decoupled) Payments
Party Methodology Interpre tive and Other Sources
United States Payments that are not tied to the production or sale of a
given product are attributed to all the products the recipient
produces; the subsidy benefits a particular product by its
share of the total value of production
SCM Agreement, Article 1.1(a);
Articles 6.3, 6.4, 6.5; Annex IV, paras.
2-3

CVD practice, Brazil and EC

Brazilian CVD proposal
153

Simply put, Brazil has pointed to nothing in the WTO agreements that would support its approach to
the allocation of non-tied (decoupled) payments.

216. Finally, Brazil’s argument that the Annex IV methodology cannot apply to claims of serious
prejudice does not withstand scrutiny. Although the provision to which Annex IV relates –
Article 6.1(a) – is no longer in effect, it may still be relevant for purposes of interpreting the Subsidies
Agreement. For example, in United States – Countervailing Measures (EC) , the Appellate Body
relied on Annex IV as context in interpreting another provision of the Subsidies Agreement.
154
Similarly, in United States – FSC: Article 22.6 , Arbitrator cited the expired Articles 8 and 9 as
"helpful . . . in understanding the overall architectur e of the Agreement with respect to the different
types of subsidies it sought and seeks to address".155

217. There is a difference between looking to th e expired provisions of Article 6.1 for a legal
obligation (for example, the presumption created by a 5 per cent ad valorem subsidization rate) and
looking to the provisions of Annex IV for a methodology, or logical approach to identifying the
subsidized product. In the former case, it is precisely the expiry of the provision that indicates that the
presumption created by that rule no longer has effect. In the latter case, unless there is some basis to
draw a negative implication from the expiry of the rule in Article 6.1, the methodology can be
examined for its underlying logic. If the methodology fits with pertinent subsidies concepts, it may
provide useful guidance in determining the product that benefits from the subsidy. In this regard, we
note Brazil’s statement that the Annex IV methodology existed only because "[n]egotiators wanted to
be certain that if such a presumption [of serious pr ejudice] was created [by virt ue of Article 6.1(a)],
the precise level of subsidization was carefully calculated".
156 To the extent that the Panel agrees that
it must "be certain" that the non-tied subsidies at issue benefit upland cotton and that "the precise level
of subsidization [must be] carefully calculated," we suggest that Annex IV provides the appropriate
methodology.

Brazil’s Allocation Methodology Does Not Make Economic Sense

218. The foregoing discussion suffices to show th at Brazil’s allocation methodology has no basis
in the Subsidies Agreement. As Brazil has not de monstrated, for each challenged decoupled payment
(production flexibility contract, market loss assistance, direct, and counter-cyclical payments), what is
the subsidized product nor what is the benefit to upland cotton, Brazil cannot and has not made a
prima facie case with respect to these payments. That is, Brazil cannot begin to demonstrate "the
effect of the subsidy" if it has not shown the subsidy benefit and the subsidized product.

219. It may be of interest to the Panel, howe ver, that Brazil’s allocation methodology does not
make economic sense. In essence, Brazil’s approach arbitrarily assigns payments for base acreage to
particular planted acres, as if the current crop was "planted on" base acr eage, even though "base

153 US Further Rebuttal Submission, paras. 9-13.
154 WT/DS212/AB/R, para. 112.
155 WT/DS108/ARB, note 56.
156 Brazil’s Further Rebuttal Submission, para. 103.

acres" do not correspond to any physical acres on a farm; they are a mere accounting concept. At the
same time, however, any "excess" base acres are assigned to crops that have "excess" planted acres.
This methodology leads to situations in which a partic ular crop could be subsidized at different rates,
depending on whether it is planted on "excess" acreage or base acreage. It leads to situations in which
a particular crop could receive a greater subsidy th an another crop that accounts for more acreage on
the farm. It also allocates payments only to cer tain "programme" crops, ignoring the fact that the
subsidy recipient may grow crops for which no base ac reage exists and may engage in other types of
production. Neither situation makes sense from an economic perspective, and neither results from the
correct (Annex IV) methodology explained above.

220. The first situation is one in which a par ticular crop, such as upland cotton, could be
subsidized at different rates, depending on what type of acreage it is "planted on." For example,
consider a farm with 200 base acres, 100 of cotton and 100 of soybeans, and 200 planted acres, 150 of
cotton and 50 of soybeans. According to Brazil’s proposed methodology, 100 base acres of cotton are
allocated to 100 acres of planted cotton, leaving 50 planted acres of cotton; similarly, the 50 of the
100 base acres of soybeans are allocated to the 50 base acres of soybeans, leaving 50 "excess" soy
base acres that can be allocated to the 50 "excess" cotton planted acres. However, this allocation
methodology results in two different rates of subs idization for cotton acreage. The 100 cotton acres
deemed to be "planted on" cotton base acreage is subsidized at the rate corresponding to decoupled
payments for upland cotton base acres while the 50 co tton acres deemed to be "planted on" soy base
acreage is subsidized at the rate correspondi ng to decoupled payments for soy base acres.
157 There is
no rationale for deeming one acre of cotton to r eceive one subsidy and deeming the next acre of
cotton to receive an entirely different subsidy. These decoupled payments are not tied to production
of a particular commodity; in fact, the "upland cotton" base acreage could now be "planted to"
soybeans or nothing at all. In economic terms, money is fungible, and payments received through
decoupled payments are deemed to subsidize whatever the recipient chooses to produce. As all of the
recipient’s production is the "subsidized product," th e subsidy should be neutrally allocated to all of
those products.

221. The second situation is one in which a particular crop that is with "excess" plantings could
receive a greater subsidy than another crop that accounts for more acreage on the farm. For example,
consider a farm with 200 base acres of soybeans an d none of cotton and with 75 planted acres of
cotton and 50 planted acres of soybeans. Seventy-fi ve base acres of soybeans are attributed to the 75
planted acres of soybeans, and "[p]ayments on any further base acreage for [that] programme crop[ is]
allocated to the crops for which planted acres exceed base acres".
158 Since cotton is the only crop "for
which planted acres exceed base acres, payments for 125 base acres of soybeans are allocated the 50
acres of cotton. 159 This produces the anomalous result that the lesser planted crop (upland cotton,
with 50 planted acres) would be deemed to receive a greater subsidy than the crop with greater
planted acreage (soybeans, with 75 planted acres) . If the same farm decided to plant 75 acres of
soybeans and only one acre of cotton, again, all of the "ex cess" base acres would be allocated to the
one acre of cotton. Again, this result mak es no economic sense since the farm "allocated" its
plantings 75 to 1, soy over cotton. The allocation of payments not tied to production of a particular
commodity should reflect the recipient’s decisions on what production to undertake.

157 See, e.g., Brazil’s Answer to Question 258, para. 48 (Sample Farm 4: 160 planted acres of cotton are
allocated 100 base acres of cotton and 60 base acres of rice).
158 Brazil’s Answer to Question 258, para. 48.
159 See, e.g., Brazil’s Answer to Question 258, para. 51 (Sample Farm 5: 140 planted acres of cotton are
allocated payments for 160 base acres (100 cotton, 40 wheat, 20 rice).

222. Brazil’s erroneous methodology also allocat es payments only to certain "programme" crops,
for which base acreage exists. 160 This ignores the fact that the subsidy recipient may grow crops for
which no base acreage exists and may engage in other types of pr oduction. A farmer’s activities and
plantings are not restricted to "programme" crops. In the production flexibility contract era, farmers
who planted cotton did not just plant wheat, oats, ri ce, corn, sorghum, and barley. They also planted
other crops, like peanuts, sugar, soybeans, and perh aps tobacco. They may have also planted fruits
and vegetables on any acreage exceeding their base acreage. They may have produced hay or had
livestock operations on the farm. The possibilities are numerous. Given the myriad production
activities that a payment recipient could (and did) c hoose to undertake, there is no basis to allocate
non-tied (decoupled) payments solely to programme crops and not to the entirety of a farm’s
production.

223. In sum, these illogical results follow from a methodology in which payments on "excess" base
acreage are allocated only to those crops for which plantings "exceed" their base. If Brazil believes a
decoupled payment is capable of allocation when base acreage "exceeds" planted acreage, Brazil must
concede that the payment is not tied to production, use, or sale of particular commodity. However,
the same consideration must apply to those payments with respect to base acreage for which there is
an equal amount of planted acres – that is, those le gally indistinguishable payments on "non-excess"
base acres are not tied to production, use, or sale of a particular commodity either. Thus, one,
consistent allocation methodology must apply to the entire amount of a recipient’s decoupled
payments. Brazil’s erroneous a llocation methodology does not provide that. The methodology set
out in Annex IV and also applied by Brazil for purposes of its countervailing duty procedures under
Part V of the Subsidies Agreement does.

Implications of Brazil’s Erroneous Methodology for Subsidies Claims and Peace Clause

224. As Brazil’s answer makes perfectly clear, and as it had previously stated
161, Brazil rejects the
allocation methodology for non-tied (decoupled) payments suggested, inter alia, by Annex IV to the
Subsidies Agreement. That is, Brazil has refused to acknowledge that such payments must be
allocated across the total value of the recipien t’s production. Therefore, as the United States
suggested in its answer to question 256, Brazil ha s not advanced claims and arguments that would
allow the Panel to determine the subsidy benefit to upland cotton. It follows that Brazil has failed to
make a prima facie case that decoupled income support paymen ts cause or threaten to cause serious
prejudice.

225. Brazil’s refusal to adopt a proper methodol ogy for determining the subsidy benefit and
subsidized product also has important implications for its Peace Clause arguments. The Panel will
recall that Brazil argued that "support to a specifi c commodity" in the Peace Clause proviso could
only be gauged by using budgetary outlays. However, calculating the subsidy benefit to upland cotton
is indispensable – on Brazil’s approach – to determining the "support to" upland cotton. To the extent
that Brazil has not utilized the correct methodology, its Peace Clause calculation of the support to
upland cotton from decoupled payments is erroneous.

226. In addition, the fact that Brazil seeks to a ttribute upland cotton decoupled payments made for
"excess" base acres is an important point. Brazil acknowledges that these decoupled payments are not
tied to production, and therefore can be attributed across production. Our difficulty with Brazil’s
approach, is that it claims the attribution is only made to crops with "excess" acreage. As explained
above, there is no basis for attributing part of a payment to only some crops planted on the farm,

160 See, e.g., Brazil’s Answer to Question 258, para. 50 ("In Brazil’s methodology, payments available
for allocation – i.e., not allocated to the program crop itself – ar e pooled and allocated proportionally to the
remaining program crop acreage.").
161 Brazil’s Further Rebuttal Submission, paras. 103 -05; Brazil’s Opening St atement at the Second
Panel Meeting, para. 4.

rather than attributing the entire value of such payments across all production. Thus, Brazil has not
established that US domestic support measures brea ch the Peace Clause, and the US domestic support
measures are entitled to Peace Clause protection.

227. Brazil’s answer also highlights that decoupl ed income support payments do not grant "support
to a specific commodity" within the meaning of Ar ticle 13(b)(ii). Brazil has asserted that such
support can be any support that benefits upland cotton. Thus, Brazil would seek to allocate decoupled
payments to the products on the farm as set out in its methodology. However, Brazil’s approach is
incompatible with important Agreement on Agriculture concepts. As is clear from Brazil’s answer, a
payment made with respect to base acreage historically planted to one crop can be support to that crop
and support to any other "programme" crop at the same time. Such a result is inconsistent on its face
with the ordinary meaning of "support to a specifi c commodity" since such a payment would in fact
be ‘support to multiple commodities.’

228. In addition, Brazil’s approach would render nugatory non-product-specific support for
purposes of the Peace Clause. Brazil has argued th at the decoupled income support payments it
challenges are not non-product-specific support because they are not support to producers "in
general." And yet, the recipients of decoupled payments are producers "in general" because they are
free, with limited exceptions, to plant any commodi ty and are free, without exception, to undertake
other agricultural activities. Thus, they are producer s generally of whatever products they choose to
produce. By asserting that the allocation of such non-product-specific support to the commodities a
recipient produces renders such payments "s upport to a specific commodity," Brazil reads
non-product-specific support out of the scope of the Peace Clause. If non-product-specific support
could simply be allocated to a recipient’s pr oduction and thereby become support to each specific
commodity produced, there would simply be no reason to have a category of non-product-specific
support in the Agreement on Agriculture.

229. In fact, the Agreement on Agriculture does not permit an interpretation that would allocate all
non-product-specific support to specific commodities. First, the precise definition of product-specific
support in Article 1(f) ensures that support that is not "provided for an agricultural product in favour
of the producers of the basic agricultural produc t" must be categorized as non-product-specific
("support provided in favour of agricultural produ cers in general"). Second, paragraph 1 of Annex 3
establishes that non-product-specific support must be kept separate from product-specific support for
purposes of AMS calculation.
162 Brazil has stated that "support to a specific commodity" under the
Peace Clause may be measured either using budge tary outlays or an "AMS-like methodology using
rules in Annex 3".163 Therefore, since Annex 3 specifically provides that non-product-specific support
must be kept separate from product-specific support, non-product-specific support must also be kept
separate from "support to a specific commodity" fo r purposes of the Peace Clause analysis. Brazil
may not allocate non-product-specific decoupled pa yments to certain products for Subsidies
Agreement purposes and then, on that basis, assert that such allocated payments are "support to a
specific commodity" for Peace Clause purposes. The product-specific / non-product-specific
categories in the Agreement on Agriculture are sui generis and may not be rendered inutile by the
application of Subsidies Agreement concepts (subsid y, benefit, subsidized product) not used in nor
directly applicable to the Peace Clause

162 Agreement on Agriculture, Annex 3, para. 1 ("Support which is non-product-specific shall be
totalled into one non-product-specific AMS in total monetary terms.").

List of Exhibits

US131 Brazil’s Mato Grosso to triple winter cotton area 2004-01-20 20:10:01 GMT
(Reuters), By Inae Riveras

US132 Chart, US Crops Cotton su pply and utilization, and Baseline

US133 Statement By O A Cleveland 1/16/04

US134 Charts of US and Brazilian E xport Unit Values to 7 Destinations

US135 Production, Yield, Trade, and Stocks Data, MY99-02

US136 USDA/FAS US trade data, MY99-03

US137 World Trade Atlas official Brazilian trade data, MY99-03

US138 Statement of the United States at the DSB (9 January 2004) on adoption of the reports
in United States- Sunset Review of Anti-Dumping Duties on Corrosion-Resistant
Carbon Steel Flat Products for Japan

US139 USDA Weekly Cotton Market Review 1/9/04

US140 USDA Weekly Cotton Market Review 1/23/04

US141 Charts of Chinese (Domestic, Import, Export) Prices vs. A-Index

US142 NY Board of Trade, NY Cotton Exchange, 27 January 2004 futures data

TABLE OF CASES

Short Title Full Case and Citation
EC – Sugar Exports I
(Australia)
GATT Panel Report, European Communities – Refunds on Exports of
Sugar Complaint by Australia, L/4833 – 26S/290, adopted
6 November, 1979.
EC – Sugar Exports II
(Brazil)
GATT Panel Report, European Communities – Refunds on Exports of
Sugar Complaint by Brazil, L/5011 – 27S/69, adopted
10 November 1980.
US – Gasoline Appellate Body Report, United States – Standards for Reformulated and
Conventional Gasoline, WT/DS2/AB/R, adopted 20 May 1996.
EC – Hormones Appellate Body Report, European Communities - Measures Concerning
Meat and Meat Products (Hormones), WT/DS26/AB/R, adopted
13 February 1998.
Australia – Salmon Panel Report, Australia – Measures Affecting Importation of Salmon,
WT/DS18/R, adopted 6 November 1998.
EC – Bananas Panel Report, European Communities – Regime for the Importation, Sale
and Distribution of Bananas – Recourse to Arbitration by the European
Communities under Article 22.6 of the DSU , WT/DS27/ARB, adopted
9 April 1999.
Brazil – Aircraft Panel Report, Brazil – Export Financing Programme for Aircraft,
WT/DS46/RW, adopted 28 August 2000.
Indonesia –
Automobiles
Panel Report, Indonesia – Certain Measures Affecting the Automobile
Industry, WT/DS54/R, adopted 23 July 1998.-
Argentina – Textiles
and Apparel
Panel Report, Argentina – Measures affec ting Imports of Footwear,
Textiles, Apparel and Other Items, WT/DS56/R, adopted 22 April 1998.
Canada – Aircraft Panel Report, Canada – Measures affecting the Exports of Civilian
Aircraft, WT/DS70/R, adopted 20 August 1999.
Canada – Aircraft Appellate Body Report, Canada – Measures affecting the Exports of
Civilian Aircraft, WT/DS70/R, adopted 20 August 1999.
Japan – Agricultural
Products
Appellate Body Report, Japan – Measures Affecting Agricultural
Products, WT/DS76/AB/R, adopted 19 March 1999.
Korea – Dairy
Safeguards
Appellate Body Report, Korea – Definitive Safeguard Measure on
Imports of Certain Dairy Products , WT/DS98/AB/R, adopted
12 January 2000.
Canada – Dairy Appellate Body Report, Canada – Measures Affecting the Importation of
Milk and the Exportation of Dairy Products, WT/DS103/AB/R, adopted
27 October 1999.
Canada – Dairy (21.5)
(II)
Appellate Body Report, Canada – Measures Affecting the Importation of
Milk and the Exportation of Dairy Products, WT/DS103/AB/RW,
adopted 17 January 2003.
US – FSC Appellate Body Report, United States – Tax Treatment for “Foreign
Sales Corporation”, WT/DS108/AB/R, adopted 20 March 2000.
Australia – Leather Panel Report, Australia – Subsidies Provided to Producers and Exporters
of Automotive Leather, WT/DS126/R, adopted 16 June 1999.
Australia – Leather
(21.5)
Panel Report, Australia – Subsidies Provided to Producers and Exporters
of Automotive Leather, WT/DS126/RW, adopted 11 February 2000.
US – 1916 Act Appellate Body Report, United States – Anti-Dumping Act of 1916,
WT/DS136/AB/R, adopted 26 September 2000.
US – Wheat Gluten Panel Report, United States – Definitive Safeguard Measures on Imports
of Wheat Gluten from the European Communities, WT/DS166/R, adopted
19 January 2001.

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

1. Introduction and Summary

1. Brazil and the Panel have repeatedly request ed information from the United States regarding
the amount of four different types of contract payments to upland cotton producers. The Panel
requested this information five months ago, in August 2003, and again in October 2003, in
December 2003 and, finally, in January 2004. Brazil first requested this information in
November 2002. This information is relevant to th e “peace clause” portion of the dispute. It would
have permitted the Panel to determine with consid erable accuracy the amount of support provided to
upland cotton from PFC, market loss assistance, direct and counter-cyclical payment subsidies. After
repeatedly denying for over thirteen months that it even collected or maintained the payment
information, the United States finally acknowledged in its 18/19 December 2003 and 20 January 2004
Letters to the Panel that USDA collected, compiled, and organized all data that would permit an
allocation of the amount of contract payments re ceived by producers of upland cotton for MY 1999-
2002. Regrettably, even after admitting it has this highly relevant information, the United States
refuses to produce the data. Accordingly, Brazil h as no choice but to request the Panel to draw
adverse inferences from the refusal of the United States to produce this data.

2. In this document, Brazil first describes in Section 2 the factual background and the purposes
behind its various requests for contract payment information. In Section 3, Brazil details exactly what
the United States produced (and did not produce) on 18/19 December 2003 when it “scrambled” farm-
specific data and refused to produce other types of data. Brazil then addresses in Section 4 the post
hoc and invalid US arguments that the farm-specific information is “confidential” under US law. In
Section 5, Brazil sets forth the relevant WTO juri sprudence interpreting Article 13.1 of the DSU,
which requires Members to produce even confidential information when so requested by panels. In
Sections 6-8, Brazil then makes its request for the Panel to draw adverse inferences that the withheld
information would show contract payments higher than those estimated in Brazil’s 14/16
th
methodology, and that, therefore, the Panel shoul d find that the United States has no peace clause
protection. In Sections 9 and 10, Brazil attempts to use the summary information provided by the
United States on 18/19 December 2003, together with a number of assumptions, to apply Brazil’s
methodology for calculating the amount of the contract payments, as well as to perform the
methodology advanced by the United States. The re sults of this analysis each support the amount of
allocated payments, as calculated using Brazil’s 14/16
th methodology. Finally, in Section 11, Brazil
demonstrates that the Japan – Agricultural Products decision relied on by the United States is
inapplicable.

2. Brazil’s Request for Information as Posed by the Panel on 8 December 2003 and
12 January 2004

3. Brazil’s request for information is set out in Exhibit Bra-369. Brazil requested “farm-specific
data to determine the amount of cotton planted on contract base acreage during marketing year 1999-
2002.” The purpose of Brazil’s request for contract acreage and planted acreage data for each farm
producing upland cotton was to obtain actual data to permit as exact an allocation as possible of
contract payments (from both upland cotton as well as other programme crop base acreage) to current
producers of upland cotton. This farm-specifi c base and planting information (together with
requested yield base information) would have perm itted the calculation of the amount of support to
upland cotton from contract payments by combin ing two different components of support: (a) upland
cotton contract payments to current producers of upland cotton, and (b) other crop contract payments
to current producers of upland cotton. These paym ents would then be allocated to the current
plantings of upland cotton on the farm and, finally, aggregated.
1 This would help the Panel in
determining the amount of contract payments that constitute “support to” upland cotton, within the
meaning of Article 13(b)(ii) of the Agreement on Agriculture, and to decide on the peace clause.
Finally, to a large extent, the requested informati on would have also permitted the Panel to apply the

1 See Brazil’s 20 January 2004 Answers to Additional Questions, paras. 43-55.

(incorrect) US-proposed methodology for calculating the amount of “benefit” from these subsidies to
current upland cotton producers.

4. Brazil first requested this information in November 2002.
2 The Panel requested it in August,
October, and December 2003, as well as in January 2004. 3 Faced with repeated US denials that it
“maintained” such information, Brazil offered its so-called “14/16 th” methodology during the peace
clause phase of this dispute. 4 Because Brazil conclusively learned in late November 2003 ( inter alia
via the rice FOIA request 5) that the United States had falsely stat ed that it did not maintain contract
and planted acreage information for each farm, it s ought the information deta iled in Exhibit Bra-369
to confirm further its 14/16 th methodology, which was already supported by a large amount of
circumstantial evidence. In effect, Brazil sought to replace the 14/16 th methodology with a
methodology using actual farm-specific data that would provide precise information that the Panel
could rely on in making its determination of the amount of support to upland cotton. 6 There is no
question that the information withheld by the Unite d States would have been the best information for
allocating contract payments that constitute support to upland cotton.

5. Based on its experience working with the data produced in the rice FOIA request, Brazil
knew how easy it is to use the computerized farm-s pecific data to perform the necessary calculations
and present the evidence in a summary form. As the Panel could see from the computerized rice data
displayed during the meeting on 3 December 2003, this farm-specific data permits the ready
calculation of the amount of contract payment s upport provided to upland cotton producers. Brazil
had an entire team ready on 18 December 2003 (and on 20 January 2004) to perform these operations
quickly. Brazil had intended to present the evidence in a summary form (obviously not in a farm-
specific form) for its Answers to Questions on 22 December 2003. But as described below, unlike
USDA’s response to the rice FOIA request, the Un ited States intentionally “scrambled” the farm-
specific information to make it useless for purposes of the comparison sought by the Panel and Brazil,
i.e., for calculating the allocated contract paym ent figures (which the Panel had requested the
United States to provide, inter alia, in response to Question 67bis on 27 August 2003).

6. On 12 January 2004, the Panel again request ed the United States to produce the data, and
offered the United States the option to (1) produce the data using “substitute farm numbers which still

2 Exhibit Bra-101 (Questions for the Purpose of Consultations, Questions 3.4, 3.5, 3.13, 3.14 and 11.2).
Brazil has made a similar request during the Annex V procedure, during which the United States refused to
participate (Exhibit Bra-49 (Brazil’s Questions for the Purpose of the Annex V Procedure, Questions 3.8 –
3.10)). Brazil reiterated its request in note 411 of its 24 June 2003 First Submission.
3 25 August 2003 Communication from the Panel, Question 67 bis; 13 October 2003 Communication
from the Panel, Question 125(9); 8 December 2003 Communication from the Panel, second bulled point;
12 January 2004 Communication from the Panel, p. 1.
4 Brazil’s 11 August 2003 Answers to Questions 60 and 67.
5 Brazil’s request in Exhibit Bra-369 was modeled on a very similar request regarding rice made by a
private US citizen who received rice fa rm-specific information as set out in Exhibit Bra-368. The rice FOIA
request resulted in the production of farm-specific acreage information showing (a) the amount of rice contract
acreage and (b) the amount of planted rice acreage for th e entirety of rice farms between MY 1996-2002. (As
noted in Exhibit Bra-368 (Second Statement of Christopher Campbell – Environmental Working Group,
para. 6), more than 99.5 per cent of rice acreage planted is accounted for in the data provided in response to this
FOIA request. The data on rice base acreage is naturally complete.) This farm-specific information allowed the
easy tabulation of precise aggregate amounts of payments received by current rice producers between MY 1999-
2002. Brazil presented the non-confidential aggregate rice information to the Panel in Exhibit Bra-368. This
aggregated data demonstrates the absurdity of the US claim that the rice (or cotton) aggregate data is somehow
“confidential.”
6 Brazil’s 20 January 2004 Answers to Additional Qu estions, paras. 43-55. Brazil also sought the
information to rebut the US argument that under its “value” allocation methodology that the amount of support
to upland cotton would be much smaller.

permit data-matching,” and (2) to arrange for special confidentiality procedures. 7 I n i t s
20 January 2004 Letter to the Panel, the United States refused again to provide the information.8

3. The United States 18/19 December 2003 and 20 January 2004 Responses to the Panel’s
and Brazil’s Request for Information9

7. The first and fundamental conclusion from the US 18 December 2003 Letter and the
accompanying data is that the United States admits, fo r the first time, that it collects, maintains, and
can readily analyze whether every farm planting upl and cotton is doing so on contract base acreage.
It admits that it knows how many farms planted upland cotton in MY 1999-2002. 10 It admits that it
knows the amount of acreage for each farm that planted upland cotton. 11 It admits that it knows the
number of upland cotton contract acres planted to upland cotton.12 It admits that it knows the amount
of non-upland cotton contract acreage planted to upland cotton. 13 And it admits that it knows the
yield information for each farm with contract acreage. 14 Indeed, it admits that it knows the amount of
contract payments received by each current producer of upland cotton.15

8. In other words, the United States knows today, and it knew on 18 December 2003 and on
20 January 2004, exactly how many dollars of contr act payments were paid to producers of upland
cotton during MY 1999-2002. Moreover, the United States, at a minimum, had the information
necessary to make all payment calculations for MY 1999-2001 in November 2002 when Brazil first
requested it.
16 And the United States had this information for MY 1999-2002 in August 2003, in
October 2003, in December 2003, and in January 2004 when the Panel requested its production.17

7 See 12 January 2004 Communication from the Panel.
8 See US 20 January 2004 Letter to the Panel, p. 3.
9 Brazil notes that the United States provided the MY 2002 data on 19 December (one day after the
deadline set by the Panel). When Br azil refers to the 18 December data, any such reference includes the MY
2002 data provided on 19 December.
10 See Electronic PFC and DCP Summary Files prov ided by the United States on 18 and
19 December 2003 respectively. These files contain su mmarized data based on farm-specific data that is
grouped in three categories: (1) farms producing upland cotton and holding upland cotton base, (2) farms not
producing upland cotton but holding upland cotton base, and (3) farms producing upland cotton but not holding
upland cotton base. Categories (1) and (2) would be relevant in this respect.
11 See Electronic Planted Acreage Files for MY 1999-2001 and MY 2002 provided by the United States
on 18 and 19 December 2003 respectively offering fa rm-specific information but no farm-identifying
information. See also Electronic PFC and DCP Summary Files provided by the United States on 18 and
19 December respectively offering summary information.
12 This information would result from matching the farm-specific information on contract acreage and
planted acreage. The United States withheld the farm id entification number for the acreage information so that
Brazil and the Panel are unable to match the information pr ovided and to generate this information. However,
the United States performed this exercise as can be seen from the electronic PFC and DCP Summary Files
provided by the United States on 18 and 19 December 20 03 respectively. Had the United States not matched
the information, it would have been impossible to group the farms into the three categories for which summary
information is provided: (1) farms planting upland cotton and holding upland cotton contract base acreage, (2)
farms not planting upland cotton but holding upland cotton contract base acreage, and (3) farms planting upland
cotton and not holding upland cotton contract base acreage.
13 This results from the information discussed in the pr evious note. It is the residual category of the
amount of upland cotton planted in any marketing year minus the amount planted on upland cotton base.
14 See Electronic PFC and DCP Files including yield info rmation. The United States used the farm-
specific yield information to provide summaries of payment units for each crop in each of the three categories
for the contained in the PFC and DCP Summary Files provided on 18 and 19 December 2003 respectively.
15 This would be the result of multiplying the farm-specific payment units for each programme crop on
each farm that plants upland cotton by the respective payment rate for the programme crop in that marketing
year.
16 Brazil’s 18 November 2003 Further Rebuttal Submission, paras. 36-40.
17 Brazil’s 18 November 2003 Further Rebuttal Submission, paras. 36-41.

9. The Panel can readily see from the US three-page description of the data it presented on
18 December 2003 that the data provided prevents any farm-specific analysis that would permit the
calculation under either of the allocation methodologies advanced by the parties in this dispute. On
page 2, the United States states that it is producing “second
, a farm-by-farm file (with particular farm
identification information) with all the requested data (plus additional data regarding payment
quantities) but not including planted acres and cropland .”18 Further, the United States states that it is
producing “[t]hird, farm-by-farm files for planted acres . . . with the order of the farms scrambled in
order to prevent any matching of farms.”19 In short, the United States admits that it does not “provide
planted acreage information associated with an individual farm.”20 Translated, this means that neither
the Panel nor Brazil can use the provided informatio n to calculate the amount of contract payments
made to all farms producing upland cotton and allocate th e support to upland cotton. Brazil has
explained this briefly in its 22 December 2003 Answers to Questions.21

10. While the United States provided a considerable am ount of farm-specific data, the fact that it
scrambled the data on plantings made any matchi ng of contract base and current planting data
impossible, and renders all data useless for purpo ses of producing any conclusive figures under any
legitimate allocation methodology. Admitting this, th e United States then provides aggregate data for
three groups of farms: (1) those planting upland cotton and having at least some upland cotton base
acreage, (2) those not planting upland cotton but having at least some upland cotton base acreage, and
(3) those planting upland cotton a nd not holding upland cotton base.
22 The United States appears to
consider that this summary data could serve as a substitute for the farm-specific information.23 This is
fundamentally wrong.

11. The United States states as follows in its 20 January 2004 Letter to the Panel:

[T]he information relevant to the Panel’s assessment would not be farm-specific data
but rather some aggregation of data to permit this “assessment of . . . total
expenditures.” As noted above, the Unite d States has provided both farm-specific
and aggregated contract data that would pe rmit an assessment of total expenditures of
decoupled payments to farms planting upland cotton.
 24
Further, the United States has provided bot h farm-specific and aggregated contract
data that would permit the Panel to make the assessment it identifies, that is, an

18 US 18 December 2003 Letter to the Panel, p. 2 (emphasis and underlining added).
19 US 18 December 2003 Letter to the Panel, p. 2 (emphasis and underlining added).
20 US 18 December 2003 Letter to the Panel, p. 2.
21 Brazil’s 22 December 2003 Answers to Questions, para. 7.
22 See Electronic PFC and DCP Summary Files prov ided by the United States on 18 and
19 December 2003 respectively.
23 US 20 January 2004 Letter to the Panel, p. 2. (“the United States notes that it has previously
provided data that permits calculation of “total expenditures” for all decoupled payments made to farms planting
upland cotton with respect to historical base acres (whether upland cotton base acres or otherwise). In
particular, for the production flexibility contract paymen t era, we provided a farm-b y-farm file (“Pfcby.txt”)
with base acreage and yield data for all programme crops for all “cotton farms” as defined in BRA-369 and data
file (“Pfcsum.xls”) that aggregated this data for ease of use. The “programme payment units” field allows for
easy calculation of “total expenditures” to farms planting upland cotton in any given year by multiplying
payment units by the applicable payment rate. Similarl y, for the direct and counte r-cyclical payment era, the
United States provided a farm-by-farm file (“Dcpby.txt”) with base acreage and yield data and an aggregate data
file (“Dcpsum.xls”). Again, the “programme paymen t units” field allows for easy calculation of total
expenditures by multiplying payment units by the applicable payment rate. Thus, the data already provided by
the United States to Brazil and the Panel would permit an assessment of total expenditures of decoupled
payments to farms planting upland cotton.”) (notes omitted).
24 US 20 January 2004 Letter to the Panel, p. 3-4 (emphasis added).

assessment of total expenditures of dec oupled payments to farms planting upland
cotton. 25
12. Both the Panel’s 12 January 2004 Communica tion and Exhibit Bra-369 are clear that the
United States was required to produce farm-specific information, on the basis of which the allocation
of contract payments as support to upland cotton co uld be performed. The Panel’s 12 January 2004
Communication states:

[T]he Panel requests the United States to provide the same data that it agreed to
provide in its letters dated 18 and 22 Dece mber 2003 but in a format which permits
matching of farm-specific information on contract payments with farm-specific
information on plantings. The Panel consid ers it both necessary and appropriate to
seek this information in a suitable format in order to undertake its mandate to assist
the DSB in discharging its responsibilities under the DSU and the covered
agreements.
26
13. There is a fundamental reason why the US summary (non-farm specific) data does not allow
for an allocation of support to upland cotton in any given marketing year. To obtain undistorted
results, any allocation calculation has to be done on the basis of individual farms. Aggregating farm-
specific data does not generate the correct amount of contract payments to be allocated to upland
cotton. On the contrary, using the aggregate data provided by the United States to allocate payments
will inevitably trigger distortions of the results due to an aggregation problem. This problem is
illustrated by considering two cotton farms with the following combination of upland cotton base and
current upland cotton plantings.

 Farm 1 Farm 2
Cotton Base 99 acres 1 acre
Cotton Plantings 1 acre 99 acres
Aggregate Cotton Base 100 acres
Aggregate Cotton Plantings 100 acres
Suggested Aggregate Cotton
Plantings on Cotton Base 100 acres
Actual Cotton Plantings On Cotton
Base 1 acre 1 acre
Real Aggregate Cotton Plantings on
Cotton Base Acreage 2 acres

Farm 1 plants 99 acres of upland cotton and has 1 upland cotton base acre. Farm 2 plants 1 acre of
upland cotton and has 99 upland cotton base acres. In the aggregate, there are 100 acres of upland
cotton planted and 100 upland cotton base acreage – a perfect match suggesting that 100 per cent of
the upland cotton is planted on upland cotton base. The underlying farm-specific data reveals,
however, that this is not the case. Both farms only plant 1 upland cotton acre on upland cotton base.
Thus, the real aggregate upland cotton planting on upland cotton base is only 2 acres – not 100 acres.
The remaining upland cotton acreage may be pl anted on some other crop base acreage – as the
information requested by the Panel and Brazil would have established.

14. This example demonstrates that using aggregat e data to allocate contract payments distorts
the results, possibly to a considerable extent. W ithout non-scrambled farm-specific data (exclusively
controlled by the United States), it is impossibl e to assess how severe this problem is. More
importantly, the same aggregation problem arises when other crop plantings and crop base acreages

25 US 20 January 2004 Letter to the Panel, p. 4.
26 12 January 2004 Communication from the Panel, p. 1 (emphasis added).

are considered. This increases the possible distortio n that stems from the analysis of aggregate data
and makes any judgement as to the direction of the distortion (over- or under-stating the results)
impossible.

15. It follows from the discussions above that it is also necessary to have farm-specific data for
any allocation exercise. It is only these farm-spe cific data that allow for farm-specific payment
allocations, which, in turn, can be aggregated to “total expenditures.”
27 Contrary to the US
assertions,28 aggregate data will not suffice. In sum, despite its numerous assertions on
18 December 2003 and 20 January 2004 to the contrary, the United States failed to provide the
requested data.

16. In addition to not providing usable farm-specific planted acreage data, the United States also
refused to provide other information requested by the Panel and Brazil.

17. First, the Panel and Brazil also requested th e United States to produce farm-specific data on
the amount of other contract crop base acreage on farms producing upland cotton with no upland
cotton base acreage. But the United States refused to provide this information – even in summary
form.
29 Although the United States claims otherwise in its 20 January 2004 Letter, 30 the summary
files, in fact, do not contain data on contract payments to farms that plant upland cotton but do not
have upland cotton base.31 The fact that farms do not have any contract base for upland cotton cannot
mean that no such farms have any base acreage wh atsoever, which the US-pro duced data appears to
suggest. To the contrary, at least some of these fa rms are likely to have contract base for other crops,
such as rice, corn, and wheat, among others. Becau se the United States withheld that information,
Brazil and the Panel would need to make assumptio ns on the amount of contract payments received
by farms in this third category. Any such assu mptions necessarily distort the resulting allocation of
contract payments that constitute support to upland cotton.

18. It appears that the reason for the US refusal to provide even summary data on non-upland
cotton contract base acreage for these farms stems from the erroneous US argument that Brazil has
only challenged upland cotton contract payments made to current producers of upland cotton.
32 The
United States concludes, therefore, that it is ina ppropriate for Brazil to allocate contract payments
made to producers of upland cotton producing on other types of base acreage. 33 This refusal is based
on an entirely flawed legal argument. In fact, th e Panel’s terms of refere nce include the following
broad references to contract payments:

Subsidies and domestic support provided unde r [the 2002 FSRI Act] … related to …
direct payments, counter-cyclical payments … that provide direct or indirect support
to the US upland cotton industry.
34
Subsidies and domestic support provided under [the 1996 FAIR Act] … relating to …
production flexibility contract payments … provi ding direct or indirect support to the
US upland cotton industry.35

27 12 January 2004 Communication from the Panel, p. 1.
28 US 20 January 2004 Letter to the Panel, p. 2-4.
29 See Electronic PFC and CCP Summary Files provided by the United States on 18 and
19 December 2003 respectively (Information on contract base of farms in the third category).
30 US 20 December Letter to the Panel, p. 2.
31 See Electronic PFC and CCP Summary Files provided by the United States on 18 and
19 December 2003 respectively (Information on contract base of farms in the third category).
34 WT/DS267/7, p. 2.
35 WT/DS267/7, p. 2.

Subsidies provided under the [1998-2001 A ppropriation Acts, i.e., market loss
assistance subsidies]36
19. These terms of reference in Brazil’s request fo r the establishment of a panel are not limited in
any way to contract payments made on upland cotton base acres. Brazil listed contract payments
(unqualified) providing support to the US upland cotton industry, not upland cotton contract
payments providing support to the US upland cotton in dustry. Indeed, the reference to “indirect”
subsidies is more than broad enough to encompass any type of payment, including payments made
from non-upland cotton base acreage. In addition, Brazil’s allocation methodology always has
included payments made to producers of upland cotton on non-upland cotton base acreage.37 In short,
the US argument ignores the Panel’s terms of re ference, evidences a misunderstanding of Brazil’s
allocation methodology, and a misunderstanding of the Panel’s and Brazil’s requests for
information.38 (As with the other data the United States refuses to produce, Brazil discusses, in
Section 5 below, how this constitutes a violation of the US obligations under Article 13.1 of the DSU
to cooperate in a panel proceeding.39)

20. Second, the United States has not provided the requested data for market loss assistance
payments received by the farms listed for MY 1999-2001 . Therefore, the Panel and Brazil would
have to make assumptions about the amount of market loss assistance paym ents that constitute
support to upland cotton, based on the information about PFC payments that constitute support to
upland cotton. This might distort the results. Fu rther, since market loss assistance payments were
also made for soybean base (that otherwise was not e ligible to receive PFC payments), this allocation
methodology may significantly underestimate the am ount of market loss assi stance payments that
constitute support to upland cotton. 40 In its 20 January 2004 Letter, the United States appears to
recognize that market loss assistance payments we re within the scope of the Panel’s request.41 It also
implies that it has provided the information – at the very least on an aggregate basis. 42 The fact,
however, remains that it has not done so.43

21. Third, Brazil notes that the 19 December 2003 US data concerning MY 2002 does not contain
any information regarding the amount of direct a nd counter-cyclical payments made on peanut base. 44
As with the missing information on market loss assistance payments (specifically the soybean

36 WT/DS267/7, p. 2.
37 Brazil’s 22 August 2003 Rebuttal Submission, Section 2.2 and particularly paras. 32, 38, 42; Brazil’s
27 October 2003 Answers to Questions, para. 40; Brazil’s 18 November 2003 Further Rebuttal Submission,
paras. 2, 17, 50.
38 Exhibit Bra-369 (Brazil’s Request to the United States for Farm-Specific Planting and Base Acreage
Data).
39 See Section 5.
40 The Electronic DCP Summary File demonstrates that farms growing upland cotton in MY 2002
(categories I and III) also grow a significant amount of soybeans, this would have been eligible for a
considerable amount of market loss assistance payments in MY 1999-2001 (for which no such data is available).
41 US 20 January 2004 Letter to the Panel, p. 2.
42 US 20 January 2004 Letter to the Panel, p. 2 (“In particular, for the production flexibility contract
payment era, we provided a farm-by-farm file (“Pfcby.txt”) with base acreage and yield data for all programme
crops for all “cotton farms” as defined in BRA-369 and data file (“Pfcsum.xls”) that aggregated this data for
ease of use.
42 The “programme payment units” field allows for easy calculation of “total expenditures” to farms
planting upland cotton in any given year by multiplying payment units by the applicable payment rate.
Similarly, for the direct and counter-cyclical payment era, the United States provided a farm-by-farm file
(“Dcpby.txt”) with base acreage and yield data and an aggregate data file (“Dcpsum.xls”). 42 A g a i n , t h e
“programme payment units” field allows for easy calculation of total expenditures by multiplying payment units
by the applicable payment rate.”).
43 See Electronic PFC Summary File, which contains no information on soybean base for market loss
assistance payments and no information on possible discrepancies between PFC base and market loss assistance
base for the other PFC crops.
44 Exhibit US-112.

payment information), the missing data on peanut contract payments for MY 2002 would cause lower
aggregate payments allocated as support to upland cotton.
45 It follows that any such figures would
lead to understating the real support to upland cotton by an amount unknown to Brazil.

22. The United States asserts that the summary da ta it provided allows for the “easy calculation”
of “total expenditures of decoupled pa yments to farms planting upland cotton.”
46 This is simply not
true. The table below presents Brazil’s calculations of total contract payments to farms that actually
produce upland cotton in as far as they were “easy” to perform. 47 The table also reflects the holes in
the US summary data described above. These holes prevent any “easy,” or even “difficult,”
calculation of the amount of contract payments to upland cotton farms. Only by making a number of
assumptions, as detailed in Sections 9 and 10 below, can the incomplete summary data be used.

Subsidy
Programme
Farms Planting Cotton and
Holding Cotton Base
Farms Planting Cotton
and Not Holding Cotton
Base1
Total
Payments
Marketing Year 1999
PFC Payments

MLA Payments2
$695,912,51048

Marketing Year 2000
PFC Payments

MLA Payments
2
$650,579,66749

Marketing Year 2001
PFC Payments

MLA Payments
2
$520,230,90850

Marketing Year 2002
Direct Payments3

CCP Payments
3
$619,049,30551

$1,062,580,72952

 1 The United States has not provided any information on contract payments to farms that plant
upland cotton, but do not hold any upland cotton base in its summary files.

45 The President of the National Cotton Council testifie d to Congress in 2001 that he grew primarily
cotton and peanuts. Exhibit Bra-41 (Congressional Hearing, “The Future of the Federal Farm Commodity
Programmes (Cotton),” House of Representatives, 15 February 2001, p. 2). Peanuts are generally grown in the
Southern states of the United States, wh ere also cotton is grown. Therefore, it is likely that many cotton farms
have also peanut base, which is a high per-acre payment base.
46 US 20 January 2004 Letter to the Panel, p. 3-4.
47 Brazil has omitted the third category of farms, for which the United States has presented data (farms
not planting upland cotton but holding upland cotton base), as those farms do not produce upland cotton.
Therefore, any contract payments received by these farms cannot be “support to” upland cotton.
48 See Exhibit Bra-424 (Allocation Calculations Based on US Methodology and US Summary Data) for
the details of the calculation. (Also provided electronically as ‘allocation calculations.xls’).
49 See Exhibit Bra-424 (Allocation Calculations Based on US Methodology and US Summary Data) for
the details of the calculation. (Also provided electronically as ‘allocation calculations.xls’).
50 See Exhibit Bra-424 (Allocation Calculations Based on US Methodology and US Summary Data) for
the details of the calculation. (Also provided electronically as ‘allocation calculations.xls’).
51 See Exhibit Bra-424 (Allocation Calculations Based on US Methodology and US Summary Data) for
the details of the calculation. (Also provided electronically as ‘allocation calculations.xls’).
52 See Exhibit Bra-424 (Allocation Calculations Based on US Methodology and US Summary Data) for
the details of the calculation. (Also provided electronically as ‘allocation calculations.xls’).

 2 The United States has not provided specific information on market loss assistance payments.
In particular, any information on soybean payments to upland cotton farms is missing.

 3 Brazil recalls that the United States withheld information on peanut base payment, thus,
these figures are in all likelihood understated.

23. As the Panel can readily see, the only “easy to calculate” payment figures are the PFC, DP
and CCP payments figures to farms planting uplan d cotton and holding upland cotton base (with the
DP and CCP payment figures being understated due to the peanut base issue). The other payment
figures relating to all market loss assistance paymen ts, and to farms that plant upland cotton but hold
only non-upland cotton base cannot be calculated, because the United States produced no data.

24. These calculations are, however, only one step to allocating the amount of contract payments
that are actually support to “upland cotton.” As Brazil has detailed above, any allocation of “support
to” upland cotton has to be performed on a farm-sp ecific basis, to avoid aggregation problems. Any
calculation using the US summary data will further dist ort the results by due to its incompleteness, as
demonstrated by the table above.

25. In sum, the fundamental shortcomings in th e scrambled and incomplete data provided by the
United States on 18 and 19 December 2003 rende r it unusable for purposes of Brazil’s allocation
methodology, discussed below,
53 and, for that matter, any allocation methodology.

26. While the United States argued in its 20 Ja nuary 2004 Letter that the summary data it
provided was useful for calculating the amount of contract acreage that constitutes support to upland
cotton
54, the Panel must realize that this is – at best – “second-best” evidence, which, due to all the
shortcomings just discussed, only allows for di storted calculation results, heavily depending on
assumptions.

27. Nevertheless, because the redacted, scrambled and incomplete US data is what was produced,
Brazil has attempted to use it.
55 In particular, in Section 9, Br azil has attempted to use the summary
data provided by the United States on 18 and 19 D ecember 2003 to allocate contract payments that
constitute support to upland cotton, within the me aning of Article 13(b)(ii) of the Agreement on
Agriculture.56 Due to the limitations of the data di scussed above, Brazil was required to make a
number of critical assumptions. None of Brazil’s assumptions would have been necessary had the

53 See Section 3 below.
54 US 20 January 2004 Letter to the Panel, p. 2.
55 Brazil notes that the data provided by the United States appears to be complete, as shown by the
following table:
MY Contract Acres (US
Data)
Contract Acres
(USDA)
Percentage Planted Acres (US
Data)
Planted Acres
(USDA)
Percentage
1999 16,416,399.4 16.4 m illion 100 % 14,572,963. 5 14.584 million 99.92 %
2000 16,306,696.2 16.3 m illion 100 % 15,388,002. 9 15.347 million 100.26 %
2001 16,245,896.4 16.2 m illion 100 % 15,463,934. 5 15.499 million 99.77 %
2002 18,558,304.2 not yet reported - 13,541,505. 9 13.714 million 98.74 %
Sources:
Contract Acres (USDA): Exhibit Bra-394 (Agricultural Outlook Tables, USDA, November 2003,
Table 19.
Planted Acres (USDA): MY 1999-2001: Exhibit Bra-4 (“Fact Sheet: Upland Cotton,” USDA,
January 2003, p. 4); MY 2002: Exhibit US-95. Contract Acres (US Data) and Planted Acres (US Data) are
taken from the Electronic PFC and DC P Summary Files provided by the Un ited States on 18 and 19 December
respectively.
56 See Section 9 below. Brazil has applied publicly available information on the payment rates for the
contract crops in the ma rketing yeas concerned ( see Exhibit Bra-394 (Agricultural Outlook Tables, USDA,
November 2003, Table 19).

United States produced the requested complete farm-sp ecific information within its exclusive control.
Therefore, Brazil cautions against the use of these results. However, Brazil offers these calculations
as further circumstantial evidence that its 14/16
th methodology is reasonable.

28. In Section 10, Brazil has also attempted to use the US data to perform the US-proposed
methodology of allocating contract payments over the total value of the crops produced on the farms
producing upland cotton.
57 Brazil strongly disagrees with the US position that such an allocation is
required under Part III of the SC M Agreement and GATT Article XVI. 58 Similarly, although Brazil
cautions against relying on Brazil’s results from applying the US-proposed methodology 59 due to the
limitations of the data and the resulting assumptions it had to make, the results would indicate that
Brazil’s 14/16th methodology generates fairly similar results.

4. The US Assertions of Confidentiality Are Baseless

29. The United States attempts to justify its “scram bling” of the acreage data on the grounds that
it is “confidential” data barred by the US Privacy Act. 60 A close examination of the facts, including
the federal court precedent that binds USDA’s admi nistrative actions, shows that the farm-specific
acreage data requested by the Panel and Brazil are not confidential.61

30. The primary basis for the US confidentiality assertion is an 11 April 2002 USDA FOIA
decision concerning FOOS Farm (Exhibit US-104). This non-appealed USDA decision stands for the
fairly narrow proposition that a FOIA request for a single farm’s planting records is an invasion of
privacy rights of that farm’s operator. In that decision, USDA found that the “release of the number
of acres farmed by FOOS Farms would not contribu te significantly to public understanding of the
operations and activities of FSA.”
62

31. As the USDA FOOS Farm decision in Exhibit US-104 demonstrates, there is clearly a
difference between a FOIA request for a single farm ’s acreage data and an across-the-board request
for all acreage information – such as that set out in Brazil’s 3 December request, and in the rice FOIA
request. USDA – and USTR – are bound by US fede ral court decisions that made exactly this
distinction. The leading case is US district court decision in Washington Post v. United States
Department of Agriculture, 943 F.Supp. 31 (D.D.C. 1996). 63 In that case, the federal court rejected
USDA’s arguments that the Priv acy Act prevented it from producing information on the US cotton
programme, including over $1 billion in marketing loan payments, Step 2 payments, and deficiency
payments, among others, to US cotton farmers. The court found that there were no violations of
privacy rights of US cotton farmers from the “discl osure of names, addresses, and payments that
commodity programme recipients received.” 64 A close reading of the decision highlights the
illegitimacy of the post hoc US assertions of confidentiality raised in this dispute. Consider the
following passages from the decision:

The nature of the list [names, addresses, amount of subsidies] sought by plaintiff in
this case does not create the same sort of personal privacy concerns or invite the kind
of unwarranted intrusion that would justif y nondisclosure. The only individualized

57 See Section 10 below.
58 See Brazil’s 18 November 2003 Further Rebuttal Submission, Section 3.5 and Brazil’s
2 December 2003 Oral Statement, Section 3.
59 See Section 10 below.
60 US 18 December 2003 Letter to the Panel, p. 1-2.
61 See also 12 January 2004 Communication from the Panel, p. 1.
62 Exhibit US-104, p. 2.
63 Cited in Exhibit US-104, p. 2.
64 Exhibit Bra-418 (Washington Post v. United States Department of Agriculture, 943 F.Supp. 31
(D.D.C. 1996, p. 5).

information that would be ascertainable from th e release of the list is that a particular
individual grows cotton, the address of the farm where the cotton is grown and where
the subsidy is received, and how much of a subsidy that cotton farmer received in
1993. It might also be deduced from the amount of the subsidy how much cotton the
producer grew in 1993. The Court is unable to di scern, nor have defendants
persuasively explained, how any of th is relatively generic information about
thousands of similarly situated business people could constitute clearly unwarranted
invasions of their personal privacy. Indeed, it is precisely because the list is so large
and the information so generic that the impact on privacy interests are so small.
65
32. The court went on to note that there was a strong public interest in the disclosure of the
information, rejecting USDA’s arguments that the data “pertaining to the cotton programme recipients
would not shed any light on the workings of the agency and that therefore there is no public interest in
its disclosure.” 66 The court found (in language that is partic ularly applicable to this WTO dispute)
that “a significant public interest lies in sheddi ng light on the workings of the Department of
Agriculture and the administration of this ma ssive subsidy programme, and plaintiffs have
persuasively demonstrated how the release of the recipients names, addr esses and subsidy amounts
could illuminate the USDA’s actions.” 67 Thus, despite the Privacy Act of 1974, the court ordered
USDA to turn over the farm-specific information.

33. A 1999 US federal court decision in Hill v. United States Department of Agriculture found
there was a privacy interest in in stances where the FOIA request sought information on loans made to
an individual borrower. Citing the Washington Post case, the court reasoned that because the
information related to the finances of one closel y-held family corporation and not to “tens of
thousands of otherwise indistinguishable business pe ople,” it found the corporation had a significant
privacy interest.
68

34. In light of this precedent, it is not surpri sing that USDA’s FOIA office in Kansas City (which
is USDA’s only FOIA office for such data) agreed on 14 November 2003 to provide complete
contract base and acreage data in relation to rice. This is because that request covered all rice planted
acreage and all rice contract acreage. Pursuant to the reasoning in the Washington Post case, USDA’s
FOIA representatives necessarily must have determin ed that because the request did not focus on an
individual producer’s farm, the interests of the public in understanding and evaluating the operation of
the contract payment schemes outweighed any privacy interests. Otherwise, the rice data would never
have been released. The post-hoc attempt by the United States on 18 December 2003 and
20 January 2004 to argue that this information was provided by “mistake” is simply not credible.

35. Brazil notes, further, that the United St ates provided no evidence that any mandatory
provisions of US law or regulations prevent the pr oduction of acreage information. The United States
incorrectly argues that the Privacy Act of 1974 prohibits the release of planted acreage information for
individual farms.
69 But nothing in the text of the Privacy Act cited by the United States requires this.
Indeed, the fact the federal court in Washington Post ordered the production of farm-specific payment
data shows the fallacy of this US arguments. The Washington Post decision teaches that the Privacy

65 Exhibit Bra-418 (Washington Post v. United States Department of Agriculture, 943 F.Supp. 31
(D.D.C. 1996, p. 3)(emphasis added). None of the information at issue this case is stigmatizing, embarrassing,
or dangerous; it does not expose these cotton farmers to creditors and nothing about the success or failure of the
farm or the wealth or poverty of the recipient.
66 Exhibit Bra-418 (Washington Post v. United States Department of Agriculture, 943 F.Supp. 31
(D.D.C. 1996, p. 3).
67 Exhibit Bra-418 (Washington Post v. United States Department of Agriculture, 943 F.Supp. 31
(D.D.C. 1996, p. 4).
68 Exhibit US-104 citing Hills v USDA decision.
69 US 18 December 2003 Letter to the Panel, p.2.

Act of 1974 does not function as an inviolate shield to protect individual crop planting data with no
exception other than the written permission of e ach US farmer, as the United States incorrectly
asserts.

36. In fact, the only reference to acreage repor ts is in what the United States incorrectly
characterizes as a “long-standing policy” set out in FSA’s FOIA Handbook.
70 But this FOIA “policy”
does not constitute a US law mandating confidentialit y of planted acreage information. It is only
guidance to FOIA officers that obviously can be disregarded by the USDA Secretary or other
implementing officials in individual cases. The release of the rice information by USDA’s FOIA
office on 14 November 2003 demonstrates that this policy guidance is not mandatory. In fact, the
statutory FOIA requirements, as interprete d by the US federal courts (as in the Washington Post
decision) clearly take priority over any internal USDA policy guidance documents. The United States
is not barred by any provision of US law, either on its face or as interpreted by US courts, from
providing the information requested by the Panel.

37. The evidence cited by the United States in suppor t of its refusal to provide the requested data
does not, therefore, support its conclusi on that the data cannot be released.
71 In effect, the US
government has attempted to create, post-hoc, a new mandatory policy for the purposes of this
dispute. This blatant attempt to prevent the Pa nel and Brazil from gaining access to information that
was readily supplied to a private US citizen in th e case of rice was rejected by the Panel in its
12 January 2004 Communication. Unfortunately, the United States’ 20 January 2004 Letter continues
this approach.

38. Finally, Brazil notes that even if the US DA FOIA policy “guidance” were set out in a
mandatory US statute, the United States could still provide the information requested by the Panel and
Brazil without “scrambling” it. As the Panel has not ed in its 12 January 2004 Communication, there
would have been various options available to th e United States to produce the information in a
manner that would have protected the confidentiality ri ghts of US farmers. Brazil made it clear in its
22 December 2004 Answers to Questions that a substitute number protecting the alleged
confidentiality rights of farmers would be acceptable.
72 Since neither Brazil nor the Panel has any
interest in an individual farm’s identity, providing the requested information in such a manner would
have provided Brazil and the Panel with the payment information that they have long sought.

39. In its 20 January 2004 Letter, the United St ates now asserts that no farm-specific data was
actually requested, as the Panel has only sought to de termine the total amount of contract payments to
farms producing upland cotton. 73 However, both the Panel’s 12 January 2004 Communication and
Exhibit Bra-369 are clear that the United States was required to produce farm-specific information, on
the basis of which the allocation of contract payments as support to upland cotton could be performed.
And as Brazil has demonstrated above, 74 the initial allocations have to be performed on a farm-
specific level to avoid any aggregation problems.

40. The United States did not even provide a complete summary of the data resulting from the
farm-specific comparison between planted and contract acreage on an aggregate basis.
75 S u c h

70 Exhibit US-106.
71 Similarly 12 January Communication from the Panel, p. 1.
72 Brazil’s 22 December 2003 Answers to Questions, para. 7.
73 US 20 January 2004 Letter to the Panel, p. 3.
74 See Section 3.
75 Of course, since the United States fails to provide other requested data, even the summary data of the
farm-specific data has huge gaps. For example, the United States does not provide data on contract base on
farms that have no upland cotton base but may have other crop contract base. Further, the United States does
not provide any MY 2002 data on peanut base on whichever type of farm, thus triggering an understatement of
the actual support to upland cotton from contract payments, calculated under any allocation methodology.

summary aggregate information is, of course, not co nfidential, since it could never reveal the names
of any producers, their farms, or the location of th e farms. Of course, such a summary document is
not a perfect substitute for the complete farm-specific data requested by the Panel. But the US failure
to present this obviously non-confidential data highlights its continuing non-justifiable concealment of
key information from the Panel and Brazil.

41. Had the United States been willing to coopera te on this issue, it could have either provided
the data, as the Panel’s 12 January 2004 Communication and Brazil’s 22 December Answers to
Questions
76 suggested, using a dummy farm number or a consolidated single file for contract and
planted acreage (with no farm number), 77 or clarified with Brazil whether there could be a way to
address the US confidentiality concern, including throught special procedures for confidential
information, as foreseen by Articles 13 and 18 of the DSU. 78 Instead, the United States has simply
chosen to refuse to produce the information.

42. Lastly, the United States’ 18 December 2003 Lette r dramatically calls for Brazil to “return”
the rice FOIA request data that was request ed and received by a private US citizen.
79 Yet, US federal
courts have held that “once records are relea sed, nothing in FOIA prevents the requester from
disclosing the information to anyone else.” 80 Thus, under US law, the rice data is in the public
domain. However, in the spirit of cooperation, Br azil notes that it understands that neither it, nor any
person in or formerly in its delegation, or which pr ovided statements to the Panel, currently retains
any of this now-public data released by USDA pursu ant to its FOIA authority. Moreover, the only
information from the rice request used by Brazil in this dispute is set out in Exhibit Bra-368, which
reflects aggregated data gleaned from the farm-specific comparisons of rice contract acreage with rice
planted acreage. Brazil assumes that even the United States would agree that this aggregated data is
not confidential.

5. There Is No Basis under WTO Rules for the United States to Withhold Planted Acreage
Information on The Basis of Confidentiality

43. As described in Section 4 above, the effect of the “scrambling” of planted acreage and
contract acreage data by the United States amounts to withholding information specifically requested
by the Panel. Further, the failure of the United States to provide any non-cotton base acreage for the
third category of farms,
81 and the failure of the United States to produce any information on market
loss assistance payments and peanut direct a nd counter-cyclical payments, also amounts to
withholding the information requested by the Panel.

44. In its 20 January 2004 Letter, the United Stat es now makes the additional argument that it can
no longer provide the requested information in an anonymous format,
82 using either a dummy farm
number, or providing a consolidated file that would contain both contract acreage and planted
acreage, but no farm serial number.
83 According to the United States, this is because it has already
provided contract acreage with farm serial numb ers, and that, with the additional information

Finally, the United States does not provide informati on on market loss assistance payments during MY 1999-
2001.
76 Brazil’s 22 December 2003 Answers to Questions, para. 7.
77 The United States was aware that neither Brazil nor presumably the Panel was interested in the farm
serial number per se.
78 The Panel has suggested that in its 12 January 2004 Communication as well.
79 The United States reiterates its request in its 20 January 2004 Letter to the Panel, p. 3.
80 Swan v. SEC, 96 F.3d 498, No. 95-5376, slip. Op. at 4 cited in Washington Post, Exhibit Bra-418,
p. 2.
81 Those that produce upland cotton, but do not have upland cotton contract acreage.
82 This was suggested by the Panel in its 12 January 2004 Communication.
83 As suggested by Brazil in its 22 December 2004 Answers to Questions, para. 7.

requested by the Panel, Brazil would be able to deconstruct the “confidential” farm serial number.
84
This argument is irrelevant, because the United Stat es has an obligation to produce the information,
even if it is “confidential.”

45. The United States asserts that, pursuant to th e US Privacy Act, it cannot release so-called
“confidential” farm-specific planted acreage information associated with a particular farm.
85
Nevertheless, despite the alleged bar of the US Privacy Act, the United States produced farm-specific
information concerning the contract acreage d esignating it as “confidential due to its sensitive
nature.”86 The United States never explained how it could produce contract payment information on a
farm-specific basis, which would be protected by WTO confidentiality procedures, but not farm-
specific acreage information . If the WTO confidentiality procedures are good enough for one set of
confidential data, then they must be good enough for another set of “confidential” data.

46. But even accepting, arguendo, that the US acreage data is confid ential under US law, there is
no basis for the United States to argue or assert that the confidentiality of this information would not
be protected in these WTO proceedings. Paragraph 3 of the Panel’s working procedures states that
“Members shall treat as confidential information submitted by another Member to the Panel which
that Member has designated as confidential.” Th ese working procedures, like DSU Articles 13.1 and
18.1, require information designated as confidential by the United States to be protected as such by
both the Panel and Brazil. Nothing in the Panel’s working procedures or any other DSU rule suggests
that the United States should be concerned that its information would not be protected. Certainly,
nothing suggests that the United States may unilate rally withhold or redact requested information on
confidentiality grounds. Indeed, the Panel notes in its 12 January 2004 Communication that this
information “can be protected under the DSU and our working procedures.”
87 Brazil fully agrees.

47. Brazil notes that the US 18 December 2004 Letter also did not request the adoption of any
special confidentiality procedures. Nor did the United States attempt to contact Brazil prior to
18 December 2003 to discuss whether Brazil would agr ee to special procedures for the protection of
the allegedly confidential information – procedures that Brazil has agreed to repeatedly in past
disputes involving business confidential information.
88 The United States has similarly participated in
many earlier WTO disputes in which it has agreed to such procedures. 89 Nor has the United States
presented evidence or argument suggesting that existing WTO confidentiality provisions would not
fully protect the confidentiality of planted acreage information. It goes without saying that Brazil
would have treated such information in a confiden tial manner, consistent with its obligations under
the Panel’s working procedures, and Articles 13.1 and 18.1 of the DSU.

48. There is no legal basis under WTO rules for the United States to withhold this information
following the Panel’s August 2003, October 2003, 3 December 2003 and 12 January 2004 requests
that it produce this information. These request s to the United States to produce the information
requested by Brazil in Exhibit Bra-369 were made pursuant to the Panel’s authority under DSU
Article 13.1.

84 US 20 January 2004 Letter to the Panel, p. 3.
85 US 18 December 2003 Letter to the Panel, p. 2.
86 US 18 December 2003 Letter to the Panel, p. 3.
87 12 January 2004 Communication from the Panel.
88 Panel Report , Brazil – Aircraft , WT/DS46/R, para. 1.10; Panel Report, Canada – Aircraft ,
WT/DS70/R, paras. 9.57 – 59.
89 Panel Report, EC – Bananas (22.6) (US) , WT/DS27/ARB, para. 2.5 (as requested specially by the
United States); Panel Report, Australia – Leather, WT/DS126/R, para. 4.1; Panel Report, Australia – Leather
(21.5),WT/DS126/RW, para. 3.2; Panel Report, US – Wheat Gluten , WT/DS166/R, para. 3.1; Panel Report,

49. The Appellate Body and panels have held that a Member is required to provide information –
including confidential business information – upon a request made under DSU Article 13.1. The
Appellate Body in Canada – Aircraft found that WTO Members “are … under a duty and an
obligation to ‘respond promptly and fully’ to re quests made by panels for information under
Article 13.1 of the DSU.”90 The obligation in DSU Article 13.1 is not limited to only non-confidential
information. Indeed, Article 13.1 explicitly antic ipates the production of confidential information,
providing that “confidential information which is provided shall not be revealed without formal
authorization from the individual, body, or authoriti es of the Member providing the information.” As
the Appellate Body stated in Canada – Aircraft:

[t]o hold that a Member party to a dispute is not legally bound to comply with a
panel's request for information relating to that dispute, is, in effect, to declare that
Member legally free to preclude a pa nel from carrying out its mandate and
responsibility under the DSU. So to rule would be to reduce to an illusion and a
vanity the fundamental right of Members to have disputes arising between them
resolved through the system and proceedings for which they bargained in concluding
the DSU.91
50. The “refusal by a Member to provide info rmation requested of it” has been found by the
Appellate Body to “undermine seriously the ability of a panel to make an objective assessment of the
facts and the matter, as required by Article 11 of the DSU.” 92 The obligation to provide information
has been deemed a “requirement for collaboration of the parties in the presentation of the facts and
evidence to the panel.” 93 Panels have found that “the mo st important result of the rule of
collaboration appears to be that the adversary is obligated to provide the tribunal with relevant
documents which are in its sole possession.”94

51. In US – Wheat Gluten , the Appellate Body reaffirmed th is “obligation” and “duty” under
DSU Article 13.1 to produce all information request ed, including information designated as “business
confidential.” In that case, the Un ited States only agreed to produce to the panel, but not to the EC,
information redacted from the public version of a USITC report in a safeguard investigation. The
panel in that case proposed three different special procedures for business confidential information,
but the United States still refused to make the inform ation available to the EC. The panel indicated
that the information withheld “would have facilitate d our objective assessment of the facts in this
case, and of the matter before us.”
95 On appeal, the Appellate Body reaffirmed the “obligation” and
“duty” of Members to produce all information, incl uding business confidential information, to panels
when requested under DSU Article 13.1. In affirmi ng the panel’s ruling, the Appellate Body stated
that it “deplore[d] the conduct of the United St ates” in refusing to produce business confidential
information.96

52. The panel in Canada – Aircraft similarly emphasized the obligation of a Member under DSU
Article 13.1 to provide “highly sens itive business confidential information,” 97 as well as information
that Canada claimed was governed by a “Cabinet privilege.” 98 Similar to what the United States did
in “scrambling” the key information in this case, Canada argued that while it could not provide the
confidential “Cabinet privilege” documents, it c ould provide a summary of the criteria the

90 Appellate Body Report, Canada – Aircraft, WT/DS70/AB/R, para. 187 (emphasis added).
91 Appellate Body Report, Canada – Aircraft, WT/DS70/AB/R, para. 189 (emphasis added).
92 Appellate Body Report, Canada – Aircraft, WT/DS70/AB/R, para. 189.
93 Panel Report, Argentina – Textiles and Apparel, WT/DS56/R, para. 6.40.
94 Panel Report, Argentina – Textiles and Apparel, WT/DS56/R, para. 6.40.
95 Panel Report, US – Wheat Gluten, WT/DS166/R, para. 8.12.
96 Appellate Body Report, US – Wheat Gluten, WT/DS166/AB/R, para. 171.
97 Panel Report, Canada – Aircraft, WT/DS70/R, para. 9.293 (Canada’s description).
98 Panel Report, Canada – Aircraft, WT/DS70/R, para. 9.294.

Government used to award one particular contribution.
99 However, the panel rejected the utility of
this proffered information, finding that the information provided by Canada was not sufficient to rebut
Brazil’s prima facie case that Canada had provided export subsidies. 100 In addition, as with the
“scrambled” information provided by the United Stat es, the panel noted the uselessness of business
confidential information “redacted” by Canada. The panel found it had been so heavily redacted that
it was “simply of no value to the panel.”101

53. As in Canada – Aircraft, the US “scrambling” of contract and acreage data effectively
“redacted” the information requested by the Panel to such an extent that it cannot be relied on. In
addition, the United States’ offer to provide “summa ry” data tabulating the incomplete “scrambled”
acreage data on the one hand, and the contract acrea ge on the other hand, should be rejected by the
P a n e l . A s i n Canada – Aircraft , a party refusing to cooperate under Article 13.1 should not be
permitted to selectively present evidence while withhol ding evidence within its exclusive control that
is far more directly relevant. As the panel found in Canada – Aircraft, “Canada has outright refused
(on the basis of Cabinet privilege) to provide what in the Panel’s view are the most relevant of the
documentation that it requested regarding the five contributions identified by Brazil.”
102 D a t a
permitting the linking of contract and acreage data is similarly the most relevant of the documentation
requested by the Panel.

54. The US refusal to provide certain allegedly confidential information in this dispute without
even seeking special confidentiality provisions
103 (while providing other information it designates as
confidential) is completely inconsistent with its arguments before the Appellate Body in Canada –
Aircraft. In that appeal, the United States argued th at “the need for additional procedures for
protecting business confidential information is extr emely important, because it goes to the viability of
WTO dispute settlement as a vehicle for preservi ng the rights and obligations of Members.” 104
Moreover, the United States argued that the a pplication of procedures for protecting business
confidential information promotes important objectives, because Members’ rights and obligations
under the covered agreements can only be prese rved if due process is accorded to both the
complaining party and the responding party. 105 The United States maintained that “the demands of
due process are not satisfied, however, if the absence of such procedures precludes a Member from
properly making its case.”
106

55. Finally, while it argues in this case that the 1974 Privacy Act allegedly prevents it from
providing the acreage information in any form, the United States maintained in Canada - Aircraft that
“a Member’s national laws do not provide a basis for depriving another Member of its rights under the
WTO Agreement.”107 In that case, the EC – as a third party – argued that requiring its officials to sign
a non-disclosure form as part of special confidentiality procedures set up by the Canada – Aircraft
panel would violate their duties of disclosure under EC law. In response, the United States argued

99 Panel Report, Canada – Aircraft, WT/DS70/R, para. 9.294.
100 Panel Report, Canada – Aircraft, WT/DS70/R, para. 9.345.
101 Panel Report, Canada – Aircraft, WT/DS70/R, para. 9.345.
102 Panel Report, Canada – Aircraft, WT/DS70/R, para. 9.345.
103 In addition to DSU Article 13.1, DSU Article 18.2 provides procedures concerning the protection of
confidential information. In addition, Article 12.1 of the DSU permits panels to adopt working procedures in
addition to those established in the DSU. This would provide private business interests with adequate protection
for their business information, if it is considered of sensitive nature. If the US concern was indeed
confidentiality, it could have requested the Panel to ar range for the proper procedures to deal with the
information the US claims has such a high confidential status, that it cannot be provided to the Panel or Brazil
under normal business confidential information procedures. Therefore, such procedures could have addressed
the US concerns about the confidential nature of the information withheld. The United States has not done so.
104 Appellate Body Report, Canada – Aircraft, WT/DS70/AB/R, para. 137.
105 Appellate Body Report, Canada – Aircraft, WT/DS70/AB/R, para. 139.
106 Appellate Body Report, Canada – Aircraft, WT/DS70/AB/R, para. 139.
107 Appellate Body Report, Canada – Aircraft, WT/DS70/AB/R, para. 140.

that the EC’s claim that “its officials would be unable, under their staff regulations, to accept the
undertaking proposed ‘should not be allowed.’”108

56. In conclusion, there is no justification unde r WTO rules for the United States to refuse to
produce all of the information sought by th e Panel in August 2003, October 2003, and on
3 December 2003 and 12 January 2004. The conti nuing refusal to provide this highly-relevant
information is clear evidence of non-cooperation.

6. The Panel Should Draw Adverse Inference s from the US Failure to Cooperate

57. In light of the US failure, in response to the Panel’s four requests for information on the
amount of contract payments provided to current producers of upland cotton, to provide information
within its exclusive control, Brazil requests the Panel to draw the following adverse inferences:

 • That the application of Brazil’s methodology
109 for allocating PFC, MLA, CCP, and DP
payments to current producer of upland co tton in each of the marketing years 1999-2002
using data exclusively within the control of the United States would have resulted in
payments that were higher than those estimated by Brazil’s 14/16th methodology.

 • That the application of the US methodology for allocating PFC, MLA, CCP, and DP
payments to current producer of upland co tton in each of the marketing years 1999-2002
using data exclusively within the control of the United States would have resulted in
payments that were as high or higher than those estimated by Brazil’s 14/16 th
methodology.

 • That the information withheld by the United States would have been detrimental to its
arguments that PFC, MLA, DP, and CCP payments are not support to upland cotton,
within the meaning of Article 13(b)(ii) of th e Agreement on Agriculture, or alternatively,
“non-product-specific” support.

58. The legal basis for the Panel’s drawing adverse inferences is found in the Appellate Body’s
decision in Canada – Aircraft , where it found that “the authority to draw adverse inferences from a
Member’s refusal to provide information belongs a fortiori also to panels examining claims of
prohibited export subsidies. Indeed, that authority se ems to us an ordinary aspect of the task of all
panels to determine the relevant facts of any dispute involving any covered agreement: a view
supported by the general practice us age of international tribunals.”
110 The Appellate Body in Canada
– Aircraft stated that “if we had been deciding the issue that confronted the panel [when referring to
the drawing of adverse inferences] we might have c oncluded that the facts of the record did warrant
the inference that the information Canada withhe ld included information prejudicial to Canada.” 111
The Appellate Body based its “adverse inferences” holding on an interpretation of the DSU and the
SCM Agreement, as well as on support from the following international law jurisprudence:

 • In The Corfu Channel Case , where the International Court of Justice stated that “… the
victim of a breach of international law is of ten unable to furnish direct proof of facts
giving rise to responsibility. Such a State should be allowed a more liberal recourse to

108 Appellate Body Report, Canada – Aircraft, WT/DS70/AB/R, paras 135, 140.
109 See Brazil’s 20 January 2004 Answers to Additional Questions, paras. 43-55.
110 Appellate Body Report, Canada – Aircraft, WT/DS70/AB/R, para. 202; See also “Evidence Before
International Tribunals,” D.V. Sandifer, Revised Edition, University Press of Virginia 1975, p.153.
111 Appellate Body Report, Canada – Aircraft, WT/DS70/AB/R, para. 205.

inferences of fact and circumstantial evidence. This indirect evidence is admitted in all
systems of law, and its use is recognized by international decisions.”
112

 • Case Concerning Military and Paramilitary Ac tivities In and Against Nicaragua, where
on the basis of the facts before it, the International Court of Justice found that it could
reasonably infer that certain aid had been provided from Nicaraguan territory.113

 • Case Concerning the Barcelona Traction, Light and Power Company Limited, where
Judge Jessup, in his separate opinion, opined that “… if a party fails to produce on
demand a relevant document which is in its po ssession, there may be an inference that the
document if brought, would have exposed facts unfavourable to the party… .” 114

 • In William A. Parker (USA) v. United Mexican States , the Mexican-United States General
Claims Commissions stated that “in any case where evidence which would probably
influence its decisions is peculiarly within the knowledge of the claimant or of the
respondent Government, the failure to produce it, unexplained, may be taken into account
by the Commission in reaching a decision.”115

59. In US – Wheat Gluten , the Appellate Body provided additional guidance on the drawing of
adverse inferences, noting that the complaining pa rty must identify which facts support a particular
inference and what inferences the Panel should have drawn from those facts.116

60. In view of these legal standards, Brazil set s forth and references the facts which support the
drawing of these three adverse inferences it has requested.

61. First, at the time it refused to produce th e requested information on 20 January 2004, the
United States was aware of the following key facts: (1) it knew Brazil’s latest estimates using the
14/16
th methodology, 117 (2) it knew the results of the EWG database tabulations, 118 and (3) it had
access to all farm-specific contract, yield, payment and planted acreage data in a centralized database
that would have permitted a calculation of th e total amount of support under a variety of
methodologies, including that advocated by the United States. These facts support the drawing of the
first two (adverse) inferences requested by Brazil.

62. Second, the United States was fully capable of calculating the amount of payments allocable
to current US producers of upland cotton. As an initial matter, the data would allow for an exact
payment total of the amount of upland cotton contract payments received by upland cotton farmers.
Thus, without using any allocation methodology fo r non-upland cotton payments, the United States
knows the exact amount of all these cotton-specific pa yments. Further, the United States was fully
instructed on how Brazil calculated the support attrib utable to rice in Exhibit Bra-368, Tables 2-3 and
accompanying data. Further, throughout the briefi ngs on the different allocation methodologies, the
United States left no doubt that it was fully aware of how to calculate the amount of payments using a

112 The Corfu Channel Case, 1949, ICJ, 4, p.18, cited in Appellate Body Report, Canada – Aircraft,
WT/DS70/AB/R; note 128.
113 Case Concerning Military and Paramilitary Activities , 1986 ICJ 14, p. 82-86, paras. 152, 154-156,
cited in Appellate Body Report, Canada – Aircraft, WT/DS70/AB/R; note 128.
114 Case Concerning the Barcelona Traction, Light and Power Company Limited, 1970 ICJ 3, p. 215,
para. 97, cited in Appellate Body Report, Canada – Aircraft, WT/DS70/AB/R; note 128.
115 Reports of International Arbitral Awards, Vol. IV, 35, p.39, cited in Appellate Body Report, Canada
– Aircraft, WT/DS70/AB/R; note 128.
116 Appellate Body Report, US – Wheat Gluten, WT/DS166/AB/R, para. 176.
117 Set out in Brazil’s 22 December 2003 Answers to Question, para. 8.
118 Brazil’s 18 November 2003 Further Rebuttal Submission, Section 2.1. See also Brazil’s
28 January 2004 Comments on US Answers, paras. 20-22.

number of different methodologies, including Brazil’s 14/16 th methodology, as well as the
methodology advocated by the United States itself. 119 Given this knowledge, opportunity, and
capability, the Panel may infer that the United Stat es knew the amount of payments resulting from the
application of both the Brazilian as well as their own allocation methodologies. These facts support
the drawing of the first two (adverse) inferences.

63. Third, the consistently misleading information provided by the United States concerning its
possession of data regarding acreage and payment inform ation for contract payments is another fact
supporting the drawing of all three adverse inferen ces. Brazil first requested this information in
November 2002, and then repeatedly through December 2003. The Panel made similar requests. It is
uncontested that the United States government, thro ugh USDA’s Kansas City Administrative Office
and its database, collected, organized and maintained in a centralized database all of the data that
would be responsive to Brazil’s and the Panel’s re quests. The United States now argues it did not
“maintain” information on the amount of contract payments paid to current producers of upland
cotton.
120 The ordinary meaning of the word “maintain” is “practice habitually,” “observe,” “cause to
continue (a state of affairs, a condition, an activity).” 121 The rapid response of USDA’s Kansas City
office to the rice FOIA request provides compe lling evidence of habitual practice of the US
government in “maintaining” both contract and planted acreage information.122 In sum, the pattern of
misrepresentations supports the finding that the Unit ed States sought to hide this information and to
mislead Brazil and the Panel, because it knew that th e requested information would be harmful to its
defence.

64. Fourth, a major issue in this dispute has b een whether the US contract payments are support
to upland cotton, or alternatively, as the United St ates argued, whether they are “non-product-specific
support.” As the United States knew on 20 January 2004, a key element of Brazil’s proof of support
to upland cotton is demonstrating the extent to which the allegedly “decoupled” contract payments are
actually paid to current producers of upland cott on. Brazil has provided extensive circumstantial
evidence demonstrating this link. 123 The refusal of the United States to provide the information
provides the basis for the Panel to infer that the United States knew this information would be
detrimental to its argument that these payments were not linked to current cotton production.

65. In deciding whether to draw any adverse inferences, the Panel may wish to consider the
precedential impact of the US refusal to cooperate. If a Member can easily block a panel’s request for
information without any consequences, it will provid e a clear roadmap for avoiding subsidy and other
WTO disciplines in the future. It will also encour age parties to a future dispute to obfuscate and
refuse to provide requested evid ence. The WTO dispute settlement system will simply cease to
function over the long run unless there are c onsequences that follow from a Member’s non-
cooperation. In short, the US lack of coopera tion, in the words of the Appellate Body in US – Wheat
Gluten, is to be “deplored,” rather than rewarded.
124

119 US 18 November 2003 Further Submission, paras. 11-17; US 2 December 2003 Oral Statement,
paras. 23-24, 26-28.
120 US 22 December 2003 Answers to Questions, paras. 6-11.
121 New Shorter Oxford Dictionary, 1993 edition, p. 1669.
122 The current WTO rules do not permit Brazil to rec over the enormous costs it has incurred in this
dispute to prove circumstantially what the United States had in its possession for the past 15 months. The Panel
should consider that, if the misrepresentations made by the United States in this proceeding had been made in
US Federal Courts, they would have resulted in the aw ard of significant attorney’s fees and costs in a US
Federal Court. See e.g., Federal Rule of Civil Procedure 26(g)(2)(A), (3) (sanctions include reasonable
expenses including attorney’s fees due to misleading certification of accuracy of discovery responses).
123 See e.g. Brazil’s 9 October Closing Statement, Annex I, although later submissions provided
considerable additional information such as Brazil’s 18 November Further Rebuttal Submission, Sections 2.1,
3.1 and 3.7.5.
124 Appellate Body Report, US – Wheat Gluten, WT/DS166/AB/R, para. 171.

66. Finally, any adverse inferen ces drawn by the Panel become part of the evidence on the basis
of which the Panel must make an objective assessment of the facts under DSU Article 11. Among the
best available “facts” are the adverse inferences themselves. The Appellate Body in Canada –
Aircraft held that “a panel must draw inferences on the b asis of all of the facts of record relevant to
the particular determination to be made,”
125 and that “[w]here a party refuses to provide information
requested by a panel, that refusal will be one of th e relevant facts on record, and indeed an important
fact, to be taken into account in determining the appropriate inference to be drawn.”126

7. The US Refusal to Provide the Information Requested Renders Brazil’s 14/16 th
Methodology the Most Accurate Information on Record Concerning the Amount of
Support to Upland Cotton from Contract Payments

67. Since the United States has not provided the da ta, the best available information before the
Panel is Brazil’s so-called “14/16th” methodology. This information is the most accurate proxy for the
amount of contract payments that constitute suppor t to upland cotton. By this methodology, Brazil
has made the assumption that all upland cotton is pl anted on upland cotton base. Or, put differently,
for each acre planted to upland cotton an average cont ract payment in the amount of an upland cotton
contract payment is received. Accordingly, Braz il has adjusted the amount of upland cotton contract
payments made in any marketing year by the ratio of the acreage actually planted to upland cotton and
the upland cotton contract payment base acreage in that marketing year. 127 For MY 2002, the original
ratio was about 14/16th,128 therefore the name of the methodology. In fact, Brazil has used a different
adjustment factor for each marketing year.129

68. Brazil has demonstrated with circumstantia l evidence that current upland cotton producers
need contract payments to generate suffici ent returns to remain economically viable.
130 Brazil has
also demonstrated that current producers of upland cotton need high per-acre contract payments (such
as those provided for upland cotton, rice, peanut or corn base) to cover the cost of upland cotton
production.131 Thus, in the absence of the withheld data, it is fair to assume that some upland cotton
was planted on base acreage with higher payments than upland cotton base ( e.g., rice132), and some
was planted on base acreage yielding lower contract payments than upland cotton base ( e.g., corn).
These phenomena would, on average, cancel each othe r out, so that one can reasonably assume that
the average planted upland cotton acre received a cont ract payment in the amount of an upland cotton
contract payment.133

69. In addition, the incomplete EWG data supports the conclusion that most US upland cotton is
planted on upland cotton base.
134 Three quarters of all upland cotton base payments are paid to

125 Appellate Body Report, Canada – Aircraft, WT/DS70/AB/R, para. 204.
126 Appellate Body Report, Canada – Aircraft, WT/DS70/AB/R, para. 204.
127 Since planted acreage in all marketing years is below the base acreage, this amounts to a downward
adjustment of the total payments made in relation to upland cotton base acreage.
128 The final planted acreage figure provided by the United States in a later stage of this dispute
required a slight adjustment to the figure: see Brazil’s 22 December 2003 Answers to Questions, para. 8.
129 See Brazil’s 11 August 2003 Answers to Questions, Notes to Table at paras. 97 and 130.
130 These facts are summarized in Annex 1 to Br azil’s 9 October 2003 Closing Statement but are
contained in a number of Brazil’s earlier submissions to the Panel beginning on 24 June 2003. See also Brazil’s
18 November Further Rebuttal Submission, Sections 3.1 and 3.7.5.
131 Brazil’s 22 August 2003 Rebuttal Submission, paras. 30-34 and 39-44; Brazil’s 27 October 2003
Answers to Questions, paras. 14-24 and Brazil’s 2 December 2003 Oral Statement, paras 26-27.
132 Brazil notes that the data provided by the United States does not contain any information on peanut
base payments, which would also be a high per-acre payment crop.
133 Brazil’s 18 November 2003 Further Rebuttal Submission, paras. 50-51.
134 Brazil’s 18 November 2003 Further Rebuttal Submission, paras. 22-28. See also Brazil’s
28 January 2004 Comments on US Answers, paras. 20-22.

producers of upland cotton. 135 The EWG data further demonstrates that the great majority of both
contract payments and marketing loan payments received by upland cotton producers are for upland
cotton.136 Thus, while part of the contract payment support to upland cotton comes from non-upland
cotton contract payments, any over- or under-counting resulting from Brazil’s “14/16th” methodology
would be minimal.

70. Finally, in making this factual finding, the Panel should also take into account, as a fact of
record, the adverse inferences outlined in Section 6 above, which fully support a finding that Brazil’s
14/16
th methodology is correct. In addition, the Pane l should take into account the adverse inference
that the US allocation methodology would have resulted in contract payments at least as high as those
in Brazil’s 14/16th methodology. However, in making its obj ective assessment of the facts, the Panel
should reject the partial information proffered by the United States in its 18 and 19 December 2003
Letter and reflected in various submissions. 137 A s i n Canada – Aircraft , this heavily redacted
information, which excludes the most relevant information requested, should be ignored.

8. Brazil’s Intended Methodology For Allocating Contract Payments as Support to Upland
Cotton

71. Brazil intended to use the data requested fro m the United States to calculate the amount of
contract payments that constitute “support to” upland cotton,
138 within the meaning of Article 13(b)(ii)
of the Agreement on Agriculture. 139 In its 20 January 2004 Answers to Additional Questions, Brazil
provided more detailed information concerning its allocation methodology. 140 Brazil emphasizes that
it intended to apply this methodology since early on in this dispute, but was prevented from doing so
due to (1) the US denial that the data existed and (2) the US refusal to prov ide the data requested by
the Panel and Brazil. 141 Only because of the US argument th at it did not have the information
requested and – after demonstrating the incorrectness of that argument – because of the US refusal to
provide the information, Brazil suggested to apply its so-called “14/16th” methodology as a proxy.

135 Brazil’s 18 November 2003 Further Rebuttal Submission, paras. 23-24.
136 Brazil’s 18 November 2003 Further Rebuttal Submission, para. 26.
137 E.g., in note 12 of the 22 December 2003 US Answer s to Questions the United States asserts that
only 30.7 per cent of cropland on US upland cotton farms was planted to upland cotton in MY 2002. This
figure is however misleading, as the United States has classified as “upland cotton farm” not only farms that
currently grow upland cotton, but also farms that historically grew upland cotton (and, therefore, have upland
cotton base) yet have stopped to do so. This is an inappropriate categorization. By contrast, in paragraph 186 of
its 22 December 2003 Answers to Questio ns, the United States provides the correct figure of 48 per cent of
cropland on farms actually producing upland cotton is planted to upland cotton. The Panel should not allow the
United States to selectively use its data (which cannot be checked), but not allow the Panel or Brazil to receive
the data needed to calculate the amount of support to upland cotton from the contract payments.
138 Brazil’s 18 November 2003 Further Rebuttal Submission, paras. 3, 17-19, 47-49; Brazil’s
2 December 2003 Oral Statement, para. 2 and Exhibit Br a-369 (Brazil’s Request to the United States for Farm-
Specific Planting and Base Acreage Data).
139 Brazil notes that it is its position that the peace cl ause is an affirmative defence and that it is the
burden of the United States to demonstrate that its curre nt support to upland cotton does not exceed the support
decided during 1992 ( see inter alia Brazil’s 22 July 2003 Oral Statement, pa ras. 5-11). The United States has
not lived up to its burden of proof and has repeatedly failed to provide the data that would allow the Panel and
Brazil to calculate the exact amount of support to upland cotton.
140 Brazil’s 20 January 2004 Answers to Additional Questions, paras. 43-55.
141 See inter alia Brazil’s 9 October 2003 Closing Statement, paras. 2-9, in particular para. 2, 6 and 9;
Brazil’s 18 November 2003 Further Rebuttal Submission, paras. 2-3, 17, 32 and 47-51.

9. Using the Problematic and Incomplete US 18 / 19 December 2003 Aggregate Data for
Allocating Contract Payments as Support to Upland Cotton Does Not Contradict
Brazil’s 14/16th Methodology

72. In this Section, Brazil presents its resu lts from applying a simplified version of its
methodology applied to the US summary data. Br azil incorporates all of its reservations it has
expressed regarding this data.
142 Brazil further recalls its various arguments why contract payments
constitute support to specific commodities. 143 Therefore, contract payments are principally allocated
to the programme crops covered, as suggested by Brazil’s methodology presented in its 20 January
2004 Answers to Additional Questions.144

73. As the record demonstrates, none of four types of contract payments 145 is truly “decoupled,”
given the production of programme crops by the fa rms holding contract payment base. To the
contrary, they are intended to and, in fact, do pr ovide support for the production of programme crops.
This is particularly true in the case of high per-acre payment crops, such as upland cotton and rice. 146
Therefore, Brazil allocates contract payments to the programme crops covered. This approach is
reasonable, since contract payments are eliminated, for instance, if fruits and vegetables are grown. In
sum, Brazil maintains its position – supported by all third parties 147 – that the support from contract
payments that can be allocated to upland cotton is product-specific support within the meaning of the
Agreement on Agriculture.148

74. Although Brazil could not use the data provide d by the United States for its intended purpose,
Brazil has attempted to apply a similar but less complex allocation methodology 149 to the aggregate
data provided by the United States. 150 The summary data provided by the United States groups farms
in three different categories and provides aggregate data for these categories: (1) those farms planting
upland cotton and holding upland cotton contract ba se acreage, (2) those farms not planting upland
cotton but holding upland cotton contract base acrea ge, and (3) those farms planting upland cotton
and not holding upland cotton contract base acreage. 151 For purposes of this analysis, only the
aggregate data concerning farms in category (1) and (3) are of interest, as only those farms actually
plant upland cotton. Brazil discusses below how it has calculated the contract payment support to
upland cotton for each of these categories.

75. Due to the summary nature of this data, Braz il had to make several critical assumptions that
would not have been necessary had the United States provided usable non-scrambled farm-specific
data rather than summary data and “scrambled” farm-specific data. These assumptions are set out
below.

142 See Section 3.
143 See inter alia Brazil’s 9 October 2003 Closing Statement, Annex 1.
144 Brazil’s 20 January 2004 Answers to Additional Questions, paras. 43-55.
145 PFC, market loss assistance, direct and counter-cyclical payments.
146 See inter alia Brazil’s 9 October 2003 Closing Statement, Annex I for a summary of these
arguments.
147 See Brazil’s 22 August 2003 Rebuttal Submission, para. 13 for further references.
148 See e.g. Brazil’s 22 August 2003 Rebuttal Submission, paras. 13-23 and 24-52 for evidence and
arguments concerning the four contract payments.
149 Due to the limitations of the data provided by th e United States, Brazil had to simplify its suggested
methodology (Brazil’s 20 January 2004 Answers to Add itional Questions, paras. 43-55) so as to enable its
application to aggregate rather than farm-specific data.
150 Brazil notes that as explained above, the farm-specific data provided by the United States does not
allow for matching the contract payment data with the data on current plantings of contract programme crops.
Therefore, Brazil could only use the summary data for this allocation exercise.
151 See Electronic PFC and DCP Summary Files pr ovided by the United States on 18 and
19 December 2003 respectively.

76. First, Brazil had to assume that no “aggregati on problem” exists with the US summary data.
Brazil’s example in Section 3 above demonstrates that basing calcul ations on aggregate rather than
farm-specific data can distort the results to a c onsiderable extent. Without usable non-scrambled
farm-specific data, it is impossible to avoid this problem – although Brazil does not know how severe
the problem is in the case of upland cotton contract payments. Using the US aggregate base acreage
data and aggregate planting data to allocate contract payments will most likely trigger distortions of
the results due to the allocation problem.

77. It bears repeating that a proper allocation calculation has to be done on the basis of individual
farms to obtain undistorted results. Only aggregatin g farm-specific allocations of contract payments
as support to upland cotton generates th e correct total amount of contract payments to be allocated to
upland cotton.

78. Further critical assumptions are discussed in the course of the description of the allocation
methodology used, as set out below.

79. First, Brazil has considered the data for uplan d cotton planted on farms that also have
upland cotton base . As indicated in Brazil’s allocation approach,
152 as a first step in these
calculations, Brazil has assigned all aggregate upland cotton base payments received by farms
producing upland cotton a nd holding upland cotton base as support to upland cotton – yet only up to
the share of upland cotton base acreage th at was actually planted to upland cotton. 153 The monetary
value of contract payments to these farms was calcu lated by multiplying the payment units for a crop
base (as provided by the United States) by the paymen t rate for that crop in the marketing year in
question.154 For MY 1999-2001, all upland cotton PFC pa yments to farms producing upland cotton
and holding upland cotton base were allocated as support to upland cotton, because the aggregate
acreage planted to upland cotton by that group of farms exceeded their aggregate upland cotton base
acreage.155 For MY 2002, only a percentage of tota l upland cotton direct and counter-cyclical
payments was allocated as support to upland cotto n, because upland cotton acres planted by farms
holding upland cotton base were below their upda ted upland cotton base for that marketing year. 156
The percentage of payments allocated corresponds to the ratio of aggregated upland cotton planted
acreage to aggregated upland cotton base acreage for the group of farms producing upland cotton and
holding upland cotton base.157 It follows that in MY 2002 for this group of farms no further direct or
counter-cyclical payments from other crops were allocated.

80. Since for MY 1999-2001 upland cotton acreage planted by farms that also had upland cotton
base exceeded that base, additio nal PFC payments paid on other crop base were allocated as support
to upland cotton. As discussed in Brazil’s methodology,
158 PFC payments for other crops were
primarily allocated as support for these crops – up to the share of contract acreage planted to the
respective crop – in a manner identical to the above described first step for upland cotton. Any further
payments stemming from contract acreage not plan ted to the respective base crop were pooled and

152 Brazil’s 20 January 2004 Answers to Additional Qu estions, paras. 43-55, in particular para. 47
discussion of Sample Farms 1-3.
153 Brazil’s 20 January 2004 Answers to Additional Questions, paras. 44-48.
154 Exhibit Bra-394 (Agricultural Outlook Tables, USDA, November 2003, Table 19).
155 See Exhibit Bra-419 (Allocation Calculations Based on Brazil’s Methodology and US Summary
Data). (Also provided electronically as ‘allocation calculations.xls’).
156 See Exhibit Bra-419 (Allocation Calculations Based on Brazil’s Methodology and US Summary
Data). (Also provided electronically as ‘allocation calculations.xls’).
157 See Exhibit Bra-419 (Allocation Calculations Based on Brazil’s Methodology and US Summary
Data). (Also provided electronically as ‘allocation calculations.xls’).
158 Brazil’s 20 January 2004 Answers to Additional Questions, para. 48 discussing Sample Farm 4.

allocated as additional support to those contract crops whose aggregate planting exceeded their
aggregated base acreage.
159

81. Second, Brazil has analyzed the US summary data concerning upland cotton that has been
planted on farms without upland cotton base . Unfortunately, the United States did not provide the
requested information (even in summary form) regard ing the amount of contract acreage that existed
on those farms.
160 The second critical assumption Brazil, therefore, must make is that, for each
upland cotton acre planted on a farm without upland co tton base, contract payments were received in
an amount identical to the average per-acre paymen t allocated to upland cotton planted by the first
group of farms. This assumption triggers furthe r uncertainty about the reliability of the results,
because it assumes that this group of farms receiv es contract payments in an equal manner as
compared to group planting upland cotton and holding upland cotton base.161

82. Third, since the United States has not provided any information on the amount of market loss
assistance payments received by any farm produci ng upland cotton – the United States did not even
provide aggregate information – Brazil has assumed
162 that any allocation of market loss assistance
payment as support to upland cotton would have to be made in the same manner as the allocation of
PFC payments in the marketing year in question.163

83. Combining the resulting PFC, market loss assistance, direct and counter-cyclical payments
from these calculations yields the following amount of contract payments that would be considered
support to upland cotton.

159 See Brazil’s 20 January 2004 Answers to Additional Questions, paras. 49-55 discussing Sample
Farms 5-7. For MY 1999 and 2000, only upland cotton plantings exceeded the crop base acreage, thus, all
additional payments were allocated to upland cotton. For MY 2001, also oats and sorghum were planted on
more acreage than their respective contract base (“overp lanted”), thus, triggering additional payments being
allocated pursuant to the crop’s share of the total acreage being “overplanted.” See Exhibit Bra-419 (Allocation
Calculations Based on Brazil’s Methodology and US Summary Data). (Also provided electronically as
‘allocation calculations.xls’).
160 See Electronic PFC and DCP Summary Files pr ovided by the United States on 18 and
19 December 2003 respectively. Considering the fact that US upland cotton producers needed contract
payments to produce upland cotton in an economically viable manner, it is simply not realistic to assume that
there were farms without any kind of contract acreage planting upland cotton. See Sections 4 and 5 rejecting the
US reasoning for not providing the data.
161 Brazil also recalls that the US data for MY 2002 does not contain any information concerning the
amount of direct and counter-cyclical payments made on peanut base (Exhibit US-112). Thus, the missing
peanut contract payments for MY 2002 are also missing in the calculation of the amount of direct and counter-
cyclical payments that constitute support to upland cotton. It follows that these figures are understated by an
amount unknown to Brazil.
162 Brazil recalls that market loss a ssistance payments are made on the same basis as PFC payments –
with the exception that market loss assistance payments were also made for soybeans.
163 See note to the summary table below. This assumption leads to an understatement of the resulting
payments, since market loss assistan ce payments also covered soybean production in additional to any PFC
payment base. Thus, just relying on PFC payments as a proxy leaves out a potential significant amount of
money that may have supported upland cotton.

MY 1999 2000 2001 2002
PFC Payments $619,336,990.11 $564,607,044.52 $456,554,286.78 -
MLA Payments164 $616,320,738.53 $601,042,809.61 $630,594,516.48 -
DP Payments - - - $464,596,092.01
CCP Payments - - - $1,025,653,053.34

84. For purposes of comparison, Brazil presents below its results based on the “14/16 th”
methodology:165

MY 1999 2000 2001 2002
PFC Payments $547,800,000 $541,300,000 $453,000,000 -
MLA Payments $545,100,000 $576,200,000 $625,700,000 -
DP Payments - - - $454,500,000
CCP Payments - - - $935,600,000

As the Panel can see, Brazil’s figures based on the 14/16
th methodology are consistently below the
results using the US summary data provided on 18 and 19 December 2003. It follows that the results
of this methodology using the flawed US summary da ta, at the very least, do not contradict Brazil’s
14/16th methodology. Judging from these results, it appears that, even having in mind all the
limitations of the US data as discussed above, 166 Brazil’s methodology is rather conservative
compared to an allocation based on the US summary data, which the United States seems to endorse
as a valid base for calculating support to upland cotton.167

10. Application of The US-Proposed Allocation Methodology to The US Summary Data

85. Brazil recalls that its allocation methodologies o ffered so far and their results are provided in
the context of the peace clause analysis under Ar ticle 13(b)(ii) of the Agreement on Agriculture. 168
The United States has criticized Brazil’s 14/16th methodology and asserts that, for purposes of Brazil’s
claims under Articles 5(c) and 6.3 of the SCM Agreemen t, Brazil has to allocate contract payments to
farms producing upland cotton over the entire sales of those farms. 169 (On the other hand, the
United States maintains that any such allocation is not warranted for purposes of the peace clause 170 –

164 The amount of market loss assistance payments has been calculated by applying the ratio of
allocated PFC payments (as calculated) to upland cotton PFC payments as provided in Exhibit Bra-4 (“Fact
Sheet: Upland Cotton,” USDA, January 2003, p. 6) to the amount of upland cotton market loss assistance
payments as provided by the same source.
165 The figures in this table are reproduced from Brazil’s 9 September 2003 Further Submission,
Table 1. MY 2002 data is taken from the updated figures presented by Brazil in its 22 December 2003 Answers,
para. 8.
166 Brazil notes that some of the limitations result in distortions in different directions. The omission of
peanut base information tends to lower the amount of payments allocated. The missing information on market
loss assistance payments has an unknown effect and so does the aggregation problem. The missing information
on base acreage of farms that produce upland cotton but have no upland cotton base could slightly overstate
results – however, Brazil cautions that this effect may not be too strong, as the mount of upland cotton planted
on such farms is very limited.
167 US 20 January 2004 Letter to the Panel, p. 2.
168 Brazil maintains that no allocation methodology is warranted under Part III of the SCM Agreement.
Rather, it is the effect of the subsidies that is the subject of scrutiny.
169 See e.g. US 7 October 2003 Oral Statement, para. 17; US 18 November 2003 Further Rebuttal
Submission, paras. 11-17; US 2 December 2003 Oral Statement, para . 24; US 22 December 2003 Answers to
Questions, paras. 11, 159-164, 184.
170 US 22 December 2003 Answers to Questions, paras. 159-164.

an entirely untenable position, as Brazil explai ns in its 28 January 2004 Comments on the US
22 December 2003 Answers to Questions.
171)

86. Despite its serious misgivings about the proposed US methodology, Brazil sets forth below its
analysis of the US methodology. Since the United States provided on 18/19 December 2003 some
limited summary data on the production composition of upland cotton farms, Brazil has attempted to
offer an estimate using the US allocation methodology . As described below, Brazil has been required
to make several assumptions, given the shortcomings in the data and due to the US refusal to provide
data in support of its own methodology.

87. Brazil notes that for MY 2002, the United St ates collected and has access to information on
all acreage planted to any crops , including non-programme crops, produced by farmers receiving
contract payments and marketing loan payments.
172 The United States has never produced this
information to the Panel or Brazil in any form (eith er as summary or farm-specific data). Thus, while
the United States asserts that the Panel should appl y a particular methodology, it refuses to provide
the information that would permit the Panel to calculate the payments under the US methodology.

88. But the information requested by Brazil on a ll different types of contract crop plantings
during MY 1999-2002 would go a long way towards permitting the calculation of the value of all crop
production, as well as the calculation of the value of upland cotton produced in relation to other crops
produced. This is because most cotton farms produc ing upland cotton specialize in the production of
upland cotton as opposed to other crops, and only produce a limited amount of other crops and almost
no livestock.
173

89. Brazil notes that among the selected information provided by the United States is the amount
of total cropland on farms producing upland cotton.
174 The following table shows the percentage of
total cropland and the percentage of total program me cropland that is planted to upland cotton (and
other programme crops) on upland cotton producing farms, i.e., farms in category (1) and (3).175

171 See Brazil’s 28 January 2004 Comment on US Answer to Question 243. See also Brazil’s
2 December 2003 Oral Statement, paras. 4-6. Brazil strongly disagrees that this is a required or appropriate
methodology under Part III of the SCM Agreement or under GATT Article XVI (or even under Article 13(b)(ii)
of the Agreement on Agriculture). The US arguments in that respect are not supported by any Vienna
Convention interpretation of these provisions.
172 Brazil’s 18 November 2003 Further Rebuttal Submission, para. 41.
173 Brazil’s 27 October 2003 Answers to Questions, para s. 7-13. While the exclusion of tiny livestock
production on upland cotton farms from the allocation of contract payments might slightly understate the
resulting contract payments allocated to upland cotton, any such over counting would be outweighed by the
missing data on peanut contract payments made to farms that results in an undercounting of the contract
payments allocated to upland cotton.
174 See Electronic PFC and DCP Summary Files pr ovided by the United States on 18 and
19 December 2003 respectively.
175 Farms planting upland cotton and holding upland cotton base and farms planting upland cotton
without holding upland cotton base. Farms not planting upland cotton are excluded from these calculations, as
they are entirely irrelevant for purposes of this dispute. They are simply not upland cotton farms, they only have
been in the past.

 MY 1999 MY 2000 MY 2001 MY 2002 176
Total Cropland
30,628,557.4
acres
Total Cropland
31,090,742.9
acres
Total Cropland
30,635,774.0
acres
Total Cropland
28,141,085.2
acres
 Total Programme
Cropland
21,388,415.0
acres
Total Programme
Cropland
22,552,704.4
Total Programme
Cropland
22,793,179.7
acres
Total Programme
Cropland
22,753,369.8
acres
Percentage of Total Cropland on the Farm Planted to That Crop Programme Crop Percentage of Total Programme Cropland on the Farm Planted to That Crop
47.58 per cent 49.49 per cent 50.48 per cent 48.12 per cent Planted to
Upland Cotton 68.13 per cent 68.23 per cent 67.84 per cent 59.51 per cent
8.95 per cent 10.60 per cent 8.58 per cent 10.36 per cent Planted to Wheat 12.82 per cent 14.61 per cent 11.54 per cent 12.82 per cent
0.28 per cent 0.32 per cent 0.61 per cent 0.56 per cent Planted to Oats 0.40 per cent 0.44 per cent 0.82 per cent 0.69 per cent
1.72 per cent 1.35 per cent 1.77 per cent 1.50 per cent Planted to Rice 2.46 per cent 1.86 per cent 2.38 per cent 1.86 per cent
4.94 per cent 5.37 per cent 4.90 per cent 6.35 per cent Planted to Corn 7.07 per cent 7.41 per cent 6.59 per cent 7.86 per cent
6.17 per cent 5.21 per cent 7.87 per cent 6.13 per cent Planted to
Sorghum 8.83 per cent 7.19 per cent 10.58 per cent 7.58 per cent
0.20 per cent 0.19 per cent 0.18 per cent 0.18 per cent Planted to Barley 0.29 per cent 0.26 per cent 0.25 per cent 0.22 per cent
7.48 per cent Planted to
Soybeans
no information, as
no PFC
programme crop
no information, as
no PFC
programme crop
no information, as
no PFC
programme crop 9.26 per cent
Total Programme
Farmland as a
Percentage of
Total Cropland
69.83 per cent 72.54 per cent 74.40 per cent 80.85 per cent

90. As demonstrated by this table, US farms pl anting upland cotton are specialized in that crop.
Upland cotton plantings account for 50 per cent of their cropland and for between 60 and 70 per cent
of the land devoted to programme crops. Important alternative crops plante d by upland cotton farms
are wheat, corn, sorghum, soybeans and rice. A bout 20 per cent of the cropland on farms producing
upland cotton is devoted to non-programme crops or to no crops. 177 As detailed below, Brazil has
conservatively assumed that the value of the crops produced on this 20 per cent of farmland is the
average per-acre value of production of non-programme crops in that marketing year in the entire
United States, as reported by USDA.178

91. Performing the US-invented allocation methodol ogy, Brazil starts again by considering the
group of farms that produce upland cotton and have upland cotton base acreage. As a first step, Brazil
has calculated the total amount of contract pa yments received by these farms by multiplying the

176 Brazil has not indicated the percentages for other oilseeds, as the figures were so small.
177 The lower figures for MY 1999-2001 are explained by the fact that soybean s were not a contract
programme crop.
178 This most certainly overstates their value for the farms under scrutiny, as it includes uses for the
production of tobacco, greenhouse crops and other high value crops not likely produced on cotton farms. The
result is an allocation of contract payments to upland cotton that is too low.

contract payment units provided in the US summary files by the payment rates applicable to the crop
in any given marketing year.
179 The resulting payments have been summed up.

92. As a second step, Brazil has calculated th e value of the programme crop production on farms
producing upland cotton and holding upland cotton base. To estimate the value of the programme
crop production on these farms,
180 Brazil has multiplied the acreage planted to a crop by its average
yield in the United States and the average price rece ived by US farmers for that crop in any given
marketing year.181 As the United States has not provided any specific information on what upland
cotton farms plant on the remainder of the cropland not devoted to the programme crops, Brazil had to
make several assumptions. First, Brazil assume d that the per-acre value of these non-contract
programme crops equals the average per-acre valu e of total US non- contract programme crop
production, excluding fruits and vegetables.182 Brazil has, therefore, calculated the total value of non-
contract payment crops as the total value of US crops minus the value of programme crops and fruits
and vegetables for each marke ting year between MY 1999-2002. 183 The resulting figure has been
divided by the total US cropland 184 (minus cropland devoted to fruits 185 and vegetables 186 and
programme crops187).188 The per-acre value thereby generate d has been multiplied by the acreage not
planted to programme crops on category (1) farms, 189 resulting in a figure for the total value of non-
contract programme crops produced on the group of farms that produce upland cotton and hold upland
cotton base.190

93. Following these preparatory steps, it is now possible to allocate contract payments that
constitute support to upland cotton. Summing up the value of all crops produced on the farm provides
the total value of the production on farms that pr oduce upland cotton and hold upland cotton base.
Dividing the value of the upland cotton crop by the value of all crops provides the adjustment factor
to be applied to the total contract pa yments received by that group of farms.
191 This concludes the
allocation for all group (1) farms.

94. Turning to farms in group (3), the Panel will recall that these farms plant upland cotton, but
do not hold upland cotton base. The Panel will furt her recall that the United States has not provided

179 Payment rates are published by USDA, see Exhibit Bra-394 (Agricultu ral Outlook Tables, USDA,
November 2003, Table 19).
180 Brazil recalls that the United States has only provided information on programme crop production
on upland cotton farms.
181 MY 1999-2002 yields and farm prices for programme crops are published by USDA, see Exhibit
Bra-420 (Agricultural Outlook Tables, November 2003, Table 17).
182 Brazil considers this exclusion justified due to th e elimination of contract payments if fruits and
vegetables are planted.
183 Exhibit Bra-421 (ERS Briefing Room: Farm Inco me and Costs: US Farm Sector Cash Receipts
from Sales of Agricultural Commodities, USDA).
184 Exhibit Bra-106 (“United States State Fact Sheet,” ERS, USDA, 15 July 2003, p. 2). The figure
represents the total amount of US cropland pursuant to the 1997 census. This is the latest figure available to
Brazil. However, since the total of US cropland can be presumed to not vary too greatly, this may be a
reasonable assumption.
185 Exhibit Bra-422 (Fruits and Tree Nuts Yearbook, USDA, October 2003, Table A-2).
186 Exhibit Bra-423 (Vegetables and Melons Yearbook, USDA, July 2003, Table 3).
187 Exhibit Bra-420 (Agricultural Outlook Tables, USDA, November 2003, Table 17).
188 See Exhibit Bra-424 (Allocation Calculations Based on US Methodology and US Summary Data)
for the details of the calculation. (Also provided electronically as ‘allocation calculations.xls’).
189 Farms that produce upland cotton and hold upland cotton base.
190 See Exhibit Bra-424 (Allocation Calculations Based on US Methodology and US Summary Data)
for the details of the calculation. (Also provided electronically as ‘allocation calculations.xls’).
191 See Exhibit Bra-424 (Allocation Calculations Based on US Methodology and US Summary Data)
for the details of the calculation. (Also provided electronically as ‘allocation calculations.xls’).

any information concerning contract paym ents for this group of upland cotton farms. 192 T h i s U S
refusal renders any precise calculations for the third group of farms impossible. Therefore, Brazil has
assumed that farms producing upland cotton but not holding upland cotton base receive per acre of
upland cotton the same amount of allocated contr act payments as farms producing upland cotton and
holding upland cotton base.193

95. Since the United States has not provided any information on the amount of market loss
assistance payments received by any farm produci ng upland cotton – the United States did not even
provide aggregate information
194 – Brazil has assumed that any allocation of market loss assistance
payment as support to upland cotton would have to be made in the same manner as the allocation of
PFC payments in the marketing year in question.195

96. Contract payments allocated in both groups of upland cotton farms are aggregated. The
results of this calculation are reported in the table below:

MY 1999 2000 2001 2002
196
PFC
Payments $477,692,236.06 $473,744,959.03 $333,295,919.25 -
MLA
Payments197 $475,365,812.83 $504,317,124.58 $460,349,590.68 -
DP
Payments - - - $416,216,862.44
CCP
Payments - - - $714,424,543.18

97. For purposes of comparison, Brazil presents below its results based on the “14/16 th”
methodology:198

192 See Electronic PFC and DCP Summary Files pr ovided by the United States on 18 and
19 December 2003 respectively.
193 See Exhibit Bra-424 (Allocation Calculations Based on US Methodology and US Summary Data)
for the details of the calculation. (Also provided electronically as ‘allocation calculations.xls’).
194 See Section 3.
195 See note to the summary table below. Brazil recalls that market loss assistance payments were made
for soybeans in addition to the PFC crops. This increases the total amount of market loss assistance payments
that would be allocated to upland cotton. Solely using the PFC payments as a basis, undercounts Brazil’s results
by an unknown amount. Brazil also r ecalls that the US data for MY 2002 does not contain any information
concerning the amount of direct and counter-cyclical pa yments made on peanut base (Exhibit US-112). Thus,
the missing peanut contract payments for MY 2002 are al so missing in the calculation of the amount of direct
and counter-cyclical payments that constitute support to upland cotton. It follows that these figures are
understated by an amount unknown to Brazil.
196 Brazil also recalls that the US data for MY 2002 does not contain any information concerning the
amount of direct and counter-cyclical payments made on peanut base (Exhibit US-112). Thus, the missing
peanut contract payments for MY 2002 are also missing in the calculation of the amount of direct and counter-
cyclical payments that constitute support to upland cotton. It follows that these figures are understated by an
amount unknown to Brazil.
197 The amount of market loss assistance payments has been calculated by applying the ratio of
allocated PFC payments (as calculated) to upland cotton PFC payments as provided in Exhibit Bra-4 (“Fact
Sheet: Upland Cotton,” USDA, January 2003, p. 6) to the amount of upland cotton market loss assistance
payments as provided by the same source.
198 The figures in this table are reproduced from Brazil’s 9 September 2003 Further Submission,
Table 1. MY 2002 data is taken from the updated figures presented by Brazil in its 22 December 2003 Answers,
para. 8.

MY 1999 2000 2001 2002
PFC Payments $547,800,000 $541,300,000 $453,000,000 -
MLA Payments $545,100,000 $576,200,000 $625,700,000 -
DP Payments - - - $454,500,000
CCP Payments - - - $935,600,000

98. As the Panel can readily see, even using the methodology proposed by the United States as
relevant under Part III of the SCM Agreement r esults in amounts of support to upland cotton from
contract payments that, accounting for the shortcomi ngs of the US data, are roughly equivalent to the
figures produced by Brazil’s 14/16
th methodology. Brazil cautions against the direct use of these
results, as they may be tainted by the assumptions Brazil had to make due to the refusal of the
United States to provide data that would render possible performing the allocation that the United
States asserts is called for under Part III of the SCM Agreement. 199 In particular, the data withheld on
MY 2002 peanut contract payments to farms pr oducing upland cotton would have increased the
amount of contract payments allocated to upland cotton. Other shortcomings of the data are discussed
above.

11. The Japan – Agricultural Products Decision is Inapposite

99. The United States claims that the Appellate Body’s decision in Japan – Measures Affecting
Agricultural Products would have prevented the Panel from using the information the United States
refused to provide to calculate the amount of co ntract payments across the “total value of the
recipient’s production.”
200 However, this Appellate Body decision is inapposite.201

100. In Japan – Agricultural Products , the complaining party (the United States) did not “claim”
in its request for establishment of a panel that there was an alternative SPS testing “measure”
(determination of sorption levels) that was less trade restrictive.
202 Rather, the request for
establishment “claimed” that testing by product (n ot variety) was sufficient to achieve Japan’s
appropriate level of protection. The panel, based on expert testimony and not on any arguments or
evidence presented by the United States, found a viol ation of SPS Article 5.6 based on the alternative
(sorption levels) testing “measure.” This decision was taken despite a US argument to the panel that
“it is not within the scope of the Panel’s terms of reference to make findings with respect to the
comparative efficacy of alternative treatments proposed by technical experts.”203

101. On appeal, the Appellate Body reversed the pa nel’s finding. Noting that a panel has authority
under DSU Article 13.1 to request information, it fou nd that “this authority cannot be used by a panel
to rule in favour of a complaining party which has not established a prima facie case of inconsistency
based on specific legal claims asserted by it.” The Appellate Body found the panel had erred in
relying on expert information and advice as the basis for a finding of inconsistency with SPS
Article 5.6, “since the Unite d States did not establish a prima facie case of inconsistency with
Article 5.6 based on claims relating to the ‘determination of sorption levels.’”
204

199 Again, Brazil notes that this allocation is not required under Part III of the SCM Agreement and
GATT Article XVI:3. Both provisions deal with the effect of subsidies, and not their amount or subsidization
rate.
200 US 20 January 2004 Letter to the Panel, p.4.
201 See also Brazil’s 28 January 2004 Comments on Question 256.
202 WT/DS76/2.
203 Appellate Body Report, Japan-Agricultural Products, WT/DS76/AB/R, note 79.
204 Appellate Body Report, Japan-Agricultural Products, WT/DS76/AB/R, para. 130.

102. The factual situation in this dispute is entirely different from that in Japan –Agricultural
Products. Brazil’s “claim” in relation to the withheld data is, first, that the United States does not
enjoy peace clause protection because, inter alia , the non-green box contract payments provide
support to upland cotton in excess of the level of support decided by the United States in MY 1992. 205
The “measures” impacted by the w ithheld data are PFC, market loss assistance, direct and counter-
cyclical payment subsidies provided unde r the 1996 FAIR Act and the 2002 FSRI Act, 206 which fall
squarely within the Panel’s terms of reference. The withheld data is also relevant to Brazil’s
actionable subsidy “claims” to establish the volum es of subsidies provided for US upland cotton
production.207 Further, the withheld data is relevant to support Brazil’s arguments that the contract
payments are “support to upland cotton,” because most of the upland cotton base payments are paid to
current producers of upland cotton. Finally, the withhe ld data is relevant to provide the factual basis
for Brazil to rebut US arguments that the US pr eferred “value” methodology for allocating payments
results in much lower benefits to upland cotton. 208 Brazil notes that the Panel’s 12 January 2004
request falls squarely within these various Brazi lian claims and arguments when it states that
“[d]isclosure is sought to permit an assessment of the total expenditures of PFC, MLA, CCP and
direct payments by the US Federal Government to upland cotton producers in the relevant marketing
years.”209

103. The implication in the US citation to the Japan – Agricultural Products decision is that the
Panel’s 8 December 2003 and 12 January 2004 request may be designed to establish a “claim” never
advanced by Brazil. This sugges tion is obviously contrary to the factual record outlined above.
Moreover, it reveals a profound misunderstanding of the difference between a “claim” and an
“argument.” The Appellate Body in EC –Hormones held that there is a distinction between legal
claims reflected in a panel’s terms of reference, and arguments used by a complainant to sustain its
legal claims. The Appellate Body ruled that “nothi ng in the DSU limits the faculty of a panel freely
to use arguments submitted by any of the parties – or to develop its own legal reasoning – to support
its own findings and conclusions of the matter under its consideration.”
210 Numerous panel reports
have narrowly interpreted “claims” to involv e only legal claims and have freely permitted
complaining parties to advance arguments not expressly reflected in a panel request. 211 A c l o s e
reading of the Appellate Body’s decision in Japan – Agricultural Products shows that it was based on
the fact that the United States had not advanced legal “claims” relating to an alternative SPS
“measure.” The fact that the United States had also not made legal “arguments” on its non-claim only
reinforced the underlying reasoning.212

205 This is a claim in the alterna tive because, as Brazil has argued, it is the United States burden of
proof to establish that it enjoys peace clause protection. See e.g. Brazil’s 24 June 2003 First Submission, paras.
110-121; Brazil’s 22 July 2003 Oral Statement, paras. 5-11; Brazil’s 11 August 2003 Answers to Questions,
paras. 48-51; Brazil’s 22 August 2003 Comments, paras 42-45.
206 The market loss assistance payments were based on various appropriations bills.
207 Brazil has argued that the exact amounts of the subsidies are not legally relevant (contrary to the US
arguments) but rather that th e “effects” of the subsidies are what is at issue in claims under Article 6.3 of the
SCM Agreement.
208 See Section 10 above.
209 12 January 2004 Communication from the Panel, p. 1.
210 Appellate Body Report, EC – Hormones, WT/DS26/AB/R, para. 156 (emphasis added).
211 Panel Report, EC – Sardines, WT/DS231/R, paras. 7.142-145 ( “…Peru’s requests for findings were
actually just summations of its arguments and not claims.”); Appellate Body Report, Korea – Dairy Safeguards,
WT/DS98/AB/R, paras. 139-140 (“…EC reliance on the OAI report during the rebuttal stage of the panel
proceeding to be a new argument rather than a new claim, and therefore, did not exclude it.”); Panel Report,
Australia – Salmon , WT/DS18/R, paras. 8.24-8.25 (Panel consid ered that “this ‘new claim’ to be a new
argument, not a new claim.”).
212 Appellate Body Report, Japan-Agricultural Products, WT/DS76/AB/R, para 130 (Appellate Body,
after ruling the Panel erred noted that “The United States did not even argue that the ‘determination of sorption
levels’ is an alternative measure which meets the three elements under Article 5.6”).

104. This United States suggestion that the Panel’s request of 8 December 2003 and
12 January 2004 would improperly make the case for Brazil is totally baseless. In the Japan –
Agricultural Products case, the United States did not seek the expert information to support a “claim”
or “measure” within the Panel’s terms of reference. By contrast, Brazil repeatedly sought the
information withheld by the United States for fourteen months. Further, the Panel’s 8 December 2003
and 12 January 2004 requests incorporated Brazil’s request of 3 December 2003, as set out in Exhibit
Bra-369. Brazil, as a litigating party, has no inde pendent right to request information from the
United States; that must be conducted through the Panel’s authority under DSU Article 13.1. Thus,
the US assertion that somehow the Panel (and not also Brazil) is seeking evidence to support a
“measure,” “claim” or even “argument” never advanced by Brazil is fallacious.

105. Indeed, the United States cautions that the Pa nel “must take care not to use the information
gathered under [the] authority [of DSU Article 13.1] to relieve a complaining party from its burdens
of establishing a prima facie case.”
213 This is a curious argument given the fact that the United States
has refused to produce information the Panel fou nd was “necessary and appropriate … in order to
undertake its mandate to assist the DSB in disch arging its responsibilities under the DSU and the
covered agreements.”214 Brazil must ask how the Panel is to even evaluate the evidence to “take care
not to use” the information, if it does not even have it?

106. Finally, Brazil notes that this is the first di spute involving interpretations of the peace clause,
as well as many provisions in Part III of the SC M Agreement. Brazil obviously does not know how
the Panel will resolve many interpretative issues. A good example is the issue of the relevant
allocation methodology under the peace clause, or whether subsidies challenged under Part III of the
SCM Agreement are required to be allocated at all, and if so, by what methodology. Brazil believes
strongly that the US methodology is not supported by any textual or legitimate contextual basis. But
in order to “cover all the bases,” and conscious of the absence of any remand procedures, Brazil has
presented – or has attempted to present in the case of the withheld US data – considerable evidence to
provide the Panel with the basis to make the f actual determinations s upporting any possible legal
interpretation of these not previously interpreted WTO provisions. As demonstrated by Brazil’s
analysis in Section 3, above, the information withheld by the United States has deprived the Panel and
Brazil of the opportunity to use the most accurate an d complete information possible – even to apply
the inappropriate US methodology for allocating contract payments.
215

12. Conclusion

107. In sum, the United States has refused to provide the information concerning the amount of
contract payments made to current producers of upland cotton. There are no legitimate confidentiality
concerns that would prevent the United States fro m producing the data. And even if there were,
confidentiality procedures under Article 13.1 of the DSU and/or the Panel’s working procedures could
have addressed these concerns.

108. Therefore, Brazil asks the Pane l to draw adverse inferences (lis ted in Section 6) and conclude
that the withheld information would have been adver se to the US defence in this case. Furthermore,
Brazil asks the Panel to use the best information av ailable, including the adverse inferences, to find
that the figures Brazil has estimated under its so-called 14/16
th methodology are supported by the

213 US 20 January 2004 Letter to the Panel, p. 4.
214 12 January 2004 Communication from the Panel, p. 1.
215 See Brazil’s 28 January comment on Question 256.

evidence in the record. Brazil also notes that its attempts to apply the flawed and incomplete US
summary data to both a simplified version of its own and the US approach yields results that further
confirm the results of Brazil’s 14/16th methodology.

ANNEX I-16

COMMENTS OF THE UNITED STATES ON COMMENTS
BY BRAZIL ON US COMMENTS CONCERNING
BRAZIL’S ECONOMETRIC MODEL

(28 January 2004)

I. Introduction

1. The United States wishes to rebut Brazil' s response to the US 22 December 2003 Comments
Concerning Brazil's Econometric Model. Our aim is to make clear the fundame ntal flaws in Brazil’s
analysis that invalidate its claims. In the follo wing section, we lay out the erroneous approach
Dr. Sumner took in modelling the effects of cotton payments. We believe that our rebuttal provides
convincing evidence why the Panel should reject this model as supporting a finding of serious
prejudice. Moreover, Dr. Sumner’s rebuttal fails to allay our concerns regarding technical issues and
lack of transparency with the model. These concerns are laid out in Section III.

II. US Concerns with the Sumner Model

2. The United States reiterates the following con cerns it has with Brazil's approach to its
economic analysis in this dispute:

 (c) Dr. Sumner continues to imply that his model is essentially the FAPRI model. It is
not. Dr. Sumner has made significant modifications to the FAPRI model. The fact
that Dr. Sumner’s model is “in no way a FAPRI model” is acknowledged by
Dr. Babcock in his letter to staff members of the Senate and House of Representatives
(Exhibit US-114).

 (d) The ways in which Dr. Sumner has modelled decoupled payments (including
Production Flexibility Contract payments, Ma rket Loss Assistance payments, Direct
payments and Counter cyclical payments ), crop insurance payments, and export
credit guarantees differ sharply from the FAPRI model and are not based on empirical
studies. These ad hoc modifications contribute to the large effects on production and
other variables obtained by Dr. Sumner when he simulates the removal of cotton
subsidies. We argue that the effects are thus largely tautological with no empirical
grounding.

 (e) In particular, Dr. Sumner’s results di ffer sharply from the economics literature on the
effects of decoupled payments on productio n. As we have argued in numerous
submissions, Dr. Sumner’s treatment of decoupled payments (particularly from
Annex I on pages 16-21) is neither a “standard ” feature of other models, nor is it as
“consistent” with USDA work in the area as repeated citations of that work might
suggest. There has been considerable work done by the USDA and other researchers
on such programmes, both theoretical and empirical, which acknowledges the
programmes may have some minimal impact on production. However, the research
concludes that the impact appears negligible (less than 1 per cent of acreage). As we
pointed out in our Comments Concerning Brazil’s Econometric Model of
22 December 2003 , similar results are obtained by FAPRI (less than 0.3 per cent
impact on cotton acreage). In contrast, Dr. Sumner’s model produces results

suggesting cotton acreage impacts as high as 15.9% - that is, more than 50 times
larger than what the FAPRI model would indicate.

 (f) Likewise, we disagree with Dr. Sumner’s modelling of the crop insurance
programme. We take issue with how the subsidies were calculated and how they
affect production. In particular, we have argued that most cotton production has been
insured at coverage levels less than 70 per cen t and thus it is likely that any
production effects are minimal. Moreover, we have noted that Dr. Sumner has failed
to take into account the potential effects of moral hazard on input use and crop yields
that potentially offset any impacts on area.

 (g) We also take issue with how Dr. Sumner modelled export credit guarantees. In our
previous comments, we have argued that Dr. Sumner’s formulation is entirely ad hoc.
He has essentially assumed an effect.

 (h) As for marketing loans and deficiency payments, we would agree that such
programmes are potentially production distorti ng when expected market prices fall
below loan rates. However, we have ar gued that the use of lagged prices, while a
modelling convenience for large scale models such as FAPRI and the model used by
Dr. Sumner, nonetheless introduce potential biases that can overstate effects when
futures market prices differ substantially fro m lagged prices, as they did in 2001 and
2002.

 (i) Lastly, as we point out in our Comments on Answers of Brazil to Questions from the
Parties following the Second Panel Meeting, calibrating Dr. Sumner’s model to the
November 2002 FAPRI baseline exaggerates the effects of price-based programmes
such as marketing loans, counter-cyclical payments and Step 2 payments. The price
outlook for cotton has improved considerably since publication of the
November 2002 FAPRI baseline used by Dr. Sumner to estimate the effects of
subsidies on US cotton production. Improving price forecasts suggest minimal
marketing loan outlays over 2003-12.

3. We will briefly summarize our points below.

Dr. Sumner’s treatment of decoupled programmes is unconventional and not based on theory
or empirical evidence

4. Dr. Sumner’s treatment of decoupled paymen ts (particularly from Annex I on pages 16-21) is
neither a “standard” feature of other models, nor is it as “consistent” with USDA work in the area as
repeated citations of that work might suggest. Th ere has been considerable work done by the USDA
and other researchers on such programmes, both theoretical and empirical, which acknowledges the
programmes may have some impact on production, and that those impacts depend in part on farmers’
expectations (Westcott et al., 2002).
1 However, the research concludes that the impact appears
negligible.

5. Dr. Sumner, on the other hand, uses a stylized logic to come up with the estimates for the
impact of production flexibility contract (PFC) paymen ts that have neither empirical nor theoretical
grounding. He cites, then ignores, recent USDA em pirical work showing that decoupled payments
have only a small impact (ERS 2003).
2 He justifies this, in part, by saying that the analysis looked at

1 Westcott, P., Young, C.E., and Price, M., USDA, ERS, The 2002 Farm Act, Provisions and
Implications for Commodity Markets, Economic Research Service, November 2002. (See Exhibit BRA-42)
2 USDA, ERS, Decoupled Payments: Household Income Transfers in Contemporary US Agriculture,
M.E. Burfisher and J. Hopkins, Eds. USDA ERS AER Number 822. February 2003. (See Exhibit US-53)

all programmes, while he is looking only at cotton. However, in both their inception and
administration, these programmes must be considered as a whole. Treating part of the overall
programmes as though they were a “cotton programme” distorts the programmes. It is widely
accepted that these programmes have whole farm impacts rather than crop specific impacts—the
payments received do not have crop-specific impacts. Furthermore, the impact is much smaller than
Dr. Sumner has estimated; the whole farm impact is , at its upper estimate, perhaps one-quarter to
one-fifth the impact he cites for cotton alone. He t hus vastly overstates the impact of these payments
on cotton production.
3

6. Dr. Sumner argues that market loss assistance (MLA) payments have a larger effect on area
than do PFC payments despite the fact that MLA payments were paid on the identical payment base
as the PFC payments. Moreover, MLA payments were authorized by Congress on a post hoc basis as
emergency supplemental payments. Supplemental legislation authorizing each of these payments was
passed several months after planting for the crop year in question had occurred. Dr. Sumner included
these payments in his acreage equations and asserts that producers had expectations that they would
receive market loss assistance paym ents at the time of planting. If producers had expectations of
payment, then they also knew that they would be eligible to receive such a payment regardless of
what crop they planted. Indeed, they could choose not to plant and still be eligible for the payment.
This would argue that market loss assistance paym ents, like production flexibility contract payments,
direct payments, and counter-cyclical payments, are decoupled from planting decisions and should not
be included in an acreage response equation.
4

7. Like other direct payments, counter-cycli cal payments are based on historical production
rather than actual production. The fact that the pa yment rate is tied to current prices does not mean
that payments are less decoupled from current production. Indeed, as economists have shown,
producers can hedge counter-cyclical payment rates us ing options markets, thus converting a counter-
cyclical payment into a fixed direct payment.5

8. Lastly, empirical evidence supports the decoupl ed nature of these payments. As reported in
the US Answer to Panel Question 125(5), a preliminary review of data from the Farm Service Agency
shows that 47 per cent of upland cotton farms eligible for decoupled income support payments planted
no cotton in marketing year 2002. This number is consistent with the Environmental Working Group
data presented by Brazil in its further rebuttal submis sion that showed the per cent of farms receiving
only contract payments in 2000, 2001, and 2002.
6 Thus, Brazil and the United States would agree that
the data support the notion that decoupled inco me support is, in fact, decoupled from production
decisions since nearly half of historic upland cotton farms no longer plant even a single acre of cotton.

9. As was shown in Exhibit US-95, enrolle d upland cotton base acreage exceeded planted
acreage by over 5.1 million acres. Thus, planted acres accounted for less than 73 per cent of total
base acres in 2002,
7 supporting the decoupled-from-production na ture of direct and counter-cyclical

3 As we pointed out in our Comments Concerning Brazil’s Econometric Model of 22 December 2003 ,
similar results are obtained by FAPRI (less than 0.3 per cent impact on cotton acreage). In contrast,
Dr. Sumner’s model produces results suggesting cotton acreage impacts as high as 15.9% - that is, more than
50 times larger than what the FAPRI model would indicate.
4 Dr. Sumner has argued that base updating provisions of the 2002 Farm Bill effectively relink direct
payments to production, but as we have shown in Dr. Glauber’s presentation at the Second Panel Meeting in
December 2004, the economics argue th e opposite and the empirical eviden ce suggests that concerns that
producers are planting cotton in expectation of future base updating are unfounded.
5 Anderson, C.G. “Consider "Hedging" Strategies to Enhance Income Beyond Farm Programme
Payments” Texas A&M University, Extension Economics, October 2002 (See Exhibit US-54)
6 Brazil’s Further Rebuttal Submission, para. 23.
7 We note that these numbers are similar to the Environmental Working Group data that show that
73.6 per cent of total contract payments in marketing year 2002 were on farms that also received marketing loan
payments.

payments. The ratio of planted acreage to base acr eage varies considerably by region, ranging from
about 40 per cent of eligible base in the West to al most 93 per cent of eligible base in the Southeast.
The data also support the notion that rather than being required to base planting decisions on acreage
base allocations, producers were able to exercise th eir planting flexibility, clearly choosing to plant
other crops instead of cotton.

Dr. Sumner’s analysis of the US crop insurance programme ignores effects of moral hazard on
yields

10. As we have documented in our previous su bmissions, crop insurance subsidies are generally
available for most crop producers and hence do not give a specific advantage to one crop over
another. Thus, their effects are not commodity specific, and have no or minimal impacts on cotton
markets.

11. Moreover, crop insurance purchases by cotton grow ers have generally been at lower coverage
levels than for other row crops. This was partic ularly the case before 2002 when less than 5 per cent
of insured cotton acres were insured at coverage levels greater than 70 per cent. Over 2002-03,
roughly 90 per cent of cotton acreage insured was at c overage levels of 70 per cent or less. This
supports the notion that crop insurance has had minimal effects on production.

12. Lastly, the economic literature on the effect s of crop insurance on production is clearly
mixed. While many studies like the ones cited by Brazil have suggested crop insurance subsidies may
have a slight effect on acreage, the effects on production are less clear. If crop insurance encourages
moral hazard problems like those cited by Brazil, crop yields will be adversely affected as producers
attempt to increase crop insurance indemnities. If moral hazard and adverse selection problems are
severe, they could potentially have a negative effect on production.
8

Impacts attributed to the export credit guarantee programme are unsubstantiated

13. Neither Brazil nor Dr. Sumner has offered empirical analysis as to how much or whether the
export credit guarantee programme actually affects expor ts. As demonstrated in Bra-313, Dr. Sumner
imposed an ad hoc reduction in US export estimates of 500,000 bales (using the National Cotton
Council testimony as his sole economic foundation), which correspondingly reduced US prices, which
correspondingly both reduced US acreage and slight ly increased exports - cutting into the initially
imposed 500,000 bale shift.

The effects of marketing loans depend on underlying assumptions regarding price expectations

14. As we have argued elsewhere, we agree with the statement of Dr. Collins that marketing loan
payments are potentially production- and trade-distorting.
9 The United States has consistently
notified upland cotton marketing loan payments as cotton-specific amber box payments in its WTO
Domestic Support notifications. The issue in this di spute is not whether marketing loan payments are

8 The Economic Research Service study cited by Dr. Sumner (Young et al. 2001) only examines the
effects of crop insurance subsidies on acreage. The authors assume th at yields are unaffected when they
simulate production effects. Recent studies by Smith and Goodwin (1996), Babcock and Hennessy (1996) and
Goodwin and Smith (2003) suggest that farms with more insurance tend to use less inputs like fertilizer and
pesticides and vice versa. This demonstrates a potential moral hazard problem with crop insurance that suggests
that crop insurance participation may have a negative effect on yields. Lower yields may well offset the
marginal effects on crop area.

9 See US Answers to Questions of the Panel to the Pa rties following the Second Meeting of the Panel,
22 December 2004, para. 74.

potentially production- and trade-distorting, but th e degree to which they have actually distorted
production and trade in a particular year, given market prices and other relevant factors.

15. The degree of distortion caused by the marke ting loan programme depends on the relationship
of the expected harvest price to the loan rate at the time of planting. If the expected price is below the
loan rate, the loan rate may provide an incen tive to plant cotton because farmers will receive a
government payment for the difference between the loan rate and the adjusted world price. For this
reason, we believe that the marketing loan progr amme was more distorting in 2002 when expected
cash prices were below loan rates at planting than in 2001, when expected cash prices were higher
than loan rates at the time of planting. However, as explained previously, the observed decline in
upland cotton planted acreage in marketing year 200 2 was commensurate with the decline in futures
prices over the previous year.

16. In this dispute two approaches have been advocated in determining farmers’ expectations
about prices. Brazil and its economic consultant have used lagged prices as the mechanism to gauge
farmers’ expectations about prices. Dr. Sumner wrote:

Of course, it is impossible to know precisely what individual growers expect. I have
adopted the long-standing approach of FAPR I, and other models[,] to approximate
these expectations by using the current y ear final realized market prices as the
expectation for the following season’s price.
10
The lagged prices used by Brazil and its economic c onsultant can, at best, be an approximation of
farmers’ price expectations. That is because the lagged prices used in Brazil’s analysis incorporate
pricing information that occurs after US farmers make their planting decision (that is, prices from
April through July of a given marketing year, when planting decisions are taken in the January to
March period). Therefore, by necessity, farmers cannot be looking at a lagged price that incorporates
prices that do not yet exist.

17. The United States, on the other hand, has a dvocated the use of futures prices, a market-
determined expectation of prices. It is evident from the use of futures and options markets by cotton
producers
11 and from numerous market reports available to producers that producers look to futures
markets rather than lagged prices for information regarding future cash prices.

18. Furthermore, economic literature supports this view. For example, in his classic paper on
rational price expectations, Muth (Exhibit US-48) ar gued that there is little evidence that expectations
based on past prices are economically meaningful. Additionally, in a 1976 paper Gardner (Exhibit
US-49) contended that the future price for next year’s crop is the best proxy for expected price.

19. As we have repeatedly argued, the use of lagge d prices may result in biased results. Over the
long term, where there is reasonable stability in ma rkets, lagged prices function adequately as a proxy
for price expectations. However, in those years, as in the period under investigation here, when
unexpected exogenous shocks such as China dumping stocks and unexpected yields worldwide due to
good weather conditions, lagged prices are poor predicto rs of expected prices. Future prices, by
contrast, are more efficient because they are based on more current information.

20. For example, during marketing years 2000, 200 1, 2002, and 2003, lagged prices significantly
understate the harvest season prices expected by producer s as seen in the futures prices at the time of
planting. The use of lagged prices thereby inflate the e ffect of the marketing loan rate. In fact, those
lagged prices would have to be increased by 8-25 per cent, depending on the year, to equal the harvest

10 Brazil’s Further Submission, Annex I, para. 18.
11 See US Answers to Questions of the Panel to the Parties following the Second Meeting of the Panel,
22 December 2004, para. 58.

season price actually expected by produ cers as indicated by the futures price. 12 For the period MY
1999-2003, only MY 2002 exhibits expected prices be low the marketing loan rate when using futures
prices. However, over that same period, when lagge d prices are used as expected prices, the loan rate
is higher than the expected price in every year over this period except MY1999. Thus, it is a
significant error for Brazil and Dr. Sumner to use la gged prices instead of the futures prices Brazil’s
own expert, Mr. MacDonald, explained to be the more accurate gauge of farmers’ price expectations.

Harvest Futures Prices at Planting Time Compared to “Lagged Prices”(cents per pound)
 MY1999 MY2000 MY2001 MY2002 MY2003
Futures Price1 60.27 61.31 58.63 42.18 59.6
Expected Cash Price2 55.27 56.31 53.63 37.18 54.6
Lagged Prices3 60.2 45 49.8 29.8 44.5
Difference -4.93 11.31 3.83 7.38 10.1
 1 February New York futures price for December delivery.
 2 Futures price minus 5 cent cash basis.
 3 Prior crop year average farm price, weighted by monthly marketings.13

21. Looking more specifically at Dr. Sumner’s analysis in Annex I provides further evidence of
the bias of lagged prices relative to future pri ces. Consider the 2002 crop year. In the Sumner
analysis, area response to the removal of the cotton loan programme results in a 36 per cent reduction
in US planted area – the largest single effect for any of the years considered in his analysis. Based on
lagged prices, price expectations for 2002 were 29.8 cents per pound, a 40 per cent reduction from
2001 levels. Yet, the futures market data sugge sts a far smaller reduction in expected price.
December futures prices taken as the average daily closing values in February 2002 averaged
42.18 cents per pound, a 28 per cent drop from year earlier levels. Based on Dr. Sumner’s range of
supply response elasticities of 0.36 to 0.47, a decl ine of this magnitude would suggest a drop in
acreage of 10 to 13 per cent from the preceding year. In fact, actual US cotton acreage dropped
12 per cent (from 15.5 million acres in 2001 to 13.7 million acres in 2002), suggesting acreage levels
entirely consistent with world market conditions an d price expectations. Thus, in marketing year
2002, lagged prices would significantly overestimate th e decline in plantings in the absence of a
marketing loan rate.

22. While the United States would agree with Braz il that it is impossible to know precisely what
individual farmers’ price expectations are, the United States argues that futures prices provide the
most current expectations of market participants. The United States disagrees with the approach used
by Brazil in its analysis to rely solely on lagged prices and ignore information provided by futures
prices. While it may be impractical to include fu tures prices in some m odels, modelling convenience
is no justification for ignoring these objective, mark et-based price expectations, and the biased results
from using lagged prices do not assist the Panel in making an objective assessment of what is the
effect of the US marketing loan programme.

Use of the November 2002 baseline exaggerates the effects of the removal of subsidies

23. The price outlook for cotton has improved considerably since publication of the
November 2002 FAPRI baseline used by Dr. Sumner to estimate the effects of subsidies on US cotton
production. As we show in the US Response to Brazil’s Answers to the Questions of the Panel of the
Parties Following the Second Meeting of the Panel, FAPRI projections for the Adjusted World Price
are as much as 20 cents per pound higher in the November 2003 baseline as under the
November 2002 baseline.

12 US Further Rebuttal Submission, paras. 164-65.
13 Exhibit US-90.

24. As a result, estimated marketing loan gains are reduced considerably. Under the
November 2003 baseline, the estimated marketing loan gain for 2003/04 is zero, compared to almost
15 cents per pound under the November 2002 baseline. Over the five year period 2003/04 to 2007/08,
the average marketing loan gain is estimated to be 1.32 cents per pound. This is compared to
10.39 cents per pound utilizing the November 2002 baseline used by Dr. Sumner in his estimates.

25. Under Dr. Sumner’s model, the marketing loan programme contributes to over 42 per cent of
the estimated effects of removing subsidies on production ( see Annex 1, table 1.4). Thus, updating
the model to the November 2003 baseline would significantly reduce the estimated effect on
production, with the remaining effects largely attr ibuted to direct payments under Dr. Sumner’s
flawed model, with which we strongly disagree.

26. In addition, the FAPRI baseline from Nove mber 2002 projected 50.7 cents per pound for the
A-Index for marketing year 2003 and the January 2003 baseline projected 58.4 cents per pound for the
A-index for marketing year 2003. FAPRI’s November 2003 preliminary baseline projection for the
A-Index is 70.9 cents per pound, 40 per cent higher than the FAPRI projections used by Dr. Sumner.
14
The actual A-index was 76.1 cents per pound on January 15, 2004. In fact, FAPRI’s November 2002
projections (through 2012/13) did not show the A-Index ever rising as high as current prices. The
current high cotton prices and market expectations of continued high prices are crucially relevant
because, as mentioned, marketing loan payments wi ll not be made if cotton prices are above the loan
rate of 52 cents per pound and, fu rther, counter-cyclical payments will not be made if the season
average farm price is above 65.73 cents per pound (t he target price of 72.5 cents minus the direct
payment rate of 6.67 cents). The weighted averag e farm price for August-November was 62.4 cents
per pound, as reported by USDA on 11 January 2004.
15

Conclusions

27. Brazil’s estimates of the impact of US subsidies on world cotton markets have rested largely
on the basis of Dr. Sumner’s flawed model. As we pointed out in our Comments on Brazil’s
Econometric Model, Dr. Sumner’s model is not the FAPRI model. The modifications he has made are
ad hoc; rather than being based on empirical research as is claimed, they are, in fact, at odds with the
empirical literature.

III. Technical Comments on Brazil’s Rebuttal

28. Brazil's explanations of exactly what was done to the FAPRI/CARD model have been stated
and restated by Brazil at least three times to this point.

29. With each new statement, different clarifications are made, different variables used. In
Annex I, Brazil submitted its economic analysis of the impacts of the US cotton programme. In Bra-
313, Brazil provided more detail about its original economic analysis, in light of its seeming inability
to provide the Panel with the actual model used. Finally, in its submission of 20 January 2004, Brazil
informs the Panel that its Annex I discussion was a "simple heuristic discussion"
16 with Bra-313
explaining how the "heuristic explanation in Anne x I was operationalized" and rationalizes the fact it
did not use the baseline it stated it did in Annex I as "necessary recalibration." 17 These post hoc

14 Cotton: World Markets and Trade , Foreign Agricultural Service, USDA. January 2004, Table 8,
pg. 20.
15 World Agricultural Supply and Demand Estimates, USDA, WAOB, WASDE-406, 11 January 2004.
16 See para. 58, Brazil's Comments on US Model Critique, 20 January 2004.
17 See para. 3, Brazil's Comments on US Model Critique, 20 January 2004.

rationalizations of Annex I differ dramatically from oral statements delivered to the Panel on
7 October 2003.18

Brazil further confuses the impact of its elasticity modifications

30. Brazil clings to its repeated representations that its model uses "exactly the same elasticities of
supply and demand that are also used in the FAPRI model ,"
19 yet, in its latest iteration of what is
really included in its analysis, Brazil seems to be saying something different:

As I will demonstrate, the differences betw een the two sets of estimates of the
United States is primarily due to differen ces in the magnitude of elasticities of
supply the United States used, as compared to the elasticities that I actually used.
The United States applied time-varying, linear elasticities because this is what is
suggested by the FAPRI linear modelling framework. My Annex I results of the
effects of these listed programmes are, however, based on a constant elasticity
structure." 20 [emphasis supplied]
31. This current claim contradicts documentation in Annex I, oral statements made before the
Panel, and Bra Exhibit-313. Table I.1 of Annex I cl early presents time-varying elasticities. This time-
varying approach is again reported in equation (4 ) – (6) of Exhibit-313. Dr. Sumner's equations
clearly indicate that the supply elasticity changes depending on the year t.

32. The United States remains convinced that neither it nor the Panel can be fully sure of whether
the elasticities used by Brazil were "exactly the same" as those used in the FAPRI model as Brazil
stated on 7 October, or whether those elasticities were based on a different structure entirely, as Brazil
states in its 20 January 2004 submission. Brazil has never submitted a simple table showing a
comparison of the elasiticities.

33. Finally, the United States does not agree w ith Dr. Sumner that the time-varying, linear
elasticities, which would be consistent with the FAPRI modelling framework, lead to a dramatic
underestimation of the effects. The United States stan ds firm by its belief th at FAPRI has it right and
that Dr. Sumner’s approach leads to a dramatic overestimation of the impacts.

Calibration vs. manipulation vs. mislabelling
21

34. The United States pointed out that Brazil stated that its analysis in Annex I was based on the
FAPRI November 1 baseline, when it, in fact, was not. Now, Brazil confirms that those baseline
numbers were, in fact, "necessarily recalibrated" by Dr . Sumner in order to conform to his use of the
CARD International model -- a use that is not co nsistent with FAPRI's modelling and a use that
decidedly was not made clear to the Panel in Annex I, 22 contrary to Brazil's assertions in paragraph 24

18 "For more detail on these equations and the discussion of the incentives provided, please refer to my
written description of the model in Annex I. My Annex I statement discusses in detail the analysis of the
production enhancing impacts of the US supply side subsidies." Oral Statement of Dr. Sumner, 7 October 2003,
paragraph 11. The United States read these and other statements, and the failure of Brazil to deliver its Annex I
analysis, as indication that Brazil meant what it said in Annex I. The US was unaware that the document in
which Dr. Sumner "discusses in detail the analysis" was, in fact, a "simple heuristic discussion." That revelation
is no doubt a surprise to the Panel, as well.
19 Oral Statement of Dr. Sumner, 7 October 2003, paragraph 20. A similar comment was made at least
twice in Annex I.
20 See para. 71, Brazil's Comments on US Model Critique, 20 January 2004.
21 See para. 24 and subsequent paragraphs in Brazil’s 20 January submission.
22 In paragraph 3 of Annex I, Dr. Sumner states that he used "the international model and parameters
used in two recent publications from [CARD] …." He goes on to state that the "approach used here is standard
and has been applied by the USDA Economic Research Service in thei r analysis of the FSRI Act of 2002 ….,"

of its recent submission. Ultimately, Brazil passes off this significant discrepancy as "confusion" in
the "labelling of the baseline used in Annex I."
23 This continues a pattern of carelessness in modelling
and analysis that has added significantly to the burden in discerning underlying data and model
constructs in order to appropriately evaluate the validity of Brazil's proffered results.
24

Crop Insurance programme results

35. The United States continues to disagree with Dr. Sumner’s characterization of the crop
insurance programme presented in paragraphs 31-33. The United States does not accept Dr. Sumner’s
logic that $1 from the crop insurance programme that is paid in the event of a crop failure would have
the same production impact as $1 of benefit that is tied directly to the production decision. While the
United States does not accept Dr. Sumner’s logic, we are puzzled by his operational implementation
of the acreage impacts. Dr. Sumner argues that FAPRI’s net returns specification includes the value of
the crop insurance programme by reducing variable costs of production. Based on this first step of
reasoning, it is unclear to the United States why Dr . Sumner did not implement his scenario by simply
increasing the costs of production in the FAPRI baseline by the amount of the per-acre benefit that he
calculates. Such an approach would have produced smaller acreage impacts.

Replicating history and predicting the future

36. In paragraphs 43-56, Dr. Sumner develops a lengthy discussion regarding his view of the use
of simulation models. Dr. Sumner dismisses a US concern that Dr. Sumner's analysis does a very
poor job of explaining the movement in cotton acreag e in the United States. Dr. Sumner appears to
assert that policy simulation models do not attempt to "forecast the future." From a layman's point of
view, it seems surprising that a model that changes the past and then estimates how that change would
have resulted in a different future can be said to not be an attempt to forecast the future.

37. From an economic point of view, the analysis doesn't really change. Economists who develop
structural models employ a number of techniqu es for validating the accuracy and reliability of a
model. One of those techniques is testing the ab ility of the model to simulate actual historical
outcomes. In such an historical simulation, the mo del is solved for each year of a historical period
and predicted values for the exogenous variables ar e compared to the actual data. Not only is the
model evaluated based on its ability to approximate hist orical values, but also on its ability to capture
the turning points in the observed values, i.e. dete rmine if the model’s predicted values for a variable
move in the same direction as the actual values from one year to the next.

38. The process of model validation involves testing the performance of the model over the
historical period that corresponds to the timeframe used for the statistical estimation of parameter
values, i.e. the in-sample period. In addition, the model will also be tested over a historical period
outside of the estimation period. This is referred to as out-of-sample validation. If a model does not

citing the Westcott study. However, one of the two stud ies referenced in footnote 4 did not use the CARD
International Cotton Model; it used FAPRI's full interna tional model. Similarly, the study referenced in
footnote 5 also used FAPRI's full international model. It is clear by reviewing paragraphs 3-11 of Annex I
(particularly footnote 10) and Dr. Sumner's Oral Statement of 7 October 2003, that Brazil's documents
manifestly led the Panel to believe it was using a broad, multi-commodity international model in its analysis.
Only later did Brazil clearly admit it did not use such a m odel and that all competing crops were not included in
its international analysis.
23 See para. 42, Brazil's Comments on US Model Critique, 20 January 2004.
24 The United States notes also that with each disc overed discrepancy, Brazil has supposedly rerun its
analysis to demonstrate that none of its misstatemen ts has had any appreciable affect on the Sumner model
results and asserts this demonstrates the "robustness" of the Sumner model. As noted in the introductory
statements to this submission, ever y economic result ascribed to a FAPRI-t ype analysis by Brazil contains the
same flawed assumptions originally introduced by Dr. Sumner, apart from the few corrections Brazil has made.
It is no surprise that each rerun of the same basic construct would reveal the same basic results.

perform well under these validation methods, then pa rticular components or equations within the
system are evaluated and re-specified.

39. It does not appear that Dr. Sumner employed any of these standard techniques for validating
the robustness of his model. It is doubtful that his model, with its modified acreage equations, would
pass this common test. However, despite the lack of documented validation of the model, Dr. Sumner
nevertheless proceeds to use the model and treats the results as credible.

40. Dr. Sumner’s “simple illustration” provided in paragraph 50 does not address the true issue
and is not relevant to the example of US cotton. The United States has repeatedly shown that the
overriding economic signals that have affected cotton acreage have been the expected prices of cotton
and relevant competing crops.

41. To conclude our response to Dr. Sumner’s ar guments in paragraphs 43-56, it is abundantly
clear that Dr. Sumner can produce no meaningful empirical validation for his approach. His results
are based on forced outcomes that are the results of his ad hoc modelling specifications.

Inconsistent descriptions of "full net revenue"

42. In paragraph 63, Dr. Sumner states that “fu ll net revenue including all programme payments”
form the basis for his model specification. He states that he does not understand how the
United States made such a mistaken assumption. Dr. Sumner’s current claim is in direct contradiction
to his documentation in Exhibit Bra-313.

43. On page 2, in equation (2) and the subseque nt paragraph of Exhibit Bra-313, Dr. Sumner
clearly states that his net revenue includes only the farm price and the marketing loan and not the full
programme payments. Then, in equations (4) - (6), the net revenue, which presumably is the same as
specified in equation (2), is again denoted as bei ng a portion of the denominator in his determination
of the impacts of the programme in question. The United States maintains its assertion that the full
programme payments should have been in the denomin ator of the function. Neither the United States
nor the Panel can be certain of Dr. Sumner’s ex act approach because his explanation changes with
each submission.

Incorrect assertions

44. Dr. Sumner’s criticisms in pa ragraph 65 of the calculations provided by the United States are
unfounded.

45. The claim in paragraph 65 that the Southe rn Plains revenue of $109.04 does not include
marketing loan benefits is patently incorrect. Th e Panel and Dr. Sumner need only to look in cell
AO236 of the Equations sheet of the file FINAL US2003CropsModel WORKOUT.xls and they will
find that the value of net revenue from the market and the marketing loan is $109.04. All subsequent
critiques on this issue put forth by Dr. Sumner are ob viously incorrect because of his error reading the
spreadsheets submitted by Brazil.

46. Dr. Sumner attempts to invalidate the US cr iticisms in paragraph 69-70 by claiming that the
numbers are not the ones reported in Annex I. He indicates that the numbers were generated by the
United States, but that is incorrect. The United Stat es properly references the source of the acreage
impacts as being the file FINAL US2003CropsMode l WORKOUT.xls. More specifically, the data
come from rows 721-771 of the Equations sheet and are the first-round impacts reported in the model.
These are appropriately compared to first-round impacts calculated in the US critique.

Marketing loan and step 2 impacts

47. Given Brazil's efforts to misstate the US pos ition on marketing loan and step 2 impacts in
paragraphs 8 and 9, the United St ates refers the Panel to its earlier discussion included in section G
(paragraphs 152, et seq.) in the US Further Rebuttal Submission, 18 November 2003 where the
United States stresses the need for the Panel to investigate the actual decisions facing producers
making their planting decisions. The United States h as also not altered its position regarding the step
2 programme. The US submission of 22 December 2003 was directed at its critique of Dr. Sumner's
economic modelling. While the US has indicated to the Panel its belief that the FAPRI model is not
the best measure of impacts of the marketing loan or step 2 programmes, it did not specifically
criticize Brazil's analytical method in this rega rd as Brazil apparently did not make significant
changes to the FAPRI model on these points - as it did in virtually every other aspect of its analysis.

Annex I results have never been independently confirmed

48. The models used and outputs obtained by Braz il and submitted to the Panel were not retained
by Brazil's employed experts.
25 The record remains incomplete with respect to Dr. Sumner's
adaptations.

49. The United States has found that the current submission by Dr. Sumner is fraught with many
of the same types of errors contained in his prev ious submissions. He disputes numbers that are taken
directly from files that either he or Dr. Babcock has provided to the Panel. He continues to provide
contradictory explanations and documentation of his methodology. Furthermore, detailed electronic
verification of his calculations used in Annex I ha ve never been provided to the United States or the
Panel. Dr. Sumner has repeatedly claimed that he has provided all information to the Panel. That is
obviously not the case, since new info rmation, such as the regional crop insurance numbers, were just
provided in this most recent submission.

Impacts attributed to the export credit guarantee programme are unsubstantiated

50. The United States is surprised that, despite repeated opportunities to offer some degree of
economic support to the 500,000 bale impact Brazil attributes to the US export credit guarantee
programme, Brazil has still not done so.
26 Worse, Brazil still refers to its estimates of the impact of
this programme as "conservative." As the United States indicated in its critique of the Sumner model,
the figures bandied about regarding acreage imp acts of the export credit guarantee programme on
cotton are anything but conservative.

51. In the September 9 Brazil Submission before the Second Session of the First Panel Meeting,
(paragraphs 192-194), Brazil implied that Dr. Sumn er's export estimates with respect to the export
credit guarantee programme were more conservative than the unsubstantiated estimate it cites from
the National Cotton Council (the "NCC"). Paragra ph 194 of that submission acts as if the NCC
estimate of a possible 3 cent per pound US price impact and Dr. Sumner's estimate of a .57 cent per
pound world
 price impact are somehow independent analyses - and demonstrate Dr. Sumner's
conservative approach. However, as demonstrated in Bra-313, all Dr. Sumner did was force a
reduction in the US export estimates of 500,000 bal es (using the NCC testimony as his sole economic
foundation), which correspondingly reduced prices in the US, which correspondingly both reduced
US acreage and slightly increased exports - cutting into the initially imposed 500,000 bale shift.

25 See Letter dated October 31, 2003 from Dr. Bruce Babcock to Dr. Dan Sumner, submitted to the
Panel by Brazil on 5 November 2003.
26 Other than citing congressional testimony offered by the National Cotton Council, a US trade
association that operates on behalf of the US cotton industry.

52. The "different" price estimates were, in fact, estimates of two different sets of prices - US and
world. Brazil inappropriately characterized Dr. Sumn er’s results as being conservative relative to the
NCC estimate. ( see para. 192, Brazil's Further Submission to the Panel, 9 September 2003) Later
when the Panel raised a question about the resu lts, Dr. Sumner somehow forced a full 500,000 bale
decline in US exports, ignoring the impacts of price response. ( See, e.g., Bra-325, last category of
tables - export credit guarantee with fixed 500,000 bale impact.) In that response, Brazil also
maintained the stance that these two "analyses," neither demonstrating economic foundation, were
somehow independent, while fairly clearly demons trating that Dr. Sumner merely took the NCC
testimony and imposed a 500,000 bale demand shift.

53. Neither Brazil nor Dr. Sumner have ever o ffered any analysis at all as to how much or
whether the export credit guarantee programme actually affects exports. They took someone else's
word for it, with no demonstrated economic founda tion - much the same approach Brazil has asked
the Panel to take with respect to important aspects of the Annex I model.

Conclusions

54. Dr. Sumner's economic analysis should not be relied upon by the Panel as credible support for
any findings on the effect of challenged US cotton subsidies. Brazil offers Dr. Sumner's model results
as evidence that but for the US cotton programmes, US cotton acreage would have declined and world
prices would have increased. In order to support this claim, Brazil and Dr. Sumner had to make
significant modifications to a previously well-r espected econometric system. The United States has
demonstrated the weakness inherent in those modifi cations and the failure of Brazil to independently
validate those modifications. Throughout its subm issions, Brazil has claimed that nebulous factors
such as a producer's "anticipation of policy ch ange" are legitimate pillars on which to base
Dr. Sumner's modifications to the FAPRI model. Brazil has pushed this questionable logic despite the
fact that FAPRI itself has refused to ascribe the type of impacts forced on its model by Brazil. When
confronted by the United States and pointedly questi oned about the particulars of its approach, Brazil
has been unable to advance convincing, supportable or even consistent explanations of its analysis.

55. As stated previously, while the US has dem onstrated fatal flaws in Brazil's arguments on
subsidy identification, causation, and its actionable subsidies claims, it is clear to the United States
that but for the significant modification and adaptation of the FAPRI model carried out by Brazil and
Dr. Sumner, acreage impacts attributed to the US cotton programme by that economic model would
be far less than reported in Annex I. Brazil has offe red nothing in its critique to change the US view
of the failure of Brazil's evidence to prove this aspect of its claim.

ANNEX I-17

BRAZIL'S RESPONSE TO THE
PANEL'S QUESTIONS

11 February 2004

TABLE OF CASES

Short Title Full Case and Citation
EC – Hormones Arbitrator Report, EC – Measures Concerning Meat and Meat Products
(Hormones), WT/DS26/15, WT/DS48/13, circulated 29 May 1998.
Brazil – Aircraft Panel Report, Brazil – Export Financing Programme for Aircraft,
WT/DS46/R, adopted 20 August 1999.
Canada – Aircraft Panel Report, Canada – Measures Affecti ng the Export of Civilian
Aircraft, WT/DS/70, adopted 20 August 1999.
Korea – Alcoholic
Beverages
Arbitrator Report, Korea – Taxes on Alcoholic Beverages , WT/DS75/16
and WT/DS84/14, circulated, 4 June 1999.
US – FSC Panel Report, United States – Tax Treatment for “Foreign Sales
Corporation”, WT/DS108/R, adopted 20 March 2000.
Australia – Leather Panel Report, Australia – Subsidies Provided to Producers and Exporters
of Automotive Leather, WT/DS126/R, adopted 16 June 1999.
US – 1916 Act Arbitrator Report, US – Anti-Dumping Act of 1916 , WT/DS136/11 and
WT/DS162/14, circulated 28 February 2001.
Canada – Automotive
Industry
Panel Report, Canada – Certain Measures Affecting the Automotive
Industry, WT/DS139/R and WT/DS/142/R, adopted 19 June 2000.
US – Section 110 Arbitrator Report, United States – Section 110(5) of the US Copyright
Act, WT/DS160/12, circulated 15 January 2001.
US – Hot-Rolled Steel Arbitrator Report, US – Hot-Rolled Steel from Japan , WT/DS184/13,
circulated 19 February 2002.
US – Byrd Amendment Arbitrator Report, US – Continued Dumping and Subsidy Offset Act ,
WT/DS217/14 and WT/DS234/22, circulated 13 June 2003.
Canada – Aircraft II Panel Report, Canada – Measures Affecti ng the Export of Civilian
Aircraft, WT/DS222/R, adopted 19 February 2002.

276. The Panel notes the parties' responses and comments relating to Question No. 252
concerning the time period within which any prohibited measure must be withdrawn
within the meaning of Article 4.7 of the SCM Agreement . Please supplement your
original response, taking into account the pa rticular nature of each alleged prohibited
subsidy measure (i.e. "Step 2" payments under Section 1207(a) of the 2002 FSRI Act,
export credit guarantee programmes and the ETI Act) and the functioning of the US
legal and regulatory system in respect of these measures.

Brazil’s Answer:

1. Brazil thanks the Panel for the opportunity to supplement its 22 December 2003 response to
Question 252.
1 As Brazil has previously noted, the three pr ohibited subsidies at issue in this dispute
(Step 2 payments, CCC export credit guarantees a nd ETI Act subsidies) all involve mandatory
measures requiring changes to the statutes that provide for these prohibited subsidies.

2. The ordinary meaning of the phrase “without de lay” in Article 4.7 of the SCM Agreement is
“as quickly as possible.” While the text does not state “immediately,” neither does it use a qualifier
such as “reasonable delay.” The term implies a certain sense of urgency. And it suggests that
implementing governments must move more quickly to implement prohibited subsidies measures than
other types of measures. In particular, the phr ase “without delay” requires a faster implementation
than the “reasonable period of time” provisions of Article 21.3 of the DSU. Article 21.3 provides that
if it is “ impracticable to comply immediately with the recommendations and rulings, the Member
shall have a reasonable period of time in which to do so” (emphasis added). The use of terms
“impracticable” and “reasonable” suggest a less urgent approach to implementation in DSU
Article 21.3 than in Article 4.7 of the SCM Agreem ent. This is exactly how the provisions of DSU
Article 21.3 have been interpreted by a number of arbitrators, as discussed below.

3. The context of Article 4.7 of the SCM Agreement strongly supports a more rapid
implementation for prohibited subsidy measures than for other measures. First, there are special
expedited dispute settlement procedures in Artic les 4.4-4.6 of the SCM Agreement for prohibited
subsidy disputes. Why would the drafters have cu t the time for litigating pr ohibited subsidy cases in
half, if they had expected “business as usual” in the implementation phase by using the same
“reasonable period” implementati on provisions of DSU Article 21.3? The “special rule and
procedure” status of Article 4.7 of the SCM Agreem ent in DSU Annex 2 is also significant. This
special status must be given meaning by the Panel. To simply treat implementation according to the
“reasonable period of time” standard of DSU Article 21.3, as the United States argument
suggests
2,would effectively denude the “without delay” standard in Article 4.7 of any “special” status.

4. The “prohibited” status of subsidies c overed by Articles 3 and 4 of the SCM Agreement
suggests that the object and purpose of prohibite d subsidy disciplines is to create significant
disincentives for Members to continue providing such subsidies. These provisions demonstrate that
negotiators determined that special dispute settle ment and implementation procedures were required
for prohibited subsidies because of their particular ly trade-distorting nature. The object and purpose
of Articles 3 and 4 would be frustrated if the phr ase “without delay” were interpreted to permit a
Member to take as long as normally required to impl ement any legislative changes. Each day that a
prohibited subsidy, such as Step 2 payments, con tinues to be provided is a day in which trade is
distorted. This is particularly true given the recent fall in cotton futures prices.3

1 See Brazil’s 22 December 2003 Answers to Questions, para. 167.
2 See US 28 January 2004 Comments, paras. 175-177.
3 http://www.nybot.com (click on cotton and then future s). As of 10 February 2004, the futures price
for the March 2004 contract had fallen to 64.96 cents from a high of 86 cents in October 2003.

5. There is only one precedent applying the Artic le 4.7 “without delay” provision to prohibited
subsidy measures requiring legislative changes. In the US – FSC dispute, the Panel found
1 October 000 (15 months after the interim report w as issued) to be the appropriate “without delay”
period.
4 However, the facts of US – FSC highlight the reason for such a long period of
implementation. In that case, the Panel found that legislation repealing a tax break had to be enacted
before the start of the next US fiscal ( i.e., tax) year. The Panel found that in view of the likely appeal
of its report and the timing of the fiscal year, 1 October 2000 would be the earliest possible
implementation date and, thus, a period of time constituting “without delay”.
5

6. Unlike the FSC measure, the export credit guarantee and Step 2 subsidies at issue in this
dispute are not tax breaks determined (retrospectively) on the basis of annual income and in force for
a fiscal year. Step 2 payments and export credit guarantees are also not paid on the basis of marketing
years or any other time period. Instead, the benefi ciaries of these two types of prohibited subsidies
receive financial contributions that confer benefits on a transaction-by-transaction basis. Therefore,
the United States cannot claim that there is a need to wait to enact legislation before a “fiscal year”, as
was required in the US – FSC dispute.6

7. Although the DSU Article 21.3 standard requi res a less rapid legislative response than
Article 4.7 of the SCM Agreement, the decisions of various arbitrators provide a useful reference
point for the Panel’s interpretation of Article 4. 7. The now standard language in almost all
arbitrators’ reports under DSU Article 21.3 is that implementation must occur in the shortest period
possible within the normal legal system of a Member.
7 DSU Article 21.3(c) implementation need not
employ “extraordinary legislative procedures”. 8 In other words, under DSU Article 21.3, an
implementing Member’s legislative process need not move faster than it would normally operate in
moving legislation through its legal system.9

8. But the Panel’s role is to interpret the mean ing of Article 4.7 of the SCM Agreement and to
give meaning to the term “wit hout delay” as a special provision apart from DSU Article 21.3. This
does not require the Panel to find that there is a conflict between the provisions. Rather, the Panel
must prevent Article 4.7 from being totally absorbed within the meaning of DSU Article 21.3, as that
latter provision has been interpreted by numerous arb itrators. Any interpretation of Article 4.7 that
would not give it special and independent meaning by instead adopting a “business as usual” approach
to implementation for prohibited subsidy measures would render that provision inutile.

9. In determining what “without delay” means for the United States’ implementation obligations
in this case, Brazil notes that various arbitrat ors have emphasized that the US Congress has
considerable flexibility to enact legislation quickly.
10 The United States has confirmed this fact. 11
Indeed, the United States enacted the FSC replaceme nt measure in less than eight months after the
adoption of the panel report in US – FSC.12 Arbitrators applying DSU Article 21.3(c) have found that
the United States must be given the right to use “normal” legislative procedures, and therefore granted

4 Panel Report, US – FSC, WT/DS108/R, para. 8.8.
5 Panel Report, US – FSC, WT/DS108/R, para. 8.8.
6 Panel Report, US – FSC, WT/DS108/R, para. 8.8.
7 Arbitrator Report, EC – Hormones , WT/DS26/15, para. 26. See also Arbitrator Report, US –
Section 110, WT/DS160/12, para. 31.
8 Arbitrator Report, US – Section 110 , WT/DS160/12, para. 32; Arbitrator Report, Korea – Alcoholic
Beverages, WT/DS75/16, para. 42.
9 Arbitrator Report, US – Section 110, WT/DS160/12, para. 32.
10 Arbitrator Report, US – Section 110 , WT/DS160/12, para. 38; Arbitrator Report, US – 1916 Act ,
11 Arbitrator Report, US – Section 110, WT/DS160/12, para. 38.
12 Arbitrator Report, US – 1916 Act, WT/DS136/11, para. 43.

the United States between 1013 and 1514 months for implementation requiring legislative changes. But
Article 4.7 of the SCM Agreement is not a “normal” procedure – it is a special one. And it requires
special efforts of implementing legislators to act more quickly than may be “normal”.

10. The record shows that Step 2 payments are prohibited subsidies that are paid upon proof of
export shipments or domestic use by US textile mill s. Eliminating this prohibited subsidy requires no
complex word play or textual wrangling. Rather, it simply involves the repeal of Section 1207(a) of
the 2002 FSRI Act. Therefore, Brazil considers that 90 days after the adoption of the Panel Report by
the DSB should be considered to be “without delay”.
15

11. With respect to the CCC export credit guaran tee programmes, the Panel should specify that
within six months after the adoption of the Panel Report, the prohibited subsidies must be withdrawn
by enacting the necessary changes to the statutes and regulations providing for GSM 102, GSM 103
and SCGP. These changes would have to result in CCC guarantees being provided on market terms
and at premium rates that are adequate to cove r the long-term operating costs and losses of the
programmes. Due to the more complex nature of the implementation with respect to the CCC export
credit guarantee programmes, Brazil considers a period of time of six months to be consistent with the
“without delay” obligation.

12. With respect to the ETI Act, the United States has repeatedly indicated that implementation is
underway and that “bills are before both houses of Congress that would repeal the FSC and that have
been reported out of their respective committees.”
16 In view of the implementation process, which
has already begun, and the text of Article 4.7 of the SCM Agreement requiring the withdrawal of the
prohibited subsidies “without delay”, the Panel shou ld specify that, with respect to the ETI Act,
“without delay” means a period of 90 days. This re presents an appropriate period of time that would
be consistent with the “without delay” obligation to withdraw the ETI Act.

13 Arbitrator Report, US – 1916 Act, WT/DS136/11, para. 45.
14 Arbitrator Report, US – Hot-Rolled Steel , WT/184/13, para. 40. Brazil notes that this case also
involved changes to the regulations that could only be adopted after the underlying statute had been changed by
Congress. Therefore, the arbitrator considered a period of more than 10 months to be “reasonable.”
15 The period of 90 days is also consistent with the specification of earlier panels that “without delay”
generally means 90 days. See Brazil’s 22 December 2003 Answers to Questions, para. 167. See Panel Report,
Brazil – Aircraft , WT/DS46/R, para. 8.5; Panel Report, Canada – Aircraft , WT/DS70/R, para. 10.4; Panel
Report, US – FSC, WT/DS108/R, paras. 8.7-8.8; Panel Report, Australia – Leather, WT/DS126/R, paras. 10.6-
10.7, Panel Report, Canada – Automotive Industry , WT/DS139/R and WT/DS142/R, paras. 11.6-11.7, and
Panel Report, Canada – Aircraft II, WT/DS222/R, para. 8.4.
16 See most recently: US 28 January 2004 Comments, para. 177. See also US 11 July 2003 First
Submission, para. 189 and US 11 August Answers to Questions, paras. 229-230.

ANNEX I-18

UNITED STATES' RESPONSE TO THE
PANEL'S QUESTIONS

11 February 2004

259. With respect to the Privacy Act of 1974, 5 U.S.C. 552a:

(a) Whose interests are protect ed under section 552a(b) in light of the definition of
“individual” in section 552a(a)(2)? Do all payment recipients, including corporations
and organizations, have Privacy Act rights? If not, is the United States prevented by its
domestic law from releasing such of the in formation requested on 12 January 2004 as
relates to payment recipients without Privacy Act rights? Please explain with references
to case law.

1. We appreciate the Panel’s interest in the Privacy Act interests that the United States
Department of Agriculture is obligated, under US do mestic law, to protect. Farm-specific planting
data is one such protected interest
1, and was one since long before the inception of this dispute. We
discuss this point further in response to question 259(c) below.

2. Under the Privacy Act of 1974, generally, “[n] o agency shall disclose any record which is
contained in a system of records by any means of communication to any person . . . ”. 5 U.S.C.
552a(b). The statute provides a criminal penalty for any agency employee who willfully discloses
protected records knowing that disclosure is prohibi ted. 5 U.S.C. 552(a)(I)(1). A “record” is defined
as “any item, collection, or grouping of information about an individual that is maintained by an
agency” (5 U.S.C. 552a(a)(4)), and an “individual” is defined as “a citizen of the United States or an
alien lawfully admitted for permanent residence” (5 U.S.C. 552a(a)(2)). Therefore, courts have held
that the rights of the Privacy Act of 1974 do not extend to corporations or organizations. See, e.g.,
Dresser Industries v. United States
, 596 F.2d 1231 (5th Cir. 1979). Wh ile corporations do not have a
personal privacy interest, closely held corporations are an exception in that the release of information
about the corporation is tantamount to a release of information on the individuals involved.

3. With respect to planting information of non-clo sely held corporations, courts have held that
information voluntarily received from a corporation is to be withhe ld under exemption (4) of the
Freedom of Information Act (FOIA), 5 U.S.C. 552 (5 USC (b)(4)), if it is not the type of information
that would customarily released by the corporation to the public. See also
, Center for Auto Safety v.
National Highway Traffic Safety Administration , 244 F.3d 144, 147 (DC Cir. 2001). This is the case
with respect to plantings. Furthermore, the Trade Secrets Act, 18 U.S.C. 1905, prohibits the release of
any information that falls within the exemption from disclosure provided by 5 U.S.C. (b)(4) unless
otherwise permitted by law. CNA Financial Corp. v. Donovan , 830 F.2d 1132, 1151-1152 (D.C. Cir.
1987).

4. The 1999-2001 plantings information of non- closely held corporations was voluntarily
submitted. For 2002 and beyond the reports are required by statute. Thus, such data could
presumably be released for non-closely held corp orations (it would still be protected under the
Privacy Act for individuals and closely-held corpor ations). However, determining which farms are

1 We discuss below an exception to this principle for farms owned by corporations other than closely
held corporations.

non-closely corporations would require examining, on a case by case basis, th e circumstances of each
operation. That would require the considerati on in county offices across the cotton-growing country
of some 200,000 files.

5. As explained in the US letter of 20 January 2004, Brazil’s insistence on receipt of contract
payment and planting data identified by farm number is unnecessary to resolution of the issues in this
dispute. Instead, to the extent any of this inform ation is relevant to this dispute, given Brazil’s
arguments, aggregation of payment data would provide information in the appropriate format, and
aggregation would moreover be cons istent with US law. The Panel has now requested aggregated
data, and as explained elsewhere in today’s submissions the United States is working to provide that.

(b) The Panel notes that data concerning th e four relevant programmes, in particular,
payment amounts, identified by specific farms, is freely available on the internet. Please
explain why that data can be disclosed but the requested planted acreage data cannot.
Do individual recipients have Privacy Act rights with respect to their entrepreneurial
activity? Please explain with references to case law.

6. The Panel is correct to distinguish be tween information on government activity and
government payments, and individual activity, in pa rticular individual entrepreneurial activity.
Indeed, there are long-standing and well-recognized di stinctions in the United States between, on the
one hand, government-generated in formation and conclusions formed by the government itself (such
as payment amounts, bases, and yields), and, on the other hand, the private reportings of farmers (such
as plantings) which do not generate any payments and which are submitted for compliance purposes
only. Filings of the latter kind have long been r ecognized in US agricultura l law as being private in
nature. See, e.g., 7 USC 1373 and 7 USC 1502(c) (protecting such filings under the terms of the
Agricultural Act of 1938 and in the crop insurance context).
2

7. The interrelationship between the Privacy Ac t of 1974 and the FOIA requires an analysis
balancing the privacy interest of the individual w ith the “core purpose” of FOIA which is to “shed
light on an agency’s performance of its statutory duties”. United States Department of Justice v.
Reporters Committee for Freedom of the Press , 489 US 749 (1989). Information that does not
directly disclose government operations cannot be f actored into the balance. Reporters Committee ,
489 US at 775.

8. Information concerning planted acreage does not demonstrate anything regarding the
government’s operation – it only demonstrates what a producer is doing. Accordingly it is protected
from disclosure. By contrast, information regard ing payment amounts relate to the government’s
implementation of farm programmes, and this outweighs any privacy interest on the part of the
producer.
3

9. With respect to the final part of the Panel’s question, while there is a split of authority in US
courts as to whether individuals have Privacy Act rights with respect to their entrepreneurial activities,
the Department of Agriculture has determined that an individual acting in an entrepreneurial capacity
is protected by the Privacy Act of 1974. See Metadure Corporation v. United States
, 490 F. Supp.
1368 (S.D.N.Y. 1980); Campaign for Family Farms v. Glickman, 200 F.3d 1180 (8th Cir. 2000).

2 It would be odd, to say the least, to say that such planted acreage information would be protected for
crop insurance purposes but then releaseable by some other avenue.
3 This sort of weighing process was the basis of the decision in Washington Post Company v.
United States Department of Agriculture , 943 F.Supp. 31 (D.D.C. 1996). There, the court found some privacy
interest in payment information, but found that interest to be both minimal and outweighed by a “substantial”
public interest in identifying “fraud and conflict of interest”. 943 F. Supp. at 37.

(c) Please provide any further available evidence of the USDA’s long-standing policy that
planted acreage information will not be released.

10. Exhibit US-144 is a notice dated December 1, 1998, from the Acting Administrator of the
Farm Service Agency (“FSA”) to all FSA employ ees setting out “FSA’s policy on information that
can be released” to the public and “exclusions to FSA’s policy on releasing lists of names and
addresses. Page 2 of the notice states that “[ a]creage, production data, and other producer-related
information, without any personal identifiers atta ched, may be released when grouped . . . unless the
request would be able to identify an individual producer from the information provided”.

11. Exhibit US-143 is a 18 September 1998, memorandum from the Director of the Legislative
Liaison Staff for FSA, to State Offices. In th is document, the author seeks to correct any
misunderstandings that may have arisen after the Washington Post
 district court decision regarding
what information may be releaseable under the Fr eedom of Information Act. The memorandum
makes clear that, unlike the payment data at issue in that case, planted acreage information is not
releaseable information under FOIA.

12. The Panel will see from these document that the positions taken by the Department of
Agriculture here predate this dispute by several years.

260. On 27 August 2003, in its response to Question No. 67 bis, the United States indicated
that “it does not maintain information on th e amount of expenditures made under the cited
programmes to US upland cotton producers”. On 12 January 2004, the Panel requested the
United States to provide information “to permit an assessment of the total expenditures of PFC,
MLA, CCP and direct payments by the US Fede ral Government to upland cotton producers in
the relevant marketing years”. On 20 January 2004, the United States informed the Panel that
“the data already provided by the United States to Brazil and the Panel would permit an
assessment of total expenditures of decoupled pa yments to farms planting upland cotton”. Is
the latest statement responsive to the Panel’s req uest? If so, how can it be reconciled with the
first statement?

13. It is important to distinguish between information on plantings
 and information on
production. The United States maintains some inform ation on plantings, but does not maintain
information on individual farm production. The 27 August 2003 statement concerned production,
while the 20 January 2004 statement concerned planti ngs. Brazil has all of the payment data and, for
every “cotton farm” (as defined in Exhibit BRA-369), all of the yield data and all of the base data. In
addition, the summary files that the United States prepared also present total cropland data for these
“cotton farms”. However, the United States does not maintain information on whether farms that
planted cotton produced (i.e., harvested) that cott on or abandoned it. For cotton, abandonment rates
can be significant.

261. Please confirm that each record in the actu al planting database relates to a specific farm
(Filenames: rPFCplac and rDCPplac in Exhibits US-111 and US-112). For example, in the data
from rDCPplac:

 First line:
Field9;Field16;Field22;Field28;Field34;Field40;Field46;Field52;Field58;Field64;Field70
Field76;Field82;Field88;Field94;Field100

 Second line:
237.10;23059.80;5566.20;0.00;0.00;0.00;0.00;0.00;0.00;0.00;0.00;0.00;0.00;0.00;0.00;0.00

 Does the second line represent data on plantings by the same farm?

14. Yes, we can confirm that the panel’s understa nding of the files is correct. That is, for the
detailed farm-by-farm text files, each farm wa s given its own line, with fields separated by
semi-colons. The last field would not be followed by any mark; rather, after the last field for a given
farm, a new line was started, indicating a new farm entry.

262. The Panel has noted the two CD-ROMs delivered by the US in the evening of
23 December 2003. They are marked “US-111” and “US-112” respectively, but the contents
actually do not correspond to the indication. Th e Panel also takes note of the US letter dated
28 January 2004 and the CD-ROM delivered together wi th it. For the record, please clarify the
correct CD-ROMs and provide corresponding descriptions of their contents with exhibit
numbers.

15. The United States originally prepared and s ubmitted six data files. The files designated
“PFCby.txt” (the base acreage and yield file for the PFC payment era)
4 and “DCPby.txt” (the base
acreage and yield file for the DCP payment era) 5 set out all base acres for each “programme crop” on
every identified farm and the associated programme yield. For the Panel’s and Brazil’s convenience,
the United States also calculated the payment units (bushels or pounds) for each “programme crop”.

16. The United States also provided farm-by-fa rm planted acreage information, with farm-
identifying information removed, in the files “ PFCplac.txt” (planted acreage for the PFC payment
era)
6 and “DCPplac.txt” (planted acreage for the DCP payment era).7 The United States has explained
that, under US law, it could not provide the farm-by -farm planted acreage information in a format that
would permit identification of a specific farm.8

17. Finally, to assist the Panel and Brazil in interpreting the voluminous data provided, the
United States prepared and submitted summary fil es setting out aggregate cropland, base acreage,
base yield, payment units, and planted acreage. These summaries were labeled “PFCsum.xls” (for the
PFC payment era) and “DCPsum.xls” (for the DCP payment era).

18. On 28 January 2004, the United States submitted re vised data files to the Panel that corrected
for certain programming errors that inevitably resulte d in the rush to provide nearly 220 megabytes of
data within the limited time available to reply to Br azil’s request for data. As set out in the US letter
of 28 January, the file names are identical to tho se previously submitted but with an “r” preceding the
original file name. Thus, the files are now titled “rDcpsum.xls” (aggregate data file), “rDcpby.txt’
(farm-by-farm base and yield data file), “rDcpplac.txt” (planted acres file), “rPfcsum.xls” (aggregate
data file), “rPfcby.txt” (base and yield data file), and “rPfcplac.txt” (planted acres file).

19. In Exhibit US-145 that is being submitted today, the United States sets out the contents of the
four revised farm-by-farm “.txt” files (that is, not the summary files) that were submitted to the Panel
on 28 January 2004, on CD-ROM. (We note that, in each of the four “.txt” files, the fields are
separated by colons and field labels are set out with in the file, with each farm having its own line, just

4 A description of the file contents for the “PFCby.txt” file was submitted as Exhibit US-109.
5 We note that Exhibit US-111 set out a description of the file contents (by field number and heading)
for the “DCPby.txt” file. Any mark ing of a CD-ROM delivered on 23 December 2003, as “Exhibit US-111”
was therefore in error.
6 A description of the file contents for the “PFCplac.txt” file was submitted as Exhibit US-110.
7 We note that Exhibit US-112 set out a description of the file contents for the “DCPplac.txt” file.
Therefore, any marking of a CD-ROM delivered on 23 D ecember 2003, as “Exhibit US-112” was in error. We
apologize for any confusion that may have been caused.
8 See US Letter to Panel of 18 December 2003; US Lette r to Panel of 20 January 2004; US Answers to
Questions 259(a), (b), (c) from the Panel (11 February 2004).

as in the corresponding “.txt” files submitted on 18 and 19 December 2003.) These four revised files
follow the same fields and formats as the files orig inally submitted on 18 and 19 December 2003. As
explained on 28 January, those revised electroni c files were prepared and submitted after the
United States became aware of certain errors in the original data files submitted.

263. The Panel has noted that the United States’ response to Question No. 214 refers to
Exhibits US-117 and US-118. Are these the cor rect documents to which the United States
intended to refer in that response? If not, pl ease provide a copy of regulations regarding the
marketing loan programme and loan deficiency payments published at 58 Federal Register
15755, dated 24 March 1993.

20. The exhibits submitted in response to Qu estion 214 were in error. A copy of the
24 March 1993, Federal Register notice is attached as Exhibit US-263. The United States regrets any
inconvenience its error may have caused.

264. The Panel asks the United States to clarify certain aspects of Exhibit US-128:

(a) Is the Panel correct in understanding that -- as Brazil asserts in footnotes 290 and 291 of
Brazil's 28 January 2004 comments on US re sponses to questions -- Exhibit US-128, all
data are presented on a cohort-specific basis? If so, please also present the information
originally requested by the Panel in another chart containing programme (as opposed to
cohort-specific) activity by fiscal year.

21. The data presented in Exhibit US-128 is pr esented on a cohort-specific basis. However, a
cohort by definition reflects activity related to guarant ees issued within a specifi c fiscal year. Exhibit
US-128 also presents such data with respect to each of the individual programmes (GSM-102, GSM-
103, and SCGP), as well as their cumulative totals . This data reflects actual performance of the
programmes, unlike the data in the US budget to whic h Brazil alludes in its footnote 290, which, as
the United States has repeatedly explained, are b ased on estimates and re-estimates required under the
Federal Credit Reform Act of 1990.

22. Although the data in Exhi bit US-128 is already presented by programme (as well as
cumulatively), the United States infers from the Pa nel’s question that it nevertheless would like to see
a different presentation of the same data. Accordingly, Exhibit US-147 presents the same data, except
Columns D (Claim Payments), E (Claims Rec overed), F (Claims Resc heduled), G (Claims
Outstanding), L (interest collected on claims recovered), and M (interest collected on reschedulings)
are presented on a chronological basis (i.e., instead of applying the particular activity back to the
cohort of the guarantee related to such activity, th e cash-flows are set out in the fiscal year in which
they occurred).

(b) Does the US agree with the statement in paragraph 135 of Brazil's 28 January 2004
comments on US responses to questions that the difference between the $1,148 billion in
the chart at para. 165 of Brazil's 11 August answers to questions and the $666 million
amount in Exhibit US-128 ($1.75 billion) closely corresponds to the total "Claims
rescheduled" figure reported by the US in Exhibit US-128 (column F)?

23. The United States is examining the cited figures and expects to be able to provide an answer
within the same period as its response to the Panel’s supplemental request for information.

(c) Does the US agree that from the formula in column G (that is: (Column (D) minus (E)
minus (F)), it follows that a rescheduled cl aim no longer constitutes an outstanding
claim at the moment the terms of the re-scheduling are agreed and that a rescheduling is

treated as 100 per cent recovered, as Brazil states in footnote 292 of Brazil's
28 January 2004 comments on US responses to questions?

24. The Panel’s understanding is correct. Ho wever, other than interest collected on
reschedulings, Exhibit US-128 does not reflect the receipt of payments under the reschedulings.
Consequently, no principal payments received under reschedulings are reflected in Exhibit US-128.
As the principal amounts rescheduled are set fo rth in Column F and subtracted from Claims
Outstanding in Column G, to include such princi pal payments as received would constitute double-
counting.

(d) Is the Panel correct in understanding that th e amount of $888,984,792.04 in column F in
Exhibit US-128 under "ALL" for 1992 represents the total continuing amount of
unrecovered claims for the 1992 cohort, and that the amount of 387,692,219.39
represents the total continuing amount of unrecovered claims for the 1993 cohort, etc?
Please indicate and substantiate how much pr incipal and/or interest has actually been
paid/recovered/rescheduled annually 1992-2003 in respect of each of the amounts shown
in Columns D, E & F in the table.

25. The Panel’s understanding is not correct. The figures in column F to which the question
refers do not reflect a continuing amount of unrecovered claims. As reflected in the response to
question 264(c) these figures do not in any way refl ect payment performance under the reschedulings
themselves and therefore do not reflect a “conti nuing amount of unrecovered claims”. Although
Column M of Exhibit US-128 reflects interest collect ed on reschedulings, neither payment of original
principal nor payments of capitalized interest are reflected in Exhibit US-128. Column M reflects
only payments of interest on such original principal or on such capitalized interest.

26. Exhibit US-148 reflects, with respect to the sa me data as originally included in Exhibit US-
128, principal and interest “paid/recovered/resch eduled” annually for 1992-2003, on a chronological
cash basis.

265. In connection with the US response to Qu estion No. 225, please also provide amounts
actually "written off" and "forgiven" annually fo r each post-1992 cohort, with annual details of
country and amount (principal/interest).

27. The response to Question 225 was intended to be comprehensive. CCC financial records
indicate that no amounts have been “written off” or “forgiven” with respect to any post-1992 cohort.

266. What are the precise terms, conditions and duration of each rescheduling reflected in
column F in Exhibit US-128?

28. Exhibit US-153 summarizes the principal terms, conditions, and duration of each
rescheduling reflected in column F in Exhibit US-1 28. In each instance in which a Paris Club Agreed
Minute is noted, the terms of the US rescheduling a dhere to the multilateral terms agreed within the
Paris Club. In no instance does the debt owed th e United States and rescheduled in accordance with
Paris Club terms pertain exclusively to debt arising from CCC export credit guarantee transactions.

267. Is the Panel correct in understanding that "interest collected on reschedulings" in
Column M in Exhibit US-128 refers not to amount s that have been actually collected by the
CCC but rather to interest capitalized in conjuncti on with the rescheduling? If so, what are the
terms, conditions and duration of the arrangements pertaining to these amounts?

29. The Panel’s understanding is not correct. As noted in the response to Question 264(d),
Column M of Exhibit US-128 reflects only interest collected on reschedulings. It does not reflect

either payment of original principal nor payments of capitalized interest. At the inception of a
rescheduling some outstanding interest may be capita lized or interest may be capitalized during the
term of the rescheduling. Such capitalized interest is not itself reflected in any way in Exhibit US-
128. Column M reflects only payments of interest on original principal or on such capitalized
interest.

268. Concerning Column N in Exhibit US-128, please elaborate upon "Interest earned from
US Treasury on uninvested funds". What is the source and authority for these funds and for
the interest thereon to be part of the CCC total revenues? What are the terms, conditions and
duration of the arrangements pertaining to these amounts?

30. Section 505(c) of the Federal Credit Re form Act (2 USC Section 661d(c)) applies to
“Treasury transactions with financing accounts”. In relevant part, it provides:

The Secretary of the Treasury shall borrow fro m, receive from, lend to, or pay to the
financing accounts such amounts as may be appropriate. The Secretary of the
Treasury may prescribe forms and denomin ations, maturities, and terms and
conditions for the transactions described above, except that the rate of interest
charged by the Secretary on lending to financ ing accounts [...] and the rate of interest
paid to financing accounts on uninvested bala nces in financing accounts shall be the
same as the rate determined pursuant to [2 USC section 655(b)] [.....] This subsection
shall apply to transactions related to dir ect loan obligations or loan guarantee
commitments made on or after October 1, 199 1 [...] Cash balances of the financing
accounts in excess of current requirements shall be maintained in a form of
uninvested funds and the Secretary of the Treasury shall pay interest on these funds.
31. Such section 655(b) provides: “In estimating ne t present values, the discount rate shall be the
average interest rate on marketable Treasury securities of similar ma turity to the cash flows of the
direct loan or loan guarantee for which the estimate is being made.”

32. Exhibit US-149 is Treasury Financial Manual I TFM 2-4600 (December 2003). This
document, promulgated by the US Department of Treasury, prescribes Treasury reporting instructions
for Federal credit programme agencies in accordance with Federal credit reform legislation. Section
4640 of that document addresses “Interest on Uninvest ed Funds”. That section provides, in part:
“Uninvested funds in the financing account consis t of fund balances with Treasury from borrowings
and/or offsetting collections that have not been di sbursed. This balance earns interest from Treasury
as determined by the disbursement-weighted average interest rate or single effective rate for each
cohort in the financing account.”

33. Agencies must report interest revenue and expe nse separately. Interest income becomes part
of the cash balance in the financing account and is available to fund future disbursements.

269. The Panel notes the table submitted by the US in its answer to Question No. 224 (CCC
Financing Account Payments of Interest on Borro wings from Treasury and Interest Earned on
Uninvested Funds). Is the Panel correct in understanding that the figures in this table
correspond to the "ALL" figures in Columns I and N of Exhibit US-128?

34. Yes. Column I of Exhibit US-128 corresponds to “Interest on Borrowings” found in the table
associated with the response to Question 224, and Co lumn N corresponds to “Interest Earned” in that
same table.

270. With respect to Column I in Exhibit US- 128, ("Interest paid on borrowing from US
Treasury") and Note 8, p. 25 of Exhibit US-129:

 (i) please provide the total annual am ounts (interest bearing and non-interest
bearing) borrowed by the CCC from the US Treasury (annually since 1992), as
well as the terms, conditions, interest rate (where applicable) and duration of
such borrowing. Please provide details of any other amount borrowed by the
CCC from the US Treasury during this peri od that may not have formed part of
the regular annual borrowings.

35. The Panel’s Question 270 in its various s ub-parts suggests that the Panel may have a
misunderstanding regarding the scope of Note 8, p. 25 of Exhibit US-129. As the Panel is aware,
CCC has extensive domestic and foreign operations. Note 8 reflects Debt to the Treasury with respect
to myriad activities of CCC, the preponderance of which is associated with borrowings from Treasury
to carry out programmes other than the export credit guarantee programmes.

36. Column I of Exhibit US-128 sets forth the total annual amount of interest paid on borrowing
from the US Treasury with respect to GSM-102, GS M-103, and SCGP for the periods described. All
references to “non-interest bearing” debt or repaym ents in Note 8, p. 25 of Exhibit US-129 are
unrelated to the export credit guarantee programmes.

 (ii) Please explain the nature of "CCC's permanent indefinite borrowing authority
from Treasury" referred to in Note 8, p. 25 of Exhibit US-129.

37. This borrowing authority does not apply to the export credit guarantee programmes. Similar
to “non-interesting bearing” debt or repayments noted in the preceding response, “CCC’s permanent
indefinite borrowing authority from Treasury” is not available with respect to export credit guarantee
programmes and activities and has not been available since the advent of the Federal Credit Reform
Act of 1990. It has therefore not been available with respect to any cohorts from 1992 to the present.

38. The permanent indefinite borrowing authority to which the question and Note 8, p. 125 of
Exhibit US-129 refer is available to finance and ca rry out many (but not all) activities of the CCC,
including, for example, certain domestic commodity and conservation programmes, but not including
the export credit guarantee programmes. CCC may incu r realized losses in the course of carrying out
such other activities, and such net realized losses are restored through the annual Federal
appropriations process.

 (iii) What determines the level of CCC export credit guarantee borrowing
(interest-bearing and non-interest-bearing)? Is the interest-free borrowing up to
the amount of unreimbursed realized losses?

39. As noted in the preceding responses no “non-inte rest bearing” or “interest-free” borrowing is
available with respect to the export credit guarantee programmes.

40. Generally speaking, the principal determin ant of the level of CCC export credit guarantee
financing will be the estimated programme activity in a particular fiscal year. Budget authority is
based on estimates of all anticipated programme ac tivity such as dollar value of guarantees projected
to be issued, premia to be collected, payments to be received, and claims to be paid. Infrequently,
borrowing from Treasury is also used if CCC has insufficient cash on hand to pay claims.

 (iv) Why are repayments applied to non-interest bearing notes first, as indicated at
Note 8, p. 25 of Exhibit US-129?

41. As noted in the previous responses, activit y with respect to non-interest bearing notes is
wholly unrelated to the export credit guarantee programmes.

271. Note 8, p. 25 of Exhibit US-129 states that "In fiscal year 2003, CCC was fully
reimbursed for its prior year net realized losses." Please indicate the amounts of prior year net
realized losses (annually, since 1992) for which the CCC has been fully reimbursed.

42. As indicated in the responses to Questions 226 (22 December 2003) and 272 below, such
reimbursement is unrelated and inapplicable to the CCC export credit guarantee programmes since the
inception of the Federal Credit Reform Act of 1990, which corresponds to fiscal year 1992. The table
comprising Exhibit US-152 displays CCC net realiz ed losses and all appropriations to restore those
losses for fiscal years 1992 through 2003, but the Unite d States hastens to reiterate that these figures
have no relation to the export credit guarantee progr ammes. Such reimbursements for net realized
losses do not include any portion attributable or allocable to the export credit guarantee programmes.

272. With respect to the US response to Qu estion No. 226, is the Panel correct in
understanding that the reflection of write-offs as part of the operating loss of the CCC which in
turn was replenished through the annual appropriations process ended with the entry into force
of the FCRA in fiscal year 1992? If not, what amounts have been replenished through this
process annually since fiscal year 1992?

43. The Panel’s understanding is correct.

273. With respect to the US response to Quest ion No. 225, what criteria does the CCC apply
to "independently determine" that a debt is unc ollectible? For post-1992 cohorts, what are
these uncollectible amounts (annually) and how, if at all, are such "uncollectible amounts"
shown in Exhibit US-128?

44. With respect to post-1992 cohorts, no am ounts have been determined uncollectible and
therefore none are reflected in Exhibit US-128.

45. The determinations of uncollectability reflect ed in the response to Question No. 225, were
based on the following facts. In the Argentine case, two private sector banks entered Argentine
insolvency proceedings and were subsequently li quidated. CCC, after collecting a portion of the
outstanding debt, received advice from the US Embassy that CCC would never receive further
collection. Accordingly, the outstanding debt was written off. In the case of the Russian debt,
certain debt of a private sector bank was not included in Paris Club rescheduling of debt of the former
Soviet Union. The Russian Federation was therefor e not liable for this debt. CCC received payments
from the private sector bank but made an internal error in properly accounting for these payments.
Certain late interest was not paid as a result, and CCC opted to deem such amount uncollectible. CCC
has so far been unable to locate records pertaining to the Nigerian write-off.

274. The Panel notes the US statement in the US response to Question No. 81 that "All
rescheduled claims are currently performing " a nd that "all payments due up to this point
under [rescheduling] agreements have been receiv ed". However, the Panel also notes Exhibit
US-129 (in particular, Note 5 on p. 22) and Br azil's reference thereto in Brazil's 28 January
comments on the US response to Question No. 222. In this connection:

(a) How does the US respond to Brazil's stat ement in Brazil's 28 January comments that
Exhibit US-129 confirms that rescheduling of export credit guarantee receivables cover
both principal and interest, thereby confirming that not all of the rescheduled debt
performs and that additional interest charges were also rescheduled?

46. The United States would first point out that the references to reschedulings in Note 5, p. 22,
of Exhibit US-129 are not limited to rescheduli ngs associated with the export credit guarantee

programmes, nor to post-1991 transactions. The subs tantial majority of the amounts rescheduled by
CCC pertain to activities related to the P.L. 480 foreign food assistance programme.

47. Brazil misinterprets Exhibit US-129, Note 5, p. 22. Citing that reference, Brazil states:
“Indeed, the CCC’s Financial Statement for FY 200 2 and 2003 confirm that rescheduling of export
credit guarantee receivables covered both principle [ sic] and interest, thereby confirming that not all
of the rescheduled debt performs and that add itional interest charges were also rescheduled.”
9 Brazil
is presumably referring to the second full paragraph of that page 22, particularly its second sentence.
The full paragraph reads as follows:

Direct credit and credit guarantee principal receivables under rescheduling
agreements as of 30 September 2003 and 2002, were $7,532 million and $7,494
million, respectively. During fiscal years 2003 and 2002, CCC entered into
agreements with debtor countries to resche dule their delinquent debt owed to CCC.
These reschedulings totalled $591 million in delinquent principal and $196 million in
delinquent interest during fiscal year 2003, and $152 million in delinquent principal
and $55 million in delinquent interest during fiscal year 2002.
48. The second sentence refers primarily to deli nquent debt under original obligations, not under
outstanding reschedulings. All rescheduled export credit guarantee debt is currently performing.

(b) In Note 5 on p. 22 of Exhibit US-129, what is the definition of "non-performing"? What
is the meaning of "delinquent"? What is the current principal balance and amount of
interest of the three CCC export credit guarantee programme "receivables" in a
non-performing status (individually and t ogether, for GSM 102, GSM 103 and SCGP))?
What is the amount of interest on non-reporting "receivables"?

49. Page 4 of Note 1 (Significant Accounting Po licies) of Exhibit US-129 provides in relevant
part under the paragraph entitled “Interest Income on Direct Credits and Credit Guarantees”: “A non-
performing direct credit or credit guarantee receiv able is defined as a repayment schedule under a
credit agreement, with an installment payment in arrears more than 90 days.” “Delinquent” would
apply to anything past due.

50. With respect to post-1991 cohorts, the prin cipal balance of non-performing credit guarantee
receivables as of 30 September 2003 is as follows:

 GSM-102: $181 million
 GSM-103: - 0 -
 SCGP: 21 million

 Total: $202 million

With respect to pre-1992 cohorts:

 GSM-102: $2,237 million
 GSM-103: 11
 SCGP: -not applicable-

 Total: $2,248 million

9 Brazil’s Comments on US 22 December Answers (28 January 2004), para. 135.

51. With respect to the last question, the United States assumes that the Panel intended to refer to
“non-performing ‘receivables’, rather than “non-reporting ‘receivables’”. The interest receivable on
“non-performing ‘receivables’ is $146 million and is entirely related to pre-1992 GSM-102 principal.

(c) The Panel notes the US reference to the "Paris Club" in US response to Question No.
225. What is the P.L. 480 programme referred to in Note 5 on p. 22 of Exhibit US-129
(including the Paris Club debt reduction pr ocess and the HIPC Initiative) ? To what
extent is the P.L. 480 programme and Paris Club process relevant to the export credit
guarantee programmes at issue in this dispute? Please identify and give the amounts of
all CCC export credit guarantee debt subject to the P.L. 480 debt reduction (or other
similar) process since 1992.

52. The P.L. 480 programme is a foreign f ood-aid programme, under which assistance can be
provided on either a grant or concessional financing basis. That programme is wholly distinct from
the export credit programmes at issue in this dis pute. Consequently, no CCC export credit guarantee
debt overlaps with debt subject to P.L. 480 debt redu ction. As the United States has noted in its prior
submissions, virtually all of the rescheduling of debt in connection with the CCC export credit
guarantee programmes is done in concert with a mu ltilateral Paris Club debt rescheduling process. In
addition, some debt has also been forgiven unde r the HIPC initiative. With reference to the
United States’ response to Question 225, all of the debt in the table reflecting “debt forgiveness” in
paragraph 114 was associated with the Paris Club (Poland, Former Yugoslavia) or HIPC (Honduras,
Tanzania, Yemen).

(d) Can the US explain the process referred to in the second column of Note 5 on p. 22
("CCC is awaiting an apportionment from the Office of Management and Budget before
the transaction can be completed. Until su ch time, however, there is a 100% subsidy
allowance established against the relevant de bt as of 30 September 2003.") Please
provide details of all such "apportionments" relating to the three export credit
guarantee programmes in fiscal years 1992-2003.

53. The transaction to which the cited referen ce applies involves an agreement between the
United States and Pakistan to reduce debt incurred under the P.L. 480 programme, which is not within
the scope of this dispute. It involves only P.L. 480 direct credits and does not involve any of the
export credit guarantee programmes. It therefore does not involve transactions under federal credit
reform provisions applicable to the export cred it guarantee programmes. The cited reference is
intended to note that although a debt reducti on agreement had been signed, the requisite
documentation from the Office of Management a nd Budget authorizing such reduction on the books
of CCC had not yet been received as of the statement date.

54. The procedure in the above P.L. 480 instance is distinct from that which would apply in the
case of export credit guarantee apportionments. The response of the United States to Panel
Question 225 indicated three cases of debt “write-off” and five cases of debt forgiveness. Seven of
those eight cases involved pre-1992 debt. Under the Federal Credit Reform Act of 1990, an
apportionment is ordinarily not necessary with respect to pre-1992 transactions. In fact, only one such
apportionment has ever occurred, and that was in fiscal year 1992 to establish the particular budgetary
account (the “liquidating account”) under which th e budgetary accounting occurs for all activity
associated with pre-1992 transactions. That apportio nment did not reflect any debt reduction or write
off.

55. The only other instance was the write-off of $13,000 owed from the Former Soviet
Union/Russia. This particular write-off did not involve a sufficiently large amount to require an
apportionment. The Office of Management and Budget database rounds to the nearest million dollars,

and therefore the write-off of $13,000 would not alte r the relevant entries in the database for the
particular budgetary account (the “financing account”) applicable to post-1991 cohort transactions.

275. Please provide evidence (or cite relevant po rtions of the record) that the premium rates
for the export credit guarantee programmes a re "reviewed annually" as stated in US 28
January comments on response to Question No. 223 (see also US 22 December response to
Question No. 107; Brazil's 28 January 2004 comments on responses to Question No. 223.).

56. Exhibit US-150 is comprised of the two mo st recent internal USDA documents entitled
“Annual Review of Fees for USDA Credit Programm es,” dated 25 March 2003, and 8 April 2002,
respectively. In addition, Exhibit US-151 are Sec tions I and II of US Office of Management and
Budget Circular No. A-129, dated November 2000, entitled “Policies for Federal Credit Programmes
and Non-Tax Receivables”. Section II.2.b mandates such annual review.

ANNEX I-19

COMMENTS OF THE UNITED STATES
ON COMMENTS OF BRAZIL

11 February 2004

I. Introduction

1. The United States thanks the Panel for pr oviding a new deadline for comments on Brazil’s
comments on the data submitted by the United States on 18 and 19 December 2003. 1 The 48-page
document filed by Brazil on 28 January 2004, goes far beyond a comment on that data or even its
application to Brazil’s invented allocation methodol ogy for determining “support to” upland cotton.
Instead, those “comments” on the US data present an attack on the good faith of the United States in
responding to Brazil’s requests for data, a lengthy attemp t to re-write the history of this dispute, an
inaccurate explanation of US domestic law regardi ng privacy interests in planting data, a request for
the Panel to draw “adverse inferences” despite the fact that Brazil could have requested aggregated
data that would not have implicated privacy interest s, a rather circumspect application of its invented
allocation methodology to the US data, and an inad equate application of the Annex IV allocation
methodology2 to the US data. Because Brazil has seen f it to raise and argue so many issues in its
comments, the United States will necessarily address those in these comments. In these comments,
we proceed as follows.

2. First , we put the issue of the use of the US data in its proper context. Brazil has asserted that
decoupled income support payments must be allocated to upland cotton only for purposes of the Peace
Clause and not for purposes of its serious prejudice claims. However, the allocation of a subsidy
benefit is only mentioned in the Subsidies Agreemen t. The Agreement on Agri culture not only does
not contain any allocation methodology, it also de fines a category of support (“non-product-specific
support”) that consists of unallocated payments “t o producers in general” . Thus, Brazil gets it
completely backwards: the text and context of the Peace Clause demonstrate that support is not to be
allocated for purposes of the Peace Clause test while the text and context of Articles 5 and 6 of the
Subsidies Agreement demonstrate that subsidies not tied to production of a given product (such as
decoupled income support) are to be allocated to all of the products the recipient sells for purposes of
serious prejudice claims.

3. Second
, we explain the implications of Brazil’s erroneous analysis and arguments, and in
particular its express disavowal of any allocati on methodology for purposes of its serious prejudice
claims on decoupled income support paym ents. Brazil has failed to make a prima facie case on these
claims; therefore, no serious prejudice findings may be made with respect to these measures, and
these payments may not be included in an analysis of whether the effect of the challenged US
subsidies has been serious prejudice to Brazil’s interests.

4. Third
, although the foregoing points should end the analysis, we nonetheless examine Brazil’s
application of its invented methodology to the US-supplied data. We recall that this Brazilian
methodology has no basis in the text or context of the WTO agreements. Neither does Brazil’s

1 Brazil’s Comments and Requests Regarding Data Provided by the United States on
18/19 December 2003 and the US Refusal to Pr ovide Non-Scrambled Da ta on 20 January 2004
(28 January 2004) (“Brazil’s Data Comments”).
2 Agreement on Subsidies and Countervailing Measures , Annex IV, paras. 2-3 (“Subsidies
Agreement”).

methodology make economic sense. It does, howev er, allow Brazil to allocate decoupled payments
exclusively or nearly exclusively to upland cott on. Thus, Brazil’s invented allocation methodology
can be described as an attempt to inflate the support to be allocated to upland cotton.

5. Fourth,
 the United States examines Brazil’s cursor y attempted application of the Annex IV
methodology to the US-supplied data . We recall that Brazil expressly disavowed the applicability of
that methodology. Brazil neither sought nor presen ted data to permit the Annex IV methodology to
be applied. In fact, Brazil requested data relevant solely to its invented methodology, meaning there
is no data before the Panel that would permit the Annex IV methodology to be applied. Finally, the
calculations presented by Brazil reflect a misunders tanding of the plain meaning of that methodology
and contain a number of erroneous assumptions that bias Brazil’s results upwards.

6. Fifth
, we correct Brazil’s serious misrepresentations with respect to the data it requested and
point out that the United States responded to that request as drafted and to the fullest extent
permissible under US law. Thus, there is no basis to draw an inference, adve rse or otherwise, from
the inability to provide certain information that is not relevant to an analysis of Brazil’s legal claims.

II. Brazil Misunderstands the Relevant Analy ses for the Peace Clause and for its Serious
Prejudice Claims

 A. Brazil’s Allocation Methodology is Inco nsistent with the Definition of Product-
Specific Support in the Agreement on Ag riculture and, Therefore, Cannot be
Used for Peace Clause Analysis

7. As has been evident since the parties’ fi rst submissions, Brazil and the United States have
offered fundamentally differing inte rpretations of Article 13(b)(ii) of the Agreement on Agriculture
and in particular the Peace Clause proviso which reads: “provided that such measures do not grant
support to a specific commodity in excess of that decided during the 1992 marketing year.” The
differences between the parties’ approaches can be seen in the way they interpret the phrase “product-
specific support” and apply that interpretation to decoupled income support payments.

8. Brazil argues that decoupled income support pa yments are not “truly ‘decoupled’” since some
recipients do produce programme crops, that “the support from contract payments that can be
allocated to upland cotton is product-specific s upport within the meaning of the Agreement on
Agriculture,” and that Brazil’s approach – “to al locate contract payments to the programme crops
covered” – is “reasonable”.
3 However, as the United States demonstrated in its comment on Brazil’s
answer to question 258, Brazil points to no text in the Peace Clause, the Agreement on Agriculture,
nor any WTO agreement that supp orts its allocation methodology 4, nor does that methodology make
economic sense. 5 Brazil may consider its approach to be “reasonable”, but that does not make it
based on any WTO provision.

9. As just one example, Brazil apparently would require that “decoupled support” discourage
recipients from producing certain crops in order to be “decoupled” while at the same time Brazil

3 Brazil’s Data Comments, para. 73. Brazil also argu es: “As the record demonstrates, none of four
types of contract payments is truly ‘decoupled,’ given the production of programme crops by the farms holding
contract payment base. To the contrary, they are intended to and, in fact, do provide support for the production
of programme crops.” Id. Brazil has in fact provided no evidence of such “intent” nor could it since the
opposite is true. These programmes are intended to be decoupled. Moreover, under the Peace Clause, the
“intent” of a payment is irrelevant; it is also irrelevant what a recipient decides to do with a payment. Rather,
the issue is whether the payment as “decided” is “support to a specific commodity” or “support provided in
favour of agricultural producers in general”.
4 US Comments on Brazil’s Answers to Panel Qu estions Following the Second Panel Meeting,
paras. 209-217 (28 January 2004) (“US January 28 Comments”).
5 US 28 January Comments, paras. 218-23.

complains that the payment restriction for planti ng fruits and vegetables means that the support is not
“decoupled”. Brazil cannot have it both ways. If s upport is decoupled, then there is no requirement
to produce any particular commodity. If producers choose to exercise their flexibility and plant
particular crops, that is perfectly consistent with the concept of decoupled support.

10. The lack of grounding of Brazil’s methodology in the WTO agreements stems from its
erroneous interpretation of “support to a specific commodity”. Brazil has argued that any support that
is not made “to producers in general” – which Brazil takes to mean “all” or “nearly all” – is not non-
product-specific and therefore must be “product-sp ecific”. As the United States has pointed out
before, not only does this reading of “in general” rely on an obsolete meaning
6, which therefore
cannot be the ordinary meaning of the terms, but Br azil has consistently failed to read together the
definitions of product-specific support and non-pr oduct-specific support in Article 1(a) of the
Agreement on Agriculture. Read in conjunction with one another, non-product-specific support
(“support provided in favour of agricultural produ cers in general”) is a residual category of support
that is not product-specific (“support . . . provide d for an agricultural product in favour of the
producers of the basic agricultural product”).

11. Brazil’s statement in its 28 January comments that “the support from contract payments that
can be allocated to upland cotton is product-specifi c support within the meaning of the Agreement on
Agriculture”
7 is significant because it confirms that both parties interpret “support to a specific
commodity” in the Peace Clause as meaning “product-specific support”. Thus, the question for the
Panel is whether decoupled income support me asures provide product-specific support or non-
product-specific support. The definitions from Articl e 1(a) quoted above establish that support that is
not “provided for a basic agricultural product in fa vour of the producers of the basic agricultural
product” cannot be product-specific support.

The very fact that Brazil must apply an allocation methodology to these decoupled
income support payments to attempt to determine the “support to upland cotton”
demonstrates that they are not product-specific support. Rather, they are support to
whatever products (if any) the recipients produce, rather than “support for a basic
agricultural product.” In addition, the reci pients are “producers in general” because
they are not required to be “producers of the basic agricultural product” the support is
“provided for”.
12. While Brazil appears to be arguing that its allocation methodology conforms to the concepts
of product-specific and non-product-specific support in the Agreement on Agriculture, in fact that
methodology is flatly inconsistent with those concepts.
8 There is nothing in the Agreement that
suggests that support may, at one and the same time, be both product-specific and non-product-
specific. For example:

In Article 1(a), these two terms are define d disjunctively (that is, product-specific
support “or” non-product-specific support).
In Article 6.4(a), de minimis levels of support not required to be included in a
Member’s Current Total AMS are separate ly given for “product-specific domestic
support” and “non-product-specific domestic support.”
Under Annex 3, paragraph 1, “an Aggregate Measurement of Support (AMS) shall be
calculated on a product-specific basis for each basic agricultural product”, and,

6 US Comments on Brazil’s Rebuttal Submission, para. 23 (noting that definition of “in general” as “in
a body; universally; without exception” was marked “obsolete” in New Shorter Oxford English Dictionary).
8 See US 28 January Comments, paras. 225-29.

separately, “[s]upport which is non-product specific shall be totalled into one
non-product-specific AMS in total monetary terms”.
Despite the fact that product-specific and non-product-specific support are kept distinct in the
Agreement on Agriculture, Brazil’s allocation methodology necessarily collapses the two concepts.

13. For example, under Brazil’s methodology decoupled income support “payments for other
crops were primarily allocated as support for these crops – up to the share of contract acreage planted
to the respective crop”, but “[a]ny further paymen ts stemming from contract acreage not planted to
the respective base crop were pooled and allocated as additional support to those contract crops whose
aggregate planting exceeded th eir aggregated base acreage”.
9 Brazil states that in marketing year
2001, cotton, “oats and sorghum were planted on more acreage than their respective contract base
(‘overplanted’), thus[] triggering additional payments being allocated pursuant to the crop’s share of
total acreage being ‘overplanted’”.10

That is, decoupled income support payments for base acreage with respect to other
programme crops (other than upland cotton, oats, and sorghum) would, under Brazil’s
approach in this dispute, first be “p roduct-specific support” to each of those
programme crops to the extent of planted acreage.
Then, the payments on “excess” base acreage would be “product-specific” support
simultaneously to upland cotton, oats, and sorghum.
Logically, then, such payments would be support to “four differe nt commodities” (whichever happen
to be ‘underplanted’), not “support to a specific commodity”. Further, payments allegedly supporting
four different commodities would not be “provided for a basic agricultural product in favour of the
producers of the basic agricultural product”.

14. Thus, decoupled income support payments are support to “agricultural producers in general”
– that is, support to recipients who may decide ( as Brazil has confirmed) to produce any of multiple
commodities in general. Because such payments are non-product-specific, they may not at the same
time be deemed to be product-specific. Brazil’s methodology for purposes of the Peace Clause would
result in non-product-specific support being allocated to the specific products the recipients produce,
contrary to the separation of these concepts in th e Agreement on Agriculture. As Brazil concedes that
“support to a specific commodity” refers to “pr oduct-specific support within the meaning of the
Agreement on Agriculture”
11, it follows that decoupled income su pport payments must be deemed to
be non-product-specific within the meaning of Ar ticle 1(a) of the Agreement on Agriculture and
therefore not part of the Peace Clause test under Article 13(b)(ii).

 B. Challenged US Measures do not Grant Support to a Specific Commodity in
Excess of that Decided during the 1992 Marketing Year

15. As Brazil has conceded that the Peace Clause proviso refers to “product-specific support”, the
question for the Panel becomes: do challenged US measures grant product-specific support in excess
of that decided during the 1992 marketing year? The United States has previously demonstrated in
exhaustive detail that, removing non-product-specifi c support(that is, decoupled income support
measures and crop insurance payments) from the Peace Clause comparison, US measures do not. We
will not repeat the extensive arguments on this poin t, for example, relating to how the United States
“decided” its support.

10 Brazil’s Data Comments, para. 80 fn. 159.

16. We do recall, however, that as the United St ates by design shifted the support it provided to
its agricultural sector from product-specific amber box support (in the form of deficiency payments)
to green box support (production flexibility contr act payments and direct payments) and non-product-
specific support (market loss assistance payments and counter-cyclical payments), the result was that
the product-specific support to upland cotton declined substantially. The only way Brazil can
overcome this fact is to argue that the only way to gauge “support to a specific commodity” is through
budgetary outlays12, which in the case of marketing loan payments will reflect through high outlays
the record low cotton prices in marketing years 200 1 and 2002 that the United States did not decide
and could not control – as Brazil has conceded.13

17. As the United States has shown, 14 any measurement of the product-specific support for upland
cotton that eliminates the effect of market pri ces and instead gauges the support “decided” by the
United States demonstrates that upland cotton pro duct-specific support was higher in marketing year
1992 than in any marketing year from 1999-2002. That is, whether the analysis is (as the
United States believes is compelled by the Peace Cl ause text) the rate of support as decided in US
measures,
15 or the upland cotton AMS measured through a price-gap methodology 16, or the “expected
rate of per unit support” calculated by Brazil’s expert 17, the result is the same: challenged US
measures are not in breach of the Peace Clause.

 C. Under the Subsidies Agreement, Alloca tion of a Non-Tied Subsidy is Necessary
to Identify the Amount of Subsidy and the Subsidized Product

18. Brazil seeks to allocate support not tied to the production of a specific commodity for
purposes of the Peace Clause, despite the fact that the Agreement on Agriculture explicitly
distinguishes and keeps separate product-specifi c and non-product-specific support. There is no
mention of an allocation methodology in that Agre ement because there is no need to allocate support
– in fact, allocation is contrary to the very structure of the agreement. Ironically, Brazil then seeks not
to allocate such a non-tied payment for purposes of its serious prejudice claims when there is an
allocation methodology set out in Annex IV and when there is a need to identify the subsidized
product as well as the subsidy amount. Brazil’s appro ach ignores the text and context of Articles 5
and 6 of the Subsidies Agreement.
18

19. Brazil has argued that it “strongly disagrees that this [Annex IV methodology for allocating
non-tied payments] is a required or appropriate me thodology under Part III of the SCM Agreement or

12 In making this argument, Brazil ignores the fact th at “support” does not mean “budgetary outlays”.
In fact, Annex 3 recognizes that an “Aggregate Measurement of Support” for price-based support either shall or
can be calculated using a price-gap methodology, which does not rely on budgetary outlays. See, e.g. ,
Agreement on Agriculture, Annex 3, paragraph 8 (“Budgetary outlays made to maintain this gap, such as
buying-in or storage costs, shall not be included in the AMS.”); id., para. 10.
13 See Brazil’s Comments on US Answers, para. 66 fn. 49 (August 22, 2003) (“Brazil acknowledges
that the United States could not possibl[y] determine its expenditures as they would depend to a certain extent
on market prices that were also influenced by factors outside the control of the US Government.”).
14 See, e.g., US Rebuttal Submission, paras. 110-30.
15 In marketing year 1992, 72.9 cents per pound; in marketing years 1999-2001, 51.92 cents per pound;
in marketing year 2002: 52 cents per pound. US Rebuttal Submission, paras. 110-13.
16 In marketing year 1992, $1,079 million; in 1999, $717 million; in 2000, $484 million; in 2001, $264
million; and in marketing year 2002 (as of the date of panel establishment, March 18, 2003), $205 million. US
Rebuttal Submission, paras. 114-17.
17 In marketing year 1992, 60.05 cents per pound; in marketing year 1999, 53.79 cents per pound; in
marketing year 2000, 55.09 cents per pound; in marketing year 2001, 52.82 cents per pound; and in marketing
year 2002, 56.32 cents per pound. US Rebuttal Submission, paras. 120-22. Removing the 1999 and 2002
marketing year cottonseed payments the Panel has determined to be not within its terms of reference results in
support of 52.82 cents per pound in marketing year 1999 and 55.71 cents per pound in marketing year 2002.
18 US Comment to Brazil’s Answer to Question 258, paras. 209-17.

under GATT Article XVI (or even under Article 13( b)(ii) of the Agreement on Agriculture)”.
19
However, Brazil has not provided any basis to conclude that the term “subsidy” can mean one thing in
the context of Articles 5 and 6 and another in Artic le 1.1 (subsidy requires a “benefit” to recipient),
Article 14 (“calculation of the amount of a subsidy in terms of the benefit to the recipient”) and
Article 15.5 (causal link necessary between injury a nd the subsidized imports “through the effects of
subsidies”), all of which suggest that an evaluati on of “the effect of the subsidy” requires an
identification of the “benefit” the subsidy is allege d to provide. Further, Brazil has not provided any
basis to conclude that a “subsidized product” for purposes of Articles 6.3(c), 6.3(d), 6.4, and 6.5 can
be read in isolation from the methodology for determ ining the “subsidization” of a “product” set out
in Annex IV. Therefore, the Subsidies Agreement – and Part III in particular – calls for an “allocation
methodology” to determine the produc ts that benefit from a subsidy th at is not tied to production or
sale of a given product.

20. Brazil denies the applicability to the Peace Clau se analysis of the Annex IV methodology for
allocating non-tied payments across the value of th e recipients’ production. However, even had
Brazil suggested that the Annex IV methodology c ould be used for Peace Clause analysis, its
interpretation would be plainly wrong. First, the phrase “support to a specific commodity” means
“product-specific support” – as Brazil has conceded – and thus must be interpreted in light of the
terms product-specific support and non-product-specifi c support in the Agreement on Agriculture (as
set out above). Second, the terms “support to a specific commodity” and “product-specific support”
are not found in Part III of the Subsidies Agreement, nor in Article 1 or Annex IV.
20 Neither are the
terms “subsidy,” “benefit,” or “subsidized product” from the Subsidies Agreement found in the Peace
Clause proviso or any supporting text. Thus, the plain language of the Peace Clause and Articles 5
and 6 indicate that these provisions refer to who lly different approaches and suggest that the
methodology for allocating non-tied (decoupled) paym ents under the Subsidies Agreement may not
be relevant under the Agreement on Agriculture. The definitions of product-specific support and non-
product-specific support in Article 1(a) of the Agr eement on Agriculture confirm that the Annex IV
allocation methodology does not apply for purposes of the Peace Clause.

21. Thus, allocating a non-tied payment across the value of the recipient’s production is not
pertinent for Peace Clause purposes but is necessary for th e Panel to be able to attempt to gauge “the
effect of the subsidy” for purposes of Brazil’s serious prejudice claims. We discuss Brazil’s failure to
bring forward evidence and arguments relating to this issue in the next section.

III. Because Brazil Expressly Disavows Any Allocation Methodology for Purposes of its
Serious Prejudice Claims on Decoupled Income Support Payments, Brazil Has Failed to
Make a Prima Facie Case on these Claims

 A Brazil Has Presented No Evidence or Arguments Supporting the Annex IV
Methodology to Allocate Decoupled Income Support Payments for Purposes of
its Serious Prejudice Claims

22. As we have noted, because Brazil has chosen to include subsidies that are not tied to the
production or sale of a given product within its ser ious prejudice claims, the Annex IV methodology
is necessary to determine the subsidized product and the amount of the challenged non-tied subsidy
that benefits upland cotton. Brazil recognizes that some allocation methodology is necessary to
identify the decoupled income support payments within the scope of its panel request (“subsidies to
producers, users, and/or exporters of upland cotton”)
21 but relies on its wholly invented methodology
(allocating decoupled payments for crop base in “excess” of planted acreage of the respective crop

19 Brazil’s Data Comments, para. 85 n. 171.
20 The term “support” appears in Article 1.1(a)(2 ) of the Subsidies Agreement, which gives one
definition of “subsidy” as “any form of income or price support in the sense of Article XVI of GATT 1994.”
21 WT/DS267/7, at 1.

solely to those programme crops planted on less acr eage that their respective base acreage). That
methodology finds no support in the text or contex t of the Subsidies Agreement or any other WTO
agreement.

23. The result is that Brazil has not provided the Panel with evidence or arguments sufficient to
establish a prima facie case that the effect of such decoupled payments is to cause serious prejudice to
the interests of Brazil. Brazil has never sought or presented evidence and made arguments that would
allow the Panel to evaluate properly “the effect of the subsidy” (decoupled income support payments)
– for example, to identify the “subsidized pr oduct” through the Annex IV methodology and the
“subsidy” in terms of the “benefit” to those recipi ents named in Brazil’s panel request. Logically, if
Brazil has not even identified the subsidized product with respect to such payments or the amount of
the challenged subsidy, the Panel cannot evaluate “the effects”.

24. Indeed, Brazil expressly disavows any allocati on or even identification of the size of the
subsidy for purposes of its serious prejudice claims:

“Brazil maintains that no allocation met hodology is warranted under Part III of the
SCM Agreement. Rather, it is the effect of the subsidies that is the subject of
scrutiny.”
22
“Brazil strongly disagrees that this is a required or appropriate methodology under
Part III of the SCM Agreement or under GATT Article XVI (or even under Article
13(b)(ii) of the Agreement on Agriculture.”23
“Again, Brazil notes that this allocation is not required under Part III of the SCM
Agreement and GATT Article XVI:3. Both provisions deal with the effect of
subsidies, and not their amount or subsidization rate.”24
25. Further, Brazil has never sought nor presented information relating to the total value of the
recipients’ sales as would be necessary to apply the Annex IV methodology to decoupled income
support payments.25 Brazil has only sought base and planted acreage information to support its own
invented methodology (and only for Peace Clause purposes).26

26. In this dispute, then, Brazil cannot have made its prima facie case with respect to the effect of
decoupled income support payments. To find otherwise would mean a complaining party in a serious
prejudice case could satisfy its burden merely by asserting that some unidentified amount of payments
are received by producers of the relevant product.

 B. The Japan – Agricultural Products Appellate Body Report Confirms that in Such
a Situation a Panel May not “Make the Case for a Complaining Party”

27. Brazil includes a discussion of the Appellate Body report in Japan – Agricultural Products ,
suggesting that the report is “inapposite” and that Br azil has advanced relevant claims and arguments
such that the Panel could in no event re lieve Brazil of its burden of establishing a prima facie case of
inconsistency with WTO obligations. However, a careful reading of both Brazil’s arguments as well
as that report reveals that, were the Panel to seek an d obtain data to apply, for purposes of its serious

22 Brazil’s Data Comments, para. 85 n. 168.
23 Brazil’s Data Comments, para. 85 n. 171.
24 Brazil’s Data Comments, para. 98 n. 199.
25 Subsidies Agreement, Annex IV, paras. 2-3 (for a subsidy not tied to the production or sale of a
given product, the subsidized product is “the total value of the recipient firm’s sales”).
26 See Exhibit Bra-369; Brazil’s Data Comments, para. 3 (“The purpose of Brazil’s request for contract
acreage and planted acreage for each farm producing upland cotton was . . . .”) (italics added).

prejudice analysis, the allocation methodology set out in Annex IV of the Subsidies Agreement to the
challenged decoupled income support payments, the Panel would be making Brazil’s case for it.

28. We begin by examining Brazil’s artfully dr afted arguments. Brazil alleges that the US
argument is that the Japan – Agricultural Products report “would have prevented the Panel from
using the information the United States refused to provide to calculate the amount of contract
payments across the ‘total value of the recipient’s production.’”
27 Brazil’s assertion is wrong. First,
the US argument is that the Panel may not seek and apply information to use the Annex IV
methodology for decoupled income support payments because (as set out in the bulleted quotes
above) Brazil has expressly disavowed any allocation or even identification of the size of the subsidy
for purposes of its serious prejudice claims. As Br azil has brought forward no evidence or arguments
to support findings on decoupled payments, it has not made its prima facie case.

29. Second, the United States has not “refused to provide” information to allocate decoupled
payments according to the Annex IV methodology for the simple reason that Brazil never sought this
information. Brazil merely asked for planted acreage and base acreage (and yield) information.
28
With respect to the farm-by-farm planted acreage data that the United States was unable under US law
to provide in a format allowing matching with farm -specific base acreage data, that data is simply
irrelevant for purposes of the Annex IV methodology. Thus, while the Panel has the authority under
DSU Article 13 to seek information “as the panel considers necessary and a ppropriate”, the inability
of the United States to provide that data in the fa rm-by-farm format requested on 12 January 2004 is
ultimately of no moment in this dispute since Br azil’s allocation methodology using planted and base
acreage data finds no support in any WTO text. Th e situation is quite different with respect to the
Annex IV methodology that is found in the WTO agreements but that has been disavowed by Brazil.

30. Thus, it is Brazil that errs when it s uggests that the Panel could seek and apply any
information at all without making Brazil’s case for it since Brazil has advanced relevant claims and
arguments.
29 With respect to the allocation of non-tied (decoupled) payments across the total value of
the recipients’ sales for purposes of identifying the amount of the subsidy and the subsidized product,
Brazil has not sought such information, has not made arguments to support use of that methodology,
and has in fact argued that no allocation or iden tification of the subsidy amount is warranted under
Part III of the Subsidies Agreement. Thus, the Panel would in fact be making Brazil’s case for it were
it to seek to apply the Annex IV methodology.

31. Appellate Body report. There, the Appellate Body reversed a panel finding of inconsistency
with Article 5.6 of the Agreement on the Application of Sanitary and Phytosanitary Measures (“SPS
Agreement”) “because this finding was reached in a manner inconsiste nt with the rules on burden of
proof”.
30 Specifically, the Appellate Body found that “it was for the United States to establish a
prima facie case . . . of inconsistency with Article 5.6. Since the United States did not even claim
before the Panel that the ‘determination of sorption levels’ is an alternative measure which meets the
three elements under Article 5.6, we are of the opinion that the United States did not establish a prima
facie case that the ‘determination of sorption levels’ is an alternative measure within the meaning of
Article 5.6”.31

32. Brazil argues that this reversal was based on the fact that “the complaining party (the
United States) did not ‘claim’ in its request for estab lishment of a panel that there was an alternative
measure (determination of sorption levels) that was less trade restrictive”. 32 However, in making this

28 See Exhibit BRA-369.
29 See Brazil’s Data Comments, para. 103-04.
30 WT/DS76/AB/R, para. 130.
31 WT/DS76/AB/R, para. 126.

argument, Brazil itself (as it later asserts of the United States) “reveals a profound misunderstanding
of the difference between a ‘claim’ and an ‘argument’”.
33 The United States agrees with Brazil (and
the Appellate Body report in EC – Hormones ) that “there is a distinction between legal claims
reflected in a panel’s terms of reference, and ar guments used by a complainant to sustain its legal
claims”. There is no question, however, that the United States advanced a legal claim that Japan’s
varietal testing measure was inconsistent with Article 5.6 of the SPS Agreement. 34 The issue was
whether the United States had presented evidence a nd arguments relating to an alternative measure
that satisfied its burden of making a prima facie case with respect to its Article 5.6 claim. 35 Thus, the
Appellate Body concluded that “the Panel was corre ct to seek information and advice from experts to
help it to understand and evaluate the evidence s ubmitted and arguments made by the United States
and Japan with regard to the alleged violation of Article 5.6” but the panel erred “when it used that
expert information and advice for a finding of inco nsistency with Article 5.6 since the United States
did not establish a prima facie case of inconsistency with Article 5.6 based on claims relating to the
‘determination of sorption levels’”.36

33. A similar situation would occur here were th e Panel to seek and appl y information to apply
the Annex IV methodology to decoupled income support payments. 37 Brazil has neither sought nor
presented any evidence relating to the total value of the recipient firms’ sales. Brazil has also not only
not argued that the Annex IV methodology is neces sary to identify the subsidized product and the
subsidy benefit, Brazil has also continually argued against use of the Annex IV methodology since, in
its view, no allocation of the payment or quantification of the benefit is warranted under Part III of the
Subsidies Agreement. Thus, it would appear th at Brazil has resisted making the necessary legal
arguments and refused to submit any evidence relating a proper analysis of its claims.

34. With respect to Brazil’s refusal to recogni ze the relevance of the Annex IV methodology for
purposes of its serious prejudice claims, and its re sulting refusal to present evidence and arguments
with respect to the application of that methodology to its claims, the findings of the Appellate Body in
Japan – Agricultural Products remain highly relevant:

“Article 13 of the DSU . . . suggest that panels have a significant investigative
authority. However, this authority cannot be used by a panel to rule in favour of a
complaining party which has not establishe d a prima facie case of inconsistency
based on specific legal claims asserted by it. A panel is entitled to seek information
and advice from experts and from any other relevant source it chooses, pursuant to
Article 13 of the DSU . . . to help it understand and evaluate the evidence submitted
and the arguments made by the parties, but not to make the case for a complaining
party.”
38
In this case, Brazil has not submitted evidence and made arguments sufficient to make its case that the
effect of decoupled income support payments is to cause serious prejudice to Brazil’s interests. In
fact, Brazil’s arguments have seemingly been desi gned to prevent the Pane l from ascertaining even
what is the amount of the subsidy being challe nged. In such a circumstance, Brazil has not

34 See, e.g. , WT/DS76/AB/R, para. 123 (“In this dispute, the United States claimed that the varietal
testing requirement is more trade restrictive than requir ed to achieve Japan’s appropriate level of protection and
is, therefore, inconsistent with Article 5.6.”); Panel Report, Japan – Agricultural Products, WT/DS76/R, paras.
1.2, 4.178, 8.64.
35 WT/DS76/AB/R, para. 124 (“As noted above, the United States argued that ‘testing by product’ is an
alternative measure which meet s the three cumulative elements under Article 5.6.”); id., para. 125 (“We note
that the Panel explicitly stated that the United States, as complaining party, did not specifically argue that the
‘determination of sorption levels’ met any of the three elements under Article 5.6”.).
36 WT/DS76/AB/R, para. 130.
37 See US Answer to Question 256 from the Panel, paras. 183-86 (22 December 2003).
38 WT/DS76/AB/R, para. 129 (italics added).

established a prima facie case of inconsistency with Articles 5 and 6 of the Subsidies Agreement with
respect to these payments, and the Panel cannot make findings of serious prejudice.

IV. Brazil’s Invented Methodology Has No Basi s in the WTO Agreemen ts and Represents
an Effort to Maximize the Payments Allocated to Upland Cotton

35. The foregoing analysis suffices to de monstrate that Brazil has not made a prima facie case
under its serious prejudice claims with respect to decoupled income support measures. Simply put,
based on the evidence and arguments brought forward by Brazil, the Panel cannot make findings on
those measures under Articles 5 and 6 of the Subsidies Agreement (as well as GATT 1994
Article XVI) without making Brazil’s case for it. In this section of these comments, we nonetheless
examine Brazil’s application of its invented methodology to the US-supplied data.

36. The United States has previously explained, both in these comments and in its comments to
Brazil’s answer to Question 258, that the Brazilian allocation methodology has no basis in the text or
context of the WTO agreements.
39 We do not repeat that detailed critique of Brazil’s invented
methodology here, other than to note that Brazil seeks to apply an allocation methodology for
purposes of Peace Clause – despite the fact that the definitions of product-specific support and non-
product-specific support (and their application in the Agreement on Agriculture) do not permit any
such allocation – while at the same time Brazil seeks to deny any allocation methodology for purposes
of serious prejudice – despite the fact that an allocation methodology is set forth explicitly in Annex
IV reflecting core Subsidies Agreement concepts relating to subsidy benefits and the subsidized
product. Thus, Brazil invites the Panel to adopt a le gally erroneous approach that does violence to the
existing texts of the Agreement on Agriculture and the Subsidies Agreement.

37. We have also previously explained that Brazil’s invented allocation methodology does not
make economic sense. Decoupled payments by thei r nature provide income support not tied to the
production or sale of any given commodity
40, therefore, there is no more reason to attribute $1 in
income support to upland cotton production on a farm than there is to attribute that $1 in income
support to production of any other product (soybeans, corn, etc.). Brazil’s approach, however, makes
just such an arbitrary attribution, producing illogical results:

The same crop (for example, upland cotton) produced on a farm could be deemed to
be subsidized at different rates. For example, planted acres of upland cotton up to the
amount of upland cotton base acres will be deemed to be subsidized at a rate
corresponding to decoupled payments for upland cotton base acres. Planted acres of
upland cotton in excess of the amount of upl and cotton base acres will be deemed to
be subsidized at a different rate – perhaps higher if sufficient payments corresponding
to base acres for other crops are available, perhaps lower or even zero if few or no
payments for “excess” base acres are available. From an economic perspective, there
is no basis to say that some income support dollars are going to a certain portion of
the crop but not others.
41
In addition, because payments on all the “excess” base acreage are allocated to
whatever programme crop has planted acr es in excess of base acreage, the
subsidization of the “excess” planted acreage can be far higher than for other acres of
that crop or for acreage of other crops that may be more heavily planted. (For
example, if a farm has 100 base acres of soy, 10 planted acres of soy, and 1 planted

39 See, e.g. , US Comments to Brazil’s An swer to Question 258 from the Panel, paras. 207-29
(28 January 2004).
40 See, e.g., Brazil’s First Written Submission, para. 51 (under direct payment program, the “amount of
payment is not dependent upon current production” of any particular commodity).
41 See US Comment on Brazil’s Answer to Question 258, para. 221.

acre of cotton, the 90 “excess” base acres of soy will be allocated to the 1 acre of
cotton, resulting in a cotton subsidy and subsidization rate far higher than that for soy,
despite the fact that soy plantings outstrip cotton plantings 10 to 1.)42
Brazil’s approach simply ignores the exis tence of crops other than “programme
crops”, much less other farming or non-farm economic activities the subsidy recipient
may undertake. Again, there is no economic reason to attribute income support
payments to some (programme) crops but not others and some (crop production)
economic activities but not others.43
38. Fundamentally, Brazil’s approach is in error because it assumes that there is a tie between the
decoupled payments and current plantings. Brazil attributes payments for base acres to currently
planted crops by describing the current crop as “plant ed on” base acres. The reality is that there are
no physical “base acres” on a farm; crop base is an acc ounting concept that is limited by the farm’s
cropland. (For example, the farm may have 100 base acres of upland cotton, but if it currently plants
100 acres of cotton, that cotton may physically be “planted on” any land on the farm.) But Brazil
does not carry through its own concept of crops “planted on” base acres.

For example, in the example given above of a farm with 100 base acres of soy and
current plantings of 10 acres of soy and 1 acre of cotton, under Brazil’s approach,
payments on the 90 “excess” base acres of soy are allocated to the 1 acre of upland
cotton. But 1 acre of upland cotton could only be “planted on” 1 base acre of soy.
Thus, for planted acreage up to the crop’s base acreage, Brazil uses the concept of a
crop “planted on” base acreage. But for planted acreage beyond the crop’s base
acreage, Brazil would allocate more than (or less than) one base acre per planted acre.
In the preceding example, the one acre of upland cotton could not be deemed to be
“planted on” 90 acres of soy.
Brazil’s allocation methodology thus is not even internally consistent.

39. Given that Brazil's invention allocation methodology has no basis in the text or context of the
Peace Clause, much less in the S ubsidies Agreement or any other WTO agreement, given that its
methodology does not make economic sense, and given that its methodology is internally inconsistent,
one is left to wonder how Brazil arrived at its methodology. One answer may be that Brazil
developed this methodology because it allows Br azil to allocate certain decoupled payments
exclusively or nearly exclusively to upland cotton. That is, Brazil’s invented allocation methodology
can be described as an attempt to maximize the paym ents to be allocated to upland cotton, regardless
of the legal or commonsense objections.

40. Consider the information set out in footnote 159 to paragraph 80 of Brazil’s Data Comments.
Brazil notes that “[f]or MY 1999 and 2000, only upland cotton plantings exceeded the crop base
acreage; thus, all additional payments were allocated to upland cotton [italics added]. For MY 2001,
also oats and sorghum were planted on more acreage than their respective contract base
(‘overplanted’); thus, triggering additional payments being allocated pursuant to the crop’s share of
the total acreage being ‘overplanted’”. Restated, in marketing year 2001, all “excess” contract
payments were allocated to upland cotton, oats, and sorghum, but the latter two crops accounted for
only a small share of plantings on farms that planted upland cotton.
44

42 See US Comment on Brazil’s Answer to Question 258, para. 221.
43 See US Comment on Brazil’s Answer to Question 258, para. 222.
44 See US Letter to Panel (January 28, 2004) (file rP FCsum.xls: for farms planting upland cotton in
MY2001 upland cotton planted acreage was 15.5 million acres, oats planted acreage was 0.19 million acres, and
sorghum planted acreage was 2.4 million acres).

Thus, for cotton plantings up to the amount of cotton base, Brazil would allocate
payments on upland cotton base acres to cotton.
For cotton plantings in excess of the amount of cotton base, Brazil’s allocation
methodology results in all “excess” contr act payments for programme crops being
allocated to upland cotton in marketing years 1999-2000 and almost all “excess”
contract payments being allocated to upland cotton in marketing year 2001.
In this way, Brazil seeks to maximize the payments being allocated to upland cotton, regardless of the
illogic of its approach. The Panel should reject Brazil’s legally erroneous and economically unsound
approach to allocation issues.

41. Brazil attempts to apply its unsound met hodology to the summary data provided by the
United States on 18 and 19 December 2003. (We note that Brazil did not request the summary data in
Exhibit BRA-369. The United States generated this summary in order to assist the Panel and Brazil in
viewing the aggregated results.) Brazil asserts th at “Using the US aggregate base acreage data and
aggregate planting data to allocate contract payments will most likely trigger distortions of the results
due to the allocation problem”.
45 However, we note that Brazil does not explain to the Panel that the
results using the aggregated data will likely be biased upwards, overstating the decoupled payments
allocated to upland cotton.

42. In Brazil’s allocation methodology, a farm that plants less acreage of upland cotton than its
cotton base acreage must always produce a drop in support because some payments on upland cotton
base acres will not be allocated to cotton. A farm that plants more cotton acreage than its cotton base
acreage, on the other hand, may still enjoy support fo r the “excess” planted acres but only if there are
also “excess” non-upland cotton base acres on the farm . However, when all of the base acreage and
planted acreage data are aggregated, Farm A’s cotton planted acreage in excess of upland cotton base
acres may effectively be allocated support from Farm B’s “excess base acreage” in another
programme crop (or more than one). Thus, while Br azil is correct that applying its methodology to
the summary data will not necessarily produce the same results as a farm-by-farm calculation, Brazil
fails to recognize that the results presented by Brazil in paragraph 83 of its data comments applying its
invented allocation methodology to the summary data are biased upwards.

43. In sum, the United States has shown that Br azil’s allocation methodology is not based on any
WTO agreement text, does not make economic sense, a nd is not internally consistent. Based on the
categorical US rejection of Brazil’s methodology, the Panel should take Brazil’s statement that
“Brazil's methodology is rather conservative comp ared to an allocation based on the US summary
data, which the United States seems to endorse as a valid base for calculating support to upland
cotton”
46 as another gross distortion by Brazil. Unlike Brazil, the United States has taken a consistent
position in this dispute that “support to a specifi c commodity” means “product-specific support” and
that such support must be gauged by looking at the support “decided” by a Member through its
measures.

V. Brazil’s Application of the Annex IV Me thodology to the US Data Is Inadequate and
Flawed

44. In this section, the United States examines Brazil’s cursory application of the Annex IV
methodology to the US-supplied data.
47 We note that Brazil’s analysis is patently insufficient to carry
Brazil’s burden with respect to decoupled income support payments. First, Brazil has neither sought

46 Brazil’s Data Comments, para. 84 (italics added).
47 See Brazil’s Data Comments, § 10.

nor presented relevant data. Brazil requested data relevant only to its invented methodology, and
there is no data before the Panel that would permit the Annex IV methodology to be applied. Brazil’s
complaint that the United States has “refuse[d] to provide” the information that would permit the
Panel to calculate the payments under the US methodology 48 – while erroneous49 – is also misplaced.
It is not the United States’ responsibility to make Brazil’s prima facie case, and Brazil’s argument
reflects an impermissible effort to shift the burden onto the responding party.

45. Brazil has also not presented arguments sufficien t to carry its burden. Brazil has repeatedly
and expressly disavowed the applicability of the Annex IV methodology for purposes of identifying
the subsidized product or quantifying the subsidy benefit for non-tied (decoupled) payments. Perhaps
for that reason, the calculations presented by Brazil reflect a misunderstanding of the plain meaning of
the Annex IV methodology and contain a number of erroneous assumptions th at bias Brazil’s results
upwards.

46. Under the Annex IV methodology, a subsidy not tied to a particular product is allocated to all
of the recipients’ sales. That is, since money is fung ible, the subsidy benefit is deemed to inure to all
of the products the recipient produces; a neutral way of attributing the subsidy to particular products is
according to their proportion of the firm’s sales. Thus, allocating to upland cotton those Production
Flexibility Contract (PFC) payments, Market Lo ss Assistance (MLA) payments, Direct Payments
(DP) and Counter-Cyclical Payments (CCP) for upland cotton base acres would be done as follows:

 PFC payments for upland cotton base * (cotton gross sales/total sales)
 MLA payments for upland cotton base * (cotton gross sales/total sales)
 DP payments for upland cotton base * (cotton gross sales/total sales)
 CCP payments for upland cotton base * (cotton gross sales/total sales)
50

The “total value of the recipient firm’s sales” (Annex IV, para. 2) would include all economic
activities by the firm (e.g., other farm and non-farm related activities). Thus, Brazil errs in limiting
the denominator in its calculations to the estim ated value of crops produced by the payment
recipients.51 Further, Brazil has presented no evidence relating to the total value of the recipient
firm’s sales that would permit the Annex IV methodology to be applied.

47. In its calculated apportionment, Brazil makes se veral errors that result in an overestimate of
the payment value allocated to cotton. First, Brazil allocates decoupled payments for all crop base
(e.g., wheat PFC payments, corn MLA payments) to upland cotton. As the United States has
explained
52, Brazil impermissibly seeks to bring within the scope of this dispute payments that Brazil
did not identify and that have not been at issue throughout this dispute.

48. In this regard, Brazil’s argument that th ese programmes are within the Panel’s terms of
reference by virtue of the reference in Brazil’s pa nel request to “payments . . . providing direct or
indirect support to the US upland cotton industry” 53 is not sustainable. Article 6.2 of the DSU
requires that the panel request “identify the specific measures at issue”. Brazil’s statement fails to
meet this requirement; indeed, Brazil affirmativ ely emphasizes that its list of payments is

49 For example, the United States has collected no information on “the recipient firm’s sales” for
marketing years 1999-2002.
50 Arguably, one could include all economic activities by the firm (e.g., other farm and non-farm
related activities.)
51 Brazil’s Data Comments, paras. 85-98.
52 See US Comment on Brazil’s Answer to Question 204 from the Panel, paras. 34-42
(28 January 2004).
53 Para. 18.

“unqualified”, and that it “is more than broad enough to encompass any type of payment”.
54 In other
words, Brazil by its own admission has provide d virtually no information that would allow
identification of the specific measures at issue.

49. Moreover, to the extent that Brazil in any way qualifies this list, it does so based on legal
conclusions. Rather than identifying the payment measures by describing their characteristics or by
citing any specific provision of US law
55, Brazil seeks to draw into the scope of this dispute an
uncircumscribed and unidentified list of measures limited only by whether the legal conclusion may
be drawn that the measure provides “direct or i ndirect support to the US upland cotton industry”.
Brazil might just as well have stated that it was chal lenging, “any US law that is inconsistent with US
WTO obligations.” In neither case would the descrip tion allow an identification of which measure is
subject to the case, and in neither case would it be possible to determine whether a measure is within
the scope of the case until the legal issues in the di spute are fully adjudicated. Indeed, the Appellate
Body has criticized a panel for blurring the dis tinction between legal claims and measures when it
read the term “measures” as synonymous with a lleged violations, and th ereby failed to require
identification of the specific measure at issue.56

50. The DSU requirement to allow identification of the measures at issue is not a hollow one, and
panels have not hesitated to conc lude that measures fall outside the scope of a dispute because they
are not adequately described.
57 Brazil’s “unqualified” panel request does not bring non-cotton
contract payments into the scope of this dispute.

51. While decoupled payments for upland cott on base account for the majority of decoupled
income support payments to farms that planted co tton, including total decoupled payments in the
allocation overstates the value of decoupled payments to be allocated.

Decoupled payments:

1999
1

20001

20011

2002

Payments on cotton base

515,280,580

482,302,565

387,870,741

1,520,701,136

Total payments

695,912,510

650,579,667

520,230,908

1,681,630,034

Cotton as per cent of total

74.0%

74.1%

74.6%

90.4%
1 Does not include Market Loss Assistance payments.
Source: Exhibit Bra-424; also provided electronically as “allocation calculations.xls”

52. Second, in calculating crop values for purposes of the total value of the recipient firm’s
sales58, Brazil calculates crop values based on plante d, not harvested, acreage. For cotton,
abandonment rates can be significant. In the US response to Question 209 from the Panel, the
United States demonstrated that harvested acreage differed significantly from planted acreage over the

54 Para. 19.
55 Brazil’s reference to payment programs provided under the 2002 FSRI Act, the 1996 FAIR Act, and
the 1998 -2001 Appropriations Acts in no way provides the required specificity. These laws provided for a
myriad of payment programmes, and it is impossible through these references to determine the payment
programmes Brazil now seeks to include within the dispute.
56 Report of the Appellate Body, Guatemala – Anti-Dumping Investigation Regarding Portland Cement
from Mexico, WT/DS60/AB/R, adopted 25 November 1998, para. 69.
57 See, e.g., Preliminary Ruling by the Panel, Canada – Measures Relating to Exports of Wheat and
Treatment of Imported Grain, WT/DS276/12, circulated 21 July 2003, paras. 28, 32.
58 See Subsidies Agreement, Annex IV, para. 2.

period 1999-2002. The use of the smaller harvested acreage figure would lower the total value of
cotton by as much as 16 per cent from what Brazil calculated.59

Planted and Harvested Upland Cotton Acres (1,000 acres)

Crop year

Planted acres

Harvested acres

Abandoned acres

Rate of
abandonment
1999 14,584 13,138 1,446 9.9%
2000 15,347 12,884 2,463 16.0%
2001 15,499 13,560 1,939 12.5%
2002 13,714 12,184 1,530 11.2%
Source: USDA, National Agricultural Statistics Service, Acreage, various issues.

53. Third, Brazil underestimates the value of crop sales on cotton farms. To calculate the value
of programme crops, Brazil multiplies acres planted to that crop (as provided electronically by the
United States on December 18 and 19) times average crop yield times average farm price. For
cropland not planted to programme crops, Brazil “a ssumed that the value of the crops produced on
this 20 per cent of farmland is the average per- acre value of production of non-programme crops in
that marketing year in the entire United States, as reported by USDA”
60. Brazil has claimed
repeatedly that upland cotton production is “concentrated” in several US States 61, but now that the
issue matters, Brazil ignores its long-standing posit ion. Under Brazil’s approach to the Annex IV
methodology, it is the per-acre value of production in cotton-producing states that would be relevant
(rather than including, say, the per acre value of production of crops grown in Alaska in its average).

54. To calculate the average per-acre value of non-programme crops, moreover, Brazil also
excludes the value of all fruits, tree crops, vegetabl es and melons, arguing that their exclusion is
justified on the basis that, if fruits or vegetables are grown, “contract payments are eliminated”.
62
However, this argument ignores the fact that producers may grow such crops on any cropland on the
farm in excess of the farm’s base acreage without any effect on payments.
63 As previously noted by
Brazil, non-programme base accounts for 20 per cent of total cropland on farms that planted cotton
over the period or about 6 million acres. Ignoring fr uits and vegetables thus underestimates the value
of non-programme crops and, as a consequence, overestimates the per cent of total crop value
accounted for by cotton.64

55. Fifth, as Brazil concedes,
65 in estimating the total value of crop sales, Brazil excluded sales of
(high value) livestock and livestock products. We would also note that Brazil excluded any other
farm-related income. Brazil has put no data on th e record that would allow for these sales to be
included in the Annex IV allocation.

59 Brazil inadvertently uses the all cotton crop yield in their calculations rather than the yield for upland
cotton only.
61 See, e.g., Brazil’s Answer to Question 125(2)(a) from the Panel, para. 13 (27 October 2003).
62 See Brazil’s Data Comments, paras. 73, 92.
63 See, e.g., Brazil’s First Written Submission, para. 45 (PFC payments are reduced or eliminated if
fruits or vegetables are grown “on ‘base acreage’” but not on total cropland).
64 Brazil also appears to have inadvertently copied the incorrect acreage numbers for cotton planted on
farms with no cotton base for 2000 and 2001. (The 1999 figure was copied to 2000 and 2001. From the
spreadsheet “Raw Data 1999-2001" the correct numbers are:
1999 1,033,617.7
2000 1,222,180.1
2001 1,347,140.2
65 Brazil’s Data Comments, fn. 173.

56. Finally, Brazil fails to make any adjustme nt in the amount of payment to reflect the
proportion of cotton planted acreage that is rented or owned.
66 However, those “subsidies” to cotton
producers that are the subject of Brazil’s panel request must “benefit” producers. 67 Brazil itself has
conceded that land rental rates as of marketing year 1997 – that is, one year after introduction of the
decoupled production flexibility contract payments – re flect the capture of more than one-third of the
subsidy by landowners.
68 Thus, only those cotton producers w ho are also landowners of base acreage
for which decoupled payments are made would benefit from those payments.69

57. The cumulative effect of these omissions and erroneous assumptions is to bias upwards
Brazil’s allocation of decoupled payments to upla nd cotton. In the following table, we have
recalculated an estimated value of cotton production compared to the value of all crops produced on
farms using corrected values for harvested acres, upland cotton yields, and per-acre value of non-
programme crops.
70 Because Brazil has not put relevant data on the record, we have not been able to
correct its calculations by including the value of all economic activities by the firm, for example,
livestock and livestock products, other farm-related activities, and non-farm economic activities in the
denominator. However, even without those necessary adjustments, the incomplete (undervalued) data
show that cotton accounted for only about half of th e total value of crop production on recipient farms
planting upland cotton over the period.

Value of Upland Cotton as Per cent of All Crops on Farms Planting Upland Cotton

1999

2000

2001

2002

Upland cotton

$3,056,169,795

$3,707,427,799

$2,554,264,280

$3,351,712,385

All crops

$5,940,836,757

$6,543,259,828

$5,277,060,069

$6,280,154,911

Per cent

51.4%

56.7%

48.4%

53.4%

58. In the table that follows, we present recal culated figures for decoupled payments on upland
cotton base using the corrected value of upland cotton sales and per-acre value for non-programme
crops in calculating the total value of crop sales to use in the denominator of the formula: decoupled
payments received by recipient firms * (upland cott on gross sales / total crop sales). Again, contrary
to Annex IV, paragraph 2, this calculation does not include in the denominator the value of all
economic activities by the recipient firms. Nor have we adjusted the value of the decoupled payments
for upland cotton base acres downwards to reflect the fact that two-thirds of cotton acreage is rented,
not owned, and that landowners will capture the benefit of those payments for base acres on farms
worked by tenants.

66 See US Answer to Question 195 from the Panel, paras. 6-11 (22 December 2003).
67 See Panel Report, United States – Imposition of Countervailing Duties on Certain Hot-Rolled Lead
and Bismuth Carbon Steel Products Originating in the United Kingdom , WT/DS138/R, adopted 7 June 2000,
paras. 6.65 and 6.66 (quoting and agreeing with Canada – Aircraft panel: “’A “benefit” does not exist in the
abstract, but must be received and enjoyed by a beneficiary or a recipient. Logically, a “benefit” can be said to
arise only if a person . . . has in fact received something.’”).
68 See, e.g., Brazil’s Further Rebuttal Submission, para. 154 (“[S]ome portion of the contract payments
do find their way into increased rent and cost of land”) (footnote omitted).
69 Indeed, the 2002 Act implicitly recognized that decoupled income support payments ultimately
benefit landowners by giving to the landowner the authority to choose whether to update his or her base acres on
the farm. See 2002 Act, § 1101(a)(1) (“For the purpose of making direct payments and counter-cyclical
payments with respect to a farm, the S ecretary shall give an owner of the fa rm an opportunity to elect 1 of the
following as the method by which the base acres of all covered commodities on the farm are to be
determined.”); see also id., § 1101(b), 1101(c), 1101(e)(1), (3), (5) (Exhibit US-1).
70 Further calculations are presented in Exhibit US-154..

59. Nonetheless, the table shows that the “14/16” methodology proposed by Brazil, as well as the
estimates purporting to apply the Annex IV met hodology provided in section 10 of Brazil’s data
comments (reproduced below), are grossly inflated.

Partially Corrected Results of Calculations A llocating Decoupled Paym ents for Upland Cotton
Base Acres to Upland Cotton Using Incomplete Annex IV Methodology

1999

2000

2001

2002

PFC Payments

265,077,970

273,273,870

187,741,729

na

MLA Payments

263,787,006

290,909,042

259,309,589

na

DP Payments

na

na

na

253,021,210

CCP Payments

na

na

na

558,575,463

 Total

528,864,975

564,182,912

447,051,318

811,596,673

Brazil’s Erroneous Calculations Allocating De coupled Payments for all Contract Base to
Upland Cotton Using Incomplete Annex IV Methodology (Brazil’s Data Comments, para. 96.)

1999

2000

2001

2002

PFC Payments

$477,692,236

$473,744,959

$333,295,919

na

MLA Payments

$475,365,813

$504,317,125

$460,349,591

na

DP Payments

na

na

na

$416,216,862

CCP Payments

na

na

na

$714,424,543

 Total

$953,058,049

$978,062,084

$793,645,510

$1,130,641,406

Minimum Per
cent Overstated

80.2

73.4

77.5

39.3

Brazil’s Allocation of Decoupled Payments for all Contract Base to Upland Cotton Using Its
Erroneous 14/16 Methodology (Brazil’s Data Comments, para. 97)

1999

2000

2001

2002

PFC Payments

$547,800,000

$541,300,000

$453,000,000

na

MLA Payments

$545,100,000

$576,200,000

$625,700,000

na

DP Payments

na

na

na

$454,500,000

CCP Payments

na

na

na

$935,600,000

 Total

$1,092,900,000

$1,117,500,000

$1,078,700,000

$1,390,100,000

Minimum Per
cent Overstated

106.7

98.1

141.3

71.3

That is, when the results of Brazil’s calculations are compared to the results obtained by the
United States correcting for certain but not all of Brazil’s errors and omissions, it appears that Brazil
dramatically overstates the decoupled payments that would be allocated to upland cotton by 39.3 to
80.2 per cent for its incomplete Annex IV calculations and by 71.3 to 141.3 per cent for its erroneous
14/16 calculations.

60. Had Brazil put other data on the record n ecessary to apply the Annex IV methodology, for
example, the value of any livestock and livestock products, other farm-related activities, and non-farm
economic activities of recipient firms, moreover, the decoupled payments allocated to upland cotton
would be reduced even further . Had Brazil further adjusted the va lue of the decoupled payments for
upland cotton base acres downwards to reflect the cap ture of two-thirds of the benefit of those
payments by landowners who are not cotton producers, the decoupled payments allocated to upland
cotton would be reduced even further . Rather than confront the fact that the Annex IV methodology
and Subsidies Agreement concepts would dramati cally reduce the value of decoupled payments
deemed to benefit upland cotton (and hence, woul d dramatically reduce the supposed “$12.9 billion”
in support provided to upland cotton between market ing years 1999-2002), Brazil chose to argue that
no allocation of non-tied payments is necessary and that no quantification of the subsidy benefit to
upland cotton is necessary. Brazil also chose not to seek or put on the record information relevant to
this determination. Thus, as explained earlier, Br azil has deliberately chosen a course of action that
results in its failure to make a prima facie case on its serious prejudice claims with respect to
decoupled payments.

VI. Brazil Misrepresents Both the Scope of Its Own Requests for Data as well as the US
Response

61. Finally, in this portion of its comments, th e United States responds to inaccurate assertions by
Brazil relating to what information it sought and wh at information the United States provided. The
United States also responds to Brazil’s arguments that certain “adverse inferences” should be drawn
from its inaccurate portrayal of what was requested and provided. The United States notes that these
issues are of relatively minor importance given th at Brazil’s allocation methodology, for which it
sought farm-by-farm planted and base acreage data:

 (1) may not be applied for purposes of determining the product-specific support to upland
cotton for purposes of the Peace Clause anal ysis because the methodology inappropriately
conflates product-specific and non-product-specific support and

 (2) may not be applied for purposes of dete rmining the subsidized product or the subsidy
benefit for decoupled income support payments because that methodology has no basis in the
WTO agreements and Brazil expressly disavows its use for purposes of its serious prejudice
claims.

Nonetheless, we undertake this review of Brazil’s assertions because Brazil grossly distorts the record
of the dispute in an effort to make the United Stat es appear uncooperative (at best). The truth is that
the United States has expended an unprecedented amount of time and resources in responding to the
fullest extent under US law to the requests for inform ation made of it. Given our experience in WTO
dispute settlement to date, we question whether other Members would have responded so fully and
promptly to similarly burdensome requests.

 A. Brazil Grossly Distorts the Record of This Dispute by Suggesting that the
United States Has Failed to Cooperate

62. Brazil make a number of spurious accusations re garding US participation in this dispute and
simple misstatements of the record. Although we regret the imposition on the Panel’s time and
attention, we do feel it necessary to set the record straight.

63. Brazil First Asked for this Data in December 2003, Not November 2002
: First, Brazil asserts
that it “first requested this information in November 2002”.71 “This information” refers to the request
for information “set out in Exhibit BRA-369” for “contract acreage and planted acreage for each farm
producing upland cotton”.72 Brazil’s claim is false. There is no request in Exhibit BRA-101 (Brazil’s
consultation questions) for “contract acreage a nd planted acreage for each farm producing upland
cotton”. Further, there is no reference in Brazil’s consultation questions to decoupled income support
payments for non-upland cotton base acres. For exam ple, Consultation Question 3.6 (not referenced
by Brazil in footnote 2 of its data comments) was expressly directed at payments made “in connection
with upland cotton for each of the marketing y ears 1992 through 2002”. When the United States
answered those questions by referring (where appropr iate) to payments made with respect to upland
cotton base acres, Brazil at no point asserted that it sought information with respect to “other crop
contract payments”.

64. Brazil Misrepresents the Panel’s Request for Information
: Second, Brazil asserts that the
“Panel requested [this data] in August, October, and December 2003, as well as in January 2004.”
The Panel well knows what it has requested, but the Un ited States notes that the Panel’s questions too
did not request contract and planted acreage information. Question 67 bis in August 2003 requested
information about annual amounts granted to upland cotton producers per pound and in total
expenditures under each of the decoupled payment programmes, not information on planted or base
acreage. As previously explained, the United Stat es accurately answered that it does not maintain
information on expenditures to upland cotton produc ers because the United States collects no farm-
specific production (harvesting) data. 73 Question 125(9) in October 2003 requested, inter alia ,
information on any adjustments to make for dec oupled payments for upland cotton base acreage, not
for information on planted and base acreage. In its 8 December 2003, communication, the Panel did
not request planted and base acreage information from the United States; rather, it stated that “the
United States will be given until 18 December to respond to Brazil's request made in Exhibit
BRA-369”.
74 Finally, the 12 January 2004, communication from the Panel did request the planted

71 Brazil’s Data Comments, para. 4 (footnote referencing BRA-101 omitted).
73 See, e.g., US Answer to Question 195 from the Panel, paras. 6-11 (22 December 2003).
74 The United States notes but does not understand the reference in fn.3 to paragraph 4 of Brazil’s data
comments to the “second bulleted point” in the Panel’s December 8 communication; that bullet point referred to
“a communication from the Panel concerning the FAPRI model”.

acreage and base acreage information as set out in Exhibit BRA-369, and the United States explained
that it was not able to provide this information fa rm-by-farm under the US Privacy Act. Thus, Brazil
misrepresents the facts when it asserts that the Panel has requested “this data” four times.

65. Brazil Falsely Alleges that the United States Denied Having Certain Data
: Brazil then
accuses the United States of “falsely stat[ing] that it did not maintain contract and planted acreage
information for each farm”.75 As just explained, the United States did not “falsely state” that it did not
maintain that information because it was not asked for that information until the Panel on
8 December 2003, invited it to respond to Brazil’s request made in Exhibit BRA-369. In its 18 and 19
December 2003, replies to that request, the United States explained that under US law it could not
provide (as Brazil specifically requested and insisted upon) planted acreage information together with
base acreage and yield information and FSA farm numbers.

66. We also recall, as explained in the US comments on Brazil’s answers
76, that it was the
United States itself at the second session of the first panel meeting (that is, before “late
November 2003” and the presentation of Exhibit BRA -369 at the second panel meeting) that brought
to the Panel’s and Brazil’s attention the acreage reporting requirement that was introduced by Section
1105 of the 2002 Act (7 USC 7915). We trust that the fact that the United States offered this
information to Brazil and the Panel will lay to rest the unwarranted suggestion that the United States
sought to obscure it instead.

67. contract base acreage and yield informa tion. The focus of the Panel’s question 67 bis and
Brazil’s argumentation has naturally been on the am ount of decoupled income support payments to
upland cotton producers. The United States has expl ained that it does not track decoupled payments
by recipients’ production and thus does not maintain information on the payments made for upland
cotton base acres (or any other base acres) to upland cotton producers. The farm-by-farm planted
acreage and base acreage and yield data sought by Br azil in Exhibit BRA-369 and by the Panel in its
request of 12 January 2004, does not provide info rmation on the payments made to upland cotton
producers. Rather, putting aside issues of the appropriate methodology to identify the amount of the
subsidy, this planted and base information would allow the calculation of the amount of decoupled
payments made to farms that reported planting upland cotton.

68. Brazil Incorrectly Accuses the United States of Refusing to Provide Data on Non-Upland
Cotton Base: Brazil also argues that the United States “r efused to provide” farm-specific data on the
amount of other contract base acreage on farms pr oducing upland cotton with no upland cotton base
acreage.77 The omission of non-upland cotton base acreage from the data submitted by the
United States in December 2003 w as inadvertent and the result of programming errors, as explained
in the US letter of 28 January 2004 transmitting revised data files. Thus, Brazil’s extensive
protestations that the United States “withheld that information” are misplaced.

69. We do note, however, that the United States continues to believe that such decoupled
payments for non-upland cotton base acreage are not w ithin the Panel’s terms of reference and that
Brazil’s effort to include these payments at the end of this proceeding would deprive the United States
of fundamental rights of due process.
78 That such payments for non-upland cotton base acreage was
not even considered by Brazil earlier in this pro ceeding is nowhere more clear than in Brazil’s own
words:

76 US Comment on Brazil’s Answer to Question 196 from the Panel, paras. 15-18 (28 January 2004).
78 See US Comments on Brazil’s Answer to Question 204 from the Panel, paras. 34-42
(28 January 2004).

“Brazil requested the United States during the Annex V procedure to provide
information on the total amount of upland cotton base acreage and yield under the
CCP (and DP) program.”
79
Indeed, the accuracy of Brazil’s own description of its questions is amply supported by the text of
those questions relating to “Deficiency Payments /Production Flexibility Contract Payments/Direct
Payments”:80

“Please state the number of US upland cotton farms updating their upland cotton base
acreage for the purposes of calculating Direct Payments under the 2002 FSRI Act.
Please also provide the percentage of all US farmers producing upland cotton that
updated their upland cotton base acreage.” (Question 3.1 (italics added))
“Please state the annual amount of Defi ciency Payments made by the US
Government in connection with upland cotton base for each of the marketing years
1992 through 1996.” (Question 3.4 (italics added))
“Please state the annual amount of Production Flexibility Contract Payments made by
the US Government in connection with upland cotton base for each of the marketing
years 1996 through 2002.” (Question 3.6 (italics added))
"Please state the total amount of Direct Payments made by the US Government in
connection with upland cotton base in marketing year 2002.” (Question 3.7 (italics
added))
“Please state the amount of upland cotton base acreage and the average upland
cotton base yield applicable on this acreage under the Deficiency Payment Program
during each of the marketing years 1992 through 1996.” (Question 3.8 (italics
added))
“Please state the amount of upland cotton base acreage and the average upland
cotton base yield applicable on this acreage under the Production Flexibility Contract
Payment Program.” (Question 3.9 (italics added))· “Please state the amount of
upland cotton base acreage and the average upland cotton base yield applicable on
this acreage for the Direct Payment Program.” (Question 3.10 (italics added))
Thus, Brazil’s assertion that it has argued all along that decoupled payments for non-upland cotton
base acres are challenged measures is flatly contradict ed by its own questions set out above. Brazil
sent these questions on 1 April 2003, a mere 14 days after the DSB established the panel to consider
this matter. If Brazil had considered that paymen ts for non-upland cotton base acreage were within
the scope of this dispute, surely it would have requested information with respect to those payments as
well. The sheer number of references to upland cotton base acreage and yields demonstrates Brazil’s
view, at the time of panel establishment, of the scope of the decoupled payments it challenged.
81

70. Market Loss Assistance Data W as Not Requested But Was Provided : Brazil argues that the
United States “has not provided the requested data for market loss assistance payments received by

79 Brazil’s First Written Submission, para. 68 (emphasis added). We note in passing that the DSB did
not initiate the Annex V procedures and that Brazil’s statement that it asked the United States questions “during
the Annex V procedure” is therefore incorrect.
80 See Exhibit BRA-49 (Brazil’s questions for purposes of the Annex V procedure).
81 The United States has previously set out further evidence that decoupled payments for non-upland
cotton base acres are not within the Panel’s terms of reference and that Brazil did not consider these payments to
be measures within the Panel’s terms of reference. See US Comments to Brazil’s Answer to Question 204 from
the Panel, paras. 32-42 (28 January 2004).

the farms listed for MY 1999-2001”. Brazil’s ar gument is confused. Exhibit BRA-369 requested
planted acreage and base acreage (and yield) for marketing years 1999-2002, and the United States
provided that, farm-by-farm. The base acreage di d not differ for productio n flexibility contract
payments and market loss assistance payments so there was no need to set out base data for market
loss assistance payments separately.

71. It is ironic that Brazil would accuse the Unite d States of failing to provide certain “data for
market loss assistance payments” since Exhibit BRA-369 did not even identify market loss assistance
payments by name. Instead, it defined “programme crop” as “any crop that was assigned base acreage
and payment yields under the Production Flexib ility Contract (MY 1999-2001). Brazil inserts a
question mark for MLA payments in its table at paragraph 22 of its comments, arguing that “[t]he
United States has not provided any specific information on market loss assistance payments,” but
again Brazil ignores its own data request. Nowh ere in Exhibit BRA-369 did Brazil request actual
payment amounts for any of the decoupled income s upport programmes, and in any event Brazil well
knows that market loss assistance payments were calculated in the same proportion as the production
flexibility contract payments.
82

72. Soybeans Were Not Within Brazil’s Data Request
: Next, Brazil argues that “since market
loss assistance payments were also made for soybea n base (that otherwise was not eligible to receive
PFC payments), this allocation methodolog y [based on PFC payments] may significantly
underestimate the amount of market loss assistan ce payments that constitute support to upland
cotton”.83 The existence of soybeans market loss assistance payments is simply irrelevant to the data
Brazil requested from the United States. Exhi bit BRA-369 requested pl anted acreage and base
acreage (and yield) information for “programme cr ops.” Soybeans, however, were not a programme
crop (or “contract commodity”) under the 1996 Act 84, and no soybean base acreage was assigned to
farms before marketing year 2002. In fact, in the very statutes that provided sections that provided for
payments designated as marketing loss assistance, th ere were separate provi sions for payments for
soybeans in marketing years 1999 and 2000; these payments were not designated as market loss
assistance and were provided for current soybeans producers (and oilseed producers of all types). 85
Contrary to market loss assistance payments, so ybeans producers received payments not based on the
farm history, but their own production history (as ex plained in the 8 June 2000 rule), no matter where
they planted the soybeans. Thus, no soybeans data was included in the US response to Exhibit BRA-
369 because no soybeans data was requested. Indeed , Brazil later implicitly concedes that soybeans
data could not have been included in its request since soybeans were not a programme crop.86

73. Peanuts Were Not With in Brazil’s Data Request:
 Finally, Brazil argues that “the
19 December 2003 US data concerning MY 2002 does not contain any information regarding the
amount of direct and counter-cyclical payments made on peanut base”. Brazil asserts that “the
missing data on peanut contract payments fo r MY 2002 would cause lower aggregate payments

82 See Brazil’s First Written Submission, para. 60 (“ Between MY1998-2001, upland cotton producers
thereby received an additional amount of money, which wa s calculated based on their respective share of total
upland cotton base times the amount of budgetary outlays allocated for upland cotton.”).
84 See 1996 FAIR Act, § 102(5) (Exhibit BRA-28).
85 The 1999 crop soybean program was provided for by a statute, PL 106-78, enacted 22 October 1999.
In fact, the USDA’s programme rules were not issued until 8 June 2000, at 65 FR 36550. The amount provided
in that statute was $475 million for all oilseeds, not just soybeans. As for the 2000 crop, the soybean payments
were allowed by PL 106-224, in the amount of $500 million for all oilseeds, with rules that did not issue until 65
F.R. 5709 in November 2000. The amount paid was amplified for the 2000 crop by the addition of monies, long
after, in PL 107-25, enacted in August of 2001. It is worth noting that all of these payments occurred well after
plantings, again contradicting the contention of Brazil th at non-upland cotton paymen ts cause farmers to plant
cotton.
86 See Brazil’s Data Comments, para. 90 fn. 177 (“The lower figures for MY 1999-2001 are explained
by the fact that soybeans were not a contract programme crop.”).

allocated as support to upland cotton”. 87 Again, Brazil makes assertions that do not follow from its
own data request. The marketing year 2002 data c ontains no peanut information because no farm had
peanut base in marketing year 2002; it follows that there were no payments made on any farm base.
No peanut base existed for farms in marketing year 2002 because decoupled payments for peanut base
acreage was brand new, and the base was not assigned by Section 1302 of the Farm Bill to a farm but
to “historical peanuts producers”. The statute did not require an assignment of the base acreage to a
farm until the 2003 crop. In fact, the United States expressly noted in Exhibits US-111 (describing
contents of farm-by-farm DCP base and yield file ) and US-112 (describing contents of farm-by-farm
DCP planted acres file) that “[p]eanut figures were not run as peanut bases were not farm-specific in
2002”. Thus, the United States could not have pr ovided farm-specific planted acreage and base
acreage information with respect to peanuts becau se there was no peanuts base acreage for farms in
marketing year 2002. Again, Brazil’s complaints are without merit.

74. Conclusion: Brazil’s Accusations Are Spuri ous and Complicate the Panel’s Task Needlessly

In conclusion, the United States notes that not only has Brazil sought to put the United States in a
difficult position through its overbro ad data request and unreasonable approach to privacy issues
under US law, but the lack of clarity in Brazil’s a pproach has added considerable confusion to this
proceeding. For example, Brazil at one and the sa me time faults the United States for not providing
the farm-specific information as requested in E xhibit BRA-369 but then also faults it for not
producing the information using “a substitute number protecting the alleged confidentiality rights of
farmers.”88 Despite refusing to consider any devia tion from BRA-369 at the second panel meeting,
Brazil now asserts that the United States should have noticed a newfound flexibility in a passing
reference within a Brazilian answer and on that basi s produced an entirely new set of data. It was
entirely reasonable for the United States to cons ider Exhibit BRA-369 as Brazil’s request since
Brazil’s refusal to consider alternatives compelle d the United States to make tremendous efforts to
produce that requested information while simultane ously preparing answers to more than 50 panel
questions and comments on Brazil’s econometric evid ence. (Further, as the United States explained
in its 20 January 2004, letter to the Panel, the sheer number of fields involved in Brazil’s request
would make possible identification of specific farms based on a unique combination of planted and
base acreage, even with substitute farm numbers.)

75. As another example, Brazil’s request was so broad that (as set out above) Brazil itself appears
not to have understood the precise scope of the in formation it requested. This continual overbroad
argumentation wastes the time and resources of the Un ited States and the Panel that would be better
spent on issues actually pertinent to this dispute. In addition, Brazil faults the United States for
“misunderstanding [] Brazil’s allocation methodology,” when that methodology was not set out until
Brazil filed its answer to Question 258 on 20 January 2004 – that is, more than one month after the
United States provided the data requested in Exhi bit BRA-369 (to the extent permissible under US
law) and more than eight months into this proceedi ng. In this regard, Brazil’s litigation tactics have
impacted the ability of the United States to address Brazil’s claims, arguments, and evidence and have
complicated this Panel’s task immensely and needlessly.
89

88 See Brazil’s Data Comments, paras. 38-39 (referencing Brazil’s December 22 Answers to Questions,
para. 7).
89 Indeed, the United States has cooperated in good faith in this dispute and expended extraordinary
resources to do so, but Brazil put the United States in the position of violating US law or providing requested
data. Brazil now seeks to have the Panel draw adverse inferences when its own request for information was
over-broad in that Brazil could simply have asked the United States to apply its methodology (which, as of
3 December 2003, it had not yet disclosed, and wo uld not until forced to do so by the Panel on
20 January 2004). The Panel should consider that it wa s Brazil at the second panel meeting that refused to
cooperate and consider alternative mean s to request information that could have protected US farmers’ privacy
interests. If there is an “adverse inference” to be drawn, it may be that Brazil withheld its methodology until the
end of the proceeding because it knew it could not with stand a full analysis and review and because Brazil

B. US Law Prohibits Disclosing Planted Acreage Information Without the Prior Consent of
the Farmer

76. The United States has explained in its lette rs dated 18 December 2003, 19 December 2003,
and 20 January 2004, that under US law it may not disclose planting information in which a farmer
has a privacy interest. This has been consistent US Department of Agriculture policy and is not
contradicted by the Washington Post district court decision referenced by Brazil (which dealt with
disclosure of payment information – similarly, the United States has provided contract data on a farm-
by-farm basis). The United States also explains these matters in more detail in its answer to
Questions 259(a), (b), and (c).

77. Brazil’s views on how US law operates in the FOIA context are not relevant to the US
Department of Agriculture’s statutory responsibility to respect the privacy interests of US farmers in
the planted acreage data. However, Brazil’s di scussion of Washington Post v. United States
Department of Agriculture , 943 F.Supp. 31 (D.D.C. 1996), does not support Brazil’s arguments that
the United States need not protect this data.

78. The US position on the privacy interests in plantings is not post hoc since, as we showed in
the attachments to the US letter of 18 December 2003, the position on planted acres has been the same
since at least 1997 – that is, after the Washington Post
 decision. Brazil neglects to mention that all
that was at issue in the Washington Post case was crop payments, not farmer plantings. Hence, that
case fit within the FOIA precept of disclosure of the activities of the government, which was what
was of concern to the court. 943 F. Supp. at 33, 36. Plantings are quite a different matter, involving
a farmer’s activities, not that of the government. Moreover, such producer-supplied information, not
government-generated, has long been recognized as having special privacy concerns. See, e.g. , 7
USC 1373 and 7 USC 1502. Thus, under specific provision of the 1938 Act and provisions of the
Crop Insurance Act, the US government has long cons idered plantings separate matters not subject to
disclosure. A similar outcome r esults from an analysis under the Privacy Act and to some degree the
Trade Secrets Act.

79. Regarding the rice matter, Brazil argues that “USDA’s FOIA representatives necessarily must
have determined that because the request did not fo cus on an individual producer’s farm, the interests
of the public in understanding and evaluating th e operation of the contract payment schemes
outweighed any privacy interests”. However, the rice matter involved one office, and that disclosure
was contrary to clearly established national policy. We have explained fully what the problem was
and what FSA policy is. The concerns he re are much greater than in the Hill
 decision, moreover,
because the privacy interests of 200,000 farmers are involved.

C. There Is No Basis to Draw Any In ference, Much Less an “Adverse Inference”

80. Brazil has asked the Panel to draw certain a dverse inferences from the alleged failure of the
United States to cooperate fully an d provide requested data. As noted in the US letter of 20 January
and explained above, the United States did not have the authority to provide the farm-specific planting
information in the format requested by the Panel’ s 12 January 2004. However, the United States did
provide both farm-specific and aggregated contract data that would permit the Panel and Brazil to
assess the total expenditures of decoupled payments to farms planting upland cotton. 90 Brazil itself
admits that “the data provided by the United Stat es appears to be complet e” with respect to both

sought to distract from Brazil’s failure to provide evidence and data necessary to support its arguments based on
its methodology.
90 The United States notes that it had no basis to provide any other aggregation of the data than that
which it provided since it was not aware of Brazil’s a llocation methodology until Brazil filed its answer to
Question 258 on 20 January 2004.

contract acres and planted acres 91 – therefore, the willingness of the United States to provide
information within the limits set by US law cannot be questioned. Further, the Panel on 3 February
requested certain additional aggr egated information, which therefore does not implicate privacy
interests of farmers and which the United States is endeavouring to provide.

81. The situation here is thus very different from the one in Canada - Aircraft where the
Appellate Body first opined that “a panel should be willing expressly to remind parties – during the
course of dispute settlement proceedings – that a refusal to provide information requested by the panel
may lead to inferences 92 being drawn about the inculpatory ch aracter of the information withheld.” 93
There is no basis for an “inference” of any kind, adverse or otherwise.

82. This is particularly so in this disp ute as the farm-specific planted and base acreage
information was sought for purposes of Brazil’s allocation methodology, which is without any textual
basis in the WTO agreements. For purposes of P eace Clause, Brazil’s methodology is inapplicable
because Brazil concedes that “suppor t to a specific commodity” means “product-specific support” –
and yet, Brazil’s allocation methodology would co ntradict the meaning of product-specific support
and non-product-specific support set out in the Ag reement on Agriculture. Further, Brazil’s
methodology is inapplicable for purposes of its seri ous prejudice claims because Brazil argues that no
allocation of decoupled payments or identification of subsidy benefits or the subsidized product is
necessary under Part III of the Subsidies Agreement. Further, the only allocation methodology set out
in the Subsidies Agreement is that of Annex IV, fo r which the farm-specific planted and base acreage
information would be irrelevant. Thus, there is no need to draw an inference of any sort in this
dispute.

83. Brazil's proposed "adverse influences" also do not follow logically from the data before the
Panel. Brazil first suggests that farm-by-farm da ta would have resulted in payments higher than
Brazil’s 14/16 methodology. However, Brazil cannot escape the fact that it has not brought forward
evidence and arguments to support findings under the Annex IV methodology.

84. Second, Brazil suggests that the Annex IV methodology would have produced higher
payments than Brazil’s 14/16 methodology. The United States is not in exclusive possession of
relevant information with respect to an Anne x IV methodology, but the incomplete data and
calculations above demonstrate that in fact the Annex IV methodology would produce a far lower
subsidy amount than Brazil’s 14/16 methodology.

85. Third, Brazil suggests that “the information withheld” by the United States “would have been
detrimental” to US arguments that decoupled pa yments are non-product-specific support. As set out
previously, the farm-by-farm planted acreage data that the United States could not provide under US
law is simply irrelevant to the issue whether decoupled payments are “product-specific support”.
Brazil appears to overreach, moreover, in suggesting that a “detrimental” inference be drawn since the
Canada – Aircraft report found that the inferences to be drawn were not punitive but factual in nature.

91 Brazil’s Data Comments, para. 27 fn. 55.
92 The United States notes that in the same report the Appellate Body was careful to distinguish
“adverse” inferences from other “inferences”, remarkin g that: “We note, preliminarily, that the ‘adverse
inference’ that Brazil believes the Panel should have drawn is not appropriately regarded as a punitive inference
in the sense of a ‘punishment’ or ‘penalty’ for Canada’s withholding of information. It is merely an inference
which in certain circumstances could be logically or reasonably derived by a panel from the facts before it.”
Canada – Measures Affecting the Export of Civilian Aircraft , WT/DS70/AB/R, adopted 20 August 1999,
para. 200 (“Canada – Aircraft”).
93 Canada – Aircraft, WT/DS70/AB/R, para. 204.

VII. Conclusion

86. Brazil has asserted that decoupled income support payments must be allocated to upland
cotton only for purposes of the Peace Clause and not for purposes of its serious prejudice claims.
However, Brazil’s analysis is completely backwa rds: the text and context of the Peace Clause
demonstrate that support is not to be allocated for purposes of the Peace Clause test while the text and
context of Articles 5 and 6 of the Subsidies Ag reement demonstrate that subsidies not tied to
production of a given product (such as decoupled income support) are to be allocated to all of the
products the recipient sells for purposes of serious prejudice claims.

87. The implication of Brazil’s erroneous analysis and arguments, and in particular its express
disavowal of any allocation methodology for purpo ses of its serious prejudice claims on decoupled
income support payments, is that Brazil has failed to make a prima facie case on these claims. As a
result, no findings may be made with respect to these measures, and these payments may not be
included in an analysis of whether the effect of the challenged US subsidies has been serious
prejudice to Brazil’s interests

ANNEX I-20

BRAZIL'S COMMENTS ON UNITED STATES
11 FEBRUARY 2004 ANSWERS TO ADDITIONAL
QUESTIONS FROM THE PANEL FOLLOWING
THE SECOND MEETING OF THE PANEL
WITH THE PARTIES

18 February 2004

Table of Cases Cited

Japan – Apples Appellate Body Report, Japan – Measures affecting the Importation of
Apples, WT/DS245/AB/R, adopted 10 December 2003.

List of Exhibits

Dresser Industries v United States, 596 F.2d 1231 (5th Cir. 1979) Exhibit Bra-425
Center for Auto Safety v National Highway Traffic Safety
Administration, 244 F.3d 144 (DC Cir 2001)
Exhibit Bra-426
CNA Financial Corporation v Donovan, 830 F.2d 1132 (DC Cir 1987) Exhibit Bra-427
United States Department of Justice at al. v Reporters Committee for the
Freedom of the Press et al., 489 US 749 (1989)
Exhibit Bra-428
Metadure Croporation v United Stat es, 490 F. Supp. 1368 (S.D.N.Y.
1990)
Exhibit Bra-429
Campaign for Family Farms v Glickman, 200 F.3d 1180 (8th Cir. 2000) Exhibit Bra-430
Comparison of US and Brazil's Cash-Basis Accounting Methodologies
for Purposes of the Item (j) Analysis
Exhibit Bra-431
Congressional Budget Office, Fact Sheet, row titled “Export Credit
Guarantee Programme, Subsidy Account”
Exhibit Bra-432

259. With respect to the Privacy Act of 1974, 5 U.S.C. 552a:

(a) Whose interests are protect ed under section 552a(b) in light of the definition of
"individual" in section 552a(a)(2)? Do all payment recipients, including corporations
and organizations, have Privacy Act rights? If not, is the United States prevented by its
domestic law from releasing such of the in formation requested on 12 January 2004 as
relates to payment recipients without Privacy Act rights? Please explain with references
to case law.

Brazil’s Comment:

1. In its 11 February 2004 res ponse, the United States repeats its assertion that (many of) US
upland cotton farms’ planting reports are protected by the US Privacy Act and cannot be produced to
the Panel and Brazil, even unde r confidentiality arrangements.
1 As explained below, the
United States is wrong. But more fundamentally, as the United States has argued before other WTO
panels, a WTO Member’s domestic laws do not provide a basis for not complying with its obligation
to cooperate in a WTO dispute settlement proceedi ng and to provide, if requested by a panel under
DSU Article 13, any information – if neces sary using special confidentiality procedures. 2 In sum, as
Brazil established in its 28 January 2004 Comment s and Requests Regarding US Data, there is no
basis for the United States, citing confidentiality concerns, to withhold data from the Panel.3

2. The US 11 February 2004 response to this question confuses two fundamental questions.
First, are there any Privacy Act rights of US upla nd cotton farms that would cover information about
planted acreage that is gathered by the US government via mandatory or voluntary planting reports?
And second, do these privacy rights prevail under the US Freedom of Information Act (“FIOA”)) over
the interest of the public in understanding the opera tions or activities of the US government. While
the United States partly (yet falsely) addresses the first question, it ignores the second question.

3. The starting point for addressing these issues is the relationship of the Privacy Act and the
FOIA. The Privacy Act, codified as 5 U.S.C. § 552a
4, protects “records maintained on individuals”
by the US government, and prevents disclosure “to any person, or to another agency”, with certain
exceptions.5 One of the exceptions listed reads: “unless disclosure would be … (2) required under
section 552 of this title”.6 5 U.S.C. § 552 is the place where the FOIA is codified. It follows that the
prohibition of disclosure of information on individuals provided for by the Privacy Act is subject to
the requirements of the FOIA.

4. Returning to the first step, the United States ad mits that corporations are not covered by the
Privacy Act.
7 This is confirmed by the case law cited by the United States ( Dresser Industries v
United States ).8 Yet, neither this case law, nor any other reference provided by United States,
supports the United States’ distinction between “normal” corporations and “closely held
corporations.”9 Even if “closely held corporations” we re covered by the Privacy Act – an assertion

1 US 11 February 2004 Answers to Additional Questions, paras. 1-5.
2 See Brazil’s 28 January 2004 Comments and Requests Regarding US Data, para. 55.
3 See Section 5 of Brazil’s 28 January 2004 Comments and Requests Regarding US Data.
4 Exhibit US-107.
5 Exhibit US-107 (5 U.S.C. § 552a(b)).
6 Exhibit US-107 (5 U.S.C. § 552a(b)(2).
7 US 11 February 2004 Answers to Additional Questions, para. 2.
8 Exhibit Bra-425 (Dresser Industries v United States, 596 F.2d 1231 (5th Cir. 1979), p. 7 [**16]).
9 US 11 February 2004 Answers to Additional Questions , para. 8. As the party asserting this fact, the
United States bears the burden of proving it. See e.g. Appellate Body Report, Japan – Apples ,
WT/DS245/AB/R, para. 157 (“It is important to distinguish, on the one hand, the principle that the complainant

for which the United States does not offer any proof – they would have the same status as private
individuals, which are discussed below in Brazil’s comment on the US 11 February 2004 response to
Question 259(b).

5. The United States further refers to the Distri ct of Columbia Court of Appeals decision in
Center for Auto Safety v National Hi ghway Traffic Safety Administration
10 for the proposition that
information voluntarily submitted to the US government by corporations may not be released if that
information would not customarily be released by the corporation to the public. 11 However, the
United States misquotes this decision. In fact, the decision states that the information was

exempt from disclosure because the information was voluntarily submitted and
constituted confidential commercial inform ation that was not customarily disclosed .
The … information at issue had been disclo sed in the past only when necessary, and
always with a confidentiality agreement or protective order.12
Thus, the restriction only applies to confidential commercial information. While the United States
asserts that “[t]his is the case with respect to plan tings”, the United States provides no evidence for
this assertion.13 The United States’ assertion is simply wrong.

6. Planting information is always in the public domain – anyone can look at a field to determine
to what crop it is planted. Most US farmland is connected by paved roads and is easily accessible to
the public. Further, the Aerial Photography Field Office of USDA’s Farm Services Agency exists to
provide detailed aerial photographs of cropland.
14 The Office maintains aerial photographs of every
square kilometre of cropland in the United States and updates the photographs on a regular basis. 15
Any person can order any aerial photograph by including a legal description of the area of interest in
township, range, and section number or latitude and longitude coordinates.
16 The Aerial Photography
Field Office indicated that scaled enlargements of photographs are made using specialized rectifying
enlargers which maintains an accuracy greater th an 99 per cent for most cropland in the United
States.17 The final rectified aerial photograph is, in effect, a photographic map accurately representing
ground features. In fact, USDA’s local FSA offices use the aerial photographs in verifying planting
reports (FSA-578 forms) required un der various US farm programmes. 18 No Privacy Act warnings
are shown on the order form or on the web-site where these photographs can be purchased.

7. By its very nature, planting information ca nnot be confidential commercial information that
could always be protected by confidentiality arrangements. In that sense, planting information is very

must establish a prima facie case of inconsistency with a provision of a covered agreement from, on the other
hand, the principle that the party that asserts a fact is responsible for providing proof thereof.”).
10 Exhibit Bra-426 (Center for Auto Safety v National Highway Traffic Safety Administration, 244
F.3d 144 (DC Cir 2001)).
11 US 11 February 2004 Answers to Additional Questions, para. 3.
12 Exhibit Bra-426 (Center for Auto Safety v National Highway Traffic Safety Administration, 244
F.3d 144 (DC Cir 2001), p. 4 [*147]) (emphasis added).
13 As the party asserting this fact, the United States bears the burden of proving it. See e.g. Appellate
Body Report, Japan – Apples, WT/DS245/AB/R, para. 157 (“It is important to distinguish, on the one hand, the
principle that the complainant must establish a prima facie case of inconsistency with a provision of a covered
agreement from, on the other hand, the pr inciple that the party that asserts a fact is responsible for providing
proof thereof.”).
14 The Web-page of the Office is found at http://www.apfo.usda.gov.
15 See http://www.apfo.usda.gov.
16 See http://www.apfo.usda.gov.
17 See http://www.apfo.usda.gov.
18 See Brazil’s 18 November 2003 Further Rebuttal Submission, para. 36.

different from technical information about ai rbags used in cars, which was at issue in Center for Auto
Safety v National Highway Traffic Safety Administration.19
8. This conclusion is supported by another appellate court decision in CNA Financial
Corporation v Donovan , also cited by the United States. 20 Referring to the Trade Secrets Act, the
court defined the scope of the exception in 5 U.S.C. § 552(b)(4) as only prohibiting the disclosure of
commercial or financial information if disclosur e “is likely to … cause substantial harm to the
competitive position of the person from whom the information was obtained”, requiring “both a
showing of actual competition and a lik elihood of substantial competitive harm”.
21 The United States
has made no such showing with respect to planting information on upland cotton farms. Furthermore,
the court held that “[t]o the extent that any da ta requested under FOIA is in the public domain, a
submitter is unable to make any claim of confidentiality – a sine qua non of [5 U.S.C. § 552(b)(4)]”.22
None of the information requested by the Panel poses a significant threat to “cause substantial harm to
the competitive position of the person from whom th e information was obtained”, in particular
because, as demonstrated above, the information is, in fact, by its very nature not information that can
remain confidential, but is in the public domain, and, indeed, offered for sale by USDA. 23 It follows
that (non-closely held) upland cotton farms cannot invoke the Trade Secrets Act to prevent disclosure
of planting information.
9. Since the United States characterizes info rmation submitted to the US Government under
mandatory terms to be releasable (i.e., MY 2002 planting information),
24 and MY 1999-2001 planting
information is not protected under the above rebutte d US theory, there is nothing in the Privacy Act
that would prevent the United States from produci ng farm-specific planting information for corporate
farms using farm serial numbers or “dummy” numbers. At best, there is some ambiguity in the US
law that should be resolved by the United States in favour of releasing the information, as required by
its obligations under the DSU.
10. Second, even for the “individuals” covered by the protection of the Privacy Act, there is no
legal basis to preclude the release of planting info rmation. As noted above, the protection of the
Privacy Act is conditional on the FOIA disclosure rules, which necessitate a weighing process
between the privacy interest of the group of individua ls and the public interest in the operations of the
US Government. Under the applicable case law, this weighing process would be resolved in favour of
disclosing the information, as discussed in Brazil’s comment on the US 11 February 2004 response to
Question 259(b), below.
11. In sum, none of the US Privacy Act arguments holds up to scrutiny. And none is relevant in
the first place, since the United States is under an obligation to provide – possibly subject to special
confidentiality procedures – information requested by the Panel under DSU Article 13, even if that
information is confidential.

19 Exhibit Bra-426 (Center for Auto Safety v National Highway Traffic Safety Administration, 244
F.3d 144 (DC Cir 2001), p. 3-4 [*146-*147]).
20 Exhibit Bra-427 (CNA Financial Corporation v Donovan, 830 F.2d 1132 (DC Cir 1987)).
21 Exhibit Bra-427 (CNA Financial Corporation v Donovan, 830 F.2d 1132 (DC Cir 1987), p. 23
[*1152]).
22 Exhibit Bra-427 (CNA Financial Corporation v Donovan, 830 F.2d 1132 (DC Cir 1987), p. 25
[*1154]).
23 The United States neither presents the legal prov isions of the Trade Secrets Act nor explains any
other pertinent information with respect to that Act. ( See U.S. 11 February 2004 Answers to Additional
Questions, para. 3.) Yet, as the party asserting this fact, the United States bears the burden of proving it. See
e.g. Appellate Body Report, Japan – Apples, WT/DS245/AB/R, para. 157 (“It is important to distinguish, on the
one hand, the principle that th e complainant must establish a prima facie case of inconsistency with a provision
of a covered agreement from, on the other hand, the principl e that the party that assert s a fact is responsible for
providing proof thereof.”).
24 US 11 February 2004 Answers to Additional Questions, para. 4.

(b) The Panel notes that data concerning th e four relevant programmes, in particular,
payment amounts, identified by specific farms, is freely available on the internet. Please
explain why that data can be disclosed but the requested planted acreage data cannot.
Do individual recipients have Privacy Act rights with respect to their entrepreneurial
activity? Please explain with references to case law.

Brazil’s Comment:

12. In its 11 February 2004 response, the Unite d States asserts that “[i]nformation concerning
planted acreage does not demonstrate anything regarding the government’s operation – it only
demonstrates what a producer is doing”.
25 Brazil strongly disagrees. Information about plantings of
farms receiving contract payments provides important information about the extent to which the US
contract payments provide support to specific commodities. US taxpayers, as in the Washington Post
case, have a strong public interest in knowing how th eir tax dollars are being spent. In particular,
such information would shed light on the question of how much upland cotton is planted on upland
cotton base acreage – information that is impor tant for the US public to assess whether the
United States is in compliance with its obligat ions under the Agreement on Agriculture. As the
aggregate information provided by the United States suggests, in MY 2002, 96 per cent of US upland
cotton plantings took place on upland cotton base.26

13. If follows that the US citation to a US S upreme Court decision in paragraph 7 of the US
11 February 2004 response misses the point. Since planting information is a vital component for
assessing the “the government’s operation”, it has to be part of the balance between “the privacy
interest of the individual with the ‘core purpose’ of FOIA”.
27 And the US district court decision in
Washington Post v. United States Department of Agriculture confirms that in cases, where “the
information is so generic that the impact on privacy interests are so small”28, the information has to be
disclosed. This interpretation is, in fact, confirme d, rather then contradicted, by the US Supreme
Court Decision in United States Department of Justice v Reporters Committee For Freedom of the
Press (“Reporters Committee”).29

14. The Reporters Committee decision concerns an individual pe rson’s FBI “rap sheet” that was
requested under the FOIA. The Supreme Court rej ected this request as outside the purpose of the
FOIA, since it did not “contribut[e] significantly to the understanding of the operation or activities of
the government ” (emphasis in original).
30 By contrast, planting information of farms clearly
contributes to the understanding of the operation of the US contract payments programmes. Providing
this information would, thus, not only enhance the Panel’s ability to make an objective assessment of
the matter before it, but would also conform to “the basic purpose of the [FOIA,] to open agency
action to the light of public scrutiny”.31

25 US 11 February 2004 Answers to Additional Questions, para. 8.
26 See Brazil’s 18 February Comments on US Comments, Annex A, para. 11.
27 US 11 February 2004 Answers to Additional Questions, para. 7.
28 Exhibit Bra-418 (Washington Post v United States Department of Agriculture, 943 Supp. 31
(D.D.C.) 1996, p. 3). See Brazil’s 28 January Comments and Requests Regarding U.S. Data, paras. 31-34.
29 Exhibit Bra-428 (United States Department of Justice at al. v Reporters Committee for the Freedom
of the Press et al., 489 US 749 (1989)).
30 Exhibit Bra-428 (United States Department of Justice at al. v Reporters Committee for the Freedom
of the Press et al., 489 US 749 (1989), p. 15 [*775]).
31 Exhibit Bra-428 (United States Department of Justice at al. v Reporters Committee for the Freedom
of the Press et al., 489 US 749 (1989), p. 15 [*774]).

15. The US Supreme Court decision in Reporters Committee states that “Congress exempted nine
categories of documents from the FOIA ’s broad disclosure requirements”. 32 These exemptions are
codified at 5 U.S.C. § 552(b). 33 In this case, disclosure of the information is neither prevented by
other laws (5 U.S.C. § 552(b)(3)), i.e., the Trade Secrets Act (because the information does not
constitute trade secrets as defined by US courts 34), or the Privacy Act (which applies subject to the
FOIA Act), nor by the separate exemption (5 U.S.C. § 552(b)(4) for trade secrets and commercial or
financial information). Once again, since planti ng information could be collected from the public
domain – or rather observed by any member of the public or, indeed, purchased from USDA – it
cannot be deemed confidential. In fact, as the appeals court in CNA Financial Corporation v
Donovan held, “[t]o the extent that any data requ ested under FOIA is in the public domain, a
submitter is unable to make any claim of confidentiality – a sine qua non of [5 U.S.C. § 552(b)(4)]”.
35
16. Moreover, 5 U.S.C. § 552(b)(7)(C) exempts information “compiled for law enforcement
purposes, but only to the extent that the production of such … information would … (C) …
constitute an unwarranted in vasion of personal privacy.” 36 While acreage reports are partly
mandatory to enforce the requirements of various US domestic support programmes 37, disclosure of
planting information does not constitute an unwarrant ed invasion of personal privacy. In fact, the
information could be gathered by simply checki ng the fields of a farm or by purchasing aerial
photographs from the Aerial Photography Fiel d Office of USDA’s Farm Services Agency, as
discussed above. 38 It is not difficult to determine the type of crop or the amount of acreage being
planted to that crop from using high resolution colo ur aerial photographs. If a farmer growing crops
can purchase from USDA high resolution and detailed aerial photographs of his next-door
neighbour’s farm to calculate that information, how can it be that this same farmer can claim a
Privacy Act violation for his own planted acreage data? This evidence provides the common sense
answer to the question whether acreage reports are, in fact, subject to the Privacy Act.
17. Thus, from the perspective of its “public dom ain” character, acreage information is even less
confidential than payment information, which the district court in Washington Post decided must be
released under FOIA.
39 Since acreage information sheds light on the performance of USDA and its
adherence to the WTO obligations of the United Stat es, any weighing of the limited privacy interests
in planting information and the interest of the pu blic in evaluating the work of USDA must be
resolved in favour of the latter.
18. Finally, with respect to the “split of authorit y in US courts as to whether individuals have
Privacy Rights with respect to their entrepreneurial activities” 40, it is clear that even if a privacy
interest protected under the Privacy Act should exist with respect to the entrepreneurial activity in
question, the FOIA takes precedence over that inte rest, as explained in Brazil’s comment to the US
11 February 2004 response to Question 259(a), and in the Washington Post and Reporters Committee
precedent. Concerning planted acreage information at issue between the parties, it is clear that the
public interest in USDA’s performance, including USDA adherence to the US obligations under the
WTO Agreement, takes precedence ove r the privacy interests of US farmers in information that is
potentially always in the public domain. Even assuming, arguendo, that there were some ambiguity

32 Exhibit Bra-428 (United States Department of Justice at al. v Reporters Committee for the Freedom
of the Press et al., 489 US 749 (1989), p. 6 [*755]).
33 Exhibit US-103.
34 See above.
35 Exhibit Bra-427 (CNA Financial Corporation v Donovan, 830 F.2d 1132, p. 25 [*1154]).
36 Exhibit US-103.
37 See Brazil’s 18 November 2003 Further Rebuttal Submission, Section 2.2.
38 See also http://www.apfo.usda.gov.
39 See Brazil’s 28 January 2004 Comments and Requests Regarding US Data, paras. 31-33.
40 US 11 February 2004 Answers to Additional Questions, para. 9. The cases cited by the United States
are reproduced as Exhibits Bra-429 (Metadure Croporation v United States, 490 F. Supp. 1368 (S.D.N.Y. 1990))
and Bra-430 (Campaign for Family Farms v Glickman, 200 F.3d 1180 (8th Cir. 2000)).

in the meaning of the US domestic law applicable to the question of confidentiality and the release of
planted acreage information, the United States shoul d resolve the ambiguity in favour of releasing the
information, as required by its obligations under the DSU.

(c) Please provide any further available evidence of the USDA's long-standing policy that
planted acreage information will not be released.

Brazil’s Comment:

19. Brazil notes that it is not USDA’s place to provide an authoritative interpretation of US law,
including the Freedom of Information Act. An y “internal policy memorandum” cannot change the
meaning of US law. Interpreting US laws is left to the US courts, which have issued rulings that
would compel release of the planting, payment and contract payment base information.

20. Further, both Exhibits US-134 and US-144 refer to individual acreage information in
connection with names that cannot be released . Brazil recalls that the Panel has requested farm-
specific information with farm serial numbers (rather than names)
41, or, alternatively, farm-specific
information using “dummy” farm numbers. 42 And Exhibit US-144 clarifies that “[a]creage,
production data, and other producer-re lated information, without any personal identifier attached may
be released”. This language would certainly c over farm-specific information using “dummy” farm
numbers.

21. Finally, whether there is a long-standing practice by USDA of not releasing farm-specific
acreage data to the public is irrelevant to a WTO dispute. First, under DSU Article 13, the
United States is required to provi de even confidential information.43 Second, any such information is
not released to the public, and can – under WTO procedures – be protected as confidential
information and be returned to the United States once this panel proceeding ends. Confidentiality
procedures either under DSU Articles 13.1 and 18.1 or special confidentiality procedures under the
Panel’s working procedures can address any US concern that Brazil could match data provided by the
United States with data publicly available to unveil the names of specific farmers and their plantings.
In addition, any such concern would not exist had the United States provided a single file containing
both base acreage and yields as well as planting information. Under these circumstances, no
identification number, whether farm serial number or “dummy” number, would be necessary.

260. On 27 August 2003, in it s response to Question No. 67 bis, the United States indicated
that "it does not maintain information on the amount of expenditures made under the cited
programmes to US upland cotton producers". On 12 January 2004, the Panel requested the
United States to provide information "to permit an assessment of the total expenditures of PFC,
MLA, CCP and direct payments by the US Fede ral Government to upland cotton producers in
the relevant marketing years". On 20 January 2004, the United States informed the Panel that
"the data already provided by the United States to Brazil and the Panel would permit an
assessment of total expenditures of decoupled pa yments to farms planting upland cotton." Is
the latest statement responsive to the Panel's re quest? If so, how can it be reconciled with the
first statement?

Brazil’s Comment:

22. The US 11 February 2004 response to th e Panel’s Question continues a pattern of
misrepresentation that has tainted the US statem ents on this issue during this entire dispute.
44 In its

41 8 December 2003 Communication from the Panel.
42 12 January 2004 Communication from the Panel.
43 See Section 5 of Brazil’s 28 January 2004 Comments and Requests Regarding US Data.
44 US 11 February 2004 Answers to Additional Questions, para. 13.

response, the United States draws the distinction be tween farms that plant upland cotton, for which
the United States admits it has information, and farms that produce upland cotton, i.e., farms that
harvest the planted upland cotton, for which the Un ited States asserts it does not have information. 45
Allegedly, this distinction between “planter s” and “producers” of upland cotton explains the
discrepancy between the two US statements referred to in the Panel’s question. It does not.

23. In fact, the United States in its 11 February 2004 response engages in a play with words that
hides its non-cooperation in this panel proceeding. Contract payments made to “planters” of upland
cotton support the production of upland cotton and are, thus, “support to” upland cotton. This is true
even if the planted upland cotton is in the end abandoned and not harvested. Indeed, the 2002 FSRI
Act defines a “producer” as someone who “ shares in the risk of producing a crop and is entitled to
share in the crop available for marketing from the farm or would have shared had the crop been
produced”.46 Thus, a person remains a “producer” even if the chances were against him or her in a
given year and a planted crop failed.
24. In sum, the terms “producer” and “planter” of a crop are synonyms for purposes of defining
“support to” a specific commodity. Any contract pa yments paid to producers/planters of upland
cotton must be considered in allocating the “s upport to” upland cotton from contract payments –
whether the crop planted on that farm was harvested or not.
25. It follows that the two US statements referred to in the Panel’s question are irreconcilable.47
Unfortunately, Brazil has to note that the United Stat es continues its approach of trying to mislead the
Panel and Brazil on the question of the amount of c ontract payments that constitute support to upland
cotton. In its 11 February 2004 Comments on Brazil’s 28 January 2004 Data Comments, the
United States engages in a self-serving revisionist history. 48 What is left after the US rhetoric is one
clear fact: that the United States has engaged in a highly successful effort over sixteen months to
deny Brazil and the Panel information giving a defi nitive amount of the four contract payments paid
to and received by producers of upland cotton during MY 1999-2002. Brazil and the Panel are still
waiting for data that would allow a precise calcula tion of this support, either in a farm-specific
manner, as requested by the Panel on 8 December 2003 and 12 January 2004, or in the aggregate
manner as requested by the Panel on 3 February 20 04. Brazil notes that the Panel has granted the
United States an extension until 3 March 2004 to provide this information.
49
26. Brazil believes the Panel is well aware of the US refusal to provide payment information in
the numerous forms in which that information has been requested. 50 In an effort to assist the Panel
with making factual findings in its report regarding this issue, Brazil sets forth a chronology of the
facts relating to these various requests. These facts need little, if any, commentary or argument from
Brazil, as they speak for themselves:
• 22 November 2002 : Brazil files its First Set of Qu estions and Request for Production of
Documents to the United States. 51 Question 3.6 stated: “What was the annual amount of . . .
(ii) production flexibility contract payments and (iii) direct payments (as relevant given the
particular time period) made by the US Gove rnment in connection with upland cotton for
each of the marketing years 1992 through 2002.” Question 11.1 stated: “Please state the total

45 US 11 February 2004 Answers to Additional Questions, para. 13. See also US 11 February 2004
Comments para. 67 and US 28 January 2004 Comments, para. 16 making the same argument.
46 Exhibit Bra-29 (Section 1000(12) of the 2002 FSRI Act)(emphasis added).
47 See also Brazil’s 28 January 2004 Comments on Question 195, para. 6-9.
48 US 11 February 2004 Comments, paras. 62-75.
49 16 February 2004 Communication from the Panel.
50 The US 11 February 2004 Comments, para. 69 incorrectly assert that “this information” refers to
contract acreage
51 Exhibit Bra-101 (Questions for Purposes of the Consultations).

amount of market loss assistance payments made to the US upland cotton industry in
marketing years 1998 through 2001.”
52

• 3 December 2002: During the consultations, the United States responded orally to Question
3.6 by referring Brazil to the “Fact Sheet: Upland Cotton” (Exhibit Bra-4) and to
www.fsa.usda.gov/dam/bud/bud1.htm. In response to Question 11.1, the United States
similarly referred Brazil to www.fsa.usda.gov/dam/bud/bud1.htm. The data in these
documents represented the total amount of paymen t data provided to holders of upland cotton
base but did not provide any information about contract payments made to the US “upland
cotton industry”, which Brazil defined in its consultation and panel requests as “US
producers, users and/or exporters of upland cotton” . Brazil used the data included in Exhibit
Bra-4 and the above-referenced web-site as the basis for its tabulation of the contract payment
amount included in Table 1 of its 24 June 2003 First Submission.

• 1 April 2003: Brazil filed a questionnaire with th e United States in the Annex V
procedures.53 Question 11.1 states: “Please state the total amount of Market Loss Assistance
payments made to the US upland cotton i ndustry in marketing ye ars 1998 through 2002. ”
Question 13.1 states: “ Please state the total amount of C ounter-Cyclical Payments made by
the United States to US upland co tton farmers in marketing year 2002.” The United States
provided no information in response to these questions.

• 24 June 2003: Brazil’s 24 June 2003 First Submission states, at paragraph 214, that “[i]n the
absence of the requested information from the United States on actual DP and CCP payments
related to the production of upland cotton or to farms holding upland cotton base, Brazil has
used conservative methodologies to estimate the amount of 2002 DP and CCP payments
received by upland cotton producers”. In addition, Brazil stated that it “reiterates its requests
to the United States to provide it and the Panel with actual upland cotton base acreage for the
DP and CCP programmes and will revise its est imates and levels of support for MY 2002
based on updated data”.
54

• 22 July 2003: Brazil states in its 22 July 2003 Oral Statement at the first meeting with the
Panel that “Brazil notes that it has presented th e best available information that it has access
to and that is not exclusively within the control of the United States.” 55 Brazil further stated
that “the United States never provided any an swers to Brazil’s Annex V questions [and]
[a]ccordingly, Brazil requests the Panel to ru le on questions of fact based on the best
information available as submitted by Brazil”.56

• 11 August 2003 : Brazil provides an estimate of the total budgetary outlays of contract
payment using its 14/16 th methodology in its 11 August 2003 response to Question 60, as
explained in paragraph 97 and notes 2-5 to the table accompanying paragraph 97. Brazil
further states in response to Question 83 that “The list of Annex V questions provided to the
United States by Brazil is included in Exhibit Bra-49. … [G]iven the United States’ failure to
cooperate in the Annex V information gather ing process, Brazil has and will present its case
regarding peace clause issues and serious prejudice claims based on evidence available to it.
If there are gaps in the evidence provided to the Panel by Brazil in support of its prima facie
case, and those gaps are due to the United States’ failure to cooperate with and participate in

52 Brazil defined “upland cotton industry” as “producers, users and/or exporters of upland cotton”.
53 Exhibit Bra-49 (Questions for Purposes of the Annex V Procedure).
54 Brazil’s 24 June 2003 First Submission, note 415.
55 Brazil’s 22 July 2003 Oral Statement, para. 4.
56 Brazil’s 22 July 2003 Oral Statement, para. 4.

the Annex V process, Annex V, paragraph 6 provid es that ‘the panel may complete the record
as necessary relying on the best information otherwise available.’”57

• 25 August 2003 : The Panel requests the United States in Question 67bis to provide “the
annual amount granted by the US Government in each of the 1999, 2000, 2001, and 2002
marketing years (as applicable) to US upland cotton producers . . . in total expenditures, under
each of the following programmes: production fl exibility contract payments, market loss
assistance payments, direct payments and counter-cyclical payments.”58

• 27 August 2003: The United States provides a response to Question 67 bis which states, inter
alia, that the United States “does not maintain and cannot calculate this information” 59 and
that it “does not maintain information on the amount of expenditures made under the cited
programmes to US upland cotton producers”. 60 The United States stated in paragraph 21 of
its 27 August 2003 response that “Thus, the Unite d States did not track total expenditures
with respect to base acres of [1996 FAIR Act covered commodities] under the expired
production flexibility contract payments and market loss assistance payments and does not
track total expenditure with r espect to base acres of [contract commodities] under the direct
payments and counter-cyclical payments.” Furt her, the United States stated in paragraph 28
of its 27 August 2003 response that “we are unabl e to provide to the Panel the total outlays
under the cited programmes with respect to upland cotton base acreage.”

• 7 October 2003 : The United States alleges that “Br azil has presented no evidence that the
recipients of these decoupled payments on upland cotton base acres are, in fact, upland cotton
producers”.
61 And the United States alleges that Brazil’s methodology is “merely a guess
because Brazil has failed to demonstrate that th e acres currently being used for upland cotton
production are, in fact, upland cotton base acres. That is, Brazil has presented no evidence
that the recipients of these decoupled paym ents on upland cotton base acres are, in fact,
upland cotton producers”.62 The United States further alleges that Brazil has not substantiated
the amount of contract payments to US upland cotton producers (“[I]t is for Brazil to establish
who are the recipients of the subsidies and that the subsidies are properly attributed to upland
cotton.”63 “Nor has [Brazil] demonstrated how much of the subsidy … should be allocated to
other products produced by the recipient, such as corn or soybeans.”64).

• 8 October 2003: The Panel orally asks the United Stat es whether it collects or maintains
information concerning the amount of cont ract payments received by upland cotton
producers. The United States answered orally that it neither collected nor retained this
information.

• 9 October 2003: Brazil stated in its closing statement that it had “requested this information
[i.e., information concerning the amount of contra ct payments to upland cotton producers]
more than a year ago in the consultation phase of this dispute but never received any
information”.65 The United States, following its closi ng statement, informed the Panel and
Brazil that the 2002 FSRI Act contained a reporting requirement for the United States to

57 Brazil’s 11 August 2003 Answers to Questions, para. 190.
58 25 August 2003 Communication from the Panel.
59 US 27 August 2003 Comments and Answers to Additional Question, para. 20.
60 US 27 August 2003 Comments and Answers to Additional Question, para. 20.
65 Brazil’s 9 October 2003 Closing Statement, para. 2.

collect information on planted acreage, as a cond ition for recipients receiving direct payments
and CCP payments.

• 13 October 2003: The Panel asks the United States in Question 125(9) how to calculate
upland cotton contract payments made to cotton producers and how to account for non-upland
cotton contract payments made to producers of upland cotton.
66

• 27 October 2003: The United States responds to Question 125(9) by stating that it is for
Brazil to prove the amount of contract payments (which the United States does not limit to
upland cotton contract payments) that need to be allocated to upland cotton.
67 While referring
to Annex IV, the United States declines to provide any data.68

• 18 November 2003: Brazil requested the Panel to request the United States to produce
information that would permit the calculation of a very precise amount of contract payment
support to current producers of upland cotton.
69 Brazil further set forth evidence that USDA
collects and maintains in a centralized database base acreage data and planted acreage data for
all farms for MY 2002 and for almost all farms for the period MY 1999-2001.70

• 21 November 2003: USDA’s Kansas City FOIA office de livered to a private US citizen a
completed analysis of farm-specific contract acreage data and planted acreage data for
MY 1996-2002 regarding rice. The FOIA documentation indicates that the request was
received on 30 October 2003, and that work wa s completed on 14 November 2003. The rice
data showed that between 99.52 and 99.90 per cent of the farms producing rice in MY 1999-
2002 completed planted acreage reports. Th e rice data provided by USDA permitted the
calculation of the exact amount of rice contr act acreage that was planted to rice during
MY 1996-2002.
71

• 2 December 2003: Brazil requests the United States to provide farm-specific information as
set out in Exhibit Bra-369.

• 3 December 2003: Brazil presented the results of the rice FOIA request to the Panel and
provided a copy of the rice data to the Panel and the United States.72

• 8 December 2003: The Panel requests the United Stat es to provide the farm-specific
information set out in Exhibit Bra-369. In Question 195, the Panel asked whether “the
United States wish to revise its response to the Panel's Question No. 67 bis, in particular, its
statement that “the United States ... does not maintain information on the amount of
expenditures made under the cited programmes to US upland cotton producers?”
73

• 18 December 2003: The United States produced scrambled farm-specific information for
MY 1999-2001, contrary to Brazil’s and the Panel’s requested set out in Exhibit Bra-369.

66 13 October 2003 Communication from the Panel.
67 US 27 October 2003 Answers to Questions, para. 23.
68 US 27 October 2003 Answers to Questions, para. 24.
69 Brazil’s 18 November 2003 Further Rebuttal Submission, para. 48.
70 Brazil’s 18 November 2003 Further Rebuttal Submission, paras. 33-48.
71 Exhibit Bra-368 (Second Statement of Christopher Campbell – Environmental Working Group, 1
December 2003) and Exhibit Bra-369 as amended on 3 D ecember 2003 (Brazil’s Request to the United States
for Farm – Specific Planting and Base Acreage Data, 3 December 2003).
72 See Exhibit Bra-368 (Second Statement of Christopher Campbell – Environmental Working Group,
1 December 2003) and Exhibit Bra-369 as amended on 3 December 2003 (Brazil’s Request to the United States
for Farm – Specific Planting and Base Acreage Data, 3 December 2003).
73 8 December 2003 Communication from the Panel.

• 19 December 2003: The United States produced scrambled farm-specific information for
MY 2002, contrary to Brazil’s and the Panel’s requested set out in Exhibit Bra-369.

• 22 December 2003: The United States responds to Question 195 but does not “state the
annual amount granted by the US governme nt in each of the 1999, 2000, 2001 and 2002
marketing years to upland cotton producers … in total expenditures under the [four contract
payment programmes]”, as requested by the Panel on 25 August 2003 in Question 67 bis. The
United States reasoned that it “does not coll ect production data based on actual harvesting
figures reported by farmers”. 74 The United States response did not offer any information
regarding the amount of contract payments received by upland cotton farmers who planted
upland cotton. Brazil indicated in its Answer to Question 196 that the scrambled information
provided by the United States prevented it from calculating the amount of payments received
by US upland cotton producers planting upland cotton on contract base acreage.75

• 12 January 2004: The Panel requested farm-specific information from the United States
indicating that “it considers it both necessary a nd appropriate to seek this information in a
suitable format in order to undertake its mandate to assist the DSB in discharging its
responsibilities under the DSU and the covered agreements”. 76 The Panel further stated that
“disclosure is sought to permit an assessment of the total expenditures of PFC, MLA, CCP,
and direct payments by the US Federal Government to upland cotton producers in the relevant
marketing years”. The Panel requested the United States to produce the information by
20 January 2004.

• 20 January 2004: The United States filed a letter with the Panel stating it would not produce
non-scrambled farm-specific data requ ested by the Panel on 12 January 2004. 77 T h e
United States did not provide total expenditure information for the four contract payments
originally requested in Question 67 bis and did not otherwise provide information that would
“permit an assessment of the total expenditu res” that constitute “support to” upland cotton
under the four contract payments, as requested by the Panel on 12 January 2004. Brazil files
a detailed description of its methodology a llocating upland cotton and non-upland cotton
contract payments as support to upland cotton.78

• 28 January 2004: Brazil filed a request that the Panel draw adverse inferences from the
United States refusal during the period N ovember 2002 through January 2004 to produce
information relating to the amount of contract payments received by upland cotton producers
who planted upland cotton. 79 The United States provided revised scrambled farm-specific
data.80

• 3 February 2004: The Panel requested aggregated farm-specific information from the
United States in a format similar to the rice FOIA request set out Exhibit Bra-369, and further
requested that the United States produce planted information on crops on cropland covered by
the acreage reports. The Panel gave the Unite d States until 11 February 2004 to provide the
requested data. 81 This aggregate data would allow a precise calculation of the amount of
support to upland cotton from the US contract payments, whereas th e US summary data

74 US 22 December 2003 Answers to Questions, para. 6.
75 Brazil’s 22 December 2003 Answer to Question 196.
76 12 January 2004 Communication from the Panel.
77 US 20 January 2004 Letter to the Panel.
78 Brazil’s 20 January 2004 Answers to Additional Questions, paras. 43-55.
79 Brazil’s 28 January 2004 Comments and Requests Regarding US Data, Section 6.
80 US 28 January 2004 Letter to the Panel.
81 3 February 2004 Communication from the Panel.

produced on 18/19 December 2003 and the revised US summary data produced on
28 January 2004 does not.
82 The Panel also asked the United States (Question 260) how it
reconciled its 27 August 2003 response (that it did not maintain data on contract payments to
upland cotton producers) with its 20 January 20 04 Letter to the Panel stating that it had
provided such information.83

• 11 February 2004: The United States indicated it was not in a position to respond to the
Panel’s 3 February 2004 request and stated that it needed an additional four weeks to provide
the aggregated data.84

• 13 February 2004: Brazil requested the Panel to deny the United States any additional time
to respond to the Panel’s 3 Fe bruary 2004 request, noting that this request represented the
fifth time that the Panel had requested the United States to provide total expenditure
information regarding the amount of contract payments made to upland cotton producers.85

• 16 February 2004: The Panel extended the deadline for the United States to provide the data
requested on 3 February 2004 and clarified its request.86

• 3 March 2004: The deadline for the United States to produce the data requested by the Panel
on 3 February 2004.87

27. Brazil hopes that the United States will fina lly live up to its obligation under the DSU and
provide data that would permit the calculation of the support to upland cotton from the US contract
payments. In one form or another, these figures have been at issue in all stages of this dispute – from
the first round of consultations until the latest subm issions to the Panel 16 months later. During all
this time, it has been clear to the United States th at what Brazil and the Panel sought was information
that would enable a determination of the amount of contract payments that actually benefit upland
cotton production. To be clear, that means suppor t that benefits farms th at plant upland cotton and
support that can be allocated to this upland cotton planting/production.

28. In case the United States should fail to pr oduce the information by 3 March 2004, Brazil
maintains its 28 January 2004 request to the Panel to draw adverse inferences from this failure of
cooperation. Drawing adverse inferences is clear ly warranted given the history of his dispute
settlement proceeding.

261. Please confirm that each record in the actu al planting database relates to a specific farm
(Filenames: rPFCplac and rDCPplac in Exhibits US-111 and US-112). For example, in the data
from rDCPplac:

First line:
Field9;Field16;Field22;Field28;Field34;Field40;Field46;Field52;Field58;Field64;Field70;Field7
6;Field82;Field88;Field94;Field100

Second line:
237.10;23059.80;5566.20;0.00;0.00;0.00;0.00;0.00;0.00;0.00;0.00;0.00;0.00;0.00;0.00;0.00

82 Brazil’s 13 February 2004 Letter to the Panel. See also Brazil’s 18 February 2004 Comments on US
11 February 2004 Comments on Brazil’s 28 January 2004 Comments and Requests Regarding U.S. Data.
83 3 February 2004 Communication from the Panel.
84 Cover Letter to US 11 February 2004 Answers to Additional Questions.
85 Brazil’s 13 February 2004 Letter to the Panel.
86 16 February 2004 Communication from the Panel.
87 16 February 2004 Communication from the Panel.

Does the second line represent data on plantings by the same farm?
262. The Panel has noted the two CD-ROMs delivered by the US in the evening of
23 December 2003. They are marked "US-111" a nd "US-112" respectively, but the contents
actually do not correspond to the indication. The Panel also takes note of the US letter dated
28 January 2004 and the CD-ROM delivered together with it. For the record, please clarify the
correct CD-ROMs and provide corresponding descriptions of their contents with exhibit
numbers.

 263. The Panel has noted that the United States' response to Question No. 214 refers
to Exhibits US-117 and US-118. Are these the co rrect documents to which the United States
intended to refer in that response? If not, pl ease provide a copy of regulations regarding the
marketing loan programme and loan deficiency payments published at 58 Federal Register
15755, dated 24 March 1993.
 264. The Panel asks the United States to clarify certain aspects of Exhibit US-128:
(a) Is the Panel correct in understanding that -- as Brazil asserts in footnotes 290 and 291 of
Brazil's 28 January 2004 comments on US re sponses to questions -- Exhibit US-128, all
data are presented on a cohort-specific basis? If so, please also present the information
originally requested by the Panel in another chart containing programme (as opposed to
cohort-specific) activity by fiscal year.
Brazil’s Comment:
29. In paragraph 21 of its 11 February 2004 r esponse, the United States suggests that Brazil’s
cash-basis accounting methodology for making an assess ment under item (j), because it uses data
included in the US budget, is “based on estimates and re-estimates” under the Federal Credit Reform
Act (“FCRA”). This response is untruthful in the extreme.
30. None – absolutely none – of the data u sed for Brazil’s cash-basis accounting methodology for
making an assessment under item (j) is “based on estimates and re-estimates” generated for the
purposes of the FCRA. As is evident from the chart included in paragraph 165 of Brazil’s
11 August 2003 Answers (reproduced in paragra ph 129 of its 28 January 2004 comments), Brazil’s
cash-basis accounting methodology relies on data from the “actual”, prior year column of the US
budget. Moreover, the data input into Brazil’ s cash-basis accounting methodology is drawn from the
“financing account” for the CCC programmes.
88 The US budget makes the following statement about
the financing account:
As required by the Federal Credit Re form Act of 1990, this non-budgetary account
records all cash flows to and from the Government resulting from loan guarantees
committed in 1992 and beyond. The amounts in this account are a means of
financing and are not
 included in the budget totals.89
31. Whether presented on a cohort-specific (Exhibit US-128) or a fiscal year (Exhibit US-147)
basis, Brazil notes that none – absolutely none – of the data provided by the United States is

88 The only exception is administrative expenses, which Brazil takes from the “programme account”
included in the U.S. Budget. See, e.g., Exhibit Bra-127 (2004 US Budget, p. 107 (line 00.09)). The US budget
notes, however, that “administrative expenses are estimated on a cash basis”, rather than a present value basis.
See, e.g., Exhibit Bra-127 (2004 US Budget, p. 108). See also Brazil’s 22 July 2003 Oral Statement, para. 130
(and citations included at footnote 168). In any event, the United States and Brazil use virtually identical figures
for the administrative costs of the CCC programs. See Exhibit Bra-431 (Columns 5(a) and 5(b)).
89 See, e.g., Exhibit Bra-127 (2004 U.S. Budget, p. 109 (emphasis added)).

verifiable. The United States has provided no
 documentation (or even citations to documentation that
could be independently collected and reviewed by th e Panel) to back up its data. The Panel asked the
United States for this supporting documentation in Ju ly 2003, in Question 78 to the United States.
The United States has never provided the supporting documentation requested by the Panel. In
contrast, Brazil has provided US government documents to back up each and every figure input into
its cash-basis accounting methodology for making an assessment under item (j).
90

(b) Does the US agree with the statement in paragraph 135 of Brazil's 28 January 2004
comments on US responses to questions that the difference between the $1,148 billion in
the chart at para. 165 of Brazil's 11 August answers to questions and the $666 million
amount in Exhibit US-128 ($1.75 billion) closely corresponds to the total "Claims
rescheduled" figure reported by the US in Exhibit US-128 (column F)?

Brazil’s Comment:

32. The United States has failed to answer the Pane l’s question, stating that it will instead do so
on a timeline of its own choosing.
91 The United States did not request additional time from the Panel,
either in its 11 February 2004 response or in the co ver letter to that response, but simply asserted in
paragraph 23 of its response that it will take whatever additional time it needs. 92 In its letter to the
Panel dated 13 February 2004, Brazil noted that th e United States had more than adequate time
(8 days) to undertake the review necessary to answ er the Panel’s question. After receiving the fiscal-
year cash-basis accounting data included in Exhibit US-147, it took Brazil one hour to prepare a
spreadsheet – included as Exhibit Bra-431 – that zero es in on and identifies the reason that Brazil’s
cash-basis accounting methodology concludes that th e operating costs and losses for the CCC export
credit guarantee programmes have exceeded income over the period 1993-2002 by $1.083 billion,
while the United States’ cash-basi s accounting methodology conclud es that income for the CCC
export credit guarantee programmes has exceeded operating costs and losses over the period 1993-
2002 by $536 million.

33. In its 16 February 2004 ruling, the Panel did not respond to Brazil’s request that it deny the
United States’ efforts to decide at what pace it wishes to offer responses to the Panel’s questions.
Brazil requests that if the United States, whenever it deems it convenient, eventually offers a response
to Question 264(b), the Panel reject that response as not timely filed. If the Panel accepts the United
States’ response, Brazil reserves the right to comment.

34. In any event, the spreadsheet included as Exhibit Bra-431 confirms the assertion Brazil made
in paragraph 135 of its 28 January 2004 Comments, which is that the difference between the results
arrived at using the Brazilian versus the US cash-b asis methodology (a differe nce of $1.6 billion) is
largely due to the United States’ treatment of r escheduled claims (listed by the United States as
$1.58 billion). As confirmed by the United States in paragraph 24 of its 11 February 2004 response to
Question 264(c), the United States’ methodology treats defaulted guarantees that have been
rescheduled as 100 per cent recovered at the moment the terms of the rescheduling are agreed.

35. Brazil, in contrast, treats rescheduled clai ms as receivables. Under Brazil’s methodology,
receivables resulting from rescheduling are treated just like any other receivable – receivables
resulting from rescheduling are only treated as recovere d incrementally, to the extent, in a given year,
some increment of the rescheduled debt is actually collected (in column 2(a) of Exhibit Bra-431).

90 See exhibits cited in Brazil’s 11 August 2003 Answers, para. 165 and Brazil’s 28 January 2004
Comments, para. 129.
91 US 11 February 2004 Answers, para. 23.
92 In a letter to the Panel dated 16 February 2004 , the United States similarly declares that it “will
provide any other data in response to Question 264(b) within the time indicated (and sooner if the data can be
collected and examined in less time).”

This fundamental difference in approach is the r eason that the “claims outstanding” recorded by the
United States (in column 4(b) of Exhibit Bra-431) and Brazil (in column 4(a) of Exhibit Bra-431)
differ by $1.6 billion – the only significant difference revealed in the comparison included in Exhibit
Bra-431.
36. As Brazil has previously demonstrated, it is not actuarially appropria te to treat defaulted
guarantees that have been rescheduled as 100 per cent recovered at the moment the terms of the
rescheduling are agreed.
93 Brazil and the United States agree that a default that has been rescheduled
is properly treated as a receivable 94, but as the CCC itself has acknowledged in its financial
statements, not all receivables are considered collectible, let alone actually collected.95
37. The United States’ methodology itself recogni zes that defaulted guarantees that have been
rescheduled are only collected over time (if at a ll). While the United States treats the principal
amounts of rescheduled debt as an immediate, 100 per cent recovery that is passed through as a
dollar-on-dollar reduction of the amount of clai ms outstanding in the year the terms of the
rescheduling are agreed, it also tracks massiv e (and ever increasing) amounts of interest collected on
reschedulings (column M in Exhibit US-147). Intere st is collected on the rescheduled debt because
significant amounts of principal remain outstanding on that rescheduled debt. It is not legitimate,
therefore, for the United States to treat that r escheduled debt as recovered at the moment it is
rescheduled, since it is not actually recovered at that moment.
38. In fact, no evidence suggests that CCC will co llect the rescheduled principal that remains
outstanding. In column F of Exhibit US-147, the United States states that $1.64 billion of defaulted
CCC guarantees have been rescheduled over the peri od 1992-2003. Yet as of 30 November 2003, the
United States reports in Exhibit US-153 that the principal outstanding on these reschedulings amounts
to $1.58 billion. This means that over the pe riod 1992-2003, the CCC has only collected $60 million,
or 3.6 per cent, of the $1.64 billion in defaulted CC C guarantees that have been rescheduled. Over
96 per cent of defaulted CCC guarantees that have been rescheduled over the period 1992-2003
remain outstanding.
39. This demonstrates precisely why it is not leg itimate for the United States to treat rescheduled
debt as recovered at the moment it is rescheduled. The record does not suggest that the CCC will
collect this rescheduled debt – in fact, the reco rd shows that the CCC hardly collects any of the
principal on its rescheduled debt. Rescheduled debt is nothing more than a receivable, and should be
treated as recovered only incrementally, as portions of th at debt are, in fact, recovered. This is how
Brazil has treated rescheduled debt in its own cash-basis accounting methodology for making an
assessment under item (j) (column 2(a) of Exhibit Bra-431).
40. Even if rescheduled debt could, as an actua rial matter, be considered 100 per cent recovered
at the very moment the terms of the rescheduling ar e concluded but before the rescheduled debt is in
actual fact collected, the United States appears to have triple-counted portions of the CCC
reschedulings. The Panel will recall that unde r the United States’ cash-basis accounting methodology
for making an assessment under item (j), the entir e amount of the approximately $1.6 billion in

93 See Brazil’s 28 January 2004 Comments, paras. 135-137; Brazil’s 27 August 2003 Comments, para.
64; Brazil’s 22 August 2003 Comments, para. 99; Brazil’s 11 August 2003 Answers, para. 162; Brazil’s 22 July
2003 Oral Statement, para. 122.
95 Exhibit Bra-158 (US Department of Agriculture, Office of Inspector General, Financial and IT
Operations, Audit Report, Commodity Credit Corporation’s Financial Statements for Fiscal Year 2002 , Audit
Report No. 06401-15-FM (December 2002), Notes to th e Financial Statements, p. 14); Exhibit US-129 (US
Department of Agriculture, Office of Inspector General, Financial and IT Operations, Audit Report, Commodity
Credit Corporation’s Financial Statements for Fiscal Years 2003 and 2002 , Audit Report No. 06401-16-FM
(November 2003), Notes to the Financial Statements, p. 15).

rescheduled debt (in column 3(b) of Exhibit Bra-431) is subtracted from the amount of claims
outstanding (in column 4(b) of Exhibit Bra-431) in the year the terms of the rescheduling are agreed.
Over $636 million of the approximately $1.6 billion in reschedulings listed in Exhibit US-153 and
column 3(b) of Exhibit Bra-431, however, appear s to have been “[p]reviously [r]escheduled” (see the
last two entries in Exhibit US-153, concerning CCC guarantees to Russia). It already is not legitimate
for the United States to treat rescheduled debt as recovered at the moment it is rescheduled, since the
record shows that the CCC has only collected 3.6 per cent of that rescheduled debt. But to allow the
United States to reduce claims outstanding multiple times for successive reschedulings of the very
same underlying defaults is unacceptable.

(c) Does the US agree that from the formula in column G (that is: (Column (D) minus (E)
minus (F)), it follows that a rescheduled cl aim no longer constitutes an outstanding
claim at the moment the terms of the re-scheduling are agreed and that a rescheduling is
treated as 100 per cent recovered, as Brazil st ates in footnote 292 of Brazil's 28 January
2004 comments on US responses to questions?

Brazil’s Comment:

41. Brazil notes the United States acknowledgment, in paragraph 24 of its response, that under
the US cash-basis accounting methodology for making an assessment under item (j), a rescheduled
claim no longer constitutes an outstanding claim as of the moment the terms of the rescheduling are
agreed. Please see Brazil’s co mment on the United States’ response to Question 264(b), which
demonstrates that it is not legitimate for the United States to treat rescheduled debt as recovered at the
moment it is rescheduled, since the record shows th at the CCC has only collected 3.6 per cent of that
rescheduled debt.

42. Additionally, Brazil notes the United States’ statement, at paragraph 24 of its
11 February 2004 response, that “no principal paymen ts received under reschedulings are reflected in
Exhibit US-128”. It is hardly surprising that th e United States does not treat principal payments on
rescheduled debt as recovered principal (under colu mn 2(b) of Exhibit Bra-431), incrementally and
year-on-year as they are actually recovered, sin ce the United States already subtracts 100 per cent of
rescheduled debt from claims outstanding (column 4(b) of Exhibit Bra-431) immediately, in the year
the terms of the rescheduling are agreed.

(d) Is the Panel correct in understanding that th e amount of $888,984,792.04 in column F in
Exhibit US-128 under "ALL" for 1992 represents the total continuing amount of
unrecovered claims for the 1992 cohort, and that the amount of 387,692,219.39
represents the total continuing amount of unrecovered claims for the 1993 cohort, etc?
Please indicate and substantiate how much pr incipal and/or interest has actually been
paid/recovered/rescheduled annually 1992-2003 in respect of each of the amounts shown
in Columns D, E & F in the table.

Brazil’s Comment:

43. Please see Brazil’s comment on the United States’ response to Question 264(b), which
demonstrates that it is not legitimate for the United States to treat rescheduled debt as recovered at the
moment it is rescheduled, since the record shows th at the CCC has only collected 3.6 per cent of that
rescheduled debt.

44. As noted in Brazil’s comment on the US respon se to Question 264(c), it is evident that the US
methodology does not “reflect payment perfo rmance under the reschedulings themselves”
96 (under
column 2(b) of Exhibit Bra-431), since the United States already subtracts 100 per cent of rescheduled

96 US 11 February 2004 Answers, para. 25.

debt from claims outstanding (column 4(b) of Exhibi t Bra-431) immediately, in the year the terms of
the rescheduling are agreed.

265. In connection with the US response to Qu estion No. 225, please also provide amounts
actually "written off" and "forgiven" annually for each post-1992 cohort, with annual details of
country and amount (principal/interest).

Brazil’s Comment:

45. The United States notes, in paragraph 27 of its response, that “CCC financial records indicate
that no amounts have been ‘written off’ or ‘forgiv en’ with respect to any post-1992 cohort.” Brazil
makes two observations.

46. First, Brazil notes that the Federal Credit Re form Act took effect for the 1992 cohort. Thus,
the Panel’s question was likely meant to refer to “each post-1991
 cohort”. Brazil hopes that the
United States understood the Panel’s question to include the 1992 cohort.

47. Second, Brazil makes the obvious point that defa ults need not be “written off” or “forgiven”
to constitute an operating cost or loss for the purpos es of item (j). Defaults (or other operating costs
and losses) that remain on the books are just as rele vant to an assessment under item (j) as they would
be if they were “written off” or “forgiven”.

266. What are the precise terms, conditions and duration of each rescheduling reflected in
column F in Exhibit US-128?

Brazil’s Comment:

48. While the Panel asked for the “precise term s, conditions and durati on of each rescheduling”,
the United States has provided “summarized” data
97, without any documentary evidence as support.

267. Is the Panel correct in understanding that "interest collected on reschedulings" in
Column M in Exhibit US-128 refers not to amount s that have been actually collected by the
CCC but rather to interest capitalized in conjuncti on with the rescheduling? If so, what are the
terms, conditions and duration of the arrangements pertaining to these amounts?

Brazil’s Comment:

49. Please see Brazil’s comment on the United States’ response to Question 264(b), which
demonstrates that it is not legitimate for the United States to treat rescheduled debt as recovered at the
moment it is rescheduled, since the record shows th at the CCC has only collected 3.6 per cent of that
rescheduled debt.

50. As noted in Brazil’s comment on the US r esponses to Questions 264(c) and 264(d), it is
hardly surprising that the US methodology does not “reflect … payment of original principal”
98
(under column 2(b) of Exhibit Bra-431), since the United States already subtracts 100 per cent of
rescheduled debt from claims outstanding (column 4(b) of Exhibit Bra-431) immediately, in the year
the terms of the rescheduling are agreed.

268. Concerning Column N in Exhibit US-128, please elaborate upon "Interest earned from
US Treasury on uninvested funds". What is the source and authority for these funds and for

97 US 11 February 2004 Answers, para. 28.
98 US 11 February 2004 Answers, para. 29.

the interest thereon to be part of the CCC total revenues? What are the terms, conditions and
duration of the arrangements pertaining to these amounts?

 269. The Panel notes the table submitted by the US in its answer to Question No. 224
(CCC Financing Account Payments of Interest on Borrowings from Treasury and Interest
Earned on Uninvested Funds). Is the Panel cor rect in understanding that the figures in this
table correspond to the "ALL" figures in Columns I and N of Exhibit US-128?

 270. With respect to Column I in Exhibit US-128, ("Interest paid on borrowing from
US Treasury") and Note 8, p. 25 of Exhibit US-129:

 (i) please provide the total annual amo unts (interest bearing and non-interest
bearing) borrowed by the CCC from the US Treasury (annually since 1992), as
well as the terms, conditions, interest ra te (where applicable) and duration of
such borrowing. Please provide details of any other amount borrowed by the
CCC from the US Treasury during this peri od that may not have formed part of
the regular annual borrowings.

Brazil’s Comment:

51. The United States has not answered the Pane l’s question, which requested “the terms,
conditions, interest rate (where applicable) and duration” of CCC borrowings from the US Treasury.

 (ii) Please explain the nature of "CCC's permanent indefinite borrowing authority
from Treasury" referred to in Note 8, p. 25 of Exhibit US-129.

Brazil’s Comment:

52. The United States’ response inaccurately imp lies that CCC’s authority to extend export credit
guarantees is somehow limited by the budget appropr iations process. As Brazil has frequently noted,
US law expressly provides that the CCC export credit guarantee programmes are exempt from the
requirement that they receive new Congressional budget authority before undertaking new guarantee
commitments.
99 Moreover, any “subsidy” losses the programmes incur are funded “through a
permanent, indefinite appropriation and not by annual appropriation”.100

 (iii) What determines the level of CCC ex port credit guarantee borrowing (interest-
bearing and non-interest-bearing)? Is the interest-free borrowing up to the
amount of unreimbursed realized losses?

 (iv) Why are repayments applied to non-interest bearing notes first, as indicated at
Note 8, p. 25 of Exhibit US-129?

271. Note 8, p. 25 of Exhibit US-129 states that "In fiscal year 2003, CCC was fully
reimbursed for its prior year net realized losses." Please indicate the amounts of prior year net
realized losses (annually, since 1992) for which the CCC has been fully reimbursed.

99 See Exhibit Bra-117 (2 U.S.C. § 661(c)(2)); Exhibit Bra-185 (Congressional Budget Office Staff
Memorandum, “An Explanation of the Budgetary Changes under Credit Reform,” April 1991, p. 7 and Table 2);
Exhibit Bra-186 (Congressional Research Service Issue Brief for Congress, “Agriculture and the Budget,”
IB95031 (16 February 1996), p. 3).
 100 US House of Representatives, Report 105-178, Agriculture, Rural Development, Food and Drug
Administration, and Related Agencies Appropriations Bill, 1998, p. 90, available at:
http://frwebgate.access.gpo.gov/cgi-
bin/getdoc.cgi?dbname=105_cong_reports&docid=f:hr178.105.pdf.

Brazil’s Comment:

53. The United States’ response inaccurately imp lies that CCC’s authority to extend export credit
guarantees is somehow limited by the budget appropr iations process. As Brazil has frequently noted,
US law expressly provides that the CCC export credit guarantee programmes are exempt from the
requirement that they receive new Congressional budget authority before undertaking new guarantee
commitments.101 Moreover, any “subsidy” losses the programmes incur are funded “through a
permanent, indefinite appropriation and not by annual appropriation”.102

272. With respect to the US response to Qu estion No. 226, is the Panel correct in
understanding that the reflection of write-offs as part of the operating loss of the CCC which in
turn was replenished through the annual appropriations process ended with the entry into force
of the FCRA in fiscal year 1992? If not, what amounts have been replenished through this
process annually since fiscal year 1992?

Brazil’s Comment:

54. Brazil notes that under US law, any “s ubsidy” losses the CCC export credit guarantee
programmes incur are funded “through a permanent, indefinite appropriation and not by annual
appropriation”.
103

273. With respect to the US response to Quest ion No. 225, what criteria does the CCC apply
to "independently determine" that a debt is uncollectible? For post-1992 cohorts, what are
these uncollectible amounts (annually) and how, if at all, are such "uncollectible amounts"
shown in Exhibit US-128?

Brazil’s Comment:

55. The United States notes, in paragraph 44 of its response, that “[w]ith respect to post-1992
cohorts, no amounts have been determined uncollectible . . .” Brazil makes two observations.

56. First, Brazil notes that the Federal Credit Re form Act took effect for the 1992 cohort. Thus,
the Panel’s question was likely meant to refer to “each post-1991
 cohort”. Brazil hopes that the
United States understood the Panel’s question to include the 1992 cohort.

57. Second, Brazil notes that CCC’s financial st atements record a $1.16 billion “subsidy
allowance” for all post-1991 cohorts.
104 Under the FCRA, the subsidy allowance is recorded on a net
present value basis, which means that it represen ts the cost CCC considers it will incur on post-1991
guarantee cohorts at the time those cohorts are closed. In other words, at the time all outstanding

101 See Exhibit Bra-117 (2 U.S.C. § 661(c)(2)); Exhibit Bra-185 (Congressional Budget Office Staff
Memorandum, “An Explanation of the Budgetary Changes under Credit Reform,” April 1991, p. 7 and Table 2);
Exhibit Bra-186 (Congressional Research Service Issue Brief for Congress, “Agriculture and the Budget,”
IB95031 (16 February 1996), p. 3).

102 US House of Representatives, Report 105-178, Agriculture, Rural Development, Food and Drug
Administration, and Related Agencies Appropriations Bill, 1998, p. 90, available at:
http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=105_cong_reports&docid=f:hr178.105.pdf.
 103 US House of Representatives, Report 105-178, Agriculture, Rural Development, Food and Drug
Administration, and Related Agencies Appropriations Bill, 1998, p. 90, available at:
http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=105_cong_reports&docid=f:hr178.105.pdf.
104 Exhibit US-129 (US Department of Agriculture, Office of Inspector General, Financial and IT
Operations, Audit Report, Commodity Credit Corporation’s Financial Statements for Fiscal Years 2003 and
2002, Audit Report No. 06401-16-FM (November 2003), Notes to the Financial Statements, p. 15).

post-1991 cohorts close, the CCC considers th at it will face $1.16 billion in uncollectible
guarantees.
105

274. The Panel notes the US statement in the US response to Question No. 81 that "All
rescheduled claims are currently performing " and that "all payments due up to this point
under [rescheduling] agreements have been re ceived". However, the Panel also notes
Exhibit US-129 (in particular, Note 5 on p. 22) and Brazil's reference thereto in Brazil's
28 January comments on the US response to Question No. 222. In this connection:

(a) How does the US respond to Brazil's stat ement in Brazil's 28 January comments
that Exhibit US-129 confirms that rescheduling of export credit guarantee receivables
cover both principal and interest, thereby co nfirming that not all of the rescheduled
debt performs and that additional interest charges were also rescheduled?

Brazil’s Comment:

58. The United States has offered no documentary support for its assertion that the “substantial
majority” of the reschedulings referred to in Note 5, p. 22 of Exhibit US-1 29 “pertain to activities
related to the P.L. 480 foreign food assistance programme”.
106

59. Moreover, the United States has never offered any
 support for its repeated assertion that “[a]ll
rescheduled export credit guarantee debt is currently performing.” 107 In fact, in its comment on the
US response to Question 264(b), Brazil demonstrated that CCC is not collecting over 96 per cent of
the rescheduled principal that remains outstanding. 108 In column F of Exhibit US-147, the
United States states that $1.64 billion of defa ulted CCC guarantees have been rescheduled over the
period 1992-2003. Yet as of 30 November 2003, the United States reports in Exhibit US-153 that the
principal outstanding on these reschedulings amounts to $1.58 billion. This means that over the
period 1992-2003, the CCC has only collected $60 milli on, or 3.6 per cent, of the $1.64 billion in

105 The Congressional Budget Office agrees, projecting positive subsidy estimates for every cohort
during the period 2002-2013. Exhibit Bra-432 (Congressional Budget Office, Fact Sheet, row titled “Export
Credit Guarantee Program, Subsidy Account,” available at http://www.cbo.gov/factsheets/CCC&FCIC.pdf).
106 US 11 February 2004 Answers, para. 46. As the party asserting this fact, the United States bears the
burden of proving it. See e.g. Appellate Body Report, Japan – Apples , WT/DS245/AB/R, para. 157 (“It is
important to distinguish, on the one hand, the principle that the complainant must establish a prima facie case of
inconsistency with a provision of a covered agreement from, on the other hand, the principle that the party that
asserts a fact is responsible for providing proof thereof.”).
107 US 11 February 2004 Answers, para. 48. See also U.S. 11 August 2003 Answers, para. 155. As the
party asserting this fact, the United States bears the burden of proving it. See e.g. Appellate Body Report, Japan
– Apples, WT/DS245/AB/R, para. 157 (“It is important to distinguish, on the one hand, the principle that the
complainant must establish a prima facie case of inconsistency with a provision of a covered agreement from,
on the other hand, the principle that the party that asserts a fact is responsible for providing proof thereof.”).
108 Moreover, the United States has never responded to reports by the U.S. General Accounting Office
and testimony by GAO officials, submitted by Brazil, demonstrating that CCC rescheduling has historically
been in arrears. See Brazil’s 28 January 2004 Comments, para. 136; Brazil’s 22 August 2003 Comments,
para. 99. See also Exhibit Bra-181 (US General Accounting Office, Report to the Ranking Minority Member,
Committee on Agriculture, Nutrition, and Forestry, US Senate, Former Soviet Union: Creditworthiness of
Successor States and US Export Credit Guarantees , GAO/GGD-95-60 (February 1995), p. 50-52 and Table 2.6
(noting that in 1995 defaults on Russian and Former Soviet Union guarantees reached $2 billion by the end of
1993, and that despite repeated rescheduling agreements, those debts were not being repaid.); Exhibit Bra-152
(GAO, Statement of Allan I. Mendelowitz, Director, Trade, Energy and Finance Issues, National Security and
International Affairs Division, before the Task Force on Urgent Fiscal Issues of the Committee on Budget of the
US House of Representatives, Status Report on GAO’s Reviews of the Targeted Export Assistance Programme,
the Export Enhancement Program, and the GSM-102/103 Export Credit Guarantee Programs, GAO/T-NSIAD-
90-53, 28 June 1990, p. 14 (noting that historically, the majority of GSM support that is rescheduled is “in
arrears.”).

defaulted CCC guarantees that have been rescheduled. Over 96 per cent of defaulted CCC guarantees
that have been rescheduled over the period 1992-2003 remains outstanding.

(b) In Note 5 on p. 22 of Exhibit US-129, what is the definition of "non-performing"? What
is the meaning of "delinquent"? What is the current principal balance and amount of
interest of the three CCC export credit guarantee programme "receivables" in a non-
performing status (individually and together, for GSM 102, GSM 103 and
SCGP))? What is the amount of interest on non-reporting "receivables"?
(c) The Panel notes the US reference to the "Paris Club" in US response to Question
No. 225. What is the P.L. 480 programme referred to in Note 5 on p. 22 of Exhibit US-
129 (including the Paris Club debt reduction process and the HIPC Initiative) ? To
what extent is the P.L. 480 programme a nd Paris Club process relevant to the export
credit guarantee programmes at issue in this dispute? Please identify and give the
amounts of all CCC export credit guarantee debt subject to the P.L. 480 debt reduction
(or other similar) process since 1992.
(d) Can the US explain the process referred to in the second column of Note 5 on p. 22
("CCC is awaiting an apportionment from the Office of Management and Budget before the
transaction can be completed. Until such ti me, however, there is a 100% subsidy allowance
established against the relevant debt as of September 30, 2003.") Please provide details of all
such "apportionments" relating to the three export credit guarantee programmes in fiscal years
1992-2003.
Brazil’s Comment:
60. Although the United States asserts that the re ference in the Panel’s question is to a single
transaction related to the P.L. 480 food aid programme
109, and further asserts that the “apportionment”
procedure cited in the Panel’s question does not apply to the CCC export credit guarantee
programmes110, the United States offers no support for these assertions.111
61. In any event, Brazil makes the obvious point that defaults need not be “written off” to
constitute an operating cost or loss for the purposes of item (j). Defaults (or other operating costs and
losses) that remain on the books are just as relevant to an assessment under item (j) as they would be
if they were “written off”.
275. Please provide evidence (or cite relevant po rtions of the record) that the premium rates
for the export credit guarantee programmes are "reviewed annually" as stated in US
28 January comments on response to Question No. 223 (see also US 22 December response to
Question No. 107; Brazil's 28 January 2004 comments on responses to Question No. 223.).
Brazil’s Comment:
62. Even if the CCC does undertake the annua l premium rate review asserted by the
United States, the US Department of Agriculture’s Inspector General noted in 2000 and 2001 that “the
fees CCC charges for its GSM-102 and GSM-103 expor t credit guarantee programmes have not been

109 US 11 February 2004 Answers, para. 53.
110 US 11 February 2004 Answers, para. 54.
111 As the party asserting this fact, the United States bears the burden of proving it. See e.g. Appellate
Body Report, Japan – Apples, WT/DS245/AB/R, para. 157 (“It is important to distinguish, on the one hand, the
principle that the complainant must establish a prima facie case of inconsistency with a provision of a covered
agreement from, on the other hand, the pr inciple that the party that asserts a fact is responsible for providing
proof thereof.”).

changed in 7 years and may not be reflecting current costs”.
112 Brazil has demonstrated that since
1993, only two changes have in fact been made to the GSM 102 fee schedule.113

63. Brazil makes several observations regardi ng Exhibit US-150, which purports to include
memoranda concerning the 2003 and 2002 annual reviews of fees for the CCC export credit guarantee
programmes.

64. First, page 2 of the 2003 memorandum show s that “offsetting fees” for GSM 102, GSM 103
and SCGP, both “historical[ly]” and for FY 2004, do not cover the “subsidy”, within the meaning of
the FCRA. As the Panel will recall, under the ne t present value accounting methodology endorsed by
the US Congress and the President in the FCRA, a positive subsidy indicates a judgment that when
the cohorts close, the CCC programmes will “lose money.”
114 At page 3 of the memorandum, a major
heading reinforces the point that the progra mmes are losing money, reading as follows:
“JUSTIFICATION FOR NOT COVERING THE SUBSIDY COST OF THE PROGRAMME.”

65. Second, Exhibit US-150 reinforces Brazil’s claim that the CCC programmes confer “benefits”
per se, within the meaning of Article 1.1(b) of the SC M Agreement, and therefore that they constitute
per se export subsidies for the purposes of Article 10.1.
115 With other evidence ( e.g., the regulations
for the CCC programmes, and a comparison to non-market benchmarks established by the US Export-
Import Bank) 116, Brazil has made this per se showing by demonstrating that CCC export credit
guarantees are unique financing instruments for ag ricultural commodity transactions that are not
available on the commercial market for terms longe r than the marketing cycles of the eligible
commodities.117 Pages 3-4 of the 2003 memorandum included in Exhibit US-150 reinforce Brazil’s
claim, by stating that fees for the CCC programme s are set not according to market benchmarks, but
are instead set according to policy considerati ons. According to page 3 of the memorandum,
“[s]etting prices is a policy matter, sometimes govern ed by statutory provisions and regulations, and
other times by managerial or public policies”. While it is fundamental that pricing for market-based
financial instruments takes account of the risks involved in a tran saction, the memorandum notes, at
page 4, that “current fees for GSM-102, GSM-103, and SCGP are not risk-based”, and that “[i]f the
fees were changed to a risk-based system, this w ould most likely exceed [the statutory fee cap of]
1 per cent . . .”
118

112 Exhibit Bra-153 (US Department of Agriculture Office of Inspector General Financial and IT
Operations Audit Report of the Commodity Credit Corporation’s Financial Statements for Fiscal Year 2000,
Audit Report No. 06401-14-FM (June 2001), p. 31). See also Exhibit Bra-154 (US Department of Agriculture
Office of Inspector General Great Plains Region Audit Report of the Commodity Credit Corporation’s Financial
Statements for Fiscal Year 2001, Audit Report No. 06401-4-KC (February 2002), p. 49 (“[T]he fees CCC
charged for its GSM-102 and GSM-103 export credit guarantee programs have not been changed for many years
and may not be reflecting current costs.”).
113 See Brazil’s 11 August 2003 Answers, para. 167 (second bullet point).
114 Exhibit Bra-121 (US General Accounting Office (“GAO”), Report to Congressional Committees,
“Credit Reform: US Needs Better Method for Esti mating Cost of Foreign Loans and Guarantees,”
GAO/NSIAD/GGD-95-31, December 1994, p. 20) (“GAO/NSIAD/GGD-95-31”)).
115 See, e.g., Brazil’s 28 January 2004 Comments, para. 253; Brazil’s 18 November 2003 Further
Rebuttal Submission, paras. 233-241.
116 This evidence is summarized at paragraphs 231-241 of Brazil’s 18 November 2003 Further Rebuttal
Submission.
117 See Brazil’s 24 June 2003 First Submission, paras. 289-292; Brazil’s 22 July 2003 Oral Statement,
para. 116; Brazil’s 11 August 2003 Answers to Questions, paras. 139-140, 152-157, 183-187; Brazil’s
22 August 2003 Rebuttal Submission, paras. 103-105; Brazil’s 22 August 2003 Comments, paras. 92-93, 109-
113; Brazil’s 27 August 2003 Comments on US Rebuttal Submission, paras. 68-80; Brazil’s 7 October 2003
Oral Statement, para. 72; Brazil’s 18 November 2003 Further Rebuttal Submission, paras. 230-242; Brazil’s
2 December 2003 Oral Statement, para. 79.
118 Regarding the statutory one-per cent fee cap, see US 11 August 2003 Answers, para. 180. See also
Exhibit US-150 (Annual Review of Fees for USDA Credit Programmes, March 25, 2003, p. 4 (“Section

276. The Panel notes the parties' responses and comments relating to Question No. 252
concerning the time period within which any prohibited measure must be withdrawn within the
meaning of Article 4.7 of the SCM Agreement . Please supplement your original response,
taking into account the particular nature of each alleged prohibited subsidy measure (i.e. "Step
2" payments under Section 1207(a) of the 2002 FS RI Act, export credit guarantee programmes
and the ETI Act) and the functioning of the US legal and regulatory system in respect of these
measures.

211(b)(2) of the Agricultural Trade Act of 1978, as amended, caps the current fees at 1 per cent for . . . GSM-
102 and SCGP.”)).