Document: WT/DS267/R/Add.3 Page J-1 ANNEX J ANSWERS OF THIRD PARTIES TO THE QUESTIONS FROM THE PANEL AND FROM OTHER THIRD PARTIES', AND COMMENTS THERETO Contents Page Annex J-1 Answers of Argentina to th e Panel's Questions Posed Following the
Date: 11 August 2003
Document codes: WT/DS267/R/Add.3
Complainant: Brazil
Respondent: U.S.
Third parties: Argentina, Australia, Benin, Canada, Chad, China, Taiwan, EU, India, New Zealand, Pakistan, Paraguay, Venezuela, Japan, Thailand
Dispute stage: Mutually Agreed Solution
Agreements cited: Art. 3, 5, 6  Subsidies and Countervailing Measures (SCM)Art. 3.3, 7.1, 8, 9.1, 10.1  AgricultureArt. III:4, XVI  GATT 1994

ANNEX J

ANSWERS OF THIRD PARTIES TO THE QUESTIONS
FROM THE PANEL AND FROM OTHER THIRD PARTIES',
AND COMMENTS THERETO

Contents Page
Annex J-1 Answers of Argentina to th e Panel's Questions Posed Following the
 First Session of the First Subs tantive Meeting (11 August 2003)
J-3
Annex J-2 Answers of Australia to the Panel's Questions Posed Following the
 First Session of the First Subs tantive Meeting (11 August 2003)
J-20
Annex J-3 Answers of Benin to the Panel's Questions Posed Following the
 First Session of the First Subs tantive Meeting (11 August 2003)
J-37
Annex J-4 Answers of Canada to the Panel's Questions Posed Following the
 First Session of the First Subs tantive Meeting (11 August 2003)
J-43
Annex J-5 Answers of China to the Pa nel's Questions Posed Following the
 First Session of the First Subs tantive Meeting (11 August 2003)
J-49
Annex J-6 Answers of the European Communities to the Panel's Questions
 Posed Following the First Session of the First Substantive Meeting
 (11 August 2003)
J-59
Annex J-7 Answers of New Zealand to the Panel's Questions Posed Following
 the First Session of the First Substantive Meeting (11 August 2003)
J-84
Annex J-8 Answers of Paraguay to the Panel's Questions Posed Following the
 First Session of the First Subs tantive Meeting (11 August 2003)
J-95
Annex J-9 Comments of Argentina (22 August 2003) J-97
Annex J-10 Comments of Australia (22 August 2003) J-99
Annex J-11 Comments of the European Communities (22 August 2003) J-101
Annex J-12 Answers of Argentina to th e Panel's Questions Posed Following the
 Resumed Session of the First Substantive Meeting
 (27 October 2003)
J-113
Annex J-13 Answers of Australia to th e Panel's Questions Posed Following the
 Resumed Session of the First Substantive Meeting
 (27 October 2003)
J-120
Annex J-14 Answers of Benin and Chad to the Panel's Questions Posed
 Following the Resumed Session of the First Substantive Meeting
 (27 October 2003)
J-126
Annex J-15 Answers of Canada to the Panel's Questions Posed Following the
 Resumed Session of the First Substantive Meeting
 (27 October 2003)
J-129
Annex J-16 Answers of China to the Panel's Questions Posed Following the
 Resumed Session of the First Substantive Meeting
 (27 October 2003)
J-132
Annex J-17 Answers of the European Communities to the Panel's Questions
 Posed Following the Resumed Session of the First Substantive
 Meeting (27 October 2003)
J-145
Annex J-18 Answers of India to the Panel's Questions Posed Following the
 Resumed Session of the First Substantive Meeting
 (27 October 2003)
J-151

Contents Page
Annex J-19 Answers of New Zealand to the Panel's Questions Posed Following
 the Resumed Session of the First Substantive Meeting
 (27 October 2003)
J-152
Annex J-20 Answers of Chinese Taipei to the Panel's Questions Posed
 Following the Resumed Session of the First Substantive Meeting
 (27 October 2003)
J-157

ANNEX J-1

REPLIES BY ARGENTINA TO QUESTIONS POSED
BY THE PANEL TO THE THIRD PARTIES
FIRST SESSION OF THE FIRST SUBSTANTIVE
MEETING OF THE PANEL

11 August 2003

Article 13 of the Agreement on Agriculture

1. Australia has argued that Article 13 of the Agreement on Agriculture is an affirmative
defence. How do you reconcile this with your view that the conditions in Article 13 are a
"prerequisite" to the availability of a right or pr ivilege? Australia Would other third parties
have any comments on Australia's assertion? 3
rd parties, in particular Argentina, Benin, China,
Chinese Taipei

 Argentina agrees with Australia that Artic le 13 of the Agreement on Agriculture is an
affirmative defence and that in these proceedings the United States therefore carries the burden of
proof on the question of whether its subsidies conform with the terms of Article 13.

 According to the Appellate Body in US-Shirts and Blouses:

 " … the burden of proof rests upon the party, wh ether complaining or defending, who asserts
the affirmative of a particular claim or defence. If that party adduces evidence sufficient to
raise a presumption that what is claimed is true, the burden then shifts to the other party, who
will fail unless it adduces sufficient evidence to rebut the presumption".1

 As stated by Brazil in Paragraph 112 of its first written submission, in the case of claims of
violation of the positive obligations of the WTO Agre ement, it is the complaining party that has the
burden of providing a prima facie case of violation. However, in the case of affirmative defences,
such as Articles XX and XI:2(c)(i), the Appellate Body itself established that it is only reasonable that
the burden of establishing such a defence should rest upon the party asserting it.
2

 According to the standards established by the Appellate Body,
3 Article 13 of the Agreement
on Agriculture is a provision in the nature of an a ffirmative defence. As such, it does not create new
obligations for Members, but limits the scope of certain provisions of the SCM Agreement and the
GATT 1994 subject to certain conditions. Nor does it alter the legal nature of Members' measures,
but simply permits Members to maintain those measures exempt from actions, if the measures meet
the conditions specified in Article 13(a), (b) or (c). As Argentina stated in its Third Party Initial
Brief:4

 "Argentina considers that the provisions c ontained in Article 13 of the AoA have an
exceptional nature. This would imply that the Member who alleges to be protected by the
Peace Clause has the burden of proving the fulfilm ent of its legal requirements. As long as

1 Appellate Body Report, US – Shirts and Blouses, WT/DS33/AB/R, p. 14, text at note 16.
2 Id., p. 16, text preceding note 23.
3 See paragraphs 113 to 116 of Brazil's First Written Submission.
4 Argentina's Third Party Initial Brief, paragraph 14.

the US does not demonstrate prima facie that it fulfils all the conditions that would allow a
protection against a claim by virtue of Article 13 of the AoA, the Panel should consider as
appropriate the claims under Article XVI of GATT 1994 or Articles 3, 5 and 6 of the SCM
Agreement".

 The exceptional nature of Article 13 of the Agreement on Agriculture (AoA) cannot change
merely because the conditions justifying it incl ude conformity with rules that create positive
obligations for Members (e.g. Article 6 of the AoA) . This legal nature comes out clearly in the
chapeau of Article 13 of the AoA which begins with the words " Notwithstanding the provisions of
GATT 1994 and the Agreement on Subsidies and Countervailing Measures … ", providing guidance to
the effect that the purpose of the entire Article 13 is to create exceptions, subject to certain conditions,
to the provisions of the GATT 1994 and the SCM Agreement.

 For example the party claiming defence under Article 13 of the AoA clearly must prove, inter
alia, that the domestic support measures which it cl aims should be exempt from actions based on
Articles 5 and 6 of the SCM Agreement and Article XVI of the GATT 1994 do not grant support to a
specific commodity in excess of that decided during the 1992 marketing year.

 If Article 13 of the AoA did not exist, a ny domestic support measure would unquestionably
be subject to actions based on Articles 5 and 6 of the SCM Agre ement and Article XVI of the
GATT 1994. The temporary defence accorded by Article 13 is an exception to that situation, and it is
therefore up to the claimant to demonstrate that the conditions permitting such defence have been
fulfilled.

 Mere reference, as one of the conditions jus tifying the measure, to conformity with a positive
obligation of the AoA, cannot alter the exceptional nature that informs all of Article 13.

Article 13(b) of the Agreement on Agriculture: Domestic Support Measures

2. Please explain the difference, if any, between the meaning of "defined" and the meaning
of "fixed" in the phrase "a defined and fixed ba se period" in paragraph 6(a) of Annex 2 of the
Agreement on Agriculture. 3
rd parties, in particular Australia, Argentina, Canada, EC, NZ

 Argentina considers that while the term "defined " refers to the need for the base period to be
clearly determined in the order authorising the paym ents, the term "fixed" refe rs to the need for the
base period to be identified in terms which prevent it from being shifted or modified a posteriori. The
term "fixed" indicates that the payments made in accordance with the criteria stipulated in
paragraph 6(a) must always rely on the same base period, and no change is possible.

3. Please explain the meaning of "a" in "a defined and fixed base period" in
paragraph 6(a) of Annex 2 of the Agreement on Agriculture , the meaning of "the" in "the base
period" in paragraphs 6(b), (c) and (d), and the difference between these and the phrase "based
on the years 1986-88" in Annex 3. 3rd parties, in particular Australia, Argentina, Canada, EC, NZ

 The purpose of the term "a" in paragraph 6(a) of Annex 2 of the Agreement on Agriculture is
to establish the obligation for Memb ers to identify a single period, which may cover two, three or
more years depending on the Member. For example the base periods established by the EU, the
United States and Argentina are different with respect to the payments referred to in paragraph 6(a) of
Annex 2. However, although different for each Member – the identification of the period is up to the
Members in that it is not specified in the text of the Agreement per se – the period must be identified
by the Member concerned and must remain constant. Otherwise, the choice of the word "a" in this
provision would be difficult to explain. If the negotiators of the AoA had not wanted the period to
maintain an identity over time, they would have so indicated by using a different preposition, for
example, "some" period, indicating that the period could be subject to a certain mobility.

 In the case at issue, the United States iden tified, for the purposes of paragraph 6(a) of
Annex 2, the period running from 1986 to 1988, as shown in document G/AG/AGST/USA on
pages 1-7, referred to in Part IV of the United States' Schedule of Commitments – Schedule XX.

 In paragraph 6(b), (c) and (d), Argentina understands the term "the
 base period" to refer to the
base period 1986-1988, the only base period identified in the AoA for domestic support (Annex 3).

 "The" base period refers to the base period 1986-1988, since there is no other period for
domestic support. Indeed, Article 1(a)(i) also refers to "the" base period, which is none other than the
period specified in Annex 3 of the AoA. Article 1( d)(i) and Article 1(h)(i) also mention "the" base
period.

 In other words, "a" base period is differen t from "the" base period. Moreover, the second
sentence of paragraph 5 of Annex 2 of the AoA re quires the adoption of "the" base period established
in paragraphs 6(b), (c) and (d), clearly reflecting this difference with paragraph 6(a).

 In the case of payments by the United States unde r paragraph 6 of Annex 2 of the AoA, this
distinction is irrelevant since "a" base period in the context of paragraph 6(a) and "the" base period of
paragraphs 6(b), (c) and (e) are the same - 1986-1988 - having been so defined by the United States in
its Schedule of Commitments.

4. How often can a Member define and fix a base period in accordance with paragraph 6
of Annex 2 of the Agreement on Agriculture? 3
rd parties, in particular Australia, Argentina, Canada,
China, EC, NZ

 It is Argentina's understanding that under paragraph 6 of Annex 2 of the Agreement on
Agriculture, for each programme a Member may onl y define and establish a base period once.
Otherwise, the term "fixed" would lose all of its relevance.

5. Do you agree that a payment penalty based on crops produced is "related to type of
production"? EC

6. Please explain the meaning of the word "criteria" in Article 6.1 and 7.1. What effect, if
any, does the use of the word "Accordingly" in paragraph 1 of Annex 2 of the Agreement on
Agriculture have on the meaning of the preceding sentence? 3
rd parties, in particular Australia,
Argentina, Canada, EC, NZ

 The word "criteria" in Article 6.1 and 7.1 signifies the parameters, rules or precepts which
serve to distinguish the domestic support measures that are not subject to reduction.

 In relation to the preceding sentence, the use of the word "accordingly" in paragraph 1 of
Annex 2 of the Agreement on Agriculture indicates that the basic criteria listed thereafter are a
corollary to the "fundamental principle" set forth in the preceding sentence. However, this does not

imply that the preceding sentence does not contain "stand-alone" obligations.

 On the contrary, the domestic support m easures for which exemption from the reduction
commitments is sought must conform to the two basi c criteria (set forth in paragraph 1(a) and (b)),
plus the policy-specific criteria and conditions set ou t in the subsequent para graphs of Annex 2, in
addition to which they must meet "the fundamental requirement
 that they have no, or at most minimal,
trade-distorting effects or effects on production". A measure which meets the tw o criteria set forth in
paragraph 1(a) and (b) plus the policy-specific cr iteria and conditions set out in the subsequent
paragraphs of Annex 2 may also violate the general principle. Any other interpretation would deprive

of any meaning the first sentence of paragraph 1 of Annex 2, which the text itself qualifies as a
"fundamental requirement".

7. Please explain the meaning of the words "the fundamental requirement" as used in
paragraph 1 of Annex 2 of the Agreement on Agriculture . 3
rd parties, in particular Australia,
Argentina, Canada, EC, NZ

 In Argentina's view, the words "the fundame ntal requirement" as used in paragraph 1 of
Annex 2 signify the establishment of a general mandatory condition governing the establishment and
application of any measure whose inclusion in the "Green Box" is claimed.

8. In your oral statement, you emphasize the u se of the word "criteria" in other parts of
the Agreement on Agriculture , as distinct from the reference to "fundamental requirement" in
the first sentence of paragraph 1 of Annex 2. Is it the case that sub-paragraphs (a) and (b) of
paragraph 1 of Annex 2 are also "criteria"? EC

9. If the first sentence of paragraph 1 of Annex 2 is a stand-alone obligation, does this
allow effects-based claims of non-compliance with Annex 2? If so, how does this affect the
purpose of Article 13(b)? 3
rd parties, in particular Australia, Argentina, Canada, EC, NZ

 The first sentence of paragraph 1 of Annex 2 of the AoA contains a stand-alone obligation.

 Since the first sentence of paragraph 1 of Anne x 2 imposes an obligation by requiring that the
measures for which exemption from a reduction commitment is claimed must, as a primary or
essential condition, be such that they do not artificia lly alter trade or production, it permits claims of
non-compliance with Annex 2 based on the effects of the domestic support measures, regardless of
whether they meet the basic criteria set out in th e second sentence of paragraph 1 and with the policy-
specific criteria and conditions set out in the rest of Annex 2.

 Otherwise, we would be exempting from the reduction commitments measures that might be
complying with the two basic criteria set forth in paragraph 1(a) and (b) of Annex 2 plus the policy-
specific criteria and conditions set out in the subsequent paragraphs of Annex 2 while at the same time
violating the general principle of meeting "the fundame ntal requirement that they have no, or at most
minimal, trade-distorting effects or effects on production."

 It might then be possible to evade conformity with the provisions of Article 6 of the AoA or
with the level of support to a specific commodity decided during the 1992 marketing year.

 The result could be to undermine the purpose of Article 13(b) of exempting from
countervailing duties or actions based on Article XVI .I or Articles 5 and 6 of the SCM Agreement
only those measures which comply with the conditions set forth therein.

10. If the first sentence of paragraph 1 of Annex 2 is not a stand-alone obligation, then must
new, non- or minimally trade-distorting measures that do not conform to the criteria listed in
Annex 2 be classified as non-Green Box? 3
rd parties, in particular Australia, Argentina, Canada.
EC, NZ

 Yes. Argentina considers that non- or minimally trade-distorting measures that do not
conform to the criteria listed in Annex 2 must be excluded from the Green Box. In other words, the
measures which satisfy the fundamental requirement of having no, or at most minimal, trade-
distorting effects or effects on production, but which do not meet the criteria established in
paragraph 1(a) and (b) of Anne x 2 and the policy-specific criteria and conditions set out in the
subsequent paragraphs of Annex 2, cannot be exempted from reduction commitments.

11. If the first sentence of paragraph 1 of Annex 2 expresses a general principle which
informs the interpretation of the criteria in Annex 2, please explain how this affects the
assessment of the direct payments programme's compliance with paragraph 6 of Annex 2. 3 rd
parties, in particular, Australia, Argentina, Canada, EC, NZ

 Argentina considers that there is a clear hier archy between the two provisions, in which the
principal obligation for Members is to ensure th at their support programmes, even if they could
qualify as decoupled support programmes under paragra ph 6 of Annex 2, do not have trade-distorting
effects or effects on production, as stipulated in paragraph 1 of the same Annex.

 Consequently, even if the Direct Payments programme complies with the requirements of the
second sentence of paragraph 1 of Annex 2, if it does not comply with the fundamental requirement
laid down in the first sentence, it cannot be considered a Green Box programme.

 Argentina agrees with Brazil's statement in pa ragraphs 183-191 of its first written submission
with respect to the strong production and trade-distorting effects of the Direct Payments programme.

12. Where does Article 13(b) requi re a year-on-year comparison? 3
rd parties, in particular
Australia, Argentina, Canada, China, EC, NZ

 As stated in paragraph 21 of its oral s ubmission, Argentina maintains that the domestic
support measures granted during any one of the mark eting years of the period covered between the
entry into force of the AoA in 1995 and the expiry of Article 13 on 31 December 2003 are relevant for
the purpose of determining conformity with Artic le 13(b), the text of which does not explicitly
establish the requirement of a year-on-year comparison.

 Thus, the excess support granted during any one of the years of the period of implementation
suffices to cancel the protection provided by the Peace Clause.

 Nor can a year-on-year comparison be infe rred from Article 13 or from its context.
Otherwise, at the beginning of each marketing year the Member that had exceeded the level of support
in the previous year would be covered by the Peace Clause once again and exempt from any claims.

 In practical terms, this interpretation woul d turn Article 13 protection into an absolute
defence, given the difficulty of challenging the le vel of support granted during the current marketing
year at the time of the complaint. If it were only possible to challenge the support granted during a
past marketing year independently of the support gr anted during the current year, what would be the
use of any successful claim under Articles 5 and 6 of the SCM Agreement? How would it be
possible, in that case, to eliminate the adverse effects of a subsidy already granted?

13. Does a failure by a Member to comply in a given year with either the chapeau of
Article 13(b) or the proviso in subparagraph (ii) of Article 13(b) impact its entitlement to benefit
in an earlier or a later year from the exem ption from action provided by Article 13(b)? 3
rd
parties, in particular Australia, Argentina, Canada, China, EC, NZ

 In Argentina's view, the failure by a Member to comply in a given year with either the
chapeau of Article 13(b) or the proviso in sub paragraph (ii) of Article 13(b) results in the loss of the
protection granted by the Peace Clause.

 Regarding the " chapeau" of Article 13(b): domestic support that does not conform to the
provisions of Article 6.1, for example distorting support in excess of the reduction commitment in
violation of Article 3.2 of the AoA, is outside the sc ope of Article 13(b). Indeed, that Article refers to
"domestic support measures that conform fully to th e provisions of Article 6 … ". Consequently,
domestic support of the kind referred to in Article 13(b) that does not conform to Article 6 does not

bear any relation to Article 13(b)(ii). Such suppor t is prohibited and does not enjoy the protection of
the Peace Clause.

 Regarding failure to comply with the proviso in Article 13(b)(ii): any failure to comply in
whatever year implies exclusion from the scope of Article 13(b) for all of the distorting domestic
support measures concerning the specific commodity in question.

14. Does a failure of a Member to comply with Article 13(b) in respect of a specific
commodity impact its entitlement to benefit in respect of other agricultural products from the
exemption from action provided by Article 13(b)? 3
rd parties, in particular Australia, Argentina,
Canada, China, EC, NZ

 In Argentina's view, failure by a Member to comp ly with Article 13(b)(i) and (ii) in respect of
a specific commodity does not impact its entitlement to benefit in respect of other agricultural
products from the exemption action provided by Article 13(b).

 However, failure to comply with the conditions laid down in the chapeau of Article 13(b)
i.e. failure of the domestic support to conform with the provisions of Article 6 of the AoA, could
result in exclusion from the protection offered by Ar ticle 13(b) in respect of domestic support granted
to all products, for example, if the domestic suppor t measure exceeds the level of the commitment in
the schedule of the Member concerned.

15. Is there any basis on which counter-cyclic al payments could be considered product-
specific? 3
rd parties, in particular Australia, Argentina, Canada, China, EC, NZ

 As stated in paragraph 8 of its Oral Submission, Argentina considers that " support to a
specific commodity " in Article 13(b)(ii) includes any domestic support measure that is not a Green
Box measure and that provides any identifiable suppor t to a commodity in particular, regardless of
whether the measure may provide support to a greater number of commodities.
5 In this respect,
counter-cyclical payments explicitly provide support to cotton (upland) as can be seen in the text of
the United States Farm Act of 2002 (2002 Farm S ecurity and Rural Investment Act, Title I,
Subtitle A, Exhibit US-1).

16. If the word "specific" were deleted from Article 13(b)(ii), would this change the
meaning of the subparagraph? 3rd parties, in particular Australia, Argentina, Benin, Canada, China,
EC, NZ

 The word "specific" is an adjective qualifying the noun "commodity". The adjective
"specific" does not qualify the support (the calculati on of which may or may not be product-specific,
as stated in paragraph 1 of Annex 3 of the AoA).

 If the word "specific" qualifying the noun "commodity" were not there, the text would no
longer have the precision that it currently has, although this does not mean that even then it could not
be interpreted as referring to any type of domestic support (regardless of whether it is categorized as
product-specific or non-specific under Annex 3 of the AoA).

17. What is the relevance, if any, of the concept of "specificity" in Article 2 of the
SCM Agreement and references to a "product" or "subsidized product" in certain provisions of
the SCM Agreement to the meaning of "support to a specific commodity" in Article 13(b)(ii)
Agreement on Agriculture? 3
rd parties, in particular Australia, Argentina, Canada, China, EC, NZ

5 In this respect, Argentina agrees with New Zealand: " … New Zealand sees no basis on which to
suggest that support to a specific commodity should be excluded simply because other commodities may receive
similar support". Third Party Submission of New Zealand, 15 July 2003, paragraph 2.23.

 In Argentina's view the concept of specific ity in Article 2 of the SCM Agreement is not
linked to the term "specific
 commodity" in Article 13(b)(ii) of the AoA. In Article 2 of the SCM
Agreement, the specificity is a characteristic of the subsidies (prohibited or actionable) covered by
the current SCM Agreement, while the specificity referred to in the phrase "specific commodity" is
characteristic of the commodity and not of the subsidy granted. The phrase "support to a specific
commodity" cannot be identified with "specific support to a commodity".

 The concept of "specificity" in Article 2 of the SCM Agreement is what indicates whether a
subsidy is subject to the provisions of Part II or to the provisions of Parts III or V of that Agreement.

18. Benin's oral statement considers the phr ase "support to a specific commodity" in
Article 13(b)(ii) of the Agreement on Agriculture . How does Benin believe that phrase is best
interpreted? Please substantiate your response, commenting on other submissions by parties
and third parties as you believe appropriate. Benin

19. Where does Article 13(b)(ii) require a year-on-year comparison? 3
rd parties, in particular
Australia, Argentina, Canada, EC, NZ

 Argentina submits that the domestic support measures granted in any of the marketing years
of the period covered between 1995 and 2003 are rele vant for the purposes of determining conformity
with Article 13(b)(ii), which does not explicitly require a year-on-year comparison.

20. Does Article 13(b)(ii) require a comparison of support granted with support decided?
How could such a comparison be made?

 In Argentina's view Article 13(b)(ii) requires a comparison of support granted with support
decided. Such a comparison is possible by making a calculation in terms of budgetary outlays in each
one of the periods in question (support granted in the implementation period as compared to support
decided during the 1992 marketing year).

21. Please comment on Brazil's assertion that the terms "grant" and "decided" in
Article 13(b)(ii) have broadly the same meaning. If so, why did the drafters not use the same
term? 3
rd parties, in particular, Australia, Argentina, Canada, China, EC, NZ

 According to the text of Article 13(b)(ii) the word " decided" signifies the decision to provide
payments for a specific commodity (including the revenue foregone under Article 1(c) of the AoA),
whether those payments are classified as product-sp ecific or non-specific, as well as other forms of
domestic support in monetary terms as set forth in Annex 3 of the AoA.

 The phrase " support decided during the 1992 marketing year " is necessarily linked to the
phrase "grant support" - indeed, there would be no b asis for comparison if in one case the support was
granted, while in the other case, the support was only planned. In other words, as indicated in the
reply to the preceding question, the Article 13(b)(ii) requirement necessarily involves a comparison of
domestic support measured in the same manner in each one of the periods in question, i.e. a
"comparison of the comparable".

 In principle, the comparison must be made be tween the support granted in any year of the
implementation period and the support "decided" during 1992. The support "decided during the 1992
marketing year" refers to a legislative or ad ministrative decision by a Member during the 1992
marketing year on the domestic support to be gran ted during the implementation period in terms of
budgetary outlays.

 Where no "decision" has been taken in terms of budgetary outlays during 1992, Argentina
understands that the only support that can be considered as "decided" during that marketing year is the
support granted during that year.

22. What is the meaning of "support" in Agreement on Agriculture 13(b)(ii)? Why would it
be used differently from Annexe 3, where it refers to total outlays? 3
rd parties, in particular,
Australia, Argentina, Canada, China, EC, NZ

 The "support granted" in each marketing year of the implementation period must necessarily
be linked to the budgetary outlays for those years.

 The term "support" used in Article 13(b)(ii) of the AoA refers to budgetary outlays for any
kind of support that is not Green Box. For ex ample, the term "support" could include assistance
granted by the State by foregoing tax revenue or writing off producers' debts.

23. Should support be compared under Article 13(b)(ii) in terms of unit of production or
total volume of support or both? 3
rd parties, in particular, Australia, Argentina, Canada, China, EC,
NZ

 Support should be compared under Article 13(b)(ii) in total monetary terms. In paragraph 16
of its oral submission, Argentina submits that the term "decided" in Article 13(b)(ii) should not be
interpreted as meaning that the rate per unit of production is the factor to be considered in determining
the amount of support granted. If the argument put forward by the United States were accepted, this
would enable an unlimited amount of domestic s upport to be granted for each product provided the
total AMS is not exceeded, since it would be covere d by Article 13. Thus, the amount of the AMS
could be granted to one or several products, provided its maximum bound level is not exceeded.

 The comparison must be made in terms of total value of support for a specific product,
comparing the levels for each marketing year subsequent to 1992 and up to 31 December 2003 with
the levels of support decided during the 1992 marketing year.

24. Please provide any written drafting history which could shed light on why the proviso
was added to what is now Article 13(b)(ii) of the Agreement on Agriculture and, in particular,
why the words "grant" and "decided" were used. EC

25. Please comment on an interpretation of the words "decided during" in Article 13(b)(ii)
that would read them as synonymous with the words "authorized during". 3
rd parties, in
particular Australia, Argentina, Canada, China, EC, NZ

 The term "decided during" in Article 13(b)( ii) refers to a decision made by the Member
granting the support during the 1992 marketing year w ith respect to the budgetary outlays that would
be made for domestic support, excluding Green Box.

 If there was no decision during the 1992 marketing year, the budgetary outlays effectively
made during that marketing year must be consid ered to constitute the support "decided during" the
1992 marketing year (i.e. if there is no express decisi on in this respect, we must fall back on what was
effectively disbursed which also, implicitly, represents a "decision").

26. Under Article 13(b)(ii), a comparison is required between support at different times.
One of the issues which is contested between the pa rties is whether the only later period that the
Panel can consider is the present one (i.e. the period underway at the time of the request for
establishment of the Panel). This argument is based on the present tense of the words "do not
grant" in the English text. The Panel asks whether there is any difference in the verb tense as

used in the Spanish-language text, or any other difference which might aid the Panel in
interpreting these words? Argentina, EC, Paraguay, Venezuela

 While it is true that in the English version of the Agreement on Agriculture, the verb tense
used in Article 13(b)(ii) is the present tense, as stat ed by the United States in paragraph 90 of its first
written submission ( … the proviso is written in the pr esent tense …), it should be stressed that in the
Spanish text, the present tense is clearly used in the subjunctive mode (" a condición de que no
otorguen ayuda … ")

 The expression " a condición de que" uses the subjunctive mode to indicate the conditional or
possible nature and expresses syntactic subordination.

 The use of the subjunctive mode in Article 13(b )(ii) is important, because in Spanish it is used
to express and form sentences in which the action remains in doubt, as opposed to the indicative mode
where the tenses always indicate that the action, concretely, is taking place, has taken place, or will be
taking place.

 The Spanish text coincides with the verb al tense used in the French version (" à condition que
ces mesures n'accordent pas"), in which the present subjunctive is also used.

 Consequently, Argentina does not agree with the United States' contention that the present
tense criterion in Article 13(b)(ii) implies that th e only support the Panel may consider is current
support.

27. If the 1992 "decision" led to or was the funding source for the money provided in 1992
and later years, is it the full amount of all that funding that constitutes the "support" decided in
1992? If the answer to this question is that it is the full amount of all the support provided
pursuant to the "decision" that must be taken in to account, must this be compared with the
total amount of support that will or might flow from the decision made in the more recent
period for the purposes of the comparison required under Article 13(b)(ii)? If a Member did
not make a "decision" (however that may be inte rpreted) in 1992 about "support", is it the case
that the Member has a zero base for the purpos es of the comparison required under Article
13(b)(ii)? EC

28. In paragraph 13 of Australia's oral statement, you state that a "question" is: "could
conditions of price competition for the purposes of a non-violation or impairment claim be
assessed solely on the basis of budg etary outlay figures, as argued by Brazil, or on the basis of a
rate of payment, as argued by the United States? In Australia's view, both factors put forward
by Brazil and the United States would properly form a part of that assessment, but not the
whole." Could you please clarify this statem ent (indicating other elements which would
complete the "whole" and explain its relevan ce for the purposes of our consideration of
Article 13 of the Agreement on Agriculture?) Australia, EC

Export Credit Guarantee Programme

29 (a) Is an export credit guarantee a financia l contribution in the form of a "potential
direct transfer of funds or liabilities (e.g. loan guarantee)" within the meaning of
Article 1.1(a)(1)(i) of the SCM Agreement? Why or why not? 3
rd parties, in particular, Argentina,
Canada, EC, NZ

 An export credit guarantee is a "financial contribution" in the form of a "potential direct
transfer of funds or liabilities" within the meaning of Article 1.1(a)(1)(i) of the SCM Agreement when
it involves the granting of a financial credit in conditions more favourable than those that can
normally be found on the market. Those conditions may contain all or some of the following

elements: lower interest rates, longer repaymen t terms for loans, lower down-payment requirement,
reduced frequency of payments per year and/or tota l or partial exemption from any fee or premium to
provide the US Government with adequate protec tion against potential flaws in its export credit
guarantee portfolio. This is confirmed in practic e by the fact that no company on the market is
prepared to provide coverage equivalent to the coverage accorded with the credit guarantees of the
Commodity Credit Corporation of the United States.

 Moreover, items (j) and (k) of the Illustrative List in (Annex 1) of the SCM Agreement set out
the circumstances in which this type of operation should be considered an export subsidy.

29. (b) How, if at all, would this be relevant to the claims of Brazil? 3
rd parties, in
particular, Argentina, Canada, EC, NZ

 It is relevant to the claims of Brazil in that the fact of being a "financial contribution" is the
first element of a prohibited export subsidy claim.

30. The Panel could arguably take the view that Articles 1 and 3 of the SCM Agreement
were relevant in assessing the WTO-consistency of United States export credit guarantees. The
Panel would therefore appreciate third party views on this situation, including with respect to
the viability of an a contrario interpretation of item (j) of the Illustrative List (as addressed in
paragraphs 180-183 of the United States' first written submission). 3
rd parties, in particular,
Argentina, Canada, EC, NZ

 As stated by the Appellate Body in US - FSC and in Canada - Dairy Products, the AoA does
not contain its own definition of a subsidy, and he nce we must turn to the SCM Agreement for the
context. The Appellate Body has also estab lished (FSC case) that export subsidies under
Article 3.1(a) of the SCM Agreement constitute export subsidies under the AoA.

 The relevance of Articles 1 and 3 of the SC M Agreement is therefore unquestionable when it
comes to evaluating the consistency of the export credit guarantees with WTO rules.

 Moreover, Annex I of the SCM Agreement identifies export subsidies by providing an
illustrative list thereof. In other words, a measure which constitutes an export subsidy classified in the
Illustrative List is per se a prohibited subsidy under Article 3.1(a) of the SCM Agreement. Obviously,
the "Illustrative" List in no way covers all me asures that could qualify as an export subsidy under
Article 3.1(a) of the SCM Agreement. As its name indicates, it is only an "illustrative" list and not an
exhaustive one.

 Now, footnote 5 in Article 3.1(a) of the SCM Agreement states that "measures referred to
" in
Annex I as not constituting export subsidies shall not be prohibited.

 There are two paragraphs in this Annex that refer to credit, guarantee or insurance
programmes: (j) and (k). There is a fundamental difference between the two. Item (k) explicitly
recognises that a measure, in the circumstances set forth in its second paragraph, shall not be
considered an export subsidy (see the last sentence of the second paragraph), fulfilling the
requirement set forth in footnote 5 to the SCM Agreement:

 (k) The grant by governments (or special ins titutions controlled by and/or acting under the
authority of governments) of export credits at ra tes below those which they actually have to
pay for the funds so employed (or would have to pay if they borrowed on international capital
markets in order to obtain funds of the same maturity and other credit terms and denominated
in the same currency as the export credit), or the payment by them of all or part of the costs
incurred by exporters or financial institutions in obtaining credits, in so far as they are used to
secure a material advantage in the field of export credit terms.

 Provided, however, that if a Member is a party to an international undertaking on official
export credits to which at least twelve original Members to this Agreement are parties as of
1 January 1979 (or a successor undertaking whic h has been adopted by those original
Members), or if in practice a Member applies the interest rates provisions of the relevant
undertaking, an export credit practice which is in conformity with those provisions shall not
be considered an export subsidy prohibited by this Agreement. (Emphasis added)

 Argentina does not agree with the a contrario interpretation provided by the United States in
paragraphs 180 to 183 of its submis sion, either with respect to the fi rst paragraph of item (k) or with
respect to item (j) of Annex I to the SCM Agreement, because unlike the final sentence of the second
paragraph of item (k), the text does not explicitl y recognize that the measure will not be an export
subsidy, and an a contrario interpretation that circumvents the test of Article of 3.1(a) of the
SCM Agreement is not possible.

 That is to say, even if a given credit, guarantee or insurance programme includes:

 - either, in relation to item (j), premium rates which are adequate to cover the long-
term operating costs and losses of the programmes;

 - or, in relation to the first paragraph of item (k), interest rates below the cost of funds
that are not used to secure a material advantage in the field of export credit terms,$

none of this in any way enables us to infer th at because they display either or both of these
characteristics, they should not be considered to be export subsidies if they meet the conditions set
forth in Articles 1 and 3.1(a) of the SCM Agreement.

 For the situation put forward by the United States to be possible, there would have to be a text
similar to the final sentence of the second paragrap h of item (k) which explicitly states that a given
measure is not considered to be an export su bsidy. Only then would footnote 5 of the
SCM Agreement become operational.

 Now, even if the appropriate language had been included in item (j) and the first paragraph of
the item (k) of Annex I of the SCM Agreem ent and footnote 5 were operational, an a contrario
interpretation would still be unacceptable because, in addition to the test of Article 3.1(a) of the
SCM Agreement, Members using such programmes must also comply with the AoA obligations, in
particular Articles 8, 10.1 and 10.3, without pr ejudice to the application of Article 3 of the
SCM Agreement to agricultural subsidies after the expiry of the Peace Clause in Article 13 of the
AoA. In other words, the absence in Article 1(e) of the AoA of a footnote such as footnote 5 of the
SCM Agreement precludes any a contrario interpretation in favour of users of export credits for
agricultural products. Furthermore, Article 10.3 of the SCM Agreement itself places on the user
Member the entire burden of proof that such programmes are not export subsidies.

31. If the Panel decides to refer to provisions of the SCM Agreement for contextual guidance
in the interpretation of the terms in Article 10 Agreement on Agriculture, should the Panel refer
to item (j) or Articles 1 and 3 of the SCM Agreement or both? 3
rd parties, in particular, Argentina,
Canada, EC, NZ

 If the Panel decides to refer to provisions of the SCM Agreement for contextual guidance, as
established by the Appellate Body, in the interpretation of the terms of Article 10 of the Agreement on
Agriculture (Prevention of Circumvention of Export Subsidy Commitments), the Panel should refer to
both: first of all to item (j) of Annex I ( Illustrative List of Export Subsidies ) of the SCM Agreement,
and subsidiarily to Articles 1 and 3 of the SCM Agreement. Naturally, if the Panel should conclude

that the challenged credit guarantees come under indent (j) of Annex I, it would have to conclude that
they violate Articles 1 and 3.1(a) of the SCM Agreement per se.

32. The Panel's attention has been drawn to Article 14(c) of the SCM Agreement (see third
party submission of Canada) and to the panel report in DS 222 Canada - Export Credits and
Loan Guarantees . How and to what extent are Article 14(c) of the SCM Agreement , and the
cited panel report, relevant to the issue of wh ether or not the United States export credit
guarantee programmes confer a "benefit"? What would the appropriate market benchmark be
to use for any comparison? Please cite any other relevant material. 3
rd parties, in particular,
Argentina, Canada, EC, NZ

 Argentina agrees with Canada's interpretation in paragraphs 41 to 48 of its written submission
to the effect that Article 14(c) of the SCM Agre ement and the Panel and A ppellate Body reports in
WT/DS70, as well as the Panel report in WT/DS222, ar e relevant to the issue of whether the export
credit guarantee programmes of the United States conf er a "benefit". The standard established therein
for the determination of the existence of a "benef it" constitutes the appropriate legal framework for
the interpretation of the facts in the present case.

 According to the last part of paragraph 157 of the report of the Appellate Body in WT/DS70,
" … the marketplace provides an appropriate basis fo r comparison in determining whether a 'benefit'
has been 'conferred', because the trade-distorting potential of a 'financial contribution' can be
identified by determining whether the recipient has received a 'financial contribution' on terms more
favourable than those available to the recipient in the market."

33. What is the relevance (if any) of Brazil's statement that: " … export credit guarantees
for exports of agricultural exports [sic] are no t available on the marketplace by commercial
lenders". 3
rd parties, in particular, Argentina, Canada, EC, NZ

 The relevance of Brazil's statement lies in the f act that if the marketplace is unable to provide
export credit guarantees for agricultural products, the mere granting of such guarantees by the
Government of the United States would constitute an export subsidy. It would demonstrate that the
market was unable to equal the conditions offered by the challenged programmes.

34. Comment on the United States' view of th e meaning of "long term operating costs and
losses" in item (j) of the Illustrative List of Export Subsidies in Annex I of the SCM Agreement
as meaning "claims paid" under the export credit guarantee programmes. Does the United
States' interpretation give meaning to both "c osts" and "losses"? Do claims paid represent
"losses"? 3
rd parties, in particular, Argentina, Canada, EC, NZ

35. Did the drafters of the Agreement on Agriculture include export credit guarantees in
Article 9.1 of the Agreement on Agriculture? Why or why not? 3rd parties, in particular, Argentina,
Canada, EC, NZ

 Article 9.1 of the Agreement on Agriculture is a list of export subsidies that are subject to
reduction commitments. As such, it does not include export credit guarantees. However, there are
other export subsidies, as emerges the actual text of Article 10.1, which are also subject to disciplines.

 In this respect, Argentina agrees with Ca nada's statement in paragraph 32 of its Written
Submission that:

 “Article 9 of the Agriculture Agreement lists and describes certain export subsidies that are
subject to reduction commitments. All other export subsidies fall within the scope of
Article 10.1 … ”

36. Please explain any possible significance the following statements may have in respect of
Brazil's claims about GSM102 and 103 (7 CFR 1493.10(a)(2), Exhibit BRA-38). 3 rd parties, in
particular, Argentina, Canada, EC, NZ

(a) "The programmes operate in cases where credit is necessary to increase or maintain US
exports to a foreign market and where U.S. financial institutions would be unwilling to
provide financing without CCC's guarantee. (7 CFR 1493.10(a)(2) Exhibit BRA-38)

 The fact that the programmes operate in cases where credit is necessary to increase or
maintain exports and where US private financial institutions would be unwilling to provide financing
without the CCC's guarantee is relevant to Brazil's claims about the GSM 102 and GSM 103
programmes in that it implies a recognition of the impact and trade-distorting effect of the export
credit guarantees.

(b) "The programmes are operated in a manner intended not to interfere with markets for
cash sales. The programmes are targeted toward those countries where the guarantee is
necessary to secure financing of the exports but which have sufficient financial strength
so that foreign exchange will be available for scheduled payments." (7 CFR
1493.10(a)(2) Exhibit BRA-38)

 This is another recognition of the fact that without such measures, there would be no exports,
or there would be fewer exports from the United States.

(c) "In providing this credit guarantee facilit y, CCC seeks to expand market opportunities
for US agricultural exporters and assist long-term market development for US
agricultural commodities." (7 CFR 1493.10(a)(2) Exhibit BRA-38)

 The fact that in providing this credit guarantee facility, the CCC seeks to expand market
opportunities for US agricultural exporters and assist long-term market development for US
agricultural commodities once agai n reinforces the negative impact and distortion caused by the
export credit guarantees to world trade.

37. The United States seems to argue that, at present, by virtue of Article 10.2 of the
Agreement on Agriculture , there are no disciplines on agricultural export credit guarantees
under the Agreement on Agriculture (or the SCM Agreement).

(a) Comment on the following proposit ion: a WTO Member may therefore extend
agricultural export credit guarantees without charging a premium, and for an indefinite
period, in addition to any other terms and conditions it may wish? How would this
reconcile with the title of Article 10 of the Agreement on Agriculture ("Prevention of
Circumvention on Export Subsidy Commit ments"), and with other commitments
contained in the Agreement on Agriculture? Please cite any relevant material, including
any past WTO dispute settlement cases. 3
rd parties, in particular, Argentina, Canada, EC,
NZ

 It is wrong to state that there are no disciplines on export credits and export credit guarantees.
Article 10.2 must be analysed together with Article 10.1, in that when the export guarantee and credit
programmes contain a subsidy component and are th erefore genuine export subsidies, they must
automatically comply with the requirement of not circumventing export subsidy commitments.

 The export credits and export credit guarantees granted by the United States constitute export
subsidies for the reasons set forth in the replies to questions 29 and 36 above. They do not comply
with Articles 3, 8 and 10.1 of the AoA.

 Regarding the first question of the Panel in (a) above, the answer is no. The granting of
export credit guarantees under conditions in which no consideration is re quired, in this case a
premium charged by the granting institution, is tantam ount to the transfer of funds to the beneficiary.
The beneficiary, in the absence of an adequate pr emium, transfers all of the credit and commercial
risk of the operation to the institution granting the guarantee without any cost to itself. In other
words, we are speaking of a subsidy.

(b) If, as the United States argues, there are no disciplines on export credit guarantees in the
Agreement on Agriculture , how could export credit guarantees "conform fully to the
provisions of Part V" of the Agreement on Agriculture within the meaning of Article 13
(how can you assess "conformity" or non-co nformity with non- existent disciplines)? 3
rd
parties, in particular, Argentina, Canada, EC, NZ

 In Argentina's view, the United States' interpre tation of Article 10.2 is entirely at odds with
the context of the provision and the object and purpose of Article 10 of the AoA, since it would
contribute to the circumvention of export subsidy commitments by excluding an entire category of
export subsidies from the general disciplines in that area.

 Article 1(e) of the AoA clearly defines expor t subsidies without excluding those that are not
listed in Article 9.1 of the Agreement.

 At the same time, Article 13(c) of the AoA s tipulates that in order to be exempted, export
subsides must conform fully to the provisions of Part V of the AoA, and not to a particular article.
Article 10, which forms part of Part V of the AoA, stipulates in paragraph 1 that: " … export
subsidies not listed in paragraph 1 of Article 9 shall not be applied in a manner which results in, or
which threatens to lead to, circumvention of export subsidy commitments … " .

 Thus, the lack of disciplines specifically developed for export credit guarantees does not
necessarily imply the absence or shortage of crite ria that would make it possible to establish
objectively whether these instruments "conform fully to the provisions of Part V of this Agreement" as
stipulated in the chapeau of Article 13(c).

STEP 2 PAYMENTS

38. Please comment on the statement in note 119 of the United States' first written
submission that "...to the extent a consumer that had intended to export instead opens the bale,
then that consumer could still obtain the Step 2 payment upon submission of the requisite
documentation". The Panel notes that Step 2 payments all involve upland cotton produced in
the United States. What are the two distinct factual situations that Step 2 payments involve?
Other than the panel report in Canada-Dairy and the findings of the Appellate Body in US-FSC
(21.5)
6, do any other dispute settlement reports offer guidance on this issue? For example, how,

6 "We recall that the ETI measure gr ants a tax exemption in two differ ent sets of circumstances: (a)
where property is produced within the United States and held for use outside the United States; and (b) where
property is produced outside the United States and held for use outside the United States. Our conclusion that
the ETI measure grants subsidies that are export contingent in the first set of circumstances is not affected by the
fact that the subsidy can also be obtained in the second set of circumstances. The fact that the subsidies granted
in the second set of circumstances might not be export contingent does not dissolve the export contingency
arising in the first set of circumstances. Conversely, the export contingency arising in these circumstances has
no bearing on whether there is an export contingent subsidy in the second set of circumstances. Where a
United States taxpayer is simultaneously producing property within and outside the United States, for direct use
outside the United States, subsidies may be granted under the ETI measure in respect of both sets of property.
The subsidy granted with respect to th e property produced within the United St ates, and exported from there, is
export contingent within the mean ing of Article 3.1(a) of the SCM Agreement , irrespective of whether the
subsidy given in respect of property produced outside the United States is also export contingent."

if at all is the Appellate Body's report in Canada-Aircraft relevant here? 7 3 rd parties, in
particular, Australia, Argentina, NZ, Paraguay

 As stated by Argentina in paragraphs 80-85 of its written submission, both the corresponding
section of the 2002 SFRI Act and the provisions of th e Section 1427.100ff. of the Code of Federal
Regulations clearly establish that the Commodity Credit Corporation (CCC) must issue marketing
certificates or cash payments to exporters and/or users of US (upland) cotton.

 Given that the purpose of the programme is to provide a direct incentive for US cotton
exports and consists of a direct payment to exporters based on the difference between the US
domestic cotton price and the world market price, th ere can be no doubt that whenever the former is
higher than the latter, an export subsidy is pr esent inasmuch as the existence of these payments
enables the US product to compete artificially w ith the lower-cost products of more efficient
producers.

 It should be noted that the programme known as Step 2 establishes the right of exporters to
receive a subsidy for shipments made in connection with foreign sale operations, while establishing an
obligation upon the CCC to grant that subsidy once the particular requirements are satisfied.

 We stress that the payment is the diffe rence between the domestic market and the
international market because that would be the most relevant evidence that the subsidy seeks to ensure
that the product can be exported at prices lower than the domestic price.

39. Please comment on the United States assert ions at paragraph 129 of its first written
submission, that "[t]he program is indifferent to whether recipients of the benefit of this
programme are exporters or parties that open bales for the processing of manufacturing raw
cotton into cotton products in the United States." 3
rd parties, in particular, Australia, Argentina,
NZ, Paraguay

 The fact that the Step 2 programme is indiffere nt to whether the recipients are exporters or
users of cotton in the United States does not alter its inconsistency, since the United States has not
specified upland cotton in its schedule of commitments and this type of subsidy under the Step 2
programme is granted for cotton. Consequently, an y provision in the legal texts with respect to the
granting of such a subsidy makes it inconsistent pe r se with Articles 3.3 and 8 of the AoA, while for
the same reason any sum distributed, budgeted or provided for under the programme constitutes a
prohibited subsidy within the meaning of Article 3 of the SCM Agreement.

40. With respect to paragraph 32 of the oral st atement of the EC, are subsidies contingent
on the use of domestic goods consistent with th e AoA? Does the phrase "provide support in
favour of domestic producers" refer to, and/or permit such subsidies? What is the meaning and
relevance of this (if any) to Brazil's claims under Article 3 of the SCM Agreement and
Article III:4 of the GATT 1994. 3
rd parties, in particular, Australia, Argentina, EC, NZ, Paraguay

 Are subsidies contingent on the use of domestic goods, because they are prohibited under
Article 3.1(b) of the SCM Agreement, also prohi bited under the AoA given that there is no specific
provision in the AoA that is explicitly mentioned in the introductory sentence of Article 3 of the

7 There, the Appellate Body stated that,
 "the fact that some of TPC's contri butions, in some industry sectors, are not contingent upon
export performance, does not necessarily mean that the same is true for all of TPC's
contributions. It is enough to show that one or some of TPC's contributions do constitute
subsidies "contingent ... in fact … upon export performance". 7

SCM Agreement? Indeed, Article 3 of the SC M Agreement reads "except as provided in the
Agreement on Agriculture … ". The AoA does not contain any provision which explicitly permits
such subsidies.

 "Except as provided in the Agreement on Agricu lture …" also means that Article 3 of the
SCM Agreement applies to agricultural subsidies to th e extent that they are not in conflict with the
AoA. In this connection, no provision can be found in the AoA that is in conflict with Article 3.1(b)
of the SCM Agreement, permitting the granting of "s ubsidies contingent, whether solely or as one of
several other conditions, upon the use of domestic over imported goods." Consequently, Argentina
considers that subsidies contingent upon the u se of domestic over imported goods are prohibited
under the AoA.

 Regarding the EC's argument in which it tries to distinguish between the terms "to" and "in
favour" with respect to support for agricultural pr oducers, this difference does not tally with the
Spanish text, and "in favour", "to" and "benefit" are synonyms.

Article from the Agreement on
Agriculture
Spanish English
1.a

a in favour
1.d a to
1.h a in favour
3.2. a in favour
6.1. en favor in favour
6.2. a to
6.3. a in favour
7.1. en favor in favour
7.2.a en favor in favour
7.2.b a to
9.1.a a to
Annex 2 a to (in different paragraphs
throughout the annex)
Annex 3.7 beneficio a benefit
Annex 4.4 beneficio a benefit

 In other words, the text does not contain the difference that the EC is attempting to expose,
nor can a phrase such as "in favour" be interpreted as the waiver of a prohibition under Article 3.1(b)
of the SCM Agreement, since such a waiver does not appear in the text.

 Regarding the second sentence of paragraph 7 of Annex 3 of the AoA concerning "measures
directed at agricultural processors", it makes no re ference whatsoever to the "subsidies contingent …
upon the use of domestic over imported goods" mentione d in Article 3.1(b) of the SCM Agreement.
Obviously, these are two different matters. Moreover, paragraph 7 of Annex 3 contains no mention of
the SCM Agreement. If the intention had been to exempt these measures from the prohibition
contained in Article 3.1(b) of the SCM Agreement, this would have been expressly stated, specifically
mentioning the provision of the SCM Agreement, i.e. Article 3.1(b).

 As regards the second question, for the r easons provided above, th e phrase "provide support
in favour of domestic producers" neither refers to the subsidies in Article 3.1(b) of the
SCM Agreement, nor permits them.

 With respect to the third question, Article III:4 of the GATT 1994 prohibits discrimination
against imported products, so that this article is also applicable, as well as Article 2.1 of the
Agreement on Trade-Related Investment Measures. Moreover, the TRIMs Agreement does not make
the slightest reference to the Agreement on Agriculture.

ETI Act

41. Concerning its claims on the ETI Act, Brazil relies on the US – FSC case. However, it
appears that the United States did not raise the issue of the Peace Clause in that case, nor did
the US appear to invoke Article 6 of the Agreement on Agriculture. If the Panel's understanding
is correct, how, if at all, are these differences relevant here? Argentina, China, EC, NZ

42. How do you view the reference in paragraph 43 of the EC's third party oral statement
with respect to the relevance of Article 17.14 of th e DSU, and, in particular, the phrase "a final
resolution to that dispute" (emphasis added)? Please explain the use, and relevance (if any) of
the term "disputes" in Articles 9.3 and 12 and Appendix 3 of the DSU, and please cite any other
provisions you consider relevant. Argentina, China, EC, NZ

ANNEX J-2

ANSWERS BY AUSTRALIA TO THE
QUESTIONS FROM THE PANEL

11 August 2003

ARTICLE 13 OF THE AGREEMENT ON AGRICULTURE

1. Australia has argued that Article 13 of the Agreement on Agriculture is an affirmative
defence. How do you reconcile this with your view that the conditions in Article 13 are a
"prerequisite" to the availability of a right or pr ivilege? Australia Would other third parties
have any comments on Australia's assertion? 3
RD parties, in particular Argentina, Benin,
China, Chinese Taipei

Reply

 Australia does not see any inconsistency in its views. In Australia’s view, the potential
availability of an affirmative defence in the genera l sense is in the nature of a right or privilege.
Australia wishes to clarify, however, that it consid ers Article 13 in the specific sense to be a right
available when the conditions prescribed therein are met, rather than a privilege.

ARTICLE 13(B) OF THE AGREEMENT ON AGRICULTURE: DOMESTIC SUPPORT MEASURES

2. Please explain the difference, if any, between the meaning of "defined" and the meaning
of "fixed" in the phrase "a defined and fixed ba se period" in paragraph 6(a) of Annex 2 of the
Agreement on Agriculture. 3rd parties, in particular Australia, Argentina, Canada, EC, NZ

Reply

 In Australia’s view, having regard to their or dinary meanings in their context of the object
and purpose of the Agreement on Agriculture , the words “defined” and “fixed” have distinct
meanings.
1 The word “defined” refers to the period of time stipulated for the purposes of determining
initial eligibility for a particular decoupled inco me support payment. The word “fixed” establishes
that once it has been “defined”, that period of time is unchangeable for that payment.

3. Please explain the meaning of "a" in "a defined and fixed base period" in paragraph
6(a) of Annex 2 of the Agreement on Agriculture, the meaning of "the" in "the base period" in
paragraphs 6(b), (c) and (d), and the difference between these and the phrase "based on the
years 1986-88" in Annex 3. 3rd parties, in particular Australia, Argentina, Canada, EC, NZ

1 The New Shorter Oxford English Dictionary , Ed. Lesley Brown, Clarendon Press, Oxford, Volume 1
provides the following potentially relevant definitions of the words:
“defined”: “having a definite or specified outline or form; clearly marked, definite” (page 618);
“fixed”: “ 1 Definitely and permanently placed or assigne d; stationary or unchanging in relative
position; definite, permanent, lasting. 2a Directed steadily or inte ntly towards an object. b … 3 Placed or
attached firmly; made firm or stable in position. …

Reply

 In Australia’s view, “a” is used in th e phrase “a defined and fixed base period” in
paragraph 6(a) of Annex 2 to the Agreement on Agriculture as an indefinite article, and is defined as
meaning “one, some, any”
2. Thus, having regard to the ordinary meaning of the words in their
context and in the light of the object and purpo se of the Agreement on Agriculture, “a defined and
fixed base period” is the base period selected by an individual WTO Member for the purposes of
determining initial eligibility for a particular d ecoupled income support payment. Once that base
period is selected, it is fixed, that is, it is unchangeable.

 “The” is defined as “designating one or mo re … things already mentioned or known,
particularized by context or circumstances, inhere ntly unique, familiar, or otherwise sufficiently
identified”.
3 Thus, the use of “the” as a definite article in the phrase “after the base period” in
paragraphs 6(b), (c) and (d) of Annex 2 establishes a relationship to the base period already identified,
that is, to the base period selected by an individual WTO Member for the purposes of determining
initial eligibility for a particular decoupled income support payment in accordance with
paragraph 6(a) and which, once fixed, is unchangeable.

 Australia does not consider that there is a ny relationship between any base period defined and
fixed for a support programme for the purposes of pa ragraph 6 of Annex 2 and the use of the years
1986-88 as a base period under Annex 3, nor was ther e intended to be. Annex 3 relates to the
calculation of a Member’s AMS for the purposes of implementing its reduction commitments in
relation to production and trade-distorting domestic support measures, consistent with the object and
purpose of the Agreement on Agriculture. By definiti on in the first sentence of paragraph 1, Annex 2
domestic support measures may not, or may only minimally, distort production and trade. Thus, there
is no logical or other basis for there to be any relationship.

 Australia notes too that Article 7.2(a) of the Agreement on Agriculture specifically envisages
the introduction of domestic support measures after entry into force of the WTO Agreement by
providing for “any [domestic support] measure that is subsequently introduced that cannot be shown
to satisfy the criteria in Annex 2 to this Agreemen t”. Australia considers that, had the negotiators
intended that the 1986-88 period be required to be used as the base period for the purposes of making
decoupled income support payments – or indeed for any other purpose envisaged in Annex 2 –
paragraph 6(a) would have expressl y provided for this rather than for “a defined and fixed base
period”.

4. How often can a Member define and fix a base period in accordance with paragraph 6
of Annex 2 of the Agreement on Agriculture? 3
rd parties, in particular Australia, Argentina,
Canada, China, EC, NZ

Reply

 In Australia’s view, and consistent with the use of the word “a” in the phrase “a defined and
fixed base period”, a Member may only define and fix a base period once for the purposes of a
particular decoupled income support payment. On ce that base period is defined and fixed, it is
unchangeable.

5. Do you agree that a payment penalty based on crops produced is "related to type of
production"? EC

2 The New Shorter Oxford English Dictionary, Volume 1, page 1.
3 The New Shorter Oxford English Dictionary, Volume 2, page 3269.

6. Please explain the meaning of the word "criteria" in Article 6.1 and 7.1. What effect, if
any, does the use of the word "Accordingly" in paragraph 1 of Annex 2 of the Agreement on
Agriculture have on the meaning of the preceding sentence? 3
rd parties, in particular Australia,
Argentina, Canada, EC, NZ

Reply

 The ordinary meaning of “criteria”, as the plural of “criterion”, is “principle[s], standard[s], or
test[s] by which a thing is judged, assessed, or identified”
4. Thus, the “criteria” in Articles 6.1 and 7.1
as these relate to Annex 2 of the Agreement on Agriculture encompasses all of the relevant principles,
standards or tests established in Annex 2 ag ainst which domestic support measures for which
exemption from reduction commitments is claimed are to be judged, assessed and/or identified.

 As Australia said in its Oral Statement,
5 the word “accordingly” has several, equally valid
meanings that are potentially applicable in the c ontext: “harmoniously”, “agreeably”, “in accordance
with the logical premises” and “correspondingly”6. A further definition is “in conformity with a given
set of circumstances”.7

 In Australia’s view, having regard to its ordina ry meanings in its context and in light of the
object and purpose of the A greement on Agriculture , including to “[correct] and [prevent] …
distortions in world agricultural markets”,
8 the word “accordingly” can and should properly be
interpreted in the sense of “consistent with” or “in conformity with” the fundamental requirement
established in the first sentence. Consistent with that interpretation, the obligation that “green box”
measures “meet the fundamental requirement …” is cumulative with the additional basic criteria
established in paragraph 1 and the policy specific crite ria established in paragr aphs 2-13 of Annex 2.
To interpret the word “accordingly” otherwise would be to negate the plain and unambiguous
obligation established in the first sentence of pa ragraph 1 of Annex 2 that “[d]omestic support
measures for which exemption from the reducti on commitments is claimed shall meet the
fundamental requirement that they have no, or at mo st minimal, trade-distortin g effects or effects on
production”.

7. Please explain the meaning of the words "the fundamental requirement" as used in
paragraph 1 of Annex 2 of the Agreement on Agriculture. 3
rd parties, in particular Australia,
Argentina, Canada, EC, NZ

Reply

 The word “fundamental” has a number of meanings 9 which can be summarised as “primary”
or “essential”. The word “requirement” too has a number of meanings10 which can be summarised as
a “condition”. Thus, a “fundamental requirement” is a primary or essential condition. 11 I t i s a n

4 The New Shorter Oxford English Dictionary, Volume 1, page 551.
5 Oral Statement by Australia, paragraphs 35-36.
6 The New Shorter Oxford English Dictionary, Volume 1, page 15.
7 Webster’s Third New International Dictionary , Ed. Philip Babcock Gove, Merriam-Webster Inc,
Springfield, Massachusetts, 1993, page 12.
8 Third preambular paragraph of the Agreement on Agriculture.
9 The New Shorter Oxford English Dictionary , Volume 1, page 1042, provides relevant definitions of
“fundamental” as “1 Of or pertaining to the basis or groundwork; going to the root of the matter. 2 Serving as
the base or foundation; essential or indispensable. Also, primary, original; from which others are derived.”
10 The New Shorter Oxford English Dictionary , Volume 1, page 2557, provides definitions of
“requirement” as “1 The action of requiring something; a request. 2 A thing required or needed, a want, a need.
Also the action or an instance of needing or wanting something. 3 Something called for or demanded; a
condition which must be complied with.”
11 Third Party Submission of Australia, paragraph 31, and Oral Statement by Australia, paragraph 33.

overarching, freestanding obligation that applies to all “green box” measures cumulatively with the
additional basic criteria establishe d in paragraph 1 and the policy specific criteria established in
paragraphs 2-13 of Annex 2. To interpret a “fundamental requirement” otherwise than as a primary or
essential condition would not give the words their ordinary meaning in their context and in light of the
object and purpose of the Agreement on Agriculture.

8. In your oral statement, you emphasize the u se of the word "criteria" in other parts of
the Agreement on Agriculture, as distinct from the reference to "fundamental requirement" in
the first sentence of paragraph 1 of Annex 2. Is it the case that sub-paragraphs (a) and (b) of
paragraph 1 of Annex 2 are also "criteria"? EC

9. If the first sentence of paragraph 1 of Annex 2 is a stand-alone obligation, does this
allow effects-based claims of non-compliance with Annex 2? If so, how does this affect the
purpose of Article 13(b)? 3
rd parties , in particular Australia, Argentina, Canada, EC, NZ

Reply

 It is not clear to Australia what is meant by “effects-based claims” in the context of this
question. In Australia’s view, a claim of non-co mpliance with the first sentence of paragraph 1 of
Annex 2 would require an assessment of whether a domestic support measure meets the primary or
essential condition that such measures have no, or at most minimal, trade-distorting effects or effects
on production, that is, that such measures not, or on ly negligibly, bias or unnaturally alter trade or
production.

10. If the first sentence of paragraph 1 of Annex 2 is not a stand-alone obligation, then must
new, non- or minimally trade-distorting measures that do not conform to the criteria listed in
Annex 2 be classified as non-Green Box? 3
rd parties, in particular Australia, Argentina,
Canada, EC, NZ

Reply

 Yes.

11. If the first sentence of paragraph 1 of Annex 2 expresses a general principle which
informs the interpretation of the criteria in Annex 2, please explain how this affects the
assessment of the direct payments programme's compliance with paragraph 6 of Annex 2. 3
rd
parties, in particular, Australia, Argentina, Canada, EC, NZ

Reply

 Australia assumes that the “direct payments pr ogramme” referred to in this question is the
Direct Payments programme of the United States at issue in this dispute.

 Even if the first sentence of paragraph 1 of Annex 2 were to express only a general principle
which informs the interpretation of the other criteri a in Annex 2, the US Direct Payments programme
would still be non-compliant with paragraph 6(b) of Annex 2 because it:

• penalises producers based on the type of production undertaken after the base period, and
• because it allowed producers to update their base acreage and base yield(s) after the base period,

contrary to the express requirement of paragraph 6(b) that the amount of decoupled income support
payments not be related to, or based on the type and/or volume of production undertaken by the
producer in any year after the base period.

12. Where does Article 13(b) require a year-on-year comparison? 3
RD parties, in particular
Australia, Argentina, Canada, China, EC, NZ

Reply

 In Australia’s view, a requirement for a tem poral comparison of measures granting support to
a specific commodity is an implicit and integral com ponent of the requirement in Article 13(b)(ii) that
such measures not be “in excess of” that decided during the 1992 marketing year. “In excess of” is
defined as “more than”12 and “to an amount or degree beyond”13.

 See question 28 below.

13. Does a failure by a Member to comply in a given year with either the chapeau of
Article 13(b) or the proviso in subparagraph (ii) of Article 13(b) impact its entitlement to benefit
in an earlier or a later year from the exempt ion from action provided by Article 13(b)? 3
RD
parties, in particular Australia, Argentina, Canada, China, EC, NZ

Reply

 It is Australia’s view that there is no obligati on with which a Member is required to comply in
either the chapeau of Article 13(b), or the proviso of Article 13(b)(ii).

 See question 28 below.

14. Does a failure of a Member to comply wi th Article 13(b) in respect of a specific
commodity impact its entitlement to benefit in respect of other agricultural products from the
exemption from action provided by Article 13(b)? 3
RD parties, in particular Australia,
Argentina, Canada, China, EC, NZ

Reply

 Yes. In Australia’s view, there is no require ment that the application of the proviso be
considered only in relation to a specific commodity at issue in a dispute. The failure of a Member to
comply with Article 13(b)(ii) and (iii) in respec t of one specific commodity affects its right to
exemption from actions under Article 13(b)(ii) and (iii) in respect of all commodities.

 Australia notes that the basic text of both Article 13(b)(ii) and (iii) reads as follows:

During the implementation period, … domes tic support measures that conform fully
to the provisions of Article 6 … shall be … exempt from actions based on [ the
specified provisions], provided that such measures do not grant support to a specific
commodity in excess of that decided during the 1992 marketing year.
The phrase “such measures” in the proviso refers to “domestic support measures that conform fully to
the provisions of Article 6 …”. Thus, the proviso states “provided that [ domestic support measures
that conform fully to the provisions of Article 6 ] do not grant support to a specific commodity in
excess of that decided during the 1992 marketing year”.

12 The New Shorter Oxford English Dictionary, Volume 1, page 873.
13 Webster’s Third New International Dictionary, page 792.

 Similarly to its use in the context of ques tion 3 above, “a” is used in the phrase “support to a
specific commodity” as an indefinite article, and is defined as meaning “one, some, any” 14. Having
regard to the ordinary meaning of the word in its context and in light of the object and purpose of the
Agreement on Agriculture, “support to a specific commodity” means support to any one commodity.

 Further, Australia considers that this interp retation is consistent with the object and purpose
of the Agreement on Agriculture, including as expressed in the preambular clauses to that Agreement,
for example, “to provide for substantial progressive reductions in agricultu ral support and protection
sustained over an agreed period of time, resulti ng in correcting and preventing restrictions and
distortions in world agricultural markets”. The Agreement on Agriculture resulted from lengthy and
complex negotiations and provided a finely balanced set of rights a nd obligations aimed at reducing
the unnatural distortions of global agricultural pro duction and trade. During an agreed transition
period, so long as a Member adheres to its obliga tions intended to achieve that objective and does not
introduce domestic support measures which result in new or additional distortions in trade and
production, it would enjoy, as a right, protection for actions that would otherwise be WTO-
inconsistent. On the other hand, if a Member did not observe the obligations that form part of the
negotiated outcome, it would lose its generic righ t to the protection that constituted an essential
element of that outcome. See also question 28 below.

15. Is there any basis on which counter-cyclic al payments could be considered product-
specific? 3
RD parties, in particular Australia, Argentina, Canada, China, EC, NZ

Reply

 In this question, Australia understands that the panel uses the term “product-specific” in the
sense of “product-specific” support as argued by the United States in its First Written Submission.
15

 Australia notes that counter-cyclical payments (CCPs) are expressly differentiated by
product.
16 Even though the CCP programme applies to more than one commodity and there is no
requirement for a producer to grow any of those commodities, actual payments are made by product.
Further, notwithstanding that there is no requireme nt for a producer to grow upland cotton to receive
the CCP for upland cotton, it is not possible for a producer to receive the CCP for upland cotton if that
producer has never actually produced upland cotton. Similarly, a producer could not receive the CCP
for another eligible commodity under the program, e.g ., corn, if that producer has never grown corn.
Thus, CCPs for eligible commodities, in this case upland cotton, are effectively product-specific.

 Australia notes too that CCPs for upland cott on are product-specific if there is a correlation
between enrolled acreage for the purposes of the CCP (and Direct Payments) programme and the
acreage actually used to grow upland cotton. Ho wever, there is insufficient current information
available to Australia to assess whether CCPs can be considered to be product-specific on this basis.

 That said, Australia re-iterates its strong vi ew that “support to a specific commodity” within
the meaning of subparagraph (ii) (and (iii)) of Article 13(b) does not equate to product-specific
support and that “support to a specific commodity ” includes that portion of non-product specific
support that benefits the commodity at issue, in this case upland cotton.
17 Had the authors of Article
13 intended that “support to a specific commodity” not include non-product specific support,
Australia believes that they would have said so, consistent with the usage of such terminology
elsewhere in the Agreement on Agriculture , for example, in Articles 1( a), 4(a) and paragraph 1 of
Annex 3.

14 The New Shorter Oxford English Dictionary, Volume 1, page 1.
15 First Written Submission of the United States, paragraphs 77-81.
16 Section 1104, 2002 Farm Security and Rural Investment Act, Exhibit Bra-29.
17 Oral Statement by Australia, paragraphs 20-25.

 Further, “such measures” in the proviso of Ar ticle 13(b)(ii) and (iii) refers to “domestic
support measures that conform fully to the provisions of Article 6” in the chapeau of Article 13(b),
which include non-product specific support measures other than “green box” support measures. In
Australia’s view, to exclude non-product specific domestic support measures from the assessment of
“support [ granted by such measures ] to a specific commodity” would be contrary to the express
meaning of the text.

 See also question 28 below.

16. If the word "specific" were deleted from Article 13(b)(ii), would this change the
meaning of the subparagraph? 3
RD parties, in particular Australia, Argentina, Benin Canada,
China, EC, NZ

Reply

 No. See also questions 14 and 28.

17. What is the relevance, if any, of the concept of "specificity" in Article 2 of the SCM
Agreement and references to "a product" or "subsidized product" in certain provisions of the
SCM Agreement to the meaning of "support to a specific commodity" in Article 13(b)(ii)
Agreement on Agriculture? 3
RD parties, in particular Australia, Argentina, Canada, China, EC,
NZ

Reply

 Australia does not consider that the concept of “specificity” in SCM Article 2, or references
to “a product” or “subsidized product” in certain provisions of the SCM Agreement, have any express
textual relationship to the meaning of “support to a specific commodity” in Article 13(b)(ii).

 However, Australia notes that a subsidy does not need to be enterprise or industry-specific to
be “specific” within the meaning of SCM Article 2. SCM Article 2.1(c) expressly provides that a
subsidy can be specific notwithstanding an appearance of non-specificity if a subsidy programme is in
fact directed at certain enterprises or industries. SCM Article 2 could therefore be considered to
provide broad contextual support for Australia’s view that CCPs for upland cotton are product-
specific .

18. Benin's oral statement considers the phr ase "support to a specific commodity" in
Article 13(b)(ii) of the Agreement on Agriculture. How does Benin believe that phrase is best
interpreted. Please substantiate your response, commenting on other submissions by parties
and third parties as you believe appropriate. Benin

19. Where does Article 13(b)(ii) require a year-on-year comparison? 3
rd parties, in
particular Australia, Argentina, Canada, EC, NZ

Reply

 See questions 12 above and 28 below.

20. Does Article 13(b)(ii) require a comparison of support granted with support decided?
How could such a comparison be made?

Reply

 See question 28 below.

21. Please comment on Brazil's assertion that the terms "grant" and "decided" in Article
13(b)(ii) have broadly the same meaning. If so , why did the drafters not use the same term? 3
rd
parties, in particular, Australia, Argentina, Canada, China, EC, NZ

Reply

 See question 28 below.

22. What is the meaning of "support" in Agreement on Agriculture 13(b)(ii) ? Why would it
be used differently from Annex 3, where it refers to total outlays? 3 rd parties, in particular,
Australia, Argentina, Canada, China, EC, NZ

Reply

 Australia believes it is significant that the pr oviso of Article 13(b)(ii) and (iii) uses “support”
rather than “AMS” , “support as calculated in Annex 3”, or a similar term and that it bears out
Australia’s view that the use of the term “support” in the proviso was not intended to have the same
meaning.

 See question 28 below.

23. Should support be compared under Article 13(b)(ii) in terms of unit of production or
total volume of support or both? 3
rd parties, in particular, Australia, Argentina, Canada,
China, EC, NZ

Reply

 See question 28 below.

24. Please provide any written drafting history which could shed light on why the proviso
was added to what is now Article 13(b)(ii) of th e Agreement on Agriculture and, in particular,
why the words "grant" and "decided" were used. EC

25. Please comment on an interpretation of the words "decided during" in Article 13(b)(ii)
that would read them as synonymous wi th the words "authorized during". 3
rd parties, in
particular Australia, Argentina, Canada, China, EC, NZ

Reply

 Australia is concerned that use of the phrase “authorised during” may be considered to imply
a relationship with budgetary appr oval and expenditure processes and that this would not necessarily
be a correct interpretation. As an alternative, Australia suggests “committed to during” could be an
appropriate interpretation of the phrase “decided during”. See question 28 below.

26. Under Article 13(b)(ii), a comparison is required between support at different times.
One of the issues which is contested between the pa rties is whether the only later period that the
Panel can consider is the present one (i.e. the period underway at the time of the request for
establishment of the Panel). This argument is based on the present tense of the words "do not
grant" in the English text. The Panel asks whether there is any difference in the verb tense as

used in the Spanish-language text, or any other difference which might aid the Panel in
interpreting these words? Argentina, EC, Paraguay, Venezuela

27. If the 1992 "decision" led to or was the funding source for the money provided in 1992
and later years, is it the full amount of all that funding that constitutes the "support" decided in
1992? If the answer to this question is that it is the full amount of all the support provided
pursuant to the "decision" that must be taken in to account, must this be compared with the
total amount of support that will or might flow from the decision made in the more recent
period for the purposes of the comparison required under Article 13(b)(ii)? If a Member did
not make a "decision" (however that may be inte rpreted) in 1992 about "support", is it the case
that the Member has a zero base for the purpos es of the comparison required under Article
13(b)(ii)? EC

28. In paragraph 13 of Australia's oral statement, you state that a "question" is: "could
conditions of price competition for the purposes of a non-violation or impairment claim be
assessed solely on the basis of budg etary outlay figures, as argued by Brazil, or on the basis of a
rate of payment, as argued by the United States? In Australia's view, both factors put forward
by Brazil and the United States would properly form a part of that assessment, but not the
whole." Could you please clarify this statem ent (indicating other elements which would
complete the "whole" and explain its relevan ce for the purposes of our consideration of
Article 13 of the Agreement on Agriculture? Australia, EC

Reply

 The proviso “provided that such measures do not grant support to a specific commodity in
excess of that decided during the 1992 marketing year” appears in both subparagraphs (ii) and (iii) of
Article 13(b). In both cases, the basic textual provision is the same:

During the implementation period … domestic support measures that conform fully
to the provisions of Article 6 … shall be … exempt from actions based on [ the
specified provisions], provided that such measures do not grant support to a specific
commodity in excess of that decided during the 1992 marketing year.
Yet Article 13(b)(ii) deals with situations of vi olation nullification or impairment complaints in
relation to actionable subsidies, and Article 13(b )(iii) deals with situations of non-violation
nullification or impairment complaints in relation to tariff concessions. It does not seem to Australia
to be feasible that the authors of the text of Article 13 of the Agreement on Agriculture would have
intended exactly the same language within the same Article to have distinct meanings. Indeed,
Australia believes it must be assumed that, had the au thors intended that the proviso be interpreted
and applied differently in the context of violation and non-violation complaints, they would have used
different texts, consistent with the normal rules of treaty interpretation. In Australia’s view, therefore,
it must be assumed that the authors of Article 13 in tended that the proviso have the same meaning in
the context of both violation and non-violation comp laints, and the proviso must be interpreted in
such a way as to be capable of being applied in relati on to both situations. To this end, it would be a
proper exercise of the Panel’s discretionary powers to consider also the nature of a non-violation
complaint to determine the proviso’s meaning.

 Australia recalls that the text of the provi so, as well as the draft text of what became
Article 13 of the Agreement on Agriculture first appeared in the “Blair House Accord” and that the

Accord also included provisions concerning the EEC – Oilseeds dispute.18 In Australia’s view, that
dispute is crucially relevant to the proper interpretation of Article 13(b)(ii) and (iii).19

 The panel in EEC – Oilseeds described the purpose of GATT Article XXIII:1(b) in the
following terms:

… The Panel noted that these provisions, as conceived by the drafters and applied by
the contracting parties, serve mainly to protect the value of tariff concessions.
[…] The
idea underlying them is that the improved competitive opportunities that can
legitimately be expected from a tariff concession can be frustrated not only by
measures proscribed by the General Agreem ent but also by measures consistent with
that Agreement. …
20
The EEC – Oilseeds panel went on to say:

The Panel carefully analysed the price me chanism established in the framework of
the Community’s market organization for oilseeds and found that the production
subsidy schemes of the Community protect Community producers completely from
the movement of prices for imports and hence prevent the lowering of import duties
from having any impact on the competitiv e relationship between domestic and
imported oilseeds. …
21
The EEC – Oilseeds panel also said:

… The Panel considered that the main value of a tariff concession is that it provides
an assurance of better market access th rough improved price competition.
Contracting parties negotiate tariff concessi ons primarily to obtain that advantage.
They must therefore be assumed to base their tariff negotiations on the expectation
that the price effect of the tariff concessions will not be systematically offset. … The
Panel does not share the view of the Community that the recognition of the
legitimacy of such expectations would amount to a re-writing of the rules of the
General Agreement. … The recognition of the legitimacy of an expectation relating
to the use of production subsidies therefore in no way prevents a contracting party
from using production subsidies consistently with the General Agreement; it merely
delineates the scope of the protection of a negotiated balance of concessions. For
these reasons the Panel found that the United States may be assumed not to have
anticipated the introduction of subsidies which protect Community producers
completely from the movement of prices for imports and thereby prevent tariff
concessions from having any impact on the competitive relationship between
domestic and imported oilseeds, and whic h have as one consequence that all
domestically-produced oilseeds are disposed of in the internal market notwithstanding
the availability of imports.
22

18 European Economic Community – Payments and Subsidies Paid to Processors and Producers of
Oilseeds and Related Animal-Feed Proteins (“EEC – Oilseeds”) , Report of the Panel, adopted 25 January 1990,
BISD 37S/86.
19 Australia notes that the report of the EEC – Oilseeds panel has been cited with approval in
subsequent WTO jurispru dence, for example, Japan – Measures Affecting Consumer Photographic Film and
Paper, Report of the Panel, WT/DS44/R, paragraph 10.35, and EC – Measures Affecting Asbestos and Asbestos-
Containing Products, Report of the Appellate Body, WT/DS135/AB/R, paragraph 185.
20 EEC – Oilseeds, paragraph 144.
21 EEC – Oilseeds, paragraph 147.
22 EEC – Oilseeds, paragraph 148.

 In summary, the EEC – Oilseeds panel considered that the basis for assessing whether the
benefits of tariff concessions are being nullified or impaired in a non-violation complaint is the
legitimate expectations of the “conditions of pri ce competition” for a product. In assessing those
conditions, matters to be consider ed included market prices and the applicable tariff concession(s) as
well as any other relevant measures, including measur es that were not inconsistent with GATT 1947.
Further, that assessment involved a temporal comparison between the “conditions of price
competition” that could legitimately have been expected at the time a tariff concession was negotiated
and the conditions that actually prevailed at a later point of time.

 Accordingly, to enable its application in a situation of non-violation nullification or
impairment of the benefits of tariff concessions accruing to another Member, the proviso of Article
13(b)(iii) must be interpreted in a manner capable of:

• establishing other Members’ legitimate expectations of the “conditions of price competition”;
• taking account of factors such as the applicable tariff concession(s), market prices and domestic
support measures that conform fully to the provisions of Article 6 of the Agreement on
Agriculture; and
• allowing a comparison between two different points in time.

 In Australia’s view, interpreting the phrase “gra nt support” in a manner that limits the factors
to be considered to domestic support measures that conform fully to the provisions of Article 6 as
measured by budgetary outlays, as argued by Brazil, or the rate of payment, as argued by the United
States, could not lead to a proper application of th e proviso of Article 13(b)(iii) in the context of a
non-violation dispute. Such an interpretation cannot establish other Members’ legitimate expectations
of “conditions of price competition” as these have been understood in GATT and WTO jurisprudence,
as it cannot capture issues relating to tariff concessi ons and market prices that are integral to a non-
violation complaint of nullification or impairment of the benefits of tariff concessions accruing to
another Member. The only essential element that such an interpretation is capable of capturing is the
basic point in time for the purposes of comparison: instead of being the time at which a tariff
concession was negotiated, it is the 1992 marketing year.

 It would not be possible for the interpretations of the proviso offered by Brazil and the United
States to apply in the context of a non-violation dispute. Thus, Australia believes it is incumbent upon
the Panel to consider whether it is possible to appl y in the context of an actionable subsidy complaint
the proviso in the sense of legitimate expectations of the “conditions of price competition” as this
applies to a non-violation nullification or impairment complaint. That application would need to take
account as appropriate of tariff concessions, mark et prices and domestic support measures that
conform fully to the provisions of Article 6.

 Australia considers that such a “conditions of price competition” test is capable of being
applied in the context of a violation complaint covered by Article 13(b)(ii) and was in fact intended by
the authors of the text of Article 13. In Australia ’s view, a “conditions of price competition” test as
this was interpreted and applied in EEC – Oilseeds, allowing as appropriate tariff concessions, market
prices and domestic support measures that conform fully to the provisions of Article 6, forms “the
whole”.

 Further, such an interpretation overcomes th e many interpretive questions raised by the
arguments put forward by the parties to the dispute. Notwithstanding that legitimate expectations of
“conditions of price competition” are not normally applicable in the context of a violation complaint,
Australia cannot identify any provision of the Agreement on Agriculture , or indeed any other of the
covered agreements, that would preclude the app lication of such a test in the context of
Article 13(b)(ii).

 The use of such a test would explain why the phrase “grant support” was used without further
elaboration, such as “support as measured by AMS” , “support as calculated in Annex 3” or similar
wording. “Support” in the context of subparagraphs (ii) and (iii) of Article 13(b) was purposefully
intended to mean all non-“green box” domestic su pport measures, whether specific or not, which
benefit a specific commodity in the sense of a “conditi ons of price competition” test. In this context,
Australia notes that paragraph 8 of Annex 3 expressly excludes from the calculation of AMS some
forms of “support” within the meaning of subparagraphs (ii) and (iii) of Article 13(b).

 The proviso establishes “support … decided during the 1992 marketing year” as the basis for
comparison. In other words, the basis for comparison is the legitimate expectations of other Members
of the “conditions of price competition” having re gard to the applicable tariff measures and non-
“green box” domestic support measures as these were committed to by a Member during the 1992
marketing year, vis-à-vis market prices. It requires a comparison of the legitimate expectations of
other Members of the “conditions of price competition” to apply in future on the basis of decisions
made by a Member during the 1992 marketing year w ith the actual “conditions of price competition”
at a future point in time. Thus, question concerni ng whether a year-on-year comparison is required or
whether a failure by a Member to comply in a give n year affects that Member’s entitlement to invoke
Article 13(b) in other years become moot. So long as a Member’s non-“green box” domestic support
measures that conform fully to the provisions of Ar ticle 6 “grant support to a specific commodity” in
the sense of a “conditions of price competition” t est “in excess of that decided during the 1992
marketing year”, Article 13(b)(ii) and (iii) does not provide an exemption from actions based on the
specified provisions. Conversely, once a Member’s non-“green box” domestic support measures no
longer grant support in excess of that decided during the 1992 marketing year, the Member re-
acquires the right to invoke Article 13(b)(ii) and (iii).

 In Australia’s view, interpreting the proviso of Article 13(b)(ii) as requiring the application of
a “conditions of price competition” test is consistent with the ordinary meaning of the words in their
context:

provided that [ domestic support measures that confor m fully to the provisions of
Article 6] do not grant [agree to, bestow or confer]
23 support [assistance or backing]24
to a specific commodity in excess of [ more than ]25 that decided [ determined or
resolved,26, i.e., committed to] during the 1992 marketing year.
Moreover, interpreted in the sense of legitimate expectations of “cond itions of price competition” in
respect of both Article 13(b)(ii) and (iii), the proviso is consistent with the object and purpose of the
Agreement on Agriculture , including as expressed in the preamble of the Agreement “to establish a
fair and market -oriented agricultural trading system and that a reform process should be initiated
through the negotiation of commitments on support and protection and through the establishment of
strengthened and more operationally effective … rules and disciplines” and “to provide for substantial
progressive reductions in agricultural support and prot ection sustained over an agreed period of time,
resulting in correcting and preventing restrictions a nd distortions in world agricultural markets”. The
provisos of Article 13(b)(ii) and (iii) establish th e outer limits within which the market distorting
support that continues to be permitted under the Agreement on Agriculture must remain during the
implementation period if a Member is to benefit fr om the protection against actionable subsidy claims
offered by Article 13(b) during that time. In ot her words, a Member’s do mestic support measures
may not create a more market distorting situati on in respect of any one commodity than could
reasonably have been anticipated on the basis of that Member’s decisions made known during the
1992 marketing year for that product.

23 The New Shorter Oxford English Dictionary, Volume 1, page 1131.
24 The New Shorter Oxford English Dictionary, Volume 2, pages 3152-3153.
25 The New Shorter Oxford English Dictionary, Volume 1, page 873.
26 The New Shorter Oxford English Dictionary, Volume 1, 607.

 However, should the Panel consider that another interpretation of the proviso of
Article 13(b)(ii) was intended by the authors of the text of Article 13, Australia believes it incumbent
upon the Panel to test its interpretation in the context of a non-violation complaint covered by
Article 13(b)(iii).

EXPORT CREDIT GUARANTEE PROGRAMMES

29. (a) Is an export credit guarantee a financia l contribution in the form of a "potential
direct transfer of funds or liabilities (e.g. loan guarantee)" within the meaning of
Article 1.1(a)(1)(i) of the SCM Agreement? Why or why not? 3 rd parties, in
particular, Argentina, Canada, EC, NZ

 (b) How, if at all, would this be relevant to the claims of Brazil? 3
rd parties, in
particular, Argentina, Canada, EC, NZ

30. The Panel could arguably take the view that Articles 1 and 3 of the SCM Agreement
were relevant in assessing the WTO-consistency of United States export credit guarantees. The
Panel would therefore appreciate third party views on this situation, including with respect to
the viability of an a contrario interpretation of it em (j) of the Illustrative List (as addressed in
paragraphs 180-183 of the United Stat es' first written submission). 3 rd parties, in particular,
Argentina, Canada, EC, NZ

31. If the Panel decides to refer to provisi ons of the SCM Agreement for contextual
guidance in the interpretation of the terms in Ar ticle 10 Agreement on Agriculture, should the
Panel refer to item (j) or Articles 1 and 3 of the SCM Agreement or both? 3
rd parties, in
particular, Argentina, Canada, EC, NZ

32. The Panel's attention has been drawn to Ar ticle 14(c) of the SCM Agreement (see third
party submission of Canada) and to the panel report in DS 222 Canada- Export Credits and
Loan Guarantees. How and to what extent are Article 14(c) of the SCM Agreement, and the
cited panel report, relevant to the issue of wh ether or not the United States export credit
guarantee programmes confer a "benefit"? What would the appropriate market benchmark be
to use for any comparison? Please cite any other relevant material. 3
rd parties, in particular,
Argentina, Canada, EC, NZ

33. What is the relevance (if any) of Brazil's statement that : "...export credit guarantees
for exports of agricultural exports [sic] are no t available on the marketplace by commercial
lenders". 3rd parties, in particular, Argentina, Canada, EC, NZ

34. Comment on the United States' view of th e meaning of "long term operating costs and
losses" in item (j) of the Illustrative List of Export Subsidies in Annex I of the SCM Agreement
as meaning "claims paid" under the export credit guarantee programmes. Does the United
States' interpretation give meaning to both "c osts" and "losses"? Do claims paid represent
"losses"? 3
rd parties, in particular, Argentina, Canada, EC, NZ

35. Did the drafters of the Agreement on Agriculture include export credit guarantees in
Article 9.1 of the Agreement on Agriculture? Why or why not? 3
rd parties, in particular,
Argentina, Canada, EC, NZ

36. Please explain any possible significance the following statements may have in respect of
Brazil's claims about GSM102 and 103 (7 CFR 1493.10(a)(2), Exhibit BRA-38) 3
rd parties, in
particular, Argentina, Canada, EC, NZ

 (a) "The programmes operate in cases where credit is necessary to increase or
maintain US exports to a foreign mark et and where US financial institutions
would be unwilling to provide financing without CCC's guarantee. (7 CFR
1493.10(a)(2) Exhibit BRA-38)

 (b) "The programmes are operated in a manner intended not to interfere with
markets for cash sales. The programm es are targeted towa rd those countries
where the guarantee is necessary to secu re financing of the exports but which
have sufficient financial strength so that foreign exchange will be available for
scheduled payments." (7 CFR 1493.10(a)(2) Exhibit BRA-38)

 (c) "In providing this credit guarant ee facility, CCC seeks to expand market
opportunities for US agricultural expo rters and assist long-term market
development for US agricultural commodities." (7 CFR 1493.10(a)(2) Exhibit
BRA-38)

37. The United States seems to argue that, at present, by virtue of Article 10.2 of the
Agreement on Agriculture, there are no discip lines on agricultural export credit guarantees
under the Agreement on Agriculture (or the SCM Agreement).

 (a) Comment on the following proposit ion: a WTO Member may therefore extend
agricultural export credit guarantees without charging a premium, and for an
indefinite period, in addition to any other terms and conditions it may wish?
How would this reconcile with the title of Article 10 of the Agreement on
Agriculture ("Prevention of Circumven tion on Export Subsidy Commitments"),
and with other commitments contained in the Agreement on Agriculture? Please
cite any relevant material, including any past WTO dispute settlement cases. 3
rd
parties, in particular, Argentina, Canada, EC, NZ

 (b) If, as the United States argues, there are no disciplines on export credit
guarantees in the Agreement on Agriculture, how could export credit guarantees
"conform fully to the provisions of Part V" of the Agreement on Agriculture
within the meaning of Article 13 (how can you assess "conformity" or non-
conformity with non- existent disciplines)? 3
rd parties, in particular, Argentina,
Canada, EC, NZ

STEP 2 PAYMENTS

38. Please comment on the statement in note 119 of the United States' first written
submission that "...to the extent a consumer that had intended to export instead opens the bale,
then that consumer could still obtain the Step 2 payment upon submission of the requisite
documentation". The Panel notes that Step 2 payments all involve upland cotton produced in
the United States. What are the two distinct factual situations that Step 2 payments involve?
Other than the panel report in Canada-Dairy and the findings of the Appellate Body in US-FSC
(21.5)
27, do any other dispute settlement reports offer guidance on this issue? For example, how,

27 "We recall that the ETI measure grants a tax exemp tion in two different sets of circumstances: (a)
where property is produced within the United States and held for use outside the United States; and (b) where
property is produced outside the United States and held for use outside the United States. Our conclusion that
the ETI measure grants subsidies that are export contingent in the first set of circumstances is not affected by the
fact that the subsidy can also be obtained in the second set of circumstances. The fact that the subsidies granted
in the second set of circumstances might not be export contingent does not dissolve the export contingency
arising in the first set of circumstances. 27 Conversely, the export contingency arising in these circumstances has
no bearing on whether there is an export contingent subsidy in the second set of circumstances. Where a

if at all is the Appellate Body's re port in Canada-Aircraft relevant here?
28 3 rd parties, in
particular, Australia, Argentina, NZ, Paraguay

39. Please comment on the United States assert ions at paragraph 129 of its first written
submission, that "[t]he programme is indifferent to whether recipients of the benefit of this
programme are exporters or parties that open bales for the processing of manufacturing raw
cotton into cotton products in the United States". 3
rd parties, in particular, Australia,
Argentina, NZ, Paraguay

Reply

 This comment responds to both questions 38 and 39.

 Australia provided detailed comment on the “S tep 2” payment programme having regard to
the Appellate Body’s findings in US – FSC (21.5) at paragraphs 49-69 of its Third Party Submission.
Australia does not dispute that “Step 2” payments ma y be made on either export or domestic use of a
bale of cotton, or that the “intent” with which a buyer purchased a bale of cotton has no effect on an
entitlement to a “Step 2” payment in respect of that particular bale. However, these arguments by the
United States are not determinative of the issue.

 To qualify for a “Step 2” payment, a bale of co tton must be either exported or consumed by a
domestic user. These are the two distinct factua l situations covered by the “Step 2” payment
programme: by definition, a particular bale of cotton cannot be both exported and consumed by a
domestic user.

 The Appellate Body’s findings in Canada – Aircraft
29 provide further support for the view
that “Step 2” payments are export or local content subs idies. In each of the di stinct factual situations
of export or domestic use, “Step 2” payments are contingent upon export performance or contingent
upon the use of domestic over imported goods respectively.

40. With respect to paragraph 32 of the oral st atement of the EC, are subsidies contingent
on the use of domestic goods consistent with th e AoA? Does the phrase "provide support in
favour of domestic producers" refer to, and/or permit such subsidies? What is the meaning and
relevance of this (if any) to Brazil's claims under Article 3 of the SCM Agreement and Article
III:4 of the GATT 1994. 3
rd parties, in particular, Australia, Argentina, EC, NZ, Paraguay

United States taxpayer is simultaneously producing property within and outside the United States, for direct use
outside the United States, subsidies may be granted under the ETI measure in respect of both sets of property.
The subsidy granted with respect to th e property produced within the United St ates, and exported from there, is
export contingent within the mean ing of Article 3.1(a) of the SCM Agreement , irrespective of whether the
subsidy given in respect of property produced outside the United States is also export contingent."
1.
28 There, the Appellate Body stated that,
"the fact that some of TPC's contributions, in some industry sectors,
are not contingent upon export performance, does not necessarily
mean that the same is true for all of TPC's contributions. It is enough
to show that one or some of TPC 's contributions do constitute
subsidies "contingent ... in fact … upon export performance". 28
29 Canada – Measures Affecting the Export of Civilian Aircraft , Report of the Appellate Body,
WT/DS70/AB/R, paragraph 179.

Reply

 Australia does not consider that the phrase “p rovide support in favour of domestic producers”
in Article 3.2 of the Agreement on Agriculture permits subsidies contingent upon the use of domestic
goods.

 In Australia’s view, the legal issu e in question relates to the condition
 attached to the grant of
a subsidy, not the grant of a subsidy per se or who might benefit from the subsidy. The fact that a
measure may benefit an agricultural producer (“sup port in favour of domestic producers”) does not
serve to override measures otherwise prohibited.

 Article 21.1 of the Agreement on Agriculture provides that “[t]he provisions of GATT 1994
and of other Multilateral Trade Agre ements in Annex 1A to the WT O Agreement shall apply subject
to the provisions of this Agreement”. Article 3.1 of the SCM Agreement applies “[e]xcept as provided
in the Agreement on Agriculture”. The Gene ral Interpretive Note to Annex 1A of the Marrakesh
Agreement Establishing the World Trade Organization also provides contextual guidance. Pursuant
to that Note, the Agreement on Agriculture would prevail to the extent of any conflict with GATT
1994.

 However, in the case of subs idies contingent upon the use of domestic goods, there is no
conflict between either the Agreement on Agriculture , which inter alia disciplines the amounts of
domestic support in favour of domestic producers which distorts trade and production, and the SCM
Agreement or GATT 1994, which discipline or prohibit certain conditions attached to subsidies,
including subsidies in favour of agricultural producers (subject only to the provisions of
Article III:8(b) of GATT 1994). There is no provision in the Agreement on Agriculture which
provides for an exception to, or cover for, local content conditions attached to the grant of a subsidy.

 Australia has already noted
30 that Article 13(b)(ii) does not exempt non-“green box” domestic
support measures from actions based on Article 3 of the SCM Agreement. Neither does Article 13
anywhere refer to GATT Article III:4. Nor with regard to these Articles is there any provision
comparable to Articles 5 and 12 of the Agreement on Agriculture. As stated in the preambular clauses
of the Agreement on Agriculture , the “long-term objective is to provide for substantial progressive
reductions in agricultural support a nd protection”: it is not intended to provide for a weakening of
disciplines, particularly when such disciplines are not specifically mentioned.

 Australia also notes that the domestic support provisions of the Agreement on Agriculture
provide for a strengthening and elaboration of the provisions of Article XVI of GATT 1994. They are
not directed towards a diminution of basic GATT ob ligations. National treatment is central to the
multilateral trading system. It is inconceivable to Australia that the negotiators of the Agreement on
Agriculture would, as part of a reform programme designed to strengthen disciplines, agree to weaken
national treatment disciplines.

 However, in the event the Panel were to consid er that the phrase “provide support in favour of
domestic producers” refers to and/or permits s ubsidies contingent upon the use of domestic goods,
Australia notes that such support could be permitted only to the extent that the support was actually
passed through to the producers of the basic agricultural product.

30 Oral Statement by Australia, paragraphs 29-30.

ETI ACT

41. Concerning its claims on the ETI Act, Brazil relies on the US – FSC case. However, it
appears that the United States did not raise the issue of the Peace Clause in that case, nor did
the US appear to invoke Article 6 of the Ag reement on Agriculture. If the Panel's
understanding is correct, how, if at all, are th ese differences relevant here? Argentina, China,
EC, NZ

42. How do you view the reference in paragraph 43 of the EC's third party oral statement
with respect to the relevance of Article 17.14 of th e DSU, and, in particular, the phrase "a final
resolution to that dispute" (emphasis added)? Please explain the use, and relevance (if any) of
the term "disputes" in Articles 9.3 and 12 and Appendix 3 of the DSU, and please cite any other
provisions you consider relevant. Argentina, China, EC, NZ

ANNEX J-3

ANSWERS OF BENIN TO THE PANEL'S
QUESTIONS OF 25 JULY 2003

11 August 2003

 Benin offers the following responses to the 25 Ju ly questions of the Panel, as they pertain to
the scope of Benin’s Third Party Submission or Oral Statement:

1. Australia has argued that Article 13 of the Agreement on Agriculture is an affirmative
defence. How do you reconcile this with your view that the conditions of Article 13 are a
“prerequisite” to the availability of a right or privilege? Australia. Would other third parties
have any comments on Australia’s assertion? 3
rd parties, in particular Argentina, Benin, China,
Chinese Taipei

Reply

 Benin agrees with the basic assertion of Australia that Article 13 of the Agreement on
Agriculture is an affirmative defence.

 In Benin’s view, the notion of Article 13 as an affirmative defence is easily reconciled with
the view that the conditions set out in Article 13 are a prerequisite to its availability. As Benin argued
in its Third Party submission, the language used in Ar ticle 13 shows the clear intent of its drafters that
the Member seeking to invoke the peace clause defe nce must bear the burden of demonstrating full
compliance with all of the preconditions set out in this provision. As noted by Benin, this intent is
demonstrated, inter alia, by the use of the proviso "provided that." In the Quantitative Restrictions
case, also referred to in Benin's Third Party subm ission, the Appellate Body considered similar
language in GATT Article XVIII:11, and found that the burden lay on the Member seeking to invoke
the proviso.

 While Benin and Australia thus share the same view on the nature of Article 13, Benin would
not find it necessary to refer to the invocation of Ar ticle 13 as a "privilege." In Benin's view, a
Member that has met the burden of demonstrating full compliance with all of the preconditions set out
in Article 13 could invoke this defence as a right. However, the United States has clearly not met this
burden in the present case.

16. If the word “specific” were deleted from Article 13(b)(ii), would this change the meaning
of the subparagraph? 3
rd parties, in particular Australia, Argentina, Benin, Canada, China,
EC, NZ

Reply
 Please see Benin’s answer to Question 18, which also addresses the issue raised in
Question 16.

18. Benin’s oral statement considers the phrase “support to a specific commodity” in
Article 13(b)(ii) of the Agreement on Agriculture . How does Benin believ e that phrase is best
interpreted? Please substantiate your response, commenting on other submissions by parties
and third parties you believe appropriate. Benin

Reply

 In Benin’s view, the phrase “support to a speci fic commodity” in Article 13(b)(ii) means any
support, other than green box support, provided to a particular, identifiable agricultural commodity.
Such support can be provided through either a product-specific or non product-specific programme.

 The United States argues that “the phrase ‘support to a specific commodity’ should be
understood to mean ‘product-specific support’”. This position is supported by the European
Communities, which suggests that the word “specific” was inserted in Article 13 as “a qualifier to the
word ‘support’”.

 As noted by Benin in its oral statement of July 24, if the drafters of the Agreement on
Agriculture had wanted to use the term “product-sp ecific support” in Article 13(b)(ii), they obviously
could have done so, as they did elsewhere in Agreement, such as in Article 6(4), or in Annex 3.

 The interpretation proposed by the United St ates and the European Communities is contrary
to the language actually used in Article 13(b)(ii) , which refers to support to a “specific commodity”
and not “specific support” to a commodity, or “product-specific support.” The treaty interpreter must
give meaning to the words actually used by the drafters of this provision.

 As noted by New Zealand in its Third Part y submission, the use of the term “specific
commodity” in Article 13(b)(ii) was used to dis tinguish the “peace clause” from general domestic
support commitments, which are determined on the basis of total “Aggregate Measure of Support”.
As stated by New Zealand, without such wording, “peace clause” protection could be lost for any
agricultural product if total AMS increased, even if support to a specific product had not increased.

 Moreover, to re-iterate another point raised by Benin in its oral statement, acceptance of the
US interpretation would clearly elevate form over s ubstance. Benin agrees with Brazil that the US
interpretation “would carve out a category of non-‘green box’ subsidies simply because the measures
distort trade in multiple commodities…This interpretation woul d permit Members to insulate their
trade-distorting non-‘green box’ measures from challenge by manipulating the form of the support so
that it does not mandate the production of a specific co mmodity in order to receive the subsidy, or by
providing such support through a non-‘product-specific’ measure.”

 Benin also notes that the Appellate Body h as made clear that the WTO-consistency of
subsidies must be determined by their substance
, and not by their form.1
 Therefore, support provided to any specific or identifiable commodity, regardless of the
nature of that support, must be included in the anal ysis required by Article 13(b)(ii). In Benin’s view,
this interpretation would remain the same if the word “specific” were deleted from Article 13(b)(ii),

 1 In Benin’s view, it is useful to recall how the Appellate Body interpreted the export subsidy
commitments of the Agreement on Agriculture in the Canada Dairy dispute, where the tribunal emphatically
rejected an interpretation that would have elevated form over substance. The Appellate Body refused to read the
word “payments” in Article 9.1(c) narrowly, i.e. to mean monetary payments only, but not payments-in-kind:

“…if a restrictive reading of the words "payments" were adopted, such that "payments" under Article
9.1(c) had to be monetary, no account could be taken, under Article 9.1(c), of "revenue foregone". This
would, we believe, prevent a proper assessment of the commitments made by WTO Members under
Article 9.2, as envisaged by Article 1(c) of the Agreement on Agriculture. We, therefore, prefer a reading
of Article 9.1(c) that allows full acco unt to be taken of "revenue foregon e". The contrary view would, in
our opinion, elevate form over substance and permit
 Members to circumvent the subsidy disciplines set
forth in Article 9 of the Agreement on Agriculture.” [emphasis added]

Appellate Body Report, Canada – Measures Affecti ng the Importation of Milk and the Exportation of
Dairy Products, WT/DS103/AB/R, WT/DS113/AB/R, paragraph 110.

an issue raised in Question 16. Such a deletion, in Benin’s view, would reinforce the view that
support provided to “a commodity”, regardless of th e form of that support, would come under this
provision.

 In any event, whether the drafters chose the term “support to a specific commodity” or
“support to a commodity”, the result would be the same. The most important point is that the drafters
of the Agreement could have used “product-specifi c support”, a term of art found elsewhere in the
Agreement, but did not.

 In addition, Benin would offer the following views on the ETI Act:

41. Concerning its claims on the ETI Act, Brazil relies on the US – FSC case. However, it
appears that the United States did not raise the issue of the Peace Clause in that case, nor did
the US appear to invoke Article 6 of the Agreement on Agriculture . If the Panel's
understanding is correct, how, if at all, are th ese differences relevant here? Argentina, China,
EC, NZ

Reply

 Brazil has asked the Panel to find that “the ETI Act constitutes an export subsidy violating
AoA Articles 10.1 and 8 and ASCM Article 3.1(a).” [Paragraph 330 of Brazil’s First Submission.]
As is well-known, the Appellate Body has f ound that the ETI measure is inconsistent, inter alia, with
the same provisions cited by Brazil: Articles 10.1 and 8 of the Agreement on Agriculture , and
Article 3.1(a) of the SCM Agreement.
2 The Appellate Body report was adopted by the DSB on
January 29, 2002, and the ETI has remained unamended since that time.

 Before responding directly to Question 41, Be nin would offer some preliminary observations
on the relevance of earlier Panel and Appellate Body reports.

 In Benin’s view, prior adopted Panel or Appella te Body reports are not technically binding on
subsequent Panels. As the Appellate Body stated in Japan Alcohol, adopted panel reports “are not
binding, except with respect to resolving the particul ar dispute between the parties to that dispute.”
 3
Thus, the adopted Appellate Body decision in the FSC/ETI dispute is binding only on the parties to
that dispute, the United States and the EC.

However, the Appellate Body in Japan Alcohol also made clear that prior panel decisions “create
legitimate expectations among WTO Members, and, therefore, should be taken into account where
they are relevant to any dispute.”
4

 A similar approach was taken by the Panel in the India – Patent Protection case. The Panel,
established at the request of the EC, had to determin e what weight to give to the adopted Panel and
Appellate Body reports on the same subject matte r in an earlier case brought by the United States.
The Panel stated that:

2 Appellate Body report, United States – Tax Treatment for ‘Foreign Sales Corporations’: Recourse to
Article 21.5 of the DSU by the European Communities. WT/DS108/AB/RW.
 3 Appellate Body report, Japan - Taxes on Alcoholic Beverages . WT/DS8/AB/R, WT/DS10/AB/R,
WT/DS11/AB/R. Page 14.
 4 Appellate Body report, Japan - Taxes on Alcoholic Beverages . Ibid, page 14. In the Shrimp-Turtle
compliance panel appeal, the Appellate Body added that: “This reasoning applies to adopted Appellate Body
Reports as well.” Appellate Body report, United States – Import Prohibition of Certain Shrimp and Shrimp
Products: Recourse to Article 21.5 of the DSU by Malaysia. WT/DS58/AB/RW, paragraph 109.

“It can thus be concluded that panels are not bound by previous decisions of panels or
the Appellate Body even if the subject-m atter is the same. In examining dispute
WT/DS79 [the EC complaint] we are not legally bound by the conclusions of the
Panel in dispute WT/DS50 [the prior US complaint] as modified by the Appellate
Body report. However, in the course of "normal dispute settlement procedures"
required under Article 10.4 of the DSU, we will take into account the conclusions and
reasoning in the Panel and Appellate Body reports in WT/DS50. Moreover, in our
examination, we believe that we should give significant weight to both Article 3.2 of
the DSU, which stresses the role of the WTO dispute settlement system in providing
security and predictability to the multilateral trading system, and to the need to avoid
inconsistent rulings (which concern has been r e f e r r e d t o b y b o t h p a r t i e s ) . I n o u r
view, these considerations form the basis of the requirement of the referral to the
"original panel" wherever possible under Article 10.4 of the DSU.”
5 [original
emphasis]
It is also highly instructive to recall the position ta ken by the United States as a third party to the EC
complaint, since there are direct parallels to the current situation in Cotton. The US position, as
summarized by the Panel, included the following:

“The United States argued in its third party submission that the precise measures and
provisions of the WTO Agreement at issue in this dispute had been the subject of a
previous WTO dispute settlement pro ceeding….[T]he Appellate Body had
thoroughly analyzed the legal issues in the case and it was neither necessary nor
appropriate for the Panel to repeat that work . The Panel should consider the
arguments of the parties, but be guided by the Appellate Body’s recent interpretation
of the obligations at issue….
The United States supported the view of the EC that it was not necessary or
appropriate to repeat all of the lega l arguments made in the earlier dispute
(WT/DS50) in the context of the present proceedings….India appeared to seek an
entirely redundant proceeding. Despite Indi a's obligation under Article 17.14 of the
DSU to accept the Appellate Body's report in the earlier case unconditionally, India's
submission gratuitously disparaged the work of the Appellate Body….
The United States added that, moreover, India did not argue that it had modified its
patent regime since the Appellate Body's ru ling and that, in that situation, the Panel
should be guided by the Appellate Body's decision, not by allegedly new arguments
about the same patent regime.
India should not be permitte d to reopen legal issues that had been conclusively
determined by a panel and the Appellate Bo dy. Such a result would invite repetitive
litigation….The drafters had wanted to avoi d giving complainants or defendants an
incentive to re-litigate disputes to see if different panels would produce different
results. If such "panel shopping" did produce different results, the effect on the
dispute settlement system would be profoundly destabilizing.

The WTO dispute settlement system could not function effectively without consistent
panel judgments….Without consistent j udgments, WTO Members would find little
guidance in the legal interpretations devel oped by dispute settlement panels and the
Appellate Body. The role of the dispute settlement system [would be] greatly

 5 Panel report, India - Patent Protection for Ph armaceutical and Agricultural Chemical Products,
WT/DS79/R, paragraph 7.30.

diminished and the system could not fulfill its purpose: to serve as a "central element
in providing security and predictability to the multilateral trading system.” [emphasis
added]
 The parallels between India – Patent Protection and Cotton are striking, and the US
submission in the former case provide clear guidance as to how the Cotton panel should examine
Brazil’s current ETI claims.

 As was the case in Patent Protection, the Appellate Body has “t horoughly analyzed the legal
issues in the [FSC/ETI] case” and it is “neither necessary nor appropriate” for the Cotton Panel to
“repeat that work.” The Cotton Panel should consider the arguments of the parties, but “be guided by
the Appellate Body’s recent interpretation of the obligations at issue.” The United States should not be
permitted to “reopen legal issues [related to the ETI ] that had been conclusively determined by a
panel and the Appellate Body.” Benin shares th e US concern that “such a result would invite
repetitive litigation”, would promote “panel shopping”, and that different results could be “profoundly
destabilizing.”

 Thus, in Benin’s view, the Cotton panel should be guided by the Appellate Body’s
interpretation of the US ETI measure.

 Turning to the specific question raised by th e Panel: as noted above, Benin agrees with the
position advanced by the United States in Patent Protection that a responding party in a subsequent
case dealing with the same measure should not be permitted to reopen issues “that had been
conclusively determined by a panel and the Appellate Body.” However, in Cotton, the United States
would have the right to advance specific new defenc es that were not considered by the Panel or the
Appellate Body in the FSC/ETI dispute (e.g. that the United States is entitled to the protection of
Article 13 because its export subsidies for cotton “confor m fully” to the provisions of Part V of the
Agreement on Agriculture).

 Thus, as a procedural matter, the Cotton Panel could consider such US arguments. However,
as a substantive matter, Benin would note that the relevant obligations in Part V of the Agreement on
Agriculture are Articles 8 and 10.1. As stated above, th e Appellate Body has already determined that
the ETI involves export subsidies inconsistent w ith US obligations under both these provisions.
Therefore, in Benin’s view, US export subsidies for cotton do not “conform fully to the provisions of
Part V.” Accordingly, the ETI is not exempt from action by virtue of the Peace Clause.

42. How do you view the reference in paragra ph 43 of the EC's third party oral statement
with respect to the relevance of Article 17.14 of the DSU, and, in particular, the phrase "a final
resolution to that dispute" (emphasis added)? Please explain the use, and relevance (if any) of
the term "disputes" in Articles 9.3 and 12 and Appendix 3 of the DSU, and please cite any other
provisions you consider relevant. Argentina, China, EC, NZ

Reply

 As noted in the footnote to paragraph 43 of the EC statement, the reference to adopted
Appellate Body reports providing “a final resolutio n to the dispute” was taken from the decision of
the Appellate Body in the Shrimp-Turtle compliance panel appeal.6 However, the context of that case
was slightly different from the present dispute. The Appellate Body decision in the Article 21.5
proceeding in Shrimp Turtle involved the same dispute as had been litigated earlier between Malaysia

 6 Appellate Body report, United States – Import Pr ohibition of Certain Shrimp and Shrimp Products:
Recourse to Article 21.5 of the DSU by Malaysia. Op. Cit.

and the United States, although it had by then moved to the compliance panel stage.
7 By contrast,
Cotton is a new dispute, albeit one that includes th e same measure that had been found to be WTO-
inconsistent in the earlier EC-US FSC dispute.

 Thus, in the present context, the reference to “the dispute” in DSU Article 17.14 would refer
to the EC-US dispute in FSC/ETI, since that is the “dispute” which has resulted in an adopted
Appellate Body report. The “dispute” referred to in Article 12 and Appendix 3 would be the Cotton
dispute, as these proceedings are now underway. Artic le 9.3 provides that if more than one panel is
established to examine the complaints related to the same matter, to the greatest extent possible, the
same persons shall serve as panelists on each of the separate panels, and the timetables shall be
harmonized. While this provision might ha ve had some potential relevance if the Cotton and FSC
cases had been running concurrently, given the par tial overlap of claims, it seems of little relevance
now to the Panel as it assesses the weight to ascribe to prior rulings on the FSC/ETI.

 In any event, Benin would strongly re-itera te its position, as set out above, that the Cotton
panel should be guided by the Appellate Body’s in terpretation of the ETI, particularly since the
measure has not been amended since the DSB adopted the Appellate Body’s report.

 7 Similar kinds of issues are raised in European Communities – Antidumping Duties on Imports of
Cotton-Type Bed Linen from India: Recourse to Article 21.5 of the DSU by India. Report of the Appellate
Body. WT/DS141/AB/RW.

ANNEX J-4

CANADA’S RESPONSES TO PANEL QUESTIONS TO
THIRD PARTIES AT THE FIRST SUBSTANTIVE MEETING
OF THE PANEL WITH THE PARTIES (FIRST SESSION)

11 August 2003

 Canada sets out responses to the questions of the Panel in which Canada has a systemic
interest:

2. Please explain the difference, if any, between the meaning of "defined" and the meaning
of "fixed" in the phrase "a defined and fixed ba se period" in paragraph 6(a) of Annex 2 of the
Agreement on Agriculture.

Reply

1. The meaning of the term “defined” is “having a definite or specified outline or form; clearly
marked, definite”.1 The term “fixed” is defined as “definitely and permanently placed or assigned;
stationary or unchanging in relative po sition; definite, permanent, lasting”. 2 Based on the ordinary
meaning of these terms, the base period for US direct payments must be clearly set out and remain
unchanged. Because the structure of direct pa yment programme and the parameters for direct
payments are essentially the same as those regardi ng PFC payments, the Panel should find that the
applicable base period for direct payments is th e base period for PFC payments. By allowing base
acreage for direct payments to be updated, the United States acts inconsistently with paragraph 6(a) of
Annex 2 because the base period is not “fixed”. Canada refers the Panel to paragraphs 4-6 of its third
party oral statement.

3. Please explain the meaning of "a" in "a defined and fixed base period" in paragraph
6(a) of Annex 2 of the Agreement on Agriculture , the meaning of "the" in "the base period" in
paragraphs 6(b), (c) and (d), and the difference between these and the phrase "based on the
years 1986-88" in Annex 3.

Reply

2. Paragraph 6(a) of Annex 2 of the Agriculture Agreement requires eligibility for decoupled
income support payments to be determined by “clearly-defined criteria such as… production level in a
defined and fixed based period”. Use of the indefini te article “a” in this provision means that no base
period is specified. To the contrary, paragraph 11 of Annex 3 specifies a base period.

3. Use of the definite article “the” in paragraphs 6(b), (c) and (d) of Annex 2 creates a reference
to the base period established pursuant to paragraph 6(a).

4. How often can a Member define and fix a base period in accordance with paragraph 6
of Annex 2 of the Agreement on Agriculture?

1 New Shorter Oxford English Dictionary, p. 618 (“defined”) [Exhibit CDA-4].
2 New Shorter Oxford English Dictionary, p. 962 (“fixed”) [Exhibit CDA-5].

Reply

4. A Member may define and fix a base peri od only once for any given type of decoupled
income support payment.

16. If the word "specific" were deleted from Article 13(b)(ii), would this change the
meaning of the subparagraph?

Reply

5. The Appellate Body explained in United States – Reformulated Gasoline that “[o]ne of the
corollaries of the ‘general rule of interpretation’ in the Vienna Convention is that interpretation must
give meaning and effect to all the terms of a treaty”. 3 The term “specific commodity” means a
commodity that is clearly and explicitly defined. 4 Deletion of the word “specific” would imply an
examination of support benefiting a potentially broade r product class, a result that is not supported by
the text of Article 13(b)(ii) of the Agriculture Agreement.

17. What is the relevance, if any, of the concept of "specificity" in Article 2 of the SCM
Agreement and references to "a product" or "subsidized product" in certain provisions of the
SCM Agreement to the meaning of "support to a specific commodity" in Article 13(b)(ii)
Agreement on Agriculture?

Reply

6. Article 2 of the SCM Agreement sets out principles that apply to determine whether a subsidy
“is specific to [certain enterprises]”. In the context of Article 2, the phrase “is specific to” means that
a government restricts the availability of a subsidy to certain enterprises.
5 In the context of
Article 13(b)(ii) of the Agriculture Agreement , the term “specific commodity” means a commodity
that is clearly and explicitly defined. 6 Article 13(b)(ii) requires an ex amination of all support that is
not exempt under Annex 2 and that benefits a “precise”, “exact”, or “defined” commodity. Such
support may be provided either through product-specific or non-product-specific support programmes.

29. (a) Is an export credit guarantee a financ ial contribution in the form of a "potential
direct transfer of funds or liabilities (e.g. loan guarantee)" within the meaning of
Article 1.1(a)(1)(i) of the SCM Agreement ? Why or why not?

Reply

7. Yes, an export credit guarantee is a potential direct transfer of funds under Article 1.1(a)(1)(i)
of the SCM Agreement. The GSM programmes “underwrite credit extended by the private banking
sector in the United States (or, less commonly, by the US exporter) to approved foreign banks using
dollar-denominated, irrevocable letters of credit to pay for food and agricultural products sold to
foreign buyers.”
7 Under the SCGP, “CCC guarantees a portion of payments due from importers under
short-term financing (up to 180 days ) that exporters have extended di rectly to the importers for the

3 United States – Standards for Reformulated and Conventional Gasoline , Report of the Appellate
Body, WT/DS2/AB/R, adopted 20 May 1996, p. 23.
4 US First Written Submission, para. 77, fn 66. (“Clearly or explicitly defined; precise, exact,
definite.”)
5 US First Written Submission, para. 77. (“‘Specific’ means ‘[s]pecially or peculiarly pertaining to a
particular thing or person, or a class of these; peculiar (to)’.”)
6 US First Written Submission, para. 77, fn 66. (“Clearly or explicitly defined; precise, exact,
definite.”)
7 See Exhibit BRA-71 ( “Fact Sheet: CCC Export Credit Guarantee Programmes (GSM-102/103)”).

purchase of US agricultural products.” 8 Where a foreign bank or fore ign importer defaults under the
terms of the credit/financing that has been extende d, the CCC will transfer funds to the US bank or
US exporter directly.

 (b) How, if at all, would this be relevant to the claims of Brazil?

Reply

8. Where the guarantees provided under the US programmes confer a “benefit”, a “subsidy”
exists within the meaning of Article 1.1 of the SCM Agreement. Whether a “subsidy” exists under
Article 1.1 of the SCM Agreement is relevant to determining whether the US programmes grant export
subsidies within the meaning of Article 1(e) of the Agriculture Agreement. Panels and the Appellate
Body have relied upon the definition of a “subsidy” in Article 1.1 of the SCM Agreement as context to
determining whether an “export subsidy” exists under Article 1(e) of the Agriculture Agreement. This
Panel should do the same.

9. Were the Panel to find that these programmes provide export subsidies within the meaning of
Article 1(e) of the Agriculture Agreement (a likely result in this case), th en it would also find that the
United States has violated Articles 8 and 10.1 at the very least in respect of exports of upland cotton
because it is an unscheduled product and the US quantitative export subsidy reduction commitment
level for that commodity is therefore zero.

30. The Panel could arguably take the view that Articles 1 and 3 of the SCM Agreement
were relevant in assessing the WTO-consistency of United States export credit guarantees. The
Panel would therefore appreciate third party views on this situation, including with respect to
the viability of an a contrario interpretation of item (j) of the Illustrative List (as addressed in
paragraphs 180-183 of the United States' first written submission).

Reply

10. Whether an export subsidy exists under Articles 1 and 3 of the SCM Agreement is relevant to
determining whether the US programmes grant export s ubsidies within the meaning of Article 1(e) of
the Agriculture Agreement. Item (j) of the Illustrative List may not be interpreted a contrario to deem
US export credit guarantee practices as not provid ing export subsidies under Article 10.1 of the
Agriculture Agreement . Where US programmes may not be deemed to provide export subsidies
because they do not meet the requirements of item (j), Articles 10.1 and 10.3 of the Agriculture
Agreement nevertheless require the United States to demonstrate that it has not granted export
subsidies within the meaning of Articles 1 and 3 of the SCM Agreement in respect of the relevant
quantity of exports. Canada refers the Panel to paragraphs 49-50 of its written third party submission
and paragraphs 12-14 of its third party oral statement.

31. If the Panel decides to refer to provisions of the SCM Agreement for contextual guidance
in the interpretation of the terms in Article 10 Agreement on Agriculture, should the Panel refer
to item (j) or Articles 1 and 3 of the SCM Agreement or both?

8 See Exhibit BRA-72 (“Fact Sheet: CCC Supplier Credit Guarantee Programme”).

Reply

11. The Panel should refer to both. Item (j) of the Illustrative List in Annex I of the SCM
Agreement allows the Panel to determine whethe r the United States provides “export credit
guarantee… programmes” such that guaranteed export credit transactions guaranteed under those
programmes are subsidized per se . Articles 1 and 3 of the SCM Agreement allow the Panel to
determine, on a transaction-by-transaction basis, whether given quantities of US exports are
subsidized.

32. The Panel's attention has been drawn to Article 14(c) of the SCM Agreement (see third
party submission of Canada) and to the panel report in DS 222 Canada - Export Credits and
Loan Guarantees . How and to what extent are Article 14(c) of the SCM Agreement , and the
cited panel report, relevant to the issue of wh ether or not the United States export credit
guarantee programmes confer a "benefit"? What would the appropriate market benchmark be
to use for any comparison? Please cite any other relevant material.

Reply

12. Canada refers the Panel to paragraphs 41-48 of its written thir d party submission with respect
to how and to what extent Article 14(c) of the SCM Agreement and the cited panel report are relevant.

13. Whether a benefit is confe rred under Article 1.1(b) of the SCM Agreement is a question of
fact, to be assessed in the light of all the relevant financial considerations of a given export credit
transaction. The Panel’s findings in this respect w ill depend on an examination of: 1) the terms of
credit transactions that are guaranteed by the CCC, including the length of the repayment period and
any fees charged for the guarantee, and 2) credit tr ansactions with similar terms that are occurring in
the market without a CCC guarantee.

33. What is the relevance (if any) of Brazil's statement that : "...export credit guarantees
for exports of agricultural exports [sic] are no t available on the marketplace by commercial
lenders."

Reply

14. Were the Panel to find that support for exports of agricultural products such as export credit
guarantees are not available on the marketplace from commercial lenders, this would suggest that a
benefit under Article 1.1(b) of the SCM Agreement exists because the provision of such support in the
market would otherwise require uneconomical terms and conditions (based on factors such as a lack
of security provided by the product and a lack of lender confidence in sales of the product).

34. Comment on the United States' view of th e meaning of "long term operating costs and
losses" in item (j) of the Illustrative List of Export Subsidies in Annex I of the SCM Agreement
as meaning "claims paid" under the export credit guarantee programmes. Does the United
States' interpretation give meaning to both "c osts" and "losses"? Do claims paid represent
"losses"?

Reply

15. The term “costs” must be distinct in meaning from the term “losses”, otherwise the
coordinating conjunction “and” is rendered meaningless. This is confirmed by the French version of
the phrase (“les frais et les pertes ”). In Canada’s view, any “claims paid” may yield “losses” when
they are added to any other “operating costs” in curred under the programme. Such losses would be
required to be covered over the long term by the premiums charged to avoid a finding that
transactions guaranteed under the programme are subsidized per se.

35. Did the drafters of the Agreement on Agriculture include export credit guarantees in
Article 9.1 of the Agreement on Agriculture? Why or why not?

Reply

16. Export credit guarantees were not included in Article 9.1 of the Agreement on Agriculture
because Members could not agree on specific langua ge. Article 10.1 therefore covers any export
subsidies granted by such guarantees.

36. Please explain any possible significance the following statements may have in respect of
Brazil's claims about GSM102 and 103 (7 CFR 1493.10(a)(2), Exhibit BRA-38)

 (a) "The programmes operate in cases where credit is necessary to increase or
maintain US exports to a foreign mark et and where US financial institutions
would be unwilling to provide financing without CCC's guarantee. (7 CFR
1493.10(a)(2) Exhibit BRA-38)

Reply

17. This statement suggests that similar credit transactions that are not guaranteed by the CCC
would involve uneconomical terms and conditions. Therefore, it suggests that a “benefit” exists
within the meaning of Article 1 of the SCM Agreement . The statement also confirms that the US
programmes are contingent upon export performance within the meaning of Article 1(e) of the
Agriculture Agreement.

 (b) "The programmes are operated in a manner intended not to interfere with
markets for cash sales. The programm es are targeted towa rd those countries
where the guarantee is necessary to secu re financing of the exports but which
have sufficient financial strength so that foreign exchange will be available for
scheduled payments." (7 CFR 1493.10(a)(2) Exhibit BRA-38)

Reply

18. This statement also suggests that a “benefit” exists within the meaning of Article 1 of the
SCM Agreement , and confirms that the US programmes are contingent upon export performance
within the meaning of Article 1(e) of the Agriculture Agreement.

 (c) "In providing this credit guaran tee facility, CCC seeks to expand market
opportunities for US agricultural expo rters and assist long-term market
development for US agricultural commodities." (7 CFR 1493.10(a)(2) Exhibit
BRA-38)

Reply

19. This statement confirms that the US progr ammes are contingent upon export performance
within the meaning of Article 1(e) of the Agriculture Agreement.

37. The United States seems to argue that, at present, by virtue of Article 10.2 of the
Agreement on Agriculture , there are no disciplines on agricultural export credit guarantees
under the Agreement on Agriculture (or the SCM Agreement).

 (a) Comment on the following proposit ion: a WTO Member may therefore extend
agricultural export credit guarantees without charging a premium, and for an

indefinite period, in addition to any other terms and conditions it may wish?
How would this reconcile with the title of Article 10 of the Agreement on
Agriculture ("Prevention of Circumvention on Export Subsidy Commitments"),
and with other commitments contained in the Agreement on Agriculture ? Please
cite any relevant material, including any past WTO dispute settlement cases.

Reply

20. Were the Panel to find that US export cr edit guarantee programmes provide export subsidies
within the meaning of Article 1(e) of the Agriculture Agreement , then it would also find that the
United States has violated its export subsidy commitments under the Agriculture Agreement at the
very least in respect of exports of upland cotton. In this respect, Canada refers the Panel to
paragraphs 51-54 of its written third party submissi on, paragraphs 15-16 of its third party oral
statement, and paragraphs 133-153 of the Appellate Body’s original report in US – FSC.
9

 (b) If, as the United States argues, there are no disciplines on export credit
guarantees in the Agreement on Agriculture, how could export credit guarantees
"conform fully to the provisions of Part V" of the Agreement on Agriculture
within the meaning of Article 13 (how can you assess "conformity" or non-
conformity with non- existent disciplines)?

Reply

21. For export credit guarantees to be exem pt from the obligations set out in the Agriculture
Agreement, the Agreement would have to expressly provide for the exemption. No provision of the
Agriculture Agreement exempts export credit guarantees from any obligation under the Agreement.
The US guarantees will therefore “conform fully to the provision of Part V” only if they do not confer
export subsidies within the meaning of Articles 1(e) of the Agriculture Agreement “in a manner which
results in, or which threatens to lead to, circ umvention of [US] export subsidy commitments” under
Article 10.1.

9 United States – Tax Treatment for “Foreign Sales Corporations” , Report of the Appellate Body,
WT/DS108/AB/R, adopted March 20, 2000.

ANNEX J-5

RESPONSE BY CHINA TO THE
PANEL’S QUESTIONS TO THIRD PARTIES

11 August 2003

1. China appreciates this opportunity to present its views to the Panel in relation to the Panel’s
questions posed to third parties on July 28, 2003. While it was specifically asked to address
Questions 1, 4, 12, 13, 14, 15, 16, 17, 21, 22, 23, 25, 41 and 42, China notes the Panel in the fax cover
page granted freedom to third parties “to respond to or comment on questions posed to the other third
parties”. Given the short period within which thir d parties are required to submit their views, China
therefore responds to and comments on the following underlined questions.

ARTICLE 13 OF THE AGREEMENT ON AGRICULTURE

2. Question 1. Australia has argued that Article 13 of the Agreement on Agriculture is an
affirmative defence. How do you [Australia] reco ncile this with your [Australian] view that the
conditions in Article 13 are a “pre-requisite” to the availability of a right or privilege? Would
other third parties have any comments on Australia’s assertion?

Reply

3. China agrees with the inte rpretation of Article 13 of the Agreement on Agriculture (the
“Peace Clause”) put forward by Australia. As explained in its written submission, China believes that
the Peace Clause does not impose positive obligations ; it only stands to provide limited exemptions
from actions to measures that may otherwise be subject to actions based on GATT 1994 and the
Agreement on Subsidies and Countervailing Measures (the “ Subsidies Agreement”). As wording of
the Peace Clause indicates, such exemptions are not automatically available or granted upon a simple
allegation by a Member that it is protected; certain conditions built into the Peace Clause must be met
before such a Member can enjoy entitlement to Peace Clause exemption.

4. The United States alleged that if conditions do have to be met for availability of Peace Clause
protection, it is upon the complaining party to prove that the US measures do not meet such
conditions, and hence do not enjoy Peace Clause protec tion. In support of its reasoning, it asserts that
the Peace Clause imposes positive obligations by its built- in reference to Annex 2 to and Article 6 of
the Agreement on Agriculture
1. China disagrees on that point. In its written submission, China stated
that when Annex 2 and Article 6 are brought under the Peace Clause as c onditions, they lose any
positive obligation nature, if any, in their origin al places; they have come to form conditions
precedent for entitlement to Peace Clause exemption. Since the Peace Clause contains limited
exemptions from actions based on GATT and the Subsidies Agreement , it is affirmative defence in
nature, and the party claiming its entitlement bears the burden of proving that it is so entitled.

5. China sees no need to “reconcil e” the affirmative defence nature with the conditions that must
be met to enjoy that defence. The latter is si mply required to happen prior to availability of
affirmative defence. The two elements, i.e. conditi ons to be met and availability of exemptions, form
an organic whole of the Peace Clause. To China’s understanding, parties to this dispute share greater

1 Para. 43, US First Written Submission, United St ates – Subsidies on Upland Cotton, WT/DS267,
11 July 2003.

disagreement on who should bear the burden of pr oof under the Peace Clause than whether conditions
under the Peace Clause are pre-requisites to availability of Peace Clause exemption.

ARTICLE 13(B) OF THE AGREEMENT ON AGRICULTURE: DOMESTIC SUPPORT MEASURES

6. Question 4, How often can a Member define and fix a base period in accordance with
paragraph 6 of Annex 2 of the Agreement on Agriculture?

Reply

7. In relation to US direct payments unde r the 2002 FRSI Act, the European Communities
(“EC”) in its oral statement took a unique stance di fferent from those of all other parties. Noting the
United States argument that updating of base periods was necessary in orde r to bring support for
oilseeds production under the direct payment scheme, th e EC argued that “it must be possible to have
different reference periods while eligibility is b ased on previous eligibility for production distorting
subsidies” “to ensure the progressive movement of production distorting subsidies to decoupled
subsidies”; on the other hand, the EC also expr essed concern that “continued updating of reference
periods in respect of the same already decoupled support, creating an expectation that production of
certain crops will be rewarded with a greater entitle ment to supposedly decoupled payments, tends to
undermine the decoupled nature of such payments”
2. Such a line of reasoning may have given rise to
the question raised by the Panel.

8. While sharing the same concern with the EC , China does not see eye to eye with the EC on
the proposed allowance for an initial jump of th e reference period over the transition from production
distorting subsidies to “decoupled subsidies”, even if the latter are found to be decoupled. In China’s
opinion, the issue is not about frequency of referen ce period updating; the issue is whether Para. 6 of
Annex 2 to the Agreement on Agriculture allows updating of the reference period at all.

9. Specifically, the Panel in this case is fa ced with a direct payment programme that was
initiated by a Member several years prior to the coming into effect of the Agreement on Agriculture ,
but was over the years, maintained in the Member country by successor legislations with slight
variations. While Para. 6 of Annex 2 to the Agreement on Agriculture does not specify when “a fixed
and defined base period” falls, it certainly does not provide a window of opportunity for an existing
production distorting support measure to transfor m into a kind of payment with an increased
production factor (acreage) in a new up-to-date pe riod. Such an interpretation would grant a bonus
not intended by the drafters. The requirement by Para. 6 for a “base” period reflects the drafters’
intention to freeze any “Green Box” programme at its initial support level, as opposed to a period
selected by a Member. If a Memb er wishes to carry out a transformation, it should certainly follow
the spirit of Para. 6 and use the base period that is already fixed and defined by the predecessor
legislation.

10. Therefore, with respect to the interpretation Para. 6 of Annex 2 to the Agreement on
Agriculture as applied to a direct payment programme that is a direct descendent of predecessor
programmes, China is of the view that no updating shall be allowed at all.

11. Question 12. Where does Article 13( b) require a year-on-year comparison?

2 Para. 30, Oral Statement by the European Communities, United States – Subsidies on Upland Cotton,
WT/DS267, 24 July 2003.

Reply

12. Main elements of Article 13(b)(ii) and ( iii) read: “domestic suppor t measures that fully
conform to … shall be exempt from actions … , provi ded that such measures do not grant support to a
specific commodity in excess of that decided during the 1992 marketing year” (emphasis added). The
full conformity chapeau and the proviso are two conditions to the availability of exemption granted by
this Article.

13. The Panel’s question relates to interpretation of the proviso. Key to the interpretation are the
words “that”, “during the 1992 marketing year” and “in excess of”. The word “that” is inserted in the
second portion of the proviso to refer back to what was described in the previous portion, i.e. “support
to a specific commodity”. The phrase “in excess of ” requires a comparison. The phrase “during the
1992 marketing year” indicates a requisite element of comparison, a common denominator in time
frame without which a comparison is impossible. The combination of these three elements requires a
comparison of support levels betwee n a given year at issue and 1992 marketing year, i.e. a year-on-
year comparison.

14. Obviously, the proviso does not contemplate th e comparison of the sum of support levels for
more than one year with that of 1992 marketing y ear. Such a comparison would be one between two
grossly unequal numbers, resulting in no statistical significance and would destroy the purpose of the
proviso being a condition precedent to the availability of a protection.

15. In addition, the proviso, properly interpre ted, cannot be limited to a comparison only of
measures currently in effect against those during the 1992 marketing year, as the US argues. The US
based its argument on the present tense of the pr oviso, arguing that such a tense only calls for
determination of the support that challenged measures currently grant. With respect, China disagrees.
While it is indeed written in the present tense, the sentence is led by the key word “provided” in a
strong limitation and demand style. As such, the pr esent tense serves the purpose. The intention of
such tense is to ensure that support levels beyond those in 1992 are not to be protected by the Peace
Clause. Further, the US argument fails to recognize that the present tense is “present” only in respect
of 1995, when the Agreement on Agriculture came into effect. It seeks to govern then “future”
measures. Using the time of panel dispute resolution as the vantage point, as the United States argues,
seriously limits the proviso’s scope to examining only measures current as of the time of dispute.
Thirdly, the US interpretation that a comparison is only limited to the measures currently in effect
drives a significant loophole into the treaty language, and seeks to remove the proviso requirement for
measures that are not current during the year of dis pute resolution. Such an interpretation would also
be tantamount to placing a period of limitation within which a complaining member must seek dispute
settlement against dispute-current measures only. Neither the loophole nor the period of limitation
can be intended by the drafters. It follows ther efore, while Article 13(b) requires a year-on-year
comparison, that comparison is not limited to measure currently in effect. The issue of what measures
are before this Panel are set out in the terms reference for this Panel.

16. Question 13. Does a failure by a Member to comply in a given year with either the
chapeau of Article 13(b) or the proviso in s ubparagraph (ii) of Article 13(b) impact its
entitlement to benefit in an earlier or a later year from the exemption from action provided by
Article 13(b)?

Reply

17. China proposes to address this question in tw o parts: one, does a failure by a Member to
comply in a given year with the chapeau of Article 13(b) impact its entitlement to benefit in an earlier
or a later year from the exemption from action provi ded by Article 13(b)? Two, does a failure by a
Member to comply in a given year with the proviso in subparagraph (ii) of Article 13(b) impact its
entitlement to benefit in an earlier or a later year from the exemption from action provided by

Article 13(b)? In this respect, it is again useful to turn back to the elements in Article 13(b)(ii) and
(iii), which read: “domestic support measures that fu lly conform to … shall be exempt from actions
… , provided that such measures do not grant sup port to a specific commodity in excess of that
decided during the 1992 marketing year”. As di scussed in China's answers to Question 12, both the
chapeau and the proviso are two co-existing conditions , and breach of either will lead to loss of the
exemption granted by these Articles.

18. For the first part, a failure by a Member to comply in a given year with the chapeau of
Article 13(b) will not impact its entitlement to benef it in an earlier or a later year from the exemption
from action. The chapeau requires that domestic support measures conform fully to provisions of
Article 6. Articles 6.1 and 6.3 in turn provide that all non-green box domestic support measures of a
Member are considered to be in compliance with Article 6 if the Member's "C urrent Total AMS does
not exceed the corresponding annual or final bound commitment level specified in Part IV of the
Member's Schedule" (emphasis added). The wo rd "exceed" requires a comparison. The words
"current", "corresponding" and "annual" indicate that the comparison is to be made on an annual basis
between the level of support actually provided in a given year and annual bound commitment level in
the same year as indicated in the Member's Schedule. A Member's actual level of support varies from
year to year, so does a Member's annual bound commi tment level. Therefore a factual comparison
between the two in a given year shall not have any bearing on a comparison of different support levels
in an earlier or later year.

19. In respect of the second part of the questi on, China would like to reiterate its answer to
Question 12 that Article 13 (b) requires a year-o n-year comparison between the annual level of
support at issue and the level of support in 1992 ma rketing year. Whether domestic support measures
in a given marketing year exceeds same in 1992 mark eting year is a matter of fact. The level of
support in each given year challenged shall be co mpared separately to same in the 1992 marketing
year. A factual conclusion on the “excess” issue for measures in one year certainly shall not preclude
an examination of a different set of facts in another year.

20. Question 14. Does a failure of a Member to comply with Article 13(b) in respect of a
specific commodity impact its entitlement to benefit in respect of other agricultural products
from the exemption from action provided by Article 13(b)?

Reply

21. The chapeau of Article 13(b) requires compliance with Article 6 for the purpose of
determining whether Peace Clause protection is av ailable. As discussed in China's answers to
Question 13, Article 6 provides that a Member's Cu rrent Total AMS in any year shall not exceed the
corresponding annual or final bound commitment le vel specified in Part IV of the Member's
Schedule. In other words, in co nsidering the "exceed" issue, Current Total AMS, being the monetary
sum value of all measures provided by a Member in a given year shall be compared against the
corresponding annual bound commitment committed by the Member in its Schedule. Such a
comparison disregards the issue of support to a specific commodity. Furthermore, the phrase "support
to a specific commodity" only appears in the provi so of Article 13(b), but not in the chapeau.
Therefore support to a specific commodity is not an issue under consideration by the chapeau of
Article 13(b).

22. In respect of the proviso of Article 13(b), China believes a failure of a Member to comply
thereof in respect of a specific commodity does not impact its entitlement to benefit in respect of other
agriculture products from the exemption from action provided by Article 13(b).

23. For the purpose of this discussion, support measu res can be classified into two categories:
support measures provided exclusively to one specifi ed product or those generally available to a
number of specified products.

24. Where a programme is designed to provide support exclusively to one product, e.g. upland
cotton for the purpose of this case, other products ar e not brought under its co verage. Failure by the
Member’s upland cotton-specific programme (if there is any in this case) to comply with Article
13(b)’s proviso would only take the exclusivel y cotton support programme at issue out of the
protection of exemption by Article 13(b). Whet her that Member’s other support programmes are
protected under Article 13(b)’s protection against ac tions is a matter not related to the cotton support
measures at issue.

25. Where support measures are generally availa ble to a number of products including upland
cotton, the term “specific commodity” requires br eak up and attribution of the general budgetary
outlay to each specific product for comparison under the proviso. For the purpose of this case, only
the portion of outlay that was used for upland cotton is relevant for that co mparison. Outlays broken
up for other products covered by the same programme is not at issue before this Panel. In addition,
terms of reference governing this Panel procedure does not require the Panel to review measures
involving other products.

26. Question 16. If the word "specific" were deleted from Article 13(b)(ii), would this
change the meaning of the subparagraph?

Reply

27. China believes that a hypothetical deletion suggested would not change the fundamental
meaning of Article 13(b)(ii).

28. China understands that the word “specific” is inserted to avoid a lump-sum treatment of
measures generally applicable to a number of commod ities. It is to emphasize that when calculating
the amount of support granted to one commodity, th e portion that is delivered to that specific
commodity at issue shall be singled out and counted as part of the amount of all support granted to
that specific commodity. Doing the comparison ot herwise would render the requisite comparison as
part of the proviso meaningless.

29. If the word “specific” were to be deleted, the proviso would read:

…, provided that such measures do not grant support to a commodity in excess of
that decided during the 1992 marketing year. (emphasis added)
With “specific” deleted, while the emphasis effect may be diminished, the word “a” remains and the
fundamental meaning of this proviso will not cha nge. A comparison is still required for the support
levels that are directly applicable and those attributable to upland cotton.

30. The above interpretation accords with the view s of New Zealand and Australia that the term
“support to a specific commodity” is not synonymous with the term “product-specific support”
3. The
term “product-specific support” focuses on “product-specific”, pointing to a support programme
designed for and provided exclusively to a specified product. On the other hand, the term “support to
a specific commodity” is used to incorpor ate a level of support delivered to a specific commodity,
combining both product specific support and the a ttributed portion of a much larger programme
generally available to a number of products including upland cotton.

3 Paras. 23 – 24, Oral Statement by Australia, United States – Subsidies on Upland Cotton, WT/DS267,
24 July 2003; Para. 9, New Zealand’s Oral Statement, United States – Subsidies on Upland Cotton, WT/DS267,
24 July 2003.

31. Question 17. What is the relevance, if any, of the concept of “specificity” in Article 2 of
the SCM Agreement and references to “a product” or “subsidized product” in certain provisions
of the SCM Agreement to the meaning of “support to a specific commodity” in Article 13(b)(ii)
Agreement on Agriculture?

32. China believes that the concept of “specificity” in Article 2 of the Subsidies Agreement is
used in a sense and for purposes different from that u sed in the proviso of Article 13(b)(ii) of the
Agreement on Agriculture. References to "a product" or "subsid ized product" in certain provisions of
the Subsidies Agreement is not relevant at all to the meaning of “support to a specific commodity”.

33. Pursuant to Article 1.2 of the Subsidies Agreement , a subsidy shall be subject to WTO
disciplines only if its availability is restri cted to specified recipients, i.e. to a specific enterprise or
industry or a group of enterprises or industries . (emphasis added) The wo rd defines what falls under
WTO discipline over subsidies. In contrast, th e word “specific” used in the phrase “support to a
specific commodity” of the Peace Clause proviso, as Ch ina explains in its answers to Question 16, is
an emphasis for calculating year on year support le vels on a product basis. The latter is only an
indicator for a method of calculation and comparison. The same word in the two different places
carry with them separate meanings and purposes.

34. Question 21. Please comment on Brazil’s assertion that “grant” and “decided” in
Article 13(b)(ii) have broadly the same meaning. If so, why did the drafters not use the same
term?

35. Debate among the parties revolves around the word “decided” in the proviso of
Article 13(b)(ii). The United States argued that its domestic support measures “did not decide on an
outlay or expenditure amount in favor of upla nd cotton”; rather, it argued that “US measures
‘determined’” a per pound rate of support during 1992 marketing year while actual outlays or
expenditures were known or completed after the mark eting year’s end. As the actual outlay would
come to its knowledge upon final accounting of the world prices, no amount of outlay was “decided”
during the 1992 marketing year
4.

36. In China’s opinion, the a bove US interpretation does not le nd any utility to interpreting the
proviso in Article 13(b)(ii). The proviso, of which “d ecided” is an element, serves, together with the
chapeau, as a qualifier to the entitlement to exempti on from actions. Were the US interpretation to
prevail, no measure involving year end accounting for the calculation of expenditure would exceed
“that decided during the 1992 marketing year”, as th e former is not capable of measuring up to the
1992 level.

37. In support of the US reading, EC argued that Brazil’s the use of “decided” as opposed to
“granted” is indication that use of budgetary outlays shall be ruled out; that “decided” implies one-off
determination, not involving “deciding” countless applications for support under a particular
programme; and that use of the word “during” in the same sentence means that “decided” may also
cover future periods.
5 However, the EC in its arguments fails to point out expressly what should
constitute the 1992 benchmark6.

38. Interpretation of the word “decided” shall be carried out “in accordance with the ordinary
meaning to be given to the terms of the treaty in their context and in the light of its object and
purpose”
7. Drafters of this Article must be understood to have used the word to carry out the Article’s
object and purpose, being a 1992 benchmark against which to measure whether certain supports are

4 Para. 94, First Written Submission of the US, 11 July 2003.
5 Paras. 14 - 17, Oral Statement by the European Communities, 24 July 2003.
6 Para. 19, Ibid.
7 Article 31.1, Vienna Convention on the Law of Treaties.

entitled to exemption. Measures involving agricu ltural support above that benchmark must risk
challenges on the basis of Article XVI:1 of the GATT and Articles 5 and 6 of the Subsidies
Agreement. As such, the 1992 benchmark must be established for the purpose of comparison.

39. Preference of the word “decided” over “granted ” by drafters of the Article may be a result of
numerous possibilities. Choosing “decided” to imply a “fixed determination” can be reflective of an
intention to exclude expenditures that cannot be precisely allocated to a specific marketing year;
certain support payments may be granted by an administration, but may not have reached its
beneficiaries in 1992; it may well be an indication of the drafters’ intention to cover the exact scenario
described by the US, i.e. granted in 1992 but decided in 1993. However, such choice of the word
shall not push aside the core intention, which is to choose the year 1992 for establishing that
benchmark support level.

40. Again, the issue of burden of proof comes up. If a subsidizing Member wishes to avail itself
of the protection of Article 13(b)(ii), it is obligated to prove that the measures being challenged do not
exceed the 1992 benchmark. Subsequent to th e coming effect of GATT 1994, there exists a
reasonable expectation that all subsidizing Me mbers should have notified the WTO Committee on
Agriculture their respective level of support in 1992 to allow a workable co mparison. In the absence
of such notice, evidence of a 1992 benchmark level can only be established by the complaining party,
in the form of actual budgetary outlays by the su bsidizing Member. Such is the best information
available for a proper comparison.

41. Question 22, What is the meaning of “support” in Agreement on Agriculture 13(b)(ii)?
Why would it be used differently from Annex 3, where it refers to total outlays? Question 23,
Should support be compared under Article 13(b)(ii) in terms of unit of production or total
volume of support or both?

42. Annex 3 of the Agreement on Agriculture is an aid to calculating AMS, which is required not
to exceed the corresponding annual or final bound commitment level specified in a Member’s
domestic support reduction commitments in the Member’s schedule under Article 6 of the Agreement
on Agriculture. In other words, the support calculated on th e basis of outlays is part of the concept of
replacing commitments to reduce domestic support on a product by product basis with a commitment
to reduce overall support to the agricultural sector , a breakthrough in the Agreement’s negotiations
effected by the Blair House accord.

43. Insertion of the Peace Clause into the Agreement on Agriculture is again a part of the Blair
House accord. Budgetary outlay, as exemplified by the calculation method in Annex 3, is the
approach adopted to ensure that levels of suppor t to upland cotton, whether generally available to a
number of products including the product at issue, or product specific, do not overstep the 1992
marketing year level if it is to be protected by the Peace Clause exemption.

44. The United States argued that the comparison required should be between the “per pound
rates” of product specific supports
8. With respect, such an approach fails to recognize the thrust of the
Blair House accord. In addition, while domestic support programmes may have specific designs, e.g.
paid on per unit basis, such designs shall not guide how Article 13(b)(ii) should be interpreted. The
Article has no reference at all to per unit calculation for the purpose of comparison.

45. If unit of production is to be accepted as an method for comparison in addition to absolution
support level comparison, under Article 13(b)(ii), four possibilities exists. A decision as to whether a
Member asserting affirmative defence is entitled to Peace Clause protection is possible only when
both the absolute support level and the per unit suppor t level are higher or lower than those during the

8 Paras. 82 – 87, US First Written Submission, United States – Subsidies on Upland Cotton ,
WT/DS267, 11 July 2003.

1992 marketing year. A decision on whether Peace Cl ause shields the measures at issue may have to
be made taking into account extraneous factors if one method yields a plus and another minus. Those
factors are, however, nowhere to be found under Ar ticle 13(b)(ii) and thus the inclusion of product
unit comparison is certainly not contemplated by the drafters.

ETI ACT

46. Question 41. Concerning its claims on the ETI Act, Brazil relies on the US – FSC case.
However, it appears that the United States did no t raise the issue of the Peace Clause in that
case, nor did the US appear to invoke Article 6 of the Agreement on Agriculture. If the Panel's
understanding is correct, how, if at all, are these differences relevant here?

47. China believes that it is not necessary for the Panel to consider the issue of the Peace Clause
or Article 6 of the Agreement on Agriculture regarding Brazil’s claims on the ETI Act.

48. The issue is dealt with by Article 7.2 of the DSU, which provides:

Panels shall address the relevant provisions in any covered agreement or agreements
cited by the parties to the dispute.” (emphasis added)
In effect, under this article, a Panel is required to consider and address relevant provisions cited by the
parties only. Since the US in this case has not claime d defence for its ETI Act, there is no need for
this Panel to consider same.

49. Question 42. How do you view the reference in paragraph 43 of the EC's third party
oral statement with respect to the relevance of Article 17.14 of the DSU, and, in particular, the
phrase "a final resolution to that dispute" (emphasis added)? Please explain the use, and
relevance (if any) of the term "disputes" in Articles 9.3 and 12 and Appendix 3 of the DSU, and
please cite any other provisions you consider relevant.

50. The phrase “a final resolution to that dispute” cited by the EC in its third party oral statement
comes from the Appellate Body Report in US-Shrimp (21.5) case, in which the Appellate Body stated,

[I]t must also be kept in mind that Article 17.14 of the DSU provides not only that
Reports of the Appellate Body ‘shall be’ adopted by the DSB, by consensus, but also
that such Reports ‘shall be unconditionally accepted by the parties to the dispute.’
Thus, Appellate Body Reports that are adopted by the DSB are, as Article 17.14
provides, ‘unconditionally accepted by the parties to the dispute’, and, therefore, must
be treated by the parties to a particular di spute as a final resolution to that dispute.
In this regard, we recall, too, that Artic le 3.3 of the DSU states that the ‘prompt
settlement’ of disputes ‘is essential to th e effective functioning of the WTO’.
(emphasis added)
51. The word “that” appears to limit the binding force of Appellate Body report only to the
parties in the case on which the Appellate Body’s report is made. Panels in other cases are not bound
by any precedential effect of an earlier Appellate Body report, because the facts, parties and other
circumstances of claim may be entirely different. Generally speaking, such an interpretation is widely
accepted by commentators
9.

9 John H. Jackson, “The Legal Meaning of a GATT Dispute Settlement Report: Some Reflections”,
Towards More Effective Supervision by International Organization: Essays in Honour of Henry G. Schermers
(Martinus Nijhoff Publishers, Dordrecht, Boston and London, 1994).

52. Be that as it may, the ETI Act in this current case is the very same one challenged by the EC,
and found to violate the Agreement on Agriculture and the Subsidies Agreement by both the panel 10
and the Appellate Body11 in US – FSC (21.5), whose reports were adopted on 29 January 2002 by the
DSB. While in that case, the complaint was the EC, and in this case, the complaint was Brazil, the
measures being challenged were the same, and the Member whose measures were challenged were the
same. Countermeasures against th e same measures were authorized by the DSB. While both the
panel and the Appellate Body reports must be treated by EC and the US as final resolution to that
dispute, the US is the party whose measures we re found to be non-WTO compliant, and the same
measures, since not having been withdrawn, is brought to this dispute. Brazil, as a Member of the
WTO system, indeed with other Members of the WT O, has reasonable expectations for the US to
withdraw the measures after the DSB authorization. In respect of ETI Act, there is no difference
between that case, being US – FSC (21.5) and this case, US – Subsidies to Upland Cotton . Under the
circumstances, there is no reason why “final resolution to that dispute” as reflected in US – FSC
(21.5) should not be considered and taken by this Panel.

53. In respect of the term “disputes” under Article 12 and Appendix 3 of the DSU, it is simply
used in the general context of limiting participa tion to only parties to a dispute for the purpose of
assisting panels in organizing their respective working procedures. Meaning and interpretation of the
term “dispute” lends no support to interpretati on of the Appellate Body’s exclamation in US-Shrimp
(21.5) that its report in a specific case “must be treated by the parties to a particular dispute as a final
resolution to that dispute”. Therefore, China be lieves that the term “disput e(s)” used in Article 12
and Appendix 3 of the DSU is not helpful for interpretation of the Appellate Body’s statement.

54. Article 9.3 of the DSU , on the other hand, is part of DSU Article 9 which deals with
procedures for multiple complainants. It is an a ttempt to consolidate panel proceedings while the
matter at issue has been challenged by more than one Member. Specifically, Article 9.3 reads:

If more than one panel is established to ex amine the complaints related to the same
matter, to the greatest extent possible the same persons shall serve as panelists on
each of the separate panels and the timetab le for the panel process in such disputes
shall be harmonized.
The Article seeks, to the extent possible, uni formity and consistency in panel reasoning and
conclusions, in the event that more than one panel is established, by having the same jurists sitting on
separate panels. The requirement for having the same panelists and harmonization of panel processes,
on the other hand, is only capable of being carried out if the first panel’s proceedings were on-going.

55. For the current case, direct application of Article 9.3 is practically impossible. While
complaints raised by Brazil in this case do cover the same ETI Act of the United States which was the
subject matter of US – FSC (21.5) , the panel in the latter case completed its proceedings as early as
29 January 2002. In addition, the complaint by Br azil involves a whole plethora of US measures, of
which the US ETI Act was only one. The majority of the measures challenged by Brazil were not
dealt with by the panel in US – FSC (21.5).

56. Having said that, China believes that the spirit of Article 9.3 is still of guidance value. Since
the ETI Act challenged by Brazil in this case is exactly the same challenged by the EU in US – FSC

10 Panel Report, US - FSC (21.5), WT/DS108/RW, adopted on 29 January, 2002.
11 Appellate Body Report in US - FSC (21.5) , AB-2002-1, WT/DS108/AB/RW,adopted on
29 January 2002.

(21.5), and that the panel proceedings have long pr ogressed beyond the panelist selection stage, the
only way to ensure uniformity and consistency in panel reasoning and conclusions is to have this
Panel consider and adopt the reasoning and conclusion of the panel and the Appellate Body US – FSC
(21.5) in respect of the US ETI Act.

57. China thanks this Panel for granting this oppor tunity to present its views on issues related to
this proceeding, and hopes that this Panel will finds the above points helpful.

I. ARTICLE 13 OF THE AGREEMENT ON AGRICULTURE

Q1. Australia has argued that Article 13 of the Agreement on Agriculture is an affirmative
defence. How do you reconcile this with your view that the conditions in Article 13 are a
"prerequisite" to the availability of a right or privilege? Australia Would other third parties
have any comments on Australia's assertion? 3
RD parties, in particular Argentina, Benin, China,
Chinese Taipei

Answer

1. Australia’s views cannot be reconciled. Austra lia is correct in noting that the conditions in
Article 13 can be considered a prere quisite for taking action under the SCM Agreement.1 In using the
term “prerequisite”, Australia essentially rec ognises that, in respect of measures covered by
Article 13, a complainant can only invo ke the relevant provisions of the SCM Agreement if it proves
that the threshold requirements or prerequisites refe rred to in Article 13 have been satisfied. As the
European Communities has pointed out, such a situation is very different from the situation where, in
the event of a violation of a WTO Agreement, a WTO Member pleads a defence which potentially
exculpates it from this violation (e.g. Article XX GA TT) in respect of which it bears the burden of
proof.

2. Comparing Article 13 with Article 3.3 of the SPS Agreement shows that Australia’s views are
irreconcilable. This provision permits WTO Me mbers not to base SPS measures on international
standards but to impose higher standards where there is a scientific justification or an appropriate risk
assessment has been carried out. This provision has some similarities with Article 13 of the
Agreement on Agriculture since it sets a threshold which must be met before a Member can act.
However, Article 3.3 may be seen as going further than Article 13 since it provides a derogation from
the central discipline of the SPS Agreement ; the obligation to base SPS measures on international
standards. On the other hand, Article 13 is simp ly one element regulating the interface between the
Agreement on Agriculture and the other Annex I Agreements and cannot be seen as a derogation
therefrom. Despite the extent to which Article 3.3 could be thought of as a derogation from the SPS
Agreement, the Appellate Body ruled in EC Hormones that it could not be considered an affirmative
defence, and that the burden of proof did not, therefore lie with the defendant.
2 In particular, the
Appellate Body noted that the situation in Ar ticle 3.3 of the SPS Agreement is “qualitatively
different” from the relationship between for instance, Article 1 and XX GATT.3

3. Consequently, Australia is correct to consider that Article 13 is a prerequisite or a threshold
condition before the other Annex I Agreements may become applicable but is incorrect to consider
that Article 13 can be considered an affirmative defence.

II. ARTICLE 13(B) OF THE AGREEMENT ON AGRICULTURE: DOMESTIC SUPPORT
MEASURES

Q2. Please explain the difference, if any, between the meaning of "defined" and the meaning
of "fixed" in the phrase "a defined and fixed ba se period" in paragraph 6(a) of Annex 2 of the
Agreement on Agriculture. 3
rd parties, in particular Australia, Argentina, Canada, EC, NZ

 2 Appellate Body Report, EC Measures Concerning Meat and Meat Products (Hormones) (“European
Communities – Hormones”), WT/DS26/AB/R, WT/DS48/AB/R, adopted 13 February 1998, para. 109.
3 Appellate Body Report, EC Measures Concerning Meat and Meat Products (Hormones) (“European
Communities – Hormones”), WT/DS26/AB/R, WT/DS48/AB/R, adopted 13 February 1998, para. 105.

Answer

4. The two words have slightly different meani ngs, as is suggested by the use of the conjunctive
“and”. “Defined” means “having a definite or speci fied outline, or form; clearly marked, definite”
4
and thus implies, in terms of interpretation of pa ragraph 6, that the base period for any measure which
is claimed to be green box must be set down in th e measure itself. “Fixed” is defined as “definitely
and permanently placed or assigned, stationary or unchanged in rela tive position, definite, permanent
lasting”5 and suggests that the base period for a particul ar measure cannot be cha nged at a later date.
In other words, a Member may define a base peri od by means of a formula whereas a fixed base
period implies that the years chosen for the base period do not change.

5. Decoupled support within a WTO Member need not take the form of a single measure, but
may involve several measures. Th e first sentence of Paragraph 1 of Annex 2 refers to “domestic
support measures”. Different measures may have different base periods, and a single measure may
have several different base periods.6 Each measure will, or course, have to be judged against the basic
and policy specific criteria set down in Annex 2. Ho wever, it would defeat the objective of Annex 2
paragraph 6 if a Member could adopt repeated, prac tically identical measures, in respect of which
farmers are aware that they may update the base period. If a farmer knows that a base period is going
to be updated, and knows the type of production that will qualify for payments, a WTO Member
inevitably encourages the growth of a particular crop, cannot be considered to have decoupled support
from production and inevitably creates trade or production distorting effects.

6. The European Communities also refers the Panel to its response to question 11.

Q3. Please explain the meaning of "a" in "a defined and fixed base period" in paragraph
6(a) of Annex 2 of the Agreement on Agriculture , the meaning of "the" in "the base period" in
paragraphs 6(b), (c) and (d), and the difference between these and the phrase "based on the
years 1986-88" in Annex 3. 3
rd parties, in particular Australia, Argentina, Canada, EC, NZ

Answer

7. In the view of the European Communities, th e word “a” indicates that it is for the Member
concerned to choose a base period, rather than the base period be fixed for all WTO Members.

8. “The” in paragraphs 6(b),(c) and (d) refers to the base period or periods established for
eligibility for payments in paragraph 6(a).

9. There are notable differences between these phrases and the phrase “based on the years 1986
to 1988” in Annex 3. First, Anne x 3 refers to an already define d and fixed period. Second, the
reference period 1986-1988 refers to all measures ta ken by all Members, and not to specific measures
which are intended to conform to Annex 2 taken by specific Members.

Q4. How often can a Member define and fix a base period in accordance with paragraph 6
of Annex 2 of the Agreement on Agriculture ? 3
rd parties, in particular Australia, Argentina,
Canada, China, EC, NZ

4 The New Shorter Oxford English Dictionary, 1993.
5 The New Shorter Oxford English Dictionary, 1993.
6 For instance, in the experience of the European Communities, where decoupled payments are based
on past payments of production aids, and not all production aids are brought under a decoupled scheme, it must
be envisioned that new products could be brought into the decoupled payment scheme, with the possibility that
such payments are based on a different base period.

Answer

10. As explained in question 2 above, a Member may provide decoupled support through several
measures which may have different base periods. However, a Member may not renew a measure,
with essentially the same characteristics as previous me asures, where, as a matter of fact, farmers are
aware that they will have the possibility to update their base periods and thus have an interest in
producing certain crops.

11. We also refer the Panel to our response to question 11.

Q5. Do you agree that a payment penalty based on crops produced is "related to type of
production"? EC

Answer

12. The European Communities believes that an ex amination of the conformity of a decoupled
scheme with the criteria set out in Annex 2 must involve an examination of the scheme as a whole. In
that light, the European Communities is not convin ced that where, as part of a scheme where no
production is required to receive pa yments, and that the production of any type of crop is permitted,
reducing payments where certain crops are produced can be such as to make the scheme, when taken
as a whole, related to a type of production. C onsequently, the reduction of payment linked to the
production of fruit and vegetables must be seen as part of a scheme which permits a farmer to grow
any type of crop, or even not to produce at all. Such a scheme, it is submitted, taken as a whole,
meets the criteria that payments are not related to a type of production. To find otherwise would not
permit a WTO Member wishing to introduce decoupl ed payments to take account of important
elements of internal competition, in an histori cal perspective, and avoid those farmers receiving
decoupled payments from enjoying both the dec oupled payments and a privileged position vis-à-vis
farmers who are not entitled to such payments . Moreover, as the European Communities has
explained, such a finding would require a Member to increase its subsidy programmes in order to
prevent internal distortions of competition, runn ing directly contrary to the process of reform
instituted by the Agreement on Agriculture.

13. We also refer the Panel to our response to question 11.

Q6. Please explain the meaning of the word "criteria" in Article 6.1 and 7.1. What effect, if
any, does the use of the word "Accordingly" in paragraph 1 of Annex 2 of the Agreement on
Agriculture have on the meaning of the preceding sentence? 3
rd parties, in particular Australia,
Argentina, Canada, EC, NZ

Answer

14. Both Article 6.1 and 7.1 refer to the “criteri a set out in [..] Annex 2”. When one considers
Annex 2, there are two sets of “criteria”. The first is the “basic criteria” set out in subparagraphs (a)
and (b) of paragraph 1, and the second is the “policy- specific criteria” set out in paragraphs 2 to 13.
This understanding is confirmed by the text of paragraph 5 of Anne x 2, which refers to the “basic
criteria” and the “specific criteria”. Thus, Articles 6.1 and 7.1 of the Agreement on Agriculture refer
to the basic and policy specific criteria set out in Annex 2.

15. The European Communities has already set out its understanding of the term “accordingly” in
its Third Party Written Submission.
7 In the European Communities view, the term “accordingly” is

7 First Third Party Submission of the European Communities, 15 July 2003, para. 20. The European
Communities recall, in this context, the opinion of Professor Desta set out in footnote 19 to para. 20.

intended to link the purposive language of the first sentence, with the “basic criteria” set out in the
second sentence. In its Third Party Submission the EC offered a dictionary definition, “in accordance
with the logical premises” which showed that th e word “accordingly” operates as a linkage between
the premise or understanding set out in the firs t sentence and the operative language in the second
sentence. Australia offers the Panel another defi nition: “harmoniously” or “agreeably”, but fails to
note that that the Oxford English Dictionary considers this usage of the word “accordingly” obsolete.8

16. The European Communities would point out that both the French and Spanish text support the
view that the use of the word “accordingly” links th e general statement in the first sentence with the
specific obligations of the second sentence. The Fren ch text uses the term “en conséquence” and the
Spanish the term “por consiguiente”. Both of these terms show that the criteria in the second sentence
are intended to express the principle set out in th e first sentence. Moreover, had the negotiators
intended that the first sentence be a self-standing oblig ation, rather than use the term “accordingly”
they would have used the term “additionally” or “in addition”, or a synonymous term.

17. Further support for this view can be found in the frequent use of the term “accordingly” in the
WTO Agreement. A survey of the term’s use s uggests that it links a general statement, often
recognising that a particular situation causes specific effects, with a right or obligation to take some
type of action set out in an ancillary sentence.
9 These general statements are not such as to impose
specific obligations. The Appellate Body had o ccasion to consider the relationship between such
provisions in the Turkey-Textiles dispute (Articles XXIV.4 and XXIV.5 GATT). It concluded:

The chapeau of paragraph 5 of Article XXI V begins with the word "accordingly",
which can only be read to refer to para graph 4 of Article XXIV, which immediately
precedes the chapeau.

57. According to paragraph 4, the purpose of a customs union is "to facilitate trade"
between the constituent members and "not to raise barriers to the trade" with third
countries. This objective demands that a balance be struck by the constituent
members of a customs union. A customs union should facilitate trade within the
customs union, but it should not do so in a way that raises barriers to trade with third
countries. [..] Paragraph 4 contains pur posive, and not operative, language. It does
not set forth a separate obligation itself but, rather, sets forth the overriding and
pervasive purpose for Article XXIV which is manifested in operative language in the
specific obligations that are found elsewhere in Article XXIV. Thus, the purpose set
forth in paragraph 4 informs the other relevant paragraphs of Article XXIV, including
the chapeau of paragraph 5. For this reas on, the chapeau of paragraph 5, and the
conditions set forth therein for establishing the availability of a defence under Article
XXIV, must be interpreted in the light of the purpose of customs unions set forth in

8 Australia’s Oral Statement, para 35. Oxford Englis h Dictionary, p. 15. Australia refers to the first
sense of the word “accordingly” which is preceded by the symbol “ =” which indicates that a particular usage is
obsolete (see Abbreviations and Symbols, page xxvi).
9 See Articles II.6(a), III.9, XII.3(d), XVI.3, XVIIII.5, XXIV.5 GATT 1994, together with Ad
Article III and Ad Article XXVIII.4 to GATT 1994, Articles 2.1 and 11 of the Dispute Settlement
Understanding, Article A(i) of the Trade Policy Re view Mechanism, Article 12.8 of the Agreement on
Technical Barriers to Trade, Artic le 1 of the GATS Annex on Telecommunications and Article 5.1 of the
Agreement on Textiles and Clothes.

paragraph 4. The chapeau cannot be interpre ted correctly without constant reference
to this purpose.
10 (emphasis added)
18. The Appellate Body has, consequently, recognised the linking function of the word
“accordingly”, and the fact that provisions which ma y be linked to later provisions through the use of
the word “accordingly” may not impose separate obligations.

19. The European Communities would also point out that the Appellate Body has found that other
provisions (e.g. Article III.1 GATT) which contai n general principles are set up as “a guide to
understanding and interpreting the specific obliga tions contained” in other provisions (e.g.
Article III.2 and the other paragraphs of Article III).
11 Such provisions do not, however, impose
additional obligations supplemental to the specific obligations, unless expressly stated.12

20. The Panel may find it useful to refer to the European Communities’ response to a question
posed by Australia (see question no. 44 in this doc ument). In its response, the European Communities
deals with Australia’s unfounded assertion that the European Communities’ reading of the first
sentence of paragraph 1 would render that provision ineffective.

Q7 Please explain the meaning of the words "the fundamental requirement" as used in
paragraph 1 of Annex 2 of the Agreement on Agriculture . 3
rd parties, in particular Australia,
Argentina, Canada, EC, NZ

Answer

21. The phrase “the fundamental requirement” signals the negotiators intent to treat differently
measures which are less or not at all distortive to trade or production and sets forth the general
purpose of Annex 2; a purpose which permeates the rest of Annex 2. Considering the term in the
abstract does not answer the question whether a panel must examine the effects of measures for which
green box status is claimed in addition to examin ing whether such measures respect the basic and
policy-specific criteria set out in Annex 2, or whet her respecting the basic and policy-specific criteria
is such that a measure is deemed not to have th e effects mentioned in the first sentence. As the
European Communities has explained, there are compelling textual and purpose based arguments
which support the latter interpretation.

Q8. In your oral statement, you emphasize the u se of the word "criteria" in other parts of
the Agreement on Agriculture , as distinct from the reference to "fundamental requirement" in
the first sentence of paragraph 1 of Annex 2. Is it the case that sub-paragraphs (a) and (b) of
paragraph 1 of Annex 2 are also "criteria"? EC

 10 Appellate Body Report, Turkey – Restrictions on Imports of Textile and Clothing Products (“Turkey
– Textiles”) , WT/DS34/AB/R, adopted 19 November 1999, paras. 56 and 57 (emphasis added). Note that the
Panel also found that Article XXIV.4 was “not expressed as an obligation” (Panel Report, Turkey – Restrictions
on Imports of Textile and Clothing Products (“Turkey – Textiles”) , WT/DS34/R, adopted 19 November 1999,
as modified by the Appellate Body Report, WT/DS34/AB/R, para. 9.126).
 11 Appellate Body Report, Japan – Taxes on Alcoholic Beverages (“Japan – Alcoholic Beverages”) ,
WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, adopted 1 November 1996, p. 17.
 12 See Appellate Body Report, European Communities - Regime for the Importation, Sale and
Distribution of Bananas (“European Communities – Bananas”) , WT/DS27/AB/R, adopted 25 September 1997,
paras. 214-216 holding that the absence of a specific reference to Article III.1 GATT in Article III.4 GATT
meant that an examination of the consistency of a measur e with Article III.4 GATT did not require, in addition,
an examination of the consistency of the measure with Article III.1 GATT.

Answer

22. Yes. The second sentence of paragraph 1 re fers to sub-paragraphs (a) and (b) as “basic
criteria”. Paragraph 5 refers to the same “basic criteria”. The European Communities considers that
the “criteria” referred to in Articles 6.1 and 7.1 of the Agreement on Agriculture (mentioned in
question 6 above) refer to both the basic criteria se t out in the second sentence of paragraph 1 and the
policy-specific criteria set out in paragraphs 2 to 13 of Annex 2.

Q9. If the first sentence of paragraph 1 of Annex 2 is a stand-alone obligation, does this
allow effects-based claims of non-compliance with Annex 2? If so, how does this affect the
purpose of Article 13(b)? 3
rd parties , in particular Australia, Argentina, Canada, EC, NZ

Answer

23. The implication of finding that the first sente nce of paragraph 1 is a stand-alone obligation is
that an effects test would become applicable to assessing compliance with Annex 2. The result of
such an interpretation is two fold. First, as th e Panel implies, another WTO Member could bring a
WTO dispute alleging that because of its effects a measure does not comply with Annex 2. Second,
WTO Members, when designing measures intended to conform to Annex 2, will be required to
attempt to identify the effects of such measure s. Such a task is often only feasible on an ex post facto
basis. The correct classification of measures is a v ital element for a Member to ensure that it respects
it domestic support ceilings. Requiring a Member to measure effects diminishes the ability of a
Member to ensure correct classification. Such an interpretation should, therefore, be avoided.
13

24. It is rather remarkable, had the drafters in tended that the first sentence of paragraph 1 be a
self-standing obligation, that no indication of how such effects are to be measured was included in the
Agreement on Agriculture . It is far from obvious how the effects of a measure on production and/or
trade is to be measured. Nor is it clear how it can be decided that a particular effect can be considered
as going beyond “minimal”. This can be contrasted with Article 6.3 of the SCM Agreement where the
negotiators set out with some precision certain cr iteria deemed to cause serious prejudice to the
interests of another Member. This leads to th e inevitable conclusion that the criteria by which a
Member or a panel is required to determine whether a measure has more than minimal trade or
production distorting effects are the basic and policy specific criteria set out in Annex 2.

25. Article 13(b) is one element of a complex series of arrangements intended to provide legal
security and certainty to Members who have embark ed on a process of agricultural reform. It is
designed to ensure that a Member may design its domestic support measures in such a way as to
ensure that they do not provide support in excess of that decided in 1992 in order that it be exempted
from the actions listed in Article 13(b). This requir es a Member to be able to classify its measures as
green box, other exempt policies, or as amber box. Only by being sure of its classification can a
Member ensure that it maintains the protection provi ded by Article 13(b). This is one reason why the
criteria for treatment as gr een box, or as another exempt measure, are so precisely defined. (Other
exempt measures are precisely defined in Articles 6.4 and 6.4 of the Agreement on Agriculture ).
Consequently, bringing an effects test into an an alysis of green box compatibility would make it very
difficult for a Member to be sure that it remains within the level of support decided in 1992 and would
therefore render nugatory the security and pr edictability necessary to permit the process of
agricultural reform initiated by the Agreement on Agriculture.

Q10. If the first sentence of paragraph 1 of Annex 2 is not a stand-alone obligation, then must
new, non- or minimally trade-distorting measures that do not conform to the criteria listed in

13 See, in this sense, First Third Party Submission of the European Communities, para. 24.

Annex 2 be classified as non-Green Box? 3
rd parties, in particular Australia, Argentina,
Canada, EC, NZ

Answer

26. The European Communities is not convinced that “non- or minimally trade-distorting
measures” might exist which would not be covered by Annex 2. Anne x 2 has at least two paragraphs
which are designed as “catch–all” provisions. Para graph 2 of Annex 2 acts as a “catch-all” for
general service programmes not involving dir ect payments to producers or processors. 14 Paragraph 5
acts as a “catch-all” for all direct payments. 15 Moreover, Annex 2 is desi gned to cover all domestic
support measures which are deemed to have no or at least minimal trade-distorting effects.
Consequently, it would seem surprising if a non- or minimally trade-distortive measure would not
meet the criteria of Annex 2.

27. In the hypothesis that a measure which had no or minimal trade-distorting effects did not
conform to the criteria in Annex 2 the European Communities would conclude that it could not be
considered as Green Box support. As the European Communities explained in its Third Party
Submission, rather than defining those domestic support measures which were to be subject to
reduction commitments, the negotiators of the Agreement on Agriculture chose to define all those
measures which were not to be subject to reduction commitments – hence Annex 2.
16 Such a result
does not run counter to the objectives of the Agreement on Agriculture since it ensures the security
and predictability of the reform process.

Q11 If the first sentence of paragraph 1 of Annex 2 expresses a general principle which
informs the interpretation of the criteria in Annex 2, please explain how this affects the
assessment of the direct payments programme 's compliance with paragraph 6 of Annex 2. 3
rd
parties, in particular, Australia, Argentina, Canada, EC, NZ

Answer

28. The European Communities considers that the first sentence of paragraph 1 of Annex 2 sets
out the general purpose of Annex 2 and therefore inform s the interpretation of the criteria in Annex 2.
It is relevant to the interpretati on of paragraph 6 in that it should be considered to be part of the
context of paragraph 6. Nevertheless, while th e first paragraph informs the interpretation of
paragraph 6 it cannot detract from the words actually used in paragraph 6.
17 As the Panel considers its
interpretation of the words used in paragraph 6, it can take account of the purposive language of the
first sentence of paragraph 1.

29. There are two issues which the Panel must r esolve with respect to direct payments – the
reduction of payments where certain crops are grown and the updating of base periods.

14 The third sentence of paragraph 2 reads “[S]uch programmes, which include but are not restricted to
the following list, shall meet the general criteria in paragraph 1 above and policy-specific conditions where set
out below [..]”.
15 The second sentence of paragraph 5 reads “[w]here exemption from reduction is claimed for any
existing or new type of direct payment other than those specified in paragraphs 6 through 13, it shall conform to
criteria (b) through (e) in paragraph 6, in addition to the general criteria set out in paragraph 1.”
16 First Third party Submission, paras. 19 & 20. Obviously, some other exempted support measures are
defined in Article 6 of the Agreement on Agriculture.
17 Appellate Body Report, Japan – Taxes on Alcoholic Beverages (“Japan – Alcoholic Beverages”) ,
WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, adopted 1 November 1996, p.17.

30. With respect to the former, the European Communities has already explained why it considers
that reducing payments upon growing certain crops cannot be considered to base payments on a type
of production (see also the EC’s response to Pa nel question 5 above). The European Communities
position is supported not only by the text of paragra ph 6(b) but also by an interpretation informed by
the first sentence of paragraph 1. Permitting such a reduction of payments does not distort trade – it
minimises any distortion which may be caused by any decoupled payments in markets which were
historically undistorted by subsidies. It ensures that the equilibrium established by the market in the
relevant product is maintained. To the extent d ecoupled support can be seen as having an effect on
trade or production by providing support to fa rmers who produce some crops, the reduction in
payment prevents subsidised farmers from potentia lly upsetting the market equilibrium, and thus
serves to prevent effects on trade or production in the market for crops for which payment is reduced.
Seen the other way, not ensuring such a reducti on would allow subsidised farmers to grow the
relevant crops and thus upset the historical market equilibrium with potential effects on trade and
production. In the light of the first sentence of paragraph 1, the only possible application of
Article 6(b) to payment reductions imposed where certain crops are grown is to find that such
reductions are not such as to make the payment based on a type of production.

31. The situation is rather different with respect to the updating of base periods. The European
Communities considers that where farmers know th at base periods will be updated, and that the
production of certain crops will give them a greater entitlement to support in a later period, there will
be a production distorting effect. Such updating is clear ly inconsistent with notions set out in the first
sentence of paragraph 1 since know ledge of such updating will inc ite farmers to produce more of
certain crops which qualify for support and thus will have effects on production.

Q12. Where does Article 13(b) requi re a year-on-year comparison? 3
RD parties, in particular
Australia, Argentina, Canada, China, EC, NZ

Answer

32. The European Communities does not c onsider that Article 13(b) requires
 a year-on-year
comparison. It permits such a year-on-year comparison and given that support is generally expressed
in annual amounts, appears a reasonable basis for ma king such a comparison. In considering this
issue, the Panel must compare two elements. The first is the domestic suppo rt measure challenged.
The second is, at least for Article 13(b)(ii), support “decided” in an earlier period.

33. We examine first the domestic support measur e challenged. In order to benefit from the
protection of Article 13 a measure must conform to the provisions of Article 6 and must “not grant
support” in excess of that decided in during the 1992 marketing year. The European Communities
interprets the present tense of “not grant support” as requiring the Panel to determine the support at
the time the measure is challenged when Panel is asked to determine whether Article 13 is applicable.
Inevitably, such a determination requires that the Panel consider a specific period, which is
comparable with an earlier period. The Europ ean Communities considers that the Panel has some
discretion in choosing a specific period, although it is clear it must be as close as possible to the time
of the dispute. However, since the Pa nel must consider the support granted
 it must choose a period
for which data is complete. Given Article 1(i) of the Agreement on Agriculture , the period chosen
may well be based on the calendar, financial or marketing year of the Member complained against.

34. In respect of support “decided”, the Panel mu st consider the nature of the support decided
during the 1992 marketing year. As the European Communities has explained at length elsewhere,
the relevant element for comparison is not the sup port actually granted for the 1992 marketing year –
rather it is the support decided. Consequently, in each case, the element for comparison must depend
on the decision made during the 1992 marketing year. As a function of that decision, the Panel will

have to choose a period which is comparable with the most recent period. This may well be a
marketing year, but need not be so.

Q13. Does a failure by a Member to comply in a given year with either the chapeau of
Article 13(b) or the proviso in subparagraph (ii) of Article 13(b) impact its entitlement to benefit
in an earlier or a later year from the exem ption from action provided by Article 13(b)? 3
RD
parties, in particular Australia, Argentina, Canada, China, EC, NZ

Answer

35. Failure to comply with Article 6 of the Agreement on Agriculture or granting support in
excess of that decided in 1992 in a given year does not impact a Member’s entitlement to benefit from
the protection of Article 13(b) in a later (or ear lier) year, provided that the Member concerned
complies with Article 6 of the Agreement on Agriculture and does not grant support at present in
excess of that decided during marketing year 1992. This is clear from the present tense of “do not
grant support” which makes it clear that the comparis on must be with the support granted in the most
recent period.

Q14. Does a failure of a Member to comply with Article 13(b) in respect of a specific
commodity impact its entitlement to benefit in respect of other agricultural products from the
exemption from action pr ovided by Article 13(b)? 3
RD parties, in particular Australia,
Argentina, Canada, China, EC, NZ

Answer

36. No. A failure to maintain support granted w ithin the level decided during marketing year
1992 in respect of a specific commodity would not affect the availability of Article 13(b) in respect of
other commodities, provided that support granted to that specific commodity was not in excess of that
decided during 1992.

Q15. Is there any basis on which counter-cyclic al payments could be considered product-
specific? 3
RD parties, in particular Australia, Argentina, Canada, China, EC, NZ

Answer

37. The European Communities c onsiders that, since counter-cyclical payments are paid as a
function of fluctuations in the price of different commodities with respect to target prices also
specified by commodity, they should be considered product specific.

Q16. If the word "specific" were deleted from Article 13(b)(ii), would this change the
meaning of the subparagraph? 3
RD parties, in particular Australia, Argentina, Benin Canada,
China, EC, NZ

Answer

38. Yes. Article 13(b)(ii) refers to product speci fic support. It does not refer to all support which
may be attributed to a product. The use of the word “specific” has meaning, because it makes it clear
that the support in question is that granted or decide d in respect of a specific product, rather than that
granted or decided in respect of all products and which could arguably be attributed to a product.

Q17. What is the relevance, if any, of the concept of "specificity" in Article 2 of the SCM
Agreement and references to "a product" or "subsidized product" in certain provisions of the
SCM Agreement to the meaning of "support to a specific commodity" in Article 13(b)(ii)

Agreement on Agriculture ? 3RD parties, in particular Australia, Argentina, Canada, China, EC,
NZ

Answer

39. The European Communities is not convinced that the drafters of the Agreement on
Agriculture had Article 2 of the SCM Agreement in mind when drafting Article 13(b) of the
Agreement on Agriculture . It may comment further depending on the views of the other third parties
on this issue.

40. The European Communities has already referre d to the relevance of the references to “ a
product” and a “subsidised product” in its Oral Statement.
18

Q18. Benin's oral statement considers the phrase "support to a specific commodity" in
Article 13(b)(ii) of the Agreement on Agriculture . How does Benin believe that phrase is best
interpreted. Please substantiate your response, commenting on other submissions by parties
and third parties as you believe appropriate. Benin

Answer

41. The European Communities may comme nt, as necessary, on Benin’s response.

Q19. Where does Article 13(b)(ii) require a year-on-year comparison? 3rd parties, in
particular Australia, Argentina, Canada, EC, NZ

Answer

42. See the answer to question 12 above.

Q20. Does Article 13(b)(ii) require a comparison of support granted with support decided?
How could such a comparison be made?

Answer

43. Yes. See the answer to question 22 below.

Q21. Please comment on Brazil's assertion that the terms "grant" and "decided" in Article
13(b)(ii) have broadly the same meaning. If so, why did the drafters not use the same term? 3rd
parties, in particular, Australia, Argentina, Canada, China, EC, NZ

Answer

44. As the European Communities has explained el sewhere, the use of the term “decided” is
crucial to an understanding of Article 13(b). It is now established that a pane l is obliged to use the
normal rules of interpretation of international law as codified in the Vienna Convention on the Law of
Treaties. This requires it to look, in the first place, to the ordinary meaning of the words. “Granted”
does not mean the same as “decided”.

45. Granted is the past tense of the verb “grant ” which means “to give or confer, (a possession, a
right etc) formally; transfer (property) legally”.
19 “Decided” is the past tense of the verb “decide”

19 The New Shorter Oxford English Dictionary, 1993, p. 1131.

which means “come to a determination or resolution that, to do, whether ”.
20 Thus, in this context,
“granted” refers to support which has been provided, to which a farmer (or all eligible farmers in a
Member) has obtained a right. “Decided” implies that a political authority (be it a legislature or a
government department or agency) has determined that a particular crop is to be entitled to a
particular type of assistance.

46. The European Communities believes that th e use of the term “decided”, as opposed to
“granted” and “provided” (which are used elsewhere in the Agreement on Agriculture ) is very
deliberate. Article 13(b) is designed to protect support which was “decided” during 1992. It was
negotiated in November 1992 as part of the first Blair House Agreement and later multilateralised.
21
In November 1992, the negotiators could not have known the support granted for the marketing year
1992, which was of course running during that period. They did not, therefore, intend to refer to the
support granted when using the term “decided”. Rather, they were referring to decisions taken during
1992 in respect of support which WTO Members intended to grant – not that actually granted.

Q22. What is the meaning of "support" in Agreement on Agriculture 13(b)(ii) ? Why would it
be used differently from Annex 3, where it refers to total outlays? 3
rd parties, in particular,
Australia, Argentina, Canada, China, EC, NZ

Answer

47. With respect, the European Communities does not consider that support is equated in Annex 3
to total outlays. Annex 3 provides methodologies for calculating the Aggregate Measure of Support
(AMS). Article 1(a) defines the AMS as “the annual level of support, expressed in monetary terms
[…]”. However, AMS is not necessarily calculated in terms of budgetary outlays. For instance,
market price support is calculated “using the gap be tween a fixed external reference price and the
applied administered price multiplied by the quantit y of production eligible to receive the applied
administered price. Budgetary payments made to maintain this gap […] shall not be included in the
AMS.” (Annex 3, para. 8) Similarly, non-exempt payments dependent on a price gap are to be
calculated “either using the gap between the fixed re ference price and the applied administered price
multiplied by the quantity of production eligible to re ceive the administered price, or using budgetary
outlays” (Annex 3, para. 10). This makes it clear th at AMS need not be calculated in terms of total
outlays.

48. The European Communities considers the te rm “support” in Article 13(b)(ii) must be
considered from several perspectiv es. First, it is clear that the word “support” refers to the support
granted
 in a recent period. Second, and at the same time, the word “that” used in the phrase “that
decided” is also a reference to the word “support” . However, as already noted, there is crucial
distinction in this comparison between the “suppor t decided” and the “support granted”. The support
decided does not equal the support actually granted du ring marketing year 1992. For the later period,
there is no reason that the support granted shoul d not be calculated on the basis of the AMS
methodology set out in Annex 3. Indeed, Article 1(a) of the Agreement on Agriculture refers to AMS
as “the annual level of support” (emphasis added).

49. For the support decided AMS-like criteria shoul d be used. This would take into account the
reference to AMS as the annual level of support , but would also recognise that Article 13(b)(ii) refers
to the support “decided” rather th an granted. Crucially, the support decided must be considered as
that which it was decided to provide during the 1992 marketing year. This must be determined on a
case-by-case basis. It should be determined on the basis of the information available to the decision

20 The New Shorter Oxford English Dictionary, 1993, p. 607. Italics in the original.
21 The main change made in the second Blair House Agreement, in respect of Article 13(b) was the
extension of the implementation period for the purposes of the Article 13(b).

makers. It may be that only a certain amount of production would be eligible, 22 or that the decision
makers had production estimates at their disposal, and thus knew the extent of the support that was
being decided. Alternatively, the amount of support decided could also be determined from budgetary
acts, preparing expenditure for future years, in which the decision making authorities would have
knowledge of the support they wished to grant, and the quantity of production which would likely
enjoy such support. Using such a basis, it woul d be possible to use AMS-like criteria. AMS-like
criteria can be used because it will often be possible to establish, for certain measures, a gap between
the applied administered price and the inte rnal or external fixed reference price
23 and establish, on the
basis of information available to the decision makers, the amount of production which was eligible, or
which was estimated. For other measures, it may al so be possible to use appropriation or budgetary
decisions.

Q23. Should support be compared under Article 13(b)(ii) in terms of unit of production or
total volume of support or both? 3rd parties, in particular, Australia, Argentina, Canada, China,
EC, NZ

Answer

50. The European Communities c onsiders that the Panel should use AMS for the most recent
period, and an AMS - like calculation for calculating the support decided during the 1992 marketing
year, as explained in our response to question 22.

Q24. Please provide any written drafting history which could shed light on why the proviso
was added to what is now Article 13(b)(ii) of the Agreement on Agriculture and, in particular,
why the words "grant" and "decided" were used. EC

Answer

51. As the European Communities has noted above, the current text of Article 13(b)(ii) formed
part of the first Blair House Agreement of Novemb er 1992. We have annexed the text which resulted
from these negotiations
24, together with the relevant sections of the “Dunkel Draft”, which were
replaced by Article 13(b)(ii).25

52. The European Communities also considers that it may assist the Panel to have a copy of some
of the key decisions reforming the EC’s Common Agricultural Policy adopted during 1992. Thus, we
have annexed Council Regul ation (EC) No. 1766/92 on the common organisation of the market in
cereals and Council Regulation (EC) No. 1765/92 establishing a system of compensatory payments.
26

Q25. Please comment on an interpretation of the words "decided during" in Article 13(b)(ii)
that would read them as synonymous with the words "authorized during". 3rd parties, in
particular Australia, Argentina, Canada, China, EC, NZ

Answer

53. The European Communities finds some merit in su ch an interpretation. It would be consistent
with the careful choice of the negotia tors to use the word “decided” ra ther than the term “granted” or

22 For instance, because of quotas on eligible production or definitive budgetary ceilings.
23 See para. 9 & 11 of Annex 3.
24 Exhibit EC-1.
25 Exhibit EC-2.
26 Council Regulation (EC) No. 1766/92 on the common organisation of the market in cereals (Exhibit
EC-3) and Council Regulation (EC) No. 1765/92 (Exhibit EC-4).

“provided”. The European Communities is concerne d, however, that the term “authorised” is more
restrictive than the term “decided”. For that reason, while the European Communities sees support for
the interpretation that “decided during” is synonymous with “authorised during”, it is not clear to the
European Communities that “authorised” has exactly the same meaning as “decided”.

Q26. Under Article 13(b)(ii), a comparison is required between support at different times.
One of the issues which is contested between the pa rties is whether the only later period that the
Panel can consider is the present one (i.e. the period underway at the time of the request for
establishment of the Panel). This argument is based on the present tense of the words "do not
grant" in the English text. The Panel asks whether there is any difference in the verb tense as
used in the Spanish-language text, or any other difference which might aid the Panel in
interpreting these words? Argentina, EC, Paraguay, Venezuela

Answer

54. The European Communities notes that both the French and Spanish text also use the present
tense.

Q27. If the 1992 "decision" led to or was the funding source for the money provided in 1992
and later years, is it the full amount of all that funding that constitutes the "support" decided in
1992? If the answer to this question is that it is the full amount of all the support provided
pursuant to the "decision" that must be taken in to account, must this be compared with the
total amount of support that will or might flow from the decision made in the more recent
period for the purposes of the comparison required under Article 13(b)(ii)? If a Member did
not make a "decision" (however that may be inte rpreted) in 1992 about "support", is it the case
that the Member has a zero base for the purpos es of the comparison required under Article
13(b)(ii)? EC

Answer

55. The European Communities does not consider th at it is the full amount of support decided in
1992 for later years that should be taken into account . Such an approach might not be feasible where
the decision taken in 1992 was an open-ended one. Th is approach also sits uneasily with the practice
in the Agreement on Agriculture of expressing support on an annual basis. Since the regulation of
agricultural production takes place on a yearly basis, it seems unlikely that a decision would be taken
setting a maximum amount for a number of years without regulating how such support would be
allocated between specific years.

56. The European Communities considers that th e Panel should use a level of support readily
comparable with the support currently granted. Th is may well be the support decided for a particular
marketing year. If a decision was made in 1992 for fu ture years, it would be to ignore the drafters
intent to rule out the possibility that the support decided for later years is the relevant support.

57. The European Communities does not consider th at it will ever be the case that a Member
which provides subsidies can be said never to ha ve made a decision in 1992 which would qualify
under Article 13(b). At the very least, a Member would have decided, on the basis of its subsidy
programmes, and the amount of eligible productio n and/or estimated production, to set aside a
specific amount of budgetary appropriations for future years. If, however, a Member decided not to
provide support to a specific commodity, the level of support for purposes of the comparison would
be zero.

Q28. In paragraph 13 of Australia's oral statem ent, you state that a "question" is: "could
conditions of price competition for the purposes of a non-violation or impairment claim be

assessed solely on the basis of budg etary outlay figures, as argued by Brazil, or on the basis of a
rate of payment, as argued by the United States? In Australia's view, both factors put forward
by Brazil and the United States would properly form a part of that assessment, but not the
whole." Could you please clarify this statem ent (indicating other elements which would
complete the "whole" and explain its relevance fo r the purposes of our consideration of Article
13 of the Agreement on Agriculture? Australia, EC

Answer

58. The European Communities would prefer to let Australia clarify its statement. The European
Communities will comment upon Australia’s clarifi cation in its comments on the responses of the
other third parties.

III. EXPORT CREDIT GUARANTEE PROGRAMMES

Q29. (a) Is an export credit guarantee a financ ial contribution in the form of a "potential
direct transfer of funds or liabilities (e.g. loan guarantee)" within the meaning of
Article 1.1(a)(1)(i) of the SCM Agreement ? Why or why not? 3
rd parties, in
particular, Argentina, Canada, EC, NZ

Answer

59. Export credits may involve the provision of “loans”. Export credit guarantees, like other
types of guarantees, normally involve an obliga tion to cover losses resulting from defaults on
guaranteed loans. If provided by a government, they may involve a “financial contribution” within
the meaning of Article 1.1(a)(1)(i) of the SCM Agreement.

 (b) How, if at all, would this be relevant to the claims of Brazil? 3rd parties, in
particular, Argentina, Canada, EC, NZ

Answer

60. Whether or not export credit guarantees are “fin ancial contributions” is directly relevant to
Brazil’s claim that GSM 102, GSM 103 and SCGP constitute “export subsidies” within the meaning
of Article 3.1 (a) of the SCM Agreement.

61. It is also relevant, by way of context, for Brazil’s claim that t hose programmes are “export
subsidies” for the purposes of Article 10.1 of the Agreement on Agriculture.

Q30. The Panel could arguably take the view that Articles 1 and 3 of the SCM Agreement
were relevant in assessing the WTO-consistency of United States export credit guarantees. The
Panel would therefore appreciate third party views on this situation, including with respect to
the viability of an a contrario interpretation of item (j) of the Illustrative List (as addressed in
paragraphs 180-183 of the United States' first written submission) . 3
rd parties, in particular,
Argentina, Canada, EC, NZ

Answer

62. The relationship between the Illustrative List and Article 3.1(a) is addressed specifically by
footnote 5, which provides that

Measures referred to in Annex I as not constituting export subsides shall not be
prohibited under this or any other provision of the Agreement.

63. In this regard, the European Communities re calls the reasoning followed by the panels in
Brazil –Aircraft (21.5) I and II
27, which concluded that the firs t paragraph of item (k) of the
Illustrative List does not provide a contrario an “affirmative defence”.

64. As noted by the panel in Brazil –Aircraft (21.5) – II , the Appellate Body’s statement relied
upon by the United States “does not form part of the legal basis for its disposition of the appeal, nor
did the Appellate Body explain its statement”.
28

65. Item (j) of the illustrative list describes circumstances in which, inter alia, export credit
guarantee programmes may constitute export subsidi es. In certain circumstances (e.g. where the
Government is the only provider), it may be that the requirement set out in item (j) – that export credit
guarantees must not be provided at premium rates which are inadequate to cover the long-term
operating costs and losses of the programme – repres ents the appropriate benchmark for determining
that an export subsidy does not exist.

Q31. If the Panel decides to refer to provisions of the SCM Agreement for contextual guidance
in the interpretation of the terms in Article 10 Agreement on Agriculture, should the Panel refer
to item (j) or Articles 1 and 3 of the SCM Agreement or both? . 3
rd parties, in particular,
Argentina, Canada, EC, NZ

Answer

66. Both.

Q32. The Panel's attention has been drawn to Article 14(c) of the SCM Agreement (see third
party submission of Canada) and to the panel report in DS 222 Canada- Export Credits and
Loan Guarantees . How and to what extent are Article 14(c) of the SCM Agreement , and the
cited panel report, relevant to the issue of wh ether or not the United States export credit
guarantee programmes confer a "benefit"? What would the appropriate market benchmark be
to use for any comparison? Please cite any other relevant material. . 3
rd parties, in particular,
Argentina, Canada, EC, NZ

Answer

67. The European Communities agrees that Artic le 14(c) may be relevant context for the
interpretation of Article 1.1(b) of the SCM Agreement , where the subsidy consists of a loan
guarantee. However, Article 14(c) may not be appli cable if the government is the only supplier of a
certain type of service and no comparable type is pr ovided by other suppliers. In that case it may be
necessary to resort to alternative benchmarks, such as the one set out in item (j) of the Illustrative List.
This would depend on the particular circumstances of the case.

Q33 What is the relevance (if any) of Brazil's statement that : "...export credit guarantees
for exports of agricultural exports [ sic] are not available on the ma rketplace by commercial
lenders." . 3
rd parties, in particular, Argentina, Canada, EC, NZ

27 Panel report, Brazil – Export Financing Programme for Aircraft – Recourse by Canada to
Article 21.5 of the DSU, WT/DS64/RW, (“Brazil – Aircraft (21.5) – I”), paras. 6.24-6.67; Panel report, Brazil –
Export Financing Programme for Aircraft – Second Recourse by Canada to Article 21.5 of the DSU ,
WT/DS46/RW/2, (Brazil – Aircraft (21.5) - II, paras5.269-5.275.
28 Panel report, Brazil –Aircraft (21.5) – II, footnote 214.

Answer

68. The European Communities does not agree w ith the proposition that the provision by a
government of finance not available from other suppliers confers per se a benefit. The European
Communities recalls that the Panel in Canada – Export Credits and Loan Guarantees left open this
issue.
29

Q34. Comment on the United States' view of the meaning of "long term operating costs and
losses" in item (j) of the Illustrative List of Export Subsidies in Annex I of the SCM Agreement
as meaning "claims paid" under the export credit guarantee programmes. Does the United
States' interpretation give meaning to both "c osts" and "losses"? Do claims paid represent
"losses"? 3rd parties, in particular, Argentina, Canada, EC, NZ

Answer

69. The European Communities does not express an opinion on this question at this time.

Q35. Did the drafters of the Agreement on Agriculture include export credit guarantees in
Article 9.1 of the Agreement on Agriculture ? Why or why not? 3rd parties, in particular,
Argentina, Canada, EC, NZ

Answer

70. Export credit guarantees are not included in Artic le 9.1. Article 9.1 represents a list of export
subsidies which were permitted to be maintain ed, but which were made subject to reduction
commitments. Article 9.1 is a list of permitted e xport subsidies negotiated by the drafters of the
Agreement on Agriculture. All other export subsides are regulated by Article 10.1.

Q36. Please explain any possible significance the following statements may have in respect of
Brazil's claims about GSM102 and 103 (7 CFR 1493.10(a)(2), Exhibit BRA-38) 3
rd parties, in
particular, Argentina, Canada, EC, NZ

 (a) "The programmes operate in cases where credit is necessary to increase or
maintain US exports to a foreign mark et and where US financial institutions
would be unwilling to provide financing without CCC's guarantee. (7 CFR
1493.10(a)(2) Exhibit BRA-38)

 (b) "The programmes are operated in a manner intended not to interfere with
markets for cash sales . The programmes are target ed toward those countries
where the guarantee is necessary to secu re financing of the exports but which
have sufficient financial strength so that foreign exchange will be available for
scheduled payments." (7 CFR 1493.10(a)(2) Exhibit BRA-38)

 (c) "In providing this credit guarant ee facility, CCC seeks to expand market
opportunities for US agricultural expo rters and assist long-term market
development for US agricultural commodities." (7 CFR 1493.10(a)(2) Exhibit
BRA-38)

29 Panel report, Canada – Export Credits and Loan Guarantees for Regional Aircraft , WT/DS222/R,
para. 7.341.

Answer

71. At this stage, the European Communities do es not comment on the factual aspects of this
claim.

Q37. The United States seems to argue that, at present, by virtue of Article 10.2 of the
Agreement on Agriculture , there are no disciplines on agricultural export credit guarantees
under the Agreement on Agriculture (or the SCM Agreement).

 (a) Comment on the following proposit ion: a WTO Member may therefore extend
agricultural export credit guarantees without charging a premium, and for an
indefinite period, in addition to any other terms and conditions it may wish?
How would this reconcile with the title of Article 10 of the Agreement on
Agriculture ("Prevention of Circumvention on Export Subsidy Commitments"),
and with other commitments contained in the Agreement on Agriculture ? Please
cite any relevant material, including any past WTO dispute settlement cases. 3
rd
parties, in particular, Argentina, Canada, EC, NZ

Answer

72. The European Communities considers that it is only the operation of export credit guarantees
as export subsidies which is regulated by the Agreement on Agriculture . Other elements of the
provision of export credit guarantees are not regulated by the Agreement on Agriculture . To the
extent that the scenario developed by the Panel w ould lead to the provision of export subsidies which
circumvent, or which threaten to circumvent, a Member’s export subsidy commitments the European
Communities considers that it cannot be reconciled with Article 10.1 of the Agreement on
Agriculture.

 (b) If, as the United States argues, there are no disciplines on export credit
guarantees in the Agreement on Agriculture, how could export credit guarantees
"conform fully to the provisions of Part V" of the Agreement on Agriculture
within the meaning of Article 13 (how can you assess "conformity" or non-
conformity with non- existent disciplines)? 3
rd parties, in particular, Argentina,
Canada, EC, NZ

Answer

73. The European Communities disagrees with th e US argument that there are no disciplines on
export credit guarantees. The discipline applying to export credit guarantees, where they operate as
export subsidies, is that they should not be provid ed in a manner inconsistent with Article 10.1. If
they are provided inconsistently with Article 10.1 then they are not protected by Article 13

IV. STEP 2 PAYMENTS

Q38. Please comment on the statement in note 119 of the United States' first written
submission that "...to the extent a consumer that had intended to export instead opens the bale,
then that consumer could still obtain the Step 2 payment upon submission of the requisite
documentation". The Panel notes that Step 2 payments all involve upland cotton produced in
the United States. What are the two distinct factual situations that Step 2 payments involve?
Other than the panel report in Canada-Dairy and the findings of the Appellate Body in US-FSC

(21.5)30, do any other dispute settlement reports offer guidance on this issue? For example, how,
if at all is the Appellate Body's report in Canada-Aircraft relevant here? 31 . 3rd parties, in
particular, Australia, Argentina, NZ, Paraguay

Answer

74. This is a question of fact on which the European Communities takes no position. It will
comment, as necessary, on the replies of the other third parties.

Q39. Please comment on the United States ass ertions at paragraph 129 of its first written
submission, that "[t]he programme is indifferent to whether recipients of the benefit of this
programme are exporters or parties that open bales for the processing of manufacturing raw
cotton into cotton products in the United States." . 3
rd parties, in particular, Australia,
Argentina, NZ, Paraguay

Answer

75. This is a statement of fact on which the Eu ropean Communities offers no comment at present.
The European Communities will comment further depending on the replies of other third parties.

Q40. With respect to paragraph 32 of the oral statement of the EC, are subsidies contingent
on the use of domestic goods consistent with the AoA? Does the phrase "provide support in
favour of domestic producers" refer to, and/or permit such subsidies? What is the meaning and
relevance of this (if any) to Brazil's claims under Article 3 of the SCM Agreement and Article
III:4 of the GATT 1994.. 3
rd parties, in particular, Australia, Argentina, EC, NZ, Paraguay

Answer

76. The Panel’s question involves two elements. First, is a Member entitled to provide domestic
content subsidies under the Agreement on Agriculture? Second, if such subsidies are permitted, what
is the relevance of such a rule to Brazil’s claims under Article 3 of the SCM Agreement and

30 [Original footnote to question] "We recall that the ETI measure grants a tax exemption in two
different sets of circumstances: (a ) where property is produced within the United States and held for use
 outside the United States; and (b) where property is produced outside the United States and held for use
outside the United States. Our conclusion that the ETI measure grants subsidies that are export contingent in the
first set of circumstances is not affect ed by the fact that the subsidy can al so be obtained in the second set of
circumstances. The fact that the subsidies granted in the second set of circumstances might not be export
contingent does not dissolve the export contingency arising in the first set of circumstances. 30 Conversely, the
export contingency arising in these ci rcumstances has no bearing on whether there is an export contingent
subsidy in the second set of circ umstances. Where a United States ta xpayer is simultaneously producing
property within and outside the United States, for direct use outside the United States, subsidies may be granted
under the ETI measure in respect of both sets of property. The subsidy granted with respect to the property
produced within the United States, an d exported from there, is export contingent within the meaning of
Article 3.1(a) of the SCM Agreement, irrespective of whether the subsidy given in respect of property produced
outside the United States is also export contingent."

31 There, the Appellate Body stated that,

"the fact that some of TPC's contributions, in some industry sectors, are not
contingent upon export performance, does not necessarily mean that the
same is true for all of TPC's contributions. It is enough to show that one or
some of TPC's contributions do constitute subsidies contingent ... in
fact … upon export performance".
31

Article III.4 GATT. The European Communities has al ready provided elements of a response in its
oral statement.
32 These are expanded upon below.

77. First, a Member is entitled to prov ide domestic content subsidies under the Agreement on
Agriculture provided such subsidies are provided consis tently with the Member’s domestic support
commitment levels. This conclusion flow s from a number of factors. First, the Agreement on
Agriculture disciplines domestic support. Article 6. 1 refers to “domestic support reduction
commitments”. Article 3.1 refers to “domes tic support [..] commitments […] constitut[ing]
commitments limiting subsidization” and Article 3. 2 obliges Members “not [to] provide support in
favour of domestic producers in excess of the [dom estic] support commitment le vels”. Despite these
clear rules on domestic support, the Agreement on Agriculture does not define “domestic support”.

78. AMS is the measurement of domestic support. AMS is defi ned as “the annual level of
support, expressed in monetary terms, provided for an agricultural product in favour of the producers
of the basic agricultural product or non-product-specific support provided in favour of agricultural
producers in general, other than [that exempted etc].” This is very general – it covers all support in
favour of agricultural producers. This broad scope of domestic support measures which can be
maintained consistently with the Agreement on Agriculture is confirmed by Article 6.1 which states
that the domestic support reduction commitments “sh all apply to all of its [i.e. the Member’s]
domestic support measures in favour of agricultural producers […]”. Paragraph 1 of Annex 3 on the
calculation of the AMS refers to AMS being calcu lated “on a product specific-basis for each basic
agricultural product receiving market prices support, non-exempt direct payments, or any other
subsidy not exempted from the reduction commitment”. (emphasis added)

79. Consequently, the range of domestic s upport measures which a Member may maintain
(consistent with reduction commitments) is very br oad and is only limited by the condition that such
support must be in favour of agricultural produ cers. As the European Communities has noted,
paragraph 7 of Annex 3 explicitly states that “measu res directed at agricultural processors shall be
included to the extent that such measures benef it the producers of the basic agricultural products”.
33
The European Communities considers that the term “benefit” used here must be regarded as being
synonymous with “favour” in the sense of “in favour of agricultural producers”. Moreover, it is clear
that by “measures directed at agricultural processo rs” the negotiators intended subsidies which were
paid to processors, where the benefit went to the agricultural producer. Consequently, in light of the
broad definition of “domestic suppor t” and the specific reference to domestic content subsidies in
paragraph 7 of Annex 3, the Eur opean Communities considers that a Member is entitled to maintain
domestic content subsidies consistently with the Agreement on Agriculture.

80. Second, in response to the Panel’s question, the effect of finding that domestic content
subsidies are provided consistently with the Agreement on Agriculture would be that they cannot be
found inconsistent with either Article 3.1(b) of the SCM Agreement or Article III.4 GATT 1994.
Article 21.1 of the Agreement on Agriculture states that “the provisions of GATT 1994 and of other
Multilateral Trade Agreements in Annex 1A to the WTO Agreement shall apply subject to the

32 Paras. 34 to 38 of the EC’s Oral Statement (a s delivered). The Panel’s reference to para. 32
corresponds to the text provided at the third party session.
33 In terms of negotiating background, it may be useful to the Panel to note that paragraph 7 of Annex 3
was subject to negotiation during the period in which a Panel had ruled that the EC’s payments to oilseed
processors was not covered by Article III.8(b) GATT 1947 and were consequently inconsistent with Article III.4
GATT 1947 (European Economic Community – Payments and Su bsidies Paid to Processors and Producers of
Oilseeds and Related Animal-Feed Proteins Report of the Panel (L/6627 BISD 37S/86) adopted on 25 January
1990. That the negotiators retained this text must theref ore be considered as a clear sign that they intended to
permit Members to maintain such subsidies, subject to reduction commitments, in the Agreement on
Agriculture.

provisions of this Agreement.” As the European Co mmunities pointed out in its oral statement, this
means that provisions of the other Annex 1A Agreements are “subordinated” to the Agreement on
Agriculture.34

81. To find that such subsidies were incons istent with either Article 3.1(b) of the SCM Agreement
or Article III.4 GATT would be to subordinate the right to provide such domestic content subsidies
under the Agreement on Agriculture to the SCM Agreement or GATT 1994. Such an interpretation
directly contradicts Article 21.1 of the Agreement on Agriculture.

82. Indeed, it can be pointed out that applying Article 3.1(b) of the SCM Agreement and
Article III.4 GATT to domestic content s ubsidies provided consistently with the Agreement on
Agriculture would lead to stricter disciplines being applie d to domestic subsidies for agriculture than
are applicable to domestic subsidies for industrial goods. If Article 3.1(b) and Article III.4 were to
apply, domestic subsidies for agricultural products would be subject to reduction commitments and
Article 3.1(b) SCM Agreement and Article III.4 GATT. However, domestic subsidies for industrial
products are not subject to reduction commitments. Since the Agreement on Agriculture establishes
“a basis for initiating a process of reform of trade in agriculture”, it would seem contradictory to find
that domestic support for agriculture is in fact subj ect to stricter obligations than domestic support for
other industries. This explains the “s ubject to” language of Article 21.1 of the Agreement on
Agriculture. Article 21.1 and the Agreement on Agriculture more generally can also be compared with
the other sectoral agreement included in Annex 1A of the WTO Agreement. The Agreement on
Textiles and Clothing explicitly provides, in its Article 9, that the textiles and clothing sector is to be
fully integrated into the GATT 1994. The Agreement on Agriculture has no such language, and
Article 21.1 runs directly counter to this notion. It cannot be lightly assumed that the negotiators,
while providing for the possibility to maintain do mestic content subsidie s, intended that such
subsidies also be subject to rules which effectively makes it impossible to maintain such subsidies.
35

83. The Panel should therefore reject Brazil’s ar guments that domestic content subsidies granted
in favour of agricultural producers can be found to be inconsistent with Article 3.1(b) of the SCM
Agreement and Article III.4 GATT 1994.

V. ETI ACT

Q41. Concerning its claims on the ETI Act, Brazil relies on the US – FSC case. However, it
appears that the United States did not raise the issue of the Peace Clause in that case, nor did
the US appear to invoke Article 6 of the Agreement on Agriculture . If the Panel's
understanding is correct, how, if at a ll, are these differences relevant here? Argentina, China,
EC, NZ

Answer

84. The European Communities does not consider that either the Peace Clause or Article 6 of the
Agreement on Agriculture is relevant. The ETI Act provides export subsidies.
36 Article 6 of the
Agreement on Agriculture does not apply to export subsidies, and therefore the US would not have
been in a position to invoke it.

34 Oral Statement, para. 38.
 35 See, in a similar sense, Appellate Body Report, EC Measures Concerning Meat and Meat Products
(Hormones) (“European Communities – Hormones”) , WT/DS26/AB/R, WT/DS48/AB/R, adopted 13 February
1998, para. 165.
36 The Appellate Body confirmed the panel's findings of a violation of Article 3.1(a) of the
SCM Agreement see Article 231.5 Appellate Body Report, United States – Tax Treatment for "Foreign Sales
Corporations" ("United States – FSC (21.5)"), WT/DS108/AB/RW, adopted 29 January 2002, para. 120.

85. The Peace Clause will only apply in respect of export subsidies which “conform fully to the
provisions of Part V” of the Agreement on Agriculture (Article 13(c)). The Appellate Body upheld
the panel’s findings that the ETI Act provided export subsidies in violation of Article 10.1 of the
Agreement on Agriculture.
37 Consequently, the US could not have legitimately maintained that it was
entitled to peace clause protection.

Q42. How do you view the reference in paragra ph 43 of the EC's third party oral statement
with respect to the relevance of Article 17.14 of the DSU, and, in particular, the phrase "a final
resolution to that dispute" (emphasis added)? Please explain the use, and relevance (if any) of
the term "disputes" in Articles 9.3 and 12 and Appendix 3 of the DSU, and please cite any other
provisions you consider relevant. Argentina, China, EC, NZ

Answer

86. Article 17.14 DSU states that an Appellate Body Report shall be “adopted by the DSB and
unconditionally accepted by the parties to the dispute”. The reference in the EC’s oral statement to
the phrase "a final resolution to that dispute" (emphasis from the Panel) is from the Appellate Body in
United States – Shrimp (21.5).38

87. In the present case the Panel must decide a pr eliminary question. It must determine whether
the claims brought by Brazil against the ETI Act ar e in any way different from those which the panel
and Appellate Body upheld against the ETI Act in the EC’s Recourse to Article 21.5. If Brazil’s
claims are identical to those upheld against the ETI Act, the European Communities considers that the
United States must be considered to have uncon ditionally accepted the Appellate Body’s findings as
adopted by the DSB.

88. The Panel may find some assistance in the Appellate Body’s findings in United States –
Shrimp (21.5). In that recourse to Article 21.5, Malaysia attempted to challenge certain aspects of the
revised US measure at issue which were identical in the measure which was subject to the original
challenge.
39 These aspects had been found by the panel and the Appellate Body to be consistent with
the United States’ WTO obligations. The Appellate Body found that there was no need for the panel,
having determined that this aspect of the measure ha d not changed, to re-examine the consistency of
the measure with the US’ WTO obligations.40

89. The situation before the Panel is the i nverse. Here, the US measure was found to be
inconsistent with US’ WTO obligations. The Eu ropean Communities understands that the measure
before the Panel in this case and before the panel and the Appellate Body in United States – FSC
(21.5) is identical. On the assumption that the claims are identical, applying Article 17.14 DSU and
the Appellate Body’s findings in United States – Shrimp (21.5) the United States must be assumed to
have unconditionally accepted the findings against the ETI Act.

37 Appellate Body Report, United States – Tax Treatment for "Foreign Sales Corporations"
("United States – FSC (21.5)"), WT/DS108/AB/RW, adopted 29 January 2002, para. 196.
38 Para. 97, Article 21.5 Appellate Body Report, United States – Import Prohibition of Certain Shrimp
and Shrimp Products – Recourse to Article 21.-5 of the DSU by Malaysia ("United States – Shrimp (21.5)"),
WT/DS58/AB/RW, adopted 21 November 2001.
39 United States – Shrimp (21.5), para. 96.
 40 The Appellate Body made a similar finding with respect to a claim not pursued before a panel. See,
Report of the Appellate Body in European Communities – Anti-Dumping Duties on Imports of Cotton-Type Bed
Linen from India – Recourse to Article 21.5 of the DSU by India, WT/DS141/AB/RW, adopted on
24 April 2003.

90. The European Communities does not consider it material that the present case concerns a
party (Brazil) which was not party to the FSC dispute. Article 17.14 states that a “party to the dispute”
must unconditionally accept the findings of the Appella te Body adopted by the DSB. Of the parties
before the Panel, the United States is a party to the FSC dispute, and must, therefore, unconditionally
accept the Appellate Body’s findings in that dispute. This is further reinforced by Articles 3.2 and 3.3
DSU which state that the dispute settlement syst em must provide security and predictability and
promote prompt settlement of disputes. Conse quently, given the United States is required to
unconditionally accept the findings in the Article 21. 5 procedure, the European Communities believes
that Brazil, by adopting the EC’ claims and the A ppellate Body’s findings in the FSC dispute, would
make a sufficient case to compel the Panel to find th at the ETI Act is inconsistent with the US’ WTO
obligations in this dispute.

VI. QUESTIONS FROM OTHER THIRD PARTIES ADDRESSED TO THE EUROPEAN
COMMUNITIES

Questions from Australia to the European Communities

Q43. Would the European Communities please expl ain why, in its view, the ordinary meaning
of the phrase “shall meet the fundamental requirem ent” as it appears in the first sentence of
paragraph 1 of Annex 2 to the Agreement on Agriculture does not give meaning and effect to all
provisions of that agreement.
41

Answer

91. The European Communities did not state th at the phrase “shall meet the fundamental
requirement” does not give meaning and effect to all provisions of that agreement. The question
appears to be based on an erroneous characterisation of the EC’s position. In paragraph 17 of its First
Written Submission the European Communities stated that the first sentence of Annex 2 did not create
a free-standing obligation. This view is compe lling when an interpreter considers the ordinary
meaning of the terms, in their context, and in light of the object and purpose of the provision. The
European Communities has explained this in some de tail in its answers to the Panel’s questions 6-11
and in its previous submissions to the Panel.

Q44. The European Communities argues that, under the “accepted canons of interpretation
of international law”, “context and objective” require that the first sentence of paragraph 1 of
Annex 2 to the Agreement on Agriculture be considered to set out an objective.
42 W o u l d t h e
European Communities please explain the legal au thorities for its argument, having regard to
relevant statements by the Appellate Body, particularly those in Japan – Alcohol Taxes.43

41 [Original footnote to question] First Third Party Submission by the European Communities,
paragraph 17.
42 [Original footnote to question] Oral Statement by the European Communities, paragraph 25.
43 [Original footnote to question] In Japan – Taxes on Alcoholic Beverages , Report of the Appellate
Body, WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, pages 11-12, the Appellate Body said:
Article 31 of the Vienna Convention provides that the words of the treaty form the foundation for the
interpretive process: “interpret ation must be based above all upon the text of the treaty”. […] T h e
provisions of the treaty are to be given their ordinary meaning in their context. […] The object and
purpose of the treaty are also to be taken into account in determining the meaning of its provisions.20 A
fundamental tenet of treaty interpretation flowing fro m the general rule of interpretation set out in
Article 31 is the princi ple of effectiveness … […] I n [US – Gasoline] , we noted that “[o]ne of the
corollaries of the ‘general rule of interpretation’ in the Vienna Convention is that interpretation must
give meaning and effect to all the terms of the treaty. An interpre ter is not free to ad opt a reading that
would result in reducing whole clauses or paragraphs of a treaty to redundancy or inutility”. […]

Answer

92. European Communities understands from Austra lia’s question that Australia considers that
the European Communities’ interp retation of the first sentence of Paragraph 1 of Annex 2 would
deprive the first sentence of effect.

93. Australia’s implication is qu ite erroneous, and built upon an incomplete, examination of the
Appellate Body’s rulings. The European Commu nities interpretation does not deprive the first
sentence of effect. Stating that the first senten ce does not impose a self-standing obligation is not the
same as stating that it is deprived of effect. Indeed, the Appellate Body has arrived at exactly the same
conclusion with respect to other provisions containing purposive language, similar to that contained in
the first sentence of paragraph 1. In Japan – Alcoholic Beverages the Appellate Body found:

Article III:1 articulates a general principl e that internal measures should not be
applied so as to afford protection to dom estic production. This general principle
informs the rest of Article III. The purpose of Article III:1 is to establish this general
principle as a guide to understanding and interpreting the specific obligations
contained in Article III:2 and in the other paragraphs of Article III, while respecting,
and not diminishing in any way, the meani ng of the words actually used in the texts
of those other paragraphs. In short, Artic le III:1 constitutes part of the context of
Article III:2, in the same way that it constitutes part of the context of each of the other
paragraphs in Article III. Any other readi ng of Article III would have the effect of
rendering the words of Article III:1 meaningless, thereby violating the fundamental
principle of effectiveness in treaty interpretation. Consistent with this principle of
effectiveness, and with the textual differe nces in the two sentences, we believe that
Article III:1 informs the first sentence and the second sentence of Article III:2 in
different ways.44 (emphasis added)
94. Moreover, the Appellate Body has also found that Article XXIV.4 GATT , which the
Appellate Body qualified as “purposive languag e”, was relevant for the interpretation of
Article XXIV.5.45 Clearly this gave a provision which had no operational effects, an effect, within the
meaning of the Appellate Body’s statements in United States – Gasoline .46 Similarly, the European
Communities has argued that while the first sentence of paragraph 1 does not impose a self standing
obligation, it does set out the purpose of Annex 2 wh ich informs the interpretation of other elements
of Annex 2. (See the European Communities response to question 11 from the Panel).

Q45. The European Communities argues that the omission of a reference to the “fundamental
requirement” as set out in the first sentence of paragraph 1 of Annex 2 to the Agreement on
Agriculture in paragraphs 5, 6 and 7 of that A nnex provides “contextual support” to its
argument that the first sentence sets out an objective. 47 Would the European Communities

Footnote 20: That is, the treaty’s “object and purpose” is to be referred to in determining the meaning
of the “terms of the treaty” and not as an independent basis for interpretation: …
 44 Appellate Body Report, Japan – Taxes on Alcoholic Beverages (“Japan – Alcoholic Beverages”) ,
WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, adopted 1 November 1996, page 18.
 45 Appellate Body Report, Turkey – Restrictions on Imports of Textile and Clothing Products (“Turkey
– Textiles”), WT/DS34/AB/R, adopted 19 November 1999, para. 57.
 46 Appellate Body Report, United States - Standards for Reformulated and Conventional Gasoline
(“United States – Gasoline”), WT/DS2/AB/R, adopted 20 May 1996, page 23.
47 [Original footnote to question] First Third Party Submission by the European Communities,
paragraph 21.

please explain the legal authorities for its argu ment, having regard to its arguments and the
Appellate Body’s findings in Argentina – Footwear Safeguard.48

Answer

95. We refer Australia in part to the European Communities’ answer to the previous question
where the European Communities has explained that its interpretation of the first sentence of
Paragraph 1 does not deprive the provision of effect. Second, the issue in Argentina – Footwear
Safeguards was whether the panel had given any effect to Article XIX GATT. 49 The panel in that
case erroneously concluded that because of the omission of a reference to unforeseen developments in
the Agreement on Safeguards it need not give effect to this requirement set out in Article XIX GATT.
As the European Communities has explained, by in terpreting the first sentence of paragraph 1 as
setting an objective informing the rest of Annex 2, the Panel would be giving effect to the first
sentence.

Questions from Argentina to the European Communities

Q46. In paragraph 18 of its Oral Statement, the European Communities state that Article 13
(b)(ii) and (iii) of the Agreement on Agricu lture are clearly "not intended to set up a
comparison between domestic support granted in 1992 and domestic suppo rt granted in a more
recent period" and request the Panel to reject the e quation of the term "decided" with the term
"granted".

 What would be, in the opinion of the EC, the appropriate benchmark in a hypothetical
case in which a subsidizing Member has taken no decision on internal support during 1992 ?

Answer

96. We refer Argentina to the European Communities’ response to question 27.

 48 [Original footnote to question] In Argentina – Safeguard Measures on Imports of Footwear , Report
of the Appellate Body, WT/DS121/AB/R, the European Communities argued (paragraphs 38-44) on appeal, and
the Appellate Body found (paragraph 88), that the Panel erred by:
fail[ing] to give meaning and legal effect to all the relevant terms of the WTO Agreement, contrary to
the principle of effectiveness … in the interpretations of treaties. […] The Panel states that the ‘express
omission of the criterion of unforeseen developments’ in Article XIX:1(a) from the Agreement on
Safeguards ‘must, in our view, have meaning’. […] On the contrary, in our view, if they had intended to
expressly omit this clause, the Uruguay Round negotiations would and could have said so in the
Agreement on Safeguards. They did not.
 49 Appellate Body Report, Argentina – Safeguard Measures on Imports of Footwear (“Argentina –
Footwear Safeguards”), WT/DS121/AB/R, adopted 12 January 2000.

ANNEX J-7

NEW ZEALAND ANSWERS TO QUESTIONS
FROM THE PANEL TO THIRD PARTIES

11 August 20031

Article 13(b) of the Agreement on Agriculture: Domestic support measures

Q2. Please explain the difference, if any, between the meaning of "defined" and the meaning
of "fixed" in the phrase "a defined and fixed ba se period" in paragraph 6(a) of Annex 2 of the
Agreement on Agriculture. 3rd parties, in particular Australia, Argentina, Canada, EC, NZ

Reply

 “Defined” and “fixed” mean two different th ings and impose two distinct and different
requirements for a base period under paragraph 6(a) of Annex 2. “Defined” means “having a definite
or specified outline or form”.
2 “Fixed” means “definitely and permanently placed or assigned;
stationary or unchanging in relative pos ition; definite, permanent, lasting”. 3 Accordingly a base
period must have a definite and specified form that is permanent.

Q3. Please explain the meaning of "a" in "a defined and fixed base period" in paragraph
6(a) of Annex 2 of the Agreement on Agriculture, the meaning of "the" in "the base period" in
paragraphs 6(b), (c) and (d), and the difference between these and the phrase "based on the
years 1986-88" in Annex 3. 3rd parties, in particular Australia, Argentina, Canada, EC, NZ

Reply

 “A” in the context of paragraph 6(a) refers to one single defined and fixed base period. “The”
in “the base period” in the context of subsequent sub-paragraphs refers to the single base period
required under paragraph 6(a). Pa ragraph 6(a), however, does not specify a particular base period –
only that once it is determined it is fixed. On th e other hand, Annex 3 specifies that the “fixed” base
period in that instance must be the 1986-88 period.

Q4. How often can a Member define and fix a base period in accordance with paragraph 6
of Annex 2 of the Agreement on Agriculture? 3
rd parties, in particular Australia, Argentina,
Canada, China, EC, NZ

Reply

 Once, when a programme is first established. Thereafter, so long as the programme retains
fundamentally the same elements, it should be cons idered to be the same programme and apply the
same base periods.

Q6. Please explain the meaning of the word "criteria" in Article 6.1 and 7.1. What effect, if
any, does the use of the word "Accordingly" in paragraph 1 of Annex 2 of the Agreement on

 1 New Zealand has not responded to questions not directed specifically to New Zealand.
 2The New Shorter Oxford English Dictionary, Vol 1, Clarendon Press, Oxford (1993), page 618.
 3 Ibid, page 962.

Agriculture have on the meaning of the preceding sentence? 3 rd parties, in particular Australia,
Argentina, Canada, EC, NZ

Reply

 “Criteria” are the standards by which a thing is assessed. In this case they are the standards
by which domestic support measures must be assessed in order to qualify for exemption from
reduction commitments. These criteria are set out in Article 6 and Annex 2 of the Agreement on
Agriculture, and include: the “fundamental requirement” in Annex 2 paragraph 1 that measures have
at most minimal trade-distorting effects; the “basic criteria” in paragraph 1(a) and (b); and the
“policy-specific criteria and conditions” set out el sewhere in Annex 2. The use of the word
“accordingly” signifies that the intention of the drafters was to indicate that in order to meet the first
criterion – the “fundamental requirement” that they be at most minimally trade-distorting – measures
would at the very least have to meet the subsequent basic and policy-specific criteria.

Q7. Please explain the meaning of the words "the fundamental requirement" as used in
paragraph 1 of Annex 2 of the Agreement on Agriculture. 3
rd parties, in particular Australia,
Argentina, Canada, EC, NZ

Reply

 “The fundamental requirement” as used in para graph 1 of Annex 2 refers to a characteristic
which, if not present, excludes a measure from a claim of exemption from reduction commitments. In
this case that characteristic is that the measure has “n o, or at most minimal, trade-distorting effects or
effects on production.” Paragraph 1 specifies that measures for which exemption is claimed “shall
meet” this fundamental requirement. Had the drafte rs intended to make only a general statement of
principle they would not have referred to a “require ment” that “shall be met”. The use of the term
“fundamental” only serves to underline the impor tance placed on all measures meeting this
requirement in order to be exempt.

Q9. If the first sentence of paragraph 1 of Annex 2 is a stand-alone obligation, does this
allow effects-based claims of non-compliance with Annex 2? If so, how does this affect the
purpose of Article 13(b)? 3
rd parties , in particular Australia, Argentina, Canada, EC, NZ

Reply

 If the first sentence of paragraph 1 of Anne x 2 is a stand-alone obligation it would allow
effects-based claims of non-compliance with Annex 2. This is consistent with Article 13(b) because it
means that the measures excluded from Annex 2 have a more than minimal distorting effect on trade
or production, and as such they could potentially give rise to the kind of adverse effects to the
interests of other Members that the GATT 1994 and the SCM Agreement establish a right to address.
As such those measures should not be exempt fro m reduction commitments and should be required to
meet the requirements of Article 13(b) in order to be exempt from actions under the Agreement on
Subsidies and Countervailing Measures (the “ SCM Agreement”) and General Agreement on Tariffs
and Trade 1994 (the “GATT 1994”).

Q10. If the first sentence of paragraph 1 of Annex 2 is not a stand-alone obligation, then must
new, non- or minimally trade-distorting measures that do not conform to the criteria listed in
Annex 2 be classified as non-Green Box? 3
rd parties, in particular Australia, Argentina,
Canada, EC, NZ

Reply

 Yes.

Q11. If the first sentence of paragraph 1 of Annex 2 expresses a general principle which
informs the interpretation of the criteria in Annex 2, please explain how this affects the
assessment of the direct payments programme's compliance with paragraph 6 of Annex 2. 3
rd
parties, in particular, Australia, Argentina, Canada, EC, NZ

Reply

 If the first sentence of paragraph 1 of Annex 2 expresses a general principle then the criteria
in paragraph 6 of Annex 2 must be strictly applie d to ensure that only genuinely decoupled income
support that had at most minimal impacts on trad e and/or production qualified for exemption from
reduction commitments.

 Irrespective of whether the first sentence of pa ragraph 1 of Annex 2 is to be considered a
general principle or a stand-alone obligation, the re quirement that there be only one defined and fixed
base period in paragraph 6 is unambiguous. In New Zealand’s view the updating of base acreage
under the Direct Payments programme alone is su fficient to exclude it from the scope of permitted
green box measures set out in paragraph 6 of Annex 2, as outlined in paragraph 2.29 of New
Zealand’s Third Party Submission.4

Q12. Where does Article 13(b) requi re a year-on-year comparison? 3 RD parties, in particular
Australia, Argentina, Canada, China, EC, NZ

Reply

 Article 13(b)(ii) and 13(b)(iii) require a comp arison with 1992 of any year in which injury,
nullification or impairment or serious prejudice is alleged to have occurred.

Q13. Does a failure by a Member to comply in a given year with either the chapeau of
Article 13(b) or the proviso in subparagraph (ii) of Article 13(b) impact its entitlement to benefit
in an earlier or a later year from the exem ption from action provided by Article 13(b)? 3
RD
parties, in particular Australia, Argentina, Canada, China, EC, NZ

Reply

 The nature of the non-compliance at issue ma y be such that it does impact on a Member’s
entitlement to benefit in an earlier or later year from the exemption from action provided by
Article 13(b). Whether or not that is so must be assessed on a case-by-case basis.

Q14. Does a failure of a Member to comply wi th Article 13(b) in respect of a specific
commodity impact its entitlement to benefit in respect of other agricultural products from the
exemption from action pr ovided by Article 13(b)? 3
RD parties, in particular Australia,
Argentina, Canada, China, EC, NZ

 4 Third Party Submission of New Zealand, 15 July 2003.

Reply

 No. The language of Article 13(b) makes it cl ear that the exemption from action applies to a
“specific commodity”, which means that the eligib ility for such exemption must be assessed on a
product-by-product basis.

Q15. Is there any basis on which counter-cyclic al payments could be considered product-
specific? 3
RD parties, in particular Australia, Argentina, Canada, China, EC, NZ

Reply

 Yes. The basis upon which counter-cyclical pa yments should be considered product-specific
have been outlined in the First Written Submission of Brazil, 5 and highlighted in New Zealand’s
Third Party Submission.6

Q16. If the word "specific" were deleted from Article 13(b)(ii), would this change the
meaning of the subparagraph? 3
RD parties, in particular Australia, Argentina, Benin Canada,
China, EC, NZ

Reply

 Not necessarily. The application of the rules of treaty interpretation to the provision, taking
into account its object and purpose, would still support a conclusion that the relevant support was that
granted to an individual commodity. The use of the word “specific” simply reinforces that
interpretation.

Q17. What is the relevance, if any, of the concept of "specificity" in Article 2 of the SCM
Agreement and references to "a product" or "sub sidized product" in certain provisions of the
SCM Agreement to the meaning of "support to a specific commodity" in Article 13(b)(ii)
Agreement on Agriculture? 3
RD parties, in particular Australia, Argentina, Canada, China, EC,
NZ

Reply

 The SCM Agreement provisions cited would seem to shed little light on the meaning of
“support to a specific commodity” in Article 13(b)(ii). Article 2 of the SCM Agreement sets out
principles for determining whether a subsidy is sp ecific to an enterprise or industry or group of
enterprises or industries. Article 13(b)(ii) of the Agreement on Agriculture is concerned with the
support granted to a specific commodity. The tw o assessments are unrelated. In relation to the
second part of the question, the references to “a product” or “subsidised product” seem fully
consistent with interpreting “support to a specific commodity” referred to in Article 13(b)(ii) as
meaning support to a particular product.

Q19. Where does Article 13(b)(ii) require a year-on-year comparison? 3
rd parties, in
particular Australia, Argentina, Canada, EC, NZ

 5 Brazil’s First Submission to the Panel Rega rding the “Peace Clause” and Non-“Peace Clause”
Related Claims, 24 June 2003 (“First Written Submission of Brazil”), paragraphs 199-202 and 207-213.
6 Paragraphs 2.17-2.13.

Reply

 See New Zealand’s answer to question 12 above.

Q20. Does Article 13(b)(ii) require a comparison of support granted with support decided?
How could such a comparison be made?

Reply

 Such a comparison could be made by inte rpreting these terms logically as requiring a
comparison between the total volume of support to a specific commodity in 1992 and in any other
year in respect of which claims under the SCM Agreement and GATT 1994 are made.

Q21. Please comment on Brazil's assertion that the terms "grant" and "decided" in Article
13(b)(ii) have broadly the same meaning. If so , why did the drafters not use the same term? 3
rd
parties, in particular, Australia, Argentina, Canada, China, EC, NZ

Reply

 Article 13(b)(ii) would be devoid of meani ng if it were to be interpreted as requiring a
comparison between two things that were not like ie if “support granted” was somehow different from
“support decided”. Therefore the issue is not the diff erence in wording used, but substantively, what
comparison meets the object and purpose of the provision. In New Zealand’s view that is a
comparison between the total volume of support to a specific commodity in 1992 and in any other
year in respect of which claims under the SCM Agreement and GATT 1994 are made.

Q22. What is the meaning of "support" in Agreement on Agriculture 13(b)(ii) ? Why would it
be used differently from Annex 3, where it refers to total outlays? 3
rd parties, in particular,
Australia, Argentina, Canada, China, EC, NZ

Reply

 Annex 3 refers to budgetary outlays as a component of the Aggregate Measurement of
Support (“AMS”) calculation. There is nothing to suggest that budgetary outlays should not also be a
component of the calculation of “support” in the context of Article 13(b)(ii).

Q23. Should support be compared under Article 13(b)(ii) in terms of unit of production or
total volume of support or both? 3
rd parties, in particular, Australia, Argentina, Canada, China,
EC, NZ

Reply

 The rationale behind the comparison required by Article 13(b)(ii) is to create an upper limit to
the level of trade and production distortion resu lting from Members’ domestic support programmes.
Therefore the appropriate comparison is with th e total volume of support because that provides the
truest indication of the real effects of the support programmes on trade and production. Support in
terms of unit of production may well be a relevant factor in that calculation but it will not be the only
one.

Q25. Please comment on an interpretation of the words "decided during" in Article 13(b)(ii)
that would read them as synonymous wi th the words "authorized during". 3
rd parties, in
particular Australia, Argentina, Canada, China, EC, NZ

Reply

 New Zealand is not sure what “authorised” in such a context would mean. Presumably it
requires evidence of some kind of formal “authori sation”. What support was formally authorised, by
legislation or regulation, might provide some insi ght into what level of support was received for
specific commodities, but it cannot provide the full pi cture. It therefore makes no sense to interpret
“decided” in such a limited way.

Export credit guarantee programmes

Q29. (a) Is an export credit guarantee a financ ial contribution in the form of a "potential
direct transfer of funds or liabilities (e.g. loan guarantee)" within the meaning of
Article 1.1(a)(1)(i) of the SCM Agreement? Why or why not? 3
rd parties, in
particular, Argentina, Canada, EC, NZ

Reply

 An export credit guarantee is a “financial c ontribution” under Article 1.1(a)(1) because it is a
“loan guarantee”.

Q29. (b) How, if at all, would this be relevant to the claims of Brazil? 3
rd parties, in
particular, Argentina, Canada, EC, NZ

Reply

 It is relevant because a financial contribu tion is a necessary element of a “subsidy” under
Article 1.1(a)(1)(i) of the SCM Agreement. Brazil has presented arguments to support a finding that
the US export credit guarantee programmes are subsidi es as defined in Article 1.1(a)(1)(i), that are
contingent upon export according to the terms of Article 3.1(a). The SCM Agreement has been found
to provide useful context for determining what constitutes an export subsidy for the purposes of
Article 10.1 of the Agreement on Agriculture . Brazil has demonstrated that, in the terms of
Article 10.1, the United States export credit guarant ee programmes are applied so as to result in, or
threaten to lead to, circumvention of the United States export subsidy commitments.

 Brazil has therefore demonstrated that th e United States export credit guarantee programmes
do not conform fully to the provisions of Part V of the Agreement on Agriculture and therefore cannot
be exempt from actions based on Article XVI of GATT 1994 or Articles 3, 5 and 6 of the SCM
Agreement by the terms of Article 13(c)(ii) of the Agreement on Agriculture.

Q30. The Panel could arguably take the view that Articles 1 and 3 of the SCM Agreement
were relevant in assessing the WTO-consistency of United States export credit guarantees. The
Panel would therefore appreciate third party views on this situation, including with respect to
the viability of an a contrario interpretation of it em (j) of the Illustrative List (as addressed in
paragraphs 180-183 of the United Stat es' first written submission). 3
rd parties, in particular,
Argentina, Canada, EC, NZ

Reply

 New Zealand notes that the Illustrative List simply lists measures that constitute export
subsidies under Article 3.1(a) of the SCM Agreement . As stated by the Panel in Canada – Export
Credits, “item (j) sets out the circumstances in which the grant of loan guarantees is per se deemed to

be an export subsidy (i.e. when the “premium rates … are inadequate to cover the long-term operating
costs and losses” of the loan guarantee).”
7

Q31. If the Panel decides to refer to provi sions of the SCM Agreement for contextual
guidance in the interpretation of the terms in Ar ticle 10 Agreement on Agriculture, should the
Panel refer to item (j) or Articles 1 and 3 of the SCM Agreement or both? 3 rd parties, in
particular, Argentina, Canada, EC, NZ

Reply

 The Panel should refer to both. The SCM Agreement provides both a general definition of an
“export subsidy” (specifically the definition of a “subsidy” in the terms of Article 1 and the
requirement of contingency upon export in the terms of Article 3) and an Illustrative List containing
specific examples of export subsidies. Therefore Artic les 1 and 3 and item (j) of the Illustrative List
provide contextual guidance for the interpretation of the terms in Article 10.

Q32. The Panel's attention has been drawn to Article 14(c) of the SCM Agreement (see third
party submission of Canada) and to the panel report in DS 222 Canada- Export Credits and
Loan Guarantees. How and to what extent are Article 14(c) of the SCM Agreement, and the
cited panel report, relevant to the issue of wh ether or not the United States export credit
guarantee programmes confer a "benefit"? What would the appropriate market benchmark be
to use for any comparison? Please cite any other relevant material. . 3
rd parties, in particular,
Argentina, Canada, EC, NZ

Reply

 The Panel in Canada – Export Credits and Loan Guarantees 8 considered that Article 14(c) of
the SCM Agreement provided contextual guidance for interpreting ‘benefit’ in relation to loan
guarantees. In that case it was determined that the relevant benchmark for determining whether a loan
guarantee conferred a “benefit” was whether there was “a difference between the amount that the firm
receiving the guarantee pays on a loan guaranteed … and the amount that the firm would pay on a
comparable commercial loan absent the … guarantee.” This confirms that the appropriate point of
reference for determining whether a “benefit” has b een conferred is the marketplace, in this case the
extent to which the premium rates charged on current export credit guarantees are lower than the
corresponding financing rates that a commercial bank would normally require given a similar level of
risk.

Q33. What is the relevance (if any) of Brazil's statement that : "...export credit guarantees
for exports of agricultural exports [sic] are no t available on the marketplace by commercial
lenders." . 3
rd parties, in particular, Argentina, Canada, EC, NZ

Reply

 Brazil’s statement goes toward a conclusion that a “benefit” is conferred in the terms of
Article 1.1(b) of the SCM Agreement . It is significant because it indicates that either commercial
lenders are not prepared to accept th e risks associated with such guar antees or that the United States
export credit programme is so big that it has forced any competition from commercial programmes
out of the marketplace. For whatever reason, the United States export credit guarantee programmes

 7 Report of the Panel, Canada – Export Credits and Loan Guarantees for Regional Aircraft ,
WT/DS/222, paragraph 7.395.
 8 Ibid, paragraph 7.397.

provide the recipient with export credit guarantees not available in, and therefore on terms more
favourable than, the marketplace, and thus confers a “benefit” in the terms of Article 1.1(b).

Q34. Comment on the United States' view of the meaning of "long term operating costs and
losses" in item (j) of the Illustrative List of Export Subsidies in Annex I of the SCM Agreement
as meaning "claims paid" under the export credit guarantee programmes. Does the United
States' interpretation give meaning to both "c osts" and "losses"? Do claims paid represent
"losses"? 3rd parties, in particular, Argentina, Canada, EC, NZ

Reply

 “Claims paid” is one element of the calculati on of the costs and losses of an export credit
guarantee programme. Other elements to be taken into account would include, for example, costs and
losses associated with reinsurance costs, administration costs and the costs of refinancing (i.e. the
rescheduling (not the full amount, but the net present value of the losses)).

Q35. Did the drafters of the Agreement on Agriculture include export credit guarantees in
Article 9.1 of the Agreement on Agriculture? Why or why not? 3 rd parties, in particular,
Argentina, Canada, EC, NZ

Reply

 The drafters of the Agreement on Agriculture did not include export credit guarantees in
Article 9.1 of the Agreement because export credit guarantees are not, per se, export subsidies. They
may involve export subsidies, but this depends on whether they provi de a benefit in relation to the
marketplace.

Q36. Please explain any possible significance the following statements may have in respect of
Brazil's claims about GSM102 and 103 (7 CFR 1493.10(a)(2), Exhibit BRA-38) 3 rd parties, in
particular, Argentina, Canada, EC, NZ

 "The programs operate in cases where credit is necessary to increase or maintain U.S.
exports to a foreign market and where U.S. fina ncial institutions would be unwilling to provide
financing without CCC's guarantee. (7 CFR 1493.10(a)(2) Exhibit BRA-38)

Reply

 See New Zealand’s answer to Question 33 above.

 "The programs are operated in a manner intended not to interfere with markets for
cash sales. The programs are ta rgeted toward those countries wh ere the guarantee is necessary
to secure financing of the exports but which have sufficient financial strength so that foreign
exchange will be available for scheduled payments." (7 CFR 1493.10(a)(2) Exhibit BRA-38)

Reply

 This statement simply supports Brazil’s anal ysis in relation to the “benefit” and “export
contingency” elements of the export credit guarantee programme.

 "In providing this credit guarantee facility, CCC seeks to expand market opportunities
for US agricultural exporters and assist long-t erm market development for U.S. agricultural
commodities." (7 CFR 1493.10(a)(2) Exhibit BRA-38)

Reply

 This statement reinforces the obvious expor t contingency of the export credit guarantee
programme and through the refere nce to expand[ing] opportunities and assist[ing] long-term market
development makes it clear that the intention of the programme is to provide a benefit to US
exporters.

Reply

Q37. The United States seems to argue that, at present, by virtue of Article 10.2 of the
Agreement on Agriculture, there are no discip lines on agricultural export credit guarantees
under the Agreement on Agriculture (or the SCM Agreement).

 (a) Comment on the following proposit ion: a WTO Member may therefore extend
agricultural export credit guarantees without charging a premium, and for an
indefinite period, in addition to any other terms and conditions it may wish?
How would this reconcile with the title of Article 10 of the Agreement on
Agriculture ("Prevention of Circumven tion on Export Subsidy Commitments"),
and with other commitments contained in the Agreement on Agriculture? Please
cite any relevant material, including any past WTO dispute settlement cases. 3
rd
parties, in particular, Argentina, Canada, EC, NZ

Reply

 The proposition is not reconcilable with the title of Article 10 of the Agreement on
Agriculture as such an export credit guarantee would cl early provide an export subsidy and thus
potentially circumvent export subsidy commitments. It also ignores the findings of the Panel in US-
FSC Article 21.5
9, affirmed by the Appellate Body, 10 that the threat of circumvention of export
subsidy reduction commitments in the terms of Article 10.1 exists in relation to both unscheduled and
scheduled agricultural products when the amount of a subsidy is unqualified or unlimited, as implied
in the proposition above.

 (b) If, as the United States argues, there are no disciplines on export credit
guarantees in the Agreement on Agriculture, how could export credit guarantees
"conform fully to the provisions of Part V" of the Agreement on Agriculture
within the meaning of Article 13 (how can you assess "conformity" or non-
conformity with non- existent disciplines)? 3
rd parties, in particular, Argentina,
Canada, EC, NZ

Reply

 The United States interpretation would render the phrase “conforming fully to the provisions
of Part V” meaningless in respect of export credit guarantees and it therefore cannot be sustained.

Step 2 payments

Q38. Please comment on the statement in note 119 of the United States' first written
submission that "...to the extent a consumer that had intended to export instead opens the bale,

 9 Report of the Panel, United States – Tax Treatment for “Foreign Sales Corporations”, Recourse to
Article 21.5 of the DSU by the European Communities (WT/DS108/RW), paragraphs 8.118 and 8.119.
 10 Report of the Appellate Body, United States – Tax Treatment for “Foreign Sales Corporations”,
Recourse to Article 21.5 of the DSU by the European Communities (WT/DS108AB/RW).

then that consumer could still obtain the Step 2 payment upon submission of the requisite
documentation". The Panel notes that Step 2 payments all involve upland cotton produced in
the United States. What are the two distinct factual situations that Step 2 payments involve?
Other than the panel report in Canada-Dairy and the findings of the Appellate Body in US-FSC
(21.5), do any other dispute settlement reports offer guidance on this issue? For example, how,
if at all is the Appellate Body's re port in Canada-Aircraft relevant here? 3
rd parties, in
particular, Australia, Argentina, NZ, Paraguay

Reply

 The two distinct factual situations involved are 1) where cotton is exported, and 2) where
cotton is used domestically. The notional consumer referred to by the United States cannot be both an
exporter and domestic user of the same bale of cotton.

 Even if the Panel were to find that there are not two distinct factual situations involved, ie that
there was only one ‘Step 2 payment’ programme as a lleged by the United States, the findings of the
Appellate Body in Canada-Aircraft
11 referred to in the question above make it clear that the fact that
some of the payments made under that programme are not contingent upon export performance, does
not necessarily mean that the same is true for all of the payments under the programme. To
paraphrase the Appellate Body, it is enough to show that one or some of the Step 2 payments do
constitute subsidies “contingent … in fact … up on export performance.” Those payments made upon
production of proof of export clearly meet the export contingency requirement.

Q39. Please comment on the United States ass ertions at paragraph 129 of its first written
submission, that "[t]he program is indifferent to whether recipients of the benefit of this
programme are exporters or parties that open bales for the processing of manufacturing raw
cotton into cotton products in the United States." . 3
rd parties, in particular, Australia,
Argentina, NZ, Paraguay

Reply

 The fact that an applicant is required to id entify themselves as either an exporter or domestic
user and an exporter is required to provide proof of export in order to receive the payment would
seem to suggest that the programme is not, in fact, so ‘indifferent’.

Q40. With respect to paragraph 32 of the oral statement of the EC, are subsidies contingent
on the use of domestic goods consistent with th e AoA? Does the phrase "provide support in
favour of domestic producers" refer to, and/or permit such subsidies? What is the meaning and
relevance of this (if any) to Brazil's claims under Article 3 of the SCM Agreement and Article
III:4 of the GATT 1994.. 3
rd parties, in particular, Australia, Argentina, EC, NZ, Paraguay

Reply

 New Zealand does not agree that a right to pr ovide subsidies contingent upon the use of
domestic products contrary to Article 3 of the SCM Agreement can be found in the requirement that
subsidies “directed at agricultural producers … to th e extent that they benefit producers of the basic
agricultural product” be included in the calculation of AMS. There is no basis for reading such a right
into the Agreement on Agriculture . To do so would allow the possibility for exemption from action
under the SCM Agreement to exist other than by virtue of the peace clause. The peace clause
explicitly does not provide such exempt ion from action under Article 3 of the SCM Agreement when

 11 Report of the Appellate Body, Canada - Measures Affecting the Export of Civilian Aircraft ,
WT/DS70/AB/R , paragraph 179.

it quite clearly could have done so. In New Zeala nd’s view that indicates that there was no intention
on the part of the drafters that domestic support meas ures, whether they conform with Article 6 of the
Agreement on Agriculture or not, should be so exempt. The same is true in respect of GATT 1994
Article III:4 claims.

ETI Act

Q41. Concerning its claims on the ETI Act, Brazil relies on the US – FSC case. However, it
appears that the United States did not raise the issue of the Peace Clause in that case, nor did
the US appear to invoke Article 6 of the Ag reement on Agriculture. If the Panel's
understanding is correct, how, if at all, are th ese differences relevant here? Argentina, China,
EC, NZ

Reply

 While it is open to the United States to cl aim exemption from action for such measures under
the peace clause, the United States has no reduction commitments in respect of upland cotton and it
cannot therefore provide export subsidies to upland cotton in a WTO-consistent manner.

Q42. How do you view the reference in paragra ph 43 of the EC's third party oral statement
with respect to the relevance of Article 17.14 of th e DSU, and, in particular, the phrase "a final
resolution to that dispute" (emphasis added)? Please explain the use, and relevance (if any) of
the term "disputes" in Articles 9.3 and 12 and Appendix 3 of the DSU, and please cite any other
provisions you consider relevant. Argentina, China, EC, NZ

Reply

 References to “disputes” in the Dispute Settle ment Understanding must be interpreted in
context. Article 17.14 requires that parties to a dispute unconditionally accept the report of the
Appellate Body once adopted by the Dispute Settleme nt Body (“DSB”). That acceptance is in the
context of that particular dispute between those pa rticular parties. However that does not preclude a
Panel from finding that a prima facie case of WTO-inconsistency has been made out where a Member
makes a complaint in relation to a measure that h as previously been ruled to be WTO-inconsistent
where that ruling has been adopted by the DSB and where the measure remains unchanged.

ANNEX J-8

PARAGUAY'S REPLY AS THIRD PARTY
TO THE FOLLOWING QUESTION

11 August 2003

ARTICLE 13 OF THE AGREEMENT ON AGRICULTURE

26. Under Article 13(b)(ii), a comparison is required between support at different times.
One of the issues which is contested between the pa rties is whether the only later period that the
Panel can consider is the present one (i.e. the period underway at the time of the request for
establishment of the Panel). This argument is based on the present tense of the words "do not
grant" in the English text.

 The Panel asks whether there is any difference in the verb tense as used in the Spanish-
language text, or any other difference which might aid the Panel in interpreting these words?

Reply

 In its analysis of the question raised by the Panel as to the period to be considered and the
verb tense used, Paraguay is expressing a view based on both versions:

 "(ii) exempt from actions based on paragraph 1 of Article XVI of GATT 1994 or Articles 5
and 6 of the Subsidies Agreement, provided that such measures do not grant support
to a specific commodity in excess of that decided during the 1992 marketing year;
and …."

campaña de comercialización de 1992; y …"

 As regards the verb tense used, the Eng lish version clearly calls for a present tense
interpretation, as the Panel rightly points out.

 It clearly reads " provided that such measures do not grant su pport". If we take the word
"provided" as indicating the occurrence of an event ( "in the event"), we must bear in mind that this
would introduce conditionality.

 The Spanish text expresses the conditionalit y in even clearer terms through the words "a
condición de que no otorguen", a conditionality which introduces a notion of facts.

 In Spanish, the verb is used in the present subjunctive mode , which according to the
Larousse Dictionary , is the mode used to express possibility , as opposed to the indicative mode,
which is the reality mode.

 Although we consider that both versions indicate the present, it appears to us that the Spanish
version of the sentence stresses conditionality, which must be given considerable weight in order to
arrive at a correct interpretation.

 In the case at issue, the condition under which the measu res shall be exempt from actions
based on paragraph 1 of Article XVI of GATT 1994 or Articles 5 and 6 of the Subsidies Agreement is
that support should not be granted to a specific commodity in excess of that decided during the 1992
marketing year.

 The 1992 marketing year provides the standard needed to carry out a proper comparison
between support at different times, so that in our view, we should be considering the entire spectrum
and taking a comprehensive view of the background information.

 Paraguay concludes that it is the Panel's task to consider the period it deems suitable for
determining the effects of this type of measure on world trade.

ANNEX J-9

COMMENTS BY ARGENTINA ON THE REPLY BY THE
EUROPEAN COMMUNITIES TO QUESTION 40
FROM THE PANEL

22 August 2003

 Argentina would like to make the followi ng comments on the reply by the European
Communities to question 40 from the Panel.

 Argentina does not share the EC's assertion that Members are entitled to provide domestic
content subsidies under the Agreement on Agricult ure (AoA) provided such subsidies are provided
consistently with the Member's domestic support commitment levels.

 It is our view that the rules of the AoA, on the one hand, and of the GATT 1994 and the
Agreement on Subsidies and Countervailing Measures (A SCM), on the other, contain disciplines that
apply independently unless there is a "conflict" betw een the provisions, in which case the rules of the
AoA apply as a result of Article 21.1 of this Agreement.

 Article 21.1 of the AoA states that "The provisions of GATT 199 4 and of other Multilateral
Trade Agreements in Annex 1A to the WTO Agreement shall apply subject to
 ("a reserva de" in the
Spanish text) the provisions of this Agreement."

 The words "subject to" or "a reserva de" indicate dependency or a condition 1. Such
dependency or condition does not, however, mean th at all the disciplines in the GATT 1994 and the
Agreements in Annex 1A automatically cease to apply in the case of the AoA. On the contrary, these
disciplines "shall apply" unless there is a discrepancy or conflict between a rule in the AoA and the
rules in the GATT 1994 or the Agreements in Annex 1A. This conclusion also receives contextual
support in the General interpretative note to Annex 1A.

 The conditions for the existence for a conf lict between two rules was clarified by the
Appellate Body in the Guatemala – Cement case 2, where it is determined that there is a conflict
between two provisions if adherence to one provision l eads to a violation of the other. In the case
before us, in order to determine whether a rule in the GATT 1994 or in an Agreement in Annex 1A
(Article 3.1(b) of the ASCM in this particular case) does not apply, it must first be determined
whether there is an inconsistency or discrepancy with a provision of the AoA. In other words, these
rules must be applied together.

 In this connection, Argentina considers that compliance with the obligations laid down in
Articles 6.1 and 3.2 of the AoA, and with paragra ph 7 of Annex 3, does not allow any inconsistency
with Article 3.1(b) of the ASCM to be detected.

 Regarding Articles 6.1 and 3.2 of the AoA, not hing in these provisions indicates that it is not
possible to apply them together with the prohibiti on on granting subsidies contingent on the use of
domestic rather than imported products. The fact th at the term "domestic support" is not defined in

1 The New Oxford Dictionary of English: "subject to: … 2 dependent or conditionally upon".
2 WT/DS60/AB/R, paragraph 65.

the AoA or that the AMS is broadly defined, as indicated by the EC
3, does not imply that the
prohibition laid down in Article 3.1(b) of the ASCM is not valid in relation to the AoA. In this
connection, the AoA does not contain any reference to possible exclusion.

 Regarding paragraph 7 of Annex 3, the statement that "Measures directed at agricultural
processors shall be excluded to the extent that such measures benefit the producers of the basic
agricultural products" does not mean that such bene fits cover measures made subject to the use of
national rather than imported produc ts. Producers of the basic agricultural products are allowed the
benefits without making the measure contingent on the use of domestic products.

 Lastly, with regard to the EC's re ference to the preamble to the AoA (" Having decided to
establish a basis for initiating a process of reform of tr ade in agriculture …"), it should be noted that
this process could very well envisage stricter oblig ations concerning certain types of measure that
particularly distort international agricultural trade. On the contrary, it appears contradictory to assume
that an agricultural trade reform process envisages the weakening of disciplines that could be applied
in another way.

 For the foregoing reasons, Argentina considers th at subsidies that are granted to agricultural
producers contingent on the use of domestic rath er than imported products, either as a sole
requirement or as one of several requirements, are in consistent with Article 3.1(b) of the ASCM and
Article III.4 of the GATT 1994.

3 Replies by the EC to question 40, paragraph 77.

ANNEX J-10

COMMENTS BY AUSTRALIA ON THE RESPONSES OF
THE EUROPEAN COMMUNITIES TO QUESTIONS
FROM THE PANEL AFTER THE FIRST SESSION
OF THE FIRST SUBSTANTIVE PANEL MEETING

22 August 2003

 These comments by Australia are offered in r esponse to some of the answers submitted by the
EC to the questions from the Panel after the first sessi on of the first substantive Panel meeting. It is
not Australia’s intention to comment on all of the answers submitted by the EC, as most issues have
already been addressed in Australia’s written Third Party Submission, Australia’s Oral Statement and
Australia’s responses to questions from the Panel af ter the first session of the first substantive Panel
meeting.

Panel question no. 6 and Australian question no. 2

 The EC refers to the findings of the Appellate Body in the Turkey – Textiles dispute
concerning the interpretation of the word “accordi ngly” at the beginning of Article XXIV:5 of GATT
1994 to support its view that the first sen tence of paragraph 1 of Annex 2 to the Agreement on
Agriculture does not establish a freestanding obligation. However, as EC recognises, the Appellate
Body expressly found in that dispute that the te xt of GATT Article XXIV:4 does not contain any
operative language, that is, that GATT Article XX IV:4 “does not set forth a separate obligation
itself”. Nor do any of the other provisions cited by the EC in its footnote 9 contain operative language
in the sense of setting forth a separate obligation.

 The words “shall meet the fundamental requirement” establish a clear and unambiguous
obligation that Annex 2 measures must conform to or satisfy the primary or essential condition that
such measures have no, or at most minimal, trade- distorting effects or effects on production. “Shall”,
when used in the present tense as an auxiliary verb followed by an infinitive as in the first sentence of
paragraph 1 of Annex 2, is defined as: “must according to a command or instruction”.
1 “Meet” has a
number of meanings, including “come into conformity with (a person, a person’s wishes or opinion)”
and “satisfy (a demand or need); satisfy the requirement s of (a particular case); be able or sufficient
to discharge (a financial obligation)”. The words “shall meet” in context mean that Annex 2 measures
must conform to or satisfy an express stipulation. Australia has previously explained that a
“fundamental requirement” is a primary or essential condition.
2 When used as a definite article as in
the clause “shall meet the fundamental requirement ”, the word “the” estab lishes the “fundamental
requirement” as the express stipulation that Annex 2 measures must conform to or satisfy.3

 In Australia’s view, the normal rules of treaty interpretation do not permit the word
“accordingly” to be interpreted so as to obviate a cl ear and unambiguous obligation. Australia agrees
that the Appellate Body found in the Turkey – Textiles dispute, in the particular circumstances of
GATT Article XXIV, that the word “accordingly” linked the purposive language of Article XXIV:4 to
operative language in the specific obligations found el sewhere in Article XXIV. However, the first

1 The New Shorter Oxford English Dictionary, Volume 2, page 2808.
2 Australian response to Question no. 7 from the Panel.
3 Australia addressed the meaning of “the” in more detail in its response to question 3 from the Panel.

sentence of paragraph 1 of Annex 2 to the Agreement on Agriculture cannot be characterised as
purposive. The Appellate Body’s finding in the Turkey – Textiles dispute is not, and cannot be, a
valid interpretative basis to say that because the word “accordingly” has a particular meaning in the
context of GATT Article XXIV, that same meaning mu st apply wherever else the word “accordingly”
appears.
4

Panel question no. 9

 It remains unclear to Australia what is meant by “effects-based claims” in the context of the
Panel’s question.

 However, Australia notes that under the EC’s in terpretation there would be no limits to the
amounts that a WTO Member could provide as Annex 2 support, even if such support had profound
trade-distorting effects or effects on production. Fo r example, the EC’s interpretation would allow a
Member to pay “decoupled income support” of such a magnitude that the support would provide the
means for that Member’s domestic producers to sw itch from dryland to irrigation production with
resulting substantial increases in production and trade- distorting effects. Thus, even if the first
sentence of paragraph 1 of Annex 2 of the Agreement on Agriculture were considered to express an
objective, such an outcome would nevertheless be di rectly contrary to that objective. At the very
least, the magnitude of Annex 2 payments must be ab le to be a factor in assessing whether Annex 2
domestic support measures “meet the fundamental requirement that they have no, or at most minimal,
trade-distorting effects or effects on production”.

 Further, the EC’s argument that identifying the effects of such measures is often only feasible
on an ex post facto basis is not convincing. First, even the EC argument concedes that in many, if not
most, cases, it is feasible to identify the effects of such measures in advance. Secondly, even if the
precise effects of such me asures cannot be identified in advance, policy makers could draw on past
experience and econometric analyses to determine whet her certain types of payments would likely be
distorting.

 Finally, Australia considers that the “pr oblems” pointed to by the EC that would be
engendered by interpreting the first sentence of paragraph 1 as a freestanding obligation are no
different to other situations, including under the Agreement on Agriculture. If another Member were
to argue successfully in a dispute that a measure at issue was indeed an export subsidy, the responding
Member could well be required to show “after the fact” that it is in compliance with its export subsidy
reduction commitments under the Agreement on Agriculture.
5

4 Australia considers that the Appellate Body’s discussion of the meaning of “like products” in
European Communities – Measures Affecting Asbestos and Asbestos-Containing Products , WTO DS135/AB/R,
paragraphs 87-100, confirms this view.
5 See, for example, United States – Tax Treatment of “Foreign Sales Corporations”, WT/DS108.

Answer

3. Australia’s views cannot be reconciled. Austra lia is correct in noting that the conditions in
Article 13 can be considered a prere quisite for taking action under the SCM Agreement.1 In using the
term “prerequisite”, Australia essentially rec ognises that, in respect of measures covered by
Article 13, a complainant can only invo ke the relevant provisions of the SCM Agreement if it proves
that the threshold requirements or prerequisites refe rred to in Article 13 have been satisfied. As the
European Communities has pointed out, such a situation is very different from the situation where, in
the event of a violation of a WTO Agreement, a WTO Member pleads a defence which potentially
exculpates it from this violation (e.g. Article XX GA TT) in respect of which it bears the burden of
proof.

4. Comparing Article 13 with Article 3.3 of the SPS Agreement shows that Australia’s views are
irreconcilable. This provision permits WTO Me mbers not to base SPS measures on international
standards but to impose higher standards where there is a scientific justification or an appropriate risk
assessment has been carried out. This provision has some similarities with Article 13 of the
Agreement on Agriculture since it sets a threshold which must be met before a Member can act.
However, Article 3.3 may be seen as going further than Article 13 since it provides a derogation from
the central discipline of the SPS Agreement ; the obligation to base SPS measures on international
standards. On the other hand, Article 13 is simp ly one element regulating the interface between the
Agreement on Agriculture and the other Annex I Agreements and cannot be seen as a derogation
therefrom. Despite the extent to which Article 3.3 could be thought of as a derogation from the SPS
Agreement, the Appellate Body ruled in EC Hormones that it could not be considered an affirmative
defence, and that the burden of proof did not, therefore lie with the defendant.
2 In particular, the
Appellate Body noted that the situation in Ar ticle 3.3 of the SPS Agreement is “qualitatively
different” from the relationship between for instance, Article 1 and XX GATT.3

5. Consequently, Australia is correct to consider that Article 13 is a prerequisite or a threshold
condition before the other Annex I Agreements may become applicable but is incorrect to consider
that Article 13 can be considered an affirmative defence.

Response of Australia

 Australia does not see any inconsistency in its views. In Australia’s view, the potential
availability of an affirmative defence in the general sense is in the nature of a right or
privilege. Australia wishes to clarify, however , that it considers Article 13 in the specific
sense to be a right available when the conditions prescribed therein are met, rather than a
privilege.

EC Comment

6. The European Communities fails to see how Australia can reasonably assert that there is no
“inconsistency in its views”. If Article 13 Agreement on Agriculture is a “prerequisite” for a
complainant to bring an action under the SCM Agreement it cannot be at the same time a defence. A
defence applies when a breach of a WTO Agreement arises, and the defending Member relies on
another provision of a WTO Agreement in order to exculpate itself. Article XX GATT is the best
example. In such a case, the burden of proof shifts to the Member invoking a defence. A prerequisite

2 Appellate Body Report, EC Measures Concerning Meat and Meat Products (Hormones) (“European
Communities – Hormones”), WT/DS26/AB/R, WT/DS48/AB/R, adopted 13 February 1998, para. 109.
3 Appellate Body Report, EC Measures Concerning Meat and Meat Products (Hormones) (“European
Communities – Hormones”), WT/DS26/AB/R, WT/DS48/AB/R, adopted 13 February 1998, para. 105.

is entirely different. It implies that before a Memb er can undertake a particular action, it must take
another action. In this context, a complaining Member must prove that Article 13 Agreement on
Agriculture does not apply, before proving that the relevant provisions of the SCM Agreement apply.

7. Australia’s bald assertion, glossing over its pr evious use of the word “prerequisite”, does not
adequately explain how its views can be reconciled.

III. ARTICLE 13(B) OF THE AGREEMENT ON AGRICULTURE: DOMESTIC SUPPORT
MEASURES

Questions 2 - 5

8. The European Communities would only note that the changes presented by Australia to
questions 2 and 3 on 15 August 2003 as “corrigenda” altered substantively the meaning of Australia’s
original response. The change from “program” to “p ayment” is a substantial change, and not a mere
typographical error.

Question

6. Please explain the meaning of the word "criteria" in Article 6.1 and 7.1. What effect, if
any, does the use of the word "Accordingly" in paragraph 1 of Annex 2 of the Agreement on
Agriculture have on the meaning of the preceding sentence? 3
rd parties, in particular Australia,
Argentina, Canada, EC, NZ

Answer

9. Both Article 6.1 and 7.1 refe r to the “criteria set out in [..] Annex 2”. When one considers
Annex 2, there are two sets of “criteria”. The first is the “basic criteria” set out in subparagraphs (a)
and (b) of paragraph 1, and the second is the “polic y-specific criteria” set out in paragraphs 2 to 13.
This understanding is confirmed by the text of paragraph 5 of Anne x 2, which refers to the “basic
criteria” and the “specific criteria”. Thus, Articles 6.1 and 7.1 of the Agreement on Agriculture refer
to the basic and policy specific criteria set out in Annex 2.

10. The European Communities has already set out its understanding of the term “accordingly” in
its Third Party Written Submission.
4 In the European Communities vi ew, the term “accordingly” is
intended to link the purposive language of the first sentence, with the “basic criteria” set out in the
second sentence. In its Third Party Submission the EC offered a dictionary definition, “in accordance
with the logical premises” which showed that th e word “accordingly” operates as a linkage between
the premise or understanding set out in the firs t sentence and the operative language in the second
sentence. Australia offers the Panel another defin ition: “harmoniously” or “agreeably”, but fails to
note that that the Oxford English Dictionary considers this usage of the word “accordingly” obsolete.5

11. The European Communities would point out that both the French and Spanish text support the
view that the use of the word “accordingly” links th e general statement in the first sentence with the
specific obligations of the second sentence. The Fren ch text uses the term “en conséquence” and the
Spanish the term “por consiguiente”. Both of these terms show that the criteria in the second sentence

4 First Third Party Submission of the European Communities, 15 July 2003, para. 20. The European
Communities recall, in this context, the opinion of Professor Desta set out in footnote 19 to para. 20.
5 Australia’s Oral Statement, para 35. Oxford Englis h Dictionary, p. 15. Australia refers to the first
sense of the word “accordingly” which is preceded by the symbol “ =” which indicates that a particular usage is
obsolete (see Abbreviations and Symbols, page xxvi).

are intended to express the principle set out in th e first sentence. Moreover, had the negotiators
intended that the first sentence be a self-standing oblig ation, rather than use the term “accordingly”
they would have used the term “additionally” or “in addition”, or a synonymous term.

12. Further support for this view can be found in the frequent use of the term “accordingly” in the
WTO Agreement. A survey of the term’s use sugg ests that it links a general statement, often
recognising that a particular situation causes specific effects, with a right or obligation to take some
type of action set out in an ancillary sentence.
6 These general statements are not such as to impose
specific obligations. The Appellate Body had occasi on to consider the relationship between such
provisions in the Turkey-Textiles dispute (Articles XXIV.4 and XXIV.5 GATT). It concluded:

The chapeau of paragraph 5 of Article XXI V begins with the word "accordingly",
which can only be read to refer to para graph 4 of Article XXIV, which immediately
precedes the chapeau.

57. According to paragraph 4, the purpose of a customs union is "to facilitate trade"
between the constituent members and "not to raise barriers to the trade" with third
countries. This objective demands that a balance be struck by the constituent
members of a customs union. A customs union should facilitate trade within the
customs union, but it should not do so in a way that raises barriers to trade with third
countries. [..] Paragraph 4 contains pur posive, and not operative, language. It does
not set forth a separate obligation itself but, rather, sets forth the overriding and
pervasive purpose for Article XXIV which is manifested in operative language in the
specific obligations that are found elsewhere in Article XXIV. Thus, the purpose set
forth in paragraph 4 informs the other relevant paragraphs of Article XXIV, including
the chapeau of paragraph 5. For this reas on, the chapeau of paragraph 5, and the
conditions set forth therein for establishing the availability of a defence under
Article XXIV, must be interpreted in the light of the purpose of customs unions set
forth in paragraph 4. The chapeau cannot be interpreted correctly without constant
reference to this purpose.7 (emphasis added)
13. The Appellate Body has, consequently, recognised the linking function of the word
“accordingly”, and the fact that provisions which ma y be linked to later provisions through the use of
the word “accordingly” may not impose separate obligations.

14. The European Communities would also point out that the Appellate Body has found that other
provisions (e.g. Article III.1 GATT) which contai n general principles are set up as “a guide to
understanding and interpreting the specific obliga tions contained” in other provisions (e.g.

6 See Articles II.6(a), III.9, XII.3(d), XVI.3, XVIIII.5, XXIV.5 GATT 1994, together with Ad
Article III and Ad Article XXVIII.4 to GATT 1994, Articles 2.1 and 11 of the Dispute Settlement
Understanding, Article A(i) of the Trade Policy Re view Mechanism, Article 12.8 of the Agreement on
Technical Barriers to Trade, Artic le 1 of the GATS Annex on Telecommunications and Article 5.1 of the
Agreement on Textiles and Clothes.
7 Appellate Body Report, Turkey – Restrictions on Im ports of Textile and Clot hing Products (“Turkey
– Textiles”) , WT/DS34/AB/R, adopted 19 November 1999, paras. 56 and 57 (emphasis added). Note that the
Panel also found that Article XXIV.4 was “not expressed as an obligation” (Panel Report, Turkey – Restrictions
on Imports of Textile and Clothing Products (“Turkey – Textiles”) , WT/DS34/R, adopted 19 November 1999,
as modified by the Appellate Body Report, WT/DS34/AB/R, para. 9.126).

Article III.2 and the other paragraphs of Article III). 8 Such provisions do not, however, impose
additional obligations supplemental to the specific obligations, unless expressly stated.9

15. The Panel may find it useful to refer to the European Communities’ response to a question
posed by Australia (see question no. 44 in this doc ument). In its response, the European Communities
deals with Australia’s unfounded assertion that the European Communities’ reading of the first
sentence of paragraph 1 would render that provision ineffective.

Response of Australia

 The ordinary meaning of “criteria”, as the plural of “criterion”, is “principle[s], standard[s], or
test[s] by which a thing is judged, assessed, or identified”
10. Thus, the “criteria” in Articles
6.1 and 7.1 as these relate to Annex 2 of the Agreement on Agriculture encompasses all of the
relevant principles, standards or tests establis hed in Annex 2 against which domestic support
measures for which exemption from reduction co mmitments is claimed are to be judged,
assessed and/or identified.

 As Australia said in its Oral Statement
11, the word “accordingly” has several, equally valid
meanings that are potentially applicable in the context: “harmoniously”, “agreeably”, “in
accordance with the logical premises” and “correspondingly”. 12 A further definition is “in
conformity with a given set of circumstances”.13

 In Australia’s view, having regard to its ordina ry meanings in its context and in light of the
object and purpose of the Agreement on Agriculture, including to “[correct] and [prevent] …
distortions in world agricultural markets”, 14 the word “accordingly” can and should properly
be interpreted in the sense of “consistent w ith” or “in conformity with” the fundamental
requirement established in the first sentence. Consistent with that interpretation, the
obligation that “green box” measures “meet th e fundamental requirement …” is cumulative
with the additional basic criteria established in paragraph 1 and the policy specific criteria
established in paragraphs 2-13 of Annex 2. To interpret the word “accordingly” otherwise
would be to negate the plain and unambiguous obligation established in the first sentence of
paragraph 1 of Annex 2 that “[d]omestic support measures for which exemption from the
reduction commitments is claimed shall meet the fundamental requirement that they have no,
or at most minimal, trade-distorting effects or effects on production”.

Response of New Zealand

 “Criteria” are the standards by which a thing is assessed. In this case they are the standards
by which domestic support measures must be assessed in order to qualify for exemption from
reduction commitments. These criteria are set out in Article 6 and Annex 2 of the Agreement

8 Appellate Body Report, Japan – Taxes on Alcoholic Beverag es (“Japan – Alcoholic Beverages”) ,
WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, adopted 1 November 1996, p. 17.
9 See Appellate Body Report, European Communities - Regime for the Importation, Sale and
Distribution of Bananas (“European Communities – Bananas”) , WT/DS27/AB/R, adopted 25 September 1997,
paras. 214-216 holding that the absence of a specific reference to Article III.1 GATT in Article III.4 GATT
meant that an examination of the consistency of a measur e with Article III.4 GATT did not require, in addition,
an examination of the consistency of the measure with Article III.1 GATT.
10 The New Shorter Oxford English Dictionary, Volume 1, page 551.
11 Oral Statement by Australia, paragraphs 35-36.
12 The New Shorter Oxford English Dictionary, Volume 1, page 15.
13 Webster’s Third New International Dictionary , Ed. Philip Babcock Gove, Merriam-Webster Inc,
Springfield, Massachusetts, 1993, page 12.
14 Third preambular paragraph of the Agreement on Agriculture.

on Agriculture , and include: the “fundamental requir ement” in Annex 2 paragraph 1 that
measures have at most minimal trade-distorting effects; the “basic criteria” in paragraph 1(a)
and (b); and the “policy-specific criteria and co nditions” set out elsewhere in Annex 2. The
use of the word “accordingly” signifies that the intention of the drafters was to indicate that in
order to meet the first criterion – the “fundame ntal requirement” that they be at most
minimally trade-distorting – measures would at th e very least have to meet the subsequent
basic and policy-specific criteria.

EC Comment

16. Neither Australia nor New Zealand examine th e use of the word “criteria” in Annex 2 where
it means something different from the fundamental requirement. The second sentence of the first
paragraph of Annex 2 clearly distinguishes th e “fundamental requirement” from the general and
policy-specific “criteria”. Paragraph 5 of Annex 2 is even more explicit in this regard. It would seem
odd that Article 6.1 and 7.1 would use criteria to mean both the basic and policy specific criteria and
the requirement, while Annex 2 itself operates a dist inction between the criteria and the requirement.
Thus, while it is the case that the dictionary defi nition of “criteria” could arguably, in the abstract,
cover a “fundamental requirement” in this particular case there are compelling arguments that the use
of the word “criteria” in Articles 6.1 and 7.1 does not.

17. The European Communities has already e xplained why Australia’s interpretation of
“accordingly” is incorrect. It is quite clear that “accordingly” establishes a relationship between the
purposive language of the first sentence of para. 1 of Annex 2 and the ope rational language of the
other parts of Annex 2. Synonyms of “accordingly” include “as a result, consequently, ergo, thus,
therefore”.
15 To read the term as meaning that the first sentence and the rest of the paragraph applied
as cumulative and separate conditions (as suggest ed by Australia) would deprive the word
“accordingly” of effect. Reading the first sentence of paragraph 1 as relevant to the interpretation of
the rest of Annex 2, but not as a separate condition would, contrary to Australia’s assertion, give the
first sentence meaning.

18. New Zealand points out that:

“the use of the word “accordingly” signifies that the intention of the drafters was to
indicate that in order to meet the first criterion – the “fundamental requirement”
[…]measures would at the very least have to meet the subsequent basic and policy-
specific criteria”
19. New Zealand does not explain how the first sentence can set a self-standing criterion if
respecting that so-called criterion de pends on satisfying other criteria. Wh at then is the content of the
separate “criterion” in the first sentence, if it is already defined in the second sentence of the first
paragraph and the rest of Annex 2 ? Moreover, how, given the allege d existence of two sets of self-
standing criteria, can it be sufficient to satisfy only one set of criteria and at the same time satisfy the
other set (or “at the very least” satisfy the other set) as the final sentence of New Zealand’s response
implies. Even on its own terms, New Zealand’s position that the first sentence of paragraph 1 is a self
standing obligation, but that it can be satisfied by meeting the criteria set out in the rest of Annex 2, is
internally inconsistent. This illustrates very well the European Communities’ point that the
proposition that the first sentence imposes a self-s tanding obligation cannot be squared with any
reasonable interpretation of “accordingly”.

15 Chamber’s Thesaurus, 1986.

Question

7. Please explain the meaning of the words "the fundamental requirement" as used in
paragraph 1 of Annex 2 of the Agreement on Agriculture. 3
rd parties, in particular Australia,
Argentina, Canada, EC, NZ

Answer

20. The phrase “the fundamental requirement” signals the negotiators intent to treat differently
measures which are less or not at all distortive to trade or production and sets forth the general
purpose of Annex 2; a purpose which permeates the re st of Annex 2. Considering the term in the
abstract does not answer the question whether a panel must examine the effects of measures for which
green box status is claimed in addition to examin ing whether such measures respect the basic and
policy-specific criteria set out in Annex 2, or whet her respecting the basic and policy-specific criteria
is such that a measure is deemed not to have th e effects mentioned in the first sentence. As the
European Communities has explained, there are compelling textual and purpose based arguments
which support the latter interpretation.

Response of Australia

 The word “fundamental” has a number of meanings
16 which can be summarised as “primary”
or “essential”. The word “requirement” too has a number of meanings 17 which can be
summarised as a “condition”. Thus, a “fundamental requirement” is a primary or essential
condition.
 18 It is an overarching, freestanding oblig ation that applies to all “green box”
measures cumulatively with the additional basi c criteria established in paragraph 1 and the
policy specific criteria established in paragr aphs 2-13 of Annex 2. To interpret a
“fundamental requirement” otherwise than as a primary or essential condition would not give
the words their ordinary meaning in their contex t and in light of the object and purpose of the
Agreement on Agriculture.

EC Response

21. Australia executes a logical leap in the four th sentence of its response. It arrives at the
conclusion that the “fundamental requirement” is a “freestanding obligation” that applies
“cumulatively” with the other criteria. However, this assertion is without foundation, and is directly
contradicted by the use of the word “accordingly” at the beginning of the next sentence.

Question

2. In paragraph 13 of Australia's oral statement, you state that a "question" is: "could
conditions of price competition for the purposes of a non-violation or impairment claim be
assessed solely on the basis of budg etary outlay figures, as argued by Brazil, or on the basis of a
rate of payment, as argued by the United States? In Australia's view, both factors put forward
by Brazil and the United States would properly form a part of that assessment, but not the

16 The New Shorter Oxford English Dictionary , Volume 1, page 1042, provides relevant definitions of
“fundamental” as “1 Of or pertaining to the basis or groundwork; going to the root of the matter. 2 Serving as
the base or foundation; essential or indispensable. Also, primary, original; from which others are derived.”
17 The New Shorter Oxford English Dictionary , Volume 1, page 2557, provides definitions of
“requirement” as “1 The action of requiring something; a request. 2 A thing required or needed, a want, a need.
Also the action or an instance of needing or wanting something. 3 Something called for or demanded; a
condition which must be complied with.”
18 Third Party Submission of Australia, paragraph 31, and Oral Statement by Australia, paragraph 33.

whole." Could you please clarify this statem ent (indicating other elements which would
complete the "whole" and explain its relevance fo r the purposes of our consideration of Article
13 of the Agreement on Agriculture? Australia, EC

Answer

22. The European Communities would prefer to let Australia clarify its statement. The European
Communities will comment upon Australia’s clarifi cation in its comments on the responses of the
other third parties.

Australia’s Response

 Given the length of Australia’s response, the European Communities has not reproduced it
here.

EC Comment

23. The European Communities is unconvinced of Au stralia’s argument. There is nothing in the
text of Article 13 to suggest that in order to determine “support” under Article 13 it is necessary to
consider all the factors which are relevant to ex amining a non-violation case. Moreover, the European
Communities notes that Article 13(b)(ii) provides that Articles 5 and 6 of the SCM Agreement may be
applicable under certain conditions. However, an a ssessment of whether a measure is inconsistent
with Articles 5 and 6 of the SCM Agreement is not based on the same criteria as would be applicable
in assessing a non-violation complaint. Indeed, such criteria may have nothing to do with the domestic
market of the Member which is providing a subsid y. Australia does not explain why the type of
criteria relevant to non-violation complaints woul d also be relevant in assessing a complaint under
Articles 5 and 6 of the SCM Agreement . Nor does it explain why it is necessary to import notions
from the assessment of non-violation compla ints, but not notions from Articles 5 and 6 SCM
Agreement into an assessment of support for the purposes of Article 13 Agreement on Agriculture.

24. In short, the European Communities se es no foundation for Australia’s assertions.

IV. STEP 2 PAYMENTS

Question

40 With respect to paragraph 32 of the oral st atement of the EC, are subsidies contingent
on the use of domestic goods consistent with the AoA? Does the phrase "provide support in
favour of domestic producers" refer to, and/or permit such subsidies? What is the meaning and
relevance of this (if any) to Brazil's claims under Article 3 of the SCM Agreement and
Article III:4 of the GATT 1994.. 3
rd parties, in particular, Australia, Argentina, EC, NZ,
Paraguay

Answer

25. The Panel’s question involves two elements. Fi rst, is a Member entitled to provide domestic
content subsidies under the Agreement on Agriculture ? Second, if such subsidies are permitted, what
is the relevance of such a rule to Brazil’s claims under Article 3 of the SCM Agreement and

Article III.4 GATT. The European Communities has al ready provided elements of a response in its
oral statement.19 These are expanded upon below.

26. First, a Member is entitled to prov ide domestic content subsidies under the Agreement on
Agriculture provided such subsidies are provided consis tently with the Member’s domestic support
commitment levels. This conclusion flow s from a number of factors. First, the Agreement on
Agriculture disciplines domestic support. Article 6. 1 refers to “domestic support reduction
commitments”. Article 3.1 refers to “domestic support [..] commitments […] constitut[ing]
commitments limiting subsidization” and Article 3. 2 obliges Members “not [to] provide support in
favour of domestic producers in excess of the [d omestic] support commitment levels”. Despite these
clear rules on domestic support, the Agreement on Agriculture does not define “domestic support”.

27. AMS is the measurement of domestic support. AMS is defi ned as “the annual level of
support, expressed in monetary terms, provided for an agricultural product in favour of the producers
of the basic agricultural product or non-product-specific support provided in favour of agricultural
producers in general, other than [that exempted etc].” This is very general – it covers all support in
favour of agricultural producers. This broad scope of domestic support measures which can be
maintained consistently with the Agreement on Agriculture is confirmed by Article 6.1 which states
that the domestic support reduction commitments “sh all apply to all of its [i.e. the Member’s]
domestic support measures in favour of agricultura l producers […]”. Paragraph 1 of Annex 3 on the
calculation of the AMS refers to AMS being calcu lated “on a product specific-basis for each basic
agricultural product receiving market prices support, non-exempt direct payments, or any other
subsidy not exempted from the reduction commitment”. (emphasis added)

28. Consequently, the range of domestic s upport measures which a Member may maintain
(consistent with reduction commitments) is very br oad and is only limited by the condition that such
support must be in favour of agricultural produ cers. As the European Communities has noted,
paragraph 7 of Annex 3 explicitly states that “measu res directed at agricultural processors shall be
included to the extent that such measures benef it the producers of the basic agricultural products”.
20
The European Communities considers that the term “benefit” used here must be regarded as being
synonymous with “favour” in the sense of “in favour of agricultural producers”. Moreover, it is clear
that by “measures directed at agricultural processo rs” the negotiators intended subsidies which were
paid to processors, where the benefit went to the ag ricultural producer. Consequently, in light of the
broad definition of “domestic suppor t” and the specific reference to domestic content subsidies in
paragraph 7 of Annex 3, the Eur opean Communities considers that a Member is entitled to maintain
domestic content subsidies consistently with the Agreement on Agriculture.

29. Second, in response to the Panel’s question, the effect of finding that domestic content
subsidies are provided consistently with the Agreement on Agriculture would be that they cannot be
found inconsistent with either Article 3.1(b) of the SCM Agreement or Article III.4 GATT 1994.
Article 21.1 of the Agreement on Agriculture states that “the provisions of GATT 1994 and of other
Multilateral Trade Agreements in Annex 1A to the WTO Agreement shall apply subject to the

19 Paras. 34 to 38 of the EC’s Oral Statement (as delivered). The Panel’s reference to para. 32
corresponds to the text provided at the third party session.
20 In terms of negotiating background, it may be useful to the Panel to note that paragraph 7 of Annex 3
was subject to negotiation during the period in which a Panel had ruled that the EC’s payments to oilseed
processors was not covered by Article III.8(b) GATT 1947 and were consequently inconsistent with Article III.4
GATT 1947 (European Economic Community – Payments and Su bsidies Paid to Processors and Producers of
Oilseeds and Related Animal-Feed Proteins Report of the Panel (L/6627 BISD 37S/86) adopted on
25 January 1990. That the negotiators retained this text must therefore be considered as a clear sign that they
intended to permit Members to maintain such subsidies, subject to reduction commitments, in the Agreement on
Agriculture.

provisions of this Agreement.” As the European Co mmunities pointed out in its oral statement, this
means that provisions of the other Annex 1A Agreements are “subordinated” to the Agreement on
Agriculture.
21

30. To find that such subsidies were incons istent with either Article 3.1(b) of the SCM Agreement
or Article III.4 GATT would be to subordinate the right to provide such domestic content subsidies
under the Agreement on Agriculture to the SCM Agreement or GATT 1994. Such an interpretation
directly contradicts Article 21.1 of the Agreement on Agriculture.

31. Indeed, it can be pointed out that applying Article 3.1(b) of the SCM Agreement and
Article III.4 GATT to domestic content s ubsidies provided consistently with the Agreement on
Agriculture would lead to stricter disciplines being applie d to domestic subsidies for agriculture than
are applicable to domestic subsidies for industria l goods. If Article 3.1(b) and Article III.4 were to
apply, domestic subsidies for agricultural products would be subject to reduction commitments and
Article 3.1(b) SCM Agreement and Article III.4 GATT. However, domestic subsidies for industrial
products are not subject to reduction commitments. Since the Agreement on Agriculture establishes “a
basis for initiating a process of reform of trade in agriculture”, it would seem contradictory to find that
domestic support for agriculture is in fact subject to stricter obligations than domestic support for
other industries. This explains the “subject to” language of Article 21.1 of the Agreement on
Agriculture. Article 21.1 and the Agreement on Agriculture more generally can also be compared with
the other sectoral agreement included in Annex 1A of the WTO Agreement. The Agreement on
Textiles and Clothing explicitly provides, in its Article 9, that the textiles and clothing sector is to be
fully integrated into the GATT 1994. The Agreement on Agriculture has no such language, and
Article 21.1 runs directly counter to this notion. It cannot be lightly assumed that the negotiators,
while providing for the possibility to maintain do mestic content subsidie s, intended that such
subsidies also be subject to rules which effectively makes it impossible to maintain such subsidies.
22

32. The Panel should therefore reject Brazil’s ar guments that domestic content subsidies granted
in favour of agricultural producers can be found to be inconsistent with Article 3.1(b) of the SCM
Agreement and Article III.4 GATT 1994.

Australia’s response

 Australia does not consider that the phrase “p rovide support in favour of domestic producers”
in Article 3.2 of the Agreement on Agriculture permits subsidies contingent upon the use of
domestic goods.

 In Australia’s view, the legal issu e in question relates to the condition
 attached to the grant of
a subsidy, not the grant of a subsidy per se or who might benefit from the subsidy. The fact
that a measure may benefit an agricultural producer (“support in favour of domestic
producers”) does not serve to override measures otherwise prohibited.

 Article 21.1 of the Agreement on Agriculture provides that “[t]he provisions of GATT 1994
and of other Multilateral Trade Agreements in Annex 1A to the WTO Agreement shall apply
subject to the provisions of this Agreement”. Article 3.1 of the SCM Agreement applies
“[e]xcept as provided in the Agreement on Agricu lture”. The General Interpretive Note to
Annex 1A of the Marrakesh Agreement Establishi ng the World Trade Organization also

21 Oral Statement, para. 38.
22 See, in a similar sense, Appellate Body Report, EC Measures Concerning Meat and Meat Products
(Hormones) (“European Communities – Hormones”) , WT/DS26/AB/R, WT/DS48/AB/R, adopted
13 February 1998, para. 165.

provides contextual guidance. Pursuant to that Note, the Agreement on Agriculture would
prevail to the extent of any conflict with GATT 1994.

 However, in the case of subs idies contingent upon the use of domestic goods, there is no
conflict between either the Agreement on Agriculture , which inter alia disciplines the
amounts of domestic support in favour of dom estic producers which distorts trade and
production, and the SCM Agreement or GATT 1994, which discipline or prohibit certain
conditions attached to subsidies, including subsidies in favour of agricultural producers
(subject only to the provisions of Article III:8(b) of GATT 1994). There is no provision in
the Agreement on Agriculture which provides for an exception to, or cover for, local content
conditions attached to the grant of a subsidy.

 Australia has already noted
23 that Article 13(b)(ii) does not exempt non-“green box” domestic
support measures from actions based on Article 3 of the SCM Agreement . Neither does
Article 13 anywhere refer to GATT Article III:4. Nor with regard to these Articles is there
any provision comparable to Articles 5 and 12 of the Agreement on Agriculture. As stated in
the preambular clauses of the Agreement on Agriculture , the “long-term objective is to
provide for substantial progressive reductions in agricultural support and protection”: it is not
intended to provide for a weakening of disciplin es, particularly when such disciplines are not
specifically mentioned.

 Australia also notes that the domestic support provisions of the Agreement on Agriculture
provide for a strengthening and elaboration of the provisions of Article XVI of GATT 1994.
They are not directed towards a diminution of basic GATT obligations. National treatment is
central to the multilateral trading system. It is inconceivable to Australia that the negotiators
of the Agreement on Agriculture would, as part of a reform program designed to strengthen
disciplines, agree to weaken national treatment disciplines.

 However, in the event the Panel were to consid er that the phrase “provide support in favour of
domestic producers” refers to a nd/or permits subsidies contingent upon the use of domestic
goods, Australia notes that such support could be permitted only to the extent that the support
was actually passed through to the producers of the basic agricultural product.

New Zealand’s Response

 New Zealand does not agree that a right to pr ovide subsidies contingent upon the use of
domestic products contrary to Article 3 of the SCM Agreement can be found in the
requirement that subsidies “directed at agricultural producers … to the exte nt that they benefit
producers of the basic agricultural product” be included in the calculation of AMS. There is
no basis for reading such a right into the Agreement on Agriculture. To do so would allow the
possibility for exemption from action under the SCM Agreement to exist other than by virtue
of the peace clause. The peace clause explic itly does not provide such exemption from action
under Article 3 of the SCM Agreement when it quite clearly could have done so. In
New Zealand’s view that indicates that there was no intention on the part of the drafters that
domestic support measures, whether they conform with Article 6 of the Agreement on
Agriculture or not, should be so exempt. The same is true in respect of GATT 1994
Article III:4 claims.

23 Oral Statement by Australia, paragraphs 29-30.

EC Comments

33. Australia confuses legal issues. Article 3.1(b) of the SCM Agreement and Article III.4 GATT
concern inter alia the conditions under which subsidies may be granted. The Agreement on
Agriculture provides a right, up to a specified limit, to provide support to domestic producers,
irrespective of the manner in which such support is provided. That is, a Member is entitled to provide
support up to the limits and to do so in any form . Paragraph 3.7 of Annex 3 makes it clear that a
Member is entitled to include in its support subsid ies granted to processors which benefit agricultural
producers. A Member thus has a right to provide su pport in the form of payments to its agricultural
producers. This right conflicts with the prohibition in Article 3.1(b) of the SCM Agreement and
Article III.4 GATT.

34. The European Communities fails to see the re levance of Article XVI GATT to this issue.
Moreover, it is inaccurate of Australia to suggest that interpreting the Agreement on Agriculture in
this manner would result in a weakening of obligations. Australia conveniently ignores that, in placing
absolute limits on the amount of domestic s upport which a Member may provide, WTO Members
agreed to impose stricter discip lines on domestic support for agricultu re than that applicable to
domestic subsidies for industrial products.

35. New Zealand’s argument rests on the conception that it is only Article 13 (the peace clause)
which regulates the interface between the Agreement on Agriculture and the other Annex 1A
Agreements. As Australia points out, Article 21.1 Agreement on Agriculture is clearly relevant, as is
the General Interpretative Note to Annex 1A. New Zealand’s unsubstantia ted argument does not
stand.

ANNEX J-12

REPLIES FROM ARGENTINA TO PANEL'S QUESTIONS

27 October 2003

A. QUESTIONS TO INDIVIDUAL THIRD PARTIES

Q43. Please elaborate, citing figures, on your statement that polyester fibre prices actually
follow cotton prices. Argentina

1. Argentina submits that the explosion in the pr oduction of synthetic fibres played no part in the
fall in international cotton prices; in fact, the contrary appears to have occurred.1

2. The "Fibre Prices" table in paragraph 23 of the Further Submission of the United States shows
that polyester prices have always been lower than cotton prices (see the columns "US mill" and
"US spot" as compared to "Asia poly") and, moreover, they appear to follow cotton prices. Thus, for
example, in 1995, when cotton prices reached their record level for the series, polyester prices
happened to follow the same trend, precisely at a tim e when the price of oil was practically at its
lowest for the period under consideration.

3. Another example is the period from 2000 to 2002: while the price of oil was at its highest,
the price of polyester reached its low point for th e period under considerati on, having "accompanied"
the very low cotton prices.

4. Attached hereto as Annex ARG-1 is a gra ph comparing the evolution of cotton prices
(US mill and US spot) with that of polyester fibre prices (Asian poly)
2 and with the price of oil per
barrel (West Texas)3, clearly reflecting a very close correlation between cotton and polyester prices.

5. On the other hand, the last few years do not show any correlation between the price per barrel
of oil and the price of polyester fibres, which shows that polyester has had to adapt to cotton prices in
order to remain competitive, and not the reverse as the United States claims.

B. QUESTIONS TO ALL THIRD PARTIES

Q49. What is the meaning and effect of the introductory phrase of Article 3 of the SCM
Agreement ("Except as provided in the Agreement on Agriculture ...")?

6. The introductory phrase of Article 3 of the SCM Agreement (" Except as provided in the
Agreement on Agriculture ...") means that the provisions of that Article apply to agricultural subsidies
to the extent that they do not c onflict with the Agreement on Agriculture (AoA). The phrase " except
as provided ..." does not necessarily imply that there is a conflict between the two Agreements.

7. In this connection, Argentina replied to questi on 40 of the Panel to the third parties, stating
that no provision could be found in the AoA that conflicted with Article 3.1(b) of the SCM
Agreement. Indeed, the AoA does not contain any provision which explicitly permits the granting of

1 Second oral third party submission by Argentina, 8 October 2003, paragraphs 15-17.
2 Source: Further submission of the United States, "Fibre Prices" table, paragraph 23.
3 Source: Argentine Oil and Gas Institute (IAPG).

"subsidies contingent, whether solely or as one of several other conditions, on the use of domestic
over imported products."

8. It is therefore Argentina's understanding that since they are prohibited under Article 3.1(b) of
the SCM Agreement, and since there is no specific provision in the AoA that is explicitly mentioned
in the introductory phrase of Article 3 of the SC M Agreement, subsidies contingent on the use of
domestic over imported goods are also prohibited under the AoA.

9. Likewise, Argentina pointed out in its comme nts on the reply by the European Communities
to question 40 from the Panel that the rules of the AoA, on the one hand, and of the GATT 1994 and
the SCM Agreement, on the other, contained disciplines that were applied together, unless there was a
discrepancy or "conflict" between the different provisions.
4

Q50. According to its revised timetable, the Pa nel will issue its report to the parties after the
end of the 2003 calendar year. Does this have any impact on "exempt[ion] from actions" under
Article 13(b)(ii) and 13(c)(ii) of the Agreement on Agriculture?

10. The impact will depend on the Panel's finding on the preliminary issue raised with respect to
the Peace Clause. If the Panel finds, as Argentin a maintains, that the United States does not qualify
for protection under Article 13 of the AoA, the expiry date of the Peace Clause will be entirely
irrelevant.

11. If after 31 December 2003 the Panel should decide not to rule on the substantive claims, this
would affect Brazil's right to due process by depriv ing it, on the basis of rules which are no longer in
force, of the right to a finding that would settle of the dispute as to whether or not the subsidies were
consistent. Thus, Brazil would be deprived of a positive settlement of the dispute.

Q51. How should the concept of specificity - a nd, in particular, the concept of specificity to
"an enterprise or industry or group of enterprises or industries" - in Article 2 of the SCM
Agreement apply to subsidies in respect of agr icultural commodities? Please answer the
following questions citing the principles in Article 2 of the SCM Agreement:

(a) Is a subsidy in respect of all agricultural, but not other, products specific?

12. Yes.

(b) Is a subsidy in respect of all agricultural crops (i.e. but not to other agricultural
commodities, such as livestock) specific?

13. Yes.

(c) Is a subsidy in respect of certain identified agricultural products specific?

14. Yes.

4 As already stated, "[t]he conditions for the existe nce for a conflict between two rules was clarified by
the Appellate Body in the Guatemala – Cement case (WT/DS60/AB/R, paragraph 65), where it is determined
that there is a conflict between two provisions if adherence to one provision leads to a violation of the other. In
the case before us, in order to determine whether a rule in the GATT 1994 or in an Agreement in Annex 1A
(Article 3.1(b) of the ASCM in this particular case) does not apply, it must first be determined whether there is
an inconsistency or discrepancy with a provision of the AoA. In other words, these rules must be applied
together
." (Comments by Argentina on the reply by the European Communities to question 40 from the Panel to
the third parties).

(d) Is a subsidy in respect of upland cotton, but not other products, specific?

15. Yes.

(e) Is a subsidy in respect of certain proportion of the value of total US commodities (or
total US agricultural commodities) specific?

16. Yes.

(f) Is a subsidy in respect of certain proportion of total US farmland specific?

17. Yes.

18. Argentina stresses that the concept of "specifi city" in Article 2 of the SCM Agreement is very
broad, since it refers to the subsidies for an en terprise or an industry or group of enterprises or
industries.

19. From the standpoint of the SCM Agreement, agricultural subsidies are specific within the
meaning of Article 2, since they are not availabl e for all products. The me re fact that they are
"agricultural" precludes any interpretation that they are not specific.

20. As regards the principle of Article 2.1, agri cultural subsidies comply with the requirements of
each one of its indents:

• Indent (a), because not all of the enterprises of a Member have access to subsidies
under the AoA;

• indent (b), because there is no automatic eligibility for the subsidies under the AoA,
nor are they based on objective criteria such as those listed in footnote 2 to Article 2,
since they benefit the producers of certai n products – in the case in point, those
included in Annex I of the AoA;

• indent (c), because a subsidy for an agricultural product complies with all of the
requirements of the first sentence thereo f. As regards the second sentence of
indent (c), there is no evidence for including an agricultural subsidy under any of
these factors.

As to the specific case of export subsidies, Article 2.3 reaffirms their specificity. Having already
pointed out that specificity is established under Arti cle 2.1 and 2.3, there is no need to address the
principle in Article 2.2.

21. Generally speaking, it should be borne in mind that in addition to the principles laid down in
indents (a) and (b) of Article 2.1 for determining wh ether a subsidy is specific, indent (c) stipulates
that in case of doubt as to the specificity of a subsid y, a number of other factors should be considered.
In Argentina's view, this implies that the intenti on of the drafters of the Agreement was that the
concept of "specificity" should be as comprehensive as possible.

Q52. The Panel notes that different remedies are available in respect of prohibited and
actionable subsidies under Article 4.7 and 7.8 of the SCM Agreement . If the Panel were to
conclude that a subsidy was prohibited and w ere to make a recommendation under Article 4.7
of the SCM Agreement to withdraw the subsidy without delay, can the Panel:

(a) Also conclude that the same subsidy had resu lted in adverse effects to the interests of
another Member? If so, what would be the value of such a conclusion in terms of the
settlement of the matter before the Panel?

22. In Argentina's view, if the Panel were to conc lude that a subsidy was prohibited and to make a
recommendation – under Article 4.7 of the SCM Agreem ent – to withdraw the subsidy without delay,
it could nevertheless also conclude that the same subsidy had resulted in adverse effects to the
interests of another Member and make the sa me recommendation to withdraw the subsidy under
Article 7.8 of the SCM Agreement.

23. Indeed, bearing in mind that we are speaking of two different claims, the value of such a
conclusion would be to have made "an objective assessment of the matter before it, including an
objective assessment of the facts of the case and the applicability of and conformity with the relevant
covered agreements, and ... such other findings as w ill assist the DSB in making recommendations or
in giving the rulings provided for in the covered agreements" , in conformity with Article 11 of the
DSU.

24. For the reasons set forth above and as stated throughout these proceedings, Argentina requests
the Panel to issue the findings and recommendations requested by Brazil, including those related to
the Step 2 and GSM 102 programmes which, under Article 4.7 of the SCM Agreement, must be
withdrawn without delay. Likewise, the Panel should also make a recommendation that the United
States take appropriate steps to remove the advers e effect of those progra mmes under Article 7.8 of
the SCM Agreement.

(b) Take into account the effects of the interact ion of those prohibited subsidies with other,
allegedly, actionable subsidies? If so, how is this relevant to the issue of causation under
Article 5 of the SCM Agreement?

25. In Argentina's view, if the Panel concludes that there were prohibited subsidies, it should
recommended – under Article 4.7 of the SCM Agreemen t – that they be withdrawn without delay,
without prejudice to taking into account the effects of the interaction of those prohibited subsidies
with other actionable subsidies.

26. Taking into account the effects of the said in teraction is extremely im portant to determining
causation under Article 5 of the SCM Agreement. Indeed, as already stated
5, Argentina considers that
it is the collective impact of all the US subsidi es that has effects on the cultivated area, production,
exports and prices, notwithstanding the fact that th e mere elimination of a prohibited subsidy would
not necessarily put an end to the adverse effects of the other actionable subsidies.

Q53. Would a finding of serious prejudice under Article 5(c) of the SCM Agreement be
determinative for a finding under Article XVI:1 of the GATT 1994? Why or why not? What, if
any, is the role of footnote 13 of the SCM Agreement in this context?

27. A finding of serious prejudice under Article 5(c) of the SCM Agreement is determinative for
a finding under Article XVI:1 of the GATT 1994, sin ce that Article orders the contracting party
granting the subsidy to consider the possibility of limiting it "[i]n any case in which it is determined
that serious prejudice to the interests of any other c ontracting party is caused or threatened by such
subsidization …". In other words, if it is determined th at a subsidy causes or threatens to cause
serious prejudice under Article 5(c) of the SCM Agreement, it necessarily calls for a finding of
violation of Article XVI:1 of the GATT 1994.

5 Second oral third party submission by Argentina, 8 October 2003, paragraph 33.

28. In this connection, footnote 13 of the SCM Agreement, which states that "the term 'serious
prejudice to the interests of another Me mber' is used in this Agreement in the same sense as it is used
in paragraph 1 of Article XVI of GATT 1994 , and includes threat of serious prejudice" , clearly
establishes the link between the two provisions.

Q54. Are US cotton producers able to cover the fixed and variable costs without subsidies?
Please provide substantiating evidence. Of what rel evance is this, if any, to Brazil's actionable
subsidy claims?

29. Argentina has no evidence that US cotton pr oducers are unable to cover their fixed and
variable costs without subsidies.

30. What Argentina has repeatedly stated – re ferring to the evidence submitted by Brazil during
these proceedings – is that the US cotton producer s cannot bridge the gap between total production
costs (i.e. the sum of fixed and variable costs) and market prices for cotton without subsidies.

31. Argentina has pointed out that cotton production costs in the United States are among the
highest in the world.
6 According to an ICAC study 7, the cost of production in the United States was
US$0.81 per pound of cotton in the marketing year 1999 8, while US producers' market prices fell
from US$0.60 to US$0.30 per pound.

32. Argentina also stated that the only possible explanation how the United States bridged this
widening gap between production costs and market pr ices is subsidies, since without them many US
producers would have been compelled to cease production (in spite of the fact that they would
eventually have been able to cover their fixed and variable costs).

33. This fact, that without subsidies US cotton producers could not have bridged the gap between
their total production costs and market prices, is entirely relevant to Brazil's claims, since it shows that
as a result of the subsidies, less efficient US producer s are immune to changes in market prices. In
other words, without the US subsidies which genera te a world market surplus, international cotton
prices would have been higher or would not have fallen as much.

34. This confirms both the actual serious prejudice and the threat of serious prejudice caused by
the subsidies, in that future subsidies will be as necessary as the current ones for US producers to
bridge the gap between market prices and their total production costs.
9 This will enable them to
continue competing with more efficient third-co untry producers, especially considering that the
USDA itself forecasts an increase in total production costs.10

Q55. In light of the fact that certain third parties have provided submissions about the price
effect of claimed US subsidies, which Member or Members is, or are, the "other party" under
Article 6.3(c) ("another Member") for the purposes of these proceedings?

6 Third party submission by Argentina, 15 July 2003, paragraphs 17 and 18.
7 Cotton: World Statistics, Bulletin of the International Cotton Advisory Committee, September 2002
(Annex BRA-9).
8 As stated by Brazil in its first submission to the Panel of 24 June 2003, paragraph 32, according to the
ICAC study the cost of production in Argentina averaged 59 cents per pound of cotton (See Annex BRA-9).
9 Second written third party submission by Argentina, 3 October 2003, paragraph 49.
10 See Annexes BRA-7 (ERS Data: Commodity Co sts and Returns); BRA-257 ("Cost of Farm
Production Up in 2003", USDA, 6 May 2003) and BRA-82 ("USDA Agricultural Baseline Projections until
2012", USDA, February 2003, p.48).

35. The concept of "another Member" within the meaning of Article 6.3(c) covers Argentina,
which indeed submitted claims relating to the price effect of US subsidies.

36. Notwithstanding, Argentina is aware that in these proceedings, it is Brazil that brought the
case and requested consultations and the establishment of this Panel. At the same time, Argentina –
which has also suffered serious prejudice – felt that it was appropriate to ask to be joined in the
consultations, participated actively in them and rais ed a number of issues, as well as asking to join as
a third party and presenting, in its submissions, arguments relating to price effect.

37. As stated throughout these proceedings, it is in Argentina's interest that the Panel should issue
the findings and recommendations requested by Brazil, since this would mean that, in conformity with
Article 7.8 of the SCM Agreement, the United States would have to "take appropriate steps to remove
the adverse effects or … withdraw the subsidy" .

38. This interest on the part of Argentina is based on the conviction that if the Panel were to issue
such findings and recommendations, the elimination of the adverse effects or the withdrawal of the
subsidies would have a favourable impact on the in ternational price of cotton – indeed, without the
US subsidies which generate a world market surplu s, international cotton prices could be higher or
could fall less. Similarly, if its share in the world market were not increased as a result of the
subsidies, the international price of cotton would be higher or would not be so low, and as a result,
third party producers, including Argentina, would not suffer as much prejudice as a result of
artificially depressed prices.
11

39. As already stated, an increase in the world cotton price would be significant – even if as a
result of the subsidies the suppression or depression of international prices amounted to only 1 cent
per pound – since it would enable countries like Argen tina to recover their competitive position in the
world cotton market.
12

11 Second oral third party submission by Argentina, 8 October 2003, paragraph 10.
12 Second written third party submission by Argentina, 3 October 2003, paragraphs 34 to 36, and
second oral third party submission by Argentina, 8 October 2003, paragraph 38.

020406080
100
120
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
year
cents per pound
0
5
10
15
20
25
30
35
us spot Cotton
us mill Cotton
asian poly
petroleo West Texas

ANNEX J-13

RESPONSES BY AUSTRALIA

27 October 2003

A. QUESTIONS TO INDIVIDUAL THIRD PARTIES

43. …

44. …

45. …

46. …

47. …

48. …

B. QUESTIONS TO ALL THIRD PARTIES

Q49. What is the meaning and effect of the introductory phrase of Article 3 of the SCM
Agreement (“Except as provided in the Agreement on Agriculture …”)?

Reply

 In Australia’s view, with regard to s ubsidies for agricultural products, unless the Agreement
on Agriculture makes express provision to the contrary, Article 3 of the SCM Agreement continues to
apply to such subsidies. The simultaneous applica tion of both Agreements to agricultural products is
confirmed by Article 21.1 of the Agreement on Agriculture.

 Australia noted previously in its response to the Panel’s earlier question 40 that the legal issue
in question concerning the relationship between the Agreement on Agriculture and Article 3.1(b) of
the SCM Agreement derives from the condition attached to the grant of a subsidy, not the grant of a
subsidy per se or who might benefit from the subsidy. The Agreement on Agriculture does not
include any provisions concerning the conditiona lity of domestic support in the sense of SCM
Article 3.1(b).

 Moreover, the Agreement on Agriculture does not confer a right to grant subsidies. Rather,
that Agreement establishes disciplines for the use of certain subsidies in relation to agricultural
products should a Member choose to provide subs idies for such products. Arguments that the
Agreement on Agriculture allows local content subsidies based on the phrase “support in favour of
domestic producers” and similar phrasing and the pr ovisions of paragraph 7 of Annex 3 of that
Agreement are not sustainable. The word “support” is used throughout the Agreement on Agriculture
in the sense of generic measures providing a calcula ble financial advantage to agricultural producers,
whether price support, direct subsidy payments or any other means not exempted from a Member’s
commitment to reduce domestic support. Indeed, A nnex 3 is headed “Domestic Support: Calculation
of Aggregate Measurement of Support”.

 It is inconceivable to Australia that any intended exemption from the very significant and
unambiguous local content subsidy disciplines of Article 3.1(b) of the SCM Agreement would not
have been expressly set out in the Agreement on Agriculture . The inclusion of express provisions
concerning export subsidies in the Agreement on Agriculture indicates that the negotiators of that
Agreement were well aware of the need to includ e express provisions if additional or alternative
disciplines concerning subsidies for agricultural products were intended vis-à-vis the disciplines
established pursuant to the SCM Agreement.

 The situation is analogous to that examined by the Panel and the Appellate Body in EC –
Bananas wherein the Appellate Body upheld the Panel’s conclusion that the Agreement on
Agriculture did not permit the EC to act inconsistently with Article XIII of GATT 1994 in the absence
of any provisions dealing specifically with the allocation of tariff quotas on agricultural products.
1 In
the absence of provisions dealing specifica lly with local content subsidies in the Agreement on
Agriculture, that Agreement does not allow a Memb er to act inconsistently with the SCM Agreement.
The fact that the phrase “[e]xcept as provided in the Agreement on Agricultu re” in the chapeau of
SCM Article 3.1 also applies to paragraph (b) of th at Article cannot of itself compel the interpretation
that there are provision(s) of the Agreement on Agriculture which necessarily apply.

 The Panel may not interpret the provisions of the SCM Agreement and the Agreement on
Agriculture so as to diminish or override fundamental WTO obligations in the absence of express
provisions to that effect. To do so would constitu te, in Australia’s view, a misapplication of the
customary rules of interpretation of public international law.

Q50. According to its revised timetable, the Pa nel will issue its report to the parties after the
end of the 2003 calendar year. Does this have any impact on “exempt[ion] from actions” under
Article 13(b)(ii) and 13(c)(ii) of the Agreement on Agriculture?

Reply

 In Australia’s view, whether the date the Pane l’s report will be issued to the parties to the
dispute will have any impact on any “exempt[ion] from actions” under Article 13(b)(ii) of the
Agreement on Agriculture will depend on whether the Panel finds that the United States is granting,
through domestic support measures that conform fu lly to the provisions of Article 6 of that
Agreement, support to a specific commodity in excess of that decided during the 1992 marketing year.
If the Panel finds that the United States is
 granting support to a specific commodity in excess of that
decided during the 1992 marketing year, the Unite d States will have no “exempt[ion] from actions”
pursuant to Article 13(b)(ii), irrespective of when th e Panel’s report is issued. If the Panel finds that
the United States is not granting such support to a specific commodity in excess of that decided during
the 1992 marketing year, the United States may be “exempt from actions” pursuant to Article 13(b)(ii)
until Article 13 expires.

Q51. How should the concept of specificity – and, in particular, the concept of specificity to
“an enterprise or industry or group of enterprises or industries” – in Article 2 of the SCM
Agreement apply to subsidies in respect of agricultural commodities? Please answer the
following questions, citing the principles in Article 2 of the SCM Agreement:

(a) is a subsidy in respect of all agricultural, but not other, products specific?

(b) is a subsidy in respect of all agricultural crops (i.e. but not to other agricultural
commodities, such as livestock) specific?

1 European Communities – Regime for the Importation, Sale and Distribution of Bananas , Report of
the Appellate Body, WT/DS27/AB/R, paragraphs 153-158.

(c) is a subsidy in respect of certain identified agricultural products specific?

(d) is a subsidy in respect of upland cotton, but not other products, specific?

(e) is a subsidy in respect of a certain proportion of the value of total US commodities (or
total US agricultural commodities) specific?

Reply

 Australia does not wish to comment on this issue.

Q52. The Panel notes that different remedies are available in respect of prohibited and
actionable subsidies under Article 4.7 and 7.8 of the SCM Agreement. If the Panel were to
conclude that a subsidy was prohibited and w ere to make a recommendation under Article 4.7
of the SCM Agreement to withdraw the subsidy without delay, can the Panel:

(a) also conclude that the same subsidy had resu lted in adverse effects to the interests of
another Member? If so, what would be the value of such a conclusion in terms of the
settlement of the matter before the Panel?

(b) take into account the effects of the interact ion of those prohibited subsidies with other,
allegedly, actionable subsidies? If so, how is this relevant to the issue of causation under
Article 5 of the SCM Agreement?

Reply

 If the Panel were to conclude that a subs idy was prohibited and to make a recommendation
under Article 4.7 of the SCM Agreement to “withdraw the subsidy with out delay”, and having regard
to the presumption of adverse effects implicit in a finding that a subsidy is prohibited and to the
observations of the Appellate Body on the meaning of “withdraw” in SCM Article 4.72:

(a) the Panel could conclude that the same subs idy had also resulted in adverse effects to the
interests of another Member under SCM Article 5, particularly if that other Member were a
third party to the dispute in light of the provisions of Article 10.1 of the DSU;

(b) the Panel could also consider the interaction of that prohibited subsidy with other, allegedly
actionable subsidies. However, the prohibite d subsidy would be requi red to be withdrawn
without delay and thus any causative contribu tion its interaction with other allegedly
actionable subsidies may make to the adverse e ffects of those other actionable subsidies will
be removed as a consequence of the withdrawal of the prohibited subsidy.

Q53. Would a finding of serious prejudice under Article 5(c) of the SCM Agreement be
determinative for a finding under Article XVI:1 of the GATT 1994? Why or why not? What, if
any, is the role of footnote 13 of the SCM Agreement in this context?

Reply

 Australia does not wish to comment on this issue.

2 Brazil – Export Financing Programme for Aircraft , Recourse by Canada to Article 21.5 of the DSU,
Report of the Appellate Body, WT/DS46/AB/RW, paragraph 45.

Q54. Are US cotton producers able to cover th e fixed and variable costs without subsidies?
Please provide substantiating evidence. Of what relevance is this, if any, to Brazil’s actionable
subsidy claims?

Reply

 Australia does not wish to comment on the facts of US costs of production in relation to
upland cotton, but notes the statements of the Appella te Body in relation to the calculation of costs of
production in the Canada – Dairy dispute.
3

Q55. In light of the fact that certain third parties have provided submissions about the price
effect of claimed US subsidies, which Member or Members is, or are, the “other party” under
Article 6.3(c) (“another Member”) for the purposes of these proceedings?

Reply

 Australia does not wish to comment on this issue.

Q56. Please respond to the following questions concerning the relationship between Article
XVI:3 of the GATT 1994, the disciplines on export subsidies and domestic support in the
Agreement on Agriculture and the disciplines on prohibited export subsidies and actionable
subsidies in Articles 3, 5(c) and 6.3(d) of the SCM Agreement.

(a) Are agricultural domestic support progr ammes challengeable under Article XVI:3 of
the GATT 1994? How, if at all, is the title of Section B of Article XVI (“Additional
provisions on export subsidies” (emphasis added) ) relevant? How, if at all, are Articles
13 and 21.1, or any other provisions, of the Agreement on Agriculture, relevant?

(b) Are the requirements of Article XVI:3 of the GATT 1994 reflected in, developed by or
subsumed by the requirements in Article 6.3(d) of the SCM Agreement, or in any other
provisions of the covered agreements? Of what relevance, if any, is the Appellate Body
Report in US – FSC, para. 117 here?

(c) Of what relevance, if any, is the fact that the definition of “subsidy” in Article 1 of the
SCM Agreement and the prohibition on subsidies contingent upon export in
Article 3.1(a) were introduced in the Uruguay Round, but did not exist at the time that
the GATT 1947 were negotiated?

Reply

 In Australia’s view, it is unambiguous that agricultural domestic support programmes are
challengeable under Article XVI:3 of GATT 1994.

 It is useful to recall to begin with that GATT 1947 did not provide a definition of a “subsidy”
or of an “export subsidy” and that the only disci plines on subsidies of any type were the general
subsidy disciplines of paragraph 1 of GATT Artic le XVI. The provisions of Section B of GATT
Article XVI, comprising paragraphs 2-5 and head ed “Additional Provisions on Export Subsidies”,
were added at the 1954-55 Review Session and const ituted the earliest disciplines directed at “the use

3 Canada – Measures Affecting the Importation of Milk and the Exportation of Dairy Products ,
Recourse to Article 21.5 of the DSU by New Zealand and the United States, WT/DS103/AB/RW –
WT/DS113/AB/RW, paragraphs 94-96, and Second Recourse to Article 21.5 of the DSU by New Zealand and
the United States, WT/DS103/AB/RW2 – WT/DS113/AB/RW2, paragraphs 91-120.

of subsidies on the export of primary products”. The plurilateral 1979 Tokyo Round Subsidies Code
4
represented a further stage in the elaboration of disciplines on export subsidies and subsidies
generally, in particular, Articles 8-11and the Annex. This background is helpful in understanding the
evolution of the use of terminology originally found in GATT Article XVI and the relationship
between provisions of the covered agreements as they exist today.

 In relation to the use of subsidies on the export of primary products, the substantive discipline
established by Article XVI:3 of GATT 1994 was that:

“[i]f a contracting party grants directly or indirectly any form of subsidy
 which
operates to increase the export of any primary product from its territory, such subsidy
shall not be applied in a manner which results in that contracting party having more
than an equitable share of world export trade in that product , account being taken of
the shares of the contracting parties in such trade in the product during a previous
representative period, and any special factor s which may have affected or may be
affecting such trade in the product”.
Thus, the key discipline established by Article XVI:3 of GATT 1994 is that a subsidy that has the
effect of increasing a Member’s exports of a primary product must not be applied so as to result in
that Member having more than an equitable, that is, a “just” or “fair”,
5 share of world export trade in
that primary product. GATT Article XVI:3 was el aborated by Article 10.1 and 10.2 of the later
plurilateral Tokyo Round Subsidies Code, but thes e provisions were not carried forward to, and
incorporated as such, in the SCM Agreement.

 Notwithstanding the heading of Section B of GAT T Article XVI, that discipline is distinct
from the export subsidy disciplines later incorporated in Article 3.1(a) of the SCM Agreement . In
particular, GATT Article XVI:3 is concerned with the effects rather than the conditions of a subsidy’s
grant.

 Moreover, the discipline established by Article XVI:3 of GATT 1994 is distinct from the
discipline established by Article 6.3(d) of the SCM Agreement, which relates to whether the effect of a
subsidy is to increase a Member’s world market shar e compared to the previous three-year average
share. At the same time, there may be substa ntial commonality of facts in demonstrating non-
compliance with either provision. Further, both GATT Article XVI:3 and SC M Article 6.3(d) must
be applied within the same contextual framewor k of “serious prejudice” established by GATT Article
XVI:1, and SCM Article 5(c) and its footnote.

 The GATT Article XVI:3 discipline is also dis tinct from the disciplines established by other
provisions of the covered agreements.

 The Appellate Body has pr eviously noted that the WTO Agreement was accepted by WTO
Members as a “single undertaking”.
6 The Appellate Body has also said:

The relationship between the GATT 1994 a nd the other goods agreements in Annex
1A is complex and must be examined on a case-by-case basis. Although the
provisions of the GATT 1947 were incorporated into, and became a part of the GATT

4 Agreement on Interpretation and Application of Articles VI, XVI and XXIII of the General Agreement
on Tariffs and Trade, BISD 26S/56.
5 The New Shorter Oxford English Dictionary , Ed. Lesley Brown, Clarendon Press, Oxford, 1993,
Volume 1, 843.
6 For example, Brazil – Measures Affecting Desiccated Coconut , Report of the Appellate Body,
WT/DS22/AB/R, page 13.

1994, they are not the sum total of the rights and obligations of WTO Members
concerning a particular matter. For example, with respect to subsidies on agricultural
products, Articles II, VI and XVI of the GATT 1994 alone do not represent the total
rights and obligations of WTO Members. The Agreement on Agriculture and the
SCM Agreement reflect the latest statement of WTO Members as to their rights and
obligations concerning agricultural subsidi es. The general interpretative note to
Annex 1A was added to reflect that the other goods agreements in Annex 1A, in
many ways, represent a substantial elaboration of the provisions of the GATT 1994,
and to the extent that the provisions of the other goods agreements conflict with the
provisions of the GATT 1994, the provisions of the other goods agreements prevail.
This does not mean, however, that the other goods agreements in Annex 1A, such as
the SCM Agreement, supersede the GATT 1994. …” 7 (emphasis added)
 In the absence of a conflict between the provisions of Article XVI:3 of GATT 1994 and
Article 6.3(d) of the SCM Agreement or any other provisions of the covered agreements such that the
General Interpretative Note to Annex 1A of the WTO Agreement becomes operative, GATT Article
XVI:3 continues to apply. In Australia’s view, the Appellate Body report in US – FSC ,
paragraph 117, does not affect the interpretation of the relationship between these provisions other
than in the sense of confirming that the relationship must be determined on the basis of the texts of the
relevant provisions as a whole.

 The continued applicability of Article XVI:3 of GATT 1994 is confirmed by Article 13 of the
Agreement on Agriculture . The exemption from action pursuant to AA Article 13(b)(ii) is only
applicable in respect of paragraph 1 of GATT Article XVI, whereas the exemption from action
pursuant to AA Article 13(c)(ii) is applicable to the whole of GATT Article XVI. Had the negotiators
of the WTO Agreement believed that GATT Article XVI:3 ha d become redundant, they would not
have expressly distinguished between the paragra phs of GATT Article XVI in AA Article 13 as they
did. Moreover, Australia believes its view is fully consistent with the provisions of Article 21.1 of the
Agreement on Agriculture and with the nature of the WTO Agreement as a whole as a “single
undertaking”.

 Further, the distinction between the provi sions of Article XVI of GATT 1994 in Article
13(b)(ii) and 13(c)(ii) of the Agreement on Agriculture is entirely consistent with the object and
purpose of the Agreement on Agriculture , including as expressed in the third preambular paragraph
that the “long-term objective is to provide for substantial progressive reductions in agricultural
support and protection sustained over an agreed peri od of time, resulting in correcting and preventing
restrictions and distortions in world agricultural markets”. It would be directly contrary to that
objective if WTO Members were able, albeit othe rwise consistently with the domestic support
provisions of the Agreement on Agriculture , nonetheless to arrange their domestic support payments
so as to achieve an inequitable share of the world export market in a particular primary product.

7 Brazil – Desiccated Coconut, Report of the Appellate Body, pages 14-15.

ANNEX J-14

RESPONSES OF BENIN AND CHAD
TO THE PANEL’S QUESTIONS

27 October 2003

 Benin and Chad would offer the following respon ses to those Panel questions that pertain to
the scope of their Third Party Submissions:

“44. Please explain how Articles 5 and 6 of the SCM Agreement and Article XVI of the GATT
1994 would permit or require the Panel to take account of any effects of the subsidies in
question on the interests of Members other than the complaining party. Benin and Chad.”

 Brazil is the sole complaining party in this dispute, and ultimately only Brazil would have the
right to any remedy provided by the SCM Agreemen t. However, Benin and Chad submit that the
Panel is nevertheless required to take account of th e effects of the US subsidies on the interest of
Members other than the complaining Member, for the following reasons.

 First, the chapeau of Article 5 states that “[ n]o Member should cause, through the use of any
subsidy referred to in paragraphs 1 and 2 of Article 1, adverse effects to the interests of other
Members”. The drafters of Article 5 referred to “Mem bers” in the plural, connoting an obligation on
behalf of the subsidizing Member not to cause adverse effects to the interests of all WTO Members –
not just the complaining Member.

 Second, when the drafters of the SCM Agreem ent intended to refer only to the “complaining
Member”, they used this term specifically, such as in Article 6.7, or in paragraph 2 of Annex V. They
could similarly have used the term “complaining Member” elsewhere in Articles 5 and 6, but they did
not. Therefore, the term “other Members” cannot be interpreted as synonymous with “complaining
Members”, just as the term “another Member” cannot be read as limited only to the “complaining
Member”. The treaty interpreter must give meaning to the terms actually used in the text.
1

 Third, this interpretation is consistent with Article 3.8 of the DSU, which provides as follows:

In cases where there is an infringement of the obligations assumed under a covered
agreement, the action is considered prima facie to constitute a case of nullification or
impairment. This means that there is normally a presumption that a breach of the
rules has an adverse impact on other Members parties to that covered agreement
, and
in such cases, it shall be up to the Member against whom the complaint has been
brought to rebut the charge. [emphasis added]
 Article 3.8 refers to the “adverse impact” on “o ther Members” in the plural, referring to all
WTO Members. Although the SCM Agreement provides special and additional rules for dispute
settlement, these special rules have not ousted the ap plication of DSU Article 3.8. Benin and Chad
are “parties to [the] covered agreement”, the SCM Ag reement, and it can therefore be presumed that

1 The textual analysis set out above applies equally to Article XVI:1 of the GATT 1994, which refers to
the “other contracting party.” (By virtue of paragraph 2(a) of the Explanatory Notes to GATT 1994 , the
references to “contracting party” are deemed to read “Member.”) Article XVI:1 thus refers to the “other
Member” and not the “complaining Member.”

the breach of the SCM Agreement by the United St ates has an adverse impact on these two African
countries.

 In any event, the Panel need not rely exclusively on the presumption set out DSU Article 3.8,
since Benin and Chad have already provided to th e Panel detailed evidence about the adverse effects
of US subsides on West and Central Africa. Beni n and Chad also note the similarities in language
between the SCM Agreement (“adverse effects”) and DSU Article 3.8 (“adverse impact”). This
reinforces the relevance and applicability of the latter provision.

 Fourth, DSU Article 10.1, which deals with Th ird Parties, provides additional support for the
position that the Panel should take into account the adverse effects on parties other than just the
complaining party:

The interests of the parties to a dispute and those of other Members under a covered
agreement at issue in the dispute shall be fully taken into account during the panel
process.
DSU Article 10.1 is not limited simply to allowing Th ird Parties to present their views. That is dealt
with elsewhere, including in DSU Article 10.2, which grants to Third Parties the right “to be heard by
the Panel”. By contrast, DSU Article 10.1 is not li mited to providing Third Parties with the right to
present views. Instead, it mandates that the “interests” of the third parties shall be “fully taken into
account”.

 Fifth, DSU Article 24.1 provides that “[a]t all stages… of dispute settlement procedures
involving a least-developed country Member, particular consideration shall be given to the special
situation of least-developed country Members”. Be nin and Chad are both least-developed countries.
The “particular consideration” that must be extende d to them goes beyond simply ensuring that their
views are heard – as noted above, such procedural pr otections are provided for elsewhere in the DSU.
Instead, Panels must give “particular consideration” to their “special situation”. In the context of the
present case, the “special situation” of Benin and Chad has been presented in some detail to the panel.
Massive US cotton subsidies have had, and contin ue to have, a devastating impact on the fragile
economies of West Africa, pushing hundreds of t housands of people from s ubsistence farming into
absolute poverty. If DSU Article 24.1 has any mean ing, this “special situation” of Benin and Chad
must be given full, substantive consideration by the Panel.

 Finally, Benin and Chad note that the seri ous prejudice caused to their economies has also
been specifically raised before the Panel by one of the disputing parties, Brazil. As the Panel will
recall, Part 7 of Brazil’s Further Submission of 9 September 2003 is on “Serious Prejudice to the
Interests of African Countries by Reason of the US Subsidies on Upland Cotton”. This provides
addition support for the position that the serious prejudice to Benin and Chad needs to examined by
the Panel in assessing the WTO-consistency of the US subsidies.

“55. In light of the fact that certain third parties have provided submissions about the price
effect of claimed US subsidies, which Member or Members is, or are, the “other party” under
Article 6.3(c) (“another Member”) for the purposes of these proceedings? All third parties.”

 As noted, the drafters of the SCM Agreement used the term “complaining Member” in other
provisions of the Agreement. In Article 6.3(c), they chose the term “other Member” rather than
“complaining Member.” For the reasons set out above, Benin and Chad are of the view that
Article 6.3(c) encompasses both the complainant, Brazil, as well as other WTO Members.

 The Panel has before it substantial evidence about the effects of the US subsidies, including
the significant price undercutting by US cotton compared with the price of the like products of Brazil,

Benin and Chad in world markets, as well as si gnificant price suppression and price depression in
world cotton markets. In assessing the WTO-consistency of the US subsidies, the Panel is required by
the SCM Agreement to take this evidence into account.

ANNEX J-15

CANADA’S RESPONSES TO PANEL QUESTIONS TO THIRD PARTIES
FIRST SUBSTANTIVE MEETING OF THE PANEL WITH THE PARTIES
(RESUMED FIRST SESSION)

27 October 2003

 Canada sets out responses to the questions of the Panel in which Canada has a systemic
interest:

49. What is the meaning and effect of the introductory phrase of Article 3 of the SCM
Agreement ("Except as provided in the Agreement on Agriculture...")?

Reply

 The meaning and effect of this phrase is that Article 3 of the SCM Agreement applies subject
to the export subsidy disciplines of the Agreement on Agriculture , which permit, in some instances
and within certain limits, the granting or maintainin g of subsidies that would otherwise be prohibited
under the SCM Agreement.

51. How should the concept of specificity – and, in particular, the concept of specificity to
"an enterprise or industry or group of enterprises or industries" – in Article 2 of the SCM
Agreement apply to subsidies in respect of agr icultural commodities? Please answer the
following questions, citing the principles in Article 2 of the SCM Agreement:

Reply

 Canada’s answers assume that the phrase “i n respect of” has the same meaning as the
standard “is specific to” in Article 2.1 of the SCM Agreement. Based on the ordinary meaning of the
phrase “is specific to”, read in context and in light of the object and purpose of Article 2 and of the
SCM Agreement , the specificity test is concerned with the actual availability of a programme.
Analysis on availability may include an assessment of the manner in which a programme is used in
the circumstances of a given case. The panel in US – Softwood Lumber III recently confirmed: “In
our view, Article 2 SCM Agreement is concerned with the distortion created by a subsidy which
either in law or in fact is not broadly available.” 1 Moreover, a programme may be found either de
jure or de facto specific, and either determination depends on the nature of the evidence relied upon.2

 (a) is a subsidy in respect of all agricultural, but not other, products specific?

1 United States – Final Countervailing Duty Determination with respect to Certain Softwood Lumber
from Canada, Report of the Panel, WT/DS257/R, circulated 29 August 2003, para. 7.116.
2 In this respect, a determination under Article 2 is similar to a determination under Article 3. The legal
standard expressed by the phrase “is specific to” is the same for both de jure or de facto determinations; the only
difference is the nature of the evidence relied upon. See Canada – Measures Affecting the Export of Civilian
Aircraft, Report of the Appellate Body, WT/DS70/AB/R, adopted 20 August 1999, para. 167 (“In our view, the
legal standard expressed by the word ‘contingent’ is the same for both de jure or de facto contingency. There is
a difference, however, in what evidence may be employed to prove that a subsidy is export contingent.”)

Reply

 No. Canada shares the view of the United States in United States – Continued Dumping and
Subsidy Offset Act of 2000 , that, as a general matter, “all agriculture” is too broad to qualify as a
“group of enterprises or industries” for specificity purposes.
3

 (b) is a subsidy in respect of all agricultu ral crops (i.e. but not to other agricultural
commodities, such as livestock) specific?

Reply

 The answer will depend on the facts of a given case. A panel would have to consider, among
other things, the number of enterprises or indu stries (based on standard industrial classification)
within the jurisdiction of the granting authority that are actually eligible to receive the subsidy, and
the level of diversification of the “all agricultura l crops” universe. Furthermore, the answer would
also depend on the nature of the measure in ques tion and whether it excludes enterprises or industries
that might otherwise be reasonably or practically included. For example, weather that may cause
extensive damage to crops (e.g. hail, frost, excessi ve moisture, drought) may not cause any damage to
livestock. Therefore, it may not be reasonable or practical to include livestock under a crop insurance
programme. On the other hand, an income stabili zation programme could reasonably or practically
include both crops and livestock.

 (c) is a subsidy in respect of certain identified agricultural products specific?

Reply

 The answer will depend on the facts of a give n case, including whether the eligible products
involve only “an enterprise or industry or group of enterprises or industries” (based on standard
industrial classification) under Article 2.1.

 (d) is a subsidy in respect of upland cotton, but not other products, specific?

Reply

 Yes.

 (e) is a subsidy in respect of a certain proportion of the value of total US
commodities (or total US agricultural commodities) specific?

Reply

 Where a programme appears de jure non-specific under Articles 2.1(a) and (b), predominant
use of a programme by “certain enterprises” (a defined term in Article 2.1) would indicate, in the
absence of any other reasonable explanation, that the availability of the subsidy is limited in fact to
such enterprises or industries unde r Article 2.1(c) and 2.4. Like wise, where a pr ogramme appears de
jure non-specific under Articles 2.1(a) and (b), the granting of disproportionately large amounts of
subsidy to certain enterprises would indicate, in th e absence of any other reasonable explanation, that
the availability of the subsidy is limited in fact to such enterprises or industries under Article 2.1(c)
and 2.4. In both cases, any predominance or disproportionality should be measured over an

3 United States – Continued Dumping and Subsidy Offset Act of 2000 , Report of the Panel,
WT/DS217/R, WT/DS234/R, adopted 27 January 2003, at para 4.1146.

appropriate period of time and in relation to the value of production in question as compared to the
total value of all agricultural production.

 (f) is a subsidy in respect of a certain proportion of total US farmland specific?

Reply

 The answer will depend on the facts of a give n case, including the proportion of total US
farmland involved, whether that proportion involves “an enterprise or industry or group of enterprises
or industries”, and whether the programme “is specific to” (i.e., available only to) those enterprises or
industries.

ANNEX J-16

RESPONSE BY CHINA TO
THE PANEL’S QUESTIONS TO THIRD PARTIES

27 October 2003

1. China appreciates this opportunity to present its views again to the Panel in relation to the
Panel’s questions posed to third parties on October 13, 2003. Give n the short period within which
third parties are required to submit their views, China responds to and comments on the following
underlined questions.

2. Question 49. What is the meaning and effect of the introductory phrase of Article 3 of
the SCM Agreement (“Except as provided in the Agreement on Agriculture …”)? All third
parties

3. To answer this Panel’s question, it is help ful to first look to the relationship between the
Agreement on Agriculture and the SCM Agreement . Art. 21.1 of the Agreement on Agriculture
provides:

The provisions of GATT 1994 and of other Multilateral Trade Agreements in Annex
1A to the WTO Agreement shall apply subj ect to the provisions of this Agreement
[on Agriculture].
4. The Appellate Body, in EC – Bananas III, further clarified this article by stating that

the provisions of GATT 1994, [and indeed ‘other Multilateral Trade Agreements
including the SCM Agreement, note added pursuant to Art. 21 of the Agreement on
Agriculture], …, apply …, except to the extent that the Agreement on Agriculture
contains specific provisions dealing specifically with the same matter”.
1
In other words, Art. 21.1 of the A greement on Agriculture , as interpreted by the Appellate Body,
requires that in connection with a specific matter, the A greement on Agriculture prevails over the
SCM Agreement to the extent that it has more specific pr ovisions over the same matter covered by the
SCM Agreement.

5. The introductory phrase of Art. 3 of the SCM Agreement again, in the matter of prohibited
subsidies, grants deference to the Agreement on Agriculture. It reads:

[E]xcept as provided in the Agreement on Agriculture, the following subsidies, within
the meaning of Article 1, shall be prohibited.
Given that the SCM Agreement contains disciplines over all types of subsidies, including agricultural,
and the Agreement on Agriculture imposes more specific disciplines over subsidies granted to
agricultural commodities only, wher e such specificity of discipline can be established, the Agreement
on Agriculture shall prevail pursuant to Article 3.1 of the SCM Agreement.

1 Appellate Body Report, European Communities – Regime for the Importation, Sale and Distribution
of Bananas, WT/DS27/AB/R, DSR 1997:II, Para. 155.

6. Therefore, in line with Art. 21.1 of the Agreement on Agriculture past Appellate Body
interpretation above and Art. 3.1 of the SCM Agreement, the Agreement on Agriculture, where it is
more specific, shall prevail over provisions of the SCM Agreement.

7. Question 50. According to its revised timeta ble, the Panel will issue its report to the
parties after the end of 2003 calendar year. Do es this have any impact on “exempt[ion] from
actions” under Article 13(b)(ii) and 13(c)(ii) of the Agreement on Agriculture? All third parties

8. China believes Article 13 continues to be appli cable to the current case even after it ceases to
be in effect.

9. Art. 13 of the Agreement on Agriculture protects subsidy measures otherwise prohibited or
actionable under the SCM Agreement during the nine-year implementation period commencing in
1995. Unless agreed otherwise amongst Members, Article 13 will expire in 2004.

10. Art. 70 of the Vienna Convention on the Law of Treaties , in dealing with the consequences of
the termination of a treaty, provides to the effect that the termination of a treaty does not affect any
right, obligation or legal situation of the parties cr eated through the execution of the treaty prior to its
termination. Applied to Art. 13 of the Agreement on Agriculture , if a Member’s subsidy measures
were granted and implemented prior to expiry of the Peace Clause, such Member’s possible right to
be protected thereunder is not removed by the e xpiry; neither are obligations on other Members to
exercise due restraint. Such rights, obligations and legal situations created through implementation
of the Peace Clause for the purpose of these proceedings are allowed by the Vienna Convention on the
Law of Treaties to be live issues as between parties to a dis pute. Even if the Panel were to make its
report after the expiry, the rights and obligations a nd their past interaction are heavily controversial
issues the interpretation and resolution of which by th is Panel will have beari ngs on the merits of the
case not only between the parties to this disput e, but also to the general WTO membership.
Therefore, this Panel, even if it chooses to issue its report after the expiry date of the Peace Clause, is
obligated to rule on such rights and obligations during implementation of the Peace Clause.

11. In addition, considering the likelihood of the Peace Clause being extended as reportedly
suggested by some Members, however remote, an interpretation of the “exempt from action”
requirement and its practical application is of extraordinary value to Members having interests in such
an extension proposal; such Members, aided with th e Panel’s interpretation of the key components of
this clause, will have a better basis to form their negotiating policy and stance, not only in terms of the
Peace Clause, but also with regard to WTO discipline on agriculture.

12. Question 51. How should the concept of specifi city – and, in particular, the concept of
specificity to "an enterprise or industry or group of enterprises or industries" -- in Article 2 of
the SCM Agreement apply to subsidies in respect of agricultural commodities? Please answer the
following questions, citing the principles in Article 2 of the SCM Agreement: All third parties

(a) is a subsidy in respect of all agricultural, but not other, products specific?

(b) is a subsidy in respect of all agricultural crops (i.e. but not to other agricultural
commodities, such as livestock) specific?

(c) is a subsidy in respect of certain identified agricultural products specific?

(d) is a subsidy in respect of upland cotton, but not other products, specific?

(e) is a subsidy in respect of a certain proportion of the value of total US commodities (or
total US agricultural commodities) specific?

(f) is a subsidy in respect of a certain proportion of total US farmland specific?

13. “Commodity” includes agricultural crops such as upland cotton.
2 While the Agreement on
Agriculture identifies agricultural products by re ference to their respective HS codes 3, in certain
places it uses the terms “commodity” and “agricultural product” interchangeably.4 Hence, in China’s
opinion, “agricultural commodity” can be understood as equivalent to “agricultural product” under the
Agreement on Agriculture . Such equivalence is particularly re levant with regard to upland cotton,
which being an agricultural product and crop, unquestionably meets the definition of a commodity.

14. On the other hand, “industry” used in the context of Art. 2 of the SCM Agreement normally
refers to “a particular form or branch of productive labour; a trade, a manufacture”
5, while in the
context of trade and commercial policy, “agricultu re” means “the science and practice of cultivating
the soil and rearing animals; farming”. 6 Cultivate, in turn, means “prepare and use soil for crops” 7,
i.e. the use of productive labour for soil preparation and use. Hence, agriculture, being the science
and practice of using productive labour, meets the definition of “industry”. Further, the Agreement on
Agriculture also treats “agriculture” as an “industry” by extensively using “agricultural producers”
and “agricultural production” to refer to the targets of domestic support measures.8

15. Art. 2 of the SCM Agreement provides that a subsidy is specific if it is provided to an
enterprise or industry or group of enterprises or industr ies. Based on the analysis in Paras. 12 and 13
above, China believes that any subsidy to agricultu ral commodities shall be co nsidered as specific for
the purpose of Art. 2 of the SCM Agreement. By the same token, China believes that:

(a) a subsidy in respect of all agricultural, but not other, product is specific, since agriculture
producing all agricultural products is an industry and consists of “group of enterprises” by
definition.

(b) Similarly, subsidies in respect of “all agri cultural crops (i.e. but not to other agricultural
commodities, such as livestock)”, “certain identified agricultural products” and “upland
cotton, but not other products” should all be deemed as specific since “group of enterprises”
producing crops (certain products, upland cotton) are targeted in all the cases.

(c) The use of “a certain proportion of the va lue of total US commodities” or “a certain
proportion of US farmland” will necessarily be e quivalent to “an enterprise or industry or
group of enterprises or industri es” because the “proportion” has to be generated by adding up
those data from specific “enterprise or industry or group of enterprises or industries”.

2 Commodity means "a thing of use or value; specially a thing that is an object of trade, especially a
raw material or agriculture crop", Lesley Brown (ed.), The Shorter Oxford English Dictionary , 5th ed. (Oxford
University Press, 2002), p.461.
3 Art. 2, Agreement on Agriculture.
4 e.g. under Art. 6, the terms " product-specific domestic support" and " basic agricultural product" are
used in the context of quantifying domestic support commitments, while under Art. 13(b), domestic support
measures under Art. 6 that do not grant support to a specific commodity in excess of that decided during the
1992 marketing year are required to be exempt from actions as specified therein.
5 The Shorter Oxford English Dictionary, p.1363.
6 Ibid, p. 44.
7 Ibid, p. 575.
8 e.g. Art. 6, Agreement on Agriculture.

16. Question 52, The Panel notes that different remedies are available in respect of
prohibited and actionable subsidies under Article 4.7 and 7.8 of the SCM Agreement . If the
Panel were to conclude that a subsidy was pr ohibited and were to make a recommendation
under Article 4.7 of the SCM Agreement to withdraw the subsidy without delay, can the Panel:

(a) also conclude that the same subsidy had resu lted in adverse effects to the interests of
another Member? If so, what would be the value of such a conclusion in terms of the
settlement of the matter before the Panel? All third parties

(b) take into account the effects of the interact ion of those prohibited subsidies with other,
allegedly, actionable subsidies? If so, how is this relevant to the issue of causation under
Article 5 of the SCM Agreement? All third parties

17. China believes that if this Panel were to find that a subsidy was prohibited and were to
recommend under Article 4.7 of the SCM Agreement an immediate withdraw the subsidy, there would
be no need for this Panel to dwell on the issue of whether adverse effects have been generated by the
same subsidy.

18. The SCM Agreement has a primary distinction between prohibited subsidies under Article 3
where effects are presumed and actionable subsid ies under Article 5 where the complaining party
must demonstrate adverse effects. Amongst diffe rences between prohibited and actionable subsidies,
such as degree of proof, dispute settlement procedures, are different remedies under Arts. 4.7 and 7.8.

19. While no panel has dealt squarely with the issued raised by this Panel, the panel on Australia
– Automotive Leather II (Article 21.5 – US) did touch upon the relationship between Arts. 4.7 and 7.8
briefly.
9

As regards the context of Article 4.7, we note that the term “withdraw the subsidy”
appears elsewhere in the SCM Agreemen t. We consider these references to
“withdrawal” of subsidies to be relevant for our understa nding of the term. In the
case of “actionable” subsidies, Members whose trade interests are adversely affected
may, under Part III of the SCM Agreement, pursue multilateral dispute settlement in
order to establish whether the subsidy in qu estion has resulted in adverse effects to
the interests of the complaining Member. If such a finding is made, the subsidizing
Member “shall take appropriate steps to remove the adverse effects or shall
withdraw the subsidy ”.
10 Alternatively, a Member whose domestic industry is
injured by subsidized imports may impose a countervailing measure under Part V of
the SCM Agreement, “ unless the subsidy or subsidies are withdrawn ”.11 In both
cases, withdrawal of the subsidy is an a lternative, available to the subsidizing
Member, to some other action. Repayment of the subsidy would certainly effectuate
withdrawal of the subsidy by a subsidizing Member so as to allow it to avoid action
by the complaining Member.
12

9 Panel Report, Australia – Subsidies Provided to Producers and Exporters of Automotive Leather –
Recourse to Article 21.5 of the DSU by the United States, WT/DS126/RW and Corr.1, adopted 1 February 2000.
10 Original note, "SCM Agreement Article 7.8 (emphasis added)".
11 Original note, "SCM Agreement Article 19.1 (emphasis added)".
12 Panel Report, Australia – Subsidies Provided to Producers and Exporters of Automotive Leather –
Recourse to Article 21.5 of the DSU by the United States, WT/DS126/RW and Corr.1, adopted 1 February 2000,
Para. 6.28.

20. The panel in that case went on to elaborate in light of Art. 4.7’s object and purpose:

Turning to the object and purpose of Article 4.7 of the SCM Agreement, we observe
that the SCM Agreement as a whole establis hes disciplines on subsidies. The SCM
Agreement categorizes subsidies as non-actionable, actionable, or prohibited.
13 In the
case of non-actionable and actionable subsidies, Members are only allowed to take
certain prescribed steps in th e event that their trade interests are harmed by another
Member's subsidies. Part II of the SCM Ag reement, however, establishes an absolute
prohibition on certain types of subsidies: Members are obligated, under Article 3.2 of
the SCM Agreement, to “neither gran t nor maintain” such subsidies. While the
trade effects of prohibited subsidies may be countered under Parts III and V of
the SCM Agreement, Part II of the SCM Agreement establishes special and
additional rules for rapid dispute settlement in cases involving such subsidies.
Article 4.7 of the SCM Agreement establishes a specific remedy to be
recommended in the case of a violatio n - withdrawal of the subsidy . (Original
emphasis added)
21. Indeed, the panel considered the Art. 4.7 pr escription of withdrawal for subsidies found to be
prohibited under to be so “special ” that it is “specific remedy” d esigned to “not merely counteract
adverse trade effects, but is intended to enforce the absolute prohibition on the grant or maintenance
of such subsidies”.
14

22. In other words, such a specific remedy under Art. 4.7 grants the subsidizing Member far less
options than Art. 7.8, which allows the subsidiz ing Member the options of either to “remove the
adverse effects” or “withdraw the subsidy”.

23. The above interpretation is further suppor ted by the difference in terminology for
countermeasures allowed to be taken by a compla ining Member in the event that recommendations
adopted by the DSB are not followed. The Arbitrators in their Decision on Brazil – Aircraft
(Article 22.6 – Brazil)
15, stated:

We also note that, when the negotiators ha ve intended to limit countermeasures to the
effect caused by the subsidy on a Member's tr ade, they have used different terms than
‘appropriate countermeasures’. Article 7.9 and 10, which is the provision equivalent
for actionable subsidies to Article 4.9 and 10 for prohibited subsid ies, uses the terms
‘commensurate with the degree and nature of the adverse effects determined to
exist’.16
while Art. 4.10 only used the term “appropriate countermeasures”, without the qualification of
commensuration with the degree and nature of adverse effects as required under Arts. 7.9 and 7.10 for
actionable subsidies. In deed, the Arbitrators ruled in the arbitration that

13 Original note, "[w]e note that, pursuant to Article 31 of the SC M Agreement, the provisions of
Articles 6.1 (presumption of serious prejudice), and 8 and 9 (non-actionable subsidies) shall apply for five years
from the date of entry into force of the WTO Agreement unless extended for a further period."
14 Panel Report, Australia – Subsidies Provided to Producers and Exporters of Automotive Leather –
Recourse to Article 21.5 of the DSU by the United States, WT/DS126/RW and Corr.1, adopted 1 February 2000,
Para. 6.34.
15 Decision by the Arbitrators, Brazil – Export Financing Programme for Aircraft – Recourse to
Arbitration by Brazil under Article 22.6 of the DSU and Article 4.11 of the SCM Agreement , WT/DS46/ARB,
28 August 2000.
16 Ibid, Para. 3.49.

when dealing with a prohibited export subs idy, an amount of countermeasures which
corresponds to the total amount of the subsidy is “appropriate”17 against the Brazilian
argument that such an interpretation would be punitive.18

24. Hence, past panels and arbitr ators have determined that Art. 4.7 remedies are special, specific,
and additional to those under Art. 7.8, that when recommended by a panel, they more than counteract
adverse trade effects. In light of such reasoning, the need for this Panel, after it having established
prohibited subsidies, to go an extra step to find adverse effects is superfluous.

25. With respect to this Panel’s question as to wh ether the Panel can “take into account the effects
of interaction of those prohibited subsidies with ot her, allegedly, actionable subsidies” if it were to
find prohibited subsidy, China believes the answer is not straight forward.

26. Art. 5 of the SCM Agreement makes no express distinction be tween prohibited and actionable
subsidies when discussing adverse effects to the interests of other Members. It simply requires that no
Member shall cause adverse effects through the use of any subsidy referred to in Paras. 1 and 2 of
Article 1 of the SCM Agreement, which covers all types of subsidies that meets the specificity test, i.e.
prohibited and actionable.

27. Having said that, the structure of the SCM Agreement is such that it sets out highly
compartmentalized sections on prohibited, acti onable and non-actionable subsides. Analyses of
adverse effects are specifically placed under Part III that deals with actionable subsidies only. As
discussed above, establishment of a prohibited subsid y does not require any finding of adverse effect,
but is contingent upon a finding of a mere existe nce. In that sense, when this Panel accounts and
analyzes adverse effects caused by actionable subsid ies, inclusion of adverse effects generated by
prohibited subsidies would tend to enlarge adverse effects caused by actionable subsidies, if the
former only adds to the latter. In other word s, the highly compartmentalized nature of the SCM
Agreement requires this Panel to form a precise opinion, where partition is possible, on the degree and
nature of adverse effects caused by actionable su bsidies alone, and such precision is vital for the
subsidizing Member to “remove the adverse effect s” under Art. 7.8 and for the complaining Member
to take commensurate countermeasures under Arts. 7.9 and 7.10. Such a partitioning method is very
much relevant to the issue of causation, as in cases where partition is possible, there should be no
causal link between prohibited subsidies and adverse effects caused by actionable subsidies.

28. If, however, this Panel finds that a simple pa rtition is not possible to exclude adverse effects
generated by prohibited subsidies, due to the fact that such adverse effects compounds or amplifies
adverse effects caused by actionable subsidies, the issue is more difficult. Prohibited subsidies may
indeed have played a role in causing a compounding or amplification of adverse effects, caused by
actionable subsidies in the first place. Such circ umstances would necessitate a consideration of the
totality of evidence before this Panel and a finding th at best reflects a possible attribution of adverse
effects to those only caused by actionable subsidies found. Such a finding, China submits, may have
to be weighed against the crucial need to discourage the use of multiple types of subsidies that are not
WTO compliant to create compounded adverse effects.

29. Question 53. Would a finding of serious prejudice under Article 5(c) of the SCM
Agreement be determinative for a finding under Article XVI:1 of the GATT 1994? Why or why
not? What, if any, is the role of footnote 13 of the SCM Agreement in this context? All third
parties

17 Ibid, Para. 3.60.
18 Ibid, Para. 3.55.

30. China believes that a finding of serious prejudice under Article 5(c) of the SCM Agreement
would be determinative for a finding under Article XVI:1 of the GATT 1994.

31. Art. 5(c) of the SCM Agreement prohibits any Member against using any subsidy to cause
serious prejudice to the interests of another Memb er. Instances of deemed existence and possible
occurrence of serious prejudice are further enumer ated under Art. 6 of the same agreement.
Art. XVI:1 of GATT 1994, on the other hand, re quires a subsidizing Member, to discuss, upon
request, with the other contracting party or parties concerned, or with the Contracting Parties, the
possibility of limiting the subsidization, in the even t that its granting of subsidies causes or threatens
to cause serious prejudice to the interests of any othe r contracting party while stopping short of listing
those under Art. 6 of the SCM Agreement.

32. China believes possible difference, if any, be tween serious prejudice found under Art. 5(c) of
the SCM Agreement and serious prejudice found under GATT Ar t. XVI:1, is effectively removed by
footnote 13 of the SCM Agreement, which specifically provides:

The term “serious prejudice to the interests of another Member” is used in this [SCM]
Agreement in the same sense as it is used in paragraph 1 of Article XVI of GATT
1994, and includes threat of serious prejudice.
To interpret otherwise would clearly be contrary to the intent of the drafters of this footnote.

33. Question 55. In light of the fact that certain third parties have provided submissions
about the price effect of claimed US subsidies, which Member or Members is, or are, the “other
party” under Article 6.3(c) (“another Member”) for the purposes of these proceedings? All
third parties

34. China believes that any Member, the prices of whose like product (upland cotton for these
proceedings), as supplied in the same market, at the same level of trade and at comparable times, are
capable of being compared to the prices of the s ubsidized product for the purpose of determining
whether significant price undercutting exists under Art. 6.3(c), is another Member for the purpose of
Art. 6.3(c) of the SCM Agreement..

35. First, 6.3(c) of the SCM Agreement reads,

Serious prejudice in the sense of paragraph (c) of Article 5 may arise in any case
where one or several of the following apply: …
(c) the effect of the subsidy is a significant price undercutting by the subsidized product as
compared with the price of a like product of another Member in the same market or
significant price suppression, price depression or lost sales in the same market.

36. Article 6.5 subsequently explains that

For the purpose of paragraph 3(c), price undercutting shall include any case in which
such price undercutting has been demonstrat ed through a comparison of prices of the
subsidized product with prices of a non-subs idized like product supplied to the same
market. The comparison shall be made at the same level of trade and at comparable
times, due account being taken of any othe r factor affecting price comparability.
However, if such a direct comparison is not possible, the existence of price
undercutting may be demonstrated on the basis of export unit values.

37. Essentially, Art. 6.5 requires a comparison between prices of the subsidized product and
prices of a non-subsidized like product supplied to the same market for the purpose of determining
whether significant price undercutting exists under Art. 6.3(c). To ensure fairness and statistical
meaningfulness of such a comparison, Art. 6.5 requires it to be made at the same level of trade and at
comparable times, as well as any other factor aff ecting price comparability. No where does Art. 6.5
limit non-subsidized like product to only those from one country, e.g. the complaining party.

38. Second, specific references to the “complaining Member” is made in other paragraphs of this
very Article 6. For instance, Article 6.7, reads

Displacement or impedime nt resulting in serious prejudice shall not arise under
paragraph 3 where any of the following circumstances exist during the relevant
period:
 (a) prohibition or restriction on exports of the like product from the complaining Member
(emphasis added) or on imports from the complaining Member (emphasis added) into
the third country market concerned;…”.

39. The same word “complaining Member” is speci fically used from Para. (a) through to Para. (e)
under Article 6.7. The above reference clearly s uggests that for the purpose of these paragraphs, the
drafters explicitly distinguis hed the like product from “the complaining Member” from the like
product from other Members. Should the drafters have the same intent to make such a distinction
under Article 6.3, they would have done so.

40. Based on the above interpretations, China believes that another Member under Art. 6.3 of the
SCM Agreement shall include any Member, the prices of whose like product, upland cotton for these
proceedings, as supplied in the same market, at the sa me level of trade and at comparable times, is
capable of being compared to the prices of the s ubsidized product for the purpose of determining
whether significant price undercutting exists under Art. 6.3(c).

41. Question 56. Please respond to the followi ng questions concerning the relationship
between Article XVI:3 of the GATT 1994, the disciplines on export subsidies and domestic
support in the Agreement on Agriculture and the disciplines on prohibited export subsidies and
actionable subsidies in Articles 3, 5(c) and 6.3(d) of the SCM Agreement. All third parties

(a) Are agricultural domestic support progr ammes challengeable under Article XVI:3 of
the GATT 1994? How, if at all, is the title of Section B of Article XVI (“Additional
provisions on export subsidies ” (emphasis added)) relevant? How, if at all, are
Articles 13 and 21.1, or any other provisions, of the Agreement on Agriculture, relevant?

42. In China’s opinion, agricultural domestic support programmes are not challengeable under
Article XVI:3 of GATT 1994.

43. Negotiating history of the current WTO agre ements, being codification of the GATT Uruguay
Round, as reported by scholars, indicates that the original Art. XVI of GATT 1947 contained only the
first paragraph. Section B of Art. XVI and the interpretive note thereto were added by the 1955
Protocol Amending the Preamble and Part I and II of the Agreement with an intent to outlaw export
subsidies that results in subsidizing Member “hav ing more than equitable share of the world export
trade in that product”
19 only.20 While the added article adopted such vague wordings as “any form of

19 Article XVI:3, GATT 1994.
20 Terence P. Stewart (ed.), the GATT Uruguay Round: a Negotiating History (Kluwer Law and
Taxation Publishers, 1993), p. 134.

subsidy which operates to increase the export of an y product”, no where can any express effort to
discipline domestic support be found.

44. The addition of Art. 11, entitled “Subsid ies other than export subsidies” by the 1979
Agreement on Interpretation and Application of Article VI, XVI and XXIII of the General Agreement
(the “Subsidies Code”)
21 is further proof that Art. XVI did not contemplate any discipline on domestic
support. While not all Contracting Parties of GATT signed the Subsidies Code, it does represent the
efforts of some GATT Contracting Parties

[t]o apply fully and to interpret the provisions of Articles VI, XVI and XXIII of the
General Agreement on Tariffs and Trade only with respect to subsidies and
countervailing measures and to elaborate rules for their application in order to
provide greater uniformity and certainty in their implementation.
22
45. On the issue of subsidies, the Subsidies Code is structured to distinguish between export
subsidies on certain primary (Art. 10, for the purpose of Art. XVI:3, GATT) and non-primary
subsidies (Art. 9 and illustrative Annex) on the one hand, and “[s]ubsidies other than export
subsidies” (Art. 11) on the other. Such a distin ction represents consensus, at least amongst some
GATT Contracting Parties, that GATT Art. XVI:3 only disciplines export subsidies per se.

46. In addition, in attempting to develop th e “unlawfulness” of these “non-export subsidies”,
Art. 11(2) of the Subsidies Code only specified possible “injury to a domestic industry of another
signatory”, “serious prejudice to the interests of another signatory”, nullification and impairment of
“benefits accruing to another signatory under the General Agreement [of Tariffs and Trade] as well as
adverse effect on “the conditions of normal competition”, to the express exclusion of a GATT
Art. XVI:3 action for “more than equitable share of world export trade”. The ostensible omission of a
GATT XVI:3 challenge against non- export subsides is again indication that GATT XVI:3 did not
contemplate a challenge against non-export subs idies, which should include domestic support
measures.

47. The Agreement on Agriculture of the WTO, while setting out object and quantitative
disciplines on agricultural domestic supports, does not engage in a comprehensive and express
definition of the term domestic support, except that it is granted in favour of domestic agricultural
producers. Yet the agreement does treat domestic su pport and export subsidies in different sections.
Art. 13, in addition, makes a symmetrical referenc e to the two concepts on equal footing. The
polarized treatment lends support to a conclusion that the multilateral trade regime at the Uruguay
Round sees a need to discipline agricultural domestic support measures. Given the progression of
discipline development for agricultural domestic su pport and the loss of inequitable world export
trade challenge in the Agreement on Agriculture, it appears to be a stretching of terms to interpret that
Art. XVI:3 of GATT 1947 should contemplate a ch allenge against agricultural domestic support
measures.

48. Language of Article 21.1 of the Agreement on Agriculture again supports the above opinion
of China. The article governs the relationship of the provisions of GATT 1994 and the Agreement on
Agriculture.
23 The Appellate Body, in its EC – Bananas III report, stated to the effect that the
provisions of GATT 1994 apply to a matter except to the extent that the Agreement on Agriculture
contains specific provisions dealing specifically with the same matter.24

21 26S/56.
22 Preamble, the Subsidies Code.
23 Appellate Body Report, European Communities – Regime for the Importation, Sale and Distribution
of Bananas, Appellate Body Report, WT/DS27/AB/R, DSR 1997:II, Paras. 155-156.
24 See Supra, Para. 3.

49. Coming back to the text of GATT Art. XVI:3, as well as the general progression of
multilateral trade regime on agricultural domestic support measures, specificity on domestic support
discipline as provided under the Agreement on Agriculture clearly stands out and pales any possible
equation of GATT Article XVI:3 to a discipline on agricultural domestic support.

(b) Are the requirements of Article XVI:3 of the GATT 1994 reflected in, developed by or
subsumed by the requirements in Article 6.3(d) of the SCM Agreement, or in any other
provisions of the covered agreements? Of what relevance, if any, is the Appellate Body
25 here?

(c) Of what relevance, if any, is the fact that the definition of "subsidy" in Article 1 of the
SCM Agreement and the prohibition on subsidies contingent upon export in
Article 3.1(a) were introduced in the Uruguay Round, but did not exist at the time that
the GATT 1947 was negotiated?

50. Art. 6(3)(d), on the other hand, is a natural prolongation of the inequitable world export trade
challenge made available by GATT Art. XVI:3 and further developed by the Subsidies Code. China
believes that requirements of Art. XVI:3 of the GATT 1994 are reflected in and developed by
requirements in Article 6.3(d) of the SCM Agreement.

51. GATT Art. XVI:3 is the first attempt by the multilateral trade system to seek avoidance of the
clinching of “more than equitable share of worl d export trade in a primary product” by a Member
granting “directly or indirectly any form of subsidy which operates to increase the export of any
primary product from its territory”. The article, le d by the word “[a]ccordingly”, grants Members the
inequitable world export trade challenge to address concerns over possible “h armful effects”, “undue

25 Original quote from the Appellate Body Report, WT/DS108/AB/R, Para. 117:
 "… the provisions of the SCM Agreement do not provide explicit assistance as to the
relationship between the export subsidy provisions of the SCM Agreement and Article XVI:4
of the GATT 1994. In the abse nce of any such specific textua l guidance, we must determine
the relationship between Articles 1.1(a)(1) and 3.1(a) of the SCM Agreement and
Article XVI:4 of the GATT 1994 on the basis of the texts of the relevant provisions as a
whole. It is clear from even a cursory examination of Article XVI:4 of the GATT 1994 that it
differs very substantially from the subsidy provisions of the SCM Agreement , and, in
particular, from the export subsidy provisions of both the SCM Agreement and the Agreement
on Agriculture. First of all, the SCM Agreement contains an express definition of the term
"subsidy" which is not contained in Article XVI:4. In fact, as we have observed previously,
the SCM Agreement contains a broad package of new export subsidy disciplines that "go well
beyond merely applying and interpreting Articles VI, XVI and XXIII of the GATT 1947".
Next, Article XVI:4 prohibits export subsidies on ly when they result in the export sale of a
product at a price lower than the "comparable pr ice charged for the like product to buyers in
the domestic market". In contrast, the SCM Agreement establishes a much broader prohibition
against any subsidy which is "contingent upon export performance". To say the least, the rule
contained in Article 3.1(a) of the SCM Agreement that all subsidies which are "contingent
upon export performance" are prohibited is significantly different from a rule that prohibits
only those subsidies which result in a lower price for the exported product than the
comparable price for that product when sold in the domestic market. Thus, whether or not a
measure is an export subsidy under Article XVI:4 of the GATT 1947 provides no guidance in
determining whether that measure is a prohibite d export subsidy under Article 3.1(a) of the
SCM Agreement. Also, and significantly, Article XVI:4 of the GATT 1994 does not apply to
"primary products", which include agricultural products. Unquestionably, the explicit export
subsidy disciplines, relating to agricultural products, contained in Articles 3, 8, 9 and 10 of the
Agreement on Agriculture must clearly take precedence over the exemption of primary
products from export subsidy disciplines in Article XVI.4 of the GATT 1994."

disturbance” and hindrance to “the achievement of the objectives” of GATT cause by subsidies to
primary products, as enumerated under the preceding article of XVI:2.

52. The Subsidies Code further defined “more than an equitable share of world export trade” as
including

any case in which the effect of an export subs idy granted by a signatory is to displace
the exports of another signatory bear ing in mind the developments on world
markets.
26
In addition to attempting to discipline subsidies to primary products, signatories to the Subsidies Code
also agreed to a number of general provisions on subsidies, not necessarily limited to primary
products. Adverse effects caused by subsidies, ex emplified by injury to the domestic industry of
another signatory, nullification or impairments to the benefits of another Member and serious
prejudice to the interests of another Members, were first introduced under Art. 8 of the Subsidies
Code as indication of the “unlawfulness” of such subsidies. The very same standards were to be later
adopted by Art. 5 of the SCM Agreement on actionable subsidies.

53. The concept of inequitable world export share caused by subsidies to primary products, on the
other hand, was retained under Art. 6.3(d) of th e SCM Agreement, with such changes as “world
market share” to replace “share of world export trade” and the addition of a three year period to
constitute “representative period” benchmark.

54. While China agrees that the requirements of GATT Art. XVI:3 are reflected in and developed
by requirements in Article 6.3(d) of the SCM Agreement, prior Appellate Body reports have indicated
that to the extent a specific WTO agreement c onflict with the provisions of GATT 1994, the former
shall prevail. In that respect, it is im portant to quote the Appellate Body in Brazil – Desiccated
Coconut:

The relationship between the GATT 1994 a nd the other goods agreements in
Annex 1A is complex and must be examined on a case-by-case basis. Although the
provisions of the GATT 1947 were incorporated into, and became a part of the GATT
1994, they are not the sum total of the rights and obligations of WTO Members
concerning a particular matter. For example, with respect to subsidies on agricultural
products, Articles II, VI and XVI of the GATT 1994 alone do not represent the total
rights and obligations of WTO Members. The Agreement on Agriculture and the
SCM Agreement reflect the latest statement of WTO Members as to their rights and
obligations concerning agricultural subsidi es. The general interpretative note to
Annex 1A was added to reflect that the other goods agreements in Annex 1A, in
many ways, represent a substantial elaboration of the provisions of the GATT 1994,
and to the extent that the provisions of the other goods agreements conflict with the
provisions of the GATT 1994, the provisions of the other goods agreements prevail.
This does not mean, however, that the other goods agreements in Annex 1A, such as
the SCM Agreement, supersede the GATT 1994. As the Panel has said:
... the question for consideration is not whether the SCM Agreement
supersedes Article VI of GATT 1994. Rather, it is whether
Article VI creates rules which are separate and distinct from those of
the SCM Agreement, and which can be applied without reference to
that Agreement, or whether Article VI of GATT 1994 and the SCM

Agreement represent an inseparable package of rights and disciplines
that must be considered in conjunction.27
55. The Appellate Body noted further that “[t]he relationship between the SCM Agreement and
Article VI of GATT 1994 is set out in Articles 10 and 32.1 of the SCM Agreement.”28 Apart from the
integrated structure of the WTO Agreement and the annexed agreements, the Appellate Body therefore
focused on these two provisions of the SCM Agreement. The Appellate Body then explicitly agreed
with the Panel’s statement that:

Article VI of GATT 1994 and the SCM Ag reement represent a new and different
package of rights and obligations, as am ong WTO Members, regarding the use of
countervailing duties. Thus, Article VI a nd the respective SCM Agreements impose
obligations on a potential user of countervaili ng duties, in the form of conditions that
have to be fulfilled in order to impose a duty, but they also confer the right to impose
a countervailing duty when those conditions are satisfied. The SCM Agreements do
not merely impose additional substantive a nd procedural obligations on a potential
user of countervailing measures. Rather, the SCM Agreements and Article VI
together define, clarify and in some ca ses modify the whole package of rights and
obligations of a potential user of countervailing measures.
29
56. The Appellate Body then proceeded to find that:

[C]ountervailing duties may only be imposed in accordance with Article VI of the
GATT 1994 and the SCM Agreement. A countervailing duty being a specific action
against a subsidy of another WTO Member, pursuant to Article 32.1, it can only be
imposed "in accordance with the provisions of GATT 1994, as interpreted by this
Agreement". The ordinary meaning of these provisions taken in their context leads us
to the conclusion that the negotiators of the SCM Agreement clearly intended that,
under the integrated WTO Agreement, countervailing duties may only be imposed in
accordance with the provisions of Part V of the SCM Agreement and Article VI of the
GATT 1994, taken together. If there is a conflict between the provisions of the SCM
Agreement and Article VI of the GATT 1994, furthermore, the provisions of the SCM
Agreement would prevail as a result of the general interpretative note to Annex 1A.
 …

The fact that Article VI of the GATT 1947 could be invoked independently of the
Tokyo Round SCM Code under the previous GATT system does not mean that Article
VI of GATT 1994 can be applied independently of the SCM Agreement in the context
of the WTO. The authors of the new WTO regime intended to put an end to the
fragmentation that had characterized the previous system.
30
57. China takes the above Appellate body statement to mean that Art. 32.1 of the SCM
Agreement, being the linkage between Art. XVI :3 of GATT 1994 and Art. 6.3(d) of SCM Agreement

27 Original Appellate Body quote, Panel Report on Brazil – Desiccated Coconut, Brazil – Measures
Affecting Desiccated coconut, WT/DS22/R, adopted 20 March 1997, Para. 227; Appellate Body Report, Brazil
– Measures Affecting Desiccated Coconut, WT/DS22/AB/R, DSR 1997:I, p. 15.
28 Appellate Body Report on Brazil – Desiccated Coconut, p. 16.
29 Panel Report, Brazil - -Desiccated Coconut, Brazil – Measures Affecting Desiccated Coconut ,
WT/DS22/R, adopted 20 March 1997, Para. 246, as upheld by the Appellate Body Report; Appellate Body
Report on Brazil – Desiccated Coconut, p. 17.
30 Appellate Body Report on Brazil – Desiccated Coconut, pages 16 and 18.

in connection with the inequitable share of world market challenge, requires that the Art. 6.3(d)
prevail over GATT Art. XVI:3. In other words, if this Panel were to find that the GATT provision in
conflict with the Art. 6.3(d), a claim against ag ricultural export subsidies cannot be brought under
GATT XVI:3, but should be brought as actionable subsidies under Art. 6.3(d) of the SCM Agreement;
however, if this Panel does not find any conflict, agricultural export subsidies actionable under Art.
6.3(d) of the SCM Agreement shall not be precluded from be ing actionable under GATT XVI:3,
which can only be logical interpretation of note 56 to the SCM Agreement as it applies to the
relationship.

58. Conflicts or differences were obvious ly found by the Appellate Body in US-FSC. It found
that Article XVI:4 of GATT 1994

differs very substantially from the subsidy provisions of the SCM Agreement, and, in
particular, from the export subsidy provisions of both the SCM Agreement and the
Agreement on Agriculture.
Hence, “[u]nquestionably, the explicit export subs idy disciplines, relating to agricultural products,
contained in Articles 3, 8, 9 and 10 of the Agre ement on Agriculture must clearly take precedence
over … the GATT 1994”.

59. Such an interpretation is further supported the general interpretative note to Annex 1A, which
provides to the effect that in the event of a co nflict between a provision of the GATT 1994 and a
provision of another agreement in Annex 1A, the latter shall prevail to the extent of the conflict.

60. This Panel’s Question 56(c) is in fact an swered by the quoted passage from the Appellate
Body in US-FSC. When GATT 1947 was negotiated and codified, there was nothing in it that
expressly defines the term “subsidy”, or the term “e xport subsidy”. Such definitions only came into
WTO wording in the Uruguay Round in addition to the new and more comprehensive discipline on
“prohibited subsidies” under the SCM Agreement and “domestic [agricu ltural] support” under the
Agreement on Agriculture . The more explicit disciplines under the SCM Agreement and the
Agreement on Agriculture , as noted by the Appellate Body in th e quoted passage, being “the latest
statement of WTO Members as to their rights and obligations concerning agricultural subsidies”,
clearly take precedence over any GATT 1994 provisions to the extent of direct conflict.

61. China thanks this Panel for granting this oppor tunity to present its views on issues related to
this proceeding, and hopes that this Panel will finds the above points helpful.

ANNEX J-17

REPLIES OF THE EUROPEAN COMMUNITIES
TO THE QUESTIONS FROM THE PANEL

27 October 2003

QUESTIONS TO THE EC

Question 45

 In relation to the term “same market” in Ar ticle 6.3 (c)of the SCM Agreement states in
paragraph 10 of its oral statement that a "wor ld market" cannot exist if there are significant
trade barriers between Members. On the other ha nd, the Panel notes that in relation to cotton,
the EC takes the position in paragraph 14 of its further submission that the term "same
market" in Article 6.3(c) should be read to in clude the domestic market of the subsidising
Member. In light of the fact that many domest ic cotton markets, possibly including that of
China, have significant trade barriers, how can the EC reconcile these two positions?

Reply

1. The question does not state correctly the views expressed by the EC. Contrary to what is said
in the question, the EC did not state at paragraph 14 of its further submission that “the term ‘ same
market’ in Article 6.3 (c) should be read to include the domestic market of the subsidising Member”.
Rather, the EC said in paragraphs 14-16 of its further submission that the term “world market share”
in Article 6.3 (d) includes also the share of the domestic ma rket of the subsidising Member. This
reading of Article 6.3(d) is compatible with the vi ew that the term “same market” in Article 6.3(c)
may include the world market, where there is such a world market. On the other hand, there is no
reason why Article 6.3(d) should a pply only in those cases where it can be established that there is a
world market. Rather the term “world market shar e” should be understood to mean, in that context,
the aggregate of the shares in each of the relevant geographical markets.

2. Contrary also to what is stated in the qu estion, the EC has taken no position on the issue of
whether, “in relation to cotton”, there is a world market for the purposes of Article 6.3 (c). It might
well be that, as suggested in the question, there is no world market for cotton, with the consequence
that the price effects mentioned in Article 6.3(c) would have to be observed separately within each
distinct national or regional market and/or in the resi dual “rest-of-the world” market. This is a factual
matter on which the EC does not wish to express any views.

Question 46

 Should the Panel prefer a concept of allocation of the benefit of subsidies to later years,
to a concept of fully expensing subsidies to the year in which the benefit was provided?

Reply

3. Whether a subsidy should be “allocated” or “e xpensed” depends on the na ture of the subsidy
concerned, having regard to relevant criteria, su ch as those outlined at paragraph 11 of the EC’s
further submission.

4. The EC is not expressing any views on the larg ely factual question of whether the subsidies at
issue should be “allocated” or “expensed”. The poi nt made by the EC was simply that Brazil cannot
have it both ways. If the subsidies are fully expensed to the marketing year where they are granted, as
Brazil appears to have done, it is contradictory to clai m at the same time that they continue to provide
benefits beyond that marketing year.

Question 47

 In the EC further submission, it is said that significantly different conditions of
competition in regional markets may prevent the Panel from arriving at the conclusion that
there is a world market. Is the payment of a subsidy a “condition of competition” and, if so,
how should that impact upon the Panel’s analysis?

Reply

5. To be precise, the EC’s position is that there is no world market for the purposes of
Article 6.3 (c) where the existence of trade barri ers has the consequence that the conditions of
competition, and in particular the price levels pr evailing in one geographical area are significantly
different from those prevailing in another geographical area.

6. Unlike, for example, import duties, quotas or transport costs, subsidies do not, of themselves,
insulate the prices in one geographical area from tho se in other areas and, therefore, do not lead to
existence of separate geographical markets.

QUESTIONS TO ALL THIRD PARTIES

Question 49

 What is the meaning and effect of the introductory phrase of Article 3 of the SCM
Agreement ("Except as provided in the Agreement on Agriculture...")?

Reply

7. The introductory phrase of Article 3 makes it cl ear that subsidies which would be inconsistent
with Article 3.1, but which are provided consisten tly with the export competition provisions of the
Agreement on Agriculture are not prohibited.

Question 50

 According to its revised timetable, the Pane l will issue its report to the parties after the
end of the 2003 calendar year. Does this have any impact on “exempt[ion] from actions” under
Article 13(b)(ii) and 13(c)(ii) of the Agreement on Agriculture?

Reply

8. No.

9. In the first place, and contrary to the Panel’s implicit suggestion, it is still an open question, in
view of the definition of the terms “implementa tion period” and “year” in Article 1 (f) and (i),
respectively, of the Agreement on Agriculture, whether the provisions cited in the question will cease
to apply by the end of the 2003 calendar year or at a subsequent date during 2004.

10. In any event, the Panel would be precluded by its terms of reference from taking into account
the consequences of the expiry of those provisions. The “matter” before the Panel was defined at the
time where the DSB agreed to the establishment of th e panel and cannot be modified in the course of
the proceedings.1 In accordance with its terms of referen ce, the Panel must consider the measures in
dispute as they existed when the matter was referred to the DSB, on the basis of the facts existing at
that moment and in the light of the WTO provisions that were relevant at that time.

11. Brazil’s claim is that the measures at issu e were WTO inconsistent at the time when the
matter was referred to the DSB. The Panel would go beyond its terms of reference if it were to decide
that the measures are WTO inconsistent at a subsequent moment, as a result of the expiry of the
peace clause. If, on the other hand, the Panel we re to apply WTO provisions that will become
relevant only after the expiry of the peace clause to measures and facts as they existed at the time
when the matter was referred to the DSB, it would be making an impermissible retroactive application
of such provisions.

Question 51

 How should the concept of specificity – and, in particular, the concept of specificity to
"an enterprise or industry or group of enterprises or industries" -- in Article 2 of the SCM
Agreement apply to subsidies in respect of agricultural commodities? Please answer the
following questions, citing the principles in Article 2 of the SCM Agreement:

(a) is a subsidy in respect of all agricultural, but not other, products specific?

(b) is a subsidy in respect of all agricultural crops (i.e. but not to other agricultural
commodities, such as livestock) specific?

(c) is a subsidy in respect of certain identified agricultural products specific?

(d) is a subsidy in respect of upland cotton, but not other products, specific?

(e) is a subsidy in respect of a certain proportion of the value of total US commodities (or
total US agricultural commodities) specific?

(f) is a subsidy in respect of a certain proportion of total US farmland specific?

Reply

 A subsidy granted to an economic operator which does not require any production of
agricultural products, and in which the subsidy may be used for any purpose, does not appear, to the
EC, to be specific in the sense of Article 2.1(a)

Question 52

 The Panel notes that different remedies a re available in respect of prohibited and
actionable subsidies under Article 4.7 and 7.8 of the SCM Agreement. If the Panel were to
conclude that a subsidy was prohibited and we re to make a recommendation under Article 4.7
of the SCM Agreement to withdraw the subsidy without delay, can the Panel:

1 See e.g. Panel report on India – Measures Affecting the Automotive Sector , WT/DS1465/R,
WT/DS175/R, at para. 7.26.

(a) also conclude that the same subsidy had resu lted in adverse effects to the interests of
another Member? If so, what would be the value of such a conclusion in terms of the
settlement of the matter before the Panel?

Reply

12. Yes. There is nothing in the SCM Agreement which prevents a complaining party from
claiming that a subsidy is prohibited under Part II and, in addition, causes “adverse effects” under
Part III.

13. A finding that a prohibited subsidy causes “seri ous prejudice” may still be relevant in so far
as at it may be possible for the subsidising Member to withdraw the export or local content condition
attached to the subsidy, which causes its prohibiti on, while maintaining the subsidy and its adverse
effects.

(b) take into account the effects of the interact ion of those prohibited subsidies with other,
allegedly, actionable subsidies? If so, how is this relevant to the issue of causation under
Article 5 of the SCM Agreement?

14. In a situation where the complaining party has made no claim that a prohibited subsidy causes
adverse effects under Part III, it would be necessary to establish the causal link between the actionable
subsidies and the adverse effects. However, the EC understands that this situation does not arise in
the present dispute, because Brazil claims that all the allegedly prohibited subsidies cause adverse
effects.

Question 53

 Would a finding of serious prejudice under Article 5(c) of the SCM Agreement be
determinative for a finding under Article XVI:1 of the GATT 1994? Why or why not? What, if
any, is the role of footnote 13 of the SCM Agreement in this context?

Reply

15. Footnote 13 states that the term “serious prejudice” is used in the SCM Agreement in the same
sense as in Article XVI:1 of the GATT. Therefor e, it seems that a finding that a subsidy causes
“serious prejudice” under Article 5(c) of the SCM Agreement would have the necessary implication
that the same subsidy causes also “serious prejudice” in the sense of Article XVI:1 of the GATT, in so
far as that provision can be applied on its own.

Question 54

 Are US cotton producers able to cover th e fixed and variable costs without subsidies?
Please provide substantiating evidence. Of what rel evance is this, if any, to Brazil's actionable
subsidy claims ?

Reply

16. The EC has not taken any position on the factual issue raised in the question.

17. In principle, whether or not a producer is able to cover all its costs without subsidies is not, as
such, directly relevant, let alone determinative of whether the subsidies cause adverse effects.

Question 55

 In light of the fact that certain third parties have provided submissions about the price
effect of claimed US subsidies, which Member or Members is, or are, the “other party” under
Article 6.3(c) (“another Member”) for the purposes of these proceedings?

Reply

18. The EC agrees with the United States that, for the purposes of Article 6.3(c), only the price
effects on the “products” of Brazil are relevant. (See US Further Submission, para. 86 and the case
law cited therein)

Question 56

 Please respond to the following questio ns concerning the relationship between
Article XVI:3 of the GATT 1994, the disciplines on export subsidies and domestic support in the
Agreement on Agriculture and the disciplines on prohibited export subsidies and actionable
subsidies in Articles 3, 5(c) and 6.3(d) of the SCM Agreement.

(a) Are agricultural domestic support progr ammes challengeable under Article XVI:3 of
the GATT 1994? How, if at all, is the title of Section B of Article XVI ("Additional
provisions on export subsidies" (emphasis added )) relevant? How, if at all, are Articles
13 and 21.1, or any other provisions, of the Agreement on Agriculture, relevant?

(b) Are the requirements of Article XVI:3 of the GATT 1994 reflected in, developed by or
subsumed by the requirements in Article 6.3(d) of the SCM Agreement, or in any other
provisions of the covered agreements? Of what relevance, if any, is the Appellate Body
2 here?

2 WT/DS108/AB/R, para 117:
"… the provisions of the SCM Agreement do not provide explicit assistance
as to the relationship between the export subsidy provisions of the
 SCM Agreement and Article XVI:4 of the GATT 1994. In the absence of
any such specific textual guidance, we must determine the relationship
between Articles 1.1(a)(1) and 3.1(a) of the SCM Agreement and
Article XVI:4 of the GATT 1994 on the basis of the texts of the relevant
provisions as a whole. It is clear from even a cursory examination of
Article XVI:4 of the GATT 1994 that it differs very substantially from the
subsidy provisions of the SCM Agreement, and, in particular, from the
export subsidy provisions of both the SCM Agreement and the Agreement on
Agriculture. First of all, the SCM Agreement contains an express definition
of the term "subsidy" which is not contained in Article XVI:4. In fact, as we
have observed previously, the SCM Agreement contains a broad package of
new export subsidy disciplines that "go well beyond merely applying and
interpreting Articles VI, XVI and XXIII of the GATT 1947". Next,
Article XVI:4 prohibits export subsidies only when they result in the export
sale of a product at a price lower than the "comparable price charged for the
like product to buyers in the domes tic market." In contrast, the
 SCM Agreement establishes a much broader prohibition against any subsidy
which is "contingent upon export performance". To say the least, the rule
contained in Article 3.1(a) of the SCM Agreement that all subsidies which
are "contingent upon export performance" are prohibited is significantly
different from a rule that prohibits only those subsidies which result in a
lower price for the exporte d product than the comp arable price for that
product when sold in the domestic market. Thus, whether or not a measure

(c) Of what relevance, if any, is the fact that the definition of "subsidy" in Article 1 of the
SCM Agreement and the prohibition on subsidies contingent upon export in
Article 3.1(a) were introduced in the Uruguay Round, but did not exist at the time that
the GATT 1947 was negotiated?

Reply

19. Article XVI:3 of the GATT has been elaborated in Article 6.3(d) of the SCM Agreement, with
the consequence that it cannot be applied independently from Part III of the SCM Agreement, just like
Article VI of the GATT cannot be app lied independently from Part V of the SCM Agreement .3
Indeed, if Article XVI:3 could be applied on its own, the additional requirements provided for in
Article 6.3(d) and related provisions, such as Article 6.7, would be rendered largely redundant.

20. By its own terms, Article XVI:3 is concerne d exclusively with “export subsidies”. However,
as noted by the Appellate Bo dy in the passage of the FSC report mentioned in the question, the scope
of the notion of export subsidy in Article XVI di ffers from the scope of the same term in the SCM
Agreement and in the Agreement on Agriculture . It is conceivable, therefore, that one and the same
measure may be at the same time an “export subsid y” in the sense of Article XVI:3 and “domestic
support” within the meaning of the Agreement on Agriculture. This is not saying that the Agreement
on Agriculture and Article XVI:3 can apply simultaneously to the same measure. Where a measure is
subject to the rules on domestic support of the Agreement on Agriculture , those rules excludes the
application of Article XVI:3 to the same me asure, in accordance with Article 21.1 of the Agreement
on Agriculture (irrespective of whether Article XVI:3 can be applied independently from the SCM
Agreement.)

21. This interpretation is confirmed by Article 13 of the Agreement on Agriculture . It would be
odd if the peace clause exempted export subsidies fro m action under Article XV I:3, but not domestic
support, which is assumed to have less pernicious trad e effects. Clearly, if the drafters of the peace
clause did not deem necessary to exempt domestic support from action under Article XVI:3 it is
because they considered that this provision did not apply to domestic support pursuant to Article 21.1
of the Agreement on Agriculture.

is an export subsidy under Article XVI:4 of the GATT 1947 provides no
guidance in determining whether that measure is a prohibited export subsidy
under Article 3.1(a) of the SCM Agreement . Also, and significantly,
Article XVI:4 of the GATT 1994 does not apply to "primary products",
which include agricultural products. Unquestionably, the explicit export
subsidy disciplines, relating to agricultural products, contained in Articles 3,
8, 9 and 10 of the Agreement on Agriculture must clearly take precedence
over the exemption of primary products from export subsidy disciplines in
Article XVI:4 of the GATT 1994."
3 Cf. Panel and Appellate Body reports, Brazil – Measures Affecting Desiccated Coconuts ,
WT/DS22/R and WT/DS22/AB/R.

ANNEX J-18

ANSWER TO PANEL QUESTION TO INDIA

27 October 2003

Question 48

 In the further submission of India, it is stated that “there is “no obligation under the
SCM Agreement to demonstrate serious prejudice separately after establishing that one of the
effects of a subsidy listed under Article 6.3 applies, as the effects listed in Article 6.3 themselves
equate to serious prejudice”. How does this view relate to Article 6.3(d), which appears to
contain no element of degree? India

Reply

 India presumes that by ‘element of degree’ the Panel means the ‘intensity or amount’ of the
effects of the subsidy as enumerated in Article 6.3 of the SCM Agreement. India notes that for serious
prejudice to arise, in respect of only one out of the four effects of the subsidy in Article 6.3, has the
intensity of the effect been specified. This is in r espect of the effect of the subsidy in Article 6.3 (c)
wherein the ‘intensity or amount’ of price underc utting, price suppression or price depression has
been qualified by ‘significant’. Thus, for serious prejudice to arise in case of price undercutting, price
suppression or price depression, such effects should be significant. What can constitute ‘significant’
would vary from case to case. India is of the view that the other cases of effect of the subsidy
specified in paragraphs 3 (a), 3(b) and 3 (d) of Article 6 contain no element of degree.

 India fails to see how the absence of any element of degree in paragraphs 3 (a), 3(b) and 3 (d)
of Article 6 results in the complaining Member being separately required to prove that the prejudice is
indeed serious even after having established that one of these effects exists. If the drafters had
intended that the complaining Member should separ ately establish that the prejudice caused by the
effects of the subsidy was serious they would have defined the requirements for this purpose. The
SCM Agreement contains no such requirement. India is, therefore, of the view that there is no
obligation under the SCM Agreement to demonstrate serious prejudice separately after establishing
that one of the effects of a subsidy listed under Article 6.3 applies.

ANNEX J-19

RESUMED FIRST SESSION OF THE FIRST SUBSTANTIVE
MEETING OF THE PANEL

NEW ZEALAND ANSWERS TO QUESTIONS FROM
THE PANEL TO THIRD PARTIES

14 October 2003

Q49. What is the meaning and effect of the introductory phrase of Article 3 of the SCM
Agreement (“Except as provided in the Agreement on Agriculture …”)? All third parties

 This phrase refers to provisions in the Agreement on Agriculture that provide specific
exception from Article 3 of the SCM Agreement . New Zealand does not agree that any such
exception exists in the Agreement on Agriculture that would authorise use of local content subsidies
contrary to Article 3.1(b) of the SCM Agreement, as argued by the United States.
1 There is no basis
upon which to claim that the Agreement on Agriculture gives Members a right to use whatever
domestic support they wish with complete impunity from action under other WTO Agreements.

Q50. According to its revised timetable, the Panel will issue its report to the parties after the
end of the 2003 calendar year. Does this have any impact on “exemp[tion] from actions” under
Article 13(b)(ii) and 13(c)(ii) of the Agreement on Agriculture? All third parties

 No. Brazil has not claimed that the implementa tion period in Article 13 has expired. It has
claimed that the provision of Articles 13(b) and (c) have not been respected.

Q51. How should the concept of specificity – and, in particular, the concept of specificity to
“an enterprise or industry or group of enterprises or industries” – in Article 2 of the SCM
Agreement apply to subsidies in respect of agricultural commodities ? Please answer the
following questions, citing the principles in Article 2 of the SCM Agreement. All third parties

 New Zealand agrees with Brazil that the ordina ry meaning, context and object and purpose of
Article 2.1(a) of the SCM Agreement confirm that subsidies that are available to discrete segments of
an economy or to only particular industries are specific. New Zealand considers that Brazil has
demonstrated that each of the subsidies provided by the United States to upland cotton are specific
within the meaning of Article 2.

 Whether or not a subsidy is specific within the terms of Article 2, with the exception of
prohibited subsidies which are deemed specific by Ar ticle 2.3, requires examination of the particular
features of the subsidy at issue, including factual information about the actual usage of the subsidy
and not simply its availability. Thus in relation to the general scenarios ou tlined below only general
responses are possible.

 1 United States – Subsidies on Upland Cotton , Further Submission of the United States,
30 September 2003, para 167.

(a) is a subsidy in respect of all agricultural, but not other, products specific?

 New Zealand does not consider that this questi on is relevant to this dispute as none of the
subsidies at issue are provided on the same terms to all agricultural products.

(b) is a subsidy in respect of all agricultural crops (ie but not to other agricultural
commodities, such as livestock) specific?

 Yes such a subsidy would be specific, because access to the subsidy is explicitly limited to
certain enterprises within the meaning of Article 2.1(a), specifically to producers of agricultural crops.

(c) is a subsidy in respect of certain identified agricultural products specific?

 Yes, because it is specific to producers of certa in agricultural products and is thus explicitly
limited to certain enterprises within the meaning of Article 2.1(a).

(d) is a subsidy in respect of upland cotton, but not other products, specific?

 Yes, because it is specific to producers of one product and is thus exp licitly limited to certain
enterprises within the meaning of Article 2.1(a).

(e) is a subsidy in respect of a certain proportion of the value of the total US commodities
(or total US agricultural commodities) specific?

 It is not clear from the question what kind of subsidy is being referred to, and, as noted in
New Zealand’s general comments on th is question, whether or not a subsidy is specific within the
terms of Article 2 of the SCM Agreement requires examination of the particular features of the
subsidy at issue. To the extent that the subsid y referred to in the question is limited to certain
enterprises (as suggested by the fact that the subsidy is provided only in respect of a certain proportion
of the total value of United States commodities or agricultural commodities) it would be specific
within the meaning of Article 2.1(a).

(f) is a subsidy in respect of a certain proportion of total US farmland specific?

See New Zealand’s answer to (e) above.

Q52. The Panel notes that different remedies are available in respect of prohibited and
actionable subsidies under Article 4.7 and 7.8 of the SCM Agreement. If the Panel were to
conclude that a subsidy was prohibited and w ere to make a recommendation under Article 4.7
of the SCM Agreement to withdraw the subsidy without delay, can the Panel:

(a) also conclude that the same subsidy had resu lted in adverse effects to the interests of
another Member? If so, what would be the value of such a conclusion in terms of the
settlement of the matter before the Panel? All third parties

 A Panel may conclude that a prohibited subsidy had resulted in adverse effects to the interests
of another Member. The chapeau of Article 5 of the SCM Agreement refers to “any subsidy referred
to in paragraphs 1 and 2 of Article 1”. Reference is ma de in paragraph 2 of Article 1 to subsidies
being subject to the provisions of Part III only if they are specific in accordance with Article 2.
Article 2.3 deems any subsidy falling under the provisions of Article 3, ie prohibited subsidies, to be
“specific”. Thus a prohibited subsidy may also be subject to the provisions of Part III of the SCM
Agreement. It is therefore open to a Panel to conclude that a prohibited subsidy resulted in adverse
effects to the interests of another Member.

 The value of such conclusion in terms of the settlement of the matter before the Panel is to
clarify the adverse effects that must be removed by the subsidising Member, albeit that a subsidising
Member does not have the option of removing the adve rse effects attributable to prohibited subsidies
other than by withdrawing the subsidy without delay.

(b) take into account the effects of the interact ion of those prohibited subsidies with other,
allegedly, actionable subsidies? If so, how is this relevant to the issue of causation under
Article 5 of the SCM Agreement? All third parties

 A Panel may take into account the effects of th e interaction of those prohibited subsidies with
other actionable subsidies. For example, actionable subsidies could operate to neutralise the effect of
removal of the prohibited subsidy, as would likely be the case in respect of removal of the Step 2
export payments. Removal of this prohibited export subsidy would be likely to lead to a decline in
United States exports and thus lower the United St ates domestic price for upland cotton. However
lower prices for upland cotton producers would trigge r increased marketing loan deficiency payments
that could in turn boost exports and thus maintain the adverse effect of the United States subsidies.

 It is therefore important to consider the inter action of the various types of subsidies at issue
and look at their collective effect. However no at tribution of the effects to either prohibited or
actionable subsidies is needed, because there is no conflict between the remedies for prohibited
subsidies and actionable subsidies. To the extent that the subsidies causing serious prejudice to the
interests of other Members include prohibited subsid ies, the subsidising Member must withdraw them
without delay, as they do not have the option av ailable in respect of actionable subsidies of
maintaining the subsidy so long as the adverse effect is removed.

Q53. Would a finding of serious prejudice under Article 5(c) of the SCM Agreement be
determinative for a finding under Article XVI:1 of the GATT 1994? Why or why not? What, if
any, is the role of footnote 13 of the SCM Agreement in this context? All third parties

 A finding of serious prejudice under Article 5(c) of the SCM Agreement would be
determinative for a finding under Article XVI:1 of the GATT 1994 because serious prejudice is used
in the same sense in Article 5(c) as it is in Article XVI:1. Footnote 13 explicitly clarifies this.

Q54. Are US cotton producers able to cover the fixed and variable costs without subsidies?
Please provide substantiating evidence. Of what relevant is this, if any, to Brazil’s actionable
subsidy claims? All third parties

 Without subsidies United States cotton producers would not be covering their full costs of
production and so would be making losses over the longe r term. Evidence for this has been provided
by Brazil in Exhibits Bra-7 and Bra-205. For example in 1999, 2000 and 2001 the USDA estimated
that United States cotton producers total costs exc eed the value of production by 173, 142 and 259
dollars per planted acre respectively, as shown in “US cotton production costs and returns 1997-
2001”.
2

 Accordingly the subsidies mean that United States production is higher than it otherwise
would be. As Professor Sumner’s econometric wo rk shows, without subsidies US production over
1999-2002 would have been an average of 28.7 per cent lower than actual US production
3 and as a
consequence United States exports would have d eclined on average by 41.2 per cent between MY

 2 Exhibit BRA 7.
 3 United States – Subsidies on Upland Cotton, Brazil’s Further Submission to the Panel,
9 September 2003, para 105.

1999-20024 and world prices would have been an average of 12.6 per cent higher. This evidence thus
supports Brazil’s claim that the United States subs idies have caused serious prejudice to Brazil’s
interests and threaten to cause serious prejudice to Brazil’s interests in the future.

Q55. In light of the fact that certain third parties have provided submissions about the price
effect of claimed US subsidies, which Member or Members is, or are, the “other party” under
Article 6.3(c) (“another Member”) for the purposes of these proceedings? All third parties

 Brazil is the “other party” in the context of Article 5(c). But that does not mean that other
Members too cannot be suffering the serious prejudice through the use of the subsidies at issue by the
United States. Indeed the Oral Statement of Benin to the Panel
5 makes it clear that this is the case.

Q56. Please respond to the following questions concerning the relationship between Article
XVI:3 of the GATT 1994, the disciplines on export subsidies and domestic support in the
Agreement on Agriculture and the disciplines on prohibited export subsidies and actionable
subsidies in Articles 3, 5 and 6.3 (d) of the SCM Agreement. All third parties.

(a) Are agricultural domestic support progr ammes challengeable under Article XVI:3 of
the GATT 1994? How, if at all, is the title of Section B of Article XVI (“Additional
provisions on export subsidies
” (emphasis added) relevant? How, if at all, are Articles
13 and 21.1, or any other provisions, of the Agreement on Agriculture relevant?

 Agricultural domestic support progra mmes are challengeable under GATT 1994
Article XVI:3 to the extent that they meet the re quirements of that Article , including, for example,
that they must provide a subsidy that “operates to increase the export of any primary product from its
territory”.

 The title of Section B is relevant in that it reflects the narrower scope of Section B vis-à-vis
Section A. Section B addresses “A dditional Provisions on Export S ubsidies”, whereas Section A is
broader and addresses “Subsidies in General” – it incl udes subsidies that operate to reduce imports of
any product into the territory of the subsidisi ng Member. The term “export subsidies” in the
particular context of GATT Article XVI is not defi ned, but can be given meaning by the scope of
paragraph 3 which applies to “any form of subs idy which operates to increase the export of any
primary product” and is thus a broader definition than “contingent … upon export” found in the SCM
Agreement.

 Article 21.1 of the Agreement on Agriculture , which provides that GATT 1994 must be
applied subject to the Agreement, is relevant in so far as it clarifies that in the event of legal conflict
the provisions of the Agreement on Agriculture apply. During the implementation period Article 13
of the Agreement on Agriculture provides exemption from actions based on specific GATT 1994
provisions, subject to certain criteria being met. Article 13 exempts domestic support measures from
action based on Article XVI:1 only if such measure s do not grant support in excess of that decided
during the 1992 marketing year.

 Brazil has brought forward evidence to demonstr ate that the subsidies at issue operate to
increase United States exports of upland cotton and that they have been applied by the US in a manner
that has resulted in the United States having a “mor e than equitable share of the world export trade”
within the meaning of Article XVI:3 and therefore cause serious prejudice within the meaning of
Article XVI:1.

 4 Ibid.
 5 Oral Statement of Benin, 8 October 2003.

(b) Are the requirements of Article XVI:3 of the GATT 1994 reflected in, developed by or
subsumed by the requirements in Article 6.3(d) of the SCM Agreement, or in any other
provisions of the covered agreements? Of what relevance, if any, is the Appellate Body
Report in US-FSC, para 117 here?

 Article 6.3(d) of the SCM Agreement elaborates on one specific aspect of the disciplines on
subsidies in GATT Article XVI:3, and that is in relation to the situation where a subsidy, as defined in
the SCM Agreement, results in an increase in the world market share of the subsidising Member in the
particular subsidised product. However GATT Ar ticle XVI:3 addresses a broader situation – where
the result of the application of the subsidies is that the subsidising Member has a “more than equitable
share” of the world export trade in the product.

 A Member challenging a subsidy need not dem onstrate that the subsidising Member’s share
of the world market has necessarily increased. Fo r example, a Member may apply a subsidy that
increases its exports of a product in order to simply main tain its market share. “But for” that subsidy,
relevant economic factors might have meant that a Member’s exports should in fact have declined.
Therefore Article 6.3(d) of the SCM Agreement covers one specific aspect of how a “more than
equitable share” of the world market might manifest itself but not all such situations.

 As such the situation is distinguishable from US-FSC
6 in relation to GATT Article XVI:4
where the Appellate Body found that the narrow prohibition in Article XVI:4 had been entirely
subsumed by Article 3.1(a) of the SCM Agreement.

(c) Of what relevance, if any, is the fact that the definition of “subsidy” in Article 1 of the
SCM Agreement and the prohibition on subsidies contingent upon export in
Article 3.1(a) were introduced in the Uruguay Round, but did not exist at the time that
the GATT 1947 was negotiated?

 See New Zealand’s answer to Questions (a) and (b) above.

 6 Appellate Body Report, United States – Tax Treatment for “Foreign Sales Corporation ”,
WT/DS108/AB/R, adopted 20 March 2000

ANNEX J-20

RESPONSES TO QUESTIONS FROM THE
PANEL FOR THIRD PARTIES

THE SEPARATE CUSTOMS TERRITORY OF TAIWAN,
PENGHU, KINMEN AND MATSU

27 October 2003

Q49. About the meaning and effect of the introductory phrase of Article 3 of the SCM
Agreement.

A: The introductory phrase of Article 3 of the SCM Agreement “Except as provided in the
Agreement on Agriculture, the following subsidies, within the meaning of Article 1, shall be
prohibited” has the meaning that if there is different provision in the Agreement on Agriculture (AoA)
with regard to the subsidies listed in Article 3 of the SCM Agreement, the AoA provision shall
prevail. In other words, even if a subsidy is specific within the meaning of Article 1 of the SCM
Agreement, and even if it is a subsidy contigent upon export performance or a subsidy contigent upon
the use of domestic over imported goods, it is still not within the scope of pr ohibition under Article 3
of the SCM Agreement. The effect of such agricultural subsidy shall be decided by the AoA.

 The critical point here is whether it is “provi ded in the Agreement on Agriculture”. In this
regard, Article 8 of the AoA is relevant. Article 8 provides that: “Each Member undertakes not to
provide export subsidies otherwise than in conformity with this Agreement and with the commitments
as specified in that Member's Schedule.” The AoA, at this current stage, only requires reduction of
such subsidy, not the elimination of such subsi dy. In other words, suppose the subsidy is in
conformity with the AoA and with the commitments as specified in the Members’ Schedule, it should
be allowed by the AoA and thus would not be pr ohibited under the SCM Agreement according to the
introductory phrase of Article 3 of the SCM Agreement.

Q50. About the impact of the revised timetable to issue the Panel report after the end of the
2003 calendar year on the “exemp t[ion] from actions” under Articles 13(b)(ii) and 13(c)(ii) of
the AoA.

A: We have no comments on this question.

Q51. About the concept of specificity in Articl e 2 of the SCM Agreement applying to subsidies
in respect of agricultural commodities.

A: Article 2.1 of the SCM Agreement provides th at “In order to determine whether a subsidy, as
defined in paragraph 1 of Article 1, is specific to an enterprise or industry or group of enterprises or
industries (referred to in this Agreement as ‘certain enterprises’) within the jurisdiction of the granting
authority, the following principles shall apply:…” Thus, when considering the answers below, the
principles set forth in Article 2.1 must also be borne in mind.

 Also, the basic reason for excluding “non-speci fic subsidies” from being prohibited should be
that the subsidies are generally available and no competitive advantage is provided to a particular
sector or some specific sectors. If there is co mpetitive advantage provided to one or more sectors

with the effect of excluding other sectors from rece iving the advantages, it should be considered as
specific.

 Our view is that the concept if specificity applies to the agriculture sector as follows:

(a) All agricultural products
: not specific. The competitive advantage is provided to all
agricultural products. No agricultural products are excluded.

(b) All agricultural crops
: specific. Although the coverage is broad, some agricultural products
are excluded.

(c) Certain identified agricultural products
: specific. Apparently it excludes a large portion of
products.

(d) Upland cotton
: specific. It excludes all other products and only gives advantage to one
product.

(e) Certain proportion of the value of total US commodities or total US agricultural commodities

not specific. No commodities or agricultural commodities are excluded.

(f) Certain proportion of total US farmland : not specific, as long as farmland is not restricted to
that producing certain commodities.

Q52. About different remedies available in respect of prohibited and actionable subsidies.

A(a) The SCM Agreement explicitly divides subsidies into three categories, and Part II and Part III
are designed to deal with different categories of subsidies. If a subsidy falls within “Part II
Prohibited Subsidies”, it would not be falling w ithin “Part III Actionable Subsidies”. Thus, it
is unthinkable that if the Panel were to concl ude, for example, that a subsidy was prohibited
and were to make a recommendation under Article 4.7 of the SCM Agreement, it would also
have to decide whether the same subsidy had r esulted in adverse effects to the interest of
another Member.

(b) For the same reason, the Panel should not take into account the interactive effects of those
prohibited subsidies with other subsidies.

Q53. About the determinativeness of a findi ng under the SCM Agreement for a finding under
GATT 1994

A: Footnote 13 of the SCM Agreement explains th at “The term ‘serious prejudice to the interests
of another Member’ is used in this Agreement in the same sense as it is used in paragraph 1 of
Article XVI of GATT 1994, and includes threat of serious prejudice.” Although there is no same
provision in Article XVI of the GATT 1994, the r eal intent of the WTO Members should be to
harmonize the meaning and concept of the same phrase where it appears in different agreements. It
would also be reasonable to interpret the same phrase in the same manner, unless there is strong
reason for not doing so. Our view, therefore, would be that if there is a finding of serious prejudice
under Article 5(c) of the SCM Agreement, it should be de facto determinative for a finding under
Article XVI:1 of the GATT 1994.

Q54. About the evidence of US cotton produ cers to cover or not to cover the fixed and
variable costs without subsidies.

A: We do not have information available on this.

Q55. About “another Member” of Article 6.3(c).

A: We do not claim that we are “another Member” in the sense of Article 6.3(c) of the SCM
Agreement.

Q56. About the relationship between Articl e XVI:3 of the GATT 1994, the disciplines on
export subsidies and domestic support in the AoA and the disciplines on prohibited export
subsidies and actionable subsidies in Article 3, 5(c) and 6.3(d) of the SCM Agreement.

A(a) Agricultural domestic support should not be challengeable under Article XVI:3 of the GATT
1994. Although the second sentence “grants directly or indirectly any form of subsidy which
operates to increase the export of any primary product from its territory” seems to be broad
enough to include domestic subsidies, this second sentence still comes after the introductory
sentence, which requires Members to avoid the use of subsidies on the export of primary
products. Also paragraph 3 of Article XVI of the GATT 1994 is under the title “Section B -
Additional Provisions on Export Subsidies”. There is no reason why the provisions in
paragraph 3 should not be limite d to export subsidies. Otherwise, the title would become
meaningless and redundant.

(b) Paragraph 117 of the Appellate Body Report in US-FSC is an appropriate interpretation of the
relationship between the definition of subsidies and export subsidies in Articles 1.1(a)(1) and
3.1(a) of the SCM Agreement on the one hand an d export subsidies in Article XVI:4 of the
GATT 1994 on the other. However, it does not ha ve relevancy in deciding the relationship
between domestic subsidies and e xport subsidies. The requirements of Article XVI:3 of the
GATT 1994 are imposed on export subsidies, as e xplained above, while Article 6.3(d) of the
SCM Agreement is about non-export subsidies. Thus, the requirements of Article XVI:3 of
the GATT 1994 are neither reflected in, nor developed by or subsumed by the requirements in
Article 6.3(d) of the SCM Agreement.

(c) Under the principle set forth by the above- mentioned Paragraph 117 of the Appellate Body
Report in US-FSC, if there is conflict between Article XVI of the GATT 1994 and the AoA,
the AoA must take precedence over the GATT 1994. Based on the same principle, the SCM
Agreement should take precedence over the GATT 1994 to the extent that there is conflict.
However, with regard to the definition of subs idy in Article 1 of the SCM Agreement and the
prohibition on subsidies contingent upon expor t in Article 3.1(a), there is no conflict
provision in Article XVI of the GATT 1994. Thus, there is no issue here of whether one
agreement would take preference over the other. Nevertheless, Article XVI of the GATT
1994 and the SCM Agreement are still the rules under the WTO dealing with the same set of
matters. The definition of certain terms in one agreement could serve as a very important
source in helping to define the same terms in a nother agreement. Therefore, unless there is a
sound basis for having a different interpreta tion, we do not see any reason for different
meanings of subsidies and export subsidies in Article XVI of the GATT 1994 from those in
the SCM Agreement.