Document: Terms of Reference
Date: 22 December 2003
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

Table of Cases

Short Title Full Case and Citation
Korea – Beef GATT Panel Report, Republic of Korea – Restrictions on Imports of Beef –
Complaint by the United States, BISD 36S/268, adopted on 7 November 1989.
Japan – Alcoholic
Beverages
Appellate Body Report, Japan – Taxes on Alcoholic Beverages, ,
adopted 1 November 1996.
EC – Hormones Appellate Body Report, European Communities - Measures Concerning Meat
and Meat Products (Hormones), , adopted 13 February 1998.
Brazil – Aircraft Panel Report, Brazil – Export Financing Programme for Aircraft, ,
adopted 20 August 1999.
Indonesia – Automobiles Panel Report, Indonesia – Certain Measures Affecting the Automobile Industry,
, adopted 23 July 1998.
Argentina – Textiles and
Apparel
Appellate Body Report, Argentina – Measures affecting Imports of Footwear,
Textiles, Apparel and Other Items, , adopted 22 April 1998.
Guatemala –
Cement (I)
Appellate Body Report, Guatemala – Anti-Dumping Investigation Regarding
Portland Cement from Mexico, , adopted 25 November 1998.
Japan – Agricultural
Products
Panel Report, Japan – Measures Affecting Agricultural Products, ,
adopted 19 March 1999.
India – Quantitative
Restrictions
Panel Report, India – Quantitative Restrictions on Imports of Agricultural,
Textiles and Industrial Products, , adopted 22 September 1999.
Canada – Dairy Appellate Body Report, Canada – Measures Affecting the Importation of Milk
and the Exportation of Dairy Products, , adopted
27 October 1999.
US – FSC Appellate Body Report, United States – Tax Treatment for “Foreign Sales
Corporation”, , adopted 20 March 2000.
Argentina – Footwear Appellate Body Report, Argentina – Safeguard Measures on Imports of
Footwear, , adopted 12 January 2000.
Australia – Leather Panel Report, Australia – Subsidies Provided to Producers and Exporters of
Automotive Leather, WT/DS126/R, adopted 16 June 1999.
US – Certain EC
Products
Appellate Body Report , United States –Import Measures on Certain Products
from the European Communities, WT/DS165/AB/R, adopted 10 January 2001.
US – Export Restraints Panel Report, United States – Measures Treating Export Restraints as Subsidies ,
WT/DS194/R, adopted 23 August 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.
Canada – Aircraft II Panel Report, Canada – Measures Affecting the Export of Civilian Aircraft,
WT/DS222/R, adopted 19 February 2002.
Argentina – Peach
Safeguard
Panel Report, Argentina – Definitive Safeguard Measure on Imports of
Preserved Peaches, WT/DS238/R, adopted 15 April 2003.
Japan – Apples Panel Report, Japan – Measures affecting the Importation of Apples,
WT/DS245/R, adopted 10 December 2003.
US – Steel Safeguards Appellate Body Report, United States – Definitive Safeguard Measures on
Imports of Certain Steel Products, WT/DS248/AB/R, adopted
10 December 2003.

List of Exhibits

Loan Deficiency Payment and Price Support Activity as of 12/3/2003 Exhibit Bra- 373

“Crop Year Statistics MY 2002” – Federal Crop Insurance Corporation Exhibit Bra- 374

Information Provided by Gerald Estur, ICAC. Exhibit Bra- 375

“About FAPRI,” Center for Agricultural and Rural Development, Iowa
State University

Exhibit Bra- 376

“About FAPRI,” Food and Agricultural Policy Research Institute at the
University of Missouri.

Exhibit Bra- 377
“About FAPRI,” Food and Agricultural Policy Research Institute. Exhibit Bra- 378

CARD Report, 40 Anniversary Commemorative Issue Exhibit Bra- 379

“Food and Agriculture Policy Resea rch Institute Receives USDA’s
Highest Honor,” CARD Press Release, 9 July 2002.

Exhibit Bra- 380
Jeffrey D. McDonald and Daniel A. Sumner. “The Influence of
Commodity Programmes on Acreage Responses to Market Price: With
and Illustration concerning Rice Policy in the United States.” American
Journal of Agricultural Economics, (85) 4 November 2003.

Exhibit Bra- 381
Cotton and Wool Outlook, USDA, 12 December 2003.
 Exhibit Bra- 382
Brazil and US Export Data on Export Quantities and Values by Country
 Exhibit Bra- 383
Import Prices from Various Countries Exhibit Bra- 384

Domestic Prices from Various Countries Exhibit Bra- 385

Brazil and US Export Prices by Country Exhibit Bra- 386

Brazil Export Prices v A-Index Prices by Country Exhibit Bra- 387

US Export Prices v A-Index Prices by Country Exhibit Bra- 388

Brazilian Domestic Price Data Exhibit Bra- 389

“Glickman Proposes Cottonseed Payment Programme,” USDA News
Release, 29 February 2000.

Exhibit Bra- 390
Cost of Ginning and Value of Cottonseed per pound of Cotton Lint Exhibit Bra- 391

“William Duvanant Says: Overproduction Thwarts Cotton price
Upturn,” Western Farm Press.

Exhibit Bra- 392
Futures Prices as of 19 December 2003 Exhibit Bra- 393

UNITED STATES – SUBSIDIES ON UPLAND COTTON

Questions from the Panel to the parties –

second substantive Panel meeting

I. Terms of Reference

192. Regarding the interest subsidies and storage payments listed by the United States in its
response to the Panel's Question No. 67:

 (a) Please provide a copy of the regul ations under which they are currently
provided and under which they were provided during the marketing years 1996-
2002;

 (b) Please indicate whether there are any such payments which are not provided to
implement the repayment rate for upland cotton within the marketing loan
programme. USA

193. Are interest subsidies and storage payments already included in the amounts shown in
your submissions to date for payments under th e marketing loan programme? Has there been
any double-counting? BRA

Brazil’s Answer:

1. The answer to both questions is “no.” Brazil reported interest subsidies and storage payments
separately and thus did not double count them. 1 To the extent that the United States confirms that
both of these payments are connected in some way to the storage of bales of cotton involved in the
marketing loan programme, then they would approp riately be included within the overall marketing
loan numbers. In that case, the Panel should in crease the amount of payments attributable to
marketing loan payments by including interest and storage payments related to bales of cotton in the
marketing loan programme.

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

Brazil’s Answer:

2. Brazil reserves its right to further comment on the US answer provides some initial thoughts.

3. Brazil reiterates its arguments that the Panel must examine data relating to payments made
after the date of establishment.
2 In addition, the Panel is not prevented from examining payment data
that originates after the date of the Panel’s est ablishment because these payments are identified in
Brazil’s panel request and, therefore, are within the Panel’s terms of reference.

4. The measures covered by Brazil’s request for th e establishment of the Panel are very broad
and encompass, inter alia, any type of payment made under the 2002 FSRI Act and the 2000 ARP
Act.
3 In addition, the panel request covers, inter alia, a time period of a “marketing year” for 2002 for

1 See e.g. Brazil’s 9 September Further Submission, Table 1.
2 Brazil’s 22 August Rebuttal Submission, paras. 88-96; Brazil’s 22 July Oral Statement, paras. 40-44.
3 WT/DS267/7, p. 2.

upland cotton for the period 1 August 2002 through 31 Ju ly 2003. The panel request further covers
2002 FSRI Act and 2000 ARP Act payments to be made during marketing years MY 2003-2007. In
addition, the identified measures guarantee the right of eligible US producers, users and exporters to
receive future payments.4 Given the comprehensive scope and ti ming coverage of the request for the
establishment of a Panel and the mandatory nature of the payments, 5 the Panel’s terms of reference
encompass all payments made under the 2002 FSRI Act for the period marketing year 2002.

5. As has been firmly established in WTO jurisp rudence, any “measure” identified in the panel
request pursuant to DSU Article 6.2, is within terms of reference of the panel.
6 As noted above,
Brazil identified all relevant “measure s” in its request for the establishm ent in the Panel. Further, in
the Chile – Agricultural Products (Price Band) case, the Appellate Body held that a panel request
which includes reference to “amendments” is suffici ent to bring later enacted significant changes to
legislation within the Panel’s terms of reference. 7 While Brazil’s panel request also included
“amendments,” this case does not even raise the Chile – Agricultural Products (Price Band) issues
because Brazil’s panel request identified the measures that have not changed or been amended since
18 March 2003. Further, to the extent that “p ayments” made since 18 March 2003 are evidence, the
Appellate Body and panels have repeatedly found that evidence ge nerated after the establishment of
the panel can be used by panel’s in their objective assessment of the facts under DSU Article 11.8

II. Economic Data

195. Does the United States wish to revise it s 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 programme s to US upland cotton producers"? Did the
United States make enquiries of the FSA in the course of preparing its original answer? USA

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

Brazil’s Answer:

6. With its letter of 18 December 2003, the Unite d 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 pa yment data that would allow it to calculate with
relative precision the amount of direct and counte r-cyclical payments made to current producers of

4 Brazil’s 9 September Further Submission, para. 423.
5 US 27 October Answers to Questions, paras. 95-97.
6 Panel Report, Japan – Agricultural Products , WT/DS76/R, para. 8.4; Panel Report, Indonesia –
Automobiles, WT/DS54/R, paras. 14.3-14.4.
7 Appellate Body Report, Chile – Agricultural Products (Price Band), WT/DS207/AB/R, para. 135.
8 Panel Report, India – Quantitative Restrictions , WT/DS90/R, para. 5.161-5.163 (“In this case the
parties and the IMF have supplied information concerning the evolution of India’s balance of payments and
reserve situation until June 1998. To the extent that such information is relevant to our determination of the
consistency of India’s balance of payments measures wi th GATT rules as of the date of establishment of the
Panel [18 November 1997], we take it in to account.”); Appellate Body Report, EC – Hormones ,
WT/DS26/AB/R, paras. 133-4 (“The deliberate disregard of, or refusal to consider, the evidence submitted to a
panel is incompatible with the panel’s duty to make an objective assessment of the facts. … A claim that a
panel disregarded or distorted the evidence submitted to it is, in effect, a claim that the panel, to a greater or
lesser degree, denied the party submitting the evidence fundamental fairness, or what in many jurisdictions is
known as due process of law or natural justice.”); Panel Report, Japan – Apples , WT/DS245/R, para. 8.49;
GATT Panel Report, Korea – Beef, BISD 36S/268, paras. 122-123.

upland cotton in MY 2002. Therefore, Brazil lo oks forward to the United States answering this
question in full on 22 December.

7. Unfortunately, Brazil cannot calculate direct payment and counter-cyclical payment figures
because the United States refused to produce on 18 December the information requested by Brazil and
the Panel. In particular, the United States refused to provide farm-specific identifying numbers, thus
rendering any matching of farm-level information on contract payments with information on farm-
specific plantings impossible. Only this unique farm number (or a substitute number protecting the
alleged confidentiality of farmers) would allow any matching of planting and payment data critical for
the calculation of the amount of contract payments that constitute support to upland cotton.
9 T h e
United States asserts newfound “confidentiality” concerns even though it provided identical
information on rice to a private US citizen ma king a simple FOIA request. But even these
confidentiality concerns could not possibly apply to aggregate matched figures that the United States
could easily calculate with the data the United St ates admits it has collected. On 12 January 2004,
Brazil will provide a more detailed analysis of the US failure to cooperate in this proceeding by
continuing to refuse to provide Brazil and the Panel with the requested information.

8. In view of the US failure to produce the requested information that would allow Brazil and
the Panel to calculate easily th e amount of direct and counter-cyclical payments (as well as PFC and
market loss assistance payments for MY 1999-2001 ), Brazil must present below revised figures using
its so-called “14/16
th” methodology.10 The figures represent the best information available and are
corroborated by circumstantial evidence. Moreover, in view of the US refusal to produce the actual
information regarding direct payment and counter-cyclical payments, the Panel could reasonably infer
that the actual amounts are greater than those estimated by Brazil.

9 Brazil pointed this out more than a month ago when it stated in its 18 November Further Rebuttal
Submission, that “CCC-509 does indicate the quantity of base acreage fir each programme crop on the farm.
Since both CCC-509 and FSA-578 require identification of the identical ‘farm’ by a unique farm serial number,
the base acreage from CCC-509 can be matched with the planted acreage in FSA-578. What the United States
has failed to do is ‘connect the dots,’ i.e., match the information in the two forms.” (Brazil’s 18 November
Further Rebuttal Submission, para. 44, emphasis in original, footnotes omitted).
10 In view of the new information provided by the Un ited States in Exhibit US-95, Brazil has adjusted
the total amount of contract payments by a ratio of 13.714 million acres of actual upland cotton plantings in MY
2002 to 18.858 million acres of total upland cotton base.

PROGRAMME PREVIOUS AMOUNT OF
PAYMENTS11
NEW AMOUNT OF
PAYMENTS
MARKETING LOAN
GAINS AND LDPS $918 MILLION $832.8 MILLION 12
CROP INSURANCE $194.1 MILLION
$194.1 MILLION*
(+ $104.2 MILLION13)
($298.3 MILLION)
STEP 2 $217 MILLION $217 MILLION *
DIRECT PAYMENTS $485.1 MILLION $454.5 MILLION 14
COUNTER-CYCLICAL
PAYMENTS $998.6 MILLION $935.6 MILLION 15
COTTONSEED
PAYMENTS $50 MILLION $50 MILLION *
OTHER PAYMENTS $65 MILLION $65 MILLION *
TOTAL PAYMENTS $2,927.8 MILLION $2,749 MILLION
($2,853.2 MILLION)
* Brazil has no new information on the amount of these payments

9. Concerning the export credit guarantee progra mmes, Brazil estimates the amount of payments
using the “guaranteed loan subsidy” estimate FY 2003 (which largely overlaps with MY 2002) results
in a subsidy amount of $17 million.
16 In sum, the latest data available to Brazil continues to
demonstrate that US support to upland cotton in MY 2002 far exceeds the support decided in MY
1992.

197. Please provide actual data for 2002/2003 for US exports, US consumption and per cent
of world consumption to replace the projected data in Exhibit US-47. If available, please
provide projected data for 2003/2004 to replace the forecast data. USA

198. Please comment on the respective merits of the price-gap calculations of MY1992
deficiency payments in US comments of 27 August, footnote 14 ($867 million), and Brazil's
response to the Panel's Question No. 67 ($812 million). BRA, USA

11 Taken from Table 1 of Brazil’s 9 September Further Rebuttal Submission.
12 Exhibit Bra-373 (Loan Deficiency Payment and Price Support Activity as of 12/3/2003).
13 Brazil notes that the United States also paid $104.2 million in fulfilment of its reinsurance
obligations towards the insurance companies providing the insurance policies to upland cotton producers. These
payments also constitute support to upland cotton, but Brazil had so far not included them in its calculation of
the total support to upland cotton. This amount results from a MY 2002 loss ratio of 1.26, i.e., the 26 per cent of
the $400,666,618 in indemnity payments were not covered by the Federal Crop Insurance Corporation or
producer premium payments. These $104.2 million were paid by the Federal Crop Insurance Corporation ( See
Exhibit Bra-374 (“Crop Year Statistics MY 2002” – Federal Crop Insurance Corporation).
14 This calculation is based on total direct payments for upland cotton base of $625 million (US 27
August Comments, Table at para. 28 reporting PFC payments for MY 2002 of $452 million and additional
direct payments of $173 million). This figure has been adjusted by the ratio of MY 2002 plantings (13.714
million acres) and MY 2002 direct payment base acreage (18.858 million acres) (See Exhibit US-95).
15 Brazil has used the direct payment of $454.5 million and adjusted it by the ratio of the direct
payment rate of 6.67 cent per pound basis and the CCP payment rate for MY 2002 of 13.76 cents per pound.
16 Brazil refers the Panel to Exhibits Bra-333 (C otton: World Markets and Trade, USDA, October
2003, Table 3) for the amount of cotton exports that were covered by export credit gu arantees during the fiscal
years that overlap with MY 2002 (FY 2002 and FY 2003). Since the overlap is largel y with fiscal year 2003,
Brazil has used the share of cotton export credit guarantees ($349.63 million) of the total guarantees made
available ($5,953 million) under GSM 102 and GSM 103 in that year to calculated the amount of payments as
estimated by the FCRA formula. The original subsidy estimate for FY 2003 (taken from the 2004 budget) is
$294 million. The share attributable to cotton export credit guarantees would be $17 million.

Brazil’s Answer:

10. Brazil has no reason to disagree with the US calculations which appear based on information
exclusively within the control of the United States.

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

Brazil’s Answer:

11. Brazil refers the Panel to the statement made by Andrew Macdonald in Annex II of Brazil’s 9
September Further Submission that provides consid erable detail about the calculation and formation
of the A-Index.17 Further information is set forth in Exhibit Bra-375. 18 The A-Index, along with the
B-Index, are two important indices that summarize the price developments of the physical market in
various countries around the world. Both indices ar e published by Cotlook, Inc., a private company,
and reflect an average price. 19 As an index, it is not a trading or negotiable price, but a composite of
quotations from the major producing origins around the world, much like a poll.

12. The A-Index is published weekly by the Cotton Outlook and calculated daily based on daily
cotton price quotes converted on the basis of delivery to Northern European ports. The A-Index is
generated based on Cotlook receiving daily inform ation as regards quotations for upland cotton
referring to 16 different origins. The quotes ar e for an upland cotton described as quality Middling
Grade with a 1 3/32” staple length. The 16 quoted prices that are eligible for inclusion in the A-Index
include prices for Brazilian Middling 1 3/32” upland cotton as well as prices for US Memphis and
California/Arizona Middling 1 3/32” upland cotton.
20 The A-Index value of the day represents the
average of the five cheapest quotes out of the 16 quot es that are considered for the index calculation.
The price quotes are derived from a variety of phys ical markets, merchants and trade information,
which is gathered telephonically and analyzed for consistency and logic.21

13. Andrew Macdonald testified that growers, consumers and traders perceive the A- (and B-
Index), along with the New York futures prices as reflecting the “world” market price for cotton.
22

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

Brazil’s Answer:

14. Brazil presented the nearby futures chart in its 18 November Further Rebuttal Submission23 to
rebut US arguments that US producers allegedly respond to market price signals in making their

17 Brazil’s 9 September Further Submission, Annex II, paras. 22-25.
18 Exhibit Bra-375 (Information Provided by Gerald Estur, ICAC).
19 Brazil’s 9 September Further Submission, Annex II, paras. 22-25.
20 The other quotes being Mexican Middling 1 3/32”, Paraguayan Middling 1 3/32”, Izmir/Ant St
White 1 3/32”, Syrian Middling 1 3/32”, Greek Middling 1 3/32”, Spanish Middling 1 3/32”, Uzbekistan
Middling 1 3/32”, Pakistan Punjab SG 1503 1 3/32”, Indian H-4/M each-1 1 3/32”, Chinese Type 329,
Tanzanian AR Type 2, African “Franc Zone” Middling 1 3/32” and Australian Middling 1 3/32”.
21 Brazil’s 9 September Further Submission, Annex II, para. 22.
22 Brazil’s 9 September Further Submission, Annex II, para. 22.
23 Brazil’s 18 November Further Rebuttal Submission, paras. 81-82.

planting decisions.24 Because the United States’ 18 Novemb er Further Rebuttal Submission focused
on the December Futures price in February as th e relevant contract month to gauge producer’s
revenue expectations, Brazil presented a similar chart in its 2 December Oral Statement based on
average December futures prices in January-March planting period.
25 Using December futures prices
(like the nearby futures chart) confirms USDA’s economists – and the world’s leading cotton
trader’s26 – conclusions that US subsidies make cotton producers largely unresponsive to market price
signals.27

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

Brazil’s Answer:

15. Brazil has reviewed the questions very carefully and regrets that it does not have a clear
understanding of the meanings of the terms used. Therefore, Brazil provides alternative answers
depending on the possible intent of the questions/terms used. Brazil regrets if it has misinterpreted the
terms in the questions and would welcome the op portunity to provide additional comments if the
Panel should so desire.

16. The first question focuses on data relating to “cotton production sold under futures contracts.”
The term “futures contracts” could have several meanings in the context of this dispute. First, if the
phrase “production sold under futures contracts” means the amount of US production sold on a
forward delivery basis, the answer is that Braz il has no access to any such data. However, Brazil
notes that all US upland cotton that is exported is for “future delivery” because it takes time to
actually ship cotton from the United States, and some contracts are more “future” than other contracts.
Theoretically, it would be possible to take the vo lume of US upland cott on exported each week and
assume that it was sold at the average A-Index pri ce that week. However, this would only be an
estimate and would not necessarily reflect the pri ce received by the US producers, or the prices
received by the exporter. Prices received by US producers are tabulated by USDA and are before the
Panel.
28 Average A-Index prices are also evidence before the Panel and are found in Exhibit Bra-311.
If this is the information sought by the Panel, Brazil would be pleased to provide an estimate.

17. If the phrase “production sold under futures c ontracts” means contracts for future delivery
where the contract for sale contains a pricing clau se pegged to the New York futures price at the time
of delivery, then the answer to the first question is “no,” i.e., there is no data that would provide the
amount of production sold through such contracts. The record contains evidence that Brazilian and
Chad producers and purchasers of upland cotton use such clauses in their contracts.
29 Brazil has no
access to information concerning the amount of US upland cotton sold through such contracts.

18. Finally, if the phrase “cotton production sold under futures contracts” means the amount of
US upland cotton that is sold through the New Yo rk cotton futures exchange , the answer is “very

24 Brazil’s 7 October Oral Statement, paras. 13-15. Brazil’s 27 October Answers to Questions, paras.
35-36.
25 See e.g. Brazil’s 2 December Oral Statement, para. 44.
26 See Brazil’s Answer to Question 247 infra.
27 Brazil’s 2 December Oral Statement, paras. 39-40.
28 See e.g. Exhibit Bra-4 (“Fact Sheet: Upland Cotton,” USDA, January 2003, p. 5) and various issues
of USDA’s Cotton and Wool Outlook, Table 6.
29 Brazil’s 9 September Further Submission, Annex II, para. 16; Chad’s 8 October Oral Statement,

little.” As Andrew Macdonald has indicated, the pur pose of the futures market is not for the buying
or selling of physical cotton.
30 Rather, it is used for hedging position for growers and the upland
cotton industry while the speculators in th e market provide the day-to-day liquidity. 31 Physical
delivery is theoretically possible in order to give reality to the market, i.e., it is always possible to take
or give delivery of cotton at the expiration of the c ontract. This ensures that the futures truly reflect
the market and vice versa. However, the volume normally delivered is very small compared to the
total volume traded during the life of a contract. Th is is because traders with long (or buy) futures
contracts and traders with short (or sell) futur es contracts “close out” or “settle” the contracts by
offsetting trades at the end of the contract period and, thus, no physical cotton is delivered.32

19. With respect to the final question of whether a “futures sale impacts the producer's
entitlement to marketing loan programme payments,” the answer is “no.” A producer is entitled to
receive a marketing loan payment independent fro m any futures price or selling price that the
producer may receive. A producer receives a marke ting loan benefit if – after having taken out a
marketing loan – he sells the upland cotton, i.e., loses the beneficial interest to the upland cotton, or
foregoes the right to a marketing loan in favour of a LDP payment, which is paid upon ginning of the
raw cotton. 33 The process of marketing and selling the upland cotton in the United States or for
export through forward contracts to supply upland cotton in the future, or contracts which set the price
based on future New York futures market prices does not impact in any way the amount the US
producer receives in marketing loan payments. The amount of marketing loan payment solely
depends on the difference between the loan rate an d the adjusted world price. Whether the actual
selling price is below or above the loan rate, or below or above the adjusted world price, has no
impact on the amount of the marketing loan benefit. The fact that producers may sell at prices above
the adjusted world price means that they genera te a combined revenue from the market and the
marketing loan programme that exceeds 52 cents per pound.

202. Concerning paragraph 7 of the US oral st atement, are the expect ed cash prices shown
for February only? Can the US provide the prices for January and March of each year as well?
USA

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

Brazil’s Answer:

20. The Food and Agricultural Policy Research In stitute (FAPRI) was established in 1984 by a
grant of Congress and continues to be financed la rgely by the US Congress. FAPRI is a unique dual-
university programme by the Center for Agricultura l and Rural Development (CARD) at Iowa State
University34 and the Center for National Food and Agricultural Policy at the University of Missouri
(Columbia),35 with researchers at the University of Mi ssouri focusing mainly on the domestic / US
side of agriculture and researchers at Iowa St ate University focusing mainly on international
agricultural issues. FAPRI uses comprehensive da ta and computer modeling systems to analyze the

30 Brazil’s 9 September Further Submission, Annex II, para. 17.
31 Brazil’s 9 September Further Submission, Annex II, paras. 14-15.
32 The information in this paragraph was provided by Andrew Macdonald to counsel for Brazil during
the week of 12 December.
33 Exhibit Bra-4 (“Fact Sheet: Upland Cotton,” USDA, January 2003, p. 1-2).
34 Exhibit Bra-376 (“About FAPRI,” Center for Agricultural and Rural Development, Iowa State
University).
35 Exhibit Bra-377 (“About FAPRI,” Food and Agricultural Policy Research Institute at the University
of Missouri).

complex economic interrelationships of the food and agriculture industry. 36 FAPRI’s mission is to
provide objective qualitative and quantitative analyses of alternative US and international agricultural
policies.

21. FAPRI is considered the leading US agricultu ral policy research institute and ever since the
1985 farm bill
37 has conducted analyses of alternative po licies that have helped shape US farm
legislation. In July 2002, FAPRI received th e USDA Secretary’s Honor Award, the highest award
bestowed by the US Department of Agriculture, for it s analysis of various farm bill proposals that led
to the 2002 FSRI Act.38 Professor Bruce Babcock described the award as follows:

This award recognizes the outstanding research effort by FAPRI at [Iowa State
University] and [the University of] Missouri in analyzing policy proposals during the
2002 farm bill debate. This group has dedicat ed itself to being the world’s best at
conducting agricultural policy analysis.
39
…
World economic integration makes it increasingly vital that we understand the
impacts of US policy decisions on US and world markets, producers and consumers.
Increasing numbers of policy proposals and their complexity requires that we
continually update our analytical capabilities and our market intelligence.
40
22. FARPI is the leading research institution that fulfills this task in the United States. FAPRI
prepares baseline projections each year for the US agricultural sector and international commodity
markets. The multi-year projections are published as FAPRI Outlooks, 41 which provide a starting
point for evaluating and comparing scenarios involving macroeconomic, policy, weather, and
technology variables.
42 These projections are intended for use by farmers, government agencies and
officials, agribusinesses, and others who do medium-range and long-term planning.43

23. FAPRI describes its objectives as follows:

• To prepare baseline projections for the US ag ricultural sector and international commodity
markets. These multi-year projections are available in print and on the Web.

• To examine the major commodity markets and analyze alternative policies and external
factors for implications on production, utilization, farm and retail prices, farm income, trade,
and government costs.

• To help determine effective risk management tools for crop and livestock producers, and to
analyze how government policy affects risk management strategies.

36 Exhibit Bra-378 (“About FAPRI,” Food and Agricultural Policy Research Institute).
37 Exhibit Bra-379 (CARD Report, 40th Anniversary Commemorative Issue, Part 2, p. 1-2.)
38 Exhibit Bra-380 (“Food and Agriculture Polic y Research Institute Receives USDA’s Highest
Honor,” CARD Press Release, 9 July 2002).
39 Exhibit Bra-380 (“Food and Agriculture Polic y Research Institute Receives USDA’s Highest
Honor,” CARD Press Release, 9 July 2002).
40 Exhibit Bra-380 (“Food and Agriculture Polic y Research Institute Receives USDA’s Highest
Honor,” CARD Press Release, 9 July 2002).
41 See http://www.fapri.iastate.edu/outlook2003.
42 See http://www.fapri.iastate.edu/publications for all of FAPRI’s publications.
43 Exhibit Bra-378 (“About FAPRI,” Food and Agricultural Policy Research Institute).

• To brief staff members of the US Senate and House Agriculture Committees on projections
for US and world agricultural markets.

• To disseminate research results through printed reports, staff presentations, and on the Web.
44

24. In sum, FAPRI is the most influential orga nization in the United States analyzing farm policy
and its effects on US and world commodity markets, i.e., that has the highest reputation and
experience in answering the kind of “but for” questions faced by this Panel. This is a fact implicitly
recognized by Dr. Glauber who indicated on 2 Decemb er in responding to the Panel’s oral questions
that the United States was not contesting FAPRI’s work or analysis but rather took issue with
Professor’s Sumner’s modifications to and use of the FAPRI baseline.

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

Brazil’s Answer:

25. While Brazil believes that the EWG data is a useful indicator of the amount of support
provided to producers of upland cotton, the EWG data undercounts the amount of support in several
basic ways. First, the database undercounts the amount of marketing loan payments reflected in
FSA’s “LDP / Loan / Market Gain Activity” Summary Report by $572 million for MY 2000 through
MY 2002.45 The EWG database also undercounts the amount of contract payments by $61 million in
MY 2000 and MY 2001. 46 This means that there are very like ly additional farms and recipients of
upland cotton contract payments th at also received marketing loan payments, but that are not tracked
by EWG data.

26. Second, as described more fully in Christopher Campbell’s statement in Exhibit Bra-316, the
database also undercounts the percentage of cont ract payments to farms growing upland cotton,
because marketing loan certificates are often purchased by partnerships, with the partnership receiving
the payment from USDA.
47 There can be multiple partners in th ese partnerships that eventually get a
portion of the marketing loan certificate payment. These partners are not recorded in the EWG data
as receiving marketing loan payment – thus as upland cotton producers – but they are, in fact,
producers of upland cotton that will most likely receive contract payments.

27. Third, current producers of upland cotton also received contract payments from base acreage
other than upland cotton. The EWG database does not readily permit the allocation of these payments
without the application of a complex methodology requiring a number of assumptions. Only farm-
specific data exclusively controlled by the United St ates, which it continues to refuse to provide to
Brazil and the Panel, would permit such a calculation.

28. The EWG data, however, provides corroborating evidence that Brazil’s “14
th/16th”
methodology is a reasonable approximation of the am ount of contract payments that are support to
upland cotton. In view of the continued refusal of the United States to provide the requested
information on contract payments and acreage matche d by farm, the Panel should infer that Brazil’s
methodology of calculating these payments undercounts the actual amount of contract payments that
constitute support to upland cotton.

44 Exhibit Bra-378 (“About FAPRI,” Food and Agricultural Policy Research Institute).
45 See Brazil 9 September Further Submission, Table 1 p. 4 and Exhibit Bra-316 (Statement of
Christopher Campbell – Environmental Working Group).
46 Compare Exhibit Bra-4 (“Fact Sheet: Upland Cotton,” USDA, January 2003, p. 6) with Exhibit Bra-
317 (EWG Database: Tables of Results, Table 2).
47 Exhibit Bra-316 (Statement of Christopher Campbell, para. 13).

205. Does the United States accept or agree with the EWG data submitted by Brazil? If not,
please explain your reasons. USA

206. Please explain how the graph in paragraph 40 of the US further rebuttal submission was
derived. In so doing, please clarify whether the figures are on a cents per pound basis or some
other basis. What averaging method was used? Can you prepare individual charts showing
average US and Brazilian cotton prices for each of those third country markets? USA

207. Please indicate whether any of the measures challenged in this dispute obliges cotton
farmers to harvest their crop in order to receive the benefit of the programme (subsidy). USA

208. Please provide data for the marketing years 1992 and 1999-2002 of the "quantity
of production to receive the applied administered price" ( Agreement on Agriculture , Annex 3,
paragraph 8) for purposes of a price-gap calcul ation of support through the marketing loan
programme. USA

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 paragraph 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

Brazil’s Answer:

29. The trend between those two gr aphs differs because they provi de a different measure for US
upland cotton acreage. The graph at paragraph 5 of the US 2 December Oral Statement shows
harvested acreage, while the graph at paragraph 39 of Brazil’s Oral Statement shows planted acreage.
The figures differ because not all planted US upland cotton is harvested. The rate of abandonment
that describes the difference between planted acr es and harvested acres is significant in the United
States. During MY 1996-2002 it varied between 3.6 per cent in MY 1997 and 20 per cent in MY
1998. The average for the period was 12.2 per cent.48

30. Brazil notes that US upland cotton farmers natura lly reflect their planting decisions in planted
– not harvested – acreage. To analyze whether the planting decisions of upland cotton farmers in the
United Sates are “congruent” to farmers in other pa rts of the world, it would be best to compare
planted acreage figures. Harvested acreage figures are a function of weather effects that may cause
the abandonment of a significant portion of planted acreage. This is relatively common in the arid
cotton producing areas of the US Southwest and less common in the irrigated regions of the US West
or in the high rainfall regions of the South. Braz il also refers the Panel to its response to Question
210.

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

Brazil’s Answer:

31. To the best of Brazil’s knowledge, there are no planted acreage figures available on a
worldwide basis. However, the fact that these figures do not or may not exist does not render the US
harvested acreage graph valid for the purpose of ev aluating the responsiveness of the US farmer to
world prices.

48 Exhibit Bra-4 (“Fact Sheet: Upland Cotton,” USDA, January 2003, p. 4).

32. Nonetheless, variations in harvested acreage could be a reasonable proxy for variations in
planted acreage for the world outside the United Stat es. The reason is that the relationship between
planted acreage and harvested acreage on a worldwid e basis can be assumed to be relatively stable,
i.e., weather-related problems likely lead to the aba ndonment of about the same percentage of planted
acreage at the aggregate level each year. Upland cotton is grown in many regions and worse than
normal weather conditions in one region will be offset by better than normal weather in other regions.
But this is not the case when only an individual coun try such as the United States is analyzed because
individual countries have more variab le weather. This is particularly true for the United States with
the considerable variance in aba ndonment in the Southwest. Thus , for the United States, planted
acreage is the appropriate measure of production decisions. By contrast, on the worldwide level, high
abandonment in one region would be compensated or balanced out by low abandonment in other
regions. On average, these differing trends woul d cancels each other out and worldwide harvested
acreage would remain relatively stable over from year to year.

33. The following graph shows percentage ch anges in US planted acreage and percentage
changes in non-US (harvested) acreage:
49

Percent Change in Planted Acres
-20
-15
-10
-5
0
5
10
15
1996 1997 1998 1999 2000 2001 2002
marketing year
percent
US change
non-US change

As expected, the graph demonstrates that the decision-making process of US producers is quite
different than that of non-US producers. US planted acreage moved in opposite directions to world
harvested acreage between MY 1998-2000. In MY 1996, 1997 and 2001, US planted acreage
changes to a far greater extent than non-US planted acreage.
50 Given those significant differences, for
any valid statistical analysis, this graph could not possibly be used to support a claim that planting
decisions in the US were analogous to those made wo rldwide. In fact, taken together with the other
evidence that US producers are not sensitive to market signals, 51 this graph confirms that US
producers are insulated from market forces and act independently of competitors’ behavior.

49 The US planted acreage is taken from Exhibit Bra-4 (“Fact Sheet: Upland Cotton,” USDA, January
2003, p. 4) and Non-US acreage is taken from Exhibit US-63.
50 The non-US planted acreage is approximated by using non-US harvested acreage. As discussed
above, with a stable rate of abandonment, changes in harvested acreage equal changes in planted acreage.
51 Brazil’s 18 November Further Rebuttal Submission, Section 3.4 with further references.

34. The United States relies on its “harvested acr eage” chart to argue that “US producers have
increased and decreased acr eage commensurately with producers in the rest of the world” relying on
data for MY 1996-2002.
52 But even using this inappropriate harvested acreage chart, the same
disconnect between US producers and other world pr oducers can be seen. Only in two out of seven
years is there a similar movement in the harvested acr eage of the US and the rest of the world. In the
other five years, the movement either goes in th e opposite direction or the magnitude of the acreage
movement is much smaller or greater respectively.

35. These distinctly different reactions by US a nd non-US farmers are consistent with the fact
that non-US farmers must actually deal with ma rket signals. The significant production declines by
Mato Grosso producers in MY 2000 and 2001 in the face of record low prices (even though they are
among the world’s highest yield and lowest cost producers) illustrate this point well.
53 In addition, the
fact that US farmers’ planted acreage did not significantly decline in MY 1999-2002 is totally
inconsistent with the considerable exchange rate increases of the US dollar during the same period.

36. Finally, even in MY 2002 when US acreage movements were relativel y consistent with the
rest of the world, the effect of the US subsidi es significantly dampened the decrease in US acreage.
As Professor has demonstrated, the US planted acreage in MY 2002 would have been 7.5 million
acres without US subsidies not the 13.7 million acres actually planted. 54 Thus, the effect of the US
subsidies is better estimated by examining the amount (or level) of US planted acres, rather than
percentage changes in which the graph moves. We re it not for the US subsidies, the US downward
trend in MY 2002 would have been much sharper, as a large number of inefficient cotton producers
would have chosen not to plant or would have switched crops.

211. Brazil presents a graph in paragraph 59 of its further rebuttal submission indicating the
increasing cumulative loss incurred by cotton pr oducers. Please comment on the argument that
US cotton producers could not continue operating without subsidies. In particular:

 (a) to what extent does the use of 1997 survey technological coefficients with
annually updated values affect the results?

 (b) to what extent do producers base pl anting decisions on their ability to cover
operating costs but not whole farm costs? USA

212. Brazil states in paragraph 37 of its oral statement that studies of Westcott and Price
found that the effect of the programme on cotton is to add an additional 1 to 1.5 million acres
during marketing years 1999-2001 and to suppress US prices by 5 cents per pound. Does the US
reject these findings? Why or why not? USA

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

52 US 2 December Oral Statement, para. 5. This da ta is different from the one contained in the above
graph, as it is based on US harvested acreage data rather then planted acreage.
53 See Exhibit Bra-283 (Statement by Christopher Ward – 7 October 2003).
54 Brazil has applied the percentage change as estimated by Professor Sumner in Brazil’s 9 September
Further Submission, Annex I, Table I.5a.

Brazil’s Answer:
55

37. Econometric simulation models of the sort used by Professor Sumner, USDA and other
independent economic analysts have not used futur es markets in their projections or counterfactual
analysis. Instead, analysts have used either lagge d prices and revenues or some variant of lagged or
actual realized prices or revenues as the representation of grower expectations. Thus, there are no
comparisons that one could make in this regard.

38. As previously noted, “it is impossible to know what precisely individual farmers expect”
56
because price expectations of farmers are “fundamentally unobservable.”57 It is important to note that
USDA economists Westcott and Price, like Professo r Sumner, have used and relied on the same
retrospective analysis of the effects of marketi ng loans using so-called “lagged prices” – not futures
prices. The United States notes that the use of a futures price analysis for MY 2002 is not possible for
“multi-commodity modeling frameworks for extended time projection.” 58 The United States accepts
that FAPRI, USDA and the US Congressional Budget Office use lagged prices rather than futures
prices as proxies for price expectations.59 And Dr. Glauber indicated during the second Panel meeting
on 3 December that the United States accepts the FAPRI modeling system as a valid means to analyze
the questions faced by this Panel.

39. The statistical estimation literature in agricu ltural economics has used a variety of proxies for
anticipated prices and revenue for the upcoming seas on. These include rational expectations in which
many sources of information available to decision makers are combined and the expectations are
consistent with the conditional forecasts of the model. Such models have strong theoretical grounding
but have been impractical in most estimation situations.

40. No systematic survey has been undertaken of the very large statistical literature estimating
supply functions to study how estimates differ ba sed on assumed models of the formation of
expectations.
60 In a recent study for rice, McDonald and Sumner 61 found that most published articles
for rice (another US programme crop with comple x government programmes) used a variant of
lagged information to project prices and future re venue per acre. None of the rice estimates used
futures markets.

41. Across a wide variety of commodities, no syst ematic differences are noticeable in estimated
supply or acreage response depending on how expecta tions of prices and other revenue terms are
represented in the model. That is, there is no evid ence that the estimated acre response elasticity are
systematically lower or higher using futures market s to represent the price that then enters the
projected relative net revenue function used for estimation.

42. Finally, if the United States were right (whi ch it is not) that futures prices are a better
indicator of farmers’ price expectations, then Professor Sumner’s results are not wrong , but

55 The information and analysis in this answer was provided by Professor Sumner.
56 Brazil’s 9 September Further Submission, Annex I, para. 18.
57 Exhibit Bra-279 (Statement of Professor Sumner – 7 October 2003, para. 9). See also Exhibit Bra-
361 (Cotton Pricing Guide, July 2001) containing guidance for farmers to take planting and marketing decisions.
60 Exhibit Bra-306 (Lin, William, Paul C. Westcott, R obert Skinner, Scott Sanford, and Daniel G. De
La Torre Ugarte. Supply Response Under the 1996 Farm Act and Implications for the US Field Crops Sector ,
TB-1888, US Department of Agriculture, Economic Research Service, July 2000) provides a survey of the
literature and cites mostly studies that use a variant of lagged prices. Lin et al. use both lagged prices and
futures markets to represent expectations.
61 Exhibit Bra-381 (Jeffrey D. McDonald and Daniel A. Sumner. “The Influence of Commodity
Programmes on Acreage Response to Market Price: With an Illustra tion concerning Rice Policy in the
United States.” American Journal of Agricultural Economics, (85) 4 (November 2003): 857-871).

conservative. This is, because, as a matter of statisti cal theory, the more precise the proxy for
expected price or revenue, the larger the coeffici ent of supply response. For example, in regression
estimations, when an explanatory variable is measur ed with error, the regression coefficient tends to
be biased toward zero, thus undercounting the significance of the variable. When there is less error in
measurement ( i.e., the imperfectly measured proxy variable becomes more accurate) the regression
coefficient tends to be larger. 62 In the present context, this means that if futures market prices were
better proxies for farmers’ expectations, the estimated coefficient of the price or revenue effect on
acreage (the acreage response elasticity) would be larger. It follows th at the estimated acreage
response elasticity would be too low in the FAPR I model. US acreage would respond stronger to
changes in relative cotton revenue than estimated in the FAPRI models. In the context of the
Professor Sumner’s simulation analysis, that would mean larger US supply response to expected price
and revenue changes, and thus hi gher supply and export response to government programme benefits.
In sum, Professor Sumner’s results, which are b ased on FAPRI elasticity estimates, would not be
wrong, but would underestimate the amount of ad ditional acreage, production and exports from US
policy incentives.

III. Domestic Support

214. Please provide a copy of regulations regar ding the marketing loan programme and loan
deficiency payments published at 58 Federal Register 15755, dated 24 March 1993. What does
this regulation indicate about the target price? USA

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

Brazil’s Answer:

43. It is correct that the CCP payments cease wh en average US farm prices for the marketing year
received by US farmers rise above 65.73 cents per pound. But this has only happened four times
since the 1930s and the last time was seven years ago in MY 1996. In MY 2002, the average price
received by US farmers was 40.50 cents per pound. 63 Through November 2003, MY 2003 average
price received by US farmers was 58.5 cents per pound. 64 Indeed, the first CCP payment has been
made for MY 2003.65

44. The impact of the direct payments has b een analyzed and quantified by Professor Sumner
who found, using the FAPRI November 2002 baselin e, that in MY 2002 direct payments added
120,000 acres to US upland cotton production.
66

45. Even in the highly unlikely even t that expected US farm prices were to exceed the CCP target
price of 72.4 cents per pound for MY 2004
67 (prices that have occurred only twice in the past
75 years), direct payments would still be made a nd US producers would still require direct payments

62 See e.g. William H. Green, Econometric Analysis, 5 th edition, 2002, Prentice Hall or any standard
textbook on regression analysis.
63 Exhibit Bra-202 (Agricultural Outlook Tables, USDA, August 2003, p. 5).
64 Exhibit Bra-382 (Cotton and Wool Outlook, USDA, 12 December 2003, Table 6) for September to
November 2003 and Exhibit Bra-328 (Cotton and Wool Outlook, USDA, 14 October 2003, Table 6) for
August 2003.
65 Exhibit Bra-340 (“USDA Announces First Partia l 2003-Crop Counter-Cyclical Payments,” USDA
Press Release, 17 October 2003).
66 Brazil’s 9 September Further Submission, Annex I, Table I.5a.
67 US farm prices have exceeded 72.4 cents per pound only twice in 75 years – in MY 1995 and in MY
1980. Exhibit Bra-4 (“Fact Sheet Upland Cotton,” USDA, January 2003, p. 5).

to cover the total cost of current production. Th ese payments, like the other payments in the package
of cotton subsidies, are essential to maintain past , current, and future high levels of US upland cotton
production.
68 Thus, they must be taken into account in assessing the production-distorting effects they
caused in MY 2002 as well as today in MY 2003.

46. Brazil recalls that even if fu tures price were to indicate that US farm prices will be at or
somewhat above the target price, the programme has a significant impact on planting decisions. At
planting time, the producer still is unsure on whethe r or not the target price will be met during the
following marketing year. Given the considerable price fluctuations and the low prices in the MY
1997-2002 period, there is a significant risk that actua l prices will be lower than the futures market
predicts. The direct and counter-cyclical payments remove the risks of lower prices. The evidence of
a long-term lack of any significant US acreage r esponse to higher or lower prices since MY 1996
demonstrates that US producers have and will c ontinue to plant upland cotton because they face no
downside revenue risk. Professor Sumner outlined this effect when he responded to a similar question
by the Panel at the second meeting with the parties.
69 This reinforces the argument that the Panel
cannot disregard these payments in the scenario described in the question.

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

Brazil’s Answer:

47. Under the deficiency payment programme as provided by the 1985 and 1990 Farm Acts,
farmers were offered the option to update the am ount of acreage participating in the programme each
year. To do this, they were required to opt out of the programme and receive no payments during the
period in which they increased the amount of acreage planted to the programme crop. Relatively few
upland cotton farmers took advantage of this pr ogramme feature because th e costs of forgoing
payments in the current year generally outweighed the present value of benefits of higher base acres
and base yield in the future.

48. In the 1996 FAIR Act, farmers establis hed their production flexibility base acreage by
carrying over the would-be deficiency payment base acreage. For example, any producers of upland
cotton during the period MY 1991-1995 were entitled to place such acreage into the PFC programme
along with any acreage that had been in the con servation programme and was released from that
programme in MY 1996.
70 Unlike the 1985 and 1990 Farm Acts, the 1996 FAIR Act did not
authorize any acreage or yield updates by individual farmers during later years. In the 1996 FAIR
Act, Congress essentially told farmers they should take advantage of planting flexibility and that
planting alternative crops would not affect the amo unt of their payments. However, several years
after 1996, as commodity prices began to decline, momentum for an update in the next farm act began
to build. Many upland cotton farmers and others ar gued that their historical acreage and yields no
longer reflected the reality of their current productio n and that they needed additional payments on
their increased programme crop acreage. These upland cotton and other programme crop growers

68 Brazil’s 18 November Further Rebuttal Submission, para. 26 citing, inter alia, the National Cotton
Council.
69 Exhibit Bra-371 (Simple Example of the Calcul ations of Marketing Lon Benefits (Probability
Distribution).
70 Any such former deficiency payment base being released from the conservation programme could be
added to the PFC base once the land left the conservation programme.

including wheat, feed grains, and rice pressure d Congress to include updating of acreage and yield
bases in the 2002 Farm Bill.71

49. The 2002 FSRI Act provided fo r the opportunity for all farmers to update their base acreage
for purposes of the direct payment programme and to update their base acreage and base yields for
purposes of the counter-cyclical payment progra mme. They could do this without having to
temporarily opt out of the programmes, which they needed to do under the deficiency payments
programme. The 2002 update and the individu al deficiency payment updates during 1985-1995
established the principle that acreage and yield ba se updates are a part of the farm policy in the
United States. Even though no updates are explicit ly provided for during the lifespan of the 2002
FSRI Act, farmers may reasonably expect future updates, either as a part of ad hoc legislation or as a
part of the regularly scheduled new law in 2007.

50. The pressure for updates will come especially fro m farmers who were not in a position to take
advantage of the 2002 update having switched aw ay from higher per-acre payment crops like upland
cotton or rice. For example, farmers who had plan ted less than their full upland cotton base to upland
cotton in the MY 1998 to 2001 period would likely have found the acreage update unattractive. But,
since the yield update was only av ailable to farmers who updated acreage, these farmers also missed
the opportunities to update yields. These farmers expressed deep disappointment in 2002 that they
had used planting flexibility, only to find that th ey were penalized by not being allowed to update
payment yields. These farmers saw the update of 2002 by farmers who had stayed in upland cotton
production during MY 1998-2001 as unfair and look to have this redressed in the next revision of the
programmes. Many of those (non-updating) farmers are now planting their full upland cotton base (or
more) and are maintaining high and expanding inputs to expand their yields in order to be in a
position to take advantage of an anticipated base upd ate at the next opportunity. These farmers will
add to the political pressure to update base in 2007, if not before.

217. What is the reason for reducing payments under the PFC and direct payments
programmes for planting and harvesting fruit, vegetables and wild rice on certain base acreage?
Please comment on the statements by the Eu ropean Communities that "the reduction in
payment for fruit and vegetables, if the EC underst ands correctly, is in fact designed to avoid
unfair competition within the subsidising Member." (EC oral statement at first session, first
substantive meeting, paragraph 29) and "To find otherwise would not permit a WTO Member
wishing to introduce decoupled payments to take account of important elements of internal
competition (…)" (EC response to Panel third party Question No. 5). USA

218. Please comment on the testimony of USDA Chief Economist Keith Collins cited in
paragraph 36 of Brazil's oral statement regar ding the trade-distorting and production-
distorting nature of the marketing loan payments. USA

IV. Export Credit Guarantees

219. Under the Agreement on Agriculture the general position is that the use of export
subsidies, both those listed in Article 9.1 as well as those within the scope of Article 1(e) which
are not so listed, may only be used within the limits of the product specific reduction
commitments specified in Part IV of Members' Schedules. One might therefore have expected
that Article 3.3 of the Agreement on Agriculture would have prohibited the use of both listed and
non-listed export subsidies in excess of reduction commitment levels in the case of scheduled
products and, in the case of non-scheduled prod ucts, would have simply prohibited the use of
any export subsidy. Instead, the Article 3.3 pr ohibition is limited in both cases to export

71 See e.g. Exhibit Bra-41 (Congressional Hearing, “The Future of Federal Farm Commodity
Programmes (Cotton),” House of Representatives, 15 February 2001, p. 4, and 24).

subsidies listed in Article 9.1. What significance, if any, does this contextual aspect have for
how Article 10.2 might be interpreted having regard, inter alia, to:

(a) the fact that export performance-relat ed tax incentives, which like subsidised
export credit facilities were considered as a possible candidate for listing as an
Article 9.1 export subsidy in the pre-December 1991 Draft Final Act
negotiations, have been held (for example, in United States – Tax Treatment for
Foreign Sales Corporations , WT/DS108) to be subject to the anti-circumvention
provisions of Article 10.1; and

(b) the treatment of international food aid and non-commercial transactions under
Article 10? USA

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

Brazil’s Answer:

51. The relevance of Articles 9 and 10.1 of the Agreement on Agriculture following the
conclusion of the negotiations called for by Article 10.2 of th e Agreement necessarily depends on the
commitments that are negotiated. Brazil does not know what the outcome of the negotiations will be,
or what commitments, if any, parties will unde rtake. Nor does Brazil know in what way those
commitments would be brought into the WTO – automatically, via the cross-reference in Article 10.2,
or instead via amendments to the Agreement on Agricultu re or the SCM Agreement, or yet some
other means. The nature of the disciplines negot iated and the way in which those disciplines are
transposed into the WTO will dictate the effect th ey will have on Articles 9 and 10.1. With these
important reservations about the purely hypothetical nature of this exercise, Brazil will explore a
number of possible outcomes and the impact those outcomes would have on Articles 9 and 10.1.

52. One possible outcome is that negotiators will reach agreement on other types of export
credits, but that export credit guarantees will not be in cluded. In Brazil’s view, this would mean that
export credit guarantees would con tinue not to be among those per se export subsidies listed in
Article 9.1, and would continue to be subject to Ar ticle 10.1, to the extent that they constitute export
subsidies and circumvent (or threaten to circumvent) a Member’s export subsidy commitments.

53. Another possible outcome is an amendment to Article 9.1 that would add export credit
guarantees (or possibly those export credit guarantees i ssued or programmes maintained on particular
terms or conditions) to the list of per se export subsidies. Article 10.1 would no longer be applicable,
since export credit guarantees would no longer be “[ e]xport subsidies not listed in paragraph 1 of
Article 9 … .”

54. Yet another possible outcome is agreement to subject export credit guarantees to the same
type of notification, consultation and informa tion exchange disciplines agreed in the OECD
Arrangement on Officially Supported Export Credits for industrial products (“OECD
Arrangement”).
72 For example, the OECD Arrangement includes provisions regarding: prior
notification of derogations, permitted exceptions, matching of derogations, permitted exceptions, non-
conforming non-notified terms, and terms granted by countries that are not parties to the OECD
Arrangement. The United States now char acterizes such disciplines as “pedestrian.” 73 In Canada –
Aircraft II , however, the United States characterized these provisions and the disciplines they

72 See OECD Arrangement on Guidelines for Officia lly Supported Export Credits, Chapter IV
(Sections 1-5) available at http://www.oecd.org/dataoecd/52/3/2763846.pdf.

provided as central to the “entire logic” of the OECD Arrangement, and as a critical way to prevent “a
subsidy ‘race to the bottom.’”74

55. Under this outcome, export credit guarant ees would continue not to be among those per se
export subsidies listed in Article 9.1, and would conti nue to be subject to Article 10.1, to the extent
that they constitute export subsidies and circumvent (or threaten to circumvent) a Member’s export
subsidy commitments. Under WTO jurisprudence, th e provisions regarding notification, consultation
and information exchange would be read cumulati vely with Article 10.1, since the obligations
imposed would not be mutually exclusive or mutually inconsistent.
75

56. Another possible outcome would be agreemen t on alternative benchmarks against which to
determine whether export credit guarantees and e xport credit guarantee programmes would constitute
export subsidies. In determining what constitu tes an “export subsidy” within the meaning of
Article 10.1, the Appellate Body’s decisions in US – FSC76 and Canada – Dairy77 currently direct the
Panel to refer to contextual gui dance included in Articles 1 and 3 of the SCM Agreement and in item
(j).78 Were agreement one day reached on alterna tive benchmarks following negotiations pursuant to
Article 10.2, that agreement might provide relevant context for a pa nel to determine what constitutes
an “export subsidy” for the purposes of Article 10.1 . Alternatively, it might serve as “subsequent
practice,” pursuant to Article 31(3)(b) of th e Vienna Convention on the Law of Treaties, indicating
the interpretation of the term “export subsidy” that the Members intend for the purposes of
Article 10.1.79

57. Under this outcome, export credit guarant ees would continue not to be among those per se
export subsidies listed in Article 9.1. Moreover, they would continue to be subject to Article 10.1, to
the extent that they constitute export subsidies, and to the extent that they circumvent (or threaten to
circumvent) a Member’s export subsidy commitm ents. The difference would be that the
interpretation of the term “export subsidy” might be based, among other things, on the context or
evidence of “subsequent practice” offered by the newly-negotiated alternative benchmark.

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 rebutta l submission) that the total figure net of re-
estimates should be $230,127,023 instead of the figure which originally appeared ($381,345,059).

74 Panel Report, Canada – Aircraft II, WT/DS222/R, Annex C-2, paras. 12-13 (Third Party Submission
of the United States, 22 June 2001).
75 See e.g. Appellate Body Report, Guatemala –Cement , WT/DS60/AB/R, paras. 66, 73-74; Panel
76 Appellate Body Report, US – FSC, WT/DS108/AB/R, para. 136-140.
77 Appellate Body Report, Canada – Dairy, WT/DS103/AB/R and WT/DS113/AB/R, para. 87-90.
78 See Brazil’s 24 June First Submission, paras. 258-261.
79 The extent to which alternative benchmarks agre ed pursuant to negotiations under Article 10.2
qualify as relevant context for or as “subsequent practice” regarding the interpretation of the term “export
subsidy” in Article 10.1 will depend, in part, on the form the agreement ta kes. If agreement is reached among
only the 10 WTO Members that participated in OECD di scussions on agricultural export credit disciplines, it
will be difficult to argue that the agreement serves as relevant context for interpretation of Article 10.1, which is
applicable to 146 Members. Nor would such an ag reement constitute evidence of “subsequent practice.” See
Appellate Body Report, Chile – Agricultural Products (Price Band) , WT/DS207/AB/R, para. 213 (defining
“subsequent practice” as “a ‘concordant, common and consistent’ sequence of acts or pronouncements which is
sufficient to establish a discernible pattern implying the agreement of the parties [to a treaty] regarding its
interpretation.”). See also Appellate Body Report, Japan – Alcoholic Beverages , WT/DS8/AB/R,
WT/DS10/AB/R, WT/DS11/AB/R, p. 12-17.

(a) Please submit a corrected table reflect ing all of the necessary information to
produce this result, to the extent this is possible for the reasons indicated in
footnote 96 in US further submission of 30 September 2003.

(b) Please clarify whether and how the Panel should treat the figures in Exhibit
BRA-182 for the net lifetime re-estimates for each respective cohort.

(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 whether the figures in the table in paragraph
161 of the US August 22 rebuttal submis sion (or a corrected version thereof)
includes "administrative expenses", of approximately $4 million per year over
the period 1992-2002, and explain why (or why not) this affects the substantive
result.

Brazil’s Comment:

58. With respect to the $4 million of administ rative expenses for the CCC guarantee programmes,
Brazil draws the Panel’s attention to Congressi onal testimony by the administrator of the
programmes, General Sales Manager Christopher Goldth wait. This testimony is included on pages
20-21 of Exhibit Bra-87. Mr. Goldthwait’s testimony clarifies that premiums charged by the CCC are
sufficient to cover these administrative expenses, but not other costs and losses of the programmes.

59. A member of Congress posed the followi ng question to Mr. Goldthwait and August
Schumacher, USDA’s Under Secretary for Farm and Foreign Agricultural Services:

Is [the GSM] programme operated at essentia lly no net costs to the US Government?
By that what I mean putting to one side the Iraq and the Poland experiences which
you outlined earlier in your response to questi ons, do we charge fees that reflect the
cost of administering the programme and the risk that is involved, the default, things
such as that, or is this a programme which is subsidized at a fairly significant level by
the Federal Government? (emphasis added)
Mr. Goldthwait’s response was as follows:

Yes. The programme is from the administrative standpoint at least pretty much self-
financing. We do collect fees. The fee structure is relatively modest. We keep the
fees low because the legislation has limited us to no more than 1 per cent. But,
nonetheless, we collect several million dollars a year in fees, and that enables us to
say that effectively the administrative cost of running the programme are more than
covered. Now, that money does not come direc tly to us at the USDA, it goes to the
general Treasury account, but the amount of the money is more than enough to cover
the administrative costs of the programme. (emphasis added)
60. Thus, although the question asked whether f ees covered “the cost of administering the
programme and the risk that is involved, the default, things such as that,” Mr. Goldthwait, the
administrator of the CCC guarantee programmes, res ponded that fees “at least pretty much” covered
only “the administrative cost of running the programme.” Mr. Goldthwait could not state that the fees
collected also cover “the risk that is involved, the default, things such as th at,” since, as Brazil has
established, fees for the CCC guarantee programmes are not set to (see comment to question 223) and
in fact do not cover those risks and defaults.

(d) Please identify what is considered an "a dministrative expense" for this purpose.

(e) The Panel notes the US statement in paragraph 160 of its answers to Panel
questions following the first meeting that all cohorts are still open although the
1994 and 1995 cohorts will close this year. Is this still an accurate statement? If
not, please indicate whether any cohorts have since "closed" for the period 1992-
2002.

(f) The Panel notes the current "high" fi gures for 1997 and 1998 indicated in the
original US chart. Pending their confirmation and/or updating by the US, why
does the US assert that a cohort will necessarily reach a "profitable" result (for
example, the 1994 cohort, which has almost closed still indicates an outstanding
amount)? Do "re-estimates" reflect also expectations about a cohort's future
performance?

Brazil’s Comment:

61. Brazil reserves the right to comment on the US response, but would like to provide a
preliminary comment on the last part of the Panel’s question. To a certain extent, reestimates do
reflect expectations about a cohort’s future perfo rmance. Agencies are to undertake two types of
reestimates – interest rate and technical reest imates. The Office of Management and Budget
(“OMB”) defines these two types of reestimates in the following way:

 Two different types of reestimates are made:

• Interest rate reestimates, for differences between interest rate assumptions at the time of
formulation (the same assumption is used at the time of obligation or commitment) and the
actual interest rate(s) for the year(s) of disbursement; and

• Technical reestimates, for changes in technical assumptions.
80

62. One purpose of technical reestimates is “to ad just the subsidy estimate for . . . new forecasts
about future economic conditions, and other events and improvements in the methods used to estimate
future cash flows.”
81 The OMB also states that one purpose of technical reestimates is to record
“changes in assumptions about future cash flows.”82

(g) Why should the Panel "eliminate" the 2001 and 2002 cohorts from its
examination, as suggested in paragr aph 198 of the US further rebuttal
submission?

(h) Why should the Panel "eliminate", in addition, the 2000 cohort, as also
suggested in paragraph 198 of the US further rebuttal submission for which
information is presumably more "complete"?

(i) Under the US approach, at what point in time could a Panel ever make an
assessment of the programme, if it had to wait for each cohort to be completed
before it could be "properly" assessed? Wh y is it inappropriate for the Panel to

80 Exhibit Bra-116 (OMB Circular A-11, p. 185-15).
81 Exhibit Bra-116 (OMB Circular A-11, p. 185-16).
82 Exhibit Bra-163 (“Introduction to Federal Credit Budgeting,” OMB Annual Training, 24 June 2002,
White House Conference Center, p. 32).

include these "most recent years" in its evaluation, as the US suggests in
paragraph 199 of its 18 November further rebuttal submission? USA

222. For GSM 102, 103 and SCGP, please provi de year-by-year amounts from 1992 to 2003
with respect to: (i) cumulative outstanding guar antees; (ii) claims paid; (iii) recoveries made;
(iv) revenue from premiums; (v) other current revenue, including interest earned; (vi) interest
charges paid; and (vii) administrative costs of running the programmes. Please indicate any
allocation methodologies used to calculate administrative costs. USA

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

Brazil’s Comment:

63. Brazil reserves the right to comment on the US response, but would like to provide a
preliminary comment on the first part of the Panel’ s question. First, Brazil notes that premium rates
for the three CCC guarantee programmes are not subject to regular review. In audit reports of the
CCC’s fiscal year 2000 and 2001 financial statem ents, USDA’s Office of the Inspector General
confirmed that “the fees CCC charges for its GSM-102 and GSM-103 export credit guarantee
programmes have not been changed in 7 years and may not be reflecting current costs.” 83 T w o
changes have been made, in the fee schedule for GSM 102, since November 1994: (i) for a 12-month
guarantee with semi-annual repayment intervals, the fee was changed from $0.209 per $100 of
coverage to $0.229 per $100 of c overage; and (ii) borrowers are now offered the additional option of
30- and 60-day guarantees, at the same fee charged for 90-day and 4-, 6- and 7-month guarantees.84

64. Moreover, the US General Accounting Offi ce (“GAO”) analyzed CCC’s failure to charge
guarantee fees that take account of country risk or the creditworthiness of individual borrowers. The
GAO emphasized that CCC’s failure to do so means th at it lacks the flexibility to cover the costs and
losses of the programmes:

Although GSM-102 recipient countries vary si gnificantly from one another in terms
of their risk of defaulting on GSM-102 lo ans, CCC does not adjust the fee that it
charges for credit guarantees to take account of country risk. CCC fees are based
upon the length of the credit period and the number of principal payments to be made.
For example, for a 3-year GSM-102 loan with semiannual principal payments, CCC
charges a fee of 55.6 cents per $100, or 0.56 per cent of the covered amount. For 3-
year loans with annual principal payments, the fee is 66.3 cents per $100.
[ ] CCC fees
that included a risk-based component might not cover all of the country risk, but they
could help to offset the cost of loan defaults.
85

83 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 programmes have not been changed for many
years and may not be reflecting current costs.”).
84 Brazil’s 11 August Answers to Questions, para. 167 (first bullet point).
85 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. 135-136).

As noted above, CCC fees for GSM 102 have not ch anged materially since the GAO published its
report in 1995.86 Moreover, the United States confirmed in its 11 August Answer to Question 84 (at
paragraph 180) that US law prohibits CCC from charging fees in excess of one per cent of the
guaranteed dollar value of the transaction.

65. With respect to the second part of the Panel’ s question, Brazil has demonstrated that forfaits
and export credit insurance are not similar financ ial instruments to CCC export credit guarantees, and
therefore that the terms for forfaits and export cr edit insurance cannot serve as benchmarks against
which to determine whether CCC export credit guarantees confer “benefits.”
87 Moreover, Brazil has
demonstrated that in any event, fees for forfa iting instruments are well above fees for CCC export
credit guarantees.88

66. Although government support from the US E xport-Import Bank does not constitute a market
benchmark for the purposes of determining “benefit, ” Brazil has offered evidence that premiums for
CCC guarantees are considerably lower that fees for Ex-Im Bank guarantees.
89 This demonstrates
that the terms for CCC guarantees do not even meet non-market benchmarks. As noted by the GAO:

The US Export-Import Bank, which provides credit guarantees to promote a variety
of US exports, uses risk-based fees to defray the cost of defaults on its portfolio.
Under its system, each borrower/guarantor is rated in one of eight country risk
categories. Exposure fees vary based on both the level of assessed risk and the length
of time provided for repayment. For example, in the case of repayment over 3 years,
a country rated in the lowest risk category is charged a fee of 75 cents per $100,
whereas a country in the highest risk ca tegory is charged a fee of $5.70 per $100 of
coverage. Thus, the bank’s fee structure includes a substantial added charge for high
country risk. According to the bank, its sy stem is designed to remain as competitive
as possible with fees charged by official export credit agencies of other countries.
Under section 211(b)(1)(b) of the 1990 Farm Bill, CCC is currently restricted from
charging an origination fee for any GSM-102 credit guarantee in excess of an amount
equal to 1 per cent of the amount of credit extended under the transaction.
[90] This
restriction was initially enacted in 1985 fo llowing proposed administration legislation
to charge a 5-per cent user fee for expor ts backed with credit guarantees. Some
Members of Congress were concerned that such a fee would adversely affect the
competitiveness of GSM-102 exports. Under the 1-per cent restriction, CCC would
be considerably limited in the size of the f ee that it could charge to take account of
country risk should it decide to do so. For example, as previously noted, CCC
charges 0.56 per cent for a loan payable in 3 years and with principal payments due
annually. The most it could increase the f ee would be 0.44 per cent. In contrast, the
Export-Import Bank currently charges fees as high as 5.7 per cent for 3-year loans.
91

86 Brazil’s 11 August Answer to Question 77 and 84, para. 167, 193-194.
87 Brazil’s 22 August Rebuttal Submission, para s. 103-105; Brazil’s 27 August Comments on US
Rebuttal Submission, paras. 68-70; Brazil’s 7 October Oral Statement, para. 72; Brazil’s 18 November Further
Rebuttal Submission, paras. 233-241; Brazil’s 2 December Oral Statement, para. 79.
88 Brazil’s 27 August Comments on US Rebuttal Submission, paras. 76-77 and Exhibit Bra-199 (Trade
and Forfaiting Review, “Argentina Trade Finance to the Rescue,” Volume 6, Issue 9 July/August 2003).
89 Brazil’s 27 August Comments on US Answers, para. 110.
90 The United States confirmed in paragraphs 179-180 of its 11 August Answer that this remains the
case.
91 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. 135-136).

224. Please indicate how the CCC's cost of borrowing was treated in the 2002 financial
statement of the CCC, in Exhibit BRA 158. USA

225. Please indicate whether there was any instan ce where the CCC "wrote off" debt and, if
so, please indicate the accounting regulation or principle used. If a "written off" debt is
subsequently recovered, do the CCC's accounts ref lect both the interest cost and interest
received in relation to the debt during the time it was "written off"? USA

226. If a debt was "written off" more than te n years ago, does it still create a cost to the
programme? If so, how is this reflected in th e 2002 financial statement of the CCC, in Exhibit
BRA 158 (or any other material)? USA

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 believes 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

Brazil’s Comment:

67. On page 4 of the notes to the CCC 2002 financial statements, CCC defines the term “Credit
Guarantee Liability” as follows:

Credit guarantee liabilities represent the estim ated net cash outflows (loss) of the
guarantees on a net present value basis. To this effect, CCC records a liability and
charges an expense to the extent, in mana gement’s estimate, CCC will be unable to
recover claim payments under the post- Credit Reform Export Credit Guarantee
programmes.92
Thus, Brazil stands by its characterization of th e $411 million figure as a cumulative running tally of
the losses for the programmes during the period 1992- 2002, and as one way of demonstrating that the
CCC guarantee programmes meet the elements of item (j).

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

Brazil’s Answer:

68. Item (j), interpreted according to its ordina ry meaning, in its context and according to the
object and purpose of the SCM and Agriculture Agre ements, does not require that the Panel use any
particular accounting principles to assess long-term op erating costs and losses. Similarly, under item
(j), it is not incumbent on the Panel to conduct its analys is in accordance with US government
accounting principles, whether or not those princi ples adhere to GAAP. (A Panel may, however,
consider it particularly persuasive that the US government’ 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.) Nor is it necessary, at this stage of dispute settlement proceedings, for

92 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 the Financial Statements, p. 4)).

the Panel to arrive at a determination of th e precise amount by which operating costs and losses
incurred by the CCC guarantee programmes outpace premiums collected.

69. For these reasons, Brazil has offered a number of different methodologies and sets of
evidence that the Panel can use to determine whether premium rates are adequate to meet the long-
term operating costs and losses of the CCC guarantee programmes. Each of those methodologies or
sets of evidence demonstrates that premium rates are inadequate to meet the long-term operating costs
and losses of the CCC guarantee programmes.

70. One methodology is the present value acc ounting endorsed by the US Congress and the
President in the Federal Credit Reform Act (“F CRA”). The FCRA has been translated into
accounting standards for US government loan gua rantees by the Federal Accounting Standards
Advisory Board (“FASAB”). Consistent with th e FCRA, the FASAB accounting standards state that
“[f]or guaranteed loans outstanding, the present valu e of estimated net cash outflows of the loan
guarantees is recognized as a liability.”
93 The FASAB standards (and the FCRA) state that “[t]he
amount of the subsidy expense equals the present va lue of estimated cash outflows over the life of the
loans minus the present value of estim ated cash inflows, discounted at the interest rate of marketable
Treasury securities with a similar maturity term a pplicable to the period during which the loans are
disbursed.”94

71. As one way to determine whether the long- term operating costs and losses of the programmes
outpace premiums collected, Brazil has used th e net subsidy expense (including reestimates)
calculated using the FCRA and FASA B standards over the period 1992-2002.
95 The CCC has itself
adopted this methodology in its 2002 financial stat ements, when it lists a net subsidy expense of
$411 million for all post-1991 CCC guarantees. 96 Using present value accounting, CCC’s 2002
financial statements also track enormous uncollectible amounts on pre-1992 and post-1991 guarantees
that far outpace premiums collected for the programmes – by $2.3 billion on pre-1992 guarantees, and
by $550 million on post-1991 guarantees.97

93 Exhibit Bra-118 (Federal Accounting Standards Advisory Board, “Statement of Federal Financial
Accounting Standards No. 19, Technical Amendments to Accounting Standards for Direct Loans and Loan
Guarantees” in S
TATEMENT OF FEDERAL FINANCIAL ACCOUNTING STANDARDS NO. 2, March 2001, p. 13 (para.
23)).
94 Exhibit Bra-118 (Federal Accounting Standards Advisory Board, “Statement of Federal Financial
Accounting Standards No. 19, Technical Amendments to Accounting Standards for Direct Loans and Loan
Guarantees” in STATEMENT OF FEDERAL FINANCIAL ACCOUNTING STANDARDS NO. 2, March 2001, pgs. 13-14
(para. 24)).
95 Exhibit Bra-193.
96 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 the Financial Statements, p. 19).
97 See Brazil’s 11 August Answers to Questions, para. 167 (third and fourth bullet points); Brazil’s
18 November Further Rebuttal Submission, para. 250; Notes to Financial Statements contained in 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), pg. 14). Contrary to the United States’ assertion at paragraph 170 of its 22 August Rebuttal
Submission, for post-1991 CCC guarantees, the amounts in the “subsidy allowance” column are actually the
amounts of receivables associated with post-1991 CCC guarantees that CCC considers uncollectible. Under the
FCRA – and as confirmed above in the quote from page 4 of the CCC 2002 financial statements – the subsidy
allowance is recorded on a net present value basis, wh ich means that it represents the cost CCC considers it will
incur on a guarantee cohort at the time that cohort is closed . The amount listed in the “subsidy allowance”
column in the receivables table of CCC’s 2002 financial statements for po st-1991 guarantees is therefore as
uncollectible as the amount listed in the “uncollectible” column of the pre-1992 CCC guarantee receivables
table.

72. The Panel asks whether, if US government regul ations require costs to be treated differently
than they would be under generally accepted a ccounting principles, the Panel must conduct its
analysis in accordance with that treatment. As Brazil has already noted, nothing in item (j) would
require the Panel to do so. However, Brazil notes that in its 2002 financial statements, the CCC,
which relies on present value accounting, states th at “[t]he accounting principles and standards
applied in preparing the financial statements a nd described in this note are in accordance with
Generally Accepted Accounting Principles (GAAP) for Federal entities.”
98

73. In this dispute, the United States objects to the use of present value accounting to determine
the costs of the CCC guarantee programmes, becau se present value accounting entails the use of
“estimates.”
99 Apart from the fact that the FCRA does not in fact rely on “estimates” to the extent
suggested by the United States, 100 Brazil also notes that in other contexts, the US government is
comfortable with this inherent aspect of present value accounting for loan guarantees. Present value
accounting has been endorsed by the US Congress and the President in the FCRA, as well as by the
FASAB, the Office of Management and Budget, 101 and the General Accounting Office, 102 to name a
few. Finally, Brazil notes that the United States is comfortable with the Panel relying on present
value accounting and some estimated data, as long as the Panel lim its itself to data suggesting that
CCC guarantees issued in some, carefully-selected years did not lose money. 103 This is not an
appropriate means of determining the performance of the “programmes,” as is required by item (j).

74. Other methodologies and means of accounting for CCC’s long-term operating costs and
losses confirm the result reached using present valu e accounting. First, Brazil has constructed a
methodology using actual data on income, costs and losses, which shows net losses for the CCC
guarantee programmes of $1.1 billion.
104 Second, defaults of more than $4 billion on CCC guarantees
for exports to Iraq and Poland alone similarly demonstrate costs and losses far in excess of total CCC
premiums collected. 105 Third, a methodology adopted by the US General Accounting Office
concluded that if GSM 102 and GS M 103 continued until 2007, costs w ould reach $7.6 billion, which
exceeds maximum premiums collected by nearly $7.3 billion.106

75. In conclusion, item (j) does not require that the Panel use any particular accounting principles
in assessing long-term operating costs and losses. Braz il has offered the Panel a number of different
methodologies based on a variety of accounting principles. Each methodology confirms that premium
rates are inadequate to meet the long-term operating costs and losses of the CCC guarantee
programmes.

98 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 the Financial Statements, p. 1).
99 US 11 August Answers to Questions, paras. 157-161, 162-163, 169-172, 173; US 22 August
100 Brazil’s 22 August Rebuttal Submission, para. 11 3; Brazil’s 11 August Answers to Questions,
paras. 180-181.
101 Exhibit Bra-116 (OMB Circular A-11) and Exhibit Bra-163 (Office of Management and Budget
Annual Training, Introduction to Federal Credit Budgeting, 24 June 2002).
102 Exhibit Bra-120 (GAO, Report to the Director, Office of Management and Budget, “Credit Reform:
Review of OMB’s Credit Subsidy Model,” GAO/AIMD-97-145, August 1997, p. 3-5).
103 US 18 November Further Rebuttal Submission, paras. 196-198.
104 Brazil’s 11 August Answers to Questions, paras. 158-166 (including chart at para. 165). Brazil’s
all-inclusive formula can be stated as follows: (Premiums collected + Recovered principal and interest (Line
88.40) + Interest revenue (Line 88.25)) – (Administrative expenses (Line 00.09) + Default claims (Line 00.01) +
Interest expense (Line 00.02)).
105 See Brazil’s 11 August Answers to Questions, para. 167 (second bullet point and note 226); Brazil’s
106 See calculation included at Brazil’s 11 August Answers to Questions, para. 167.

V. 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

Brazil’s Answer:

76. The phrase “ one or several” must be interpreted in its ordinary meaning. This phrase means
that the conditional clause “may arise” is satisfied when one of the following applies or when more
than one of the following apply. The phrase “ one or several” is equivalent to: “at least one.” Such a
trigger is not conditioned on any other clause. In fact, this is stressed by the words “in any case” just
before the phrase where one or several. Therefore, serious prejudice may be shown in any case where
at least one of the subparagraphs of Article 6.3 applies.

77. Brazil disagrees with the possibility that the words one or several indicate that one of the
Article 6.3 subparagraphs may not be sufficient to establish serious prejudice. Had negotiators felt
that this should be the case, they certainly would ha ve found a way to say so. This was the case, for
example, in Articles 3.2 and 3.4 of the Anti-Dumping Agreement, where after the enumeration of
relevant factors, the text states that no “… one or several of these factors” can “give decisive
guidance.” Identical language is found in the SCM Agreement itself. Article 15.4 in fine reads “…
nor can one or several of these factors necessarily give decisive guidance.” In SCM Article 15.7
negotiators were even more explicit, affirming that “[n]o one of these factors by itself can necessarily
give decisive guidance but the totality of the factors considered must lead to the conclusion that … .”

78. The provisions of the Anti-Dumping and SCM Agreement cited above re late to situations
where a number of factors could lead to a determinat ion of injury. Article 6.3 of the SCM Agreement
is meant to address a similar situation: a list of factor s could lead to a determination of serious injury.
However, in stark contrast with Articles 3.2 and 3.4 of the Anti-Dumping Agreement and
Articles 15.4 and 15.7 of the SCM Agreement, nego tiators chose not to include reference to the
possibility that, in Article 6.3, “the words one or several indicate that one of the Article 6
subparagraphs may not be sufficient to establish ser ious prejudice.” To find so, the Panel would need
to read into Article 6.3 the words found in Artic les 3.2 and 3.4 of the Anti-Dumping Agreement and
Articles 15.4 and 15.7 of the SCM Agreement. The A ppellate Body has made clear that panels must
not read into a text words that are not there.

79. The phrase “may arise in any case where one or several of the following apply” recognizes
that effects of subsidies constituting serious pr ejudice under one of the identified paragraphs of
Article 6.3 may also constitute serious prejudice under anothe r of the identified paragraphs of
Article 6.3. This case is a good example. US cotton subsidies have both increased the US world
market share under Article 6.3(d) as well as suppr essed world market prices and prices in third
country markets under Article 6.3(c). But the existe nce of “serious prejudice” in this or other cases
does not depend upon whether the effects of the subsid ies cause one or four different types of serious
prejudice.

80. In its context within Article 6, the phrase “m ay arise in any case where one or several of the
following apply” is necessary becau se while the facts may demonstrate that the effects of the
subsidies may create the one, two, three or four enumerated types of serious prejudice, these effects
may not be actionable. For example, under Article 6.3(d), there may be an increase in the world
market share for a commodity product. But it “m ay” not be actionable because there are specific
multilaterally agreed rules for that commodity, w ithin the meaning of footnote 17. Further,

Article 6.7 of the SCM Agreement creates exempti ons from serious prejudice findings even if the
requirements of Article 6.3 would be fulfilled. Th ese situations include export prohibitions by the
complaining Member, force majeure , arrangements that limit exports, or the failure to conform to
standards and regulatory requirements. Article 6.9 of the SCM Agreement covers another situation in
which the “may” language would be applicable. It exempts serious prejudice that exists even where
the requirements of Article 6.3 are fulfilled because th e subsidies are exempt from action by virtue of
the peace clause of Article 13 of the Agreement on Agriculture.

230. Please comment on Brazil's views on Article 6.3 of the SCM Agreement as stated in
paragraphs 92-94 of its further submission. USA

231. Do you believe that the now-expired Article 6.1 and/or Annex IV of the SCM Agreement
are relevant context for the Panel's interpretation of Article 6.3? USA

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

Brazil’s Answer:

81. Brazil divides its response to this question into two parts. First, Brazil will discuss
Article 6.3(c), and, second, Brazil will discuss Article 6.3(d).

82. Concerning Article 6.3(c), the Panel can and shoul d, to the extent it is relevant to do so, take
into account the effects of non-subsidy related factors in its analysis of the price-suppressing effects of
US subsidies. The only “other factors” identified by the United States include demand-related factors
the United States claims contributed to lower co tton prices in MY 1999-2002 including weak cotton
demand, flat retail consumption, falling world inco mes, increasing US textile imports, and China’s
releasing of stocks.
107 The United States further claimed that US production-related factors accounted
for increased US production including boll weevil eradication, higher yielding GMO cotton, and
lower prices of alternative crops.108

83. Brazil addressed all of these “other” factors in earlier submissions and demonstrated that
while some of the so-called other factors no doubt influenced prices, many of them either were
factually incorrect ( i.e., not “other factors”) or could not have had the effect claimed by the
United States.
109 Brazil further demonstrated that Professo r Sumner’s analysis took account of all the
“other” factors identified by the United States. Professor Sumner stated:

The baseline is calibrated to reproduce th e acreage, production, exports, prices and
other variables that actually applied be tween the marketing years 1999-2001, the
period over which data was available at the time the baseline was developed. By
calibrating the baseline to actual data for the recent past, the model incorporates all
the factors that have determined the situation of the cotton market during this period.
The United States has highlighted some of these factors. In their Further Submission
they discuss developments in the synthetic fiber market, such as prices of polyester;
Chinese stock releases, exchange rate m ovements, global and US macroeconomic

107 US 30 September Further Submission, paras. 22-44.
108 US 30 September Further Submission, paras. 45-70.
109 Brazil’s 7 October Oral Statement, paras. 18-28; Exhibit Bra-279 (Statement of Professor Sumner –
7 October 2003, paras. 13-14); Brazil’s 27October Answers to Question 176, paras. 157-160.

conditions, and technical changes in cotton production that reduce costs, such as boll
weevil eradication and release of genetically modified cotton varieties. Remember,
my model is calibrated to reproduce actual cotton market data for the historical
period. Hence, my model incorporates all these historical factors into the baseline
from which I analyze the impact of removing cotton subsidies.
110
84. The econometric evidence presented by Brazil – including the studies by USDA economists
Westcott and Price, Professor Sumner, and Professor Ray of the University of Tennessee, among
others – separate out the effects of the US subsid ies from the effects of all other supply and demand
factors that impact on the upland cotton market. In effect, these studies are designed precisely to
answer the question posed by the Panel. The results of these studies sift through the “other factors” to
isolate for the effects of the US subsidies. Professor Sumner has conservatively estimated that A-
Index prices would on average be 12.6 per cent or 6.5 cents per pound higher without the US
subsidizing upland cotton production, use and exports. The other econometric simulation models find
that cotton prices are suppressed to a significant degree regardless of whether other factors push
upland cotton prices up or down.

85. It bears repeating that Brazil has not claimed in this dispute that the entire decline in upland
cotton prices during MY 1999-2002 was due to the effe cts of US subsidies. Brazil’s argument has
been all along that but for the US subsidies upland cotton prices would be higher by a significant
degree, whether prices rise or fall. Thus, for exam ple, the fact that Chinese release of stocks may
have lowered world prices in MY 2000-2001 to a certa in extent is entirely consistent with Brazil’s
evidence and its proof. Brazil demonstrated that actual market prices in MY 1999-2002 would have
been higher to a significant degree but for the US subsidies.

86. Thus, the Panel can and should take “other f actors” into account. 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.

87. Brazil’s claim under Article 6.3(d) concerns the development of actual world market share
data. This world market share is the result of several key factors including US subsidies, weather
effects in many countries, and exchange rate effect s. However, Brazil has de monstrated that the US
subsidies were a major contributing factor behind th e increase in the US worl d market share, which
occurred even when prices were falling and the US dollar increased in value. Professor Sumner has
conservatively estimated that without the US subsidies, US exports would be on average 41.2 per cent
lower during MY 1999-2002.
111 The US upland cotton farmers’ long-term cost of production gap
between market revenue and total costs of $872 per acre for over 14.38 million acres during MY
1997-2002 (or $12.5 billion) fully supports Professor Sumner’s analysis.112

88. It follows that the US world market share w ould be much lower absent the US subsidies. As
an example, based on Exhibit Bra-302, Brazil has calc ulated out the effects of a 41.2 per cent decline
in US exports as estimated by Professor Sumner for MY 2002.
113 In this example, US world market
shares for MY 1999-2001 remain unchanged.114 The results are as follows:

110 Exhibit Bra-279 (Statement of Professor Sumner – 7 October 2003, paras. 13-14).
111 Brazil’s 9 September Further Submission, Annex I, Table I.5a.
112 Brazil’s 3 December Closing Statement, para. 13.
113 This calculation assumes that total world trade wo uld not be affected if US subsidies were not
provided.
114 Brazil emphasizes that also for these years ther e are strong export-enhanc ing effects of the US
subsidies, but has assumed for this exercise that they had no effects on US world market share.

U.S. World Market Share W/Out Subsidies in MY 2002
0
5
10
15
20
25
30
35
40
45
1999 2000 2001 2002
marketing year
percent
U.S. World Market Share
1999-2001 Average

89. This graph shows that in MY 2002, US expor ts would have fallen and remained below their
previous three-year average without the US subsidies for that year. In other words, but for the 2002
US subsidies, there would have been a re duction in US world market share, not an increase.115 This
analysis also demonstrates that while there may have been other factors at work stimulating US
exports (such as reduced domestic US demand for upland cotton), these factors were not enough to
cause an increase in US world market share ove r the previous 3 year period as required by
Article 6.3(d).

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

Brazil’s Answer:

90. The “same market(s)” for the purposes of Brazil’s price suppression claims under
Article 6.3(c) are (1) the world market for upland cotton, (2) the Brazilian market, (3) the US market,
and (4) 40 third country markets 116 where Brazil exports its cotton. US and Brazilian “like” upland
cotton is found in each of these markets.

115 Brazil’s 9 September Further Submission, Annex I, Table I.5a.
116 Argentina, Belgium, Bangladesh, Bolivia, Cambodia, China, Chile, Colombia, Cuba, Ecuador,
France, Germany, Greece, Hong Kong, Indonesia, India, Israel, Italy, Japan, South Korea, Malaysia, Morocco,
Netherlands, Pakistan, Peru, Poland, Portugal, Philippines, Singapore, South Africa, Spain, Switzerland,
Thailand, Tunisia, Turkey, Taiwan, United Kingdom, Ukraine, Venezuela, Vietnam.

91. 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. 117 Brazil
established that there is a global price discovery m echanism that reflects the “world market price,”
which is heavily influenced by world market supply and demand factors, including the US
subsidies.118 These “world market prices,” in turn, ar e transmitted to the US market, the Brazilian
market, and to the 40 other markets where both Braz ilian and US subsidized cottons are marketed as
typical commodities.119

92. In response to the Panel’s question whether the world market prices that Brazil claims are
suppressed are also “identifiable” in the “domestic (or other) ‘market,’” the answer is “yes.” The
evidence of the transmission of the global effect s to these other markets includes (1) USDA’s own
data for the US prices received by US producers,
120 (2) USDA volume and value data for US exports
to third countries, 121 (3) Brazilian Government volume and va lue data for Brazilian exports to 40
countries,122 (4) Brazilian ESALQ Index data regarding internal Brazilian prices, 123 (5) data from
various third countries reflecting upland cotton import prices, 124 and (6) data from several third
countries reflecting their domes tic prices for upland cotton. 125 In addition, Brazil has presented the
evidence of Andrew Macdonald and Christopher Ward who testified concerning the importance of the
A-Index. Brazil further includes the views of Gerald Estur, the ICAC’s chief statistician, as set out
below.126

93. A-Index world prices are a useful benchmar k by which to judge whether prices for upland
cotton traded internationally or even within domes tic markets are influenced by global world market
forces.
127 While the New York futures prices play a majo r role in influencing markets, the short term
volatility of the futures market makes comparison with monthly or annual export prices more difficult.
Andrew Macdonald indicated that “the price o scillations of the A and B-Index are much less
pronounced than the futur es market, but in the longer term they accompany the signs and trends
coming from the futures market.”
128 Moreover, the US Government uses the A-Index as a key basis
for Step 2 and marketing loan payments. Prof essor Sumner’s model adapted from the FAPRI model
used actual A-Index prices for the period MY 1999-2001 and the “world price” simulation effects are
estimated “A-Index” prices.
129

94. Organized below is the evidence on pricing da ta supporting the link between A-Index prices
that reflect the global supply and demand influences (including effects of the US subsidies) and prices
in “other markets” as posed in the Panel’s question. Brazil first presents evidence of US and Brazilian

117 Brazil’s 2 December Oral Statement, paras. 14-16 (citing evidence set out in the record from earlier
submissions to the Panel).
118 Brazil’s 2 December Oral Statement, paras. 14-16 (citing evidence set out in the record from earlier
submissions to the Panel).
119 Brazil’s 2 December Oral Statement, paras. 14-16 (citing evidence set out in the record from earlier
submissions to the Panel).
120 Brazil’s 9 September Further Submission, para. 113 (citing Exhibit Bra-4 and Exhibit Bra-202).
121 Exhibit Bra-383 (Brazil and US Export Data on Export Quantities and Values by Country).
122 Exhibit Bra-383 (Brazil and US Export Data on Export Quantities and Values by Country).
123 Exhibit Bra-207 (Cotton lint: International Prices & Brazilian Prices); Brazil’s 9 September Further
Submission, para. 115 note 156.
124 Exhibit Bra-384 (Import Prices from Various Countries).
125 Exhibit Bra-385 (Domestic Prices from Various Countries).
126 Exhibit Bra-375 (Information Provided by Gerald Estur, ICAC).
127 Exhibit Bra-375 (Information Provided by Gerald Estur, ICAC)(“The A-Index is a good proxy for
prices of cotton traded internationally.”).
128 Brazil’s 9 September Further Submission, Annex II (Statement of Andrew Macdonald, para. 23.).
129 Brazil’s 9 September Further Submission, Annex I (Sumner Analysis, para. 70 (“the model uses the
Cotlook A-Index price to represent the world price . . . [and] the actual A-Index prices were used for the
database for the model for marketing years 1999-2001.”).

export prices to 40 different countries, based on official published US and Brazilian Government
sources. It then provides (based on availability) information concerning the import prices of all
imports from certain of the 40 countries where bot h Brazil and US upland cotton was exported during
MY 1999-2002. Finally, Brazil presents information of internal domestic pric es in the United States,
Brazil, and China.

Brazilian and US Export Prices

95. In response to the Panel’s question, Brazil first presents evidence of US and Brazilian export
prices to 40 different markets where both Brazilian and US upland cotton was exported at some point
during MY 1999-2002. The information and evid ence below is based on a compilation from two
sources. First, all information on US upland cott on export prices is based on the “US Trade Internet
System,” a web application run by USDA’s Foreign Agricultural Service (FAS).
130 Second,
information on Brazilian upland cotton export pr ices is taken from information published and
maintained the Brazilian Ministry of Agriculture on its public web-site. 131 The export “prices”
represent the declared contract value of the upla nd cotton at the US and Brazilian port of export –
known as “Free Alongside Ship (FAS)” values.132

96. The first way to examine the available data is to view it collectively similar to what the
United States did in Exhibit US-75. The first graph below examines the cumulative Brazilian and US
export prices in MY 1999-2002 cove ring exports to the 40 markets where Brazil exports its upland
cotton as well as US exports to Brazil.
133

130 See http://www.fas.usda.gov/ustrade/. The four upland cotton HS-10 codes used are 5201001010,
5201001020, 5201001025 and 5201001090. All data originally in tons and dollars, was converted into pounds
and cents.
131 See http://alicewebl.desenvolvimento.gov.br; www.mdic.gov.br/indicadores/balanca/balanca.html.
See also Exhibit Bra-383 (Brazil and US Export Data on Export Quantities and Values by Country). All
Brazilian data originally provided in kilograms and dollars was converted into pounds and cents.
132 The FAS value includes all inla nd freight, insurance and other charges incurred in placing the
merchandise alongside the carrier at shipping or insurance costs.
133 Exhibit Bra-386 (Brazil and US Export Prices by Co untry). The data for all of the graphs in this
subsection of Brazil’s answer is cont ained in Exhibit Bra-383 (Brazil a nd US Export Data on Quantities and
Values by Country).

Export Prices Total
0.00
20.00
40.00
60.00
80.00
100.00
Aug-99Oct-99Dec-99Feb-
00
Apr
-00
Jun-00Aug
-00
Oct-00
De
c-00
Feb-0
1
Apr-0
1
Jun-01Aug
-01
Oct-
01
Dec-01
Feb-02Apr-02Jun-
02
Aug
-02
Oct-02Dec-02
Feb-
03
Apr
-03
Jun-03
cents per pound
U.S. Brazil A-Index

97. The A-Index on the graph is the solid black lin e. The Panel can see that over the four year
period, US and Brazilian export prices closely follow th e movements in the A-Index. In addition, as
discussed in greater detail in th e answer to Question 235, Brazilian prices are at times equal to,
slightly greater than US prices or slightly lower than US prices.

98. The Brazilian export data can be used as a prox y for third country market prices in a handful
of countries where there were extensive Brazilian expor ts. This is illustrated in the cases of three of
the larger markets for Brazilian exports – Argentin a, India, and Portugal as set out in the graph
below:
134

134 The Panel will find a complete list of graphs showing A-Index prices plotted against Brazilian
export prices to all countries to which Brazil exports in Exhibit Bra-387 (Brazil Export Prices v A-Index Prices
by Country).

Brazilian Export Prices to Argentina
0.00
20.00
40.00
60.00
80.00
100.00
Au
g-99Oct-99
Dec-99Feb-00
Apr-0
0
Jun-
00
Aug
-00
Oc
t-00
Dec-00Feb-01
Apr-0
1
Jun-01
Aug-01Oct
-01
De
c-01
Feb-0
2
Apr-02Jun-02
Aug-02Oct
-02
De
c-02
Feb-03Apr
-03
Jun-03
cents per pound
Brazil A-Index

Brazilian Export Prices to India
0.00
20.00
40.00
60.00
80.00
100.00
Au
g-99Oct-99
Dec-99Feb-00
Apr-0
0
Jun-
00
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Oc
t-00
Dec-00Feb-01
Apr-0
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Jun-01
Aug-01Oct
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De
c-01
Feb-0
2
Apr-02Jun-02
Aug-02Oct
-02
De
c-02
Feb-03Apr
-03
Jun-03
cents per pound
Brazil A-Index

Brazilian Export Prices to Portugal
0.00
20.00
40.00
60.00
80.00
100.00
Au
g-99Oct-99
Dec-99Feb-00
Apr-0
0
Jun-
00
Aug
-00
Oc
t-00
Dec-00Feb-01
Apr-0
1
Jun-01
Aug-01Oct
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De
c-01
Feb-0
2
Apr-02Jun-02
Aug-02Oct
-02
De
c-02
Feb-03Apr
-03
Jun-03
cents per pound
Brazil A-Index

99. Because US exports were so much greater th an Brazilian exports, a better way to examine the
relationship between A-Index prices and prices in the 40 countries is to examine US export prices,
particularly where there were large volumes of US e xports. This is illustrated in the graphs below for
China, Indonesia, South Korea and the Philippines (as well as other graphs in Exhibit Bra-388):135

US Export Prices to China
0.00
20.00
40.00
60.00
80.00
100.00
Aug-99Oct-99Dec-99
Feb-
00
Apr
-00
Jun-00
Aug
-00
Oct-00
Dec-00
Feb-
01
Apr-0
1
Jun-01
Aug
-01
Oct-
01
Dec
-01
Feb-0
2
Apr-02Jun-02
Aug
-02
Oct-02Dec-02Feb-03
Apr
-03
Jun-03
cents per pound
United States A-Index

135 The Panel will find a complete list of graphs s howing A-Index prices plotted against US export
prices to all countries to which Brazil exports in Exhibit Bra-388 (US Export Prices v A-Index Prices by
Country).

US Export Prices to Indonesia
0.00
20.00
40.00
60.00
80.00
100.00
Aug-99Oct-99Dec-99Feb-
00
Apr
-00
Jun-00Aug
-00
Oct-00
De
c-00
Feb-0
1
Apr-0
1
Jun-01Aug
-01
Oct-
01
Dec-01
Feb-02Apr-02Jun-
02
Aug
-02
Oct-02Dec-02
Feb-
03
Apr
-03
Jun-03
cents per pound
United States A-Index

Export Prices to South Korea
0.00
20.00
40.00
60.00
80.00
100.00
Aug-99Oct-99Dec-99Feb-
00
Apr
-00
Jun-00Aug
-00
Oct-00
De
c-00
Feb-0
1
Apr-0
1
Jun-01Aug
-01
Oct-
01
Dec-01
Feb-02Apr-02Jun-
02
Aug
-02
Oct-02Dec-02
Feb-
03
Apr
-03
Jun-03
cents per pound
United States A-Index

Export Prices to Philippines
0.00
20.00
40.00
60.00
80.00
100.00
Aug-99Oct-99Dec-99Feb-
00
Apr
-00
Jun-00Aug
-00
Oct-00
De
c-00
Feb-0
1
Apr-0
1
Jun-01Aug
-01
Oct-
01
Dec-01
Feb-02Apr-02Jun-
02
Aug
-02
Oct-02Dec-02
Feb-
03
Apr
-03
Jun-03
cents per pound
United States A-Index

100. Brazil presents in Exhibit Bra-383 the underlying data on all 40 of the markets where Brazil
and the United States export their upland cotton. Th is underlying data is presented in a variety of
different graphs; one set compares Brazilian exports to the A-Index;
136 another compares US exports
to the A-Index,137 and a third combines Brazilian and US export prices.138

101. Many of the 40 markets show only very lim ited amounts of Brazilian exports. Compared to
the volume of US exports, Brazilian exports during MY 1999-2002 were relatively small
(representing approximately 1 per cent of total world market share).
139 Thus, when the monthly
export data is examined on a country-by-country b asis, there are very few third country markets
where Brazil exported in each of the 48 months in MY 19999-2002, i.e., where there is a complete set
of 48 data points. Nevertheless, even the limited data points for each of the 40 countries shows that
Brazilian export prices generally tracked A-Index prices.

102. Many of the graphs also reflect fairly widely ranging data point prices, particularly where the
import volumes are not very great.
140 By contrast, country markets with very high volumes of
imports141 tend to have much more stable import prices that closely follow the A-Index. This is why
the US high-volume import data gra phs provide reliable evidence of pricing trends in some of the 40
country markets examined. There are various reas ons that explain the widely ranging pricing data
points. First, while US and Brazilian cottons may have the same staple length, their quality may
differ significantly which, in turn , impacts their respective price. 142 For example, California A-Index
cotton is consistently sold at a premium in world markets because its superior quality allows it to be

136 Exhibit Bra-387 (Brazil Export Prices v A-Index by Country).
137 Exhibit Bra-388 (US Export Prices v A-Index by Country).
138 Exhibit Bra-386 (Brazil and US Export Prices by Country).
139 Exhibit Bra-208 (“Cotton: World Statistics,” ICAC, September 2003, p. 4 and 76).
140 See Exhibit Bra-387 (Brazil Export Prices v A-Index by Country). Examples are Belgium, Pakistan,
South Africa.
141 See Exhibit Bra-387 (Brazil Export Prices v A-Index by Country). Examples are Argentina, China,
India, Italy, Portugal, Philippines, Thailand.
142 Brazil’s 9 September Further Submission, Annex II (Statement of Andrew Macdonald, paras 9-10).

used in production of finer cotton fabric.
143 During certain period between MY 1999-2002, both
Brazil and the United States exported cotton with a high staple length or a particularly good quality to
a third country market, resulting in higher prices. This no doubt accounts for much higher US prices
compared to Brazilian cotton in some markets such as France, Germany, and Portugal.

103. Second, smaller monthly export sales to a thir d country market with relatively few imports
may result in much higher prices than large vol ume sales to large importers. Larger consuming
countries (with larger consumers) can demand volume price premiums and sellers can export at higher
volumes and lower prices based on economies of scal e. The country data of the world’s largest
importers such as China, Hong Kong, Taiwan, and Indonesia, for example, closely match A-Index
price trends.144 But even larger importing countries data reflects an occasional month where prices
diverge from the overall trend. This may be due to the fact that smaller shipments were purchased
quickly on a spot basis at higher prices.

104. Third, some exports or forward contracts for export sales are fixed-price contracts, which may
be executed months before export takes place.
145 For example, a yarn spinner or textile producer in
Brazil may contract to purchase 100 tons of US cotton on 1 January 2002 at an import price fixed at
40 cents per pound at that date, but when the cott on is actually exported on 1 June 2002 the A-Index
price may be 50 cents. This type of contract with terms fixed at execution rather than on delivery may
explain a number of country market graphs where there is a delayed reaction of the country price to
declines or increases in the A-Index prices. However, even where th ere is a delay in response, the
longer-term trends in most markets thereafter track the downward or upward climb of A-Index prices.

105. But even with the limitations in the monthly da ta for individual country markets, the data on
the whole strongly supports the conclusion that world prices do influence local export market prices.
Any anomalies in smaller importing country markets are notably eliminated by using the weighted
average analysis of monthly data from all 40 markets where Brazil and US cotton exports are found.
With the vast bulk of US – and most of Brazilian cotton – being exported to large volume markets, the
combined analysis shows the close relationship between A-Index prices and both Brazilian and US
prices. Indeed, the Chief Statistician of the ICAC, who has extensive experience with individual
country and world market pricing data, came to the following conclusions:

For all importing non-pro ducing countries, domestic prices follow the Cotlook A
Index, taking into account appropriate location and quality differentials and the
quality differential for the particular type of cotton needed by the spinning industry.
Prices of imported cotton in producing countries also follow the Cotlook A Index,
with appropriate location and quality differ entials. The international market for raw
cotton is relatively open, with rather lo w imports taxes (averaging less than 5 per
cent. The US having one of the highest).

143 Exhibit Bra-375 (Information Provided by Gerald Estur, ICAC)(California/Arizona cottons “is
usually about 2 cents more expensive than Memphis”). See also Brazil’s 9 September Further Submission,
para. 241, figure 17 (showing California A-Index quotes at higher prices than Brazil A-Index cotton which is
comparable to Memphis).
144 See Exhibit Bra-387 (Brazil Export Prices v A-Index by Country), Exhibit Bra-388 (US Export
Prices v A-Index by Country) and Exhibit Bra-384 (Import Prices from Various Countries).
145 Exhibit Bra-375 (Information Provided by Gerald Estur, ICAC)(“Actual prices of imported cotton,
in non-producing as well as in producing countries, are based on the A Index or on New York Futures . . . on the
day of the contract (concluded prior to shipment, and cotton can be sold more than one year forward). As a
result, the average price of imports (value divided by quantity) for a specific period is not directly related to
prevailing market prices.”).

Domestic prices of cotton produced and c onsumed locally are influenced by the
supply and demand situation in the country but are not disconnected from
international prices.
146
Individual Country Market Import Price Data

106. Additional evidence responsive to the Panel’ s question is found in various third country
market import pricing data that was collected since 9 December 2003 by Brazilian embassies around
the world. The data and the graphs are set out in Exhibit Bra-384. This data is available in two
forms: (1) monthly import data from all sources, and (2) annual import data from all sources. While
this information is not available to Brazil for many of the 40 export market countries, the available
evidence confirms the other third country market data discussed above.

107. Monthly import data is available from Argentina, Ecuador, Hong Kong, Japan, Spain,
Thailand, and the Ukraine. The data generally s hows a close relationship between the movement of
import prices and the movement of the A-Index. For example, set out below are graphs representing
the data from Ecuador, Hong Kong, Japan and Spain:

Equador Import Prices
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
Au
g. 99
Oct-99
De
c. 99
Feb. 00
April 00June 00
Aug. 00Oct-00
Dec. 00Feb. 01April
01
June 01Aug.01Oct-01Dec.
01
Feb.0
2
April 02June 0
2
Aug. 02Oc
t-02
Dec. 02Feb. 03
April
03
June 03
Month/Year
Dollar per pound
Import Prices
A-Index

146 Exhibit Bra-375 (Information Provided by Gerald Estur, ICAC).

Import Prices in Hong-Kong
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
Au
g. 99
Oct-99Dec.
99
Feb. 00Ap
ril 00
Ju
ne 00
Aug
. 00
Oct-00
Dec. 00Feb
. 01
Apri
l 01
June 01Au
g.01
Oct-01De
c.
01
Feb.
02
April 02Ju
ne 02
Au
g. 02
Oct
-02
Dec. 02Feb. 03Ap
ril 03
June 03
Month/Year
Dollar per pound
A-Index
Hong-Kong Import Price

Japan Import prices
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
Aug. 9
9
Oct-
99
Dec. 99
Fe
b. 00
April 0
0
June
 00
Aug. 0
0
Oct-
00
Dec. 00Fe
b.
01
Apr
il 01
June
 01
Aug.01Oct-
01
Dec.
01
Feb.
02
April 02Ju
ne
 02
Aug. 02Oct-
02
Dec.
02
Feb. 0
3
April 03Ju
ne
 03
Month/Year
Dollar per pound
Japan Import prices
A-Index
Spain Import prices
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
Au
g. 99
Oct-99De
c. 9
9
Feb.
 00
April 00
June 00Au
g. 00
Oc
t-00
Dec. 00Feb. 01April 01Jun
e 01
Aug.01Oc
t-01
Dec. 01Feb.02
April 02Jun
e 02
Aug. 02Oct-02
Dec
. 02
Feb. 03
April 0
3
June 03
Month/Year
Dollar per pound
A-Index
Import prices

The monthly data for these countries reflects fairly high-volume imports from all worldwide sources.
The higher volumes guarantee a more accurate reflection of the bulk of prices within these countries.
The link between A-Index and import prices is also confirmed by the data for Argentina, Thailand and
the Ukraine in Exhibit Bra-384.

108. There is also annual import data available from a few countries. While annual data does not
provide as detailed information c oncerning price movements within a year, it also supports a link
between the A-Index and import prices. These import prices, in turn, serve as a proxy for prices in the
third country market generally. For example, th e available import data from China, Chile, and the
United Kingdom is set forth below:
147

China Import prices
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
1999 2000 2001
Calendar Year
U.S. Dollar
China Import prices
A-Index

147 Exhibit Bra-384 (Import Prices from Various Countries).

Chilean Import prices
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
1999 2000 2001 2002
Year
Dollar Per Pound
Chilean Import Prices
A-Index

United Kingdom Import prices
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1999 2000 2001 2002
Year
Dollar per pound
Import prices
A-Index

Individual Country Domestic Prices

109. Finally, Brazil presents a series of graphs showing domestic prices in those countries for
which domestic prices were available. Andrew M acdonald has indicated that most countries do not
collect or maintain accessible data on domestic upl and cotton prices. This was confirmed by the
requests for such data by Brazilian embassies aro und the world. Therefore, Brazil can only offer
information on domestic prices from a limited number of countries. These countries, however,
constitute key markets, including the United States, China, Brazil and Pakistan.

110. The record shows that domestic prices within several key producing countries including the
United States, Brazil, China and Pakistan also reflect and generally move with the overall trends of A-
Index prices. This is shown in the graphs below:
148

U.S. Price Received by Farmers (MY1999-2002)
0
10
20
30
40
50
60
70
8 99 2 00 8 00 2 01 8 01 2 02 8 02 2 03 8 03
month / year
cents per pound
US Farm Price
A-Index

111. This data provides further confirmation of the close link between US domestic prices and the
A-Index prices. As set forth below, this close link also exists for the domestic Brazilian market where
most of Brazilian production is marketed:149

148 This graph is reproduced from Figure 5 of Brazil’s 9 September Further Submission.
149 This graph is reproduced from Figure 7 of Brazil’s 9 September Further Submission.

A-Index v Brazilian Prices (long-term)
0.00
20.00
40.00
60.00
80.00
1 00.00
1 20.00
month / year
A-In de x
ESLAQ Index

112. Finally, the domestic prices of the world’s largest producer and consumer of upland cotton is
the Chinese market. Because China is one of the wo rld’s largest importers of upland cotton, it is not
surprising that its domestic market prices also track the A-Index prices as seen in the graph below:150

150 Exhibit Bra-385 (Domestic Prices from Various Countries).

China Domestic Prices
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
January 01Marc
h 01
May 0
1
July
 01
September 01November 01January 02Marc
h 02
May 02
July
 02
September
 02
Nove
mber 02
January 03Marc
h 03
Ma
y 03
July
 03
Month/Year
Dollar per pound
China Domestic Prices
A-Index

A similar pattern also evolves for domestic prices in another major producers and user of upland
cotton: Pakistan.151

Pakistan Domestic Prices
0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00
80.00
90.00
Aug-99
Oct-99Dec
-99
Feb-00
Apr-00Jun-0
0
Aug-00Oct-00
De
c-00
Feb-01
Apr-0
1
Jun-01
Aug-01
Oct-01De
c-01
Feb-02Ap
r-02
Jun-02Au
g-02
Oct-0
2
De
c-02
Feb-03
Apr-0
3
Jun-03
Aug-03Oct-03
Month/Year
Cents per Pound
Pakistan
A-Index

151 Exhibit Bra-385 (Domestic Prices from Various Countries).

Conclusion

113. The evidence outlined above and in Brazil’s earlier submissi ons shows that world market
prices were transmitted to other markets during MY 1999-2002, and that this continues today.
Whether the data is viewed collectively or individua lly, the data generally shows that Brazilian, US
and other exporters’ prices to these 42 countries are consistent with movement s and trends in the A-
Index price. While there are some (particularly low volume) graphs that show monthly differences
from A-Index trends or movements, Brazil has set forth the quality, contract, and timing factors
accounting for such anomalies. The collective st atistical evidence supports the conclusion of the
ICAC’s chief statistician that “[a]ctual prices of imported cotton, in non-producing as well as in
producing countries, are based on the Cotlook A Index or on the New York futures” and “the prices of
the major types of cotton … are affected by the supply and demand situation facing the market as a
whole.”152 All of this evidence is consistent with the conclusion that these third country market prices
are heavily influenced by A-Index and New York fu tures prices. Professor Sumner analysis and the
studies by USDA economists undeniably show that the US subsidies have suppressed A-Index and
New York futures prices. Since these indices are th e benchmarks for prices in those “same markets”
where US and Brazilian upland cotton were exported, it is indisputable that the US subsidies have
suppressed the prices in each of the “markets” cited in the introductory paragraph of Brazil’s answer
to this question.

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

Brazil’s Answer:

114. In response to both questions, Brazil, New Ze aland, and Argentina have argued previously
that whether price suppression is “significant” cannot be judged solely by reference to a non-textually
based “objective” amount of price suppression. 153 Rather, the “significance” of price suppression
must be assessed with reference to the quality of the impacts of whatever level of price suppression
exists on the producers of the like product. For ex ample, a panel could find that even large amounts
of price suppression are not “significant” where the complaining party producers had de minimis
production, or no exports, and/or that the total value of lost revenue from suppressed prices was
minimal. On the other hand, very large producers of a commodity product like upland cotton would
suffer serious prejudice from even smaller “objectiv e” levels of price suppression in terms of the
amount of lost revenue.

115. The Panel’s question really comes down to whether Article 6.3 of the SCM Agreement
requires a two step process – first, an objective finding of an amount of price suppression that is
“significant,” and second, whether the complaining party Member suffers serious prejudice from such
“significant” levels of price suppression. Brazil doe s not believe the text requires such a two-step
process for the reasons outlined above and in previous submissions. However, the facts of this case
show that even if such a test were required, the amount of price suppr ession caused by the US
subsidies is significant and far from de minimis. Brazil has also submitted undisputed evidence that
its producers have suffered considerable losses in revenue from suppressed prices that could have

152 Exhibit Bra-375 (Information Provided by Gerald Estur, ICAC).
153 Brazil’s 9 September Further Submission, paras. 251-259; Brazil’s 7 October Oral Statement,
para. 30; Brazil’s 27 October Answers to Questions, paras. 119-122. New Zealand’s 3 October Further
Submission, paras. 2.21-2.27; New Zealand’s 8 October Oral Statement, para. 8; Argentina’s 3 October Oral

been used for further investment in high-yielding lower cost production.
154 By any measure, this
evidence establishes both “significance” of the price suppression and “serious prejudice” to the
interests of Brazil.

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

Brazil’s Answer:

116. Brazil previously has set forth its reasoning why evidence of lower Brazilian prices in some
markets is irrelevant to the issue of whether or not all the prices in those markets were suppressed by
the global effects of US subsidies. 155 This global price transferra l mechanism is and remains the
relevant analysis of Brazil’s Article 6.3(c) price suppression claim as Brazil has outlined in its Answer
to Question 233. Brazil sets forth its comments a nd rebuttal to paragraphs 8, 9 and 10 of the US 2
December Oral Statement and Exhibit US-75 below.

Cumulative Analysis of 8 Country Export Prices

117. With respect to the US “price undercutting” ar gument, and in particular the US chart set out
in Exhibit US-75, the factual assertion that cumulative US prices in the 8 countries examined are
consistently much higher than Brazilian prices is si mply wrong. One fundamental error with Exhibit
US-75 is that the United States did not “weight -average” the data regarding export prices for
Argentina, Bolivia, Italy, Philippines, Portugal, Indonesia, Paraguay and India. Rather, Exhibit US-75
is based on a simple average, not taking into acc ount whether Brazilian shipments on a monthly basis
were 2 tons or US shipments the same month we re 100,000 tons. In addition, the US chart (and
accompanying data) in Exhibit US-75 provid es no volumes on monthly shipments, provides no
published backup material, uses a non-public source of information, and inexplicably does not use
official USDA Foreign Agricultural Service (FAS) published data on export prices.

118. Using the proper monthly weighted averag e methodology and FAS’s own official export
pricing data together with the Brazilian G overnment’s official export pricing data,
156 the collective
situation in the eight countries examined in Exhi bit US-75 looks completely different than the US
chart in that exhibit:

154 Brazil’s 9 September Further Submission, Section 6 and Annex III. See also Exhibit Bra-283
(Statement by Christopher Ward – 7 October 2003).
155 Brazil’s 2 December Oral Statement, paras. 14-19 (providing evidence and references to other
evidence supporting Brazil’s clams); Brazil’s 9 September Further Submission, Section 3.3.4.9.
156 This data was discussed in so me detail in Brazil’s Answer to Question 233 and is contained in
Exhibit Bra-383 (Brazil and US Export Data on Export Quantities and Values by Country).

Weighted Average U.S. and Brazil Export Prices to Argentina, Bolivia, Italy,
Philippines, Portugal, Indonesia and India
0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00
80.00
90.00
Jan-
99
Mar-99
May-99Jul-9
9
Sep-99Nov-99Jan-00Mar-00May-00
Jul
-00
Sep-00Nov-00Jan-
01
Ma
r-01
May-
01
Jul-01Sep-01Nov-01
Jan-02Mar-02
Ma
y-02
Jul
-02
Se
p-02
Nov-02
US Weighted Average Brazil Weighted Average A-Index

119. The graph shows that US and Brazilian prices fluctuate with Brazilian prices at times higher
than US prices and US prices higher than Brazilian prices at other times. The chart shows that
beginning in November 2000, US prices plunged al ong with the A-Index prices and that Brazilian
prices quickly followed, with both US and Brazilian prices remaining at record lows until near the end
of 2002 when both started rising again. Finally, th e chart shows that US prices generally followed the
movements or trends in A-Index prices (the solid li ne in the graph). As discussed in Brazil’s Answer
to Question 233, this is what is relevant for a price suppression claim under Article 6.3(c) as opposed
to any alleged “undercutting” by Brazilian cotton in individual markets as the US claims.

Cumulative Analysis of US and Brazilian Prices in 40 Third-Country Markets

120. Moving beyond the 8 countries in Exhibit US -75 to all 41 countries (including Brazil) where
Brazil and the US both sold at least some upla nd cotton between MY 1999-2002 further demonstrates
the absence of so-called “price undercutting” by Br azilian products as alleged by the United States.
For the period MY 1999-2002, the weighted average price covering a total of 10.5 billion pounds of
US upland cotton exported to these same 41 countr ies (including Brazil) is 45.33 cents per pound.
157
By contrast, the average weighted price of 709 million pounds of exported Brazilian upland cotton to
40 export markets is 44.65 cents per pound. 158 This is a difference of 0.68 cents per pound. For
marketing year 2001 – the year when prices plunged to record lows – the weighted average price of
US upland cotton in all markets where Brazilian co tton was also exported was 38.83 cents per pound
while Brazilian weighted average prices to the sam e markets was significantly higher at 44.05 cents
per pound.159 Brazilian prices were lower than US pr ices during MY 2000 and 2002, but were higher
than US prices in MY 1999. 160 This is hardly evidence of “price undercutting” by Brazilian upland
cotton.

157 Exhibit Bra-383 (Brazil and US Export Data on Export Quantities and Values by Country).
158 Exhibit Bra-383 (Brazil and US Export Data on Export Quantities and Values by Country).
159 Exhibit Bra-383 (Brazil and US Export Data on Export Quantities and Values by Country).
160 Exhibit Bra-383 (Brazil and US Export Data on Export Quantities and Values by Country).

121. These very close relationships – as well as movements – of Brazilian and US cumulative
prices in the 41 countries are reflected in cumulativ e weighted average monthly prices in the graph
below:
161

Export Prices Total
0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00
80.00
90.00
100.00
Au
g-99Oct-9
9
Dec-99Feb-00
Apr-0
0
Jun-00
Aug
-00
Oct-00Dec-00Feb-01
Apr-0
1
Jun-01
Aug-01Oc
t-01
De
c-01
Feb-02Apr-02Jun-02
Aug-02Oc
t-02
De
c-02
Feb-0
3
Apr
-03
Jun-03
cents per pound
U.S. Brazil

122. This graph illustrates the absolute closen ess of prices between Brazilian and US prices,
particularly after mid-2001. But it also shows very similar movements in prices between Brazilian
and US exports. And, as discussed in Brazil’s Answer to Question 233, these similar movements are
further evidence of the influence of the global pricing mechanisms on prices received by US and
Brazilian exporters in third country markets.

Individual Third-Country Analysis of Brazilian and US Export Prices

123. When US and Brazilian prices in the 40 indi vidual markets are examined, the evidence does
not support the United States’ broad assertion that Brazilian prices are consistently lower than US
prices. In some of the key textile producing countri es where US exporters ship large quantities of US
upland cotton – Hong Kong, Taiwan, India, Pakistan, and Vietnam – US prices during MY 1999-2002
were lower than Brazilian prices.
162

124. In other large consuming (textile producing) countries, while US prices were somewhat
higher than Brazilian prices, the volume of US exports vastly exceeded the volume of Brazilian
exports, including China (120 times greater), Bangl adesh (26 times greater), Colombia (9 times
greater), Indonesia (17 times greater), Japan (35 tim es greater), Korea (3384 times greater), and Peru
(631 times greater).
163 Huge volumes of US exports in these 7 markets compared to the volumes of
Brazilian exports suggest that US exports, not Br azilian exports, play a dominating role in the
conditions of competition in those markets.

161 Exhibit Bra-386 (Brazil and US Export Price by Country).
162 A complete set of graphs for each of the 40 c ountries country markets and the underlying data are
set forth in Exhibit Bra-383 (Brazil and US Export Da ta on Export Quantities and Values by Country) and
Exhibit Bra-386 (Brazil and US Export Prices by Country).
163 Exhibit Bra-383 (Brazil and US Export Data on Export Quantities and Values by Country).

125. Indeed, overall, the cumulative volume of US exports to the 40 countries where Brazilian
exports were shipped was 15 times greater than the volume of Brazilian exports. 164 For Brazilian
exports to secure any sales, let alone increase market share in competition with heavily subsidized US
exports in these markets, it would not be surprisi ng that textile consumer s of upland cotton would
expect Brazilian exporters to discount their prices. Andrew Macdonald confirmed that such discount
pricing was necessary for non-Brazilian cottons to compete with US cotton. 165 This is particularly
true in Argentina, Bolivia, Chile, Colombia, Ec uador, Indonesia, Peru, South Korea, Turkey and
Venezuela where US exporters received the benefit of US export credit guarantees. 166 No exporter of
non-US cotton could hope to compete with those export credits without discounting its upland cotton
prices.
167

126. But even where the volume of Brazilian expor ts was greater than US exports, the evidence
does not suggest the absence of overall price suppression from the effects of US subsidies. 168
Brazilian exports were greater than US exports in only 10 of the 40 countries (Argentina, Bolivia,
Cuba, Poland, France, Germany, Greece, Portugal, South Africa, and Spain) over the MY 1999-2002
period. These 10 countries represented a tiny fraction – 0.49 per cent – of total US exports during
MY 1999-2002 to the 41 countries, and onl y 37.5 per cent of Brazilian exports. 169 Yet, even without
significant US exports to these countries, the domest ic prices of these countries still largely followed
A-Index prices, as discussed in Brazil’s Answer to Question 233.

127. Further, in the 10 countries where the volum e of Brazilian exports was larger than the
United States, Brazilian prices were higher than US prices in 3 of the 10 countries – Poland, Greece,
and South Africa.
170 Further, US prices in 4 of the 10 countries – France, Germany, Spain, and
Portugal – were much higher than Brazilian prices. 171 The very low volume of US exports to these
same four countries suggests that far higher quality US cotton was sold in these countries which
produce low-volume specialized cotton textile products.
172 Finally, US and Brazilian prices were very
close in remaining 3 countries – Argentina, Bolivia, and Cuba. 173 Thus, contrary to the US
arguments, this evidence does not suggest that Br azilian prices are suppressing US prices, even in
those markets where there are larger volumes of Brazilian imports.

128. Similarly, the unqualified US assertion that “the Brazilian A-Index qu ote is consistently
below the US A-Index quote”
174 is both untrue as well as irrelevant to the question of whether US
production subsidies caused suppression of world and third country market prices. Comparing US
Memphis A-Index prices with Brazil A-Index prices shows the following graph:175

164 Exhibit Bra-383 (Brazil and US Export Data on Export Quantities and Values by Country).
165 Brazil’s 9 September Further Submission, Annex II, para. 50.
166 Exhibit Bra-73 (Summary of Export Credit Guarantee Programmes, FY 1999-2003) and Exhibit
Bra-299 (“Summary of FY 2003 Export Credit Guarantee Activity,” USDA, Covering GSM 102, GSM 103 and
SCGP).
167 Brazil’s 9 September Further Submission, Annex II, paras. 49-53.
168 Exhibit Bra-383 (Brazil and US Export Data on Quantities and Values by Country).
169 Exhibit Bra-383 (Brazil and US Export Data on Quantities and Values by Country).
170 Exhibit Bra-383 (Brazil and US Export Data on Quantities and Values by Country).
171 Exhibit Bra-383 (Brazil and US Export Data on Quantities and Values by Country).
172 Exhibit Bra-383 (Brazil and US Export Data on Quantities and Values by Country).
173 Exhibit Bra-383 (Brazil and US Export Data on Quantities and Values by Country).
175 Based on Exhibit Bra-242 (A and B-Index Quotes from Major Producers), extended to
November 2003 using Cotton Outlook quotes.

Brazil and U.S. A-Index
30
40
50
60
70
80
90
08 200010 200012 200002 200104 200106 200108 200110 200112 200102 200204 2002
06 200208 2002
10 20
02
12 2002
02 20
03
04 20
03
06 2003
08 20
03
10 200
3
month/year
cents per pound
Brazil A
U.S. Memphis

129. As the Panel can see from the graph, since October of 2001, the US Memphis A-Index price
has been slightly higher or slightly lower than the Brazilian A-Index price. 176 But throughout the
entire period, the movements of both US Memphis and Brazilian A-Index prices track each other very
closely.177 This is the key fact illustrating the transmission of global price-suppressing effects as
discussed in Answer to Question 233 supra.

Domestic Prices for Brazil, US and China

130. Nor does the record support the US claim th at Brazilian prices undercut US export prices to
the Brazilian market. Indeed, the evidence suggests th e opposite. More than 90 per cent of Brazilian
production of upland cotton was sold in Brazil during MY 1999-2002.
178 Imports represented
approximately 20 per cent of Brazilia n consumption dur ing MY 1999-2002. 179 US exports to Brazil
represented 21 per cent of Brazilian imports with a total of 306 million pounds of US upland cotton
exported to Brazil 180 in MY 1999-2002. 181 US annual weighted average export prices to Brazil were
lower in every year except MY 2000 when US exports volumes fell to very low levels. 182
Significantly, in MY 1999, when US export volumes to Brazil represented 17.6 per cent of very large
Brazilian imports of upland cotton, the US weighted average prices were 10.27 cents below Brazilian
domestic prices. 183 Similarly, in MY 2002, when US exports represented 50 per cent of total
Brazilian imports, US export prices were 4.57 cents per pound lower than Brazilian domestic

176 The US comparison between the Brazilian quote and the California/Arizona quote is misleading
given the much higher quality of the latter cotton, as discussed above.
177 The absence of data in MY 2002 for Memphis cotton was due to weather-related quality problems
according to Gerald Estur of the ICAC. See Exhibit Bra-375 (Information Provided by Gerald Estur, ICAC).
178 Exhibit Bra-208 (“Cotton: World Statistics,” ICAC, September 2003, p. 76).
179 Exhibit Bra-208 (“Cotton: World Statistics,” ICAC, September 2003, p. 76).
180 Exhibit Bra-383 (Brazil and US Export Data on Export Quantities and Values by Country).
181 Exhibit Bra-208 (“Cotton: World Statistics,” ICAC, September 2003, p. 76).
182 Exhibit Bra-383 (Brazil and US Export Data on Export Quantities and Values by Country).
183 Exhibit Bra-383 (Brazil and US Export Data on Export Quantities and Values by Country).

prices.184 This evidence confirms the testimony of Andrew Macdonald that Brazilian textile
purchases of cotton used, inter alia, US imports – or the threat of US imports – to negotiate lower
Brazilian domestic prices during MY 1999-2002. 185 It may also be an effect of US GSM 102 export
credit guarantees. And this evidence further confirms the price suppressing effects of US subsidies in
the Brazilian market.

Conclusion

131. The evidence set out above refutes the inappropr iate non-weighted average analysis in Exhibit
US-75, and confirms the effects of the US subsid ies in each market where Brazil and the US upland
cotton were found in MY 1999-2002. Any “compet ition” between US and Brazilian cottons took
place against the background of subsidy-distorted mark etplaces. In the final analysis, the fact that
selected US prices are higher 186 or lower in the A-Index or in individual third country markets is
largely irrelevant to the question whether US s ubsidies are causing significant price suppression “in
the same market” where US and Brazilian cotton is marketed. Rather, as Brazil has established, it is
the impact of the US subsidies on the global suppl y and demand factors that suppresses prices in the
world market as well as in the third countries where upland cotton is marketed. This means that the
prices in each of those 40 third country markets – as well as the Brazilian and US markets – were
already suppressed before any cotton was shipped by US or Brazilian exporters.

132. Finally, the generalized price-suppression eff ect manifests itself in all 42 individual country
markets
187 in which Brazilian upland cotton is consumed. Professor Sumner estimates that over
40 per cent of US upland cotton exports during MY 1999-2002 would not have been made but for the
US subsidies.188 Forty per cent fewer US exports necessarily means lower, or even non-existent, US
exports in many of the 40 markets where Brazil e xported its upland cotton. Had significant volumes
of US upland cotton not received Step 2 export paym ents, US exports and, thus, the amount of US
upland cotton competing with Brazilian cottons would ha ve been lower. Similarly, far fewer bids of
US upland cotton financed by the GSM 102 programme may well have meant higher prices for
Brazilian exporters and/or an expanded market share in each of these markets.

236. The Panel notes Exhibit US-47 (and the chart in paragraph 13 of the US 2 December
oral statement). Please provide a conceptually analogous chart to Exhibit US-63 with respect to
data relating to the US interpretation of "world market share". USA

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

184 Exhibit Bra-383 (Brazil and US Export Data on Export Quantities and Values by Country); Exhibit
Bra-389 (Brazilian Domestic Price Data) updating Exhibit Bra-240 (International, US and Brazilian Prices).
185 Brazil’s 9 September Further Submission, Annex II , para. 47 (“local purchasers of Brazilian cotton
will frequently threaten to import foreign cotton if they consider the price of local cotton to be too high.”).
186 See Brazil’s 9 September Further Submission, Figure 17 (US California A-Index prices were higher
than Brazilian prices).
187 40 export markets plus the United States and Brazil.
188 Brazil’s 9 September Further Submission, Annex I, Table 5a. This conclusion is conservative in
view of the huge $12.5 billion loss that would have b een suffered by US producers with no US subsidies
between MY 1997-2002.

Brazil’s Answer:

133. In responding to this question, Brazil starts fro m the ordinary meaning of the term “consistent
trend.” A “trend” means “a general course, tendency or drift.” 189 “Consistent” means “congruous,
compatible with, not contradictory, marked by uniformity or regularity.” 190 A consistent trend within
the meaning of Article 6.3(d) therefore means a non-contradictory tendency marked by regularity.

134. Generally, a phenomenon that remains at approxi mately the same level could be considered a
consistent trend. However, read in the context of Article 6.3(d), which speaks of an “increase that
follows a consistent trend over a period when subsid ies have been granted,” the consistent trend must
reflect the increase in the world market share of a Member over its previous three-year average. Thus,
for a given period of time, the world market share of a Member could remain at approximately the
same level and be compatible with a finding of a cons istent trend. Yet, there will not be a consistent
trend, within the meaning of Article 6.3(d), if duri ng the final year there is no increase of a Member’s
world market share over its previous three-year average. It follows that over the period when
subsidies have been granted there must be a regular tendency of an increase in the world market share
of a Member – although no increase in each and every year is required for the conditions of
Article 6.3(d) to be fulfilled.

135. This interpretation is confirmed by the scope of Article 6.3(d), which applies to primary
products or commodities. The parties agree that th is includes agricultural products that necessarily
will be affected by favourable or adverse weat her conditions. The United States, for example,
repeatedly asserts that the weather-related problems of MY 1998 mean that data for that year should
be disregarded. These weather-related effects alone could cause in particular years the world market
share of a Member to increase or decrease. This may well be the reasoning behind requiring
examination of a longer trend in Article 6.3(d). But to require a constant increase in the world market
share during each year “when subsidies have b een granted” would render the disciplines of
Article 6.3(d) largely inutile for agricultura l products faced with weather-related production
fluctuations.

136. Brazil has offered data on the US world ma rket share over the period since MY 1996 as well
as since MY 1986.
191 The data shows that the trendline for the US world market share increases
whether based on MY 1996 or MY 1986 as the starti ng point. The Panel’s question asks for guidance
on the conditions for a finding whether this trend is consistent.

137. Brazil cautious that statistical methods may not be helpful in analyzing the consistency of a
trend within the meaning of Article 6.3(d) for two reasons: first, Article 6.3(d) is concerned with
yearly data over a relatively short period. That means that only very few data points will be available,
which will affect the statistical significance of any results. Second, as discussed above, it is the nature
of world market shares in agricultural products to fluctuate due to weather-r elated effects. This
phenomenon tends to further weaken any statistical significance of methods analyzing the consistency
of a trend.

138. With these considerations in mind, Brazil s uggests that the Panel analyze the trendlines
offered by Brazil
192 and decide whether on their face they demonstrate – as Brazil has argued – a trend
consistent with a finding that the effect of the subs idies is an increase in the US world market share
for upland cotton. Brazil believes they do, particularly if the severe MY 1998 decline is disregarded.

189 The New Short Oxford English Dictionary 1993 edition, p. 3384.
190 The New Shorter Oxford English Dictionary, 1993 edition, p. 486.
191 Brazil’s 27 October Answers to Questions, paras. 123-129 and Brazil’s 9 September Further
Submission, Sections 3.4 and 4.12.2.
192 Brazil’s 27 October Answers to Questions, paras. 123-129 and Brazil’s 9 September Further
Submission, Sections 3.4 and 4.12.2.

139. However, Brazil has also run a regression an alysis for the trends over the period MY 1986-
2003, MY 1996-2003 and MY 1996-2002, with the results being reproduced in the graphs below.
193

US World Market Share Upland Cotton (MY 1986-2003)
y = 0.866x + 18.4
R2 = 0.4438
0
5
10
15
20
25
30
35
40
45
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
marketing year
percentage

193 The results are based on data as reported in Exhibit Bra-302 (Revised and Extended Data on Article
6.3(d) Claim).

U.S. World Market Share Upland Cotton (MY 2003)
y = 2.7379x + 17.428
R2 = 0.6033
0
5
10
15
20
25
30
35
40
45
1996 1997 1998 1999 2000 2001 2002 2003
marketing year
percentage

U.S. World Market Share Upland Cotton (MY 2002)
y = 2.8107x + 17.21
R2 = 0.5171
0
5
10
15
20
25
30
35
40
45
1996 1997 1998 1999 2000 2001 2002
marketing year
percentage

The R2 – the measure for the fit of a regression analysis – varies between 0.44 for MY 1986-2003 and
0.60 for MY 1996-2003. The R 2 demonstrate that there is a positive relationship between the US
world market share and its increase over time. In view of the limited number of observations and the
nature of the commodity market in question, this is a very high number.

238. According to the US interpretation of the term "world market share":

 (a) should the domestic consumption of closed markets be added into the
denominator?

 (b) if US production and consumption in creased by the same percentage, whilst the
rest of the world's production and co nsumption remained steady, would this
imply an increase in the US "world market share" by a different percentage?

 (c) does Saudi Arabia have a small wo rld market share for oil? USA

239. How does the US respond to Brazil's assertions that, under the US interpretation of the
term "world market share":

 (a) there would be no WTO disciplines on production-enhancing subsidies that
increase a Member's world market sha re of exports? (see paragraph 64 of
Brazil's 2 December oral statement);

 (b) a Member's exports would have to be disregarded in calculating their "world
market share" in terms of "world co nsumption"? (see e.g. paragraph 65 of
Brazil's 2 December oral statement) USA

240. Does Article XVI:3 of GATT 1994 provide context in interpreting Article 6.3(d) of the
SCM Agreement? Do these provisions apply separately? If not, could it indicate that "world
market share" is intended to mean the same as "share of world export trade"? USA

241. How does the US reconcile its data on co nsumption for 2002 in US Exhibit 40, Table 1
with the "consumption" data it refers to in it s 30 September submission, paragraph 34, Exhibit
US-47 or US-71? USA

242. How much of the benefits of PFC, MLA, CCP and Direct Payments go to land owners?
If not all of the benefits go to land owners, what proportion goes to producers? USA

243. Can the Panel assume that any support at all, even marketing loan programme
payments, benefits upland cotton if an upl and cotton producer has other agricultural
production besides upland cotton? USA

244. What proportion of the 2000 cottonseed payments 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

Brazil’s Answer:

140. Brazil does not know “what proportion of the 2000 cottonseed payments” were paid directly
to producers of upland cotton by first handlers. A ny such information would be within the exclusive
control of USDA. Therefore, Brazil looks forward to the United States providing this information in
its 19 January comments.

141. However, there is evidence that the MY 2000 cottonseed payments – together with the MY
1999 and MY 2002 payments – benefited upland cotton pro ducers either directly or indirectly. First,
producers who ginned their own cott on received payments directly as “first handlers.” But even
producers who did not gin their own cotton received i ndirect benefits because the purpose and effect
of the subsidy was to prevent producers from having to pay more for ginning because of low

cottonseed prices. This was made clear by the official USDA announcement of the USDA Secretary
Glickman in announcing the MY 2000 cottonseed payments:

Agriculture Secretary Dan Glickman announced today that USDA will propose to pay
cotton farmers and ginners about $74 million to help offset losses from low 1999-
crop cottonseed prices.
Because of those low prices, many gins were unable to meet operating expenses
normally covered by cottonseed revenues a nd some cotton farmers had to pay higher
ginning costs,” Glickman said. “This discretionary programme will help farmers
make up this lost income.”
The proposed payments would be made to cotton gins based on seed tonnage
produced from the 1999 crops of upland and Extra Long Staple cotton. USDA plans
to propose that gins share cottonseed programme payments with cotton farmers
commensurate with any increased 1999-cr op ginning charges as a condition of
accepting programme payments.
194
142. This analysis makes it clear that upland cotton producers in MY 1999-2000 were required to
pay more for ginning when cottonseed prices fe ll because ginning companies accept as part of the
payment for ginning the cottonseed produced from the ginning process of raw cotton. The benefits of
the cottonseed programme to producers explains why the NCC strongly supported the “the
establishment of a permanent programme for cottonseed” during the debate for the 2002 FSRI Act.
195
In testimony before Congress, the Chairman of the NCC stated as follows:

Cottonseed is a critical component of total farm revenue generated from cotton
production. From 1994-1998, co ttonseed accounted for approximately 13 per cent of
the total value of cotton production, averaging $58 per acre. Unfortunately
cottonseed prices weakened significantly in 1999 as a result of weak crushing
demand ads well as low oilseed prices. Cottonseed values remain well below those of
previous years. The special cottonseed payment authorized by Congress for the 1999
and 2000 marketing years were vitally important on boosting producer income
 and
helping to maintain the industry’s ginning infrastructure.196
143. Finally, the importance of cottonseed paymen ts to producers is further demonstrated by
comparing the costs of ginning to the value of cottonseed. This is illustrated in the graph below:197

194 Exhibit Bra-390 (“Glickman Proposes Cottonseed Payment Programme,” USDA News Release,
29 February 2000) (emphasis and underlining added).
195 Exhibit Bra-41 (Congressional Hearing, “The Future of Federal Farm Commodity Programmes
(Cotton),” House of Representatives, 15 February 2001, p. 5).
196 Exhibit Bra-188 (Testimony of James Echols, Chairman of the National Cotton Council before the
Committee of Agriculture, Nutrition and Forestry of the US Senate, 17 July 2001, p. 9).
197 This graph is based on per pound figures for the value of cottonseed and the cost of ginning per
pound of cotton lint produced as calculated from Exhibit Bra-323 (Costs and Returns of US Upland Cotton
Farmers, MY 1997-2002). They calculated figures are reproduced in Exhibit Bra-391 (Cost of Ginning and
Value of Cottonseed per Pound of Cotton Lint).

Cost of Ginning vs Value of Cottonseed
0
2
4
6
8
10
12
1997 1998 1999 2000 2001 2002
Years
Cents Per Pound
Cost of Ginning per pound of cotton lint
Value of cottonseed per pound of cotton lint

144. This graph shows that producers were the pr imary beneficiaries of the cottonseed programme.
When cottonseed prices declined in MY 1999, ginning costs exceeded cottonseed prices by 2.18 cents
per pound of cotton lint. 198 This gap between ginning costs and cottonseed prices totalled
$170.5 million.199 Congress authorized $185 million in cottonseed payments in MY 2000 200, which
covered much of the MY 1999 losses. As noted, it was upland cotton producers – not ginners – who
were required to pay the $170.5 million difference in MY 1999 between the costs of ginning and the
value of the cottonseed. When cottonseed prices again plunged in MY 2001 and MY 2002, Congress
provided relief to producers with the 2002 cotton seed payments. For example, the $50 million in
cottonseed payments in MY 2002 covered part of a gap of $73 million between the ginning cost and
the value of the cottonseed. 201 Thus, this evidence suggests not only that cottonseed payments were
support to upland cotton within the meaning of Article 13(b)(ii) of the Agreement on Agriculture, but
that these payments, while relatively small in comp arison to the billions of dollars paid to US
producers, nevertheless, provided yet further s ubsidies supporting large quantities of US upland
cotton production.

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

198 Exhibit Bra-391 (Cost of Ginning and Value of Cottonseed per Pound of Cotton Lint).
199 This figure has been calculated based on the price gap of 2.18 cents per pound multiplied by the MY
1999 production of 16.294 million 480-pound bales (Exhibit Bra-4 (“Fact Sheet: Upland Cotton,” USDA,
January 2003, p. 4).
200 Brazil’s 9 September Further Submission, Table 1.
201 This figure has been calculated based on the price gap of 0.92 cents per pound multiplied by the MY
2002 production of 16.531 million 480-pound bales (Exhibit Bra-391 (Cotton and Wool Outlook, USDA,
12 December 2003, Table 1).

Brazil’s Answer:

145. The Panel is well aware of Brazil’s view that all of the US subsidies are non-green box. But
if the Panel were to find that certain of the subs idies are green-box subsidies, then under the specific
circumstances of this dispute, Article 13(a)(ii) of the Agreement on Agriculture prohibits – during the
implementation period – the effects of these subsidie s being included along with other effects of non-
green box subsidies in assessing Brazil’s actionable subs idy claims. Professor Sumner’s analysis in
Annex I of Brazil’s 9 September Further Submission permits the Panel to examine both the individual
as well as collective effects of the various US s ubsidies. In response to Question 146, Professor
Sumner analyzed the production, export and pr ice effects of all of the subsidies except PFC
subsidies.202 This analysis would also permit the Panel to ensure that effects caused by, for example,
PFC payments, were not attributed to the effects caused by the other non-green box subsidies.

146. After the 9-year implementation period of th e Agreement on Agriculture, there is nothing in
that Agreement that exempts the effects of green box subsidies from being considered by panels in
actions based on Articles 5 and 6 of the SCM Agreemen t. Subsidies that conform to Annex 2 of the
Agreement on Agriculture are exempt from the re duction commitments established under Article 6,
but there is nothing in Articles 5 or 6 of the SCM Agreement that provides for any type of exemption,
beginning in 2004. On the contrary, Article 5 of the SCM Agreement clearly states the Members
should not cause, “… through the use of any subsidy … adverse effects to the interests of other
Members.” The only exception provided therein refers to the temporary exception of Article 13 of the
Agreement on Agriculture.

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

Brazil’s Answer:

147. Yes, the Panel is requi red 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. 203 Even
if the Panel were to conclude that the effects of prohibited subsidies, such as Step 2 and export credit
guarantees, should not be assessed for the purposes of Brazil’s Article 5 and 6 claims, Professor
Sumner’s analysis permits the Panel to analy ze such claims for those non-green box and non-
prohibited subsidies (marketing loan payments, crop insurance subsidies and contract payments).

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

Brazil’s Answer:

148. Yes. Nothing prevents the Panel from cons idering – in assessing Brazil’s threat of serious
prejudice claims – the volatility of the upland cotton market and current and likely futures price
developments after the date of establishment of th e Panel. Brazil has proposed that the Panel follow
the guidance of the GATT EC – Sugar Exports panels and the Appellate Body in US – FSC and
analyze whether there is any mechanism that stems, or otherwise controls, the flow of US upland

202 Brazil’s 27 October Answers to Questions, paras. 114-118 and Exhibit Bra-301 (Additional Results
from Professor Sumner’s Model, Table “Impact of removal of all domestic support except PFC/direct payments
and crop insurance).
203 See Brazil’s 27 October Answer to Question 145(b).

cotton subsidies and whether these mandated and unlimited subsidies constitute a permanent source of
uncertainty in the upland cotton market.204

149. The Panel’s question raises both legal and factua l issues. First, as a legal matter, Brazil has
previously argued that it is appropriate for the Pane l to consider pricing, export, production, acreage
and other evidence occurring after the da te of establishment of the Panel.
205 The Panel’s terms of
reference in this case involve both present and threat of serious prejudice claims ( i.e., matters) with
each of these types of claims overlapping during the period of MY 2002. Thus, the “matter” before
the Panel has not changed (and cannot) since the establishment of the Panel.

150. In “making an objective assessment of the matter,” the Panel must make “an objective
assessment of the facts of the case” pursuant to DSU Article 11. Nothing in the text of DSU
Article 11 suggests that this objective assessment of “facts” cannot include collecting and analyzing
facts occurring after the establishment of a Panel. Indeed, there are a number of precedents in which
panel’s have considered eviden ce that came into existence after the date of the establishment of a
panel.
206 As with investigating authorities in trade reme dy investigations, a “period of investigation”
for a WTO Panel in an Article 5 and 6 claim is useful for assessing whether present or threatened
effects presently exist. There is nothing in the text of Part III of the SCM Agreement or the DSU that
suggests that the time period for the collection of ev idence or data to investigate must stop with the
establishment of the Panel.

151. The second question raised by the Panel’s question is a factual one, i.e., what weight should
the Panel give to the most recent evidence of volatility in the cotton futures and spot markets? It is
fact that upland cotton prices have risen – and falle n – significantly since the Panel was established in
March 2003. For example, futures prices for the nearby March 2004 contract rose from 55.80 cents
on 6 March 2003 to a high of 86 cents on 30 October before falling to 72.32 cents on
19 December 2003.
207 But the record shows that such vola tile futures price increases – and decreases
– also occurred between MY 1999-2002.208 And they will no doubt exist during MY 2003-2007.

152. In assessing whether there is a threat of seri ous prejudice, the Panel should be cautious about
relying too heavily on only 3-4 months worth of the most recent data. Indeed, the Appellate Body has
cautioned that “competent authorities are required to examine the trends in [data] over the entire
period of investigation,” because the “analysis could be easily manipulated to lead to different results,
depending on the choice of end points.”
209 Similarly, in Argentina – Footwear the Appellate Body
held that “competent authorities are required to co nsider the trends in imports over the period of
investigation (rather than ju st comparing the end points).” 210 The panel in Argentina – Peach
Safeguards stated that “[t]the most recent past should not be considered separ ately from the overall

204 See Brazil’s 18 November Further Rebuttal Submission, Section 4.
205 Brazil repeatedly in its many submission to the Panel refers to data that originates after the
establishment of the Panel, including in these answers to the Panel’s questions.
206 Panel Report, India – Quantitative Restrictions , WT/DS90/R, para. 5.161-5.163 (“In this case the
parties and the IMF have supplied information concerning the evolution of India’s balance of payments and
reserve situation until June 1998. To the extent that such information is relevant to our determination of the
consistency of India’s balance of payments measures wi th GATT rules as of the date of establishment of the
Panel [18 November 1997], we take it into account.”); Panel Report, Japan – Apples, WT/DS245/R, para. 8.49;
GATT Panel Report, Korea – Beef, BISD 36S/268, paras. 122-123.
207 Exhibit Bra-393 (Futures Prices as of 19 December 2003).
208 See Exhibit Bra-311 (Side-By-Side Chart of the Weekly US Adjusted World Price, the A-Index, the
nearby New York Futures Price, the Average Spot Market Price and Pri ces Received by US Producers from
January 1996 to the Present).
209 Appellate Body Report, US – Steel Safeguards, WT/DS248/AB/R, paras 353-356.
210 Appellate Body Report, Argentina – Footwear, WT/DS121/AB/R, para. 129.

trends during the period of analysis,” as otherwis e the resulting picture may be “quite misleading.”
211
The Panel in this case performs a task similar to a domestic competent authority in a trade remedy
case.

153. The Panel has before it two different met hodologies to judge the present price levels and
threat of serious prejudice. The first methodology before the Panel is the use of baseline projections
such as the USDA’s and FAPRI’s baseline projections to assess the effects of mandated US subsidies
in the year ahead. Professor Sumner’s analysis based on the January 2003 FAPRI baseline, shows
that the US subsidies continue to maintain larg e amounts of US production whether prices are high or
low. Professor Sumner found that during MY 2003-2007 annual US production would be 19.4 per
cent lower leading to a reduction in projected US exports by 32.4 per cent annually and world prices
that would be 8.3 per cent higher absent the US subsidies.
212 Similarly, Professor Ray of the
University of Tennessee also found significant pr oduction, export, and price suppressing effects from
the US subsidies from MY 2003-2007.213 These findings by two of the leading US economists cannot
be ignored by the Panel.

154. A second far less valid methodology would be to use the US “futures methodology.” This
methodology would examine the December futur es price at the time of planting (January-
March 2004). What is significant about current futu res prices (in December 2003) is that the “futures
market” is predicting that prices will fall in MY 2004. The December 2003 price of the
December 2004 futures contract is 65.85 cents per pound as of 19 December 2003, while the
March 2004 futures contract is 72.32 cents per pound.
214 Assuming that the current 65.85 cents per
pound December 2004 futures contract price will continue during the planting decision marking time
between January-March 2004, the expected adju sted world price will be 52.48 cents per pound
215 and
the expected average MY 2004 price received by US producers would be 59.73 cents per pound. 216
This means that US producers “expect” to receive a considerable CCP payment of 6 cents per pound
in MY 2004 (65.73 cents minus 59.73 cents).

155. As discussed by Professor Sumner on 3 December, given the probability distribution of the
expected adjusted world price,
217 producers would also expect to receive some marketing loan
payments because producers expect with a certain pr obability that the adjusted world price would be
below the marketing loan rate triggering marketing loan payments.

156. As with the period MY 1999-2002, the existi ng (December 2003) price levels in the upland
cotton world and US markets mean that US prod ucers will be planting in 2004 for government
support during MY 2004, not for the market. This constant theme was recently emphasized by the
world’s largest cotton trader, William Dunavant:

The [US] farm programme can return more when prices are low rather than when
prices are high . . . [and] [t]he loan deficiency payment created by the farm
programme is the name of the game – not necessarily the futures price or the cash
price . . .

211 Panel Report, Argentina – Peach Safeguards , WT/DS238/R, para. 7.64-7.65 citing para. 138 of the
Appellate Body Report in US – Lamb.
212 Exhibit Bra-326 (Results of Professor Sumner’s Modified Model, Table B).
213 See Brazil’s 9 September Further Submission, paras. 204-205.
214 Exhibit Bra-393 (Futures Prices as of 19 December 2003).
215 Exhibit Bra-370 (The Difference between th e Average World Price and the Nearby December
Futures Contract Price).
216 The spread of 6.12 cents has been calculated based on the data in Exhibit Bra-370 (The Difference
between the Average World Price and the Nearby December Futures Contract Price) and the average farm price
in Exhibit Bra-4 (“Fact Sheet: Upland Cotton,” USDA, January 2003, p. 5).
217 See Exhibit Bra-371 (Simple Example of the Calcula tions of Marketing Lon Benefits (Probability
Distribution)).

It’s interesting that we project nearly an 8 per cent increase in world production [in
MY 2003], but US production is forecast to rise only slightly. This tells me the world
is certainly more price sensitive and responsive than the US cotton producer. I think
the nature of our farm programme de finitely creates this situation. Cotton futures
prices need to rise to nearly 70 cents a pound to make cash prices better than the
farm programme protection.218
In addition, Mr. Dunavant emphasized that US producers “must have” the GSM-102 programme “if
we are to export the quantities needed to support ou r level of cotton production in this country [ i.e.,
the United States].”219 These statements by the world’s lead ing cotton trader confirm the significant
effects that have existed and will continue to exis t at current price levels because of the mandatory
nature of the subsidy programmes.

157. Finally, nothing about the price levels that have increased since 18 March 2003 has changed
in any way the mandatory nature of the US subsidies. At current price levels, producers would
receive benefits from crop insurance subsidies, direct payments, and indirectly from Step 2 payments
and export credit guarantees. Whether prices are at 70 cents per pound or 30 cents per pound, US
producers know and expect that they will be protected by the wide range of US subsidies. When US
prices decline, as they inevitable will, US producer s will be provided direct production incentives to
continue producing at any price level. Historical data convincingly demonstrates that this downside
risk protection guarantees high leve ls of production. Brazil proved that US planted acreage remains
high within relatively narrow ranges whether market prices increase or decrease. This lack of US
producers’ production response to huge costs overruns of $12.5 billion over six years or to record low
prices, or even to increasing prices, is at the heart of Brazil’s threat case. While the cumulative price-
suppressing and export-enhancing effects of the US s ubsidies may be smaller now than they were on
18 March 2003, they are, and will remain significan t for MY 2003 and for MY 2004 based on current
prices.

158. In sum, Brazil reiterates its arguments that taking all available data into account, the US
subsidies pose a threat of serious prejudice to the inte rests of Brazil, in violation of Articles 5(c) and
6.3 of the SCM Agreement and GATT Articles XVI:1 and XVI:3.
220

VI. Step 2

248. In respect of the level of Step 2 payments in certain time periods, the Panel notes, inter
alia, footnote 129 in the US first written submission; footnote 33 in the US 18 November further
rebuttal submission; and Exhibit BRA-350. Have Step 2 payments ever been zero since the
elimination of the 1.25 cent per pound threshold in the FSRI Act of 2002? In what
circumstances could a Step 2 payment be zero? How does the elimination of the 1.25 cent per
pound threshold in the FSRI Act of 2002 affect your response? BRA, USA

Brazil’s Answer:

159. Under the 2002 FSRI Act (with the elimination of the 1.25 cent per pound threshold), Step 2
payments will be zero when the lowest US A-I ndex quote is equal or below the average A-Index. 221
Thus, for Step 2 payments to expire, the lowest US quote will have to be one of the cheapest of the

218 Exhibit Bra-392 (“William Dunavant Says: Overproduction Thwarts Cotton Price Upturn,” Western
Farm Press).
219 Exhibit Bra-392 (“William Dunavant Says: Overproduction Thwarts Cotton Price Upturn,” Western
Farm Press).
220 See Section 4 of Brazil’s 18 November Further Rebuttal Submission.
221 Exhibit Bra-29 (Section 1207 (a) of the FSRI Act).

only five quotes making up the given A-Index. Du ring MY 2002, there were zero Step 2 payments
during five weeks: 20 September, 27 September, 4 October, 11 October and 18 October 2002.
222

160. By contrast, during MY 2001, Step 2 payments were zero during 15 weeks: 14 December,
21 December, 28 December, 4 January, 11 January, 18 January, 25 January, 1 February, 8 February,
15 February, 22 February, 1 March, 8 March, 15 March, and 22 March.
223

161. The elimination of the 1.25 cent per pound threshold under the 2002 FSRI Act has reduced
the likelihood of zero payments under the Step 2 programme because the lowest US quote must now
be even lower relative to the A-Index for Step 2 pa yments to expire. It also means that the US
government will pay the entire difference between th e cheapest US price quote for the A-Index and
the A-Index itself.

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?
224 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

Brazil’s Answer:

162. As set out in Brazil’s Answer to Question 1 25, Step 2 payments generally are not received by
US producers but rather by eligib le exporters and domestic users. 225 Of course, it is theoretically
possible for a producer to receive directly Step 2 payments when the producer meets the definition of
an exporter “regularly engaged in selling eligible upland cotton for exportation from the
United States.”226 However, the fact that most US producers do not directly receive Step 2 payments
does not mean that they do not benefit indirectly from Step 2 payments. Quite the contrary. Step 2
payments support significant quantities of planted upland cotton acreage, production and exports by
stimulating the demand for high-cost and high-priced US cotton. 227 Brazil has provided considerable
evidence of these effects in its earlier submissions that has never been rebutted by the United States.228

163. The answer to the second question is “not at all. ” Exporters are only eligible to receive Step 2
export payments if they produce evidence to CCC th at they have exported an amount of US upland
cotton. Thus, payments are conditional upon proof of export. Exporters will not receive any Step 2
export payments if they have not produced evidence of the export of US upland cotton. In sum, the
fact that producers – in their capacity as exporters – may benefit from Step 2 export payments does
not impact the export contingency of these payments.

222 Exhibit Bra-350 (Weekly Step 2 Certificate Values).
223 Exhibit Bra-350 (Weekly Step 2 Certificate Values).
224 For example, Brazil's response to Panel Question 125, paragraph 14.
225 Brazil’s 27 August Answers to Question, para. 14.
226 Exhibit Bra-37 (7 CFR 1427.104(a)(2)).
227 See Brazil’s 9 September Further Submission, Annex I, table I.5f.
228 Sections 2.6.7, 2.6.8, 4.1, 5.1 and 5.2 of Brazil’s 24 June First Submission; Section 3 of Brazil’s
22 July Oral Statement; Brazil’s 24 July Closing Statement, paras. 21-22; Section 4 of Brazil’s 22 August
Rebuttal Submission; Section 3.3.4.7.5 of Brazil’s 9 September Further Submission; Section 3.7.3 of Brazil’s
18 November Further Rebuttal Submission.

(b) How does this reconcile with Dr. Glauber's statement in Exhibit US-24, p. 3
(referring to "the 1990 Farm Bill and subsequent legislation") that Step 2
payments do not go directly to the producer? USA

(c) What proportion of Step 2 "export payments" go to producers? Please supply
supporting evidence. USA

VII. 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

Brazil’s Answer:

164. Brazil does not seek relief under GATT Article XVI of GATT 1994 in respect of expired
measures, which Brazil understands the Panel to me an only the legal instruments consisting of the
1996 US Farm Bill providing, inter alia, for production flexibility contract payments, as well as the
various emergency appropriation Acts in 1998-2001 providing, inter alia, for market loss assistance
payments.229

165. With respect to the second ques tion, the Appellate Body held in US – Certain EC Products,
that a panel may not make a recommendation to the DSB that a Member bring a measure into
conformity with its WTO obligations if that measure no longer exists. 230 Therefore, as detailed in
paragraph 471(x) of Brazil’s 9 September Furt her Submission, Brazil requests the Panel to
recommend that the United States bring its existing measures providing or facilitating the payment of
subsidies to producers, users and exporters of upland cotton into conformity with GATT Article XVI.

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

Brazil’s Answer:

166. Yes. If the Panel agrees with Brazil that th e US subsidies to upland cotton cause and threaten
to cause serious prejudice to the interests of Brazil, in violation of Article 5 of the SCM Agreement,
the Panel should recommend pursuant to Article 7. 8 of the SCM Agreement that the United States
remove these adverse effects or withdraw the subsidies.231

252. Without prejudice to any findings by the Panel, if the Panel were to find that any of the
challenged measures constitute prohibited subs idies 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 Agreement relating to the time period "within
which the measure must be withdrawn"? What should that time period be? BRA

229 Brazil’s claims under Articles 5(a) and 6(c) of the SCM Agreement do include the continuing
adverse effects today and in the future of subsidies provided under these expired legal provisions. See Brazil’s
24 July Closing Statement, paras 4-7.
230 Appellate Body Report, US – Certain EC Products, WT/DS165/AB/R, para. 81
231 See Brazil’s 9 September Further Submission, paras. 471(viii) and 471(ix).

Brazil’s Answer:

167. Brazil suggests that the Panel follow th e precedent of all previous WTO panels 232 that made
findings of prohibited subsidies and specify that the measure must be withdrawn within 90 days.233

VIII. Miscellaneous

253. Regarding the adjustment authority related to Uruguay Round compliance in s.1601(e)
of the FSRI Act of 2002 (the so-called "circuit-breaker provision"):

 (a) Does it relate to export credit gu arantees, crop insurance and cottonseed
payments?

 (b) Does it relate only to compliance with AMS commitments?

 (c) Is the authority discretionary? If so, can its exercise be limited by the legislative
branch of government?

 (d) How would the Secretary exercise her au thority to prevent serious prejudice to
the interests of another Member? How would she exercise her authority to
prevent a threat of serious prejudice to the interests of another Member? At
what time and on the basis of what type of information would she exercise her
authority?

 (e) What does "to the maximum extent practicable" mean? In what circumstances
would it not be practicable for the Secretary to exercise her adjustment
authority? USA

254. Would payments made after the date of panel establishment be mandatory under the
marketing loan, direct payments, counter-cyclical payments and user marketing certificate
(step 2) programmes, but for the circuit-breaker provision? USA

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

Brazil’s Answer:

168. The United States has admitted what the text of the “circuit breaker” provision in
Section 1601(e)(1) of the 2002 FSRI Act already makes clear, i.e. that it only applies to “total
allowable domestic support levels under the Uruguay Round Agreements,” i.e., “total AMS.”234 The
United States further acknowledges that this provi sion “is not specifically addressed to forestalling

232 Panel Report, Brazil – Aircraft , WT/DS46/R, para. 8.5; Panel Report, Canada – Aircraft ,
WT/DS70/R, para. 10.4; Panel Report, Australia – Leather , WT/DS126/R, paras. 10.6-10.7, Panel Report,
WT/DS139/R and WT/DS142/R, paras. 11.6-11.7 and Panel Report, Canada – Aircraft II , WT/DS222/R,
para. 8.4.
233 Brazil notes that the panel in US – FSC took account of the fact that the US tax system could only
be changed from the beginning of the next fiscal year and therefore set the 1 October 2001 as the deadline for
withdrawing the FSC subsidies “without delay.”

serious prejudice.”235 Indeed, no provision in US law is designed to forestall serious prejudice to US
trading partners caused by US agricultural subsidies specifically in support of upland cotton.

169. The current US “total AMS” is $19.1 billion. As long as the United States stays below this
level, there is no legal provision in the 2002 FSRI Act granting the Secretary of Agriculture any
authority to stem, or otherwise control, the amount of upland cotton subsidies. Indeed, the numerous
mandatory provisions of the 2002 FSRI Act text cited in Brazil’s earlier submissions
236 requires the
Secretary to make the payments to which eligib le producers, users and exporters have a legal
entitlement. No exceptions for upland cotton are provi ded for. Thus, these provisions continue to be
mandatory in all circumstances where the US total AMS is below $19.1 billion. The Appellate Body
and WTO panels have held that measures are ma ndatory where they cannot be applied in a WTO
consistent manner in certain circumstances.237

170. And even were the US total AMS to exceed $19.1 billion, the text of Section 1601(e)(1) does
not mandate any reductions if it is not “practicabl e” to do so. Nor does the text mandate an even,
across the board, cut for all programme crops. For example, the Secretary appears to have the
discretion to cut corn or wheat subsidies but retain the full amount of upland cotton subsidies. Brazil
will provide further comments on the “circuit breaker ” provision on 19 January in response to the US
Answers to Questions 253-254.

256. The United States submits that the Panel ca nnot make rulings without allocating precise
amounts of payments to upland cotton production . However, to the extent that such precise
data is not on the Panel record, to what extent can the Panel rely on less precise data, and on
reasonable assumptions, in fulfilling its duty under Article 11 of the DSU in this case? USA

236 Brazil’s 9 September Further Submission, para . 423 (summarizing the evidence and the specific
statutory provisions of the 2002 FSRI Act and the 2000 ARP Act mandating payments by USDA).
237 Appellate Body Report, Argentina – Textiles and Apparel, WT/DS56/AB/R, paras. 48-54, 62; Panel
Report, US – Export Restraints, WT/DS194/R, para. 877.

ANNEX I-8

ANSWERS OF THE UNITED STATES TO QUESTIONS POSED
BY THE PANEL FOLLOWING THE SECOND
SUBSTANTIVE MEETING OF THE PANEL

(22 December 2003)

A. TERMS OF REFERENCE

 192. Regarding the interest subsidie s and storage payments listed by the
United States in its response to the Panel's Question No. 67:

(a) Please provide a copy of the regulat ions under which they are currently and
under which they were provided during the marketing years 1996-2002;

1. For interest subsidies and storage paym ents under the 1996 Act (marketing years 1996-2002),
the relevant regulations are found at 7 CFR 1427.13 a nd 1427.19 (2000 ed.) (first published at 61 FR
37601, 18 July 1996). 1 Under the 2002 Act, those rules are found at 7 CFR 1427.13 and 1427.19
(2003 ed.) (first published at 67 FR 64459, 18 October 2002). 2 We describe and discuss these
provisions below in response to part "(b)" of this question.

(b) Please indicate whether there are any su ch payments which are not provided to
implement the repayment rate for upland cotton within the marketing loan
programme. USA

2. Interest subsidies and storage payments are support provided in connection with the
marketing loan programme. On a forfeit of warehouse-stored upland cotton under loan, the
Commodity Credit Corporation (CCC) pays warehou se charges for the loan period (even though the
farmer had title during that period) and forgives inte rest. 7 CFR 1427.13 (2000 ed. and 2003 ed.). As
for redemption of cotton under loan, repayment ra tes depend on the world market price. If the
repayment amount set on that price is low enough, CCC may have to forgive interest and pay storage
charges because the repayment amount will not be enough to satisfy the loan amount and those
charges. See 1427.19(e) (2000 and 2002). By contrast, if the repayment rate set on the world market
price is high enough, the producer pays both. Id. In general, if the loan is repaid, there is not an
interest subsidy at all; rather, in 7 CFR Part 1405, it is provided that CCC will charge the sum of (1)
the rate that CCC pays the Treasury and (2) anothe r 1 per cent per annum. We are not aware of any
other payments that would be responsive to the panel’s question.

1 See Exhibit US-117 (7 CFR 1427.13 and 1427.19 (2000 ed.)).
2 See Exhibit US-118 (7 CFR 1427.13 and 1427.19 (2003 ed.)).

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

3. In response to the Panel’s Question 67, whic h asked the parties "to calculate and submit
estimates of the AMS for upland cotton for marketing years 1992, 1999, 2000, 2001 and 2002," the
United States stated, in the context of its calcula tion of the AMS for marketing year 2002, that "it
would not be appropriate for the Panel to exam ine payments made after the date of panel
establishment, on which the Panel’s terms of refere nce were set. Measures taken after the Panel was
established cannot be within the Panel’s terms of reference."
3 The United States continues to believe
that this statement is accurate. Past panels have fr equently been confronted wi th the issue of the date
as of which measures should be examined. Panels have generally determined to examine those
measures as of the date of panel establishment as a matter both of terms of reference as well as for
practical reasons (for example, so as to allow findings to be made with respect to a measure
withdrawn after the panel was established but before panel proceedings were completed).

4. The Panel’s terms of reference were set by the DSB at its meeting on 18 March 2003, namely,
"[t]o examine, in the light of the relevant provisi ons of the covered agreements cited by Brazil in
document WT/DS267/7, the matter referred to the DSB by Brazil in that document and to make such
findings as will assist the DSB in making the recommendations or in giving the rulings provided for in
those agreements."
4 In that panel request, Brazil identifi es the measures at issue as "prohibited and
actionable subsidies provided to US producers, users and/or exporters of upland cotton." 5 In Brazil’s
answer to question 19 from the Panel, Brazil clarified: "Brazil’s Request for Establishment of a Panel
(‘Panel Request’) challenges two types of domestic support ‘measures’ provided to upland cotton and
various different types of export subsidy measures. The first type of domestic support "measure" is
the payment of subsidies for the production and use of upland cotton. These payments were and
continue to be made between MY 1999 to the present (and will be made through MY 2007) through
the various statutory and regulatory instruments listed on pages 2-3 of Brazil’s Panel Request. Brazil
referred to these payments at pages 2-3 of th e Panel Request as ‘subsidies and domestic support
provided under’ or ‘mandated to be provided’ under the various listed statutory and regulatory
instruments. 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."
6 That is, to the extent that
"payments" are at issue (as opposed to Brazil’s challenge of certain legal instruments "as such") 7, the
"measure" is "the payment of subsidies for the production and use of upland cotton." Only those
payments made through the date of panel establis hment could be "measures at issue" within the
meaning of DSU Article 6.2 (as opposed to meas ures not yet taken, such as the Agricultural
Assistance Act of 2003, which had not been enacted at the time of Brazil’s panel request).

5. Thus, for purposes of the Panel’s Peace Clause an alysis or the evaluation of the "effect of the
subsidy" for purposes of the Panel’s actionable subsidies analysis, Brazil’s choice to obtain
establishment of this Panel several months into the 2002 marketing year but well before that
marketing year was completed necessarily impact s the payments ("measure") that the Panel may
examine. The payment of subsidies after panel establishment cannot alter the measures within the
Panel’s terms of reference and properly before the Panel, just as the cessation of payments after panel
establishment would not prevent the Panel from making findings as to those payments that had been
made as of the date of establishment.

3 US Answer to Question 67 from the Panel, para. 134 (11 August 2003).
4 WT/DSB/M/145, para. 35.
5 WT/DS267/7, at 1.
6 Brazil’s Answer to Question 19 from the Panel, para 15 (emphasis added).
7 Brazil’s Answer to Question 19 from the Panel, para. 16.

B. ECONOMIC DATA

195. Does the United States wish to rev ise its response to the Panel's Question
No. 67bis, in particular, its statement that "the United States ... does not maintain
information on the amount of expenditu res made under the cited programmes to US
upland cotton producers"? Did the United States make enquiries of the FSA in the
course of preparing its original answer?

6. Question No. 67 bis inquired about annual amounts gran ted to upland cotton producers per
pound and in total expenditures under each of the decoupled payment programmes. The United States
of course conferred with US Department of Agriculture personnel, including FSA personnel,
concerning this question and reporte d to the Panel that USDA "does not maintain information on the
amount of expenditures made under the cited programmes to US upland cotton producers."
8 T h a t
response remains accurate today: because those pa yments are decoupled from current production,
expenditures under such programmes are not tracked by whether the recipient produces upland cotton.
In fact, the United States does not collect producti on data based on actual harvesting figures reported
by farmers; we do not understand Brazil to have asserted the contrary.9

7. Brazil has also not asserted that the United St ates maintains information on the receipt of
decoupled payments for upland cotton base acres by upland cotton producers. Rather, it has presented
a novel methodology developed by the Environmental Working Group (EWG) to compare disparate
data separately collected by the United States to attempt to infer that information.
10EWG compared
the farm numbers of recipients of decoupled pa yments for upland cotton base acres with the farm
numbers of recipients of marketing loan payments in marketing years 2000-2002. It bears emphasis
that the latter database is not a production data base based on actual harvesting figures reported by
farmers; the marketing loan database merely reco rds the quantities of cotton on which a recipient has
received payments. By comparing the matches by farm number between the two databases, EWG
calculated that the share of decoupled payments for upland cotton base acres paid to upland cotton
"producers" (that is, recipients of marketing loan payments) was 71.3 per cent in marketing year 2000,
76.9 per cent in marketing year 2001, and 73.6 per cent in marketing year 2002.

8. As we have previously mentioned
11, using the marketing loan payments database to identify
"producers" would be contingent on marketing year prices; only if prices are sufficiently low would a
high proportion of pro duction of a crop receive marketing loan pa yments. This appears to have been
the case for upland cotton in some recent marketing years but will not always be so (for example, no
marketing loan payments are being made in the 2003 marketing year) and was not the case for other
commodities (in marketing year 2002, total marketing loan payments of only $16.3 million for
soybeans, $16.3 million for corn, and $16.1 million for wheat were made).
12

8 US Comments and Answer to Additional Question, para. 20.
9 We do note that the record reflects the extens ive evidence the United States has presented on the
programmes and crop in question, from the actual data of amounts paid under the programmes to the amounts of
cotton that have been planted from year to year. Fu rther, in response to a Brazilian request for certain
information that was presented for the first time at th e second panel meeting, th e United States generated,
through significant expenditures of time and resources, aggregate and farm-by-farm records for both the "PFC"
and "DCP" period for every "cotton farm" in the United States, including the planting records for all such farms.
These data were transmitted on 18 and 19 December 2003.
10 See Brazil’s Further Rebuttal Submission, para. 31 ("If USDA was able to provide comprehensive
payment data for all (or most) payments in an electronic format, it is also able to generate information on
subsidy payments made to farms.") (emphasis added).
11 US Opening Oral Statement at Second Panel Meeting, para. 29.
12 Exhibit US-93. For this reason, it is fallacious for Brazil to argue that the specialization of cotton
farms on cotton is show by the alleged fact that "[i]n MY 2002, 92.45 per cent of marketing loan payments for
all crops made to farms producing upland cotton were ma de with respect to upland cotton." Brazil’s Further

9. We note that Brazil has not made any adjustme nt in the outlay figures it has presented to the
Panel for purposes of both Peace Clause and its actionable subsidy claims to reflect the fact that the
EWG percentages are substantially lower than the 87 per cent revision made by Brazil to correct its
initial Peace Clause analysis. The adjustment resu lting from the EWG data in the total decoupled
payments for upland cotton base acres made to upland cotton "producers" is also substantial. Since
Brazil presents the EWG percentages as Brazil's ow n data, Brazil has effectively conceded that its
own figures should be corrected at least as follows:

Decoupled payments for upland cotton base acres to upland cotton "producers" ($ millions)
 Brazil initial amount 13 Brazil corrected amount14 EWG amount15
1999 PFC 616 547.8 no data presented
1999 MLA 613 545.1 no data presented
2000 PFC 575 541.3 373.4
2000 MLA 612 576.2 436.7
2001 PFC 474 453 364.3
2001 MLA 654 625.7 402.8
2002 Direct 523 485.1 451.4
2002 CC 1077 998.6 893.5

The Panel can see a rather striking decline in the d ecoupled payments at issue that have not been
reflected in Brazil’s argumentation to the Panel.

10. We note further, however, that the EWG figur es do not end the story. These figures represent
only the first step in a proper calculation of th e decoupled payments received by upland cotton
producers that benefit upland cotton. For example, as detailed in the US answer to question 242 from
the Panel, the literature on decoupled payments i ndicates that these payments benefit the owners of
the base acres on which payments are made; paymen ts made on rented acres will be captured by
landowners through increased rent or other arrangements. Brazil itself has conceded that as of
marketing year 1997 – that is, only the first y ear after introduction of the production flexibility
contracts – already 34-41 cents per dollar of production flexibility contract payment were capitalized
into land rents.
16 Thus, based on its own evidence , Brazil should have adjusted the EWG figures
downwards by 22 to 27 per cent to reflect the capture by landowners (who are not producers) through
increased rent of 34-41 per cent of decoupled paym ents on the 65 per cent of cotton acres that are
rented.17 Furthermore, this study as of marketing year 1997 is consistent with the evidence presented
by the United States that as rental contracts come up for renewal the full value of the decoupled

Rebuttal Submission, para. 26. If prices were above the respective loan rates for other crops produced by a farm
also producing upland cotton, then logically the share of marketing loan payments for upland cotton will be
high, given that upland cotton prices were so low in marketing year 2002. The fallacy of Brazil’s argument is
further demonstrated by reviewing the data submitted by the United St ates on 19 December 2003. In the
aggregated data file "Dcpsum.xls", for marketing year 2002 upland cotton planted area represented only 30.7
per cent of total cropland for "cotton farms" (13.541 million acres out of total cropland of 44.036 million acres).
13 Brazil’s First Written Submission, paras. 148-49.
14 Brazil’s Answer to Question 67 from the Panel, para. 130 (adjusted amount of decoupled payments
for upland cotton base acres estimated as "support for upland cotton").
15 Brazil’s Further Rebuttal Submission, para. 23 (EWG data on amount of decoupled payments for
upland cotton base acres received by upland cotton "producers")
16 Brazil’s Answer to Question 179 from the Panel, para. 165; Brazil’s Opening Oral Statement at the
Second Panel Meeting, para. 57.
17 See Exhibit US-69 (cost of production data published by the Economic Research Service, based on
the 1997 ARMS survey, showing cotton producers owning 35 per cent of land they operate).

payments on rented acres will be captured by landowners and capitalized into land values.
18 Thus, to
reflect the benefit to upland cotton producer s, the EWG data should be adjusted downwards by 65 per
cent to reflect the fact that "[n]ot all operators [producers] can therefore be considered as true
beneficiaries of the [PFC] programme, since co mpetitive cropland rental markets work to pass
through payments from PFC recipients who are tenants to the owners of base acres." 19 Only those
upland cotton producers who are owners of upland cotton base acres will receive the benefit of those
decoupled payments.

11. Finally, to answer the Panel’s question on the total payments for upland cotton base acres that
benefit upland cotton producers would require in formation relating to the total value of each
recipient’s production. The EWG figures, adjusted to account for the capture of 65 per cent of those
payments by owners of base acreage who are not cott on producers, would need to be allocated across
the total value of production in order to calculate th e subsidy benefit to upland cotton. Brazil has not
brought forward information to permit that allocati on; in fact, as discussed in more detail in the US
answer to question 256 from the Panel, Brazil has not even claimed that such an allocation is
necessary. Accordingly, it does no t appear possible to calculate th e total payments to upland cotton
producers that benefit upland cotton nor any per pound measurement.

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

12. Data for marketing loan and user marketi ng certificate programmes are for upland cotton only
and are current as of 12 December 2003.
20

• Marketing loan programme (includes lo an deficiency payments, marketing loan
gains, and certificate gains): $832,836,963
• Step 2 payments (data are on a October 2002 - September 2003 fiscal year basis):
$415,379,000

13. Data for direct payments and counter-cyclical payments are presented for upland cotton base
acres only and are current as of 12 December 2003.
21

• Direct payments: $181,811,374 million. (Because the 2002 marketing year was a
transition year between the 1996 and 2002 farm bills, $436,805,000 in Production
Flexibility Contract payments were made in 2002.)
• Counter-cyclical payments: $1,309,471,167

14. Data for export credit guarantee programme s are only available on a fiscal year basis
(October 2002 - September 2003) and apply to all cotton. No breakout is available for upland cotton.
The value of registration guarantees is $234,423,344. This figure repr esents the coverage applied for
by exporters, not actual exports. An exporter may apply for a guarantee but not actually ship the
goods.22 Outstanding claims are $280,898, less than one-tenth of one per cent of the value of

18 See US Further Rebuttal Submission, paras. 75-77.
19 Burfisher, M. and J. Hopkins. "Farm Paym ents: Decoupled Payments Increase Households’
Well-Being, Not Production." Amber Waves, Vol. 1, Issue 1, (February 2003): 38-45, at 44 (Exhibit US-78)
20 Source: Official data base of the Commodity Credit Corporation, maintained by the Farm Service
Agency, USDA; latest data are unpublished and may differ from published FSA data.
21 Source: Official data base of the Commodity Credit Corporation, maintained by the Farm Service
Agency, USDA; latest data are unpublished and may differ from published FSA data.
22 Published data on guarantee values can be found in Export Assistance, Food Aid, and Market
Development Programmes, FY 2003 Summary at http://www.fas.usda.gov/excr edits/quarterly/archive.html.
Data for FY 2003 found in this report are current as of 9/30/03 and differ slightly from these figures, which
reflect exporter activity through mid- December, including cancellations and reserve activity. Data for FY 2003

registrations (further evidence, specific to cotton export credit guarant ees in particular, that premiums
are more than sufficient to cover operating costs and losses).

197. Please provide actual data for 2002/2003 for US exports, US consumption and
per cent of world consumption to replace the projected data in Exhibit US-47. If
available, please provide projected data for 2003/2004 to replace the forecast data. USA

15. The 11 December 2003 World Agricultural Supply and Demand Estimates report, published
by USDA’s Office of the Chief Economist, the Depa rtment’s official commodity estimates, provide
the latest data available. Note that 2002/03 is s till considered an estimate and 2003/04 is considered a
projection.
23

US and World Cotton Consumption (1,000 480-lb bales)
 2002/03 (e) 2003/04 (p)
US exports 11,900 13,200
US mill use 7,270 6,200
Total US consumption24 19,170 19,400
World consumption 97,930 97,690
US as a per cent of world 19.6% 19.9%

The updated data show that the US world market share is basically unchanged from Exhibit US-47; in
fact, US world market share usi ng the 11 December 2003 data is the same (19.6 per cent) as reported
in the exhibit.25 Viewed in conjunction with the data in Exhibit US-47, the data further confirm that
there has been no increase in US world market sh are following a consistent trend over a period when
subsidies to upland cotton have been granted.

 198. Please comment on the respective merits of the price-gap calculations of
MY1992 deficiency payments in US comments of 27 August, footnote 14 ($867 million),
and Brazil's response to the Panel's Question No. 67 ($812 million).

16. The two calculations use similar methodologi es to measure MY 1992 deficiency payments.
Both measures calculate deficiency payments as the deficiency payment rate times eligible
production. Both the US and Brazil measures use th e same deficiency payment rate for MY 1992 of
15 cents per pound. The difference between the tw o measures can thus be attributed to how each
calculated the amount of production eligible for deficiency payments.

17. In their response to the Panel’s Question No . 67, Brazil provides a simplistic calculation of
payment production by multiplying the upland cotton programme yield times the amount of area
eligible for deficiency payments. Bu t as the United States previously indicated
26, the average
programme yield for deficiency payment recipi ents in MY 1992 was 601 pounds per acre and the
average programme yield for 50/92 recipients was 628 pounds per acre. By contrast, Brazil

found in this report are current as of 9/30/03 and diff er slightly from these figures, which reflect exporter
activity through mid-December, including cancellations and reserve activity.
23 USDA Office of the Chief Economist, World Agricultural Supply and Demand Estimates ,
11 December 2003 (Exhibit US-119).
24 The US consumption figure includes imports. However, US cotton imports are often zero and, even
when positive, have accounted for less than one per cent of consumption over the past decade. See USDA,
Economic Research Service, Fibers Yearbook, Appendix Table 2, Upland Cotton Supply and Use (Exhibit US-
120).
25 See also US Opening Oral Statement at the Second Panel Meeting, para. 13.
26 US Comments and Answer to Additional Question, para. 8 fn. 14.

incorrectly estimates programme yields to be 531 pounds per acre. This underestimates deficiency
payments for MY 1992.

18. The US calculation uses the methodology set out in paragraphs 10 and 11 of Annex 3.
Consistent with the 1995 US WTO notification, pa yment production is the sum of production eligible
for basic deficiency payments and production eligib le for 50/92 payments. Eligible production for
basic deficiency payments in 1992 was equal to 5,544 million pounds (9.226 million acres times the
average programme yield of 601 pounds per acre) . Multiplying the price gap times eligible
production gives basic deficiency payments equal to $832 million. The same formula is used to
calculate deficiency payments under the 50/92 programme. For 1992, the price gap is the same as that
calculated for the basic deficiency payments (15 cents per pound). Eligible production under the
50/92 programme was 254 million pou nds (404 thousand acres times the average programme yield of
50/92 participants of 628 pounds per acre). Defi ciency payments under the 50/92 programme were
thus equal to $35 million (0.92 times 254 million times $0.15). Total deficiency payments under the
price gap methodology were thus equal to $867 million ($832 million plus $35 million).

19. We also note that this calculation is con servative in that it uses the actual payment acreage
(that is, acres planted for harvest or participa ting in the 50/92 programme on which payment was
received) rather than eligible acreage to calculate the "quantity of production eligible to receive the
applied administered price."
27 Using instead the base acreage minus the 10 per cent acreage reduction
figure and the 15 per cent normal flex acr es (14.9 million effective base acres 28 x 0.75 = 11.175
million acres) and multiplying by the programme yi eld (602 pounds per acre), the "quantity of
production eligible to receive the administered price" is 6,727 million pounds, yielding a price gap
deficiency payment calculation of $1,009 million.

201. Is data available to show the proportion of US upland cotton production sold
under futures contracts, and th e prices under those contracts, 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 en titlement to marketing loan programme
payments? BRA, USA

20. In April 1999, the US General Accounting O ffice published a report on farmers’ use of risk
management strategies.
29 Based on survey data from the 1996 USDA Agricultural Resource
Management Study, the study showed that betw een 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. 30 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.

21. For 18 December 2003, total open interest for all cotton futures contracts on the New York
Board of Trade was 79,283 contracts
31 while open interest for all cotton options contracts on the

28 See Exhibit Bra-105, Annex 2 (1st source document: US Department of Agriculture, Provisions of
the Federal Agricultural Improvement and Reform Act of 1996 , at 142) (giving 1992 e ffective base acreage of
14.9 million acres); id., Annex 2 (2nd source document: Daniel A. Sumner, Farm Programmes and Related
Policy in the United States, at 4) (same).
29 US General Accounting Office. Agriculture in Transition: Farmers’ Use of Risk Management
Strategies. GAO/RCED-99-90. April 1999. See page 9, table 4 (Exhibit US-121)
30 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.
31 See, Exhibit US-122.

NYBOT totalled 320,657 contracts. 32 Based on a contract size of 50,000 pounds, total open interest
on futures and options contracts represent 41.7 milli on bales. While a bale of cotton may be hedged
several times throughout the marketing chain, we note that 41 million bales is approximately 2.3 times
the total size of the US upland cotton crop. A futur es or options contract transaction has no effect on
a producer’s entitlement to marketing loan programme payments.

202. Concerning paragraph 7 of the US oral statement, are the expected cash prices
shown for February only? Can the US provi de the prices for January and March of
each year as well? USA

22. The following tables show the average daily closing futures price for the December contract
for January, February and March, as well as the aver age for the three months. As the United States
previously noted33, the differences between months is small. As outlined in para graph 162 of the US
further rebuttal submission, the expected cash price is calculated as the futures prices minus a 5-cent
basis.

Average Daily December Futures Closing Prices ($/lb)
Contract Month
Month DEC
1999
DEC
2000
DEC
2001
DEC
2002
DEC
2003
January 0.6335 0.5912 0.6188 0.4295 0.5808
February 0.6027 0.6131 0.5863 0.4218 0.5960
March 0.5980 0.6233 0.5321 0.4292 0.5975
Average January –
March

0.6114

0.6092

0.5791

0.4268

0.5914

Source: New York Board of Trade (Exhibit US-124)

Expected Cash Price ($/lb)
Month MY 1999 MY 2000 MY 2001 MY 2002 MY 2003
January 0.5835 0.5412 0.5688 0.3795 0.5308
February 0.5527 0.5631 0.5363 0.3718 0.5460
March 0.5480 0.5733 0.4821 0.3792 0.5475
Average January –
March

0.5614

0.5592

0.5291

0.3768

0.5414

Source: Futures Price minus 5-cent cash basis.

205. Does the United States accept or agree with the EWG data submitted by Brazil? If not,
please explain your reasons. USA

23. USDA provided the EWG with payment data un der a Freedom of Information Act Request.
Although the United States can confirm the data tr ansmitted to EWG was correct, we do not know if
the data has changed after EWG further processed the in formation. Taking that data at face value, the
United States would note the following.

32 See, Exhibit US-123.
33 US Further Rebuttal Submission, para. 162 fn. 124 ("The United States notes that the January-March
average futures price for December delivery does not differ significantly from the February average presented in
the text.").

24. As was reported in the US Answer to Panel Question 125(5) and the US oral statement of
2 December, a preliminary review of data from the Farm Service Agency shows that approximately
47 per cent of upland cotton farms eligible for d ecoupled income support payments planted no cotton
in marketing year 2002. This number is consis tent with the Environmental Working Group data
presented by Brazil in its further rebuttal submission that showed the per cent of farms receiving only
contract payments in 2000, 2001, and 2002 (46, 45, and 45 per cent, respectively).
34 Thus, the EWG
data support the US position 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.35

25. The EWG data also show that Brazil’s 14/16 adjustment to decoupled payments, even on
Brazil’s faulty allocation theory, is too small an adjustment. Brazil has asserted that 87 per cent of
decoupled payments for upland cotton base acres are received by upland cotton producers and support
to upland cotton. However, the EWG data suggest that in marketing years 2000, 2001, and 2002 only
71, 77, and 74 per cent, respectively of upland cotton base acreage payments went to farms that
planted upland cotton. Thus, the EWG data support the US position that Brazil has overestimated and
failed to properly calculate the subsidy benefit to upland cotton provided by these payments. For
further detail, please see the US answer to question 195.

26. We also note a serious misuse of the EWG data when Brazil claims that, because
approximately 92 per cent of total marketing loan payments received in MY 2002 by farms planting
upland cotton were upland cotton payments, therefore such farms must predominantly produce cotton.
In fact, marketing loan payments crucially depend on whether prices are above or below the loan rate
for the crop at issue. Soybeans and corn saw high prices in MY 2002, meaning few marketing loan
payments were made in MY2002.
36 Furthermore, the data collected by the United States in response
to Brazil’s request for certain information demonstrate that for MY 2002 upland cotton planted acres
accounted for only 29.4 per cent of total cropland of those farms receiving production flexibility
contract payments for upland cotton base acreage. Thus, the EWG data on marketing loan payments
does not support an inference that farms producing upl and cotton are so "specialized in upland
cotton"37 that it would be "reasonable" to attribute decoupled payments for upland cotton base acres
almost entirely (87 per cent) to upland cotton.

206. Please explain how the graph in paragraph 40 of the US further rebuttal
submission was derived. In so doing, pl ease clarify whether the figures are on a cents
per pound basis or some other basis. Wh at averaging method was used? Can you
prepare individual charts showing average US and Brazilian cotton prices for each of
those third country markets? USA

27. The data were based on official export data reported by the United States and Brazil, as
obtained and published in the "World Trade Atlas". The World Trade Atlas is a service that monthly
provides world-wide trade information for a fee.

28. The United States reports its export values to the World Trade Atlas as F.A.S. and Brazil
reports its values as F.O.B.

34 Brazil’s Further Rebuttal Submission, para 23.
35 Indeed, even Brazil states that "the evidence still suggests that there are a large number of very small
farms (with base acreage resulting from production dating back as far as MY 1981-85) that no longer produce
upland cotton," Brazil’s Further Rebuttal Submission, para. 27 (emphasis added), which would seem to support
the US view that contract payments are decoupled from production decisions.
36 See US Opening Oral Statement at the Second Panel Meeting, para. 29.
37 See Brazil’s Further Rebuttal Submission, para. 26.

Free Along Ship Export Value (F.A.S.) – The value of exports at the seaport, airport, or
border, port of export, based on the transaction price, including inland freight, insurance, and
other charges incurred in placing the merc handise alongside the carrier at the port of
exportation. The value, as defined, excludes the cost of loading the merchandise aboard the
exporting carrier and also excludes freight, insura nce, and any charges or transportation costs
beyond the port of exportation.

Free On Board (F.O.B.) – A standard reference to the price of merchandise on the border or
at a national port. In F.O.B. contracts, the seller is obliged to have the goods packaged and
ready for shipment at the place agreed upo n, and purchaser agrees to cover all ground
transport costs and to assure all risks in th e exporting country, together with subsequent
transport costs and expenses incurred in lo ading the goods onto the chosen means of
transport.

FOB is greater than FAS except when the vessel is not changed at the port of export, in which case the
values are equal.

29. The World Trade Atlas publishes an average un it price for exports. The average unit price is
calculated by dividing the value of the exports by the quantity for selected HS codes. Average unit
prices are expressed in dollars per kilogram. This value was converted to dollars per pound for the
graphs.

30. The graph in paragraph 40 of the US furthe r rebuttal submission is a comparison of simple
average unit prices of cotton exports from the Unite d States and Brazil to Argentina, Bolivia, Italy,
Philippines, Portugal, Indonesia, Paraguay, and Indi a. The data for each third country market is
provided in the following table.

Unit Export Values to Selected Countries

U S
Country

3Q/99 4Q/99 1Q/00 2Q /00 3Q/00 4Q/00 1Q /01 2Q/01 3Q/01 4Q /01 1Q/02 2Q/02
Argentina 0.71 0.71 0.42 0.49 na na na na na na na na
Bolivia na 1.15 1.15 na na na na 0.76 na na na na
India 0.96 0.46 0.51 0.55 0.64 1.04 0.74 0.50 0.43 0.36 0.38 0.42
Indonesia 0.61 0.59 0.56 0.57 0.59 0.65 0.65 0.57 0.49 0.50 0.50 0.45
Italy 0.90 0.81 0.80 0.98 0.73 0.93 0.90 0.92 0.92 0.67 0.76 0.70
Paraguay na na na na na na na na na na na na
Philippines 0.50 0.42 0.41 0.41 0.53 0.54 0.52 0.44 0.42 0.41 0.41 0.38
Portugal 0.97 0.93 0.92 0.92 0.98 0.75 1.17 1.14 0.92 0.57 1.03 0.94
Average 0.78 0.72 0.68 0.65 0.70 0.78 0.79 0.72 0.64 0.50 0.61 0.58

Brazil

Country 3Q/99 4Q/99 1Q/00 2Q /00 3Q/00 4Q/00 1Q/01 2Q/ 01 3Q/01 4Q/01 1Q/02 2Q/02
Argentina 0.54 0.51 0.58 0.54 0.54 0.52 0.50 na 0.38 0.35 0.37 na
Bolivia na na na na 0.47 0.48 0.47 na na na na na
India na na na na 0.49 0.50 0.50 0.53 0.49 0.43 0.36 0.36
Indonesia na na na na 0.49 0.49 0.48 0.47 0.50 0.47 0.47 0.45
Italy na na na na 0.48 0.51 0.54 0.56 0.46 0.44 0.39 0.37
Paraguay na na 0.50 na na 0.55 na na 0.50 na na na
Philippines na na na na na 0.59 0.52 0.53 0.52 0.49 0.36 na
Portugal na na na na 0.49 0.51 0.54 0.56 0.47 0.42 0.35 0.37
Average 0.54 0.51 0.54 0.54 0.49 0.52 0.51 0.53 0.47 0.43 0.38 0.39
Source: World Trade Atlas

207. Please indicate whether any of the measur es challenged in this dispute obliges cotton
farmers to harvest their crop in order to receive the benefit of the programme (subsidy).

31. One programme at issue in this dispute requi res that a cotton farmer harvest upland cotton in
order to receive payment: the marketing loan progra mme. In addition, the user marketing certificate
programme (Step 2) requires that upland cotton have been harvested and marketed although payment
is made to upland cotton users and not to farmers directly.

208. Please provide data for the marketin g years 1992 and 1999-2002 of the "quantity
of production to receive the applied admini stered price" (Agreement on Agriculture,
Annex 3, paragraph 8) for purposes of a pr ice-gap calculation of support through the
marketing loan programme.

32. The marketing loan programme is a direct payment to support producer income that is
"dependent on a price gap," namely, the differen ce between the loan rate and the Adjusted World
Price. Thus, the price-gap calculation of support would be calculated under paragraphs 10 and 11 of
Annex 3 of the Agreement on Agriculture on "non-ex empt direct payments," not paragraph 8 on
"market price support." That said, the calculations to quantify the support under these provisions are
similar. Under paragraph 10, "non-exempt direct payments which are dependent on a price gap shall
be calculated either using the gap between the fixed reference price and the applied administered price
multiplied by the quantity of production eligible to re ceive the administered price, or using budgetary
outlays."

33. Under the 1990 Act, only produc tion produced on cotton base acres or other programme crop
base acres was eligible for mark eting loans. Based on the 1992 Compliance Report (Exhibit US-39),
11,164,726 acres programme acres were planted to upl and cotton. Based on an average crop yield of
694 pounds per acre
38, 7,748,319,844 pounds or 16,142,333 480-lb bales, would have been eligible
for marketing loans in 1992.

34. Under provisions of the 1996 farm bill, upla nd cotton planted on farms with any programme
crop base were eligible for marketing loans. While production data are not collected by the Farm
Service Agency, the following quantities of upland cotton were put under loan or collected a loan
deficiency payment in 1999, 2000, 2001 and 2002.

Upland cotton loan activity (pounds)
 Quantity receiving loan
deficiency payment
Quantity placed under
loan
Total
1999 3,393,678,940 4,290,958,570 7,684,637,510
2000 3,499,431,430 4,349,621,850 7,849,053,280
2001 2,618,109,300 6,718,513,500 9,336,622,800
2002 1,603,527,850 6,292,102,810 7,895,630,660

 Source: USDA, Farm Service Agency, Loan Deficiency Payment and Price Support
Cumulative Activity as of 10 December 2003. Available at: http://www.fsa.usda.gov/dafp/psd

35. Thus, compared to MY1992, the quantity of cotton placed under marketing loans or receiving
loan deficiency payments in MYs 1999, 2000, and 2002 were similar. In MY 2001, as a result of
exceptional weather conditions and yields, a much larger quantity of cotton was eligible.

36. As noted above, the price gap calculation invo lves comparing a fixed reference price to an
applied administered price. Under paragraph 11 of Annex 3, the fixed reference price "shall be based

38 See Upland Cotton Fact Sheet at 4 (Exhibit BRA-4).

on the years 1986 to 1988 and shall generally be the act ual price used for determining payment rates."
The applied administered price for marketing loan payments is the marketing loan rate. The fixed
reference price is the average over 1986 to 1988 of the Adjusted World Price (the "actual price used
for determining payment rate").

37. The average Adjusted World Price for 1986-88 was 53.65 cents per pound – that is, higher
than the loan rate in marketing years 1992 (52.35 cents per pound), 1999-2001 (51.92 cents per
pound), and 2002 (52 cents per pound). The result is th at the gap between the fixed reference price
and the applied administered price is always nega tive as would be the AMS calculation. When these
price gap calculations for marketing loan payments are utilized, negative numbers result, reflecting
the decrease in support from the 1986-88 level. Sim ilarly, if the applied administered price for
marketing years 1999-2002 were compared to the 1992 applied administered price, the resulting
negative numbers would again show the decrease in the level of support from MY 1992. Thus, the
large budgetary expenditures for marketing loan paymen ts in recent years obscu res the fact that the
level of support decided by the United States had declined; the price gap calculation, on the other
hand, reflects this reduction in support. As the Un ited States demonstrated in its rebuttal submission,
by calculating both deficiency payments and marketing loan payments using a price gap
methodology, the upland cotton AMS reveals that in no year have the challenged US measures
granted support in excess of that decided during the 1992 marketing year.
39

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 da ta in the graph in paragraph 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

38. The planted and harvested area differ becau se of abandonment. Over the period 1965 to
2003, the rate of abandonment (abandoned acres di vided by total acres) for US upland cotton
averaged 8.3 per cent, but the rate will vary from y ear to year primarily because of weather, primarily
in the Southwest. In 1997, for example, weather in the Southwest was generally good and the
abandonment rate for that year was only 3.6 per cent. By contrast, dry weather in Texas, Oklahoma
and parts of the Southeast in 1998 led many farm ers to abandon their cotton crop because of poor
yields, resulting in an abandonment rate of 20 per cent.

Planted and Harvested Upland Cotton Acres (1,000 acres)
Crop year Planted acres Harvested acres Abandoned acres Rate of
abandonment
1995 16,717 15,796 921 5.5%
1996 14,395 12,632 1,763 12.2%
1997 13,648 13,157 491 3.6%
1998 13,064 10,449 2,615 20.0%
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%

39 See US Rebuttal Submission, paras. 115. In that calculation, the United States conservatively
assigned a value of zero to marketing loan payments th at in every instance were negative under the price gap
methodology. Had the United States used the actual negative values resulting from the calculation, the AMS
would have been even smaller for those years with a lower loan rate (marketing years 1999-2001) and larger
eligible production (marketing year 2001). The end result would have been the same, however: in no year
would upland cotton support (as measured by an upland cotton AMS) have exceeded the 1992 marketing year
level.

Crop year Planted acres Harvested acres Abandoned acres Rate of
abandonment
2003 13,451 11,939 1,512 11.2%

 Source: USDA, National Agricultural Statistics Service, Acreage, various issues.

Change in U.S. Upland Cotton Acreage from Previous Year
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
1996 1997 1998 1999 2000 2001 2002 2003
Planted
Harvested

39. Comparing the per cent change from the prior year of planted and harvested US upland cotton
acreage shows that movements in acreage figures are fairly similar, as one would expect.

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

40. To our knowledge, planted acreage figures ar e not available on a consistent basis across
countries. No other sources (including ICAC) carry worldwide-planted area. Harvested area is the
standard, but in reality many countries do not have a sophisticated system for data collection. To
provide a comparative analysis of US acreage chang es to the rest of the world, the United States has
therefore used harvested acreage, the most reliable acreage measure available.

211. Brazil presents a graph in paragra ph 59 of its further rebuttal submission
indicating the increasing cumulative loss incurred by cotton producers. Please comment
on the argument that US cotton producers could not continue operating without
subsidies. In particular:

(a) to what extent does the use of 1997 su rvey technological coefficients with
annually updated values affect the results?

41. Brazil’s cost of production argument is based on erroneous facts and arguments. Brazil points
to dated average total cost of production data over a randomly selected period, compares this to
market revenue, and proclaims that any "gap" must be covered by subsidies. The United States has
identified several fatal conceptual and factual flaws in Brazil’s analysis.
40 For example, Brazil
ignores the evidence on record that a significant number (approximately 47 per cent) of traditional
(and likely high-cost) upland cotton producers no longer plant upland cotton. This structural shift in

40 US Further Rebuttal Submission, paras. 105-51.

the industry is not reflected in cost of production data. In addition, Brazil treats the only sources of
farm income as cotton market prices and governme nt payments, ignoring crop diversification and
off-farm sources of income. By ignoring alternativ e revenue sources, Brazil invalidates its claim that
only government payments could serve to cover any alleged cost-revenue gap.

42. But most importantly, Brazil has no legal b asis for its argument. Brazil argues that the
Appellate Body in Canada - Dairy (21.5) has stated that total costs ar e the relevant measure, but that
reasoning is inapt here. The only question in that dispute was whether a practice involved an export
subsidy within the meaning of Article 9.1(c) of the Agriculture Agreemen t. Solely because the
question was to determine whether certain milk provided to processors constituted a payment for
purposes of Article 9.1(c) did the Appellate B ody opt to use the average cost of production.
41
However, the Appellate Body explicitly recognized that "a producer may well decide to sell goods or
services if the sales price covers its marginal costs. " The Appellate Body also noted that cost of
production can be measured "in at least two ways": (1) per unit average total cost of production and
(2) marginal cost of production. 42 Here, the issue for which Braz il seeks to use total costs is not
whether a subsidy exists but to evaluate the effect of the subsidy, an altogether different analysis.
Thus, Canada - Dairy (21.5) provides no support Brazil’s average total cost argument.

(a) to what extent does the use of 1997 survey technological coefficients with
annually updated values affect the results?

43. As described in detail in previous US submissions 43, the combination of, among other things,
the boll weevil eradication programme and the extr aordinary adoption rates of biotech cotton have
combined to lower producers’ costs and enhance ne t revenues. Despite the difficulty in providing
precise figures on the extent of cost savings and ne t revenue increases for the cotton sector that have
occurred since the 1997 USDA ARMS cost and return s survey, the rapid adoption of biotech cotton
(over 90 per cent of area in key producing States) su ggests farmers are reaping significant benefits in
terms of net returns. These cost savings have b een analyzed and documented in a wide range of
studies.

44. In June 2002, the National Center for F ood and Agricultural Policy (NCFAP) compiled
40 case studies of 27 crops to documen t the benefits of biotechnology.
44 These case studies were
done by various universities. Among other findings, one study found that adoption of insect resistant
biotech cotton in states in the Southeast and Sout hwest experiencing high infestations of budworm
resulted in a $20 per acre increase in net income . Another study that examined the use of
herbicide-resistant cotton in several Mid-Sout h states estimated producers saved $133 million
annually in weed control costs.

45. The post-1997 updates of the cost of pr oduction data assume the same technological
coefficients as the 1997 survey – for example, pounds of seed per acre, the number of pesticide
applications per acre, etc. Brazil correctly notes that the ERS/USDA updated COP data from 1997
show increased seed costs, which reflects the use of higher-cost biotech seed. 45 To the extent those
inputs become more costly (for example, as biot ech seed replaces conventional), cost increases are
captured by the updating process through input price indexes. What is not captured is the cost savings
from technological changes that alter the mix of production activities and inputs. New survey data

41 The specific issue addressed was limited to whether the supply of certain milk to processors
constituted a "payment" on the export of milk "financed by virtue of governmental action."
42 Canada-Dairy: First Recourse to 21.5, AB-2001-6, para. 94.
43 US Further Submission, paras. 46-54; US Further Rebuttal Submission, paras. 123 -132.
44 Plant Biotechnology: Current and Potential Impact For Improving Pest Management in US
Agriculture: An Analysis of 40 Case Studies. Leonard P. Gianessi, Cressida S. Silvers, Sujatha Sankula and
Janet Carpenter. NCFAP, June 2002. The full report can be found at http://www.ncfap.org/40CaseStudies.htm.
45 Further Rebuttal Submission of Brazil, 18 November, para. 72.

will incorporate new technological coefficients as we ll as changes in such practices as direct pesticide
costs, changes in tillage, application and cultivation trips, and handweeding. Many of the cost-saving
aspects of biotechnology or other new practices ( no-till farming) cannot be accurately captured by
simply updating old cost data by price indices. T hus, relying on such updated cost data that reflects
an outdated technological mix is in error.

(b) to what extent do producers base pl anting decisions on their ability to cover
operating costs but not whole farm costs? USA

46. As explained in some detail in the US Fu rther Rebuttal Submission of 18 November, the
agricultural economics profession is clear that shor t-run production decisions are made based on the
ability of a producer to cover his variable or operating costs. 46 All economic models that attempt to
capture supply response (producer planting behaviour) use variable costs in the equations, not total
costs. Examples include the FAPRI baseline projecti ons model (a variation of which was used by Dr.
Sumner), the ERS baseline projections model, a nd the Economic Research Service’s FAPSIM model,
the results of which are cited by Brazil. 47 No economic model of which we are aware looks to total
costs as the relevant costs for producer planting decisions.

47. One can do the same exercise as done by Brazil in paragraph 59 of its further rebuttal
submission, but using the economically correct variable costs instead of total costs.
48 Even using the
technologically- and structurally-dated cost-of-pr oduction data based off the 1997 ARMS survey, in
all years except the extraordinary year of 2001, av erage market returns more than covered variable
costs, allowing producers to earn a sufficient margin to pay off other fixed costs, a conventional
agricultural business practice, as noted by Christopher Ward. 49 Instead of a cumulative loss of
$332.79 per acre over the 6-year period as claimed by Brazil, producers had a cumulative net margin
of $592.65 per acre. Clearly, if all years were like 2001, US cotton farmers would go out of
business.
50 But because most US cotton farmers regularly cover their variable costs – and then some
– they can survive a year like 2001.

Cumulative net returns ($ per acre)

Item 1997 1998 1999 2000 2001 2002
Variable costs 271.46 230.87 244.26 296.38 284.24 278
Market revenue 545.55 356.1 314.8 375.18 271.4 307.83
Net return 274.09 125.23 70.54 105.8 -12.84 29.83
Cumulative net
return
274.09 399.32 469.86 575.66 562.82 592.65

 Source: USDA, Economic Research Service, www.ers.usda.gov/data/costsandreturns

46 US Further Rebuttal Submission, 18 November 2003, para. 117. Brazil continues to inappropriately
make all its cost-revenue arguments using total costs. Brazil cites the Appellate Body decision in Canada –
Dairy 21.5 III as support for using a total cost of production figure but that decision was unique to those
circumstances and involved export subsidies. That decision does not refute accepted wisdom and long-standing
economic theory, as well as farmers’ usual business practices.
47 Exhibit Bra-222.
48 See http:/www.ers.usda.gov/data/costsandreturns/.
49 Further Rebuttal Submission of Brazil, 18 November 2003, para. 58.
50 Even Mr. Christopher Ward was unable to cove r his variable costs in 2001. Statement of
Mr. Christopher Ward at the Second Session of the First Panel Meeting, para. 6.

212. Brazil states in paragraph 37 of its oral statement that studies of Westcott and
Price found that the effect of the programme on cotton is to add an additional 1 to 1.5
million acres during marketing years 1999-2001 and to suppress US prices by 5 cents
per pound. Does the US reject these findings? Why or why not?

48. While an interesting "academic" analysis of the impacts of the US marketing loan
programme, the Westcott and Price study Analysis of the US Commodity Loan Programme With Loan
Provisions (Exhibit BRA-222) is not relevant for the Panel’s assessment of the matter before it. In
this study acreage decisions are based on an expected net returns which includes as the expected price
term as the higher of the lagged market price or the loan rate plus additional marketing loan facilitated
revenue. Since the period of analysis for the stud y is 1998 through 2005, rather than actual data, the
authors used USDA’s 2000 baseline. This baselin e incorporates actual data for years prior to
marketing year 1998 and partial marketing year 1999 to make projections about prices and other
factors for marketing year 1999 forward. Thus the study is based on projections except for MY1998.
51

49. A panel, however, cannot base its findings on hy pothetical market conditions instead of actual
conditions. That is, Brazil must show that US do mestic support has actually caused serious prejudice
in a given year based on actual market conditions and not that under some assumed conditions US
domestic support programmes have impacted prices. Since the study is based on projected prices, the
analysis is not useful for the Panel in dete rmining whether US support programmes have caused
serious prejudice to Brazil.

50. Putting aside the issue that the study is based on projections and not actual market conditions
for the 1999-2001 period, the United States believes the study results overstate the impacts of the US
marketing loan programme for two reasons: (1) the e xpectation of prices used and (2) the overstated
additional marketing loan facilitated revenue.

51. As previously discussed, the authors used USDA’s 2000 baseline as the input into the USDA
FAPSIM model. To represent farmers’ price expectations, the simulation uses lagged prices from the
projections in the USDA’s 2000 baseline. The model uses the higher of lagged market prices or the
loan rate plus additional marketing loan facilita ted revenue (fixed at 14 cents per pound for cotton).
Using the price projections in the USDA 2000 baselin e, farmers would expect the marketing loan
programme to kick in for the period 1999-2001. The problem here is that the price expectations used
by the model are not consistent with the price expectations the farmers actually held at the time of
planting for prices at harvest. As the United States provided in its opening statement at the Second
Meeting of the Panel with the Parties, the futures pr ices at the time of planting indicated that prices
would be above the marketing loan rate during this period.

Harvest Futures Prices at Planting Time Compared to USDA Baseline Expected Prices
(cents per pound)
 MY1999 MY2000 MY2001
Futures Price 1/ 60.27 61.31 58.63
Expected Cash Price 2/ 55.27 56.31 53.63
1/ February New York futures price for December delivery.
2/ Futures price minus 5 cent cash basis.

51 In fact, the study found marketing loans to have negligible impacts in 1998. See Exhibit BRA-222,
p. 16.

As the futures prices demonstrate, market expectations at the time of planting for marketing years
1999-2001 was that prices would be above the mark eting loan rate and hence no marketing loan
benefits. Therefore, the marketing loan programme would not have had the impact this study found.

52. In addition to having the wrong expectations about price le vels and the marketing loan
programme being tripped, the study has overstate d the potential additional market loan facilitated
revenue that can be achieved. The authors used a fixed rate of 14 cents to represent this additional
revenue above the loan rate when the marketing loan programme kicks in. Their justification for this
figure is that this was their calculation for 1998. The authors do not provide any discussion as to why
conditions in 1998 were indicative of conditions to continue for the near future that would keep this
margin at 14 cents. This margin is based on the fact that farmers can pick the date to make the claim
for the marketing loan gain/deficiency payment and th en sell the cotton at a later date. The premise is
that a farmer is able to sell when prices have incr eased relative to the date they made their claim.
However, in reality, there is no such guarantee. It is just as possible that prices will fall below the
price when the claim was made. In fact, the additional revenue has not been as large as in MY1998.
52
In MY1999, the annual average was 6.1 cents, MY2000 was 5.8 cents, and MY2001 was 1.3 cents.
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 crop at the time he received
the marketing loan payment earned less than the marketing loan rate. Using a much lower value for
this additional revenue above the loan rate when th e marketing loan rate kick s in would have reduced
the impact of the study’s result.

53. By request of the Payment Limitations Commission, Westcott and Price updated this analysis
using actual prices for MY2001. As the United States has discussed at the panel meetings and in its
further rebuttal submission, this will overstate the impact of the marketing loan programme because it
assumes that farmers had perfect foresight. That is , the model is calibrated to the actual values that
occurred in that year while, in fact, producers coul d not have anticipated such events when planting
decisions occurred. This overstates the eff ects of the programme because the model assumes
outcomes that were unanticipated by producers when they made their planting decisions.

54. This overstatement is similar to the other third party studies that used actual outlays for
marketing loans when calculating the price wedge. As the United States argued when critiquing those
models, a more appropriate method to determine the impact is to look at expectations based on futures
prices relative to the marketing loan rate. If the fu tures prices are above the loan rate, the programme
will have a negligible impact on planting decisions since farmers are not expecting benefits from the
programme.

55. For these reasons, the United States finds the results from these studies not relevant for the
Panel in making its assessment of the effect of the marketing loan programme.

213. What differences, if any, can be observe d 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

56. 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

52 See Exhibit US-126 for calculations using the authors’ formulation of the additional marketing loan
facilitated revenue realized per unit for MY 1998-2003 (partial year), using actual data.

these expectations by using the current y ear final realized market prices as the
expectation for the following season’s price.
53

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.

57. The United States, on the other hand, has a dvocated the use of futures prices, a market
determined expectation of prices. As Mr. MacD onald, Brazil’s own witness, has explained, the New
York futures price is a key mechan ism used by cotton growers, traders and consumers in determining
current market values as well as the contract prices for forward deliveries, in the domestic US and
non-US markets.
54

58. The use of futures by market participants is supported by a US government study. In
April 1999, the US General Accounting Office published a report on farmers’ use of risk management
strategies.
55 Based on survey data from the 1996 USDA Ag ricultural Resource Management Study,
the study showed that between 35 and 57 per cent of cotton farmers used a hedging instrument in
1996. (The ranges reflect a 95 per cent confidence inte rval.) In addition, an estimated 63 to 89 per
cent of cotton farms used cash forward contracts in 1996. 56 These survey results suggest that a large
proportion of cotton farmers either directly or indir ectly price their cotton off of organized futures and
options markets.

59. Furthermore, economic literature supports the United States’ approach. For example, in his
classic paper on rational price expectations, Muth (E xhibit US-48) argued that there is little evidence
that expectations based on past prices are economic ally meaningful. Additionally, in a 1976 paper
Gardner (Exhibit US-49) contended that the future pr ice for next year’s crop is the best proxy for
expected price.

60. Unfortunately, the use of futures prices in a multi-commodity modelling framework for
extended time projection is cumbersome. First, equa tions must be developed that can predict values
for futures contracts in simulation analysis. S econd, many commodities lack an organized futures
exchange (e.g., grain sorghum). For these reasons , large-scale models like those used by FAPRI,
USDA and the US Congressional Budget Office typically use lagged prices rather than futures prices
as proxies for price expectations.

61. 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 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 predictors of expected prices. Future prices, by contrast,
are more efficient because they are based on more current information.

53 Brazil’s Further Submission, Annex I, para 18.
54 Exhibit BRA-281, para 13 (statement by Andrew MacDonald)
55 US General Accounting Office. Agriculture in Transition: Farmers’ Use of Risk Management
Strategies. GAO/RCED-99-90. April 1999. See page 9, table 4 (Exhibit US-125).
56 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 ex ample, a farmer agrees to 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-125, page 22.

62. 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 produ cers as indicated by the futures price. 57 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 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 Price 1/ 60.27 61.31 58.63 42.18 59.6
Expected Cash Price 2/ 55.27 56.31 53.63 37.18 54.6
Lagged Prices 3/ 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.
58

63. 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 m illion 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.

64. 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 to ignore 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.

57 US Further Rebuttal Submission, paras. 164-65.
58 Exhibit US-90.

C. DOMESTIC SUPPORT

214. Please provide a copy of regulations regarding the marketing loan programme
and loan deficiency payments published at 58 Federal Register 15755, dated
24 March 1993. What does this regulation indicate about the target price? USA

65. Please see US Exhibits 117 and 118. In these document, the Department of Agriculture set
the level of support for the 1993 marketing year . For example, the Department announced a
marketing loan rate of 52.35 cents per pound. In addition, the Secretary did not exercise his discretion
to alter the effective price, which by statute was to be "not less than" 72.9 cents per pound.
59 We also
note that the March 24 notice lowered the acreage re duction percentage (the share of base acreage on
which deficiency payments could not be obtained) from 10 to 7.5 per cent.

215. Please expand or comment on the statement at paragraph 91 of the US further
rebuttal submission that the counter-cyclical target price 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

66. Direct payments are made to producers rega rdless of the price level; no production of upland
cotton or any other crop is required to receive paym ent, and the recipient may additionally leave the
land in conserving use. In contrast, the counter-cyc lical payment is continge nt on farm prices falling
below the target price of 72.4 cents per pound less the direct payment rate of 6.67 cents per pound.
Thus, at farm prices near to or over the 65.73 cen ts threshold, the counter-cyclical payment will be
reduced or eliminated.

216. How many times have upland cotton pr oducers 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

67. Under the 1990 Act, base acreage for purposes of deficiency payments was calculated as the
average, minus the high and low year, of the previous five years plantings. There was no updating of
base acres by upland cotton producers since the base period was always a rolling average of the
previous five years. In effect, to increase acreage base, a producer had to overplant his or her current
acreage base. The 1990 Act penalized producers who overplanted their base by declaring them
ineligible for farm programme payments in the year they overplanted their base. For this reason,
participation in the programme was quite high.

68. The 1996 Act eliminated deficiency paymen ts in favour of decoupled production flexibility
contract payments. The Act also did away with the rolling five-year average approach for base
acreage. Instead, crop base acreage was based on the am ount of base acreage that would have been in
effect under the 1990 farm bill for the 1996 crop y ear. Producers maintained the same acreage base
over the 1996 through 2001 crop years, without current plantings affecting their base acreage.

69. The 2002 Act allowed producers either to retain base acreage as under the production
flexibility contracts or to update their base area e qual to the average acreage planted and prevented in
1998-2001. The latter option allowed decoupled paymen ts to be made with respect to soybeans and
other oilseeds, which did not have base acreage unde r the 1990 Act. This new crop acreage base
cannot be updated as it extends for the life of the 2002 Act (that is, through the 2006 crop year).

70. We note that the likelihood of further base upda ting would appear small. Currently, there is
no authority for future base updating. Any changes would have to originate in Congress where there

59 7 USC 1444-2 (Exhibit US-5).

would likely be an associated budgetary cost. Give n the current US fiscal situation, increases in the
agricultural budget are seen as unlikely.

217. What is the reason for reducing paym ents under the PFC and direct payments
programmes for planting and harvesting fruit, vegetables and wild rice on certain base
acreage? Please comment on the statements by the European Communities that "the
reduction in payment for fruit and vegetables, if the EC understands correctly, is in fact
designed to avoid unfair competition within the subsidising Member." (EC oral
statement at first session, first substant ive meeting, paragraph 29) and "To find
otherwise would not permit a WTO Member wishing to introduce decoupled payments
to take account of important elements of internal competition (…)" (EC response to
Panel third party Question No. 5).

71. The limitation only applies to base amounts of acr eage, and to that end it is worthy of note
that the US December 18-19 filings indicate that co tton farms plant less than one-third of their total
cropland to cotton. Of note, too, is that fruit a nd vegetable prohibition came into play before 1996 in
connection with the "flex acre" concept of the 1990 fa rm bill as reflected in the provisions of 7 USC
1464 (1988 ed. Supp. III) as enacted at that time. It continues to be the case under the 1996 and 2002
Farm Bill, as with the 1990 Bill, that the restric tions on plantings is only limited to the base acres
amount of the farmer’s cropland.

72.

73. Paragraph 6 prohibits basing payments on pr oduction requirements, not basing payments on
not producing. As the United States earlier pointed out, consider a situation in which a recipient of
direct payments produces fruits and vegetables and sees the direct payment reduced. How could that
recipient receive the entire payment to which he or she is entitled? The marginal amount of
decoupled payment is not "related to, or based on, the type or volume of production" undertaken by
the producer since the recipient n eed not produce anything at all. Rather, to receive the marginal
payment, the recipient need merely refrain from pr oducing fruit, vegetables, or wild rice. Thus, the
extra amount of payment is not "related to, or based on" production; if anything, it is "related to, or
based on" non-production (of certain crops).

218. Please comment on the testimony of USDA Chief Economist Keith Collins cited
in paragraph 36 of Brazil's oral statem ent regarding the trade-distorting and
production-distorting nature of the marketing loan payments.

74. We agree with the statement of Dr. Collins that marketing loan payments are potentially
production- and trade-distorting. 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 dispute is not whether marke ting loan payments are potentially production- and
trade-distorting, but the degree to which they ha ve actually distorted production and trade in a
particular year, given market prices and other relevant factors.

75. 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 year before.

D. EXPORT CREDIT GUARANTEES

219. Under the Agreement on Agriculture the general position is that the use of export
subsidies, both those listed in Article 9.1 as well as those within the scope of Article 1(e)
which are not so listed, may only be used within the limits of the product specific
reduction commitments specified in Part IV of Members' Schedules. One might
therefore have expected that Article 3.3 of the Agreement on Agriculture would have
prohibited the use of both listed and non-listed export subsidies in excess of reduction
commitment levels in the case of scheduled pr oducts and, in the case of non-scheduled
products, would have simply prohibited the use of any export subsidy. Instead, the
Article 3.3 prohibition is limited in both cases to export subsidies listed in Article 9.1.
What significance, if any, does this contextual aspect have for how Article 10.2 might be
interpreted having regard, inter alia, to:

(a) the fact that export performance-relat ed tax incentives, which like subsidised
export credit facilities were considered as a possible candidate for listing as an
Article 9.1 export subsidy in the pre-D ecember 1991 Draft Final Act negotiations,
have been held (for example, in United States - Tax Treatment for Foreign Sales
Corporations, WT/DS108) to be subject to the anti-circumvention provisions of
Article 10.1; and

(b) the treatment of international food aid and non-commercial transactions under
Article 10? USA

76. The United States has previously noted the unremarkable fact that Article 9.1 of the
Agreement on Agriculture sets forth a list of six ve ry specific practices known to the drafters and
deemed to constitute export subsidies under that Agreement.
60 The specific identification and
description of these export subsidy practices, well- known and notorious in the agricultural trade
sector, served at least three purposes in the text. First, under Article 3.3, these particular practices
were unambiguously subject to the export subsidy reduction commitments of each member.

77. However, certain limited exceptions to this rule constitute the second and third purposes of
the specific list of export subsidies in Article 9.1: Article 3.3 is by its terms "subject to the provisions
of paragraphs 2(b) and 4 of Article 9." Article 9.2(b) has since lapsed, but while in effect permitted a
Member to provide export subsidies listed in Article 9.1 in a given year in excess of the corresponding
annual commitment levels in the Member’ s schedule, subject to the cumulation limits of
Articles 9.2(b)(i)-(iv). Under Article 9.4, durin g the implementation peri od, developing country
Members were not required to undertake export subsidy commitments with respect to export subsidies
listed in Articles 9.1(d) and 9.1(e), except not to ap ply them in a manner that would circumvent their
reduction commitments.

78. Unlike export performance-rela ted tax incentives, which are not expressly mentioned in the
Agreement on Agriculture, export credit guarantees were subject to an altogether separate treatment
and commitment: exclusion from the export subs idy disciplines altogether until agreement on

60 US First Written Submission (11 July 2003), para. 161.

internationally agreed disciplines. Under Article 10.2, Members were (and continue to be) obligated
to work toward the development of such disciplines, and once agreed, adhere to them.

79. Question 219 suggests one might have expected Article 3.3 to have prohibited the use of both
listed and non-listed export subsidies in excess of reduction commitment levels in the case of
scheduled products and, in the case of non-scheduled products, to have simply prohibited the use of
any export subsidy. Article 8, however, serves this specific role. It imposes the obligation not to
provide export subsidies otherwise than in confor mity with the Agreement on Agriculture and with
the commitments specified in the respective Members’ schedules.

80. The anti-circumvention provisions of Article 10. 1 further highlight the separate treatment of
export credit guarantees. That article explicitly recognizes that "non-commercial transactions" shall
not be used to circumvent export subsidy commitments. This phraseology is di stinctly similar to that
of item (h) in Addendum 10, entitled "Export Competition: Export Subsidies to be subject to the terms
of the Final Agreement," dated August 2, 1991, am ong the series of addenda to the Note on Options
circulated by Chairman Dunkel.
61 That item(h) addressed: "Export credits provided by governments
or their agencies on less than fully commercial terms."

81. However, instead of making any connecti on between "non-commercial transactions" and
export credits, the Members agreed in the very ne xt section - Article 10.2 as ultimately adopted - to
provide wholly distinct treatment to export cr edits, export credit guarantees and insurance. The
reference to circumvention for no n-commercial transactions in the current Article 10.1 would have
been the obvious place to draw the distinction that New Zealand and Brazil claim the Members
allegedly made between "commercial" and "non-commercial" export credits.
62 But the text simply
does not support this fictional argument.

82. Article 10.4 provides further support that expor t credits are part of a work programme to
develop disciplines for them and consequently are not currently subject to the other disciplines of
Article 10. Article 10.4 of the Agreement on Agriculture ties the discipline on food aid to terms
negotiated elsewhere: the Food Aid Convention and the United Nations’ Food and Agriculture
Organization (FAO). This specific set of disciplines applicable to food aid demonstrate the situation
that will apply once the negotiations mandated under Artic le 10.2 are completed. They also illustrate
an approach comparable to the negotiations th at subsequently occurred in the OECD and as
contemplated in paragraph 5 of A ttachment 5 of the Harbinson Text.
63 Once internationally agreed
disciplines are achieved, then it will be possible for a given export credit practice to circumvent export
subsidy disciplines as a result of failure to comply with the export credit disciplines.64

221. In respect of the table in paragraph 1 61 of the US August 22 rebuttal submission
(concerning the cohort specific treatment of export 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 rebuttal submission) to
Brazil's assertion (footnote 67 in Brazil's 27 August 2003 comments on US rebuttal
submission) that the total figure net of re-estimates should be $230,127,023 instead of the
figure which originally appeared ($381,345,059).

(a) Please submit a corrected table reflect ing all of the necessary information to
produce this result, to the extent this is possible for the reasons indicated in
footnote 96 in US further submission of 30 September 2003.

61 MTN.GNG/AG/W/1/Add. 10 (2 August 1991) (Exhibit US-27)
62 See, New Zealand Answers to Question 35 of Pa nel to Third Parties, Brazil Answer to Panel
Question 71(a); US Rebuttal Submission (22 August 2003), para. 144-145
63 Exhibit US-9
64 See US First Written Submission (11 July 2003), fn. 150.

GSM 102/GSM-103/SCGP
Subsidy Estimates and Reestimates By Cohort

Original
Subsidy
Cohort
Reestimates
by Fiscal
Year
 Total Subsidy
Estimate
Cohort Estimate FY93-00 FY01 FY02 FY 03 Reestimates Net of
Reestimate

1992 267,426,000 166,136,256 -599,604,000 27,030,201 14,823,708 -391,613,835 -124,187,835
1993 171,786,000 -10,556,906 -257,206,000 23, 017,631 16,571,778 -228,173,497 -56,387,497
1994 122,921,000 -82,345,960 -77,135,000 2,228,985 41,521,000 -115,730,975 7,190,025
1995 113,000,000 -40,555,149 -105,216,000 2,823,516 -6,351,460 -149,299,093 -36,299,093
1996 328,000,000 896,907 -386,916,000 7,611,330 44,934,327 -333,473,436 -5,473,436
1997 289,000,000 0 -237,316,000 19,845,279 50,733,713 -166,737,008 122,262,992
1998 301,000,000 0 -237,271,000 14,661,079 - 15,693,431 -238,303,352 62,696,648
1999 158,000,000 0 -68,758,000 51,146,455 -144,434,351 -162,045,896 -4,045,896
2000 195,000,000 0 -91987247 -61,534,936 -153,522,183 41,477,817
2001 103,000,000 -33497152 16,381,864 -17,115,288 85,884,712
2002 97,000,000 40008586 40,008,586 137,008,586

Total for all
Cohorts
2,146,133,000 33,575,148 -1,969,422,000 22,880,077 -3,039,202 -1916005977 230127023

Source: FSA Budget Division Reestimate Documentation and Apportionment Documents.
There were no reestimates apportioned during FY 1998 through FY 2000.

(b) Please clarify whether and how the Panel should treat the figures in Exhibit
BRA-182 for the net lifetime re-estimates for each respective cohort.

83. The United States has no objection to use of th e figures in the column entitled "Net lifetime
reestimate amount" in Exhibit Bra-182 in lieu of the column entitled "Reestimates" in the table that
accompanied paragraph 161 of the US Rebuttal S ubmission (22 August 2003) and reproduced in the
response to question 221(a) immediately above. The figures are intended to represent the same thing.

84. The Panel will first note that with respect to the figures corresponding to cohorts 1997-2002,
Exhibit Bra-182 and the table previously submitted by the United States match.

85. Differences appear with respect to cohorts 1992-1996. The United States attempted to
explain the disparity in footnote 96 of its Further Submission of 30 September 2003. These
differences would appear to be related to the cumu lative re-estimates applied to these cohorts within
the calculations of the budgets in fiscal years 1993-2000. The United States noted that it was
searching for internal documentation to corroborate the figures included in the table previously
submitted to the Panel. In the absence of such documentation and unable to explain the relatively
minor disparity in figures, the United States necessarily accepts Exhibit Bra-182.

86. In fact, the United States’ initial figures we re more conservative than these official figures
which show profitability in every year during the period 1992-1996. The following table illustrates
this result:

Cohort Estimate Re-estimates (B ra-182) Net of Re-estimates
1992 267426000 -370963000 -103537000
1993 171786000 -239160000 -67374000
1994 122921000 -133746000 -10825000
1995 113000000 -159564000 -46564000
1996 328000000 -333407000 -5407000
1997 289000000 -166737000 122263000
1998 301000000 -238304000 62696000
1999 158000000 -162046000 -4046000
2000 195000000 -153522000 41478000
2001 103000000 -17115000 85885000
2002 97000000 40009000 137009000

These figures show that all of the first five cohor ts (1992-1996), including 1994, are profitable. The
figures for these years, unlike the more recent cohorts , reflect much more complete data for actual
operating experience (although 1999 is already showing profitability).

(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.

87. The figures in the table in paragraph 161 do not include administrative expenses. Imputed
administrative costs are not subject to the re-est imation process but are reflected separately in the
budget.
65 The United States has previously acknowledge d that it would be appropriate to apply an
administrative expense as an operating cost of the programme. 66 Consequently, it would be
appropriate to add the administrative expense applicable to a particular cohort as an operating cost.

(d) Please identify what is considered an "administrative expense" for this purpose.

88. The Commodity Credit Corporation (CCC) has no physical presence. It also has no
employees. The "administrative expense" in the budget is simply a reasonable approximation for
budgetary purposes of the value of services supplied by US Department of Agriculture agencies and
personnel in the administration of this particular programme subsumed within the CCC.

89. The relevant provision from the applicable appropriations legislation for fiscal year 2003
reads as follows:

COMMODITY CREDIT CORPORATION EXPORT LOANS PROGRAMME ACCOUNT
(INCLUDING TRANSFERS OF FUNDS)

For administrative expenses to carry out the Commodity Credit Corporation's export
guarantee programme, GSM 102 and GSM 103, $4,058,000; to cover common overhead
expenses as permitted by section 11 of the Commod ity Credit Corporation Charter Act and in
conformity with the Federal Credit Reform Act of 1990, of which $3,224,000 may be

65 See US First Written Submission (11 July 2003), para. 175 and fn. 160.
66 US Answers to Panel Question 77 (11 August 2003), para. 146.

transferred to and merged with the appropriati on for "Foreign Agricultural Services, Salaries
and Expenses", and of which $834,000 may be transferred to and merged with the
appropriation for "Farm Service Agency, Salaries and Expenses."

Also, paragraph 38 of Statement of Fede ral Financial Accounting Standard No. 2
67, originally issued
23 August 199368, provides:

Costs for administering credit activ ities, such as salaries, legal fe es, and office costs, that are
incurred for credit policy evaluation, loan and loan guarantee origination, closing, servicing,
monitoring, maintaining accounting and computer systems, and other credit administrative
purposes, are recognized as administrative expense. Administrative expenses are not included
in calculating the subsidy costs of direct loans and loan guarantees.

(e) The Panel notes the US statement in paragraph 160 of its answers to Panel
questions following the first meeting that all cohorts are still open although the
1994 and 1995 cohorts will close this year. Is this still an accurate statement? If
not, please indicate whether any cohort s have since "closed" for the period
1992-2002.

90. Although the United States has not completed th e formal administrative steps to close cohorts
1994 and 1995, all financial transactions necessary to do so are complete. Consistent with figures
reflected in the 2004 Budget Federal Credit Supp lement Table 8 (Exhibit Bra-182), the net of
reestimate figure for each of cohorts 1994 and 1995 will be negative, indicating profitability.

(f) The Panel notes the current "high" fi gures for 1997 and 1998 indicated in the
original US chart. Pending their confirmation and/or updating by the US, why
does the US assert that a cohort will necessarily reach a "profitable" result (for
example, the 1994 cohort, which has almost closed still indicates an outstanding
amount)? Do "re-estimates" reflect also expectations about a cohort's future
performance?

91. Until a "closing reestimate" occurs with respect to a particular cohort, which is made "once all
the loans in the cohort have been repaid or written off,"
69 each reestimate does necessarily reflect
certain expectations about a cohort’s future performance. "Reestimates mean revisions of the subsidy
cost estimate of a cohort (or risk category) based on information about the actual performance and/or
estimated changes in future cash flows of the cohort." 70 Generally, reestimates must be made
immediately after end of each fiscal year.

92. With the passage of time, of course, each reestimate necessarily more closely reflects actual
results. In the case of the GSM-102 export cred it guarantee programme, for example, after three
fiscal years have elapsed both the actual amount of guarantees and the actual amount of defaults are
known.

93. With respect to the 1994 cohort alone, as noted in the response to Panel Question 221(b)
above, the numbers from Table 8 of the Federal Credit Supplement (Exhibit Bra-182), indicate
profitability. As noted in the immediately preced ing response, although the United States has not

67 See Answer to Question 228, infra, regarding the Federal Accounting Standards Advisory Board
68 Statement of Federal Financial Accounting Standards No. 2: Accounting for Direct Loans and Loan
Guarantees, issued 23 August 1993, pp. 187-267. (Exhibit US-127)
69 See OMB Circular A-11 (Exhibit Bra- 116), section 185.6, page 185-15. See also, US Rebuttal
Submission (22 August 2003), paras. 155-156 and fn. 189; US Answers to Panel Question 81(d)
(11 August 2003), paras. 162-163.
70 OMB Circular A-11 (Exhibit Bra- 116), Section 185.3(x), p. 185-12

completed the formal administrativ e steps to close cohorts 1994 a nd 1995, all financial transactions
necessary to do so are complete. Consistent with figures reflected in the 2004 Budget Federal Credit
Supplement Table 8 (Exhibit Bra-182), the net of reestimate figure for each of cohorts 1994 and 1995
will be negative, indicating profitability.

94. With respect to 1997 and 1998, the United States of course cannot with absolute certainty
predict the future . A principal issue with respect to the 1997 cohort concerns Pakistani and
Ecuadorean defaults. All of this debt has been rescheduled and is now fully performing. These
rescheduled amounts currently involve approximately $209 million of outstanding principal alone.
Consequently, the United States has every reason to believe that 1997 cohort will ultimately reflect
profitability.

95. With respect to the 1998 cohort over $30 m illion of Ecuadorean and Russian (private sector)
outstanding principal are in performing reschedulings.

(g) Why should the Panel "eliminate" the 2001 and 2002 cohorts from its
examination, as suggested in paragr aph 198 of the US further rebuttal
submission?

96. The United States has previously noted that the original subsidy estimate in the US budget
begins with an historically overly optimistic proj ection of the actual use of the programme and then
the use of government-wide estimation rules is re quired, including mandated risk assessment country
grades without regard to the actual experien ce specific to the CCC export credit guarantee
programmes.
71 The original subsidy estimate for these c ohorts, like the original subsidy estimate for
all cohorts, necessarily reflects no actual operating experience with respect to that cohort.

97. Subsequent downward reestimates (i.e., goo d performance) are calculated not from the
original subsidy estimate but from the actual figure corresponding to amounts of guarantees actually
issued.
72 Although this budgetary convention exaggera tes the apparent negative performance in all
years, this exaggeration is particularly acute in the nearer term. As reflected in the table entitled
"CCC Export Credit Guarantee Programme Levels - Annual President’s Budgets and Actual Sales
Registrations - FYs 1992-2004" accompanying pa ragraph 148 of the US Further Submission
(30 September 2003), actual sales registrations are onl y reflected in budgetary figures two fiscal years
following the fiscal year of the particular cohort. For the 2002 cohort, therefore, the actual sales
registrations of $3,388 million contrasts with the estimated programme level of $3,926 million in the
immediately preceding budget. Similarly, for the 2001 cohort, the actual fi gure of $3,227 million is
also more than one-half billion dollars less than the anticipated programme level of $3,792 million
reflected in the preceding budgets. For this reason, the tables set forth in response to questions 221(a)
and 221(b) commence with an "estimate" figure corresponding to the actual level of sales
registrations.

98. More significant in direct response to the ques tion, as reflected in the tables above in response
to questions 221(a) and 221(b), is the trend of negative reestimates (i.e., better than expected
performance). They are uniformly large for all cohorts for 1999-2000. This trend has also
commenced with respect to the 2001 cohort. It is reasonable to expect that in the fullness of time the
data will similarly reflect further negative reestimat es for cohorts 2001 and 2002. This is likely to
become more pronounced as the terms of the guarantees issued during this time expire.

99. For the foregoing reasons, the United States submits that the current budgetary subsidy
estimate figures do not accurately reflect the proper relationship of premia to long-term operating
costs and losses (if any) with respect to cohorts 2001 and 2002. Although over the long-term the

71 US Further Submission (30 September 2003), paras. 147-148.
72 See US Further Submission (30 September 2003), paras. 148-149.

subsidy estimate / re-estimate process will inco rporate information relating to actual operating
experience, the original subsidy estimate figures in the budget do not reflect any operating experience
for the respective cohort. Thus, those subsidy estimates cannot properly be used as part of an analysis
of whether the export credit guarantee programmes confor m to Item (j) of the Illustrative List (i.e, the
sufficiency of premia to cover long-term operating costs or losses (if any)).

(h) Why should the Panel "eliminate", in addition, the 2000 cohort, as also
suggested in paragraph 198 of the US further rebuttal submission for which
information is presumably more "complete"?

100. The Panel is of course correct to note that the data for the 2000 cohort is necessarily more
complete than with respect to the subsequent cohorts. And, as the United States would have
anticipated, the large negative reestimates have comme nced for the 2000 cohort. As we are now in
the third month of fiscal year 2004, all out standing GSM-102 and SCGP guarantees will have
expired, and the next budget cycle reestimate process will necessarily reflect that fact.

101. The same points made in the immediately pr eceding response to question 221(g) apply to the
2000 cohort. Of particular note with respect to th is cohort, however, is the very large difference
between the original projected level of use refl ected in the 2000 budget ($4,506 million) and the
actual level of sales registrations reflected in the 2002 budget for that cohort ($3,082 million). This
difference, approaching $1.5 billion of initially over estimated utilization, has a profound effect on the
budgetary depiction of programme performance a nd required estimates (although the tables set forth
above eliminate this distortion in the US budget by starting from the estimate figure corresponding to
actual sales registrations).

(i) Under the US approach, at what point in time could a Panel ever make an
assessment of the programme, if it had to wait for each cohort to be completed
before it could be "properly" assessed? Wh y is it inappropriate for the Panel to
include these "most recent years" in its evaluation, as the US suggests in
paragraph 199 of its 18 November further rebuttal submission? USA

102. Fortunately, neither the Panel nor the United St ates has to answer this question entirely in the
abstract. First, Brazil and the United Stat es agree that an examination beyond 10 years is
inappropriate.
73 Indeed, as the United States has noted, to subject the programme to the analytical
yoke of the unique circumstances of the Polish and Ira qi defaults over 10 years ago would effectively
require elimination of the programme altogether. 74 Item(j) analysis requires a certain retrospection to
make the requisite comparison be tween premia and net operating r esults of the programme. The
question therefore becomes at what point does the fi nancial data yield a sufficiently accurate picture
to render this judgment.

103. The United States has noted that the budgetary figures inherently tend to exaggerate negative
performance of the programme. This is more pronoun ced in the "most recent years" for the reasons
noted above. As noted in the immediately precedin g sub-question(h), in the case of fiscal year 2001
and 2002 cohorts, the original budgetary subsidy estimates do not reflect any operating results of
those cohorts. In contrast, cohorts 1992-1999, ta ken as a whole, currently reflect a net negative
reestimate (i.e., profitable performance). Although it is theoretically conceivable that status could
change, every indication in the trends related to the programme, including most specifically the
uniform performance of reschedulings, indicate that the negative reestimates will grow, not diminish,
in time.

73 The most recent manifestation is Brazil’s statem ent in paragraph 81 of its 2 December 2003, Oral
Statement: "Item(j) requires the Panel to determine whet her the ‘programmes,’ . . . charge premium rates that
meet operating costs and losses over a period that the United States and Brazil agree should be 10 years."
74 US Rebuttal Submission (August 22, 2003), paras. 172-174

104. Consequently, the United States believes the Panel has sufficient data to determine that
premium rates are adequate to cover long-term operating costs and losses of the programmes.

222. For GSM 102, 103 and SCGP, please provide year-by-year amounts from 1992 to
2003 with respect to: (i) cumulative outstanding guarantees; (ii) claims paid; (iii)
recoveries made; (iv) revenue from premiums; (v) other current revenue, including
interest earned; (vi) interest charges paid; a nd (vii) administrative costs of running the
programmes. Please indicate any allocation methodologies used to calculate
administrative costs. USA

105. The chart constituting Exhibit US-128 sets fo rth the information requested. This data is
current through November 30, 2003. As the Pane l will note, claims outstanding plus interest and
administrative expenses are now well below premia plus interest otherwise collected or earned. This
current data clearly reflects that premia are adequate to cover long-term operating costs and losses.

106. For each of cohorts 1992-1996, $3 million of administrative costs are allocated. For each
subsequent cohort, $4 million of such costs are allo cated. These are the figures reflected in the table
accompanying paragraph 132 of Brazil’ s Oral St atement of July 22, 2003, and the corresponding
references to the US budget cited therein. As Exhibit US-128 breaks out activity for each of
GSM-102, GSM-103, and SCGP, these respective administrative costs have then been allocated based
on the relative registration values of these programmes. Interest costs and revenue (see response to
question 224 and table therein) have similarly been allocated based on registration value.

223. Are the premium rates applicable to GSM 102, 103 and SCGP subject to regular
review as to their adequacy in enabling th e operating 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 rates applied compare with the implicit
cost of forfaiting transactions and with premiums for export credit insurance? USA

107. Premium rates applicable to GSM-102, GSM- 103, and SCGP are reviewed annually. The
premia rates vary by programme, length of cove rage, and repayment interval. For GSM-102, the
premium ranges from 15.3 cents per $100 of coverage to about 66 cents per $100 of coverage. Under
SCGP, a two-tier fee schedule exists. For up to 90 days, the fee is 45 cents per $100 of coverage. For
91 to 180 days, the fee is 90 cents per $100 of cove rage. A higher fee structure for longer term is
viewed as an incentive to exporters to opt for a shorter term and correspondingly reduce the likelihood
of claims, and therefore potential operating losses, associated with the programmes. Premia for both
GSM-102 and SCGP are currently subject to a statutory cap of one per cent.
75

108. Private commercial quotes for export credit in surance are simply not available to the
United States. As the United St ates has previously noted, however
76, commercial insurers do offer
export credit insurance covering agricultural comm odities. According to a background paper on
export credits prepared by the WTO Secretaria t: "While guarantees could be unconditional, they
usually have conditions attached to them, so that in practice there is little distinction between credits
which are guaranteed and credits which are subject to insurance."77

109. With respect to forfaiting, the United States si milarly does not have access to specific implicit
rates available in the marketplace. The United States notes, however, that an importer does not
necessarily realize any benefit from a CCC export credit guarantee. CCC has no role in the
arrangements between the foreign bank issuing the le tter of credit and the importer, which is typically

75 See US Answer to Panel Question 85 (11 August 2003), paras. 181-183.
76 US Answer to Panel Question 76 (11 August 2003), para. 144
77 Export Credits and Related Facilities, G/AG/NG/S/13 (26 June 2000)

the account party under the letter of credit. Conseq uently, the importer may have to pay its bank in
full upon disbursement under the documentary letter of credit. The existence of an export credit
guarantee transaction also has no necessary effect on th e pricing of financing or letter of credit fees
that the importer’s bank may charge. In this resp ect, the export credit guarantee transaction is less
favourable to the importer than a forfaiting transaction.
78 As the United States has previously
observed, forfaiting and export credit guarantee transac tions compete as a method for trade financing
over comparable tenors in similar markets, but it is difficult to make direct comparisons of implicit
rates even among forfaiting transactions themselves.79

 224. Please indicate how the CCC's cost of borrowing was treated in the 2002
financial statement of the CCC, in Exhibit BRA 158.

110. In the 2002 financial statements of the CCC, the cost of borrowing is treated as interest
expense. It is included as part of the Net Cost of Operations set forth in Exhibit US-129, entitled
"Commodity Credit Corporation Consolidated Statem ent of Net Cost (Note 13) for the Fiscal Year
Ended 30 September 2002)." A separate column is presented for Foreign Programmes, of which the
Export Credit Guarantee programmes are a part . Borrowing costs are subsumed within
"Intragovernmental Gross Costs". CCC also earns interest on monies held by Treasury. These
interest collections become a component of "intrago vernmental earned revenue." The net result is the
difference between these two figures in a given year.

111. With respect to the export credit guarantee pr ogrammes specifically, this "interest on debt to
Treasury" and "interest on uninvested funds" are refl ected in the financing account portion of each
budget. As interest expense and revenue are nec essarily homogenized numbers, they are not readily
allocated to cohorts. Actual interest expense and revenue figures for a particular fiscal year are set
forth in line 00.02 and 88.25 of the financing acc ount provisions of each budget. The following table
sets out these figures, which are also reflected in the table responding to question 222 above.

78 See, generally, US Further Submission (30 September 2003), paras. 157-162

CCC Export Credit Guarantee Programme -- Financing Account
Payments of Interest on Borrowings from Treasury (00.02) and
Interest Earned on Uninvested Funds (88.25)
Programming Years 1992 – 2002
($ Millions)

Annual President’s Budgets

Programme Year 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

1992 Actuals

 Interest on
 Borrowings

$0

 Interest Earned (1)

1993 Actuals

 Interest on
 Borrowings

$0

 Interest Earned (16)

1994 Actuals

 Interest on
 Borrowings

$0

 Interest Earned (0)

1995 Actuals

 Interest on
 Borrowings

$10

 Interest Earned (0)

1996 Actuals

 Interest on
 Borrowings

$61

 Interest Earned (26)

1997 Actuals

 Interest on
 Borrowings

$62

 Interest Earned (26)

1998 Actuals

 Interest on
 Borrowings

$62

 Interest Earned (54)

1999 Actuals

 Interest on
 Borrowings

$62

 Interest Earned (0)

2000 Actuals

 Interest on
 Borrowings

$62

 Interest Earned (99)

Annual President’s Budgets

Programme Year 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

2001 Actuals

 Interest on
 Borrowings

$104

 Interest Earned (125)

2002 Actuals

 Interest on
 Borrowings

$93
 Interest Earned -61

225. Please indicate whether there was any instan ce where the CCC "wrote off" debt and, if
so, please indicate the accounting regulation or principle used. If a "written off" debt is
subsequently recovered, do the CCC's accounts ref lect both the interest cost and interest
received in relation to the debt during the time it was "written off"? USA

112. A complete response to this question requires a vocabulary distinction between "write off" for
purposes of CCC accounting and debt forgiveness. A "w rite off" conventionally is used to describe
debt that CCC itself independently determines to be unc ollectible. This determination is made by the
Controller of CCC.

113. Debt forgiveness, on the other hand, refers to multilaterally agreed debt forgiveness, usually
through the Paris Club, that is subsequently implemented by the United States and CCC through
legislation or other internal mechanisms to elimin ate the outstanding debt. As a result, in the more
common parlance, that debt too is written off.

114. Historically, debt forgiveness is far larg er than independent "write off." CCC has
independently written off as uncoll ectible only approximately $190,0 00 of private sector debt with
respect to the export credit guarantee programmes as follows:

Cohort Fiscal Year of Write Off Country Amount
Pre-1992 1995 Nigeria $129,000
Pre-1992 1999 Argentina 48,000
1992 1999 Russia and Former Sovie t
Union
 13,000

Debt forgiveness:

Cohort Fiscal Year of forgiveness Country Amount
Pre-1992 1991, 1994 Poland $1,406,000,000 80
Pre-1992 1997 Yemen 1,686,000
Pre-1992 1999 Honduras 5,951,000
Pre-1992 2002 Former Yugoslavia 3,343,000
Pre-1992 2002 Tanzania 8,806,000

None of the foregoing debt in either table has been recovered.

226. If a debt was "written off" more than ten years ago, does it still create a cost to
the programme? If so, how is this reflected in the 2002 financial statement of the CCC,
in Exhibit BRA 158 (or any other material)?

115. The provisions of the Federal Credit Reform Act first took effect with fiscal year 1992, which
commenced on 1 October 1991. Write-offs before 1 October 1991 would have no continuing effect
in the current financial statements of CCC, as such write-offs would have been reflected as part of the
operating loss of the corporation, which in turn was replenished through the annual appropriations
process in the year following such write-off.

80 This amount is approximate as it requires allocation of write off related to debt arising from various
programmes.

116. Write-offs after 1 October 1991 also would not independently create an expense. Upon
payment of a claim on an export credit guarantee, CCC receives a fully subrogated position to collect
from the defaulting obligor. As a result, this debt is then reflected as a loan receivable for both
budgetary and financial statement purposes. In accordance with paragraph 61 of Statement of Federal
Financial Accounting Standard No. 2,
81:

When post-1991 direct loans are written off, the unpaid principal of the loans is removed
from the gross amount of loans receivable. Concurrently, the same amount is charged to the
allowance for subsidy costs. Prior to the write-off, the uncollectible amounts should have
been fully provided for in the subsidy cost allowance through the subsidy cost estimate or
reestimates. Therefore, the write-off would have no effect on expenses.

227. The United States has indicated that Brazil continues to "mischaracterize" 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 believes 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, do es it represent CCC operating costs or losses?
USA

117. Brazil wrongly describes this amount as "record losses . . . for its guarantee programmes over
the period 1992-2002."
82 This figure does not represent a loss. It is a prospective estimate at a
particular moment in time of anticipated expe rience under the programme. It is, like the budget
figures, an estimate.

118. The $411 million figure is simply another manifestation of the estimate and re-estimate
process required under the Credit Reform Act of 1990 and reflected in the budget figures of the
United States. As a result, it is another depiction, albeit in a different format, of the results of the
estimate and re-estimate process.

119. Just as the estimate figures in the budget proceed in a downward direction (i.e., good
performance), one would expect this corresponding est imate figure in the CCC Financial Statements
to do the same. And it does. On the correspondi ng page of the Notes to Financial Statements
30 September 2003 and 2002
83, the $411 million figure has declined to $22 million.

120. As reflected on page 19
84 of Exhibit Bra-158 and on its 2003 analog, the $411 million figure
and the more recent $22 million figure are the result net of "interest rate reestimate" and
"technical/default reestimate". The figure, net of such total subsidy reestimates, is then brought
forward to the subsequent year (as is manifest on page 19 from 2001 to 2002 and in turn from 2002 to
2003). Prior years’ figures similarly brought forward are also figures net of "total subsidy
reestimates".

121. Furthermore, Appendix E of the Statements of Federal Financial Accounting Concepts and
Standards of the Financial Accounting Standards Advi sory Board is a consolidated glossary of terms

81 Exhibit US-127.
82 The most recent example of this repeated asser tion is in paragraph 84 of the 2 December 2003,
Statement of Brazil.
83 Audit Report, Commodity Credit Corporation, Financial Statements for Fiscal Years 2003 and 2002,
Note 5, page 19. (Exhibit US-129).
84 The information and format of this page are required by Statement of Federal Financial Accounting
Standards No. 18: Amendments To Accounting Standards for Direct Loans and Loan Guarantees In Statement
of Federal Financial Accounting Standards No. 2, Ap pendix B: Schedule B, entitled "Schedule for Reconciling
Loan Guarantee Liability Balances." Exhibit US-125 , p. 990 (Exhibit US-125:
http://www.fasab.gov/pdf/cod4.pdf
 pages 967-993).

applicable to GAAP for federal entities. That glo ssary defines "liability" as: "For Federal accounting
purposes, a probable future outflow or other sacrifice of resources as a result of past transactions or
events." Loss, on the other hand, is: "Any expense or irrecoverable cost, often referred to as a form of
nonrecurring charge, an expenditure from which no present or future benefit may be expected."
85 The
$411 million figure in the 2002 Financial Statements and the $22 million figure in the 2003 Financial
Statements describe "credit guarantee liability," not loss.

228. What accounting principles should th e Panel use in asses sing the long-term
operating costs and losses of these three program mes? 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

122. Financial statements of the Commodity Cred it Corporation are prepared in accordance with
generally accepted accounting principles (GAAP), ba sed on accounting standards promulgated by the
Federal Accounting Standards Advisory Board (FASAB). 86 In October, 1999, this board was
designated by the American Institute of Ce rtified Public Accountants (AICPA) as the
standards-setting body for financial statements of federal government entities, with respect to the
establishment of generally accepted accounting principl es. On October 19, 1999, AICPA adopted an
amendment to its Code of Professional Ethics to recognize accounting standards published by the
FASAB as GAAP for federal financial reporting en tities. The amendment recognized FASAB as the
source of GAAP for federal entities. Conseque ntly, no incompatibility of accounting principles
exists.

E. SERIOUS PREJUDICE

230. Please comment on Brazil's views on Ar ticle 6.3 of the SCM Agreement as stated
in paragraphs 92-94 of its further submission. USA

123. Brazil’s arguments fail to convince. First, Br azil complains that "[t]here is no valid basis for
the US interpretation that the word "may" in the chapeau of Article 6.3 of the SCM Agreement [to]
mean[] that a complainant - in addition to demonstr ating the existence of one of the effects listed in
the subparagraphs, e.g., significant price suppression - must also make a separate showing of ‘serious’
prejudice."
87 Brazil may choose to believe there is no "va lid" basis, but there is a clear textual basis
for the US interpretation: the ordinary meaning of the word "may."

124. The ordinary meaning of "may" is "have ability or power to; can."
88 Therefore, the chapeau
of Article 6.3 permits but does not require a findi ng that serious prejudice exists when one of the
situations in Article 6.3 is demonstrated.

125. Second, Brazil argues that the use of "may" in Article 6.3 is merely intended to reflect that
there are "situations in which the four enumerat ed types of serious prejudice exist but are not
actionable." For example, Brazil points to Article 6.7, which delineates certain circumstances in
which displacement or impeding of exports shall not arise, and Article 6.9, which states that Article 6
does not apply to measures that conform to the Peace Clause. Brazil’s argument is badly flawed. The
ordinary meaning of the chapeau to Article 6.3 do es not suggest that serious prejudice must arise if
one of the situations in Article 6.3 exists. If the drafters had intended merely to suggest that
exceptions to Article 6.3 exist, they succeeded in stead in creating a provision that does not compel

85 Statement of Federal Financial Accounting Concepts and Standards (May 2002), Appendix E, pages
1140-1141 (Exhibit US-130).
86 The website for the FASAB is www.fasab.gov.
87 Brazil’s Further Rebuttal Submission, para. 92.
88 New Shorter Oxford English Dictionary, vol.1, at 1721.

any finding of serious prejudice in a circumstance in which one of the criteria under Article 6.3 is met,
even when the circumstances in Articles 6.7 and 6.9 are met.

126. Indeed, the text of Article 6 does reflect Memb ers’ decision to create in Articles 6.1 and 6.2
exactly the sort of mandatory presumption / excepti on structure that Brazil attempts to read into
Article 6.3. Article 6.1 states that "[s]erious pr ejudice in the sense of paragraph (c) of Article 5 shall
be deemed to exist in [certain] case[s]" (emphasis added). Article 6.2 states that, " [n]otwithstanding
the provisions of paragraph 1, serious prejudice shall not be found if the subsidizing Member
demonstrates that the subsidy in question has not resulted in any of the effects enumerated in
paragraph 3" (emphasis added). By wa y of contrast, Articles 6.3 and 6.7 do not use mandatory
language (for example, "shall be de emed to exist" / "shall not be found") to establish a presumption /
exception relationship. Rather, the language of Ar ticle 6.3 is permissive, and Article 6.7 is not
expressed as an exception to a mandatory finding under Article 6.3.

127. Brazil’s reference to Article 6.9 is inapt. We note that Article 6.9 does not limit its
application to situations under Article 6.3. Rather, it states: "This Article does not apply to subsidies
maintained on agricultural products as provided in Article 13 of the Agreement on Agriculture"
(emphasis added). The language of Article 6.9 indicates that it applies to all of the provisions under
"[t]his Article." Thus, according to Brazil’s logi c, every affirmative use of the word "shall" in
Article 6 (for example, Article 6.1: "Serious prejudi ce shall be deemed to exist . . . ."; Article 6.4:
"[D]isplacement or impeding of exports shall include . . . ."; Article 6.5: "[P]rice undercutting shall
include . . . .") should have been written "may" to re flect the fact that "even where the requirements of
[that provision] are fulfilled," the "subsidies are ex empt from action by virtue of the peace clause of
Article 13 of the Agreement on Agriculture." Those other provisions do use the term "shall,"
however, suggesting that the term "may" in Article 6.3 was used deliberately and according to its
ordinary meaning.

128. Finally, Brazil asserts that "Article 6 is silent on the nature of the alleged additional
requirements for a finding of ‘serious’ prejudice."
89 This is not wholly accurate. For example, as
Question 229 from the Panel to Brazil notes, the ch apeau to Article 6.3 indicates that "[s]erious
prejudice . . . may arise in any case where one or several of the following apply " (emphasis added).
Therefore, the Panel could conclude that where more than one prong of Article 6.3 is satisfied, the
likelihood that the result is "serious prejudice" in creases. Furthermore, Brazil points to additional
details provided in Article 6.4 on displacement or impedance and in Article 6.5 on price undercutting
as suggesting that a finding of "serious prejudice" must result if one prong of Article 6.3 is satisfied.
However, Brazil draws no consequence from the lack of" detailed definitions" capable of application
for Articles 6.3(a), 6.3(c) (significant prices suppression, price depression, or lost sales), or 6.3(d).

129. Finally, Brazil claims that the United States did not assert and the panel in Indonesia -
Automobiles did not find any separate "serious prejudice" requirement in Article 6.3. As the
United States notes in its answer to Question 234, th e permissive ("may") language of the chapeau to
Article 6.3 would not preclude the Panel from c oncluding that a finding under one prong of
Article 6.3 suffices to establish serious prejudice. As Article 6.8 suggests, "the existence of serious
prejudice should be determined on the basis of the information submitted to or obtained by the panel"
– that is, on a case-by-case basis. Thus, the Panel will be called upon to exercise its judgment on the
quality of the evidence on causation and on the extent of any alleged effects. To reiterate one
hypothetical example suggested at the second panel meeting, were a complaining party to make a
prima facie case that one unit of its exports had been displaced from the market of the subsidizing
Member, the situation in Article 6.3(a) would techni cally have been demonstrated. Such a situation,
however, would lend itself to the exercise of the Panel’s discretion not to find serious prejudice. This
is the type of flexibility that the chapeau to Article 6.3 gives the Panel and which Brazil ’s
interpretation would read out of the Subsidies Agreement.

89 Brazil’s Further Rebuttal Submission, para. 94.

231. Do you believe that the now-expired Article 6.1 and/or Annex IV of the SCM
Agreement are relevant context for the Panel's interpretation of Article 6.3? USA

130. The United States believes that both Article 6.1 and Annex IV of the Subsidies Agreement
provide relevant context for interpreting "serious prejudice" within the meaning of Article 5(c) and
Article 6.3. As the Panel’s question notes, Artic le 6.1 has expired pursuant to Article 31, which
established that Article 6.1 would "apply for a period of five years, beginning with the date of entry
into force of the WTO Agreement," unless the Committee on Subsidies and Countervailing Measures
determined to extend its applica tion. Annex IV is entitled, "Calculation of the Total Ad Valorem
Subsidization (Paragraph 1(a) of Article 6)," and by its terms establishes a methodology to calculate
"the amount of a subsidy for the purpose of paragraph 1(a) of Article 6." Thus, since the provision it
is meant to implement is no longer in effect, Annex IV as well is no longer directly applicable.

131. The context provided by these provisions, of course, must be judged in light of the fact that
Members did not agree to extend Article 6.1(a). That is, it is highly relevant that the provision
establishing a rebuttable presumption of serious prejudice upon a showing of a 5 per cent ad valorem
subsidization rate was allowed by Members to lap se. On the other hand, no decision on whether to
extend Annex IV was contemplated or taken pursuant to Article 31. In addition, we note that in
United States – Countervailing Measures (EC) , the Appellate Body relied on Annex IV as context in
interpreting another provision of the Subsidies Agreement.
90 Thus, although the underlying provision
attaching a consequence to a certain subsidizati on rate lapsed, it is appropriate to examine how
Members agreed in Annex IV a subsidy not tied to the production or sale of a given product would be
allocated across the total value of the recipient’s production.

132. The Panel must utilize some methodology to determine the benefit to upland cotton from a
subsidy not tied to production of upland cotton. For example, Part V does not expressly set out an
allocation methodology, but the same methodology of allocating an untied subsidy across the total
value of the recipient’s production is applied by several Members (for example, the European
Communities and the United States) for purposes of their countervailing duty law. Indeed, Brazil
itself has proposed in the Negotiating Group on Rules that Members adopt a "guideline" on
calculating the amount of the subsidy for countervailing duty purposes precisely setting out the
methodology contained in Annex IV.
91 The Panel should consider whether Brazil’s refusal to
countenance any allocation of the decoupled payments it has challenged is credible given the fact that
Brazil in its Rules proposal and Annex IV as agreed by Members both express the same approach to
allocating non-tied subsidies across production. Thus, the United States believes that Annex IV
continues to provide useful context for the necessary task of identifying the products that benefit from
a subsidy not tied to the production or sale of a given product.

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"?

133. "Significant" price suppression under Article 6.3(c) does not necessarily amount to "serious
prejudice" within the meaning of Article 5(c). Th is conclusion flows from the ordinary meaning of

90 WT/DS212/AB/R, para. 112. Similarly, in United States – FSC: Article 22.6 , Arbitrator cited the
expired Articles 8 and 9 as "helpful . . . in understand ing the overall architecture of the Agreement with respect
to the different types of subsidies it sought and seeks to address." WT/DS108/ARB, note 56.
91 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.").

the text of Article 6.3(c): "Serious prejudice in the sense of paragraph (c) of Article 5 may arise in any
case where one or several of the following apply." The ordinary meaning of "may" is "have ability or
power to; can." Therefore, the existence of one of the situations in Article 6.3 is a necessary condition
for a finding of serious prejudice but may not be sufficient.

134. Brazil argues that the use of "may" in Article 6. 3 is merely intended to reflect that Article 6.7
delineates certain circumstances in which displacemen t or impeding of exports shall not arise.
However, the ordinary meaning of the chapeau to Article 6.3 does not suggest that serious prejudice
must arise if one of the situations in Article 6.3 exists. Further, the text of Article 6 reflects Members’
decision to create just such a mandatory presumpti on / exception structure in Article 6.1 and 6.2.
Article 6.1 states that "[s]erious prejudice in the sense of paragraph (c) of Article 5 shall be deemed to
exist in [certain] case[s]" (emphasis added). Article 6.2 states that, "[n]otwithstanding the provisions
of paragraph 1, serious prejudice shall not be found if the subsidizing Member demonstrates that the
subsidy in question has not resulted in any of th e effects enumerated in paragraph 3" (emphasis
added). Article 6.3 and 6.7 do not use mandatory language ("shall be deemed to exist" / "shall not be
found") to establish a presumption / exception relations hip. Rather, the language of Article 6.3 is
permissive, and Article 6.7 is not expressed as an exception to a mandatory finding under Article 6.3.

135. At the same time, the United States does not be lieve the text of the chapeau to Article 6.3
precludes a finding of serious prejudice where only "significant price suppression" by the subsidized
product "in the same market" as a like product and no other situation in Article 6.3 has been
demonstrated. Thus, it is conceivable that the ef fect of a subsidy could be price suppression so
significant that it alone rises to the level of serious prejudice to the interests of another Member.

136. We recall that Brazil’s interp retation is that price suppression would be "significant" even at a
level of 1 cent per pound because this coul d still "meaningfully affect" its producers.
92 The use of the
term "significant," however, would seem to be inte nded to prevent insignificant price effects from
rising to the level of serious prejudice. For ex ample, were the term "significant" omitted from
Article 6.3(c), any production subsidy (for example, a per- unit payment of 0.0001 cents per pound of
production) would be deemed to satisfy Article 6.3(c) because any increase in production resulting
from the subsidy would theoretically result in some price effect. Coupled with Brazil’s reading of
"may arise" in the chapeau of Article 6.3, this would result in any production subsidy running afoul of
Articles 5 and 6, effectively undermining the separ ation of Part III of the Subsidies Agreement on
"Actionable Subsidies" from Part II on "Prohibited Subsidies."

236. The Panel notes Exhibit US-47 (and the chart in paragraph 13 of the US 2
December oral statement). Please provide a conceptually analogous chart to Exhibit
US-63 with respect to data relating to the US interpretation of "world market share".

137. The graph shows the year-over-year percenta ge change in the world market share over
1996-2002. US world market share is defined as in Exhibit US-47 as the quantity of consumption of
US cotton (domestic mill use + exports) relative to world cotton consumption.

138. The annual change in the US market share is relatively slight with the exception of 1998
when severe drought, primarily in Texas, caused US production to fall significantly.

92 See Brazil’s Further Submission, para. 256.

Change in Market Share Percentage
-6%
-4%
-2%
0%
2%
4%
6%
1996 1997 1998 1999 2000 2001 2002*
United States
Rest of World

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

139. It would not appear that a phenomenon (world market share) that remains at approximately
the same level over a given period of time could be considered a "consiste nt trend" within the
meaning of Article 6.3(d). This follows from the text of Article 6.3(d) itself because the "effect of the
subsidy" must be an increase in world market share (as compared to the preceding three-year period),
and "this increase [must] follow[] a consistent trend over a period when subsidies have been granted."
Thus, if world market share remains at approximate ly the same level over a given period of time, the
trend would not be an "increase" in world market share; hence, the trend would not be a "consistent
trend" within the meaning of Article 6.3(d). And, in fact, the data do not demonstrate that US world
market share has increased following a consistent trend over a period when subsidies have been
granted.
93

238. According to the US interpretation of the term "world market share":

(a) should the domestic consumption of closed markets be added into the
denominator?

140. It is not clear from the Panel’s question what is meant by "closed markets," but the US
reading of Article 6.3(d) is that "world market shar e . . . in a particular subsidized primary product or
commodity" means just that: a Member’s share of th e world market in, for example, upland cotton.
There is nothing in the text of Article 6.3(d) that supports excluding any portion of the "world" from
the analysis. For this reason, Brazil’s reading of this provision as solely relating to world export trade
necessarily excludes any portions of the "world market" for upland cotton that do not import, no

93 See, e.g. , US Opening Statement at the Second Panel M eeting, paras. 12-13 ("That is, the facts
demonstrate that since marketing y ear 1996, US world market share ha s increased and then decreased in
alternating years, and US world market share in marketin g year 2002 (19.6 per cent) is lower than in marketing
years 1996 and 1997 (20.4 and 21.6 per cent, respectively).").

matter the size of that market. Such a result runs c ontrary to the ordinary meaning of the terms of the
provision.

141. We note that excluding consumption from "closed markets" in the world market share
calculation would increase the overall market share of the United States (and other suppliers) because
the total world consumption figure would be lower. However, the variation in market share across
years would not change appreciably assuming that the level of consumption in closed markets was
relatively constant.

(b) if US production and consumption in creased by the same percentage, whilst the
rest of the world's production and co nsumption remained steady, would this
imply an increase in the US "world market share" by a different percentage?

142. The United States interprets this question as asking whether the US market share would
increase if an increase in US cotton consumption was completely supplied by increased US
production without any changes to the consumption a nd supply patterns of the rest of the world.
Under the US approach to "world market sh are," US world market share would increase.
94 T h e
amount of increase in the US world market sh are would depend largely on the size of US
consumption relative to world consumption.

143. Under Brazil’s approach to Article 6.3(d) , however, an increase in a Member’s cotton
consumption that was completely supplied by increased production by that Member would result in
no change in that Member’s world market share sinc e there was no change in the Member’s exports.
Brazil’s approach, therefore, would allow a larger or even dominant cotton consumer to provide huge
per-unit production subsidies that increased the sh are of its own domestic consumption that its
producers supplied without any discipline under Article 6.3(d), regardless of the impact on other
Members who could potentially supply that increasi ng domestic consumption. Such a result runs
contrary to the ordinary meaning of "world market share" in Article 6.3(d) since the term "world
market" would captures impacts both in the market of the subsidizing Member (as in Article 6.3(a))
and in third-country markets (Articles 6.3(b) and 6.3(c)).

(c) does Saudi Arabia have a sma ll world market share for oil?

144. The relevance of this question is not entirely clear since Article 6.3(d) does not speak of
"large" or "small" world market shares. That is, it is only a certain increase in world market share,
from whatever level, that follows a consistent tr end over a period when subsidies have been granted
that is relevant to the 6.3(d) analysis.

145. Nonetheless, we note that Saudi Arabia expor ts crude oil but also refines petroleum into
products that it consumes and refines as well. Ba sed on 2000 world petroleum supply and disposition
data for 2000, Saudi crude oil exports account for a bout 16 per cent of total world exports. Using an
analogous measure for consumption (exports plus domestic consumption–i.e., refining–divided by
total world consumption) gives a market share of 12 per cent.

239. How does the US respond to Brazil's assert ions that, under the US interpretation
of the term "world market share":

(a) there would be no WTO disciplines on production-enhancing subsidies that
increase a Member's world market sha re of exports? (see paragraph 64 of
Brazil's 2 December oral statement);

94 US world market share = (US domestic use of US cotton + US exports)/world consumption of cotton

(b) a Member's exports would have to be disregarded in calculating their "world
market share" in terms of "world co nsumption"? (see e.g. paragraph 65 of
Brazil's 2 December oral statement)

146. (a) We note that Brazil must repeatedly insert the term "export" into the phrase "world
market share of export" or "world export share" in order to convey a meaning restricting the term
"market share" to exports. That is because the ordinary meaning of "world market share" would be all
those markets in which cotton is consumed. Further, Brazil’s argument is overstated. There would be
disciplines on production-enhancing subsidies, even those that increase a Member’s world market
share of exports (even though that is not an WTO obligation in and of itself). Under Article 6.3(d),
for example, a Member’s world market share is determined by its domestic consumption plus exports
of the product it produces. If a subsidy increased the Member’s exports, and domestic consumption
and world consumption remained the same, the increase in the Member’s exports alone would
increase that Member’s world market share.

147. Further, production-enhancing subsidies with export effects could be inconsistent with
Article 5(a) (injury), Article 6.3(b) (displace or impede exports to third country markets),
Article 6.3(c) (lost sales), or GATT 1994 XVI:1 (serious prejudice).

148. (b) It is interesting that Brazil, which roundl y rejects the use of any concepts from Part V or
Annex IV of the Subsidies Agreement or from th e Safeguards or Anti-Dumping Agreements when
these are inconvenient for it, here tries to introduce "the ordinary meaning in a trade remedy context
of ‘domestic consumption’." The Panel’s task is not to interpret the term "domestic consumption" but
rather the "world market share of the subsidizing Member in a particular subsidized primary product
or commodity". The United States has proposed that the US share of the world market for upland
cotton must be measured by that portion of worl d consumption of upland cotton satisfied by US
upland cotton. That necessarily must include US domestic consumption satisfied by US upland
cotton. Again, we note that a relevant "market" for serious prejudice purposes is the market of the
subsidizing Member under Article 6.3(a). There is no b asis in the text or context of 6.3(d) to exclude
that market from the "world market" identified in 6.3(d).

240. Does Article XVI:3 of GATT 1994 provide context in interpreting Article 6.3(d)
of the SCM Agreement? Do these provisions apply separately? If not, could it indicate
that "world market share" is intended to mean the same as "share of world export
trade"?

149. GATT 1994 Article XVI:3 provides some context to reading Article 6.3(d). Both provisions
are addressed to subsidies that have effects on prim ary products. However, the context they provide
also consists of the differences in their respective texts. GATT 1994 Article XVI:3 is limited to
export subsidies, as Brazil acknow ledged and agreed in the Tokyo Round Subsidies Code. (Brazil
does not, because it cannot, deny that in the T okyo Round it expressed its understanding that GATT
1994 Article XVI:3 applies only to export subsidi es. The Panel can judge how credible it finds
Brazil’s change of opinion in this dispute.) GATT 1994 Article XVI:3 relies on an "equitable share"
concept that panels and Members found incapable of definition or application. Moreover, Brazil has
not provided any objective definition in this dispute of the "equitable share" concept but to argue that
anything other than a non-subsidized level of export s is inequitable, a reading that would convert
Article XVI:3 into a prohibition on domestic subsidies with production effects.

150. Article 6.3(d) of the Subsidies Agreement, on the other hand, applies to all subsidies and has
objective criteria that are capable of application. This provision sets forward a mechanical test: a
Member’s share of the world market for a product must be greater than preceding 3-year average, and
the increase must follow a consistent trend over a period when subsidies have been granted.
Therefore, there is no "inequitable share" concept to deal with, and the consistency of a Member with
its obligations is a straightforward matter to determine.

151. The United States does not see any basis to say that "world market share" was intended to
mean the same as the "share of world export trad e". The key difference is the use of the term
"market" instead of "export". The term "market" can, of course, mean a domestic market; its meaning
is not limited to markets in international trade. "E xport" refers to cross-border transactions; therefore,
a more limited set of transactions would be of interest. As a result, the term "world market share"
requires that one look at all places where upland co tton is consumed and determine what portion of
world consumption of is satisfied with US upland cotton.

241. How does the US reconcile its data on consumption for 2002 in US Exhibit 40,
Table 1 with the "consumption" data it refers to in its 30 September submission,
paragraph 34, Exhibit US-47 or US-71? USA

152. In paragraph 34 of the 30 September s ubmission and in the accompanying table,
"consumption" is used to capture both the domestic use of raw cotton production (that is, the "mill
use" figure), plus the raw cotton equivalent of textile imports (that is, how much raw cotton is
incorporated into manufactured cotton textile imports). This point is crucial to understanding how the
growth in cotton textile imports has contributed to the decline in consumption of US domestically
produced raw cotton for domestic manufacturing, wh ich has resulted in more US domestic cotton
finding a home in off-shore markets. That is, much US domestic cotton that is exported returns to the
United States in the form of textiles and apparel.
95

153. In Exhibits 40, 47, and 71, the data on consumption correspond to the "mill use" data
described above. The only difference is that th ese data are on a crop year basis (August - July).
Therefore, the mill use figure in paragraph 34 of the US further submission will differ slightly from
the consumption figure in the other exhibits. They are the same data, adjusted for different periods.
The most recent domestic consumption (that is, mill use) figure is given in the response to Question
197.

242. How much of the benefits of PFC, MLA, CCP and Direct Payments go to land
owners? If not all of the benefits go to land owners, what proportion goes to producers?
USA

154. As noted in the US further rebuttal submission, the literature on direct payments suggest that
a large portion of direct payments get capitalized into land values. As Burfisher and Hopkins (2003)
note: "Not all operators can . . . be considered as true beneficiaries of the [PFC] programme, since
competitive cropland rental markets work to pass through payments from PFC recipients who are
tenants to the owners of base acres."
96 Thus, the effects of increased wealth largely accrue to
non-operators, and any theoretical production effects are further minimized.

155. In well-functioning markets, asset prices refl ect expectations about the future returns from
their ownership. The PFC programme covered a fi xed number of base cropland acres, established in
1996 when farmers enrolled in the programme, and be nefits did not require current production. The
direct link between base acres and the known progr amme benefits allowed the future stream of
payments to be efficiently capitalized into land values:

Decoupled payments clearly increase the well-being of the operators who receive
them, but only when they are owners of base acres. Otherwise, land markets allow a
pass-through of payments from operators to landowners, via modified rental

95 The data in the table in paragraph 34 are on a cal endar year basis in order to match them with the
import data from the US Bureau of the Census.
96 Burfisher, M. and J. Hopkins. "Farm Paym ents: Decoupled Payments Increase Households’
Well-Being, Not Production." Amber Waves, Vol. 1, Issue 1, (February 2003): 38-45, at 44 (Exhibit US-78)

arrangements. Despite uncertainty over futu re policy, land values already reflect the
market’s expectations about future programme benefits.97

156. Land values set by sales and rental markets can be examined to see whether they track
commodity price trends. If these values diverge fro m prices, it suggests that land markets have
additionally capitalized the present and expected futu re value of government payments. As the figure
from Burfisher and Hopkins (2003) below demonstrates, commodity prices have fallen since 1996
due to a number of factors while land values have trended upward, consistent with land capitalization
of payments. Land rent data, although more fragmented, follow the same trend as land values.

157. In its 27 October answer to Question 179 a nd in paragraph 57 of its oral presentation of
2 December, Brazil attempts to minimize the effects of direct payments on land by citing a recent
study that showed that 34-41 cents per dollar of PFC payment were capitalized into land rents in MY
1997. However, in citing this study, Brazil effectiv ely concedes the US analys is. The study cited by
Brazil analyzes cash rent data in only the first year following implementation of the 1996 Act and the
decoupled production flexibility contract payments. As the authors of the study acknowledge, cash
rents may be "sticky" and adjust over the long run.
98 For example, not all rental contracts would be
year-to-year; as additional multi-year rental contract s expire, landowners would be expected to adjust
rents to capture the value of the decoupled paym ents made with respect to the base acreage on the
land.

158. In the long run, only those upland cotton producers who are owners of upland cotton base
acres will receive the benefit of those decoupled payments. Based on 1997 cost of production data,
about 35 per cent of cotton production is grown by owner-operators. Therefore, only 35 per cent of
the value of decoupled payments would benefit upland cotton producers, a nd this subsidy benefit
would then have to be attributed across the tota l value of the recipient’s production in order to
determine the benefit to upland cotton.

243. Can the Panel assume that any support at all, even marketing loan programme
payments, benefits upland cotton if an upland cotton producer has other agricultural
production besides upland cotton? USA

97 Burfisher, M. and J. Hopkins. "Farm Paym ents: Decoupled Payments Increase Households’
Well-Being, Not Production." Amber Waves, Vol. 1, Issue 1, (February 2003): 38-45, at 45 (Exhibit US-78)
98 See Roberts et al., at 769 (Exhibit Bra-310).

159. If the United States has understood the Panel’s qu estion, the answer would appear to be no.
To explain this answer, we distinguish between three types of subsidies: (1) a subsidy tied to
production of upland cotton, (2) a subsidy tied to pr oduction of another commodity, and (3) a subsidy
not tied to the production of any commodity. In th e first case, a subsidy tied to production of upland
cotton (for example, marketing loan payments) would be support to upland cotton exclusively, even if
the upland cotton producer also produces other commod ities. In the language of Annex IV, a subsidy
that "is tied to the production or sale of a given produc t" is deemed to subsidize "the recipient firm’s
sales of that product."
99 Similarly, in the second case, a s ubsidy tied to the production of another
commodity (for example, marketing loan paymen ts for soybeans) are deemed to benefit that
commodity exclusively. Thus, such payments – which depend upon production of a commodity other
than upland cotton – would not be deemed to benefit upland cotton.

160. In the third case, a subsidy not tied to the production or sale of a given product (for example,
decoupled income payments) would be deemed to subsidize any product sold by the recipient.
Annex IV establishes that the value of the subsidized product for such a payment is "the total value of
the recipient firm’s sales."
100 Logically, a subsidy not tied to a particular product provides a benefit to
the recipient in the form of increased income. Sinc e money is fungible, the benefit can be 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, for purposes of Subsidies
Agreement analysis, such a non-tied payment would be deemed to benefit upland cotton and any other
commodity the recipient produces.

161. It is worthwhile to compare these Subsid ies Agreement concepts of payments tied to
productions or sale and payments not tied to production or sale to Agriculture Agreement concepts of
product-specific and non-product-specific. The two set s of concepts are not identical. Recall that
Article 1(a) of the Agreement on Agriculture establis hes that product-specific support is "support . . .
provided for an agricultural product in favour of the producers of the basic agricultural product" while
non-product-specific support is a residual category of "support provided in favour of agricultural
producers in general." Thus, product-specific support is "tied to the production or sale of a given
product" within the meaning of the Subsidies Agreement (Annex IV, para. 3) because it must be
"provided for an agricultural product" and must be "in favour of the producers of the basic
agricultural product."

162. Non-product-specific support is not tied to the production or sale of a particular product since
it is provided to producers in general – for example, decoupled payments for which the recipient need
not produce any particular commodity or any commod ity at all. However, as noted above, such a
non-tied payment will be allocated over the total value of the recipient’s production. Hence, it could
be possible to derive the benefit to upland co tton for purposes of the Subsidies Agreement from
non-product-specific support.

163. Brazil would take these different concepts a nd suggest that any support that is not tied to
production must be allocated to a particular cr op; such support would be "support to a specific
commodity" within the meaning of the Peace Clau se. However, Brazil’s approach eliminates the
concept of non-product-specific support for purposes of Peace Clause since a non-tied payment may
always be allocated according to the recipient’s production (and, in Brazil’s approach, then be deemed
"support to a specific commodity"). It would appear anomalous to import into Article 13 of the
Agreement on Agriculture a concept from the Subsid ies Agreement (that itself is only reflected in
Annex IV, which Brazil does not believe is relevant to actionable subsidies claims) that renders inutile
such a key concept from the Agreement on Agricultu re. Such an interpretation, moreover, runs
contrary to the ordinary meaning of the phrase "suppor t to a specific commodity." As the EC pointed
out, support cannot at the same time be "support to a specific commodity" and "support to multiple

99 See Subsidies Agreement, Annex IV, para. 3.
100 See Subsidies Agreement, Annex IV, para. 2.

commodities." And yet, allocating a non-tied paymen t across the total value of the recipient’s
production necessarily means that the payment is support not to a specific commodity but rather to
multiple commodities (in fact, any commodities the recipient happens to produce).

164. Thus, it is important to distinguish Agreem ent on Agriculture concepts for purposes of Peace
Clause from Subsidies Agreement concepts for purpo ses of identifying the amount of subsidy benefit
and subsidized products. While decoupled paymen ts – properly allocated – may provide support to
upland cotton within the meaning of the Subsidies Agreement, they do not provide support to a
specific commodity within the meaning of the P eace Clause. In fact, such decoupled payments
provide support to any commodities the recipient happens to produce.
101

245. Can a panel take Green Box subsidies in to 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

165. A subsidy that is green box – that is, confor ms fully to the provisions of Annex 2 to the
Agreement on Agriculture – is "exempt from actions based on Article XVI of GATT 1994 and Part III
of the Subsidies Agreement" pursuant to Article 13(a)(ii) of the Agreement on Agriculture.
Therefore, green box subsidies may not be taken into account when considering whether a Member
has caused serious prejudice to the interests of a nother Member through the use of any other subsidy
for purposes of Article 5 nor when considering th e "effect of" any other subsidy for purposes of
Article 6.

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

166. The United States has previously indicated that it takes no position on whether prohibited
subsidies may be taken into account in considering "the effect of the subsidy" under Article 6 or
whether the use of any subsidy has caused adverse effects. We note, however, that there may be
limited utility in making a finding that a subsidy is prohibited and then finding that that subsidy
contributes to "adverse effects" or "serious prejudice." Once the DSB adopts findings that a subsidy
is prohibited, the responding Member is required to withdraw the subsidy without delay under
Article 4. If the same measure were to form pa rt of findings that a Member had caused adverse
effects in the form of serious prejudice, for ex ample, the responding Member would presumably be
free to argue that the withdrawal of the prohib ited subsidy was sufficient to remove the adverse
effects. Thus, as the Panel is charged with ma king findings to promote a prompt settlement of
disputes, the Panel should not include any subsidy it deems to be prohibited as part off its actionable
subsidy analysis.

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

167. Under its terms of reference, the Panel is called upon "[t]o examine, in the light of the
relevant provisions of the covered agreements c ited by Brazil in document WT/DS267/7, the matter
referred to the DSB by Brazil in that document."
102 Past panels have concluded that it is appropriate
to look at the measures at issue in a dispute as of panel establishment. By that time, it was already

101 As the United States has noted, finding that non- tied payments, once allocated, could be "support to
a specific commodity" would rob Members of the ability to design their measures to be consistent with the
Peace Clause. For example, if every recipient of decoupled income suppor t, or any other non-tied payment,
decided to produce upland cotton, a Member could be deemed to have granted support in excess of that decided
during the 1992 marketing year, solely as a function of producer choices, not that of the Member.
102 WT/DSB/M/145, para. 35.

evident that the challenged US measures would not po se a threat of serious prejudice. For example,
the 2003 harvest season futures price at planting time – 59.60 cents per pound, or a 54.60 expected
cash price – suggested that the marketing loan rate (52.00 cents per pound) would have no or minimal
effect on planting decisions.
103 The evidence already indicat ed that US acreage movements
corresponded to acreage changes in the (lar gely unsubsidized) rest of the world. 104 The evidence
already indicated that direct and counter-cyclical payments have no more than minimal impacts on
production and trade. Thus, by the time of panel establishment the evidence did not support a clearly
demonstrated and imminent likelihood of future serious prejudice.

168. The Panel is not precluded from examining evidence subsequent to panel establishment. In
fact, both Brazil and the United States have presented such evidence (of course, which cannot alter the
Panel’s terms of reference). For example, act ual market prices and future prices for the 2003
marketing year confirm that producers are receiving higher prices for their 2003 crop and expect to
continue doing so for the remainder of the marketi ng year. Thus, that evidence arising after panel
establishment serves to confirm what prior evidence suggested: the evidence does not support a
clearly demonstrated and imminent likelihood of future serious prejudice.

F. STEP 2

248. In respect of the level of Step 2 payments in certain time periods, the Panel
notes, inter alia, footnote 129 in the US first written submission; footnote 33 in the US
18 November further rebuttal submission; and Exhibit BRA-350. Have Step 2 payments
ever been zero since the elimination of the 1.25 cent per pound threshold in the FSRI
Act of 2002? In what circumstances could a Step 2 payment be zero? How does the
elimination of the 1.25 cent per pound threshold in the FSRI Act of 2002 affect your
response? BRA, USA

169. Step 2 payments have been zero since the elim ination of the 1.25 cents per pound threshold in
the 2002 farm bill. This occurred in 5 consecutive weeks beginning 19 September 2002.

170. A Step 2 payment could be zero when the AWP exceeds 134 per cent of the base loan rate
(52 cents) or the US/North Europe price is less than the Northern Europe price. If either occurs, the
rate will be zero for at least 4 consecutive weeks.

171. Elimination of the 1.25 cent per pound threshol d increases the range of price differences in
which a step 2 payment could be triggered and ra ises the resulting payment by 1.25 cents. To some
degree, as compared with prior years, the 1.25 cen t threshold elimination may correct for some long
term changes in the valuation of currencies. Furthe r, at certain price levels where the market price
used to determine countercyclical payments is above the loan ra te but below 65.73 cents per pound,
the additional impact that the Step 2 payment can have on the market price for US cotton can reduce
the amount of countercyclical payments received by US producers.

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 contingenc y under the Agreement on Agriculture or the
SCM Agreement? BRA

103 The futures price in the text is the average daily February closing price for the December contract.
As noted in the US further rebuttal submission, para. 162 fn. 124., the January through March average daily
closing price (59.10 cents per pound) is not markedly different.
104 See, e.g., US Opening Statement at the Second Panel Meeting, paras. 5-6.

(b) How does this reconcile with Dr. Glauber's statement in Exhibit US-24, p. 3
(referring to "the 1990 Farm Bill and subsequent legislation") that Step 2
payments do not go directly to the producer? USA

172. By referring to "producers" in this context, the US has referred to producers acting in their
capacity as producers of cotton, that is as persons with a risk of loss in cotton that they have planted
and harvested. It could be that some large produ cers of cotton in that sense could also be persons
who are manufacturers of cotton or exporters who ma rketed their cotton directly overseas. In that
sense, they could receive payments just as any other manufacturer or exporter could do, but they
would be receiving the payment not as a producer of raw cotton but in their other capacity.

173. In short, the regulations are drafted simply to reflect that there may be many ways in which
the public may organize itself, but we are assured that the same bundle of cotton will only produce
one payment and the breaking of the bundle would only come in connection with the manufacturing
process. Officials know of no instance in which a payment was made other than for a legitimate
export or for some sort of legitimate manufacturing effort. Again, these payments are received by
such persons in their other capacities and not as producers of raw cotton. Such payments simply
reflect the universal application of the programme to all cotton uses without a market-interfering
government restriction on who may be a manufacturer or exporter of cotton.

(c) What proportion of Step 2 "export payments" go to producers? Please supply
supporting evidence. USA

174. As of the present writing, the United States do es not have any data or information on how
many producer/manufacturers there are, or how ma ny producer/exporters there are. We do not think
that there are many but we continue to search for a dditional information that might be relevant in this
regard.

H. MISCELLANEOUS

253. Regarding the adjustment authority related to Uruguay Round compliance in
s.1601(e) of the FSRI Act of 2002 (the so-called "circuit-breaker provision"):

(a) Does it relate to export credit gu arantees, crop insurance and cottonseed
payments?

175. The adjustment authority would not reach export credit guarantees, crop insurance premium
payments, or the 2003 cottonseed payment. Secti on 1601(e) of the 2002 Act, codified at 7 USC
7991(e), states that if the Secretary determines that expenditures under subtitles A through E of Title I
of the Farm Bill (which cover the "programme crop s") subject to the total allowable domestic support
levels under the Uruguay Round Agreements (as defined in section 2 of the Uruguay Round
Agreements Act as in effect on the date of enactment of this Act) "will exceed such allowable levels
for any applicable reporting period, the Secretary shall, to the maximum extent practicable, make
adjustments in the amount of such expenditures during that period to ensure that such expenditures do
not exceed such allowable levels." Further the st atute provides as to procedure that before making
any adjustment under that authority, "the Secr etary shall submit to the Committee on Agriculture,
Nutrition, and Forestry of the Senate and the Committee on Agriculture of the House of
Representatives a report describing the determination ma de under that paragraph and the extent of the
adjustment to be made."

176. It should be noted that interpretation of th is language should take into account that, as we
have noted throughout, the government cannot predic t how much actual expenditures for programme
crops will be since those expenditur es are sensitive to factors outside the control of the government.

What is clear is that the Congress thought that th e problems with total dollar commitments, the AMS,
were the only problem likely to arise given that Congress did discipline itself to stay within the
support levels of the Peace Clause. The con tinuation of decoupled payment programmes was
anticipated to protect producer income without causi ng distortions that could increase the level of US
world share or could result in price suppression or depression in particular markets. To the contrary,
because the Congress anticipated that US prices woul d still be higher than those elsewhere, the 2002
Act reauthorizes Step 2 payments. There was no contem plation that the mere fact of support, because
of the size of the United States, would ipso fact result in a WTO violation, as Brazil would have the
Panel make it through its threat of serious prejudice and per se claims. This point is made clear in the
conference report on the 2002 Act, in which the Congress says:

The Conference has made it a priority to cra ft a programme that provides assistance to
producers in a way that is consistent with our obligations under the Uruguay Round
Agreement on Agriculture.
105

177. That said, the circuit breaker provision by its terms applies only to the cited subtitles of the
2002 Farm Bill and as such does not address expe nditures under the export credit guarantees
programme, crop insurance, or cottonseed programme , provided for elsewhere. Rather, the circuit
breaker provision addresses only expenditures u nder the programme crop programmes that are
covered in the cited subtitles – namely, the direct and countercyclical payments, the marketing loan
payment, and Step 2, for all of the programme addressed in Title I. Those programmes would
include, in addition to other crops that are the mo re traditional "programme crops," payments related
to sugar, wool, mohair, and peanuts, and various oilseeds.

(b) Does it relate only to compliance with AMS commitments?

178. By reference to 19 USC 3501, the reference in Section 1601 is to the entirety of the Uruguay
Round Agreements, which is identified in 19 USC 3501 and described there. Consequently, the
provision would arguably recognize any total limits provided for in that agreement; thus, section
1601(e) applies to the Aggregate Measurement of Support commitments under the Uruguay Round
Agreement on Agriculture. To this point, there has been no specific test to determine the precise
nature of its limits. Again, however, it must be pr esumed in light of the history outlined above that
the Congress contemplated that if there was to be a problem it would be with the AMS limit. Thus, if
there is an AMS problem, the Secretary could limit the expenditures for upland cotton; in that sense,
those expenditures are not "without limit."

(c) Is the authority discretionary? If so, can its exercise be limited by the
legislative branch of government?

179. The authority is not discretionary, but rather requires that the Secretary take action as the
statute provides that "the Secretary shall, to the maximum extent practicable, make adjustments"
(emphasis added). In adopting this language, th e Senate and House conference members rejected
"circuit breaker" provisions proposed in the original House version of the farm bill (HR 2646) and
original Senate version (Senate amendment to HR 2646) which would have made the adjustment
discretionary.
106 However, it should be noted that the statute does contain a Congressional referral

105 Report 107-424, page 469 (printed at 148 Cong. Rec.H1916, May 1, 2002).
106 Under the original House version: "[T]he Secretary may make adjustments in the amount of such
expenditures during that period to ensure that such e xpenditures don not exceed, but in no case are less than,
such allowable levels" (emphasis added). Under the original Senate version: "Amends Section 161 of the FAIR
Act to allow the Secretary to adjust the amount of domestic support to assure compliance with Uruguay Round
obligations." See Farm Security and Rural Investment Act of 2002, Conference Report to Accompany HR
2646. House of Representatives, Report 107-424, 1 May 2002, page 468.

provision, which presumably would allow the Congress to intervene in the ev ent that the Secretary
felt it necessary to implement the authority contained in 1601.

(d) How would the Secretary exercise her authority to prevent serious prejudice to
the interests of another Member? How would she exercise her authority to
prevent a threat of serious prejudice to the interests of another Member? At what
time and on the basis of what type of information would she exercise her
authority?

180. To the extent mandated by the statute, the S ecretary would, subject to the foregoing concerns
about the breadth of the statute, adjust the program me provisions to provide for reduced expenditures.
But, as indicated, the statute does not appear to c ontemplate any such finding of serious prejudice, but
rather is seemingly focussed more particularly on the overall level of expenditures as that was the
only restriction agreed to in this instance by th e United States and the United States believes its
programme designs to be in compliance with its WTO commitments. The United States continues to
maintain its compliance with the AMS levels as agreed to and with a ll other aspect of its obligations
under the agreement, as we have shown. As noted, Congress understood and believed that it was
acting within traditional levels and with the allowed levels of the agreement.

(e) What does "to the maximum extent practicable" mean? In what circumstances
would it not be practicable for the Secretary to exercise her adjustment authority?
USA

181. We believe that this provision of the 2002 Act is directed, in the first instance at least, more at
domestic complainants in the event that the correct ion by the Secretary, because of the difficulties of
predicting how much an effect a change could have, could prove more than needed. If so, this could
lead, to potential legal claims by US farmers that they had been unduly denied benefits that there were
entitled to receive. However, this provision could al so contemplate that in some cases the results of
an adjustment might well be unknown or that cer tain programmes or procedures would be too far
along in a crop year to allow corrections to be made in any real or fair way, leading to results that
otherwise might be objectionable.

254. Would payments made after the date of panel establishment be mandatory
under the marketing loan, direct payments, counter-cyclical payments and user
marketing certificate (step 2) programmes, but for the circuit-breaker provision? USA

182. Not in the sense at least that there are many conditions that a person must meet in order to
qualify for payments, and in the sense that the paym ents are of course dependent upon the availability
of funds from the Commodity Credit Corporation (CCC). The CCC has a large, however limited,
borrowing authority which must be replenished from time to time. Rarely has CCC run out of funds,
but it has happened for brief periods of time -- and of course, Congress can change the programme at
any time.

256. The United States submits that the Panel cannot make rulings without allocating
precise amounts of payments to upland cotton production. However, to the extent that
such precise data is not on the Panel record, to what extent can the Panel rely on less
precise data, and on reasonable assumptions, in fulfilling its duty under Article 11 of the
DSU in this case? USA

183. Under DSU Article 11, the Pa nel is called upon to make an objective assessment of the matter
before it, which consists of the measures challenged by Brazil and the claims Brazil has advanced.
This assessment must include an objective assessment of the facts of the case. It is well-established,
however, that a Panel is not to make claims for a pa rty, nor to develop evidence for a party. As the
Appellate Body explained in Japan – Varietal Testing, it is for the complaining party to bring forward

sufficient evidence and arguments to carry its burden of establishing a prima facie case. Thus,
although a panel may be able to draw reasonable in ferences from evidence on the record as part of its
objective assessment of the facts of the case, su ch inferences cannot take the place of evidence
necessary for a complaining party to establish its prima facie case.

184. The difficulty in this dispute arises because Brazil has chosen to challenge decoupled income
support measures – namely, direct payments and c ounter-cyclical payments – that are not tied to
production or sale of upland cotton. For payments that are tied to production of upland cotton – for
example, marketing loan payments – there is no diffi culty because the subsidy is solely attributed to
upland cotton.
107 As set out in previous US submissions and oral statements, however, decoupled
payments must be allocated across the value of each recipient’s production in order to determine what
is the benefit to upland cotton within the meaning of Article 1 of the Subsidies Agreement. A failure
to allocate the decoupled payment either would resu lt in arbitrarily assigning subsidy benefits to one
product over another or would result in double-coun ting of a subsidy as providing a greater benefit
than the value of the payment.

185. Brazil has not identified evidence that would allow for the challenged decoupled payments to
be allocated across their recipients’ production (tha t is, attributed to upland cotton and any other
commodities produced by those recipients). Thus, Brazil has not established facts necessary for the
Panel to identify the amount of the challenged subsidy nor evaluate its effects. Even if there were
evidence on the record from which "reasonable assump tions" (in the words of the question) could be
drawn, the Panel could not make those assumptions because Brazil has not claimed that allocating the
value of these decoupled payments across the total value of each recipient’s production is necessary.
That is, while Brazil has improperly sought to ex pand the scope of this dispute by allocating
decoupled payments received for non-upland cotto n base acres to upland cotton producers, Brazil has
not claimed that all such payments must be alloca ted across the value of the recipient’s production.
To the contrary, Brazil has argued that such payments would exclusively be support to upland
cotton.108

186. As a result, this dispute presents a situation analogous to that in the Japan – Varietals dispute.
Were the Panel to agree that to determine the s ubsidy benefit to upland cotton decoupled payments
not tied to upland cotton production must be allocat ed across the total value of the recipient’s
production, the Panel could not then seek evidence or make "reasonable assumptions" relating to such
an allocation because to do so would be to make a claim that Brazil has not advanced. Brazil has
chosen solely to argue that decoupled payments for b ase acreage up to the amount of upland cotton
planted on the farm are support to upland cotton, ignoring the production of any other crops on the

107 In the language of Annex IV, "the value of the [subsidized] product shall be calculated as the total
value of the recipient firm’s sales of that product." Subsidies Agreement, Annex IV, para. 3 (italics added).
108 See Brazil’s Further Rebuttal Submission, pa ra. 24 ("This EWG data also provides the
amount of upland cotton contract payments attri butable to upland cotton producers, broken down by
PFC, market loss assistance, direct and counter-cyc lical payments. These figures are also set out in
the table above. However, because some upland cotton was produced on non-upland cotton contract base, it
would be necessary to calculate an amount of non-upland cotton contract payments, based on the EWG data,
that also constitutes support to upland cotton received by producers of upland cotton.").

farm. (For example, with respect to plantings and not production, the data provided to the Panel and
Brazil on December 18 and 19, 2003, demonstrate th at, in the aggregate for farms planting upland
cotton in marketing year 2002, upland cotton plan ted acres represented only 48 per cent of total
cropland on those farms. One could surmise that Br azil refuses to recognize that decoupled payments
must be allocated because to do so would inva lidate both Brazil’s Peace Clause analysis, which
merely took the value of decoupled payments for upland cotton base acres and factored such
payments by approximately 14/16, and Brazil’s serious prejudice analysis by eliminating a substantial
portion of the "$12.9 billion" in payments alleged to have been made to upland cotton. Nonetheless,
Brazil has chosen what arguments and evidence to advance to support its claims – as is its
prerogative. The Panel must judge whether those arguments and evidence amount to a prima facie
case. Where Brazil has refused to adopt the proper ap proach to allocation of decoupled payments and
has identified no evidence to allow a proper allocati on, the Panel may not step into the breach and
make any "reasonable assumptions" to support Brazil’ s claims.

ANNEX I-9

COMMENTS OF THE UNITED STATES
CONCERNING BRAZIL’S ECONOMETRIC MODEL

22 December 2003

I. THE SUMNER MODEL PRESENTED BY BRAZIL DOES NOT PROVIDE
ACCEPTABLE ECONOMIC SUPPORT FOR BRAZIL'S CLAIM OF SERIOUS
PREJUDICE

A. INTRODUCTION

1. Our review of Brazil's economic model anal ysis as submitted by Brazil and independently by
Dr. Bruce Babcock of Iowa State University shows a clear and consistent manipulation of well-known
econometric tools and mischaracterization of the US cotton programme in order to exaggerate acreage
and ultimate price impacts. In particular:

• The Sumner approach forces changes onto the FAPRI system, and misleadingly claims the
result as a FAPRI-type analysis;

• Using flawed and often unsubstantiated economic assumptions, Brazil transformed the FAPRI
model for its own purposes;

• Every economic result ascribed to a FAPRI-type an alysis by Brazil contains the same flawed
assumptions originally introduced by Dr. Sumner;

• Brazil did not use the correct models or assump tions according to FAPRI/CARD analysts and
appears to have even changed the underlying FAPRI baseline in order to exaggerate acreage
and price impacts of programme removal.

2. This critique is directed primarily at Dr. Su mner's model, the results of which were first
presented to the Panel in Annex I.
1 Brazil continues to cite Annex I as a part of its fundamental
economic findings. The United States notes that Brazil has introduced different analytical tools since
the United States and the Panel requested to see the model used to produce the Annex I results.2 In no
instance has Brazil appeared to retreat from its impacts cited in Annex I.

3. Dr. Sumner's supply-side adaptations or modi fications to the FAPRI model with respect to
various components of the US cotton programme, such as direct payments or export credit guarantees,
continue to be the key reason his model displayed the results presented in Annex I and are carried

1 In evaluating Dr. Sumner's impacts (and this critique of them), the Panel should take into
consideration that Annex I results have not been, and apparently cannot be, confirmed. The models used and
outputs obtained were, by their own admission, not retained by Dr. Sumner nor Dr. Babcock. See, Letter dated
31 October 2003 from Dr. Bruce Babcock to Dr. Dan Sumner, submitted to Panel by Brazil on
5 November 2003. The record remains incomplete with respect to Dr. Sumner's adaptations. The United States
has attempted in this critique to note where it has been forced to make assumptions due to missing data.
2 The United States has based its critique on three Excel spreadsheets that have been provided by Brazil
and/or Dr. Bruce Babcock. These include the CARD international cotton model, delivered by Brazil on
13 November, the cotton-only US model provided by Brazil on 18 November; and the US crops model
provided by Dr. Babcock on November 26. A graphical representation of the scope and disclosure of Brazil’s
modelling system is provided in Exhibit US-113.

forward into all subsequent econom etric demonstrations using subsequent FAPRI baselines. In many
respects, Brazil's Annex I (and subsequent) results ar e caused directly by in troduced changes to the
FAPRI model.

4. Brazil offers Dr. Sumner's model results as evidence that but for the US cotton programme,
US cotton acreage would have declined and world pr ices would have increased. While the US has in
its submissions and oral statements demonstrated the 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 manipulation 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. As a result, Dr. Sumner’s economic analysis cannot serve as a
basis for any findings on the effect of challenged US subsidies.

II. BRAZIL MODEL IS NOT FAPRI/CARD ANALYSIS

5. The adaptations and modifications made to the FAPRI model by Brazil have so changed the
model that Brazil cannot rely on FAPRI's reputation to confirm the results.

• Dr. Babcock, Dr. Sumner's "collaborator" on th e project, states that a FAPRI analysis would
have used different models and applied different assumptions;

• Thus, Dr. Babcock has stated that the Sumner analysis is "in no way" an official FAPRI
analysis.

6. In a recent letter, Dr. Babcock, an economist at the CARD located at Iowa State University
and the "technician" that carried out much of Dr. Sumner's economic analysis
3, cleared up some of the
confusion regarding the models used in Brazil's an alysis. In Dr. Babcock's opinion, a true FAPRI
analysis would have used different models and applied different assumptions to those models to arrive
at the type of estimate presented by Brazil in its Annex I. In his letter Dr. Babcock states that the
analysis carried out by Dr. Sumner and used by Brazil was

"in no way an official FAPRI analysis a nd if FAPRI had done the analysis, FAPRI
would have come up with different estimates of the effects of US cotton subsidies on
world prices."
4
7. Dr. Babcock also stresses the differences be tween FAPRI and Dr. Sumner's assumptions used
to estimate the effects of various components of US cotton policy. Many of these different
assumptions are described in Bra-313 and will be discussed in detail.

8. Dr. Babcock indicates a FAPRI analysis would have used different models. He states that
FAPRI would have used different models entirely.

"The domestic model used was not based on the models used for the FAPRI 2003
baseline. … the model that FAPRI uses to conduct domestic and international US
policy analysis is the US stochastic mode l and the FAPRI international models. The

3 Opening Statement of Dr. Sumner, 2 Dec. 2003, "I have specified equations and parameters which
adapt the systems to apply to the specific questions of interest in this dispute and I have worked closely with
skilled and experienced technicians who have operated the details of the system. This is the same procedure that
economists routinely use in performing simulation mode lling in academic research and that they use in
performing complex econometric statistical analysis. I rely on the technician to oper ate the “machinery” of the
models just as a medical doctor would rely on an X-ra y or Magnetic Resonance Imag ing technician to operate
those systems and generate results for analysis and interpretation."
4 Letter from Dr. Bruce Babcock, Exhibit US-114.

international cotton model used in Dan's analysis was a stand-alone cotton model
developed to better understand the role th at China plays in international cotton
markets."
 "... FAPRI would have u sed different models ..."
5

9. Dr. Babcock's letter confirms that the concer ns of the United States have been well-founded.
While cloaking itself in the FAPRI model's reputation, Brazil and Dr. Sumner's analysis is, in fact,
something quite different. The differences between FAPRI and the Brazil analysis reflected in
Annex I involve much more than small, "cons ervative" changes. As the United States will
demonstrate, Brazil's Annex I analysis relies too heavily on adaptations, modifications and
adjustments to suggest acceptance based upon FAPRI's reputation. Brazil's estimates, to a very great
extent, distort the FAPRI system for the express purpose of achieving pre-conceived results.

10. The United States, after completing as complete a critique of Annex I results as possible in
this proceeding, respectfully submits that the results indicated in Annex I are significantly
exaggerated, due either to economic errors or to Dr. Sumner's introduced biases (most of which are
discussed in Bra-313 and in Annex I, and many of wh ich contain errors). Brazil's results set out in
Annex I and subsequent submissions have no explanatory power.

11. The United States submits that the results in Annex I provide very little guidance to the Panel
in terms of overall impacts of the US cotton prog ramme. The United States has stated that the
FAPRI model as used by Dr. Sumner was an inappropria te tool for the intended job. This opinion has
now been confirmed by Dr. Sumner's chief "technician" on this project
6, who has directly stated that
FAPRI would not have used the models used by Dr. Sumner and would not have made the adaptations
to that model that he discusses in Annex I and in Bra 313 if it had been requested as an organization to
conduct this analysis.

A. BRAZIL MODEL NOT COMPARABLE TO FAPRI SYSTEM

12. The differences between Dr. Sumner's analysis and the FAPRI framework are significant.
Those differences arise primarily as a result of Br azil's disagreement with FAPRI and many other
agricultural economists over the impact of paymen t programmes that are not directly linked to
production decisions. There are other important differences. Most notably, FAPRI does not include
crop insurance as a production-distorting progra mme. The FAPRI model also does not contain
components designed to estimate production effect s from the export credit guarantee programme, a
seemingly appropriate choice since Brazil itself has stated that it cannot quantify the alleged benefit to
upland cotton provided by the export credit guarantee programmes.
7

13. Whenever the FAPRI modeling system did not tend to show acreage impacts high enough to
satisfy Brazil in this case, Dr. Sumner simply made modifications to encourage it to do so. The
United States disagrees with these modifications, but still cannot confirm all of these changes or the
specific components of each of them. Second, whenever the FAPRI modeling system did not include
a programme component challenged by Brazil, Dr. Sumner simply forced acreage impacts of that
programme onto the system - showing little or no economic foundation for the introduced variables.
8

5 Id.
6 "…FAPRI would have used different models". Letter from Dr. Babcock, Exhibit US-114.
7 Paragraph 82 of Answers of Brazil to Questions from the Panel, 27 October 2003.
8 For example, Brazil cites export impacts ascribed to the export credit guar antee programme by the
National Cotton Council of America and uses those impacts without further foundation. The National Cotton
Council of America's economic analysis in this instance has no foundation and no demonstrated methodology.

14. All of these effects, displayed in Annex I, were introduced into the FAPRI system by Dr.
Sumner. Dr. Sumner discusses some of his modifications in Bra-313, but not all of them. Dr. Sumner
has never provided the United States with an electr onic, verifiable version of his modifications.
Efforts by the United States to replicate the Sumner formula using a FAPRI model have been
unsuccessful, leading to the conclusion that othe r modifications, adaptations or calibrations are
involved.

B. ADAPTATIONS TO AND MODIFICATIONS OF FAPRI MODEL RESULTED IN
EXAGGERATED RESULTS

15. Dr. Sumner’s treatment of decoupled paym ents, crop insurance, and export credits are
significant deviations from the FAPRI modelling framework. These changes are forced onto the
FAPRI system resulting acreage effects that are much gr eater than would ever be anticipated by a true
FAPRI analysis. Again, as Dr. Babcock has now candidly stated:

"In addition, the modeling assumptions that Dan used to estimate the effects of the
various US domestic programme components of US policy are different than FAPRI
would use if asked to answer the same questions."9
1. Dr. Sumner exaggerates the impact of decoupled payments as compared to FAPRI’s
modelling of those payments

16. FAPRI analysis of the impacts of decoupled programmes (like Production Flexibility Contract
payments (PFC), Direct Payments (DP), Market Loss Assistance payments (MLA) and Counter-
cyclical Payments (CCP) was discarded by Dr. Sumn er and replaced with an approach not supported
by FAPRI, nor supported by the bulk of economic literature on the subject.

17. Dr. Sumner's decoupled effects are differen t than those normally used by FAPRI and were
supposedly justified by Dr. Sumner's own estimation of producers' "anticipation" of future programme
changes and on his, now proven incorrect, contrive d assumptions about actual planting patterns in the
United States.10

18. The FAPRI baseline reflects their “mos t-likely” outcome for acreage, production,
consumption and prices under a defined set of assump tions. Acreage projections for each of the crops
reflect assumptions and outcomes for market indicat ors and government policy. According to the US
crops model (Excel file US CROPS MODEL 2002.x ls) sent by Dr. Babcock on 26 November, upland
cotton acreage in each region is determined by the following equation:

CTPLT
i = ao + ao*CTENRi/PD + A*(Vector of Competing Crop Returnsi)/PD
 + Decoupled Payment Impacts i + CRP11 Impactsi + Єi

where
 CTPLT = upland cotton planted acreage in region i
 CTENR = expected cotton net returns from the market and the marketing loan in region i
 PD = general price deflator
 A = vector of parameter estimates for competing crops.

9 For example, Brazil cites export impacts ascribed to the export credit guar antee programme by the
National Cotton Council of America and uses those impacts without further foundation. The National Cotton
Council of America's economic analysis in this instance has no foundation and no demonstrated methodology.
10 Paragraphs 39-44 of US Opening Statement at the Second Session of the First Panel Meeting,
7 October 2003.
11 CRP = Conservation Reserve Programme.

19. Although the US does not agree that decoupled payments impact planting decisions, it is
useful to compare FAPRI’s view of the impacts with that of Dr. Sumner.

20. Looking further into the FAPRI model, one finds that the decoupled payments are not
included on a crop-specific basis as done by Dr. Sumn er in his adaptations. Instead, FAPRI allocates
total decoupled payments across all crops in a region. First, the total money is put on a per-acre basis
by dividing the payments by acres planted to the major crops. Second, FAPRI then determines a total
acreage impact for the region based on the responsiv eness of the total land to the infusion of money.
Third, the total acreage impact is allocated to th e individual crops in each region based on the crop’s
share of recent plantings.

• Dr. Sumner discarded this FAPRI approach to decoupled payments and inserted his own
"coupling" factor.

• Cotton acreage impacts for US decoupled pr ogrammes as would likely be presented by
FAPRI are about 0.3%, consistent with the est imates in the economic literature previously
presented by the United States (e.g., Westcott et al.).
12

• Dr. Sumner's cotton acreage impacts, by contrast, are as high as 15.9% - that is, more than
50 times larger than what the FAPRI model would indicate.

21. The following table provides a comparison of acreage impacts included in the FAPRI model
to those calculated by Dr. Sumner. In the FAPRI model, the acreage contribution of all decoupled
payments across all major programme crops rang es between 1.4 and 2.6 million acres. Decoupled
payments to all crops contribute between 69 and 123 thousand acres to upland cotton. If we isolate
the impact of decoupled payments for upland co tton base acres, the FAPRI model indicates that the
shift in total cotton plantings ranges between 23 a nd 45 thousand acres, or less than three-tenths of
one percent of upland cotton area. Impacts of this magnitude would not have appreciable impact on
production and prices.

22. In stark contrast to the FAPRI model are the contrived impacts calculated by Dr. Sumner. In
order to present a complete picture to the Panel, the United States presents Dr. Sumner’s impacts in
two ways. In Dr. Sumner’s analysis of decoupled payments, equations (5) and (6) of Exhibit Bra-313
document his formulas for determining “the amount of cotton acreage that was held in cotton by these
programme payments”. This acreage is subtracted from the error term of the equation or the impact
can also be thought of as a shift in the supply curve. This impact will be termed the “gross impact” on
cotton acreage of the programme in question. Values for these “gross impacts” have been taken from
the file FINAL US2003CropsModel WORKOUT.xls (received by the United States on 18
November). Dr. Sumner’s “gross impacts” of co tton decoupled payments on cotton plantings range
from a low of 352 thousand acres to a high of 2.2 million acres. In contrast, the FAPRI model shows
a gross impact of 23 to 45 thousand acres. Dr. Sumner ’s impacts are almost 50 times larger than those
included in the FAPRI model.

23. To avoid any confusion by the Panel, the gr oss impacts of the programmes are not the same
values as the impacts shown in Annex I and Exhibit Bra-325. The results of Dr. Sumner’s scenarios
reflect his estimate of the net impact of removi ng various aspects of the cotton programme. Net
impacts will reflect the fact that producers have responded to the higher cotton prices under the
scenario and increased plantings to partially offset the initial loss in acreage.

24. The following table also provides a compar ison of Dr. Sumner’s net acreage impacts of
removing decoupled payments. These impacts correspond to the results presented in Annex I. It is

12 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)

worthwhile to note that Dr. Sumner’s net impact s are still 25 times larger than the gross impacts
derived from the FAPRI model. Simply put, FAPRI's model would not show the kind of acreage
impacts assumed by Dr. Sumner.

Acreage Impacts of Decoupled Payments (Million Acres)
1999 2000 2001 2002 2003 2004 2005 2006 2007 99-02
Avg
03-07
Avg
FAPRI Model Gross Total Area Impact of all
Decoupled Pymts Across All Crops (1) 1.379 1.838 1.912 2.091 1.534 2.180 2.566 2.379 2.101 1.805 2.152
 % of Plantings of All Crops 0.5% 0.7% 0.8% 0.8% 0.6% 0.9% 1.0% 0.9% 0.8% 0.8% 0.8%
FAPRI Model Gross Impact of All Decoupled
Pymts on Cotton Acreage (2) 0.069 0.090 0.092 0.101 0.075 0.105 0.123 0.115 0.101 0.088 0.104
 % of Upland Cotton Area 0.5% 0.6% 0.6% 0.7% 0.5% 0.7% 0.8% 0.8% 0.7% 0.6% 0.7%
FAPRI Model Gross Impact of Cotton
Decoupled Pymts on Cotton Acreage (3) 0.023 0.030 0.031 0.029 0.037 0.042 0.045 0.043 0.040 0.028 0.041
 % of Upland Cotton Area 0.2% 0.2% 0.2% 0.2% 0.3% 0.3% 0.3% 0.3% 0.3% 0.2% 0.3%
Sumner's Gross Impact of Cotton Decoupled
Pymts on Cotton Acreage (4) 0.352 0.437 0.670 0.538 2.185 2.114 2.200 2.038 2.029 0.500 2.113
 % of Upland Cotton Area 2.4% 2.8% 4.3% 3.8% 15.9% 14.2% 14.9% 13.9% 14.2% 3.4% 14.6%
Sumner's Net Impact of Cotton Decoupled
Payments on Cotton Acreage (5) 0.350 0.320 0.510 0.300 1.710 1.190 0.790 0.860 0.850 0.370 1.080
 % of Upland Cotton Area 2.4% 2.1% 3.3% 2.1% 12.4% 8.0% 5.3% 5.9% 6.0% 2.5% 7.5%
FAPRI Model Gross Impact of Cotton
AMTA/DP Pymts on Cotton Acreage (6) 0.018 0.017 0.013 0.014 0.014 0.014 0.014 0.013 0.013 0.016 0.014
 % of Upland Cotton Area 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1%
Sumner's Gross Impact of Cotton AMTA/DP
Payments on Cotton Acreage (7) 0.191 0.164 0.240 0.202 0.575 0.567 0.593 0.544 0.544 0.199 0.565
 % of Upland Cotton Area 1.3% 1.1% 1.5% 1.4% 4.2% 3.8% 4.0% 3.7% 3.8% 1.3% 3.9%
Sumner's Net Impact of Cotton AMTA/DP
Payments on Cotton Acreage (8) 0.190 0.100 0.170 0.120 0.420 0.310 0.200 0.220 0.220 0.145 0.274
 % of Upland Cotton Area 1.3% 0.7% 1.1% 0.9% 3.0% 2.1% 1.4% 1.5% 1.5% 1.0% 1.9%
FAPRI Model Gross Impact of Cotton
MLA/CCP Pymts on Cotton Acreage (9) 0.005 0.014 0.017 0.015 0.023 0.028 0.031 0.029 0.027 0.013 0.028
 % of Upland Cotton Area 0.0% 0.1% 0.1% 0.1% 0.2% 0.2% 0.2% 0.2% 0.2% 0.1% 0.2%
Sumner's Gross Impact of Cotton MLA/CCP
Payments on Cotton Acreage (10) 0.161 0.273 0.431 0.336 1.610 1.546 1.607 1.494 1.484 0.300 1.548
 % of Upland Cotton Area 1.1% 1.8% 2.8% 2.4% 11.7% 10.4% 10.9% 10.2% 10.4% 2.0% 10.7%
Sumner's Net Impact of Cotton MLA/CCP
Payments on Cotton Acreage (11) 0.160 0.220 0.340 0.180 1.290 0.880 0.590 0.640 0.630 0.225 0.806
 % of Upland Cotton Area 1.1% 1.4% 2.2% 1.3% 9.4% 5.9% 4.0% 4.4% 4.4% 1.5% 5.6%
(1) Source: File US CROPS MODEL 2002.xls, Model sheet, Row 4484.
(2) Source: File US CROPS MODEL 2002.xls, Model sheet, Row 4475.
(3) Source: Calculated in file US CROPS MODEL 2002 NO Decoupled.xls by setting cotton decoupled payments to zero.
(4) Source: File FINAL US2003CropsModel WORKOUT.xls, Equations sheet, sum of Rows 728 and 740.
(5) Source: Sum of Sumner's Net Impacts of AMTA/DP Payments and MLA/CCP Payments.
(6) Source: Calculated by subtracting acreage impacts of NO MLA/CCP from acreage impacts of NO Decoupled payments.
(7) Source: File FINAL US2003CropsModel WORKOUT.xls, Equations sheet, Row 728.
(8) Source: Table I.5b of Annex I.
(9) Source: Calculated in file US CROPS MODEL 2002 NO MLA CCP.xls by setting cotton MLA/CCP payments to zero.
(10) Source: File FINAL US2003CropsModel WORKOUT.xls, Equations sheet, sum of Row 740.
(11) Source: Table I.5c of Annex I.

2. Dr. Sumner Assigns Production Effects to Crop Insurance that FAPRI Does Not

25. Dr. Sumner’s arbitrary introduction of crop insurance into his acreage system is a direct
departure from the FAPRI model. Dr. Sumner provides no statistical basis to support his
incorporation of crop insurance. He simply derive s a per-acre value, forces those impacts into the
acreage system, and treats the results as valid analys is. There is absolutely no empirical validation
associated with his results.

26. FAPRI does not explicitly attribute any acreage response to the availability of crop insurance.
Dr. Sumner’s gross impacts range as high as 1.05 million acres, and net impacts reach 590 thousand
acres.

27. The exclusion of crop insurance from the FAPR I model is warranted. As the United States
has previously suggested
13, if one were to consider the covera ge levels obtained by cotton farmers,
over 90 per cent of insured cotton area would be subj ect to coverage levels agreed by Members to
have no or minimal trade-distorting effects.

28. The United States has also demonstrated that the economic literature examining acreage
effects of crop insurance is clearly mixed, but have never gone so far as to attribute production
impacts as great as those asserted by Brazil.
14 The literature in general refl ects that by its very nature
the impact of crop insurance on production may be significantly different than its impact on acreage.

29. It seems intuitive to the Un ited States that a dollar provided in the way of an insurance
premium subsidy (provided to reduce the cost of an insurance product that pays when the crop is not
produced) would have different im pacts on producer decisions than a dollar provided to the producer
when the value of a harvested crop falls short of some defined level (such as a marketing loan
payment). Dr. Sumner's analysis treats them the same. FAPRI does not.

30. Thus, it is significant that the FAPRI mode l does not attribute acreage response to the
availability of crop insurance. Dr. Sumner deviates from that model without any empirical foundation
in the economic literature.

Acreage Impacts of Crop Insurance (Million Acres)
1999 2000 2001 2002 2003 2004 2005 2006 2007 99-02
Avg
03-07
Avg
FAPRI Model Impact of Cotton Crop
Insurance Program on Cotton Acreage (1) 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000
 % of Upland Cotton Area 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Sumner's Gross Impact of Cotton Crop
Insurance Program on Cotton Acreage (2) 0.584 0.541 0.798 0.808 1.040 1.018 1.056 0.979 0.974 0.683 1.013
 % of Upland Cotton Area 4.0% 3.5% 5.1% 5.7% 7.5% 6.8% 7.1% 6.7% 6.8% 4.6% 7.0%
Sumner's Net Impact of Cotton Crop
Insurance Program on Cotton Acreage (3) 0.580 0.360 0.600 0.540 0.590 0.550 0.420 0.440 0.430 0.520 0.486
 % of Upland Cotton Area 4.0% 2.3% 3.9% 3.8% 4.3% 3.7% 2.8% 3.0% 3.0% 3.5% 3.4%
(1) Source: No impact included in file US CROPS MODEL 2002.xls.
(2) Source: File FINAL US2003CropsModel WORKOUT.xls, Equations sheet, Row 752.
(3) Source: Table I.5d of Annex I.

13 US Opening Statement at the Second Session of the First Panel Meeting, 7 Oct. 2003, paras. 45-47.
14 See Exhibits US-57 through US-60.

3. Dr. Sumner Assigns a Production Effect to Export Credits that FAPRI Does Not

31. In a further departure from the modelling approach used by FAPRI, Dr. Sumner introduces a
500 thousand-bale impact for export credit programmes. US exports are reduced by introducing this
shift in the US export equation.
15 The resulting effect is to lowe r the US price while increasing the
world price. However, as with Dr. Sumner’s other m odifications, there is no statistical basis for these
changes.

32. Brazil provides no statistical or other economic foundation for this level of impact from the
export credit guarantee programme. Dr. Sumner's st ated source for the 500,000 bale impact is
testimony delivered by the National Cotton Council of America in 2001, a US trade association that
operates on behalf of the US cotton industry.
16 Brazil presents no evidence of how that estimate was
calculated and presents no analysis of its own.17

33. With respect to any actual effects on world prices caused by the application of the US export
credit guarantee programme to US cotton exports, Brazil has cited no subsidy component estimates
and demonstrated no economic analysis.

34. Dr. Sumner's model passes off his 500,000-bale export shift as economic analysis and forces
it upon the FAPRI model. Does the Sumner model show acreage impacts from the removal of the
export credit guarantee programme? Of course it does since Dr. Sumner forced it to show those
impacts. Brazil, cannot, however, base its estimates on FAPRI or on any demonstrated analytical
approach.

15 Exhibit Bra-313, page 5, "For the export credit, as explained in the Annex I, I base the estimated shift
in export demand conservatively on the information provided by the US Cotton Council. The FAPRI baseline,
which assumes continuation of the export credit prog ramme, implicitly includes 500,000 bales of cotton
attributable to the export credit programme. So eliminating the programme is implemented by simply
subtracting 500,000 bales from the intercept of equation 7 in each year."
16 See Exhibit Bra-41. The National Cotton Council is a trade association that lobbies the US
government on behalf of the US cotton industry.
17 In the 9 September Brazil Submission before the Second Session of the First Panel Meeting,
paras 192-194, Brazil carried out another economic sleight of hand by implying that Dr. Sumner's export
estimates with respect to the export credit guarantee program were more conservative than the unsubstantiated
estimate it cites from the National Cotton Council. Paragraph 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 - a nd demonstrate Dr. Sumner's conservative approach.
However, as demonstrated in Bra-31 3, all Dr. Sumner did was force a reduction in US export estimates of
500,000 bales (using the NCC testimony as his sole economic foundation), which correspondingly reduced
prices in the US, which correspondingl y both reduced US acreage and sligh tly increased exports - cutting into
the initially imposed 500,000 bale shift. Further, the "different" price estimates were, in fact, estimates of two
different set of prices - US and world. Brazil inappr opriately characterized Dr. Sumner’s results as being
conservative relative to the NCC estimate. (Paragra ph 192, Brazil's Further Submission to the Panel,
9 September 2003) Later when the Panel raised a question about the results, Dr. Sumner somehow forced a full
500,000 bale decline in US exports, ignoring the impact s of price response. (See, for example, Bra-325, last
category of tables - export credit gu arantee with fixed 500,000 bale impact) In that response, Brazil also
maintained the stance that these two "analyses," neith er demonstrating economic foundation, were somehow
independent, while fairly clearly demonstrating that Dr . Sumner merely took the NCC testimony and imposed a
500,000 bale demand shift.

Export Shifts due to Export Credits (Million Bales)
1999 2000 2001 2002 2003 2004 2005 2006 2007 99-02
Avg
03-07
Avg
FAPRI Model Impact of Export Credits on
Cotton Exports (1) 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000
Sumner's Gross Impact of Export Credits on
Cotton Exports (2) 0.500 0.500 0.500 0.500 0.500 0.500 0.500 0.500 0.500 0.500 0.500
Sumner's Net Impact of Export Credits on
Cotton Exports (3) 0.300 0.290 0.330 0.300 0.300 0.300 0.300 0.310 0.310 0.305 0.304
(1) Source: No impact included in file US CROPS MODEL 2002.xls.
(2) Source: Paragraph 59 of Annex I.
(3) Source: Table I.5g of Annex I.

III. ANNEX I RESULTS USED VARIABLES LOWER THAN CITED NOVEMBER 2002
FAPRI BASELINE

35. The United States has previously indicated to the Panel its concern that acreage impacts in
Annex I were based off of the FAPRI preliminary November '02 baseline instead of the more recent
and readily available final January 2003 FAPRI ba seline. The United States believes this choice of
baseline biased the results shown in Annex I.18 A closer review of the Annex I results, however, show
they were not exactly based off the November 2002 baseline either.

A. USE OF VARIABLES LOWER THAN NOVEMBER 2002 BASELINE INCREASED ACREAGE
IMPACTS

• By using prices and other variables that were even lower than the FAPRI November '02
baseline, Brazil managed to further increase acre age impacts it attributed to the US cotton
programme.

36. Contrary to the assertions contained in Annex I, it appears that the baseline that is presented
there is not the FAPRI November 2002 baseline. The following table provides a comparison of the
“A” Index from the baseline presented in Annex I with the FAPRI November 2002 baseline as
provided by Dr. Babcock on 26 November.

18 US Opening Statement at the Second Session of the First Panel Meeting, 7 Oct. 2003, para. 36.

Comparison of Annex I Baseline with FAPRI November '02 Baseline
2003 2004 2005 2006 2007
"A" Index (Cents/Lb)
 Annex I 50.69 53.44 55.75 57.56 59.60
 FAPRI Nov '02 Baseline 52.35 54.74 56.77 58.69 60.52
 Change from FAPRI -1.66 -1.30 -1.02 -1.13 -0.92
Upland Cotton Farm Price (Cents/Lb)
 Annex I 44.96 47.74 50.30 51.20 53.89
 FAPRI Nov '02 Baseline 45.66 48.83 51.18 52.04 54.67
 Change from FAPRI -0.70 -1.09 -0.88 -0.84 -0.78
Upland Cotton Planted Area (Million Acres)
 Annex I 13.780 14.880 14.770 14.650 14.270
 FAPRI Nov '02 Baseline 13.782 14.720 14.772 14.658 14.252
 Change from FAPRI -0.002 0.160 -0.002 -0.008 0.018
Upland Cotton Production (Million Bales)
 Annex I 16.050 17.420 17.400 17.370 17.010
 FAPRI Nov '02 Baseline 16.052 17.215 17.397 17.377 16.982
 Change from FAPRI -0.002 0.205 0.003 -0.007 0.028
Source: FAPRI Nov '02 Baseline numbers from file US CROPS MODEL 2002.xls

37. The baseline used by the Annex I model appears to contain slightly lower cotton planted
acreage, different upland cotton production, lower upland cotton farm prices and lower "A" index
cotton prices than were shown in the FAPRI preliminary November 2002 baseline.
19

B. BASELINE USED IN ANNEX I EXAGGERA TED PROGRAMME EFFECTS BEYOND THAT
PREVIOUSLY ASSUMED BY UNITED STATES

38. The baseline used in Annex I exaggerated pr ogramme effects even more than previously
assumed by the United States. The baseline used in Annex I contained lower cotton prices than those
included in the FAPRI November 2002 baseline. It also contains several other variables that are
different from the November 2002 baseline. There is no basis for this discrepancy, if Dr. Sumner
actually used the November 2002 FAPRI baseline and, as stated in Bra-313, "none of the other
equations in the FAPRI specification are modified to explicitly analyze the removal of US cotton
programmes".20

IV. BRAZIL'S MODEL HAS NO EXPLANATORY POWER

39. It would be anticipated that a model proposed to demonstrate effects of removing programme
components of the US cotton programme and the impact of that removal on planting decisions would
also demonstrate the ability to correctly predict planted acreage of upland cotton, given prices and
other factors.

40. The Sumner-modified model presented in Anne x I does not explain cotton planting decisions.

19 Brazil's later submissions refer to the November 2002 baseline, paragraph 114 of Brazil’s Further
Rebuttal Submission of 18 Nov 2003.
20 Bra-313, page 5.

41. In fact, the simple ratio of cotton to soyb eans expected harvest season futures prices at the
time of planting, discussed by the United States
21, does a much better job of explaining the movement
in US cotton acreage than what is found in Dr. Sumner’s formulation.

42. Even an analysis of planting decisions b ased on lagged prices, while not as correlated as the
ratio of expected futures prices, also does a better job of explaining producer planting decisions than
does Dr. Sumner's net returns formulation.

43. In fact, the formulation presented in Annex I actually contains a negative correlation between
expected net revenue and planting decisions in most cotton regions of the United States.

44. In other words, the Annex I model tends to predict that cotton producers will plant less cotton
in response to higher returns.

45. In Annex I, Dr. Sumner reports the functi onal form of expected net revenue used in
determining planted acreage of upl and cotton (equation 1 on page 13). Empirical results indicate that
Dr. Sumner’s contrived formulation of expected net revenue does not explai n the movement in US
plantings of upland cotton.
22 The following table presents correlation coefficients between the
explanatory variables in Dr. Sumner’s acreage equations and actual acreage levels for each region and
for the United States over the 1996-2002 period.

46. Cotton expected net revenue, in nominal term s, calculated according to equation (1) of
Annex I has a negative correlation with planted acreage in 4 of the 6 cotton-producing regions
modelled by Dr. Sumner. Over the 1996-2002 pe riod, those 4 regions accounted for 93% of US
acreage. Dr. Sumner’s equations for planted acreage are not solely based on nominal net revenue of
cotton. They also take into account competing crops in each region, and returns are converted to real
dollars by dividing by a general price deflator.

47. The lack of predictive ability of Dr. Sumner’s acreage equations is best illustrated by the
correlation between acreage and the Weighted Expected Net Returns for all Crops in real terms. This
aggregate net return is calculated by multiplying each parameter estimate by the respective real net
returns for that crop calculated according to equa tion (1) of Annex I and then summing the resulting
values. This calculation incorporates all explanat ory variables that are included in Dr. Sumner’s
acreage equations with the appropriate elasticity.

48. The correlation results indicate that Dr. Sumner ’s equations are not accurate predictors of the
movements in cotton acreage. The correlation in 3 regions is negative, and in two other regions, the
correlation is weakly positive. Only in the sma llest production region in the US is there a positive
correlation that is statistically significant.

21 Paragraphs 152-167 of US Further Rebuttal Submission, 18 November 2003.
22 The calculation of expected net revenue follows the general form indicated by equation (1) of
Annex I. Data for expected market and marketing lo an benefits are taken directly from the file FINAL
US2003CropsModel WORKOUT.xls, which is a cotton-only US model supplied by Brazil. Exact calculations
of per-acre PFC, DP, MLA and CCP payments, as well as crop insurance were not included in the file. Nor has
this exact documentation been provided by Brazil. In the absence of a complete explanation regarding these
calculations, the US has adopted the following formulas for expected per-acre payments for each region i:
 PFCi = 0.85 * (PFC Payment Rate) * (Programme Yield)i,
 MLAi = 0.85 * (MLA Payment Rate) * (Programme Yield)i,
 DPi = 0.85 * (Direct Payment Rate) * (Programme Yield)i,
 CCPi = 0.85 * max(0, Target Price – max)(L oan Rate, Farm Price)) (Programme Yield)I,
The variables for decoupled payments and crop in surance have been calculated for each crop and
region and included in expected net revenue for the determination of correlation coefficients and explanatory
power.

49. In fact, the explanatory powe r and reliability of Dr. Sumner’s acreage model is far less than
one explanation of recent movements in cotton acreage provided by the United States, the ratio of
cotton to soybeans expected harvest season futures prices at time of planting. Because soybeans is a
major competing crop of cotton in many cotton-pro ducing regions, this ratio expresses the relative
attractiveness of planting cotton from expected market returns.
23 Simply put, the ratio of expected
futures prices does a much better job of explaining the movement in US cotton acreage than what is
found in Dr. Sumner’s arbitrary formulation.

Correlation of Selected Explanatory Variables with Upland Cotton Planted Area, 1996-2002 Period (1)
Corn Belt Central
Plains
Delta
States Far West Southeast Southern
Plains US
Sumner's Cotton Expected Net
Returns (Nominal $) -0.27 0.11 -0.29 0.29 -0.53 -0.09 -0.28
Sumner's Cotton Expected Net
Returns (Real $) -0.29 -0.08 -0.32 0.38 -0.58 -0.14 -0.30
Sumner's Weighted Expected Net
Returns for all Crops (Real $) -0.21 0.40 -0.25 0.17 -0.35 0.16 -0.14
Ratio of Cotton and Soybean
Futures Prices 0.55 -0.37 0.66 0.23 0.33 0.63 0.69
Ratio of Lagged Cotton and
Soybean Farm Prices 0.14 -0.64 0.37 0.40 -0.06 0.46 0.40
(1) Source: File FINAL US2003CropsModel Correl 1.xls

50. The statistics are very clear. Dr. Sumner’s methodology of modelling producer expectations
and planting decisions has no explanatory power, and analysis based on these equations is not reliable.
His proposed formulation of net returns is not cons istent with producers’ expectations and acreage
decisions. The equations are not reliable for asses sing the removal of US programmes, and this
applies to not only decoupled payments and crop insurance, but also marketing loans.

51. Recent historical data clearly indicate that producers are making their decisions on their
expectations of market prices for cotton and primary competing crops.
24 Furthermore, those price
expectations are not captured by the naïve approach of simply using last year’s price to determine this
year’s acreage decision. As Brazil’s expert, Mr . MacDonald explained at the second session of the
first panel meeting, futures markets embody the best available information about expected prices.
The data indicate that cotton farmers’ planting decisions are made accordingly.

23 Paragraphs 5-9 of Answers of the United States of America to the Questions from the Panel to the
Parties following the Second Session of the First Substantive Panel Meeting, 27 October 2003.
 PFCi = 0.85 * (PFC Payment Rate) * (Programme Yield)i,
 MLAi = 0.85 * (MLA Payment Rate) * (Programme Yield)i,
 DPi = 0.85 * (Direct Payment Rate) * (Programme Yield)i,
 CCPi = 0.85 * max(0, Target Price – max)(L oan Rate, Farm Price)) (Programme Yield)I,
The variables for decoupled payments and crop in surance have been calculated for each crop and
region and included in expected net revenue for the determination of correlation coefficients and explanatory
power.
24 Paragraphs 152-167 of US Further Rebuttal Submission, 18 November 2003.

52. The formulations discussed in Annex I do not reflect the expectations of producers and do not
explain the movement in US cotton acreage. This is particularly troublesome as those formulations
are a critical link in Brazil's attempt to ascrib e significant acreage impacts to the US cotton
programme. There is no credible statistical evid ence that supports this linkage, and the Annex I
formulations that form a part of this analytical linkage fail to accurately explain movement in acreage.

V. DR. SUMNER’S METHODOLOGY DE VIATES FROM FAPRI’S LINEAR
ACREAGE SYSTEM

53. FAPRI's linear acreage system would tend to ensure that impacts from a static change in
returns should be the same across several years. Ho wever, contrary to the normal FAPRI system, the
Sumner analysis shows impacts that grow substantially over several years.

54. According to the US crops model (Excel file US CROPS MODEL 2002.xls) sent by
Dr. Babcock on 26 November, upland cotton acreage in each region is determined by the following
equation:

CTPLT
i = ao + ao*CTENRi/PD + A*(Vector of Competing Crop Returnsi)/PD
 + Decoupled Payment Impacts i + CRP Impactsi + Єi
where
 CTPLT = upland cotton planted acreage in region i
 CTENR = expected cotton net returns from the market and the marketing loan in region i
 PD = general price deflator
 A = vector of parameter estimates for competing crops.
Expected net returns for each crop are defined as
(Lagged Farm Price + max(0, Loan Rate – Lagge d Loan Repayment Price)) * Expected Yield –
Variable Costs.

55. As documented in equation (1) of Annex I, Dr. Sumner modifies expected net returns to
include his calculations of decoupled payments a nd crop insurance benefits. The new equations for
expected net returns are transformed as follows:

(Lagged Farm Price + max(0, Loan Rate – Lagge d Loan Repayment Price)) * Expected Yield –
Variable Costs + b
pfc * PFC + bdp * DP + bmla * MLA + bccp * CCP + CIS,
where
 PFC = per-acre PFC payments
 DP = per-acre direct payments
 MLA = per-acre MLA payments
 CCP = per-acre counter-cyclical payments
 CIS = crop insurance variable
 b
pfc , bdp , bmla , bccp = scaling factors.

56. An important aspect of the linear acreage equations as modified by Dr. Sumner concerns the
response to changes in net returns. If net returns for cotton change by a given amount, then the impact
or shift in cotton acreage is determined as a
i*(Change in returns)/PD. If the change in returns is the
same across years, then the only difference in terms of the acreage impact is due to the value of the
price deflator PD.

A. ACREAGE IMPACTS FOR 2003-07 APPEAR INCONSISTENT WITH 1999-2002 PERIOD

57. Dr. Sumner’s acreage impacts attributed to decoupled payments and crop insurance show
tremendous variations over the 1999- 2007 period. Specifically, acreage shifts for the 2003-07 period
are much larger than those reported for the 1999-02 period. The larger impacts are not consistent with

the relative programme values assumed by Dr. Su mner. In the case of decoupled payments,
incorporating Dr. Sumner’s “coupling” factors does not fully explain the differences in impacts.

58. The following table provides a comparison of the average acreage impacts reported in rows
720-771 of the file FINAL US2003CropsModel WORK OUT.xls. The averages reflect the two
periods of the analysis covered by the different farm bills. The US cannot verify Dr. Sumner’s
calculations due to insufficient in formation. However, some basi c calculations cast serious doubt on
the validity of Dr. Sumner’s analysis.

59. The acreage impacts reported for DP payments over the 2003-07 period are much larger than
those indicated for PFC payments during 1999-20 02 even though direct payment rates under the
current farm bill are actually smaller than PFC paym ent rates under the FAIR Act. Surprisingly, this
difference cannot be adequately explained by Dr. Sumner's decision to provide much stronger acreage
impacts for Direct Payments than he attributed to PFC payments. Even when the United States
attempted to incorporate Dr. Sumner's “coupling” factor, the acreage impacts appear much larger than
the increased (1.5 times) "coupling" factor would seem to indicate.

60. The same concern holds true for MLA and CCP payments. The acreage impact associated
with CCP increases by a factor of five while th e effective payment under the 2002 Act is 3.4 times
larger than the MLA payment. In the Central Plains, the impact is more than 147 times larger over the
03-07 period than over 99-02. The Southeast show s an acreage impact due to CCP that is almost
8 times the size of that implied for MLA by Dr. Sumner under the 1996 Act.

B. CROP INSURANCE IMPACTS OVER 2003-2007 PERIOD VARY FROM IMPACTS OVER 1999-
2002

61. In paragraphs 52 through 56 of Annex I, Dr. Sumner addresses his contrived methodology for
incorporating crop insurance. He states that the per-acre crop insurance effect on net revenue is the
same in all years of the analysis, and at the nationa l level, it equals $19 per acre. He does not indicate
if the value changes for each region in his acreage system. That notwithstanding, we do know that the
impact on net revenue is the same in all years of the analysis. If that is the case, then the linear
specification presented in equation (1) of Annex I would generate roughly the same acreage shift in
each year of the analysis, with the exception of the impact of the change in the general price deflator.
Since the price deflator, which is a measure of ge neral price inflation, generally increases over time,
then the actual impact on acreage should get modes tly smaller over time. Instead, Dr. Sumner’s
acreage shifts due to crop insurance increase dramatica lly over the analysis period. In the early years,
the impact of $19 in net revenue amounts to fewe r than 600 thousand acres, while it grows to more
than 1 million acres in 2003.

62. Despite the fact that the perceived bene fit did not change, Dr. Sumner’s methodology
produced an acreage impact over the 2003-07 period that is roughly 1.5 times larger than over the
1999-2002 period. Furthermore, in the case of the Corn Belt, Dr. Sumner’s analysis actually indicates
that the presence of the crop insurance progra mme has removed acres from cotton production - a
result that is implausible.

99-02 Average 03-07 Average Ratio
AMTA/DP Effective Average
Payment Rate (Cents/Lb) * 1.10 (= 7.34 * 0.15) 1.67 (= 6.67 * 0.25) 1.52
AMTA/DP Acreage Impacts (Mil Acres)
 Corn Belt 0.0015 0.0047 3.03
 Central Plains 0.0025 0.0053 2.11
 Delta States 0.0390 0.1425 3.65
 Far West 0.0004 0.0012 2.84
 Southeast 0.0764 0.2734 3.58
 Southern Plains 0.0794 0.1380 1.74
 Total U.S. 0.1993 0.5650 2.84
MLA/CCP Effective Average
Payment Rate (Cents/Lb) * 1.61 (= 6.42 * 0.25) 5.49 (= 13.73 * 0.40) 3.41
MLA/CCP Acreage Impacts (Mil Acres)
 Corn Belt 0.0023 0.0137 5.96
 Central Plains 0.0001 0.0151 147.22
 Delta States 0.0872 0.3867 4.43
 Far West 0.0022 0.0037 1.67
 Southeast 0.0927 0.7307 7.88
 Southern Plains 0.1157 0.3983 3.44
 Total U.S. 0.3002 1.5482 5.16
Crop Insurance Average Benefit
(Dollars/Ac) $19 $19 1.00
Crop Insurance Acreage Impacts (Mil Acres)
 Corn Belt -0.0002 -0.0003 1.52
 Central Plains 0.0120 0.0219 1.83
 Delta States 0.0596 0.1018 1.71
 Far West 0.0012 0.0013 1.06
 Southeast 0.2372 0.4609 1.94
 Southern Plains 0.3728 0.4279 1.15
 Total U.S. 0.6826 1.0135 1.48
* Effective Rates Calculated by Multiplying Average Rates by Dr. Sumner's "Coupling" Factor.
Comparison of Calculated Payment Rates with Acreage Shifts Reported in FINAL
US2003CropsModel WORKOUT.xls

C. SUMNER MODEL ADOPTS NON-LINEAR RESPONSES CONTRARY TO FAPRI

63. In Exhibit Bra-313, Dr. Sumner provides further documentation regarding the analysis of
decoupled payments and crop insurance. The new documentation suggests an entirely different
methodology than presented in Annex I.

64. The documentation provided in Annex I suggests that cotton area is determined by the
equation:

CTPLT
i = ao + ao*CTENRi/PD + A*(Vector of Competing Crop Returnsi)/PD
 + Єi
where cotton expected net returns CTENR are determined as
(Lagged Farm Price + max(0, Loan Rate – Lagge d Loan Repayment Price)) * Expected Yield –
Variable Costs + bpfc * PFC + bdp * DP + bmla * MLA + bccp * CCP + CIS.

65. Based on this documentation, analyzing the im pacts of no decoupled payments would be done
by simply setting the decoupled payments to zero. However, in Exhibit Bra-313, equations (4)-(6)
suggest a very different methodology for deriving impacts. Dr. Sumner reports to use the following
approach:

Percentage difference in acreage due to programme
= (Expected programme payments/(Expected progra mme payments + (cotton market & market loan
net revenue))) * Acreage elasticity.

Acreage impacts would be derived by multiplying the percentage difference in acreage by the baseline
level of acreage.

66. The new methodology yields acr eage impacts that vary depending on the level of returns from
the market and marketing loan. This methodology expl ains how Dr. Sumner is able to derive varying
impacts in a scenario where the ch ange introduced into the system is constant, such as the crop
insurance scenario.

D. SUMNER FORMULATION IGNORES PRESENCE OF OTHER PROGRAMMES AND
THEREFORE EXAGGERATES IMPACTS

67. Dr. Sumner’s formulation for isolating th e impacts of each individual programme produces
exaggerated results. It is logical to assume that Dr. Sumner’s baseline acreage represents his most
likely view based on the presence of all US cotton programmes. As such, determining the acreage
impact of each individual progr amme should be done by comparing returns from the programme in
question with total returns, where total returns are defined as

(Lagged Farm Price + max(0, Loan Rate – Lagge d Loan Repayment Price)) * Expected Yield –
Variable Costs + bpfc * PFC + bdp * DP + bmla * MLA + bccp * CCP + CIS.

68. Dr. Sumner’s approach of comparing returns for the programme in question to returns from
the market and marketing loan i gnores the presence of other progra mmes. Since returns from the
market and marketing loan are less than total retu rns, then the acreage impacts for a given programme
based on Dr. Sumner’s formulation will be larger. The following table uses data for the Southern
Plains in 2005 to illustrate the differences. Fo llowing Dr. Sumner’s documentation of Exhibit Bra-
313, the acreage impacts of decoupled payments an d crop insurance total 671 thousand acres. If the
methodology was based on total revenue, then the estimated acreage impact is 543 thousand acres.
Full details of the calculations are presented in the file FINAL US2003CropsModel Correl 1 (Exhibit
US-115).

E. UNITED STATES HAS DIFFICULTY REPLICATING SUMNER RESULTS - EVEN AFTER
ADOPTING SUMNER METHODOLOGY

69. The estimates prepared by the US are substan tially smaller than those reported by Dr. Sumner
in the file FINAL US2003CropsModel WORK OUT.xls (submitted on 18 November). The
discrepancies are particularly large over the 2003-07 period. Dr. Sumner reports an average acreage

impact due to decoupled payments and crop insu rance of 3.1 million acres over the 2003-07 period.
Estimates by the US using Dr. Sumner’s formulas find an impact of only 1.2 million acres. The
inability to even remotely replicate Dr. Sumner’s estimates casts serious doubts about the validity of
his results. Dr. Sumner’s calculations appear to be as arbitrary as his economic logic.

70. Brazil may cite the fact that the elasticity with respect to net returns is lower than the
estimates published in Table I.3 of Annex I. While the United States is not able to verify the
discrepancy, the elasticities used in the US calculations are based on data provided in the file FINAL
US2003CropsModel WORKOUT.xls. Specifically, the el asticity in each year is determined by the
formula (a
i / Value of price deflator)*(Value of net retu rns / Value of cotton acres), where a1 is the
coefficient on cotton net returns in the regional cotto n acreage equation. The value of net returns and
cotton acres are based on regional numbers in each year. This formulation is consistent with
Dr. Sumner’s documentation presented in Exhibit Bra-313.

Example of Southern Plains Acreage Impacts, 2005
(1) (2) (3) = (2)/((1) + (2)) (4) (5) (6) = (3)*(4)*(5) (7)
Program Market
Revenue
Program
Revenue
% of Market +
Program Revenue Elasticity Planted Estimated
Impact
Sumner
Impact
 Direct Payments $109.04 $6.08 5.28% 0.28 6.046 0.090 0.145
 CCP's $109.04 $20.02 15.51% 0.28 6.046 0.265 0.416
 Crop Insurance $109.04 $24.67 18.45% 0.28 6.046 0.316 0.446
 Total Area Impact 0.671 1.007
Example of Southern Plains Acreage Impacts, 2005
(1) (2) (3) = (2)/(1) (4) (5) (6) = (3)*(4)*(5) (7)
Program Total
Revenue
Program
Revenue
% of Total
Revenue Elasticity Planted Estimated
Impact
Sumner
Impact
 Direct Payments $159.81 $6.08 3.80% 0.28 6.046 0.065 0.145
 CCP's $159.81 $20.02 12.53% 0.28 6.046 0.214 0.416
 Crop Insurance $159.81 $24.67 15.44% 0.28 6.046 0.264 0.446
 Total Area Impact 0.543 1.007

AMTA/DP MLA/CCP Crop Insurance Total
Sumner Reported Impact 0.199 0.300 0.683 1.182
Estimate of Sumner Approach
Using Market Returns 0.197 0.286 0.636 1.119
Estimate of Sumner Approach
Using Total Returns 0.166 0.243 0.587 0.996
AMTA/DP MLA/CCP Crop Insurance Total
Sumner Reported Impact 0.565 1.548 1.013 3.127
Estimate of Sumner Approach
Using Market Returns 0.258 0.718 0.553 1.529
Estimate of Sumner Approach
Using Total Returns 0.179 0.591 0.432 1.202
1999-2002 Average Acreage Impact (Million Acres)
2003-2007 Average Acreage Impact (Million Acres)

71. The following charts provide a year-by-y ear comparison between Dr. Sumner’s reported
impacts and estimates prepared by the United States . The formulas use to generate these estimates
follow the documentation provided by Dr. Sumner. In cases where the information was incomplete,
reasonable assumptions were made to facilitate the calculations. Complete details are provided in the
file FINAL US2003CropsModel Correl 125.

72. Estimates by the United States for the 1999-2002 period are reasonably close to those offered
by Dr. Sumner. However, there are large discrep ancies over the 2003-07 period. It is inexplicable
how the impact between the two periods can be so di fferent. The differences cannot be explained by
Dr. Sumner’s method of incorporating alternative “coupling” factors.

25 Exhibit US-115.

AMTA/DP Acreage Shifts for US Upland Cotton (Million Acres)
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
1999 2000 2001 2002 2003 2004 2005 2006 2007
US Estimate of Sumner's Impacts Sumner's Reported Impacts

MLA/CCP Acreage Shifts for US Upland Cotton (Million Acres)
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
1999 2000 2001 2002 2003 2004 2005 2006 2007
US Estimate of Sumner's Impacts Sumner's Reported Impacts

Crop Insurance Acreage Shifts for US Upland Cotton (Million Acres)
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1999 2000 2001 2002 2003 2004 2005 2006 2007
US Estimate of Sumner's Impacts Sumner's Reported Impacts

VI. SUMNER MODIFICATIONS TO FA PRI MODEL DESCRIBED IN BRA-313
CONTAIN ERRORS

73. In Exhibit Bra-313, equation (2) on page 2 states that real net revenue for crop i in year (t-1)
is a function of the price in (t-1) and the loan rate in (t-1), and other variables. It is this specification
for real net revenue that determines acreage in year t, as described in equatio n (1). The combination
of these two equations indicates that the loan rate in t-1 helps determine acreage in period t. In other
words, Dr. Sumner's equation seems to assert it is last year's loan rate, and not the one in effect for
this year's crop, that determines this year's plantings . Not only is this completely illogical, but it is in
direct conflict with acreage equations previously developed by both FAPRI and USDA. The
United States cannot determine if this equation refl ects a lack of knowledge of the model, a broader
deficiency in economics, or some previously unknown modification of the FAPRI or CARD models.

74. Dr. Sumner’s documentation presented in e quation (2) is inconsis tent with equations
contained in the files US CROPS MODEL 2002.xls (provided by Dr. Bruce Babcock on
26 November) and FINAL US2003CropsModel WORKOUT.xls (provided by Brazil on
18 November). Equation (2) defines real net reve nue for crop i by taking the higher of the lagged
farm price and the lagged loan rate, then multiplying by trend yield and subtracting variable costs. He
further explains that this formulation applies to all crops except cotton and rice, where the marketing
loan benefit depends on the differe nce between the loan rate and the AWP. However, in the two
electronic versions of the crops model, which ha ve been provided by Dr. Sumner and Dr. Babcock
26,
the formulation of expected net revenue is not consistent with Dr. Su mner’s documentation.
According to the electronic versions, all crops inco rporate the marketing loan benefit by taking the
difference between the loan rate and the loan repa yment price. The United States and the Panel are
left to wonder why there is a discrepancy between Dr. Sumner’s documentation and the models that
have been provided.

26 File US CROPS MODEL 2002.xls (provided by Dr. Bruce Babcock on 26 November) (Exhibit US-
116) and FINAL US2003CropsModel WORKOUT.xls (provided by Brazil on 18 November) (Exhibit US-115).

75. Exhibit Bra-313 and Annex I provide di fferent and conflicting methodologies for
incorporating the impacts of crop insurance and d ecoupled payments. According to equation (1) of
Annex I, the formula for determining expected ne t revenue has been modified to include per-acre
decoupled payments and crop insurance benefits. These net returns then determine cotton planted
acreage. However, in equation (1a) of Bra-313, Dr . Sumner indicates that net revenue only considers
returns from the market and the marketing loan. He then incorporates the impacts of decoupled
payments and crop insurance by adding some arbitrary acreage impacts into the equation. As
explained earlier
27, the approach presented in Exhibit Bra- 313 only serves to exaggerate his acreage
impacts.

76. In equation (7), Dr. Sumner documents the equation specification for US cotton exports. His
documentation indicates that exports in year t are a f unction of production in t-1, and other variables.
Dr. Sumner’s model suggests that last year’s production directly determines this year’s exports. This
is both illogical and a departure from the specification included in the FAPRI framework.

VII. OVERALL PRICE RESPONSIVENESS OF THE ANNEX I MODEL

77. The overall price impacts generated by a mode l are determined by the underlying supply and
demand elasticities within the system. If overall supply and demand are more elastic, or more
responsive, then an external shock to the system w ill generate a smaller change in price than a system
that is more inelastic.

78. In the case of the scenarios examined by Dr. Sumn er, the external shocks to the model are the
elimination of various aspects of the US cotton prog ramme. According to Dr. Sumner’s analysis, the
removal of the US cotton programme leads to a reduction in planted area, production, and
subsequently exports onto the world market. The re duced supplies into the world market generate an
increase in world price, with the magnitude of th e price increase determined by the overall elasticities
embodied within the models for foreign production and consumption.

79. The following table provides a comparison of aggregate supply and demand elasticities for
foreign area and mill use. Based on individual coun try elasticities, the response of aggregate foreign
area and consumption can be calculated based on weights derived from recent historical data. The
elasticities reported in Table I.3 of Annex I are used to derive the aggregate elasticities of the Sumner-
CARD international cotton
28 model provided by Brazil on 13 November. These are compared to
published research from Dr. Seth Meyer at FAPRI-U niversity of Missouri, which reports more
responsiveness in both area and consumption.29

Comparison of Model Elasticities
 Meyer – FAPRI Sumner – CARD
 Short Run Long Run Short Run Long Run
Foreign Area 0.45 0.78 0.24 N/A
Foreign Mill Use -0.37 -0.49 -0.25 N/A

80. The net trade position of countries outside of th e US is one of a net importer. Since their
consumption exceeds their production, their excess demand (ED) is defined as demand (D) – supply
(S). The responsiveness of their excess demand (E D) is approximated by the elasticity of the

27 Section V.c of this document.
28 File WDCT2002 Meltdown WORKOUT.xls, provided by Brazil on 13 November 2003. (Exhibit
US-115.)
29 Seth D. Meyer, A Model of Textile Fiber Supply and Inter-Fiber Competition with Emphasis on the
United States of America, Food & Agricultural Policy Research Institute, University of Missouri, 2002.

domestic demand less the elasticity of their domestic supply. In the case of the Meyer model, the
elasticity of excess demand is -0.37 – 0.45 = -0.82. For the Sumner model, the elasticity of excess
demand is -0.25 – 0.24 = -0.49. This fundamental difference has a direct impact on the price impacts
generated by the model, as evidenced by the fo llowing chart. The line ED1 represents an excess
demand curve with more price responsiveness, wh ile ED2 is an excess demand curve with less
elasticity. The intersection of excess demand outside of the United States with excess supply (ESUS)
from the United States generates an equilibrium price. When there is a reduction in the excess supply
from the United States, the elasticity of excess demand, which is reflected by the slope of the line has
a direst impact on the change in price. Dr. Sumner’s choice of intern ational supply and demand
elasticities leads to exaggerated price impacts.

Q
P
P2
P1
P*
ED1
ED2
ESUS

VIII. CONCLUSION

81. The Sumner models, as presented by Brazil, are so laden with faulty theory on programme
impacts and so deviate from the FAPRI standards that they cannot provide any foundation for the
Panel's analysis of the effect of challenged United States programmes with respect to upland cotton.
Not only does the Sumner model contain major differences from previous FAPRI work, it also
appears to be internally inconsistent as the Unite d States has noted changes in described methodology
from the original Annex I submission to later s ubmissions, such as Exhibit Bra-313 and subsequent
documentation.

82. Virtually all of the concerns of the United St ates cited in this critique are directed toward
Brazil economic manipulation that exaggerates acr eage impacts of the United States upland cotton
programme.

• Brazil's impacts attributed to decoupled programmes deviate from traditional FAPRI analysis.

• Brazil's impacts attributed to crop insurance programme are not supported by FAPRI analysis.

• Brazil's impacts attributed to the export cr edit guarantee programme have no demonstrated
economic foundation.

• Brazil's Annex I results used baselines that we re inexplicably lower than even FAPRI's
preliminary November 2002 baseline.

• Brazil's non-linear approach to results deviated from the traditional FAPRI methodology.

• Many of Dr. Sumner's adaptations contain errors.

83. In the final analysis, Brazil does not rely on the FAPRI model to prove its case, it relies on its
manipulation of that model to ensure it obtains the desired results.

ANNEX I-10

BRAZIL'S ANSWERS TO ADDITIONAL QUESTIONS
FROM THE PANEL

20 January 2004

TABLE OF CASES

EC – Sugar Exports I
(Australia)
GATT Panel Report, European Communities – Refunds on Exports of
Sugar (Complaint by Australia , L4833 - 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 – FSC Appellate Body Report, United States – Tax Treatment for “Foreign
Sales Corporation”, WT/DS108/AB/R, adopted 20 March 2000.
US – 1916 Act Appellate Body Report, United States – Anti-Dumping Act of 1916 ,
WT/DS136/AB/R, adopted 26 September 2000.
US – Corrosion-
Resistant Steel
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.

List of Exhibits

Agricultural Outlook Tables, USDA, November 2003, Table 19 Exhibit Bra- 394
“Trade Issues Facing the US Cotton Industry,” Speech by Dr. Mark
Lange, President and CEO, National Cotton Council, 6 January 2004.
Exhibit Bra- 395
“Farm Groups Shocked at UC Economist’s Testimony in WTO
Dispute,” Western Farm Press, 2 September 2003.
Exhibit Bra- 396
“Report of the Commission on the Application of Payment Limitations
for Agriculture,” August 2003.
Exhibit Bra- 397
Western Farm Press, 7 January 2003 Exhibit Bra- 398
Acreage Discrepancies.xls Exhibit Bra- 399
List of Publications of Professors Babcock and Beghin Exhibit Bra- 400

257. The Panel takes note of the Appellate Bo dy 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 Body caut ioned against the "mechanistic" application of
the so-called "mandatory/discretio nary distinction" and stated that the import of this
distinction may vary from case to case (para. 93). For the Appellate Body, the question
of whether 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:

 (i) the legal standard and elements Br azil sets out to establish its export and
prohibited subsidy claims under the provisions 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

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

 (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

 (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

The Appellate Body’s Decision

1. Prior to answering the Panel’s specific qu estions, Brazil makes the following introductory
comments. Generally speaking, with respect to the Panel’s Questions 257(a) – (c), Brazil does not
believe that the Appellate Body Report in US – Corrosion-Resistant Steel has a significant impact on
the legal standards or the elements of Brazil’s “ per se” or threat of serious prejudice claims. This is
because, unlike the USDO C Policy Bulletin in US – Corrosion-Resistant Steel , the measures at issue
in this dispute, on their face, require the paymen t of subsidies to eligible producers, users, and
exporters. The record in this dispute shows that US government officials enjoy no flexibility to apply
the US subsidy programmes in a WTO-consistent manner.

2. The US – Corrosion-Resistant Steel decision does make the important conclusion that panels
cannot reject on a jurisdictional basis “ per se ” claims against measures that on their face are not
mandatory.
1 This Panel therefore need not examine whether the subsidy measures that Brazil has
challenged are mandatory as a preliminary jurisdictional matter. However, this does not mean that the
mandatory nature of measure is not important in deciding the merits of a “ per se” (or threat of serious
prejudice) claim. Indeed, the Appellate Body’s analysis of the merits of Japan’s “per se” claims in US
– Corrosion-Resistant Steel appeared to turn largely on whethe r the measure was “mandatory”, i.e.,
whether it required USDOC officials to analyze sunset reviews in a WTO-inconsistent manner.

1 Appellate Body Report, US – Corrosion-Resistant Steel, WT/DS244/AB/R, para. 88.

3. The Appellate Body held that “[w]hen a measure is challenged ‘as such,’ the starting point for
an analysis must be the measure on its face. If the meaning and content of the measure are clear on its
face, then the consistency of the measure as such can be assessed on that basis alone”.
2 The Appellate
Body in US – Corrosion-Resistant Steel found that the “as such” challenge “hinges upon whether [the
Sunset Policy Bulletin] instruct[s] USDOC to treat dumping margins and/or import volumes as
determinative or conclusive, on the one hand, or merely indicative or probative, on the other hand, of
the likelihood of future dumping”.3 Finding ambiguity in the text of the Bulletin (the use of the word
“normally” and “good cause”), the Appellate Body he ld that the panel shou ld have examined the
history of the application of the Bulle tin and individual decisions thereunder. 4 Since the panel had
failed to make the necessary factual findings, the A ppellate Body was unable to complete the analysis
and to rule on Japan’s claim.5

4. Nevertheless, the Appellate Body’s decision appears to stand for the proposition that “per se”
challenges require demonstration that either th e text or the operation of a measure creates
requirements for government officials to act in a WTO-inconsistent manner. Where the text is not
completely clear, the Appellate Body found that pane ls must determine whether the measure creates
“normative” requirements, i.e., whether the measures are treated as binding by government officials,
are interpreted as binding on executive branch official s by courts, or are consistently applied in a
manner suggesting that the measures are considered to be mandates for action.
6

5. Further, the US – Corrosion-Resistant Steel decision highlights the importance of challenges
to legal/regulatory measures as a way to avoid re peated WTO dispute settlement challenges in “as
applied” claims. In describing what is a “measure,” the Appellate Body recalled:

[I]n GATT and WTO dispute settlement prac tice, panels have frequently examined
measures consisting not only of particular acts applied only to a specific situation, but
also of acts setting forth rules or norms that are intended to have general and
prospective application. In other words, instruments of a Member containing rules or
norms could constitute a “measure”, irresp ective of how or whether those rules or
norms are applied in a particular instance. This is so because the disciplines of the
GATT and the WTO, as well as the dispute settlement system, are intended to protect
not only existing trade but also the secu rity and predictability needed to conduct
future trade . This objective would be frustrated if instruments setting out rules or
norms inconsistent with a Member's obliga tions could not be brought before a panel
once they have been adopted and irrespective of any particular instance of application
of such rules or norms. It would also lead to a multiplicity of litigation if instruments
embodying rules or norms could not be cha llenged as such, but only in the instances
of their application. Thus, allowing clai ms against measures, as such, serves the
purpose of preventing future disputes by allowing the root of WTO-inconsistent
behaviour to be eliminated.
7

6. Consistent with the language quoted above, Brazil’s various challenges to US legal/regulatory
instruments “per se” are intended to protect the security and predictability that Brazil’s upland cotton
producers need to conduct future trade. In additio n, resolution of Brazil’s sep arate threat of serious

2 Appellate Body Report, US – Corrosion-Resistant Steel, WT/DS244/AB/R, para. 168.
3 Appellate Body Report, US – Corrosion-Resistant Steel, WT/DS244/AB/R, para. 178.
4 Appellate Body Report, US – Corrosion-Resistant Steel, WT/DS244/AB/R, paras. 182-184, 187-189.
5 Appellate Body Report, US – Corrosion-Resistant Steel, WT/DS244/AB/R, paras. 189-190.
6 Appellate Body Report, US – Corrosion-Resistant Steel, WT/DS244/AB/R, paras. 99, 168.
7 Appellate Body Report, US – Corrosion-Resistant Steel , WT/DS244/AB/R, para. 83 (emphasis
added; references in original omitted).

prejudice claim under the EC – Sugar Exports and US – FSC rationales will prevent future disputes
by addressing the root cause of the United States’ WTO-inconsistent behaviour – the absence of any
legal or regulatory limitations on subsidy payments, which creates a structural and permanent source
of uncertainty in upland cotton markets.
8 Brazil has demonstrated that the mandatory US subsidy
measures function to guarantee a high level of US upland cotton production and exports, and by
definition, act to suppress world prices because of th e increased supply by US producers of a fungible
commodity.9 Brazil further demonstrated that Braz ilian producers are reluctant to engage in
significant investments in leasing or purchasing land for upland cotton production because of the
uncertainty caused by locked-in US production. 10 Brazil also recalls its position that requiring an
“imminent threat” standard, as proposed by the United States, would in effect require Members such
as Brazil to litigate claim after claim on the application of these measures, which threaten to cause
serious prejudice to its interests.

7. Finally, Brazil notes that the Appellate Body’s conclusions in US – Corrosion-Resistant Steel
regarding the mandatory/discretionary distinction, although based on provisions of the Anti-Dumping
Agreement, are equally relevant to claims under any of the covered agreements, including Brazil’s
claims under the SCM Agreement, the Agreement on Agriculture, and Article XVI of GATT 1994.
11

 (i) the legal standard and elements Br azil sets out to establish its export and
prohibited subsidy claims under the provisions 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
Brazil’s Answer

8. Application of the US – Corrosion-Resistant Steel criteria requires a complainant bringing a
per se claim to demonstrate that a measure does not provide relevant government officials with the
flexibility to apply the measure in a WTO-consistent manner. As Brazil has argued
12, US government
officials are not provided with any flexibility to ma ke Step 2 subsidies under Section 1207(a) of the
2002 FSRI Act in a WTO-consistent manner. Thus, the Act violates Articles 3.3 and 8 of the
Agreement on Agriculture, and Articles 3.1(a) and 3. 1(b) of the SCM Agreement. The United States
has conceded that “subject to th e availability of funds (that is, the availability of CCC borrowing
authority), Step 2 payments must be made to all those who meet the conditions for eligibility”. 13 The

8 Brazil’s 18 November 2003 Further Rebuttal Submission, paras. 203-216; Brazil’s 9 September 2003
Further Submission, paras. 413-436.
9 Brazil’s 18 November 2003 Further Rebuttal Submission, paras. 200-202.
10 See Annex III of Brazil’s 9 September 2003 Further Submission; Brazil’s 9 September 2003 Further
Submission, Section 6.3; Exhibit Bra-283 (Statement of Christopher Ward – 7 October 2003); Brazil’s
11 The Appellate Body noted with respect to Article 17.3, the consultation clause of the Anti-Dumping
Agreement, that there is “no threshold requirement, in Article 17.3, that the measure in question be of a certain
type”. Moreover, it has drawn the conclusion from the phrasing of Article 18.4 of the Anti-Dumping
Agreement that “the entire body of generally applicable rules, norms and standards adopted by Members in
connection with the conduct of anti-dumping proceedings” should be potentially subject to dispute settlement. 11
The provisions of Article 17.3 of the Anti-Dumping Agreement are closely modeled on those of GATT Article
XXIII:1 which are cross-referenced in Article 30 of the SCM Agreement and Article 19 of the Agreement on
Agriculture, and the provisions of Article 18.4 are vi rtually identical to Article XVI:3 of the Marrakesh
Agreement Establishing the WTO.
12 Brazil’s 24 June 2003 First Submission, paras. 93-96, 244-45 and 250; Brazil’s 22 August 2003
Comments to the US 11 August 2003 Answers to Questions 92-93, 96, 99 and 107.
13 US 11 August 2003 Answer to Question 109.

United States admits that “the CCC has a large” borrowing authority and “ rarely has CCC run out of
funds but it has happened for brief periods of time”. 14 Indeed, while the 1996 FAIR Act imposed a
$701 million budgetary limit on the Step 2 programme during MY 1996-2001, this limit was reached
by 1999. At the urging of the NCC, Congress eliminated the spending cap in 2000. 15 Unlimited
funding has existed ever since, including $415 million in expenditures in MY 2002 alone.16

9. The Secretary of the USDA must make paym ents pursuant to the plain text of Section
1207(a)(1), (2), and (4) of the 2002 FSRI Act (as se t out in paragraph 245 of Brazil’s 24 June First
Submission). Consistent with the US – Corrosion-Resistant Steel decision, the evidence of mandatory
payments demonstrates the absence of any flexibility for US officials to apply the programme in a
WTO-consistent manner. Even if US authorities, acting in the best of faith, recognize that Step 2
payments are inconsistent with the US export s ubsidy obligations as well as with the prohibition on
local content subsidies, Congress has not given them the discretion to stop the payments . Indeed,
Congress has created a legal right for eligible recipients to demand and receive payments.

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

Brazil’s Answer

10. The Appellate Body Report in US – Corrosion-Resistant Steel does not affect the legal
standard and elements set out by Brazil to estab lish its claims against the GSM 102, GSM 103 and
SCGP programmes under Articles 10.1 and 8 of the Agreement on Agriculture, and under Article
3.1(a) of the SCM Agreement. In fact, the mandato ry/discretionary distinction is not relevant to
Brazil’s claims against the CCC export credit guarantee progra mmes under Article 10.1 of the
Agreement on Agriculture.

11. Article 10.1 prohibits circumvention, and the threat of circumvention, of export subsidy
reduction commitments. Brazil has demonstrated act ual circumvention, by establishing that with
respect to both unscheduled products
17 and at least one scheduled product 18, the United States has in
fact circumvented its export subsidy reduction co mmitments. This is some what akin to an “as
applied” claim, and it is therefore not releva nt to this claim whether the CCC programmes are
mandatory or discretionary.

12. Brazil has also demonstrated threat of circum vention. With respect to unscheduled products,
the Appellate Body has held that it const itutes threat of circumvention to provide any export subsidies
for unscheduled products.
19 Having proven that CCC guarantees are export subsidies (under
Articles 1.1 and 3.1(a) of the SCM Agreement, as well as item (j)), and having proven that those
guarantees are available for unscheduled products 20, Brazil demonstrated threat of circumvention, and
a violation of Article 10.1. This is the standard set out by the Appellate Body in US – FSC ; it does
not appear to be relevant to this claim whether the CCC programmes are mandatory or discretionary.

13. With respect to scheduled products, the test under Article 10.1 is not whether the CCC
programmes are “mandatory” as opposed to “discre tionary”. Rather, to determine whether CCC
export credit guarantees for scheduled products threaten to lead to circumvention of the US export

14 US 22 December 2003 Answers to Question 254.
15 Brazil’s 24 June 2003 First Submission, para. 95.
16 US 22 December 203 Answer to Question 196, para. 12 (based on October 2002-September 2003
fiscal year data).
17 See Brazil’s 2 December 2003 Oral Statement, para. 87.
18 See Brazil’s 2 December 2003 Oral Statement, para. 89 (and note 179).
19 Appellate Body Report, US – FSC, WT/DS108/AB/R, para. 150.
20 See Brazil’s 18 November 2003 Further Rebuttal Submission, para. 256 (and note 414).

subsidy reduction commitments, Brazil has noted th at the test set out by the Appellate Body in US –
FSC is whether the CCC can “stem[], or otherwise control[], the flow of” CCC export credit
guarantees. Brazil has demonstrated that CCC cannot do so.
21 One fact Brazil has noted is that the
CCC programmes are “mandatory,” as that term is defined in US law. 22 (In Brazil’s view, the CCC
programmes are also “mandatory,” within the meaning of WTO/GATT law).

14. Brazil also claims that the CCC export credit guarantee programmes constitute prohibited
export subsidies under Articles 1.1 and 3.1(a) of th e SCM Agreement. Brazil has demonstrated that
the CCC programmes confer “benefits ” per se, within the meaning of Article 1.1(b) of the SCM
Agreement (as well as that they are financial contributions and are de jure contingent on export).
Brazil has relied on three types of evidence and argument to make this per se showing, as summarized
in paragraphs 231-241 of its 18 November 2003 Further Rebuttal Submission. These three types of
evidence and argument demonstrate that every time a CCC guarantee is issued, a benefit is conferred
per se. This is effectively the equivalent of saying that the CCC programmes “mandate” a violation.

15. Finally, Brazil also claims that the CCC export credit guarantee programmes constitute
prohibited export subsidies under item (j) of the Illustrative List of Export Subsidies included as
Annex I to the SCM Agreement. Brazil does not consider that, to the extent the traditional
mandatory/discretionary principle was modified by the Appellate Body in US Corrosion-Resistant
Steel, those modifications have any impact on Brazil’s claim.

16. Moreover, Brazil does not consider that it is pa rticularly useful to determine whether Brazil’s
claim is “as applied” or “as such”, thus neces sitating a determination whether the CCC programmes
are “mandatory” or “discretionary”. Indeed, the Appellate Body in US Corrosion-Resistant Steel
stressed that the “import of the ‘mandatory/discre tionary distinction’ may vary from case to case”,
cautioning “against the application of this distinction in a mechanistic fashion”.
23 Item (j) imposes a
sui generis standard – it calls for an evaluation whether the CCC programmes are offered at premium
rates that are inadequate to cover the long-term operating costs and losses of the programmes. Brazil
has established these elements in two ways. Firs t, using a number of methodologies, Brazil has
looked at historical data concerning premiums collected and costs and losses incurred, to establish that
costs and losses incurred exceeded premiums collected over a 10-year period.
24 Second, Brazil used
statements by USDA’s Office of the Inspector General and the US General Accounting Office to
establish that premium rates for the CCC programmes, and not just premiums collected, do not and
will continue not to meet costs because they do not, and are not adjusted to, offset credit risks, and
are, further, capped at one per cent. 25 Given the forward-looking nature of this analysis, Brazil does
not agree with the United States that item (j) necessarily “requires a certain retrospection”.26

 (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"

21 See Brazil’s 2 December 2003 Oral Statement, pa ras. 90-91; Brazil’s N ovember 2003 Further
Rebuttal Submission, paras. 258-262.
22 Exhibit Bra-295 (2004 US Budget, Federal Credit Supplement, Introduction and Table 2 (CCC
Export Loan Guarantee Programme classified as “Manda tory” in Table 2, and in the “Introduction”, the Office
of Management and Budget states that Table 2 provides “the programme’s BEA classification under the Budget
Enforcement Act (BEA) of 1990 as discretionary or mandatory”).
23 Appellate Body Report, US – Corrosion-Resistant Steel, WT/DS244/AB/R, para. 93.
24 See Brazil’s 18 November 2003 Further Rebuttal Submission, paras. 243, 245-253 and the references
cited therein.
25 See Brazil’s 18 November 2003 Further Rebuttal Submission, para. 252 (and all citations). Given
the forward-looking nature of this analysis, Brazil does no t agree with the United States that item (j) necessarily
“requires a certain retrospection”. (US 22 December 2003 Answers to Questions, para. 103).
26 US 22 December 2003 Answers to Questions, para. 103.

Brazil’s Answer

17. The US – Corrosion-Resistant Steel decision does not significantly change Brazil’s analysis
of its serious prejudice or threat of serious prejudi ce claims. There has never been an issue whether
the statutes and regulations providing for the five US subsidies referred to in the Panel’s question are
“mandatory” – this has been clear from the face of the statutory and regulat ory provisions, as set out
in Brazil’s earlier submissions and even acknowledged by the United States.27 The record establishes
that marketing loan, crop insurance, direct and c ounter-cyclical payments, and Step 2 payments are
“mandatory” provisions – payments and expenditures are required to be made by US Government
officials to eligible producers, users or exporters.
28

18. The mandatory nature of the US subsidies is relevant to (a) Brazil’s “per se” claims as well as
(b) Brazil’s threat of serious prejudice claims that do not involve claims regarding the “ per se ”
validity of the statutes. The evidence of mandatory (or “normative”) measures is a required element
for Brazil’s “per se” claims. And a threat of serious prejudice under Article 6.3 and 5(c) will be more
likely to exist if the subsidies are mandatory, i.e., that the subsidies must be paid to eligible producers,
exporters, and users. The record demonstrates that there are no provisions in US law limiting the
payments, and, thus, limiting the threat of serious prejudice (i.e., significant price suppression,
increased world market share for US exports, or in equitable share of world trade). The so-called
“circuit-breaker” in the 2002 FSRI Act is not applicab le to individual commodities, but instead only
to total US AMS.
29 The United States has admitted that there is no provision in US law that stops
subsidy payments when serious prejudice is caused to other WTO Members.30 In particular, there was
no flexibility provided to US government officials to limit upland cotton payments at any time during
MY 1999-2002. When prices plunged to reco rd lows in MY 2001 and MY 2002, USDA poured
funds into sustaining high levels of US upland cott on production and exports. Th e participants in the
world market know this will happen again when pri ces fall. And world producers, such as those from
Brazil, as well as traders discovering prices in the Ne w York futures markets, know that this means
that US production and exports will remain high for the remainder of the 2002 FSRI Act.
31

27 See Brazil’s 9 September 2003 Further Submission, Sections 4.2.1-4.2.5 (summarized in paragraph
423); US 27 October 2003 Answer to Question 162, para 95 (“The statutory authority for marketing loan
payments, step 2 payments, and counter-cyclical payments does not provide the Secretary with the authority to
arbitrarily decline to make these payments to qualified re cipients.”); para. 97 (“there is no present limit on the
total amount of payments that can be made under each of these programmes although for counter-cyclical
payments a maximum total outlay can be calculated using the base acres, base yields, and maximum payment
rate for each commodity produced during the historical base period”.).
28 See also Brazil’s Answer to Question 257(b) below.
29 US 2 December 2003 Oral Statement para 82. US 22 December 2003 Answer to Question 253, para.
180.
30 US 22 December 2003 Answer to Question 253, para . 180 (the circuit-breaker provision “does not
appear to contemplate any such finding of serious prejudice, but rather is seemingly focused more particularly
on the overall level of expenditures as that was the only restriction agreed to in this instance by the United States
… ”.).
31 The absence of any “circuit breaker” for upland cotton is significant given the fact that producers of
upland cotton received far more per unit and ad valorem subsidies than any other US commodity during MY
1999-2002 (Brazil’s 9 September 2003 Further Submission, para. 4). No other US crop has a
“competitiveness” subsidy such as Step 2, which paid $415 million to US users and exporters of upland cotton
in MY 2002. No other US crop had counter-cyclical pa yments of over $1 billion in MY 2002. No other US
crop had such large per unit marketing loan payments during MY 1999-2002. These huge guaranteed payments,
along with the unlimited amount of upland cotton that can receive be nefits from marketing loan, Step 2, and
crop insurance subsidies, together with the very high per-acre direct and counter-cyclical payments (compared
to other programme crops), together constitutes strong ev idence that these measures have not, are not, and will
not be applied in the future in a WTO-consistent manner.

19. This permanent threat of serious prejudice is similar to “threat of ci rcumvention” of export
subsidy reduction commitments, under Article 10.1 of the Agreement on Agriculture. In US – FSC,
the Appellate Body held that th e absence of any legal mechanism that can “stem[], or otherwise
control[], the flow of”
32 subsidies creates a threat of circumvention. Again, as in this dispute, in US –
FSC and EC – Sugar Exports, there was no legal mechanism to limit the amount of potential subsidies
that could be paid. The threat was and is tangible

20. The price-trigger mechanism contained in certain of the programmes does not minimize the
threat of serious prejudice. In fact, the very ex istence of the mandatory marketing loan, Step 2 and
counter-cyclical payment programme alone impacts fa rmers’ planting decisions. Even when farmers
expect market price levels that would not trigger these payments, farmers know that there is a certain
likelihood that their expectations will turn out to be wrong and prices will turn out much lower than
anticipated. However, history has taught US upland cotton producers to know with certainty that they
will not suffer any economic harm from their misperception of prices for the upcoming marketing
year. Any downside market revenue risk is covere d by the combined effect s of the marketing loan
and counter-cyclical payment programmes, as well as by the effects of certain crop insurance policies
such as revenue insurance. In short, the mandato ry US subsidies mean that high US production and
exports are guaranteed.

21. Further, these programmes have effect s on production decisions of US farmers via a second
mechanism, as Brazil and Professor Sumner have detailed at the second meeting of the Panel.
33 Even
if farmers expect upland cotton prices (cash prices as well as the adjusted world price) to be above the
trigger prices for marketing loan, counter-cyclical and Step 2 payments, farmers will expect with a
certain likelihood that prices might nevertheless turn out to be below these trigger prices, i.e., farmers
have a probability distribution for expected prices. Given this probability distribution, Professor
Sumner explained at the second meeting of the Pane l that farmers would still expect some payments
from these programmes.34 Thus, these programmes impact farmers planting decisions, increasing and
locking in a high US supply of upland cotton that causes adverse effects.

22. Finally, Brazil has demonstrated that the “ch illing effect” of guaranteed US subsidies leads to
reduced investment of Brazilian fa rmers in upland cotton production.
35 Indeed, USDA itself
acknowledges – with respect to soybeans, but equally applicable to upland cotton – that low
international prices have had negative impacts on additional investments and increases in production
in Brazil.36 This “chilling effect” is the result of Brazilian and other countries’ farmers’ perception of
the threat of serious prejudice from the US upland cotton subsidies.

 (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.)?

32 Appellate Body Report, US – FSC, WT/DS108/AB/R, para. 149.
33 See Brazil’s 2 December 2003 Oral Statement, para. 48 and Exhibit Bra-371 (Simple Example of the
Calculation of Expected Marketing Loan Benefit); Brazil’s 22 December 2003 Answers to Questions,
para. 155.
34 Exhibit Bra-371 (Simple Example of the Calculation of Expected Marketing Loan Benefit).
35 Brazil’s 9 September 2003 Further Submission, Section 6.3 and Annex III; Exhibit Bra-283
(Statement of Christopher Ward – 7 October 2003); Brazil’s 18 November 2003 Further Rebuttal Submission,
para. 203.
36 Brazil’s 9 September 2003 Further Submission, para. 455 and Exhibit Bra-263 (“Argentina & Brazil
Sharpen Their Competitive Edge,” USDA, Agricultural Outlook, September 2001, p. 32).

Brazil’s Answer

23. As detailed in Brazil’s answer to Question 25 7(a)(ii) and (b), marketing loan, Step 2, crop
insurance, direct and counter-cyclical payment subsidies are mandatory within the traditional
mandatory/discretionary distinction. Thus, the Appellate Body decision in US – Corrosion-Resistant
Steel does not affect the legal standard and elements for Brazil’s per se claims against those subsidy
programmes.
37

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

Brazil’s Answer

24. Brazil understands the ordinary meaning of “normative” to be “establishing a norm or
standard of; deriving from or implying a standard or norm; prescriptive”. 38 In the sense of the term
used by the Appellate Body in US – Corrosion-Resistant Steel , the US statutes and regulations
summarized in paragraphs 415 and 423 of Brazil’s 9 September Further Submission39 are “normative”
because they establish (a) obligations for US offici als to make payments, and (b) legal rights for
eligible producers, users, and exporters to receive the payments. As used by the Appellate Body, the
term “normative” includes as a subcategory the gr oup of measures that are mandatory, within the
meaning of the traditional mandatory/discretionary distinction.

25. The United States has acknowledged that the “statutory authority for marketing loan
payments, step 2 payments, and counter-cyclical pa yments does not provide the Secretary with the
authority to arbitrarily decline to make these payments to qualified recipients”.
40 In addition, the
direct payment provisions of the 2002 FSRI Act similarly provide that “payment [is] required” and the
“Secretary shall make direct payments to producers on farms for which payment yields and base acres
are established”.
41 Finally, the crop insurance payment provisions of the 2000 ARP Act also create
“norms” in the form of mandated payments of subsidies for “catastrophic risk protection” and
“alternative catastrophic covera ge” that “shall” be provide d to all eligible producers. 42 Thus, the
statutory and regulatory provisions mandating payments for each of these five types of subsidies are,
by any reasonable definition, “normative” measures.

26. The Panel asks further whether Brazil’s r esponse differs depending on whether the payments
are dependent upon market price conditions. The answer is “no”.

27. As Brazil has argued before, the fact that marketing loan, counter-cyclical and Step 2
payments may not be made due to higher prices does not mean that these subsidy programmes are not
mandatory.
43 The focus for deciding whether a measure is mandatory or discretionary is on whether it

37 While a per se claims against non-mandatory measures under Article 5(c) and footnote 13 of the
SCM Agreement seems possible, the Panel is not faced with such a situation in this case, as all the measures
challenged by Brazil are, in fact, of a mandatory nature.
38 New Shorter Oxford Dictionary, 1993 edition, p. 1941.
39 Each of these statutory and regulatory provisions were discussed in more detail in paragraphs 312-
341 of Brazil’s 9 September 2003 Further Submission.
40 US 27 October 2003 Answer to Question 162, para 95.
41 Brazil’s 9 September 2003 Further Submission, para. 333 citing Section 1103(a) of the 2002 FSRI
Act.
42 Brazil's 9 September 2003 Further Submission, para. 319 citing Section 508(b)(1), (2), and
508(c)(1)(A) of the 2000 ARP Act.
43 Brazil’s 7 October 2003 Oral Statement, paras. 50-51.

provides government officials with the discretion to implement the measure in a WTO-consistent
manner.
44 But the terms of the statutes/regulations provide no discretion or flexibility to any US
Government official when low prices trigger the required marketing loan and counter-cyclical
payments or when high prices lead payments to phase out temporarily. Rather, price levels are an
eligibility condition for payment, similar to cond itioning eligibility of a producer for contract
payments on his not growing fruits and vegetables.

28. Objective conditions, such as market price m ovements, or objective eligibility criteria are not
appropriately considered in determining whet her a measure gives an implementing official
“discretion” to act in a WTO-consistent fashion. For example, the FSC measure payments were only
available where the income concerned was of fore ign origin. Despite the fact that non-foreign
sourced income would thus be excluded from FSC benefits, the measure was still found to threaten
the circumvention of export subsidy requirements. Similarly, Step 2 payments are only available if an
exporter is regularly engaged in the business of exporting upland cotton. The fact that a USDA
official cannot legally make a Step 2 payment to a non-eligible exporter does not make the Step 2
programme “discretionary”. And the fact that no marketing loan payments are available for upland
cotton when the adjusted world price exceeds 52 cents per pound does not mean that the billions of
dollars of payments made dur ing MY 1999-2002, when prices were below that level, were
“discretionary”.

29. The United States argues that measures are “discretionary” if there are any conditions
attached to payments – regardless of whether th e executive official is permitted to exercise any
discretion in refusing to make the payment. Such an interpretation would read out any meaning to the
“mandatory/discretionary” distinction. Of course, at some level of abstraction, it is possible to create
scenarios under which subsidies might not be paid. For example, the US Congress could decide to
impose actual limits on CCC funding or change the 2002 FSRI Act to include a cotton “circuit-
breaker” provision to limit cotton payments. Bu t these theoretical possibilities do not make the
existing mandatory text of the 2002 FSRI and 2000 ARP Act discretionary.

30. However, even if these existing texts were not mandatory on their face (which they are), the
US – Corrosion-Resistant Steel decision teaches that the Panel must give weight to the long-term
application of the measure to determ ine its normative character. The fact that billions of dollars in
marketing loan, Step 2, counter-cyclical and direct payment were paid to US upland cotton producers,
users and exporters of upland cotton over the past four years is highly relevant evidence for that
determination. So is the fact that billions more will be paid before the 2002 FSRI ends in MY 2007.
The provisions of these programmes have never been applied in a “discretionary” manner. Not a
single eligible upland cotton farmer, user or exporter has been denied payment under these
programmes by USDA officials. This is because th ere is simply no discretion vested in any US
official to decide, independent of any objective ma rket conditions or eligibility criteria, not to make
these payments. Therefore, they are mandatory within the meaning WTO/GATT precedent, including
the US – Corrosion-Resistant Steel decision.

 (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

Brazil’s Answer

31. With respect to the Panel’s question, Braz il does not believe that there is any difference
between the “subsidy programmes” and the “legal/regulatory provisions” for the grant or maintenance
of the subsidies.

44 Appellate Body Report, US – 1916 Act, WT/DS132/AB/R, para. 100.

32. With respect to Brazil’s “ per se ” claim, it challenges as “mandatory” the legal/regulatory
provisions for the grant or maintenance of the subsidies.45

33. Brazil’s “threat of serious prejudice” claim also challenges as “mandatory” the
legal/regulatory provisions for the grant or maintena nce of the subsidies. However, in this claim
Brazil is not challenging the text of these provisions in the traditional “ per se” sense, but rather under
the rationale of the EC – Sugar Exports precedent. Under this claim, the mandatory nature of the
largely unlimited subsidies required to be provided in MY 2003-2007 under the 2002 FSRI Act and
the 2000 ARP Act (and implementing regulations) is key evidence demonstrating an ongoing,
significant threat of significant price suppression and increased and inequitable US world market
shares in the period MY 2003-2007.

34. In Brazil’s view, a “threat of serious prejudice” claim is, in the Panel’s word, “something
else” – a sui generis claim. Brazil considers that the Appellate Body was advising against slavish
adherence to the “ per se ” and “as applied” labels – intim ately related to the traditional
mandatory/discretionary distinction – when it cautioned in US – Corrosion Resistant Steel “against
the application of this distinc tion in a mechanistic fashion”.
46 If a claimant proves the elements of a
threat claim, as set out in EC – Sugar Exports and US – FSC , it succeeds on the merits, regardless
whether the claim is labelled “ per se ” or “as applied” – terms which are not themselves found in
Part III of the SCM Agreement.

35. In the case of a “threat” claim, this note of caution is particularly apt. In proving its threat of
serious prejudice claim, Brazil has followed the rationale in EC – Sugar Exports and US – FSC,
demonstrating the “mandatory” nature of the legal/regulatory instruments by which the subsidies are
paid, together with the unlimited am ount of products that may receive the subsidies, and the extent to
which those legal/regulatory instruments fail to stem or control the flow of the subsidies.
47 Brazil has
backed up this evidence with historical data rega rding the unlimited way in which the legal/regulatory
instruments have been applied to grant payments to US upland cotton farmers during the period MY
1999-2002.

36. This data gives context to the nature and extent of the threat posed by the mandatory
legal/regulatory instruments at hand. The data is critical, because it demonstrates that even if the
measures are not mandatory (which they are), the US authorities have always applied the measures in
a way that would cause serious prejudice. Since payments have never been withheld, the data
demonstrates, at the very least, that the US author ities treat the measures as “normative”, as that term
was used by the Appellate Body in US – Corrosion Resistant Steel.
48

37. Brazil turns now to its claims regarding the three CCC export credit guarantee programmes.
As discussed in Brazil’s response to question 257(a )(i), Article 10.1 prohibits circumvention, and the
threat of circumvention, of export subsidy reduc tion commitments. As discussed above, Brazil has
demonstrated actual circumvention with respect to both unscheduled products and at least one
scheduled product. This is somewhat akin to an “as applied” claim against guarantees issued under
the CCC programmes. It is therefore not releva nt to this claim whether the CCC programmes are
mandatory or discretionary.

38. Brazil has also demonstrated that the three CCC programmes pose a threat of circumvention.
Brazil’s threat of circumvention claims are ag ainst the programmes as such. With respect to
unscheduled products, it constitutes threat of circumvention to provide any export subsidies for

45 Brazil’s 9 September 2003 Further Submission, paras. 422-423.
46 Appellate Body Report, US – Corrosion-Resistant Steel, WT/DS244/AB/R, para. 93.
47 Brazil refers the Panel to the additional discussion regarding the mandatory nature of the US
measures and Brazil’s threat of serious prejudice claim in its Answer to Question 257(a)(ii) supra.
48 Appellate Body Report, US – Corrosion-Resistant Steel, WT/DS244/AB/R, para. 93.

unscheduled products. Under US – FSC , it does not appear to be relevant to this claim whether the
CCC programmes are mandatory or discretionary. W ith respect to unscheduled products, the test
under Article 10.1 is whether export subsidies are made available to those products. With respect to
scheduled products, the test under Article 10.1 is also not whether the CCC programmes are
“mandatory” as opposed to “discretionary”. Rather, the question set out in US – FSC is whether the
CCC can “stem[], or otherwise control[], the flow of” CCC export credit guarantees. Brazil has
demonstrated that CCC cannot do so.

39. Brazil turns now to its claims under Articles 1. 1 and 3.1(a) of the SCM Agreement, which are
against the CCC programmes themselves. Brazil has demonstrated that the CCC programmes confer
“benefits” per se, within the meaning of Article 1.1(b) of the SCM Agreement (as well as that they are
financial contributions and are de jure contingent on export). Brazil has demonstrated that every time
a CCC guarantee is issued, a benefit is conferred per se. This is effectively the equivalent of saying
that the CCC programmes themselves “mandate” a vi olation, under the traditional meaning of the
mandatory/discretionary principle.

40. Finally, Brazil’s claims under item (j) of the Illustrative List of Export Subsidies are both
against guarantees granted under the three CCC programmes, and against the CCC programmes
themselves. First, Brazil has demonstrated that, retrospectively, costs and losses incurred by the
programmes exceeded premiums collected over a 10-year period. This is somewhat akin to an “as
applied” claim against guarantees issued under the CCC programmes. It is therefore not relevant to
this claim whether the CCC programmes are mandatory or discretionary. Second, Brazil has
demonstrated that, looking forward, premium rat es for the CCC programmes, and not just premiums
collected, do not and will continue not to meet costs because they do not, and are not adjusted to,
offset credit risks, and are, further, capped at one percent.
49 As statements by USDA’s Office of the
Inspector General and the US General Accounti ng Office demonstrate, the CCC programmes do not
have the flexibility under US law to offset credit ri sks and meet costs. This is effectively the
equivalent of saying that the CCC programmes themselves “mandate” a violation, under the
traditional meaning of the mandatory/discretionary principle.

(d) Does the "requirement" upon the CCC to make available "not less than" $5.5 billion
annually in guarantees have a normative character and operation? (see, e.g. Brazil's
response to Panel Question 142; Exhibit BRA-297, 7 USC 5641(b)(1); 7 USC 5622(a) &
(b); paragraph 201 of US 18 November furt her rebuttal submissions). Is this
requirement "mandatory"? If so, how does the CCC have "discretion" not to make this
amount of guarantees available in a given year? USA

Brazil’s Comment

41. Brazil offered the evidence mentioned by the Panel (as well as evidence regarding CCC’s
obligation to make available an a dditional annual amount of at least $1 billion in direct credits or
guarantees for exports to “emerging markets”
50) to demonstrate, with r espect to scheduled products,
its threat of circumvention claim under Article 10.1 of the Agreement on Agriculture. Brazil has
already noted that the test under Article 10.1 is not whether the CCC programmes are “mandatory” as
opposed to “discretionary”. Rather, to determine whether CCC export credit guarantees for scheduled

49 For this reason, Brazil does not agree with the United States that an item (j) analysis necessarily
“requires a certain retrospection” (US 22 December 2003 Answers to Questions, para. 102).
50 See Exhibit Bra-366 (7 U.S.C. § 5622 note, “Promotion of Agricultural Exports to Emerging
Markets, para. (a) (“The Commodity Credit Corporation shall make available for fiscal years 1996 through 2002
not less than $1,000,000,000 of direct credits or export credit guarantees for exports to emerging markets under
section 201 or 202 of the Agricultura l Trade Act of 1978 (7 U.S.C. 5621 and 5622), in addition to the amounts
acquired or authorized under section 211 of the Act (7 U.S.C. 5641) for the programme.”)). See also Exhibit
Bra-367 (Section 3203 of the 2002 FSRI Act (extending mandate to 2007)).

products threaten to lead to circumvention of th e US export subsidy reduction commitments, the test
set out by the Appellate Body in US – FSC is whether the CCC can “stem[], or otherwise control[],
the flow of” CCC export credit guarantees. Brazil has demonstrated that CCC cannot do so.

(e) Does the US agree that, under the Budget Enforcement Act of 1990, the Office of
Management and Budget classifies the export credit guarantee programmes as
"mandatory" (see Brazil's response to Panel Question 142, para. 89)? Does this exempt
the programmes from the requirement to receive new Congressional budget authority
before it undertakes new guarantee commitments (e.g. Exhibit BRA-117 (2 USC
661(c)(2))? USA

Brazil’s Comment

42. As noted in Brazil’s response to question 25 7(a)(i), Brazil has provided evidence that the
CCC programmes are “mandatory,” within the meani ng of that term under US law (although that is
not to say that the CCC programmes are not al so mandatory, within the meaning of WTO/GATT
law).

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

Brazil’s Answer

43. Brazil appreciates the opportunity to describe to the Panel the methodology that it will apply
to the data, should the United States produce it on 20 January 2004. As the Panel noted in its
12 January Communication, the United States faile d on 18/19 December 2003 to comply with its
obligation to provide the requested data in a non- “scrambled” form. Therefore, Brazil is not in a
position to apply the methodology discussed below and to present its results to the Panel today. If the
United States does not produce non-scrambled and othe rwise complete data responsive to the Panel’s
request, on 28 January 2004, Brazil will provide further comments and make requests as appropriate.

44. Generally, Brazil’s methodology will calcula te the amount of expenditures that support
upland cotton production by examining farm-specific c ontract and planted acreage data. For each of
these farms, Brazil would calculate the amount of contract payments for each crop for which the
upland cotton farm has base acreage.
51 To that end, for each crop, the amount of contract payment
units (as provided by the United States 52) would be multiplied by the payment rate for the subsidy
programme (PFC, market loss assistance, direct and counter-cyclical payments) in the marketing year
in question.53 Brazil will allocate crop contract payments to the respective crop for which they are
made for each farm, up to the amount of acreage actually planted to that crop. For example, any
contract payment for an upland cotton base acre th at is actually planted to upland cotton is deemed

51 These crops include all crops that constitute programme crops for purposes of the PFC, market loss
assistance, direct and counter-cyclical payment programmes.
52 In case the United States does not provide the payments units with its 20 January 2004 data, they can
be easily calculated by multiplying the contract acreage fo r a crop with the payment yield for that crop. The
payments units are calculated as 85 percent of that figure.
53 Exhibit Bra-394 (Agricultural Outlook Tables, USDA, November 2003, Table 19 provides payment
rates for PFC, direct and counter-cyclical payments in a column called “income support rates” for marketing
years 1999-2002. However, rice payments for MY 2002 a ppear to be reported in er ror, since no rice counter-
cyclical payments were made. In fact, the full rice counter-cyclical payment was made in MY 2002 (see Exhibit
Bra-173 (Revised Estimate of Support Granted by Comm odity via Counter-Cyclical Payments)). The full rice
CCP is $1.65 (see Exhibit Bra-27 (“Side by Side Comparison of the 1996 and 2002 Farm Act, p. 2-5) report the
rice target price as $10.50 per cwt, th e direct payment rate as $2.35 per cwt and the loan rate as $6.50 per cwt,
resulting in a full CCP payment of $1.65 per cwt or $0.00748 per pound).

support to upland cotton. If non-upland cotton base acres on a farm are planted to upland cotton,
payments made for these base acres would also be deemed to constitute support to upland cotton.

45. Application of Brazil's methodology would require the writing of a simple computer
programme that calculates the contract payments th at constitute support to upland cotton for any farm
in the United States that receives contract payments and plants upland cotton. The individual farm
data would then be tabulated to calculate a tota l amount of expenditures provided in support of the
production of upland cotton.

46. Brazil provides below additional details concer ning its methodology. The data that has been
withheld by the United States will show farms with many different combinations of base acreage and
upland cotton plantings. There may be farms with more upland cotton base acres than planted acres,
or with less base acres than planted acres. There ma y be farms that plant only upland cotton, or farms
that have other programme crops as well. Finally, farms may have more or less crop base acreage
than they plant to programme crops. Brazil systematically presents below a number of sample farms
and illustrates how its allocation methodology will be applied to the actual data for each type of
farms.

47. In a first step, Brazil considers three general categories of upland cotton farms: (1) those with
fewer planted upland cotton acres than upland cotton base acres, (2) those with more planted upland
cotton acres than upland cotton base acres, and (3) those planting cotton with out any upland cotton
base acres.
54 The table below illustrates this for the three categories of farms:

Sample Farm No. Farm 1 Farm 2 Farm 3
Type of Cotton Farm Farm With Cotton
Plantings Below
Cotton Base
Farm With Cotton
Plantings Exceeding
Cotton Base
Farm With Cotton
Plantings But No
Cotton Base
Cotton Base 100 acres 100 acres 0 acres
Cotton Plantings 50 acres 150 acres 100 acres
Payments Allocated In
A First Step
Payments for 50
Cotton Base Acres
Payments for 100
Cotton Base Acres
No Payments for
Cotton Base Acres

Sample Farm 1 plants 50 acres of its 100 upland cotton base acres to upland cotton. Thus, any
payments for these 50 upland cotton base acr es constitute support to upland cotton. 55 Since contract
payments for all acres planted to upland cotton are allocated therewith, the calculation ends for this
farm (and any farm in a similar position). Any pa yments associated with the other 50 upland cotton
base acres are not considered, as they do not cons titute support to upland cotton. Sample Farm 2
plants 150 acres of upland cotton, but has only 100 acres of upland cotton base. The entire upland
cotton base payments, therefore, constitute support to upland cotton. Sample Farm 3 plants 100 acres
of upland cotton, but has no upland cotton base. No upland cotton base payments can be allocated in
this case. Thus, in this overly simple methodology, support to upland cotton would be calculated only
by adding up the amount of upland cotton payments received on land that currently produces upland
cotton. However, Brazil believes the Panel should also include as support to upland cotton contract
payments on non-upland cotton base acreage that is cu rrently planted to upland cotton. For example,
for Sample Farms 2 and 3 above, for which payments for less upland cotton acres than actually
planted were allocated in this first step, additiona l contract payments made for other contract crop
base could be allocated as support to upland cotton in a second step, provided they are available on

54 In later steps, Brazil will discuss what happens when the farms have other crop contract payment
base and how this may be allocated.
55 The amount payments results from multiplying the pa yment rate for the contr act crop, including for
upland cotton, by the amount of base acres involved. The respective contract payment amounts to 85 per cent of
this figure. Payment rates are published by USDA, see Exhibit Bra-394 (Agricultural Outlook Tables, USDA,
November 2003, Table 19).

the farm. These additionally allocated contract payments stem from contract payments made for other
crops and not allocated to these other crops.

48. However, as with upland cotton contract paymen ts, any contract payments for other crop base
would be primarily assigned as support to the prod uction of those crops. As with upland cotton
contract payments, any other programme crop base payments are treated as support to those crops up
to the amount of base acreage that is actually plante d to the respective programme crop. Payments on
any further base acreage for those programme crops ar e allocated to the crops for which planted acres
exceed base acres. The following table illustrates this for Sample Farm 4:

Sample Farm 4
Crop Cotton Rice Corn
Crop Base 100 acres 100 acres 100 acres
Crop Plantings 160 acres 40 acres 100 acres
Crop Base Allocated as
Support for the Crop in
Question
100 acres 40 acres 100 acres
Remaining Crop Base
Available for
Allocation
0 acres 60 acres 0 acres
Crop Plantings To
Which Additional
Payments Will Be
Allocated
60 rice acres 0 acres 0 acres

Sample Farm 4 plants three crops (upland cotton, ri ce and corn) having 100 base acres for each crop.
All 100 corn base acres are planted to corn and, thus , any corn contract payments made for the corn
base constitute support to corn. However, only 40 of the 100 rice base acres are planted to rice and,
consequently, only payments for those 40 rice base acres constitute support to rice. Sample Farm 4
plants 160 acres of upland cotton, but has only 100 upland cotton base acres. Thus, all payments on
the entire 100 upland cotton base acres represent support to cotton. In addition, payments for the 60
rice base acres not planted to rice but to upland cotton also represent support to upland cotton.

49. Sample Farm 4 was a farm for which the tota l base acreage and the total acreage planted to
programme crops were equal. However, there may be instances in which farms plant more (or less)
acreage to programme crops than they used to do in the past establishing their base acreage.

50. The following two tables explain how Brazil’s methodology addresses the issue of farms that
plant more acreage to programme crops than they have base acreage (Sample Farm 5) and farms that
plant less acreage to programme crops than they have base acreage (Sample Farm 6).
56 In Brazil’s
methodology, payments available for allocation – i.e., not allocated to the programme crop itself – are
pooled and allocated proportionally to the remaining programme crop acreage.57 Brazil’s approach of
pooling payments from additional base acres not planted to the respective programme crop and
allocating these payments proportionally as support to crops, for which plantings exceeds base
acreage, ensures that a single dollar is not allo cated to two different crops, resulting in double

56 Brazil exemplifies the principle for farms with less upland cotton base than upland cotton plantings,
but the same principle applies to farms without any upland cotton base.
57 Since the United States has not provided the data necessary to do this allocation, Brazil has no
information on how often such situations actually occur. However, the record strongly suggests that not many
farms would be able to plant more program crops than they have base acreage. In particular for upland cotton,
Brazil has demonstrated that it is not economically possible to produce this crop without contract payments. See
inter alia Brazil’s 2 December 2003 Oral Statement, paras. 26-27 and Exhibit Bra-353 (Cumulative Loss From
Upland Cotton Production MY 1997-2002 Without Contract Payments).

counting.
58 It also ensures that each contract paymen t dollar is allocated to a programme crop, as
exemplified by the calculations for Sample Farms 5 and 6 below.

51. The first table shows the allocation of contr act payments on Sample Farm 5, a farm with
fewer planted (370 acres) than base acres (400 acres).

Sample Farm 5
Crop Cotton Corn Wheat Rice
Crop Base 100 acres 100 acres 100 acres 100 acres
Crop Plantings 140 acres 120 acres 40 acres 70 acres
Crop Base
Allocated as
Support for the
Crop in Question
100 acres 100 acres 40 acres 70 acres
Remaining Crop
Base Available
for Allocation
0 acres 0 acres 60 acres 30 acres
Crop Plantings To
Which Additional
Payments Will Be
Allocated
40 acres 20 acres 0 acres 0 acres
Pooled Available
Crop Base
60 Wheat Base Acres and 30 Rice Base Acres
Allocated Share
of Payments on
Pooled Crop Base
40/60th or 2/3rd 20/60th or 1/3 rd 0 0
Allocation 100 Cotton Base
Acres and 2/3rd
of 60 Wheat and
30 Rice Base
Acres (40 and 20)
100 Corn Base
Acres and 1/3rd
of 60 Wheat and
30 Rice Base
Acres (20 and 10)
70 Wheat Base
Acres
30 $rice Base
Acres

52. The second table shows the allocation of contr act payments on Sample Farm 6, a farm with
more planted (410 acres) than base acres (400 acres).

58 The United States alleges that Brazil’s 14/16 th methodology would allocate the same contract
payments to two different crops resulting in double counting ( see e.g. US 2 December 2003 Oral Statement,
para. 27). The US claim about double counting by Brazil originates in an entirely erroneous understanding of
Brazil’s 14/16th methodology. As explained many times, Brazil used this methodology only as a proxy, since
the United States refused to provide the very data th at would allow the calculati on of the exact amount of
support to upland cotton from contract payments. It makes the assumption that for any acre planted to upland
cotton an average contract payment in the amount of an upland cotton contract payment is received.

Sample Farm 6
Crop Cotton Corn Wheat Rice
Crop Base 100 acres 100 acres 100 acres 100 acres
Crop Plantingq 125 acres 125 acres 80 acres 80 acres
Crop Base
Allocated as
Support for the
Crop in Question
100 acres 100 acres 80 acres 80 acres
Remaining Crop
Base Available
for Allocation
0 acres 0 acres 20 acres 20 acres
Crop Plantings To
Which Additional
Payments Will Be
Allocated
25 acres 25 acres 0 acres 0 acres
Pooled Available
Crop Base
20 Wheat Base Acres and 20 Rice Base Acres
Allocation 100 Cotton Base
Acres and 1/2 of
20 Wheat and 20
Rice Base Acres
(10 and 10)
100 Corn Base
Acres and 1/2 of
20 Wheat and 20
Rice Base Acres
(10 and 10)
80 Wheat Base
Acres
30 Rice Base
Acres

53. In both cases, the contract payments on wheat and rice base acres that are not allocated to
production of these crops (as current plantings are below the base acreage) are pooled. The resulting
amount of contract payments is distributed as support to upland cotton and corn with the share of both
crops corresponding to the ratio of plantings to which additional payments are allocated.
59

54. This same principle would be applied for farms that have no upland cotton base acreage. For
these farms, contract payments would be allocated to upland cotton solely from the pool of payments
made on crop base not planted to the respective programme crop. This is illustrated in the table below
(Sample Farm 7).

Sample Farm 7
Crop Cotton Rice Corn
Crop Base 0 acres 100 acres 100 acres
Crop Plantings 100 acres 50 acres 50 acres
Crop Base Allocated as
Support for the Crop in
Question
0 acres 50 acres 50 acres
Remaining Crop Base
Available for
Allocation
0 acres 50 acres 50 acres
Pooled Available Crop
Base
50 Rice Base Acres and 50 Corn Base Acres
Crop Plantings To
Which Additional
Payments Will Be
Allocated
50 Rice Base Acres
and 50 Corn Base Acre
0 acres 0 acres

59 Additional payments will only be allocated to planted crop acres exceeding the amount of base
acreage.

55. For Sample Farm 7 with no upland cotton base but 100 acres of upland cotton plantings,
contract payments would be allocated from the rice and corn base not allocated to these crops. In this
case payments on 50 rice and 50 corn base acres are a llocated to upland cotton. On average, the per-
acre payment from those crop base acres is similar to the amount of upland cotton base acre
payments.

ANNEX I-11

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

20 January 2004

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.

(d) Does the "requirement" upon the CCC to make available "not less than" $5.5 billion
annually in guarantees have a normative charact er and operation? (see, e.g. Brazil's response to
Panel Question 142; Exhibit BRA-297, 7 USC 5641(b)(1); 7 USC 5622(a) & (b); paragraph 201
of US 18 November further rebuttal submissions) . Is this requirement "mandatory"? If so,
how does the CCC have "discretion" not to make th is amount of guarantees available in a given
year? USA

1. With respect to the Panel’s first question, the United States notes that 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 instrume nt is a “measure” subject to challenge in dispute
settlement and that the Appellate Body distinguis hed this question from the separate question of
whether the instrument, if a measure, ma ndates a breach of a WTO obligation under a
“mandatory/discretionary” analysis.
1 The Appellate Body explicitly noted that it was not undertaking
a comprehensive examination of the relevance or si gnificance of that analysis and, indeed, simply
applied it. 2 An analysis of the normative character a nd operation of this “requirement” to make
available not less than $5.5 billion in guarantees is not necessary because the parties do not dispute
whether the “requirement” is a “measure.”

2. Under a “mandatory/discretionary” analysis, the relevant question would be not whether the
requirement to make available $5.5 billion in gua rantees per year is as such inconsistent with a
provision of the WTO agreements (since Brazil has not claimed that it is), but rather whether the
provisions establishing the export credit guarant ee programmes mandate a breach of any WTO
obligation. As we have explaine d, they do not. As an initial matter, the requirement that the CCC
“make available . . . not less than $5,500,000,000 in credit guarantees” does not mandate that the CCC
actually issue any particular level of credit guarantees. 3 This law merely requires that CCC “make
available” certain guarantees; the actual issuance of guarantees, however, is within the discretion of
the Commodity Credit Corporation, which “may guara ntee the repayment of credit made available to

1 Appellate Body report, United States - Sunset Review of Anti-Dumping Duties on Corrosion-Resistant
Carbon Steel Flat Products from Japan (“US -Sunset Review) , WT/DS244/AB/R, adopted 9 January 2004,
paras. 78, 81-82, 89, and 93.
2 US Sunset Review, paras. 93, 156, and 172-174.
3 As the United States has previously noted, except for programme year 1992, CCC has never issued
$5.5 billion in guarantees in any year during the period 1992 to the present. Sales registrations have been as low
as $2.876 billion for programme year 1997 and have generally hovered in the range of $3.0 billion - $3.2 billion.
Further Rebuttal Submission of the United States (18 November 2003), para. 201; US Further Submission
(30 September 2003), para. 148 and accompanying table entitled CCC Export Credit Guarantee Program Levels,
Annual President’s Budgets and Actual Sales Registrations, Fiscal Years 1992-2004.

finance commercial export sales of agricultural commodities”.
4 The statute makes clear that “[e]xport
credit guarantees issued pursuant to this section shall contain such terms and conditions as the
Commodity Credit Corporation determines to be necessary”.5

3. The United States has elsewhere noted the various discretionary elements in the operation of
the programme that tamp down the actual issuan ce of guarantees. These include the regulatory
authorities permitting non-issuance of guarantees with respect to any individual application for an
export credit guarantee or to suspend the issuance of export credit guarantees under any particular
allocation; limitations on commodities with respect to which guarantees may be made available, total
guarantee value for individual commodities, destinati on, time within which export must occur, and
internally established exposure limits applicable to individual bank obligors.
6

4. Furthermore, and more importantly, Brazil’s own approach would require a showing that the
programmes mandate that the premium rates will be insufficient to cover long-term operating costs
and losses of the programmes. Brazil has not made such a showing, for the simple reason that the
programmes do not so mandate. The Commodity Credit Corporation (“CCC”) has discretion
concerning numerous aspects of any guarantees it ma y issue, such as the destinations, types of
commodities, and length of term of the guarantee. All of these aspects could affect the question of the
long-term operating costs and losses of the programm es. For example, the credit risk involved in
some destinations may be less than for others. Similarly, the risk associated with a guarantee of credit
extended for one year may be less than for credit extended for three years.

5. Thus, while the provisions establishing the export credit guarantee programmes are measures,
they do not mandate an inconsistency with any WT O obligation. Putting aside the US argument that
export credit guarantees are not subject to export subs idy disciplines by virtue of Article 10.2 of the
Agreement on Agriculture until Members conclude their ongoing negotiations and agree on such
disciplines, there is no basis to presume, on the basis of the law itself, that the export credit guarantee
programmes provide export subsidies and threaten to lead to circumvention of US export subsidy
reduction commitments.
7 Because the CCC retains the discretion to issue particular guarantees and
attach terms and conditions as set out above, the statute alone does not allow a presumption that
premium rates will be insufficient to cover long-te rm operating costs and losses of the programmes.
Thus, Brazil’s argument that the CCC is mandated to “make available” $5.5 billion in export credit
guarantees cannot alter the fact that the CCC has discretion to control the guarantees actually provided
and the terms of those guarantees; as a result, no WTO inconsistency is mandated.

(e) Does the US agree that, under the Budget Enforcement Act of 1990, the Office of
Management and Budget classifies the export credit guarantee programmes as "mandatory"
(see Brazil's response to Panel Question 142, para. 89)? Does this exempt the programmes from
the requirement to receive new Congressional budget authority before it undertakes new
guarantee commitments (e.g. Exhibit BRA-117 (2 USC 661(c)(2))? USA

6. The Budget Enforcement Act of 1990 (“BE A”) divides spending into two types:
“discretionary” spending and “direct” spending. 8 “Discretionary” spending means budget authority

4 7 U.S.C. 5622(a)(1), (b); see also id. 5622(k) (imposing requirement that certain percentages “of the
total amount of credit guarantees issued for a fiscal year [be] issued,” not merely made available, with respect to
certain products) (italics added).
5 7 U.S.C. 5622(g).
6 US First Written Submission (11 July 2003), fn. 134; 7 C.F.R. Sections 1493.10(d), 1493.40(b)
(Exhibit US-6); US Answer to Panel Question 5 (11 August 2003), para. 12 (Exhibit US-12); US Rebuttal
Submission (22 August 2003), paras. 180-182; US Further Submission (30 September 2003), paras. 153-156;
US Answer to Panel Question 142 (27 October 2003), paras. 56-57.
7 See Brazil’s Answer to Question 142 from the Panel, para. 88 (27 October 2003).
8 See OMB Circular A-11 (2003), Section 15: Basic Budget Laws (available at:
http://www.whitehouse.gov/ omb/circulars/a11/current_year/s15.pdf).

controlled by annual appropriations acts and the ou tlays that result from that budget authority.
“Direct” spending (commonly referre d to as “mandatory” spending) 9 means budget authority and
outlays resulting from permanent laws as well as “entitlement authority”.10 That is, whether spending
is “mandatory” for purposes of the BEA is an ac counting classification issue and does not control
whether a measure is “mandatory” for a mandatory / discretionary analysis for WTO purposes.

7. The Office of Management and Budget cl assifies the export credit guarantee programmes as
“mandatory” because the “budget authority is provided by law other than appropriation Acts”.11 As a
result, although the export credit guarantee progra mmes are exempt from the ordinary requirement
that budget authority be provided in advance through annual appropriations acts, they remain subject
to the continuing availability of budget authority in law other than annual appropriations legislation.
Of note, the Office of Management and Budge t has also recognized: “While mandatory and
discretionary classifications are used for measuring compliance with the BEA, they do not determine
whether a programme provides legal entitlement to a payment or benefit ”12 (italics added). Thus, the
classification of these programmes as “mandatory” for purposes of the BEA merely means that the
budget authority is not “discretionary”, th at is, “provided in appropriation Acts”. 13 This accounting
classification does not alter CCC’s considerable discretion in operating the pr ogrammes, as explained
in more detail in the US answer to Question 257(d), and does not make the programmes “mandatory”
for purposes of a mandatory/discretionary analysis.

9 See OMB Circular A-11 (2003), Section 20: Terms and Concepts (available at:
http://www.whitehouse.gov/omb/circulars/a11/current_year/s20.pdf).
10 This distinction between discretionary spending, mandatory direct spending and mandatory
entitlement spending is reflected in the applicable stat utory definitions. 2 U.S.C. Section 900(7) and 900(8)
provide:
“(7) The term ‘discretionary appropriations’ means budgetary resources (except to fund direct-spending
programmes) provided in appropriation Acts.

“(8) The term ‘direct spending’ means—
(A) budget authority provided by law other than appropriation Acts;
(B) entitlement authority; and
(C) the food stamp programme
11 2 U.S.C. 900(8).
12 OMB Circular A-11 (2003), Section 20.9 (emphasis added).
13 2 U.S.C. 900(7).