Document: WT/DS267/R/Add.1 Page A-1 ANNEX A INITIAL BRIEFS OF PARTIES AND THIRD PARTIES Contents Page Annex A-1 Initial Brief from Brazil (5 June 2003) A-2 Annex A-2 Initial Brief from the United States (5 June 2003) A-10
Date: 5 June 2003
Document codes: WT/DS267/R/Add.1
Complainant: Brazil
Respondent: U.S.
Third parties: Argentina, Australia, Benin, Canada, Chad, China, Taiwan, EU, India, New Zealand, Pakistan, Paraguay, Venezuela, Japan, Thailand
Dispute stage: Mutually Agreed Solution
Agreements cited: Art. 3, 5, 6  Subsidies and Countervailing Measures (SCM)Art. 3.3, 7.1, 8, 9.1, 10.1  AgricultureArt. III:4, XVI  GATT 1994

ANNEX A

INITIAL BRIEFS OF PARTIES AND THIRD PARTIES

Contents Page
Annex A-1 Initial Brief from Brazil (5 June 2003) A-2
Annex A-2 Initial Brief from the United States (5 June 2003) A-10
Annex A-3 Third Party Initial Brief from Argentina (10 June 2003) A-15
Annex A-4 Third Party Initial Brief from Australia (10 June 2003) A-18
Annex A-5 Third Party Initial Brief from the European Communities
(10 June 2003)
A-20
Annex A-6 Third Party Initial Brief from India (10 June 2003) A-25
Annex A-7 Third Party Initial Brief from New Zealand (10 June 2003) A-27
Annex A-8 Third Party Initial Brief from Paraguay (10 June 2003) A-28
Annex A-9 Comments of Brazil on the Initial Briefs (13 June 2003) A-29
Annex A-10 Comments of the United States on the Initial Briefs (13 June 2003) A-38

2. The short answer to this question is “no”. There is no procedural rule or legal requirement
for a panel to make such a preliminary finding. The phrase “exempt from actions” in Article 13(b)(ii)
and 13(c)(ii) of the Agreement on Agriculture (AoA) means that if all the conditions of
Article 13(b)(ii) and 13(c)(ii) are fulfilled ( i.e., there is peace clause protection), a complaining
Member cannot receive authorization from the DSB to obtain a remedy against another Member’s
domestic and export support measures that otherwise would be subject to the disciplines of certain
provisions of the Agreement on Subsidies and Countervailing Measures (ASCM or SCM Agreement)
or Article XVI of GATT 1994. But neither the ph rase “exempt from actions” nor AoA Article 13
compel the Panel to first make a peace clause finding before considering the substance of Brazil’s
ASCM and GATT Article XVI claims.

3. Article 13 of the Agreement on Agriculture is not a “special and additional” rule set out in
Appendix 2 to the Understanding on Rules and Procedures Governing the Settlement of Disputes
(DSU). Article 19 of the AoA makes all DSU provisions applicable to the AoA. Pursuant to DSU
Article 11, a panel must make an “objective assessment of the facts of the case”. Assessing and
weighing all relevant facts – including rebuttal facts – obtained during the normal two meeting panel
process is essential to resolve properly fact-intensive issues relating to the peace clause. This Panel
should follow the lead of previous panels that made similar complex threshold findings in final panel
reports.

4. Brazil will be prejudiced by delays in the process because a number of Brazil’s claims are not
dependent on any resolution of the “peace clause”. Much of the proof required for demonstrating
that the US has no peace clause protection under Articl es 13(b)(ii) and 13(c)(ii) is the same evidence
demonstrating US violations under the SCM Agreement. Requiring separate briefings, hearing,
presentation of factual evidence and legal argumen t for such inter-connected “peace clause” issues
would seriously disrupt Brazil’s presentation of its evidence, lead to duplication of its efforts, delay
the proceeding, and increase Brazil’s financial and human resource costs.

II. ANALYSIS OF THE PHRASE “EXEMPT FROM ACTIONS”

1. The Panel has requested that Brazil address the meaning of the phrase “exempt from actions”
in AoA Article 13. In the view of Brazil, this phrase means that a complaining Member cannot
receive authorization from the DSB to obtain a remedy against another Member’s domestic or export
support measures that otherwise would be subject to the disciplines of certain ASCM and GATT
1994 provisions if those measures are in compliance with the various peace clause provisions. It
does not mean that a Panel may not hear evidence or consider Brazil’s ASCM or GATT 1994 claims
while it decides whether all the peace clause conditions have been fulfilled. In sum, this phrase in no
way suggests that a panel must make a finding that the peace clause provisions are unfulfilled before
proceeding with the other claims.

2. The phrase “exempt from actions” is used, as relevant to this dispute, in AoA Articles 13(a),
13(b)(ii), and 13(c)(ii). The dictionary definition of “actions” is “the taking of legal steps to establish
a claim or obtain a remedy.”
2 In a multilateral system such as the WTO (like GATT 1947 3 before it),
“actions” are taken collectively by Members. DSU Article 2.1 (last sentence) emphasizes this notion

2 New Shorter Oxford Dictionary, Volume 1 (1993 Edition), at 22.
3 Article XXV of GATT 1994 provides for “joint action” by the contracting parties to “further the
objectives of this Agreement”. The decision by the contracting parties to approve the Tokyo Round results in
1979 was entitled “Action by the CONTRACTING PARTIES on the Multilateral Trade Negotiations”. BISD
26S/201.

in stating that “only those Members that are parties to that Agreement may participate in decisions or
actions taken by the DSB with respect to that dispute.” (emphasis added) “Actions” include
decisions made by the Dispute Settlement Body (DSB) to adopt rulings and recommendations of
panels and the Appellate Body. Article XVI:1 of GATT 1994 also provides for another action, a
decision by the relevant WTO body to hold consultations with a subsidizing Member to discuss what
steps that Member will take to remove the serious prejudice or threat caused by its subsidies.
4 And
“actions” also include the enforcement of remedies authorized by the DSB pursuant to DSU
Article 22. In sum, “actions” are multilaterally agreed decisions of WTO bodies including the DSB.

3. The ordinary meaning of the word “exempt” is “grant immunity or freedom from liability to
which others are subject”.
5 The chapeau of Article 13 states that the period of exemption is “during
the implementation period”, i.e., until 1 January 2004.

4. Combining these definitions of “actions” and “exempt,” the term “exempt from action” in
Article 13(b)(ii) means that before 1 Jan uary 2004, a complaining Member cannot receive
authorization from the DSB to obtain a remedy against another Member’s domestic support measures
that otherwise would be subject to the disciplines of Article XVI:1 and ASCM Articles 5 and 6. And
“exempt from action” in the context of Article XVI:1 would mean that the WTO could not take a
decision to require a Member to consult with the WTO on how the Member will eliminate serious
prejudice or the threat of serious prejudice caused by that subsidy. However, the immediate context
of the phrase “exempt from actions” in Articles 13(a), 13 (b)(ii) and 13(c)(ii) make clear that the
“exemption” is not absolute but rather subject to a number of conditions:

 Article 13(a) only permits green box domestic subsidies to be exempt from the types of
determinations listed in Article 13(a) (i), (ii) or (iii) if they “conform fully to the provisions of
Annex 2” of the AoA. If a domestic support measure does not comply with one of a number of
requirements of the “green box” provisions of Annex 2, then such domestic support would be
evaluated under the peace clause provisions of Article 13(b) and could be subject to a remedy
determination by the DSB and/or the WTO.

 Under the provisions of peace clause Article 13(b )(ii), “amber” and “blue” box domestic support
measures provided during any marketing year between 1995-2003 are only exempt from
determinations by the DSB and/or the WTO relating to paragraph 1 of Article XVI of GATT
1994 (not Article XVI, paragraph 3) and Articles 5 and 6 (not Article 3) of the SCM Agreement
“provided that such measures do not grant suppor t to a specific commodity in excess of that
decided during the 1992 marketing year”. If the quantity of amber and/or blue box support
granted in any marketing year from the 1995-2003 period is greater than that decided during
marketing year 1992, then the subsidy programme is not “exempt” from such determinations.

 Export subsidies under the peace clause provisions of AoA Article 13(c)(ii) are only exempt from
determinations by the DSB and/or the WTO relating to Article XVI of GATT 1994 or Articles 3,
5 and 6 of the SCM Agreement if they “conform fully to the provisions of Part V of [the AoA]”.
Thus, if export subsidy measures are inconsistent wi th the provisions of AoA Articles 8, 9 or 10,
then they are no longer exempt from such determinations.

4 See, e.g., Report of the Working Party on Article XVI:1 discussions on EC- Refunds on Exports of
Sugar, BISD 28S/80.
5 New Shorter Oxford Dictionary, Volume 1 (1993 Edition), at 878.

5. In sum, “exempt from actions” means that a complaining Member cannot receive
authorization from the DSB to obtain a remedy against another Member’s domestic or export support
measures that are “peace clause” protected. Yet, as described below, the phrase “exempt from
actions” when viewed in the broader context of DSU provisions does not require the Panel to first
make a peace clause compliance finding before hearing or considering any of the evidence or
arguments relating to the various ASCM or GATT 1994 claims.

III. THE CONTEXT OF ARTICLE 13 DEMONSTRATES THAT THERE IS NO LEGAL
REQUIREMENT FOR THE PANEL TO FIRST MAKE A FINDING ON THE
PEACE CLAUSE BEFORE PERMITTING BRAZIL TO SET OUT ITS ARGUMENT
AND CLAIMS REGARDING US VIOLATIONS OF THE SCM AGREEMENT

1. There is nothing in the text of Article 13 or other provisions of the AoA, the SCM
Agreement, or any other WTO Agreement requiring the Panel to make a preliminary factual and
legal finding on the applicability of the peace clause before examining Brazil’s evidence and
argument regarding US violations of the SCM Agreement or GATT 1994.

2. First, and most importantly, Annex 2 of the DSU Agreement is the closed list of “special and
additional” rules and procedures that trump the normal rules of dispute settlement. This list does not
include Article 13 or any other AoA provisions. Thus, resolution of the “peace clause” issues, like
other issues raised by Brazil’s request for establishment of a panel, must be resolved using normal
DSU rules and procedures.

3. Second, AoA Article 13 does not exclude AoA Article 19 which states that the “provisions of
Articles XXII and XXIII of GATT 1994, as elaborated and applied by the Dispute Settlement
Understanding, shall apply to consultations and the settlement of disputes under this Agreement ”
(emphasis added). Among the DSU procedures applicable to AoA Article 13 is DSU Article 11
which provides, in part:

[a] panel should make 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 make such other findings as will assist the
DSB in making the recommendations or in giving the rulings provided for in the
covered agreements.
4. Article 11 contemplates that a panel must make an “objective assessment of the facts of the
case”. It does not state that a panel must conduct such an assessment by first examining part of the
facts of a case before it then examines other facts. Further, Article 11 contemplates that the parties
will have the full opportunity to search for and present rebuttal facts. This is accomplished through
the normal two meeting panel process – not in a single truncated meeting. It is also accomplished
through the exchange of rebuttal submissions.

5. Review by a panel of all the facts including rebuttal facts is necessary before deciding
whether the peace clause is applicable or not. This follows from the inter-related nature of the proof
necessary to demonstrate the peace clause and ASCM actionable and prohibited export subsidy
claims. As the Panel will discover shortly u pon reviewing Brazil’s First Submission, the facts
relevant to the application of the “peace clause” largely overlap with facts relevant to determining
whether the programmes at issue are “actionable” or “prohibited export subsidies”. Consider the
following:

 Each of the domestic support subsidies at issue in Brazil’s actionable subsidy claims are also at
issue in Brazil’s proof regarding the absence of US peace clause protection for marketing years
1999-2002. For the purposes of AoA Article 13(b)(ii) the “amber” box subsidies include
marketing loan/loan deficiency payments; crop insurance payments; Step-2 payments; production
flexibility contract payments; direct payments; marketing loss assistance payments; counter-
cyclical payments, and cottonseed payments. Proof of both peace clause and actionable subsidies
require the same detailed descriptions of the type, nature, extent, and history of each of these US
domestic support programmes.

 Brazil has made claims under the AoA and the ASCM regarding prohibited export subsidies
under the US Step-2 programme and US export credit guarantee programmes. Brazil will
demonstrate that these two export subsidies do not “conform fully to the provisions of Part V of
this Agreement” in the sense of AoA Article 13(c); obviously, Brazil's evidence and argument
regarding the lack of conformity of these two measures with Part V of the AoA largely overlaps
with the evidence and argument necessary to demonstrate a violation of ASCM Articles 3.1(a)
and (b).

6. This close overlap of proof for both peace clause and actionable and prohibited subsidy
claims highlights the need for the Panel to examin e all the “facts of the case” together – including
rebuttal facts presented by Brazil to contest US assertions. Such a determination can only be made
after collecting information in an iterative process.

7. DSU Article 11 also requires a panel to consider the “applicability” of the “relevant covered
agreements”. This includes deciding whether actions are exempt from the covered agreements. But
Article 11 contains no requirement for a special briefing, meeting or determination by a panel to
resolve such applicability or exemption.

8. Of course, when fulfilling its obligations under DSU Article 11, the Panel may well need to
organize its assessment of the facts in its final determination by first examining and deciding issues
related to the peace clause. The Appellate Body in Brazil Aircraft held that this is what the panel
should have done in deciding the very similar peace-clause-like issues under ASCM Articles 27.2(b)
and 27.4.
6 But there is nothing in DSU Article 11 or any other WTO provision mandating that Brazil
present its evidence relating to the peace clause alone, divorced from factual evidence and argument
relating to the SCM Agreement. As described below, such a requirement would be inconsistent with
the previous practice of panels and prejudicial to Brazil’s efforts to make a coherent and unified
presentation of its case.

IV. RESOLUTION OF THRESHOLD ISSUES PRIOR TO PROVIDING PARTIES THE
OPPORTUNITY TO PRESENT ALL OF ITS EVIDENCE IS CONTRARY TO THE
PRACTICE OF EARLIER PANELS

1. Many panels have faced preliminary threshold issues under DSU Article 6.2 and other WTO
Agreements. These preliminary issues have involved whether panels have the jurisdiction to resolve
and make recommendations concerning certain claims and measures. Many of these preliminary
issues involved far less complex facts than are presented by the peace clause in this dispute. Despite
this, many panels waited to resolve these threshold jurisdictional issues until the final determination

6 Appellate Body Report, Brazil – Export Financing Programme for Aircraft , WT/DS46/AB/R
(adopted 2 August 1999), paras. 143-44.

after reviewing all the evidence and arguments.
7 Other panels have decided these threshold issues
after the first meeting of the panel with the parties where the complaining party had an opportunity to
present its evidence.
8

2. The closest case to the peace clause issue presented here was addressed in Brazil – Export
Financing Programme for Aircraft .9 That dispute involved Articles 27.2(b) and 27.4 of the SCM
Agreement, which exempts certain developing country Members from obligations under ASCM
Article 3.1(a) provided that such a Member has complied with certain stated condiditons.
10 The
Appellate Body discussed the application of this peace-clause-like provision in Brazil Aircraft.11

7 WTO Panel Report, Canada – Measures Affecting the Export of Civilian Aircraft, WT/DS70/R
(adopted 20 August 1999), para. 9.15 (Panel rejected request for preliminary ruling based claims under DSU
Article 6.2 and decided issues in final report); WTO Panel Report, Egypt – Definitive Anti-Dumping Measures
on Steel Rebar from Turkey , WT/DS211/R (adopted 1 October 2002), para. 7.27-7.31 (Panel determined in
final report that certain claims were not within its terms of reference); WTO Panel Report, India – Measures
Affecting the Automotive Sector , WT/DS146/R and WT/DS/175/R (adopted 5 April 2002), paras. 7.44-7.103
(Panel rejected India’s threshold res judicata claims in final panel report); WTO Panel Report, United States –
Anti-Dumping Duty and Dynamic Random Access Semiconductors (DRAMS) of One Megabit or more From
Korea, WT/DS99/R (adopted 19 March 1999), para. 6.17 (Panel ruled in final report granting US’s preliminary
objections that certain AD measures predated the WTO and could therefore not be subject to challenge); WTO
Panel Report, Japan – Taxes on Alcoholic Beverages , WT/DS8/R, WT/DS10/R and WT/DS11/R (adopted 1
November 1996), para. 6.5 (Final report determined that a claim was outside of the Panel’s terms of reference);
WTO Panel Report United States – Definitive Safeguard Measures on Circular Welded Carbon Quality Line
Pipe from Korea, WT/DS202/R (adopted 8 March 2002), para. 7.121-7.126 (Panel rejected a Korean claim as
beyond its terms of reference in the final panel report); WTO Panel Report, United States – Anti-Dumping
Measures on Certain Hot-Rolled Steel Products from Japan , WT/DS184/R (adopted 23 August 2001), para.
7.22 (final report determined that the “adverse facts available“ claim was beyond its terms of reference).
8 WTO Panel Report, European Communities – Anti-Dumping Duties on Malleable Cast Iron Tube or
Pipe Fittings from Brazil, WT/DS219/R (not yet adopted), para. 7.14 (preliminary finding made following first
meeting with the parties that certain claims were not within its terms of reference); WTO Panel Report,
United States – Countervailing Duties on Certain Corrosion-Resistant Carbon Steel Flat Products from
Germany, WTDS213/R (adopted 19 December 2002), para 8.1 –8.2 and footnote 224 (Panel decided at end of
first meeting that two claims were outside its terms of reference and provided reasoning in final Panel report);
WTO Panel Report, United States – Import Measures on Certain Products from the European Communities ,
WT/DS165/R (adopted 10 January 2001), para. 6.11 (Panel issued preliminary ruling regarding scope of
measures within its terms of reference at the end of the second meeting with the parties); WTO Panel Report,
United States – Safeguard Measures on Imports of Certain Fresh, Chilled and Frozen Lamb from New Zealand
and Australia, WT/DS177/R and WT/DS178/R (adopted 16 May 2001), para. 5.15 (Panel ruled during first
meeting that panel request was sufficient in covering all the claims brought by Australia and New Zealand).
9 WTO Panel Report, WT/DS46/AB/R (adopted 2 August 1999).
10 These provisions provide as follows:

27.2: The prohibition of paragraph 1(a) of Article 3 [prohibited export subsidies] shall not apply to:

(b) other developing country Members for a period of eight years from the date of entry into force of
the WTO Agreement, subject to compliance with the provisions in paragraph 4.

27.4: Any developing country Member referred to in paragraph 2(b) shall phase out its
export subsidies within the eight-year period, preferably in a progressive manner. However, a
developing country Member shall not increase the level of its export subsidies, and shall eliminate
them within a period shorter than that provided for in this paragraph when the use of such export
subsidies is inconsistent with its development needs. . .
11 Appellate Body Report, WT/DS46/AB/R (adopted 2 August 1999).

In our view, too, paragraph 4 of Article 27 provides certain obligations that
developing country Members must fulfill if they are to benefit from this special and
differential treatment during the transitional period. . . . If a developing country
Member complies with the obligations in Article 27.4, the prohibition on export
subsidies in Article 3.1(a) simply does not apply. . . . If [. . .] non-compliance is
demonstrated, then, and only then, does the prohibition of Article 3.1(a) apply to that
developing country Member.12 (emphasis added)
3. The Appellate Body found that the panel should have considered first the threshold issue of
whether Brazil was in compliance with Article 27.4 before deciding whether Brazil was in violation
of ASCM Article 3.1(a). 13 Yet, there was never a suggestion or finding that the Panel erred by not
conducting a special briefing and special determination before even accepting arguments of Brazil
and Canada regarding the ASCM Article 3.1(a) issue. A finding on the threshold issue in that case,
as here, was conditioned upon other crucial determinations such as: the definition of subsidy; the
moment when a subsidy was granted; the relevant level, etc. In that case, the threshold issue was
decided by the Panel in the final report only after the parties had a chance to discuss all the related
issues during the full course of the Panel proceedings.

4. There are a number of other threshold issues in WTO Agreements. No claim may be brought
against a measure under the General Agreement on Trade in Services (GATS) unless the measure
falls within the scope of the General Agreement on Trade in Services as defined in GATS Article I.
No claim may be brought under Article 2 of the Agreement on Technical Barriers to Trade except in
respect of a measure that is a “technical regulation” as defined by that agreement. Claims under the
Agreement on Government Procurement may only be brought concerning procurement of an entity
covered by Annex I of that agreement. While the language of these provisions differs, the effect is
the same as the operation of the AoA Article 13 and ASCM Articles 27.2(b) and 27.4 – if the
threshold objections are granted, the Panel cannot make a finding that the defending Member has
acted contrary to the covered agreements. Yet none of these provisions have special and additional
rules to provide for extraordinary preliminary briefings, meetings, and determinations prior to a panel
hearing all of the claims presented.

V. BRAZIL WILL BE PREJUDICED BY SEPARATE HEARINGS AND BRIEFINGS
ON THE PEACE CLAUSE ISSUE

1. Brazil has previously described in its letter of 23 May 2003 to the Panel the prejudice that
will occur if special meetings and briefings are imposed to resolve peace clause issues. Such
prejudice includes requiring Brazil to present the same evidence three – not two times – and in
having to bring its legal and economic experts to Geneva for an extra meeting.

2. In addition, Brazil would note that such special proceedings would cause it prejudice because
there would be significantly delays in the resolution of its claims – many of which do not implicate
the peace clause. These non-peace clause claims include the following:

 1. Article XVI:3 of GATT 1994 involving all domestic and export subsidies challenged
by Brazil;
 2. Article III:4 of GATT 1994 regarding Step-2 domestic payments;

12 Appellate Body Report, WT/DS46/AB/R, paras. 140-41 .
13 Appellate Body Report, WT/DS46/AB/R, paras. 143-44.

 1. Articles 3.1(b) and 3.2 of SCM Agreement regarding prohibited local content Step-2
domestic payments;
 2. Articles 3.3 and 9.1(a) of the AoA regarding export subsidies including Step-2 export
payments;
 3. Articles 8 and 10.1 of the AoA regarding the GSM 102, GSM 103, and SCGP export
credit guarantee programmes;
 1. Articles 8 and 10.1 of the AoA regarding ETI measure (FSC replacement measure).

3. Moreover, Brazil’s proof of these claims involves evidence overlapping with that relevant to
Brazil’s peace clause claims, as well as with its actionable and prohibited export subsidy claims.
Given this overlap, a special proceeding on only the peace clause would negatively impact on
Brazil’s ability to present a coherent and unified presentation of its case.

VI. CONCLUSION

1. For the reasons set forth above, Brazil requests that this Panel find that it is not precluded
from hearing evidence and considering Brazil’s claims under the ASCM or Article XVI of GATT
1994 without first concluding that the peace clause conditions of AoA Article 13(b)(ii) and 13(c)(ii)
remain unfulfilled.

ANNEX A-2

INITIAL BRIEF OF THE UNITED STATES
ON THE QUESTION POSED BY THE PANEL

5 June 2003

A. INTRODUCTION

1. The United States thanks the Panel for this opportunity to comment on the question concerning
Article 13 of the Agreement on Agriculture (“Agriculture Agreement”) posed by the Panel in its fax of
28 May 2003. The Panel asked the parties to address:

[W]hether Article 13 of the Agreement on Agriculture precludes the Panel from considering
Brazil’s claims under the Agreement on Subsidies and Countervailing Measures in these
proceedings in the absence of a prior conclusion by the Panel that certain conditions in Article
13 remain unfulfilled. In particular, the Panel invites the parties to explain their interpretation
of the words “exempt from action s” as used in Article 13 of the Agreement on Agriculture, as
well as bringing to the Panel’s attention an y other relevant provisions of the covered
agreements and any other relevant considerati ons which the parties consider should guide the
Panel’s consideration of this issue.
2. Article 13 (the “Peace Clause”) precludes the Panel from considering Brazil’s claims under
Article XVI of the General Agreement on Tariffs and Trade 1994 (“GATT 1994”) and the Agreement
on Subsidies and Countervailing Measures (“Subsidies Agreement”) since the US support measures at
issue conform with the Peace Clause. The Peac e Clause “exempt[s]” conforming support measures
“from actions based on” the corresponding provisions of the Subsidies Agreement and the GATT
1994.
1 Read in accordance with the customary rules of interpretation of public international law, the
phrase “exempt from actions” means “not exposed or subject to” a “legal process or suit” or the “taking
of legal steps to establish a claim”. Therefore, Brazil cannot maintain any action – and the United
States cannot be required to defend any such action – based on provisions specified in the Peace
Clause
2 since the US support measures for upland cotton conform to the Peace Clause. In light of the
correct interpretation of the Peace Clause, the United States respectfully requests the Panel to organize
its procedures to first determine whether Brazil may maintain any action based on provisions exempted
by the Peace Clause.

3. Consider the alternative approach proposed by Brazil in its 23 May letter – that is, requiring the
United States to defend the substantive claims at th e same time as arguing the Peace Clause issues. If
the Panel were to allow Brazil to proceed with its substantive claims under the Subsidies Agreement
and GATT 1994 now, and only conclude later (for exam ple, at the time of the issuance of its report)
that the US measures at issue conform to the Peace Clause based on the facts of this dispute, US
measures would already have been subject to Br azil’s action based on those claims. As the
United States will explain, this would contradict the ordinary meaning of the phrase “exempt from
actions” in Article 13, read in its context, and in light of the object and purpose of the Agriculture

1 For example, Article XVI of the GATT 1994 and Part III of the Subsidies Agreement correspond to
Article 13(a)(ii) of the Agriculture Agreement, GATT 199 4 Article XVI:1 and Articles 5 and 6 of the Subsidies
Agreement correspond to Article 13(b)(ii) of the Agriculture Agreement, and GATT 1994 Article XVI and
Articles 3, 5, and 6 of the Subsidies Agreement correspond to Article 13(c)(ii) of the Agriculture Agreement..
2 See WT/DS267/7, at 3 (asserting claims based on Subsidies Agreement Articles 3.1(a), 3.1(b), 3.2,
5(a), 5(c), 6.3(b), 6.3(c), and 6.3(d) and GATT 1994 Articles XVI:1 and Article XVI:3).

Agreement. Consequently, to allow Brazil to pr oceed with any action against these US measures that
are exempt from actions based on such claims w ould contravene the Pea ce Clause and upset the
balance of rights and obligations of WTO Members.

B. LEGAL INTERPRETATION OF THE PEACE CLAUSE

4. The Peace Clause, Article 13 of the Agriculture Agreement 3, governs the treatment during the
implementation period of the Agreement of certai n domestic support measures and export subsidies
“notwithstanding the provisions of GATT 1994 and th e Agreement on Subsidies and Countervailing
Measures".4 For purposes of the Panel ’s question, there would appear to be two interpretive issues.
The first is straightforward and apparently not in di spute: whether the Peace Clause is in effect for the
measures at issue. The second is what is the nature of the treatment under the Peace Clause of
conforming measures – i.e., what does it mean to say that conforming measures are “exempt from
actions”.

 3 The Peace Clause reads:

During the implementation period, notwithstanding the provisions of GATT 1994 and the Agreement on
Subsidies and Countervailing Measures (referred to in this Article as the “Subsidies Agreement”):

(a) domestic support measures that conform fully to the provisions of Annex 2 to this Agreement shall be:
(i) non-actionable subsidies for purposes of countervailing duties;
(ii) exempt from actions based on Article XVI of GATT 1994 and Part III of the Subsidies
Agreement; and
(iii) exempt from actions based on non-violation nullification or impairment of the benefits of
tariff concessions accruing to another Member under Article II of GATT 1994, in the sense of
paragraph 1(b) of Article XXIII of GATT 1994;

(b) domestic support measures that conform fully to the provisions of Article 6 of this Agreement
including direct payments that conform to the require ments of paragraph 5 thereof, as reflected in each
Member's Schedule, as well as domestic support within de minimis levels and in conformity with
paragraph 2 of Article 6, shall be:
(i) exempt from the imposition of countervailing duties unless a determination of injury or threat
thereof is made in accordance with Article VI of GATT 1994 and Part V of the Subsidies
Agreement, and due restraint shall be shown in initiating any countervailing duty
investigations;
(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
(iii) exempt from actions based on non-violation nullification or impairment of the benefits of
tariff concessions accruing to another Member under Article II of GATT 1994, in the sense of
paragraph 1(b) of Article XXIII of GATT 1994, provided that such measures do not grant
support to a specific commodity in excess of that decided during the 1992 marketing year;

(c) export subsidies that conform fully to the provisions of Part V of this Agreement, as reflected in each
Member's Schedule, shall be:
(i) subject to countervailing duties only upon a determination of injury or threat thereof based on
volume, effect on prices, or consequent imp act in accordance with Article VI of GATT 1994
and Part V of the Subsidies Agreement, and due restraint shall be shown in initiating any
countervailing duty investigations; and
(ii) exempt from actions based on Article XVI of GATT 1994 or Articles 3, 5 and 6 of the
Subsidies Agreement.

Agriculture Agreement, Article 13 (footnote omitted).
4 Agriculture Agreement, Article 13 (chapeau). Artic le 21.1 of the Agriculture Agreement also makes
it clear that the Subsidies Agreement and GATT 1994 only apply “subject to” the provisions of the Agriculture
Agreement, including Article 13 (the Peace Clause).

 1. Duration of the Peace Clause: The “Implementation Period”

5. The Peace Clause is in force at present. The first words of the Peace Clause (“During the
implementation period”) establish the duration of the treatment afforded by this provision. Article 1(f)
of the Agriculture Agreement defines “implementatio n period” as “the six-year period commencing in
the year 1995” but goes on to specify that “for purposes of Article 13, it means the nine-year period
commencing in 1995”. That is, Members determined that exempting certain measures from certain
actions based on otherwise applicable WTO provisions was desirable for a time period longer than the
period for the phase-in of all other commitments under the Agriculture Agreement. Thus, the Peace
Clause currently continues to exempt conforming m easures – whether US, Brazilian, or of any other
Member – from actions under the corresponding provisions of the GATT 1994 and the Subsidies
Agreement.

 2. Effect of the Peace Clause: “Exempt from Actions”

6. For purposes of this dispute, all of the rele vant provisions of the P eace Clause utilize the same
language and construction: conforming measures “sh all be . . . exempt from actions based on”
specified provisions of the WTO agreements. The critical phrase “exempt from actions” is not defined
in the Agriculture Agreement. According to the customary rules of interpretation of public
international law
5, these terms should be interpreted according to their ordinary meaning in their
context, in light of the object and purpose of the Agreement.6

7. The ordinary meaning of the word “exempt” is “[n]ot exposed or subject to something
unpleasant or inconvenient; not liable to a charge, tax, etc. (Foll. by from, of.)".7 The ordinary meaning
of the word “action” is “[t]he taking of legal steps to establish a claim or obtain remedy; the right to
institute a legal process” and “[a] legal process or suit".
8 A legal dictionary provides further
explanation of the term “action”:

Term in its usual legal sense means a lawsuit brought in a court; a formal complaint within the
jurisdiction of a court of law. . . . . The legal or formal demand of one's right from another
person or party made and insisted on in a court of justice. An ordinary proceeding in a court
of justice by which one party pr osecutes another for the enforcem ent or protection of a right,
the redress or prevention of a wrong, or the punishment of a public offence. It includes all the
formal proceedings in a court of justice attendant upon the demand of a right made by one
person of another in such court, including an adjudication upon the right and its enforcement
or denial by the court.9
Thus, according to the ordinary meaning of the terms, “exempt from action” means “not exposed or
subject to” the “taking of legal steps to establish a claim”, such as a “formal complaint” or any “formal
proceedings”, including an “adjudicati on” of the claim. An even si mpler formulation would be “not
liable to” a “legal process or suit”.

5 See Understanding on Rules and Procedures Governing the Settlement of Disputes , Article 3.2 (The
dispute settlement system “serves to preserve the rights and obligations of Members under the covered
agreements, and to clarify the existing provisions of those agreements in accordan ce with customary rules of
interpretation of public international law.”).
6 The customary rules of interpretation of public international law are reflected in part in Article 31(1)
of the Vienna Convention, which reads: “A treaty sha ll be interpreted in good faith 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 The New Shorter Oxford English Dictionary , vol. 1, at 878 (first definition as adjective & noun)
(italics in original).
8 The New Shorter Oxford English Dictionary, vol. 1, at 22 (first and second definitions).
9 Black’s Law Dictionary at 28 (6th ed. 1990) (emphasis added).

8. Relevant context for the phrase “exempt from actions” includes the Understanding on Rules
and Procedures Governing the Settlement of Disputes (“DSU”), which applies to “disputes brought
pursuant to the consultation and dispute settlement provisions of the agreements listed in Appendix 1 to
this Understanding (referred to in this Understa nding as the ‘covered agreements’)”. The covered
agreements, of course, include the Agriculture Agreement and the Subsidies Agreement. Article 3.7 of
the DSU states: “ Before bringing a case , a Member shall exercise its judgement as to whether action
under these procedures would be fruitful” (emphasis added). Similarly, Article 4.5 of the DSU states:
“In the course of consultations in accordance with the provisions of a covered agreement, before
resorting to further action under this Understanding, Members should attempt to obtain satisfactory
adjustment of the matter” (emphasis added). Thus, these provisions s uggest that “action” based on the
relevant provisions woul d include all stages of a dispute, including th e “bringing [of] a case”,
consultations, and panel proceedings.
10

9. In addition, Article 7, which forms part of Part III of the Subsidies Agreement (entitled
“Actionable Subsidies”), serves as context for the term “exempt from actions.” Article 7 provides
procedures (including consultations , panel proceedings, and remedies) to enforce the legal rights
contained in Article 5 (on “adverse ef fects”) and Article 6 (on “serious prejudice”). Article 7 states in
its introductory phrase that its procedures apply “[e]xcept as provided in Article 13 of the Agreement
on Agriculture".
11 Thus, these provisions also support reading “exempt from actions” in Article 13 to
mean “not subject to” the “taking of legal steps to establish a claim”. Footnote 35 of the Subsidies
Agreement provides additional context that may help explain that “exempt from action” includes not
resorting to dispute settlement. Footnote 35, which deals with “non-actionable" 12 subsidies, states that
“[t]he provisions of Parts III [on actionable subsidies] and V [on countervailing measures] shall not be
invoked regarding measures considered non-actionable in accordance with the provisions of Part IV". 13
As otherwise relevant provisions cannot be “i nvoked” for non-actionable subsidies, footnote 35
supports reading “ exempt from action” as not resorting to dispute settlement by asserting legal claims.

10. This interpretation of “exempt from actions” meshes with the object and purpose of the
Agriculture Agreement. The Agreement represents the outcome of long and difficult negotiations to
move towards the “long-term objective . . . to provide for substantial progressive reductions in
agricultural support and protection sustained over an agreed period of time, resulting in correcting and
preventing restrictions and distortions in world agricultural markets".
14 Members therefore agreed to
the Peace Clause, recognizing that agricultural subsidies could not be eliminated immediately and
needed, under certain conditions, to be exempted from the Subsidies Agreement and GATT 1994
subsidies disciplines.

C. CONCLUSION: BRAZIL MAY NOT BRING, AND THE PANEL MAY NOT ADJUDICATE, A
SUBSIDIES AGREEMENT OR GATT 1994 ARTICLE XVI ACTION AGAINST US MEASURES
CONFORMING TO THE PEACE CLAUSE

11. Brazil’s approach – that both the applicability of the Peace Clause and Brazil’s Subsidies
Agreement and GATT 1994 Article XVI claims be considered at the same time – would contravene the
plain meaning of the Peace Clause by subjecting US m easures to the “taking of legal steps to establish
a claim”. Under Brazil’s approach, the US measur es would be subject to an action based on the

 10 As further support for the fact that “action” includes dispute settlement, DSU Article 3.10
provides that: “It is understood that requests for conciliation and the use of the dispute settlement
procedures should not be intended or considered as contentious acts . . .” (emphasis added).
11 Subsidies Agreement, Article 7.1.
12 The ordinary meaning of the term “actionable” is “[a]ffording ground for an action at law”. The New
Shorter Oxford English Dictionary, vol. 1, at 22.
13 Subsidies Agreement, Article 10 fn. 35 (emphasis added).
14 Agriculture Agreement, preamble (third paragraph).

corresponding provisions of the Subsidies Agreement and GATT 1994 at the same time that the Panel
would be reviewing the applicability of the Peace Clause. Brazil’s approach would ignore the plain
meaning of the provisions of the Peace Clause exempting these measures from actions.

12. Accordingly, the United St ates respectfully requests the Pa nel to find that measures that
conform to the Peace Clause are exempt from any action, including action under the DSU, based on
the corresponding provisions of the Subsidies Agreement and the GATT 1994. As a result, the
United States is not required to defend those measures in any action based on Brazilian claims
exempted by the Peace Clause.

ANNEX A-3

ARGENTINA'S THIRD PARTY INITIAL BRIEF

10 June 2003

1. Argentina would like to thank the Panel for the opportunity to submit, as third party to the
dispute, written comments concerning whether Ar ticle 13 of the Agreement on Agriculture (AoA)
precludes the Panel from considering Brazil´s claims under the Agreement on Subsidies and
Countervailing Measures (SCM Agreement) in the absence of a prior conclusion by the Panel that
certain conditions of Article 13 remain unfulfilled. To that respect, Argentina states the following:

2. The text of Article 13 of the AoA does not require the Panel to make a preliminary finding on
the applicability of the peace clause before exam ining Brazil´s claims under the SCM Agreement or
GATT 1994. If the negotiators had considered su ch preliminary finding was necessary, they would
have set it forth.

3. Indeed, a textual analysis of Article 13 of the AoA reveals that “actions”, and not the analysis
of claims under Article XVI of GATT 1994 or Articles 3, 5 or 6 of the SCM Agreement, can only be
precluded if all conditions established in paragraphs b) (ii) or c) (ii) of the referred Article 13 are met.

4. To that regard, the Appe llate Body has established:

“The duty of a treaty interpreter is to exami ne the words of the treaty to determine
the intentions of the parties. This should be done in accordance with the principles of
treaty interpretation set out in Article 31 of the Vienna Convention. But these
principles of interpretation neither require nor condone the imputation into a treaty
of words that are not there or the importation into a treaty of concepts that were not
intended.”1
 The terms “exempt from actions” as stated in Article 13 of the Agreement on Agriculture:

5. From Argentina´s point of view, in the context of Article 13 of the AoA the words “exempt
from actions” do not amount to an impossibility to request a panel procedure. “Exempt from actions”
means that a finding of inconsistency with Article s XVI of GATT 1994 or Articles 3, 5 and 6 of SCM
Agreement will not be possible if the legal requ irements for the exemption are fulfilled. The
immediate context of the terms “ exempt from actions” -i.e., paragraphs b) and c)- confirms this
interpretation since that exemption require a particul ar threshold, i.e., that domestic support measures
and export subsidies “conform fully” (to different provisions of the AoA).

6. Nevertheless, it is precisely through the pane l procedures that the fulfilment of those legal
requirements will be determined. Argentina agrees w ith Brazil´s statement in paragraph 6 of its Brief
that the word “actions” in the context of Article 13 of the AoA refers to decisions of WTO competent
bodies, such as the DSB when it discharges its dut ies by establishing a panel. A different
interpretation would imply giving the measures alle gedly covered by the Peace Clause a character of
absolute immunity, independent of whether the legal requirements established in Article 13 are
fulfilled or not. This would contradict the principle of in dubio mitius , constituting a more onerous
interpretation of the treaty provisions

1 Appellate Body Report, India-Patents, adopted 16 January 1998, WT/DS50/AB/R, para. 45.
(Emphasis added).

7. Therefore, the words “exempt from actions” do not preclude a Panel from considering a claim
under the SCM Agreement or GATT 1994 while it deci des whether the Peace Clause conditions have
been fulfilled.

8. Argentina considers that there is no doubt that “the Peace Clause currently continues to
exempt conforming measures from actions under the corresponding provisions of the GATT 1994 and
the Subsidies Agreement”.2 Indeed, the key words in Article 13 b) (ii) and c) (ii) of the AoA are “that
conform fully” and “provided that” and “that conform fully ”, respectively. These words imply that
the exception is not absolute, but rather subject to the fulfilment of certain conditions. When
considering the interpretative issu es for purposes of the Panel's questi on at paragraph 4 of its Brief,
the US seems to omit this issue by stating that wh at appears to be in dispute is the nature of the
treatment of conforming measures under the Peace Clause. However, from Argentina's point of view,
what is important here is to determine at this stage of the proceedings the treatment under the Peace
Clause of measures that are supposed not to be in conformity with the legal requirements needed to be
exempted from actions.

9. In addition, the fulfilment of the legal conditions set forth under Article 13 is a matter of fact
that necessarily requires to be elucidated during pa nel procedures. If not, how can this issue be
elucidated where, as in the present case, the US did not state which was its 1992 domestic support
level and did not answer the specific questions during the consultations? Only through panel
proceedings could those issues be elucidated.

10. On the other hand, as Brazil stated in paragraph 17 of its Brief
3, there is no WTO provision
obliging a Member to present evid ence relating to the Peace Clause in a manner that is divorced from
factual evidence and allegations under the SCM Agreement and/or GATT 1994. As stated by Brazil
in paragraphs 13 and 14 of its Brief, according to Article 11 of the DSU a panel must make an
objective assessment of the facts of the case and not of part of them before examining others,
specially when, as in the case at hand, there is an overlap between the ev idence related to the
requirements of Art. 13 of the AoA and the evidence related to the actionable and prohibited subsidy
claims.

11. Argentina considers that the text of Article 13 of the AoA does not ban a Panel from
considering altogether a defence invoked under the P eace Clause and the allegations of inconsistency
under GATT 1994 or the SCM Agreement. If a prel iminary ruling on the applicability of the Peace
Clause were necessary before being able to exam ine Brazil´s claims under the SCM Agreement or
GATT 1994, the terms “exempt from actions” would have too broad a sense. It would amount to the
creation of a new obligations for Members clearly not envisaged in the text of Art. 13.

12. Finally , the same reasoning could apply to ot her preliminary issues, such us the objections to
the consistency of a Panel´s terms of reference with Article 6.2 of the DSU or the general exceptions
under Article XX of GATT 1994. However, different Pa nels and the Appellate Body have made their
findings on those issues altogether with their findings regarding substantive claims.

 Other relevant provisions of the covered agreements:

13. The SCM Agreement is applicable both for agricultural and non-agricultural products. It is
true that Article 7 of the SCM Agreement states th at the request of consultations is subject to
Article 13 of the AoA. However, in the case at hand the US did not put it forward neither during

2 US Initial Brief on Question Posed by Panel, 5 June 2003.
3 Brazil´s Brief on Preliminary Issue Regarding the “Peace Clause” of the Agreement on Agriculture,
5 June 2003.

consultations nor during the meetings where the establishment of the Panel was requested, thus
engaging itself in such procedures.

 Other considerations that should guide the assessment of this issue :

14. Argentina considers that the provisions contained in Article 13 of the AoA have an
exceptional nature. This would imply that the Me mber who alleges to be protected by the Peace
Clause has the burden of proving the fulfilment of its legal requirements. As long as the US does not
demonstrates 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 Pane l should consider as appropriate the claims under
Article XVI of GATT 1994 or Articles 3, 5 and 6 of the SCM Agreement.

15. Finally, as stated by Brazil in paragraphs 13 and 14 of its Brief, according to DSU Article 11
a panel must make an objective assessment of the fa cts of the case and not of part of them before
examining others, specially when, as in the case at ha nd, there is a need to clarify closely related
issues of fact that relate both to the fulfilment of the conditions set forth by the Peace Clause and to
the substantive claims regarding actionable and prohibited subsidies.

Conclusion

16. According to the above statements, Argentin a considers that Article 13 of the AoA does not
preclude the Panel from hearing evidence and cons idering Brazil´s claims under the SCM Agreement
or GATT 1994 while it decides whether the Peace Cl ause conditions of Article 13 have or have not
been met.

ANNEX A-4

AUSTRALIA'S WRITTEN COMMENTS

10 June 2003

1. I refer to your faxed letter of 28 May 2003 in which you invited third parties to the dispute to
submit any written comments they may have in relation to the following:

whether Article 13 of the Agreement on Agriculture precludes the Panel from
considering Brazil’s claims under the Agreement on Subsidies and Countervailing
Measures in these proceedings in the absence of a prior conclusion by the Panel that
certain conditions of Article 13 remain unfulfilled. In particular, the Panel invite the
parties to explain their interpretation of the words “exempt from action” as used in
Article 13 of the Agreement on Agriculture , as well as bringing to the Panel’s
attention any other relevant provisions of the covered agreements and any other
relevant considerations which the part ies consider should guide the Panel’s
consideration of this issue. For greater clarity, the Panel invites the parties, during
this initial stage of the proceedings, to focu s on matters of legal interpretation, rather
than upon the submission of any factual evidence that might be associated with the
substantive elements of Article 13.
2. Please note that, for the purpo ses of Australia’s comments in re lation to the issues identified
in the previous paragraph, references to “Article 13” refer to Article 13(a)(ii), 13(b)(ii) and 13(c)(ii).
There is nothing in Article 13 of the Agreement on Agriculture – nor indeed in the Dispute Settlement
Understanding (“the DSU”) – that would preclude the Panel from considering claims under the
Agreement on Subsidies and Countervailing Measures in the absence of a prior conclusion by the
Panel that certain conditions of Article 13 remain unfulfilled.

3. Article 13 of the Agreement on Agriculture provides a limited, conditional and time-limited
exemption from actions based on Article XVI of GATT 1994 and certain provisions of the Agreement
on Subsidies and Countervailing Measures (“the specified provisions”) in respect of measures which
conform fully to the respective provisions of the Agreement on Agriculture and to Article 13 itself.
Article 13 does not preclude per se claims based on the specified provisions, that is, Article 13 does
not prevent the specified provisions being invoked. Rather, Article 13 is in the nature of an
“affirmative defence” for measures which are inconsistent with the specified provisions.
1

4. Viewing Article 13 of the Agreement on Agriculture as an affirmative defence gives proper
meaning to that provision, as well as to Article 21 of the Agreement on Agriculture and Articles 3.1,
6.9 and 7.1 of the Agreement on Subsidies and Countervailing Measures . This view would also be
consistent with the interpretive principle of e ffectiveness, which the Appellate Body has found should
guide the interpretation of the WTO Agreement.2

5. In assessing an affirmative defence based on Article 13 of the Agreement on Agriculture, the
proper application of that provision would require the Panel to consider the conditions listed in
Article 13 (“the prescribed conditions”), that is:

1 See, for example, United States – Measures Affecting Imports of Woven Wool Shirts and Blouses from
India, WT/DS33/AB/R, page 16.
2 United States – Continued Dumping and Subsidy Offset Act of 2000 , WT/DS217/AB/R,
WT/DS234/AB/R, paragraph 271.

 as appropriate, whether the measure at issue cons titutes a domestic support measure or an export
subsidy within the meaning of Annex 2 to, or Articles 6 or 1(e) of, the Agreement on Agriculture;
and, if so,

 as appropriate, whether the measure at issue conforms fully to the provisions of Annex 2 to, or
Article 6 or Part V of, the Agreement on Agriculture; and

 as appropriate, whether measures falling with in the provisions of Article 6 of the Agreement on
Agriculture grant support to a specific commodity not in excess of that decided during the 1992
marketing year.

6. Only if the Panel determines that Article 13 of the Agreement on Agriculture is relevant
because the prescribed conditions are met would it need to consider whether the measures at issue are
“exempt from actions based on” the specified provisi ons. In that event, the Panel would need to
consider whether the measures at issue are “free or released from a duty or liability to which others
are held”
3 in relation to a proceeding “found[ed], buil[t] or construct[ed] on”4 the specified provisions.
In other words, if the prescribed conditions are me t, a Member will be immune from liability for a
measure’s inconsistency with the specified provisions for the period for which Article 13 applies.

7. In this dispute, there is disagreement betw een the parties to the di spute whether the measures
at issue conform fully to th e respective provisions of the Agreement on Agriculture . However,
disagreement between the parties to the dispute does not serve to limit the Panel’s mandate. There is
no provision in the covered agreements that a disag reement between the parties to the dispute about
conformity would serve as a barrier to a Panel’s le gal mandate to examine claims in accordance with
the provisions of Article 3.2 and 11 of the DSU. There is, therefore, no requirement that the Panel
reach a conclusion that certain conditions of Article 13 of the Agreement on Agriculture remain
unfulfilled before considering claims under the Agreement on Subsidies and Countervailing
Measures.

3 Black’s Law Dictionary, Seventh Edition, Bryan A Garner, Editor in Chief, West Group, St Paul,
Minn., 1999, page 593.
4 The New Shorter Oxford English Dictionary, Ed. Lesley Brown, Volume 1, Clarendon Press, Oxford,
1993, page 187.

Subsidies and Countervailing Duties (SCM Agreement).1 On the other hand, Brazil considers that the
Panel should, after settling this initial issue, examine Brazil’s claims under Article 13 of the
Agreement on Agriculture and the SCM Agreement simultaneously, treating Brazil’s claims under
Article 13 of the Agreement on Agriculture as a threshold issue.2 Neither party appears to suggest that
this issue is anything other than a substantive issue. 3

3. The parties submissions concern the ma nner in which the Panel should organise its
procedures. In other words, should it hear arguments and evidence on Brazil’s claims under
Article XVI GATT and the SCM Agreement before it has decided whether the United States can avail
itself of Article 13 of the Agreement on Agriculture . The European Communities considers that this
issue falls within the Panel’s discretion as to the organization of its procedures. Such discretion is,
nevertheless, not without its limits. The European Communities considers that there are a number of
factors which require the Panel to exercise its disc retion so as to examine the evidence and arguments
presented by the parties with re spect to both Article 13 of the Agreement on Agriculture and
Article XVI GATT and the SCM Agreement at the same time. The European Communities sets out its
arguments on these issues in more detail in the sections below.

II. THE QUESTION AT ISSUE FALLS WITH IN THE PANEL’S DISCRETION AS TO
THE ORGANISATION OF ITS OWN PROCEDURES

4. Both parties seem to consider that the Panel is required to rule, as a matter of substance, on
whether the US measures fall under Article 13 of the Agreement on Agriculture , and if not, whether
they are consistent with Article XVI GATT and the SCM Agreement. Brazil’s contention that the US
measures are inconsistent with Article XVI GATT and the SCM Agreement , because they are not
covered by Article 13 of the Agreement on Agriculture requires the Panel to determine whether
Article 13 is applicable. Similarly, the United States’ claim that Article 13 of the Agreement on
Agriculture prevents the Panel from ruling on Brazil’s ot her claims requires adjudication of the issue
of the applicability of Article 13.

5. The European Communities finds support for it s view that the choice between a single and
multistage procedure is a matter for the Panel’s discretion in the fact that Article 13 of the Agreement
on Agriculture is not set up as a specific rule which can be distinguished from the normal DSU
procedures. Thus, for instance, Article 13 is not mentioned in Annex 2 of the DSU listing special or
additional rules and procedures contained in the c overed agreements. Moreover, Article 19 of the
Agreement on Agriculture states that the provisions of Artic le XXII and XXIII GATT, as elaborated
in the DSU, apply to the Agreement on Agriculture. Consequently, there are no special rules foreseen
in respect of Article 13 in the event that a Memb er requests dispute settlement in which it may be
raised as an issue.

6. In order further to demonstrate that this is a matter for the Panel’s discretion, it is instructive
to consider the United States’ arguments on the meaning of exempt from action”. The United States
argues that the meaning of the term “exempt from action” is that no formal proceedings can be

1 In para. 2 of its initial brief, the US argues

 “[t]he United States respectfully requests the Pane l to organize its procedures to first determine
whether Brazil may maintain any action based on provisions exempted by the Peace Clause.”
2 Brazil concludes its initial brief as follows:

 “[ ..] Brazil requests that this Panel find that it is not precluded from hearing evidence and considering
Brazil’s claims under the ASCM or Article XVI of GATT 1994 without first concluding that the peace
clause conditions of AoA Article 13(b)(ii) and 13(c)(ii) remain unfulfilled.”
3 For instance, that the arguments on Article XVI GATT and the SCM Agreement are not within the
terms of reference of the Panel.

launched with respect to the matter exempt from action, and that in the WTO, this would mean that a
Member could not request cons ultations and later request the establishment of a panel.
4 T h e
implications of this are unclear however. The logi cal conclusion would appear to be that the United
States is suggesting that Brazil should first bring a panel arguing that Article 13 of the Agreement on
Agriculture is not applicable, and then (if it is successful) bring a second panel to adjudicate its claims
under Article XVI GATT and the SCM Agreement? This notion seems implausible for a number of
reasons. First, in considering whether Article 13 of the Agreement on Agriculture is applicable, the
first Panel would not be adjudicating a dispute but would be requested to issue a declaratory
judgement. Second, a Member is not under an obligat ion to act consistently with Article 13 of the
Agreement on Agriculture – failing to respect Article 13 implies that a Member no longer enjoys the
protection thereof. Consequently, and third, Article 13 of the Agreement on Agriculture can only be
seen as a defence against a claim brought under othe r aspects of the WTO Agreements which regulate
the provision of subsidies. It would seem bizarre if, before Brazil could bring a claim with respect to
subsidies which it considered did not respect the US’s WTO obligations, Brazil had first to establish
that potential US defences did not apply.

7. The European Communities notes that, although this situation is the logical continuation of
the US interpretation of the term “exempt from action”, the United States does not suggest that Brazil
should have launched two successive WTO panels. Rather it maintains that the Panel’s hearing
argument and evidence on Article XVI GATT and the SCM Agreement would amount to an “action”
which cannot be brought against it until it is determined that the US measures do not conform to
Article 13 of the Agreement on Agriculture . Why the United States cons iders that hearing evidence
would amount to such a prohibited “action”, while re questing consultations or the establishment of a
panel does not amount to maintaining an “action” is unclear. Indeed, the European Communities
would presume that the United States would agree that Article 13 of the Agreement on Agriculture has
the ultimate effect of not requiring any subsidy maintained consistently with Article 13 of the
Agreement on Agriculture and otherwise inconsistent with the SCM Agreement to be brought into
conformity with the provisions of the SCM Agreement (typically through its withdrawal). For the
European Communities, therefore, the issue of wh ether a measure falls under Article 13 is necessarily
a question which a Panel must decide before it decides whether the measure might violate Article XVI
GATT or the SCM Agreement. However, the mere fact that the Article 13 issues must be decided
before the other claims are decided does not imply that a panel, when it is examining evidence and
considering arguments with respect to Article 13 of the Agreement on Agriculture , is precluded from
hearing the evidence and arguments re lating to Article XVI GATT or the SCM Agreement until after
it has decided on the applicability of Article 13 of the Agreement on Agriculture.

8. In conclusion, the Panel has substantial di scretion in deciding how it will manage these
issues. Article 12.1 DSU makes it quite clear that the Working Procedures set out in Appendix 3 of
the DSU may be departed from if the Panel decides th is is appropriate. Therefore, it is a matter for
the Panel’s discretion whether to arrange a multistage procedure as proposed by the United States or a
single stage procedure as proposed by Brazil.

9. The European Communities considers that th e normal procedure proposed by Brazil should
be followed by the Panel for the reasons set out in the next section.

4 See paras. 7 and 8 of the US initial Submission.

III. SEVERAL FACTORS MILITATE IN FAVOUR OF EXAMINING THE EVIDENCE
AND ARGUMENTS PRESENTED IN RESPECT OF ARTICLE 13 OF THE
AGREEMENT ON AGRICULTURE AT THE SAME TIME AS THE OTHER
CLAIMS

10. The European Communities submits that the Panel should consider evidence and argument
relating to both the applicability of Article 13 of the Agreement on Agriculture , and the other
provisions which Brazil has alleged the United States has acted inconsistently with.

A. THE APPLICATION OF ARTICLE 13 OF THE AGREEMENT ON AGRICULTURE IS
DEPENDENT ON THE EXAMINATION OF QUESTIOnS OF SUBSTANCE

11. As the United States and Brazil appear to have recognised, the question of the applicability of
Article 13 of the Agreement on Agriculture is dependent on the assessment of substantive issues,
notably the conformity of the measures in question with other provisions of the Agreement on
Agriculture. In order for the Panel to establish whethe r Article 13 applies, the Panel will have to
consider detailed arguments and evidence. For that reason, the applicability of Article 13 should be
subjected to the normally applicable procedures by which Panel deal with complex issues of fact and
law and not adjudicated in some form of preliminary procedure. The European Communities note, for
instance, that this was the approach taken by the panel in the United States – Export Restraints
dispute, which refused to rule on a number of preliminary objections brought by the United States (as
the defendant) which went to the substance of the matter.
5

B. ASSESSING THE APPLICABILITY OF ARTICLE 13 AS A PRELIMINARY MEASURE MAY
DELAY THE ISSUANCE OF THE REPORT

12. In the same vein, it can be noted that hearing evidence and considering arguments on the
applicability of Article 13 would inevitably require a considerable amount of time, as will hearing and
assessing the arguments and evidence on the other is sues which could only be considered after the
preliminary decision on Article 13 was taken. Given the substantial number of claims brought, their
complex nature, and the substantial interest in this dispute from third parties, the Panel may, if it splits
up the dispute into three stages, have problems issuin g its report within nine months, as it is required
to do under the Article 12.9 DSU.

13. The European Communities also has some symp athy for the concerns set out by Brazil, in
section V of its Initial Submission, as to the effect of splitting the procedure on Brazil’s ability to
present its case.

C. THIRD PARTY DUE PROCESS RIGHTS MAY BE INFRINGED BY A DECISION TO SPLIT THE
PROCEDURE INTO THREE STAGES

14. As the Panel is aware, Article 10.3 DSU provi des that third parties are entitled to receive the
submissions of the parties to the first meeting with the Panel. If the first panel meeting is limited to
considering the applicability of Article 13 of the Agreement on Agriculture and thus parties
submissions are limited to that question, the third pa rties will not have an opportunity to be heard on
issues other than Article 13 of the Agreement on Agriculture . If the Panel decides to adopt a three
stage procedure, in order to avoid such a situati on arising, the European Communities respectfully
submits that the Panel should make provision to ensure that third parties have adequate access, and the
opportunity to be heard on all matters (that is, also in the third stage of procedures). Inevitably,

5 Panel report, United States – Measures Treating Export Restraints as Subsidies , WT/DS194/R,
adopted 23 August 2001, para. 8.2.

however, setting up such a procedure will involve additional work for both the Panel and the
Secretariat.

IV. CONCLUSION

15. In conclusion, the European Communities re spectfully submits that, while the Panel is
obliged to decide on the applicability of Article 13 of the Agreement on Agriculture before it may take
a decision with respect to Brazil’s claims under Article XVI GATT and the SCM Agreement it is not
precluded from considering evidence or argument on these claims until after it has decided on the
applicability of Article 13 of the Agreement on Agriculture . As the European Communities has
explained above, there are several reasons militating in favour of the Panel considering all arguments
and evidence simultaneously.

ANNEX A-6

INDIA’S COMMENTS ON PRELIMINARY ISSUE
REGARDING THE PEACE CLAUSE OF THE
AGREEMENT ON AGRICULTURE

10 June 2003

1. India thanks the panel for being provided an opportunity to comment on the submissions of
Brazil and the United States on the following question concerning Article 13 of the Agreement on
Agriculture posed by the Panel:

Whether Article 13 of the Agreement on Ag riculture precludes the Panel from
considering Brazil’s claims under th e Agreement on Subsidies and Countervailing
Measures in these proceedings in the absence of a prior conclusion by the Panel that
certain conditions of Article 13 remain unfulfilled.
1
2. India notes that both Brazil and the United St ates evidently agree that “exempt from actions”
means that a complaining Member cannot receive authorization from the DSB to obtain a remedy
against another Member’s domestic or export suppo rt measures that are in compliance with various
provisions of the Peace Clause. In other words, a measure must be in conformity with: (a) provisions
of Annex 2 of the Agreement on Agriculture in respect of green box domestic support measures; (b)
provisions of Article 6 of the Agreement on Agri culture in respect of amber and blue box support
measures; and (c) Part V of the Agreement on Agriculture as reflected in each member’s Schedule in
respect of export subsidies to attract the exemption from obtaining a remedy under the Peace Clause.

3. However the United States seems to argue in various paragraphs of its submission, including
in paragraphs 7, 9 and 12, that this exemption extends to “any action, including action under the DSU,
based on the corresponding provisions of the S ubsidies Agreement and GATT 1994”. The
United States thereby suggests that resort cannot be had to the dispute settlement proceedings by
asserting legal claims in respect of measures claimed by a Member to be Peace Clause protected.

4. Thus, on the question posed by the Panel, the United States is of the view that the Panel
should organize its procedures to first determine wh ether Brazil may maintain any “action” based on
provisions exempted by the Peace Clause. On the other hand, Brazil has asserted that the phrase
“exempt from actions” in Article 13 of the Agreem ent on Agriculture does not compel the Panel to
first make a Peace Clause finding before considering the substance of Brazil’s other claims.

5. The United States seeks to interpret “action” to “include all stages of a dispute, including the
“bringing [of] a case,” consul tations, and panel proceedings.” Subsequently, the United States
suggests a reading of “exempt from actions” in Article 13 to mean “not subject to” the “taking of legal
steps to establish a claim” or “not resorting to dispute settlement by asserting legal claims”.

6. In India’s view, if the interpretation of “exempt from actions” under Article 13 of the
Agreement on Agriculture, as sought by the United States, extends to exemption from “any action”

1 The Panel also “invites the parties to explain their interpretation of the words ‘exempt from actions’
as used in Article 13 of the Agreemen t on Agriculture, as well as bringi ng to the Panel’s attention any other
relevant provisions of the covered agreements and any ot her relevant considerations which the parties consider
should guide the Panel’s consideration of this issue.”

such that resorting to dispute settlement by asserti ng legal claims is precluded in respect of Peace
Clause protected measures, then consequences foll ow that have systemic implications. This
interpretation would result in countries being prec luded from even resorting to the dispute settlement
process in respect of measures claimed by the country to be complained against to be conforming to
the Peace Clause unless there is a prior finding on the lack of conformity of the measure with the
Peace Clause. This interpretation of “exempt from actions” taken to its logical end would imply that
even consultations under the DSU can not be sought in respect of such a measure, unless there is a
prior finding on non-conformity of the measure with the Peace Clause. A complaining country would
therefore have to resort to the dispute settlement pr ocess twice in resp ect of the same measure; first,
for obtaining a finding whether the measure is in conformity with the Peace Clause and, if not, then
whether the measure is in conformity with oblig ations under various WTO Ag reements. In India’s
view this result is neither desirable nor envisaged under the DSU or any other covered agreements.

7. India believes that neither the phrase “exempt from actions” nor Article 13 of the Agreement
on Agriculture compel the Panel to first make a peace clause finding before considering the substance
of Brazil’s claims in various issues in this disput e. India is of the view that Article 13 of the
Agreement on Agriculture is not a “special and additi onal” rule set out in Appendix 2 to the DSU.
Article 19 of the Agreement on Agriculture makes all DSU provisions applicable to the Agreement on
Agriculture. Thus there is no legal basis under the DSU or any of the covered agreements that would
support the two stage approach suggested by the Un ited States in this dispute whereby the Panel
would first make a Peace Clause finding before considering claims on other agreements.

8. In conclusion, India believ es that the phrase “exempt from actions” when viewed in the
context of DSU provisions does not require the Panel to first make a Peace Clause non-compliance
finding before hearing or considering any of the ev idence or arguments relating to the various claims
under other agreements.

ANNEX A-7

THIRD PARTY COMMENTS BY NEW ZEALAND
ON PRELIMINARY ISSUE REGARDING
ARTICLE 13 OF THE AGREEMENT ON AGRICULTURE
("THE PEACE CLAUSE")

10 June 2003

 New Zealand welcomes the opportunity to comment on the preliminary issue addressed in the
Panel's 28 May 2003 request:

"Whether Article 13 of the Agreement on Agriculture precludes the Panel from
considering Brazil's claims under the Agreement on Subsidies and Countervailing
Measures in these proceedings in the absence of a prior conclusion of the Panel that
certain conditions of Article 13 remain unfulfilled …"
 In New Zealand's view, a Panel is not require d to make any prior conclusion concerning the
applicability of Article 13 (the "Peace Clause") be fore proceeding to hear evidence and submissions
relating to substance of legal claims brought un der the Agreement on Subsidies and Countervailing
Measures (ASCM) and GATT Article XVI. New Zeala nd notes in this regard that the overlapping
nature of the evidence required to establish bot h the applicability of the Peace Clause as well as
actionable and prohibited subsidies claims would ma ke a separation of submissions and hearings on
each aspect artificial.

 In relation to the Panel's request for views on the term "exempt from actions" in
Article 13(b)(ii) and 13(c)(ii), Ne w Zealand considers that these wo rds simply mean that a Member
cannot receive authorization from the DSB to obtain a remedy against another Member's domestic or
export support measures that are otherwise protected by the "Peace Clause". New Zealand does not
consider that this phrase should be interpreted so as to suggest that substantive claims under the
ASCM and GATT Article XVI can only be addressed in written or oral submissions after a Panel has
made a ruling that the Peace Clause apply.

 In summary, New Zealand considers that the Panel is not precluded from hearing evidence
and considering claims under the Agreement on Subsidies and Countervailing Measures or
Article XVI of the GATT without first concluding that Peace Clause conditions remain unfulfilled.

ANNEX A-8

SUBMISSION OF PARAGUAY
COMMENTS ON THE "PEACE CLAUSE"

10 June 2003

 Paraguay does not see how, under the provisions of the Dispute Settlement Understanding
(DSU), the Panel can establish that a matter calls for a "preliminary and special ruling" when the DSU
does not provide for such a procedure.

 If this were so, many complaints would be subject to the prior demonstration of the existence
of the conditions for bringing the action, when in fact, what needs to be resolved is the main subject of
the dispute and the effects caused by the failure to comply with the rules and regulations of world
trade.

 Paraguay considers that to set a precedent of this kind would be to undermine the DSU's
purpose of providing a flexible and prompt dispute settlement procedure, since countries would be
faced with an unnecessary delay in the process involving costs and time beyond their "predictions".

 Since there is no established procedural rule in this respect, the Panel must proceed to the
analysis of the substantive issue, and permit the parties, in this case especially Brazil as complainant –
and by extension Paraguay – to demonstrate that the subsidies and support measures benefiting upland
cotton have effects on trade and production by the cotton industry in the world.

 Paraguay has a supreme interest in ensuring the appl ication of strict justice with respect to this
complaint, since cotton production is the sustenance of the poorest segments of its population.
Indeed, 70 per cent of the country's small farmers depend on cotton production for their living.

 As already stated in the past, of Paraguay's population of approximately 5,300,000, some
150,000 families work in cotton production, and the damage caused by the kinds of subsidies and
support measures at issue in this case have caused an exodus of this rural population to urban areas
with no relief or solution in sight, further aggravating the country's economic situation.

 In view of the above, Paraguay considers that si nce Article XIII is not a rule forming part of
the procedural system established by the DSU, a preliminary ruling by the Panel on the "Peace
Clause" would be inappropriate.

I. INTRODUCTION

1. Brazil welcomes the opportunity to provide its comments regarding the third party
submissions of Argentina, Australia, the Europ ean Communities, India, New Zealand, and Paraguay
filed on 10 June 2003, and to respond to the Initial Brief of the United States of America on the
Questions Posed by the Panel (US Initial Brief), filed on 5 June 2003.

II. THE US TEXTUAL AND CONTEXTUAL ARGUMENTS CONCERNING “EXEMPT
FROM ACTIONS” ARE I NCONSISTENT WITH THE MULTILATERAL NATURE
OF “ACTIONS” UNDER THE DSU AND WITH US CONDUCT IN THIS DISPUTE

2. The customary rules of interpretation of public international law do not support the
United States’ reading of Article 13 of the Agreement on Agriculture (AoA). The United States relies
on a legal dictionary for a definition of “action” and then concludes incorrectly that “action” means
any “proceeding in a court of justice” including any “legal steps to establish a claim”.
1 T h i s
interpretation misreads Article 13 because it starts from fundamentally mistaken premises.

3. A WTO panel is not a “court” because the WTO panel process is founded on, and guided by,
collective action by the Members. A lawsuit in a US or Brazilian court of law starts automatically
when a plaintiff takes the “action” of filing pape rs that are in the proper form. But a DSU panel
proceeding commences only when the Members of the WTO take collective “action” to establish the
panel. The DSU rules “elaborate and apply”
2 the rules in GATT Article XXIII:2, which speak of an
investigation by the CONTRACTING PARTIES – which under GATT Article XXV:1 are all the
contracting parties "acting jointly". Whereas a US or Brazilian judge has broad powers conferred on
him or her constitutionally, a WTO panel is a bod y of limited jurisdiction acting only with powers
delegated to it by the DSB. For example, defending parties challenge claims as going beyond the
terms of reference under DSU 6.2, because the terms of reference define th e limits of the powers
delegated to the panel by the DSB through the DSB's action to establish the panel.

4. The “negative consensus” provisions in DSU Article 16.4 further support Brazil’s position
that “action” in AoA Article 13 must be interpreted as joint action by WTO Members. Decisions of a
court are directly and immediately binding on the part ies to the litigation, but such is not the case for
decisions of a panel or the Appellate Body. Instead, the drafters of the DSU decided that the
Members acting jointly would retain ultimate control of whether a panel or Appellate Body report has
any binding effect. Similarly, the recommendations and rulings referred to in DSU Articles 21 and 22
are not recommendations and rulings of a panel or the Appellate Body, but are recommendations and
rulings of the DSB. Accordingly, DSU 21.7 refers to further actions that the DSB must consider
when a matter (not an “action”) has been raised by a developing country.

5. The United States misinterprets DSU Article 3.7.
3 In this provision (“Before bringing a case,
a Member shall exercise its judgment as to whet her action under these procedures would be fruitful"),
“actions” could and should be read in a collective context, as referring to the DSB’s action to adopt a
panel report and (if need be) to authorize suspensi on of concessions. DSU Article 3.7 transposed a
provision in the 1979 Understanding Regarding Notif ication, Dispute Settlement and Surveillance 4

1 US Initial Brief, para. 7.
2 AoA Article 19: provides that “The provisi ons of Articles XXII and XXIII of GATT 1994, as
elaborated and applied by the Dispute Settlement Understanding, shall apply to consultations and the settlement
of disputes under this Agreement.”
3 US Initial Brief, para. 8.
4 Adopted on 28 November 1979; BISD 26S/210. The full text is set out in the GATT Analytical Index
(6th Ed., 1995) at page 632. DSU Article 3.7 transposes paragraph 4 of the Agreed Description of the

which refers to "action under Article XXIII:2." As discussed in Brazil’s Initial Brief, such “action”
has always meant joint action by the CONTRACTING PARTIES, not individual action by a
particular contracting party. Article 3.7 simply restates the common-sense advice that litigants must
consider in advance whether the pers uasive effect of a collective dete rmination of rule violation and a
collective authorization of suspen sion of concessions would be usef ul in eliminating the concrete
problem. It cannot be read to suggest that any Member should be able to pressure another into
dropping a valid legal claim by arguing that enforcing rights through litigation is not “fruitful.”

6. The United States also misinterprets DSU Article 4.5 ("before resorting to further action
under this Understanding, Members should attempt to obtain satisfactory adjustment of the matter.").
5
Read correctly, DSU Article 4.5 simply refers to the “action” of the DSB to grant a request for
establishment of a panel. 6 Thus, Article 4.5 urges a Member to attempt to obtain satisfactory
adjustment of the “matter” (not the “action”) before it requests the DSB to take action to establish a
panel.

7. The United States also cites footnote 35 of the SCM Agreement (“The provisions of Parts III
and V shall not be invoked regarding measures considered non-actionable in accordance with the
provisions of Part IV.”).
7 Yet “shall not be invoked” is a different legal standard that goes
substantially farther than “shall be . . . ex empt from actions.” Under footnote 35, no DSB
authorization could be obtained to establish a panel against a non-actionable subsidy granted by
another Member. By contrast, AoA Article 13 exempts certain agricultural subsidies from actions by
the DSB adopting a panel or Appellate Body report or authorizing suspension of concessions, but only
under certain conditions . The DSB can only take “actions” agains t such subsidies if it decides that
those conditions are unfulfilled (based on the re commendations in the report of the panel and/or
Appellate Body). But this conditionality means that a panel must address the conditions of the peace
clause if they are invoked by the Member providing the domestic support – as the United States
appears to have indicated it will do in this dispute. If the drafters had intended to protect agricultural
subsidies against even an invocation of Part II and III of the SCM Agreement, they would have said
so, and they did not.

8. The United States argues in paragraph 9 th at its subsidies are even “exempt” from
consultations under the DSU. Paragraph 9 highli ghts the logical challenges presented by the US
argument—particularly in light of the fact, di scussed below, that Article 13 does not create any
exception to the normal rules of WTO dispute settlement.

9. Moreover, the United States’ own conduct in th is dispute is at odds with paragraph 9 of the
US brief. Brazil’s consultation request dated 3 October 2002 clearly stated that “the United States has
no basis to assert a defence under Article 13(b)(ii) . . . [and] Article 13(c)(ii) of the Agreement on
Agriculture . . ”.
8 Yet, the United States said nothing duri ng three rounds of consultations about any
requirement for a separate panel proceeding regardi ng the peace clause. Brazil’s panel request also
referred to the lack of any basis for the Un ited States to assert a peace clause “defence”.9 The DSB
minutes reflect that the United States did not men tion the peace clause at all in the meetings of the

Customary Practice of the GATT in th e Field of Dispute Settlement (Ar ticle XXIII:2) annexed to the 1979
Understanding; paragraph 4 appears on page 635.
5 US Initial Brief, para. 8.
6 DSU Article 4.5 was a transposition of paragraph 4 in the Agreed Description of the Customary
Practice of the GATT in the Field of Dispute Settlement annexed to the (Tokyo Round) Understanding
Regarding Notification (BISD 26S/210; The full text is set out in the GATT Analytical Index on page 635).
That provision refers to "action under Article XXIII:2." As discussed by Brazil, such “actions” are multilateral
actions by the CONTRACTING PARTIES, not individual action by a particular contracting party.
7 US Initial Brief, para. 9.
8 WT/DS267/1 at 3.
9 WT/DS267/7.

DSB that considered the panel request.
10 The first official US assertion regarding special procedural
requirements relating to the peace clause did not come until a meeting in the office of the Director of
the Legal Services Division, on 25 March 2003, on e week after the Panel was established on 18
March 2003.

10. In considering the US request for a specia l “peace clause” proceeding, the Panel should take
note that the panel and Appellate Body in the US - FSC dispute rejected US procedural claims of an
allegedly defective EC consultation request. In that dispute the United States engaged in three rounds
of consultations without mentioning the problem once and then attempted to raise the defect
consultations request as a preliminary objection to the panel. The panel and the Appellate Body both
rejected the objection. As the Appellate Body found:

It seems to us that, by engaging in consultations on three separate occasions, and not
even raising its objections in the two DSB meetings at which the request for
establishment of a panel was on the agenda, the United States acted as if it had
accepted the establishment of the Panel in this dispute, as well as the consultations
preceding such establishment. In these ci rcumstances, the United States cannot now,
in our view, assert that the European Communities' claims under Article 3 of the SCM
Agreement should have been dismissed and that the Panel's findings on these issues
should be reversed.
11
11. In this dispute, the United States sat mute on the subject of peace clause procedures through
three rounds of consultations and two DSB meetings. Had the United States raised this particular
procedural issue on a timely basis, other WTO Members may have reserved their rights under DSU
Article 10. To permit such an issue to be raised on such an untimely basis also denies those other
Members their rights under the DSU.

III. THE NARROW INTERPRETATION OF THE WORD “ACTION” SUGGESTED BY
THE UNITED STATES IS NOT SUPPO RTED BY ALL THREE AUTHENTIC
VERSIONS OF THE AOA

12. As argued in Brazil’s Initial Brief of 5 June , Brazil believes that the word action refers to
collective actions of the WTO Members, and not to actions by individual Members. Brazil further
submits that the meaning the United States tries to impute to the word “action” is too narrow and
inadequate.

13. Brazil recalls that the three versions of the WTO Agreements are authentic. The US
interprets the word “action” in the English version as “legal process or suit”. Brazil agrees that this is
a possible meaning of the word, but so is “the process or condition of acting or doing”; or “a thing
done, a deed, an act...; habitual or ordinary deeds”.
12 Therefore, the word action in the English
language could mean either a legal process or a simple act or deed.

14. The French version uses the word “action” which also allows both connotations. It could
impulsion;” “exercice de la faculté d’agir;” but it could also have the more specific meaning of the
“exercice d’un droit en justice”.
13

10 WT/DSB/M/143, WT/DSB/M/145.
11 WT/DS108/AB/R, “United States – Tax Treatment for “Foreign Sales Corporations”, para. 165.
12 The New Shorter Oxford English Dictionary, 1993 edition.

15. The Spanish version however does not allow such interpretative flexibility. The word used in
Article 13 is not the word “acción”, which would allow the arguable double meaning of the English
and French versions: “resultado de hacer” or “ [e]n sentido procesal , derecho a acudir a un juez o
tribunal ...”
14 (emphasis added). The word used in Article 13 of the Spanish version is “medidas.”
While “medidas” could mean “disposición, prevención ... tomar, adoptar medidas” 15, it could not
possibly have the connotation of a legal action. Again, while the dictionary meanings of the word
“acción” do include the possibility of a judicial measure, the same is not true for the word “medidas”.

16. Therefore, the Panel must avoid an interpretation of Article 13 that is possible in only two of
the authentic versions, while there is another plausi ble – and in fact more adequate – interpretation
that is equally possible in all th ree authentic versions. The Panel must accordingly reject the narrow
interpretation suggested by the United States for the word “action”.

IV. THE OVERLY-BROAD US DEFINI TION OF “EXEMPT FROM ACTION”
IMPROPERLY CREATES NEW OBLIGATIONS AND PROCEDURES NOT
CONTEMPLATED IN THE AOA OR THE DSU

17. The United States argues that the word “action” means “all stages of the dispute, including
the ‘bringing [of] a case,’ consultations, and panel proceedings”.
16 Brazil agrees with the arguments
advanced by Argentina 17, the European Communities 18 and India 19 that this broad US interpretation
would exempt measures allegedly covered by the “peace clause” exemption from any aspect of the
DSU, including consultations. As India and the Eur opean Communities correctly point out, the result
would logically lead to two separate panel proceed ings – an initial proceeding deciding the peace
clause issues, and after the issuance of a decision, the initiation of a second proceeding beginning with
consultations to challenge the measures under the ASCM.
20 Yet, as these and other third parties
highlight, there is no textual requirement or provision in the AoA, the DSU, or any other WTO
provision for such a two-panel or two-stage process to resolve peace clause issues.

V. THE US PROPOSAL FOR A SEPARATE PROCEEDING FOR PEACE CLAUSE
ISSUES WOULD EFFECTIVELY ADD AOA ARTICLE 13 TO THE CLOSED LIST
OF SPECIAL AND ADDITIONAL PROVISIONS IN DSU APPENDIX 2 AND GIVE
AOA ARTICLE 13 A SCOPE THAT WAS NOT INTENDED BY AOA DRAFTERS

18. The United States’ initial brief makes no reference to DSU Appendix 2, even though this
provision was a key issue raised in Brazil’s 23 May letter to the Panel. Brazil repeats that Appendix 2
provides a closed list of all the “special and additional” provisions that trump the normal rules of
dispute settlement under the DSU. Article 13 does not appear in Appendix 2. Set forth below are two
additional reasons in support of this argument.

19. First, providing a special proceeding for dete rmining peace clause defences would effectively
add Article 13 to DSU Appe ndix 2. In the first dis pute settlement proceeding on Guatemala Cement,
the panel found that Article 17 of the Anti-Dumping Agreement (ADA) replaced the DSU system as a
whole because ADA Articles 17.4-17.7 were listed as special and additional provisions in Appendix 2

14 Diccionario de la Lengua Española (Real Academia Española), vigésima segunda edición, 2001.
15 Id.
16 US Initial Brief para. 8.
17 Argentina’s Third Party Initial Brief, para. 6;
18 Initial Submission by the European Communities, paras. 6-7;
19 India’s comments on preliminary issue regarding the Peace Clause of the Agreement on Agriculture,
para. 6.
20 Initial Submission by the European Communities, para s. 6-7; India’s comments on preliminary issue
regarding the Peace Clause of the Agreement on Agriculture, para. 6.

even though ADA Articles 17.1-17.3 were not included.
21 The Appellate Body reversed the panel’s
implied determination to treat ADA Articles 17.1-17.3 as special and additional rules when it found
that DSU provisions generally do not apply to disputes brought pursuant to the ADA:

Article 17.3 of the Anti-Dumping Agreement is not listed in Appendix 2 of the DSU
as a special or additional rule and procedur e. It is not listed precisely because it
provides the legal basis for consultations to be requested by a complaining Member
under the Anti-Dumping Agreement.
22
The special or additional provisions listed in Appendix 2 of the DSU are designed to
deal with the particularities of dispute settlement relating to obligations arising under
a specific covered agreement, while Article 1 of the DSU seeks to establish an
integrated and comprehensive dispute settlement system for all of the covered
agreements of the WTO Agreements as a whole. . .
23
20. The effect of the United States argument and in terpretation of “action” in this case would be
to include AoA Article 13 as a special and additional rule in Appendix 2. Were the Panel to agree
with the United States, it would create a precedent for applying a special procedure whenever a peace
clause defence might be invoked. However, this is precisely what the Appellate Body rejected in
Guatemala Cement, emphasizing that the WTO’s dispute settlement system is a unified system, not
one fragmented according to topic.
24

21. Second, the negotiating history confirms that AoA Article 13 was not intended to alter normal
dispute settlement procedures. The concept of “due restraint” first appeared in Article 18.2 of the
Agriculture text in the Dunkel Draft of December 1991, which provided:

On the basis of the commitments undertaken in the framework of this Agreement,
Members will exercise due restraint in the application of their rights under the
General Agreement in relation to products included in the reform programme.
25
The concept of special and additional provisions and Appendix 2 then emerged during the work of the
Legal Drafting Group on dispute settlement in Spring 1992. The final Legal Drafting Group DSU text
dated 15 June 1992 included AoA Article 18.2 in its Appendix 2, as a special and additional
provision.
26

22. The United States and the EC then reached the Blair House Agreements in November 1992,
providing inter alia for the Dunkel Draft text of Article 18.2 to be deleted, and for the insertion in the
AoA of a text corresponding to the present Article 13. In the fall of 1993, the Institutions Group
discussed both institutions and dispute settlement; the DSU text resulting from its work, as circulated
on 15 November 1993, placed AoA Article 18.2 in brackets.
27

23. During this period, further discussions also took place on the AoA. After a US-EU settlement
in early December 1993 adjusting the Blair House de al, the Blair House changes as adjusted were

21 Guatemala – Anti-Dumping Investigation Regarding Portland Cement from Mexico, WT/DS60/R,
22 WT/DS60/AB/R, para. 64.
23 Id., para. 66.
24 Id., para. 67.
25 MTN/TNC/W/FA, 20 December 1991, page L.11.
26 Brazil Exhibit 1 (hereinafter Brazil will refer to its exhibits as “Exhibit Bra-1, 2 , 3 etc.”) Excerpt of
Draft Understanding on Rules and Procedures Governing the Settlement of Disputes , Job No. 968,
15 June 1992.
27 Exhibit Bra-2. Excerpt of Draft Understanding on Rules and Procedures Governing the Settlement
of Disputes, 15 November 1993.

made to the AoA. In the December 15, 1993 Final Act, the text of the AoA reflected those changes 28,
and Appendix 2 of the DSU29 included no reference to the AoA. The negotiating record thus confirms
that if negotiators had intended to include the peace clause in Appendix 2, they had ample opportunity
to do so. The changes in the “peace clause” co mponent of the Blair House agreements involved
deleting former Article 18.2, which was a dispute settlement provision listed in Appendix 2, and
substituting Article 13. However, although Article 13 limits the ultimate “action” that the DSB may
take, as a drafting matter it is not placed together with the dispute settlement provisions of the AoA, it
is not labeled as a dispute settlement provision, and it is not included in Appendix 2 of the DSU.
Reading Article 13 as the United States requests w ould be inconsistent with DSU Article 3.2 by
impermissibly altering the balance of rights and ob ligations in the WTO and its dispute settlement
procedures.

24. Furthermore, AoA Article 13 deliberately mak es no reference to any provisions relating to
dispute settlement under the Agreement on Agriculture itself (Article 19) or other relevant WTO
Agreements (ASCM Articles 4 and 7; DSU or GATT 1994 Articles XXII and XXIII). The AoA
Article 13 drafting denotes that Uruguay Round ne gotiators were concerne d about the relationship
between substantive provisions of the SCM Ag reement (Articles 3, 5 and 6) and GATT 1994
(Article XVI) and the substantive provisions on domestic support and export subsidies under the AoA.
In short, what Article 13 does is to protect Memb ers that comply with Article 13 conditions from
actions derived from a violation of the substantive provisions cited therein, namely ASCM Articles 3,
5 and 6 and GATT 1994 Article XVI. What Article 13 does not, given the way it was drafted, is to
shield Members from the dispute settlement procedures which would be necessary to identify or to
confirm the substantive violation of those Articles.

25. Had the AoA drafters intended to carve dome stic support and/or expor t subsidy measures out
of the WTO dispute settlement mechanism they would have done it expressly, but they did not. This
is further confirmed by the example of Article 6 of the TRIPS Agreement, which clearly states that
the issue of the exhaustion of intellectual pr operty rights cannot be addressed through dispute
settlement.
30 Unlike AoA Article 13, TRIPS Article 6 expressly prohibits a Member from resorting to
the WTO dispute settlement mechanism to challenge cer tain matters. Against all these evident facts,
the only argument the US has to read a prohibition to resort to dispute settlement into Article 13 is
based on a groundless definition of “action”, as shown above.

VI. A SPECIAL PEACE CLAUSE PROCEDURE WOULD AMOUNT TO HAVING THE
PANEL ISSUE A DECLARATORY JUDGMENT FOR THE US AFFIRMATIVE
DEFENCE

26. Brazil’s request for the establishment of a pane l (as well as its consultation request) stated that
the “United States has no basis to assert a defence unde r Article 13(b)(ii) . . . and Article 13(c)(ii) of
the Agreement on Agriculture . . .”.
31 The third-party statements of the European Communities,
Australia, and Argentina agree with Brazil’s descrip tion of the peace clause as a “defence”. Each of
these third parties agree that the United States is re quired to assert and prove that all the peace clause
conditions apply. For example, the European Communities stated that AoA Article 13

can only be seen as a defence against a claim brought under other aspects of the WTO
Agreements which regulate the provision of subsidies. It would seem bizarre if,

28 MTN/FA II/A1A-3, Arts. 13, 19.
29 MTN/FA II/A2, Appendix 2.
30 TRIPs Article 6 reads: “ For the purposes of dispute settlement under this Agreement, subject to the
provisions of Articles 3 and 4 nothing in this Agreement shall be used to address the issue of the exhaustion of
intellectual property rights.”
31 WT/DS267/7

before Brazil could bring a claim with respect to subsidies which it considered did not
respect the US’s WTO obligations, Brazil had first to establish that potential US
defences did not apply.
32
27. In addition, Australia argues that “Article 13 is in the natu re of an ‘affirmative defence’ for
measures which are inconsistent with the specified provisions”. 33 Argentina also takes the view that
this provision is in the nature of an affirmative defence, stating that “the Member who alleges to be
protected by the Peace Clause has the burden of proving the fulfillment of its legal requirement”.34

28. The United States’ Initial Brief alleges in pa ragraph 2 that “the US support measures at issue
conform with the Peace Clause”. Based on this alle gation, the United States concludes that “Brazil
cannot maintain any action – and the United States cannot be required to defend any such action. . .”
35
The United States has not labeled this as a defence, or an “affirmative defence”. However, this
assertion by the United States suggests its intent to invoke such a defence as part of its First
Submission that it will file on 11 July 2003.
36

29. Brazil agrees with the European Communities , Australia and Argentina that the peace clause
is a defence requiring the United States – not Brazil – to demonstrate that it has met all of its
conditions. Brazil also agrees with the European Co mmunities that it would be bizarre if Brazil were
required to establish that potential US defences did not apply before it could bring its own claims.
And Brazil further agrees with the European Communities that what the United States is requesting in
this dispute is effectively a “declaratory judgment” that the United States defences of the peace clause
do or do not apply.

30. Brazil will present evidence in its First Su bmission that the US measures do not meet the
conditions of the various peace clause provisions. Braz il will do this because the United States is on
record before this Panel in asserting that its support measures are fully in compliance with the peace
clause. However, Brazil is not required to pres ent any evidence on the peac e clause to assert its
actionable and prohibited subsidy claims under the AS CM. Rather, this is the US burden defending
against Brazil’s various claims. The time and place for the Panel to hear and consider any evidence
proffered by the US in any such defence is during the normal panel process, as Brazil has argued in
this Comments, in its Initial Brief and in its letter dated 23 May 2003. There is no basis for the
United States to demand, or for the Panel to grant, a declaratory judgment that the US peace clause
defences are legitimate or not.

VII. CONCLUSION

31. For the reasons set forth above, Brazil’s Initial Brief and its letter dated 23 May 2003, Brazil
requests that this Panel find that it is not precl uded from hearing evidence and considering Brazil’s
claims under the ASCM or Article XVI of GATT 199 4 without first concluding that the peace clause
conditions of AoA Article 13(b)(ii) and 13(c)(ii) remain unfulfilled.

32 EC Initial Submisson, para. 6.
33 Australia Initial Submission paras. 4-7.
34 Argentina Initial Submission, para. 14.
35 US Initial Brief, para. 2.
36 By contrast, the United States did not invoke the peace clause defence in US - FSC even though the
EC request for the establishment of a panel included claims under ASCM Article 3.1(a) with respect to export
subsidies for agricultural products. AoA Article 13(c) conditionally exempts those claims from “actions.”

ANNEX A-10

COMMENTS OF THE UNITED STATES ON THE
COMMENTS BY BRAZIL AND THE THIRD PARTIES
ON THE QUESTION POSED BY THE PANEL

13 June 2003

I. OVERVIEW

1. The United States thanks the Panel for this opportunity to provide its views on the comments
by Brazil and the third parties on the question concerning Article 13 of the Agreement on Agriculture
(“Agriculture Agreement”) posed by the Panel in its fax of 28 May 2003.
1 The interpretation of
Article 13 (the “Peace Clause”) advanced by Brazil and endorsed by some of the third parties is
deeply flawed. Simply put, Brazil fails to read the Peace Clause acco rding to the customary rules of
interpretation of public international law. Its interpretation does not read the terms of the Peace
Clause according to their ordinary meaning, ignores relevant context, and would lead to an absurd
result.

2. Brazil reads the Peace Clause phrase “exempt fr om actions” to mean only that “a complaining
Member cannot receive authorization from the DSB [Dispute Settlement Body] to obtain a remedy
against another Member’s domestic and export supp ort measures that otherwise would be subject to
the disciplines of certain provisions of the Agre ement on Subsidies and Countervailing Measures . . .
or Article XVI of GATT 1994'".
2 However, Brazil’s reading simply ignores parts of the definition of
“actions” that it quotes: "The dictionary definition of ‘actions’ is ‘the taking of legal steps to establish
a claim or obtain a remedy". 3 Thus, while the United States w ould agree that the phrase “exempt
from actions” precludes “the taking of legal steps to . . . obtain a remedy”, Brazil provides no
explanation of why the term “exempt from actions” would not, based on its ordinary meaning, also
preclude "the taking of legal steps to establish a claim".
4

3. Brazil also bases its reading in part on the assertion that "[i]n a multilateral system such as the
WTO (like GATT 1947 before it), ‘acti ons’ are taken collectively by Members". 5 Brazil cannot
explain, however, why “actions” should be limited to only those actions taken collectively. Read in
the context of provisions in the WTO agreements in which the term “action” does not refer to
collective action by Members, “action” in the Peace Clause refers broadly to the “taking of legal steps
to establish a claim or obtain a remedy”.

1 The Panel asked the parties to address: “[W]heth er Article 13 of the Agreement on Agriculture
precludes the Panel from considering Brazil’s claims under the Agreement on Subsidies and Countervailing
Measures in these proceedings in the absence of a pr ior conclusion by the Panel that certain conditions in
Article 13 remain unfulfilled. In particular, the Panel invites the parties to explain their interpretation of the
words “exempt from actions” as used in Article 13 of th e Agreement on Agriculture, as well as bringing to the
Panel’s attention any other relevant provisions of the covered agreements and any other relevant considerations
which the parties consider should guide the Panel’s consideration of this issue.”
2 Brazil’s Brief on Preliminary Issue Regarding the “Peace Clause” of the Agreement on Agriculture,
para. 2 (5 June 2003) (“Brazil’s Initial Brief”) (emphasis added).
3 Brazil’s Initial Brief, para. 6 (emphasis added).
4 See infra part II.A.
5 Brazil’s Initial Brief, para. 6 (footnote omitted).

4. In addition, Brazil’s suggested reading of the Pe ace Clause would lead to an absurd result. If
the phrase “exempt from actions” means nothing mo re than that “a complaining Member cannot
receive authorization from the DSB to obtain a remedy”, then a panel would be perfectly free to make
findings that a measure that conforms to the Peace Clause is inconsistent with the relevant provisions
of the General Agreement on Tariffs and Trade 1994 (“GATT 1994”) or the Agreement on Subsidies
and Countervailing Measures (“Subsidies Agreement”). Under the Understanding on Rules and
Procedures Governing the Settlement of Disputes (“DSU”), the DSB would be unable to avoid
adopting the panel findings of inconsistency with the Subsidies Agreement or GATT 1994 or
recommendations to bring the measure into confor mity, thus depriving the Peace Clause of any
meaning.

5. The remainder of Brazil’s argu ments do not go to a proper interpretation of the Peace Clause
under the customary rules of interpretation of public international law and so do not assist in
answering the question posed by the Panel co ncerning the Peace Clause. Nonetheless, the
United States addresses various of these misplaced concerns. For example, Brazil argues that the
Peace Clause is not a special or additional rule set out in Appendix 2 of the DSU; however, the Peace
Clause need not be a special or additional rule b ecause the Panel may properly deal with the Peace
Clause issue under normal DSU rules. Brazil also tries to cite to unrelated issues in completely
distinct disputes, arguing that so me of these other panels have delayed making “complex threshold
findings” until final panel reports. None of these pa nels is relevant since none of them has been
presented with the issues presented by the Peace Clau se. Brazil also asserts that consideration of
alleged administrative burdens s hould override the plain meaning of the text of the Agriculture
Agreement – an obviously erroneous approach.

6. As the United States explained in its initial brief on the Panel’s question
6, the phrase “exempt
from actions” (read in accordance with the customar y rules of interpretation of public international
law) means “not exposed or subject to” a “legal pr ocess or suit” or the “taking of legal steps to
establish a claim”. Therefore, Brazil cannot main tain any action – and the United States cannot be
required to defend any such action – based on provisions specified in the Peace Clause since the US
support measures for upland cotton conform to the Peace Clause.

7. In light of the correct inte rpretation of the Peace Clause, th e United States affirms that it
respectfully requests the Panel to organize its procedures to first determine whether Brazil may
maintain any action based on provisions exempted by the Peace Clause. Bifurcation of the legal
issues in this proceeding is not only required under the Peace Clause but, as an exercise of the Panel’s
discretion to organize its procedures, would assist the Panel in resolving the complex issues involved
in this dispute in a logical and orderly fashion.

II. BRAZIL’S INITIAL BRIEF DOES NOT READ THE PEACE CLAUSE ACCORDING
TO THE CUSTOMARY RULES OF INTERPRETATION OF PUBLIC
INTERNATIONAL LAW AND LEADS TO ABSURD RESULTS

A. THE ORDINARY MEANING OF “EXEMPT FROM ACTIONS” DOES NOT SUPPORT BRAZIL’S
READING

8. According to the customary rules of interpretation of public international law 7, the terms of
the Peace Clause should be interpreted according to their ordinary meaning in their context, in light of

6 Initial Brief of the United States of America on the Question Posed by the Panel, paras. 6-10
(5 June 2003) (“US Initial Brief”).
7 See DSU Article 3.2 (The dispute settlement system “serves to preserve the rights and obligations of
Members under the covered agreements, and to clarif y the existing provisions of those agreements in
accordance with customary rules of interpretation of public international law.”).

the object and purpose of the Agriculture Agreement. 8 The United States agrees completely with
Brazil in terms of the dictionary definition of “actions”. Under that definition, “action” means "the
taking of legal steps to establish a claim or obtain a remedy".
9 As the Panel’s question has
highlighted, one of th e key issues in this dispute is whether the Peace Clause permits Brazil to “take
legal steps” so Brazil can “establish” its Subsidies Agreement “claims”.

9. Yet, as soon as Brazil provides the correct defi nition of “action”, Brazil urges an approach
that would ignore it. Combining this definition with that for the word "exempt" 10, Brazil reads the
term “exempt from actions” to mean “that a complaining Member cannot receive authorization from
the DSB to obtain a remedy against another Member ’s domestic or export support measures that are
‘peace clause’ protected".
11 Strikingly, neither Brazil nor any of the third parties who share this
interpretation12 provides any basis in the text of the Peace Clause for ignoring that portion of the
definition of “actions” that refers to “the taking of legal steps to establish a claim".13

8 The customary rules of interpretation of public international law are reflected in part in Article 31(1)
of the Vienna Convention, which reads: “A treaty sha ll be interpreted in good faith 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.”
9 Brazil’s Initial Brief, para. 6 (emphasis added).
10 Brazil has quoted the definition of the word “exempt” when used as a verb. See The New Shorter
Oxford English Dictionary , vol. 1, at 878 (1993 ed.) (first definition as transitive verb: “Grant immunity or
freedom from or from a liability to which others are subject”) (italics in original). However, if used as a verb in
the Peace Clause, the correct form of “exempt” would be “shall be exempted from actions.” See id., vol. 1, at
878 (examples for first definition of “exempt” as verb: “J. A. FROUDE Clergy who committed felony were no
longer exempted from the penalties of their crimes. R. D. LAING I was exempted from military service because
of asthma.”) (italics added). As used in the Peace Clause in the construction “shall be . . . exempt from actions,”
“exempt” is an adjective. See id., vol. 1, at 878 (examples of “exempt” as used in first definition as adjective:
“R.C. TRENCH They whom Christ loves are no more exempt than others from their share of earthly trouble and
anguish. J. BERGER He is exempt on medical grounds from military service.”) (italic s added). Therefore, the
correct definition of “exempt” as used in the Peace Clause is “[n]ot exposed or subject to something unpleasant
or inconvenient; not liable to a charge, tax, etc. (Foll. by from, of .).” Id., vol. 1, at 878 (first definition as
adjective) (italics in original).
12 Regrettably, none of the third parties (save Australia) even attempts to read the Peace Clause – and in
particular the phrase “exempt from actions” – according to the customary rules of interpretation of public
international law. Australia does offer an interpreta tion of “exempt from actions based on” purportedly using
the ordinary meaning of the terms, but it appears that Australia has interpreted “exempt from actions” merely by
quoting a definition for “ exempt.” Compare Comments of Australia on Question Posed by Panel, para. 7 &
n. 3, with Black’s Law Dictionary at 593 (7th ed. 1999) (definition of “e xempt” as adjective: “Free or released
from a duty or liability to which others are held.”). That is, Australia’s interpretation ascribes no meaning to the
words “from actions,” reducing them to inutility. In a ddition to failing to provide any definition for “actions,”
Australia also fails to examine any context for that term in the DSU and the Subsidies Agreement. See US
Initial Brief, paras. 7-10.
13 Argentina reads “exempt from actions” as meaning that “a finding of inconsistency with
Articles XVI of GATT 1994 or Articles 3, 5 and 6 of SCM Agreement will not be possible if the legal
requirements for the exemption are fulfilled.” Comments by Argentina on Question Posed by Panel, para. 5.
However, in making this assertion, Argentina neither pr ovides nor attempts to distinguish the ordinary meaning
of “action” as the “taking of legal steps to establish a claim or obtain a remedy.” Nor does Argentina explain
why, if Members only meant to preclude “a finding of inconsistency” with specified provisions, they did not
simply use the word “finding” – for example, “measures . . . shall be . . . exempt from findings based on” certain
specified provisions – when the term “finding” is used at least 12 times in the DSU. See, e.g., DSU Article 7.1
(standard panel terms of reference include “mak[ing] such findings as will assist the DSB in making the
recommendations or in giving the rulings provided for in that/those agreement(s)”); DSU Article 11 (panel
should make an objective assessment of matter before it, including “such other findings as will assist the DSB in
making the recommendations or in giving the rulings provided for in the covered agreements”); DSU

10. As the United States has demonstrated, the ordinary meaning of “action” encompasses not
only the “taking of legal steps to . . . obtain a remedy” but also the “taking of legal steps to establish a
claim”. Other dictionary definitions of “action” – such as “the right to institute a legal process”, “[a]
legal process or suit”, “a lawsuit brought in court”, “a formal complaint”, “a legal or formal demand
of one’s right”, and “all the formal proceedings in a court of justice attendant upon the demand of a
right made by one person of another in such court"
14 – provide additional support for this reading.
Thus, while the United States agrees that the phras e “exempt from actions” would also preclude “the
taking of legal steps to . . . obtain a remedy" 15, the United States disagrees with Brazil that one may
ignore that “exempt from actions” also precludes “the taking of legal steps to establish a claim.”
Nothing in the text of the Peace Cl ause authorizes departing from th e ordinary meaning of the Peace
Clause phrase “exempt from actions” to narrow this text to refer solely to "obtaining a remedy".
16

B. THE CONTEXT FOR “EXEMPT FROM ACTIONS” DOES NOT SUPPORT BRAZIL’S READING

11. In its analysis of the phrase “exempt from actions”, Brazil quickly moves beyond the ordinary
meaning of the term “action” it quotes (which enco mpasses “the taking of legal steps to establish a
claim”) to examine what it deems relevant context for the term. Brazil asserts that “[i]n a multilateral
system such as the WTO (like GATT 1947 before it), ‘actions’ are taken collectively by Members"
17,
citing DSU Article 2.1 (last sentence), GATT 1994 Article XVI:1, and DSU Article 22 18, and
concludes: "In sum, ‘actions’ are multilaterally agreed decisions of WTO bodies including the
DSB."19 Brazil’s argument overlooks the fact that there are numerous instances in various WTO
agreements in which the term “action ” is used to refer to action by an individual Member, not just
collective action by Members.

12. Brazil notes that the term “actions” is sometimes used in the DSU to refer to collective
“decisions or actions” by the DSB.
20 This observation is accurate, but the conclusion that Brazil
draws from it is a non sequitur . The fact that the term “action” can mean “collective decision or
action by the DSB” does not imply that the term “action” can mean only “collective decision or action
by the DSB”.

13. Brazil has moreover failed to consider those instances in which the term “action” is used to
refer to individual action by Members.
21 For example, Article 3.7 of the DSU, which states that
“[b]efore bringing a case, a Member shall exercise its judgement as to whether action under these

Article 12.7 (panel “shall submit its findings in the form of a written report to the DSB”). There is no basis in
the text or context of the Peace Clause to read “actions” to be limited to “panel findings”.
14 US Initial Brief, para. 7.
15 Indeed, this necessarily follows from the fact that, if a party cannot take legal steps to establish a
claim, it will also be precluded from obtaining a remedy.
16 We also note that Brazil’s approach of inte rpreting “exempt from actions” as “cannot receive
authorization . . . to obtain a remedy” appears to overlook the “taking of legal steps” component of even the
“remedy” portion of the definition of “ action”.
17 Brazil’s Initial Brief, para. 6 (footnote omitted).
18 Brazil also asserts that “‘[a]ctions’ include decisions made by the Dispute Settlement Body (DSB) to
adopt rulings and recommendations of panels and the Appellate Body” but provides no reference to a provision
of the DSU to support the assertion. Neither DSU Artic le 16.4 (on adoption of panel reports) nor DSU Article
17.14 (on adoption of Appellate Body reports) uses the te rm “action” to describe a DSB decision to adopt panel
and Appellate Body rulings and recommendations.
20 For example, Brazil quotes DSU Article 2.1, whic h states that “[w]here the DSB administers the
dispute settlement provisions of a Plurilateral Trade Agre ement, only those Members that are parties to that
Agreement may participate in decisions or actions taken by the DSB with respect to that dispute.”
21 See US Initial Brief, paras. 8-9.

procedures would be fruitful,” does not by its terms refer to “multilaterally agreed decisions of WTO
bodies including the DSB”. Similarly, Article 4.5 of the DSU states: “ In the course of consultations
in accordance with the provisions of a covered agreement, before resorting to further action under this
Understanding, Members should attempt to obtain satisfactory adjustment of the matter” (emphasis
added). In the Subsidies Agreement, subsidie s are divided into prohibited, actionable, and
non-actionable categories, and a Member may im pose countervailing duties against prohibited and
“actionable” subsidies without first obtaining authorization through a “multilaterally agreed decision[]
of WTO bodies including the DSB".
22 Brazil’s interpretation is at odds with all of these provisions –
for example, since during consultations the DSB will not have taken any action with respect to a
dispute, how could a Member attempt to settle a matter before resorting to further action? These
provisions make clear that, read in the context of the DSU and the Subsidies Agreement, “actions” has
a broader scope than Brazil would like: as indicated by its ordinary meaning, “actions ” refers to “the
taking of legal steps to establish a claim or obtain a remedy,” encompassing all stages of a dispute –
obtaining DSB authorization for retaliation would only constitute one, final step.23

14. Indeed, had Members intended the scope of the P eace Clause to be limited solely to collective
decisions taken by the DSB, they could have used in the Peace Clause the same construction as used
in DSU Article 2.1 – for example, “measures . . . sh all be . . . exempt from actions taken by the DSB
based on” specified provisions. Members did not do so, however.

15. Finally, the United States notes that Brazil has asserted that GATT 1994 Article XVI:1 and
DSU Article 22 provide relevant context for the term “actions”. However, neither of these provisions
uses the term “action” at all
24, and they do not support Brazil’s assertion that “actions” in the Peace
Clause must be read to refer solely to “multilaterally agreed decisions of WTO bodies including the
DSB.” Similarly, Brazil refers to GATT 1994 Article XXV, entitled “Joint Action by the Contracting
Parties.” The fact that the drafters referred to this one kind of “action” as joint action only reinforces
that the term “action” by itself is not intended to be limited to only “joint” or “collective” action. The
phrase “contracting parties acting jointly” in Article XXV would be unnecessary if Brazil’s
interpretation of “action” were correct.25

22 Members are obligated to “take all necessary steps to ensure that the imposition of a countervailing
duty on any product of the territory of any Member imported into the territory of another Member is in
accordance with the provisions of Ar ticle VI of GATT 1994 and the terms of this Agreement.” Subsidies
Agreement, Article 10 (footnote omitted). See also GATT 1994 Article VI:6 (requiring multilateral approval of
certain exceptional anti-dumping and countervailing duties).
23 We note that Argentina implicitly concedes that relevant context in the Subsidies Agreement for the
phrase “exempt from actions” suggests that the term is no t limited to decisions or actions taken by the DSB.
Argentina recognizes that “[i]t is true that Article 7 of the SCM Agreement states that the request of
consultations is subject to Article 13 of the AoA”. Arge ntina’s Third Party Initial Brief, para. 13. This would
appear to contradict its reading of “the word ‘actions’ in the context of Article 13 of the AoA [as] refer[ring] to
decisions of WTO competent bodies, such as the DSB when it discharges its duties by establishing a panel,” id.,
para. 6. That is, if the Peace Clause precludes a request for consultations by a Me mber under Article 7 of the
Subsidies Agreement, the term “actions” in the Peace Clause cannot solely refer to “decisions of WTO
competent bodies”.
24 See, e.g., GATT 1994 Article XVI:1 (“In any case in which it is determined that serious prejudice to
the interests of any other contracting party is caused or threatened by any such subs idization, the contracting
party granting the subsidy shall, upon request, discuss w ith the other contracting party or contracting parties
concerned, or with the CONTRACTING PARTIES, the possibility of limiting the subsidization.”); DSU Article 22.6
(“When the situation described in paragraph 2 occurs, the DSB, upon request, shall grant authorization to
suspend concessions or other obligations within 30 days of the expiry of the reasonable period of time unless the
DSB decides by consensus to reject the request.”).
25 See GATT 1994 Article XXV (“Wherever reference is made in this Agreement to the contracting
parties acting jointly they are designated as the CONTRACTING PARTIES. ”).

C. BRAZIL’S INTERPRETATION OF THE PEACE CLAUSE WOULD LEAD TO ABSURD
RESULTS

16. Brazil’s suggested reading of the Peace Clause would rob this provision of any real meaning.
Brazil would expose measures that conform to the Pe ace Clause to finding of inconsistency with the
relevant GATT 1994 and Subsidies Agreement provi sions and would expose them to retaliation
unless the complaining party were to agree not to adopt the findings or authorize retaliation.

17. Under Brazil’s interpretation, the phr ase “exempt from actions” means only that “a
complaining Member cannot receive authorization from the DSB to obtain a remedy” – that is, the
Peace Clause would exempt conforming measures from actions taken by the DSB to authorize
remedies but not from findings by the Panel. A panel would therefore be perfectly free to make
findings in its final report that a challenged measure that conforms to the Peace Clause is inconsistent
with, inter alia , the Subsidies Agreement. Under the DSU, the DSB would be unable to avoid
adopting the panel findings of inconsistency with the relevant GATT 1994 or Subsidies Agreement
provisions or recommendations to br ing the measure into conformity.
26 Panel reports are adopted
automatically by the DSB under the “negative consensus” rule 27 and authorization to retaliate is also
automatically given unless the DSB de cides by consensus against this. 28 As a result, the DSB could
not decline to adopt the report or authorize remedies unless the complaining party agreed. Thus,
under Brazil’s reading, the phrase “measures . . . shall be . . . exempt from actions” in the Peace
Clause would exempt conforming measures from DSB authorization to retaliate, but only if the
complaining Member itself agreed not to authorize a remedy. This would be a strange and strained
interpretation of the Peace Clause indeed and would effectively render it inutile, contrary to
customary rules of treaty interpretation.

18. This absurd result would also conflict with the object and purpose of the Peace Clause and the
Agriculture Agreement: namely, to exempt agricult ural subsidies, under certain conditions, from the
subsidies disciplines of the Subsidies Agreement and GATT 1994 while Members continue
negotiations to move towards the “long-term objective . . . to provide for substantial progressive
reductions in agricultural support and protecti on sustained over an agreed period of time".
29 Brazil
also has not explained why, on its reading, Members would have chosen to allow actions, with all of
their attendant burden on Members’ (and the WTO’s) resources, up to but not including authorization
for retaliation.

26 Under DSU Article 19, “[w]here a panel or th e Appellate Body concludes that a measure is
inconsistent with a covered agreement, it shall recomm end that the Member concerned bring the measure into
conformity with that agreement.” DSU Article 19 (emphasis added) (footnote omitted).
27 Under DSU Article 16, a panel report “shall be adopted at a DSB meeting unless a party to the
dispute formally notifies the DSB of its decision to appeal or the DSB decides by consensus not to adopt the
report”. DSU Article 16.4 (footnote omitted).
28 When a Member “fails to bring the measure found to be inconsistent with a covered agreement into
compliance therewith or otherwise comply with the recommendations and rulings” and compensation cannot be
agreed, the complaining party Member may request authorization from the DSB to suspend concessions, DSU
Article 22.2, and “the DSB, upon request, shall grant auth orization to suspend concessions or other obligations
within 30 days of the expiry of the reasonable period of time unless the DSB decides by consensus to reject the
request”, DSU Article 22.6.
29 Agriculture Agreement, preamble (third paragraph).

III. BRAZIL’S INITIAL BRIEF RAISES A NUMBER OF MISGUIDED CONCERNS
WHICH CANNOT UPSET THE BALANCE OF RIGHTS AND OBLIGATIONS OF
MEMBERS UNDER THE PEACE CLAUSE AND DO NOT SUPPORT
CONSIDERING BOTH THE APPLICABILITY OF THE PEACE CLAUSE AND
BRAZIL’S SUBSTANTIVE CLAIMS TOGETHER

19. Brazil has advanced a number of other arguments, which relate neither to the ordinary
meaning and context of the phrase “exempt from ac tions” nor to the object and purpose of the Peace
Clause and the Agreement on Agriculture . These arguments are thus not relevant to the Panel’s task
of clarifying the meaning of the Peace Clause in a ccordance with customary rules of interpretation of
public international law. Nonetheless, an examination of each of Brazil’s arguments reveals that none
of these concerns is well-founded.

A. THE PANEL MAY EXAMINE THE APPLICABILITY OF THE PEACE CLAUSE UNDER
NORMAL DSU RULES

20. Brazil argues that because Article 13 is not a special or additional rule set out in Appendix 2
of the DSU, Peace Clause issues must be resolv ed using normal DSU rules and procedures, which
Brazil believes would prohibit reaching the Peace Clause issue first. Brazil errs on two counts. There
was no need to designate Article 13 of the Agricult ure Agreement as a special or additional rule
precisely because the Panel may properly deal with the Peace Clause issue using the flexibility
inherent in the normal DSU rules. The DSU, in Articles 12.1 and 12.2, provides the Panel with all the
authority it needs to organize its working procedur es as it considers best to resolve the matter in
dispute.30 Under DSU Article 12.1, the Panel is give n the authority to determine its own working
procedures "after consulting the parties to the dispute". 31 Under DSU Article 12.2, moreover, the
Panel is charged with establishing panel procedures with "sufficient flexibility so as to ensure
high-quality panel reports".32

21. Brazil itself has conceded th e Panel’s broad authority to establish its procedures in its letter of
23 May 2003, when it wrote of objections relati ng to the scope of a panel request under DSU
Article 6.2: "The decision on how to handle such preliminary objections procedurally is a matter of
panel discretion".
33 Thus, Brazil implicitly recognizes that the Panel already has the flexibility and
the authority under normal DSU rules to organize it s procedures to consider and dispose of the Peace
Clause issue first. There is no need for the Peace Clause to be listed as a “special or additional rule
and procedure” in DSU Appendix 2 because under normal DSU rules the Panel may bifurcate the
proceedings in order to respect the balance of rights and obligations of Members under the Peace
Clause and the Agriculture Agreement – that is, to ensure that conforming US measures are “exempt
from actions based on” provisions specified in the Peace Clause.

30 See Comments by the European Communities on certain issues raised on an initial basis by the
Panel, para. 8 (“In conclusion, the Panel has substantia l discretion in deciding how it will manage these issues.
Article 12.1 DSU makes it quite clear that the Working Procedures set out in Appendix 3 of the DSU may be
departed from if the Panel decides this is appropriate.”).
31 DSU Article 12.1 (“Panels shall follow the Working Procedures in Appendix 3 unless the panel
decides otherwise after consulting with the parties to the dispute. ”).
32 DSU Article 12.2 (“Panel procedures should provide sufficient flexibility so as to ensure high-quality
panel reports, while not unduly delaying the panel process.”).
33 Letter from Ambassador Luiz Felipe de Seixas Co rrêa, Permanent Mission of Brazil, to Mr. Dariusz
Rosati, Chairman of Panel, at 3 (23 May 2003) (emphasi s added). The carry-over paragraph continues: “Where
preliminary objections have been resolved in advance of other claims, normally they have been resolved in the
panel’s first meeting, on the basis of the first round of submissions and oral statements.”

22. The United States notes that the Appellate Body has urged panels to adopt working
procedures providing for preliminary rulings to deal with threshold jurisdictional issues
34, even
though there are no “special and additional rules” in the DSU providing for these. In addition, we
note that Article 10.3 of the Agriculture Agreement (the same agreement at issue here) is not listed as
a “special and additional rule,” but panels and the Appellate Body ha ve made clear that this provision
nonetheless governs dispute settlement proceedings by shifting the burden of proof to the responding
party.
35

23. Finally, Brazil relies on Article 11 of the DSU – pursuant to which a panel “should make 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 th e relevant covered agreements” – to support its
position. Brazil’s reliance on Article 11 is misplaced as shown by a simple examination of the text of
Article 11. Article 11 provides the standard of review for panels; it does not guide the procedure used
by panels. According to Brazil, DSU Article 11 so mehow mandates that a panel review “all the facts
including rebuttal facts,” hold two panel meetin gs, and allow for the exchange of rebuttal
submissions.36 Brazil’s argument is untenable; it would read Article 11 to mandate a particular series
of meetings and submissions when Article 11 does not set out any particular procedural steps through
which a panel “should make an objective assessment of the matter before it.” At the same time,
Brazil argues that the Panel may not, consistent with Article 11, consider the applicability of the Peace
Clause first because "Article 11 contains no re quirement for a special briefing, meeting or
determination by a panel to resolve such applicability or exemption." 37 Of course, there is nothing in
the text of Article 11 that supports reading this provision to preclude the Panel’s bifurcating the
proceeding to respect the balance of rights and oblig ations in the Peace Clause. However, to be
consistent with its own argument, Brazil should al so read Article 11 not to mandate any particular
number or sequence of procedural steps (such as those set out in DSU Appendix 3) that are not
required under its terms.

B. NO PREVIOUS PANEL REPORT HAS EXAMINED THE PEACE CLAUSE, AND OTHER
PROCEDURAL PROVISIONS CITED BY BRAZIL DO NOT CONTAIN THE PHRASE “SHALL
BE . . . EXEMPT FROM ACTIONS”

24. Brazil suggests that deciding the issue of the applicability of the Peace Clause in advance of
Brazil’s substantive Subsidies Agreement and GA TT 1994 claims is "contrary to the practice of
earlier panels".38 Of course, there is no such practice since this is the first dispute to face this issue.

25. Brazil also argues that there are “a number of other threshold issues in WTO Agreements” but
that "none of these provisions have special a nd additional rules to provide for extraordinary
preliminary briefings, meetings, and determinations prior to a panel hearing on all of the claims
presented".
39 Brazil’s invocation of previous panel proceedings is inapt. Brazil has not asserted that
any of the “threshold” provisions in other WTO agreem ents that it cites or that have been interpreted
by previous panels contain the same language as the Peace Clause (that is, “shall be . . . exempt from

34 See Appellate Body Report, European Communities – Regime for the Importation, Sale and
Distribution of Bananas, WT/DS27/AB/R, para. 144.
35 See Appellate Body Report, Canada – Measures Affecting the Importation of Milk and the
Exportation of Dairy Products , WT/DS103/AB/RW2, WT/DS113/AB/RW2, paras. 67-75 (second recourse to
DSU Article 21.5).
36 See Brazil’s Initial Brief, paras. 11-16.
37 Brazil’s Initial Brief, para. 16; see id., para. 11 (“Thus, resolution of the ‘peace clause’ issues . . .
must be resolved using normal DSU rules and procedures.”).
38 Brazil’s Initial Brief at 7 (heading IV).

actions”).40 Indeed, it is striking that Brazil studiously avoids comparing the text of any of these
provisions with the text of the Peace Clause.41

26. Given the fact that none of the other provisions cited by Brazil contains Peace Clause-like
language, these provisions have little relevance for th e Panel’s interpretation of the Peace Clause. At
most, the relevance of these provisions lies in the fact that such “ threshold” provisions do not use
language that certain measures “shall be . . . exempt from actions.” This suggests that the distinct
language of the Peace Clause was intended to provide a distinct right, and one that differs from rights
provided by these other WTO provisions.

27. We also note Brazil’s argument that in the “closest case to the peace clause issue presented
here” – that is, Brazil – Export Financing Programme for Aircraft , WT/DS46/AB/R – there was
“never a suggestion or finding that the panel erre d by not conducting a special briefing and special
determination” on the “threshold issue whether Braz il was in compliance with Article 27.4” of the
Subsidies Agreement. From the Appellate Body repo rt, it would appear that the Appellate Body did
not address it because no party suggested that this threshold issue had to be taken up as a first stage of
the proceeding. Nonetheless, the Appellate Body found that the panel erred in not considering the
threshold Article 27.4 issue first. The Peace Clause language (“measures . . . shall be . . . exempt
from actions”) is different and even stronger in requiring that the Peace Clause be taken up first and
separately, with findings, prior to any consideration of the relevant GATT 1994 and Subsidies
Agreement provisions.

C. BRAZIL WILL NOT BE PREJUDICED BY SEPARATE HEARINGS AND BRIEFINGS ON THE
PEACE CLAUSE ISSUE

28. Brazil, referring to its 23 May letter, argues that it will be prejudiced if the Panel considers
separately the issue of the applicability of the Peace Clause from Brazil’s substantive claims as this
will disrupt "Brazil’s efforts to make a c oherent and unified presentation of its case"
42 and result in
greater expense to Brazil "in having to bring its legal and economic experts to Geneva for an extra
meeting."43 Of course, any concerns that Brazil’s presentation of its case may be affected cannot
supersede the rights and obligations of Members as set out in the covered agreements – including the
Peace Clause. In fact, the Peace Clause resolves any issue of how to account for burdens on parties
since it provides that the responding party’s measures are exempt from any action based on the
relevant GATT 1994 and Subsidies Agreement provisi ons – it exempts the responding party from the
burden of having to respond to the complaining party’s claims. Brazil ignores this aspect of the Peace
Clause. In any event, we note that bifurcating this proceeding to ensure that these conforming US
measures are exempt from action based on Peace Clause-specified provisions will reduce, rather than
increase, the amount of work involved for both parties. Here, dealing with the Peace Clause issue
first will resolve that part of the dispute, savi ng both parties further work, since the US measures
conform to the Peace Clause. And in general, such an approach simply means that a panel would deal

40 For example, arguments that a particular claim is not within a panel’s terms of reference under DSU
Article 6.2 do not involve any textual mandate that measures “shall be . . . exempt from actions.” What Brazil
calls the “closest case to the peace clause issue presen ted here” involved Articles 27.2(b) and 27.4 of the
Subsidies Agreement, neither of which says that measures “shall be . . . exempt from actions based on” specified
provisions. See Brazil’s Initial Brief, para. 19 (quoting Appellate Body discussion of Subsidies Agreement
Articles 27.2(b) and 27.4 in Brazil – Export Financing Programme for Aircraft , WT/DS46/AB/R; Subsidies
Agreement Article 27.2 states that the “prohibition of paragraph 1(a) of Article 3 shall not apply to” developing
country Members in compliance with Article 27.4). Other provisions cited by Brazil (Article 1 of the General
Agreement on Trade in Services, Article 2 of the Agreement on Technical Barriers to Trade, and Annex I of the
Agreement on Government Procurement) similarly do not provide a legal right not to be subject to actions.
41 See Brazil's Initial Brief, paras. 18-21.
42 See Brazil’s Initial Brief, paras. 17.

in sequence with the issues it would otherwise have to confront in a dispute. Because no additional
issues would be covered (and needless work on certain claims might be avoided), it would not appear
that additional effort on the part of a panel or the parties would be required.

29. We also note in any event that Brazil’s con cerns about duplication of its factual presentation
and increased expense seem overstated. Even if this were a dispute where the relevant measures did
not conform to the Peace Clause, Brazil misunderstands the process. The fact that some of the same
evidence might be relevant to Peace Clause as well as Subsidies Agreement claims does not mean that
the evidence would have to be introduced twice. Once Brazil’s factual evidence were introduced, if it
were relevant to later stages of the proceeding, it could of course be used for that purpose.
44 Thus,
there should be no duplication of its factual presen tation and no additional burden to Brazil on that
count. Similarly, with respect to concerns about the additional e xpenditure of resources should the
Panel bifurcate this proceeding, the full-time pres ence of Brazil’s private-sector counsel in Geneva
should alleviate some of the expense that extra meetings (which there is no reason to assume would be
needed since the US measures conform to the Peace Clause) might entail. In any event, however, the
United States finds it difficult to believe that Brazil would bring an action with claims under 17
different provisions of the WTO agreements with respect to programs under at least 12 US statutes
and not expect that the resulting dispute woul d involve additional complications and all the
accompanying demands for time and resources.

30. Finally, the United States notes that Brazil h as raised the issue that separate hearings and
briefing on the Peace Clause issue "would cause it prejudice because there would be significant[]
delays in the resolution of its claims – many of which do not implicate the peace clause".
45. While, on
its face, Brazil’s list of “non-peace clause claims” appears to include claims based on provisions
specified in the Peace Clause
46, Brazil’s point is not raised by the Panel’s question. If the Panel
requests the parties to give their views on the question of what should happen with any claims in this
action based on provisions not specified by the Peace Clause, th e United States would be pleased to
do so.

IV. WERE THE PANEL TO CONSIDER THAT THE PEACE CLAUSE DOES NOT REQUIRE
THAT THE PANEL DETERMINE WHETHER US MEASURES ARE EXEMPT FROM
ACTIONS BEFORE CONSIDERING BRAZIL’S SUBSIDIES AGREEMENT AND GATT 1994
ARTICLE XVI ACTION, THE PANEL SHOULD EXERCISE ITS DISCRETION TO
BIFURCATE THE PROCEEDING

31. Putting aside the arguments related to prej udice and expense which have been discussed
above, the United States notes that, in the course of allegedly discussing the “context” for the Peace
Clause, Brazil makes an argument that speaks not to any relevant context but to the Panel’s exercise
of its discretion to organize its procedures. Brazil argues that the “close overlap of proof for both
peace clause and actionable and prohibited subsidy claims highli ghts the need for the Panel to
examine all the ‘facts of the case’ together".47 First, in this context, the United States has noted, and
Brazil and the European Communities apparently agr ee, that the Panel enjoys significant discretion
under DSU Articles 12.1 and 12.2 to organize its work ing procedures as it considers best to resolve
the matter in dispute.

44 To put it simply, “Brazil exhibit 419” (for example) would remain “Brazil exhibit 419” – it would
not change simply because it was now being cited in a different argument.
46 Brazil argues that its “non-peace clause claims in clude . . . Article XVI:3 of GATT 1994 involving
all domestic and export subsidies cha llenged by Brazil.” Brazil’s Initial Br ief, para. 23. However, the Peace
Clause explicitly states that conforming “export subsidies . . . shall be . . . exempt from actions based on Article
XVI of GATT 1994.” Agriculture Agreement, Article 13(c)(ii).

32. However, even were the Panel to conclude that Article 13 does not require the Panel to
determine whether US measures are in breach of the Peace Clause and no longer “exempt from
actions based on” specified provisions, the significa nce and wording of the Peace Clause in this
dispute would mean that the Panel should exercise its discretion to bifurcate this proceeding. The
Peace Clause would remain a significant, decisive i ssue. As noted above, bifurcating the proceedings
would save both parties as well as the Panel significant time and work since it will render it
unnecessary to address the relevant GATT 1994 and Subsidies Agreement claims.

33. Furthermore, given that Brazil has signall ed that its Peace Clause arguments alone will
involve "the presentation of considerable fact ual evidence and expert econometric testimony"
48, it
would appear that to hear Brazil’s substantive claims at the same time would significantly complicate
the Panel’s work. The apparent complexity of Brazil’s Peace Clause evidence also calls into
significant question the likelihood that the timetable requested by Brazil is realistic with respect to the
legitimate interests of the United States to defend its position. Finally, we note that, by seeking to
have the Panel consider both the Peace Clause issue and Brazil’s substantive claims at the same time,
Brazil may be attempting to prejud ice the US rights of defence – part icularly since, even on Brazil’s
mis-reading of the Peace Clause, th e US measures are “exempt from actions”, Brazil is not entitled to
obtain any remedy from the DSB.
49

34. The United States also disagrees in any event that the “close overlap of proof for both peace
clause and actionable and prohibited subsidy claims highlights the need for th e Panel to examine all
the ‘facts of the case’ together”. For example, to establish its “serious prejudice” claims, Brazil must
present evidence showing that the United States has caused “adverse effects” through “the use of any
subsidy” (Subsidies Agreement, Artic le 5(c)) and evidence on “the effect of the subsidy” (Subsidies
Agreement, Article 6.3(b), (c), (d)). Neither of thes e showings is relevant to the issue of whether US
measures have breached the Peace Clause.

35. Frankly, if Brazil’s Peace Clause arguments will involve extensive factual and econometric
evidence, it is difficult to understand why the Panel would be better served by considering this
“considerable” evidence and testimony at the same time that it receives even more evidence and
testimony on other, unrelated issues. Thus, even if one hypothesized that the Peace Clause does not
require the Panel to consider the issue of its applicability prior to examining Brazil’s substantive
claims and that the Panel solely needed to consider how to take the Peace Clause issue into account in
exercising its discretion to organize its procedures, the United States submits that the Panel’s work
would be facilitated by focusing on the legally and logically distinct Peace Clause issue first.
50

48 Letter from Ambassador Luiz Felipe de Seixas Corrêa, Permanent Mission of Brazil, to
Mr. Dariusz Rosati, Chairman of Panel, at 4.
49 See Brazil’s Initial Brief, para. 9 (“In sum, ‘exempt from actions’ means that a complaining Member
cannot receive authorization from the DSB to obtain a remedy against a nother Member’s domestic or export
support measures that are ‘peace clause’ protected.”).
50 See Appellate Body Report, Brazil – Export Financing Programme for Aircraft , WT/DS46/AB/R,
paras. 142-44 (finding that panel should have considered threshold Article 27.4 issue before examining whether
export subsidy had been provided under Subsidies Agreement Article 3.1(a)); European Communities – Regime
for the Importation, Sale and Distribution of Bananas , WT/DS27/AB/R, para. 144 (noting that panels would be
better served by adopting working procedures providing for preliminary rulings to deal with threshold
jurisdictional issues).

V. OTHER ARGUMENTS BY THIRD PARTIES

A. GIVEN DSU RULES, THE PANEL’S ORGANIZA TION OF ITS PROCEDURES REPRESENTS
THE FIRST OPPORTUNITY TO ARREST BRAZIL’ S ACTION

36. India and the European Communities have s uggested that, taken to its logical extreme,
reading “actions” as the “taking of legal steps to establish a claim” would require a complaining party
to bring two actions: first, an action to establish that the Peace Clause does not apply to certain
measures, and second, if a panel were to find the Peace Clause inapplicable, an action challenging the
measures based on the provisions specified in the Peace Clause. While this issu e is not pertinent to
the Panel’s question concerning Article 13, the United States notes that it has not advanced such an
interpretation by, for example, asking the Panel to find that it could not be established. 51 Thus, this
issue is not before the Panel, and India’s and the EC’s arguments are irrelevant. Rather, we have
requested more modestly that the Panel, consistent with the Peace Clause, structure its procedures so
that US measures will in fact be exempted from Brazil’s action based on provisions specified in the
Peace Clause at the earliest possible juncture under the DSU.

37. As these third parties apparently fail to appreciate, prior to this moment, DSU rules provided
for the dispute to proceed through consultations and panel establishment automatically, regardless of
the US insistence that its measures conform to the Peace Clause. Although the United States has
maintained at each and every st age that the challenged measures conform to the Peace Clause, the
United States could not have stopped Brazil from asking for consultations
52, nor could it reasonably
have been expected to refuse an en tire request for consultations because it contains a request contrary
to the Peace Clause, nor could the United States have prevented the establishment of this Panel. As a
responding party cannot prevent panel establishment from occurring, it will inevitably be forced to
argue to a panel that the panel’s procedures should be structured so that the party’ s challenged
measures are not subject, from that point on, to actions based on provisions specified in the Peace
Clause. Thus, given the automaticity in DSU rules relating to consultations and panel establishment,
the Panel’s organization of its procedures provides th e first opportunity to arrest Brazil’s “taking of
legal steps to establish a claim”, and this is all the United States has asked the Panel to do.

B. CONTRARY TO THE SUGGESTION BY SEVE RAL THIRD PARTIES, THE PEACE CLAUSE IS
NOT AN AFFIRMATIVE DEFENCE

38. Australia and the European Communities have each asserted that the Peace Clause is an
affirmative defence.53 The United States believes that they are in error. However, this issue is not

51 We also note that this potential question relating to whether a panel could have been established
given the applicability of the Peace Clause could arise even under Brazil’s interpretation of “exempt from
actions”. Brazil states that “actions are multilaterally agreed decisions of WTO bodies including the DSB”.
However, “exempt from actions” would then seem to reach DSU Article 6.1, under which the DSB takes a
“multilaterally agreed decision” to establish a panel to consider a matter. Thus, under Brazil’s own logic,
“exempt from actions” in the Peace Clause should also prec lude a decision by the DSB to establish a panel and
not just a decision to authorize remedies. Argentina implicitly concedes the point when it states that it “agrees
with Brazil’s statement in paragraph 6 of its Brief that the word ‘actions’ in the context of Article 13 of the AoA
refers to decisions of WTO competent bodies, such as the DSB when it discharges its duties by establishing a
panel”. Argentina’s Third Party Initial Brief, para. 6 (emphasis added).
52 However, the United States notes that Argentina (in paragraph 13 of its “Third Party Initial Brief”)
accepts that under Article 7 of the Subs idies Agreement, a Member is not to request consultations on measures
conforming to the Peace Clause.
53 See Comments by Australia, para. 4 (10 June 2003); Comments by the European Communities on
certain issues raised on an initial basis by the Panel, para. 6 (dated 10 June “2002” on first page, 2003 in the
heading).

raised by the Panel’s question concerning Article 13, and there is no need to discuss it further at this
time.

VI. CONCLUSION: BRAZIL MAY NOT BRING, AND THE PANEL MAY NOT
ADJUDICATE, A SUBSIDIES AGR EEMENT OR GATT 1994 ARTICLE XVI
ACTION AGAINST US MEASURES CONFORMING TO THE PEACE CLAUSE

39. For the reasons set out above and in its in itial brief on the Panel’s question concerning the
Peace Clause, the United States respectfully request s the Panel to find that measures that conform to
the Peace Clause are exempt from any action, including action under the DSU, based on the
corresponding provisions of the Subsidies Agreem ent and the GATT 1994. As a result, the
United States is not required to defend those measures in any action based on Brazilian claims
exempted by the Peace Clause.

ANNEX B

SUBMISSION OF PARTIES AND THIRD PARTIES FOR THE
FIRST SESSION OF THE FIRST SUBSTANTIVE MEETING

Contents Page
Annex B-1 Executive Summary of the Submission of Brazil B-2
Annex B-2 Executive Summary of the Submission of the United States B-10
Annex B-3 Third Party Submission of Argentina B-18
Annex B-4 Third Party Submission of Australia B-36
Annex B-5 Third Party Submission of Benin B-51
Annex B-6 Third Party Submission of Canada B-58
Annex B-7 Third Party Submission of China B-71
Annex B-8 Third Party Submission of the European Communities B-78
Annex B-9 Third Party Submission of New Zealand B-87
Annex B-10 Third Party Submission of Paraguay B-100
Annex B-11 Third Party Submission of Chinese Taipei B-104

ANNEX B-1

EXECUTIVE SUMMARY OF BRAZIL’S FIRST SUBMISSION
TO THE PANEL REGARDING THE “PEACE CLAUSE”
AND NON-PEACE CLAUSE RELATED CLAIMS

Introduction

1. Brazil’s first submission initially addresses issu es relating to the substantive interpretation of
Article 13 of the Agreement on Agriculture (AoA ), known as the “peace clause,” and details the
evidence demonstrating that the Un ited States has no basis to assert a peace clause defence regarding
Brazil’s actionable and prohibited subsidy claims. The second part of Brazil’s first submission sets
forth the evidence and arguments concerning claims involving the following US measures: Step 2
export payments, the US export credit guarantee programmes (GSM 102, GSM 103 and SCGP) and
the ETI Act subsidies. These three subsidies do not fu lly conform to the provis ions of Part V of the
Agreement on Agriculture and, t hus, the United States has no peace clause protection from claims
under the SCM Agreement. Step 2 export payments , the three export credit guarantee programmes
and the ETI Act subsidies also violate ASCM Article 3. 1(a) and 3.2. Finally, Brazil demonstrates that
Step 2 domestic payments violate ASCM Article 3.1(b) and GATT Article III:4.

Issues Regarding the Peace Clause in AoA Article 13

2. The peace clause of AoA Article 13 is in the nature of an affirmative defence. The
United States has indicated that it will invoke a p eace clause defence. To do so, the United States
bears the burden of proof that US domestic suppor t and export subsidies to upland cotton are provided
in conformity with the requirements of the pea ce clause. Based on public international law and
Appellate Body jurisprudence on the allocation of the burden of proof, AoA Article 13 is an
affirmative defence because it provides an excep tion to a legal regime otherwise applying to
agricultural support measures. It does not alter the scope of other provisions providing positive
obligations on Members, and is not itself a positive obligation. It simply allows Members to maintain
measures otherwise inconsistent with their WTO ob ligations exempt from actions, provided that the
measures meet the conditions specified in AoA Article 13.

3. In accordance with Article 31 of the Vienna Convention, the appropriate interpretation of AoA
Article 13(b)(ii) is the following: Members may assert a peace clause defence under AoA Article
13(b)(ii) only if the total quantity of support granted through all non-“green box” domestic support
measures (i.e., measures that do not fully comply with the provisions of AoA Annex 2) to a specific
commodity in any marketing year from 1995-2003 does not exceed the quantity of non-“green box”
domestic support decided to be granted in MY 1992. The only “decision” made by the United States
“during” MY 1992 was to grant (i.e., make actual expenditures) of $1.994 billion in non-“green box”
support to upland cotton pursuant to the terms of the 1990 FACT Act.

4. The evidence regarding the amount of non-“green box” US support to upland cotton granted
in MY 1999-2002 is based largely on USDA docu ments, which show that US non-“green box”
domestic support decided to be authorized and pa id to upland cotton increased to $3,445 million in
MY 1999, was $2,311 million in MY 2000, and incr eased to a new record high of $4,093 million in
MY 2001 (for a crop valued at $3,312 million). Br azil estimates that US non-“green box” domestic
support for MY 2002 (which will end on 31 July 2003) is $3,113 million. This estimate is based on
the last available data and the requirements set out in the 2002 FSRI Act.

5. Thus, the evidence reveals that the amount of non-“green box” support granted in MY 1999-
2002 exceeds the level of support “decided” by the United States in MY 1992. Therefore, the
United States does not enjoy peace clause exemption from actions based on ASCM Article 5 and 6
and Article XVI:1 of GATT 1994 involving non-“green box” domestic support to upland cotton.

6. Brazil’s calculation of the MY 1999-2002 reflects the appropriate set of non-“green box”
domestic support measures granted to upland cotton. The United States notified to the WTO
Committee on Agriculture that the following programmes are “amber box” support for MY 1999:
Step 2 payments, loan deficiency payments, marketing loan gains, crop insurance payments,
cottonseed payments, and market loss assistance paym ents. The structure of the first five of these
domestic support programmes is substantially th e same in MY 2000-2001 and under the 2002 FSRI
Act as it was in MY 1999. There is also no indication that these five programmes should not continue
to be treated as non-“green box” domestic support to upland cotton for the purposes of MY 2002.
Therefore, the support under these five programmes, as well as market loss assistance payments, are
non-“green box” support to upland cotton and are pr operly included in the set of domestic support
measures for purposes of assessing possible US peace clause exemption from action.

7. With respect to production flexibility contra ct payments (PFC), direct payments (DP) and
counter-cyclical payments (CCP), the evidence demons trates that these payments are also non-“green
box” support granted to upland cotton. The basis of this conclusion is summarized below.

8. Production Flexibility Contract Payments (PFC) : There are two reasons why PFC payments
are not properly “green box” support. First, PFC payments are inconsistent with AoA Annex 2
paragraph 6(b), because Section 118(b) of the 1996 FAIR Act and the regulations implementing the
PFC programme eliminates or reduces payments if producers grow certain products – fruits,
vegetables and wild rice – on contract acreage.

9. AoA Annex 2 paragraph 6(b) re quires that the “amount” of payments “shall not be related to
or based on, the type of production…” The object an d purpose of paragraph 6(b), based on its text and
context, is to ensure that decoupled “green box” payments are not focused or channelled for a single
product or a particular sub-set of products. It covers only completely decoupled domestic support
measures. Paragraph 6(b) seeks to guarantee that a producer who receives such payments can produce
any product covered by the Agreement on Agriculture.

10. Section 118(b) of the 1996 FAIR Act a nd its regulations make it clear that the amount of PFC
payments in any given marketing year between 1996 and 2001 was related to or was based on the type
of production undertaken by a producer who entered in to a PFC contract. The general rule is that
“planting fruits and vegetables (except lentils, mung beans, and dry peas) shall be prohibited on
contract acreage”. If fruits and vegetables are gr own on contract acreage, then the regulations provide
that “the Deputy Administrator shall terminate the contract with respect to the producer on each farm
in which the producer has an inte rest”. The regulations also provide that in less serious cases of
violation, the penalty may be a re duction of contract payments equal to the market value of the fruits
and vegetables or the contract payment for each acre used for fruits and vegetables. Thus, the PFC
payments are not “decoupled income support” as set out in AoA Annex 2 paragraph 6(b) and
therefore, are not “green box” support.

11. The second reason that PFC payments provide d to upland cotton producers are not properly
“green box” support is that they are inconsistent with the “fundamental” requirement in AoA Annex 2
paragraph 1 that they have “no, or at most minima l, trade distorting effects or effects on production”.
The quantity or level of production or trade distorti ng effects need only be very minimal to trigger
denial of “green box” status under AoA Annex 2. This follows from the text of AoA Annex 2
paragraph 1, which contains the phrases “no,” “at most,” and “fundamental”.

12. The record in this case demonstrates that PFC payments have had more than “at most” a
“minimal” effect on production of US upland cotton during MY 1999-2002. Almost all upland cotton
producers participated in the PFC programme. Furthermore, domestic US upland cotton producers
view PFC payments as an important component of payments provided to upland cotton farmers. The
percentage of subsidization by PFC payments re lative to the market valu e measured by the price
received by US upland cotton producers represents between 14 and 17 per cent for period MY 1999-
2001. This provides US producers with a significa nt advantage in export competition with producers
in the rest of the world who do not receive such a level of (or any) subsidies.

13. The PFC payments also have production effect s because of the very high cost of production
for upland cotton in the United States. Given th e high US costs, without 14-17 per cent subsidies
some higher-cost US producers would likely stop producing upland cotton. This would have resulted
in lower levels of US upland cotton produc tion. USDA economists have acknowledged the
production-enhancing effects of PFC payments. Th ey have also identified likely patterns of
production effects.

14. Because the quantity or level or trade distorting effects need only be very minimal to trigger
denial of “green box” status under AoA Annex 2, th e evidence of the production enhancing effects of
PFC payments necessitates the conclusion that PFC payments are not properly included within the
AoA Annex 2 “green box”. They are, thus, properly included within the domestic support measures to
be used for the calculation of the amount of domestic support to upland cotton for MY 1999, 2000 and
2001.

15. Direct payments (DP) : with the passage of the new FSRI Act in May 2002, PFC payments
were discontinued and replaced with DP. These began to be paid in MY 2002 and will be paid until
the end of MY 2007. USDA has identified the DP programme as the direct successor to the PFC
programme under the 1996 FAIR Act.

16. There are three reasons why DP are not properly within AoA Annex 2. First, as with PFC
payments, the amount of DP are related to or based on the type of production undertaken in any year
after the base period in violation of AoA A nnex 2 paragraph 6(b). Th e 2002 FSRI Act and its
implementing regulations eliminate or limit the amount of DP if base acreage is used for the
production of certain crops, i.e., fruits, vegetables and wild rice.

17. Second, the DP provisions of the 2002 FSRI Ac t violate AoA Annex 2, paragraph 6(a) and (b)
because producers were permitted to “update” their base acreage using MY 1998-2001 production
totals. This is inconsistent with Annex 2, paragraph 6(a), which requires a single, fixed base period for
a programme of support. The object and purpose of Ao A Annex 2 paragraph 6(a) and (b) is to ensure
that Members do not permit payments to incre ase over time in a manner linked to increases in
production over time. This also follows from the AoA Annex 2 paragraph 1 requirement that “green
box” support measures have no or at most minimal production effects. That can only occur if the base
(i.e., the base for increased payments) does not adapt to recent changes in the production of a farmer.

18. The major structural elements of the PFC programme and the DP programme are the same for
both programmes in terms of the basic types of crops covered, the producer’s obligations to receive
payments, prohibited plantings of certain crops, a nd freedom to receive payments for one crop and
farm another crop. The change from the PFC programme to the DP programme is not “de-coupling”
but rather “re-coupling” of MY 2002 and future DP with MY 1998-2001 production.

19. One third of farms receiving PFC payments between MY 1996-2001 updated their acreage for
the DP programme using MY 1998-2001 production da ta. Thus, interpreting AoA Annex 2 paragraph
6(a) and (b) to permit an updating of the “fixed” ba se period by essentially changing the name of the
“PFC payment” programme to DP programme would render these provisions a nullity.

20. Third, DP also have more than “at most minimal” production and trade-distorting effects
contrary to the chapeau of AoA Annex 2 paragr aph 1. DP, like PFC payments, can increase
production of upland cotton through (1) a direct weal th effect through risk aversion reduction, (2) a
wealth facilitated increased investment reflecting reduced credit constraints, and (3) a secondary
wealth effect resulting from the increase in investment. In addition, the updating of base acres in the
2002 FSRI Act created an ongoing produc tion-enhancing effect because farmers will expect future
updates and continue to maintain high levels a nd even increase production between MY 2002 - 2007.
Continued low cotton prices will increase the need of producers to protect their base as a hedge against
low prices. In addition, US upland cotton producers are among the world’s highest cost producers.
That means that the amount of DP (and CCP) is critical to the economic survival of many US upland
cotton producers. Thus, there will be a very strong incentive to maintain and increase upland cotton
base in anticipation of future base updates in future farm legislation to offset potentially lower world
prices.

21. In sum, DP are properly included within the set of domestic support measures to be used for
calculating the amount of domestic support to upland cotton for MY 2002.

22. Counter-Cyclical Payments (CCP) : are non-“green box” domestic support because they are
inconsistent with AoA Annex 2 pa ragraphs 6(a), 6(b) and 6(c). Fi rst, like PFC and DP, CCP are
inconsistent with Annex 2 paragraph 6(b) because the CCP programme eliminates or limits the amount
of payments for those producers who grow fruits, vegetables and wild rice on base acres.

23. Second, CCP also violate AoA Annex 2 para graph 6(c) because the amount of payments is
based on current market prices. The ordinary meaning of AoA Anne x 2 paragraph 6(c) is that any
direct income support to a producer of agricultural products must not be linked to an international or
domestic price established after the base period, i.e., to a current price. CCP are not based on the
prices of upland cotton production that took place in a prior base period but rather on prices of present
production. As the current upland cotton prices rece ived by US farmers fluctuate between $0.52 and
$0.6573 per pound, the amount of payments for each year between MY 2002-2007 changes. This is
inconsistent with AoA Annex 2 pa ragraph 6(c), which requires that payments cannot be based on “the
prices…applying to any production undertaken in an y period after the base period”. But the CCP
programme has no fixed “base period” for the purposes of setting “prices”. It uses current prices, i.e.,
prices that apply to current production and, thus, to a “production undertaken in a period after the base
period”.

24. Third, like PFC and DP, CCP have production a nd trade distorting effects in violation of AoA
Annex 2 paragraph 1. The new CCP programme fo r upland cotton is one of the main sources of
increased payments for US cotton producers between the 1996 FAIR Act and the 2002 FSRI Act. The
payments to US upland cotton farmers in MY 2002 will exceed $1 billion and represent over 32 per
cent of the market value of US upland cotton. USDA economists have acknowledged that CCP have
identifiable and measurable production effects.

25. In sum, CCP are non-“green box” domestic support properly included within the set of
domestic support measures to be used for calculating the amount of domestic support to upland cotton
for MY 2002.

26. DP and CCP are support to upland cotton : DP and CCP made in MY 2002 are support to
upland cotton within the meaning of AoA Article 13(b)(ii). The great majority of upland cotton
producers are enrolled in the programmes and will receive the full amount of these payments in MY
2002. Most of the producers of upland cotton in MY 2002 used upland cotton base acres to produce
upland cotton. US farms growing the bulk of upla nd cotton tend to grow upland cotton year after year
because of considerable investments in cotton-specific equipment and the lack of alternative crops.
Thus, most farmers with cotton “base acreage” genera lly do not use that base acreage to grow other

crops. In addition, CCP create incentives to main tain upland cotton production at the level of the base
period in order to minimize the risk of low revenues.

27. In sum, the United States cannot successfull y invoke peace clause protection against Brazil’s
actionable subsidy claims under ASCM Arti cles 5 and 6 or Brazil’s claims under GATT
Article XVI:1.

28. Export Subsidy Peace Clause Issues Under AoA Article 13 (c): The United States also has no
peace clause protection under AoA Article 13(c) fo r claims against export subsidies under the SCM
Agreement regarding Step 2 export payments, the export credit guarantees and subsidies provided
under the ETI Act. AoA Article 13(c) can only be invoked by a WTO Member as an affirmative
defence if that WTO Member can demonstrate th at its export subsidies “conform fully to the
provisions of Part V” of the AoA. Part V of the AoA consists of Articles 8 to 11. A Member violates
Part V of the AoA if it provides export subsidie s for products for which it has not undertaken any
export subsidy reduction commitments; or second, if it has export subsidy reduction commitments for
the product under consideration, but exceeds the ma ximum amount of export subsidies to or the
maximum value of the product that it has scheduled to be exported with the assistance of export
subsidies. The United States does not enjoy peace clause protection for the agricultural export
subsidies challenged by Brazil under the SCM Agreem ent because – as Brazil demonstrates – each of
the subsidies at issue does not fully conform to Part V of the AoA.

Brazil’s Claims Regarding Prohibited US Export and Local Content Subsidies

29. The United States maintains three types of export subsidies related to US upland cotton and
other commodities. These subsidies violate AoA Articles 3.3, 8 and 10.1 and are prohibited under
ASCM Articles 3.1(a) and 3.2. Brazil challenge s all three measures to th e extent they provide
subsidies to upland cotton. In addition, it chal lenges the export credit guarantee programmes for all
products covered.

30. The first measure, the Step 2 export programme, relates solely to exports of US upland cotton
and provides grants to exporters. The second group of measures are three export credit guarantee
programmes – the General Sales Manager 102 (“GSM 102”), the Ge neral Sales Manager 103 (“GSM
103”) and the Supplier Credit Guarantee Programme (“SCGP”) – provided by the United States in
connection with the export of agricultural goods in general. The third measure providing export
subsidies is the FSC Repeal and Extraterritorial Income (ETI) Act of 2000, by which the United States
provides tax breaks for exporters of US products , including agricultural products such as upland
cotton.

31. Step 2 Export Payments: Section 1207(a) of the 2002 FSRI Act mandates Step 2 export
payments contingent on the export of US upland cotton lint. Section 1207(a) of the 2002 FSRI Act
requires USDA to pay US exporters the difference be tween higher priced US upland cotton and the
average of the five lowest price quotes for exports of upland cotton worldwide (Cotlook’s A-Index).
The size of this subsidy averaged 8 per cent of the price received by US producers between MY 1999-
2001 and an estimated 9.9 per cent in MY 2002.

32. Step 2 export payments constitute export subsidies within the meaning of the AoA. The
Appellate Body has indicated that context for inte rpretation of an “export subsidy” under the AoA is
found in the ASCM. Step 2 export payments involve grants within the meaning of ASCM Article
1.1(a)(1)(i), as the US Government pays money to US exporters. Such grants are direct transfers of
economic resources for which the US Government receives no consideration. Step 2 export payments
constitute “free money” for which exporters incur no corresponding obligations and, thus are made for
“less than full consideration”. They, therefore, confer a benefit within the meaning of ASCM
Article 1.1(b). Finally, Step 2 payments are also export contingent within the meaning of ASCM

Article 3.1(a) because exporters are only eligible to receive Step 2 export payments if they produce
evidence that they have exported an amount of US upland cotton.

33. Section 1207(a) of the 2002 FSRI Act requires th e US Secretary of Agriculture to make Step 2
export payments to eligible exporters upon proof of the export of US cotton. Therefore, Section
1207(a) of the 2002 FSRI Act is inconsistent wi th AoA Articles 3.3 and 8, because it requires
payments of export subsidies to upland cotton without the United States having undertaken any export
subsidy reduction commitments under the AoA. Thus, the United States has no peace clause
protection against claims made under the ASCM for Step 2 export payments. In addition, for the same
reasons the Step 2 export payments violate AoA Articles 3.3 and 8, Section 1207(a) of the 2002 FSRI
Act also mandates payment of export subsidies in violation of ASCM Articles 3.1(a) and 3.2.

34. Export Credit Guarantee Programmes: The United States, through the US Commodity Credit
Corporation (CCC), operates three export credit gua rantee programmes – Gene ral Sales Manager 102
(GSM 102), General Sales Manager 103 (GSM 103) and the Supplier Credit Guarantee Programme
(SCGP). The programmes guarantee the repayment of loans granted to foreign importers of all US
agricultural commodities and are not limited to upl and cotton. Brazil’s also challenges the whole
programmes, not just as they relate to upland cotton.

35. USDA export data demonstrates that US exports of most scheduled commodities exceed the
respective US quantitative export subsidy reduc tion commitment. For unscheduled commitments,
there is no such commitment, which means that every export of these commod ities is in excess of the
United States’ commitments. In Canada – Dairy Article 21.5 (II) , the Appellate Body characterized
export subsidy claims under the AoA as involvi ng both a “quantitative aspect” and an “export
subsidization aspect”. It held that AoA Article 10.3 allocates the burden of proof for the export
subsidization part to the defending Member – in this case the United States – if the complaining
Member – in this case Brazil – establishes that th e level of exports in exceeds of the export subsidy
reduction commitments. Therefore, the United States bears the burden to prove that its excess exports
did not benefit from export subsidies, including export credit guarantees

36. Nevertheless, Brazil also provides evidence th at the three export credit guarantee programmes
are export subsidies within the meaning of the AoA. The Appellate Body in US – FSC held that
export subsidies within the meaning of the SCM Ag reement are also export subsidies for the purposes
of the AoA. Brazil demonstrates in two distin ct ways that GSM 102, GSM 103 and SCGP are “export
subsidies”. First, context for determining whet her the US programmes are export subsidies under the
AoA is provided by reference to ASCM Annex I, Item (j) of the Illustrative List of Export Subsidies.
Item (j) provides that export credit guarantee progr ammes are export subsidies if they are operated “at
premium rates which are inadequate to cover the long-term operating costs and losses of the
programme”. Second, export credit guarantees also constitute export subsidies under the AoA and in
light of the Appelllate Body decisions in US- FSC and Canada – Dairy, if they involve “financial
contributions” that confer “benefits” and are cont ingent upon export performance within the meaning
of ASCM Articles 1.1 and 3.1(a).

37. US documents demonstrate that GSM 102, GS M 103 and SCGP are export subsidies because
they are operated at premium rates which are far below the level necessary to cover the programmes
operating costs and losses. The programmes are, thus , export subsidies as defined in item (j) of the
Illustrative List of Export Subsidies. Under Appella te Body and panel jurisprudence, export subsidies
defined in the ASCM Agreement are relevant cont ext for a finding of export subsidies under the AoA.
Therefore these three programmes constitute export subsidies within the meaning of the AoA.

38. In addition, GSM 102, GSM 103 and SCGP are export subsidies within the meaning of the
AoA because they are financial contributions consis tent with ASCM Article 1.1(a)(1)(i), and confer
benefits within the meaning of ASCM Article 1.1(b). The United States itself, in its budget, treats
them as subsidies. In addition, no such guarantees are commercially available in the marketplace.

GSM 102, GSM 103 and SCGP are, furthermore, c ontingent upon export performance within the
meaning of ASCM Article 3.1(a). Thus, the pr ogramme constitutes export subsidies within the
meaning of both the SCM Agreement and the AoA.

39. The export subsidies GSM 102, GSM 103 and SCGP result in, or threaten to lead to,
circumvention of the United States’ export subsidy commitments within the meaning of AoA
Article 10.1. GSM 102, GSM 103 and SCGP, in so far as they are available for unscheduled products,
violate AoA Articles 10.1 and 8 because they make export subsidies available for unscheduled
products. The Appellate Body has held that for un scheduled products, it is inconsistent with AoA
Article 3.3 to provide export subsidies listed in AoA Article 9.1, and that it is inconsistent with AoA
Articles 10.1 and 8 to provide any other export subsidy. GSM 102, GSM 103 and SCGP provide
export subsidies to unscheduled products, and thus violate AoA Article 10.1 and 8.

40. With respect to scheduled products, GSM 102, GSM 103 and SCGP as such also threaten to
lead to circumvention of the US export subsidy reduction commitments. The United States provides
monetary allocations for export credit guarantees to individual third countries either on a commodity
specific basis or on a non-commodity specific basis. This common feature of the three export credit
guarantee programmes creates a threat that the Un ited States will exceed its quantitative export
subsidy reduction commitment for scheduled products in violation of AoA Articles 10.1 and 8.

41. In sum, the export credit guarantee programmes GSM 102, GSM 103 and SCGP are
inconsistent with AoA Articles 10.1 and 8. As they do not fully conform to AoA Part V, they do not
enjoy peace clause protection under AoA Article 13(c)(ii).

42. Brazil has already established that GSM 102, GSM 103 and SCGP are export subsidies within
the meaning of item (j) of the Illustrative List of Export Subsidies attached as Annex I to the SCM
Agreement, and within the meaning of ASCM Artic le 3.1(a). It follows that GSM 102, GSM 103 and
SCGP are prohibited export subsidies within the meaning of ASCM Articles 3.1(a) and 3.2.

43. ETI Act Export Subsidies : The third export subsidy provided by the United States to upland
cotton consists of tax cuts under the FSC Repeal and Extraterritorial Income Act of 2000. This Act
eliminates tax liabilities for exporters, inter alia, of upland cotton. A WTO panel and the Appellate
Body have previously found that the ETI Ac t violates AoA Articles 10.1 and 8 and ASCM
Articles 3.1(a) and 3.2. The tax breaks provide d for under the ETI Act constitute export subsidies
within the meaning of AoA Article 10.1. The ETI Ac t threatens to circumvent the US export subsidy
commitments by providing an export subsidy to upland cotton while the United States does not have
any export subsidy reduction commitments for upland cotton in violation of AoA Articles 10.1 and 8.
As the ETI Act subsidies do not fully conform to AoA Part V, there is no peace clause exemption
from actions under the SCM Agreement. Consequently, the ETI Act also constitutes a prohibited
export subsidy within the meaning of ASCM Article 3.1(a) and 3.2.

44. Step 2 Domestic Payments: Section 1207(a) of the 2002 FSRI Act mandates the payment of
the Step 2 domestic payments. Step 2 domestic pa yments are subsidies within the meaning of the
ASCM Article 1.1. They involve grants because the US Government pays domestic users of US
upland cotton the difference between higher priced US upland cotton and the average of the five
lowest upland cotton price quotes for exports (A-Index) without receiving any consideration in return.
These grants are direct transfers of funds and constitute a financial contribution by a Government
within the meaning of ASCM Article 1.1(a)(1)(i). They confer a “benefit” within the meaning of
ASCM Article 1.1(b) because the domestic user of US upland cotton receives the financial
contribution on terms more favorable than those available in the market. Step 2 domestic payments
constitute “free money” for which domestic users of US upland cotton incur no corresponding
obligations. Finally, Step 2 domestic payments are contingent on the use of domestic over imported
goods. Domestic users of US cotton can only r eceive payments upon proof of opening a bale of
domestic US upland cotton. In sum, Section 1207(a) of the 2002 FSRI Act mandating Step 2 domestic

payments violates ASCM Articles 3.1(b) and 3.2 by requiring the provision of subsidies contingent
upon the use of domestic over imported goods.

45. The Step 2 domestic payment programme also constitutes a viol ation of GATT Article III:4.
Section 1207(a) requires the US Secretary of Agriculture to treat upland cotton of non-US source less
favorable than like US upland cotton. Only upland cotton that “is domestically produced baled upland
cotton” is eligible for the Step 2 domestic payment programme. Paying a subsidy to like domestic
upland cotton while denying such payments to imported like cotton negatively affects the
competitiveness of imported cotton by making it less attractive to US purchasers. The Step 2 domestic
payment programme therefore extends “less favor able treatment” to imported goods within the
meaning of GATT Article III:4.

Conclusion

46. In Brazil’s further submission (scheduled for 4 September 2003 following the Panels
expression of its views on AoA Article 13 on 1 September 2003) Brazil will present its arguments
concerning its claims under ASCM Articles 5(c), 6.3(b), 6.3(c) and 6.3(d), as well as under GATT
Article XVI.

ANNEX B-2

EXECUTIVE SUMMARY OF THE FIRST
WRITTEN SUBMISSION OF THE UNITED STATES

1. In this submission, the United States principally focuses on the issues involving the Peace
Clause. However, three sets of measures identified by Brazil – (1) export credit guarantee measures
relating to eligible US agricultural commodities other than US upland cotton; (2) production flexibility
contract payments and market loss assistance payments; and (3) cottonseed payments – were,
respectively, not the subject of consultations, had e xpired before consultations were requested, or had
not yet been adopted at the time of the consulta tion and panel requests. With respect to these
measures, the United States requests that the Panel make preliminary rulings that they are not within
the Panel’s terms of reference.

2. General Interpretation of the Peace Clause and “Exempt from Actions” : As set out in
more previous submissions, read in accordance with the customary rules of interpretation of public
international law, the key Peace Clause phrase “exempt from actions” means “not exposed or subject
to” a “legal process or suit” or the “taking of lega l steps to establish a claim or obtain a remedy”.
Relevant context in DSU Article 3.7 and 4.5 and Subs idies Agreement Article 7 supports this reading.
For example, contrary to Brazil’s suggestion that “action” only refers to “collective action” by the
Dispute Settlement Body, DSU Article 4.5 uses the phrase “further” action. Since no “action” will
have been taken by the DSB “in the course of consu ltations,” the phrase “further action” suggests that
requesting consultations is part of the action brought by a complaining party. Thus, these provisions
suggest that “action” based on the relevant provisions would include all stages of a dispute, including
the “bringing [of] a case”, consultations, and pane l proceedings and would support reading “exempt
from actions” in Article 13 to mean “not subject to” the “taking of legal steps to establish a claim”.

3. Prior to this point in the process, DSU rules did not afford the United States any opportunity to
prevent the dispute from proceeding through consul tations and panel establishment automatically,
regardless of the US insistence that its measures co nform to the Peace Clause. As a responding party
cannot prevent panel establishment from occurring, it will inevitably be forced to argue to a panel that
its procedures should be structured so that the pa rty’s challenged measures are not subject, from that
point on, to actions based on provisions specified in the Peace Clause. Thus, the Panel’s organization
of its procedures provided the first opportunity to arre st Brazil’s “taking of legal steps to establish a
claim”.

4. The Peace Clause Is Not an Affirmative Defence : The Peace Clause applies
“[n]otwithstanding the provisions of GATT 1994” and the Subsidies Agreement – that is, in spite of
and without regard to or prevention by the subsidies obligations contained in those agreements.
Article 21.1 of the Agriculture Agreement further clarifies that the obligations of Members under the
Subsidies Agreement and GATT 1994 only apply “ subject to ” the provisions of the Agriculture
Agreement, including the Peace Clause. There is no n eed to determine if a measure is inconsistent
with WTO subsidies disciplines before applying the Peace Clause as would be the case if the Peace
Clause were an affirmative defence to those obligations.

5. As in United States - Measures Affecting Imports of Woven Wool Shirts and Blouses from
India, in which the Appellate Body explained that a provision that was described as an “exception”
was not an affirmative defence a nd in fact was “an integral part” of the arrangement under the
Agreement on Textiles and Clothing that “reflects an equally carefully drawn balance of rights and
obligations of Members”, here, too, the Peace Clause is part and parcel of the balance of rights and

obligations with the subsidies disciplines of GATT 1994 and the Subsidies Agreement and explains
which measures are subject to actions based on those disciplines.

6. Article 13(a)(i) establishes that green box measures are “non-actionable subsidies for purposes
of countervailing duties”. This obligation is not contingent on whether a Member asserts an
“affirmative defence” that a particular measure is “g reen box”; that is, one Member is not free to
impose a countervailing duty until another establishes a Peace Clause “affirmative defence”. There is
no textual basis to interpret the Peace Clause to be an affirmative defence under one provision
(Article 13(b)(ii)) but not another. In fact, rather than a defence, the Peace Clause could be used on
the offense (as a cause of action) if, for example, a Member imposed a countervailing duty on a “green
box” measure while the Peace Clause was in force.

7. Brazil has erroneously asserted that the Peace Cl ause “provides no positive obligations itself”.
Brazil overlooks the text of, for example, Articl e 13(a)(ii) and (b)(ii), which incorporates positive
obligations of Annex 2 and Article 6 by reference. The Peace Clause also differs from the fifth
sentence of footnote 59 to item (e) and under the second paragraph of item (k) of the Illustrative List,
under which it appears that a measure otherwis e prohibited under Article 3 of the Subsidies
Agreement would nonetheless be permitted given the existence of circumstances detailed in those
provisions. However, under the Pe ace Clause, conforming measures are not even exposed or subject
to the taking of legal steps to establish a claim or obtain a remedy based on Peace Clause-specified
provisions. Further, Subsidies Agreement Articles 3, 5, and 6 recognize that measures conforming to
the Peace Clause are not subject to those discipli nes by expressly excluding such measures from the
scope of those obligations.

8. Brazil asserted in both its panel and consul tation requests that the Peace Clause does not
exempt the challenged US measures from action. Braz il implicitly recognized in these documents that
it must surmount the Peace Clause hurdle to bring this action against US agricultural support
measures. Even were the United States to pr esent no arguments on the applicability of the Peace
Clause, Article 13 would bar Brazil’s claims unless Brazil made a prima facie case that the US
measures breach the Peace Clause.

9. US Direct Payments Meet and Conform to the Criteria in Article 13(a) : Pursuant to
Agriculture Agreement Article 13(a)(ii) domestic support measures that “conform fully to the
provisions of Annex 2 to this Agreement” are “e xempt from actions based on Article XVI of GATT
1994 and Part III of the Subsidies Agreement”. Th e 2002 Act establishes several types of measures
that qualify for green box protection, including one, direct payments, that is challenged by Brazil.

10. Direct payments under the 2002 Act conform fu lly to the basic criteria in paragraph 1,
Annex 2, as well as the five “policy-specific criter ia and conditions” in paragraph 6, Annex 2, for
“decoupled income support”. Consistent with pa ragraph 1, direct payments are provided by a
publicly-funded government programme and do not provi de price support. Cons istent with paragraph
6, direct payments establish eligibility by reference to the clearly-defined criteria of factor use or
production level in a defined and fixed base period. Payments are not related to production or prices
or the factors of production employed in any year after the base period, and no production is required
in order to receive such payments.

11. In short, direct payments do not provide support for upland cotton because they are not linked
to current cotton production. These payments are made with respect to farm acreage that was devoted
to agricultural production in the past, including pr evious upland cotton production. Direct payments,
however, are made regardless of whether cotton is currently produced on those acres or whether
anything is produced at all. Because all of the crit eria in paragraphs 1, 5, and 6 are met, direct
payments conform to the requirements of Annex 2 and are “exempt from actions” based on Part III of
the Subsidies Agreement and GATT 1994 Article XVI.

12. Applicability of Agriculture Agreement Article 13(b)(ii): Pursuant to Agriculture
Agreement Article 13(b)(ii), “domestic support measu res that conform fully to the provisions of
Article 6” are “exempt from actions” based on GATT 1994 Article XVI:1 and Subsidies Agreement
Articles 5 and 6. Brazil does not contest that US non-green box domestic support measures conform
fully to the requirements of Article 6. Thus, the only question is whether US non-green box domestic
support measures do or do not “grant support to a specific commodity in excess of that decided during
the 1992 marketing year.”

13. The phrase “grant support to a specific commodity” is not explicitly defined. Read according
to its ordinary meaning, this phrase means to “giv e” or “confer” formally a “subsidy” (“assistance,
backing”) “specially . . . pertaining to a particular” “agricultural crop”. Read in the context of, inter
alia, the definition of “Aggregate Measurement of Support” in Article 1(a), “support to a specific
commodity” refers to support “provided for an agricultural product in favour of the producers of the
basic agricultural product” or “product-specific support”.

14. The product-specific support granted by such Article 6 measures must be compared to “that
decided during the 1992 marketing year”. According to its ordinary meaning, this phrase would mean
the product-specific support that was “determined” or “pronounced” during the 1992 marketing year.
With reference to support or subsidies, the term “decided” is not used elsewhere in the Agriculture
Agreement nor in the Subsidies Agreement. Vari ous provisions that define the overall domestic
support in favour of agricultural producers that has been, is being, and may be provided by a Member
use the phrase “support provided ” in favour of an agricultural product or agricultural producers no
fewer than 13 times. Context thus suggests that the use of the term “decided” in Article 13(b) was
deliberate so as to make the availability of the Peace Clause not dependent upon the support – for
example, as measured through budgetary outlays – actually “provided” during the 1992 marketing
year. This interpretation is further supported by Members’ decision not to use the term “Aggregate
Measurement of Support” in this part of Article 13( b)(ii). That is, Members did not choose to make
the applicability of the Peace Clause contingent on comparison of a Member’s product-specific
Aggregate Measurement of Support.

15. The Peace Clause thus exempts from certa in actions a Member’s non-green box domestic
support measures that conform to that Member’s overall reduction commitments under Article 6,
provided that such measures do not currently “give” or “confer” “product-specific support” in excess
of that “determined” or “pronounced” during the 1992 marketing year. The relevant test for the
applicability of Article 13(b)(ii) is to compare th e product-specific support as it was decided in 1992
versus the product-specific support that existing measures currently grant.

16. US Measures Conform to the Criteria in Article 13(b) and Are Exempt from Actions :
US domestic support measures under the 2002 Act were written to grant support for upland cotton
within the 1992 marketing year level so that such measures would conform to the Peace Clause
criteria. In particular, the 2002 Act shifts s upport away from the product-specific support that
prevailed in 1992 to reduce support linked to the production of upland cotton.

17. The Product-Specific Support for Upland Co tton Decided During 1992 Was To Ensure
Income of 72.9 Cents per Pound : The product-specific support in favour of upland cotton decided
during the 1992 marketing year was to ensure a level of income ($0.729) for upland cotton farmers for
each pound of upland cotton production. That is, US domestic support measures set a rate of support,
rather than deciding ex ante a level of budgetary outlay or expenditures. This support was granted by
the 1990 Act through two programmes: marketing loans (including marketing loan gains and loan
deficiency payments) and deficiency payments.

18. Through marketing loans, the United States in effect guaranteed that cotton producers would
realize income equivalent to at least 52. 35 cents per pound of upland cotton produced. The
United States further ensured cotton farmers would realize income equivalent to 72.9 cents per pound

of upland cotton produced by making “deficiency pa yments”. By the terms of the 1990 Act and all
subsequent implementing regulations, the support “d ecided” (that is, “ determined” or “pronounced”)
in favour of upland cotton was not expressed in terms of outlays or appropriations but rather as a rate:
that is, through both marketing loans and deficien cy payments, producer income of 72.9 cents per
pound of upland cotton. Thus, budgetary outlays, wh ich reflect the difference between the rates set
out in US legislation and regulations (which were decided by the US Government) and market prices
(which obviously were not), do not represent the product-specific support “decided” during the 1992
marketing year.

19. US Domestic Support Measures Currently Gran t Product-Specific Support to Upland
Cotton to Ensure Producer Income of 52 Cents per Pound : Under the 2002 Act, product-specific
support is again granted to upland cotton through the marketing loan programme and through user
marketing (step 2) payments. Despite a small adju stment in the user marketing (step 2) payment
formula, US measures currently in effect grant product-specific support to upland cotton far lower
than that decided in the 1992 marketing year. Through the marketing loan programme, the US
Government has in effect guaranteed that cotton producers will realize income equivalent to at least 52
cents ($0.52) per pound (the “2002 loan rate”) of upland cotton produced. Marketing loans and loan
deficiency payments are contingent on a farm’s actual production of upland cotton in the current
marketing year.

20. Product-specific support decided during the 1992 marketing year for upland cotton was to
ensure producer income of 72.9 cents per pound; US domestic support measures currently grant
product-specific support only at the rate of 52 cents per pound of production. Even taking into
account the minor differences in payment rates for user marketing payments, this comparison indicates
that US measures do not grant product-specific s upport to upland cotton in excess of that decided
during the 1992 marketing year; in fact, current US measures grant product-specific support at a rate
more than 20 cents per pound less than that decided during 1992.

21. US Payments That Brazil Has Mischaracterized As Providing Support to a Specific
Commodity Do Not Form Part of the Peace Clause Comparison : Direct payments,
counter-cyclical payments, and crop insurance are not product-specific support for upland cotton and
are therefore irrelevant to the 1992 to 2002 Peace Clause comparison. Direct payments are green box
support because they conform to the applicable general and policy-specific criteria under Annex 2 of
the Agriculture Agreement. As green box measures, direct payments are not part of the comparison of
“product-specific” support under Article 13(b)(ii). Because direct payments are based on quantities of
acreage that historically produced certain commod ities, including upland cotton, and there is no
requirement to produce upland cott on to receive these payments, however, direct payments are
non-product-specific.

22. With respect to counter-cyclical payments, th e United States notes that these measures do not
grant product-specific support to upland cotton. Product-specific support is “ provided for an
agricultural product” for the benefit of “the producers of the basic agricultural product”. The payment
formula for counter-cyclical payments demonstrates that these payments are not “provided for an
agricultural product” because it is not current production of upland cotton that qualifies a recipient to
receive payment. In addition, it is not “the producers of the basic agricultural product” – that is,
current upland cotton growers – that are entitled to receive the counter-cyclical payments but rather
persons (farmers and landown ers) on farm acres with past histories of producing covered
commodities, including upland cotton. Because counte r-cyclical payments are not product-specific
support for upland cotton, such payments are not pr operly part of the Peace Clause comparison under
Article 13(b)(ii).

23. Neither does crop insurance grant product-spec ific support to upland cotton. A variety of
insurance plans are now subsidized and reinsure d by the United States. The basic programme
provisions for crop insurance are generic, not commod ity-specific. For example, the US Government

provides an incentive to participate in the crop insurance programme by subsidizing the premium paid
by the farmer. This premium subsidy is availabl e to a broad array of commodities around the country
and does not vary by commodity. Thus, while the United States notifies crop insurance as “amber
box” domestic support subject to US reduction commi tments, crop insurance is “non-product-specific
support in favour of agricultural producers in general”.

24. Conclusion: US Non-Green Box Domestic Suppo rt Measures Are Exempt from Brazil’s
Subsidies Agreement and GATT 1994 Article XVI Action : Brazil has asserted that US domestic
support measures breach the Peace Clause by comparing US budgetary outlays for the 1992 marketing
year to US budgetary outlays for marketing years 1999-2001 and its “reasonable” estimates of US
outlays for the 2002 marketing year. As noted above, Brazil’s interpretation of the Peace Clause and
resulting analysis is fundamentally in error. B ecause the level of income support granted to upland
cotton producers is far lower now than the support decided in marketing year 1992, Brazil may not
maintain this action and advance claims under GATT 1994 Article XVI:1 or Subsidies Agreement
Articles 5 and 6 with respect to US non-green box domestic support measures – marketing loan
programme payments, user marketing (step 2) ce rtificates, counter-cyclical payments, and crop
insurance subsidies.

25. US Step 2 Payments Are Not an Export Subsidy for Upland Cotton: User marketing (Step
2) payments are made to users of upland cotton. Under section 1207 of the 2002 Act, the Secretary of
Agriculture is authorized to issue marketing certificates or cash payments to domestic users and
exporters of upland cotton for documented purchases by domestic users and sales for export by
exporters. The programme is indifferent to whether reci pients of the benefit of this programme are
parties that open bales for the processing of manufacturing raw cotton into cotton products in the
United States or exporters. Accordingly, the Un ited States reports the benefits conferred under the
Step 2 programme as product-specific amber box domestic support.

26. The Step 2 programme is not an export subs idy under Agriculture Agreement Article 9.1 and
not an export subsidy in circumvention of the US obligation not to confer an export subsidy with
respect to cotton, contrary to Article 10.1. Artic le 1(e) of the Agriculture Agreement states that
“‘export subsidies’ refers to subsidies continge nt upon export performance, including the export
subsidies listed in Article 9 of this Agreement”. Consequently, to constitute an “export subsidy” for
any purposes of the Agreement, the subsidy must first be “contingent on export performance”. The
benefits of the Step 2 programme are not contingent on export performance.

27. A WTO dispute settlement panel has already determined that such facts do not involve an
export subsidy for purposes of both Articles 9 and 10 of the Agriculture Agreement, because the
subsidy is not “contingent on export performance”. The panel in Canada - Measures Affecting the
Importation of Milk and the Exportation of Dairy Products concluded that where a subsidy was
available in connection with the exported product but also to processors producing for the domestic
market, “access to milk under such other classes is not ‘contingent on export performance.’ We
therefore find that such other milk classes do not i nvolve an export subsidy under Article 9.1(a)”. For
precisely the same reasons, the panel also found that “these other milk classes do not involve an export
subsidy in the sense of Article 10.1”. Similarly, the Step 2 programme is not an export subsidy
inconsistent with Articles 9 and 10 of because the subsidy is not contingent on export performance and
therefore is not an export subsidy.

28. Brazil Bears the Burden of Proof to Demons trate the Existence of an Export Subsidy for
Upland Cotton: Brazil as complainant bears the burden of proof with respect to any export subsidy
claim relating to upland cotton. Brazil cites Agri culture Agreement Article 10.3 to assert that the
United States bears this burden. However, the burden-shift set forth in Article 10.3 is only applicable
with respect to exports in excess of a reduction commitment level. As Brazil correctly points out, the
United States does not have such a reduction commitment level with respect to upland cotton.
Article 10.3 therefore does not apply with respect to US cotton exports. With respect to products for

which a Member has no scheduled export subsi dy reduction commitments, the burden of proof
remains with the complainant.

29. US Step 2 Payments Are Not a Prohibited Subsidy Under Article 3 of the Subsidies
Agreement: With respect to domestic support, the negot iators of the Agriculture Agreement devised
the novel concept of “Aggregate Measurement of Suppor t” (AMS), defined in Article 1(a). As the
definition provides, all annual domestic support provide d for an agricultural product, like cotton, in
favour of the producers of that product that is not otherwise exempt under the “green box” (Annex 2)
from reduction commitments, or as otherwise provide d in Articles 6.4 and 6.5 of the Agreement, is
included in the AMS. The definition further cont emplates that support provided during any one year
is to be calculated in accordance with the provisions of Annex 3. Paragraph 7 of Annex 3 requires that
“measures directed at agricultural processors sha ll be included [in the AMS] to the extent such
measures benefit the producers of the basic agricultural products”.

30. Accordingly, Step 2 user pa yments, directed at upland cott on processors and other users but
intended to benefit US producers of upland cotton, are included in the annual AMS calculation of the
United States. As a result, such payments are s ubject to reduction commitments applicable to the
United States. Agriculture Agreement Article 6.3 provi des that “a Member shal l be considered to be
in compliance with its domestic support reduction commitments in any year in which its domestic
support in favour of agricultural producers expressed in terms of Current Total AMS does not exceed
the corresponding annual or final bound commitment level specified in Part IV of the Member’s
Schedule”. Where a particular programme exists in favour of agricultural producers within such
Current Total AMS, the Agriculture Agreement is entirely agnostic as to the method of delivery of
such support.

31. The United States is in compliance with its domestic support reduction commitments, of
which support in the form of the Step 2 programme is a constituent part, as provided in the Agriculture
Agreement. Articles 3.1(a) and 3.1(b) of the S ubsidies Agreement apply “except as provided in the
Agreement on Agriculture”. The conformity of th e Step 2 programmes with the terms, object and
purpose of the Agriculture Agreement – and in particular the domestic support reduction commitments
– constitute precisely the kind of exception contemplated in the introductory words of Article 3.
Inasmuch as Articles 3.1(a) and (b) do not apply to Step 2 payments, the Step 2 programme also
cannot violate Subsidies Agreement Article 3.2.

32. US Step 2 Payments Are Not Inconsistent with GATT 1994 Article III:4 : As
contemplated by the terms of the Step 2 programme itself, as well as Annex 3 of the Agriculture
Agreement, the Step 2 programme provides benefits in favour of US upland cotton producers. As
noted above, the Step 2 programme is in conformi ty with Agriculture Agreement Article 6. In
addition, Agriculture Agreement Article 3.1 provid es that the domestic support commitments in Part
IV of each Member’s Schedule are made an inte gral part of GATT 1994. The domestic support
commitments of the United States are therefore an integral part of GATT 1994 itself, and Agriculture
Agreement Article 21.1 expressly states that “the provisions of GATT 1994 . . . shall apply subject to
the provisions of this Agreement”.

33. Pursuant to Article 6.3 of the Agriculture Agre ement, “a Member shall be considered to be in
compliance with its domestic support reduction comm itments in any year in which its domestic
support in favour of agricultural producers expressed in terms of Current Total AMS does not exceed
the corresponding annual or final bound commitment level specified in Part IV of the Member’s
Schedule”. Annex 3, paragraph 7, specifically requires that “[m]easures directed at processors shall be
included” in the calculation of AMS to subject these measures to the domestic support reduction
commitments established for the first time in th e Agriculture Agreement. The Step 2 programme
exists in favour of agricultural producers within such Current Total AMS, and the text of the
Agriculture Agreement does not prohibit any particular form of delivery of such amber box domestic
support.

34. The Agriculture Agreement imposed for the fi rst time rigorous disciplines on agricultural
support. The domestic support reduction commitments of the United States constitute an integral part
of GATT 1994. A coherent reading of the Agricu lture Agreement with the GATT 1994 indicates that
the Step 2 programme does not violate GATT 1994 Article III:4.

35. The Commodity Credit Corporation Export Credit Guarantee Programmes are Not
Export Subsidies: During the Uruguay Round, negotiators did not reach agreement on disciplines on
all areas that had been the subject of negotiations , in several cases agreeing to continue negotiating
after the close of the Round and the entry into force of the WTO Agreement. The simple fact is that
during the Uruguay Round WTO Members did not agree on disciplines to be applicable to export
credits, export credit guarantees, and insurance pr ogrammes. Unable to reach agreement on such
disciplines within the Uruguay Round, Members opted to continue discussions in an appropriate
forum, deferring the imposition of substantive disciplines until a consensus was achieved.

36. Following the entry into force of the WTO Agreement, numerous WTO Members commenced
negotiations under the auspices of the OECD to achieve such internationally agreed disciplines. When
such negotiations failed to achieve an agreement, negotiations on disciplines for export credits and
export credit guarantees have subsequently con tinued both under the reform process contemplated
under Article 20 of the Agriculture Agreement and the mandate of the Doha Ministerial Declaration.

37. The scope and detail of the current agricultur e negotiations as reflected in the Harbinson text
demonstrate that the Members are currently engaged in active negotiations on disciplines for export
credits and credit guarantees. Among the areas under active discussion include disciplines on the
relationship between premiums, term, and long-term operating costs and losses. These discussions
would be unnecessary if existing disciplines applied to such programmes in agriculture. The Panel
should not pre-empt such negotiations.

38. The text of Article 10.2 of the Agriculture Ag reement reflects the deferral of disciplines on
export credit guarantee programmes contemplated by WTO Members. As simply reflected in the
structure and text of the Agriculture Agreement, Members came to no agreement with respect to
substantive disciplines on export credit guarantee prog rammes. Article 10.2 stands in stark contrast to
Article 9.1. Article 9.1 sets forth a list of six very specific practices known to the drafters and deemed
to constitute export subsidies under the Agriculture Agreement. Significantly, the Illustrative List of
Export Subsidies in the Subsidies Agreement exp licitly addresses export credit and credit guarantee
practices in its item (j). Conspicuously absent in Article 9.1 is any provision addressing such
practices, even though US export credit guarantee progra mmes had been in existence for nearly fifteen
years preceding the inception of obligations under the WTO.

39. To include US export credit guarantee programmes within the ambit of Article 10.1 or within
the definition of export subsidy under Article 1(e) of the Agreement would render the work
programme envisioned by Article 10.2 unnecessary. Fu rther, to adhere to th e approach that Brazil
advocates would allow for the utter irrelevance of Article 10.2. Indeed, Brazil unabashedly makes not
one reference to Article 10.2 in its initial submission.

40. CCC Export Credit Guarantees are Not Prohibited Export Subsidies Under the
Subsidies Agreement : Brazil has alleged that the CCC export credit guarantee programmes are
prohibited subsidies under Article 3.1(a) of the S ubsidies Agreement. The very first words of
Article 3.1 of the Subsidies Agreement, however, are: “Except as provided in the Agreement on
Agriculture.” Article 10.2 of the Agriculture Agreement, as noted above, provides for the deferral of
disciplines unless and until internationally agreed disciplines are in fact achieved. Brazil has
conveniently ignored both Article 10.2 and the explicit introductory words of the Subsidies Agreement
Article 3.1 in its first submission. However, Br azil concedes that the e xport credit guarantees are
“exempt from action under ASCM Article 3.1(a) if they fully conform to the provisions of [Agreement

on Agriculture] Part V”. These programmes are in conf ormity with Article 10.2, which is within such
Part V. In addition, Article 21.1 explicitly provides that the Multilateral Trade Agreements in
Annex 1A to the WTO Agreement, which include the Subsidies Agreement, shall apply subject to the
Agriculture Agreement.

41. Brazil alleges that the export credit guarantee programmes constitute an export subsidy for
purposes of the Subsidies Agreement because such programmes fall within item (j) of the Illustrative
List of Export Subsidies. Brazil alleges the Un ited States provides export credit guarantees for cotton
“at premium rates which are inadequate to cover the long-term operating costs and losses of the
programmes” and that a ten-fiscal -year period “fulfils the criterion of being ‘long-term’ within the
meaning of item (j)”. Quite simply, with respect to cotton, for the last 10 fiscal years for which
complete data is available, premiums paid exceed claims paid. As with any other insurance-type
programme, moreover, a proper analysis of “losses” s hould involve the calculation of the net result of
premiums collected, plus claims amounts repaid or rescheduled, minus claims paid. Such calculation
would properly reflect the net position of the programme.

42. For the 10-year period from fiscal year 1993 through fiscal year 2002, premiums collected
total $16,026,202 and losses incurred via clai ms total $4,768,096. Consequently, even before any
post-default recoveries, premiums exceeded claims paid. Of claims incurred, $1,015,365 were
subsequently directly recovered, and an additional $8,175,570 have been rescheduled. Brazil argues
that the United States “must at the very least recover their operating costs by virtue of fees or
premiums collected”. Without conceding that this is the applicable test by which the conformity of
export credit guarantee programmes with WTO oblig ations should be assessed, nevertheless, the US
programmes for cotton satisfy this Brazilian suggestion.

43. Brazil, like any complainant, bears the bur den of establishing that export credit programmes
fall within the terms of item (j). Brazil, the Unit ed States, and the Appellate Body would apparently
agree, however, that a contrario , to the extent a WTO Member pr ovides, as the United States has
already demonstrated with respect to cotton, export credit guarantees at premium rates which do cover
long-term operating costs and losses of the programmes, then it is not an export subsidy within the
meaning of item (j) and the Subsidies Agreement. Premiums collected for US export credit guarantees
in connection with cotton transactions over the last 10 fiscal years exceed long-term operating costs
and losses. Under the criteria of item (j) alone, these programmes do not constitute a prohibited export
subsidy within the meaning of the Subsidies Agreement and are not prohibited under Article 3.1(a) nor
inconsistent with Article 3.2.

44. Brazil Has Failed to Make a Prima Fa cie Case Regarding the FSC Repeal and
Extraterritorial Income Exclusion Act of 2000 : With respect to its claims concerning the FSC
Repeal and Extraterritorial Income Exclusion Act of 2000 (“ETI Act”), in its first submission Brazil
has not presented any evidence regarding the ETI Act itself and does nothing more than “reiterate[] the
claims brought by the European Communities under the [Agriculture Agreement] and the Subsidies
Agreement in US – FSC (21.5) , and ask[] the Panel to apply the reasoning as developed by the panel
and as modified by the Appellate Body in that case mutatis mutandis”. In so doing, Brazil has failed
to make a prima facie case with respect to the ETI Act. Brazil’s approach would put the Panel in the
position of having to violate its obligation under DSU Article 11 to “make 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”. As a result of Brazil’s approach, the Panel is
in no position to exercise its judgment to follow, or decline to follow, prior reports concerning the ETI
Act, nor even in a position to make factual findi ngs concerning the Act. In the absence of a prima
facie case by Brazil, the Panel should reject Brazil’s claims concerning the ETI Act.

I. INTRODUCTION

1. Argentina thanks the Panel fo r this opportunity to present its views as a third party to these
proceedings and will address Brazil's claims1 of inconsistency of the subsidy programmes provided by
the United States to US producers, users and exporte rs of upland cotton, as well as legislation,
regulations and statutory instruments and amendments thereto providing such subsidies.

 In addition, Argentina will discuss the e xport credit guarantee programmes provided by the
United States for exports of cotton and other commodities that are also exported by Argentina.

2. Given the little time available between the receipt on 11 July of the responding party
submission of the United States and the date fixe d for this third-party submission, Argentina will
comment on the US submission at the meeting of the Panel with the parties and third parties scheduled
on 24 July.

3. Firstly, Argentina proposes to argue the absence of US protection under Article 13(b)(ii) and
(c)(ii) of the Agreement on Agricu lture (hereinafter "AoA"), since the United States does not fulfil the
legal requirements for protection against claims under Article XVI of the GATT 1994 and Articles 3,
5 and 6 of the Agreement on Subsidies and Countervailing Measures (hereinafter "SCM Agreement").

4. Secondly, Argentina will argue that the domestic support measures challenged by Brazil are
inconsistent with Articles 5 and 6 of the SCM Agreement to the extent that they cause adverse effects
to the interests of other Members, including Argentina. It will also argue that the United States grants
export subsidies that are prohibited under Article 3(a) and (b) of the SCM Agreement.

5. Nevertheless, Argentina has ta ken note of the Panel's decision of 20 June to express its views,
by 1 September next, on whether the measures at issue satisfy the conditions in Article 13 of the AoA
and to differ its consideration of the claims under Article XVI of the GATT 1994 and Articles 3, 5 and
6 of the SCM Agreement as those provisions are referred to in Article 13 of the AoA.

6. Argentina will therefore address the inconsistenc y of the US subsidies with Articles 5 and 6 of
the SCM Agreement in the submission of 22 September next, providing evidence that the US may not
invoke protection under Article 13 of the AoA since it does not fulfil the conditions for protection
under that provision.

7. Lastly, Argentina maintains that US cotton export subsidies are inconsistent with Articles 3.3,
8 and 10.1 of the AoA, since the Peace Clause cannot be used as a defence in respect of such claims.

II. WORLD COTTON MARKET SITUATION AND IMPACT OF THE US SUBSIDIES
IN ARGENTINA

II.1. WORLD COTTON MARKET SITUATION

8. According to data from the Statement of the 61
st Plenary Meeting of the International Cotton
Advisory Committee (ICAC), held in Ca iro, Egypt, from 20 to 25 October 2002 2, world cotton

1 "Brazil´s First Submission to the Panel regard ing the 'Peace Clause' and Non-Peace Clause Related
Claims", 24 June 2003. (Hereinafter "Brazil's Submission").
2 Representatives of 38 governments and eight international organizations took part in the meeting.
MEMBER GOVERNMENTS: Argentina, Australia, Belgiu m, Brazil, Burkina Faso, Cameroon, Chad, Chinese
Taipei, Colombia, Côte d'Ivoire, Egypt, Finland, France, Germany, Greece, India, Iran, Israel, Italy, Japan,
Republic of Korea, Mali, Netherlands, Nigeria, Pakistan , Paraguay, Philippines, Poland, Russia, South Africa,

production reached a record 21.5 million tons in marketing year 2001/2002, exceeding global
consumption by 1.3 millions tons.

9. Over the same period, world cotton exports increased by 10 per cent to an unprecedented
6.5 million tons, while international cotton prices fell to the lowest average level in 30 years of
US$0.418 per pound (according to Cotlook Index A).

10. The value of world production declined by US$5 billion from the previous season, affecting
the incomes of millions of growers, input suppliers and service providers in unsubsidized countries.

11. Since the mid-1990s, the world cotton economy has been marked by chronic price depression.
Average international cotton prices , adjusted for inflation, are at their lowest since the Great
Depression of 1930, having remained below US$0.60 per pound for the last four consecutive years
(1998/1999 to 2001/2002) against an average of US$0.725 per pound over the past 25 years.

12. According to the ICAC, at 1 July 2003 the average international cotton price in marketing year
2002/2003 was estimated at US$0.56 per pound, still well below the average of the last 30 years.
Under such conditions, even the most efficient producers find themselves operating at a loss, unable to
cover even their production costs. ICAC projections suggest that prices will remain chronically
depressed for the foreseeable future. Forecasts point to a modest recovery in 2003/2004, but prices
will stay within the US$0.50-0.60/lb range until 2015.

II.2. COTTON SITUATION IN THE UNITED STATES

13. As a rule, when prices slump production unde rgoes a similar downturn. However, while
world cotton prices have fallen by 54 per cent since the mid-1990s, the United States has increased its
output and exports.

14. Since 1998, US cotton production has experienced 42 per cent growth from 14 million metric
tons to a record 20.3 million metric tons in 2001.

15. Likewise, at a time of dramatically declining international cotton prices the volume of US
exports has expanded to unprecedented levels, from 946,000 tons in 1998 to 2,395,000 tons in 2002.
3

16. In addition, US cotton production costs are among the highest in the world. According to a
recent ICAC study
4, the cost of production in the United States was US$0.81 per pound of cotton in
marketing year 1999,5 while US producers market prices fell from US$0.60 to US$0.30 per pound.

17. The only possible explanation how the Unit ed States bridged the widening gap between
production costs and market prices is subsidies, for without them many US producers would have been
compelled to cease production.

18. Hence the factor underlying the world cotton market crisis is the US subsidies. As Brazil
points out at paragraph 2 of its Submission, it was the subsidies that enabled the United States to

Spain, Sudan, Switzerland, Syria, Tanzania, Togo, Turkey, Uganda, United Kingdom, United States, Uzbekistan
and Zimbabwe.
3 According to data from "Cultivating Poverty: The Impact of U.S. Cotton Subsidies on Africa", Oxfam
Briefing Paper 30, 27 September 2002 (See Exhibit Bra-15) and ICAC Secretariat.
4 "Cotton: World Statistics". Bulletin of the International Cotton Advisory Committee,
September 2002. (Exhibit Bra-9).
5 As stated by Brazil at paragraph 32 of its Submi ssion, the cost of productio n in Argentina averaged
59 cents/lb of cotton, according to the ICAC study (See Exhibit Bra-9).

increase production and exports while market prices remained far below the cost of production over
marketing years 1999 to 2002.

19. The total value of US cotton subsidies during this period – as stated at paragraph 3 of Brazil's
Submission – amounted to almost US$13 billion and the average cotton subsidization rate was 95 per
cent.
6

20. While there are a great many cotton producing countries, four of them (China, the
United States, India and Pakistan, in descending orde r) alone account for two thirds of world cotton
production. Most of the cotton is used in the produci ng country itself. The great exception to this rule
is the United States, which exports over half of the cotton it produces
7 and is the world's leading
exporter. This is why the level of subsidization in the United States is so important as far as the world
cotton market is concerned.

II.3. COTTON SITUATION IN ARGENTINA

21. Argentina's cotton sector is a substantial source of employment and income for many of the
country's provinces. The Argentine cotton sector has been contracting since 1998, as a result of
declining international prices. In 2001/2002, cultivated area and production plummeted to historic low
levels. Cultivated area has shrunk by 76 per cent since 1998, with 174,000 hectares planted to cotton,
and production has fallen by 63 per cent compared to 1998, with an estimated 73,000 tons of cotton
fibre produced.
8

22. According to the Argentine Ministry of Agriculture, Livestock, Fisheries and Food,
provisional estimates as at 13 June 2003 for marketing year 2002/2003 were 157,930 hectares of
cultivated area and 60,000 tons of cotton produced.

23. The decline is even more significant when considered in terms of a 10-year annual average,
record prices in 1994/1995 (US$0.9275/lb Cotlook A Index) having led to record figures for both
cultivated area and production (1,010,000 hectares and 437,000 tons of cotton fibre in 1995/1996).

24. The contraction of the cotton sector started in 1997/1998. Since then, steadily falling prices
and increased US government support have gradually driven raw cotton
9 producer prices down to their
lowest level (US$192/ton) since 1991/1992, which in turn has entailed constant reductions in
cultivated area and production.

25. Although domestic consumption is dwindling, Argentine exports of cotton fibre set another
historic low record of 18,366 tons in 2001/2002. Data updated at 31 May 2003 show even worse
results, since exports for marketing year 2002/2003 barely reached 2,000 metric tons.

(a) Impact of low international prices on Argentine production

26. Over the last three years, low international prices – because of the huge US subsidies – have
impacted heavily on producers' decisions, with only 309,287 cultivated hectares, representing a
58 per cent reduction from a 10-year annual average (1989/1990 to 1998/1999). This has led to sharp
reductions in cotton fibre production. Over th at same three-year period (1999/2000 to 2001/2002),
production averaged 122,883 tons – a 62 per cent fall from the annual average of 327,360 tons

6 USDA Fact Sheet: Upland Cotton (January 2003). (See Exhibit Bra-4).
7 As indicated at paragraph 10 of Brazil's Submission, domestic cotton consumption in the United States
is dwindling steadily.
8 "Argentina: Economic Injury to the Cotton Sector as a Result of Low Prices", Working Group on
Government Measures of the International Cotton Advisory Committee, 2002.
9 Seed cotton; unginned.

between 1994/1995 and 1998/1999. Worse still, production in 2001/2002 was estimated at
69,810 tons and in 2002/2003 at 60,000 tons, against 163,000 tons in 2000/2001.

27. This collapse of the Argentine cotton sector is reflected in the high level of indebtedness of
producers estimated at US$600 million and equivalent to twice the size of agricultural GDP of
Argentina's largest cotton producing province.

28. The table below shows the direct relationship between the area of cultivated and harvested
cotton and fibre production in Argentina, and tre nds in world cotton prices according to Cotlook A
Index.

Season Cotton area
(hectares)
Fibre production World price
A Index
 Cultivated Harvested (Metric tons) (US cents/lb)
1995/96 1,010,000 969,400 437,000 85.60
1996/97 955,600 887,140 338,000 78.55
1997/98 1,133,500 877,900 311,000 72.20
1998/99 751,000 639,700 200,000 58.90
1999/00 345,950 332,100 134,000 52.80
2000/01 407,980 384,850 165,000 57.20
2001/02 173,930 170,000 73,000 41.80
2002/03* 157,930 147,410 60,000 55.30
* Estimate

TRENDS IN ARGENTINE COTTON PRODUCTION
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1990-
91
1991-
92
1992-
93
1993-
94
1994-
95
1995-
96
1996-
97
1997-
98
1998-
99
1999-
00
2000-
01
2001-
02
Marketing Year
Hectares
Series1
Series2

(b) Impact of low international prices on employment

29. Total employment in raw cotton production in Argentina amounts to 93,470 workers; this
figure includes 32,060 cotton producers and is based on an average harvested area of 810,828 hectares.
The ginning sector employs 3,946 workers and the marketing and input supply chain represents 12,550
additional jobs.

30. Between 1999/2000 and 2001/2002, employment in the cotton sector decreased to an average
of 70,400 workers, i.e. a reduction in employment of 64 per cent. These figures were obtained from
the official employment records of registered workers but they are probably underestimated.
According to private estimates, there are 50,000 non -registered workers, which would increase labour
loss to 102,000 jobs.

31. Argentina's cotton production is concentrated in 11 provinces and, according to a 1999 World
Bank study, 56.6 per cent of the population in these provinces live under the poverty line and 18.2 per
cent below the indigence line. The same study shows that 36.1 per cent of Argentina's population live

under the poverty line and 8.6 per cent below the indi gence line, which reflects the higher level of
poverty in the cotton producing provinces.10

(c) Impact of low international prices on income

32. Between 1999/2000 and 2001/2002, average raw cotton production
11 was 652,872 tons lower
than the 1994/1995 to 1998/1999 average. Using an average price received by producers of
US$358/ton
12 between 1994/1995 and 1998/1999, annual gross revenue has dropped by
US$255 million over the past three years.

(d) Impact of low international prices on the value and volume of Argentine exports

33. In marketing year 2002/2003, planted area shrank to a mere 157,930 hectares, its lowest level
in the last 66 years, and production will not even succeed in meeting domestic demand. Even in
circumstances like these, it might have been possible to generate sufficient export supply had
international prices not been artificially depressed.

34. It should be emphasized that in 1996 Argentin a exported 70 per cent of its production, ranking
that year as the world's fourth largest exporter.

35. The table below shows the trends in Argentine cotton exports.

TRENDS IN ARGENTINE COTTON EXPORTS

Years Volume
(tons)
FOB value
(US$ millions)
Argentina's per cent share of
world exports
1995 243,474 432.8 4%
1996 357,447 497.0 6%
1997 214,904 332.3 3.6%
1998 177,025 224.3 3.2%
1999 180,897 177.9 3%
2000 53,637 53.2 0.9%
2001 89,262 72.8 1.5%
2002 18,366 11.9 0.1%
2003* 1,985 1.6 --
*(Estimate at 31 May 2003)

10 Id.
11 Seed cotton; unginned.
12 For a quality equal to a C-1/2 grade.

36. In chart form, Argentine cotton exports (tons) since 1995 show the following trends:
0
50000
100000
150000
200000
250000
300000
350000
400000
1995 1996 1997 1998 1999 2000 2001 2002 2003*

37. This chart shows – as does the table below – a direct relationship between the decline in
international cotton prices, which began in 1996/ 1997, along with the implementation of the 1996 US
Farm Act, and the collapse of the Argentine cotton economy.

Years Argentine cotton exports
(FOB value in US$ millions)
Cotlook A Index
(US$/lb)
1996 497.0 0.7855
1997 332.3 0.7220
1998 224.3 0.5890
1999 177.9 0.5280
2000 53.2 0.5720
2001 72.8 0.4180
2002 11.9 0.5530
2003* 1.6 ---

38. The following chart clearly illustrates the direct relationship (except for the year 2000)
between Argentine exports and international cotton prices.

0
100
200
300
400
500
1996
1997
1998
1999
2000
2001
Argentine cotton exports (f.o.b. value in
US$ millions)
0
0.2
0.4
0.6
0.8
1996
1997
1998
1999
2000
2001
Cotlook A Index (US$/lb)

III. LOSS OF PROTECTION UNDER THE PEACE CLAUSE: ARTICLE 13 OF THE
AGREEMENT ON AGRICULTURE (AOA)

39. As stated in paragraph 6 a bove, Argentina will address the inconsistency of the United States
subsidies with Articles 5 and 6 of the SCM Agre ement in the 22 September submission. On that
occasion, Argentina will explain why the United St ates cannot seek the protection of Article 13 of the
AoA because of non-compliance with the legal requirements for protection under that provision.

PEACE CLAUSE DEFENCE SUBJECT TO CONDITIONS

40. The "Peace Clause" – Article 13 of the Ao A – precludes actions against a Member's
agricultural subsidies up to 1 January 2004 if such measures comply with certain legal requirements.

41. As stated by Argentina in its Third Party Initial Brief:

 "… a textual analysis of Arti cle 13 of the AoA reveals that "actions"… can only be precluded
if all conditions established in paragraphs (b) (ii) or (c) (ii) of the referred Article 13 are
met".13 (Emphasis added).

 …

 " … 'Exempt from actions' means that a finding of inconsistency with Article XV1 of GATT
1994 or Articles 3, 5 and 6 of the SCM Agreement will not be possible if the legal
requirements for the exemption are fulfilled . The immediate context of the term 'exempt from
actions' – i.e., paragraphs (b) and (c) – confirms this interpretation since that exemption
requires a particular threshold, i.e. that domestic support measures and export subsidies
'conform fully' (to different provisions of the AoA)".
14

 …

 " … A different interpretation would imply giving the measures allegedly covered by the
Peace Clause a character of absolute immunity, independent of whether the legal requirements
established in Article 13 are fulfilled or not. This would contradict the principle of in dubio
mitius, constituting a more onerous interpretation of the treaty provisions".
15

 …

 " … Indeed, the key words in Article 13 (b) (ii) and (c) (ii) of the AoA are "that conform fully"
and "provided that" and "that conform fully" , respectively. These words imply that the
exception is not absolute, but rather subject to the fulfilment of certain conditions … ".
16

BURDEN OF PROOF WITH RESPECT TO TH E CONDITIONS FOR THE PEACE CLAUSE
DEFENCE

42. As Argentina stated in its Third Party Initial Brief, the defence under Article 13 of the AoA is
in the nature of an exception (affirmative defence).

43. It follows that in accordance with the WTO rules on the burden of proof (laid down by the
Appellate Body in (United States – Shirts and Blouses from India), the burden is on the party invoking
the exception to show that its use is justified. In the present case, it is clearly for the party invoking
the protection of Article 13 of the AoA to show that the conditions stipulated in that Article are
satisfied.

44. Accordingly, for the United States domestic support measures to be exempt from actions
based on Article XVI.1 of GATT 1994 or Articles 5 and 6 of the SCM Agreement, the United States
must show that:

13 See Argentina's Third Party Initial Brief of 10 June 2003, paragraph 3.
14 Ibidem paragraph 5.
15 Ibidem, paragraph 6.
16 Ibidem, paragraph 8.

 - The domestic support measures for cotton conform fully to the provisions of Annex 2
to the AoA (or belong in the "green box", at the risk of being included in the Current
Total AMS in accordance with Article 7.2 (a) of the AoA), or that

 - the domestic support measures that do not belong in the "green box" and grant support
to cotton do not exceed the support decided during the 1992 marketing year.

45. Likewise in order for the export subsidies granted by the United States to be exempt from
actions based on Article XVI of GATT 1994 and Articles 3, 5 and 6 of the SCM Agreement the
United States must show that these export subsidies conform fully to Articles 8 to 11 of the AoA
(Part V).

III.1 LOSS OF PEACE CLAUSE PROTECTION IN RELATION TO DOMESTIC SUPPORT
MEASURES: ARTICLE 13 (B) (II) OF THE AoA

46. In particular, in relation to domestic support measures, Article 13 (b) (ii) of the AoA states
that:

 "During the implementation period, notwithstanding the provisions of GATT 1994 and the
Agreement on Subsidies … :

 … domestic support measures that conform fully to the provisions of Article 6 of this
Agreement including direct payments that c onform to the requirements of paragraph 5
thereof, as reflected in each Member's Sche dule, as well as domestic support within de
minimis levels and in conformity with paragraph 2 of Article 6, shall be:

 …

 exempt from actions based on paragraph 1 of Arti cle 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; …" (emphasis added).

47. In Argentina's opinion, in th e present case, for lack of a specific WTO notification or known
US laws or regulations, the support "decided during the 1992 marketing year" by the United States
should be considered to be the non-"green box" dome stic support granted by that country to cotton
during the 1992 marketing year.

48. Argentina agrees with Brazil that the level of subsidies granted by the United States to its
cotton sector during marketing years 1999 to 2002 exceeded that of 1992, thereby depriving the
United States of Peace Clause protection, for non-compliance with the legal requirements of Article 13
(b) (ii) of the AoA.

49. In this respect, th e Oxfam Briefing Paper (" Cultivating Poverty : The impact of USCotton
Subsidies on Africa")
17 states that:

 "The US has lost this protection (the Peace Clause protection) by virtue of the fact that the
level of subsidies it provided in 2001 was double that provided in 1992".

 …

17 See Exhibit Bra – 15.

 "Every acre of cotton farmland in the US attracts a subsidy of $230, or around five times the
transfer for cereals. In 2001/02 farmers reaped a bumper harvest of subsidies amounting to
$3.9bn – double the level in 1992. This increase in subsidie s is a breach of the "Peace
Clause" in the WTO Agreement on Agriculture …"

 …

 "The United States accounts for approximatel y one-half of the world's production subsidies
for cotton. In 2001/02 the value of US cotton production amounted to $3bn at world market
prices. In the same year, the value of outlays in the form of subsidies to cotton farmers by
the USDA's Commodity Credit Corporation (CCC) was $3.9bn. In other words, cotton was
being produced at a net cost to the American economy".

50. The domestic support measures which, in Argentina's view, do not enjoy Peace Clause
protection under Article 13 (b) (ii) are the following programmes established in the United States
legislation as described by Brazil in it s First Submission: Deficiency Payments
18, Loan Deficiency
Payments19, Production Flexibility Contract Payments20, Direct Payments21, Market Loss Assistance22,
Counter-Cyclical Payments23, Marketing Loan Gains 24, Crop Insurance Subsidies 25, Step 2 Domestic
Payments26, and Cottonseed Payments27.

51. It should be pointed out that in the cons ultations held on 3, 4 and 19 December 2002 – in
which Argentina was joined – in relation to the above-mentioned programmes Argentina requested the
United States for information on the amount of support granted to cotton producers in the years 1999,
2000 and 2001, considering that the last domestic support notification had been for the year 1998
28.

52. In this connection, the United States confined itself to pointing out that various answers to the
Argentine questions could be found in US domes tic support notifications in the process of being
submitted to the Committee on Agriculture, without specifying what these answers were or when these
notifications would be made.

The programmes Production Flexibility Contract (P FC), Direct Payment (DP) and Counter-Cyclical
Payment (CCP) are non-"green box"

53. As Brazil shows in its Submission, the PFC, DP and CCP programmes are not subsidies that
can be classified as "domestic support measures that conform fully to the provisions of Annex 2" of
the AoA.

54. Accordingly, the amounts granted to cotton producers under these programmes must be
treated as domestic support in calculating total support under Article 13(b)(ii).

55. These three programmes are inconsistent with Annex 2 of the AoA, inter alia, because they
are not in accordance with the provisions of paragraph 6 (b) of that Annex in as much as the amount of

18 Submission by Brazil, paragraphs 45 to 47.
19 Ibidem, paragraphs 70 to 78 and Exhibits Bra – 28, Bra – 29 and Bra – 36.
20 Ibidem, Sections 2.6.1 and 3.2.6.
21 Ibidem, Sections 2.6.2 and 3.2.7.
22 Ibidem, Section 2.6.3.
23 Ibidem, Sections 2.6.4 and 3.2.8.
24 Ibidem, Section 2.6.5.
25 Ibidem, Section 2.6.6
26 Ibidem, Section 2.6.8
27 Ibidem, Section 2.6.10.
28 It should be noted that after the consultations the United States notified the Committee on Agriculture
of the amount of domestic support for the year 1999 (G/AG/N/USA/43; Exhibit Bra – 47).

payments is related with the type of production undertaken by the producer in years after the base
period.

56. In this respect, Argentina agrees with Brazil that the term "type … of production …" means
the type of crop planted and not the production method employed.

Failure of the United States to comply with its notification obligations

57. Considering (i) that the last domestic support notification available is that for the year 1999
29
and (ii) the delay of more than three years, since the end of that year, in submitting a notification,
Argentina wishes to make the following points:

58. Argentina considers that the United States has failed to fulfil its notification obligations under
Article 18.2 of the AoA, the Decision on Notification Procedures adopted on 15 December 1993 and
the Notification Requirements and Formats (G/AG/2) adopted by the Committee on Agriculture on
8 June 1995.

59. This failure to comply with notification obligations makes it very difficult to verify the
domestic support provided from 2000 onwards as regards compliance with the commitments under
Article 3.2 of the AoA, that is to say, whether or not the United States' non-"green box" subsidy
programmes remain within the limits to which it is committed in its Schedule. The lack of notification
also makes it difficult to verify whether the domestic support measures "conform fully to Article 6" of
the AoA.

60. It is also difficult to review the implementation of the AoA by the United States under
Article 18.2 in relation to the categorization of its subsidies, in particular whether some of them are
"green box" or not.

61. The seriousness of failure to comply with th e obligation to inform Members is such that
paragraph 7 of Annex V to the SCM Agreement ac tually sanctions instances of non-cooperation by
requiring the Panel to draw adverse inferences.

62. Argentina considers that this failure should be taken into account in deciding whether the
United States' domestic support is consistent with Article 3.2 of the AoA and whether that domestic
support should be included among the subsidies of Annex II to the Agreement.

THE US LEVELS OF DOMESTIC SUPPORT FOR COTTON EXCEED THE 1992 LEVEL

63. Argentina agrees with Brazil's figures in para graphs 144, 148 and 149 of its First Submission
showing that the United States budgetary outlays for domestic support for the cotton sector have been
as follows (in millions of dollars), on the basis of information supplied by the USDA itself
30:

29 G/AG/N/USA/43 (Exhibit Bra-47).
30 See Exhibits Bra-6, Bra-76, Bra-4, Bra-57, Bra-55, Bra-47, and footnotes 301 and 321.

Domestic
Support
Marketing
Year 1992
Marketing
Year 1999
Marketing
Year 2000
Marketing
Year 2001
Marketing
Year 2002*
Loan
Deficiency
Payments
268 685 152 743 206
31
Marketing
Loan Gains
476 860 390 1.763 602 32
(Total
Marketing
Loan
Payments)
--- --- --- --- 952
33
Deficiency
Payments
1,017 --- --- --- ---
Production
Flexibility
Contract
Payments
34
--- 616 575 474 ---
Direct
Payments35
--- --- --- --- 523
Step 2
Payments
207 422 236 196 317
Crop
Insurance
Payments
26.5 170 161 263 194
Market Loss
Assistance
Payments
--- 613 612 654 ---
Counter-
Cyclical
Payments36
--- --- --- --- 1,077
Cottonseed
Payments
--- 79 185 --- 50
TOTAL 1,994.5 3,445 2,311 4,093 3,113
 * The information relating to United States support for cotton during marketing year 2002 is
not yet complete as the marketing year does not end until 31 July 2003. Nevertheless, Argentina has
used the best available evidence provided by Brazi l in paragraph 149 of its Submission using partial
USDA data and estimates based on criteria and provisions of support under the 1996 FAIR Act.

64. Thus, the subsidy levels for cotton in 1999, 2000, 2001 and 2002 are considerably in excess of
the level for 1992 and, as already pointed out, the Unit ed States therefore lacks a basis for its claim,

31 See Exhibit Bra-55.
32 See Exhibit Bra-55.
33 See footnote 338 of Brazil's Submission.
34 According to paragraph 45 of Brazil's Submission , PFC payments replaced the Deficiency Payment
Programme that had existed for years and had been renewed in the 1990 FACT Act.
35 As indicated by Brazil in paragraph 49 of its Submission, direct payments began to be paid in
marketing year 2002 with the passage of the new Farm Act in May 2002 (2002 FSRI Act) and will be paid until
the end of marketing year 2007, in place of the Production Flexibility Contract payments.
36 As indicated by Brazil in paragraph 63 of its Submission, the 2002 Farm Act (2002 FSRI Act)
institutionalized the market loss assistance payments that the United States enacted in marketing years
1998- 2001 with a new programme of counter-cyclical payments up to the end of marketing year 2007.

under Article 13(b)(ii) of the AoA, that its domestic support measures for cotton are exempt from
actions based on Article XVI.1 of GATT 1994 or Articles 5 and 6 of the SCM Agreement.

III.2 LOSS OF PEACE CLAUSE PROTECTION IN RELATION TO EXPORT SUBSIDIES:
ARTICLE 13(c)(ii) OF THE AoA

65. With respect to export subsidies, Ar ticle 13(c)(ii) of the AoA states that:

 "During the implementation period, notwithstanding the provisions of GATT 1994 and the
 Agreement on Subsidies … :

 …

 export subsidies that conform fully to the provis ions of Part V of this Agreement, as reflected
in each Member's Schedule, shall be:

 …

 exempt from actions based on Article XVI of GATT 1994 or Articles 3, 5 and 6 of the
Subsidies Agreement". (Emphasis added).

66. In relation to export subsidies, the Peace Clau se could only be invoked by the United States if
its export subsidies conformed fully to the provisions of Part V of the AoA, that is, Articles 8-11 of the
AoA.

67. According to Article 8 of the AoA, "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".

68. Thus, as Brazil asserts in paragraph 222 of its Submission, the United States can provide
export subsidies for agricultural products if it satisfies two conditions: (i) has a reduction commitment
for the product in question and (ii) the amount of export subsidies provided does not exceed this
reduction commitment.

69. In this case, the measures that Argentina cons iders to be inconsistent with WTO rules are:

 I. the export subsidies for US (upland) cott on established in the United States legislation
under the Step 2 Export Program
37;

 II. the export credit guarantee programmes for cotton and other products, General Sales
Manager 102 (GSM 102), General Sales Manager 103 (GSM 103), and Supplied
Credit Guarantee Programme (SCGP), as described by Brazil in its First
Submission
38; and

 III. the cotton export subsidies granted under the FSC Repeal and Extraterritorial Income
Act of 2000(ETI Act).

37 CFR 1427.103 to 1427.107.
38 Submission by Brazil, sections 2.6.7, 4.1 and 4.1.1 and 2.6.9.

Inconsistency with the provisions of Part V (Articles 8 to 11) of the AoA

70. Article 3.3 of the AoA prohibits the granting of export subsidies in respect of agricultural
products not specified in Section II of Part IV of a Member's Schedule
39. This provision forms part of
the reference to "unconformity with this Agreement and with the commitments as specified in that
Member's Schedule" in Article 8 of the AoA.40

71. In fact, Schedule XX of the United States, Part IV (Agricultural Products: Commitments
Limiting Subsidization), Section II (Export Subsid ies: Budgetary Outlay and Quantity Reduction
Commitments)
41, does not specify cotton among the products subject to commitments.

72. Consequently, because its export subsidies are not in conformity with the provisions of Part V
of the AoA, the United States has no basis for invoking, under Article 13 (c) (ii) of the AoA, the
exception to the effect that its cotton export subsidies are exempt from actions based on Article XVI of
GATT 1994 or Articles 3, 5 and 6 of the SCM Agreement.

73. Moreover, as described in Section IV of this submission, neither the US (upland) cotton export
subsidies established in the United States legislation under the Step 2 Export programme, nor the
export credit guarantee programmes for cotton and other products General Sales Manager 102 (GSM
102), General Sales Manager 103 (GSM 103) and Supplied Guarantee Programme (SCG), nor the
subsidies granted to cotton exports under the FSC Repeal and Extraterritorial Income Act of 2000
(ETI Act) are in conformity with Part V of the AoA since they are inconsistent with Articles 3.3, 8 and
10.1 of the AoA.

IV. INCONSISTENCY WITH ARTICLES 3.3, 8 AND 10.1 OF THE AoA AND ARTICLE 3
OF THE SCM AGREEMENT

74. In accordance with paragra ph 7 above, Argentina maintains that the United States cotton
export subsidies are inconsistent with Articles 3.3, 8 and 10.1 of the AoA.

75. As already pointed out, Schedule XX of the Un ited States, Part IV (Agricultural Products:
Commitments Limiting Subsidization), Section II (Export Subsidies: Budgetary Outlay and Quantity
Reduction Commitments)
42, does not specify cotton among the products subject to commitments.

76. Consequently, as noted by Brazil in paragra ph 237 of its Submission, any export subsidy
provided by the United States to its cotton industry wi ll be inconsistent with Articles 3.3 and 8 of the
AoA. In other words, as it has not specifie d cotton as a product subject to subsidy reduction
commitments, the United States has no right to grant this type of support for the product in question,
any support granted or proposed constituting a breach of the provisions of Articles 3.3 and 8 of the
AoA:

39 Article 3.3 of the AoA reads as follows: "…a Member shall not provide export subsidies listed in
paragraph 1 of Article 9 in respect of the agricultural pr oducts or groups of products specified in Section II of
Part IV of its Schedule in excess of the budgetary outlay and quantity commitment levels specified therein and
shall not provide such subsidies in respect of any agricultural product not specified in that Section of its
Schedule". (Emphasis added).
40 Article 8 of the AoA reads as follows:
"Each Member undertakes not to provide export subsid ies otherwise than in conformity with this
Agreement and with the commitments as specified in that Member's Schedule".
41 See Exhibit Bra-83.
42 See Exhibit Bra-83.

ARTICLE 10.3 OF THE AoA

77. Argentina wishes to point out that, in acco rdance with Article 10.3 of the AoA and the
Appellate Body's interpretation in " Canada - Dairy Products: Article 21.5 DSU (II)
43", it is for the
United States to show that quantities exported in excess of the export subsidy reduction commitment
level have not been subsidized.

78. Figures 18 and 19 in paragraphs 265 and 266 of Braz il's submission clearly indicate that in the
case of both cotton and other agricultural commodities exports of which qualify for the export credit
guarantee programmes GSM 102, GSM 103 and SCGP United States exports during the year 2001
were well in excess of the reduction commitments in its Schedule.

79. Consequently, the United States bears the bur den of proving that both for cotton and for other
products that benefit from export credit guarantee programmes the export segment in excess of the
scheduled reduction commitment has not received any export subsidy.

THE INDIVIDUAL EXPORT SUBSIDY PROGRAMMES

- Step 2 Export Programme

80. Referring to Brazil's observations in para graphs 244 and 245 of its Submission, Argentina
agrees that Section 1207(a) of the Farm Act of 2002 ( 2002 FSRI Act )
44 – establishing the Step 2
Export Programme – constitutes a per se violation of AoA Articles 3.3 and 8 as it is a mandatory
provision, in the same way that the Step 2 Export Programme also constitutes a per se violation of
those provisions because of its mandatory nature.

81. Both the corresponding section of the 2002 FSRI Act and the provisions of Section
1427.100 ff. 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.

82. 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. There can be no doubt that whenever the former is higher than the latter
an export subsidy is present in as much as the existence of these payments enables the US product to
compete artificially with the lower-cost products of more efficient producers. All these aspects are
dealt with in extenso by Brazil in its Submission dated 24 June 2003
45, and Argentina therefore
considers it unnecessary to dwell on a description of the operational details of the programme itself.

83. What Argentina wishes to make clear is the fact – to which attention has already been drawn
by Brazil – 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.

84. In " US EXPORT CREDITS: Denials and Double Standards "46, published by Oxfam America,
it is noted that:

"In the case of cotton, developing countries are clearly losing out because of the
unfair competitive advantage given to US cotton exports. For the marketing year

43 WT/DS103/AB/RW2, WT/DS113/AB/RW2, adopted17 January 2003.
44 See Exhibit Bra-29.
45 Submission by Brazil, Sections 4.1, 4.1.1, 4.1.2, 4.2 ff.
46 Oxfam American Briefing Note, March 2003.

2001/2002, US subsidies to cotton amounted to $4 billion, including, among other
programs, export credits. In the 2001/2002 marketing year, the transfer linked with
Step 2 cotton subsidies ranged from 0-7 cents per pound, or up to 18 per cent of the
world market price. Total export subsidization under this heading was around $197
million in 2001".
85. Insofar as the United States does not specify Upland Cotton in its Schedule of Commitments
(see paragraphs 72 and 75 above) and this type of subsidy is granted to cotton under the Step 2
programme, any provision in the legal texts with respect to the granting of such a subsidy makes those
texts inconsistent per se with Articles 3.3 and 8 of the AoA, while for the same reason any sum
distributed, budgeted or provided for under this progr amme constitutes a prohibited subsidy within the
meaning of Article 3 of the SCM Agreement, which expressly establishes a reservation in respect of
the Agreement on Agriculture.

- The programmes GSM 102, GSM 103 and SCGP:

86. In its submission of 24 June, Brazil establ ishes unequivocally that the US export credit
guarantee programmes constitute export subsidies. For this purpose Brazil carries out a combined
analysis of the provisions of the AoA and the SCM Agreement, while also basing its arguments on the
relevant WTO case-law
47.

87. Argentina agrees with the Brazilian analysis and therefore considers it unnecessary to repeat
the description of the operational programmes or the analysis of their legal coverage under the
Agreement on Agriculture and the SCM Agreement. Suffice it to note that Argentina also considers
that these programmes constitute export subsidies under item (j) of the Illustrative List in Annex I to
the SCM Agreement – in as much as the export credit guarantees are granted " at premium rates which
are inadequate to cover the long term op erating costs and losses of the programmes " – thereby
resulting in a violation of the provisions of Article 10.1 of the AoA.

88. At the same time, Argentina wishes to emphasi ze the impact and distorting effect on trade of
these export credit guarantees.

89. The export credit guarantee programmes provi de incentives for exports for United States
agricultural products, in this case cotton and other agricultural products, and the credits are granted on
terms more favourable than those available on the market. This situation is clearly reflected in
paragraphs 275 to 286 of Brazil's First Written Submission and further illustrated by the Oxfam study
"US EXPORT CREDITS: Denials and Double Standards"
48 which on page 3 states:

" … those favourable conditions include lower interest rates, a longer loan repayment
period, a smaller down payment, less freque nt payments per year and/or the virtual
waiver of a fee or premium designed to provide the US government with adequate
protection against potential defaults".
90. Likewise, a study carried out by the OECD in 2000, in which the effects of export subsidies
granted by various countries are evaluated, indicates that the United States credit guarantee
programmes are the most trade-distorting of all thos e analyzed, in as much as the premiums paid by
the beneficiaries are too low to cover the high level of the guarantees granted for long term credits.
49

47 Submission by Brazil, Section 4.2.1.4.2.
48 Oxfam America Briefing Note, March 2003.
49 "An analysis of officially supported export credits in agriculture", OECD, 2000.

91. According to the " Summary of FY 2002 Export Credit Guarantee Programme Activity ",
published on the Federal Agricultural Service (FAS) Website
50, the percent shares of export credit
guarantee applications, by commodity, for fiscal year 2002 were as follows:

Applications for export credit guarantees, by commodity,
Fiscal year 2002, Percent share
 feed grains
27%
vegetable oils
4%wheat
21%
rice
3%
protein meals
11%
oilseeds
22%
cotton and cotton
products
7%
other
5%

92. Thus, as the United States does not have e xport subsidy reduction commitments specified in
its Schedule for cotton and other products such as soya, maize (corn) and oilseeds and given the
existence of United States export subsidies for co tton and other products, the United States is in
violation of Articles 3.3, 8 and 10.1 of the Agreement on Agriculture.

93. Finally, it should be noted that the GSM 102, GSM 103 and SCGP programmes can be
granted both to products for which reduction commitments exist and to those for which no such
commitments exist
51. With the respect to the products for which there are reduction commitments, the
amounts exported by the United States are well in excess of the levels of those commitments. 52
Accordingly, Argentina considers – as indicated by Brazil53- that the burden lies with the United States
to prove that its excess exports did not benefi t from export subsidies, including export credit
guarantees.

94. Moreover, since the GSM 102, GSM 103 and SCGP programmes are intended to promote
exports of cotton, confirmation of their export subsidy component would imply the presence of a
subsidy prohibited within the meaning of Article 3.1 (a) of the SCM Agreement and a violation of
Article 10.1 of the AoA –

50 "US EXPORT CREDITS: Denials and Double Standards", Oxfam America Briefing Note,
March 2003.
51 See Exhibit Bra-84, pages 9, 12 and 17, and Exhibit Bra-73.
52 Submission by Brazil, paragraphs 265 and 266.
53 Submission by Brazil, paragraph 268.

- ETI ACT

95. With respect to the export subsidies granted to cotton under the ETI Act, which provides tax
exemptions for US exporters who sell products outside the United States, Argentina refers to the fact
that this Act was declared inconsistent with Article 3.1 (a) of the SCM Agreement and Articles 10.1
and 8 of the AoA in the "United States - FSC
54" dispute.

V. CONCLUSION

96. For the above reasons Argentina considers th at both the domestic support measures and the
export subsidies granted by the United States to its cotton sector and called into question in these
proceedings do not qualify for the protection provided unde r Article 13, paragraphs (b) (ii) and (c) (ii)
of the Agreement on Agriculture.

97. Furthermore, the export subsidies for cotton and other products provided for in the United
States legislation in the form of export credit guarantees (GSM 102, GSM 103, and SCGP) are
likewise not protected by Article 13 (c) (ii).

98. Argentina also maintains that the subsidies fo r cotton exports provided for in the United States
legislation are inconsistent with Articles 3.3, 8 and 10.1 of the Agreement on Agriculture.

54 WT/DS108/AB/R adopted on 20 March 2000.

I. INTRODUCTION

1. Australia welcomes the opportunity to present its views in this proceeding on US subsidies
for upland cotton.

2. Australia notes that this dispute is the first to involve the interpretation and application of
Article 13 of the Agreement on Agriculture (AA), the so-called “peace clau se”. As such, this dispute
has particular systemic as well as commercial significance.

3. In this third party Submis sion, Australia addresses:

I. the nature of AA Article 13 as an affirmat ive defence, and the meaning of Article
13(b)(ii);

II. whether “production flexibility contract payments” and their successor “direct
payments” may be claimed as “green box” support within the meaning of AA
Annex 2;

III. whether s.1207(a) of the Farm Security a nd Rural Investment Act of 2002 (“the FSRI
Act”) mandating payments to exporters of US cotton (“Step 2” export payments) is
inconsistent with AA Articles 3.3 and 8 and thus is also inconsistent with Article 3 of
the Agreement on Subsidies and Countervailing Measures (the SCM Agreement); and

IV. whether s.1207(a) of the FSRI Act mandating payments to domestic users of US
cotton (“Step 2” domestic payments) is inconsistent with Article 3 of the SCM
Agreement.

4. Because of the very limited time that has been available to cons ider the First Written
Submission of the United States, Au stralia will address issues raised in that Submission in its oral
statement before the Panel.

II. ARTICLE 13 OF THE AG REEMENT ON AGRICULTURE

A. AA ARTICLE 13 IS IN THE NATURE OF AN AFFIRMATIVE DEFENCE AND THE UNITED
STATES HAS THE BURDEN OF PROOF

5. Australia agrees with Brazil that AA Article 13 is in the nature of an affirmative defence and
that the United States has the burden of proof on the question of whether th e measures at issue fully
conform with the applicable conditions of Article 13.

6. Like Article XX of the General Agreement on Tariffs and Trade (“GATT”), AA Article 13
“does not establish any ‘positive obligations’ relevant to determining the proper scope of the
obligations under [the specified provisions of GATT 1994 and the SCM Agreement] . Instead, it sets
out circumstances in which Members are entitled to ‘adopt or maintain’ measures that are inconsistent
with the obligations imposed under other provisions of [the GATT 1994 and the SCM Agreement]”.
1

7. AA Article 13 does not of itself impose any obligation on a Member granting domestic
support measures falling within Annex 2 or Article 6 or granting export subsidies falling within Part
V of the Agreement on Agriculture.

1 United States – Tax Treatment for “Foreign Sales Corporations” , Recourse to Article 21.5 of the
DSU by the European Communities, Report of the Appellate Body, WT/DS108/AB/RW, paragraph 127.

8. Instead, AA Article 13 sets out the circumstan ces in which Members will be immune, either
wholly or partially, from the consequences of gr anting domestic support measures or export subsidies
that otherwise constitute grounds for a claim of in fringement of the obligations contained in the
provisions of GATT 1994 and the SCM Agreement specified in that Article. Thus, for example, under
AA Article 13(b)(ii), “domestic support measures that conform fully to the provisions of Article 6 of
[the Agreement on Agriculture] … shall be: … exempt from actions based on” the specified
provisions of GATT 1994 and the SCM Agreement , “provided that such measures do not grant
support to a specific commodity in excess of that decided during the 1992 marketing year”.

9. The nature of AA Article 13 as an affirmative defence is confirmed by an examination of the
protection afforded by Article 13.

10. Under AA Article 13(a)(i), domestic support measures that conform fully to the provisions of
AA Annex 2 “shall be non-actionable subsidies for purposes of countervailing duties”. Under AA
Article 13(b)(i), domestic support measures that conform fully to AA Article 6 shall be “exempt from
the imposition of countervailing duties unless …”. U nder AA Article 13(c)(i), export subsidies that
conform fully to the provisions of AA Part V sh all be “subject to countervailing duties only upon a
determination of …”.

11. Under the other provisions of AA Article 13, domestic support measur es or export subsidies
that conform fully with the prescribed conditions “shall be exempt from actions based on …” the
specified provisions of GATT 1994 and the SCM Agreement. If domestic support measures or export
subsidies infringe the relevant provisions specified in Article 13, they are nevertheless “free or
released from a duty or liability to which others are held”
2 in relation to a proceeding 3 “found[ed],
buil[t] or construct[ed] on” 4 those provisions, as long as the measures meet the relevant conditions
specified in Article 13.

12. Thus, the protection afforded by AA Arti cle 13 becomes available only in circumstances
where the domestic support measures or export subsidies at issue have been found:

V. to be actionable subsidies, or to be othe rwise countervailable, under Article 13(a)(i),
13(b)(i) or 13(c)(i); or

VI. in all other cases, to be inconsistent with the relevant specified provisions of GATT
1994 and/or the SCM Agreement;

and if the applicable conditions for the availability of that protection as specified in Article 13 are
met.

13. Further, had the negotiators of the Agreement on Agriculture intended that AA Article 13
should mean that a Member would not be liable to a legal process of dispute, it is reasonable to
assume that they would have said so. For exampl e, the negotiators could have provided that the
specified provisions of GATT and the SCM Agreement could not be “invoked”, as they did in
footnote 35 to Article 10 of the SCM Agreement in relation to non-actionable subsidy measures.

2 Black’s Law Dictionary, Seventh Edition, Bryan A Garner, Editor in Chief, West Group, St Paul,
Minn., 1999, page 593.
3 Black’s Law Dictionary, page 593, defines “action” as “1. The process of doing something; conduct
of behaviour. 2. A thing done; act. 3. A civil or criminal judicial proceeding.”
4 The New Shorter Oxford English Dictionary, Ed. Lesley Brown, Volume 1, Clarendon Press, Oxford,
1993, page 187.

14. The Appellate Body has previously clarified that “the burden of proof rests upon the party,
whether complaining or defending, who asserts the affirmative of a particular claim or defence”
5, and
that “[i]t is only reasonable that the burden of establishing [an affirmative defence] should rest on the
party asserting it”.6

15. Thus, in order to qualify for the protection afforded by AA Article 13, the United States must
prove that the measures at issue conform fu lly to the applicable provisions of the Agreement on
Agriculture. Further, in the case of the protection potentia lly afforded by Article 13(b)(ii), as well as
by Article 13(b)(iii), the United States must prove that it has not granted, and does not grant, support
to a specific commodity in excess of that decided during the 1992 marketing year.

B. THE MEANING OF AA ARTICLE 13(B)(II) 7

16. In its First Written Submission, Brazil corre ctly highlights that there are a number of
interpretative issues raised by the text of AA Article 13(b)(ii).8

 (i) “Implementation period”

17. Under AA Article 1(f) and 1(i) read together, the “implementation period” is, for the purposes
of Article 13, defined as the nine-year period commencing in 1995 according to the calendar, financial
or marketing year specified in the Schedule relating to that Member.

 (ii) “Domestic support measures that conform fully to the provisions of [AA]
Article 6”

18. Australia supports Brazil’s interpretation that the chapeau of AA Article 13(b) includes all
non-“green box” domestic support measures, includi ng product specific and non-product specific, de
minimis and production-limiting domestic support, as well as investment subsidies and
“diversification” support in developing countries.
9

5 United States – Measure Affecting Imports of Woven Wool Shirts and Blouses from India , Report of
the Appellate Body, WT/DS33/AB/R, page 14.
6 United States – Woven Wool Shirts and Blouses , WT/DS33/AB/R, page 16.
7 Article 13(b)(ii) of the Agreement on Agriculture provides as follows:
During the implementation period, notwithstanding the provisions of GATT 1994 and [the
SCM
Agreement]:
…
(b) domestic support measures that conform fully to the provisions of Article 6 of this Agreement
including direct payments that conform to the requirements of paragraph 5 thereof, as
reflected in each Member’s Schedule, as well as domestic support within de minimis levels
and in conformity with paragraph 2 of Article 6, shall be:
…
(ii) exempt from actions based on paragraph 1 of Article XVI of GATT 1994 or Articles 5
and 6 of the [SCM Agreement], provided that such measures do not grant support to a
specific commodity in excess of that decided during the 1992 marketing year; and
…
8 First Submission of Brazil, paragraph 127.
9 First Submission of Brazil, paragraph 133.

 (iii) “Exempt from actions based on para graph 1 of Article XVI of GATT 1994 or
Articles 5 and 6 of the [SCM Agreement]”

19. As noted in Section II.A above, if domestic support measures within the scope of the chapeau
of AA Article 13(b) infringe the specified provisions , they are nevertheless “free or released from a
duty or liability to which others are held”
10 in relation to a proceeding 11 “found[ed], buil[t] or
construct[ed] on”12 those provisions as long as the conditions specified in Article 13 are met. Again,
had the negotiators of the Agreement on Agriculture intended that a Member would not be liable to a
legal process of dispute, it is reasonable to assume that they woul d have said so, for example, by
providing that the specified provisions may not be “invoked” as in footnote 35 to Article 10 of the
SCM Agreement in relation to non-actionable subsidy measures.

20. Australia notes, however, that only actions based on paragr aph 1 of GATT Article XVI and
Articles 5 and 6 of the SCM Agreement are covere d under AA Article 13(b)(ii). Thus, for example,
any actions based on paragraph 3 of GATT Article XVI or on SCM Article 3 would not benefit from
the protection afforded by AA Article 13(b)(ii). In Australia’s view, the limitation of protection under
Article 13(b)(ii) to actions based on GATT Article XVI:1 and on SCM Articles 5 and 6 is consistent
with the object and purpose of the Agreement on Agriculture as expressed in the preamble to the
Agreement, including to “[prevent] … distortions in world agricultural markets” and “to [achieve]
specific binding commitments in … export competition”. The attainment of those objectives would
be too easily subverted if commitments in regard to export subsidies could be circumvented through
the provision of domestic support.

 (iv) “Such measures”

21. In Australia’s view, the phr ase “such measures” in AA Article 13(b)(ii) refers to the universe
of non-“green box” measures covered by the chapeau of Article 13(b), consistent with the ordinary
meaning of “such” as “of the kind, degree, or category previously specified or implied
contextually”.
13

 (v) “Grant support”

22. In Australia’s view, having regard to the ordinary meaning of the words in their context and
in light of the object and purpose of the Agreement on Agriculture , “support” means the actual
support, other than legitimate “green box” support, provided to an agricultural product. Thus, to
“grant support” is to “agree to”, “promise”, “bestow”, “allow”, “give”, “confer” or “transfer”
14 non-
“green box” domestic support of the type referred to in the chapeau of AA Article 13(b), which
calculation must include that portion of non-produc t specific support that benefits the specific
commodity at issue.

 (vi) “To a specific commodity”

23. Australia agrees with Brazil’s interpretation
15 that the ordinary meaning of this phrase, read in
its context and in light of the object and purpose of the Agreement on Agriculture, is support granted

10 Black’s Law Dictionary, page 593.
11 Black’s Law Dictionary, page 28, defines “action” as “1. The process of doing something; conduct of
behaviour. 2. A thing done; act. 3. A civil or criminal judicial proceeding.”
12 The New Shorter Oxford English Dictionary, Volume 1, page 187.
13 The New Shorter Oxford English Dictionary. Volume II, page 3129.
14 The New Shorter Oxford English Dictionary. Volume I, page 1131.
15 First Submission of Brazil, paragraph 136.

to an individual agricultural commodity covered by AA Annex 1, such as upland cotton, whether
through product specific, or non-product specific, support.

 (vii) “That decided during the 1992 marketing year”

24. In Australia’s view, this phrase, read in it s context and in light of the object and purpose of
the Agreement on Agriculture , means the level of non-“green box” domestic support, including
support provided through non-product specific non-“green box” domes tic support measures,
“decided” by a Member in the course of the 1992 marketing year to be provided to the benefit of a
specific agricultural commodity in the future.

25. The use of the word “decided” in this context was deliberate.

26. Australia notes that the other operative provision of the Agreement on Agriculture in which
the word “decided” is used is Article 13(b)(iii), which relates to non-violation nullification or
impairment actions. Australia notes too that Article 13(b)(iii) contains precisely the same language –
“provided that such measures do not grant support to a specific commodity in excess of that decided
during the 1992 marketing year” – as used in Article 13(b)(ii). Thus, the meaning of the word
“decided” in the context of Articl e 13(b)(ii) must be capable of having that same meaning in the
context of non-violation nullification and impairment actions under Article 13(b)(iii).

 (viii) Summary of the meaning of AA Article 13(b)(ii)

27. During the nine calendar, financial or ma rketing year period specified in a Member’s
Schedule period commencing in 1995, all non-“green box” domestic support measures that conform
fully to the provisions of AA Article 6 are immu ne from the consequences of infringing GATT
Article XVI:1 or Part V of the SCM Agreement, provided that the level of support to an individual
commodity does not exceed the level of support for th at commodity that was decided by the Member
to be made available during the relevant 1992 marketing year.

III. “PRODUCTION FLEXIBILITY CONTRACT PAYMENTS” AND “DIRECT
PAYMENTS” MAY NOT BE CLAIMED AS “GREEN BOX” MEASURES UNDER
ANNEX 2 TO THE AGREEMENT ON AGRICULTURE

28. The United States has previously notified “Production Flexibility Contract (PFC) Payments”
16
as AA Annex 2 “green box” measures. 17 The United States has not made a domestic support
notification since PFC payments were replaced by “Direct Payments” (DP) 18 under the 2002 FSRI
Act. Like Brazil 19, Australia considers that neither of these payments programs may be claimed as
“green box” measures for the reasons outlined below.

A. THE RELEVANT REQUIREMENTS OF PA RAGRAPHS 1 AND 6(B) OF AA ANNEX 2

29. AA Annex 2.1 provides that “[d]omestic support measures for which exemption from
reduction commitments is claimed shall meet the fundamental requirement that they have no, or at
most minimal, trade-distorting effects or effects on production”.

16 “Production Flexibility Contract Payments” are described at Section 2.6.1 of the First Submission of
Brazil.
17 See, for example, WTO document G/AG/N/USA/43 of 5 February 2003, page 8, Exhibit Bra-47.
18 “Direct Payments” are described at Section 2.6.2 of the First Submission of Brazil.
19 First Submission of Brazil, Sections 3.2.6 and 3.2.7.

30. In addition, in relation to decoupled income support, AA Annex 2.6(b) provides that “[t]he
amount of such payments in any given year shall not be related to, or based on, the type or volume of
production (including livestock units) undertaken by the producer in any year after the base period”.

 (i) “No, or at most minimal, trade-distorting effects or effects on production”

31. In requiring that domestic support measures “shall meet the fundamental requirement that
they have no, or at most minimal, trade-distorting effects or effects on production”, AA Annex 2.1
imposes a stringent standard. Anne x 2.1 requires that such measures must, as a primary or essential
condition, not “bias” or “unnaturally alter”
20 trade or production. Alternatively, Annex 2.1 requires
that, at most, such measures must have “extremely small; of a minimum amount, quantity or degree;
very slight, negligible”21 effects on trade or production.

32. In Australia’s view, this standard cannot be met if the domestic support measure at issue
directly and specifically stimulates production and/ or trade of a particular commodity, or if that
support measure directly retards or halts the transfer of economic resources to other forms of
economic activity, other than as specifically provide d for under paragraphs 2-13 of AA Annex 2. If a
domestic support measure results in a level of produc tion and/or trade in a particular product or group
of products higher than would otherwise be the case except as specifically provided for in Annex 2,
the support measure cannot meet the standard established in Annex 2.1. Thus, if the direct effect of a
support measure is that farmers keep producing, or keep producing a particular product, in
circumstances that would be uneconomic but for th e support measure, that measure cannot meet the
requirements of Annex 2.1.

 (ii) “The amount of such payments in any given year shall not be related to, or based
on, the type or volume of production (including livestock units) undertaken by
the producer in any year after the base period”

33. Paragraph 6 of AA Annex 2 is headed “decoupl ed income support”. Paragraph 6(a) provides
that “[e]ligibility for [decoupled income support] payments shall be determined by clearly defined
criteria such as income, status as a producer or landow ner, factor use or production level in a defined
and fixed base period”. Thus, cons istent with the customary rules of interpretation codified at
Article 31 of the Vienna Convention on the Law of Treaties , “after the base period” in paragraph 6(b)
means after the base period defined and fixed pursuant to paragraph 6(a).

34. Accordingly, the meaning of paragraph 6(b) of AA Annex 2 is clear. Once a base period has
been defined and fixed pursuant to paragraph 6(a) , decoupled income support payments may not be
“connected”
22 to or “found[ed], buil[t] or construct[ed] on” 23 the type of production or the volume of
production undertaken by a producer in a later period.

20 The New Shorter Oxford English Dictionary. Volume I, page 707.
21 The New Shorter Oxford English Dictionary. Volume I, page 1781.
22 The New Shorter Oxford English Dictionary. Volume II, page 2534.
23 The New Shorter Oxford English Dictionary, Volume 1, page 187.

B. “PRODUCTION FLEXIBILITY CONTRACT (PFC ) PAYMENTS” COULD NOT BE CLAIMED AS
“GREEN BOX” PAYMENTS

 (i) PFC payments had more than a neglig ible trade-distorting effect or effect on
production, contrary to paragraph 1 of AA Annex 2$

35. Like Brazil, Australia considers that PFC pa yments directly stimulated, and stimulated by
more than a negligible amount, US production of, and trade in, upland cotton and Australia endorses
Brazil’s arguments in this respect.
24

36. Further, the value of PFC payments rates as a proportion of the marketing year average farm
price received by US upland cotton growers can be seen from data published by the United States
Department of Agriculture (USDA) and included in Table 1 below.

Table 1: The value of PFC payments as a percentage proportion of the marketing year average farm
price received by US upland cotton growers

Marketing or Crop Year Production flexibility
contract (PFC) payment
rates US¢/lb.25
Average farm price
US¢/lb.26
PFC payment rates as a
proportion of the
marketing year average
farm price %
1996/97 8.882 69.3 12.82
1997/98 7.625 65.2 11.69
1998/99 8.173 60.2 13.58
1999/2000 7.990 45.0 17.76
2000/01 7.330 49.8 14.72
2001/02 5.990 29.8 20.10

37. In addition, data published by the USDA for this period show that PFC payments constituted
26.37%, 36.5% and 22.90% of government payments by crop year for the 1999, 2000 and 2001 years
respectively.27

38. PFC payments constituting such high proportions of the marketing year average farm prices
and of domestic support measures must have a production and trade-distorting effect.

39. But this view is further confirmed when the marketing year average farm prices as shown in
Table 1 are considered against the fact that in 1997 the average of total economic costs for all US
cotton farms was approximately 73 cents per pound and operating costs averaged 38 cents per
pound
28. In such circumstances, economically rational producers should have begun to transfer
resources to other forms of economic activity. This did not happen. USDA data shows that the area
planted to cotton in the United States over this period increased, from 13.1 million acres in 1998 to
15.5 million acres in 2001. 29 It is clear that many US producers of upland cotton could only have

24 First Submission of Brazil, Section 3.2.6.2.
25 Figures extracted from Agricultural Outlook, USDA, May 2000 and May 2002, Table 19, available
at http://www.ers.usda.gov/publications/agoutlook/may2000/ao271k.pdf and
http://www.ers.usda.gov/publications/agoutlook/May2002/ao291j.pdf respectively.
26 . Fact Sheet: Upland Cotton: Summary of 2002 Commodity Loan and Payment Program , USDA,
January 2003, page 5, Exhibit Bra-4.
27 Fact Sheet: Upland Cotton, page 6, Exhibit Bra-4.
28 Cotton: Background and Issues for Farm Legislation, USDA, July 2001, page 6, Exhibit Bra-46.
29 Fact Sheet: Upland Cotton, page 4, Exhibit Bra-4.

remained viable over this period through subsidisation. Further, US exports of upland cotton
increased from 4.1 million bales in 1998 to 10.6 million bales in 2001.30

40. In Australia’s view, PFC payments during this period contributed directly to increased
production and export levels and that they did so contrary to the express requirement of AA
Annex 2.1 that the domestic support measures at issue not, or only negligibly, bias or unnaturally alter
trade or production.

 (ii) PFC payments were related to the type of production undertaken by the producer,
contrary to paragraph 6(b) of AA Annex 2

41. By excluding fruits and vegetables (other than lentils, mung beans, and dry peas) from the
planting flexibility otherwise avai lable in respect of the contract acreage for which PFC payments
could be made, s.118 of the Federal Agriculture Improvement and Reform Act of 1996 (the FAIR
Act) related, or connected, PFC payments to the type of production undertaken by the producer in any
year after the base period, contrary to the requirements of AA Annex 2.6(a).

C. “DIRECT PAYMENTS” FOR UPLAND COTTON MAY NOT BE CLAIMED AS “GREEN BOX”
PAYMENTS

 (i) Direct payments are likely to have mo re than a negligible trade-distorting effect
or effect on production, contrary to paragraph 1 of AA Annex 2

42. Australia considers that direct payments for upland cotton are likely to stimulate, by more
than a negligible amount, US production of, and trade in, upland cotton. The 2002 FSRI Act has
established a direct payment rate for upland cotton of 6.67 cents per pound for each of the 2002
through 2007 crop years.

43. In addition to the arguments put forward by Brazil
31, which Australia endorses, Australia
considers that, so long as there is a reasonable pos sibility of continuing and significant longer-term
volatility in the gross returns to producers (as measured by the marketing year average farm price), the
assured availability of a direct payment for upland cotton at the rate of 6.67 cents per pound must be
presumed to influence directly and specifically the decisions of growers to continue producing upland
cotton, notwithstanding significant peaks and troughs in their income, rather than to transfer resources
to other forms of economic activity.

 (ii) Direct payments are related to th e type of production undertaken by the producer,
contrary to paragraph 6(b) of Annex 2 of the Agreement on Agriculture

44. Under s.1106(b) of the 2002 FSRI Act, fruits, vegetables (other than lentils, mung beans and
dry peas) and wild rice are generally prohibite d from being planted on base acreage unless the
commodity, if planted, is destroyed before harvest except that trees and other perennial plants are
prohibited. The implementing regulations make clea r that, where it is determined that a producer
made a good faith effort to comply with the “planting flexibility” provisions of s.1106 of the FSRI
Act but that that producer’s acreage report of fruits, vegetables or wild rice planted on a farm’s base
acreage is inaccurate and exceeds the allowed tole rance levels, the producer “shall accept a reduction
in the direct and counter-cyclical payments for the farm …”.
32

30 Fact Sheet: Upland Cotton, page 5, Exhibit Bra-4.
31 First Submission of Brazil, at Section 3.2.7.3.
32 7 CFR 1412.602(a)(2), Exhibit Bra-35.

45. Thus, direct payments are related, or conn ected, to the type of production undertaken by the
producer, contrary to paragraph 6(a) of AA Annex 2.

 (iii) Direct payments are related to, or based on, the type or volume of production
undertaken by the producer in a year after the base period, contrary to
paragraph 6(b) of Annex 2 of the Agreement on Agriculture

46. Sections 1101 and 1102 of the 2002 FSRI Act allow producers to update their base acres and
payment yields respectively for the purposes of rece iving direct payments. As set out in Section
III.A.ii above, only one base period is possible for th e purposes of paragraph 6 of AA Annex 2. Once
the base period has been defined and fixed, no furt her updating of either the type or volume of
production is permissible if a support program is to comply with the conditions of paragraph 6 of
Annex 2.

47. Under the 2002 FSRI Act, direct payments replaced PFC payments.
33 Since the United States
has claimed PFC payments as “green box” decoupled income support 34, Australia considers that the
United States has selected the base period that it used to determine base acres and payment yields
under the 1996 FAIR Act as its defined and fixed b ase period for the purposes of paragraph 6 of AA
Annex 2.

48. By providing for base acres and payment yields to be updated under the 2002 FSRI Act, the
United States has related the amount of direct payments to, or based the amount of direct payments
on, the type and volume of production undertaken by a producer in any year after the base period,
contrary to paragraph 6(b) of AA Annex 2.

IV. “STEP 2” PAYMENTS ARE PROHIBITED SUBSIDIES CONTRARY TO ARTICLES
3.3 AND 8 OF THE AGREEMENT ON AGRICULTURE AND/OR ARTICLE 3 OF
THE SCM AGREEMENT

49. Section 1207(a)(1) of the 2002 FSRI Act provides: “… the Secretary shall issue marketing
certificates or cash payments … to domestic users and exporters for documented purchases by
domestic users and sales for export by exporters …”. Section 136 of the 1996 FAIR Act provided
similarly that “… the Secretary sh all issue marketing certificates or cash payments to domestic users
and exporters …”.

50. The regulations to implement s. 1207(a)(1) of the FSRI Act provide:

 Eligible upland cotton must not be: … (2) imported cotton …
35

Payments … shall be made available to eligible domestic users and exporters who
have entered into an Upland Cotton Domestic User/Export Agreement with CCC and
who have complied with the terms and conditions in this subpart, the Upland Cotton
Domestic User/Exporter Agreement and instructions issued by CCC.
36
51. The standard Upland Cotton Domestic User/Export Agreement 37 provides inter alia:

33 Fact Sheet: Upland Cotton, Exhibit Bra-4.
34 WTO document G/AG/N/USA/43, page 8, Exhibit Bra-47.
35 7 CFR 1427.103(c), Exhibit Bra-37.
36 7 CFR 1427.105(a), Exhibit Bra-37.
37 Exhibit Bra-65.

Upland cotton eligible for payment is cotton consumed by the Domestic User in the
United States … (Section B-2)
Eligible upland cotton will be considered consumed by the Domestic User on the date
the bagging and ties are removed from the bale in the normal opening area,
immediately prior to use, … (Section B-3(b))
Upland cotton eligible for payment is cotton which is shipped by an eligible Exporter
… (Section C-2)
Eligible upland cotton will be considered exported based on the on-board-vessel-date
as shown on the bill of lading. (Section C-3)
52. A “Step 2” payment is unquestionably a subsidy within the meaning of the Agreement on
Agriculture and the SCM Agreement . A “Step 2” payment involves a direct transfer of economic
resources (cash or the equivalent value in ownershi p of goods) to a domestic user or exporter of US
upland cotton.

53. The Article 21.5 stage of United States – Tax Treatment fo r “Foreign Sales Corporations”
(US – FSC (21.5)) involved provisions under which more favourable tax treatment was available in
either of two, mutually exclusive, situations. The availability of the favourable tax treatment was
found to be a prohibited export subsidy in one of th ose situations notwithstanding that the favourable
tax treatment was freely available in both situa tions, subject to the prescribed conditions for
entitlement being met. The Appellate Body said:

In our view, it is … necessary, under Article 3.1(a) of the SCM Agreement , to
examine separately the conditions pertaining to the grant of the subsidy in the two
different situations addressed by the meas ure. We find it difficult to accept the
United States’ arguments that such examination involves an ‘artificial bifurcation” of
the measure. The measure itself identifies th e two situations which must be different
since the very same property cannot be produced both within and outside the United
States.
38
54. The availability of “Step 2” payments under s.1207(a)(1) is analogous to the situation
examined in US – FSC (21.5) . “Step 2” payments are available only to exporters (“Step 2” export
payments) or to domestic users (“Step 2” domestic payments). Section 1207(a)(1) “identifies the two
situations which must be different since the very same property cannot be” exported or used within
the United States.

A. “STEP 2” EXPORT PAYMENTS ARE PROHI BITED EXPORT SUBSIDIES CONTRARY TO
ARTICLES 3.3 AND 8 OF THE AGREEMENT ON AGRICULTURE AND ARTICLE 3.1(A) AND
3.2 OF THE SCM AGREEMENT

 (i) “Step 2” export payments are s ubsidies contingent upon export performance

55. For “Step 2” export payments, the export contingency is expressly provided for in
s.1207(a)(1), which provides “… the Secretary shall issue marketing certificates or cash payments …
to exporters for … sales for export by exporters …” and in the implementing regulations.

38 United States – Tax Treatment of “Foreign Sales Corporations” , Recourse to Article 21.5 of the
DSU by the European Communities, WT/DS108/AB/RW, paragraph 115.

56 “Step 2” export payments are only payable once US-produced upland cotton has been placed
aboard a vessel: they are “conditional” upon the cotton actually being exported. Thus, “Step 2”
export payments are contingent upon export performance.

 (ii) “Step 2” export payments are export subsidies contrary to Articles 3.3 and 8 of
the Agreement on Agriculture

57. “Step 2” export payments are a type of export subsidy expressly foreseen by AA
Article 9.1(a) and subject to budgetary outlay and quantity reduction commitments thereunder. They
are a direct subsidy, including through payment-in-kind, to an industry, to producers of an agricultural
product, or to a cooperative or other association of such producers, contingent on export performance.

58. The United States has not specified any reduction commitments in its Schedule for upland
cotton.

59. Consequently, by providing “Step 2” expor t payments under both the 1996 FAIR Act and the
2002 FSI Act, the United States has provided export subsidies contrary to its obligations:

VII. pursuant to AA Article 3.3 not to provide export subsidies in respect of any
agricultural product not specified in Section II of Part IV of its Schedule; and

VIII. pursuant to its obligation pursuant to Ar ticle 8 not to provide export subsidies
otherwise than in conformity with this Agreement and with the commitments as
specified in its Schedule.

 (iii) “Step 2” export payments are pr ohibited export subsidies contrary to SCM
Article 3

60. Because “Step 2” export payments are expor t subsidies that do not conform fully to the
provisions of Part V of the Agreement on Agriculture , Article 13(c)(ii) of that Agreement is not
applicable and the payments are not protected from the operation of SCM Article 3.

61. A “Step 2” export payment is a subsidy within the meaning of SCM Article 1.1(a)(1)(i) for
the purposes of SCM Article 3.1: it involves a dire ct transfer of economic resources to a domestic
user or exporter of US upland cotton, and conf ers a benefit on the recipient by making US upland
cotton commercially competitive.

62. Further, a “Step 2” export payment is conti ngent upon export performance: it is only payable
once the upland cotton has been placed aboard a vessel for export. The Appellate Body has said:

We see no reason, and none has been pointed out to us, to read the requirement of
“contingent upon export performance” in the Agreement on Agriculture differently
from the same requirement imposed by the SCM Agreement.
39
63. As a consequence, because “Step 2” expor t payments mandated by s.1207(a)(1) of the FSRI
Act are export subsidies that are not being made “as provided in the Agreement on Agriculture”, they
are prohibited export subsidies pursuant to SCM Article 3.1(a), and the United States is acting
contrary to its obligations under SCM Article 3.2 by granting or maintaining such subsidies pursuant
to s.1207(a)(1) of the FSRI Act. Consistent with the provisions of SCM Article 4.7, Australia

39 United States – Tax Treatment for “Foreign Sales Corporations” , Report of the Appellate Body,
WT/DS108/AB/R, paragraph 141.

endorses Brazil’s request40 that the Panel recommend that the United States withdraw the “Step 2”
export payments without delay.

B. “STEP 2” DOMESTIC PAYMENTS ARE LOCAL CONTENT SUBSID IES CONTRARY TO
ARTICLE 3 OF THE SCM AGREEMENT

64. For “Step 2” domestic payments, the local c ontent requirement is expressly provided for in
s.1207(a)(1), which provides “… the Secretary shall issue marketing certificates or cash payments …
to domestic users … for documented purchases by domestic users …” and in the implementing
regulations, which provide that “eligible cotton must not be … imported cotton”.

65. “Step 2” domestic payments are only payable once US-produced upland cotton is consumed
by a domestic user. “Step 2” domestic payments are contingent upon the use of domestic over
imported goods.

66. Thus, s.1207(a)(1) of the FSRI Act mandates the payment of subsidies which are prohibited
pursuant to SCM Article 3.1(b), and the United States is acting contrary to its obligations under SCM
Article 3.2 by granting or maintaining such subsidies. Consistent with the provisions of SCM Article
4.7, Australia endorses Brazil’s request
41 that the Panel recommend that the United States withdraw
the “Step 2” domestic payments without delay.

C. THE UNITED STATES CANNOT AVOID IT S OBLIGATIONS RELATING TO PROHIBITED
SUBSIDIES BY DESIGNING A MEASURE UNDER WHICH ENTITLEMENTS ARE
OSTENSIBLY AVAILABLE IN MULTIPLE CIRCUMSTANCES

67. In Australia’s view, the United States cannot avoid its obligations relating to prohibited
subsidies under the Agreement on Agriculture and the SCM Agreement by designing a measure under
which entitlements are ostensibly available in multiple circumstances. As the Appellate Body
concluded in US – FSC (21.5):

Our conclusion that the ETI measure grants subsidies that are export contingent in the
first set of circumstan ces 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.
42
68. Moreover, in the circumstances of the present case, it would be a manifestly inequitable
outcome if a WTO Member was able to avoid its obl igations relating to prohibited subsidies under the
Agreement on Agriculture and the SCM Agreement on the basis that there is a second set of
circumstances in which a subsidy can be paid, when the second set of circumstances is itself a
prohibited subsidy.

69. Australia considers that, through the “Step 2” payments mandated by s.1207(a)(1) of the FSRI
Act, the United States is paying: (1) export subs idies contrary to its obligations pursuant to AA
Articles 3.3 and 8 and SCM Article 3.1(a) and 3.2; and (2) local content s ubsidies contrary to its
obligations pursuant to SCM Article 3.1(b) and 3.2.

40 First Submission of Brazil, paragraph 251.
41 First Submission of Brazil, paragraph 341.
42 United States – Tax Treatment for “Foreign Sales Corporations” , Recourse to Article 21.5 of the
DSU by the European Communities, Report of the Appellate Body, WT/DS108/AB/RW, paragraph 119

V. CONCLUSION

70. This dispute raises fundamental issues concerning the object and purpose of the Agreement on
Agriculture, and the balance of rights and obligations accepted by all Members under the Marrakesh
Agreement Establishing the World Trade Organization . The outcome of this dispute will determine
whether, in fact, Members accepted any meaningful obligations in relation to domestic support
measures pursuant to the Agreement on Agriculture.

71. In Australia’s view, Brazil has provided prima facie evidence that the United States has not
acted consistently with its obligations in relati on to domestic support meas ures and export subsidies
provided to upland cotton under the Agreement on Agriculture . Further, Australia considers that the
“Step 2” payments for domestic users and exporters of upland cotton are clearly subsidies prohibited
by the SCM Agreement, and endorses Brazil’s request that these be withdrawn without delay.

II. BENIN AND US COTTON SUBSIDIES

6. Benin is a least-developed country, with a GNP per capita of US $380. Of the 175 countries
listed in the 2003 Human Development Index of the United Nations Development Programme, Benin
is ranked 159
th.1

7. Cotton plays a crucial role in the development of Benin. It is the most important cash crop in
the national economy. Cotton accounts for 90 per cen t of agricultural exports, and has provided
around 75 per cent of the country’s export earnings over the past four years. Benin is the 12
th largest
exporter of cotton in the world.

8. Cotton generates 25 per cent of the country’s revenues. A third of all households in Benin
depend on the cultivation of cotton, and a fifth of wage-earning workers are employed in the cotton
sector. Overall, about a million people in Benin – out of a population of six million – are dependant
on cotton, or cotton-related activities.

9. The cotton sector in Benin, which is mainly in the rural regions, h as suffered considerable
hardship. As the International Monetary Fund noted in a report earlier this year, “poverty is prevalent
in cotton-producing areas”.
2 Cotton growers are concentrated in the north of the country, a more arid
region where the potential for any agricultural dive rsification is lower, and where opportunities for
non-farm employment are scare.3

10. Despite these problems of persistent poverty, the cotton sector in Benin and the region
remains highly competitive by world standards. The cost of producing cotton in West Africa is
50 per cent lower than comparable costs in the United States.4

11. As recent report noted: “West Africa is one of the world’s most e fficient cotton producing
regions. The IMF estimates that the sector can ope rate profitably at world price levels of around
50 cents/lb. Few producers in the US could comp ete at this price. Indeed, the USDA estimates
average production costs at 75 cents/lb.”5

12. Moreover, the sector has also undergone major structural reforms in recent years to increase
efficiency. The IMF reported that: “Benin ha s moved away from the integrated monopoly that
characterized the organization of cotton production and marketi ng of seed cotton in western and
central Africa. Benin’s reform process is among the most advanced in the region.”
6

13. Unfortunately, the benefits of such reforms have been completely negated by massive US
subsidies. As noted by Brazil in its First Su bmission, total upland cotton subsidies amounted to

1 Human Developme nt Report 2003 , United Nations Development Programme,
http://www.undp.org/hdr2003.
 2 According to the IMF, “The cotton zone in central Benin (the Zou and Borgou) presents one of the
highest incidences of poverty, while the deepest poverty (as measured by the poverty gap index) can be found
in the north (cotton-producing area in northern Borgou). International Monetary Fund, Country Report No.
03/120. Benin: Fourth Review Under the Poverty Reduction and Growth Facility – Staff Report . April 2003.
Page 28.
3 Impact of Global Cotton Markets on Rural Poverty in Benin . Nicholas Minot and Lisa Daniels.
International Food Policy Research Institute, Washington, D.C. November 2002. Page 19.
March 2003. Cited in TN/AG/GEN/4, 16 May 2003.
 5 Northern Agricultural Policies and World Po verty: Will the Doha ‘Development Round’ Make a
Difference? Kevin Watkins, Head of Research, Oxfam Great Britain. Paper presented to the Annual World
Bank Conference of Development Economics. 15-16 May, 2003. Page 65.
6 IMF Country Report, Op. Cit., page 23

US$12.9 billion during the 1999-2002 marketing years. 7 The International Cotton Advisory Cotton
estimates that US subsidies are equivalent to 24 cents per pound of cotton produced.8

14. Subsidies of this magnitude have sharply increased supplies on the international market,
thereby producing a collapse in global cotton prices. From January, 2001 to May, 2002, world cotton
prices fell by nearly 40 per cent, from 64 cents to about 39 cents per pound, the lowest level since the
1930s. Although prices have improved since last year, the world market for cotton remains
characterized by oversupply as a result of US subsidies. This has extremely serious consequences for
Benin and other West African countries.

15. Benin is highly vulnerable to changes in the world price of this cash crop. The International
Food Policy Research Institute has estimated that a 40 per cent reduction in farm-level prices of
cotton results in an increase in rural poverty in Benin of 8 per cent in the short term, and 6-7 per cent
in the long term. An increase of 8 per cent is equivalent to pushing an additional 334,000 people
below the poverty line.
9 This, in turn, has produced a deterioration in the social conditions of many
rural communities, including conditions pertaining to housing, schooling, sanitation, nutrition and
other basic needs.

16. The overwhelming magnitude of US cotton subsidies, and the impossibility of Benin
competing with them, are well illustrated in the table below.
10 As the table indicates, the subsidies
paid by the United States to 25,000 US cotton farmers exceeds the gross national income of Benin.
These subsidies also exceed the gross national income of Burkina Faso, the Central African Republic,
Chad, Mali and Togo.

7 First Submission of Brazil, paragraph 3.
8 Minot and Daniels, op. cit, page 1.
9 Minot and Daniels, op cit., page 50.
10 This table is from Cultivating Poverty: The Impact of US Cotton Subsidies on Africa . Oxfam
Briefing Paper 30. 27 September 2002. Brazil has filed the full Oxfam report as exhibit Bra–15.

17. Thus, when cotton from Benin enters world ma rkets, it must compete against such massively
subsidized US cotton.

18. Oxfam has estimated that US subsidies have caused Benin to lose US $33 million in foreign
exchange earnings, equivalent to 9 per cent of the country’s export earnings.
11

19. Indeed, the shock of such subsidies, and thei r attendant effect on prices, threatens the very
existence of the cotton sector in Benin. It has crea ted a genuine economic crisis in the sector, and it
is possible that the cotton sector in Benin could simply disappear during the 2003/04 marketing year.
This would have catastrophic effects both for the national economy, and for the social cohesion of the
country in regions where cotton production predominates. This also poses a significant threat to
Benin’s efforts at poverty alleviation in economically precarious rural areas.

20. With these preliminary comments as additional context, Benin now comments briefly on
some of the legal issues raised in Brazil’s submission.

III. WTO LEGAL ISSUES

21. Benin agrees with Brazil that the United States cannot successfully invoke the peace clause
to bar the actionable subsidy claims that have been advanced in this dispute.

11 Ibid., page 17.

22. The peace clause is an affirmative defence. The United States, not Brazil, must bear of
burden of demonstrating that US domestic support and export subsidies comply with the
requirements of Article 13.

23. Affirmative defences, as the Appellate Body made clear in United States – Wool Shirts and
Blouses, are “limited exceptions from obligations un der certain other provisions”, not “positive rules
establishing obligations in themselves”. In the view of the Appellate Body, “[i]t is only reasonable
that the burden of establishing such a defence should rest on the party asserting it”.

24. The language in Article 13 shows the clear intent of the drafters that the Member seeking to
invoke the peace clause must bear the burden of demonstrating full compliance with all of the
preconditions set out in this provision.

25. In addition to the arguments advanced by Brazil, Benin would note that the use of the proviso
“provided that” in Article 13(b)(ii) and (iii) also shows the intent of the drafters to shift the burden to
the Member seeking to invoke this exception. In both subsections, the exemption from actions has
been qualified by the addition of this proviso:

(b) domestic support measures that conform fully to the provisions of Article 6 of this
Agreement including direct payments that conform to the requirements of paragraph 5
thereof, as reflected in each Member's Schedule, as well as domestic support within de
minimis levels and in conformity with paragraph 2 of Article 6, shall be:

 (ii) exempt from actions based on para graph 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

 (iii) exempt from actions based on non-violation nullification or impairment of the
benefits of tariff concessions accruing to another Member under Article II of GATT
1994, in the sense of paragraph 1(b) of Article XXIII of GATT 1994, provided that
such measures do not grant support to a specific commodity in excess of that decided
during the 1992 marketing year…” [emphasis added]

26. A similar proviso can be found in GATT Arti cle XVIII:11, dealing with the elimination of
restrictions imposed for balance of payments purposes:

“[T] he contracting party concerned… sh all progressively relax any restrictions
applied under this Section as conditions improve, maintaining them only to the extent
necessary under the terms of paragraph 9 of this Article and shall eliminate them
when conditions no longer justify such maintenance; Provided that no contracting
party shall be required to withdraw or modify restrictions on the ground that a
change in its development policy would render unnecessary the restrictions which it
is applying under this Section.” [emphasis added]
27. In construing GATT Article XVIII:11, th e Appellate Body ma de clear in the Quantitative
Restrictions case that the burden of proof lay clearly on the responding party – in that case, India –
seeking to invoke the proviso:

“The proviso precludes a Member, which is challenging the consistency of balance-
of payments restrictions, from arguing that such restrictions would be unnecessary if
the developing country Member maintaining them were to change its development
policy. In effect, the proviso places an obligation on Members not to require a
developing country Member imposing balance-of payments restrictions to change its
development policy….

[W]e do not exclude the possibility that a si tuation might arise in which an assertion
regarding development policy does involve a burden of proof issue. Assuming that
the complaining party has su ccessfully established a prima facie case of
inconsistency with Article XVIII:11 and the Ad Note, the responding party may, in
its defence, either rebut the evidence a dduced in support of the inconsistency or
invoke the proviso. In the latter case, it would have to demonstrate that the
complaining party violated its obligation not to require the responding party to
change its development policy. This is an assertion with respect to which the
responding party must bear the burden of pr oof. We, therefore, agree with the Panel
that the burden of proof with respect to the proviso is on India.”12

28. Although the use of the proviso “provided that” is not determinative, it does provide strong
textual support for the proposition that the drafters of Article 13 of the Agreement on Agriculture, like
the drafters of GATT Article XVIII:11, intended the burden of proof to shift to the party seeking to
invoke the proviso.

29. Indeed, the situation in the Cotton dispute is very similar to that examined by the Appellate
Body in the Quantitative Restrictions case. The United States is seeking to invoke the “provided
that” proviso set out in Article 13. This is, as the Appellate Body reasoned, “an assertion with respect
to which the responding party must bear the burden of proof”. Therefore, as with India in
Quantitative Restrictions, the burden of proof with respect to the proviso is on the United States.

30. Article 13, construed as a whole, also supports the position that if the United States seeks
entry into the “safe harbour”, it bears the burden of demonstrating that it has met the preconditions
necessary to justify entry.

31. For example, the chapeau to paragraphs (a), (b) and (c) all provide that the measures or
subsidies “must conform fully” with the applicable disciplines. Domestic support measures or export
subsidies that do not “conform fully” to the specified provisions cannot benefit from the peace clause.
Since the United States claims that it “conforms fully” to the relevant provisions of the Agreement on
Agriculture, the SCM Agreement, and the GATT 1994, and it is up to the United States to provide
sufficient evidence in support of this defence.

32. Thus, as argued above, the burden falls on the United States if it wishes successfully to
invoke the affirmative defence of Article 13.

33. However, even if the burden rested on Brazil – which it does not – Brazil has amply
demonstrated in its First Submission that the United States is providing domestic support and export
subsidies far in excess of WTO commitments.

34. For example, as Brazil demonstrated in its submission, US non-“green box” domestic support
to upland cotton in the 1992 marketing year was $1,994.4 million. By 2001, US non-“green box”
domestic support increased to $4,093 million. Thus, the defence that may have been conditionally
available to the United States – had it “conformed fully” to the requirements of Article 13 – is
unavailable.

35. Brazil presents compelling evidence on the WTO-inconsistency of all of the impugned US
measures, encompassing both domestic support paym ents and export payments. Benin agrees with
Brazil that the US measures violate the Agreement on Agriculture , the SCM Agreement, and the
GATT 1994.

12 Appellate Body Report, India – Quantitative Restrictions on Imports of Agricultural, Textile an
Industrial Products, WT/DS90/AB/R, paragraph 134 and 136.

36. The United States, in its submission of July 11, has done nothing to rebut the presumption of
WTO-inconsistency established by Brazil.

IV. CONCLUSIONS

37. As noted above, US cotton s ubsidies exceed the Gross National Income of Benin. Benin has
few options available to it to respond to subsidies of such magnitude. The resulting impact on the
economy of the country has been devastating.

38. Benin is not seeking an y special and differential treatment in this dispute. It simply asks the
Panel to ensure that the relevant provisions of the WTO Agreements, including Article 13 of the
Agreement on Agriculture, are interpreted and applied as negotiated. The United States must respect
the disciplines that it, and other WTO Members, agreed to at the end of the Uruguay Round.

39. Benin is grateful for the opportunity to present its views to the Panel in this extremely
important dispute. Benin notes that further subm issions are intended, and reserves the right to
provide additional views to the Panel (including in response to the US First Written Submission of 11
July) as necessary and appropriate, at a later stage.

I. INTRODUCTION

1. Canada has a systemic interest in th e correct interpretation of Annex 2 of the Agreement on
Agriculture (Agriculture Agreement), as well as the export subsidy provisions of both the Agriculture
Agreement and the Agreement on Subsidies and Countervailing Measures (SCM Agreement).

2. In its first written submission, Brazil makes a number of claims. Canada’s comments relate
to the claims of Brazil in respect of the following:

IX. Whether US production flexibility contract payments (PFC payments) made under
the Federal Agriculture Improvement and Reform Act of 1996 and US direct
payments made under the US Farm Security and Rural Investment Act of 2002 (2002
FSRI Act) satisfy the policy-specific criteria for decoupled income support in
Annex 2, paragraph 6(b) of the Agriculture Agreement; and

X. Whether US GSM-102, GSM-103, and the SC G export credit guarantee programmes
provide export subsidies in violation of Articles 8 and 10.1 of the Agriculture
Agreement.

II. CLAIMS REGARDING US DOMESTIC AGRICULTURAL SUPPORT MEASURES

3. Among the claims brought by Brazil against the United States in this dispute are those
concerning the conformity of US domestic subsidies with US obligations under Part III of the SCM
Agreement and Article XVI of the General Agreement on Tariffs and Trade 1994 (GATT 1994).

4. On 20 June 2003, the Panel preliminarily ru led that it would defer consideration of Brazil’s
claims under Part III of the SCM Agreement and Article XVI of GATT 1994 until after it had
expressed views on whether the US measures satisfy the conditions of Article 13 of the Agriculture
Agreement (the so-called “Peace Clause”). Accordingl y, Brazil argues in its first written submission
that PFC payments and direct payments (US measur es involving direct payments to US agricultural
producers) are not exempt from action under the Peace Clause because they do not conform fully to
the criteria in Annex 2 of the Agriculture Agreement.
1 The United States argues in response that PFC
payments are not within the Panel’s terms of reference because they were no longer in effect at the
time of the consultation or panel requests. 2 Regarding direct payments, the United States argues that
these measures are exempt from action because they conform fully to the pr ovisions of Annex 2 and
are therefore covered by Article 13(a)(ii) of the Agriculture Agreement.3

5. Canada provides views in this submission on the conformity of PFC payments and direct
payments with criteria in Annex 2 of the Agriculture Agreement.

A. PFC PAYMENTS AND DIRECT PAYMENTS DO NOT QUALIFY AS EXEMPT DECOUPLED
INCOME SUPPORT UNDER THE AGRICULTURE AGREEMENT

6. It is Canada’s view that PFC payments and direct payments do not fully conform to the
provisions of paragraph 6(b) of Annex 2 of the Agriculture Agreement for the reasons set out below.

1 First Written Submission of Brazil, 24 June 2003 , at paras. 153 and 173 [hereinafter Brazil First
Written Submission].
2 First Written Submission of the United States, 11 Ju ly 2003, at paras. 190 and 207-211 [hereinafter
“US First Written Submission”].
3 US First Written Submission, paras. 64-68.

1. Decoupled income support under Annex 2 of the Agriculture Agreement is exempt from
action under the SCM Agreement and GATT 1994

7. Annex 2 of the Agriculture Agreement is relevant to actionable subsidy cases under the SCM
Agreement and GATT 1994 because the Agriculture Agreement provides for certain conditional
exemptions. In this section, Canada sets out the relationship between these three agreements in this
respect.

8. Action under Part III of the SCM Agreement and Article XVI of GATT 1994 depends on a
determination of the existence of a “subsidy”.
4 Article 1.1 of the SCM Agreement sets out the
definition of a subsidy:

1.1 For the purpose of this Agreement, a subsidy shall be deemed to exist if:

 (a)(1) there is a financial contribution by a government or any public body within the
territory of a Member…

or

 (a)(2) here is any form of income or price support in the sense of Article XVI of GATT
1994;

and

 (b) a benefit is thereby conferred.

9. Article 1.2 provides that a s ubsidy is actionable under Part III of the Agreement if it is
“specific” in accordance with the provisions of Article 2.

10. Article 5 begins Part III of the SCM Agreement on actionable subsidies by providing 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 ot her Members...”. Articles 5 and 6 describe “adverse
effects” and set out the basis for determining whethe r they exist. Article 7 sets out the available
remedies where adverse effects do exist. All of these provisions are subject to Article 13 of the
Agriculture Agreement.
5

11. Article 13 of the Agriculture Agreement conditionally exempts domestic support measures
from actionable subsidy complaints. It provides in relevant part:

4 See United States – Tax Treatment for “Foreign Sales Corporations” , Report of the Appellate Body,
WT/DS108/AB/R, adopted March 20, 2000 at para. 93 [hereinafter US FSC AB Report]:

 Article 1.1 sets forth the general definition of the te rm “subsidy” which applies “for the purpose of this
Agreement”. This definition, therefore, applies wherever the word “subsidy” occurs throughout the
SCM Agreement and conditions the application of the provisions of that Agreement regarding
prohibited subsidies in Part II, actionable subsidies in Part III, non-actionable subsidies in Part IV and
countervailing measures in Part V [emphasis in original].
5 Article 5 ends with: “This Article does not apply to subsidies maintained on agricultural products as
provided in Article 13 of the Agreement on Agriculture”. Article 6.9 contains identical language. Article 7.1
begins: “Except as provided in Article 13 of the Agreement on Agriculture, …”.

 Regarding action under Article XVI of GATT 1994, in addition to the provisions in Article 13 of the
Agriculture Agreement, Article 21.1 states: “The provisions of GATT 1994… shall apply subject to
the provisions of this Agreement.”

During the implementation period, notwithstanding the provisions of GATT 1994 and
the SCM Agreement on Subsidies and Counter vailing Measures (referred to in this
Article as the “Subsidies Agreement”):
 (a) domestic support measures that conform fully to the provisions of Annex 2 to this
Agreement shall be:
 …

 (ii) exempt from actions based on Article XVI of GATT 1994 and Part III of the
Subsidies Agreement;
 …

 (b) domestic support measures that conform fully to the provisions of Article 6 of this
Agreement including direct payments that conform to the requirements of paragraph
5 thereof, as reflected in each Member's Schedule, as well as domestic support within
de minimis levels and in conformity with paragraph 2 of Article 6, shall be:
 …

 (ii) exempt from actions based on para graph 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…

12. Accordingly, domestic subsidies are exempt fr om application of the pr ovisions in Part III of
the Subsidies Agreement and of Article XVI of GATT 1994 if they conform to Annex 2 of the
Agriculture Agreement . Domestic subsidies that do not conform to Annex 2 are exempt if such
measures do not grant support to a specific commodity in excess of that decided during the 1992
marketing year.

2. Decoupled income support must not be link ed to the type of commodity produced in
any year after the base period

13. To determine whether a measure is exempt under Article 13(a) of the Agriculture Agreement,
it must be assessed under the criteria of Annex 2. Canada sets out the relevant Annex 2 provisions.

14. Annex 2 is the basis for the conditional exempt ion of domestic subsidies, under Article 13(a)
of the Agriculture Agreement, from the application of Part III of the SCM Agreement and Article XVI
of GATT 1994 . Annex 2 also conditionally (and princi pally) exempts domestic support measures
from reduction commitments pursuant to exceptions under Articles 3.2, 6 and 7 of the Agreement.
Paragraph 1 of Annex 2 reads as follows:

 1. Domestic support measures for which ex emption 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. Acco rdingly, all measures for which exemption is
claimed shall conform to the following basic criteria:

 (a) the support in question shall be provided through a publicly-funded government
programme (including government revenue foregone) not involving transfers from
consumers; and,

 (b) the support in question shall not have the effect of providing price support to
producers;

 plus policy-specific criteria and conditions as set out below.

15. The policy-specific criteria are for each of the following measures: general services
(paragraph 2); public stockholding (paragraph 3); domestic food aid (paragraph 4); and direct
payments to producers (paragraphs 5-13).

16. Paragraph 5 of Annex 2 provides that direct payments to producers are exempt only if they
meet the basic criteria in paragraph 1 of Annex 2 and the “specific criteria applying to individual
types of direct payment as set out in paragraphs 6 through 13…”. Paragraph 5 further specifies that,
to be exempt, any measure that does not constitute a type of direct payment covered by paragraphs 6-
13 must conform to the criteria in paragraph 6(b) through (e) as well as the basic criteria listed in
paragraph 1.

17. Paragraph 6 of Annex 2 reads:

 6. Decoupled income support

 (a) Eligibility for such payments shall be dete rmined by clearly-defin ed criteria such as
income, status as a producer or landowner, factor use or production level in a defined
and fixed base period.

 (b) The amount of such payments in any given year shall not be related to, or based on,
the type or volume of production (inclu ding livestock units) undertaken by the
producer in any year after the base period.

 (c) The amount of such payments in any given year shall not be related to, or based on,
the prices, domestic or international, applying to any production undertaken in any
year after the base period.

 (d) The amount of such payments in any given year shall not be related to, or based on,
the factors of production employed in any year after the base period.

 (e) No production shall be required in order to receive such payments.

18. For direct payments to qualify as decoupled in come support, paragraph 6(b) requires that the
amount of the payments not be “related to, or based on, the type… of production… undertaken by the
producer in any year after the base period.” The ordinary meaning of “production” is “something
which is produced by an action, process, etc.; a product”.
6 Nothing in the context or in the object and
purpose of this subparagraph, of Annex 2, or of the Agriculture Agreement as a whole detracts from
this ordinary meaning. Accordingly, under paragraph 6(b), the amount of the payment must not be
linked to the kind of product that is produced.

3. PFC payments and direct payments do not conform to Annex 2 of the Agriculture
Agreement because the amount of these payments is linked to the type of commodity
produced after the base period

19. Based on the evidence and arguments presented in the submissions of the disputing parties at
this stage of the proceedings, it is Canada’s asse ssment that the amount of PFC payments and direct
payments are based on the type of commodity pro duced after the base period. Were the Panel to
accept the evidence submitted by Brazil, it would fi nd that PFC payments and direct payments are
inconsistent with paragraph 6(b) of Annex 2 of the Agriculture Agreement.

6 The New Shorter Oxford English Dictionary, p. 2367 [Exhibit CDA-1.].

20. Brazil asserts that under US law implementing PFC payments, the amount of such payments
“could fluctuate from 100 percent of the PFC payments if [a producer] did not grow any fruits and
vegetables, to zero percent in case such prohibite d products are grown” or “[to] a reduced and pro-
rated decrease based on acreage and/ or value of the fruit or vege table crop grown on PFC contract
acres.”
7 According to Brazil, US implementing law al so provides that “PFC payments are reduced
for each acre of wild rice that is produced.” 8 Regarding direct payments, Brazil argues that under
US implementing law, current fruit, vegetable, or wild rice production affects the amount of the
direct payment in the same manner as such production affects the amount of the PFC payment.
9
21. The United States describes direct payments under the 2002 FSRI Act as direct payments “to
persons (farmers and landowners) with farm acres that formerly produced any of a series of
commodities during the base period.” 10 The United States claims that these payments constitute
“decoupled income support” under Annex 2 of the Agriculture Agreement because they: (1) are
provided through a publicly-funded government programme not involving transfers from consumers;
(2) do not have the effect of providing price support to producers; and (3) conform to the five policy-
specific criteria and conditi ons set out in paragraph 6.
11 The United States claims in particular that
the direct payments are “decoupled from production” because the amount of the payments is not
based on the type of production undertaken after the base period, in conformity with paragraph 6(b).
In this respect, the United States argues:

Not only is there no requirement that a direct payment recipient engage in any
particular type or volume of production, a recipient need not engage in any current
agricultural production in order to receive the direct payment.
12 [emphasis in
original]
22. The United States does not describe or assess PFC payments, given its request for a
preliminary ruling by the Panel that such payments are not within its terms of reference.13

23. Canada’s assessment of the facts and arguments presented so far in this case is that the
United States has incorrectly classified PFC payments as decoupled income support,
14 and that US
direct payments do not qualify as such support. 15 Nowhere in its submission does the United States
address the evidence of implementing legislation a nd regulations re garding either measure. Its
argument that direct payment recipients are not required to engage in any particular type or volume of
production (or any current agricultural production at al l) to receive direct payments fails to address
the evidence indicating that the amount of the payment may change based on whether base acreage is
used for current production of fruits, vegetables, or wild rice. For both measures, the evidence
indicates that the amount of the payment is based on the type of production: payments are full, nil, or
some amount in between where base acres are used for current fruit, vegetable or wild rice
production.

8 Ibid., para. 161.
11 Ibid., paras. 64-68.
12 Ibid., para. 67.
13 Ibid., para. 211.
15 Ibid., paras. 175 and 198.

III. CLAIMS REGARDING US EXPO RT CREDIT GUARANTEE PROGRAMMES

24. Brazil asserts that the US GSM-102, GSM-103, and SCG progr ammes provide export
subsidies with respect to upland cotton and other agricultural commodities in violation of Articles 8
and 10.1 of the Agriculture Agreement.
16 According to Brazil, the United States violates Articles 8
and 10.1 of the Agriculture Agreement because these programmes:

XI. provide export subsidies under item (j) of th e Illustrative List of Export Subsidies in
Annex I of the SCM Agreement;17 and

XII. provide “subsidies” that are “contingent upon export performance” under Articles 1.1
and 3.1(a) of that Agreement.18

25. As a result, Brazil argues, these measures do no t fully conform to the pr ovisions of Part V of
the Agriculture Agreement and the Peace Clause, therefore, does not exempt them from actions based
on Article 3 of the SCM Agreement.
19 Brazil also argues that these programmes provide prohibited
export subsidies within the meaning of Article 3.1(a) of the SCM Agreement and requests the Panel to
recommend to the DSB that the measures be withdrawn without delay under Article 4.7.20

26. The United States argues in response that it s export credit guarantee programmes are not
export subsidies subject to Article 10.1 of the Agriculture Agreement because Article 10.2 permits
export credit guarantee practices “to continue, unaff ected by export subsidy disciplines otherwise
negotiated and reflected in the text of the Agreement”.
21 The United States asserts that these
programmes do not provide pr ohibited export subsidies under Article 3.1(a) of the SCM Agreement
because export credit guarantees are carved out from export subsidy commitments by virtue of
Article 10.2 of the Agriculture Agreement and any application of Article 3 of the SCM Agreement is
subject to the provisions of the Agriculture Agreement.
22 Finally, according to the United States, its
measures do not satisfy the standard in item (j) of Annex I of the SCM Agreement and are not, for that
reason alone, export subsidies under Article 3.1(a).23

27. The United States also requests the Panel to rule preliminarily that Brazil’s arguments in
connection with all commodities other than upla nd cotton are not properly before the Panel, and
limits its arguments to upland cotton accordingly.
24

28. In this submission, Canada limits its vi ews to whether the Unit ed States has violated
Articles 8 and 10.1 of the Agriculture Agreement by providing export subsidies in the form of export
credit guarantees resulting in the circumvention of US export subsidy commitments with respect to
upland cotton. Canada notes that this aspect of Brazil’s claim is both independent and determinative
of the applicability in this dispute of the Peace Clause under Article 13(c)(ii) of the Agriculture
Agreement. That is, a violation of Articles 8 and 10.1 in this case would itself form the basis for both
a recommendation by the DSB to the United States to bring its measures into conformity and would
also form the basis for continued action by Brazil under Article 3 of the SCM Agreement.

16 Ibid., para. 304.
17 Ibid., paras. 272-286.
18 Ibid., paras. 287-294.
19 Ibid., para. 306.
20 Ibid., para. 306.
22 Ibid., para. 167.
23 Ibid., paras. 171 to 183.
24 US First Written Submission, paras. 171 and 218.

A. EXPORT CREDIT GUARANTEES MAY PROVI DE “EXPORT SUBSIDIES” UNDER THE
AGRICULTURE AGREEMENT

29. Under the SCM Agreement , export subsidies are prohibited. Under the Agriculture
Agreement, certain export subsidies are allowed up to cer tain limits. The export subsidy disciplines
of the SCM Agreement apply subject to the export subsidy disciplines of the Agriculture Agreement.25
The Appellate Body confirmed in its first Canada - Dairy implementation report that “the WTO-
consistency of an export subsidy for agricultural products has to be examined, in the first place, under
the Agreement on Agriculture .”26 Canada sets out the relevant provi sions of both Agreements in this
section.

30. Article 1(e) of the Agriculture Agreement defines “export subsidies” as “subsidies contingent
upon export performance, including the export subsidies listed in Article 9 of this Agreement”.
Article 3.3 sets out the obligation of Members not to provide export subsidies listed in Article 9 in
excess of scheduled commitment levels:

Subject to the provisions of paragraphs 2(b) and 4 of Article 9, a Member shall not
provide export subsidies listed in paragr aph 1 of Article 9 in respect of the
agricultural products or groups of products sp ecified in Section II of Part IV of its
Schedule in excess of the budgetary outlay and quantity commitment levels specified
therein and shall not provide such subsidies in respect of any agricultural product not
specified in that Section of its Schedule.
31. Article 8 of the Agriculture Agreement confirms the fundamental obligations of Members
with respect to the provision of export subsidies:

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.
32. 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,
which reads:

Export subsidies not listed in paragraph 1 of Article 9 shall not be applied in a
manner which results in, or which threaten s to lead to, circumvention of export
subsidy commitments; nor shall non-commerci al transactions be used to circumvent
such commitments.
33. The Agriculture Agreement does not define the term “subsidy” in the definition of “export
subsidy” in Article 1(e) of the Agreement. Th e Appellate Body drew upon the definition of a
“subsidy” in Article 1.1 of the SCM Agreement as context to the term “subsidy” in Article 1(e) of the
Agriculture Agreement in both its original Canada – Dairy report and its original and implementation

25 See Article 3.1 of the SCM Agreement and Articles 13(c)(ii) and 21.1 of the Agriculture Agreement.
26 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 , Report of the Appellate Body,
WT/DS103/AB/RW, WT/DS113/AB/RW, adopted 18 December 2001, paras. 123-124.

reports in US - FSC .
27 The Appellate Body also held in US - FSC that the “contingent upon export
performance” requirements in the Agriculture Agreement and the SCM Agreement are the same.28

34. Article 1.1 of the SCM Agreement sets out the definition of a subsidy, which reads in relevant
part:

 1.1 For the purpose of this Agreement, a subsidy shall be deemed to exist if:

 (a)(1) there is a financial contribution by a government or any public body
within the territory of a Member…, i.e. where:

 (i) a government practice involves… potential direct transfers of funds
or liabilities (e.g. loan guarantees); …

and

 (b) a benefit is thereby conferred.

35. Article 3.1(a) of the SCM Agreement describes export subsidies as follows:

 3.1 Except as provided in the Agreement on Agriculture, the following subsidies, within
the meaning of Article 1, shall be prohibited:

 (a) subsidies contingent, in law or in fact, whether solely or as one of several
other conditions, upon export performance, including those illustrated in
Annex I…

36. Annex I of the SCM Agreement includes in particular item (j), which reads:

The provision by governments (or special institutions controlled by governments) of
export credit guarantee or insurance pr ogrammes, of insurance or guarantee
programmes against increases in the cost of exported products or of exchange risk
programmes, at premium rates which are inadequate to cover the long-term operating
costs and losses of the programmes.
37. Canada provides views only on key elements of Articles 1 and 3.1(a) of the SCM Agreement
that are applicable to a determination of whether the US programmes provide “export subsidies”
under Article 1(e) of the Agriculture Agreement. If they do, then they are subject to US obligations
under Articles 8 and 10.1 of the Agriculture Agreement.

B. US EXPORT CREDIT GUARANTEES M AY GRANT EXPORT SUBSIDIES UNDER
ARTICLE 1(E) OF THE AGRICULTURE AGREEMENT AND ARTICLE 3.1(A) OF THE SCM
AGREEMENT

38. Based on the evidence and arguments presented by the disputing parties at this stage in the
proceedings, it is Canada’s assessment that US export credit guarantee programmes may provide
“subsidies contingent upon export performance” under Article 1(e) of the Agriculture Agreement that

27 See Canada - Measures Affecting the Importation of Milk and the Exportation of Dairy Products ,
Report of the Appellate Body, WT/DS103/AB/R, WT/DS113/R, adopted 27 October 1999, para. 87; US – FSC
AB Report, paras. 136-137; United States – Tax Treatment for “Foreign Sales Corporations: Recourse to
Article 21.5 of the DSU by the European Communities , Report of the Appellate Body, WT/DS108/AB/RW,
adopted 29 January 2002, para. 194 [hereinafter US – FSC Article 21.5 AB Report].
28 US – FSC AB Report, paras. 141-142; US – FSC Article 21.5 AB Report, para. 192.

are “not listed in paragraph 1 of Article 9”, pursuan t to Article 10.1. Because the United States has
no export subsidy reduction commitments for upland co tton, it may have violated Article 10.1 by
applying such subsidies in a manner that results in circumvention of its export subsidy commitments.
The United States may have also therefore violated Article 8 by providing export subsidies
“otherwise than in conformity with this Agreement”.

39. Evidence submitted by Brazil indicates that the United Stat es has exceeded its quantitative
export subsidy reduction commitment level for va rious agricultural commodities, including upland
cotton.
29 Accordingly, were the Panel to accept such evidence, the United States would bear the
burden of establishing that no export subsidies have been granted in respect of the quantity of exports
in question pursuant to Article 10.3 of the Agriculture Agreement.30

40. The United States cannot deny that US export credit guarantees involve a “financial
contribution” in the form of a “potential direct transfer of funds” under Article 1.1(a)(1)(i) of the
SCM Agreement. Export credit guarantees are loan guarante es. Nor can the United States deny that
the export guarantees are contingent upon export performance under Article 3.1(a) of the Agreement.
Canada therefore addresses only the “benefit” re quirement of the subs idy definition under
Article 1.1(b) of the SCM Agreement.

41. The determination of a “benefit” in transactions involving agricultural commodities is
necessarily factual. However, any assessment of the facts in this dispute must be undertaken within
an appropriate legal framework. The applicab le framework in this dispute is based on well-
established WTO case law.

42. In Canada – Aircraft, the panel found that:

… a financial contribution will only confer a "benefit", i.e., an advantage, if it is
provided on terms that are more advantage ous than those that would have been
available to the recipient on the market.
31
43. The Appellate Body upheld this finding:

We ... believe that the word “benefit”, as used in Article 1.1(b), implies some kind of
comparison. This must be so, for there can be no “benefit” to the recipient unless the
“financial contribution” makes the recipient “better off” than it would otherwise have
been, absent that contribution. In our vi ew, the marketplace provides an appropriate
basis for comparison in determining whet her 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.
32
44. Based on this reasoning, the question is whethe r there is a difference between the amount that
the firm receiving the guarantee pays on credit guaranteed under the US programmes and the amount
that the firm would pay on a comparable commercial loan absent that guarantee. The benefit is the

29 Brazil First Written Submission, paras. 265-266.
30 See Canada – Measures Affecting the Importation of Milk and the Exportation of Dairy Products:
Second Recourse to Article 21.5 of the DSU by New Zealand and the United States , Report of the Appellate
Body, WT/DS103/AB/RW2, WT/DS113/AB/RW2, adopted 17 January 2003, para. 73.
31 Canada – Measures Affecting the Export of Civilian Aircraft , Report of the Panel, WT/DS70/R,
adopted 20 August 1999, para. 9.112.
32 Canada – Measures Affecting the Export of Civilian Aircraft , Report of the Appellate Body,
WT/DS70/AB/R, adopted August 20, 1999 at para. 157.

difference between these two amounts adjusted for any differences in fees. The useful context
provided by Article 14(c) of the SCM Agreement supports such a standard. Article 14(c) reads:

[A] loan guarantee by a government shall not be considered as conferring a benefit,
unless there is a difference between the amount that the firm receiving the guarantee
pays on a loan guaranteed by the government and the amount that the firm would pay
on a comparable commercial loan absent the government guarantee. In this case the
benefit shall be the difference between these two amounts adjusted for any
differences in fees[.]
45. The panel in Canada - Aircraft II established a similar standard in respect of equity
guarantees provided through a Canadian provincia l government financing institution called
Investissement Québec (IQ).
33 The panel reasoned as follows:

Consistent with the findings of the panel and Appellate Body in Canada – Aircraft ,
we consider that IQ equity guarantees will confer a “b enefit” to the extent that they
are made available to Bombardier customers on terms more favourable than those on
which such Bombardier customers could obt ain comparable equity guarantees in the
market. We note that the parties appear to agree that this standard can be applied by
reviewing the fees, if any, charged by IQ for providing its equity guarantees. We
agree that the “benefit” sta ndard could be applied to IQ equity guarantees in this
manner. Thus, to the extent that IQ’s fees are more favourable than fees that would
be charged by guarantors w ith Québec’s credit rating in the market for comparable
transactions, IQ’s equity guarantees may be deemed to confer a “benefit”.34

46. The panel went on to find that:

… a “benefit” could arise if there is a diff erence between the cost of equity with and
without an IQ equity guarantee, to the extent that such difference is not covered by
the fees charged by IQ for providing the equity guarantee. In our opinion, it is safe
to assume that such cost diffe rence would not be covered by IQ’s fees if it is
established that IQ’s fees are not market-based.
35
47. Regarding IQ loan guarantees, th e panel applied the same reasoning:

In considering precisely what Brazil must show in order to demonstrate the existence
of a “benefit”, we note the findings of the panel and Appellate Body in Canada –
Aircraft. We therefore consider that IQ loan guarantees will confer a “benefit” to the
extent that they are made available to Bombardier customers on terms more
favourable that those on which such Bombardier customers could obtain comparable
loan guarantees in the market. In applying this standard, we are guided by Article
14(c) of the SCM Agreement, which provides contextual guidance for interpreting
the term “benefit” in the context of loan guarantees.
(…)

In our view, and taking into account the contextual guidance afforded by
Article 14(c), we consider that an IQ loan guarantee will confer a “benefit” when

33 Canada – Export Credits and Loan Guarantees for Regional Aircraft , Report of the Panel,
WT/DS222/R, adopted 19 February 2002, para. 7.397 [hereinafter Canada – Export Credits, Panel Report].
34 Canada – Export Credits, Panel Report, para. 7.344.
35 Canada – Export Credits, Panel Report, para. 7.345.

“there is a difference between the amount that the firm receiving the guarantee pays
on a loan guaranteed by [ IQ] and the amount that the firm would pay on a
comparable commercial loan absent the [ IQ] guarantee. In this case the benefit shall
be the difference between these two amounts adjusted for any differences in fees”.
In other words, there will be a “benefit ” when the cost-saving for a Bombardier
customer for securing a loan with an IQ loan guarantee is not offset by IQ’s fees. In
our opinion, it is safe to assume that this will be the case if it is established that IQ’s
fees are not market-based.
36
48. The same standard applies in the current dispute.

49. The United States avoids addressing the standard under Article 1.1(b) and argues simply that
its export credit guarantee programmes “do not run afoul of the criteria of item (j)” of Annex I of the
SCM Agreement and that, therefore, “…they are not a pr ohibited export subsidy under Article 3.1(a)
of the Subsidies Agreement.” 37 The United States asks the panel to interpret item (j) a contrario,
meaning that if its measures meet the description of the programmes in the provisions but do not meet
the standard for being considered a subsidy per se, the measures must be deemed not to confer export
subsidies. However, item (j) does not create a “safe haven” for export credit guarantees where
“premium rates… are [adequate] to cover the long-term operating costs and losses of the
[programme].” To the contrary, item (j) “sets out the circumstances in wh ich the grant of loan
guarantees is per se deemed to be an export subsidy.”38 It simply “illustrates” deemed export subsidy
practices. Nothing in the cont ext or object and purpose of the SCM Agreement supports the US
interpretation.

50. The issue of whether the premium rates under the US programmes are adequate under
item (j) of Annex I of the SCM Agreement is necessarily factual. However, even if the US
programmes charge adequate fees under the item (j ) standard, the United States must nevertheless
demonstrate that no export subsidies have been gr anted in respect of the quantity of exports in
question in accordance with Articles 10.1 and 10.3 of the Agriculture Agreement. In other words, it
must demonstrate the absence of subsidization on a transaction-by-transaction basis under Articles 1
and 3.1(a) of the SCM Agreement.

51. The United States also argues at length that Article 10.2 of the Agriculture Agreement
exempts export credit practices from subsidy disciplines under the Agreement. This argument is
untenable.

52. Article 10.2 of the Agreement on Agriculture reads:

Members undertake to work toward the development of internationally agreed
disciplines to govern the provision of export credits, export credit guarantees or
insurance programmes and, after agreement on such disciplines, to provide export
credits, export credit guarantees or insu rance programmes only in conformity
therewith.
53. Article 10.2 refers to “disciplines to govern the provision of export credits, export credit
guarantees or insurance programmes” and not to “disciplines to govern the provision of export
subsidies in the form of export credits, export credit guarant ees or insurance programmes”. This
provision sets out an intention on the part of Members to undertake further work regarding these
measures – the simple fact of agreeing to do so, however, does not amount to a permission to use
those measures to confer export subsidies without consequence and without limit. The US

36 Canada – Export Credits, Panel Report, paras. 7.397 and 7.398.
38 Canada – Export Credits, Panel Report, para. 7.395.

interpretation of Article 10.2 ignores the important co ntext provided by Article 10.1. It also directly
contradicts the stated object and purpose of Article 10 as a whole: “Prevention of Circumvention of
Export Subsidy Commitments”.
39

54. Article 10.2 of the Agriculture Agreement does not exempt the United States from its
obligation to demonstrate, under Article 10.3, that no export subsidies have been granted in respect of
the quantity of exports in question in this dispute contrary to Article 10.1. For the United States to
meet the requirements of Article 10.3, it must demonstrate the absence of subsidization as understood
under Article 1(e) of the Agriculture Agreement. Indeed, the United States does not address Articles
1(e) or 10.1, or any prior panel and Appellate Body findings thereon.

IV. CONCLUSION

55. At this stage of the proceedings, it is Cana da’s view that if the panel accepts the evidence
presented by Brazil in its first written submissi on, it would find that PFC payments and direct
payments do not satisfy the policy-specific criteria in paragraph 6(b) of Annex 2 of the Agriculture
Agreement. Contrary to those requirements, the amount of these payments would be found to vary
based on current production of certain fruit, vegetables and wild rice.

56. Regarding the US export credit guarantee progr ammes, in Canada’s view, were the Panel to
find that these programs 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 Articles 8 and 10.1
at the very least in respect of exports of upland cotton.

39 See also “Export Credits and Related Facilitie s”, Background Paper by the Secretariat,
G/AG/NG/S/13, 26 June 2000 [Exhibit CDA-2.] at para. 44:

 [A]s matters currently stand the only rules and disciplines on agricultural export credits are those of
the Agreement on Agriculture but only to the extent that such measures constitute export subsidies for
the purposes of the Agreement on Agriculture. Where exports of an agricultural product are
considered to be subsidised through export credits or related facilities, ascertaining the exported
quantities benefitting [sic] from such measures for the purposes of determining conformity with export
quantity reduction commitments would be reasonably straight forward. Quantifying related budgetary
outlays and revenue foregone for the annual comm itment level in question, using market-related
premium or interest rate benchmarks for example (it is not clear what, if any, role there might be for
export credit “subsidy equivalents” in this context), may be less stra ight forward but not necessarily
problematic.

1. INTRODUCTION

1. China is appreciative of this opportunity to present its views to the Panel in this proceeding on
various domestic supports and e xport subsidies granted by the United States (the “US”) for the
production, use and export of US upland cotton.

2. In line with this Panel’s decision dated 20 June 2003, China will focus its submission to
issues relating to

 (1) the burden of proof under Article 13 of the Agreement on Agriculture (the “Peace
Clause”);

 (2) proper categorization of direct payments under the US. Farm Security and Rural
Investment Act of 2002 (“FSRI”); and

 (3) treatment of a non-complying measure by this Panel.

In China’s opinion, these three issues, amongst others , call for close attention and analysis by the
Panel.

2. ARGUMENTS

2.1. The Burden Of Proof Under The Peace Clause

3. China agrees with Brazil that “the [P]eace [C]lau se is in the nature of an affirmative defense,
and that the burden of proof that US domestic support and export subsidies to upland cotton are
provided in conformity with the requirements of th e [P]eace [C]lause lies with the United States and
not with Brazil as the complainant”
1.

4. The burden of proof issue has been squarely dealt with by the Appellate Body in the US –
Shirts and Blouses Case
2. It stated that a complaining party asserting a claim under a positive rule,
establishing obligations in themselves, first has the burden of proof to establish a prima facie case of
an infringement of obligations by the responding Member, then the burden shift to the responding
Member to adduces sufficient ev idence to rebut the presumption 3. However, with respect to rules
providing "limited exceptions from obligations under certain other provisions of the GATT 1994", the
Appellate Body is of the view that they are “in the nature of affirmative defense, thus it is only
reasonable that the burden of establishing such a defense should rest on the party asserting it”
4.

5. The parties to this dispute disagree on the nature of the Peace Clause. The US does not see the
Peace Clause as an affirmative defense; it argues that portions of the Peace Clause impose positive
obligations. It cites Articles 13(a)(i), 13(a)(ii) and 13(b)(ii) of the Peace Clause to prove that by
incorporating obligations under Article 6 and Annex 2 within the "conform fully to" requirement, the
Peace Clause contains positive obligations on members
5.

1 Para. 107, Page 50, First Submission of Brazil, 24 June 2003.
2 Section IV, Appellate Body Report, US - Shirts and Blouses, WT/DS33/AB/R.
3 Page13-14, Section IV Burden of Proof, Appellate Body Report, US - Shirts and Blouses,

4 Page 15-16, Section IV and Text at Note 23, Appellate Body Report, US - Shirts and Blouses,
WT/DS33/AB/R .
5 Paras. 43 and 45, US First Written Submission, 11 July 2003.

6. China has a different opinion. When stand-alone, Article 6 in and Annex 2 to the Agreement
on Agriculture and may contain positive obligations on Memb ers. However, when cross-referred to
by Articles 13(a)(ii) and 13(b)(ii) respectively, th ey are brought under the Peace Clause to form part
and parcel of pre-conditions to its application. Generic components of the relevant Peace Clause
provisions
6 are (i) domestic support measures or export subs idies; (ii) that fully conform to Annex 2
and/or Article 6 of the Agreement on Agriculture; (iii) are exempt from actions; (iv) provided that… 7
The thrust of the relevant provisions of the Peac e Clause lies in its exemption of measures from
certain actions. To qualify under the exemption, a measure under item (i) above must first meet the
requirements under items (ii) and (iv) above. The moment either Annex 2 or Article 6 are brought
into “fully conform to” formula under item (ii) above, it ranks pari passu with the other requirement
under item (iv) above to form conditions precedent to a successful exemption.

7. China believes the US errs on seeing no distin ction between "obligat ion" and "condition".
The Peace Clause requirement for full conformity to Article 6 and Annex 2 does not create new
obligations because Members have to comply with Article 6 and Annex 2 whether Article 13 exists or
not. Within the Peace Clause, these requirements do not stand to impose obligations on Members, but
to set conditions precedent for a Members intending to invoke Peace Clause protection. Positive
obligations to comply with Article 6 and Annex 2, lie under where they are, i.e. under Article 6 and
Annex 2, but not under the Peace Clause.

8. China does not see any "absurdity" as describ ed by the United States in its written
submission
8. No such "absurdity" would be instilled into the process if at the first stage, the party
alleging protection of Peace Clause for its measures is required to discharge its burden to prove that
such measures do conform to the relevant Peace Clause conditions; if it cannot so prove, the measures
would lose Peace Clause protection. A second stage will follow for the party claiming against the
measures to establish its substantive case, without the Peace Clause shield.

9. China hopes the above two-step approach will he lp both this Panel and the parties to move the
procedures on towards resolution of the case.

2.2 Proper Categorization Of US FSRI 2002 Direct Payments

10. The United States in its first written submission argues that direct payments (“DP”) under
FSRI conforms fully to Annex 2 of the Agreement on Agriculture
9 and are therefore “Green Box” in
nature. Brazil argues that DP programme is inconsiste nt with Paras. 1, 6(a) and (b) of Annex 2 to the
Agreement on Agriculture, as

 (1) it conditions the type of production undertaken by the producer 10;

 (2) it sanctions base period updating
11; and

 (3) it has production and trade-distorting effects
12.

11. Para. 6(a) of Annex 2 to the Agreement on Agriculture provides to the effect that eligibility
for “Green Box” direct payment support measures “s hall be determined by clearly-defined criteria”

6 Articles 13(b)(ii), 13(b)(iii) and 13(c)(ii), the Agreement on Agriculture.
7 Note that Article 13(c)(ii) of the Peace Clause has no such proviso.
8 Para. 36, US First Written Submission, 11 July 2003.
9 Paras. 54 through to 68, US First Written Submission, 11 July 2003.
10 Para. 174, First Submission of Brazil, 24 June 2003.
11 Paras. 176 through to 182, First Submission of Brazil, 24 June 2003.
12 Paras. 183 through to 191, First Submission of Brazil, 24 June 2003.

“in a defined and fixed base period.” The word “i n” requires a link between the “criteria” and the
“defined and fixed base period”. In other words, to qualify for “Green Box” direct payment measure
under Para. 6(a), a criterion adopted by a Member must be tied, in a chronological sense, to a starting
time frame that cannot be moved up on the calendar.

12. As the United States concedes, production acreage is a criterion for making FSRI DP
13.
However, under FSRI, production acreage for the purpo se of DP is not tied to a defined and fixed
base period. It moves progressively along the calendar.

13. Under the FSRI DP scheme, payment acreage, being one factor in calculating payment
14, is
85% of a person’s base acreage. Base acreage, in turn, are either (i) “a four year average (1998-2001)
of plantings of covered commodities (including upland cotton)”, or (ii) the total of production
flexibility contract (“PFC”) acreage under the US 1996 Federal Agricultural Reform Improvement
and Reform Act (“FAIR”) and the four-year average (1998-2001) of plantings of eligible oilseeds 15.
With respect to base acreage calculation method (i) above, the United States explains, FSRI DP
allowed landowners to retain PFC base acres and “a dd 1998-2001 acres of eligible oilseeds or simply
declare base acreage for all covered commodities” (including upland cotton) 16. With respect to base
acreage calculation method (ii) above, the United St ates explains that while a landowner may elect to
simply utilize acres devoted to covered comm odities during the 1998-2001 period for purpose of DP,
a landowner need not do so; base acres may remain those under FAIR, implying no cotton production
need have occurred since the 1993-1995 period for a landowner to have “cotton base acres”. The
United States then concludes that “[t]hese … base acres are defined in the 2002 [FSRI] Act and fixed
for the duration of the legislation (that it, from marketing year 2002-2007)”
17. Such a conclusion
ignores the fact that during the progression from PFC to DP, the requisite link between the
programme acreage as a criterion and the “defined and fixed” starting time frame is broken. The
change of legislation from FAIR to FSRI and th e replacement of PFC with DP were utilized for
producers to leap from their previous coverage acr eage, which should have been tied to the base
period, to a new updated acreage in 2002.

14. Enticement certainly exists for a producer to obtain more payments by leaping over the
calendar and updating production acreage. The fundamental requirement that “no, or at most minimal
trade distorting effects or effects on production” as required by Article 1 of Annex 2 to the Agreement
on Agriculture is therefore not met.

15. In China’s opinion, without dwelling upon the burden of proof issue, the preponderance of
evidence as produced by the par ties indicates that the US DP under FSRI fails to meet the “tie”
requirement under Para. 6(a) of Annex 2 of the Agreement on Agriculture and shall be properly
categorized as non-“Green Box” measures.

2.3 Panel Treatment Of Meas ures Found By Earlier Proceedings To Be In Violation

16. Brazil also brought claims against export subsidy support granted for upland cotton export
sales by US “Foreign Sales Corporations” (“FSCs”) under the “FSC Repeal and Extraterritorial
Income Act of 2000” (“ETI Act”)
 18.

13 Paras. 56 and 67, US. First Written Submission, July 11, 2003.,
14 Para. 58, Ibid.
15 Para. 59, Ibid.
16 Para. 60, Ibid.
17 Subpara. 67(1), Ibid.
18 Paras. 315 through to 330, First Submission of Brazil.

17. The US ETI Act has previously been found to violate the Agreement on Agriculture and the
Subsidies Agreement by both the panel 19 and the Appellate Body 20 in US – FSC (21.5) . On
29 January 2002, the WTO Dispute Settlement Body (the “DSB”) adopted the panel and Appellate
Body reports, declaring that the ETI Act violates Articles 3.1(a) and 4.7 of the Subsidies Agreement,
Articles 8 and 10.1 of the Agreement on Agriculture and Article III:4 of GATT 1994.

18. As the United States had failed to implem ent the DSB recommendations and rulings within
the prescribed time framework, on 25 April 2003, the European Communities (the “EC”) requested
the DSB authorization to take appropriate counter measures and to suspend concessions pursuant to
Article 4.10 of the Subsidies Agreement and Article 22.7 of the DSU21. On 7 May 2003, the DSB
authorized the EC to impose countermeasures against the US.

19. Brazil quoted main EC arguments and portions of the panel’s and the Appellate Body’s
reasoning from their respective reports in US – FSC (21.5) , all to persuade this Panel into taking the
same reasoning and conclusion
22.

20. China believes that the panel and the Appe llate Body’s reasoning and their conclusion in US –
FSC (21.5) are of extraordinary value to the current Panel.

21. First, “[a]dopted panel reports are an important part of the GATT acquis. They are often
considered by subsequent panels. They create legitimate expectations among WTO members, and,
therefore, should be taken into account where they are relevant to any dispute . [emphasis added].”
 23
Export subsidy support provided to upland cotton export sales by US “Foreign Sales Corporations”
under the ETI Act as challenged by Brazil in this case , is exactly the very same one challenged by the
EC and found to violate the Agreement on Agriculture and the Subsidies Agreement by the panel24 and
the Appellate Body 25 in US – FSC (21.5) . The panel and the Appellate Body’s decisions, as well as
DSB’s adoption of same in US – FSC (21.5) , have already created “legitimate expectations” among
WTO members. Should this Panel re-consider the ar guments, analysis and conclusions in respect of
the same measure adopted by the same Member in dispute, and re-decide with even the slightest
difference, the WTO Members’ legitimate expectati ons will be seriously disturbed and offended.
Unless the current Panel finds the FSC export subsidies under the ETI Act challenged by Brazil in this
case different from the FSC export subsidies under the ETI Act challenged by the EC in the US – FSC
(21.5), relevancy is fulfilled to the maximum extent possible. The very same export subsidies shall be
governed by the same juridical analysis, rule and conclusion . Substantive deviation from that the
reasoning and conclusion of the earlier case on the same measure may well cast misgivings on the
established DSB authority and reputation.

22. The United States in its First Written Submission argues that:

19 Panel Report, US - FSC (21.5), WT/DS108/RW, adopted on 29 January, 2002.
20 Appellate Body Report in US - FSC (21.5), AB-2002-1, WT/DS108/AB/RW,adopted on 29 January,
2002.
21 Recourse by the European Comm unities to Article 4.10 of the Subsidies Agreement and Article 22.7
of the DSU, WT/DS/108/26, circulated on April 25, 2003.
22 Paras. 315 through to 327, First Submission of Brazil.
 23 Para. E, Report of the Appellate Body, Japan - Taxes on Alcoholic Beverages , AB-1996-2, adopted
on 1 November 1996).
24 Paras.8.30, 8.46, 8.48, 8.50, 8.74, 8.75, and 9.1(a.), Panel Report, US - FSC (21.5), WT/DS108/RW,
adopted on 29 January 2002.
25 Paras.111, 116 through to 120, 122, 194, 196, and 256(d), Appellate Body Report, US - FSC (21.5),
AB-2002-1, WT/DS108/AB/RW, adopted on 29 January 2002.

It also is well-established that even though panels may take into account prior panel
and Appellate Body reports, “panels are not bound by previous decisions of panels or
the Appellate Body even if the subject-matter is the same.”
26
China notes that US had omitted the immediate subsequent paragraph, in which the panel states:

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 referred to by both parties). In our
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.27 [emphasis added]
China believes that second sentence following the US quote from the panel’s report could not be more
relevant to the US ETI Act before this Panel.

23. Secondly, the DSB has already, upon request by the EC, authorized the EC to impose
countermeasures against the US, for its failure to implement the DSB recommendations and rulings
within the prescribed time framework. DSB’s authorization to counteract

 (1) further strengthens the weight of the panel and the Appellate Body’s decisions in US
– FSC (21.5). Authorization by the DSB for countermeasures against the very same
measures is a collective reflection that the measures shall have been withdrawn, and;

 (2) brings up the need for efficiency. Gi ven the DSB’s heavy caseload, as well as
workload of this Panel, benefits of e fficiency far overweighs whatever need for
repeating the work that had been complete ly accomplished by a previous panel and
the Appellate Body.

24. Thirdly, in light of difficulties encount ered by the DSB in encouraging compliance
subsequent to the US – FSC (21.5) proceedings, a different finding by this Panel in relation to ETI in
the current dispute will frustrate WTO’s effect iveness as reflected in the DSB mechanism. The
essence of “[p]rompt compliance with recommendations or rulings of the DSB” “to ensure effective
resolution of disputes to the benefit of all Members” called for under Article 21.1of the DSU will
evaporate.

25. Being a multilateral system, the WTO cannot afford to permit non-compliance by any
Member in its face. One dispute settled will defi nitively involve several legal issues having been
clarified and practices of certain members adjudicate d. Such clarification and adjudication in one
case must serve to benefit all members in the multilateral system. As Article 3.2 of the DSU tries to
impress, the dispute settlement system of the WTO is a pivotal element in providing uniform security
and predictability to the multilateral trading system and to avoid multiplication of the same practices
being disputed in separate but non-distinct cases. To compel panels in later instances to re-visit the

26 Para. 185, First Written Submission of the US, 11 July 2003, quoting in quotation marks Para. 7.30,
Panel Report, India – Patent Protection for Pharmaceutical and Agricultural Chemical Products , WT/DS79/R,
adopted 22 September 1998.
27 Para. 7.30, Panel Report, India – Patent Protection for Pharmaceutical and Agricultural Chemical
Product, WT/DS79/R, adopted 22 September 1998.

same legal issue and re-adjudicate the same prac tices the DSB recommends against on a second or
even indefinite analytical journey would relegate WTO dispute settlement regime into disrepute.

26. The concern is not unfounded. The fact that Brazil had to resort to the WTO dispute
settlement system and bring the ETI Act before this Panel is distinctly telling. This current Panel
must put an end to that concern by ruling that the panel and the Appellate Body’s reasoning and their
conclusion in US – FSC (21.5) be taken by this Panel, unless by the time the current Panel makes it
decision, such measures will have already been withdrawn by the US.

3. CONCLUSION

27. To sum up, China is of the following opinion:

 (1) The Peace Clause is an affirmative de fense in nature, and a party seeking its
protection bears the burden of proof;

 (2) The US DP, which removes production acreage from its required nexus with a
defined and fixed based period by allowing acreage updating, is not “Green Box”
measure within the meaning of Para. 6(a) of Annex 2 to the Agreement on
Agriculture; and

 (3) The US ETI Act has been found by a prior panel and the Appellate Body to violate
the Agreement on Agriculture and the Subsidies Agreement. In addition, the DSB has
authorized the complaining party in the prio r proceeding to take countermeasures. In
light of coherency and efficiency of the WTO dispute settlement mechanism, this
Panel shall take the reasoning and conclusion of the Appellate Body in the earlier
case.

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

I. INTRODUCTION

1. This dispute raises a number of complex yet important questions in respect of the applicable
WTO regime for trade in agricultural goods. In this First Third Party Submission, the European
Communities has submitted arguments on a number of questions raised by Brazil’s First Written
Submission.
1 However, the present submission should not be seen as exhaustive. Given the very short
period between the deadline for the US First Writte n Submission and the deadline for submissions
from third parties, the European Communities has not been able to incorporate in this submission a
response to all of the arguments brought in the US First Written Submission which might merit a
comment. Consequently, the European Communities reserves its right to submit argument on other
questions (or to further develop the arguments set out here) at the First Session of the First
Substantive Meeting with the Parties.

2. Following the Panel’s invitation of 20 June 2003, the European Communities has essentially
limited itself to questions related to the interpretation of Article 13 of the Agreement on Agriculture ,
and some of the “non-peace clause” related claims brought by Brazil. The European Communities
will therefore argue that :

▻ As a preliminary matter, Brazil is incorrect to consider that only legislation which mandates a
particular action can be found inconsistent with the WTO Agreements;

▻ Article 13 Agreement on Agriculture is not an affirmative defence;

▻ The first sentence of paragraph 1 of Annex 2 to the Agreement on Agriculture does not create
a free-standing obligation, separate from the basi c criteria set out in the second sentence of
paragraph 1; and,

▻ Article 10.2 of the Agreement on Agriculture does not exempt export credits and export credit
guarantees from the disciplines of the Agreement on Agriculture.

3. The European Communities does not express an opinion on the applicat ion of the relevant
legal interpretations to the facts of this dispute.

II. PRELIMINARY ISSUE - BRAZIL’S REFERENCE TO A “MANDATORY /
DISCRETIONARY DOCTRINE” IS UNFOUNDED

4. Before turning to the substantive questions of interpretation the European Communities
would like to touch briefly upon one systemic issue ra ised in Brazil’s submission. Brazil states in its
First Written Submission that:

“It is established under WTO law that a Member can only challenge measures of
another Member per se if such measures mandat e a violation of the WTO
Agreement.”
2
5. Brazil cites as authority for this position para. 88 of the Appellate Body’s Report in
United States – 1916 Act. However, the Appellate Body did not “establish” that measures can only be

1 Brazil’s First Submission to the Panel regardi ng the “Peace Clause” and Non-Peace Clause Related
Claims, 24 June 2003 (“Brazil’s First Written Submission”).
2 Brazil’s First Written Submission, para. 244. See, in the same sense, paras. 250 and 341.

challenged if they mandate a violation of the WTO Agreements. In that case, the Appellate Body
upheld the panel’s finding that the legislation in question was not discretionary and thus;

“[did] not find it necessary to consider [..] whether Article 18.4, or any other
provision of the Anti-Dumping Agreement, has supplanted or modified the distinction
between mandatory and discretionary legislation”.
3
6. Panels have taken di fferent approaches to this issue. The panel in United States – Section 301
found that discretionary legislation may violate certain WTO obligations. 4 This approach can be
contrasted with that of the panel in United States – Export Restraints .5 More recently, the Appellate
Body in considering an EC claim against US legislation noted that;

“[it did not] preclud[e] the possibility that a Member could violate its WTO
obligations by enacting legislation granting discretion to its authorities to act in
violation of its WTO obligations. We [the Appellate Body] make no finding in this
respect”.
6
7. Consequently, it is far from established that only mandatory legislation can be found per se
inconsistent with the WTO Agreements. The European Communities, for one, is convinced that
discretionary legislation may, in certain circumstances, be found to be inconsistent with WTO
obligations. However, further disc ussion of this issue does not appear necessary at present, since
Brazil claims that the legislation in question pe rmits of no discretion and the United States does not
appear to dispute this point.
7 Consequently, the European Communities will not develop its
arguments on this issue further in this submission.

III. ARTICLE 13 OF THE AGREEMENT ON AGRICULTURE CANNOT BE
CONSIDERED AN AFFIRMATIVE DEFENCE

8. Brazil argues that Article 13 of the Agreement on Agriculture should be understood as an
affirmative defence and thus that the United States bears the burden of proof. 8 The United States has
indicated that it disagrees with this characterisation, and considers that Article 13 is not an affirmative
defence.9

9. The European Communities shares the view of the United States that there are compelling
reasons to consider that Article 13 is not an affirmative defence.
10 Article 13 cannot be considered an

 3 Appellate Body Report, United States – Anti-Dumping Act of 1916 (“United States – 1916 Act”) ,
WT/DS136/AB/R, WT/DS162/AB/R, adopted 26 September 2000, para. 99
4 Panel Report, United States – Sections 301-310 of the Trade Act of 1974 (“United States – Section
301”), WT/DS152/R, adopted 27 January 2000, footnote 23, pa ras. 7.53-7.54. Note that the Appellate Body in
United States – 1916 Act mentioned this finding, without suggesting that it was incorrect (see footnote 59 of the
Appellate Body Report).
5 Panel report, United States – Measures Treating Export Restraints as Subsidies , WT/DS194/R,
adopted 23 August 2001, paras. 8.8 and 8.9.
6 Footnote 334, Appellate Body Report, United States – Countervailing Measures Concerning Certain
Products from the European Communities, WT/DS212/AB/R, adopted 8 January 2003.
7 Brazil’s First Written Submission, para. 245.
8 Brazil’s First Written Submission, paras. 110 to 121.
9 Para. 38, Comments of the United States of America on the Comments by Brazil and the Third Parties
on the Question Posed by the Panel,.13 June 2003. See also First Written Submission of the United States of
America, 11 July 2003 (“US First Written Submission”), paras. 38 to 47.
10 The European Communities is aware of the fact that it used the term “defence” in its Initial
Submission to the Panel of 10 June 2003 (Para. 6 , Comments by the European Communities on certain issues
raised on an initial basis by the Panel, 10 June 2003). It did so, however, in the context of a discussion of what

affirmative defence which will excuse a violation of another provision of the WTO Agreements.
Rather, it seems to the European Communities, Article 13 is a form of “gateway” or “threshold”
provision, which regulates the use of certain mechanisms (countervailing duties, serious prejudice
claims, non-violation complaints) in respect of certain types of subsidies. Conformity with the
conditions of Article 13 has the effect of providing an exemption from action under Article XVI
GATT 1994 and the SCM Agreement . Consequently, once a panel has determined whether or not
agricultural subsides conform to the conditions of Article 13, it need not, indeed cannot, rule on
whether those agricultural subsidies are c onsistent with Article XVI GATT 1994 and the SCM
Agreement. For that reason, it cannot be equated to a defence to a violation of a provision of a WTO
Agreement, in the way, for instance, Article XX may be considered a defence to a violation of
Article I or III GATT 1994.

10. Even assuming, arguendo, Brazil’s contention th at Article 13 of the Agreement on
Agriculture is an exception to the othe rwise applicable disciplines
11, the Appellate Body has pointed
out in EC-Hormones that merely characterising a provision as an “exception” and consequently an
affirmative defence is insufficient to shift the burden of proof in dispute settlement proceedings. 12
Any finding reversing the ordinary rule that the complaining party bears the burden of proof to
establish a prima facie case must be derived from an application of the normal rules of treaty
interpretation. The ordinary rules of treaty interpretation do not lead to such a conclusion in this case.

11. First, as noted above, the Panel is not asked to examine a general rule – exception situation
with respect to Article 13. Article 13 is more ak in to a threshold permitting further action if that
threshold is not complied with.

12. Second, Article 13 is an integral part of the Agreement on Agriculture . In that sense, it is
comparable to Article 6 of the Agreement on Textiles and Clothing , Article 3.3 of the Sanitary and
Phytosanitary Agreement and the second sentence of Article 2.4 of the Agreement on Technical
Barriers to Trade which were found not to be affirmat ive defences by the Appellate Body.
13
Article 13 incorporates the obligations which a WTO Member assumes under the Agreement on
Agriculture should it decide to provide agricultural subs idies to its producers, and regulates the status
of such subsidies with respect to potential dis pute settlement and the application of countervailing
duties. In a similar fashion, Article 6 of the Agreement on Textiles and Clothing provides certain
obligations which a WTO Member assumes if it decid es to dis-apply the disciplines of the ATC in the
form of a “transitional safeguard measure”. Likewise, Article 3.3 of the Sanitary and Phytosanitary

appeared to be the extreme logical conclusion of the arguments which the United States made, in order to refute
the proposition that the issue of conformity with Article 13 could only be dealt with in a separate panel
proceeding, divorced from a panel proceeding which dealt with the claims conditional upon Article 13 not being
applicable. The term “defence” was used in a general sense to connote an argument which could be invoked in
reaction to another argument. Moreover, the European Communities did not use the term “affirmative defence”
and did not use the term “defence” in the sense of a “defence […] to a claim of violation of a GATT obligation”
or as a “limited exception from certain other provisions of the [WTO Agreements]”
 (Appellate Body Report,
United States – Measure Affecting Imports of Woven Wool Shirts and Blouses from India (“United States –
Shirts and Blouses”), WT/DS33/AB/R, adopted 23 May 1997, page 15-16). Finally, the European Communities
was addressing only the question posed by the Panel and not the question of the burden of proof applicable to
Article 13.
11 Brazil’s First Written Submission, para. 120.
 12 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. 104.
13 Appellate Body Report, United States – Measure Affecting Imports of Woven Wool Shirts and
Blouses from India (“United States – Shirts and Blouses”), WT/DS33/AB/R, adopted 23 May 1997, page 16.
European Communities – Hormones Para. 104, Appellate Body Report, European Communities — Trade
Description of Sardines (European Communities – Sardines), WT/DS231/AB/R, adopted 23 October 2002.
Paras. 274-275.

Agreement sets out obligations on a Member wishing to maintain a higher level of sanitary or
phytosanitary protection than provided for in in ternational standards. These provisions, like
Article 13 of the Agreement on Agriculture provide certain rights to WTO Members, but cannot be
seen as exceptions.

13. Third, as pointed out by the United States, considering Article 13 as an affirmative defence
leads to perverse effects.
14 If a complaining Member makes a claim that a Member has acted
inconsistently with the Agreement on Agriculture , the complaining Member will bear the burden of
proof to establish a breach of the Agreement. Ho wever, if Article 13 is considered an affirmative
defence, where a complaining Member bri ngs a claim arguing breach of both the Agreement on
Agriculture and the SCM Agreement the complaining Member would bear the burden of establishing a
breach of the Agreement on Agriculture, the responding Member would bear the burden of proving
that it was in compliance with the same provisions of the Agreement on Agriculture in order to apply
Article 13, and the complaining Member would bear the burden of proof under the SCM Agreement.
This cannot be what WTO Members intended when they negotiated Article 13. Indeed, the
negotiators were aware of the issue of burden of pr oof and explicitly reversed the burden of proof in
Article 10.3 Agreement on Agriculture with respect to potential circumvention of export subsidy
commitments. That they did not agree on similar language with respect to Article 13 suggests that
they intended the ordinary rules of burden of proof to apply.

14. Consequently, the European Communities respectfully requests that the Panel find that
Article 13 is not an affirmative defence.

IV. THE INTERPRETATION OF ANNEX 2 OF THE AGREEMENT ON
AGRICULTURE

A. THE RELEVANCE OF THE FIRST SENTENCE OF PARAGRAPH 1 OF ANNEX 2

15. Brazil argues in several instances that the fi rst sentence of paragra ph 1 of Annex 2 of the
Agreement on Agriculture is an independent obligation which must be satisfied in addition to the basic
criteria set out in paragraph 1 and the policy-specif ic criteria set out in paragraphs 2 to 13 of
Annex 2.15 The European Communities considers that this interpretation is incorrect. The first
sentence does not set out an independent obligation. It simply signals the objective of Annex 2.

16. Paragraph 1 of Annex 2 reads as follows:

 1. Domestic support measures for which ex emption 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. Accordingly, all measures
for which exemption is claimed shall conform to the following basic criteria:

 (a) the support in question shall be provided through a publicly-funded government
programme (including government reve nue foregone) not involving transfers
from consumers; and,

 (b) the support in question shall not have the effect of providing price support to
producers;

 plus policy-specific criteria and conditions as set out below.

15 See, e.g. Brazil’s First Written Submission, paras. 163-172, 183-191 and 199-201.

17. The European Communities will set out its unde rstanding of the first sentence below. While
some ambiguity as to the effect of the first se ntence might arise when considering its ordinary
meaning in isolation, as Brazil do es, it is quite clear that, when seen in context, the first sentence
should not be considered to be a free-standing obligation. This result also follows from a
consideration of the objective of Annex 2.

18. It should be recalled that the provision of do mestic subsidies for industrial products (i.e. non-
export contingent subsidies) is not prohibited as such under the SCM Agreement or other WTO
Agreements.
16 Such subsidies will only be actionable if they meet the requirements of Articles 1 and
2 of the SCM Agreement, and cause adverse effects to the interest s of another Member in the sense of
Article 5 of the SCM Agreement.

19. The Agreement on Agriculture initiated a process of reform for domestic support for
agricultural products.
17 Negotiators recognised that domestic support for agricultural products
required discipline and binding limits on the amount of domestic support. However, given that the
provision of domestic subsidies to industrial products can be unlimited, provided there is no
infringement of Article 5 of the SCM Agreement, it would have been inequitable to subject all types of
domestic support to the strict discipline and limitations of the Agreement on Agriculture when the
economic effects of different types of measures are not comparable. Consequently, it was necessary
for the negotiators to differentiate between thos e types of support measures whose economic effect
was deemed significant
18, and those types of measures whose economic effects were deemed less
significant. This differentiation was achieved, not by defining those measures deemed to have a
significant effect, but rather those deemed to have a less significant effect. The result was Annex 2 to
the Agreement on Agriculture.

20. The first sentence of paragraph 1 announces the differentiation which is achieved by the
criteria set out in Annex 2.
19 It sets out the logic for distinguishing between the types of domestic
support which come under Annex 2 and are exempt from reduction commitments and other domestic
support measures. That the first sentence does not set out an independent obligation can be seen from
the next sentence of Paragraph 1 which starts with the word “accordingly”. “Accordingly” means “in
accordance with the logical premises; correspondingly”.
20 “Accordingly” consequently links the
“fundamental requirement” in the first sentence with the “basic criteria” in the second sentence
making it clear that in order to be considered to ha ve “no, or at most minimal, trade-distorting effects
or effects on production” the measure must meet the basic criteria in the second sentence of
paragraph 1 together with the policy-specific criteria set out in paragraphs 2 to 13.

16 Provided the subsidisation is not contingent upon the use of domestic over imported goods, in the
sense of Article 3.1(b) of the SCM Agreement.
17 See the Preamble to the Agreement on Agriculture.
18 Without analysing whether the eff ects would, in the absence of the Agreement on Agriculture and
assuming the SCM Agreement to be applicable to agricultural goods, lead, in a particular case, for a particular
product, to a finding of inconsistency with the SCM Agreement.
19 It can be noted that one commentator, who has undertaken one of the most comprehensive reviews of
the Agreement on Agriculture, notes that the requirement in the first sentence of paragraph 1 is:
“[t]oo vague to translate into concrete and enforceable obligations. As an
appreciation of this fact, the Agreement on Agriculture has gone to great
lengths to provide a detailed and comprehensive [..] list of measures along
with the general and specific criteria they have to satisfy before they are
exempted from the reduction commitments.”
 P. 420-421, M. G. Desta, The Law of International Trade in Agricultural Products (Kluwer
Law International 2002).
20 The New Shorter Oxford English Dictionary, 1993.

21. Contextual support for this position can be f ound in Annex 2 itself and in Articles 6 and 7 of
the Agreement on Agriculture.

22. Paragraph 5 of Annex 2 states that support provi ded through direct payments which are to be
exempted from reduction commitments “shall meet th e basic criteria set out in paragraph 1 above,
plus specific criteria applying to individual types of direct payment as set out in paragraphs 6 through
13.” It is quite clear that the “basic criteria” referred to here is the “basic criteria” referred to in the
second sentence of paragraph 1 of Annex 1. There is no reference to the fundamental requirement
and thus that the measures should have “no or at le ast minimal trade distorting effects or effects on
production”. Consequently, this fundamental requi rement cannot be an additional criteria for a
domestic measure to be exempted from reduction commitments under Annex 2.

23. Further support for this view is found in the Agreement on Agriculture. Article 6.1 applies to
domestic support measures other than those “which are not subject to reduction in terms of the criteria
set out in this Article and in Annex 2” (emphasis a dded). Article 7.1 obliges Members to ensure that
domestic support measures “not subject to reduc tion commitments because they qualify under the
criteria set out in Annex 2 to this Agreement are maintained in conformity therewith” (emphasis
added). Article 7.2(a) goes on to state that “any measure that is subsequently introduced that cannot
be shown to satisfy the criteria in Annex 2 to this Agreement […] shall be included in the Member’s
calculation of its Current Total AMS” (emphasis a dded). Annex 2 itself clearly distinguishes between
the “fundamental requirement” of the first sentence of paragraph 1 and the “basic criteria” of the
second sentence of paragraph 1 and the “policy-specific criteria” set out in paragraphs 1 to 13. The
use of the word “criteria” in Articles 6 and 7, and its use in Annex 2 make it quite clear that in order
to be exempted from reduction commitments by virtue of inclusion in the green box a domestic
support measure must meet the criteria. It is obviou s that the negotiators developed the criteria in
order to determine whether a policy could be deem ed to meet the “fundamental requirement” set out
in paragraph 1 of Annex 2 and did not intend the first sentence to set out an independent obligation.

24. This interpretation is also supported by the objective behind Annex 2 and the Agreement on
Agriculture more generally. In the administration of its agricultural policy, in or der to ensure respect
for their reduction commitments, a WTO Member must know how to classify its support measures. It
is thus vital, for reasons of legal security a nd predictability, that a Member can determine the
classification of its measures. The clear and sp ecific criteria set out in Annex 2 provides WTO
Members with guidance on how to approach this task. Assuming Brazil’s argument to be correct, a
Member would also have to determine whether a pa rticular measure to be taken might have a more
than minimal trade distorting effect or effect on production. This is inevitably a difficult exercise,
based on a subjective appreciation of a particular situation, which of ten may only be performed on an
ex post facto basis. This is not a reasonable basis for a dvancing reform of trade in agriculture, and
promoting the predictability of the system. Moreover, it can be noted that there is no such “effects”
text in respect of other exempted domestic support measures viz. “de minimis payments” under
Article 6.4 of the Agreement on Agriculture and “blue box payments” under Article 6.5 of the
Agreement on Agriculture.

25. On the basis of the above, the European Communities respectfully requests the Panel to
conclude that the first sentence of Paragraph 1 of Annex 2 of the Agreement on Agriculture does not
impose an obligation independent of the basic and policy-specific criteria set out in Annex 2.

B. INTERPRETATION OF PARAGRAPH 6 OF ANNEX 2

26. Brazil’s first written submission raises a number of questions as to the correct interpretation
of paragraph 6 of Annex 2. The European Communiti es attaches the utmost importance to the correct
interpretation of these provisions. While the Eur opean Communities is still analysing the Brazilian

and US arguments, it already takes note of the fact that the US does not claim that its counter-cyclical
payments qualify as exempt under the green box.21

V. INTERPRETATION OF ARTICLES 10.1 AND 10.2 OF THE AGREEMENT ON
AGRICULTURE (EXPORT CREDIT GUARANTEES)

27. Brazil argues that the US export credit guarantee schemes violate the Agreement on
Agriculture and the SCM Agreement.22 The European Communities can concur with this argument to
the extent it can be confirmed that the export credit guarantees in question are to be considered export
subsidies.

28. The European Communities points out, in this regard, that Article 10.2 of the Agreement on
Agriculture cannot be considered to exempt export credit guarantees from the disciplines of
Article 10.1 of the Agreement on Agriculture.23 Article 10.2 states:

Members undertake to work toward the development of internationally agreed
disciplines to govern the provision of export credits, export credit guarantees or
insurance programmes and, after agreement on such disciplines, to provide export
credits, export credit guarantees or in surance programmes only in conformity
therewith.
29. Article 10.2 makes it clear that the provision of export credit guarantees is not one of the
types of export subsidies listed in Article 9.1 wh ich a Member is given a limited authorisation to
apply. Article 10.1 provides that non-listed e xport subsidies may not be applied in order to
circumvent export subsidy commitments. Since expor t credit guarantees may be “export subsidies not
listed in paragraph 1 of Article 9” they may be applied in a manner which “results in or threatens to
lead to, circumvention of export subsidy commitments” and thus may be prohibited by Article 10.1.
For unscheduled products, since the listed export s ubsidies cannot be provided, the Appellate Body
has found that the transfer of economic resources in the form of non-listed export subsidies (e.g.
export credit guarantees) threatens to circumvent the prohibition on giving listed export subsidies to
such products.
24 Thus, export credit guarantees which qualify as export subsidies may be illegal
under Article 10.1 where they might lead to circumvention of the export subsidy commitments.

30. Such a conclusion does not render Article 10.2 devoid of meaning. Article 10.2 is designed to
develop disciplines of a broader nature than simply the regulation of export credits and export credit
guarantees which operate as an export subsidy, sin ce whether an export credit guarantee is an export
subsidy depends on an analysis of the structure of that instrument. One reason why Article 10.2 was
necessary is that export credits and export credit guarantees for agricultural commodities are not
covered by the OECD Arrangement on Guidelines for Officially Supported Export Credits (see
Article 3d).
25 Export credits which conform to this arrangement are considered not to be prohibited
export subsidies.26 Consequently, Article 10.2 sets up an ob ligation to develop disciplines for export
credits and export credit guarantees irrespective of the question whether such instruments operate as

22 Brazil’s First Written Submission, paras. 252-314.
23 The European Communities notes that the US has ma de this argument in paras. 154-166 of its First
Written Submission.
24 Appellate Body Report, United States – Tax Treatment for “Foreign Sales Corporations” (“United
States – FSC”), WT/DS108/AB/R, adopted 20 March 2000, para. 150.
25 OECD Arrangement on Guidelines for Officially Supported Export Credits of 15 October 2002
available at www.oecd.org/dataoecd/52/3/2763846.pdf.
26 See Item K of the Illustrative List of Export Subsidies, Annex 1 to the SCM Agreement.

export subsidies. It does not permit any differen tiation in treatment between export credits, export
credit guarantees or insurance programmes and other non-listed export subsidies.
27

31. The European Communities submits, therefore, that Article 10.2 cannot be seen as exempting
export credit guarantees granted to agriculture products from WTO disciplines.

VI. CONCLUSION

32. By way of conclusion, the European Communiti es respectfully requests the Panel to find that:

▻ Article 13 Agreement on Agriculture should not be considered an affirmative defence;

▻ The first sentence of the first paragraph of Annex 2 to the Agreement on Agriculture should
not be interpreted as a free-standing obligation; and,
▻ Article 10.2 of the Agreement on Agriculture does not exempt export credits and export credit
guarantees, which are export subsidies, from the disciplines of the Agreement on Agriculture.

33. The European Communities reserves its right to address new arguments, and further develop
the arguments set out herein, in its oral statement to the first session of the first substantive meeting.

27 Note that Desta arrives at a similar conclusion:

“To the extent that no such agreement [on the provision of export credits
etc] has been reached, this provision si mply remains to be an agreement to
maintain good faith for a planned future negotiation devoid of any
substantive additional obligation for some time to come. Until then, there
seems to exist no legal distinction in the treatment of these three practices
and the other forms of export subsidies not listed under Article 9.1.”
 See Desta, p. 234 op cit. footnote 19.

I. INTRODUCTION

1.01 The present dispute between Brazil and the Un ited States regarding United States subsidies to
upland cotton, as well as being important in respect of addressing the rights and obligations of the
parties concerned, is also timely. New Zealand hopes this dispute will give greater clarity to the
proper interpretation of important WTO disciplin es applicable to agricultural trade. Although
New Zealand is not a producer or exporter of cotton, New Zealand has a systemic interest in ensuring
the continued integrity of these disciplines and has therefore joined this dispute as a third party.

1.02 New Zealand also acknowledges the importance of the cotton sector for a number of
developing countries. In this regard New Zealand recalls the recent joint proposal made in the context
of the Doha Development Agenda negotiations by Benin, Burkina Faso, Chad, Mali entitled ‘Poverty
Reduction: Sectoral initiative in favour of cotton’.
1 The joint proposal calls for recognition of the
strategic nature of cotton for development and pove rty reduction in many least developed countries
and for the complete phasing out of support measures for the production and export of cotton. As the
paper points out, the efforts of cotton producers in West and Central African countries towards
liberalisation and competitiveness are virtually nullified by the fact that certain WTO Members
continue to apply support measures to cotton that distort global markets.

1.03 The joint proposal outlines the damage caused by the very high levels of support given to
cotton producers in certain WTO Member countries, including artificially increasing supply in
international markets and bringing down export prices. This is the very same damage that Brazil is
attempting to address through this dispute.

1.04 With respect to WTO disciplines, one of the biggest achievements of the Uruguay Round was
the recognition that domestic support policies were in strumental in determining the overall nature of
international agricultural trade. For the first time specific discip lines were placed on the ability of
Members to use domestic support programmes in an unfettered manner. Trade-distorting or
production-distorting domestic support measures became subject to reduction commitments.

1.05 New Zealand is concerned to ensure trade- distorting or “amber box” measures cannot be used
contrary to the “peace clause” in a manner that negatively affects other Members.

1.06 At the same time as addressing trade-distorting support, Members recognized that some forms
of domestic support were less trade-distorting than others and that certain types of programmes should
continue to play a role in Members' policy “tool box”. Accordingly the “green box”, as set out in
Annex 2 of the Agreement on Agriculture , was designed to allow Members to pursue agricultural
objectives such as the provision of general services, disaster relief, food security and structural
adjustment assistance and to support incomes as long as that was done in a way totally “decoupled”
from production. The “green box” therefore allows WTO Members to meet legitimate non-trade
objectives in a non-trade distorting way.

1.07 Strict eligibility criteria have been set down in Articles 6 and 7 and Annex 2 of the Agreement
on Agriculture to ensure that only genuine non-trade distorting measures escape reduction
commitments, including explicit inclusion of the “fundamental requirement” that such measures
“have no, or at most minimal, trade-distorting effects or effects on production”.
2

1.08 The fact that basic and policy-sp ecific criteria were included in the Agreement on Agriculture
shows Members recognised the potential for the “g reen box” to be abused and domestic support
commitments circumvented. In New Zealand's view it is critical that the integrity of the disciplines

1 TN/AG/GEN/4
2 Agreement on Agriculture Annex 2, paragraph 1.

on “green box” measures are not weakened or their legitimate purpose undermined through the
inclusion of measures that fail to meet the strict requirements of Annex 2, including the fundamental
criterion that such measures are non-trade or production distorting. Accordingly one of New
Zealand’s key objectives in joining this dispute as a third party is to ensure that the “green box”
cannot be used to circumvent commitments on trade-distorting measures.

1.09 Under the Uruguay Round Members also ag reed to a “peace clause” (Article 13 of the
Agreement on Agriculture ). Of particular relevance to this dispute is Members’ agreement that
provided non-“green box” measures meet the requirements of the Agreement on Agriculture and the
levels of support did not exceed 1992 levels, such measures would be exempt during the
implementation period of the Agreement from certain actions that w ould otherwise be available to
Members under the Agreement on Subsidies and Countervailing Measures (the “ SCM Agreement ”)
and General Agreement on Tariffs and Trade 1994 (the “ GATT 1994” ). “Peace clause” protection
was also extended to export subsidies conforming with the requirements of the Agreement on
Agriculture.

1.10 Accordingly, New Zealand is also concerned to ensure that Members are able to utilise their
rights under the SCM Agreement and GATT 1994 to take action in respect of domestic support
measures and export subsidies where the requirements of the “peace clause” have not been respected.

1.11 New Zealand believes that the arguments put forward by Brazil
3 show that the “peace clause”
has not been respected in relation to domestic support and export subsidies provided by the United
States to upland cotton in the marketing years (“MY”) 1999, 2000, 2001 and 2002, and that
accordingly Brazil is en titled to bring actionable and prohi bited subsidy claims against the
United States under the GATT 1994 and the SCM Agreement.

1.12 This submission, as requested by the Panel
4, primarily addresses issues raised in the
submissions of Brazil and the United States relating to the substantive interpretation of Article 13 of
the Agreement on Agriculture . As further elaborated in this submission New Zealand supports the
claims made by Brazil. New Zealand has had only limited time to consider the First Written
Submission of the United States
5 and therefore addresses only some of the issues raised therein. In
particular New Zealand addresses, at the end of this submission, 6 the request by the United States for
a Preliminary Ruling on certain matters. 7 New Zealand looks forward to the next phase of the case
which will examine Brazil’s claims under Articles 3, 5 and 6 of the SCM Agreement and Article XVI
of the GATT 1994.

II. DOMESTIC SUPPORT MEASURES

A. THE UNITED STATES HAS NO “PEACE CLAUSE” PROTECTION AGAINST ACTIONABLE
SUBSIDY CLAIMS RELATED TO SUPPORT PROVIDED TO UPLAND COTTON IN
MARKETING YEARS 1999, 2000, 2001 AND 2002

2.01 New Zealand agrees with Brazil that Members may assert a “peace clause” defence under
Agreement on Agriculture Article 13(b)(ii) only if the total quantity of support granted through all

3 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”).
4 Panel communication to the Parties, 20 June 2003.
5 First Written Submission of the United States of America, July 11 2003 (“First Written Submission of
the United States”).
6 Para 5.01-5.02.
7 First Written Submission of the United States, Pt V.

non-“green box” domestic support measures to a specific commodity does not exceed the quantity of
non-green box domestic support decided to be granted in MY 1992.

2.02 New Zealand endorses the process outlined by Brazil
8 for determining whether the
United States can claim peace clause protec tion against serious prejudice claims under SCM
Agreement Articles 5(c) and 6.3 and GATT 1994 Article XVI.1.

2.03 Specifically New Zealand agrees that the first step is to identify and quantify all the
United States non-“green box” support for the pr oduction of upland cotton in MY 1992. The second
step is to identify and quantify all non-“green box” United States payments that grant support to
upland cotton in MY 1999, 2000, 2001 and to provide estimates for MY 2002. The final step is to
determine whether United States support to upland cotton in MY 1999-2002 exceeded its 1992
support to upland cotton.

2.04 The information provided by Brazil
9 demonstrates that the level of domestic support for
upland cotton in each of those marketing years did in fact exceed the level decided during the 1992
marketing year and therefore such domestic suppo rt measures may be subject to claims based on
GATT 1994 Article XVI or SCM Agreement Articles 5 and 6.

2.05 New Zealand notes that the United States argue s that the relevant con cept for the comparison
required by Article 13(b)(ii) is only the ‘per pound’ rate of support set by the relevant domestic
support measures.
10 Using this concept the United States argues that the support currently granted to
upland cotton ($0.52 per pound) does not exceed that granted to upland cotton in the 1992 marketing
year ($0.729 per pound).11

2.06 New Zealand agrees that the measures concerne d (the loan rate) contribute to the effect of
guaranteeing a producer price at a specified rate per pound of production and that the per pound rate
of guaranteed price for producers is one of the rele vant factors in making the comparison required by
Article 13(b)(ii). However New Zealand does not agr ee that the use of the wo rd “decided” in Article
13(b)(ii) was intended to be, or should be, construed to mean that the per pound rate of guaranteed
price to producers of a commodity is the only factor to be considered in determining the amount of
support granted. Indeed, New Zealand sees no support for such an approach in either the specific
wording of Article 13(b)(ii) or in its object and purpose.

2.07 New Zealand considers that the comparison must take into account the totality of payments to
upland cotton producers in order to reflect the true nature of the support that is being granted to a
producer – the United States approach ignores this obj ective. For example, in relation to support
granted to United States producers of upland cotton, Step 2 payments and crop insurance payments
are also factors which affect farmers production de cisions as is, of course, the “counter-cyclical”
payments programme that effectively guarantees a price of $0.724 per pound. Therefore even under
the United States assumption that the use of a “rate” is key, the story is very different from that
claimed by the United States.

2.08 Further, New Zealand considers that an eval uation of budgetary payments is also essential in
order to see the real effects of the support programmes. Focussing solely on a rate per pound ignores
the actual levels of domestic support represented by budgetary outlays that must be granted in order to
maintain those rates and the other payments received.

8 First Written Submission of Brazil, para 123.
9 Ibid, para 124.
10 First Written Submission of the United States, paras 94 and 105.
11 Ibid, para 125.

2.09 In this respect New Zealand recalls that th e rationale behind the proviso in Article 13(b)(ii)
that such measures not grant support to a specific commodity in excess of that decided during the
1992 marketing year is to create an upper limit in the level of trade or production distortion caused by
such measures. The clear overarching intention of WTO Members in the negotiation of the
Agreement on Agriculture was that henceforth such distortions would be reduced, consistent with the
long term objective of “correcting and preventing re strictions and distortions in world agriculture
markets”.
12 Accordingly it would be inconsistent with the object and purpose of the Agreement, and
Article 13(b)(ii) specifically, to adopt an interpre tation that artificially limits consideration of the
scope of support granted to that of a ‘per pound rate’ of guaranteed price to a producer rather than the
totality of the support granted that creates the trade and production distortions.

2.10 In that respect the fact that United States budgetary outlays have increased from their 1992
levels is not coincidental. Such increases are due , at least in part, to the production and market
distorting effects of the United States measures that have lead to higher export levels of upland cotton
from the United States that have in turn pushed wo rld market prices for cotton down. In essence, the
level of trade distortion has increased as the gap be tween the price farmers expect to receive and the
world price has increased. Looking at it the other way around, had the United States maintained the
1992 level of support its producers would be far more aware of the realities of the world market for
cotton and have less incentive to add further to the trade distortion.

1. Step 2 payments, loan deficiency paym ents, marketing loan gains and cottonseed
payments

2.11 These payments are clearly non-“green box” s upport, as implied by the notification by the
United States to the WTO Committee on Agriculture for MY 1999.
13 As Brazil points out, the
structure of most of these programmes is substantially the same in MY 2000-2001 and under the Farm
Security and Rural Investment Act of 2002 (the “2002 FSRI Act”) 14 as it was in MY 1999. New
Zealand considers that these payments should con tinue to be treated as non-“green box” support to
upland cotton and must therefore be used in calcula ting the total quantity of support granted to upland
cotton in MY 1999-2002.

2. Marketing loss payments, counter-cyclical payments and crop insurance payments

2.12 The United States has notified crop insura nce payments and marketing loss assistance
payments as “amber box” domestic support.
15 Brazil notes that the 2002 FSRI Act institutionalised
marketing loss assistance payments with a new program of “counter-cyclical” payments (“CCP”).16

2.13 New Zealand notes that Brazil argues that CCP subsidies do not meet the criteria set out in
Agreement on Agriculture Annex 2, specifically paragraphs 6( b) and (c), and fail to meet the
fundamental requirement that “green box” measures “have no, or at most minimal, trade-distorting
effects or effects on production”.

2.14 Brazil argues that the CCP programme is not a “green box” measure because payments are
not based on prices of upland cotton that took place in a prior base period but are linked to present
prices for the product concerned, contrary to the requirements of Annex 2 paragraph 6(c).
17

12 Preambular paragraph 3 of the Agreement on Agriculture.
13 G/AG/N/USA/43, Exhibit BRA-47.
14 Exhibit BRA-29.
15G/AG/N/USA/43 page 37. Exhibit BRA-47.
16 First Written Submission of Brazil, para 62.
17 Ibid, para 197.

2.15 Paragraph 6(c) of Annex 2 makes it clear that the amount of decoupled income support
payments “shall not be related to, or based on, the prices, domestic or international, applying to any
production undertaken in any year after the base period.” As Brazil notes, the amount of the payment
under the CCP programme varies with fluctuations in the national average market price, that is, it is
linked to a current price. Accordingly, in New Zealand’s view this is sufficient to support a finding
by the Panel that the CCP programme involves payments that are not “green box” support measures in
accordance with Annex 2 of the Agreement on Agriculture and must therefore be used in calculating
the total quantity of domestic support granted to upland cotton for MY 2002. Indeed, the
United States endorses this approach.
18

2.16 New Zealand notes, however, that the United States has argued that the term “support to a
specific commodity” used in Article 13(b)(ii) should be interpreted to mean “product-specific
support”.19 On this basis the United States argues that the CCP programme and crop insurance
programme should be excluded from the scope of support granted to upland cotton for the purposes of
Article 13(b)(ii). 20

2.17 While New Zealand notes that the United St ates has notified marketing loss assistance and
crop insurance (and presumably will notify CCP payments) as non-product specific domestic
support,
21 it is clear from discussion in the WTO Committee on Agriculture that Members, including
New Zealand, have questioned whether that is appropriate.22

2.18 The United States asserts that CCP payments are non-product specific because they are not
coupled to current production of any specific commodity but rather are based on historical fixed base
acreage and yields.
23 However in New Zealand’s view Brazil has brought forward significant
evidence of a strong linkage between the CCP payments and production of upland cotton, such that
farmers with upland cotton base acreage are likely to continue to produce upland cotton.

2.19 In particular Brazil points out that most co tton farmers have made considerable investments in
cotton-specific equipment, or farm in locations where cotton is the most productive crop, and are
therefore more likely to continue to produce cotton.
24 The linkage between the receipt of CCP
payments and production of cotton is further reinforced by the CCP payments being explicitly
calculated on the basis of current cotton prices.

2.20 Brazil also points out that CCP payments create incentives for farmers with upland cotton
base acreage to maintain upland cotton production.
25 In fact under the CCP programme the only way
a farmer can guarantee a particular outcome is to continue to grow the same crop, otherwise the
farmer runs the risk of missing out. For exampl e, if he or she chooses to produce wheat and cotton
prices are high enough that no CCP payment is made but wheat prices fall, the farmer will make a loss
they would not have made had they stayed with cotton production.

2.21 Irrespective of whether or not these payments are notified as product-specific or not, they
must still be considered “support granted to a specific commodity” for the purposes of Article
13(b)(ii). There is no foundation for the assertion by the United States that “support granted to a
specific commodity” should be read as meaning “product-specific support”. Given the detailed listing

18 First Written Submission of the United States, para 118.
19 Ibid, para 78.
20 Ibid, para 122.
21 G/AG/N/USA/43, Exhibit BRA-47.
22 See for example, G/AG/R/34 ‘Summary report of the meeting held on 27 March 2003’ at page 32.
23 First Written Submission of the United States, para 115.
24 First Written Submission of Brazil, para 207.
25 Ibid, para 211.

of domestic support measures potentially exempt in the chapeau to Article 13(b)(ii) itself, had
Members intended to exclude non-product specific suppor t they would surely have said so. Further,
had they meant that “support granted to a specific commodity” was to be read as “product specific”
support they would have said so – the phrase was used at least five times elsewhere in the Agreement.

2.22 Rather, the reference to support to a “specific commodity” in Article 13(b)(ii) was used to
distinguish the nature of the “peace clause” from the domestic support commitments more generally
which are on a “Total” (i.e. over all agriculture) Aggregate Measurement of Support (“AMS”) basis.
Only if support increases for a particular product can it be open to challenge under the SCM
Agreement. Without such clarification “peace clause” protection could potentially be lost for any
agricultural product if Total AMS increases, even though support to that specific product had not
increased. This would have unpredictable results for individual products and cannot have been the
intended effect of the “peace clause”.

2.23 Nothing in Article 6 suggests that treati ng product-specific and non-product specific support
separately under Article 13 is warranted. 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. Support provided through generally avai lable programmes (which, New Zealand notes, the
marketing loss assistance programme and now the CCP programme are not) is still support received
for the individual products. Taking the United States argument to its logical extreme would
effectively render all agricultural support non-produ ct specific so long as the same kind of support
was being provided to more than one product.

2.24 Accordingly, New Zealand considers that the United States incorrectly categorises CCP
payments as non-product specific support. But whether they are product-specific or non-product
specific is, in fact, irrelevant for the purposes of Article 13(b)(ii) as there is no basis upon which to
read such a limitation on the kinds of domestic support to be considered within the meaning of that
provision. Instead, the portion of any non-product specific support granted to a specific commodity,
in this case to upland cotton, must be includ ed in the comparative analysis required by
Article 13(b)(ii). In this respect New Zealand notes that what Brazil is proposing is no more than
what the United States has done in relation to export credits in its First Written Submission where it
has allocated export credit administrative costs to the specific product of upland cotton.
26

2.25 The same arguments can be made with respect to the payments under the crop insurance
programmes.

3. Production Flexibility Contract Payments, Direct Payments

2.26 In New Zealand’s view one important aspect of the “Direct Payments” (“DP”) programme
rules out inclusion of those payments in the “green box”, specifically the ability of farmers to update
the base acreage used for calculation of DP payments.
27 As outlined by Brazil, the DP programme is
the successor to the Product ion Flexibility Contract Payments (“ PFC”) programme and to permit an
updating of the ‘fixed’ base period by changing the name of the PFC programme to a DP program
would render the provisions of paragraph 6(a) and (b) of Agreement on Agriculture Annex 2 a
nullity.28

2.27 The option for farmers to update base acreage under the 2002 FSRI Act directly violates the
requirement under Annex 2 paragraph 6 that decoupled income support be determined in relation to a

26 First Written Submission of the United States, para 175.
27 First Written Submission of Brazil, para 52; Exhibit BRA-35.
28 Ibid, para 182.

“defined and fixed base period”. New Zealand agrees with Brazil’s interpretation that paragraph 6(a)
and (b) contemplates only one base period that is fixed and unchanging.

2.28 As Brazil points out, permitting the updating of the base period to capture additional payment
acreage (as one third of all United States farms with eligible acreage opted to do)
29 would link
increased recent volumes of production with the amount of current payments. 30 Brazil is also correct
to state that this is contrary to the object and purpose of “de-coupled income support”, which is to
break the link between production and the amount of support and thereby ensure that such measures
“have no, or at most minimal” effects on production. As the evidence brought forward by Brazil
shows, an expectation of being able to update base acreage and payment yields influences production
in a number of ways,
31 particularly as, having had one opportu nity to update their base acreage,
farmers could reasonably expect further opportunities to do so in the future.

2.29 In New Zealand’s view the updating of base acr eage for the DP programme alone is sufficient
to exclude it from the scope of permitted “green box” measures as set out in Annex 2. Instead such
payments are “amber box” measures that, in accordance with Article 6 of the Agreement on
Agriculture, are domestic support to upland cotton in MY 2002.

2.30 Brazil has also argued that the PFC and DP programmes have more than a minimal effect on
production and trade and therefore fail to meet the “fundamental requirement” of “green box”
domestic support measures.

2.31 New Zealand agrees with Brazil’s interpretation that the “fundamental requirement” that
“green box” domestic support measures “have no, or at most minimal, trade-distorting effects or
effects on production” means that the quantity or le vel of production or trade distorting effects need
only be very small to trigger denial of “green box” status under Annex 2 of the Agreement on
Agriculture.
32 The language of paragraph 1 of Annex 2 makes it clear that this fundamental
requirement and the other criteria set out in Annex 2 are to be strictly applied to any measures in order
to obtain exemption from reduction commitments.

2.32 The trade-distorting effects or effects on production of any domestic support measure must be
determined on a case-by-case basis, looking at the sp ecific circumstances and characteristics of each
particular measure. Brazil has provided comprehens ive information regarding the effects of the PFC
and DP programmes to enable the Panel to dete rmine whether those payments have even very
minimal production or trade distorting effects and thus fail to meet the “fundamental requirement” for
“green box” measures as provided in Agreement on Agriculture Annex 2.

2.33 New Zealand notes that the United States provides no response to any of Brazil’s arguments
regarding the PFC/DP programme and the level of production distortion it causes other than to claim
that changing the name of the programme indemnifi es it from consideration. Accordingly Brazil’s
arguments should stand.

29 Ibid, para 181.
30 Ibid, para 179.
31 Ibid, paras 185 – 190.
32 Ibid, para 165.

III. PROHIBITED EXPORT SUBSIDIES

A. THE UNITED STATES HAS NO “PEACE CLAUSE” PROTECTION AGAINST PROHIBITED
AND ACTIONABLE SUBSIDY CLAIMS RELATED TO EXPORT SUBSIDIES

3.01 New Zealand supports the arguments made by Brazil that the three types of export subsidies
applied to upland cotton and other commodities by the United States (the Step 2 Export Programme,
the Export Credit Guarantee Programme, and the FSC Replacement Programme) violate Articles 3.3,
8 and 10.1 of the Agreement on Agriculture and therefore fail to meet the requirement of conformity
with Part V of the Agreement, with the result that such subsidies are not exempt from claims by Brazil
based on Article XVI of GATT 1994 or Articles 3, 5 and 6 of the SCM Agreement.

B. THE UNITED STATES EXPORT SUBSIDIE S VIOLATE THE AGREEMENT ON AGRICULTURE
AND THE SCM AGREEMENT

1. Step 2 Export Payments

 (a) Per se violation of Articles 3.3 and 8 of the Agreement on Agriculture

3.02 As outlined by Brazil,
33 Step 2 export payments clearly fall within the description of an export
subsidy set out in Article 9.1(a) of the Agreement on Agriculture in that it is a direct subsidy provided
by the United States government to exporters of upland cotton contingent upon export.

3.03 Even if the Panel were to find that Step 2 export payments did not fall within the description
set out in Article 9.1(a) of the Agreement on Agriculture , the Appellate Body has determined, as
Brazil notes, that the effect of Article 10.1 is that a Member can only provide export subsidies in
conformity with the Agreement on Agriculture if it has scheduled export subsidy reduction
commitment levels for the agricultural product concerned.
34 The use of any other type of export
subsidy will “at the very least” threaten circum vention of subsidy reduction commitments within the
meaning of Article 10.1.

3.04 Accordingly New Zealand agrees with Brazil that the Step 2 export payments violate per se
Articles 3.3 and 8 of the Agreement on Agriculture

3.05 New Zealand notes that the United States has argued that Step 2 export payments are not
export subsidies as defined by Article 9.1(a) and 10 of the Agreement on Agriculture (and
Article 3.1(a) of the SCM Agreement) because the Step 2 payments are available to domestic users as
well as exporters of upland cotton.
35 As the Appellate Body in US-FSC Recourse to Article 21.5 36
recognised, the fact that a scheme allows for paymen ts to be made otherwise than contingently on
export does not diminish the export contingency of those that are.

3.06 In US-FSC Recourse to Article 21.5 the United States argued that a measure that provided tax
exclusion for exported products, but also allowed ta x exclusion to be obtained without exportation,
could not be considered to be ‘contingent upon export performance’. The Appellate Body disagreed.

33 Ibid, paras 238-243.
34 Report of the Appellate Body, United States – Tax Treatment for “Foreign Sales Corporations” ,
WT/DS108/AB/R (“US-FSC”), para 150-152; First Written Submission of Brazil, para 237.
35 First Written Submission of the United States, para 132.
36 Report of the Appellate Body, United States – Tax Treatment for “Foreign Sales Corporations”
Recourse to Article 21.5 of the Dispute Settlement Understanding by the European Communities,
WT/DS108/AB/RW (“US-FSC Recourse to Article 21.5”).

3.07 The Appellate Body said that the measure “c ontemplates two differen t factual situations”;
where property is produced within the United States and held for use outside the United States, and
where property is produced outside the United States and held for use outside the United States. The
Appellate Body said that “the fact that the subsid ies 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”.
37

3.08 New Zealand considers that the fact that paym ents are also able to be made to domestic users
of upland cotton does not ‘dissolve’ the export contingency of the payments that are made to
exporters. Payments to eligible exporters of upland cotton are dependent on proof of export being
provided and are therefore contingent on export performance.

3.09 Accordingly Step 2 export payments breach the obligation of the United States under
Article 3.3 not to provide such subsidies in respect of any agricultural product that it has not specified
in Section II of Part IV of its Schedule and therefore violates per se the undertaking by the United
States in Article 8 not to provide export subsidies otherwise than in conformity with the Agreement on
Agriculture.

 (b) Violation of Article 3.1(a) and 3.2 of the SCM Agreement

3.10 New Zealand supports Brazil’s conclusion that the Step 2 export payments meet the
requirements of a subsidy under Article 1. 1(a)(1)(i) and Article 1.1(a)(2) of the SCM Agreement and
are contingent upon export within the meaning of Article 3.1(a) of the SCM Agreement.

3.11 Accordingly if the Panel finds, as New Ze aland believes it should, that Step 2 export
payments constitute per se prohibited subsidies under Article 3.1(a) and 3.2 of the SCM Agreement,
the Panel is required to recommend under Article 4.7 of the SCM Agreement that the United States
withdraw the programme without delay. New Zeal and therefore supports Brazil’s request that the
Panel expressly make such a recommendation.

2. Export Credit Guarantee Programme

 (a) Violation of Articles 8 and 10.1 of the Agreement on Agriculture

3.12 New Zealand supports Brazil’s arguments that the export credit guarantee programme
provides export subsidies that can lead to, or thre aten to lead to, circumvention of export subsidy
commitments under Article 10.1. As established by the Appellate Body in US-FSC,
38 Article 10.1 of
the Agreement on Agriculture is violated where an export subsidy is available for unscheduled
agricultural products for which no reduction commitm ents have been made, as, “at the very least”,
this threatens to lead to circumvention of export subsidy commitments.

3.13 It is evident that Members considered th at export credit programme s could provide export
subsidies through the specific re ference to such programmes in Agreement on Agriculture
Article 10.2. While not all government export credit programmes necessarily provide export
subsidies, it is clear that the United States programme does so in both of the ways demonstrated by
Brazil (ie because it clearly falls within Item j of the Illustrative List of Export Subsidies in Annex I of
the SCM Agreement
39 or is otherwise an export subsidy as defi ned in Articles 1.1 and 3.1(a) of the

37 Ibid, para 119.
38 Report of the Appellate Body, US-FSC, para 150-152.
39 First Written Submission of Brazil, paras 272-286.

SCM Agreement ).40 The export credit scheme is therefore a subsidy contingent on export in the
context of Article 10.1 of the Agreement on Agriculture.

3.14 New Zealand notes that the United States has argued that “the plain words of Article 10.2 (of
the Agreement on Agriculture ) indicate that the export credit guarantee programs are not subject in
any way to the export subsidy disciplines of that Agreement.”
41 New Zealand disagrees with this
assertion. The heading of Article 10 is ‘Prevention of circumvention of export subsidy commitments’
and the inclusion of reference to export credits unde r that Article clearly reflects Members’ concern
that export credits can provide export subsidies.

3.15 Nor does Article 10.2 in any way suggest that it provides an exception from the disciplines of
Article 10.1. New Zealand agrees with the United States that Article 10.2 does not say “in addition to
the export subsidy commitments” of the Agreement.
42 That is because it did not have to, coming as it
does directly after the general prohibition against ci rcumvention in Article 10.1. While Article 10.1
currently provides the only discipline on the use of export credits, it is expected that the work
envisaged in Article 10.2 will elaborate further and more specific disciplines that will presumably
make identification of the extent to which such export credit programmes constitute export subsidies
more straightforward. However it is incorrect to assume that ther e is a vacuum in the meantime.
Item j of the Illustrative List of the SCM Agreement clearly already provides guidance on when export
credit guarantee or insurance programmes are to be considered to be ‘export subsidies’ and beyond
this the general definition in Articles 1.1 and 3.1(a) of the SCM Agreement also applies. While the
provisions of Item j do not apply to agricultural products mutatis mutandis there is no reason to
believe that the guidance th ere and elsewhere in the SCM Agreement is not appropriate for analyses
under the Agreement on Agriculture.

3.16 Nor should the application of the disciplines in the Agreement on Agriculture in the meantime
obviate the need for continued negotiations as envi saged by Article 10.2, as New Zealand hopes that
those negotiations will result in clea rer and more specific rules. Ind eed it may even be that the result
of the negotiations is that an export credit programme that is considered to be an export subsidy under
the current, more generally applicable rules, will be deemed not to be an export subsidy in the future.
However in that respect New Zealand notes, for example, that the United States Intermediate Export
Credit Guarantee Program (GSM-103) provides for a repayment term of between 3 and 10 years
43,
terms clearly well outside the scope of disciplines to govern the use of export credit guarantee
programmes currently being considered in the negotiations.

 (b) Violation of Articles 3.1(a) and 3.2 of the SCM Agreement

3.17 As export credits are not in conformity with Part V of the Agreement on Agriculture and thus
do not benefit from protection under the “peace clause”, they can equally be examined under the SCM
Agreement. If the Panel finds, as New Zealand believes it should, that export credit guarantee
payments are prohibited subsidies under Article 3.1(a) of the SCM Agreement, the Panel is required to
recommend under Article 4.7 of the SCM Agreement that the United States withdraw the payments
without delay. New Zealand therefore supports Braz il’s request that the Panel expressly make such a
recommendation.

40 Ibid, paras 287-293.
41 First Written Submission of the United States, para 164.
42 Ibid.
43 Ibid, para 151.

3. FSC Replacement Measure

3.18 New Zealand supports the claims made by Brazil,
44 based on the findings already made by the
Appellate Body in US-FSC Recourse to Article 21.5 , that the tax cuts under the FSC Repeal and
Extraterritorial Income Act of 2000 threaten to circumvent United States export subsidy commitments
within the meaning of Article 10.1 of the Agreement on Agriculture and therefore cannot be exempt
from actions under the SCM Agreement under Article 13(c)(ii) of the Agreement on Agriculture . In
addition the Appellate Body found that there was a prohibited subsidy under Article 3.1(a) of the SCM
Agreement.

3.19 Accordingly if the Panel finds, as New Zeala nd believes it should, that the tax cuts under the
FSC Repeal and Extraterritorial Income Act of 2000 are prohibited subsidies under Article 3.1(a) of
the SCM Agreement, the Panel is required to recommend under Article 4.7 of the SCM Agreement that
the United States withdraw the subsidies without delay. New Zealand therefore supports Brazil’s
request that the Panel expressly make such a recommendation.

IV. PROHIBITED SUBSIDIES

A. STEP 2 DOMESTIC PAYMENTS VIOLATE THE SCM AGREEMENT AND GATT ARTICLE III:4

4.01 New Zealand supports Brazil’s argument that the “peace clause” provides no immunity for
“amber box” subsidies from prohibited subsidy claims under Article 3.1(b) of the SCM Agreement.45
New Zealand believes that Brazil has demonstrated that Step 2 domestic payments are a prohibited
subsidy under Article 3.1(b) in that the payments are contingent on the use of domestic over imported
upland cotton. On that basis they also violate Article III.4 of GATT 1994.

4.02 Accordingly if the Panel finds, as New Ze aland believes it should, that Step 2 domestic
payments violate per se Article 3.2 of the SCM Agreement, the Panel is required to recommend under
Article 4.7 of the SCM Agreement that the United States withdraw the payments without delay. New
Zealand therefore supports Brazil’s request that the Panel expressly make such a recommendation.

V. UNITED STATES REQUEST FOR A PRELIMINARY RULING ON CERTAIN
MATTERS

5.01 New Zealand rejects the arguments of the United States that measures no longer in effect are
not within the Panel’s terms of reference.
46 Such measures should be within the scope of the Panel’s
consideration, particularly when the programmes in question have effectively only been renamed and
in fact continue in a slightly different form. In addition, the nature of serious prejudice claims may
necessitate consideration of data beyond a single y ear and may in fact require a Panel to consider
trends over a number of years. Accordingly New Zealand rejects the United States claim that market
loss assistance payments and PFC payments should be excluded from the Panel’s consideration of
Brazil’s claims.

5.02 New Zealand also considers that the Panel should reject the United States request that that
Panel rule that export credit guarantee measures relating to eligible United States agricultural
commodities (other than upland cotton) ar e not within its terms of reference.
47 While New Zealand
did not participate in the consultations, in New Zeal and’s view Brazil had little choice but to look at a
broader commodity coverage in relation to export credits because the information specific to upland

44 First Written Submission of Brazil, paras 315-330.
45 First Written Submission of Brazil, para 332.
46 First Written Submission of the United States, paras 207-211.
47 Ibid, paras 191-206.

cotton alone was not available. To prevent Brazil from doing so would unjustly allow a lack of
transparency to preclude scruti ny of measures by Members taking disputes, especially where the
information at a higher level of aggregation showed there was clearly a case to answer in respect of a
particular measure, in this instance export credit s. While more time is needed to analyse the
information brought forward by the United States (which does not appear to be sourced from publicly
available documents), at this stage of the Pane l’s consideration of Brazil’s claims, New Zealand
considers that the Panel should not make the ruling requested by the United States.

VI. CONCLUSION

6.01 In conclusion, New Zealand believes that Brazi l had demonstrated that the “peace clause” has
not been respected in relation to domestic support and export subsidies provided by the United States
to upland cotton in the marketing years 1999, 2000 , 2001 and 2002, and that accordingly Brazil is
entitled to bring actionable and prohibited subs idy claims against the United States under the GATT
1994 and the SCM Agreement. New Zealand looks forward to the next phase of the case which will
examine Brazil’s claims under Articles 3, 5 and 6 of the SCM Agreement and Article XVI of the
GATT 1994.

ANNEX B-10

THIRD PARTY SUBMISSION BY PARAGUAY

INTRODUCTION

1. Paraguay is grateful for the opportunity to express its views on the matter at issue in this
dispute.

2. Because Paraguay is a firm believer in a fair system of international trade, it feels that it
should explain its position on this issue which is of particular interest to its economy.

Applicable rules

3. In the Marrakesh Ministerial Declaration of April 1994 itself, Ministers affirmed that the
establishment of the WTO ushered in a new er a of global economic cooperation, reflecting the
widespread desire to operate in a fairer and more open multilateral trading system for the benefit and
welfare of their peoples, and expressed their determinat ion to resist protectionist pressures of all kinds
as well as their belief that the strengthened rules achieved in the Uruguay Round would lead to a
progressively more open world trading environment.

4. Moreover, in October 2002, on the occasion of the meeting of the International Cotton
Advisory Committee, governments observed the critical situation that the world cotton industry was
going through and its link to subsidies, suggesting th e establishment of a schedule for the elimination
of measures that distorted world production and trade in cotton, and stressing the need to submit
complaints before the WTO for violation of the applicable rules.

5. Paraguay considers that the subsidies and sup port granted by the United States to its cotton
production are inconsistent with the Agreement on Subsidies and Countervailing Measures, the
Agreement on Agriculture and the rules and principles of the GATT 1994, and that for the purposes of
this dispute it is therefore essential to take account of WTO legislation, which was carefully drafted to
avoid causing distortions in international trade and prejudice to developing countries such as
Paraguay.

6. WTO jurisprudence and the principles of inte rpretation of international law applied to the
various cases suggests that the applicable rules sh ould be read cumulatively, taking account of all
elements applied to the case in order to support the system as an integrated whole.

7. Paraguay considers Brazil's complaint and the legal justifications invoked with respect to the
inconsistency of the United States' laws, regulations and administrative procedures with the applicable
WTO rules to be fully consistent with the law.

PEACE CLAUSE

8. With respect to the applicability of Article 13(b)(ii) concerning domestic support measures
that conform fully to the provisions of Article 6 of the Agreement including direct payments that
conform to the requirements to paragraph 5 thereof, as reflected in each Member's Schedule, as well
as domestic support within de minimis levels and in conformity w ith paragraph 2 of Article 6,
Paraguay considers they shall be exempt from ac tions based on paragraph 1 of Article XVI of GATT

1994 or Articles 5 and 6 of Subsidies Agreement, provided that such measures do not grant support to
a specific commodity in excess of that decided during the 1992 marketing year.

9. This implies that it is not limited or confin ed to specific products. Thus, it can be concluded
that the United States does not enjoy protection from actions relating to subsidies using 1999, 2001
and 2002 as a basis, as Brazil duly proved.

10. In interpreting the Peace Clause, account must be taken of the serious prejudice that Member
economies could suffer, and an assessment made of the overall significance of all of the agreements
relating to the case.

11. Paraguay does not grant subsidies, either under the Subsidies Agreement or under the
Agreement on Agriculture. Paraguay did notify the Committee on Agriculture, on 22 July 2002, of its
domestic support commitments for 2000 and 2001 (G/AG/N/PRY/10, supporting table DS.1 and
related supporting tables) as required under the Agreement on Agriculture and the Agreement on
Subsidies and Countervailing Measures.

12. Consequently, as long as discriminatory s upport not provided for under WTO Agreement on
Agriculture or the WTO Agreement on Subsidies on Countervailing Measures continues to be
granted, Paraguay will have no choice but to file complaints with the relevant bodies.

Inconsistency with the Agreement on Agriculture

13. The Step 2 programme introduced by the United States to stimulate exports and the
competitiveness of its products on the international market is inconsistent with Articles 3.3 and 8 of
the Agreement on Agriculture.

14. Article 3 of the Agreement on Agriculture re fers to the incorporation of concessions and
commitments. Paragraph 3 thereof stipulates that:

Subject to the provisions of paragraphs 2(b) and 4 of Article 9 of this Agreement, a
Member shall not provide export subsidies listed in paragraph 1 of Article 9 in
respect of the agricultural products or groups of products specified in Section II of
Part IV of its Schedule in excess of the budgetary outlay and quantity commitment
levels specified therein and shall not provide such subsidies in respect of any
agricultural product not specified in that Section of its Schedule.
15. The above paragraph enables Members to provi de the subsidies listed in Article 9.1 of the
Agreement on Agriculture subject to fulfilment of the commitments assumed.

16. Similarly, Article 8 of the said Agreement regulates export competition commitments,
stipulating that:

Each Member undertakes not to provide export subsidies otherwise than in
conformity with this Agreement and the co mmitments as specified in that Member's
Schedule.
17. For the above reasons, and b ecause it does not consider the provisions of the Agreement on
Agriculture to have been complied with, Paraguay be lieves that the export subsidies granted by the
United States to its cotton industry are inconsistent with Articles 3.3, 8 and 9.1 of the Agreement on
Agriculture.

Inconsistency with the Agreement on Subsidies and Countervailing Measures

18. The agricultural subsidies cause "serious prejudice" to the domestic industry of other
Members under Articles 5 and 6 of the Agreement on Subsidies and Countervailing Measures.

19. The introductory paragraph of part III, Arti cle 5 of the said Agreement provides that no
Member should cause, through the use of any subsidy – specific and not exempted under the
Agreement – adverse effects to the interests of other Members, more specifically, as categorically
stated in the indents that follow, (a) injury to th e domestic industry of another Member and (c) serious
prejudice to the interests of another Member.

20. Article 6 specifically refers to cases in whic h "serious prejudice" is deemed to exist in the
sense of paragraph (c) of Article 5.

Effects of agricultural subsidies

21. Agricultural subsidies have effects on world trade, and measures such as those applied by the
United States have a significant impact on developing countries like Paraguay.

22. Indeed, Paraguay is all the more affected by the said measures in that it is precisely cotton
production that provides sustenance for the most needy segments of the population.

23. Paraguay has a total population of approximate ly 5,300,000, of which more than 500,000 are
linked to cotton production. If we add the related industries and activities, the figure reaches an
estimated 1,500,000, or approximately 30 per cent of the country's total population.

24. Any slump in the cotton trade causes an e xodus of rural population towards the urban areas
which do not offer any relief or solution, and th is further undermines the economic situation of a
country that depends on its agriculture.

25. As regards exports, in 1991, the foreign exch ange revenue generated by sales of cotton and
byproducts thereof reached US$318,912,000, approximately 43 per cent of the total for the country's
exports that year. At the time, a total of 299,259 farms, 190,000 were cultivating cotton.

26. By 2001, the figures had changed considerably . Export revenue had fallen to US$90,505,000,
a 72 per cent drop in the value of exports. The number of farms producing cotton decreased to about
90,000, representing a 52 per cent decrease in farms, employment and small farmer income. In other
words, the impoverishment was real.

27. Regarding international cotton fibre prices, in 1991, the price per ton of Paraguayan type fibre
was quoted on the New York Exchange at US$1,624, while in 2001, it was quoted at US$934.

28. In Paraguay, some 60 per cent of cotton is produced on farms of less than 10 hectares, making
it the main or only source of income for small farmers and the main source of employment for the
rural workforce in the most disadvantaged segment of society where access to capital and technology
is more restricted and the leading socio-economic welfare indicators are lower than anywhere else.

CONCLUSION

29. Paraguay is a small economy. It is a land-lock ed country that has no oil, gas, gold or other
natural resources of a kind that could make it of pa rticular interest to the developed countries. The
Paraguayan economy is essentially based on agricultural production, including the production and sale
of cotton.

30. Paraguay therefore considers that the measures adopted by the United States cause serious
prejudice to world trade, affecting Paraguay in partic ular, and that the necessary steps should be taken
to eliminate the adverse effects and seek to achieve a balance in world trade.

31. Paraguay respectfully requests the Panel to c onclude that the measure applied by the United
States is inconsistent with its WTO obligations under the various provisions of the Agreement on
Agriculture, the GATT 1994 and the Agreement on Subsidies and Countervailing Measures.

ANNEX B-11

THIRD PARTY SUBMISSION OF THE SEPARATE CUSTOMS
TERRITORY OF TAIWAN, PENGHU, KINMEN AND MATSU.

15 July 2003

1. In its fax of 28 May 2003 to the parties to th is dispute, the Panel poses questions regarding the
correct interpretation of Article 13 of the Agreement on Agriculture and the on the issue of
preliminary rulings. As the Panel’s questions ra ise an important point of law and the Separate
Customs Territory of Taiwan, Penghu, Kinmen and Matsu has a systemic interest in the proper
interpretation and operation of these and other re levant provisions involved in the procedures, we
would like to submit our views on the following aspects:

I. THE BURDEN OF PROOF REQUIRED BY ARTICLE 13 OF THE AGREEMENT
ON AGRICULTURE (THE “PEACE CLAUSE”), AND

II. THE QUESTION OF PRELIMINARY RULINGS.

I. BURDEN OF PROOF IN THE “PEACE CLAUSE”

2. In attempting to arrive at a proper interp retation of the burden of proof as provided in
Article 13 of the Agreement on Agriculture, we s uggest comparing differen t types of exemptions,
defences, or carving-out under different agreements.

3. It could happen that a matter is brought under an agreement not covered by the DSU. Since
Article 1 of the DSU provides that the DSU shall apply to disputes brought pursuant to the
consultation and dispute settlement provisions of the agreements listed in Appendix 1 to the DSU and
the WTO Agreement, it follows that consultation or dispute arising from or in connection with any
non-covered agreement would not be within the scope of the dispute settlement procedures under the
DSU. Thus, if a Member brings a complaint alle ging a breach of certain international environmental
treaties, for example, the complaining party would bear the burden to prove that the issue in dispute
falls within the purview of the DSB.

4. It could also be that a matter is specifical ly excluded from the dispute settlement procedures
by certain relevant agreements. A typical example of this would be the provision in Article 6 of the
TRIPS agreement, which provides that “for the purposes of dispute settlement under this Agreement,
subject to the provisions of Articl es 3 and 4 nothing in this Agreement shall be used to address the
issue of the exhaustion of intellectual property rights”. It is apparent that as long as it is an “issue of
the exhaustion of intellectual property rights,” the dispute settlement procedure shall not be used.
There is no threshold or prerequisite for applying such provision. The Member applying this
provision would be able to prev ent such dispute settlement procedures unless the complaining party
asserts and proves that the measure concerned is not such an “exhaustion issue”.

5. It could also happen that exceptions or ex emptions are granted under relevant agreements
providing specific obligations. There are different ways of providing exceptions for specific activities
or measures. Examples include paragraph 2 of Arti cle XI of the GATT stating “...shall not extend to
the following”; Articles XX and XXI of the GATT stating “nothing in this Agreement shall be

construed to...” These are in the nature of an affi rmative defence. Here, the burden of proof rests on
the party invoking the exception.

6. It is clear that Article 13 of the Agreemen t on Agriculture is not a “matter under an agreement
not covered under the DSU”. Neither is it a matter specifically excluded from the dispute settlement
procedures as provided in Article 6 of the TRIPS Agreem ent. It is also not typical of the type of
exception as contained in Articles XI, XX or XXI of the GATT. In our view, Article 13 falls between
the type of exception in Article 6 of the TRIPS and that in Article XI, XX or XXI of the GATT. Thus
the procedures for applying the provision should be interpreted differently.

7. In its First Written Submission, Brazil assert ed that, “Article 13 is in the nature of an
affirmative defense, because it provides an exception to a legal regime otherwise applying to
agricultural support measures. It does not alter the scope of other provisions providing positive
obligations on Members, and is not itself a positiv e obligation” and as a consequence, in this
proceeding the United States has th e burden of proof on the question of whether its subsidies “are in
conformity with the AOA Article 13”
1.

8. In our view, the very nature of Article 13 is such that it is not appropriate for any particular
description or “label” such as an “affirmative defence”, or “exception”, to be ascribed to it, simply for
the convenience of resolving the question of burden of proof.
2 We consider that Article 13 in itself
contains both rights and obligations of Members. The right conferred by Article 13, i.e. entitlement to
“exempt from actions” is conditional; conditional upon a positive obligation of full conformity to the
requirements as set out in the relevant provisions of the Agreement on Agriculture. We agree with the
view put forward by the United States at paragr aph 43 of its First Written Submission which purports
to identify such positive obligations. If the contention that Article 13 confers a right as well as
imposes a positive obligation, is accepted, then, as a complainant, it is for Brazil to prove a breach of
this positive obligation by demonstrating non-conformity rather than for the United States to bear the
burden of proving conformity. We consider that the above contention is the only logical conclusion in
giving effect to Article 13. Since there is no scheme for a Member under Article 13 to prevent the
initiation and the establishment of a panel, suppose Ar ticle 13 is interpreted in such a way as to still
require the United States to bear the burden of pr oving the conformity of relevant provisions of the
Agreement of Agriculture, it would mean Article 13 having less than its originally intended effect.

9. In addition to the above, drafters’ intent s hould be taken into account when interpreting this
Article. Domestic support measures are expressly allowed under this Article with the intention of
giving Members some flexibility on domestic support measures to help the progressive liberalization
of their agriculture. Requiring the respondent to b ear the burden to prove that the subsidy measure in
question is consistent with this Agreement will, to a certain degree, offset the respondent’s right to
claim for the exceptions provided by this Provision, which is contrary to the drafters’ intention.

10. To impose the burden of proof on the respondent has another negative implication. In the
case before us, if Brazil’s argument stands, it would render the words “exempt from actions” pointless
as the result would inevitably be a full-blown dispute settlement proceeding with Brazil submitting
evidence to substantiate its complaints and the US filing its defence by invoking Article 13 and
submitting proof of conformity thereto.

1 Brazil first Written Submission, paragraph 23.
2 In EC-Hormones, the Appellate Body is of the view that the particular description of “exception” did
not discharge the burden of the complaining party in establishing a prima facie case. At para 104, the Appellate
Body stated: the general rule in a dispute settlement proceeding requiring a complaining party to establish a
prima facie case of inconsistency of a provision…before the burden of showing consistency with that provision
is taken by the defending party is not avoided by simply describing the same provision as an exception.”

II. THE QUESTION OF PRELIMINARY RULINGS

11. Although on the evidence of past dispute settlement cases the normal practice of the Panel
tends to be that it hears preliminary issues, provi des indicative rulings and consolidates detailed
reasoning only in the final Panel report, the questio ns associated with the co rrect interpretation of
Article 13 are such that they merit the Panel’ s consideration and disposition at the earliest
opportunity.

12. We consider that the preliminary issues raised in this dispute determine the manner in which
the parties to this proceeding prepare their case. If the question of the correct interpretation of the
words “exempt from actions” is not resolved along with the question of the allocation of burden of
proof, considerable resources will be wasted both by complaining and defending claims. Needless to
say, due process will not be properly served in such a case. Accordingly, we respectfully urge this
Panel to adopt a special procedure to deal with this preliminary issue at the earliest opportunity so that
parties to this dispute will not be prejudiced.
3

3 This Panel may recall that the Appellant Body in EC-Banana indicated its opinion that “…this kind of
issue could be decided early in panel proceedings, without causing prejudice and unfairness to any party or third
party,..” WT/DS27/AB/R, at para. 144.