UNITED STATES – SUBSIDIES ON UPLAND COTTON
Document: Recourse to Article 21.5 of the DSU by Brazil Report of the Panel
Date: 18 December 2007
Document codes: WT/DS267/RW
Complainant: Brazil
Respondent: U.S.
Third parties: Argentina, Australia, Benin, Canada, Chad, China, Taiwan, EU, India, New Zealand, Pakistan, Paraguay, Venezuela, Japan, Thailand
Dispute stage: Mutually Agreed Solution
Agreements cited: Art. 3, 5, 6  Subsidies and Countervailing Measures (SCM)Art. 3.3, 7.1, 8, 9.1, 10.1  AgricultureArt. III:4, XVI  GATT 1994

UNITED STATES – SUBSIDIES ON UPLAND COTTON

Recourse to Article 21.5 of the DSU by Brazil

Report of the Panel

I. INTRODUCTION
1.1 On 18 August 2006, Brazil requested the establishm ent of a panel pursuant to Article 21.5 of
the Dispute Settlement Understanding ("DSU") concer ning the alleged failure of the United States to
implement the recommendations and rulings of the Dispute Settlement Body ("DSB") in US – Upland
Cotton.1
1.2 At its meeting of 28 September 2006 the DSB decided, in accordance with Article 21.5 of the
DSU, to refer this matter, if possible, to the original panel.
1.3 The terms of reference of the Panel are the following:
"To examine, in the light of the relevant provisions of the covered agreements cited
by Brazil in document , the matter referred to the DSB by Brazil in that
document, and to make such finding s as will assist the DSB in making the
recommendations or in giving the rulings provided for in those agreements."
1.4 On 18 and 20 October 2006, Brazil and the United States respectively requested the Director-
General to determine the composition of the Pane l in accordance with Article 8.7 of the DSU.
Article 8.7 of the DSU provides:
"If there is no agreement on the panelists within 20 days after the date of the
establishment of a panel, at the request of either party, the Director-General, in
consultation with the Chairman of the DSB and the Chairman of the relevant Council
or Committee, shall determine the com position of the panel by appointing the
panelists whom the Director-General consid ers most appropriate in accordance with
any relevant special or additional rules or procedures of the covered agreement or
covered agreements which are at issue in th e dispute after consulting with the parties
to the dispute. The Chairman of the DSB shall inform the Members of the
composition of the panel thus formed no later than 10 days after the date the
Chairman receives such a request."
1.5 On 25 October 2006, the Director-General de termined the composition of the Panel as
follows:
Chairman: Mr. Eduardo Pérez Motta
Members: Mr. Mario Matus
 Mr. Ho-Young Ahn.
2

1.6 Argentina, Australia, Canada, Chad, China, the European Communities, India, Japan,
New Zealand, and Thailand reserved their rights to participate in the Panel proceedings as third
parties.
1.7 The Panel met with the parties to the disput e on 27-28 February 2007. The Panel met with
the third parties on 28 February 2007.
1.8 The Panel submitted its interim report to the pa rties on 27 July 2007 and submitted its final
report to the parties on 15 October 2007.

1 WT/DS267/30.
2 WT/DS267/31.

II. BACKGROUND
2.1 This dispute concerns the disagreement betw een Brazil and the United States, within the
meaning of Article 21.5 of the DSU, as to "the exis tence or consistency with a covered agreement of
measures taken to comply with the reco mmendations and rulings" of the DSB in US – Upland
Cotton.
3
2.2 The report of the original panel in US – Upland Cotton was circulated to Members on
8 September 2004.
2.3 The original panel found that certain measures of the United States were inconsistent with the
Agreement on Agriculture and/or the Agreement on Subsidies and Countervailing Measures (" SCM
Agreement").
2.4 First, the original panel found that export credit guarantees under the GSM 102, GSM 103
and SCGP export credit guarantee programmes 4 were inconsistent with Articles 10.1 and 8 of the
Agreement on Agriculture and Articles 3.1(a) and 3.2 of the SCM Agreement in respect of exports of
upland cotton and other unscheduled agricultural products supported under these programmes and in
respect of one scheduled product (rice). 5 The original panel also found that in respect of exports of
unscheduled agricultural products not supporte d under the programmes and other scheduled
agricultural products, export credit guarantees under the GSM 102, GSM 103 and SCGP export credit
guarantee programmes were not inconsistent with Articles 10.1 and 8 of the Agreement on
Agriculture.6
2.5 Second, the original panel found that section 1207(a) of the Farm Security and Rural
Investment Act of 2002 ("FSRI Act of 2002") provid ing for user marketing (Step 2) payments to
exporters of upland cotton was inconsiste nt with Articles 3.3 and 8 of the Agreement on Agriculture
and Articles 3.1(a) and 3.2 of the SCM Agreement7 and that section 1207 (a) of the FSRI Act of 2002
providing for user marketing (Step 2) payments to domestic users of upland cotton was inconsistent
with Articles 3.1(b) and 3.2 of the SCM Agreement.8
2.6 Third, the original panel found that the effect of certain mandatory, price-contingent subsidy
measures of the United States 9 was significant price suppression within the meaning of Article 6.3(c)
of the SCM Agreement in the same world market constituting serious prejudice to the interests of
Brazil within the meaning of Article 5(c) of the SCM Agreement.10

3 As discussed below, the United St ates considers that cer tain claims of Brazil are not properly within
the scope of this proceeding because they do not pe rtain to a disagreement regarding "the existence or
consistency with a covered agreement of measures take n to comply with the recommendations and rulings".
Infra, Section IX.B.
4 See infra, paras. 3.13-3.16.
5 Panel Report, US – Upland Cotton, paras. 7.875, 7.881 and 8.1(d)(i).
6 Panel Report, US – Upland Cotton, paras. 7.896 and. 8.1(d)(ii). Thus the Panel concluded that these
export credit guarantees were exempt from actions based on Article XVI of the GATT 1994 and Article 3 of the
SCM Agreement.
7 Panel Report, US – Upland Cotton, paras. 7.749, 7.760-7.761 and 8.1(e).
8 Panel Report, US – Upland Cotton, paras. 7.1097-7.1098 and 8.1(f).
9 Marketing loan programme payments, user mark eting (Step 2) payments, market loss assistance
payments and counter-cyclical payments. See infra, paras. 3.7-3.11.
10 Panel Report, US – Upland Cotton, paras. 7.1416 and 8.1(g)(i).

2.7 In respect of the measures found to be inconsistent with the Agreement on Agriculture , the
original panel recommended pursuant to Article 19.1 of the DSU that the United States bring its
measures into conformity with the Agreement on Agriculture.11
2.8 In respect of the measures found to be subsidies prohibited under Articles 3.1(a) and 3.2 and
3.1(b) and 3.2 of the SCM Agreement, the original panel recommended pursuant to Article 4.7 of the
SCM Agreement that the United States withdraw the prohibited subsidy without delay, i.e. at the latest
within six months of the date of adoption of the panel report by the DSB or 1 July 2005, whichever
was earlier.12
2.9 In respect of the measures subject to the finding of significant price suppression within the
meaning of Article 6.3(c) of the SCM Agreement constituting serious prejudice to the interests of
Brazil within the meaning of Article 5(c) of the SCM Agreement , the original panel stated the
following:
"[W]e recall that, in respect of the subsidies subject to our conclusion in
paragraph 8.1(g)(i) above, pursuant to Article 7.8 of the SCM Agreement:
'7.8 Where a panel report or an Appellate Body report is adopted
in which it is determined that an y subsidy has resulted in adverse
effects to the interests of another Member within the meaning of
Article 5, the Member granting or maintaining such subsidy shall
take appropriate steps to remove the adverse effects or shall withdraw
the subsidy.'
Accordingly, upon adoption of this report, the United States is under an obligation to
'take appropriate steps to remove the adverse effects or ... withdraw the subsidy'."
13
2.10 The Appellate Body report in the original pr oceeding in this dispute was circulated to
Members on 3 March 2005.
2.11 The Appellate Body upheld the finding in paragraph 7.869 of the original panel report that the
export credit guarantee programmes at issue constituted a per se export subsidy within the meaning of
item (j) of the Illustrative List of Export Subsidies in Annex I of the SCM Agreement and the finding
in paragraphs 7.947 and 7.948 of the original panel report that these export credit guarantee
programmes were inconsistent with Articles 3.1(a) and 3.2 of the SCM Agreement.14 The Appellate
Body reversed the finding in paragraph 7.881 of the original panel report that Brazil had not
established that the application of export credit guarantees had resulted in actual circumvention of
export subsidy commitments for pig meat and poultr y meat. The Appellate Body considered that
there were insufficient facts in th e record to enable it to complete the legal analysis to determine
whether the export credit guarantees had been applied in a manner that resulted in actual
circumvention of the export subsidy commitments of the United States.15
2.12 The Appellate Body upheld the findings in paragraphs 7.1088, 7. 1097-7.1098 and 8.1(f) of
the original panel report that Step 2 payments to domestic users of upland cotton under
section 1207(a) of the FSRI Act of 2002 were inc onsistent with Articles 3.1(b) and 3.2 of the SCM
Agreement and the findings in paragraphs 7.748-7.749, 7.760-7.761 and 8.1(e) of the original panel

11 Panel Report, US – Upland Cotton, para. 8.3(a).
12 Panel Report, US – Upland Cotton, paras. 8.3(b) and (c).
13 Panel Report, US – Upland Cotton, para. 8.3(d).
14 Appellate Body Report, US – Upland Cotton, paras. 674 and 763(e)(iv).
15 Appellate Body Report, US – Upland Cotton, paras. 693-694 and 763(f)(i).

report that Step 2 payments to exporters of US upland cotton under section 1207(a) of the FSRI Act of
2002 were inconsistent with Articles 3.3 and 8 of the Agreement on Agriculture and Articles 3.1(a)
and 3.2 of the SCM Agreement.
16
2.13 The Appellate Body upheld the finding in para graphs 7.1416 and 8.1(g)(i) of the original
panel report that the effect of certain price c ontingent subsidies was significant price suppression
within the meaning of Article 6.3(c) of the SCM Agreement.17
2.14 On 21 March 2005, the DSB adopted the report of the Appellate Body in US – Upland Cotton
and the report of the original panel, as modified by the Appellate Body report.
III. FACTUAL ASPECTS
A. PRODUCTS AT ISSUE
3.1 The original panel described the products at issue as follows:
"This dispute principally concerns allege d United States subsidies in respect of
'upland cotton' ( Gossypium hirsutum ). This is defined in relevant United States
legislation as:
'Planted and stub cotton that is produced from other than pure strain
varieties of the Barbadense species, any hybrid thereof, or any other
variety of cotton in which one or more of these varieties
predominate.'
In relation to Brazil's claims that Un ited States export credit guarantee measures
constitute export subsidies under the Agreement on Agriculture and the
SCM Agreement, the dispute concerns upland cotto n and other eligible agricultural
products as well."
18 (footnotes omitted)
3.2 In this compliance dispute, there is no disagre ement between the parties on the description of
upland cotton, and thus, the Panel considers that the above description of upland cotton remains
accurate.
3.3 The original panel explained that "[u]pland cotton harvested from a field has cotton lint and
cottonseed", that "[g]inning involves separating co tton lint from cottonseed", and that "[u]nless
otherwise indicated, references in this report to upl and cotton ordinarily refe r to upland cotton lint." 19
In this proceeding, there is no disagreement between th e parties that the term "upland cotton" refers to
upland cotton lint.
3.4 While the product at issue in Brazil's claims of serious prejudice is upland cotton, with respect
to Brazil's claims under the Agreement on Agriculture and the SCM Agreement relating to export
credit guarantees, this compliance dispute concerns upland cotton and the following products: (i)
three agricultural products for which the Unite d States has entered export subsidy reduction

16 Appellate Body Report, US – Upland Cotton, paras. 552, 583-584 and 763(d).
17 Appellate Body Report, US – Upland Cotton, paras. 496 and 763(c).
18 Panel Report, US – Upland Cotton, paras. 7.197-7.198.
19 Panel Report, US – Upland Cotton, footnote 258.

commitments ("scheduled products") – rice, poultry meat and pig meat 20 – and (ii) "unscheduled
products" for which export credit guarantees were provided after 1 July 2005.21
3.5 The products described in (i) and (ii) in the preceding paragraph as well as upland cotton, all
fall within the product coverage of the Agreement on Agriculture.22
3.6 In addition, three other products (lysine, lyoce ll and wood products) are the subject of claims
by Brazil that the United States provided export s ubsidies in the form of export credit guarantees,
inconsistently with its obligations under the SCM Agreement.23
B. DEVELOPMENTS CONCERNING THE MEASURES FOUND TO BE WTO -INCONSISTENT BY THE
ORIGINAL PANEL24
1. User marketing (Step 2) payments, marketing loan payments, market loss assistance
payments and counter-cyclical payments
(a) User marketing (Step 2) payments
3.7 The term "user marketing (Step 2) payments" as used in the or iginal panel report refers to
payments made under the upland cotton user marke ting certificate or "Step 2" programme, a special
marketing loan provision for upland cotton in section 1207(a) of the FSRI Act of 2002. This
programme provided for marketing certificates or cash payments to eligible domestic users and
exporters of eligible upland cotton when certain market conditions existed such that US cotton pricing
benchmarks were exceeded. 25 On 1 February 2006, the Congress of the United States adopted
legislation repealing the Step 2 subsidy programme for upland cotton effective as of 1 August 2006.26
(b) Marketing loan payments
3.8 Marketing loan payments are provided for in sections 1201-1205 of the FSRI Act of 2002.
The original panel described these measures as follows:
"Marketing loan programme payments fo r upland cotton began in 1986 and have
continued under successive legislati on, including the Federal Agriculture

20 The United States requests that the Panel rule th at Brazil's claims concer ning poultry meat and pig
meat are outside the scope of this pr oceeding. US First Written Submission, paras. 24-30. The Panel addresses
this request of the United States below in Section IX.B.2.
21 Brazil has identified the follo wing products as having benef ited from GSM 102 export credit
guarantees since 1 July 2005: cotton, oilseeds (including soybeans and soybean meal), protein meals, fresh
vegetables, hides/skins, tallow, corn products. Brazil's First Written Submission, para. 450 and note 622.
22 Article 2 and Annex 1 of the Agreement on Agriculture . In particular, the Panel notes that the
Agreement covers products under Harm onized System Headings 52.01 to 52 .03 (raw cotton, waste and cotton
carded and combed).
23 Brazil included these products in the list of un scheduled products that benefited from GSM 102
export credit guarantees. Following an argument by th e United States that these products fall outside the
product coverage of the Agreement on Agriculture, Brazil indicated that, with resp ect to these three products, it
makes no claims under the Agreement on Agriculture but maintains its claims under the SCM Agreement. See
US Rebuttal Submission, para. 83, Brazil's Response to Panel Question 50 and US Comments thereon. See
infra, Section XIV.D for the Panel's determination that Brazil's claims concerning these products are outside the
scope of these proceedings.
24 The inclusion of a measure in th is section and the terms used to describe the measure are without
prejudice to the Panel's position on the preliminary objec tions raised by the United States with respect to
whether certain measures are properly within the scope of this proceeding under Article 21.5 of the DSU.
25 Panel Report, US – Upland Cotton, para. 7.209.
26 Section 1103 of the Deficit Reduction Act of 2005, reproduced in Exhibit Bra-435.

Improvement and Reform Act of 1996 (' FAIR Act of 1996') and the FSRI Act of
2002. The marketing loan programme is intended to minimize potential loan
forfeitures by providing interim financing to eligible producers on their eligible
production and facilitate the orderly distri bution of eligible commodities throughout
the year. Accordingly, rather than selling the crop at harvest when prices tend to be
at their lowest, the proceeds of the interi m loan enable producers to pay off their
expenses when they become due, while storing their pledged harvested crop as
collateral and repaying the loan when market conditions are potentially more
favourable.
Under the FAIR Act of 1996, marketing assistance loans for upland cotton were
provided to producers for upland cotton harvested on a farm containing eligible
cropland covered by a production flexibility contract [...]. The loans for upland
cotton were made on conditions prescribed by the Secretary for a term of ten months.
The legislation provided that the loan rate for upland cotton was determined by the
Secretary for each year's crop at a rate that was no less than the smaller of 85 per cent
of the five year Olympic average of county spot market prices, or 90 per cent of the
Northern Europe-based average price but wh ich should be not less than 50 cents per
pound and not more than 51.92 cents per pound. The loan rates for the 1999, 2000,
2001 and 2002 crops of upland cotton were each determined at 51.92 cents per
pound. The loans were non-recourse, so a producer had the option to deliver to the
CCC [Commodity Credit Corporation] th e quantity of a commodity pledged as
collateral for the loan as payment in full when the loan was due to be repaid.
Under the FSRI Act of 2002, marketing assistance loans continue to be provided, but
certain features of the programme have b een changed. In particular, loans are
provided to producers for any upland cotton produced on a farm, the term of a
marketing assistance loan for upland cotton is now nine months and the loan rate for
upland cotton is fixed by the Act itself at 52 cents per pound for the 2002 through
2007 crop years.
The repayment rate for marketing loans is the lower of the adjusted world market
price and the loan rate plus interest. When the adjusted world market price is lower
than the loan rate, the producer repays at le ss than the loan rate and the difference is
referred to as a 'marketing loan gain'. Alternatively, a producer may forego a
marketing loan and receive a 'loan deficiency payment' in the amount of the
difference between the lower adjusted wo rld market price and the loan rate.
Additionally, in October 1999, the FAIR Act of 1996 was amended to include
provisions for the issuance of 'commodity certificates', available to producers,
including upland cotton producers, to use in acquiring 1998 through 2002 crop
collateral pledged to CCC for a commodity loan. Marketing loan gains, loan
deficiency payments and commodity certif icate exchange gains are collectively
referred to below as 'marketing loan programme payments'.
When loans are repaid, the CC C charges interest at a rate 1 per cent higher than the
rate it pays the Treasury. The CCC forgives interest and pays storage charges for the
loan period when upland cotton under loan is forfeited, and also on redemption of
upland cotton under loan where the repayment amount is too low to satisfy the loan
amount and those charges."
27 (footnotes omitted)

27 Panel Report, US – Upland Cotton, paras. 7.204-7.208.

3.9 It is not in dispute that the United States con tinues to provide marketing loan payments to US
producers of upland cotton and that the legislativ e and regulatory provisions governing these
marketing loan payments have not been changed.
(c) Market loss assistance payments
3.10 Market loss assistance payments were provided for in four separate pieces of legislation. 28
The original panel described these measures as follows:
"Market loss assistance ('MLA') payments we re made under four separate pieces of
legislation, one each for the years 1998 through 2001. They were ad hoc emergency
and supplementary assistance provided to producers in order to make up for losses
sustained as a result of recent low commodity prices.
The 1998 MLA payments were intended essentially as a 50 per cent additional
[production flexibility contract] paymen t. The 1998, 1999 and 2001 Acts each
appropriated a dollar amount to assistance which was divided among PFC payment
recipients proportionately to their respective previous PFC payment. The 2000 Act
provided for payments at the same contract payment rates as the 1999 Act. MLA
payments were only made to recipients enrolled in the PFC programmes."
29
(footnotes omitted)
(d) Counter-cyclical payments
3.11 Counter-cyclical payments are provided for in sections 1101-1108 of th e FSRI Act of 2002.
The original panel described these measures as follows:
"The counter-cyclical payments ('CCP') pr ogramme was also established by the FSRI
Act of 2002. It provides support to producers (as defined) based on historical acreage
and yields for the same commodities as [direct payments], including upland cotton.
An eligible producer must enter into an annual agreement in order to receive
payments for a crop year. The eligibility requirements and planting flexibility
requirements are the same as for the DP programme. CCP payments, like DP
payments, are made to producers on farms for which payment yields and base acres
are established for each of the 2002 th rough 2007 crop years of each covered
commodity.
CCP payments depend on the current prices of commodities. They are provided to
producers with base acres and yields for a covered commodity for each of the 2002
through 2007 crop years whenever the effec tive price falls below the target price,
which is fixed by the Act at 72.4 cents per pound for upland cotton. The effective
price for a commodity is the sum of the DP payment rate [...], plus the higher of the
national average farm price for the marketi ng year or the loan rate [...]. The
difference between the effective price and th e target price is the CCP payment rate.
Consequently, the CCP payment rate, DP pa yment rate and, where applicable, the

28 Market loss assistance payments were provided pursuant to the following Acts: the Agriculture,
Rural Development, Food and Drug Administration and Related Agencies Appropriation Act of 1999 for the
1998 crop; the Agriculture, Rural Development, Food and Drug Administration and Related Agencies
Appropriation Act of 2000 for the 1999 crop; the Agriculture Risk Protection Act of 2000 for the 2000 crop;
and the Crop Year 2001 Agriculture Economic Assistance Act for the 2001 crop.
29 Panel Report, US – Upland Cotton, paras. 7.216-7.217.

loan rate, are equal to the difference be tween the market price and 72.4 cents per
pound.
CCP payments are made on 85 per cent of the base acreage for each commodity
multiplied by the corresponding payment rate multiplied by the applicable payment
yield. An owner who elected to have hi s or her base acreage calculated on the basis
of the four-year average of planted acreage during the 1998 through 2001 crops, had a
one-time opportunity partially to 'update' CCP payment yields for CCP payments for
all covered commodities, using one of two methods which both included the farm's
average yields for the 1998 through 2001 crop years."
30 (emphasis original, footnotes
omitted)
3.12 It is not in dispute that the United States c ontinues to provide counter-cyclical payments to
US producers of upland cotton and that the legislative and regulatory provisions governing these
counter-cyclical payments have not been changed.
2. Export credit guarantees
3.13 The original panel examined three export credit guarantee programmes administered by the
United States Department of Agriculture (US DA) through the Commodity Credit Corporation
(CCC):
31 the General Sales Manager 102 ("GSM 102" ) programme, the General Sales Manager 103
("GSM 103") programme and the Supplier Cred it Guarantee Programme ("SCGP"). Brazil
challenged the programmes "as such" and "as applied" 32 to exports of upland cotton and other eligible
agricultural commodities. 33 All three programmes were used to guarantee the repayment of credit
made available to finance commercial export sales of US agricultural commodities.
3.14 The original panel described the three programmes as follows:
"General Sales Manager 102 ('GSM 102')
Under the GSM 102 export credit guarant ee programme, the CCC is authorized to
guarantee the repayment of credit made ava ilable to finance commercial export sales
of agricultural commodities from privately owned stocks on cred it terms between 90
days and three years. The CCC generally covers 98 per cent of the principal and a
portion of the interest. The CCC selects agricultural commodities and products
according to market potential. The CCC do es not provide financing, but rather
guarantees payments due from foreign banks. To secure such a payment guarantee,
once a firm export sale exists, the United Stat es exporter must apply prior to the date
of exportation. The exporter pays a fee calculated on the dollar amount guaranteed,
based on a schedule of rates applicable to different credit periods. There is a statutory
cap on the fee charged of 1 per cent of the gua ranteed dollar value of the transaction.
In terms of financing, the CCC-approved fore ign bank issues an irrevocable letter of
credit in favour of the United States exporter, ordinarily advised or confirmed by the
financial institution in the United States wh ich agrees to extend credit to the foreign

30 Panel Report, US – Upland Cotton, paras. 7.223-7.226.
31 The CCC is a wholly-owned government corporation within the USDA; it has no employees and
carries out the majority of its programmes through the personnel and facilities of the Farm Service Agency. See
Panel Report, US – Upland Cotton, footnote 346.
32 Because the original panel adopted a "programme-w ide" analytical approach under item (j) of the
Illustrative List of Export Subsidies in Annex I to the SCM Agreement, it did not view the distinction between
Brazil's "as such" and "as applied" claims as a determinative one. Panel Report, US – Upland Cotton ,
para. 7.763.
33 Panel Report, US – Upland Cotton, para. 7.69.

bank. If the foreign bank fails to make any payment as agreed, the exporter is
required to submit a notice of default to the CCC. The CCC pays a valid claim for
loss.
General Sales Manager 103 ('GSM 103')
The GSM 103 programme operates in a similar fashion to GSM 102. The main
differences between the two programme s include: export credit guarantees under
GSM 103 are "intermediate term credit guarantees" issued for terms from three to 10
years; there are additional statutory require d determinations to be made when the
CCC issues guarantees; and there is no statutory cap on the origination fees that may
be charged by the CCC in connection with an export credit guarantee transaction.
Supplier Credit Guarantee Programme ('SCGP')
Under the SCGP, the CCC is authorized to issue guarantees for the repayment of
credit made available for a period not exceeding 180 days by a United States exporter
to a purchaser of United States agricultural commodities in a foreign country. These
direct credits must be secured by promissory notes signed by the importers. The CCC
does not provide financing, but rather guarantees payment due from the importer.
Typically, the CCC guarantees a portion (65 pe r cent) of the value of the exports
(principal only; the guarantee does not cover interest). The exporter negotiates terms
of export credit sales with the importer. Once a firm export sale exists, the United
States exporter must apply for a payment guara ntee prior to the date of exportation.
The exporter pays a fee for the guarantee calculated on the guaranteed portion of the
value of the export sales. There is a statutory cap on the fee charged of 1 per cent of
the guaranteed dollar value of the transaction. The importer must issue a dollar-
denominated promissory note in favour of the United States exporter in the form
specified in the applicable country or regional programme announcement. The
United States exporter may negotiate an arrange ment to be paid, in full or in part, by
assigning the right to proceeds that may b ecome payable under the CCC's guarantee
to a United States financial institution. If the foreign bank fails to make any payment,
the exporter or assignee is required to submit a notice of default to the CCC. The
CCC pays a valid claim for loss."
34 (footnotes omitted)
3.15 Under the GSM 102 and GSM 103 export credit gu arantee programmes, the fees charged by
the CCC varied with the guaranteed dollar value of the transaction, the repayment period, and the
principal repayment interv al (annual or semi-annual). 35 Under the SCGP, fees varied with the
repayment period (up to 90 days or 90 to 180 days).36
3.16 Following the adoption of the original pa nel and Appellate Body reports, the USDA
announced, on 30 June 2005, that as of 1 July 2005, the CCC would no longer accept applications for
payment guarantees under the GSM 103 programme. 37 It also announced that the CCC would
henceforth use a new fee stru cture for the GSM 102 and SCGP programmes. Under the new
schedule, fees were increased and fees now vary with country risk, repayment term (tenor) and
repayment frequency (annual or semi-annual).38 Countries are classified in eight risk categories (0-7);

34 Panel Report, US – Upland Cotton, paras. 7.242-7.244.
35 Panel Report, US – Upland Cotton, para. 7.820.
36 Panel Report, US – Upland Cotton, para. 7.821 and footnote 975.
37 Exhibits Bra-502 and Bra-503.
38 "Fee rates will be based on the country risk that CCC is undertaking, as well as the repayment term
(tenor) and repayment frequency (annual or semi-annual) under the guarantee. For the GSM-102 programme,

countries in the riskiest category (category 7) are ineligible.
39 Lastly, in October 2005, the
United States ceased issuing export credit guarantees under the SCGP.40
IV. PARTIES' REQUESTS FOR FINDINGS AND RECOMMENDATIONS
4.1 With respect to its claims relating to adverse effects within the meaning of Article 5 of the
SCM Agreement, Brazil requests the Panel to make the following findings:
(a) The United States failed to take any measures to remove the adverse effects or to
withdraw the three price-contingent upland cotton subsidy programmes under the
FSRI Act of 2002 between 22 September 2005 and 31 July 2006.
(b) The US measure eventually taken to comply , i.e. the amendment of the FSRI Act of
2002 to repeal Section 1207(a), providing for Step 2 payments, is insufficient to
ensure compliance with the DSB recomme ndations and rulings, because the resulting
basket of measures is inconsistent with Articles 5 and 6 of the SCM Agreement. In
particular, Brazil requests the compliance Pa nel to find that the marketing loan and
counter-cyclical payment programmes of the FSRI Act of 2002 cause "present"
serious prejudice to the interests of Brazil in the form of (a) significant price
suppression in the world market for upland cotton and (b) an increase in the US world
market share of upland cotton.
(c) The US measure eventually taken to comply is insufficient to ensure compliance with
the DSB recommendations and rulings, becau se the resulting basket of measures is
inconsistent with Articles 5(c) and 6.3(c) as well as footnote 13 of the SCM
Agreement. In particular, Brazil requests the compliance Panel to find that the
marketing loan and counter-cyclical payment programmes of the FSRI Act of 2002
cause a threat of serious prejudice to the inter ests of Brazil in the form of a threat of
significant price suppression in the world mark et for upland cotton. The Panel need
only decide this claim if it is unable to find that there is "present" serious prejudice
from marketing loan and counter-cyclical payment programmes of the FSRI Act of
2002; and
(d) The failure of the United States to take any measure to remove the adverse effects or
to withdraw the three price-contingent upland cotton subsidy programmes under the
FSRI Act of 2002 between 22 September 2005 and 31 July 2006 causes "present"
serious prejudice to the interests of Brazil in the form of significant price suppression
in the world market for upland cotton and an increase in the US world market share,
in violation of Articles 5(c), 6.3(c) and (d) of the SCM Agreement. The Panel need
only reach this claim if it is unable to make findings in favour of Brazil with respect
to Brazil's claims summarized under (a)-(c) above.
41
4.2 With regard to its claims under the Agreement on Agriculture and the SCM Agreement
relating to export credit guarantees, Brazil requests the Panel to make the following findings:

country risk will be based on the country of the foreign obligor (opening bank), as determined by the CCC. For
the SCGP, country risk will be based on the country of the foreign obligor (importer), as determined by the
CCC." Exhibit Bra-504. See also Exhibits Bra-502, Bra-505 and Bra-506.
39 A number of countries that were previously eligible were reclassified into this ineligible risk
category. See US First Written Submission, footnote 15 and Exhibit US-2.
40 See US First Written Submission, para. 20 and Exhibit Bra-513. The United States indicates that
"[a]t present, [it] has no plan to resume the SCGP either in the same or different form." US First Written
Submission, para. 20.
41 See Brazil's First Written Submission, para. 461.

(a) With respect to those export credit guarantees under the GSM 102, GSM 103 and
SCGP programmes that were outstanding on 1 July 2005, "measures taken to
comply" within the meaning of Article 21.5 of the DSU do not exist.
(b) The "measures taken to comply" by the United States with regard to the GSM 102
export credit guarantee programme are incons istent with Articles 10.1 and 8 of the
Agreement on Agriculture.
(c) The "measures taken to comply" by the United States with regard to the GSM 102
export credit guarantee programme are inconsistent with Articles 3.1(a) and 3.2 of the
SCM Agreement. 42
4.3 Brazil requests that, on the basis of the fi ndings requested above, the Panel make the
following recommendations:
(a) The United States has failed to comply fully with its obligation, under Article 7.8 of
the SCM Agreement, to "remove the adverse effects or … withdraw the subsidy", and
the original Article 7.8 recommendation of the DSB therefore remains in effect, and
applies to the full extent of the findings requested above.
(b) The United States has failed to comply fully with its obligation, under Article 4.7 of
the SCM Agreement , to "withdraw the subsidy", and the original Article 4.7
recommendation of the DSB therefore remains in effect, and applies to the full extent
of the findings requested above.
(c) The United States has failed to bring itself in to conformity with its obligations under
the Agreement on Agriculture, and the original recommendation of the DSB therefore
remains in effect, and applies to the full extent of the findings requested above.
 43 44
4.4 The United States requests the Panel to reject the claims of Brazil in their entirety and to find
that the United States has complied with the recomme ndations and rulings of the DSB and, further,
that the measures of the United States taken to comply are not inconsistent with the SCM Agreement
or the Agreement on Agriculture.45
4.5 The United States requests the Panel to make prel iminary rulings that certain claims of Brazil
are not within the scope of this proceeding.46
4.6 In respect of Brazil's claims of "present" seri ous prejudice and threat of serious prejudice, the
United States submits that: (i) Brazil fails to substan tiate its arguments in support of the claim that the
effects of the elimination of the Step 2 programme are modest; (ii) Brazil does not demonstrate that
the marketing loan or counter-cyclical programmes mandate a breach of WTO obligations; (iii) Brazil
fails to make a prima facie case of "present" serious prejudice within the meaning of Articles 5(c) and
6.3(c) (significant price suppression) of the SCM Agreement; (iv) Brazil fails to make a prima facie
case of "present" serious prejudice under Articles 5(c) and 6.3(d) (inc reased market share) of the

42 See Brazil's First Written Submission, para. 462.
43 See Brazil's First Written Submission, para. 463.
44 In this connection, Brazil also observes that the deadlines for implementation of the original
recommendations and rulings of the DSB continue to be 1 July 2005 (for the export credit guarantee-related
recommendations and rulings) and 21 September 2005 (for the adverse effects-related recommendations and
rulings). Brazil's First Written Submission, para. 464.
46 See infra, para. 9.7. The Panel addresses the issue of whether, as argued by the United States, certain
claims of Brazil are not properly within the scope of this proceeding in Sections IX.B.2-5 of this Report.

SCM Agreement; and (v) Brazil fails to make a prima facie case of threat of serious prejudice pursuant
to Articles 5(c) and 6.3(c) of the SCM Agreement.
47
4.7 In respect of Brazil's claims regarding export credit guarantees, the United States submits that
export credit guarantees have been provided un der the GSM 102 programme subsequent to
1 July 2005 consistently with WTO obligations of the United States and that the United States has
taken action to withdraw the subsidy with r espect to GSM 102, GSM 103 and SCGP export credit
guarantees issued prior to 1 July 2005.48
V. ARGUMENTS OF THE PARTIES
5.1 The arguments of the parties, as submitted, or as summarized in their executive summaries as
submitted to the Panel, are attached as Annexes.
5.2 The responses of the parties to questions of the Panel, their comments on each other's
responses and other relevant documents submitted by the parties are also attached as Annexes.
VI. ARGUMENTS OF THE THIRD PARTIES
6.1 The arguments of the third parties are attached to this Report as Annexes.49
VII. INTERIM REVIEW
7.1 The Panel submitted its interim report to the pa rties on 27 July 2007. On 3 September 2007,
the parties submitted written requests for review of precise aspects of the interim report. Neither party
requested that the Panel hold an interim review meeting. On 17 September 2007, the parties
submitted written comments on each other's written requests for review.
7.2 The Panel has modified aspects of the interim re port in light of the parties' requests and
comments where the Panel considered it appropriate. The Panel has also made technical corrections
and changes of an editorial nature.
A.
CHANGES REQUESTED BY THE PARTIES REGARDING THE "FACTUAL ASPECTS" SECTION OF THE
INTERIM REPORT
7.3 The United States proposes changes to paragraphs 3. 7, 3.13 and 3.16 in the "Factual
Aspects" Section of the interim report (paragraphs 3.7, 3.13 and 3.16 of this Report). The Panel
considers that these proposed changes correct certai n factual errors or inaccuracies in the interim
report and has therefore amended the concerned pa ragraphs in accordance with the request of the
United States.
B. CHANGES REQUESTED BY THE PARTIE S WITH RESPECT TO THE PANEL 'S DESCRIPTION OF
ARGUMENTS OF THE PARTIES
7.4 The Panel has made a number of amendments to the interim report pursuant to requests by
one of the parties to amend certain paragraphs of the report in order to better reflect arguments made
by that party in the course of the proceeding. Th e Panel has made such changes to paragraphs 4.5;
9.19 (footnote 101); 9.28 (footnote 111); 9.62 (footnote 163); 9.56; 10.6; 10.46 (footnote 254); 10.73;
10.118; 10.155; 10.156; 10.163 (footnote 443); 10.165; 10.200; 10.200 (footnote 481); 14.16 and

47 US First Written Submission, paras. 149, 196, 203 and 332 and US Rebuttal Submission, para. 405.
48 US First Written Submission, paras. 60-142 and 143-145.
49 India and Thailand did not make written submissions.

footnote 588, and 14.122 (footnote 728) of the in terim report (paragraphs 4.5; 9.19 (footnote 105);
9.29 (footnote 115); 9.64 (footnote 165); 9.58; 10.6; 10.46 (footnote 256); 10.73; 10.118; 10.155;
10.156; 10.163 (footnote 450); 10.165; 10.205; 10.205 (footnote 497); 14.16 and footnote 604, and
14.122 (footnote 747) of this Report).
7.5 The United States requests the Panel to add a footnote to the first sentence of paragraph 8.29
of the interim report (paragraph 8.29 of this Repor t) with the following text: "For purposes of this
dispute, the United States did not object to Chad being considered as a least-developed country
Member". The United States notes in this respect th at the issue of whether Chad is a least-developed
country Member was not discussed by either party a nd that no relevant evidence was presented to
support such a finding. Brazil opposes the change proposed by the United States.
7.6 The Panel declines to make the change requested by the United States. The reference in the
interim report to Chad as a least-developed country Member is consistent with the WTO practice to
rely on the UN classification of least-developed countries.
50 Moreover, the United States has not
stated in this proceeding that it did not object to Chad being considered a least-developed country
Member for purposes this dispute. Therefore, the sentence suggested by the United States is not an
accurate reflection of an argument made in this proceeding.
7.7 The United States notes that paragraph 9.7 of the interim report (paragraph 9.7 of this
Report) appears to omit a summary of an additiona l argument of the United States and requests that
this paragraph be revised to add the objection of the United States that Brazil's claims against the
marketing loan and counter-cyclical programmes are outside the scope of this dispute because these
measures were not measures taken to comply under Article 21.5 of the DSU. Brazil has not
commented on this suggested change.
7.8 The Panel agrees with the United States that the interim report does not adequately reflect the
two distinct bases of the preliminary objections of the United States to Brazil's claims regarding the
marketing loan and counter-cyclical payment progr ammes. To address this issue, the Panel has
amended the title of Section IX.A.3 and has added new paragraphs 9.28 and 9.55.
C. REQUESTS FOR CHANGES WITH RESPECT TO THE PANEL'S FACTUAL AND LEGAL ANALYSIS
7.9 The United States requests that the Panel delete footnote 108 to the last sentence of
paragraph 9.25 of the interim report (footnote 112 to the last sentence of paragraph 9.25 of this
Report) in which the Panel notes that in interpretin g the concept of "measures taken to comply" in
Article 21.5 of the DSU, the Appellate Body has taken into consideration the need for prompt
compliance with DSB recommendations and rulings. The United States argues that the need for
prompt compliance with DSB recommendations and rulings does not somehow convert a claim
outside the scope of an Article 21.5 proceeding into one that is properly before the compliance panel.
The United States also observes that Brazil itself has implicitly recognized that any export credit
guarantees for pig meat and poultry meat are outside the scope of this proceeding by bringing a
separate case in WT/DS365 challenging US export credit guarantees in respect of all scheduled and
unscheduled products.
7.10 Brazil objects to the suggestion of the United States to delete this footnote. Brazil submits, in
this respect, that the Panel's citation to the stat ements made by the Appellate Body regarding the
promotion of prompt compliance is correct as a matter of law and that the Panel is entitled to consider
that the argument of the United States that GSM 102 export credit guarantees for pig meat and poultry

50 It should be noted that the original panel treated Benin and Chad as least-developed country
Members and that there is nothing in the original panel report to indicate that the United States had expressed a
view or a reservation on that issue. Panel Report, US – Upland Cotton, para. 7.54.

meat are outside the scope of this proceeding will not promote prompt compliance with DSB
recommendations and rulings. Brazil rejects the argument of the United States that the fact that Brazil
has raised the consistency of GSM 102 export credit guarantees in a consultation request in
WT/DS365 constitutes an implicit recognition by Brazil that GSM102 export credit guarantees for pig
meat and poultry meat are outside the scope of this proceeding.
7.11 The Panel declines to delete the footnote to the last sentence of paragraph 9.25 of the interim
report (footnote 112 to the last sentence of paragraph 9.25 of this Report). In this footnote, the Panel
refers to a statement of the Appellate Body in US – Oil Country Tubular Goods Sunset Reviews
(Article 21.5 – Argentina), paragraph 151, which the Panel consider s to provide further support for its
view that Brazil's claims regarding export credit guarantees for pig meat and poultry meat are properly
within the scope of this proceeding. The United States does not contest the factual accuracy of the
Panel's citation to the statement of the Appellate Body. As is already clear from the fact that the Panel
makes this point in a footnote, the Panel relies on this statement simply as an additional element in
support of the main arguments set out in paragra phs 9.24-9.25 of the interim report (paragraphs 9.24-
9.25 of this Report). The Panel remains of the view that the notion that the purpose of Article 21.5 of
the DSU is to promote prompt compliance with DSB recommendations and rulings is a pertinent
consideration that supports the Pane l's conclusion that Brazil's claims are within the scope of this
proceeding. Finally, the Panel sees no merit to the argument of the United States that the Panel
should construe Brazil's request for consultations in WT/DS365 as constituting an implicit recognition
by Brazil that Brazil's claims relating to GSM102 export credit guarantees for pig meat and poultry
meat are not within the scope of this proceeding.
7.12 With regard to paragraph 9.78 of the inte rim report (paragraph 9.80 of this Report), Brazil
suggests that the Panel may wish to provide a mo re detailed explanation as to why the rulings in US –
Softwood Lumber IV support the Panel’s conclusion that marketing loan and counter-cyclical
payments made after 21 September 2005 are "measu res taken to comply" within the meaning of
Article 21.5 of the DSU. Brazil refers, in this re gard, to the arguments that it has advanced on this
issue in this proceeding. The United States disagrees with Brazil’s suggestion. The United States
submits that Brazil errs in suggesting that the panel and Appellate Body reports in US – Softwood
Lumber IV (Article 21.5 – Canada) support finding that the US measures at issue are measures taken
to comply.
7.13 The Panel agrees with Brazil that paragraph 9.78 of the interim report (paragraph 9.80 of this
Report) does not sufficiently explain why the Panel considers that its reasoning is supported by the
reports of the panel and the Appellate Bo dy in previous Article 21.5 proceedings. The Panel has
amended this paragraph to state more clearly why the Panel considers that its reasoning is supported
by the Appellate Body's statement in US – Softwood Lumber IV (Article 21.5 – Canada) that
"measures taken to comply" in Article 21.5 of the DSU include "measures with a particularly close
relationship to the declared 'measure taken to co mply', and to the recomme ndations and rulings of
the DSB".
7.14 Brazil requests the Panel to ame nd paragraph 9.79 of the interim report (paragraph 9.81 of
this Report) by deleting the words "to the extent" in the first line, the word "are" in the second line,
and the comma and the word "they" after "prejudice" in the fifth line. Brazil submits that these
proposed changes are consistent with its comment on paragraph 9.78 of the interim report and with
the reasoning underlying the Panel's conclusion that marketing-loan and counter-cyclical payments
made after 21 September 2005 are within the scope of this proceeding. The United States disagrees
with Brazil's proposed changes. The United States considers that the wording of paragraph 9.79
makes clear that the existing marketing loan and co unter-cyclical payments could be provided by the
United States on different conditions that were fou nd to be inconsistent with the provisions of the
SCM Agreement.

7.15 The Panel declines to make the chang es requested by Brazil to paragraph 9.79 of the interim
report (paragraph 9.81 of this Repor t). The Panel considers that these changes are inconsistent with
the text of the immediately preceding paragra phs and that Brazil has offered no convincing
explanation as to why these changes are warranted.
7.16 With respect to the paragraph 10.23 of the inte rim report (paragraph 10.23 of this Report), the
United States considers that it is inaccurate to state th at there is "no disagreement" between the
parties regarding the "general order of magnitude" of marketing loan payments made by the United
States to upland cotton producers in MY 2004 and MY 2005. The United States notes that while
Brazil and the United States have submitted identical figures for the amount of marketing loan
payments in MY 2005, with respect to the amount of marketing loan payments in MY 2004 the
figures submitted by the parties have continued to di ffer. The United States thus requests the Panel to
delete the reference to MY 2004 in this paragraph. Brazil objects to the request of the United States,
arguing that any difference between Brazil’s and the US figures for MY 2004 is negligible.
7.17 The Panel has amended paragraph 10.23 of the in terim report (paragraph 10.23 of this
Report) by deleting the statement that "there is no disagreement" between the parties regarding the
general order of magnitude of marketing loan payments in MY 2004 and MY 2005 and by adding
language that makes clear that it is the Panel, rather than the parties, that considers that the figures
supplied by the parties on marketing loan paym ents for MY 2004 and MY 2005 are of the same
general order of magnitude.
7.18 The United States requests that the Panel revise the text of footnote 236 to paragraph 10.40
of the interim report (footnote 238 to paragraph 10.40 of this Report) to make it clear that the response
of the United States to Panel question 55 does no t imply agreement with the "cotton-to-cotton"
methodology. Brazil opposes this request, arguing that the change requested by the United States is
unnecessary as the interim report already summarizes the arguments of the United States on the
"cotton-to-cotton" methodology.
7.19 The Panel has amended the text of footnote 236 to paragraph 10.40 of the interim report
(footnote 238 to paragraph 10.40 of this Report) to clarify that in posing question 55 the Panel was not
asking whether the United States agreed with "B razil's methodology or the "cotton-to-cotton"
methodology.
7.20 With respect to paragraph 10.95 of the interi m report (paragraph 10.95 of this Report), the
United States requests the Panel either (1) to add a finding that the current economic literature
supports the view that counter-cyclical payments do not appear to have had more than minimal
production- and trade-distorting effects, inter alia, because the conditions under which such payments
might in theory have greater effects have not been established in fact by Braz il in this proceeding, or
(2) to explain its basis for rejecting each of the studies cited by the United States drawing the
conclusion that the production effects of counter-cyclical payments are minimal.
7.21 Brazil objects to this request of the United States. Brazil argues that both parties have
submitted significant evidence and arguments regardi ng the effects of counter-cyclical payments and
that in its interim report the Panel has analyzed th e studies submitted by both parties in great detail.
Since the Panel has explained its evaluation of these studies, there is no basis for the United States to
request the Panel to explain its basis for rejecti ng the evidence and argument of the United States.
Similarly, there is no basis for the Panel to conc lude that the economic literature supports the US
position since the Panel has found exactly the opposite.
7.22 The Panel considers that paragraphs 10.90-10.95 of the interi m report adequately explain the
conclusion drawn by the Panel from its review of th e economic studies referred to by the parties.
However, in light of the comments of the United States, the Panel has made certain changes to

paragraphs 10.91 and 10.92 of the interim report (par agraphs 10.91 and 10.92 of this Report) to refer
more specifically to certain studies cited by the United States.
7.23 The United States requests that the text of foot note 363 to the third sentence of
paragraph 10.110 of the interim report (footnote 369 to the third sentence of paragraph 10.110 of this
Report) be revised to reflect that Step 2 payments were only made to users of upland cotton rather
than to producers. Brazil opposes the change requested by the United States on the ground that Step
2 payments were made not only to users but also to exporters of cotton.
7.24 The Panel considers that while the United States is correct that Step 2 payments were not
made to producers, Brazil is correct that such payments were made not only to users but also to
exporters. The Panel has therefore amended the text of footnote 363 to the third sentence of
paragraph 10.110 of the interim report (footnote 369 to the third sentence of paragraph 10.110 of this
Report), to reflect that Step 2 payments were made to users and exporters of cotton.
7.25 With respect to paragraph 10.126 of the interi m report (paragraph 10.126 of this Report), the
United States requests the Panel to revise the statement in the second sentence that "neither Brazil
nor the United States appear to have access to recent data on foreign planted acreage." The
United States submits that foreign planted acreage data does not exist; therefore, it is not a question of
access for either party. Only the United States has a consistent public source of data on both planted
and harvested acreage. The United States requests th at the Panel revise the second sentence to read:
"However, neither Brazil nor the United States appear to have access to recent data on foreign planted
acreage; indeed such data do not appear to exist." Brazil objects to the request of the United States on
the ground that the United States is raising a new ar gument that foreign planted acreage data does not
exist. Brazil submits, in this regard, that it is not appropriate for a party to make new arguments at the
interim review stage that were not made during the proceedings, much less to ask a panel to reflect
those new arguments in its final report.
7.26 The Panel has decided not to make the change to paragraph 10.126 of the interim report
proposed by the United States. The question of whet her or not data on foreign planted acreage exists
was not raised in this dispute.
7.27 Brazil requests the Panel to amend paragraph 10.1 27 of the interim report (paragraph 10.127
of this Report) because, as currently formulated, the paragraph can be construed to be in contradiction
with other findings made by the Panel in its interim re port. Brazil refers in particular to the statement
of the Panel in paragraph 10.127 that "Brazil's cl aim of insulation of US producers from market price
signals applies when expected prices are below their intervention levels" but "this insulation does not
apply when expected cotton prices are above their in tervention levels". Brazil considers that, taken
out of context, this statement might be construed to be in contradiction with the Panel's finding in
paragraph 10.81 of the interim report (paragraph 10.81 of this Report) that marketing loan payments
affect the level of acreage planted to cotton even when the expected market price for upland cotton at
the time of planting is higher than the marketing loan rate. Brazil requests that the Panel revise
paragraph 10.127 "to eliminate any basis for concl uding that paragraph 10.127 conflicts in any way
with the Panel's earlier findings regarding the role of marketing loan and counter-cyclical payments in
insulating US upland cotton farmers from market price signals".
7.28 The United States opposes the changes proposed by Brazil to paragraph 10.127 of the interim
report. The United States considers that Brazil is attempting to substitute its own view that, regardless
of the expected price level or other factors, upland cotton producers are insulated from market signals
and that marketing loan and counter-cyclical paym ents always have effects on the production of
upland cotton that lead to significant price suppressi on. The Panel, in Section X.7 of the interim
report, has examined, inter alia , the US evidence of the relative st ability of the US share of world
production and exports over the entire period of the FSRI Act of 2002, and has rejected Brazil’s

extreme view that US upland cotton producers are always insulated from market price signals. The
United States also submits that even Brazil’s proposed edits concede that producers are responding to
market signals when expected prices are above the market loan rate.
7.29 The Panel agrees with Brazil that certain statements in paragraph 10.127 of the interim report
(paragraph 10.127 of this Report) do not entirely accu rately reflect the Panel's findings regarding the
issue of the insulation of US cotton producers form ma rket prices. The Panel's finding is that whether
expected market prices at the time of planting are above the levels that will trigger marketing loan and
counter-cyclical payments is a factor that affects the degree of insulation of US cotton producers from
market price signals but not th e existence of such insulation per se . The Panel has amended the
paragraph to better convey this idea.
7.30 With respect to paragraph 10.146 of the inte rim report, (paragraph 10.146 of this Report),
Brazil requests the Panel to delete the term "necessar ily" from the last sentence of the paragraph.
Brazil states that the inclusion of this word could be read as suggesting that, absent a clear
"discernable temporal coincidence", there is an increased burden for a complaining Member to
demonstrate adverse effects. Brazil considers that this is particularly troublesome in proceedings
under Article 21.5 of the DSU because there is alr eady a finding adopted by the Dispute Settlement
Body that the challenged subsidies cause adverse e ffects. Similarly, a complaining Member that
challenges a long-existing distortion of a market caus ed by long-term subsidization might not be able
to establish that the effects of subsidies increased simply because the market distortion has continued
to exist for a long time. In Brazil’s view, as in the original proceeding, the existence of a "discernable
temporal coincidence" can be a useful factor to assess in an adverse effects claim. However, it is not
an indispensable element for establishing causation.
7.31 The United States objects to Brazil's request, arguing that there is no basis for Brazil’s
argument that the word "necessarily" in the last sen tence of paragraph 10.146 of the interim report
relates to the question of a party’s burden of proof . The United States considers that the Panel is
merely stating its own findings based on the evid ence presented with respect to causation. The
United States also submits that Brazil actually seems to imply that the burden of demonstrating
adverse effects in proceedings under Article 21.5 of the DSU should be less "b ecause there already is
a finding adopted by the Dispute Settlement Bo dy that the challenged subsidies cause adverse
effects". In making this argument, Brazil ignores the fact that since the "challenged subsidies" in this
proceeding are not the same ones as those at issue in the original proceeding, there is no finding with
respect to payments made outside of MY 1999-2002. Moreover, as stated by the Panel in
paragraph 9.3 of the interim report, "[t]he general rules regarding the allocation of the burden of proof
in WTO dispute settlement require that a party clai ming a violation . . . assert and prove its claim.
These rules also apply to proceedings under Article 21.5 of the DSU." Thus, Brazil must make a
showing of adverse effects, assuming that its claim with respect to the marketing loan payment and
counter-cyclical payment programmes is properly before the Article 21.5 compliance panel in the first
place.
7.32 The Panel rejects Brazil's request to delete the term "necessarily" from the last sentence of
paragraph 10.146 of the interim re port (paragraph 10.146 of this Report). The Panel disagrees with
Brazil's analysis of the implications of the use of this term. The word "necessarily" in the last
sentence of paragraph 10.146 simply underlines the point that price suppression can exist even though
"recent years have not witnessed the sharp decline in the world market price for upland cotton that
occurred during the period considered by the original panel". The Panel therefore considers that there
is no basis for Brazil's argument that this word can somehow be interpreted as implying a view of the
Panel that "absent a clear 'discernible temporal coincidence', there is an increased burden for a
complaining Member demonstrating (sic) adverse eff ects" and that "a complaining Member would be
required to explain that the absence of a discernabl e temporal coincidence does not break any causal
link between the subsidies and the adverse effects."

7.33 The United States requests that paragraph 10.162 of th e interim report (paragraph 10.162 of
this Report) be amended to indicate that the new data begins with MY 2003, based on the more recent
USDA cost survey, and that the MY 2002 data originates with the 1997 USDA survey. Brazil objects
to the US request, noting that USDA Survey Data is updated annually. The Panel has decided to
substitute "data" for "updated information" at the beginning of the second sentence of
paragraph 10.162 of the interim report.
7.34 With regard to the Panel's statement in the last sentence of paragraph 10.166 of the interim
report (paragraph 10.166 of this Report) that "[w]e therefore consider the inclusion of land, labour and
capital recovery costs in fixed (overhead) cost s as appropriate, being in accordance with the
recommended methodology", the United States requests the Panel to differentiate between paid and
unpaid labour costs and to treat paid labour cost s as variable. The United States notes that with
respect to paid labour that does not have farm ow nership claims, there is a difference in opinion on
whether to classify the cost as fixed or variable, a nd that, as a conservative measure, the United States
considers paid labour cost as a variable cost. Brazil has not commented on this request of the
United States.
7.35 The Panel does not consider that the change requested by the United States is appropriate.
Whether paid labour costs are classified as variab le or fixed will have no effect on the cost of
production analysis. The Panel sees no reason why it should make a ruling on this matter when such a
ruling would not affect its cost of production analysis.
7.36 Brazil requests the Panel to make changes to th e text of paragraph 10.176 of the interim
report (paragraph 10.176 of this Report), to reflect th at there is no requirement that proof of long-term
costs be produced over the lifetime of the challe nged measure. Brazil notes that many subsidy
programmes have been in place for many decades. Moreover, any suggestion that cost of production
data needs to cover the lifetime of a measure would be inconsistent with claims of threat of serious
prejudice under Articles 5 and 6 of the SCM Agreement in particular. Finally, the notion that the full
lifetime of a measure should be the basis for assessing pr oof of adverse effects is inconsistent with the
concept of a more recent reference period to assess the existence of present adverse effects.
7.37 The United States disagrees with Brazil’s argument that the Panel is possibly implying a
requirement that proof of long-term costs be pr oduced over the lifetime of a challenged measure.
Rather, the Panel simply states that the effect of marketing loan and counter-cyclical payments is
"best assessed" over the lifetime of the FSRI Act, but recognizes that data was unavailable for that
entire time frame, and relies instead on the data that is available for MY 2002-2006.
7.38 The Panel agrees with some of the concerns that Brazil has raised and has therefore made
certain of the changes proposed by Brazil. Howeve r, the Panel also agrees with the United States that
other changes proposed by Brazil attempt to expand the universe of the cost data reviewed by the
Panel. The Panel therefore declines to make those changes.
7.39 With respect to paragraph 10.188 of the interim report (paragraph 10.193 of this Report), the
United States
 submits that the Panel has not accounted for the argument of the United States that
ginning costs should not be included in the calculation of the costs of production of upland cotton lint.
The United States submits that it has demonstrated th at ginning costs are appropriately excluded from
the calculation of costs of production of upland cotton lint, in light of the common practice in the
United States of ginning costs being paid out of the proceeds gained by the gin from the sale of the
cotton seed separated out in the ginning process. The United States therefore requests the Panel to
find that ginning costs should be excluded from th e calculation of the costs of production of upland
cotton and to make adjustments accordingly to its calculation of cotton revenue costs and returns.

7.40 Brazil objects to the United States request for excl usion of ginning costs from the calculation
of the costs of production of upland cotton lint. First, Brazil observes that such an approach is
inconsistent with the original panel’s approach, which, in making its cost of production-related
findings, relied upon USDA cost data that included ginning costs and market returns from cottonseed.
USDA cost of production data shows that the costs associated with ginning are far higher than the
market value of cottonseed. An exclusion of ginni ng costs and revenue would result in manipulated
cost of production data that would paint an inappr opriately advantageous picture of the situation of
US upland cotton farming. Brazil submits, in this respect, that it has explained that the US approach
would cut out a large portion of ginning costs and a much smaller portion of upland cotton producers'
market revenue from cottonseed. Second, Brazil notes that if one were to exclude ginning costs, for
accuracy, at the very least, ginning revenues would also have to be excluded. However, the exclusion
of such costs and revenues would result in an inadequate basis to assess medium-to-longer-term
developments in the industry.
7.41 The Panel agrees with the United States that the interim report does not address the argument
made by the United States in this proceeding that ginning costs should be excluded from the
calculation of the costs of production of upland cotto n lint. Without taking a position on whether this
argument is correct or not, the Panel has analysed th e revenue and cost data in two forms: (i) without
cottonseed revenues and ginning costs as the US proposes and (ii) with cottonseed revenues and
ginning costs as in the original dispute. The results of this analysis show that whether or not ginning
costs are excluded from the calculation of the costs of production of upland cotton lint does not alter
the Panel's conclusion that market revenues exceed tota l costs of production. To reflect this analysis
in the final report, we have am ended the interim report by adding new paragraphs 10.185-10.188 and
by changing the text of paragraphs 10.185-10.191 of the interim report (paragraphs 10.189-10.196 of
this Report).
7.42 With respect to paragraph 10.214 of the interi m report (paragraph 10.219 of this Report), the
United States requests that the Panel delete the last sentence, which states that "a good model does
not need a lot of extraneous bells and whistles". In the view of the United States, a proper model
estimating the degree of price suppression should be constructed to take into account as many relevant
economic factors as possible.
7.43 Brazil objects to the request of the United States, explaining that the Panel has correctly
identified the advantages of Brazil’s model. Brazil agrees with the Panel that a "simpler and more
accessible model can be readily focused on the specific issue at hand" and that "it should include only
relevant economic features that are crucial to a determination whether certain US Government
payments led to significant price suppression."
7.44 Notwithstanding Brazil's objection, the Panel has accepted the request of the United States to
delete the last sentence of para graph 10.214 of the interim report (p aragraph 10.219 of this Report).
The Panel explains its assessment of the advantage of Brazil's model in the second and third sentences
of the paragraph. The statement in the fourth sentence of the paragraph that "a good model does not
need a lot of extraneous bells and whistles" is not essential in this respect and its deletion does not
entail a substantive change.
7.45 Brazil requests that the Panel delete the phrase "it has not undergone any peer review" from
paragraph 10.215 of the interim report (paragraph 10.220 of this Report). Brazil expresses a concern
that in future disputes economic models that ha ve not undergone a "peer review" will be heavily
discounted or even discarded for that reason al one, leading to a "peer review" requirement for
economic models offered, for example, in disput es involving claims of adverse effects under the SCM
Agreement or in proceedings under Articles 21.5 and 22.6 of the DSU. Brazil submits that from a
practical standpoint peer review can be a quite lengt hy and costly process. A crucial consideration in
determining the issue of "peer review" is the fact that any economic model must be tailored to the

particular facts and circumstances of a dispute. Thus, any economic analysis presented to a panel or
arbitrator in a case of adverse effects is likely to be very recent in order to reflect current conditions of
competition in the relevant market. Given th e relatively short time-frames of WTO dispute
settlement, it may simply not be possible to secure a timely "peer review" of an economic model
specifically tailored to the current conditions of co mpetition. Brazil also submits that a requirement
for "peer review" is not supported by an examinati on of proceedings under Article 22 of the DSU. A
number of economic models have been presented to ar bitrators, but there is no evidence in any of the
Article 22.6 arbitration reports that these models ha d been "peer reviewed". Finally, Brazil claims
that there is no precise definition of "peer review".
7.46 The United States notes that the phrase "it has not underg one any peer review" is a simple
factual statement. The United States also states, however, that the term "peer review" may not apply
as well in this context so that a better means of expressing the concern over potential deficiencies
inherent in the economic model would be that th e model was not well-known and not widely-used for
published research and analysis.
7.47 The Panel agrees with Brazil that there exists no requirement that economic models
submitted in WTO dispute settlement proceedings must have been the subject of a process of peer
review. The Panel also notes that the United States concurs with Brazil that the term "peer review"
may not be applicable in this context. In light of these considerations, the Panel has deleted the
reference to peer review in the second sente nce of paragraph 10.215 of the interim report
(paragraph 10.220 of this Report).
7.48 Regarding the Panel's statement in paragraph 10.217 of the interim report (paragraph 10.222
of this Report) that "price suppression has been the outcome of all the simulation results whether one
uses the parameter values proposed by Brazil or the FAPRI and ATPSM parameter values proposed
by the United States", the United States submits that the appropriate question before the Panel is
whether there has been significant price suppress ion, not simply any price suppression. The
United States argues that it has submitted the a lternative parameter valu es solely for purposes of
showing that, even if one were to employ Br azil's modelling approach, correcting its flawed
parameters shows that the price effects are not significant. The United States requests the Panel to
clarify that Brazil’s model has not "earn[ed] the confidence of the Panel," and that it therefore has not
contributed to the Panel’s finding of significant price suppression.
7.49 Brazil objects to the request of the United States. Brazil argues that in its examination of
price suppression the Panel has thoroughly examined th e evidence and data provided by both parties.
Like the original panel, the Panel has considered sev eral elements to be crucial in its analysis. The
price suppression results of Brazil's model, applyi ng the parameter sets both of Brazil and of the
United States provided additional comfort to the Panel in its finding of price suppression because all
parameter sets showed that the effect of the subsid ies is to suppress prices. While the Panel has not
endorsed a particular set of parameters, this is not a sufficient basis for the United States to request
that the Panel find that the model itself did not earn the Panel's confidence.
7.50 The Panel rejects the request of the United States, since the Panel has adequately explained
the role of the model in its analysis in paragr aphs 10.217 and 10.241-10.252 of the interim report
(paragraphs 10.222 and 10.246-10.257 of this Report). It is clear from the report that the Panel has
used the results of the economic simulation model in conjunction with other factors – the substantial
proportionate influence of the United States on the world market for upland cotton, the mandatory,
and price-contingent nature and revenue-stabilizi ng effect of marketing loan and counter-cyclical
payments, the order of magnitude of the marketi ng loan and counter-cyclical subsidies, and the
significant gap between the total costs of production of US upland cotton producers and their market
revenue – to arrive at its finding that the effect of marketing loan payments and counter-cyclical
payments is significant price suppression.

7.51 Brazil requests the Panel to amend paragraph 10.2 26 of the interim report (paragraph 10.231
of this Report). Brazil's concern with respect to th is paragraph pertains to the statement of the Panel
that "it is not possible for the Panel to determine with any great deal of precision or confidence just
how much of the projected decline in US exports of upland cotton is due to the elimination of the Step
2 payments". Brazil considers that, if read in isola tion, this statement could be taken to suggest that
the Panel considers that it is unable to assess the effe cts of the withdrawal of the Step 2 subsidies and
hence should not have concluded that the withdrawal of these subsidies is insufficient to bring the
United States into conformity with Articles 5 and 6 of the SCM Agreement. Brazil proposes that the
Panel add a statement to recall its finding in para graph 10.248 of the interim report (paragraph 10.253
of this Report) that "even if the entire decline of US exports is attributable to the repeal of Step 2, we
would still find that marketing loan and counte r-cyclical payments significantly suppress world
prices". Brazil also suggests that the Panel cite the evidence submitted by Brazil that not the entire
decline in US exports is attributable to the removal of the Step 2 payments.
7.52 The United States disagrees with the change proposed by Brazil. The United States
considers that Brazil's proposed change mis-characterizes the Panel's finding in paragraph 10.248 of
the interim report (paragraph 10.253 of this Report) . The Panel there notes that the "effect of the
elimination of this subsidy on US exports and on the amounts of marketing loan payments and
counter-cyclical payments suggests that the elimin ation of this subsidy does not affect the price
suppressing effects of the marketing loan payments and counter-cyclical payments in the world
market for upland cotton". However, in reachin g this conclusion, the Panel does not make the
alternative assumption that Brazil clai ms it does, i.e. that "even if th e entire decline of US exports is
attributable to the repeal of Step 2, we woul d still find that marketing loan and counter-cyclical
payments significantly suppress world prices".
7.53 The Panel declines to make the change proposed by Brazil to paragraph 10.226 of the interim
report (paragraph 10.231 of this Report). The Pane l considers that the text proposed by Brazil does
not correctly reflect the finding of the Panel in paragraph 10.248 of the interim report (paragraph
10.253 of this Report).
7.54 The United States requests the Panel to reiterate in paragraph 12.269 of the interim report
(paragraph 12.2 of this Report) the conclusion draw n in paragraphs 9.68-9.69 of the interim report
(paragraphs 9.70-9.71 of this Report) that it is not necessary for the Panel to make a finding on
Brazil's claim of non-compliance by the United States in the period 22 September 31 July 2006.
Brazil has not commented on this request. The Panel has amended paragraph 12.269 of the interim
report (paragraph 12.2 of this Report) by inserting a reference to the panel's ruling in paragraph 9.68
of the interim report (paragraph. 9.70 of this Report).
7.55 The United States requests that the Panel replace the word "underwrite" by "guarantee" in the
first sentence of paragraph 14.5 of the interim report (paragraph 14.5 of this Report) to more
accurately describe the GSM 102 and GSM 103 progra mmes. The United States also requests the
Panel to amend the paragraph to reflect the fact that the GSM 103 programme no longer operates.
Brazil objects to the request of the United States. The Panel
 has made the change requested by the
United States as it considers that the term "guara ntee" more precisely describes the operation of the
programmes at issue than the term "underwrite". The Panel has also amende d paragraph 14.5 of the
interim report to reflect the fact that the GSM 103 programme no longer operates.
7.56 For clarity, the United States suggests that a sentence be inserted after the first sentence of
footnote 605 (paragraph 14.30) of the interim report (footnote 621 to paragraph 14.30 of this Report)
to describe with more precision what was at issue in the Brazil – Aircraft (Article 21.5 – Canada)
dispute. The United States further requests that the last sentence of the footnote be revised to reflect
more accurately its Opening Statement. Brazil does not comment on this request. The Panel has
amended footnote 605 (footnote 621 in this Report) to reflect the US suggestion.

7.57 Brazil requests that the Panel modify the first sentence of paragraph 14.67 of the interim
report (paragraph 14.67 of this Report). Brazil not es that, as the next sentence indicates, the source
for Brazil's argument regarding re-estimates are not US "budget" documents but are, rather, CCC
Financial Statements. The United States does not oppose Brazil's request, but suggests alternative
language to make it clear that Brazil exclusively referred to the CCC Financial Statements. The Panel
has amended paragraph 14.67 of the interim report (paragraph 14.67 of this Report) in accordance
with the language suggested by the United States.
7.58 Both parties have asked that the Panel make cer tain changes to paragraph 14.76 of the interim
report (paragraph 14.76 of this Report).
7.59 Brazil's concern lies with the use by the Panel of the term "inflated". Brazil is concerned that
that word is not neutral and ma y be misunderstood as indicating that the Panel considered the initial
estimate to be flawed through exaggeration or deliberate overstatement. The United States objects to
Brazil’s proposed edit. The United States cons iders that adopting Brazil's suggestion would
unnecessarily eliminate one of the two points made by the Panel in the last sentence of
paragraph 14.76 – the Panel's rec ognition that it is possible that the initial subsidy estimates are
inflated because they do not reflect the actual use of the programme.
7.60 With respect to the same paragraph, the United States is concerned that the Panel is imposing
an impossible standard to achieve when it indi cates that "[i]n no case has the reduction turned a
positive subsidy estimate into a negative one" and requests that the Panel eliminate that sentence. The
United States submits that re-estimates are not ca lculated from, or based on, the original subsidy
estimates. Consequently, the re-estimate process can never re-capture any difference between the
original subsidy estimate and estimates based on the amount of guarantees actually issued. Brazil
considers that the United States misunderstands what it believes to be the intent of paragraph 14.76.
7.61 The Panel has made changes to paragraph 14.76 of the interim report (paragraph 14.76 of this
Report) and to footnote 665 of the interim report (fo otnote 681 of this Report) to make it clear that
what is at issue in this paragraph is not the re-estimate process that is mandated under the FCRA.
Rather, the Panel, in this paragraph, is merely describing the process by which the initial subsidy
estimate is readjusted in the two subsequent budge ts that follow the first budget in which a subsidy
estimate for a particular cohort is provided, and increasingly takes actual use of the programme into
account. The United States argued before the Panel that the initial subsidy estimate is unreliable
because it is computed before any actual use is made of the GSM 102 programme. In
paragraph 14.76 the Panel responds to that argume nt of the United States. The Panel therefore
declines to delete the sentence iden tified by the United States. With respect to the use of the word
"inflated", the Panel has replaced that term by "overs tated" which, it believes, is more neutral and
reflective of the Panel's intent.
7.62 The United States requests that the Panel clarify its characterization of the US position
concerning the initial estimates in paragraph 14.78 of the interim report (paragraph 14.78 of this
Report). Brazil objects to the US request. The Panel
 has amended the paragraph to remove the word
"indirectly" and clarify the terms "by themselves" in order to better reflect the argument of the
United States. The Panel does not understand the Unite d States to have requested any other change to
the paragraph at issue.
7.63 Brazil makes a number of comments with respect to the second sentence of paragraph 14.81
of the interim report (paragraph 14.81 of this Report). First, the Panel dismisses the arguments of the
United States that the subsidy re-estimates demonstrate that GSM 102, GSM 103 and SCGP
programmes were provided at no net cost to govern ment. The Panel states that the evidence provided
by the United States "do[es] not conclusively establish that the programmes were provided at no net

cost to the US Government". 51 Brazil is concerned that this formul ation might be read to suggest that
the Panel has imposed the burden of proof on the United States, which Brazil understands is not the
case. Brazil, therefore, suggests th at this passage be reformulated to state that the evidence provided
by the United States does not sufficiently rebut the evidence that the programmes were provided at a
net cost to the US Government. Second, the Panel characterizes negative subsidy numbers as
indicative of "profitability". Brazil requests that the Panel refer to the concept of "net cost", which the
Panel has used elsewhere, instead of the word "profitable". Third, the Panel’s statement suggests that
the re-estimated data provided by the United Stat es uniformly shows profitability across all cohorts,
whereas the data provided by the United States, however, continues to project losses for several
cohorts during the period FY 1992-2006. The United States objects to Brazil's suggested edits apart
from the one which corrects language that would appear to place the burden of proof on the
United States.
7.64 The Panel has amended the paragraph at issue (par agraph 14.81 of this Report) to adopt
Brazil's suggestion with respect to the Panel's use of the term "profitability", a term which the Panel
had used as shorthand for the concept of "no net co st to the government." The Panel has also taken
note of Brazil's comment with respect to the fact that the re-estimates data submitted by the
United States does not project a negative subsidy estim ate in respect if all c ohorts and has inserted a
mention to that effect in a footnote (footnote 689). The Panel disagrees, however, with Brazil that the
second sentence of the paragraph may be interprete d as the Panel having imposed the burden of proof
on the United States. The Panel has clarified th e sentence at issue to better convey the intended
meaning of the sentence.
7.65 The United States submits that footnote 673 of the interim report (footnote 690 of this
Report) does not accurately reflect its arguments concerning the role played by original subsidy
estimates in the original panel's conclusion that the programmes at issue fell within the scope of item
(j) of the Illustrative List. Brazil objects to the US request. The Panel considers that footnote 673 of
the interim report (footnote 690 of this Report) accurately reflects the argument of the United States in
its Response to Panel Question 105 and therefore rejects the request of the United States.
7.66 The United States considers that the use of the word "figure" in the third sentence of
paragraph 14.83 of the interim report (paragraph 14. 83 of this Report) is confusing, as the previous
sentence references the CCC’s estimated net cash outflow for export credit guarantees as of
30 September 2006, a "figure" that was not before the original panel. Moreover, the United States
indicates that while it agrees with the original pa nel's conclusion that the credit guarantee liability
figure does not represent in any sense an actual loss, the United States in no way accepts the original
panel’s ultimate reliance on the credit guarantee liability figure as an indicator of the estimated long-
term loss of the programmes to the US Government. Brazil opposes the second aspect of the US
request.
7.67 The Panel takes note of the concern of the United St ates with respect to the use of the term
"figure" in the sentence at issue and of its concern that it not be depicted as endorsing a view that the
"credit guarantee liability" reported in the CCC's Fina ncial Statements indicates a future loss. We
have, for this reason, amended and moved the sen tence at issue to a new footnote (footnote 699)
which quotes from the US Response to Panel Questi ons 107 and 108 and therefore, in the Panel's
view, accurately reflects the arguments made by the United States.
7.68
The United States submits that the Panel misconstrues its criticism of Brazil’s failure to
include cash received when it states, in paragraph 14. 86 of the interim report (paragraph 14.86 of this
Report) that "including these amounts would not allow a comparison with the re-estimates data
submitted by the United States." The United States e xplains that its point was not to facilitate a

51 Emphasis added.

comparison with re-estimates data but was simply to offer a more accurate depiction of cash flows
during the period of time identified by Brazil. The Panel has amended paragraph 14.86 of the interim
report (paragraph 14.86 of this Report) to reflect the fact that the comment at issue was not made in
response to an argument of the United States but ra ther reflected an additional reason why the Panel
considered it inappropriate to include amounts as sociated with recoveries on pre-1992 guarantees, as
had been suggested by the United States.
7.69 Brazil requests that the Panel modify the fina l two sentences of paragraph 14.94 of the
interim report (paragraph 14.94 of this Report). In paragraph 14.94, the Panel suggests that GSM 102
fees are not subject to the OECD Arrangement "beca use", "the Arrangement only applies to official
support for terms of two years or more". This statement implies that GSM 102 guarantees are not
subject to the OECD Arrangement because they are provided for tenors not covered by the
Arrangement. Brazil notes that, as the Panel correc tly observes at paragraph 14.102, however, GSM
102 provides for tenors (over 24 months) which are subject to the OECD Arrangement. The United
States does not object to Brazil’s stylistic edits to this paragraph. The Panel has made the changes
suggested by Brazil.
7.70 With respect to paragraph 14.96 of the interi m report (paragraph 14.96 of this Report), the
United States asks the Panel to note that the US participa tion in the elaboration of the MPRs does not
mean in any way that the United States views the MPRs as a proper basis for comparison to GSM 102
fees in this case. Brazil does not comment on this request. The Panel considers that there is no
ambiguity in the interim report that the United States considers that the MPRs are not applicable to
GSM 102 export credit guarantees (see paragraph 14.92 of the interim report, paragraph 14.92 of this
Report) and therefore considers that the addition suggested by the United States is unnecessary.
7.71 Brazil and the United States request that the Panel correct what they consider to be a factual
inaccuracy in paragraph 14.117 of the interim report (paragraph 14.117 of this Report). They indicate
that there are 6, rather than 7, eligible country risk categories under the amended GSM 102
programme. The Panel has deleted the reference to there being "7" eligible country risk categories in
the body of paragraph 14.117, but has added a new footnote to that paragraph to explain that the
parties have, in their submissions to the Panel, been inconsistent in designating the number of eligible
country risk categories.
7.72 With respect to paragraph 14.115 of the inte rim report (paragraph 14.115 of this Report),
Brazil requests that the Panel either provide a cita tion to documentary evidence in support of the
assertion of the United States that it "sets bank limits with respect to each foreign bank obligor" or,
alternatively, that the Panel note that this asserti on in this respect is unsupported by documentary
evidence. The United States objects to Brazil's suggestion.
7.73 The Panel considers that the main point of the last sentence of paragraph 14.115 does not
concern whether the United States has established as a fact that it sets bank limits with respect to each
foreign obligor. Rather, the sentence at issue indicat es that whether or not such bank limits exist does
not alter the Panel's conclusion, in the first sentenc e of the same paragraph, that "GSM 102 fees are
not risk-based insofar as they do no t take into account one of the main elements of risk associated
with the guarantees, the risk of default that is spec ific to an individual foreign obligor." In any case,
the Panel does not understand Brazil to have challenge d, in its submissions to the Panel, the US
assertion that it sets bank limits with respect to each foreign bank obligor. The Panel therefore denies
Brazil's request.
7.74 The United States requests that the Panel delete the pa renthetical, in the last sentence of
paragraph 14.119 of the interim report (paragraph 14.119 of this Report), to the effect that "meaning
that, for the United States, the other programmes were primarily responsible for any net cost to the US
Government in the original proceeding". The Unite d States disagrees to the extent that the sentence

implies that the United States agrees that the three export credit guarantee programmes resulted in any
net cost or loss. Brazil objects to the US request. The Panel considers that the use of the term "any"
in the sentence at issue ensured that the reader would not ascribe to the parenthetical the meaning
which the United States suggests may be implied. Nonetheless, the Panel is mindful of accurately
reflecting the parties' arguments and has therefore deleted the parenthetical. In any case, the Panel
does not regard that sentence as essential to the understanding of the Panel's discussion of this issue.
7.75 Brazil requests that the Panel modify the second sentence of paragraph 14.120 of the interim
report (paragraph 14.120 of this Report), in which th e Panel indicates that it is "therefore unable to
assess whether a 46 per cent average fee increase (23 pe r cent trade-weighted increase) is sufficient to
ensure that the GSM 102 programme is not provided at a net cost to the US Government." Brazil has
two concerns with this sentence. First, Brazil is concerned that this formulation might be read to
suggest that the Panel has imposed the burden of proof on the United States, which Brazil understands
is not the case. Second, Brazil believes that it would be prudent to put the Panel’s statement in the
context of its overall conclusion, in paragraph 14.131, that the ev idence as a whole demonstrates that
the GSM 102 export credit guarantee programme is provided against premiums which involve a net
cost to the US Government. The United States does not comment on Brazil's request with respect to
this paragraph. The Panel does not consider that the language used in paragraph 14.120 of the interim
report (paragraph 14.120 of this Report), gives rise to the concern expressed by Brazil. The Panel
therefore rejects Brazil's request to amend this paragraph.
D. EDITORIAL CORRECTIONS
7.76 In addition to the above-mentioned changes, the Panel has made a number of editorial
changes and technical corrections.52
VIII. PROCEDURAL MATTERS
A. REQUEST OF BRAZIL THAT THE PANEL EXERCISE ITS DISCRETION TO SEEK CERTAIN
INFORMATION FROM THE UNITED STATES UNDER ARTICLE 13 OF THE DSU
8.1 On 1 November 2006, prior to the organizati onal meeting of this Panel, Brazil submitted a
document entitled "Brazil's Request to the Complian ce Panel to Pose Questions to the United States,
under Article 13.1 of the DSU", in which it request ed the Panel to "exerc ise its discretion under
Article 13.1 [of the DSU] to request the United St ates to produce documents and information relating
to (a) payments to US producers of upland cotton under the US counter-cyclical payment programme
and (b) the export credit guarantee programmes (p rincipally the GSM 102 export credit guarantee
programme)".53 Brazil asserted that all the requested documents and information were "highly
relevant to Brazil's claims and the issues before th is compliance Panel. Therefore, Brazil considers
that it is 'necessary and appropriate' for the complia nce Panel to seek the documents and information
requested at this early stage of the compliance pr oceeding". Brazil asked the Panel to "request the
United States to produce this information within three weeks of the date the Panel issues its request".
8.2 On 7 November 2006, at the request of the Panel, the United States submitted comments on
Brazil's request. The United States requested th e Panel to decline Brazil's request stating, inter alia,

52 In the course of the interim re view, the Panel has noted that the paragraph numbers cited by the
Parties in their submissions are sometimes different from the paragraph numbers that appear in the paper version
of the submission the parties are referring to. The Panel understands that this discrepancy is often a result of the
improper functioning of the electronic version submitted by one of the parties. The Panel has endeavoured to
correct any such discrepancies, but the Panel points out, for the record, that the final report may still contain
such discrepancies in the references to paragraph numbering of the parties' submissions.
53 Excerpt from Brazil's 1 November 2006 submission. See item 1 of Annex D for the full text of this
submission.

that "Brazil fails to explain how the Panel can assess whether any of the documents and information
[it is seeking] is 'essential' or 'suitable' for th e Panel's objective assessment of the matter before it, and
not to be used to make Brazil's prima facie case for it, before either party has even had the opportunity
to present any arguments or any evidence in support of its case".
54
8.3 On 8 November 2006, the Panel communicated the following to the Parties:
"The Panel declines to make a decision on Brazil's request at this point of time. The
Panel will communicate to the parties its decision on this request after having
received and considered Brazil's first submission. In this connection, the Panel
reserves its right to amend the timetable (and the working procedures, as necessary)
in relation to this issue."
55
8.4 On 17 November 2006, in accordance with the Panel's timetable, Brazil made its First Written
Submission. In relation to its request under Ar ticle 13 of the DSU concerning counter-cyclical
payments, Brazil stated the following:
"During informal discussions held [before the establishment of the Panel], Brazil
requested the United States to provide the information needed to allocate counter-
cyclical payments to upland cotton production in MY 2003-2005. The United States
claimed that this information was 'confiden tial.' In a letter to the compliance Panel
dated 1 November 2006, Brazil requested the compliance Panel to request the
United States, pursuant to Article 13.1 of th e DSU, to produce the exact same type of
information that it finally produced during the original proceeding in response to
repeated requests by the original panel, updated for MY 2003-2005. Brazil reiterates
its request based on the reasons set out in this submission and in its letter of
1 November 2006."
56 (footnotes omitted)
8.5 Brazil also stated:
"Furthermore, there is every reason to believe that a strong positive relationship
continues to exist between upland cotton base acre holders receiving annual counter-
cyclical payments and upland cotton pr oduction. As during the period MY 1999-
2002, the economics of high-cost upland cotton production in the United States
compel that a significant majority of US upland cotton be grown on upland cotton
base acres (or other types of high-payment base acreage such as rice and peanuts)
during MY 2003-2005. Brazil looks forward to receipt of this base and planted
acreage information from the United States following a request by the compliance
Panel to the United States pursuant to Article 13.1 of the DSU."
57 (footnotes omitted)
8.6 In its First Written Submission, Brazil did not refer to its DSU Article 13 request in relation to
export credit guarantee programmes.

54 Excerpt from the 7 November 2006 comments of the United States. See item 1 of Annex E for the
full text of these comments.
55 Panel's communication to the parties dated 8 November 2006, para. 1. See item 1 of Annex F for the
full text of this communication.
56 Brazil's First Written Submission para. 117.
57 Brazil's First Written Submission para. 131.

8.7 The United States further explained its position on this matter in a letter of
20 November 2006.58 On 22 November 2006, Brazil subm itted comments on this letter of the
United States.59
8.8 On 27 November 2006, the Panel sent a communication to the parties stating that it "is of the
view that it cannot conclude at this stage that it is necessary and appropriate within the meaning of
Article 13 of the DSU to seek the information re quested by Brazil before the Panel has had the
opportunity to review the arguments and supporting ev idence, if any, that will be presented by the
United States in response to Brazil's argument re garding the causal relationship between certain
subsidies and price suppression for upland cotton".60
8.9 On 11 January 2007, Brazil filed its Rebuttal Submission. In making its argument that
marketing loan and counter-cyclical payments were trade-distorting, Brazil stated the following:
"Had the United States produced all data requ ested by Brazil, this data would allow
Brazil to allocate counter-cyclical paymen ts to upland cotton planted on non-upland
cotton base acreage under Brazil's Methodology, as determined to be 'appropriate' and
conservative by the original panel (as detailed below, Brazil requests the compliance
Panel to exercise its discretion under Artic le 13.1 of the DSU to request that the
United States produce the same data for MY 2003-2005 that was available to the
original panel for MY 2002)."
61 (footnote omitted)

"As noted above, the limited data that the United States produced (in the context of its
flawed argument that counter-cyclical payments have no significant effects on
production) does not allow Brazil to update the amounts of counter-cyclical payments
it allocates to upland cotton based on its own methodology. Therefore, Brazil
reiterates its request, set out in its 1 N ovember 2006 letter to the compliance Panel,
that the Panel exercise its discretion and request that the United States produce the
same data for MY 2003-2005 that was available to the original panel for MY 2002."
62
8.10 In its Rebuttal Submission Brazil did not refer to its DSU Article 13 request in relation to
export credit guarantee programmes.
8.11 On 17 January 2007, the Panel posed certain questions to the United States and to Brazil on
Brazil's request under Article 13 of the DSU. 63 Brazil and the United States submitted their responses
to these questions on 19 January 2007. 64 In relation to export credit guarantee programmes 65, Brazil
stated that it "continues to believe that the informat ion, documents and data re quested in [its request
submitted on 1 November 2006] will assist the comp liance Panel in making 'an objective assessment
of the matter before it,' within the meaning of Article 11 of the [DSU]". In relation to counter-cyclical

58 The full text of the US letter dated 20 November 2006 is contained in item 2 of Annex E.
59 The full text of Brazil's letter dated 22 November 2006 is contained in item 4 of Annex E.
60 Excerpt from the Panel's communication dated 27 November 2006. The full text of this
communication is contained in item 2 of Annex F.
63 See item 5 of Annex F for the full text of the questions.
64 See items 2 and 3 of Annex D for the full text of the responses of the United States and Brazil,
respectively.
65 The question read as follows: "Does Brazil deem that the questi ons posed [concerning export credit
guarantee programs] submitted on 1 November [..] are now unnecessary?"

payments, the United States pointed out that it had actu ally provided, in an exhibit to its First Written
Submission, the data (for MY 2005) sought by Brazil.
8.12 On 22 January 2007, Brazil submitted another letter
66 regarding the data on counter-cyclical
payments. In this letter, while acknowledging th at the data provided by the United States for
MY 2005 corresponded to what Brazil had sought, Braz il pointed out that the United States had still
not submitted the data for MY 2003-2004 and MY 2006.
8.13 On 5 February 2007, the United States filed its Rebuttal Submission. In it, the United States
reiterated that it had already submitted the data sought by Brazil in respect of counter-cyclical
payments, and stated that MY 2006 data were not yet available and that earlier years were not relevant
to Brazil's claim of "present" serious prejudice. The United States therefore considered that Brazil's
request was moot.67
8.14 On 21 March 2007, the Panel issued the follo wing communication to the parties on this
matter:
"The Panel notes that Brazil's request was made prior to the filing of the written submissions
in this case and that information on certain items identified in that request has since been
provided to the Panel. The Panel also expects to receive information on issues raised in
Brazil's request in response to the questions posed by the Panel on 15 March 2007. The Panel
considers that at this juncture it is not necessar y to seek more information in respect of issues
identified in Brazil's request. The Panel may, how ever, decide to request this information at a
later stage of this proceeding and may ask ques tions to the parties at any time, in accordance
with paragraph 7 of the Panel's working procedures."68

8.15 The Panel ultimately did not resort to Article 13 of the DSU concerning the above or any
other issue.
B. R
EQUEST OF THE UNITED STATES FOR OPEN HEARING
8.16 During the organizational meeting held on 6 November 2006, the United States stated, in
relation to paragraph 2 of the draft working procedures 69, that it preferred the panel meeting to be
opened to the public. The United States acknowledge d that it could not secure agreement with Brazil
on this issue, and requested that, given Brazil's refusal, the working procedures at least should indicate
that the portions of the meeting where the United States presented its position be open to the public.
8.17 On 8 November 2006, the Panel sent a communication in which it stated as follows:
"In relation to paragraph 2 of the working procedures, the Panel has noted that the
United States wishes to open up the portion of the meeting where it presents its own
views and statements, while Brazil opposes ope ning the meeting to the public. The
Panel draws the attention of the parties th at opening up of any portion of the Panel
meeting entails logistical considerations . The Panel invites the United States to
submit comments, by close of business of Tuesday 21 November, on how exactly it

66 See item 8 of Annex E for the full text of Brazil's letter.
68 Excerpt from the Panel's communication dated 21 March 2007. See item 8 of Annex F for the full
text of this communication.
69 The Panel's draft working procedures paragraph 2 read as follows: "The Panel shall meet in closed
session. The parties to the dispute, and interested third parties, shall be present at the meetings only when
invited by the Panel to appear before it." (This paragraph remained unchanged in the final working procedures.)

envisages such opening to be logistically me aningful. The Panel reserves its right to
amend the working procedures in relation to this matter." 70
8.18 On 21 November 2006, the United States submitte d, in response to the Panel's invitation
above, its comments on the possible logistics of opening a specific part of the meeting. The
United States explained inter alia that it "has invoked its right under Article 18.2 of the [DSU] to
make statements of its own positions public and, as an appropriate means to do this, has requested that
the Panel exercise its authority to open to the public the US statements and US answers to questions
presented in the panel meeting".
71
8.19 In a letter of 24 November 2006, Brazil indicated that it did not agree with the assertions of
the United States, noting inter alia, that "nothing in Article 18.2 mandates or implies that to effect a
Member's right to disclose its own positions or stat ements, panels must agree to open meetings to
public observation" and that "a Member's right to disclose its own positions cannot prejudice another
Member's right to confidentiality".72
8.20 On 28 November 2006, the Panel informed the parties as follows:
"The Panel notes, first, that there is no precedent in WTO dispute settlement practice
for a decision to open a (portion of) a panel meeting to the public based on a request
by one party to a dispute that is opposed by another party. Second, the Panel has
carefully considered the argument of the United States in its letter dated 21 November
that in requesting the Panel to open to th e public US statements and US answers to
questions presented in the panel meeting the United States is exercising its right under
Article 18.2 of the DSU, second sentence. Th e Panel considers that there are various
possible ways in which a party can disclose its statements to the public and that the
United States has not explained why procedures the United States normally uses to
disclose its statements in WTO dispute settlement proceedings to the public would
not be adequate in this case. Furthermore, the right of party to disclose its statements
of its positions must also be reconciled w ith the obligation of confidentiality in the
third sentence of Article 18.2. Finally, the Panel considers that the practical
arrangements proposed by the United States in its letter of 21 November 2006 pose
serious practical and logistical difficulties.
For the above reasons, we decline to grant the request made by the United States."
73
(footnote omitted)
C. SERVICING OF SUBMISSIONS
8.21 On 18 December 2006, Brazil sent a letter to the Panel complaining about the late filing of the
First Written Submission by the United States 74 and requested that "the compliance Panel reject the
United States' submission as not timely filed".75

70 Panel's communication to the parties dated 8 November 2006, paragraph 3. See item 1 of Annex F
for the full text of this communication.
71 US letter dated 21 November 2006, second paragraph. See item 3 of Annex E for the full text of this
letter.
72 See item 5 of Annex E for the full text of Brazil's letter of 24 November 2006.
73 Excerpt from the Panel's communication dated 28 November 2006. See item 3 of Annex F for the
full text of this letter.
74 Brazil stated that "the United St ates [...] filed the electronic version of its submission 12 hours late,
on Saturday, 16 December at 5:24 a.m."

8.22 On 19 December 2006, the United States sent a letter to the Panel stating that the Panel
should reject Brazil's request, asserting inter alia that "the DSU does not au thorize the 'rejection' of
submissions for the inability of a Member to meet precisely the time by which parties 'should provide
their submissions' according to a panel's working pr ocedures. To the contrary, the DSU provides that
'[p]anel procedures should provide sufficient flex ibility so as to ensure high-quality panel reports,
while not unduly delaying the panel process'".
76 (footnotes omitted)
8.23 On 20 December 2006, the Panel communicated the following to the parties:
"The Panel notes that Brazil requests the Panel to 'reject the United States' submission
as not timely filed'. The Panel declines to do so. However, the Panel regrets this
delay by the United States, and requests th e United States to abide by the deadlines
established by the Panel concerning its future submission(s)."77
8.24 On 7 February 2007, Brazil sent a letter to the Panel complaining about the late filing of the
Rebuttal Submission by the United States. 78 Brazil requested that the compliance Panel "reject the
United States' submission as not timely filed".79
8.25 On 12 February 2007, the United States sent a letter to the Panel commenting on this letter
from Brazil stating inter alia that "Brazil has no basis for its request that the Panel reject the US
Rebuttal Submission".80
8.26 On 16 February 2007, the Panel communicated the following to the parties:
"The Panel regrets that the United States has missed the deadlin e for the second time
in this Article 21.5 proceeding. The Panel fi nds it extraordinary that the United States
has missed so many deadlines in the original proceeding as well as in this Article 21.5
proceeding.
On the other hand, the Panel considers that there is no provision in the DSU that
allows a panel to simply reject an entire submission as not timely. The Panel does not
consider that the two cases cited by Braz il support Brazil's request. Thus, we decline
to grant the request made by Brazil."
81 (footnote omitted)

75 Excerpt from Brazil's letter dated 18 December 2006. See item 6 of Annex E for the full text of this
letter.
76 Excerpt from US letter dated 19 December 2006. See item 7 of Annex E for the full text of this letter.
77 Excerpt from the Panel's communication to parties dated 20 December 2006. See item 4 of Annex F
for the full text of this communication.
78 Brazil stated that "the United States [...] filed the electronic version of its submission more than
6 hours late - at 11:39 p.m. on Monday, 5 February".
79 Excerpt from Brazil's letter dated 7 February 2007. (footnote omitted.) See item 9 of Annex E for
the full text of this letter.
80 Excerpt from US letter dated 12 February 2007. See item 10 of Annex E for the full text of this
letter.
81 Excerpt from the Panel's communication dated 16 February 2007. See item 7 of Annex F for the full
text of this communication.

D. REQUEST OF THE EUROPEAN COMMUNITIES FOR A FINDING OR RULING ON THE PANEL'S
COMPOSITION
8.27 The European Communities, a third party to this proceeding, requests the Panel to make "a
finding or ruling" with respect to "the propriety of [the Panel's] composition".82
8.28 The Panel considers that it is not within its authority under the DSU to make a "finding or
ruling" on an issue that has not been raised by any of the parties to the dispute and which concerns the
application by the WTO Director-General of the DSU provisions regarding panel composition. 83 The
Panel fails to see how the "finding or ruling" requested by the Eur opean Communities would
contribute to a positive solution to this dispute within the meaning of Article 3.7 of the DSU.
E. LEAST DEVELOPED COUNTRY MEMBERS
8.29 Chad, a least-developed country Member, participat ed in this proceeding as a third party. In
accordance with Article 24.1 of the DSU, particular consideration was given to the special situation of
this Member. Chad made a detailed written submissi on and made an oral statement at the meeting of
the Panel with the third parties on 28 February 2007. 84 Chad was represented by a delegation which
was headed by its Ambassador to the United Nations and Other International Organisations in Geneva
and which also included staff members of the Advi sory Centre on WTO Law. In its Submission and
Oral Statement, Chad stressed that it had a special in terest in this proceeding in light of the critical
importance of the cotton sector to its economy a nd of the commitments that WTO Members have
undertaken with respect to cotton in the July 2004 Framework and at the Hong Kong Ministerial
Conference. Chad emphasized the benefits fo r Chad and other Sub-Saharan cotton-producing
countries of full implementation by the United States of the DSB recommendations and rulings in this
dispute and drew attention, in this regard, to r ecent studies that provide empirical evidence of the
magnitude of these benefits. Chad also submitted de tailed legal arguments in support of its view that
the United States had not complied with the DSB re commendations and rulings. The Panel refers to
the arguments of Chad in the summaries of arguments of the third parties.
IX. GENERAL CONSIDERATIONS AND ISSUES RELATING TO THE SCOPE OF
THIS PROCEEDING
A. STANDARD OF REVIEW, BURDEN OF PROOF AND RULES OF TREATY INTERPRETATION
1. Standard of review
9.1 In respect of the standard of review that this Panel must apply, Article 11 of the DSU
provides, in relevant part:
"The function of panels is to assist the DSB in discharging its responsibilities under this
Understanding and the covered ag reements. Accordingly, 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, and make such

82 EC Third Party Submission, paras. 6-30; EC Third Party Oral Statement, paras. 2-4.
83 While the European Communities asserts that there is precedent in WTO dispute settlement practice
that supports its position that the Panel has the authority to rule on the propriety of its own composition, and that
the Panel is under a duty to address this issue because "it is of fundamental importance for the correct
interpretation of the DSU and for the smooth and equitable operation of the WTO dispute settlement system"
(EC Third Party Submission, paras. 28-29), the Panel finds the arguments of the European Communities in this
regard unpersuasive.
84 Chad's Written Submission and Oral Statement were prepared with the cooper ation of the Advisory
Centre on WTO Law.

other findings as will assist the DSB in making the recommendations or in giving the rulings
provided for in the covered agreements."

9.2 The Panel is cognizant of the need to give due consideration to the findings of the original
panel in this dispute. Proceedings under Article 21. 5 of the DSU do not occur in isolation but are part
of a "continuum of events". The Panel conducts it s analysis of the claims of Brazil "against the
background of the original proceedings, and with full cognizance of the reasons provided by the
original panel".
85 86 The parties have expressed views on the issue of the weight that this Panel
should accord to the legal and factual findings and reasoning of the panel in the original proceeding. 87
The Panel does not consider that it is necessary or appropriate for it to make a general statement on
this question in the abstract.
2. Burden of proof
9.3 The general rules regarding the allocation of the burden of proof in WTO dispute settlement
require that a party claiming a violation of a provision of a WTO agreement by another Member assert
and prove its claim. 88 These rules also apply to proceedings under Article 21.5 of the DSU. 89 Brazil

85 Appellate Body Report, Mexico – Corn Syrup (Article 21.5 – US ), para. 121. In the same report, the
Appellate Body stated that "a panel acting pursuant to Article 21.5 of the DSU would be expected to refer to the
initial panel report, particularly in cases where the im plementing measure is closely related to the original
measure, and where the claims made in the proceedings under Article 21.5 cl osely resemble the claims made in
the initial proceedings". Appellate Body Report, Mexico – Corn Syrup (Article 21.5 – US), para. 109.
86 We note, in this regard, that in reviewing the fi ndings of a panel in a proceeding under Article 21.5
involving a determination of injury by a domestic investigating authority, the Appellate Body has observed that:

"doubts could arise about the objective nature of an Article 21.5 panel's assessment if, on a
specific issue, that panel were to deviate from th e reasoning in the original panel report in the
absence of any change in the underlying evidence in the record and explanations given by the
investigating authority in a redetermination. These concerns are not, however, based on the
binding effect of the adopted findings of the original panel".

Appellate Body Report, US – Softwood Lumber VI (Article 21.5 – Canada) , para. 103. The Appellate
Body made these observations in addressing an argument of Canada that the panel had "failed to make
an objective examination of the ma tter before it because it failed to apply findings from the original
panel report even though these findings had been adopted by the DSB and are binding upon the parties
to the dispute." Appellate Body Report, US – Softwood Lumber VI (Article 21.5 – Canada), para. 101.
87 E.g., Brazil's Response to Panel Question 2; US Response to Panel Question 2.
88 Appellate Body Report, US – Wool Shirts and Blouses, p. 14. With respect to these general rules on
allocation of the burden of proof, the Appellate Body recently observed:

"... in WTO dispute settlement, as in most legal systems and international tribunals, the burden
of proof rests on the party that asserts the affi rmative of a claim or defence. A complaining
party will satisfy its burden when it establishes a prima facie case by putting forward adequate
legal arguments and evidence. The nature and scope of arguments and evidence required 'will
necessarily vary from measure to measure, provision to provision, and case to case'. When a
claim is brought against a WTO Member's legislation or regulation, a panel may, in some
circumstances, consider that the text of the relevant legal instrument is sufficiently clear to
establish the scope and meaning of the law. However, in other cases, a panel may consider
that additional evidence is necessary to do so. Once the complaining party has established a
prima facie case, it is then for the responding party to rebut it.
A panel errs when it sustains a claim for which the complaining party has failed to make out a
prima facie case. Nevertheless, a panel does not commit legal error merely by omitting to
specify which party bears the burde n of proof in respect of each claim or defence. Moreover,
a panel is not obliged, in every instance, to make an explicit finding that a complaining party

as the complaining party must therefore make a prima facie case of violation of the relevant
provisions of the WTO agreements invoked by Brazil, which the United States must refute. We also
note, however, that it is generally for each party asserting a fact, whether complainant or respondent,
to provide proof thereof.
90 In this respect, therefore, it is also for the United States to provide
evidence for the facts which it asserts. A prima facie case is one which, in the absence of effective
refutation by the other party, requires a panel, as a matter of law, to rule in favour of the party
presenting the prima facie case.
9.4 The Appellate Body recently discussed the appli cation of the general rules on the allocation
of burden of proof in the context of Article 21.5 of the DSU as follows:
"The text of Article 21.5 expressly links the 'measures taken to comply' with the
recommendations and rulings of the DSB con cerning the original measure. A panel's
examination of a measure taken to comply cannot, therefore, be undertaken in
abstraction from the findings by the original panel and the Appellate Body adopted by
the DSB. Such findings identify the WTO-in consistency with respect to the original
measure, and a panel's examination of a me asure taken to comply must be conducted
with due cognizance of this background. Thus, the adopted findings from the original
proceedings may well figure prominently in proceedings under Article 21.5,
especially where the measure taken to comply is alleged to be inconsistent with WTO
law in ways similar to the original measure. In our view, these considerations may
influence the way in which the complaining party presents its case, and they may also
be relevant to the manner in which an Article 21.5 panel determines whether that
party has discharged its burden of proof and established a prima facie case."
91

has met its burden to establish a prima facie case in respect of each element of a particular
claim, or that the responding party has effectively rebutted a prima facie case. Thus, a panel
is not required to make an explicit ruling that a complaining party has established a prima
facie case of inconsistency before examining the responding party's defence and evidence. At
the same time, the mere articulation by a panel of the correct rules as to the burden of proof is
not sufficient if the panel does not, in fact, properly allocate that burden in the case before it."
Appellate Body Report, Chile – Price Band System (Article 21.5 – Argentina), paras. 134-135.
89 Appellate Body Report, Chile – Price Band System (Article 21.5 – Argentina), para. 136.
New Zealand argues in its Third Party Submission that Article 7.8 of the SCM Agreement affects the distribution
of burden of proof in this proceeding under Article 21.5 of the DSU. Specifically, New Zealand asserts that:

"[s]ince an implementing Member has the optio n of either withdraw ing the subsidising
measure or removing the adverse effects, a Memb er that fails to withdraw the measure in
question then should have the burden of showing that it has removed the adverse effects.
Thus, in the present case proof by Brazil that the measures found by the original panel to
cause adverse effects have not been withdrawn should establish a prima facie case that
implementation has not occurred and the burden should then shift to the United States to prove
that the adverse effects caused by those subsidizing measures have been removed."

New Zealand's Third Party Submission, para. 5.06. The Panel finds no support in the text of Article 7.8 of the
SCM Agreement and Article 21.5 of the DSU for the propos ition that in a proceeding under Article 21.5
involving an alleged failure to comply with Article 7.8 of the SCM Agreement , a Member which has not
withdrawn the subsidy has the burden of showing that it has removed the adverse effects. The Panel also notes
Brazil's statement that, in the present case, "Brazil has the burden of dem onstrating under Article 7.8 that the
United States did not take appropriate steps to remove the adverse effects caused by the original basket of
measures". Brazil's Response to Panel Question 26, para. 20.
90 Appellate Body Report, US – Wool Shirts and Blouses, p. 14.
91 Appellate Body Report, Chile – Price Band System (Article 21.5 – Argentina), para. 136.

3. Rules of treaty interpretation
9.5 Article 3.2 of the DSU requires the Panel to appl y customary rules of public international law
on the interpretation of treaties. It is generally accepted that these rules can be found in Articles 31-33
of the Vienna Convention on the Law of Treaties of 1969 ("Vienna Convention"). Article 31(1) of the
Vienna Convention provides:

"A treaty shall 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."

B. SCOPE OF THIS PROCEEDING UNDER ARTICLE 21.5 OF THE DSU
1. Introduction
9.6 Article 21.5 of the DSU provides:
"Where there is disagreement as to the existen ce or consistency with a covered agreement of
measures taken to comply with the recommenda tions and rulings such dispute shall be
decided through recourse to these dispute settl ement procedures, including wherever possible
resort to the original panel. The panel shall circulate its report within 90 days after the date of
referral of the matter to it. When the panel c onsiders that it cannot provide its report within
this time frame, it shall inform the DSB in writi ng of the reasons for the delay together with
an estimate of the period within which it will submit its report."
9.7 The United States requests that the Panel make preliminary rulings that certain claims of
Brazil are outside the scope of Article 21.5 of the DSU because they are not claims relating to the
"existence or consistency with a covered agr eement of measures taken to comply with the
recommendations and rulings" of the DSB. The Unite d States makes this request in respect of: (i)
claims of Brazil relating to export credit guarant ees regarding exports of pig meat and poultry meat;
(ii) claims of Brazil relating to the ma rketing loan and counter-cyclical payment programmes in
addition to payments made under those programmes; and (iii) claims of Brazil regarding non-
compliance in a past period.92
9.8 The United States also considers that payments made under the marketing loan and counter-
cyclical payment programmes after 21 September 2005 are not properly within the scope of this
proceeding.
93
2. Whether Brazil's claims relating to export credit guarantees for pig meat and poultry
meat are outside the scope of this proceeding
(a) Main arguments of the parties
9.9 The United States argues that since export credit guarantees for pig meat and poultry meat
were not found to be WTO-inconsistent in the or iginal proceeding they were not subject to DSB
recommendations and rulings. Therefore, GSM 102 e xport credit guarantees in respect of exports of
pig meat and poultry meat are not "measures taken to comply" with the recommendations and rulings

92 US First Written Submission, paras. 22-56; US Rebuttal Submission, paras. 16-71.
93 The United States did not make the argument that payments made after 21 September 2005 are not
within the scope of this proceeding as part of its reque st for preliminary rulings in its First Written Submission
but presented this argument at a later stage of the proceeding. US Comments on Brazil's Response to Panel
Question 15; US Response to Panel Question 47; US Comments on Brazil's Response to Panel's Second Set of
Questions, paras. 8-14.

of the DSB and these measures and Brazil's claims re lating to these measures are not within the scope
of this proceeding.94
9.10 The United States considers that Brazil confuses the proper standard as to when claims are
within the scope of Article 21.5 proceedings and incorrectly assumes that the standard is one of
whether there has been a "final resolution" of the issue in the original proceeding. Brazil
misinterprets the Appellate Body report in EC – Bed Linen (Article 21.5 – India) and confuses two
distinct issues: the issue of the scope of a comp liance proceeding under Article 21.5 of the DSU, on
the one hand, and the issue of when a claim agains t a specific measure or aspect of a measure can be
considered to be "finally resolved" for purposes of WTO dispute settlement, on the other.95
9.11 The United States submits that compliance pr oceedings under Article 21.5 of the DSU may
address two types of matters. First, that measures taken to comply with DSB recommendations and
rulings do not exist. Second, that measures taken to comply with DSB recommendations and rulings
are not consistent with a covered agreement. If a measure is not subject to any DSB
recommendations and rulings because the measure ha s not been found to be WTO-inconsistent, there
is no logical basis for any claim that a Member has not implemented the DSB recommendations and
rulings in respect of that measure. Moreover, unle ss the original measure itself is considered to be a
measure taken to comply, there is no basis for claims to be made against the measure alleging that it is
inconsistent with a covered agreem ent. Thus, measures are outside the scope of Article 21.5 of the
DSU when they have not been found to be WTO-in consistent and are not themselves measures taken
to comply.
96
9.12 The United States submits that specific expor t credit guarantees are "measures" and those
guarantees provided in support of exports of pig meat, poultry meat and other scheduled products
other than rice have never been subject to any DSB recommendations and rulings and are not
measures taken to comply with any DSB reco mmendations and rulings . Prior WTO dispute
settlement reports do not support the proposition that the scope of this proceeding under Article 21.5
can be extended to include claims against me asures that were never subject to any DSB
recommendations and rulings and that are not measures taken to comply with any such
recommendations and rulings.97
9.13 Brazil requests the Panel to reject the preliminar y objection of the United States because this
objection is contrary to Appellate Body jurispru dence on the scope of claims properly brought in
compliance proceedings.98 While the Appellate Body held in EC – Bed Linen (Article 21.5 – India)
that an unappealed finding in a panel report adopted by the DSB must be treated as a final resolution
to the dispute in respect of a particular claim and specific component of a measure, this limitation
does not apply to Brazil's claims relating to e xport credit guarantees for pig meat and poultry meat
because there has been no such final r esolution with respect to these claims. 99 Thus, Brazil argues
that it may bring these claims in this proceeding b ecause the original proceeding did not lead to a
"final resolution" with respect to these claims.
9.14 Brazil argues that its claims relating to export credit guarantees for pig meat and poultry meat
relate to a measure taken to comply within the me aning of Article 21.5 of the DSU. While Brazil's

94 US First Written Submission, para. 24-30. The United States emphasizes that the relevant question
is not whether, as argued by Brazil, Brazil may "re-assert" its claims against export credit guarantees for exports
of pig meat and poultry meat, but whether Brazil may do so in the context of a proceeding under Article 21.5 of
the DSU.
95 US Rebuttal Submission, paras. 10-15; US Response to Panel Question 10.
96 US Response to Panel Question 6.
97 US Comments on Brazil's Response to Panel Question 6.
98 Brazil's Submission Regarding US Requests for Preliminary Ruling, para. 7.
99 Brazil's Submission Regarding US Requests for Preliminary Ruling, paras. 9-12.

claims are product-specific, the measure at issue, the amended GSM 102 programme, applies in the
same manner to all products covered by the pr ogramme. There is no factual basis for the US
argument that the measures at issue are the export credit guarantees for pig meat and poultry meat.
100
9.15 Further, Brazil submits that the measure subject to its claims is a new measure and that a
Member may present any claim in a proceeding unde r Article 21.5 with respect to a new measure.
While panels have determined that a Member may not bring a new claim in a proceeding under
Article 21.5 in respect of an aspect of a measure that remains unchanged from the original proceeding
and that was not challenged in the original pro ceeding, that limitation does not apply to the present
case because Brazil presents the same claim with respect to a new aspect of a new measure. Referring
to the Appellate Body report in EC – Bed linen (Article 21.5 – India), Brazil asserts that it should not
be held responsible for the absence of a final resolution in the original proceeding.101
(b) Main arguments of third parties
9.16 Australia submits that Brazil's claim relating to GSM 102 export credit guarantees issued in
respect of pig meat and poultry meat may properly be considered by this Panel. The situation in the
present case is not that of a measure that was not challenged in the original proceedings or, if
challenged, was addressed in those proceedings a nd not found to be WTO-inconsistent. The claim
specifically made by Brazil in its request for estab lishment relates to the WTO-consistency of a new
measure – guarantees issued under the revised GS M 102 programme – the revisions to which were
implemented in response to the rulings and reco mmendations of the DSB. Brazil is entitled to
request, and the Panel is required to consider, the new measure in its totality, including the measure's
application.102
9.17 The European Communities considers that in addressing the question whether GSM 102
export credit guarantees relating to pig meat and poultr y meat are properly within the scope of this
proceeding, the key issue before the Panel is the nexus or the degree of interrelatedness or
interdependence between different elements of th e measure. Thus, the Panel should examine the
original measure at issue and the measure taken to comply and, with particular reference to the
elements of the measure that the United States argues are outside the terms of reference of the Panel,
enquire into the extent to which these elements are interrelated or interdependent with the measures or
elements of measures that the United States accepts as being within the Panel's terms of reference. At
first sight, the question of whether US export cred it guarantees relating to pig meat and poultry meat
circumvent US commitments under the Agreement on Agriculture and are inconsistent with the SCM
Agreement may not be necessarily interdependent with a nd not even necessarily interrelated with the
same question regarding upland cotton. However, there are other factors that merit careful
consideration, including the fact that the SCM Agreement makes clear that a "programme" can be a
measure, that the United States has admitted that th e measure at issue is a "programme" within the
meaning of the SCM Agreement , that the original panel consistently referred to the GSM 102
"programme", and that the United States has el ected to amend the GSM 102 programme generally,
including with respect to pig meat and poultry meat.103
9.18 Japan submits that the claim of Brazil regarding GSM 102 export credit guarantees for pig
meat and poultry meat is within the scope of this proceeding. The inability of the Appellate Body to
complete the analysis with respect to a panel finding reversed by the Appellate Body is similar to the
exercise of judicial economy in that in both cases th ere is no "final resolution" with respect to the

100 Brazil's Response to Panel Question 6, para. 21; Brazil's Comments on US Response to Panel
Question 6.
101 Brazil's Response to Panel Question 6, paras. 42-47.
102 Australia's Third Party Submission, paras. 8-11.
103 EC Third Party Oral Statement, para. 5-13.

claim in question. The recent panel report in US – Oil Country Tubular Goods Sunset Reviews
(Article 21.5 – Argentina) makes clear that this Panel has the authority to identify and assess the new
measure taken by the United States to comply with the DSB recommendations and rulings, including
the GSM 102 programme as applied to pig meat and poultry meat.
104
(c) Evaluation by the Panel
9.19 The United States request the Panel to make a pr eliminary ruling that Brazil's claims relating
to GSM 102 guarantees in respect of exports of pig meat and poultry meat are outside the scope of
this proceeding under Article 21.5 of the DSU.105
9.20 The Panel recalls that the original panel found that in respect of twelve scheduled products,
including pig meat and poultry meat, it had not been established that the United States had applied
export credit guarantees constituting export subsidies within the meaning of Article 10.1 of the
Agreement on Agriculture in a manner resulting in circumventi on of export subsidy commitments of
the United States. 106 The Appellate Body reversed this finding of the original panel, but considered
that there were insufficient undisputed facts in the reco rd to enable it to complete the legal analysis to
determine whether the United States had applied export credit guarantees with respect to pig meat and
poultry meat in a manner resulting in circumven tion of export subsidy commitments of the
United States. 107
9.21 Thus, the issue before the Panel is whether in this proceeding under Article 21.5 of the DSU
Brazil may present claims relating to export credit guarantees for pig meat and poultry meat
considering that: (i) Brazil presented such claims in the original proceeding; (ii) the original panel
rejected these claims; (iii) the Appellate Body reve rsed the original panel's rejection of these claims,
but found itself unable to complete the analysis; such that (iv) the original proceeding did not result in
a finding of WTO-inconsistency in respect of export credit guarantees for pig meat and poultry meat.
9.22 The phrase "measures taken to comply with th e rulings or recommendations" in Article 21.5
of the DSU limits the scope of Article 21.5 proceedi ngs to a particular category of measures; "[i]f a
claim challenges a measure which is not a 'measure taken to comply', that claim cannot properly be
raised in Article 21.5 proceedings".
108 Thus, "[i]n an Article 21. 5 proceeding, the measure or
measures taken to comply go to the heart of [a] panel's mandate".109 110
9.23 The Panel considers that the fact that export credit guarantees for pig meat and poultry meat
were not found to be WTO-inconsistent in the origin al proceeding and were therefore not subject to
DSB recommendations and rulings does not necessarily m ean that the claims of Brazil with respect to
export credit guarantees for pig meat and poultry meat should be found to be outside the scope of

104 Japan's Third Party Oral Statement, paras. 3-4.
105 The United States does not argue that these clai ms are not covered by Brazil's request for the
establishment of a panel (WT/DS267/30). The Panel notes that paragraph 27 of this request refers to "upland
cotton and other unscheduled products; and rice, pig meat and poultry meat".
106 Panel Report, US – Upland Cotton, para. 7.881.
107 Appellate Body Report, US – Upland Cotton, paras. 692-694 and 763(f)(i).
108 Appellate Body Report, EC – Bed Linen (Article 21.5 – India) , para. 78. See also Appellate Body
Report, Canada – Aircraft (Article 21.5 – Brazil) , para. 36; Appellate Body Report, US – Softwood Lumber IV
(Article 21.5 – Canada), para. 65.
109 Panel Report, US – Countervailing Measures on Certain EC Products (Article 21.5 – EC);
para. 7.35.
110 Whether a measure identified in a panel request under Article 21.5 is a "measure taken to comply"
within the meaning of Article 21.5 is a matter to be deci ded by the Article 21.5 panel, not by the parties to the
dispute. Appellate Body Report, EC – Bed Linen (Article 21.5 – India) , para. 78; Panel Report, US –
Countervailing Measures on Certain EC Products (Article 21.5 – EC), para. 7.7.

Article 21.5 of the DSU as not relating to "measure s taken to comply". The Panel finds support for
this view in the reasoning of several recent Appe llate Body and panel repor ts in proceedings under
Article 21.5 of the DSU.
9.24 The Panel notes, in particular, the observations of the Appellate Body in US – Softwood
Lumber (Article 21.5 – Canada):
"Some measures with a particularly close rela tionship to the declared 'measure taken to
comply', and to the recommendations and rulings of the DSB, may also be susceptible to
review by a panel acting under Ar ticle 21.5. Determining whet her this is the case requires a
panel to scrutinize these relationships, which ma y, depending on the particular facts, call for
an examination of the timing, nature, and effect s of the various measures. This also requires
an Article 21.5 panel to examine the factual and legal background against which a declared
'measure taken to comply' is adopted. Only then is a panel in a position to take a view as to
whether there are sufficiently close links for it to characterize such an other measure as one
'taken to comply' and, conseque ntly, to assess its consistency w ith the covered agreements in
an Article 21.5 proceeding."
111
9.25 The United States amended its GSM 102 programme in order to comply with the DSB
recommendations and rulings in the original proceed ing. The amendments made to the programme
apply to exports of all products covered under the programme, incl uding pig meat and poultry meat.
The Panel does not agree with Brazil's argument that the measure that is the subject of its claims is the
amended GSM 102 programme itself and that export credit guarantees with respect to pig meat and
poultry meat are not themselves "measures". In the Panel's view, that the amended programme
applies to all products in the same manner does not alter the fact that the application of the
programme to an individual product constitutes a "measure". Nevertheless, while accepting the
argument of the United States that GSM 102 export credit guarantees in respect of exports of pig meat
and poultry meat are measures, we consider that these measures have a "particularly close relationship
to the declared measure taken to comply and to the recommendations and rulings of the DSB". As
noted above, the amended programme applies in th e same manner to all products covered by the
programme. Furthermore, the Panel notes that most of the legal and factual issues raised by Brazil's
claims relating to export credit guarantees pertain to the amended GSM programme in general without
distinction between individual products to whic h the programme applies. In addition, the
United States has strongly argued that the Pane l should examine Brazil's claim solely under the
standard contained in item (j) of the Illustrative List of Export Subsidies, a standard that requires the
Panel to analyze the GSM programme as a whole rather than in relation to particular products.
112
9.26 The Panel also notes that Brazil's claims with respect to export credit guarantees for pig meat
and poultry meat are not claims that were rejected in the original proceeding and that relate to an
unchanged measure. Rather with respect to a ne w measure – the application of the amended GSM
102 programme to exports of pig meat and poultry m eat – Brazil makes a clai m in respect of which
the original proceeding did not result in a finding as to whether or not the United States was acting

111 Appellate Body Report, US – Softwood Lumber IV (Article 21.5 – Canada), para. 77.
112 We note in this regard that in interpreting the scope of the phrase "measures taken to comply" in
Article 21.5, the Appellate Body has taken into considera tion the fact that the purpose of Article 21.5 of the
DSU is to promote prompt compliance with DSB recommendations and rulings and the consistency of measures
taken to comply with the covered agreements by ma king it unnecessary for complainants to initiate new
proceedings. (Appellate Body Report, US – Oil Country Tubular Goods Sunset Reviews (Article 21.5 –
Argentina), para. 151). The logic of the argument of the United States is that in order to obtain a finding on
whether export credit guarantees for pig meat and poultr y meat are WTO-inconsistent, Brazil must commence a
new panel proceeding in which Brazil will need to make the same legal and factual arguments as in this case.

inconsistently with its WTO obligations. 113 No previous panel or Appellate Body proceeding has
addressed the precise question before us in this case of whether a Member may assert a claim in an
Article 21.5 proceeding in respect of which the Ap pellate Body found itself unable to complete the
analysis in the original proceeding. We find it si gnificant, however, that the Appellate Body recently
held that a claim relating to an aspect of a measure on which the panel in the original proceeding had
exercised judicial economy was properly within the scope of Article 21.5 of the DSU. 114 In our view,
this demonstrates that a claim relating to a meas ure that has a sufficiently close nexus with the
measure taken to comply or with the DSB recomme ndations and rulings in the original proceeding
can be within the scope of Article 21.5 even where that measure itself has not been the subject of DSB
recommendations and rulings in the original proceeding.
9.27 In light of the foregoing considerations, the Panel finds that the claims of Brazil relating to
export credit guarantees for exports of pig meat and poultry meat are within the scope of this
proceeding under Article 21.5 of the DSU.
3. Whether Brazil's claims with respect to the marketing loan and counter-cyclical
payment programmes are outside the scope of this proceeding
9.28 In support for its request for a preliminary rulin g that Brazil's claims regarding the marketing
loan and counter-cyclical payment programmes ar e outside the scope of this proceeding, the
United States argues, first, that these programmes were not subject to recommendations and rulings of
the DSB in the original proceeding and, second, that these programmes are not "measures taken to
comply" within the meaning of Article 21.5 of the DSU because they have not been changed in
response to DSB recommendations and rulings or otherwise.
(a) Whether Brazil's claims with respect to the marketing loan payment and counter-cyclical
programmes are outside the scope of this proceeding because these programmes were not
subject to recommendations and rulings of the DSB in the original proceeding
(i) Main arguments of the parties
9.29 The United States requests the Panel to make a preliminary ruling that Brazil's claims of
(threat of) serious prejudice in respect of the marketing loan and counter-cyclical payment
programmes are outside the scope of this proceeding because these programmes are not measures to
which the recommendations and rulings of the DSB in the original proceeding were addressed.
115
9.30 The United States submits that Brazil made a cl ear distinction in the original proceeding
between its actionable subsidy claims against programmes per se and actionable subsidy claims
against payments under specific programmes, and th at the original panel only made a finding of

113 The facts before us are in this respect significantly different from the facts before the panel and the
Appellate Body in EC – Bed Linen (Article 21.5 – India). In that case, the original panel had rejected a claim of
India that a certain aspect of a measure taken by th e European Communities was WTO-inconsistent. However,
in the Article 21.5 proceeding India raised the same cl aim with respect to the same unchanged aspect of the
original measure.
114 Appellate Body Report, US – Oil Country Tubular Goods Sunset Reviews (Article 21.5 –
Argentina).
115 The United States does not argue that these clai ms are not covered by Brazil's request for the
establishment of a panel (WT/DS267/30), but argues that they are outside the Panel's terms of reference by
virtue of the limited terms of reference contained in Article 21.5 of the DSU. The Panel notes that in
paragraphs 18 and 20 of this request Brazil refers to the "US marketing loan, and counter-cyclical payment
programs under the FSRI Act of 2002, as amended, as well as payments made under those programs" and to
"the US marketing loan and counter-cyclical payment programs under the FSRI Act of 2002, as amended, as
well as payments mandated to be made thereunder".

WTO-inconsistency with regard to the claim of "present" serious prejudice against certain payments
made in MY 1999-2002. According to the United St ates, the original panel specifically rejected or
declined to address Brazil's other serious prejudice claims.
116 117
9.31 The United States submits that Brazil's claims are outside the scope of this proceeding,
regardless of whether they are against the mark eting loan and counter-cyc lical payment programmes
alone or against the programmes in addition to pa yments under the programmes. The original panel
did not make a finding of WTO-inconsistency against the Step 2, marketing loan and counter-cyclical
payment programmes or against the programmes in addition to all payments thereunder. In this
regard, the United States submits that there is no legal or factual basis for Brazil's assertion that "in
the circumstances of this dispute a subsidy paymen t cannot be divorced from a subsidy programme".
As a factual matter, the marketing loan and counte r-cyclical payment programme s, i.e. the statutory
and regulatory provisions authorizing marketing loan and counter-cyclical payments are distinct from
the payments that they authorize. Either th e statutory/regulatory provisions themselves or the
measures resulting from their application, i.e. part icular payments, may be challenged in dispute
settlement, but each is a distinct measure. The Ap pellate Body has clarified that "as such" and "as
applied" claims are distinct, and there is no support in any Appellate Body report for Brazil's
argument that the real world difference between a statutory/regulatory provision and the measures that
it authorizes must be disregarded. With respect to Brazil's argument that because an analysis under
Articles 5 and 6 of the SCM Agreement focuses on the effects of the subsidy, no distinction can be
made between a programme and the payments ma de under the programme, the United States submits
that Brazil does not explain why the focus on effects in Part III of the SCM Agreement would require
that the statutory and regulatory provisions author izing payments be conflated with the payments
themselves. This argument of Brazil is also in contradiction with the fact that in the original
proceeding Brazil itself made separate claims agains t the payments and the statutory and regulatory
provisions.
118
9.32 The United States asserts that Brazil did not challe nge, the original panel did not find, and the
DSB did not make any recommendation or ruling ag ainst the marketing loan and counter-cyclical
payment programmes or against the programmes in a ddition to the payments under the programmes.
The measures that were the subject of Brazil's claims, and the panel's finding, of present serious
prejudice were subsidies provided during MY 1999 -2002. The absence of any express reference to
any legal/regulatory provisions in paragraphs 8.3(d) and 8.1(g)(i) of the original panel report confirms
that the actionable subsidy-related conclusion a nd recommendation laid out therein do not apply to
any programme as such, either alone or as part of any invented amalgam of programmes and
payments. As illustrated by Section VII:D of the panel report, where the original panel wanted to
refer to programmes, as such, and payments together, it expressly stated it was doing so.
119 T h e
United States considers that in arguing that the original panel did make findings of WTO-
inconsistency against the marketing loan and c ounter-cyclical payment programmes as such, Brazil
relies on selectively cited language from the panel report taken out of its proper context.
120
9.33 Brazil argues that the preliminary objection of the United States rests on a
mischaracterization of the claims of Brazil in this pr oceeding and of the findings of the original panel.

116US First Written Submission, paras. 31-33.
117 The United States points out that the statement in paragraph 7.1501 of the original panel report that
"the United States is obliged to take action concerning its present statutory and regulatory framework as a result
of our 'present' serious prejudice finding" is not a recommendation. US First Written Submission, para. 39.
118 US Rebuttal Submission, paras. 20-28.
119 US Rebuttal Submission, paras. 30-43.
120 US Rebuttal Submission, paras. 44-52. See also US Comments on Brazil's Responses to Panel
Questions 11 and 15.

Brazil further argues that under established jurisprude nce, Brazil's claims fa ll squarely within the
scope of this proceeding.
9.34 Brazil submits that in this proceeding it is not asserting a claim against US marketing loan
and counter-cyclical payment programmes "as such". The measures that constitute the subsidies at
issue in this proceeding are the statutory and regulatory provisions of the FSRI Act of 2002 relating to
upland cotton and the mandatory and price-continge nt payments that have been made and will
continue to be made during the lifetime of the FSRI Act of 2002, and Brazil makes no distinction
between serious prejudice caused by the provisions of the FSRI Act and serious prejudice caused by
the payments mandated by those provisions. It follows from the particular nature of the obligations in
Articles 5 and 6 of the SCM Agreement, which focus on the effects of subsidies, that a payment of a
subsidy cannot be divorced from the subsidy prog ramme pursuant to which the payment is made. 121
Brazil argues that the idea that programmes and paymen ts together constitute the subsidy is consistent
with the approach of the original panel. Brazil re fers to statements in the panel report that indicate
that the panel considered that its findings in Sec tion VII:G and its conclusion in paragraph 8.1(g)(i)
pertained to both the subsidy programmes under the FSRI Act and the pa yments mandated under
those programmes. Brazil also submits that a review of the submissions of the parties in the original
proceeding shows that they both referred to the e ffects of the programmes as well as the effects of
payments under the programmes. Since the original panel necessarily considered all forms of the
subsidy, i.e. programmes and specific paymen ts made under the programmes, and since the
United States did not appeal the original panel's fi nding that it was obliged to take action with respect
to the statutory and regulatory framework under whic h subsidies were provided, the United States is
precluded from challenging this Panel's authority to review Brazil's claim regarding the marketing
loan and counter-cyclical payment programmes.122
9.35 Brazil argues that while recent jurisprudence has clarified that the original proceeding
imposes limits on the scope of the claims that may be presented in an Article 21.5 proceeding, those
limits do not apply to Brazil's claims regarding the marketing loan and counter-cyclical payment
programmes.123 Brazil's claims against the adverse effects flowing from the programmes and the
payments mandated under the programmes were iden tified in Brazil's request for establishment and
involve measures taken to comply within the meaning of Article 21.5 of the DSU. 124 Brazil further
submits that the United States is factually incorrect in suggesting that the original panel rejected the
serious prejudice claims of Brazil in respect of the marketing loan and counter-cyclical
programmes.
125 Brazil also submits that the original pane l exercised judicial economy with respect to
Brazil's claims of threat of serious prejudice and with respect to Brazil's per se claims because the
panel considered that its finding regarding "present" serious prejudice would oblige the United States
to take action concerning its statut ory and regulatory framework. Therefore, the exercise of judicial

121 Brazil's Submission Regarding US Requests for Preliminary Ruling, paras. 31-34.
122 Brazil's Submission Regarding US Requests for Preliminary Ruling, paras. 36-40.
123 Brazil's Submission Regarding US Requests for Preliminary Ruling, paras. 41-47. Brazil points out
in this connection that the fact that a panel in an origin al proceeding declines to address certain claims does not
prevent a party from raising the same claims in an Article 21.5 proceeding.
124 Brazil's Submission Regarding US Requests for Preliminary Ruling, paras. 49-50.
125 In this regard, Brazil refers in particular to the statement in paragraph 7.1501 of the panel report.
Brazil also refers to para. 8.1(g)(i) of the report (particularly the phrase "mandatory price-contingent
United States subsidy measures"), the definition of the measures at issue in para . 7.1107 of the report,
statements in para. 7.1499 of the report, findings of the Panel regarding the "statutory and regulatory
framework" providing for the subsidies at issue (for exampl e, the Panel's examination of the "structure, design
and operation" of the programmes) and statements re flecting that the Panel assessed the effects caused by
statutory and regulatory instruments that provide for the payment of the subsidies along with the magnitude of
the payments. Brazil's Submission Regarding US Requests for Preliminary Ruling, paras. 52-62.

economy with respect to these claims confirms that the Panel's finding with respect to "present"
serious prejudice covered the subsidy programmes as well the payments made thereunder.
126
9.36 Brazil summarizes as follows the fa ctors that support its view that the original panel's finding
of "present" serious prejudice included the subsid y programmes as well as the payments mandated by
the subsidy programmes: (i) the identification by th e panel of the measures at issue in the "present"
serious prejudice section; (ii) the panel's reasoning re garding the "effect" of those measures; (iii) the
panel's reasoning in explaining its decision not to exam ine Brazil's claims of "as such" violations, and
(iv) the panel's description of the implementation action that the United States was obliged to take.127
(ii) Main arguments of third parties
9.37 Argentina submits that the marketing loan and counter-cyclical payment programmes were
subject to the findings and recommendations of the orig inal panel. The panel specifically stated that
the measures at issue included "legislative and regulatory provisions currently providing for the
payment of measures". Moreover, paragraph 8.1(g)(i ) of the panel report refers to "mandatory price-
contingent United States subsidy measures". The pane l stated that its findings pertained to measures
in force and subsidies paid in MY 2002 and that , as a result of its finding of "present" serious
prejudice, the United States was "obliged to take action concerning its present statutory and regulatory
framework".
128
9.38 Australia considers that the finding of the original panel in paragraph 8. 1(g)(i) of its report
relates to certain payments rather than to the subsidy programmes as such. However, Brazil is not
seeking to challenge the marketing loan and counter-cyclical payment programmes per se in this
proceeding. The focus of Brazil's case under Articles 5 and 6 of the SCM Agreement is the continuing
effects of the unamended programmes, i.e. payments made under those programmes, rather than the
programmes as such. In this context, it is impos sible to analyze the price-contingent subsidy
measures still in existence in isolation from the pr ogrammes that govern those measures. Insofar as a
consideration of those programmes is necessary to determine whether the price-contingent subsidy
measures cause significant price suppression, the programmes may properly be considered by this
Panel.129
9.39 China argues that the text of the report of the original panel makes clear that the serious
prejudice finding of the panel applies to the marketing loan and counter-cyclical payment
programmes. China mentions in this regard re ferences made by the panel to the "legislative and
regulatory provisions currently providing for the pa yment of" certain subsidies, including marketing
loan and counter-cyclical subsidies, to "the le gislation pursuant to which the granting authority
operates" and to the "structure, design and operation of these meas ures". In addition, the panel
specifically stated that, as a result of the panel' s finding of serious prejudice, the United States was
"obliged to take action concerning its present statutory and regulatory framework".130
9.40 Chad argues that the original panel described the measures at issue as including "the
legislative and regulatory provisions currently pr oviding for the payment of measures". Moreover,
the panel explained that, as a consequence of its finding of serious prejudice, the United States was
"obliged to take action concerning its present st atutory and regulatory fra mework", and found it
unnecessary to address Brazil's claim of threat of serious prejudice. Thus, the original panel clearly
considered that its finding of serious prejudice incl uded not simply the payments themselves but also

126 Brazil's Submission Regarding US Requests for Preliminary Ruling, paras. 63-71.
127 Brazil's Comments on US Response to Panel Question 45.
128 Argentina's Third Party Oral Statement, paras. 5-12.
129 Australia's Third Party Submission, paras. 14-15.
130 China's Third Party Submission, paras. 12-13.

the statutory and regulatory measures under which th e payments were made. Chad considers that by
describing the measures at issue in paragraph 8.1( g)(i) of its report as "mandatory" payments, the
panel necessarily included the statutory and regu latory framework that made those payments
mandatory. Chad also argues that the United St ates appears to confuse the issue of whether a
statutory provision is challenged as such with the altogether separate issue of whether a statutory
provision mandating certain payments can be found to cause serious prejudice. Brazil's claims in the
original proceeding were "as applied" claims regarding measures that included legislative and
regulatory provisions. The distin ction sometimes made in WTO proceedings between "as such" and
"as applied" claims does not mean that statutory or regulatory provisions cannot be challenged on an
"as applied" basis or that "as applied" claims are necessarily limited to the payments themselves to the
exclusion of measures mandating those payments.131
9.41 The European Communities agrees with the United States that there is a meaningful
distinction between an "as such" claim and an "as applied" claim and between a subsidy "programme"
within the meaning of the SCM Agreement and the provision of subsidies in individual cases under the
programme. A claim under Part III of the SCM Agreement can pertain to either the subsidy
programme, the provision of subsidy in individual instances or both. These measures should normally
not be conflated. However, the European Co mmunities considers that where an entitlement is
conditional upon the fulfilment of essentially factua l requirements and there is no discretion in the
hands of a granting authority, it may be justifiable to treat the subsidy programme and payments made
under the programme as indivisible for purposes of Article 21.5 proceedings. The European
Communities agrees with Brazil that the fact that the United States implemented the DSB
recommendations and rulings by withdrawing the Step 2 programme supports the view that there was
at least a sufficient nexus between the Step 2 payments and the Step 2 programme. Moreover, that the
original panel assessed a bundle of payments under the three different programmes implies that it
assumed that there was a sufficient nexus betw een the payments under the three different
programmes. If there is a sufficient nexus between payments and programme for one programme and
if there is a sufficient nexus between all payments, th is in turn suggests that there is a sufficient nexus
between the three programmes, such that the whole bundle can and should be treated as indivisible for
the purposes of this compliance panel.
132
9.42 India submits that the original panel clearly described the measures at issue as comprising the
"legislative and regulatory provisions currently providing for the payment of measures", including the
marketing loan and counter-cyclical payments, and th at the panel clearly considered that its findings
regarding "present" serious prejudice applied not on ly to payments but also to the statutory and
regulatory framework of the FSRI Act of 2002 and its implementing obligations. Therefore, the
obligations of the United States in the implementati on period were not limited to payments made in a
period in the past.
133
9.43 New Zealand submits that, read properly in the context of the panel's decision as a whole, the
finding of the original panel in paragraph 8.1(g)(i) of its report is not limited to the specific payments
made in MY 1999-2002 but applies to the measures under which those payments are authorized and
hence to the marketing loan and counter-cyclical payment programmes themselves. The panel made a
finding with respect to "the mandatory price-con tingent United States subsidy measures". Payments
are not mandatory subsidy measures; they are si mply the means by which the subsidy measures are
implemented. Moreover, it is clear from the report that the panel's analysis of the subsidy measures
that caused price suppression was of the progr ammes under the FSRI Act of 2002 under which
payments were made. Finally, the statement of the panel in paragraph 7.1501 of its report that "the
United States is obliged to take action concerni ng its present statutory and regulatory framework as a

131 Chad's Third Party Submission, paras. 22-31.
132 EC Third Party Oral Statement, paras. 15-21.
133 India's Third Party Oral Statement, para. 6.

result of our 'present' serious prejudice finding" gi ves meaning to the finding in paragraph 8.1(g)(i)
relating to the "United States subsidy measures" that constituted significant price suppression.
134
(iii) Evaluation by the Panel
9.44 The Panel interprets the scope of the original panel's finding of "present" serious prejudice
based on the terms used by the panel to express that finding. The original panel's finding of "present"
serious prejudice is contained in paragraphs 7.1416 and 8.1(g)(i) of the panel report.135
9.45 Paragraph 7.1416 of the report reads as follows:
"In conclusion, in light of all of these consider ations, we find that the effect of the mandatory,
price contingent United States subsidies at is sue – that is, marketing loan programme
payments, user marketing (Step 2) payments and MLA payments and CCP payments – is
significant price suppression in the same world market for upland cotton in the period MY
1999-2002 within the meaning of Articles 6.3(c) and 5(c) of the SCM Agreement."
9.46 Paragraph 8.1(g)(i) of the report reads as follows:
"the effect of the mandatory price-continge nt United States subsidy measures - marketing
loan programme payments, user marketing (Step 2) payments, MLA payments and CCP
payments - is significant price suppression in th e same world market within the meaning of
Article 6.3(c) of the SCM Agreement constituting serious prejudice to the interests of Brazil
within the meaning of Article 5(c) of the SCM Agreement;"
9.47 In the Panel's view, there is no basis in the te xt of these paragraphs to interpret the measures
subject to the original panel's finding as incl uding anything other than "subsidies" and "subsidy
measures" defined in terms of the four categories of "payments" identified by the panel. The term
"payments" in its ordinary meaning does not incl ude the legal provisions or programmes pursuant to
which the payments are made. 136 The explicit statement by the panel that the subsidies and subsidy

134 New Zealand's Third Party Submission, paras. 4.03-4.07.
135 Paragraph 7.1416 is the concluding paragraph in section VII:G.3 of the report ("Claims under
Articles 6.3(c) and 5(c) of the SCM Agreement "). Paragraph 8.1(g)(i) appears in the "Conclusions and
recommendations" section of the report. We note that the Appellate Body Report in the original proceeding
refers to the "finding [of serious prejudice] in paragraphs 7.1416 and 8.1(g)(i) of the Panel Report." Appellate
Body Report, US – Upland Cotton , paras. 249(c)(i), 395, 496 and 763(c)(i). Thus, for example, in
paragraph 763(c)(i), the Appellate Body upheld "the Pane l's finding, in paragraphs 7.1416 and 8.1(g)(i) of the
Panel Report, that the effect of the marketing loan prog ram payments, Step 2 payments, market loss assistance
payments, and counter-cyclical payments (the 'price-contingent') subsidies is significant price suppression
within the meaning of Article 6.3(c) of the SCM Agreement".
136 A careful reading of the original panel report as a whole makes it clear that the panel generally
equated "subsidies" with "payments" and that the term "payments" in this context does not include legal and
regulatory provisions. For example, one of the issu es addressed by the panel in response to preliminary
objections raised by the United States was whether production flexibility contract payments and market loss
assistance payments made under legislation that no longer existed were within the panel's terms of reference. In
its discussion of this issue the panel observed inter alia:

"The Panel notes that Brazil pursues claims only in respect of the subsidies and domestic
support provided under the expired programmes and authorizing legislation, in other words,
the payments themselves . Brazil does not seek any relief in respect of the PFC and MLA
programmes or authorizing legislation 'as such'. Therefore, the Panel only considers whether
the payments are within its terms of reference." (emphasis added)

measures at issue are certain kinds of payments, a nd the absence of any reference to legal provisions
or subsidy programmes providing for the payments, therefore necessarily mean that the subsidies and
subsidy measures do not include such le gal provisions or subsidy programmes. 137 We also note, in
this regard, that Section III of the panel report ("Parties' Requests for Findings and
Recommendations") identifies the measures subject to Brazil's claims of "present" serious prejudice as
"subsidies provided during MY 1999–2002" without mentioning the legal provisions or programmes
providing for these subsidies. The panel's finding of "present" serious prejudice in paragraphs 7.1416
and 8.1(g)(i) logically cannot have been broader in sc ope than the claims of Brazil in respect of which
the panel made this finding. Finally, the panel sp ecified the temporal scope of its finding when it
stated in paragraph 7.1416 that the effect of the mandatory, price-contingent subsidies at issue was
significant price suppression in the period MY 1999-2002.
9.48 In support of its argument that the original panel's finding of "present" serious prejudice
applied to payments and programmes, Brazil emphasi zes the original panel's explanation as to why
the panel considered it not necessary or appropriate to address Brazil's claims of threat of serious
prejudice under Articles 5(c) and 6.3(c) of the SCM Agreement.138
9.49 We find Brazil's emphasis on these paragraphs in the panel report 139 to interpret the scope of
the panel's finding of "present" serious prejudice misplaced. First, the finding of "present" serious
prejudice is contained in paragraphs 7.1416 and 8. 1(g)(i), not in paragraphs 7.1499-7.1503. As
discussed above, consistent with Brazil's claims, para graphs 7.1416 and 8.1(g)(i) of the original panel
report contain a finding that the effect of certain subsidies and subsidy measures, defined in terms of
certain kinds of payments, is significant price suppression constituting serious prejudice to the
interests of Brazil in the period MY 1999-2002. These paragraphs do not refer in any way to
programmes or legislation. We do not see how the observations made by th e panel in paragraphs
7.1499-7.1503 could be used to support an interpretation of the panel's finding of "present" serious
prejudice that is inconsistent with the natural mean ing of the terms used by the panel in paragraphs
7.1416 and 8.1(g)(i). Second, there is no explicit statement in paragraphs 7.1499-7.1503 that the
panel had found that serious prejudice to the inter est of Brazil was the effect of subsidy programmes
or legal provisions establishing subsidy progra mmes as well as payments made under those
programmes. The panel stated in paragraphs 7.1499 and 7.1501 that "[o]ur finding of 'present' serious
prejudice thus pertain[s] also to measures in for ce and subsidies paid in MY 2002..." and that "the
Panel's 'present' serious prejudice findings include fi ndings of inconsistency that deal with the FSRI
Act of 2002 and subsidies granted thereunder". Th e panel did not state that it had found that, in
addition to subsidies paid in MY 1999-2002, the FSR I Act itself was inconsistent with Articles 5 and
6 of the SCM Agreement.

Panel Report, US – Upland Cotton , para. 7.108. Thus, the panel understood "the subsidies and
domestic support..." to refer to "the payments themselves", as distinguished from the "... programmes or
authorizing legislation 'as such'". Where the panel used the concept of payments in a broader sense to
encompass regulatory provisions, it made an explicit statement to that effect. See Panel Report, US – Upland
Cotton, para. 7.337, footnote 466: "In this Section of our report, the Panel will consider the current programmes
'as applied' and 'as such' together. Therefore, references to marketing loan programme, user marketing (step 2),

direct, counter-cyclical and crop insuran ce 'payments' include the legislative and regulatory provisions
authorizing those payments, unless otherwise indicated." No such statement can be found in the section of the
original panel report that addresses Brazil's claims of serious prejudice.
137 By using the words "mandatory" and "price contingent" to qualify "United States subsidy measures"
the panel characterized the subsidies at issue in terms of certain conditions set out in the legal provisions
governing those subsidies, but this does not alter the fact that the panel only made a finding of "present" serious
prejudice with respect to subsidies (defined as paymen ts) and not with respect to both subsidies and the legal
provisions governing those subsidies.
138 Brazil's Submission Regarding US Requests for Preliminary Ruling, paras. 36-39, 52, 59-60, 64-71;
Brazil's Responses to Panel Questions 11 and 13, paras. 99-102, 105-106, 119, 126-128.
139 Panel Report, US – Upland Cotton, paras. 7.1499-7.1503.

9.50 Similarly, the statement in paragraph 7.1501 of the report of the original panel that "the
United States is obliged to take action concerni ng its present statutory and regulatory framework as a
result of our 'present' serious prejudice finding" is an expression of a view about the steps to be taken
by the United States under Article 7.8 of the SCM Agreement and does not mean that the Panel had
found that the "present statutory and regulatory frame work" in addition to subsidies paid under that
framework had itself caused serious prejudice.
140
9.51 While the legal provisions or subsidy program mes pursuant to which the subsidies were
provided were not themselves part of the measures subject to the original panel's finding in
paragraphs 7.1416 and 8.1(g)(i), it is clear that in making this finding the original panel took into
consideration these legal provisi ons or subsidy programmes. The panel undertook "an analysis
focusing on the existence and nature of the subsidies in question by examining their structure, design
and operation with a view to discerning their effects". 141 The panel considered that "the nature of the
United States subsidies at issue – in terms of thei r structure, design and ope ration – is relevant in
assessing whether or not they have price suppressing effects". 142 In finding that there was
"significant" price suppression, the panel relied inter alia upon the "the market-price contingent,
counter-cyclical, nature of the marketing loan programme [and] the user marketing (Step 2)
programme".143 The panel observed that "the structure, design and operation of the marketing loan
programme has enhanced production and trade-distorting effects". 144 145 The panel found that "the
structure, design and operation of these three m easures constitutes evidence supporting a causal link
with the significant price suppression we have found to exist".146
9.52 In our view, it is self-evident that in order to properly analyze the effect of a subsidy for
purposes of an analysis under Articles 5 and 6 of the SCM Agreement, the subsidy must be examined
in light of the conditions and criteria contained in the legal and regulatory framework that governs the
granting of that subsidy. Therefore, in this sense we concur with the argument of Brazil that it is
difficult to divorce a payment of a subsidy from the programme or legal provisions pursuant to which
the subsidy is provided. As we understand the position of the United States, the United States does
not contest that in order to evaluate whether a subs idy is inconsistent with a Member's obligations it
may be necessary to analyze that subsidy in the c ontext of the legal and regulatory framework that
defines the conditions under which the subsidy is granted.
147 It would appear that the preliminary
objection of the United States reflects a concern that Brazil challenges the programmes as such, as

140 Contrary to what Brazil argues, this statemen t cannot be treated as part of the panel's
"recommendation". As the panel recalled in paragraph 8.3(d), the obligations of the United States arising from
the finding of serious prejudice are defined in Article 7.8 of the SCM Agreement. There is no legal basis in the
text of the SCM Agreement or in the DSU to suggest that where a pa nel has made a finding of serious prejudice
under Articles 5 and 6 of the SCM Agreement it has the authority to make a "recommendation" other than in
terms of Article 7.8 of the SCM Agreement.
141 Panel Report, US – Upland Cotton, para. 7.1194.
142 Panel Report, US – Upland Cotton, para. 7.1289.
143 Panel Report, US – Upland Cotton, para. 7.1332.
144 Panel Report, US – Upland Cotton, para. 7.1295.
145 Similarly, in discussing the influence of counter-cyclical payments on production decisions, the
Panel observed inter alia: "The FSRI Act of 2002 provides, on an on-going basis, for payments under certain
market conditions. This contrasts with the ad hoc nature of the MLA payments. Under the FSRI Act of 2002,
United States producers are currently aware that such pa yments are available under certain conditions and that
there is no need to be uncertain as to whether [the] United States Congress may or may not decide to authorize
such payments in a given year. This certain claim on future payments under certain conditions increases
United States producers' economic stability." Panel Report, US – Upland Cotton, para. 7.1302, footnote 1410.
146 Panel Report, US – Upland Cotton, para. 7.1349.
147 US Comments on Brazil's Response to Panel Question 11, para. 50.

that concept is commonly understood in WTO dispute settlement practice. 148 The references in
Brazil's First Written Submission to "programme" a nd "programmes" and certain statements made by
Brazil during this proceeding could indeed be inte rpreted to suggest that Brazil is challenging
programmes as such.149 However, Brazil has stated explicitly that it is not challenging the marketing
loan and counter-cyclical payment programmes as such.150 While Brazil has emphasized that it is not
possible to distinguish between the adverse effects of the statutory and regulatory provisions of the
FSRI Act relating to upland cotton and the adver se effects of the payments mandated by these
provisions151, Brazil does not request the Panel to find that, independently of their application in
individual cases, the marketing loan and counter-c yclical payment programmes "will necessarily be
inconsistent with"152 Articles 5 and 6 of the SCM Agreement.
9.53 Given that Brazil is not seeking an "as such" finding, we consider that the preliminary
objection of the United States is without object insofar as it would appear to be based on an
interpretation of Brazil's claims as claims against programmes per se.
153
9.54 The Panel finds that, although the original panel's finding of "present" serious prejudice did
not apply to legal provisions or subsidy programmes in addition to subsidies and subsidy measures, it
is not necessary for the Panel to make a ruling on the preliminary objection of the United States
because Brazil does not request the Panel to find that the marketing loan and counter-cyclical payment
programmes are WTO-inconsistent as such. The Panel also concludes that the original panel's finding
of serious prejudice was based on an analysis that took into consideration the legal provisions or
subsidy programmes pursuant to which the subsidies were provided. The Panel considers that it is

148 As stated by the Appellate Body: "[b]y definition, an 'as such' claim challenges laws, regulations, or
other instruments of a Member that have general and prospective application, asserting that a Member's
conduct—not only in a particular instan ce that has occurred but in future s ituations as well—will necessarily be
inconsistent with that Member's WTO obligations. In essence, complaining parties bringing 'as such' challenges
seek to prevent Members ex ante from engaging in certain conduct." Appellate Body Report, US – Oil Country
149 For example, Brazil has stated that "[t]he measures that constitute these 'subsidies' are the statutory
and regulatory provisions of the FSRI Act of 2002 that relate to upland cotton, i.e. the marketing loan and
counter-cyclical payment provisions, and the mandatory and price-contingent payments to US upland cotton
farmers that have been and will continue to be made during the lifetime of the FSRI Act of 2002, i.e. until
MY 2007, unless the measure is extended". Brazil's Submission Regarding US Requests for Preliminary
Ruling, para. 31.
150 Brazil's Rebuttal Submission, Section 2.1.3 ("Brazil's Serious Prejudice Claims Do Not Constitute
what the United States Calls 'As Such' Claims"); Braz il's Submission Regarding US Requests for Preliminary
Ruling, para. 31 ("The United States claims that Braz il is asserting a claim against US marketing loan and
counter-cyclical payment programs 'as such'. This is erroneous. Rather, Brazil is challenging in this proceeding
the US subsidies inasmuch as they cause adverse effect s."); Brazil's Response to Panel Question 12, para. 112
("While Brazil has challenged the marketing loan and counter-cyclical 'programs' and their mandatory, price-
contingent 'payments', to the extent that they cause adverse effects, it has not asserted an 'as such' claim
regarding the marketing loan and counter-cyclical payment programs in the FSRI Act of 2002."). At the
meeting of the Panel with the parties Brazil confirmed, in response to a question of the Panel, that it was not
seeking a finding of the Panel under Articles 5 and 6 of the SCM Agreement against the marketing loan and
counter-cyclical payments programmes themselves, as distinguished from the payments made pursuant to those
programmes.
151 See, e.g., Brazil's Rebuttal Submission, paras. 34-35; Brazil's Submission Regarding the US
Requests for Preliminary Ruling, paras. 33-34.
152 Supra, footnote 148.
153 The question of whether a measure can, as such, i.e. independently of its application, be inconsistent
with the effects-based disciplines in Articles 5 and 6 raises serious conceptual issues. As Brazil is not seeking a
finding that the subsidy programmes are as such inconsistent with Articles 5 and 6 of the SCM Agreement, the
Panel does not need to address these issues.

appropriate in this proceeding to conduct a similar analysis of subsidies in the context of the legal
provisions or subsidy programmes pursuant to which the subsidies are granted.
(b) Whether Brazil's claims with respect to the marketing loan and counter-cyclical payment
programmes are outside the scope of this proceeding because these programmes have not
been changed in response to DSB recommendati ons and rulings or otherwise and therefore
are not "measures taken to comply" within the meaning of Article 21.5 of the DSU
9.55 As discussed above, Brazil does not request the Panel to find that the marketing loan and
counter-cyclical payment programmes are WTO-inconsis tent as such. For this reason, the Panel does
not find it necessary to rule on the objection of th e United States that since the marketing loan and
counter-cyclical programmes are not "measures taken to comply" within the meaning of Article 21.5
of the DSU, Brazil's claims with respect to th ese programmes are not within the scope of this
proceeding.
4. Whether Brazil's claim regarding the failure of the United States to take measures
between 22 September 2005 and 31 July 2006 is outside the scope of this proceeding
(a) Main arguments of the parties
9.56 Brazil requests the Panel to find that the United St ates failed to take any measures to remove
the adverse effects or to withdraw the three price-contingent upland cotton subsidy programmes under
the FSRI Act of 2002 between 22 September 2005 and 31 July 2006 and that, as a consequence,
measures taken to comply with the adverse effect s-related recommendations and rulings of the DSB
did not exist in this period.
154 Brazil also requests that the Panel conclude that the recommendation
under Article 7.8 has not been complied with entirely and remains in effect.155
9.57 Brazil argues that under Articles 7.8 and 7.9 of the SCM Agreement the United States had
until 21 September 2005 (six months after the date of adoption of the reports in the original
proceeding) to withdraw the subsidies or to take ap propriate steps to remove their adverse effects.
Since the United States repealed the Step 2 programme only on 1 August 2006 and did not take any
action to amend the marketing loan and counter-c yclical payments provisions of the FSRI Act of
2002, the United States has failed to adopt measures to comply within the implementation period.
This means that the Panel can conclude that no measures to comply existed between
22 September 2005 and 31 July 2006.
156 Brazil submits that the panel report in Australia – Salmon
(Article 21.5 – Canada) provides relevant precedent for a finding in an Article 21.5 proceeding that
measures to comply did not exist in a past period.157
9.58 The United States asserts that Brazil's claim that there were no measures taken to comply in
the period between 22 September 2005-31 July 2006 is not within the scope of this proceeding. First,
assuming (incorrectly) that the DSB actionable subs idy-related recommendations are related to the
Step 2, marketing loan, and counter-cyclical programm es, Brazil asserts that it is 'undisputed' that the
United States failed to take measures to comply in a timely fashion, before the repeal of the Step 2
programme on 1 August 2006. Thus, in the view of the United States, Brazil does not even assert a
'disagreement' as to the absence of measures taken to comply prior to 1 August 2006. 158 Second, the
issue of the timeliness of implementation is not within the scope of a panel's mandate under
Article 21.5 of the DSU. Specifically, Article 21. 5 does not direct a panel to examine whether a

154 Brazil's First Written Submission, paras. 40 and 461.
155 Brazil's First Written Submission, para. 46.
156 Brazil's First Written Submission, paras. 39-46.
157 Brazil's First Written Submission, para. 46, footnote 37.
158 See US First Written Submission, para. 50.

Member has implemented actionable subsidy-relate d recommendations within the six-month period
provided for in Article 7.9 of the SCM Agreement. The United States submits that not only is there no
textual basis for the kind of finding requested by Br azil, but that a finding with respect to a factual
situation that no longer exists is also inconsistent with the DSU objective of securing a positive
solution to a dispute. The United States submits th at prior panel reports in Article 21.5 proceedings
support its position that compliance must be examined on the basis of the facts as they stand when a
matter is referred to a compliance panel.159
9.59 Brazil submits that by arguing that there is no disagreement between the parties with respect
to the existence of measures taken to comply th e United States acknowledges that it has not taken any
measures to comply with the adverse effects-rela ted rulings and recommendations of the DSB by the
end of the implementation period and requests the Pane l to make a finding to that effect. Brazil also
argues that Articles 7.9 and 7.10 of the SCM Agreement constitute a legal basis for the kind of finding
requested by Brazil. Brazil argues that whether me asures taken to comply existed within the time-
frame specified in Article 7.9 is relevant to an an alysis under Article 21.5 of the "consistency" of such
measures with the provisions of the covered agreem ents and that "Brazil's right to pursue the
United States' failure to remove the adverse effect s or withdraw the subsidy, and the assessment of
whether any proposed countermeasures are commensurate, are tied to the date on which the
implementation period expires".
160
(b) Main arguments of third parties
9.60 Australia argues that the Panel should refuse th e request of the United States for a
preliminary ruling regarding Brazil's claim concer ning the failure of the United States to take
measures to comply within the period 22 September 2005-1 July 2006. Australia considers that an
examination under Article 21.5 of the DSU of the "existence" of measures taken to comply can
encompass a finding that no measures taken to comply exist. Australia refers, in this respect, to the
panel in Australia – Salmon (Article 21.5 – Canada), which found that because the date of entry into
force of measures taken to comply by Australia occurred subsequent to the date upon which the
reasonable period of time for implementation expired, for the period of time that the new measures
did not apply subsequent to that date, "no measures taken to comply existed ... in the sense of
Article 21.5". Australia also argues that a prelim inary ruling cannot be granted in a way that would
void rights under Article 22 of the DSU. Article 22 rights would logically ensue from findings of
inconsistency with Articles 7.8 and 7.9 of the SCM Agreement. Thus, if the Panel were to accept the
preliminary ruling requested by the United States, this would diminish the rights of Brazil under
Article 22 of the DSU.
161
9.61 The European Communities disagrees with the view of the United States that Brazil's claim
regarding non-compliance in a past period is not within the scope of this proceeding under
Article 21.5 of the DSU. The European Communi ties considers that in making this argument the
United States overlooks the fact that any act or omission may be a measure for purposes of WTO
dispute settlement. The European Communities also submits that there is nothing in the text of
Article 21.5 of the DSU to limit the temporal application of that provision in the manner advocated by
the United States.162

159 US First Written Submission, paras. 49-56.
160 Brazil's Submission Regarding US Requests for Preliminary Ruling, paras. 77-87.
161 Australia's Third Party Submission, paras. 18-20.
162 EC Third Party Oral Statement, paras. 25-30. W ith respect to the merits of Brazil's claim, the
European Communities argues that Members enjoy a certain measure of discretion in the implementation of the
obligation under Article 7.8 of the SCM Agreement to take appropriate steps to remove the adverse effects of the
subsidy or withdraw the subsidy. Ar ticle 7.8 does not necessarily require that a Member take positive action.
Whether a Member has complied with its obligation under Article 7.8 requires a careful analysis of the

9.62 Japan submits that the Panel has the authority to make a finding on Brazil's claim regarding
the non-compliance of the United States with the DSB recommendations and rulings in the period
22 September 2005-31 July 2006. Japan specifically rejects, in this regard, the argument of the
United States that since there is no disagreement be tween the parties, Brazil's claim is outside the
scope of this proceeding under Article 21.5 of the DSU. Japan agrees with Australia's argument that a
failure of the Panel to address Brazil's claim w ith respect to the alleged non-compliance of the
United States in the period 22 September 2005-31 July 2006 would diminish rights of Brazil under
Article 22 of the DSU.
163
9.63 New Zealand submits that the United States cannot claim that since it took no implementing
action until 1 August 2006, that period is outside th e scope of this proceeding. Article 21.5 of the
DSU applies to the "existence" of measures, not just to the consistency of measures actually taken to
comply with the recommendations and rulings of the DSB.164
(c) Evaluation by the Panel
9.64 The United States requests the Panel to make a pr eliminary ruling that Brazil's claim that the
United States failed to take any measures to remove the adverse effects or to withdraw the three price-
contingent upland cotton subsidy progra mmes under the FSRI Act of 2002 between
22 September 2005 and 31 July 2006 and that, as a c onsequence, measures taken to comply with the
adverse effects-related recommendati ons and rulings of the DSB did not exist in this period, is not
properly within the scope of this proceeding under Article 21.5 of the DSU.165
9.65 It is not in dispute that the factual situati on referred to by Brazil in this request no longer
existed at the time of the establishment of th e Panel as the United States repealed the Step 2
programme effective 1 August 2006. In this regard, th e parties disagree as to whether it is within this
Panel's mandate under Article 21.5 of the DSU to make a finding as to whether the United States had
complied with its obligations under Article 7.8 of the SCM Agreement at the end of the six-month
period provided for in Article 7.9 of the SCM Agreement, or whether the Panel's mandate under
Article 21.5 only allows the Panel to determine whether the United States had complied with its
obligations under Article 7.8 of the SCM Agreement at the time of the establishment of the Panel.
9.66 Brazil's request is based on two important premises. First, the request assumes that under
Article 21.5 of the DSU this Panel is required to make findings in relation to factual situations at two
different points in time. Specifically, according to the logic of Brazil's argument, the Panel is required
to make a finding as to the "existence or consiste ncy with a covered agreement of measures taken to
comply" as of the end of the period referred to by Brazil as the implementation period 166
(22 September 2005) in addition to a finding as to "existence or consistency with a covered agreement
of measures taken to comply" as of the time of the establishment of the Panel. Second, Brazil's
request also assumes that the fact that the United States did not take any action in the period 22
September 2005-31 July 2006 with respect to the measures subject to the DSB recommendations and
rulings in the original proceeding is a sufficient ba sis for this Panel to find that the United States

particular facts and circumstances of each individual case. Therefore, the fact that between 22 September 2005
and 31 July 2006 the United States took no positive action to comply with the recommendations and rulings of
the DSB does not necessarily warrant the conclusion that the United States is in breach of Article 7.8. EC Third
Party Submission, paras. 34-48.
163 Japan's Third Party Oral Statement, paras. 8-9.
164 New Zealand's Third Party Submission, para. 4.02.
165 The Panel notes that in its request for the establishment of a panel Brazil asserts that "[a]t least
during the period 21 September 2005 through 31 July 2006, measures taken to comply did not exist, within the
meaning of Article 21.5 of the DSU". WT/DS267/30, para. 12.
166 Brazil refers to the period of six m onths mentioned in Article 7.9 of the SCM Agreement as the
"implementation period". See e.g. Brazil's Response to Panel Question 22, para. 159.

failed to comply with its obligation under Article 7.8 of the SCM Agreement to "take appropriate steps
to remove the adverse effects or …withdraw the subsidy" 167 and that, as a consequence, no measure
taken to comply within the meaning of Article 21.5 of the DSU existed at the end of that period.
9.67 With respect to the first premise of Brazil's ar gument, the Panel considers that a finding as to
the "existence or consistency with a covered agreem ent of measures taken to comply" as of the end of
the "implementation period" of Article 7.9 of the SCM Agreement or of the reasonable period of time
referred to in Article 21.3 of the DSU, in addition to a finding as to the "existence or consistency with
a covered agreement of measures taken to comply" as of the time of the establishment of a panel,
would be of little relevance to the effective reso lution of disputes. Where a panel makes a finding
under Article 21.5 of the DSU that a Member has not complied with the DSB recommendations and
rulings in the original dispute, the consequence of that finding is that the Member remains subject to
obligations that flow from the recommenda tion issued in the original proceeding
168 and is thus
required to take steps to bring itself into compliance with that recommendation. A finding by the
panel that the Member also failed to comply with the DSB recommendations and rulings in the
original proceeding at an earlier point in time would have no additional operative value in terms of the
nature of the obligations of the Member in questio n. On the other hand, if a panel under Article 21.5
finds that the Member has brought itself into compliance with the DSB recommendations and rulings
as of the time of the establishment of the panel, such a finding logically would supersede and render
irrelevant any finding that the Member was not in compliance with those recommendations and
rulings at an earlier point in time. Thus, in both cases a finding of a violation at the end of the
reasonable period of time would be of a declaratory nature and without practical implications as to the
obligations of the Member in question, unless one interprets the DSU to mean that a proceeding under
Article 21.5 can create obligations for a Member to ta ke steps that must be effective as of the end of
the reasonable period of time. We see no textual su pport for such a retroactive interpretation of the
DSU.
9.68 Brazil argues that the provisions on countermeasures in Articles 7.9 and 7.10 of the SCM
Agreement provide support for its request that the Panel make a finding that the United States failed to
take any measure at the end of what Brazil characterizes as the implementation period.
169 W e
disagree with this argument. We see nothing in the text of Article 21.5 or of other provisions of the
DSU that suggests that, because of considerations re lating to the application of Articles 7.9-7.10 of
the SCM Agreement or Article 22.6 of the DSU, a panel mu st make a finding as to the existence or
consistency of measures taken to comply as of the end of the six-month period set out in Article 7.9 of
the SCM Agreement or the reasonable period of time rather than as of the time of the establishment of
the panel. Nothing in the text or context of Article 21.5 of the DSU indicates that one of the functions
of a panel in a proceeding under Article 21.5 of the DSU is to assist arbitrators
170 in proceedings under
Articles 7.10 of the SCM Agreement or Article 22.6 of the DSU to determine the amount of
countermeasures or the amount of suspension of concessi ons or obligations and th at, to this end, the
panel must make findings as to the existence or c onsistency with a covered agreement of measures
taken to comply other than as of the date of the es tablishment of a panel. Brazil also argues that a
right to apply countermeasures arises under Article 7.9 of the SCM Agreement if the implementing
Member fails to comply with Article 7.8 within six months of the date of a doption of the panel report
or the Appellate Body report in the original pro ceeding, and that "[b]y pursuing its claim regarding

167 Brazil submits that Article 7.8 of the SCM Agreement requires affirmative action to remove the
adverse effects or withdraw the subsid y and that inaction is not sufficient in this respect. Brazil's Responses to
Panel Questions 22, 24-25 and 27.
168 Panel Report, US – FSC (Article 21.5 – EC).
169 Brazil's Submission Regarding US Requests for Preliminary Ruling, paras. 79-85; Brazil's Response
to Panel Question 21; Brazil's Comments on US Response to Panel Question 23; Brazil's Comments on US
Response to Panel Question 43.
170 Brazil's Response to Panel Question 21.

the non-existence of measures on 21 September 2005, Br azil seeks a multilateral basis for the DSB to
authorize countermeasures against the United Stat es for its failure to take any implementation
measures by the date required in Article 7.9 of the SCM Agreement". However, while a finding by a
panel under Article 21.5 of the DSU may be requir ed to provide "a multilateral basis" for DSB
authorization of countermeasures under Article 7.9 of the SCM Agreement , it does not logically
follow that such a panel must make a finding of no n-compliance as of the end of the six-month period
refered to in Article 7.9 of the SCM Agreement.
9.69 Finally, we note that in response to a Pane l question as to whether Brazil's request for a
finding of non-compliance by the United States as of the end of the six-month period provided for in
Article 7.9 of the SCM Agreement is supported by prior panel practice in Article 21.5 proceedings,
Brazil identifies only one panel report, Australia – Salmon (Article 21.5 – Canada ). While we
acknowledge that this panel re port contains findings of non-compliance in past periods
171, the
United States points to other panel reports that ha ve concluded that it is not appropriate to make
findings of non-compliance under Article 21.5 as of the end of the reasonable period of time.172
9.70 Thus, we disagree with Brazil's argument that Article 21.5 of the DSU contemplates a finding
on the existence or consistency with a covered agr eement of measures taken to comply at the end of
the reasonable period of time in addition to a finding on the existence of a measure taken to comply as
of the date of the establishment of a panel. We therefore do not need to address the question whether
the fact that the United States did not take action before the expiry of the period of six months referred
to in Article 7.9 of the SCM Agreement is a sufficient basis to find that the United States had not
complied with Article 7.8 of the SCM Agreement by that date.
9.71 In light of the foregoing considerations, the Panel finds that it is not appropriate to make a
finding on Brazil's claim that the United States failed to take any measures to remove the adverse
effects or to withdraw the three price-contingent upland cotton subsidy programmes under the FSRI
Act of 2002 between 22 September 2005 and 31 July 2006 and that, as a consequence, measures taken
to comply with the adverse effects-related recomme ndations and rulings of the DSB did not exist in
this period.
5. Whether "payments" made after 21 September 2005 pursuant to the marketing loan
and counter-cyclical payment programmes are within the scope of this proceeding
9.72 The Panel now turns to the question of whethe r payments made under the marketing loan and
counter-cyclical payment programmes after 21 Septem ber 2005 are properly within the scope of this
proceeding.
(a) Main arguments of the parties
9.73 The United States argues that the subsidies subject to the obligation in Article 7.8 of the SCM
Agreement to "take appropriate steps to remove the a dverse effects or... withdraw the subsidy" were
the subsidies provided during MY 1999-2002 which th e original panel had found to cause "present"
serious prejudice in MY 1999-2002.
173 Since the only measure subject to the obligation under
Article 7.8 were payments made until 31 Ju ly 2003 and since the payments made after
21 September 2005 are not measures taken to comply the United States considers that these payments
are not properly within the scope of this proceeding. 174 The United States considers that there is no

171 Panel Report, Australia – Salmon (Article 21.5 – Canada), paras. 7.30, 7.35 and 8.1(i).
172 Panel Report, US – Shrimp (Article 21.5 – Malaysia) , paras. 5.12-5.13; Panel Report , EC – Bed
Linen (Article 21.5 – India), para. 6.28.
173 US Response to Panel Question 18; US Comments on Brazil's Response to Panel Question 15.
174 US Response to Panel Question 47.

merit to the argument of Brazil that, even assuming that the original panel's findings of "present"
serious prejudice were "as applied" findings, s ubsequent payments under the same programme would
still be subject to the implementation obligations of the United States. The Appellate Body report that
Brazil cites in support of that argument ( US – Softwood Lumber IV (Article 21.5 – Canada)) said
nothing about whether a complaining party could in post hoc fashion attempt to add to the measures
found to be WTO-inconsistent by asserting that other measures not found to be WTO-inconsistent are
similar. Rather that dispute addressed the distinct issue of what measures could be considered to be
part of the measure taken to comply. Future pa yments under the marketing loan and counter-cyclical
payment programmes in MY 2003-2007 are not measures taken to comply with any recommendations
and rulings. To the contrary, they were original measures that were challenged by Brazil but against
which the original panel made no finding of WTO-inconsistency.175
9.74 Brazil argues that the subsidies subject to the obligation in Article 7.8 of the SCM Agreement
include the legislative and regulatory subsidy pr ogrammes in the FSRI Act and the payments made
under those programmes. However, even assuming arguendo that the original panel's finding of
serious prejudice only applied to payments made in MY 1999-2002, the reas oning of the Appellate
Body in US – Softwood Lumber IV (Article 21.5 – Canada) supports the view that subsequent
payments made under these programmes are subject to the obligation in Article 7.8 because such
subsequent payments have "a particularly close re lationship" to the recommendations and rulings of
the DSB.176 177 Brazil also submits that Article 7.8 requi res a full and permanent removal of adverse
effects and that this means that a Member may not replace a subsidy found to cause adverse effects
with another subsidy that continues to cause the same adverse effects. Therefore, even if in this
dispute the original panel had made findings limited to payments made in MY 1999-2002, the
obligation of the United States under Article 7.8 woul d not be limited to the removal of the adverse
effects of payments made in that period.
178 Brazil argues that if a panel makes a finding of "present"
adverse effects, such a finding applies beyond the hi storical period considered by the panel and that
the Member whose subsidies cause such adverse ef fects is therefor e obligated under Article 7.8 to
take appropriate steps to fully withdraw the pr esent, ongoing and future effects of the subsidies. 179
Finally, Brazil also argues that the fact that the or iginal panel exercised judicial economy with respect
to future payments in 2003-2007 does not prevent Brazil from challenging those payments in this
proceeding.
(b) Evaluation by the Panel
9.75 In order to determine whether payments made under the marketing loan and counter-cyclical
payment programmes after 21 September 2005 are with in the scope of this proceeding, we must
consider whether such payments fall within the sco pe of the phrase "disagreement as to the existence
or consistency with a covered agreement of measu res taken to comply with the recommendations and
rulings" of the DSB in the original proceeding. In this respect, the Panel's examination of the scope of
"measures taken to comply" must also involve an examination of the recommendations and rulings of
the DSB.180
9.76 With respect to its finding of "present" seri ous prejudice the original panel recalled in
paragraph 8.3(d) of its report that Article 7.8 of the SCM Agreement provides as follows:

175 US Comments on Brazil's Response to Panel Question 15.
176 Brazil's Response to Panel Question 15, paras. 145-150; Brazil, Response to Panel Question 24,
para. 4.
177 See also Brazil's Comments on US Response to Panel Question 44, paras. 41-47.
178 Brazil's Response to Panel Question 24, paras. 13-14.
179 Brazil's Comments on US Response to Panel Question 24, para. 39.
180 Appellate Body Report, US – Softwood Lumber IV (Article 21.5 – Canada) , para. 68; Appellate
Body Report, US – Oil Country Tubular Goods Sunset Reviews (Article 21.5 – Argentina), para.142.

"Where a panel report or an Appellate Body report is adopted in which it is
determined that any subsidy has resulted in adverse effects to the interests of another
Member within the meaning of Article 5, the Member granting or maintaining such
subsidy shall take appropriate steps to rem ove the adverse effects or shall withdraw
the subsidy."
9.77 Under Article 7.8 of the SCM Agreement the United States was obligated, with respect to the
subsidies subject to the "present" serious prejudice fi nding of the original panel, to "take appropriate
steps to remove the adverse effects or ... withdraw the subsidy".
9.78 It is clear from the context that the adverse effects that must be removed are the adverse
effects of the subsidy that has been determined to ha ve resulted in adverse effects. Since the original
panel made a finding of present serious prejudice in respect of subsidies provided during MY 1999-
2002, the question arises whether the obligation to take appropriate steps to remove the adverse
effects only applies to payments of subsidies made in those years.
9.79 It is not in dispute that the United States presently provides marketing loan and counter-
cyclical payments on the same legal basis and s ubject to the same conditions and criteria as the
marketing loan payments and counter-cyclical paymen ts that were subject to the panel's finding of
"present" serious prejudice. In a situation where the subsidy in question has been found to be a
prohibited one, the continued use of the subsidy under the same conditio ns and criteria is inconsistent
with a Member's obligation to "withdraw " the subsidy under Article 4.7 of the SCM Agreement.
181
Thus, the concept of "withdrawal" must in any event be interpreted to mean that a Member must cease
to act in a WTO-inconsistent manner with respect to that subsidy. If a failure to cease conduct
inconsistent with a Member's ob ligations under Article 3 of the SCM Agreement is inconsistent with
the obligation to withdraw the subsidy in Article 4.7 of the SCM Agreement, we see no logical reason
why the same concept should not also apply to th e obligation that arises under Article 7.8 of the
SCM Agreement to withdraw the subsidy or to take appropr iate steps to remove the adverse effects of
a subsidy that has been determined to result in adverse effects. In our view, the remedy under
Article 7.8 must be viewed in its relationship to the obligation in Article 5 not to cause through the
use of any subsidy referred to in Articles 1.1 and 1.2 of the SCM Agreement adverse effects to the
interests of other Members. It must serve to rest ore conformity with the Member's obligation to avoid
causing adverse effects through the use of any subsid y. As a consequence, a Member does not take
appropriate steps to remove adverse effects of a s ubsidy if it continues to provide payments under the
same conditions and criteria as the original subsidy in a manner that causes adverse effects. The
interpretation advocated by the United States, whereby the obligation under Article 7.8 of the
SCM Agreement is limited to the removal of the adver se effects caused by subsidies granted in a
particular period of time, implies that it would not be possible to review in an Article 21.5 proceeding
whether a Member causes adverse effects by contin uing to grant subsidies under the same conditions
and criteria as the subsidies found to have caused adver se effects. Such an inte rpretation fails to take
into account the relationship between Article 7.8 and Article 5 of the SCM Agreement and thus fails to
interpret Article 7.8 in its proper context.
9.80 We find further support for this approach in pane l and Appellate Body reports on the scope of
Article 21.5 of the DSU in which it has been held th at "measures taken to comply" include " measures
with a particularly close relationship to the d eclared 'measure taken to comply', and to the
recommendations and rulings of the DSB". 182 As explained above, our interpretation of Article 7.8
implies that if a Member continues to make paymen ts of a subsidy on the same legal basis and under

181 See Appellate Body Report, Brazil – Aircraft (Article 21.5 – Canada), para. 45; Panel Report, Brazil
Aircraft (Article 21.5 – Canada), para. 6.8; Panel Report, Canada – Aircraft (Article 21.5 – Brazil), para. 5.10.
182 E.g. Appellate Body Report, US – Softwood Lumber IV (Article 21.5 – Canada ), para. 77. Supra,
para. 9.24.

the same conditions and criteria as the subsidy found to have caused serious prejudice in the original
proceeding, it must be possible for a panel in a proceeding under Article 21.5 of the DSU to examine
a claim that the continued payment of that subs idy causes adverse effects within the meaning of
Article 5 of the SCM Agreement. To hold that in such a situation a Member that considers itself to be
adversely affected by the subsidy must initiate an entirely new proceeding under the DSU would in
our view undermine the effectiveness of Article 7.8. Therefore, in light of our interpretation of
Article 7.8, we consider that, where payments of a subsidy have been found to cause serious prejudice
and the Member in question continues to provide the same subsidy under the same conditions and
criteria, there exists "a particularly close relations hip" between the subsidy that the Member continues
to provide and the recommendations and rulings of the DSB in the original proceeding.
9.81 In light of these considerations, the Panel c oncludes that to the extent marketing loan
payments and counter-cyclical payments made by the United States after 21 September 2005 are
provided under the same conditions and criteria as the marketing loan payments and counter-cyclical
payments subject to the original panel's finding of "present" serious prejudice, they are subject to the
obligation of the United States under Article 7.8 of the SCM Agreement to take appropriate steps to
remove the adverse effects of the subsidy. As a cons equence, we also consider that Brazil's claim that
the United States has failed to comply with its ob ligations under Article 7.8 with respect to these
payments is properly before this Panel. In our vi ew this claim pertains to a disagreement between the
parties as to the "existence or consistency with a covered agreement of measures taken to comply"
with the recommendations and rulings of the DSB.
X. FINDINGS ON BRAZIL'S CLAIMS OF "PRESENT" SERIOUS PREJUDICE
UNDER ARTICLES 5(C) AND 6.3 OF THE SCM AGREEMENT
A. I
NTRODUCTION
10.1 Brazil requests the Panel to find that the measure taken by the United States to comply with
the recommendations and rulings of the DSB, i.e. the amendment of the FSRI Act of 2002 to repeal
section 1207(a) providing for Step 2 payments, is insufficient to ensure compliance with those
recommendations and rulings because the remaining pri ce-contingent subsidies are inconsistent with
Articles 5 and 6 of the SCM Agreement . In particular, Brazil requests the Panel to find that the
marketing loan and counter-cyclical payment programmes 183 of the FSRI Act of 2002 cause "present"
serious prejudice to the interests of Brazil within the meaning of Article 5(c) of the SCM Agreement in
the form of significant price suppression and an in crease in the US world market share of upland
cotton within the meaning of, respectively, Articles 6.3(c) and 6.3(d) of the SCM Agreement.
10.2 The United States requests that the Panel find that the United States has complied with the
recommendations and rulings of the DSB. The United States submits that Brazil fails to substantiate
its arguments in support of the claim that the effect s of the elimination of the Step 2 programme are

183 As formulated in para. 461 of Brazil's First Writte n Submission, Brazil's request is with respect to
the marketing loan and counter-cyclical programmes. The Panel notes, however, that Brazil has clarified that it
does not request the Panel to make a finding that the programmes or legal provisions pursuant to which
marketing loan and counter-cyclical payments are made ar e, as such, inconsistent with Articles 5 and 6 of the
SCM Agreement . Supra, footnote 150. In light of this clarifi cation the Panel will hereinafter refer to the
subsidies subject to Brazil's serious prejudice claims as marketing loan and counter-cyclical payments. The
Panel emphasizes, however, that as discussed above ( supra, para. 9.52) a proper analysis of the effect of the
marketing loan and counter-cyclical payments for purposes of Articles 5 and 6 of the SCM Agreement must
examine them in the context of the legal and regulatory framework that defines the nature, conditions and
criteria under which these payments will be made.

modest and that Brazil fails to make a prima facie case of "present" serious prejudice within the
meaning of Articles 5(c) and 6.3(c) and 6.3(d) of the SCM Agreement.
184
10.3 The Panel addresses Brazil's claim of "present" serious prejudice within the meaning of
Articles 5(c) and 6.3(c) of the SCM Agreement in Section X.B of this Report. The Panel addresses
Brazil's claim of "present" serious prejudice within the meaning of Articles 5(c) and 6.3(d) of the
SCM Agreement in Section X.C of this Report.
B. BRAZIL'S CLAIM OF "PRESENT" SERIOUS PREJUDICE WITHIN THE MEANING OF ARTICLES 5(C)
AND 6.3 (C) OF THE SCM AGREEMENT
1. Introduction – overview of the main arguments of the parties
10.4 Brazil submits that marketing loan and counter-c yclical payments made pursuant to the FSRI
Act of 2002 cause significant price suppression in the world market for upland cotton within the
meaning of Article 6.3(c) of the SCM Agreement and thereby cause "present" serious prejudice to the
interests of Brazil within the meaning of Article 5(c) of the SCM Agreement . The United States
submits that Brazil has not made a prima facie case under Articles 5(c) and 6.3(c) of the
SCM Agreement.
10.5 In support of its claim that US marketing loan and counter-cyclical payments cause
significant price suppression in the world market for upland cotton, Brazil submits that:185
(a) US upland cotton production and exports continue to expand and exercise a
substantial proportionate influence on prices in the world market for upland cotton.
(b) The level of US planted acreage, pr oduction and exports heavily impacts world
market prices of upland cotton, as evidenced by data showing broad similarities in the
trends of the five major price indices relied upon by the original panel. Moreover,
upland cotton prices during MY 2002-2005 have remained well below historic levels.
(c) The magnitude of the marketing loan a nd counter-cyclical payments remains very
large.
(d) The structure, design and operation of the marketing loan and counter-cyclical
payments186 stimulate US upland cotton production by insulating US producers from
market forces.

184 The United States also submits that Brazil has failed to demonstrate that the marketing loan payment
and counter-cyclical payment programmes mandate a breach of WTO obligations. US First Written
Submission, paras. 196-202. The Panel understands that the United States made this argument in its First
Written Submission on the assumption that Brazil was challenging the marketing loan and counter-cyclical
payment programmes as such. Because Brazil has made it clear that it does not claim in this proceeding that the
marketing loan and counter-cyclical payment prog rammes at issue are WTO-inconsistent as such ( supra,
footnote 150), we do not need to address this argument of the United States.
185 Brazil also submits that marketing loan and counte r-cyclical payments are specific subsidies, that
US and Brazilian upland cotton are like products, that there exists a world market for upland cotton and that the
A-Index represents the world market price. See infra, paras. 10.20 and 10.42-10.44.
186 We note that in the title of the relevant section of its First Written Submission, Brazil refers to the
structure, design and operation of "US marketing loan and counter-cyclical payments", but Brazil elsewhere in
the same section also uses the phrase "nature of marketing loan and counter-cyclical payment programs, in
terms of their structure, design and operation". Brazil's First Written Submission, Section 7.8.

(e) There remains a strong link between high leve ls of US subsidies and high levels of
US planted acreage, production and exports during MY 2002-MY 2005, which is due
to the fact that marketing loan and count er-cyclical payments insulate US cotton
producers from market price signals.
(f) There remains a discernible temporal coin cidence of suppressed world market prices
and large marketing loan and countercyclical payments.
(g) Marketing loan and counter-cyclical paym ents continue to cover a significant portion
of US upland cotton producers' long-term costs of production.
(h) Economic studies support a finding that marketing loan and counter-cyclical
payments continue to cause significant price suppression.
(i) The factors relied upon by the original panel as the basis for its conclusion regarding
the "significance" of the price suppression caused by the subsidies provided by the
United States continue to exist.
187
10.6 Brazil argues that the effects of the US marke ting loan and counter-cyclical payments alone
cause significant price suppression. Although Step 2 payments caused significant price suppression in
and of themselves during MY 2005, this does not detract from the significant, independent price
suppressing effects of the marketing loan and count er-cyclical payments. The removal of Step 2
payments has had a relatively modest impact on US production, US exports and world market prices
for upland cotton, compared to the effects of marketing loan and counter-cyclical payments. 188 Other
factors impacting the world market price of upland cotton do not account for the significant price
suppressing effects caused by marketing loan and counter-cyclical payments.
189
10.7 In support of its argument that Brazil fails to make a prima facie case of WTO inconsistency
under Articles 5(c) and 6.3(c) of the SCM Agreement, the United States submits that:
(a) The structure, design and operation of the marketing loan and counter-cyclical
payments do not support Brazil's claim of significant price suppression.
(b) The facts demonstrate that US producers a nd exporters have reacted to market signals
and are not "insulated" by the marketing lo an and counter-cyclical payments. Brazil
fails to demonstrate the alleged strong link between marketing loan and counter-
cyclical payments and US planted acreage, production and exports.
(c) "Absolute" increases in US production are the effect of improvements in yields, not
the marketing loan and counter-cyclical payments.
(d) Brazil fails to demonstrate a "temporal coincidence" between marketing loan and
counter-cyclical payments and the alleged price suppression.
(e) Brazil fails to demonstrate that US produ cers would "switch to alternative crops" in
the absence of marketing loan and counter-cyclical payments.
(f) Brazil attempts to attribute the price effects of other factors to the marketing loan and
counter-cyclical payments.

187 Brazil's First Written Submission, paras. 88-209.
188 Brazil's First Written Submission, paras. 191-209.
189 Brazil's First Written Submission, paras. 210-211.

(g) The econometric modeling cited by Braz il is flawed and greatly exaggerates any
effects of removing the marketing loan and counter-cyclical payment programmes.
(h) Brazil has not demonstrated that "the effect" of the marketing loan and counter-
cyclical payments is "significant" price suppression.
190
2. Arguments of third parties
10.8 Argentina considers that by maintaining the marketing loan and counter-cyclical payment
programmes the United States has failed to comply with its obligation un der Article 7.8 of the SCM
Agreement to take appropriate steps to remove the a dverse effects or withdraw the subsidy. The
evidence submitted by Brazil demonstrates that th e marketing loan and counter-cyclical payment
programmes continue to cause adverse effects on the interests of Brazil and other cotton-producing
countries such as Argentina in the form of significant price suppression.191
10.9 Australia submits that the Panel should consider wh ether the United States, by repealing the
Step 2 payment programme while maintaining the two other price-contingent subsidies (payments
under the marketing loan and counter-cyclical paym ent programmes), has take n appropriate steps to
remove the adverse effects or withdraw the subs idies within the meaning of Article 7.8 of the SCM
Agreement in accordance with the DSB recommendations and rulings. Australia recalls, in this
respect, that in making its findings the original panel examined each price-contingent subsidy measure
in turn before considering the collective operation of those measures, and that it is clear from the
panel's analysis that each of the price-contingent measures individually was found to have a trade-
distorting effect.192
10.10 Chad argues that the United States has not properl y implemented the original panel's findings
regarding the marketing loan and counter-cycli cal payment programmes. As the only action
undertaken by the United States is the repeal of the Step 2 programme with effect from
1 August 2006, it is clear that the United States has not withdrawn or amended the marketing loan or
counter-cyclical payment programmes found to be WT O-inconsistent. Moreover, the repeal of the
Step 2 programme cannot be considered to have re moved the adverse effects of the marketing loan
and counter-cyclical payments. The marketing loan and counter-cyclical payment programmes
accounted for the vast majority of the adverse effect s found by the original panel. In this respect,
Chad points to empirical studies that have found that the measures most detrimental to Chad are the
US domestic support programmes, rather than export subsidies under the Step 2 programme. Chad
submits that since the United States has not ch anged the marketing loan and counter-cyclical
programmes that were subject to the original pane l's finding, this Panel s hould rely on the legal and
factual conclusions drawn by the original panel concerning the existence, nature and potential for
price suppression of those measures. The price effe cts of these measures have continued and indeed
gotten worse since the original panel made its finding and Chad and other West African cotton-
producing countries have continued to lose market share.
193
10.11 India submits that the original panel examined carefully and separately the individual nature,
operation and magnitude and price-suppressing effects of the marketing loan payment programme, the
counter-cyclical payment programme and the Step 2 payment programme and found that the vast
majority of the price-suppressing and adverse effects were caused by the marketing loan and counter-
cyclical payment programmes, rather than by the St ep 2 payments. Therefore, the withdrawal of the

190 US First Written Submission, paras. 204-331.
191 Argentina's Third Party Submission, paras. 5-8.
192 Australia's Third Party Submission, paras. 25-31.
193 Chad's Third Party Submission, paras. 22-46.

Step 2 programme for upland cotton cannot be said to have also removed the adverse effects of the
marketing loan and counter-cyclical payment programmes.194
10.12 New Zealand submits that the various arguments of the United States on the removal of the
Step 2 payment programme leave intact the fundame ntal point made by Brazil, that even in the
absence of the Step 2 payment programme the marketing loan and counter-cyclical payment
programme still result in significant price suppression within the meaning of Article 6.3.(c) of the
SCM Agreement and thus cause serious prejudice to the interests of Brazil. Regarding the argument
of the United States that Brazil has failed to make a prima facie case of WTO-inconsistency of the
marketing loan and counter-cyclical payment progra mmes, New Zealand argues th at an approach that
would put the burden on Brazil to prove once again what Brazil already proved before the original
panel would risk depriving the provisions in Part III of the SCM Agreement on actionable subsidies of
their useful effect. Similarly, New Zealand considers that the attempt of the United States to reargue
what it had argued before the original panel is not consistent with the objective of Article 7.8 of the
SCM Agreement and of Article 21.5 of the DSU. New Zealand argues that counter-cyclical payments
are not real decoupled payments because they ar e linked to prices. The proposition that marketing
loan payments are distorting is self-evident because these payments are amber box measures, the
category in which are included the non-prohibited measures with the most distorting effect on
production and trade. Moreover, the arguments of the United States on marketing loan payments
ignore that it is the expectations of producers th at are important, and that those expectations are
generated because of the existence of the applie d administrative prices under the marketing loan
programme, not because of the financial transfers in any year. New Zealand considers that the
United States does not and cannot demonstrate that planting decisions of US cotton producers were
shaped by market factors. W ith respect to the arguments of the United States on the econometric
modelling provided by Brazil, New Zealand submits that these arguments are either an attempt to
reargue what was litigated before, and disposed of, by the original panel and the Appellate Body, or
are inconsequential.
3. Preliminary considerations relating to the Pa nel's evaluation of Brazil's claim under
Articles 5(c) and 6.3(c) of the SCM Agreement
(a) Text of legal provisions
10.13 Article 5(c) of the SCM Agreement provides:
"No Member should cause, through the use of any subsidy referred to in paragraphs 1
and 2 of Article 1, adverse effects to the interests of other Members, i.e.:

(c) serious prejudice to the interests of another Member.
13
13
 The term "serious prejudice to the interests of another Member" is used in this
Agreement in the same sense as it is used in paragraph 1 of Article XVI of GATT
1994, and includes threat of serious prejudice."
10.14 Article 6.3(c) of the SCM Agreement reads as follows:

194 India's Third Party Oral Statement, para. 5.

"6.3 Serious prejudice in the sense of para graph (c) of Article 5 may arise in any
case where one or several of the following apply:

 (c) the effect of the subsidy is a significant price undercutting by the
subsidized product as compared with the price of a like product of another
Member in the same market or significant price suppression, price
depression, or lost sales in the same market."
(b) Period to be considered by the Panel
(i) Main arguments of the parties
10.15 Brazil submits that in analyzing Brazil's claims of "present" serious prejudice the Panel
should use as reference period MY 2005 (1 Augus t 2005-31 July 2006), which is the most recently
completed marketing year for which complete data is available. The Panel can also use partial data
for MY 2006 if such data is credible and reliable. Brazil submits that by conducting a counter-factual
analysis the Panel can isolate the effects of the ma rketing loan and counter-cyclical payments made in
MY 2005 from the effects of Step 2 payments made in MY 2005. Brazil argues that the Panel can
also use data for the period MY 2002-MY 2005 in order to assess the continued relevance of the
findings of the original panel.
195
10.16 The United States argues that Brazil's claims of "present" serious prejudice pertain to the
present marketing year, MY 2006. The use of the term "is" in Article 6.3(c) of the SCM Agreement
("the effect of any subsidy is ... significant price suppression") means that the relevant period is the
immediate present rather than a historical period. While it may be appropriate to use historical data as
a proxy for the present period when complete data is not available for that period, where relevant data
is available for MY 2006 or part thereof the Panel should consider that data.196
(ii) Main arguments of third parties
10.17 The European Communities argues that the Panel must examine recent relevant data
reasonably available, including, where possible, data for MY 2006.197
(iii) Evaluation by the Panel
10.18 The claim of Brazil under Article 6.3(c) of the SCM Agreement requires an analysis by the
Panel as to whether "the effect of the subsidy … is … significant price suppression". While the SCM
Agreement does not contain a specific provision on the period to be considered for this purpose 198, the

195 Brazil's First Written Submission, para. 49; Brazil's Rebuttal Submission, paras. 22-25; Brazil's Oral
Statement, paras. 19-20; Brazil's Responses to Panel Questions 28 and 74.
196 US First Written Submission, para. 229; US Rebutta l Submission, paras. 215-216; US Response to
Panel Question 28.
197 EC Third Party Submission, paras. 53-58; EC Third Party Oral Statement, para. 36. The European
Communities considers that in establishing claims of "pre sent" serious prejudice, Members are required to rely
on the most recent relevant data reasonably available to them.
198 The original panel addressed the issue of what it te rmed the "reference period" to be used in its
analysis as follows:
 "The Panel concurs with the United States assertio n that MY 2002 is a relevant year
for our serious prejudice inquiry. It represents a recent period for which essentially
complete data exists. The identification of 'significant price suppression' flowing

use of the present tense logically implies the need to make a determination with respect to the present
period. The United States has put before us some da ta relating to MY 2006. Given that our task is to
decide whether or not significant price suppression "i s" the effect of the marketing loan and counter-
cyclical payments at issue in this proceeding we see no reason to exclude data relating to MY 2006 to
the extent that it is available. 199 We note that while Brazil has argued that the Panel should rely
primarily on data for MY 2005, Brazil does not contest that it is appropriate for the Panel to use data
pertaining to MY 2006 to the extent that such data is reliable and credible. 200 A n i m p o r t a n t
consideration reinforcing the need to take into acco unt data pertaining to the period since July 2006 is
that the "measure taken to comply" by the United States – the elimination of the Step 2 programme –
was effective as of the beginning of MY 2006.
10.19 Moreover, while our determination relates to the present period, we agree with the
observation of the original panel that considerati on of developments over a longer period of time
"provides a more robust basis for a serious prej udice evaluation than merely paying attention to
developments in a single year".201
(c) Whether marketing loan and counter-cyclical payments are specific subsidies
10.20 The Panel considers that marketing loan paym ents and counter-cyclical payments to US
upland cotton producers pursuant to the relevant provisions of the FSRI Act of 2002 are "subsidies"
within the meaning of Article 1.1 of the SCM Agreement, which are "specific" within the meaning of
Article 1.2 of the SCM Agreement and that Part III of the SCM Agreement therefore applies to these
measures.202 We recall, in this regard, that the original panel found that the measures at issue in that
case, including marketing loan payments and coun ter-cyclical payments, constituted "subsidies"

from 'the effect of the subsidy' calls for an evaluation of this effects-based
phenomenon that cannot be conducted in the abstract. Rather, discerning adverse
effects of subsidies seems to us to require reference to a recent historical period. We
believe, however, that it is important for the establishment of "current" serious
prejudice that such prejudice would be established to exist up to, and including, a
recent point in time.
We also believe that subsidies granted prior to MY 2002 are relevant to our
evaluation. Consideration of developments over a period longer than one year, while
not necessarily required (at least in Articles 5(c) and 6.3(c)) provides a more robust
basis for a serious prejudice evaluation than merely paying attention to developments
in a single recent year. It may put such developments in a broader temporal context.
In addition, having found that the subsidies exist and have been provided over a
longer period of time than one year, it would be inappropriate to look at trends only in
the last year to arrive at any conclusion on serious prejudice. It may, for example, be
that the market may well already be distorted in a given year due to subsidies."
Panel Report, US – Upland Cotton, paras. 7.1198-7.1199.
199 Indeed, the failure to take into account relevant and available data placed before us pertaining to the
period since July 2006 would not be consistent with the requirement under Article 11 of the DSU that a panel
"make an objective assessment of the matter before it, including an objective asse ssment of the facts of the
case…"
200 We note that the original panel, which was estab lished on 18 March 2003, considered data covering
the period MY 2002, which ended on 31 July 2003. Thus, the panel took into account data covering a period of
4 ½ months following its establishment.
201 Supra, footnote 198.
202 Article 5 of the SCM Agreement applies to "any subsidy referred to in paragraphs 1 and 2 of
Article 1" of the SCM Agreement. Thus in order for any measure to be an "actionable subsidy" subject to the
provisions in Articles 5-7 of the SCM Agreement the measure must be a "specifi c subsidy" within the meaning
of Articles 1.1 and 1.2 of the SCM Agreement.

within the meaning of Articles 1.1(a) and 1.1(b) of the SCM Agreement and that these subsidies were
"specific" within the meaning of Article 2 of the SCM Agreement .
203 It is not disputed that the
provisions of the FSRI Act of 2002 concerning mark eting loan and counter-cyclical payments have
not been changed since the original panel conducted its analysis. The United States has not contested
the argument made by Brazil in this proceeding th at marketing loan and counter-cyclical payments
constitute specific subsidies.204
(d) Magnitude of the marketing loan and counter-cyclical payments
10.21 The original panel considered that while a ser ious prejudice analysis under Part III of the
SCM Agreement does not require a precise quantification of the amount of a subsidy 205, "the general
order of magnitude of a subsidy may be a relevant consideration in a serious prejudice analysis in a
particular case (where such informati on is probative and readily available)". 206 The Appellate Body
held that the magnitude of a subsidy and its relationshi p to prices is a relevant factor to consider in an
analysis of whether the effect of a subsidy is significant price suppression 207, but that Article 6.3(c) of
the SCM Agreement does not oblige a panel "to quantify precisely the amount of a subsidy benefiting
the product at issue in every case. A precise, de finitive quantification of the subsidy is not
required".208 However, the Appellate Body also consider ed that the original panel could have been
more explicit as to what it meant by referring to "very large amounts" of subsidies.209
10.22 The Panel provides below an overview of the factual information submitted by the parties
with regard to the magnitude of the marketing loan and counter-cyclical payments to US upland
cotton producers.
(i) Marketing loan payments
10.23 The Panel considers that the figures provided by the parties regarding the marketing loan
payments made by the United States to upland cotton producers in MY 2004 and MY 2005 210 are in
the same "general order of magnitude."211
10.24 The following table compares the figures provi ded by Brazil and the United States on the
magnitude of marketing loan payments:

203 Panel Report, US – Upland Cotton, paras. 7.1120 and 7.1154.
204 Brazil's First Written Submission, paras. 64-78.
205 Panel Report, US – Upland Cotton, paras. 7.1167, 7.1177 and 7.1179.
206 Panel Report, US – Upland Cotton, footnote 1289.
207 Appellate Body Report, US – Upland Cotton, para. 461.
208 Appellate Body Report, US – Upland Cotton, para. 467.
209 Appellate Body Report, US – Upland Cotton, para. 468.
210 Brazil's First Written Submission, paras. 108 and 111 (Table 6) and Exhibit Bra-471; US Response
to Panel Question 4, paras. 13-14; Brazil's Comments on US Response to Panel Question 4, para. 14 and Exhibit
Bra-639.
211 Supra, para. 10.21.

Table 1: Marketing Loan Payments, MY 2002-2005
(million US$)
Source MY 2002 MY 2003 MY 2004 MY 2005
Brazil's First Written
Submission, Table 6
898 184 1,842 1,257
US Response to
Panel Question 4
– – 1,780 1,269
Brazil's Comments
on US Response to
Panel Question 4
– – 1,812 1,269

10.25 Brazil has also provided data on projected marketing loan payments in the period MY 2006-
2010. This data shows that the projected amount of marketing loan payments in MY 2006 is US$650
million based on USDA Budget Estimates 212, US$475 million based on data from the Food and
Agricultural Policy Research Institute ("FAPRI") 213, and US$757 million based on February 2007
USDA stochastic projections.214 215
(ii) Counter-cyclical payments
10.26 The parties disagree on the magnitude of counter-cyclical payments made by the
United States to upland cotton producers. This disag reement is the result of different approaches to

212 According to Table 26 of the First Written Submission of Brazil, which is based on USDA Budget
Estimates, marketing loan payments are expected to amount to US$650 million in MY 2006, US$541 million in
MY 2007, US$433 million in MY 2008, US$407 million in MY 2009 and US$407 million in 2010. Brazil's
First Written Submission, paras. 281-282 and Exhibit Bra-456.
213 In Table 27 of its First Written Submission Brazil pr ovides estimates of marketing loan payments in
the period MY 2006-2010 based on the July 2006 FAPRI Baseline Update for US Agricultural Markets. This
Table indicates that the amount of marketing loan payments will be US$475 million in MY 2006,
US$190 million in MY 2007, US$50 million in MY 2008, US$0 in MY 2009 and US$0 in MY 2010.
 Brazil's
First Written Submission, para. 286 (Table 27) and Exhibit Bra-479.
214 In response to a question of the Panel, Brazil explains that the figures in Table 27 of its First Written
Submission reflect deterministic projections of outlays, which by their very nature tend to underestimate
outlays. The most up to date (February 2007) USDA deterministic and stochastic projections of upland cotton
budget outlays show that the degree of this underestimation is very significant. According to the February 2007
USDA stochastic projections, the amounts of marketing loan payments will be US $757 million in MY 2006,
US$798 million in MY 2007, US$515 million in MY 2008, US$468 million in MY 2009 and US$477 million in
2010. Brazil's Response to Panel Question 89, para. 189 (Table 4). The United States submits that Brazil's
response is incorrect because the figures on government outlays in Table 27 of Brazil's First Written Submission
were not projected by FAPRI but were estimated by Braz il. Moreover, the values reported by FAPRI are, in
fact, based on a stochastic approach. US Comments on Brazil's Response to Panel Question 89.
 215 The United States considers that the FAPRI data provided by Brazil on the projected amounts of
marketing loan payments are entirely consistent with a market report of the International Cotton Advisory
Committee and recent projections by the US Congressiona l Budget Office of higher world market prices for
cotton in MY 2006 and MY 2007. At these higher prices, any marketing loan payments are likely to be small.
US Response to Panel Question 82. Brazil contests this argument of the United States. Brazil considers that in
making this argument the United States is making the mistake of relying on expected prices without taking into
account the probability that actua l prices will be lower than expected prices . Brazil refers in this respect to the
USDA February 2007 stochastic projections of marketing loan payments, which are higher than the July 2006
FAPRI projections. Brazil argues that the February 2007 USDA projections are more reliable than the July
2006 FAPRI projections. Brazil's Comments on US Response to Panel Question 82.

the question of how the counter-cyclical paymen ts at issue in this case should be allocated
216 to actual
production of upland cotton.
10.27 Two main issues have arisen in this regard. First, as in the original proceeding, Brazil has
used two methodologies for allocating counter-cyc lical payments to actual production of upland
cotton, referred to as "Brazil's methodology" and the "cotton-to-cotton" methodology. 217 Whereas
Brazil asserts that "Brazil's methodology" was endorsed in the original proceeding, the United States
argues that this allocation methodology was spec ifically rejected by the Appellate Body. Second, the
parties disagree on whether counter-cyclical paymen ts should be allocated in accordance with the
methodology found in Annex IV of the SCM Agreement.
10.28 According to the First Written Submission of Brazil, "counter-cyclical payments allocated to
actual upland cotton production" amounted to US$869 million in MY 2002, US$260 million in MY
2003, US$913 million in MY 2004 and US$914 million in MY 2005. 218 In its Rebuttal Submission,
Brazil asserts that, calculated in accordance with th e "cotton-to-cotton" methodology, the amounts of
counter-cyclical payments allocated to upl and cotton were US$851.5 million in MY 2002,
US$237.2 million in MY 2003, US$823.5 million in MY 2004 and US$832.0 million in MY 2005. 219
In its Opening Statement, Brazil, referring to E xhibit Bra-625, submits that applying (an updated)
"Brazil's methodology", counter-cyclical payments allocated to cotton production amounted to
US$868 million in MY 2005 and that applying (an updated) "cotton-to-cotton" methodology, the
amount of counter-cyclical payments allocated to cotton production was US$838 million in MY
2005.220 221 Brazil asserts, in this regard, that the orig inal panel described "Brazil's methodology" as

216 The counter-cyclical payments at issue in this case are calculated on the ba sis of historical cotton
base acres and are not tied to actual production of upland cotton . We recall in this respect the observations of
the original panel:

"The PFC, MLA, DP and CCP programmes permit planting flexibility and do not require
production. Eligibility for these payments depends on production of specific covered
commodities in a base period, not the year of the payment. Payments are calculated with
respect to these 'base acres', at a rate speci fic to each covered commodity, as described in
Section VII:C of this report. Recipients who hold upland cotton base acres, in respect of
which payments are calculated at the upland cotton rate, coul d have since ceased production
of upland cotton. Recipients who hold other base acres, in respect of which payments are
calculated at the rate for other specific covered commodities, could have since commenced
production of upland cotton." (footnote omitted, emphasis added)

Panel Report, US – Upland Cotton, para. 7.635.
217 For a description of "Brazil's methodology" see Panel Report, US – Upland Cotton, para. 7.642 and
footnote 836. For a description of the "cotton-to-cotton" methodology see Panel Report, US – Upland Cotton
para. 7.641 and footnote 835.
218 Brazil's First Written Submission, para. 111 (Table 6) and Exhibit Bra-471. Brazil explains that
these allocated amounts of counter-cyclical payments are derived by multiplying (a) the ratio of allocated upland
cotton counter-cyclical payments in MY 2002 (869.4 m illion) to total upland cotton counter-cyclical payments
in MY 2002 (US$1.309 billion) by (b) total upland cotton counter-cyclical payments in MY 2003-2005. Brazil's
First Written Submission, paras. 116-118. The figure of US$869.4 million for allocated counter-cyclical
payments in MY 2002 is based on the application of "Brazil's methodology".
219 Brazil's Rebuttal Submission, paras. 173-174, Ta ble 5. Brazil observes that the limited data
provided by the United States in this proceeding does not enable Brazil to update the amounts of counter-
cyclical payments allocated to upland cotton based on "Brazil's methodology".
 221 With regard to the difference between the figu res mentioned in Brazil's First Written Submission,
Rebuttal Submission and Opening Statement, Brazil has explained, in response to Panel Question 66, that: (i)
the figures in Table 6 of Brazil' s First Written Submission reflect an allocation according to "Brazil's
Methodology" using data available at the time of the preparation of that submission; (ii) the figures in Table 5
of Brazil's Rebuttal Submission reflect an allocation according to the "cotton-to-cotton methodology" using the

"appropriate" and that the Appellate Body endorsed "Brazil's methodology" when it affirmed the
original panel's findings.222 223
10.29 Brazil submits that the argument of the Unite d States on the allocation of counter-cyclical
payments on the basis of the methodology set out in Annex IV of the SCM Agreement is inconsistent
with the findings of the panel and the Appellate Body in the original proceeding. Brazil considers that
the calculation provided by the Unite d States is in any event incorrect and that, correctly applied, the
amount of counter-cyclical payments allocated to cotton production in accordance with Annex IV of
the SCM Agreement is US$577 million in MY 2005.224
10.30 The United States submits that there is no basis for Brazil's argument that counter-cyclical
payments should be allocated according to "Braz il's methodology" since that methodology was only
addressed in the original panel's Peace Clause an alysis and was not relied upon by the panel.
Moreover, the methodology was specifica lly rejected by the Appellate Body. 225 In response to a
question of the Panel, the United States indicates that it has "tested" the figures in Table 5 of Brazil's
Rebuttal Submission and that applying the "cott on-to-cotton" methodology the figures for counter-
cyclical payments allocated to cotton production are US$820 million in MY 2004 and
US$825 million in MY 2005.226
10.31 The United States submits that under Article 6.3(c) of the SCM Agreement Brazil must
identify the subsidized product for each of the t ypes of subsidies from which it claims serious
prejudice.227 In this regard, the United States considers that in the case of counter-cyclical payments,
which are not tied to the production or sale of any particular product, Annex IV of the
SCM Agreement contains an appropriate, economica lly neutral, allocation methodology. 228 T h e
amount of counter-cyclical payments allocated to upland cotton production in accordance with this
methodology is US$386.6 million in MY 2005.229
10.32 The following tables compare the results of the various calculations provided by the parties of
the amounts of counter-cyclical payments to US upland cotton producers.

data in the table in paragraph 224 of the US First Wr itten Submission; (iii) the figures in paragraph 40 of
Brazil's Opening Statement reflect allocations accordi ng to, respectively, "Brazil's methodology" and the
"cotton-to-cotton methodology" using the updated data provided by the United States in Exhibit US-64; and (iv)
the figures in Table 5 of Brazil's Rebuttal Submission do not supersede the figures in Table 6 of Brazil's First
Written Submission.
222 Brazil's Comments on US Response to Panel Question 3, para. 7; Brazil's Opening Statement, para.
40. Brazil refers to paragraph 469 of the Appellate Body Report as support for this contention.
223 Brazil argues that while the methodology applied by the Appellate Body might have related to
counter-cyclical payments w ith respect to upland cotton base only, the finding that "support to" upland cotton
exceed support decided in 19 92 includes any support for upland cotton and is not limited to counter-cyclical
payments for upland cotton base only. Brazil's Comments on US Response to Panel Question 3, para. 9.
224 Brazil's Comments on US Response to Panel Question 3.
225 US Rebuttal Submission, paras. 278-280.
226 US Response to Panel Question 4, para. 16.
227 US Response to Panel Question 3, para. 7. The United States refers in this regard to the statement
of the Appellate Body in the original proceeding that the "subsidized product" must be properly identified for
purposes of significant price suppression under Article 6.3(c) of the SCM Agreement and that, if challenged
payments do not in fact subsidize the "subsidized product", this may undermine the conclusion that the effect of
the subsidy is significant price suppression. Appellate Body Report, US – Upland Cotton, para. 472.
228 US Response to Panel Question 3, paras. 7-11. The United States notes that Annex IV of the SCM
Agreement is not directly applicable to Articles 5(c) and 6.3(c) , but that it provides essential context as it is the
only allocation methodology that Members have agreed in the SCM Agreement and that specifically deals with
the question of how to allocate subsidies that are not tied to the production or sale of a given product. US
229 US Response to Panel Question 3, para. 12.

Table 2A: Counter-Cyclical Payments (non-Annex IV Methodology), MY 2002-2005

(million US$)
Source MY 2002 MY 2003 MY 2004 MY 2005
Brazil's First Written Submission
Table 6
869.0 260.0 913.0 914.0
Brazil's Rebuttal Submission
Table 5
851.5 237.2 823.5 832.0
US Response to Panel Question 4 – 237.0 820.0 825.0
Brazil's Opening Statement – – – 868/838
Brazil's Comments on US
Response to Panel Question 4
– – – 868.0

Table 2B: Counter-Cyclical Payments (Annex IV Methodology), MY 2004-2005

(million US$)
Source MY 2004 MY 2005
US Response to Panel Question 3
(Annex IV methodology)
437.3 386.6
Brazil's Comments on US Response
to Panel Question 3 (Annex IV
methodology (a))
540 468
Brazil's Comments on US Response
to Panel Question 3 (Annex IV
methodology (b))
– 577

10.33 Brazil submits data on projected counter-cycli cal payments in MY 2006-2015. Based on
USDA Budget Estimates, allocated counter-cyclical payments to US upland cotton producers are
projected to amount to US$715 million in MY 2006, US$516 million in MY 2007 and
US$449 million in MY 2008, MY 2009 and MY 2010. 230 Based on the July 2006 FAPRI Baseline
Update for US Agricultural Markets, project ed allocated counter-cyclical payments are
US$912 million in MY 2006, US$825 million in MY 2007, US$732 million in MY 2008,
US$679 million in MY 2009 and US$686 million in MY 2010.231
10.34 The Panel first addresses the argument of the United States that counter-cyclical payments
calculated on the basis of cotton base acres should be allocated to cotton production in accordance
with Annex IV of the SCM Agreement.
10.35 We recall that the original panel and the Appellate Body rejected the view that Article 6.3 of
the SCM Agreement requires a precise quantification of the subsidy and that the allocation
methodology provided for in Annex IV of the SCM Agreement should be used in this connection. 232

230 Brazil's First Written Submission, para. 282 (Table 26).
231 Brazil's First Written Submission, para. 286 (Table 27).
232 Panel Report, US – Upland Cotton , paras. 7.1159-7.1190; Appellate Body Report, US – Upland
Cotton, paras. 461-473. We note that the original panel discussed the issue of whether and how subsidies
should be quantified and allocated in an analysis under Article 6 of the SCM Agreement in response to an
argument of the United States that Brazil had failed to pr operly identify "the subsidized product for each of the
types of subsidies from which it claims serious prejudice". Panel Report, US – Upland Cotton, para. 7.1159. In

We see no basis to accept in this proceeding the same argument of the United States that was rejected
by the panel and the Appellate Body in the origin al proceeding. We also note that the methods
actually relied upon by the panel and the Appellate Body to determine the amounts of counter-cyclical
payments allocated to upland cotton production were not based on the methodology set out in
Annex IV of the SCM Agreement . Thus, we reject the argument of the United States that for the
purposes of this proceeding the amount of count er-cyclical payments benefiting upland cotton
production should be determined by using the allocation methodology provided for in Annex IV of
the SCM Agreement.
10.36 With respect to the disagreement between the parties as to the appropriateness of using
"Brazil's methodology" to allocate the cotton base acres counter-cyclical payments to actual
production of upland cotton, we consider that it is cl ear from the Appellate Body report in the original
proceeding that the Appellate Body did not endorse that methodology. First, in the context of its
analysis of issues raised with respect to the application of Article 13 (b)(ii) of the Agreement on
Agriculture, the Appellate Body made the following observations:
"We underline that these Panel findings do not pertain to all payments to current
producers of upland cotton, but rather are limited to payments to producers with
respect to historic upland cotton base acres. Indeed, we see little in the Panel's
finding or on the record that would allow us to discern a link between the support-
conferring measures with respect to non-co tton historical base acres and current
production of upland cotton. We do not, therefore, accept the methodology submitted
by Brazil that included, in the Article 13(b )(ii) calculation, payments with respect to
both cotton and non-cotton base acres flowing to current production of upland cotton.
We believe that only the 'cotton to cotton' methodology, included by the Panel in
'Attachment to Section VII:D' to its Report as an 'appropriate' alternative calculation,
sufficiently demonstrates a discernible link between payments under base acre
dependent measures (related to upland cotton) and upland cotton."
233 (footnotes
omitted, original emphasis)
10.37 Thus, in upholding the panel finding that the US domestic support measures in question
granted support to upland cotton in excess of that decided during MY 1992 234, the Appellate Body

our view, the considerations which led the original panel to reject the argument that Brazil had failed to properly
identify the product benefiting from the subsidies at issue remain relevant.
233 Appellate Body Report, US – Upland Cotton , para. 380. In paragraph 384 of the Report, the
Appellate Body observed:

"For the reasons stated above, we conclude that payments with respect to upland cotton base
acres to producers currently growing upland cotton under the production flexibility contract,
market loss assistance, direct payment and coun ter-cyclical payment measures, calculated in
accordance with the 'co tton to cotton' methodology, are support granted to the specific
commodity upland cotton in the sense of Article 13(b)(ii) of the Agreement on Agriculture."

Finally, the Appellate Body stated that

"In our review above, we have concluded that, for purposes of the comparison envisaged by
Article 13(b)(ii), the values of the four m easures, namely, production flexibility contract
payments, market loss assistance payments, direct payments and counter-cyclical payments in
the years 1999, 2000, 2001, and 2002 are properly determined by using the 'cotton to cotton'
methodology, and we have therefore modified the Panel's findings in this regard...."

Appellate Body Report, US – Upland Cotton, para. 392.
234 Appellate Body Report, US – Upland Cotton, para. 393.

calculated the amount of counter-cyclical payments to upland cotton in accordance with the "cotton-
to-cotton" methodology.
235
10.38 Second, in reviewing the serious prejudice finding of the original panel, the Appellate Body
upheld the panel's conclusion regarding the amount of the subsidies at issue. In this respect, the
Appellate Body referred inter alia to paragraph 7.641 of the origin al panel report, which is the
paragraph that contains figures reflecting the "cotton-to-cotton" methodology.236 The Appellate Body
referred to the same figures as support for its observati on that even using certain alternative allocation
methodologies, the panel's conclusion regarding the ge neral magnitude of pri ce-contingent subsidies
stood.237
10.39 The Panel considers that Brazil has not presente d any persuasive argument as to why it would
be appropriate to apply in this proceeding an allocation methodology that was specifically rejected by
the Appellate Body in the original proceeding.
10.40 In light of the above considerations, the Pane l concludes that the amount of counter-cyclical
payments allocated to upland cotton production must be calculated based on the "cotton-to-cotton"
methodology. The information before us i ndicates that in MY 2005 this amount was
US$838 million.238
10.41 Finally, the Panel notes that the parties have al so made arguments on the likely impact of the
removal of Step 2 payments on the amounts of ma rketing loan and counter-cyclical payments in
future years. The Panel addresses that issue below in Section X.B.11 of this Report.
(e) Product at issue, like product, relevant "market" and "price"
10.42 The Panel notes that the parties agree that the product at issue for purposes of Brazil's claims
of "present" serious prejudice is upland cotton lint. 239 Brazil recalls that the original panel had found
that US upland cotton is like Brazilian upland cotton and submits evidence to demonstrate that this
finding remains valid.240 The United States has not contested Brazil's position on this issue.241

235 Appellate Body Report, US – Upland Cotton, Annex 2, Tables 1-3.
236 Appellate Body Report, US – Upland Cotton, para. 468 and footnote 631.
237 Appellate Body Report, US – Upland Cotton , para. 469 and Annex 2, Table 3. The notes to the
Tables in Annex 2 state explicitly that "[t]he values of production flexibility contract payments, market loss
assistance payments, direct payments , and counter-cyclical payments ar e based on the 'cotton to cotton'
methodology, discussed supra, paras. 377-380. Figures are drawn from Panel Report, para. 7.641". Thus, we
disagree with Brazil that the Appellate Body's observations in paragraph 469 amount to an endorsement of
"Brazil's methodology". Brazil's Opening Statement, para. 40.
238 Exhibit Bra-625 and US Response to Panel Ques tion 55. The Panel notes that this question was
posed to the United States with the explanation that the Panel "is not asking whether the US agrees with these
[i.e. 'Brazil's methodology' and the 'cotton-to-cotton'] methodologies".
239 US Response to Panel Question 3, para. 9; Brazil's Comments on US Response to Panel Question 3,
para. 4. The Panel recalls in this respect that the original panel explained that, as used in the panel's report, the
term "upland cotton" ordinarily refers to upland cotton lint. Panel Report, US – Upland Cotton, footnote 258. It
is the Panel's understanding that in this proceeding Brazil and the United States also use the term "upland
cotton" to refer to upland cotton lint.
240 Brazil's First Written Submission, para. 80 and Annex II ("Declaration by Andrew Macdonald").
241 The original panel observed that it was not entirel y clear from the text of Article 6.3(c) of the SCM
Agreement whether the requirement to establish a "subsidized product" and a "like product" applies to a price
suppression analysis. The panel nevertheless decided to address these concepts because its "examination of
'prices' in the world market necessarily relate[d] to 'prices' of certain 'products' ". Panel Report, US – Upland
Cotton, footnote 1333. The Appellate Body noted that since the panel and the participants agreed that US
upland cotton and Brazilian upland cotton must be "in the same market" it was not necessary to decide whether

10.43 Under Article 6.3(c) of the SCM Agreement, the Panel must determine whether the effect of
the subsidy is significant price suppression "in the same market". Brazil submits that in this case the
relevant market for purposes of Article 6.3(c) is th e world market for upland cotton. We note that the
original panel found that the term "same market" in Article 6.3(c) can be interpreted "as including a
geographical area which may embrace the entire world" 242 and that such a "world market" did, in fact,
exist in the case of upland cotton. 243 The Appellate Body upheld these conclusions of the panel. 244
We note that the United States does not contest that the relevant market for purposes of our analysis
under Article 6.3(c) is the world market for upland cotton. Therefore, in determining whether the
effect of the subsidies at issue is significant pri ce suppression "in the same market", we will treat the
world market for upland cotton as the relevant market.
10.44 As pointed out by Brazil, the original panel f ound that the relevant "price" for purposes of its
analysis under Article 6.3(c) was the world market price for upland cotton, as represented by the A-
Index.
245 246 Brazil submits that this Panel should adopt the same approach and use the A-Index as
reflecting the world market price for upland cotton. The Panel finds the arguments of Brazil in this
regard persuasive. 247 The Panel also notes that the Unite d States has not contradicted Brazil's
arguments regarding the existence of a world ma rket price for upland cotton and the A-Index as
representing this world market price. 248 In light of these considerati ons, the Panel finds that a world
"market" exists for upland cotton and that the A-Inde x represents the "price" relevant to the analysis
of price suppression under Article 6.3(c) of the SCM Agreement.249

the "like product" requirement applied to a price suppression analysis. Appellate Body Report, US – Upland
Cotton, para. 407 and footnote 453. The panel in Korea – Commercial Vessels concluded that the concept of
"like product" does not apply to an analysis of price suppression or price depression under Article 6.3(c) of the
SCM Agreement. Panel Report, Korea – Commercial Vessels, paras. 7.538-7.560.
242 Panel Report, US – Upland Cotton , para. 7.1243. See also Panel Report, Korea – Commercial
Vessels, paras. 7.564-7.565.
243 Panel Report, US – Upland Cotton, paras. 7.1246-7.1247.
244 Appellate Body Report, US – Upland Cotton, paras. 410-411.
245 Panel Report, US – Upland Cotton, para. 7.1274.
 246 The original panel described the "A-Index" as "a composite of an average of the five lowest price
quotes from a selection of the principal upland cottons traded in the world market obtained by Cotlook, a private
UK-based organization". The panel clarified in a footnote that "the prices are quoted c.i.f. Northern Europe".
Panel Report, US – Upland Cotton , paras. 7.1264 and footnote 1374. Brazil has explained in this proceeding
that in March 2003 the basis for the calculation of th e A-Index was changed to re flect the fact that Asian
importers now account for three quarters of total imports of upland cotton. The A-Index proper now reflects
values for delivery c.i.f. to Far Eastern ports (A(FE)Index). Cotlook continues to publish an A(NE)Index which
reflects values for delivery c.i.f. Northern European ports. Brazil submits that the A(FE)Index and the
A(NE)Index are almost perfectly aligned and that the technical change in the A-Index does not affect the
conclusion that the A-Index represents the world ma rket price for upland cotton. Brazil's First Written
Submission, paras. 85-86 and Annex II (Declaration by Andrew Macdonald), footnote 4.
247 Brazil's First Written Submission, para. 84.
248 The United States has argued in this proceeding that the fact that the A-Index had to be changed to
reflect the growing importance of China in the world ma rket supports the US argume nt that price trends for
upland cotton cannot be explained without taking into account the influence of China. US First Written
Submission, paras. 312-313. However, the United States has not contested that the A-Index represents the
world market price of upland cotton.
249 We also note that the Appellate Body held in the original proceeding that it was sufficient for the
original panel to analyze the price of upland cotton in general in the world market and that the panel was not
required to find significant price suppression specifically with respect to the price of Brazilian upland cotton in
the world market. Appellate Body Report, US – Upland Cotton, paras. 415-418.

(f) Significant price suppression as the effect of the subsidy
10.45 The original panel defined "price suppression" as re ferring to "the situation where 'prices' – in
terms of the 'amount of money set for sale of upland cotton' or the 'value or worth' of upland cotton –
either are prevented or inhibited from rising (i.e . they do not increase when they otherwise would
have) or they do actually increase, but the incr ease is less than it otherwise would have been".
250 The
Appellate Body ruled that this description of the meaning of "price suppression" reflected the ordinary
meaning of that term. 251 252 In this proceeding neither party h as contested this definition of "price
suppression".
10.46 The Panel considers that, as discussed in th e Appellate Body report in the original
proceeding253, a determination of whether price suppression exists is difficult to separate from an
analysis of the effect of the subsidy. Brazil h as explained that in light of the comments of the
Appellate Body in the original proceeding 254, it has adopted a "unitary" approach, which does not
separate the question of the existence of signifi cant price suppression from the issue of the causal
relationship between significant price suppression and the subsidies at issue. 255 The United States has
not questioned this "unitary" approach in this proceeding. 256 Therefore, while we note that the
original panel determined in three separate analyti cal steps that (i) there was price suppression in the
world market for upland cotton, (ii) this price suppression was significant and (iii) a causal
relationship existed between this significant price suppression and certain price-contingent
subsidies
257, in this proceeding we will not make a determination as to whether significant price

250 Panel Report, US – Upland Cotton, para. 7.1277.
251 Appellate Body Report, US – Upland Cotton, para. 424.
252 Similarly, the panel in Korea – Commercial Vessels noted that the parties in that dispute understood
the term "price suppression" in Article 6.3(c) of the SCM Agreement "to refer to the situation where prices have
not increased when, or have increased less than, they otherwise would have". Panel Report, Korea –
Commercial Vessels, para. 7.533.
253 Appellate Body Report, US – Upland Cotton , para. 433. ("...the ordinary meaning of the transitive
verb 'suppress' implies the existence of a subject (the challenged subsidies) an d an object (in this case, prices in
the world market for upland cotton). This suggests that it would be difficult to make a judgment on significant
price suppression without taking into account th e effect of the subsidies.") See also Panel Report, Korea –
Commercial Vessels, para. 7.537:

"...the existence of a flat or declining price trend, on its own, would not be a sufficient basis on
which to conclude that prices were 'suppressed' or 'depressed'. For such a conclusion to be
reached, the causes of these observed trends would need to be examined. In other words,
price depression is not simply a decline in pr ices but a situation where prices have been
'pushed down' by something . Price suppression is where pri ces have been restrained by
something. In other words, for a finding of 'price suppression' or price depression' in the sense
of SCM Article 6.3(c), there must not only be a flattened or downward price trend as a
prerequisite, but in addition this trend must be the result of an exogenous factor, namely the
subsidy or subsidies in question. Thus, the analysis that seems to be called for by the
Agreement (by virtue of the concepts of pri ce suppression and price de pression themselves),
concerns what the price movements for the relevant ships would have been in the absence of
(i.e. 'but for') the subsidies at issue." (emphasis original)
254 Appellate Body Report, US – Upland Cotton, paras. 432-434.
255 Brazil's First Written Submission, paras. 55-58.
256 In the original proceeding the United States argued before the Appellate Body that the panel had
erred in adopting a bifurcated approach under which the original panel made a finding of price suppression
before making a prior finding of the effect of the subsidy. Appellate Body Report, US – Upland Cotton , para.
430. The Appellate Body rejected that argument and held that "the text of Article 6.3 (c) does not, however,
preclude the approach taken by the Panel to examine first whether significant price suppression exists and then,
if it is found to exist, to proceed further to examine wh ether the significant price suppression is the effect of the
subsidy." Appellate Body Report, US – Upland Cotton, para. 431.
257 Panel Report, US – Upland Cotton, paras. 7.1275-7.1363.

suppression exists separately from whether significant price suppression is the effect of the subsidies
at issue.258
10.47 Closely related to this, the Panel notes the argument of Brazil that an analysis of price
suppression under Article 6.3(c) is necessarily of a c ounterfactual nature, focusing on the situation
that would exist but for the subsidies at issue. The United States has not contested this argument of
Brazil. We note that the original panel did not ex plicitly use the concept of a counterfactual analysis
and that the panel did to some extent re ly on an analysis of trends in prices. 259 At the same time, it is
clear that key elements of the panel's analysis in volved an examination of the situation that would
have existed but for the subsidies at issue. Thus, fo r example, the panel found that the fact that prices
had declined from 1996 through the beginning of 2002 and increased from 2002 was not conclusive
as to whether or not there was price suppression: "[w]e need to examine whether these prices were
suppressed, that is, lower than they would have been without the United States subsidies in respect of
upland cotton".260 In its analysis of the design, structur e and operation of the subsidies at issue the
panel found that certain price-contingent subsidies resulted in "lower world market prices than would
prevail in their absence".261 Based on an examination of the co sts of production and market revenues
of US upland cotton producers, the panel concluded that:
"United States upland cotton producers would not have been economically capable of
remaining in the production of upland cotton had it not been for the United States
subsidies at issue and that the effect of the subsidies was to allow United States
producers to sell upland cotton at a price lower than would otherwise have been
necessary to cover their total costs."
262
10.48 As noted above, the panel in Korea – Commercial Vessels has interpreted Article 6.3(c) of the
SCM Agreement as requiring a "but for" approach to the analysis of whether the effect of a subsidy is
significant price suppression.263

258 We note that the Appellate Body has stated that "Article 6.3(c) does not set forth any specific
methodology for determining whether the effect of a subsidy is significant price suppression" and that
"Article 6.3(c) is silent as to the se quence of steps to be followed in assess ing whether the effect of a subsidy is
significant price suppression". Appellate Body Report, US – Upland Cotton , paras. 427 and 431. While the
Appellate Body saw no legal error in the approach taken by the original panel, it is clear that the Appellate Body
did not consider that Article 6.3(c) required that approach.
259 Panel Report, US – Upland Cotton, paras. 7. 1286-7.1288.
260 Panel Report, US – Upland Cotton, para. 7.1288.
261 Panel Report, US – Upland Cotton, paras. 7.1291 and 7.1295.
262 Panel Report, US – Upland Cotton , paras. 7.1353. The panel concluded its discussion of costs of
production in relation to market revenue by observing that "the existence of this gap between upland cotton
producers' total costs and market revenue, on the one hand, and the effect of the subsidies, on the other hand,
was to sustain a higher level of output than would have occurred in the absence of the United States subsidies at
issue". Panel Report, US – Upland Cotton, para. 7.1354.
263 Supra, footnote, 253. The panel also observed:

"As noted supra, we believe that the text of Article 6.3(c) implies a 'but for' approach to causation
in respect of price suppression/p rice depression. Price suppression is the situation where prices
have been restrained by something, and price depression is the situation where prices have been
pushed down by something. So the question to be answered is whether the 'something' is
subsidization. Looking at a counterfactual situation, i.e. trying to determine what prices would
have been in the absence of the subsidy, seems to us the most logical and straightforward way to
answer this question."

Panel Report, Korea – Commercial Vessels, para. 7.612. The panel considered that this "but for" approach was
consistent with the approaches taken by the panels in Indonesia – Autos and in US – Upland Cotton.

10.49 Thus, in order to determine whether the effe ct of marketing loan payments and counter-
cyclical payments to upland cotton producers is significant price suppression within the meaning of
Article 6.3(c) of the SCM Agreement, the Panel will determine whether, but for these subsidies, the
world market price
264 for upland cotton "would have increased [significantly], or would have
increased by [significantly] more than was in fact the case".265
10.50 The Panel concurs with the original panel that the word "significant" in "significant price
suppression" in Article 6.3(c) of the SCM Agreement relates to the degree of price suppression in the
context of the price that has been affected and that the significance of any degree of price suppression
may vary from case to case, de pending upon the factual circumstances. 266 As stated by the original
panel,
"… for a basic and widely traded comm odity, such as upland cotton, a relatively
small decrease or suppression of prices could be significant because, for example,
profit margins may ordinarily be narrow, product homogeneity means that sales are
price sensitive or because of the sheer size of the market in terms of the amount of
revenue involved in large volumes traded on the markets experiencing the price
suppression."
267
10.51 Finally, like the original panel, we conduct an examination of the collective effects of the
marketing loan and counter-cyclical payments. 268 We recall, in this respect, that the original panel
made a finding that certain price-contingent subs idies (marketing loan payments, counter-cyclical
payments, Step 2 payments and market loss assistance payments) collectively were a cause of
significant price suppression in the world market for upland cotton. The panel did not find that each
of these four subsidies, taken individually, was a cause of significant price suppression nor did it
pronounce on the relative importance of each of these subsidies in causing significant price
suppression.
4. The alleged "substantial proportionate influe nce" of US upland cotton production and
exports
(a) Main arguments of the parties
10.52 Brazil submits that US upland cotton production and exports continue to expand and exercise
a "substantial proportionate influence" on prices in the world market for upland cotton. In the view of
Brazil, the United States is "the single most important market influencing world market prices" of
upland cotton.
269 In this connection, Brazil presents data showing that in MY 2005 the US share of
world upland cotton production was 20.9 per cent and th e US share of the world market for exports of

264 We recall that the Appellate Body found that the original panel had not erred by not conducting a
separate analysis of Brazilian prices in the world market. Appellate Body Report, US – Upland Cotton ,
paras. 415-418.
265 Panel Report, Korea – Commercial Vessels, para. 7.615.
266 Panel Report, US – Upland Cotton , paras. 7.1328-7.1329. The Panel also notes the observation
made by the panel in Korea – Commercial Vessels, para. 7.571 that "only price suppression or price depression
of sufficient magnitude or degree, seen in the context of the par ticular product at issu e, to be able to
meaningfully affect suppliers should be found to be 'significant' in the sense of SCM Article 6.3(c)".
267 Panel Report, US – Upland Cotton, para. 7.1330.
268 Panel Report, US – Upland Cotton , para. 7.1192. See also Panel Report, Korea – Commercial
Vessels, para. 7.616.
269 Brazil's First Written Submission, para. 89.

upland cotton was 39.6 per cent. During the period MY 2002-2005 the volume of US production
increased by 40.7 per cent and the volume of US exports increased by 54.8 per cent.270
10.53 The United States submits that Brazil's argument that the United States is "the single most
important market influencing world market pr ices" of upland cotton is overly simplistic and
inconsistent with the realities of the world cotto n market. In particular, Brazil fails to account
properly for the important role of China's trade in cotton.271
(b) Evaluation by the Panel
10.54 The original panel relied upon what it termed a substantial proportionate influence of the
United States in the world upland cotton market as one of four factors that cumulatively supported a
finding of a causal link between certain of th e challenged subsidies and significant price
suppression.272 This substantial proportionate infl uence of the United States resulted inter alia from
the magnitude of US production and export of upland cotton. 273 The United States was the world's
second largest producer, and the world's largest exporter, of upland cotton.274
10.55 The Appellate Body considered that, when view ed in conjunction with other findings made
by the original panel, the "substantial proportiona te influence" of the United States in the world
market for upland cotton seemed to support the pa nel's conclusion of the existence of a causal
relationship between the price-contingent subsidies and significant price suppression.275
10.56 The data provided by the United States 276 indicates that in MY 2005 the US share of world
cotton production was 20.9 per cent and that the US share of world upland cotton production averaged
19.7 per cent during the period MY 2002-2005 (see Ta ble 3). The US share of world exports was
40.1 per cent in MY 2005. During the period MY 2002-2005 the US share of world exports averaged
40.5 per cent.

270 Brazil's First Written Submission, paras. 92-93, Figures 2 and 3.
271 US First Written Submission, paras. 308-318. US Rebuttal Submission, paras. 387-396.
272 Panel Report, US – Upland Cotton, paras. 7.1347-7.1348.
273 Panel Report, US – Upland Cotton, paras. 7.1285 and 7.1348.
274 In the period MY 1999 –2002, the United States accounted for approximately 20 per cent of world
production of upland cotton. The share of the United States in world production of upland cotton was 19.2 per
cent in MY 1999, 19.3 per cent in MY 2000, 20.6 per cent in MY 2001 and 19.6 per cent in MY 2002. The
share of the United States in world exports of upland cotton was 23.5 per cent in MY 1999, 24.5 per cent in
MY 2000, 37.3 per cent in MY 2001 and 39.9 per cent in MY 2002. Panel Report, US – Upland Cotton ,
paras. 7.1282-7.1283.
275 Appellate Body Report, US – Upland Cotton, para. 449:

"We agree that, in and of itself, the degree of in fluence of the United States in the world market
for upland cotton may not be conclusive as to the effect of the price-contingent subsidies on
prices in that market. However, if the pric e-contingent subsidies increased United States
production and exports or decreased prices for United States upland cotton, then the fact that
United States production and exports of upland cotton significantly influenced world market
prices would make it more likely that the effect of the price-contingent subsidies is significant
price suppression. Accordingly, this fact seems to support the Panel's conclusion when read in
conjunction with its other findings."
276 Exhibit US-27.

Table 3: US and World Cotton Exports and Production, MY 2002-2005

MY United States
(in 1000 480 lb bales)
World
(in 1000 480 lb bales)
US Share of World
Exports and Production
 Exports Production Exports Production Exports Production
2002 11,900 17,209 30,325 88,251 39.2% 19.5%
2003 13,758 18,255 33,221 95,267 41.4% 19.2%
2004 14,436 23,251 35,022 120,394 41.2% 19.3%
2005 18,036 23,890 44,935 114,142 40.1% 20.9%
Average 14,533 20,651 35,876 104,514 40.5% 19.7%
Source: Exhibit US-27.

10.57 Given that complete data for MY 2006 is not ava ilable, the Panel has relied on projections of
production and exports provided by the United States. 277 These projections of US and world
production and exports were made in February 2007, halfway through MY 2006. According to these
projections, the absolute volumes of US cotton pr oduction and exports in MY 2006 will decline by 9
per cent and 19.6 per cent, respectively, from MY 2005 levels. Since the average "error" of USDA
projections is only 0.1 per cent for US cotton production and 4 per cent for US exports 278, the Panel
considers that these USDA projections of a declin e in production and exports in MY 2006 are very
likely to materialize. Taken together with proj ections of world production and exports, they indicate
that the US share of world upland cotton produc tion is projected to fall from 20.9 per cent in
MY 2005 to 18.6 per cent in MY 2006. Further, the US share of world exports of upland cotton is
projected to fall from 40.1 per cent in MY 2005 to 36.3 per cent in MY 2006.

277 The source of the US projections of producti on and exports is the USDA's World Agricultural
Supply and Demand Estimates (WASDE) report, which provi des forecasts of supply and demand for major US
and global crops and US livestock . The February 2007 projection of US production and exports for MY 2006
is contained in Exhibit US-114 while corresponding figures for world production and exports are taken from
WASDE 443-27.
278 Given that a lower degree of certainty attach es to these projections, the Panel asked the
United States to provide the information on how final ma rketing year data on the variables of interest would
differ from projections made in February of the same marketing year. The idea is to compare projections made
in the middle of a given marketing year with the final estimate for the complete ma rketing year. The closer
February projections are to final estimates of production and export for the same marketing year, the more
reliable we judge these projections to be. The United States provided the Panel with this data spanning the
period from MY 1992-2005. (Exhibit US-145) Using this information, we have estimated how much these
February projections have differed from the final marketing year data:
Table 4: Difference Between Final Estimates And Projections, MY 1992-2005
Item Production Exports
Average difference: (Final estimate minus
February projection)
0.1% 4.0%
Standard deviation of difference 0.6% 6.6%
Source: Exhibit US-145.

Over the period MY 1992-2005, projections of US production made in February underestimated the final
production number by only an average of 0.1 per cent (with a standard deviation of 0.6 per cent). The
corresponding underestimate for US exports is 4 per cent (with a standard deviation of 6.6 per cent). Projections
of US cotton production have been more accurate than projections of US exports.

10.58 In our view, even taking into account the projections for MY 2006, the figures on the relative
magnitude of US production and e xports of upland cotton at present are not significantly different
from the figures that formed the b asis for the original panel's finding that the United States exerted a
substantial proportionate influence on the world mark et for upland cotton. The US share of world
upland cotton production was 19.6 per cent in MY 2002, 20.9 per cent in MY 2005 and is projected to
be 18.6 per cent in MY 2006. The US share of wo rld exports of upland cotton was 39.9 per cent in
MY 2002, 39.8 per cent in MY 2005 and is projected to be 36.3 per cent in MY 2006. In light of
these figures and taking into account other evidence presented by Brazil 279, the Panel considers that
the United States exerts a substantial proportionate influence on the world market for upland cotton.
This substantial proportionate influe nce of the United States, analyzed in light of the totality of the
evidence before us, as discussed in the next sub-secti ons, is an element that supports a finding that the
marketing loan and counter-cyclical payments to US upland cotton producers cause significant price
suppression in the world market for upland cotton.
5. "Structure, design and operation" of the marketing loan and counter-cyclical payments
(a) Main arguments of the parties
10.59 Brazil argues that the "structure, design and oper ation" of the marketing loan and counter-
cyclical payments280 stimulate US upland cotton production by insulating US producers from market
forces. In support of this argument, Brazil refers to the magnitude of the marketing loan payments in
MY 2004 and MY 2005, the fact that the legislative provisions in question have not been changed,
economic studies presented in the original proceeding, and the fact that during most of the period
MY 2002-2005 the adjusted world price was below the marketing loan rate. In Brazil's view, these
factors show that the conclusion of the original panel that marketing loan payments stimulate
production and exports and suppress prices continues to apply.
281 Similarly, the findings of the
original panel on the effects of counter-cyclical pa yments on production, exports and prices of upland
cotton also remain applicable. In this regard, Br azil refers to the magnitude of the counter-cyclical
payments in MY 2004 and MY 2005, the fact that the legislative provisions in question have not been
changed, economic studies presented in the original proceeding, and the continued existence of a
strong positive relationship between upland cotton base acre holders receiving annual counter-cyclical
payments and upland cotton production. 282 Referring to the original panel's findings that price-
contingent US subsidies isolated US cotton farmers from market forces, Brazil argues that data on the
importance of marketing loan and counter-cyclical pa yments in stabilizing US upland cotton farmers'
revenues demonstrates that this insulating effect continues today.283
10.60 The United States argues that Brazil has not provided any persuasive evidence that the
structure, design and operation of the marketing loan and counter-cyclical payments programme
support Brazil's claims of significant price suppression. With respect to marketing loan payments, the
United States submits that an analysis of planti ng decisions made by US upland cotton producers in
light of the conditions that exist at the time of planting (January-March) shows that for the present
marketing year, MY 2006, payments under the mark eting loan programme did not distort production
decisions. Since the average Ne w York futures price in January-March 2006 was well above the
marketing loan rate, US upland cotton producers did not expect to receive marketing loan payments

279 The Panel notes, in particular, the evidence provid ed by Brazil on the similarity in trends in certain
US domestic prices and the world market price for upland cotton (Brazil's First Written Submission, Figures 4
and 5), a factor also relied upon by the original panel. Panel Report, US – Upland Cotton , para. 7.1311. The
Panel also notes the analysis prepared by Brazil's consultant of the functioning of the world market for upland
cotton. Brazil's First Written Submission, Annex II (Declaration by Andrew Macdonald).
280 Supra, footnote 186.
281 Brazil's First Written Submission, paras. 123-127; Brazil's Rebuttal Submission, paras. 101-110.
282 Brazil's First Written Submission, paras. 128-131. Brazil's Rebuttal Submission, paras. 111-118.
283 Brazil's First Written Submission, paras. 133-136 and Figure 8.

upon harvest, and these payments could not have fi gured in their planting decisions for MY 2006.
 284
The United States submits, in this respect, that even in earlier marketing years planting decisions of
US upland cotton producers were not shaped by exp ectations about marketing loan payments but by
market factors. With respect to counter-cyclical payments, the United States argues that (i) research
based on recent empirical data does not support Brazi l's claim that counter-cyclical payments have
significant trade-distorting effects; (ii) significant amounts of decoupled payments are capitalized into
higher land values; and (iii) data comparing base acr es to planted acreage does not demonstrate that
counter-cyclical payments have significant effects on production. 285 The United States also submits
that Brazil does not demonstrate that the size of the outlays under the marketing loan and counter-
cyclical payment programmes support the existence of a causal link.286
(b) Evaluation by the Panel
10.61 The question before the Panel is whether the structure, design and operation of marketing loan
payments and counter-cyclical payments provided by the United States pursuant to the FSRI Act of
2002 support a finding that the effect of these s ubsidies is "present" significant price suppression in
the world market for upland cotton within the meaning of Article 6.3(c) of the SCM Agreement.
10.62 Because Brazil asserts that, based on the eviden ce which it has submitted in this proceeding,
this Panel should reach the same conclusions as the original panel regarding the price suppressing
effects of the structure, design and operation of the marketing loan payments and counter-cyclical
payments, we begin by providing a summary of the or iginal panel's analysis th at formed the basis for
those conclusions.
10.63 The original panel first examined the "nature" of the subsidies in determining whether price
suppression existed in the world market for upland cotton. 287 The panel considered that the "nature of
the US subsidies at issue – in terms of their stru cture, design and operation – is relevant in assessing
whether or not they have price suppressing effects". 288 The panel attached particular importance to
the "directly price-contingent" nature of certain subsidies.289
10.64 Regarding marketing loan payments, the origin al panel pointed out that under the marketing
loan programme benefits to producers resulted when the adjusted world market price was below the
marketing loan rate and that the payments were mandatory 290, that the magnitude of the marketing
loan payments was counter-cyclical and increased with the difference between the adjusted world
price and the marketing loan rate291, and that the marketing loan payments insulated the revenue of US

284 US First Written Submission, paras. 226-235; US Rebuttal Submission, paras. 268-275.
285 US First Written Submission, paras. 207-225; US Rebuttal Submission, paras. 224-267.
286 US First Written Submission, paras. 236-241; US Rebuttal Submission, paras. 267-280.
287 Panel Report, US – Upland Cotton, paras. 7.1289-7.1307. In determining whether price suppression
existed in the world market for upland cotton, the panel also considered the relative magnitude of the US
production and exports and the general price trends. Panel Report, US – Upland Cotton, paras. 7.1281-7.1288.
288 Panel Report, US – Upland Cotton, para. 7.1289.
289The panel explained that in light of certain guiding considerations outlined earlier in its report, the
distinction between "directly price-contingent" subsidies and other subsidies before it was critical "in terms of
the nexus which the subsidies have to any price suppression and to the subsidized product". Thus, the panel
considered it highly relevant that certain US subs idies under consideration, including marketing loan
programme payments and counter-cyclical programme paymen ts were "directly linked to world market prices".
Panel Report, US – Upland Cotton, paras. 7.1289-7.1290.
290 Panel Report, US – Upland Cotton, para. 7.1291.
291 Panel Report, US – Upland Cotton, paras. 7.1292-7.1294. The panel also observed that the data
before it showed that "the marketing loan subsidy by the United States government, at certain points, was
greater than the market value of the product" and that "it accounted for more than half of the difference between
the adjusted world price and the ma rketing loan rate (and thus of United States upland cotton producer
revenue)". Panel Report, US – Upland Cotton, para. 7.1294 (original emphasis).

upland cotton producers from a dec line in the adjusted world price. 292 The panel considered that the
marketing loan payments "stimula te production and exports and result in lower world market prices
than would preva il in their absence" 293 and that the "structure, design and operation of the marketing
loan programme has enhanced produc tion and trade-distorting effects". 294 The panel also observed
that data for the period MY 1999-2002 showed that , because of the impact of marketing loan
payments on production of upland cotton, a decline in US prices did not result in a decline in US
production or export, that the structure of the measure affected world market prices generally, and that
for most of the period under consideration the ad justed world market price was below the marketing
loan rate.295 Finally, the panel noted that the amount of the subsidies was "very large".296
10.65 Also as part of its examination of whether price suppression existed, the original panel stated
the following with respect to counter-cyclical payments:
"We agree with the view of USDA econom ists that, due to their market-price
contingency, [counter-cyclical paymen ts] may influence production decisions
indirectly by reducing total and per unit re venue risk associated with price variability
in some situations. In the price range from the loan rate up to the target price minus
the [direct payments] rate, changes in pr oducer revenues due to changes in market
prices are partly offset by the countercyc lical payments if the base acreage crop is
planted, thereby reducing to tal revenue risk associated with price variability. We
have confirmed a strong positive relationship between upland cotton (base acre)
producers receiving annual payments and upl and cotton production. Moreover, the
payments are mandatory, under certain market conditions."
297 (footnotes omitted)
10.66 It is clear from these statements that a key el ement in the original panel's analysis of the
structure, design and operation of marketing loan payments and counter-cyclical payments was the
idea that the price-contingent nature of these subsidies made US upland cotton production less
responsive to market prices by insulating the reve nue of US upland cotton producers from declines in
prices. It is also clear, however, that closely re lated to this, the panel attached importance to the
magnitude of these subsidies in the period under consideration.
10.67 The original panel highlighted these two themes in its conclusion on the existence of price
suppression:
"As we have just indicated, several of the United States subsidies are directly linked
to world prices for upland cotton, thereby numbing the response of United States
producers to production adjustment decisions when prices are low . We have readily
available information on the record showing us that the price-contingent subsidies in
question involve very large amounts of Un ited States government money benefiting
United States upland cotton . In our view, the collective operation of these subsidies
was akin to a very large, counter cyclical , deficiency payment laced with additional
enhancements. We believe that the structure, design and operation, particularly of the

292 Panel Report, US – Upland Cotton , para. 7.1294: "The further the adjusted world price drops, the
greater the extent to which United States upland cotton producers' revenue is insulated from the decline,
numbing United States production decisions from world market signals."
293 Panel Report, US – Upland Cotton, paras. 7.1291 and 7.1295.
294 Panel Report, US – Upland Cotton, paras. 7.1295.
295 Panel Report, US – Upland Cotton, paras. 7.1294 and 7.1296.
296 Panel Report, US – Upland Cotton, para. 7. 1297.
297 Panel Report, US – Upland Cotton, para. 7.1302.

price-contingent subsidies, constitutes st rong evidence supporting a finding of price
suppression."
298 299 (emphasis added)
10.68 Having found that price suppression existed 300 and that this price suppression was
significant301, the original panel also referred to the structure, design and operation of the price-
contingent subsidies at issue in its examination of whether this significant price suppression was the
effect of certain of the subsidies at issue. The panel again emphasized the "insulating" effect and the
magnitude of the price-contingent subsidies at issue:
"Second, we recall our examination of the nature of the United States subsidies at issue. In
particular, we recall that several of the Unite d States subsidies – marketing loan programme
payments, the user marketing (Step 2) payments, MLA payments and CCP payments – are
directly linked to world prices for upland co tton, thereby insulating United States producers
from low prices. We believe that the structure, d esign and operation of these three measures
constitutes evidence supporting a causal link with the significant price suppression we have
found to exist. Furthermore, while we do not be lieve that it is strictly necessarily to calculate
precisely the amount of the subsidies in question, we observe that we have readily available
information on the record showing us that the price-contingent subsidies in question involve
very large amounts of United States government money benefiting United States upland
cotton production."302 (emphasis added, footnote omitted)
10.69 By contrast, the original panel considered that Brazil had not established that significant price
suppression was the effect of certain subsidies – pr oduction flexibility payments, direct payments and
crop insurance payments – that were not price-con tingent. The panel considered that these non-price
contingent subsidies were "more concerned with income support than directly with world price
effects" and were "of a different nature, and thus effect" than the price-contingent subsidies.303
10.70 The Appellate Body upheld the original panel's finding that the effect of certain price-
contingent subsidies was significant price suppression within the meaning of Article 6.3(c) of the
SCM Agreement constituting serious prejudice to the interests of Brazil within the meaning of
Article 5(c) of the SCM Agreement, and in so doing rejected various arguments of the United States,
including in respect of the panel's analysis of the structure, design and operation of the marketing loan
and counter-cyclical subsidies.304
10.71 It is not in dispute that the conditions of application of the marketing loan and counter-
cyclical payments, as defined in the relevant provisions of the FSRI Act of 2002, are the same at
present as when the original panel analyzed these measures. Therefore, there has been no change with
respect to the mandatory, price-contingent and counter-cyclical nature of these subsidies.
10.72 Apart from the fact that the provisions of th e FSRI Act of 2002 regarding marketing loan
payments and counter-cyclical payments have rema ined unchanged, Brazil refers to several other
factors, including the magnitude of these subsides in recent years, in light of which Brazil considers
that this Panel should reach the same conclusions as the original panel regarding the effects of the

298 Panel Report, US – Upland Cotton, para. 7.1308.
 299The panel considered that the parallelism between declining US price and world market prices in the
period under consideration was evidence that increased US production and supply had caused price suppression.
Panel Report, US – Upland Cotton, paras. 7.1309-7.1311.
300 Panel Report, US – Upland Cotton, para. 7.1312.
301 Panel Report, US – Upland Cotton, para. 7.1333.
302 Panel Report, US – Upland Cotton, para. 7.1349.
303 Panel Report, US – Upland Cotton, paras. 7.1307 and 7.1350.
304 Appellate Body Report, US – Upland Cotton, paras. 395-496.

structure, design and operation of marketing lo an payments and counter-cyclical payments on
production, exports and prices of US upland cotton.305
10.73 The United States does not contest that the effect of marketing loan and counter-cyclical
payments on revenues of US upland cotton producers could affect acreage and production of upland
cotton. However, the United Stat es argues that the relevant question is whether, taking into account
the particular structure and design of the marke ting loan and counter-cyclical payment programmes
and the way that they operate under marketing cond itions at present, payments under the programmes
are in fact having production effects, and if so, whether the degree of the effect is so significant that it
is resulting in "present" significant price suppress ion. The United States submits that in this
proceeding Brazil has failed to demonstrate, thr ough a proper analysis of the factors actually
considered by US upland cotton producers in thei r annual planting decisions and of the way that
marketing loan and counter-cyclical payments interact with these planting decisions, that the effect of
marketing loan and counter-cyclical payments is to induce US upland cotton producers to increase the
level of upland cotton acreage above what it would ha ve been in the absence of those payments. The
United States emphasizes in this r espect that a proper analysis of annual planting decisions of upland
cotton producers must take into account the fact th at producers must base their planting decisions on
expectations with regard to factors such as weather, demand, supply, prices of upland cotton and other
crops, and variable costs. Moreover, the United Stat es considers that Brazil has not demonstrated that
the degree of any effect of marketing loan and c ounter-cyclical payments on production is such as to
cause "present" significant price suppression.306
10.74 In our view, the United States made the same arguments in the original proceeding. For
example, before the original panel the United States argued, with regard to marketing loan payments,
that "Brazil has failed to make a proper analysis of the conditions actually faced by producers in
making production decisions using futures prices, which reveals no expected impact from marketing
loans except for MY 2002". 307 In this connection, the United States also submitted that "[i]n no
marketing year from 1999-2001 would the marketing loan rate have impacted planting decisions and
in marketing year 2002 the marketing loan rate did not prevent price-responsive acreage
adjustment".308
10.75 As noted above, the original panel considered, in respect of marketing loan payments, that
"the payments stimulate production and exports and result in lower world market prices than would
prevail in their absence" and that "the struct ure, design and operation of the marketing loan
programme has enhanced production and trade-distorting effects". 309 It is clear from these statements
that the panel did not consider that the fact that in certain years expected market prices at the time of
planting exceeded the marketing lo an rate meant that marketing loan payments had only minimal
effects on production in those years.310 However, while the United States argued before the Appellate
Body that "the Panel failed to address the releva nt economic decision faced by United States upland

305 Supra, para. 10.59.
306 E.g. US Rebuttal Submission, paras. 222 and 287-291; US Opening Statement paras. 62-64; US
Reponses to Panel Questions 51, 53 and 54. US Comments on Brazil's Response to Panel Question 62.
307 US Further Rebuttal Submission (18 November 2003), Section IV.G.
308 US Further Rebuttal Submission (18 November 2003), Section IV.G.6.
309 Panel Report, US – Upland Cotton, paras. 7.1291 and 7.1295.
310 The United States interprets these statements to mean that the panel noted "that the particular design
and operation of the marketing loan program is such that it may have more than non- or minimally-trade-
distorting effects given the particular market conditions that prevail." US Response to Panel Question 54,
para. 105. While we do not disagree that the panel's analysis must be understood in the context of the
"particular market conditions" that prevailed in the period considered by the panel, it is clear that the panel did
not adopt the particular methodology for analyzing the relevance of market conditions advocated by the
United States in the original proceeding.

cotton farmers at the time of planting, namely, the decision of whether to plant upland cotton or
alternative crops (and how much of each)"
 311, the Appellate Body rejected this argument.312
10.76 We also note that specifically with regard to th e argument of the United States that marketing
loan payments have minimal effects on planting de cisions if the expected market price at the time
planting decisions are made is above the marketing loan rate, the Appellate Body observed:
"During the oral hearing, the United States presented data to show that, when planting
decisions were made for the 1999, 2000, 2001, and 2003 upland cotton crops, the
expected upland cotton price upon harvest was higher than the marketing loan rate.
Accordingly, the United States contends, the marketing loan program payments
would have had only a minimal effect on planting decisions, because farmers would
have expected to receive a higher price from the sale of their upland cotton and no
marketing loan program payments.
We note, based on the evidence provided by the United States, that, for four of the
five upland cotton crops between 1999 and 2003, the expected harvest price at the
time of making planting decisions was al ways substantially higher than the actual
price realized at the time of harvest of the crop. This suggests that although farmers
had expected higher prices in making their planting decisions, they were also aware
that if actual prices were ultimately lower, they would be 'ins ulated' by government
support, including not only marketing loan program payments but also counter-
cyclical payments, which were based on a ta rget upland cotton price of 72.4 cents per
pound. We are therefore satisfied that the Panel adopted a plausible view of the facts
in connection with expected prices and planting decisions, even though it attributed to
these factors a different weight or meaning than did the United States. As the
Appellate Body has said, it is not necessary for panels to 'accord to factual evidence
of the parties the same meaning and weight as do the parties'."
313 (emphasis original,
footnotes omitted)
10.77 Thus, even if expected market prices at the time of planting are higher than the marketing
loan rate and producers do not expect to receive marketing payments at that time 314, the availability of
marketing loan payments can be considered to in fluence planting decisions. While US upland cotton
producers may be uncertain at the time of planting as to whether actual harvest prices will be below
the marketing loan rate, there is no uncertainty as to the fact that, if actual harvest prices are below the
marketing loan rate, they will receive marketing loan payments. Therefore, the logic of the original
panel's analysis regarding the re venue-stabilizing impact of the pr ice-contingent, counter-cyclical
nature of marketing loan payments and the conse quent impact on the level of production applies even

311 Appellate Body Report, US – Upland Cotton , para. 440. In arguing that the original panel had
ignored the relevant production decision faced by US cott on farmers at the time of pl anting, the United States
referred to the panel's conclusion that the price-contingent subsidies are linked to world prices for upland cotton
"thereby numbing the response of United States producers to production adjustment decisions when prices are
low". Appellate Body Report, US – Upland Cotton, para. 38.
312 Appellate Body Report, US – Upland Cotton, paras. 440-445. The Appellate Body considered that
the original panel had, in fact, addressed upland cotton planting decisions, expected prices and expected market
revenue in paragraph 7.1362 of its report. Appellate Body Report, US – Upland Cotton, para. 441.
313 Appellate Body Report, US – Upland Cotton, paras. 444-445.
314 We note that Brazil disagrees with the United States that in most recent years US upland cotton
producers have not expected to receive marketing loan payments. See Brazil's Rebuttal Submission,
paras. 104-105.

if one accepts that, as argued by the United States, it is necessary to take into account producers' price
expectations.315
10.78 We note that the Appellate Body also uphe ld the original panel's conclusion in
paragraph 7.1349 of the panel report that the fact th at certain subsidies were directly related to the
world market prices for upland cotton supported a fi nding of the existence of a causal relationship
between these subsidies and significant price suppr ession. In that context, the Appellate Body
reviewed and affirmed the conclusions drawn by th e original panel from its earlier assessment of the
structure, design and operation of the price-contin gent subsidies, including the panel's statements
concerning the effects of these subsidies on production and exports.316
10.79 The United States argues that Article 11 of the DSU requires this Panel to carry out an
"objective assessment of the matter before it" and that "there is no basis to automatically adopt for
purposes of this proceeding the same factual conclusions drawn by the original panel about the effects
of the marketing loan, counter-cyclical payment, and Step 2 payments in a different period".317
10.80 We note, in this regard, that in its discussion of the argument of the United States concerning
the role of expected market prices, the Appellate Body referred to the fact that in four of the five years
under consideration the actual market price at th e time of harvest was below the expected market
price at the time of planting. 318 The evidence shows that this pa ttern has persisted in more recent
years.319 The Panel also has evidence before it, provided by Brazil but not contested by the

315 Brazil does not disagree that it is "important to look at the way that the marketing loan and counter-
cyclical payments programs actually operate and interact with production decisions". Brazil's Comments on US
Response to Panel Question 51, para. 71. Brazil also agr ees that the expectations of US cotton producers are a
relevant factor to consider in an assessment of the eff ects of the marketing loan an d counter-cyclical payments.
Brazil's Comments on US Response to Panel Question 51, paras. 70-80.

316 Appellate Body Report, US – Upland Cotton, para. 450:

"The second reason the Panel provided for finding a 'causal link' was its view that the price-
contingent subsidies 'are directly linked to wo rld prices for upland cotton'. This conclusion
flowed from the Panel's earlier assessment—in conn ection with its analysis of significant price
suppression—of the nature of the price-contingent subsidies. The nature of a subsidy plays
an important role in any analysis of whether the effect of the subsidy is significant price
suppression under Article 6.3(c). With respect to marketing loan program payments, the
Panel found that '[t]he further the adjusted world price drops, the greater the extent to which
United States upland cotton producers' revenue is insulated from the decline'. As a result,
during the 1999-2002 marketing years, United States production and exports remained stable
or increased, even though prices of United States upland cotton decreased. The Panel found
that Step 2 payments stimulate domestic and foreign demand for United States upland cotton
by 'eliminating any positive difference between Unite d States internal prices and international
prices of upland cotton'. The Pa nel stated that Step 2 payments 'result in lower world market
prices than would prevail in their absence'. Finally, the Panel found that market loss
assistance payments and counter-cyclical payments are made in response to low prices for
upland cotton and stimulate United States production of upland cotton by reducing the 'total
and per unit revenue risk associated with price variability'. The United States contends that
the Panel's analysis of the price-contingent su bsidies was 'deficient'. However, the Panel
found that the price-contingent subsidies stimulated United States production and exports of
upland cotton and thereby lowered United States upland cotton prices. This seems to us to
support the Panel's conclusion that the effect of the price-contingent subsidies is significant
price suppression." (original emphasis, footnotes omitted)
317 US Response to Panel Question 54, para. 102.
318 Supra, para. 10.76.
319Brazil submits that a comparison of the adjusted world price and the average December price of the
futures contract at the time of planting shows that in the period 1996-2005 the adjusted world price was on

United States, that in most recent years the adjust ed world price has been below the marketing loan
rate.
320
10.81 Given that in most recent years actual market prices have been lower than expected market
prices at the time of planting and that the adjusted world price has been below the marketing loan rate,
the Panel considers that it is reasonable to conclude that the fact that US cotton producers know that
they will receive marketing loan payments whenever the adjusted world pri ce is below the marketing
loan rate continues to be an important factor affe cting the level of acreage planted to cotton (and thus
the level of production), even when, as in MY 2006 , the expected market price for upland cotton at
the time of planting is higher than the marketing loan rate. 321 The Panel also notes in this regard that
according to FAPRI and USDA data, the projected amount of marketing loan payments in MY 2006
is very significant.322
10.82 Thus, in arguing that because the expected market price for MY 2006 was above the
marketing loan rate, marketing loan payments did not significantly affect th e planting decisions of
upland cotton producers, the United States makes an ar gument that was already rejected by the panel
and the Appellate Body in the original proceeding. 323 Nothing in the facts presented to the Panel in
this proceeding would appear to warrant a conc lusion different from the conclusion drawn by the
panel and the Appellate Body in the original proceeding.
10.83 Moreover, while the discussion in the preceding pa ragraphs has focused on the impact of the
structure, design and operation of marketing loan payments on acreage and production when analyzed
from the short-term perspective of how these paymen ts interact with annual planting decisions, the
Panel considers that this impact should also be an alyzed from the long-term perspective of how these
subsidies influence the economic viability of US upland cotton farming. Article 6.3(c) of the SCM
Agreement does not prescribe a particular methodology for determining whether significant price
suppression is the effect of a subsidy. It is clear to us that whether production of a particular product
is higher than would have been the case in the ab sence of the subsidy is often a critical issue in
establishing whether the effect of the subsidy is significant price suppression. However, nothing in
the text of Article 6 suggests that this can only be examined from a short-term perspective. In our
view, the type of effect of a subsidy on production relevant to the analysis under Article 6.3(c) can
also be demonstrated on the basis of a longer-term perspective that focuses on how the subsidy affects
decisions of producers to enter or to exit a given industry. The Panel considers, in this regard, that the
evidence on the record, notably the evidence regarding the role of marketing loan and counter-cyclical
payments in covering the difference between the ma rket revenue of US upland cotton producers and
their costs of production, supports the view that these subsidies have a long-term impact on acreage
and production of upland cotton by affecting decisions of US cotton farmers to enter or exit cotton
farming. The Panel addresses this issue below in section X.B.9.

average 17.3 per cent below the December futures contract price. Brazil's Rebuttal Submission, para. 105 and
Exhibit Bra-564.
320 Data submitted by Brazil shows that for most of the period from August 1999 to February 2007, the
adjusted world price was below the marketing loan rate. Brazil's Response to Panel Question 62, Figure 1, and
Exhibit Bra-673.
321 In order to assess the significance of the eff ect of marketing loan payments on acreage and
production under current conditions, we obviously must ta ke into consideration other factors, such as the
magnitude of these subsidies and their importance to the revenues of US upland cotton producers. We discuss
these factors below.
323 We recall, in this respect, the observation made by the Appellate Body that "doubts could arise
about the objective nature of an Article 21.5 panel's assessment if, on a specific issue, that panel were to deviate
from the reasoning in the original panel report in the absence of any change in the underlying evidence in the
record…" Appellate Body Report, US - Softwood Lumber VI (Article 21.5 – Canada), para. 103.

10.84 The Panel now turns to the issues that have been raised in this proceeding specifically with
respect to the design, structure and operation of counter-cyclical payments. In this regard, the parties
disagree on (i) whether recent economic literature referred to by the United States contradicts Brazil's
claim that counter-cyclical payments have signifi cant trade-distorting effects and whether significant
amounts of decoupled payments are capitalized into higher land values, and (ii) whether the existence
of what Brazil characterizes as a strongly positive relationship between US upland cotton farmers and
upland cotton production demonstrates that counte r-cyclical payments have significant effects on
production.
10.85 The Panel first considers the recent economic literature referred to by the United States.
10.86 The United States argues that recent economic literature that reflects the results of research
based on empirical data finds no evidence that c ounter-cyclical payments are the cause of any
significant changes in plantings. 324 In the view of the United States, these new studies and reviews
show that counter-cyclical payments have no effects on crop-specific production decisions and
minimal effects on overall production.
10.87 Brazil, for its part, criticizes the studies referred to by the United States and submits other
new studies.
325 Brazil contends that these studies are consis tent with the original panel's finding that
counter-cyclical payments sustain high levels of acreage, production and exports.326
10.88 The United States also argues that the question of wh ether counter-cyclical payments are
capitalized into higher land values has a bearing on the extent to which counter-cyclical payments
provide incentives to farm operators to increase prod uction of upland cotton. If a significant part of
upland cotton farm land is rented by operators inst ead of being owned by them and if most of the
counter-cyclical payments end up as higher land values, and thus in landowners' rather than operators'
hands, then there may be little production effect from th e payments. In this regard, the United States
refers to studies that the United States claims find that decoupled payments, such as counter-cyclical
payments, are capitalized into land values and land rents.327
10.89 Brazil argues that the price-contingent nature of counter-cyclical subsidies means that they
can be very large in one year and small or non-existent in another year and that, hence, such payments
are not as easily capitalized into land values as decoupled payments. Brazil submits that a comparison
of actual land rents and the amount of direct and c ounter-cyclical payments per acre demonstrates that
only a relatively small portion of the counter-cyclical payments could possibly be shifted to land rents

324 The studies referred to by the United States in clude: "Risk Considerations in Supply Response:
Implications for Counter-Cyclical Payments' Production Impact" by William Lin and Robert Dismukes (Exhibit
US-34); "Counter-Cyclical Payments Under the 2002 Farm Act: Production Effects Likely to be Limited" by
Paul Westcott (Exhibit US-35); "US Ag ricultural Policy: Overview and Recen t Analyses" by Edwin C. Young,
Anne Effland, Paul Westcott and Demcey Johnson (Exhibit US-40); and "Another Look at Decoupling:
Additional Evidence on the Production Effects of Direct Payments" by B. Goodwin and A. Mishra (Exhibit US-
41).
325 The new studies submitted by Brazil include: "Are 'Decoupled' Farm Payments Really Decoupled?
An Empirical Evaluation" by B. K. Goodwin and A. Mishra (Exhibit BRA-618); "Farm-Level Production Effect
From Participation in Government Commodity Programs: Did the 1996 Federal Agricultural Improvement and
Reform Act Make a Difference?" by Nigel Key, Ruben Lubowski and Michael Roberts (Exhibit BRA-566);
"Supply Response to Counter-Cyclical Payments and Base Acre Updating under Uncertainty: An Experimental
Study" by Christopher R. McIntosh, Jason F. Shogren and Erik Dohlman (Exhibit BRA-565); and "How
Distorting Are Direct Payments?" by Erik J. O'Donoghue and James Whitaker (Exhibit BRA-568).
327 These include the USDA ERS study "Structure and Finances of US Farms: 2005 Family Farm
Report" reproduced in Exhibit US-67 and the OECD study "A Review of Empirical Studies of the Acreage and
Production Response to US Production Flexibility Contract Payments Under the Fair Act and Related Payments
Under Supplementary Legislation" reproduced in Exhibit US-32.

or capitalized into the value of land.
328 While Brazil recognizes the possibility that certain landowners
might capture a portion of counter-cyclical payments , this assessment does not change the fact that
upland cotton counter-cyclical payments are tied to prices and increase US upland cotton production
and exports.
10.90 The Panel recalls that in assessing the productio n impact of counter-cyclical payments, the
original panel relied upon several USDA studies 329 to conclude that, due to their market-price
contingency, counter-cyclical payments "may infl uence production decisions indirectly by reducing
total and per unit revenue risk associated with price variability in some situations". 330 As the
United States points out in this proceeding, these studies did not reflect experience with the counter-
cyclical payment programme itself. 331 The Panel therefore considers that the studies cited by the
United States and Brazil in this proceeding are rele vant insofar as they provide new information not
available to the original panel reflecting the experience with the operation of counter-cyclical
payments to upland cotton. Both academics and USDA staff have contributed to this recent literature.
This is we believe the most recent set of studies avai lable. The Panel has reviewed this new literature
and weighed the findings of the experts carefully. 332 The conclusion that we draw from our review of
this literature is the same as that of the original pa nel i.e. that "due to their market-price contingency,
[counter-cyclical payments] may influence production decisions indirectly by reducing total and per
unit revenue risk associated with price variability in some situations". 333
10.91 Turning to the literature cited by the United States, the Panel notes that none of the recent
studies submitted by the United States specifically analyzes the experience with counter-cyclical
payments to growers of upland cotton. We find that:
(a) Instead of counter-cyclical payments, full y decoupled payments or programmes that
antedated the counter-cyclical programme (s uch as the production flexibility contract
payments) were studied. For instance, the Goodwin and Mishra study published in
2005
334 examines the extent to which production flexibility contract or Agricultural
Market Transition Act (AMTA) payments under the FAIR Act affected the acreage
decisions of a set of farms in the US Corn Belt who grew corn, wheat, and soybeans.
(b) Instead of empirical studies of the effects of counter-cyclical payments:
(i) A survey of other studies was undertaken. The Young, Effland, Westcott and
Johnson paper 335 presents an overview of recent US agricultural policies
under the 1996 and 2002 Farm Acts. The paper surveys recent analyses
regarding the effects of those policies;

328 Brazil's Rebuttal Submission, paras. 146-148.
329 The studies include the USDA paper "The 2002 Farm Act, Provisions and Implications for
Commodity Markets" (November 2002), reproduced in Exhibit BRA-42 and a 2002 USDA ERS report to the
United States Congress contained in "Farm Program Payments and the Economic Viability of Production
Agriculture", reproduced in Exhibit BRA-130.
330 Panel Report, US – Upland Cotton, para 7.1302.
 331 The FSRI Act of 2002, which authorized countercyclical payments for the first time, entered into
force only on 13 May 2002. The period examined by the panel in determining "present" serious prejudice was
MY 1999-2002.
332 Attachment 1 (Section XIII), contains a summary of the studies submitted by the parties.
333 Panel Report, US – Upland Cotton, para. 7.1302.
334 See supra, footnote 324.
335 See supra, footnote 324.

(ii) A simulation of the effects of these pa yments was undertaken. The Lin and
Dismukes study336 attempts to simulate the acreage effects of counter-cyclical
payments for three crops – corn, soybeans and wheat. The simulation is
based on an acreage model, which was estimated using state-level data during
1991-2001 (before counter-cyclical paymen ts came into effect), drawn from
farms in the Northcentral region of the United States; and
(iii) A conceptual analysis of the effect s of counter-cyclical payments was
attempted. The Westcott paper
337 considers the case of a hypothetical corn
farmer who plants all of his hundred acres of corn base with corn. It
examines how the farmer's revenues are affected by counter-cyclical
payments (among other subsidies) depe nding on realizations of the market
price.
Thus, the relevance of these studies to the present dis pute is somewhat limited. We also note some
variation in the type and quality of the studies: some are published or slated to be published in
academic journals while others are articles in newsletters or unpublished manuscripts.
10.92 Many of these observations also apply to the st udies provided by Brazil. While the parties
have drawn widely differing conclusions from these studies, the Panel has also found that the studies
tend to converge on some important points. First, there is no disagreement in the recent literature
cited by both parties that counter-cyclical pa yments can or may have production effects. Second, the
studies cited by the parties are also in some agreement about the mechanisms by which these
payments can encourage additional production. Incr eased wealth can reduce risk aversion, leading
farmers to increase production. The presence of direct payments will allow credit-constrained farmers
to finance the purchase of more farm inputs. Fa rmers may be willing to produce more output since
counter-cyclical payments, which vary with the outpu t price, can reduce revenue risk. Payments may
allow producers to cover fixed costs and thus may allow marginal farmers who would otherwise be
forced to shut down to remain in production. If farmers believe that future payments are based on
current production, because of the possibility of updating base acres, they may increase the current
production of those crops for which they expect to receive future payments.
338
10.93 Where the studies differ is in their assessment of the magnitude of these production effects.
The studies cited by the United States argue that the production effects of counter-cyclical payments
are likely to be small, while the papers cited by Braz il contend that the effects are substantial. Almost
all of the papers have focused on the acreage respons e by farmers to the payments. There appears to
have been a surge of interest in the research community on the question of the production effects of
decoupled payments. It would seem that this recent literature is fairly divided on the magnitude of the
production impact of counter-cyclical payments. Academics and USDA economists can be found on
both sides of the question.
10.94 With respect to the issue of whether counte r-cyclical payments are capitalized into higher
land values, the Panel considers that this in no way implies that the payments have no production
effects. While the OECD study cited by the United States concluded that most of the impact of
production flexibility contract and market loss assistance payments pass-through to higher land
values, enough seems to have been left in the ha nds of farm operators to create a modest production
effect. Given that counter-cyclical payments, in c ontrast to production flexibility contract payments,
are price-contingent, there is a presumption that the output effect of counter-cyclical payments will be
higher than that of the production flexibility payments.

336 See supra, footnote 324.
337 See supra, footnote 324.
338 The Panel understands that the issue of base acreage updating is not an issue before it.

10.95 Thus, in our assessment, the current state of th is academic and policy research is such that
even though the experts disagree among themselves about the exact magnitude of the production
effects of counter-cyclical payments, there is no disa greement about the direction of those effects nor
on the mechanisms by which the production effects ar e transmitted. Thus, counter-cyclical payments
can increase production and these production effects occur because increased wealth reduces risk
aversion, the availability of the payments relieves credit constraints and provides some insurance from
fluctuations in revenues and the payments allow farmers to cover fixed costs of production.
10.96 The Panel now turns to the arguments of Brazi l and the United States on the issue of whether
the relationship between upland cotton farmers receiving counter-cyclical payments and upland cotton
production supports a finding that the effect of counte r-cyclical payments, by virtue of their structure,
design and operation, is significant price suppression in the world market for upland cotton.
10.97 In support of its argument that the structure, design and operation of the counter-cyclical
payments insulate US cotton producers from ma rket forces and thereby stimulate production, Brazil
submits that there continues to be a "strong pos itive relationship" between upland cotton base acre
holders receiving annual counter-cyclical payments and upl and cotton production.
339 T h e
overwhelming majority of US upland cotton is grown on farms holding upland cotton base.
Moreover, the evidence also shows that the amount of upland cotton acreage of recipients who over-
planted their cotton base remains at a low level co mpared to 1999-2001. Brazil considers that it is
unimportant that, as argued by the United States, some 40 per cent of upland cotton base acreage is
not planted to upland cotton and that an average of 17 per cent of upland cotton acreage is on farms
with cotton planted acreage that exceeded cott on base acreage or on farms with no cotton base
acreage.
340 Brazil submits that its claim pertains to the effect of counter-cyclical subsidies in
maintaining production of US upland cotton by keeping current producers of upland cotton in
business and that it is not arguing that counter-cyclical subsidies induce production. Therefore, the
focus of the analysis should be on the relationship between current US upland cotton producers and
upland cotton counter-cyclical subsidies. From this perspective, the key fact is that the overwhelming
majority of current US upland cotton production is undertaken by historic upland cotton producers
that receive upland cotton-counter-cyclical payments. The percentage of US upland cotton acreage on
farms with upland cotton base acres is essentially the sa me as in the period considered by the original
panel. Similarly, the fact that cotton producers planted 40 per cent fewer acres to cotton than in the
base period is irrelevant to Brazil's claim that count er-cyclical subsidies received by current producers
of upland cotton are critical to ensure a profit for those farms that currently do produce upland cotton.
In any event, this percentage is essentially the same as in the period c onsidered by the original panel.
Brazil submits that the fact that, as argued by the United States, US upland cotton was grown
historically and continues to be grown today in certain regions of the United States supports Brazil's
argument that by providing for counter-cyclical payments based on historical base acres the US
Congress intended to support current production of upland cotton.
341

339 Brazil's First Written Submission, para. 131. Brazil refers to the statement of the original panel that
the evidence before the Panel showed "a strongly pos itive relationship between those recipients who hold
upland cotton base acres and those who continue to plant upland cotton..." Panel Report, US – Upland Cotton,
para. 7.637.
340 Brazil's Rebuttal Submission, paras. 153-165.
341 Brazil's Comments on US Responses to Panel Qu estions 29 and 54. Brazil submits that in
MY 2005, 83 per cent of cotton planted acreage was on cotton base acreage. This is the more significant portion
of US upland cotton acreage. Moreover, of the remaining 17 per cent, 12 per cent was on farms that
"overplanted" their cotton base acreage and 5 per cent was on farms that did not have any upland cotton base
acreage. In other words, 95 per cent of US upland cotton acreage is on farms that hold upland cotton base.
These facts, according to Brazil, demonstrate that ther e continues to be a strong positive relationship between
upland cotton (base acre) producers r eceiving annual payments and upland cotto n production. In regard to the
argument of the United States that 40 per cent of upland cotton base acres are not currently planted to upland

10.98 The United States argues that data comparing base to planted acreage does not demonstrate
that counter-cyclical payments have significant eff ects on production. The fact that there is some
overlap between current and historic productio n of upland cotton in the United States is not
remarkable. What is notable is that the data shows that counter-cyclical payments do not induce
recipients to continue planting cotton. Over the period MY 2002-2005 an average of 17 per cent of
US cotton planted acreage was on farms with cotton planted acreage that exceeded cotton base acres
or on farms with no cotton base acres at all. Moreover, traditional US cotton producers receiving
counter-cyclical payments planted approximately 40 per cent fewer cotton acres over MY 2002-2005
than in the period used to calculate cotton base acres. 342 Brazil's attempts to dismiss these facts as
unimportant are inexplicable and baseless. Give n that Brazil is arguing that counter-cyclical
payments induce US producers to produce cotton even though they are not required to do so to receive
the payments, it would seem to be very importa nt whether in fact, US producers holding upland
cotton base acres are continuing to produce upland cotton and if so, whether they are producing cotton
in such a way as to eviden ce the significant production effects that Br azil has alleged. Brazil fails to
explain what the fact that 95 per cent of US upland cotton planted acreage was on farms that held
upland cotton base acreage has to do with its claim that counter-cyclical payments have significant
production inducing effects. The United States not es in this respect th at the same "positive
relationship" exists between upla nd cotton production and recipients of direct payments, which were
not found to have significant price suppressing effects in the original proceeding. 343 The facts show
that US farmers use the planting flexibility afforded by the direct and counter-cyclical payments and
that counter-cyclical payments do not induce producers to grow cotton where they would not
otherwise have done so. Upland cotton is grown in a limited number of regions in the United States
where the weather and other conditions are ideal fo r upland cotton production. The fact that many
farmers who planted upland cotton in the historical period continue to produce some cotton today
simply means that it makes sense for these produ cers to grow cotton given their experience and
expertise, their equipment and the particular growi ng conditions. Therefore, what matters in order to
assess the effects of counter-cyclical payments on production is not the percentage of farms producing
upland cotton that received upland cotton counter-cyc lical payments but the level of acreage planted
to cotton vis-à-vis upland cotton base acres.
344
10.99 The Panel notes that the original panel f ound a "strongly positive relationship between
recipients who currently plant upland cotton and thos e whose payments are calculated with respect to
upland cotton base acres and whose payments are th erefore calculated at the upland cotton–specific
payments rate". 345 More specifically, the panel determined on the basis of data provided by the
United States that:
"a very large proportion of farms with upl and cotton base acres continue to plant
upland cotton in the year of payment. The data provided also shows that the
overwhelming majority of farms enrolle d in the programmes which plant upland
cotton also hold upland cotton base."
346 (footnote omitted)

cotton, Brazil notes that at no time in recent history has US upland cotton acreage been 18.4 million acres – the
amount of upland cotton base. The high level of upland cotton base relative to production reflects the fact that
with consecutive base updates, US farms elected to update only if that would increase their high payment upland
cotton base. In case an update would have decreased high payment upland cotton base in favour of lower
payment crop base, US farms declined to update. Thus, US upland cotton base acres are not a reliable measure
to compare to annual US upland cotton acreage.
342 US First Written Submission, paras. 220-225.
343 US Rebuttal Submission, paras. 263-266.
344 US Response to Panel Question 29; US Response to Panel Question 54, paras. 109-111.
345 Panel Report, US – Upland Cotton, para. 7.583.
346 Panel Report, US – Upland Cotton , para. 7.636. The panel provided precise figures on these
relationships in Tables A-1 and A-2.

10.100 The original panel provided figures on this rela tionship in Tables A-1 and A-2 of its report
and observed that:
"These figures show a strongly positive rela tionship between those recipients who
hold upland cotton base acres and those who c ontinue to plant upland cotton, despite
their entitlement to plant other crops, which is indicative of the relationship between
payments calculated with respect to upl and cotton base acreage and recipients who
plant upland cotton. These figures also show that upland cotton production within
these four programmes is almost exclusively taking place on farms which hold upland
cotton base acres."
347
10.101 The original panel referred to this positive rela tionship in support of certain aspects of its
findings on serious prejudice. 348 With respect to the structure, design and operation of counter-
cyclical payments the panel observed:
"We agree with the view of USDA econom ists that, due to their market-price
contingency, CCPs may influence production decisions indirectly by reducing total
and per unit revenue risk associated with pr ice variability in some situations. In the
price range from the loan rate up to the target price minus the DP payment rate,
changes in producer revenues due to changes in market prices are partly offset by the
countercyclical payments if the base acreag e crop is planted, thereby reducing total
revenue risk associated with price variability. We have confirmed a strong positive
relationship between upland cotton (base acre) producers receiving annual payments
and upland cotton production. Moreover, the payments are mandatory, under certain
market conditions."349 (footnotes omitted, emphasis added)
10.102 The evidence provided by Brazil in this pro ceeding shows that the facts regarding the
relationship between base acres and planted acreage ar e not significantly different from the facts that
formed the basis for the Panel's conclusion regarding the existence of a "strongly positive
relationship" between upland cotton base acre holders receiving annual counter-cyclical payments and
upland cotton production. 350 The United States has not questione d the factual accuracy of the data
submitted by Brazil on the existence of this relationship. In other words, the United States does not
contest that, as argued by Brazil, the overwhelming majority of current US upland cotton production
is undertaken by historic upland cotton producer s that receive upland cotton counter-cyclical
payments. Rather, the United States contests that this relationship supports Brazil's claim of
significant price suppression. However, the Panel c oncurs with Brazil that this relationship between
upland cotton base acre holders and upland cotton prod uction is significant in that it suggests that
cotton counter-cyclical payments play a role in maintaining the level of acreage and production at a
higher level than would otherwise be the case. In addition, as noted above, this relationship is
essentially the same as in the period considered by th e original panel. We therefore see no basis in
this proceeding to arrive at a conclusion different fro m that of the original panel with respect to this
issue.

347 Panel Report, US – Upland Cotton, para. 7.637.
348 Panel Report, US – Upland Cotton, paras. 7.1119, 7.1226, 7.1302, footnote 1417 and para. 7.1362.
349 Panel Report, US – Upland Cotton, para. 7.1302.
350 Table 3 of Brazil's Rebuttal Submission shows that in MY 2005, 95 per cent of US upland cotton
planted acreage was planted on farms th at received upland cotton counter-cycli cal payments. This table is an
updated version of a table in the original panel report th at showed that the percentage of upland cotton planted
acres on farms with upland cotton base acres was 92.9 in MY 1999, 92.0 in MY 2000, 91.3 in MY 2001 and
96.1 in MY 2002. Panel Report, US – Upland Cotton, para. 7.636, Table A-2. In addition, the Panel notes that
while the United States emphasizes that 40 per cent of upland cotton base acreage is not planted to upland
cotton, Brazil has pointed out that during the period considered by the original panel this percentage was similar.

10.103 The Panel therefore finds that a strongly positiv e relationship exists between recipients of
upland cotton counter-cyclical payments who hold upland cotton base acres and those who continue
to plant upland cotton and that this factor is an element that provides support for a finding that the
counter-cyclical payments, because of their struct ure, design and operation, have price-suppressing
effects.
10.104 In conclusion, based on an analysis of the ar guments and evidence presented to the Panel in
this proceeding regarding the structure, design and operation of the marketing loan and counter-
cyclical payments to US upland cotton producers, th e Panel considers that these subsidies affect the
level of US upland cotton acreage and production as a result of their mandatory and price-contingent
nature and their revenue-stabilizing effect. In this respect, the Panel concurs with the view of the
original panel that these subsidies protect or "ins ulate" revenues of US upland cotton producers when
prices are low. It is important to emphasize, how ever, that in determining whether the structure,
design and operation of these subsidies support a finding of significant price suppression under
current factual conditions, we need to consider this factor in conjunction with other facts. The Panel
considers, in this regard, that viewed together with other evidence on the record, including the fact
that the adjusted world price in most recent y ears has been below the ma rketing loan rate, the
magnitude of the marketing loan and counter-cycli cal payments, the importance of these subsidies as
a share of the revenues of US upland cotton producer s and their role in covering a significant part of
the costs of production of these producers 351, it is reasonable to conclude that without these subsidies
the level of US upland cotton acreage and production would likely be significantly lower.
10.105 As discussed above352, the original panel relied upon the design, structure and operation of the
marketing loan and counter-cyclical payments in c onjunction with the magnitude of the subsidies.
We therefore now turn to the argument of Braz il that the magnitude of the marketing loan and
counter-cyclical payments supports a finding that th e effect of marketing loan and counter-cyclical
payments is significant price suppression.
6. Alleged "large magnitude" of the market ing loan payments and counter-cyclical
payments
(a) Main arguments of the parties
10.106 Brazil argues that the magnitude of US marketing loan and counter-cyclical payments under
the FSRI Act of 2002 remains very large and that this is evidence supporting the existence of a causal
link between these two subsidies and significant price suppression in the world market for upland
cotton. The elimination of Step 2 payments has not significantly reduced the overall magnitude of the
price-contingent subsidies.353 Brazil considers that the significance of the magnitude of the marketing
loan and counter-cyclical payments must be assessed in light of the fact that, as found by the original
panel, these subsidies are provided in respect of a fungible, widely-traded product. Because of the
high subsidization rate from the marketing loan payments and counter-cyclical payments, US
producers and exporters have a significant advantag e over their competitors in securing sales in the
world market. Brazil submits that the large magn itude of the marketing loan payments is highly
significant in light of their trade-distorting nature . The panel and Appellate Body reports in the
original proceeding and the panel reports in Indonesia – Autos and Korea – Commercial Vessels

351 Infra, Sections X.B.6 and X.B.9.
352 Supra, paras. 10.66-10.67.
353 Brazil asserts that while the ad valorem rate of subsidization from Step 2 payments was 6.7 per cent
in MY 2005, the ad valorem subsidization rate from marketing loan payments and counter-cyclical payments in
MY 2005 was 42 per cent.

support the view that the amount of a subsidy is an important factor to consider in a price suppression
analysis.
354
10.107 The United States submits that Brazil does not demonstrate that the size of the outlays under
the marketing loan and counter-cyclical payment pr ogrammes supports the existence of a causal link
between these payments and the exis tence of significant price suppression. 355 Labelling the annual
amounts of marketing loan and counter-cyclical paym ents as "large" or "very large" says nothing
about the effects of these payments on world market prices. The size of outlays under the marketing
loan and counter-cyclical payment programmes cannot be meaningfully addressed apart from an
actual examination of their design, structure and operation. Brazil provides no evidence to
substantiate its contention that marketing loan a nd counter-cyclical payments provide an "enormous
advantage" to US producers and exporters "to secure sales" in the world market. While Brazil appears
to suggest that US exporters use marketing loan and counter-cyclical paymen ts to undercut foreign
cotton prices, Brazil provides no evidence to support this assertion. Moreover, Brazil has failed to
explain the relevance of this assertion to its claim, which is a claim of price suppression rather than
price undercutting.
356
(b) Evaluation by the Panel
10.108 The original panel considered that a precise qua ntification of the amount of a subsidy was not
required in a serious prejudice analysis under Part III of the SCM Agreement357, but that "the general
order of magnitude of a subsidy may be a relevant consideration in a serious prejudice analysis in a
particular case (where such informati on is probative and readily available)". 358 The panel noted that
as it had readily available information on the general order of magnitude of many of the subsidies at
issue, it would take this into account in determining whether or not significant price suppression
and/or serious prejudice existed. 359 The panel relied upon the magnitude of the subsidies at issue,
which it characterized as "very large", as a factor supporting its findings that price suppression
existed360, that this price suppression was significant 361 and that a causal link existed between certain
price-contingent subsidies and the significant price suppression which it had found to exist.362
10.109 The Appellate Body held that the original pane l had not erred in its assessment of the amount
of the subsidies for the purposes of its analysis under Article 6.3(c) of the SCM Agreement.363 The
Appellate Body also held that the magnitude of a subsidy and its relationship to prices is a relevant
factor to consider in an analysis of whether th e effect of a subsidy is significant price suppression 364,

354 Brazil's First Written Submission, paras. 107-119; Brazil's Rebuttal Submission, paras. 167-179.
355 The United States addresses this issue as part of its arguments on the design, structure and operation
of the subsidies at issue. US First Written Submissi on, paras. 236-241; US Rebuttal Submission, paras. 276-
280.
356 US First Written Submission, paras. 236-241; US Rebuttal Submission, paras. 276-280.
357 Panel Report, US – Upland Cotton, paras. 7.1167, 7.1177 and 7.1179.
358 Panel Report, US – Upland Cotton, footnote 1289.
359 Panel Report, US – Upland Cotton, para. 7.1194. The "readily available information" referred to by
the panel was information contained in section VII:D and in footnote 895 of the panel report.
360 Panel Report, US – Upland Cotton, paras. 7.1297 and 7.1308.
361 Panel Report, US – Upland Cotton, para. 7.1332.
362 Panel Report, US – Upland Cotton, para. 7.1349.
363 Appellate Body Report, US – Upland Cotton, para. 473.
364 The Appellate Body stated:

 "Beginning with the text of Article 6.3(c), we note that this provision does not state
explicitly that a panel needs to quantify the amount of the challenged subsidy.
However, in assessing whether 'the effect of the subsidy is ... significant price
suppression', and ultimately serious prej udice, a panel will need to consider the

but that Article 6.3(c) of the SCM Agreement does not oblige a panel "to quantify precisely the
amount of a subsidy benefiting the product at issue in every case. A precise, definitive quantification
of the subsidy is not required". 365 The Appellate Body also considered that although the panel could
have been more explicit as to what it meant by th e "very large amounts" of subsidies, the information
before the panel clearly supported the panel's general statements on the magnitude of the subsides.366
10.110 We have summarized the data on record with respect to the magnitude of marketing loan
payments and counter-cyclical payments in Tables 1 and 2. 367 The evidence before the Panel
indicates that in MY 2005 the total amount of marketing loan payments to upland cotton producers
and of counter-cyclical payments allocated to upland cotton was higher than in MY 2002.
368 We also
note that the amount of marketing loan payments an d counter-cyclical payments in MY 2005 is of the
same order of magnitude as the total amount in MY 2002 of the price-contingent subsidies subject to
the original's panel finding of "present" serious prejudice. 369 At the same time, we also note that the
amount of projected marketing loan payments in MY 2006 is significantly less than the amount of
marketing loan payments in MY 2005.
370
10.111 The Panel considers, in light of the approach taken by the panel and Appellate Body in the
original proceeding, that in determining whether the magnitude of the subs idies at issue in this
proceeding supports a finding that the effect of th ese subsidies is significant price suppression, it is
necessary to examine this factor in relation to other factors. Thus, the relevance of the magnitude of
the subsidies in this connection must also be assessed in light of our analysis above of the structure,
design and operation of the subsidies. We reca ll, in this respect, our conclusion regarding the
important revenue-stabilizing effect of these mandator y, price-contingent subsidies. In the latter
regard, the evidence before us indicates that mark eting loan and counter-cyclical payments play a

effects of the subsidy on prices. The magnitude of the subsidy is an important factor
in this analysis. A large subsidy that is closely linked to prices of the relevant
product is likely to have a greater impact on prices than a small subsidy that is less
closely linked to prices. All other things being equal, the smaller the subsidy for a
given product, the smaller the degree to wh ich it will affect the costs or revenue of
the recipient, and the smaller its likely impa ct on the prices charged by the recipient
for the product. However, the size of a subsidy is only one of the factors that may be
relevant to the determination of the effects of a challenged subsidy. A panel needs to
assess the effect of the subsidy taking into account all relevant factors."

Appellate Body Report, US – Upland Cotton, para. 461 (footnote omitted).
365 Appellate Body Report, US – Upland Cotton, para. 467.
366 Appellate Body Report, US – Upland Cotton, para. 468.
367 Supra, paras. 10.24 and 10.32.
368 As can be seen from Tables 1 and 2, the total amount of marketing loan payments in MY 2005 was
US$1.269 billion and the amount of counter-cyclical pa yments allocated to upland cotton was US$838 million .
The total amount of marketing loan and counter-cyclical payments to US upland cotton producers was
US$2.107 billion in MY 2005. In MY 2002, the amount of marketing loan payments was US$898 million while
the amount of counter-cyclical payments allocated to upland cotton was US$851.5 million.
369 According to Table 6 in Brazil's First Written Submission, the amount of Step 2 payments in
MY 2002 was US$429 million. No market loss assistance payments were made in MY 2002. Thus, the total
amount of marketing loan and counter-cyclical payments to upland cotton producers and of Step 2 payments to
upland cotton users and exporters was US$2.179 billion in MY 2002.
370 As noted above, Brazil has pointed to three different projections of the amount of marketing loan
payments MY 2006: US$650 million, US$475 million and US$757 million. Brazil argues that the more recent
and reliable of these projections is the February 2007 USDA projection (US$757 million). However, even if we
take the lowest of the three figures mentioned by Brazil we note that the total amount of marketing loan and
counter-cyclical payments in MY 2006 is projected to be well above US$1 billion.

significant role in stabilizing the revenues of US upland cotton producers.
371 The share of marketing
loan payments and counter-cyclical payments in to tal revenues of US upland cotton producers was 35
per cent in MY 2004 and 27 per cent in MY 2005. 372 This data on the share of marketing loan and
counter-cyclical payments in US upland cotton producer s' revenues is especially important in light of
our finding regarding the gap between costs of pr oduction and market revenues of US upland cotton
producers.373 In our view, when considered in conjuncti on with other factors, the order of magnitude
of the marketing loan payments and counter-cyclical payments supports a finding of significant price
suppression, even when account is taken of the de cline in the amount of marketing loan payments
projected for MY 2006.374
7. Alleged "link between high levels of US subsidies and high levels of US planted acreage,
production and exports"
(a) Main arguments of the parties
10.112 Brazil argues that there remains a strong link betw een high levels of US subsidies and high
levels of US planted acreage, production and expor ts during MY 2002-2005, which is due to the fact
that marketing loan and counter-cyclical payments insulate US cotton producers from market price
signals.375 Brazil asserts in this connection that, regardl ess of the type of price examined, US planted
acreage, production and exports do not respond signif icantly to market prices and have increased
significantly in recent years. 376 377 Brazil provides graphs demonstrating that while US acreage does
not show any relationship to futures prices, forei gn acreage reacts to changes in expected prices. 378
Brazil also provides graphs demonstrating that US upland cotton production and exports do not
respond significantly to changes in either movements or absolute levels of the US farm price.379
10.113 Brazil provides a table to show the amounts of US planted and harvested acreage, yields, US
production and US exports of upland cotton over th e MY 1999-2005 period that were achieved under
the revenue protection afforded US upland cotton pro ducers by the effects of the marketing loan and
counter-cyclical payment programmes.

371 Brazil's First Written Submission, para. 133, Figure 8; Brazil's Comments on US Response to Panel
Question 51, para. 72, Figure 1.
372 Brazil's First Written Submission, para. 135.
373 Infra, Section X.B.9
374 Supra, footnote 370.
375 Brazil's First Written Submission, para. 137.
376 Brazil's First Written Submission, paras. 139-149; Brazil's Rebuttal Submission, paras. 209-231.
377 Brazil asserts that US planted acreage, after falli ng slightly in MY 2002 and 2003, has increased
every year since. MY 2006 acreage, planted in the spring of 2006, is es timated to be the highest in five years,
and, at 14.96 million acres, only a half-million acres below the ten-year high reached in MY 2001. Overall, US
planted acreage during MY 2002-2005 has remained at levels that are similar to 10- and 15-year averages –
periods during which US upland cotton producers also benefited from large US subsidies. Brazil's First Written
Submission, para. 140 and Exhibit Bra-447 (Upland Cotton Supply and Use).
378 Brazil's First Written Submission, Figure 9; Brazil's Rebuttal Submission, Figures 8 and 9.
379 Brazil's First Written Submission, Figures 10 and 11.

Table 5: US Upland Cotton Production, Exports and Acreage, MY 1999-2006

MY 1999 2000 2001 2002 2003 2004 2005 2006
Production (million bales) 16.294 16.799 19.603 16.531 17.8 23 22.505 23.260
Exports (million bales) 6.303 6.303 10.603 11.266 13.220 13.618 17.437
Planted acres (million
acres) 14.584 15.347 15.499 13.714 13.301 13.409 13.975 14.995
Harvested acres (million
acres) 13.138 12.884 13.560 12.174 11.826 12.809 13.534
Yield (bales per acre) 1.240 1.304 1.446 1.358 1.507 1.757 1.719

Source: Brazil's First Written Submission, Table 12.380

10.114 Brazil asserts that the record amount of US upland cotton production in MY 2001 was
surpassed in MY 2004 by 15 per cent and that MY 2 005 saw yet another record level of production.
Production in MY 2005 was 43 per cent higher than in MY 1999. 381 Since MY 1999, US exports
have increased even more rapidly than production. In MY 2005, US upland cotton exports were 177
per cent higher than in MY 1999. MY 2001, 2002, 2003, 2004 and 2005 each established new record
volumes of US exports. Exports in MY 2005 were, in fact, larger than total US upland cotton
production in MY 1999, 2000 and 2002.382
10.115 Brazil submits that in arguing that US cotton producers are not insulated from market signals
the United States makes arguments that were already rejected in the original proceeding. According
to Brazil, the United States effectively asks this Panel to overturn the finding of the panel and
Appellate Body that the structure, design and ope ration of the marketing loan and counter-cyclical
subsidies insulate US upland cotton producers from ma rket forces by stabilizing their revenue at very
high levels. Adverse effects within the meaning of Articles 5 and 6 of the SCM Agreement result not
from increases as such but from production and exports in excess of what would have been the levels
of production and exports in the absence of the subs idies. But for the marketing loan and counter-
cyclical payments, US producers would have been mo re responsive to market price signals. The very
fact that the US shares of world production and export s have remained stable is evidence of the effect
of the marketing loan and counter-cyclical subsidies.383
10.116 Brazil submits that the argument of the United States that US cotton planting decisions should
be explained by the ratio of upland cotton futur es prices to soybeans futu res prices was already
rejected by the panel and Appellate Body in th e original proceeding and is not supported by the
evidence submitted by the United States.384
10.117 The United States argues that US upland cotton producer s and exporters have reacted to
market signals and are not insulated by the marketing loan and counter-cyclical payment programmes.
First, stable US shares of world production and exports confirm that the marketing loan and counter-

 380 Brazil compiled this table from Exhibit Bra-447 (Upland Cotton Supply and Use) and, for planted
acreage in MY 2006, Exhi bit Bra-449 (Cotton and Wool Outlook, USDA, Oct ober 2006, p. 9, accessed
October 2006 at http://usda.mannlib.cornell.edu/usda/current/CWS/CWS-10-13-2006.pdf). Brazil notes that
evidence on harvested acres, yield per harvested acre, production, and exports is not yet available for MY 2006.
 381 Brazil's First Written Submission, para 147.
 382 Brazil's First Written Submission, para 148.
383 Brazil's Rebuttal Submission, paras. 195-208. Brazil also submits that the US share of world
production has in fact increased in MY 2005.
384 Brazil's Rebuttal Submission, paras. 214-215.

cyclical payment programmes are not insu lating US producers from market signals.
385 The fact that
these shares have been stable shows that US upland cotton producers are affected by market signals in
the same ways as foreign producers. 386 According to the United States, Brazil has no credible answer
to a fundamental question in this regard – if US producers continue to plant and produce, and US
exporters continue to export, in circumstances where "any rational non-subsidized producer" would
have "reduced plantings, productio n, and exports," why has US share of world production and world
exports not increased over the life of the FSRI Act of 2002? 387 The United States submits that it has
not argued that adverse effects within the meaning of Articles 5 and 6 of the SCM Agreement can only
be found if there are increases in production, acreag e and exports, but that increased US share of
production is a necessary implication of Brazil's theory of market insulation.
10.118 Second, the United States argues that Brazil fails to demonstrate the alleged strong link
between marketing loan and counter-cyclical pa yments and US planted acreage, production and
exports. Brazil's analysis of the sensitivity of US planted acreage, production and exports to prices is
flawed in that it does not properly reflect the fact ors taken into consideration by US farmers when
making their production decisions. Since farmers do not only consider the cotton futures price but
also take into account other factors, such as weat her conditions, prices of competing crops, changes in
technology, labour and input prices and marketing e fforts, it is not surprising that planted acreage
does not correlate with the cotton futures price. 388 Regarding Brazil's comparison of US cotton
production to the farm price, the United States subm its that Brazil firstly assumes, incorrectly, that
planting decisions could be explained through an examination of cotton prices alone. Moreover, in
comparing US upland cotton production in a marketing year to the average US farm price for the
same marketing year, Brazil assumes that US farmers know at the time that they plant what the actual
farm price will be in the upcoming marketing y ear, which does not start until August. Finally,
producers do not decide on production, but on plantings . Ultimate production is affected by weather
and other factors affecting yields.389
10.119 The United States argues that it is apparent from Brazil's chart 390 that foreign acreage (even
harvested acreage) is many orders of magnitude greater than US planted acreage. Plotted against each
other in a chart, US planted acreage will inevitabl y appear to be flat relative to foreign acreage. 391
The United States also submits that a comparison of US acreage and foreign acreage to futures prices
of upland cotton shows that neither US nor foreign harvested acreage moves closely in line with
futures prices of cotton alone.
392

385 US First Written Submission, Section VI.C.2(a). The United States provides charts to show that the
US shares of world production and exports of upland cotton have remained stable over the life the FSRI Act of
2002 in paras. 243 and 247 of its First Written Submission. In paras. 283-284 of its Rebuttal Submission, the
United States provides charts to show that the US share of world production has been stable from well before
either the marketing loan or the counter-cyclical payment programme came into effect.
386 With respect to the increase in the US share of world exports in the period MY 1999-2002, the
United States argues that th is increase did not reflect an increase in US share of world production. In other
words, US producers were not increasing their production relative to foreign producers in order to gain market
share, as Brazil has suggested. Rather, a greater propor tion of US production was being exported. The reason
for this was the decline in US mill use resulting from the declining competitiveness of the US textile industry
and increasing US imports of textiles and clothing in the same period. US First Written Submission, para 249.

387 US Rebuttal Submission, para 283.
388 US First Written Submission, paras. 255-261.
389 US First Written Submission, para 262-263. The United States also argues that, if one compares
both US and foreign production to movements in the A-In dex, the same alleged "absence" of a "link" between
absolute production levels and prices is apparent in both cases. US First Written Submission, para. 265.
390 Brazil's Rebuttal Submission, para. 221, Figure 8.
 391 US Rebuttal Submission, para 303.
 392 US Rebuttal Submission, para 308.

10.120 The United States argues that "absolute" incr eases in US production are "the effect" of
improvements in yields, not the marketing loan and counter-cyclical payment programmes.393
10.121 Brazil submits that there is no legitimate basis for the United States to claim that increased
yields alone accounted for increased US production and increased US exports in MY 2004 and 2005.
Brazil agrees that for the portion of US upland co tton planted acreage that would have been planted
even without the effects of the US subsidies, th e increased yields alone accounted for an increase in
resulting production and exports. However, for the portion of US upland cotton planted acreage that
would not have been planted but for the marketi ng loan and counter-cyclical payment revenue, the
increased yields secured on such acreage – and hen ce also the resulting production and exports – are
linked to the effects of the US subsidies.394
(b) Evaluation by the Panel
10.122 The Panel notes that in support of its argument that there exists a strong link between high
levels of US subsidy payments and high levels of US planted acr eage, production and exports, Brazil
argues that US cotton producers are insulated from market price signals.395 In Brazil's view, the price-
contingent marketing loan and counter-cyclical payments act to ensure that US upland cotton
producers' total revenue per unit remains largely unaffect ed by price movements. Brazil refers in this
respect to the findings of the panel and the Appellate Body in the original proceeding.
10.123 Brazil has also sought to provide factual suppor t for its argument that US producers do not
react to market price signals by comparing US pl anted acreage and futures prices of cotton. Brazil
argues that, as during the time period assessed by the original panel, US planted acreage continues to
show no obvious relationship to market price signals.
 396 By contrast, the United States asserts that the
futures price of cotton is not the sole basis for a farmer's planting decision as many growers, in the
United States and elsewhere have several alterna tive crops to consider. In this respect, the
United States submits that a comparison between, on the one hand, US cotton planted acreage and, on
the other hand, the ratio of cotton futures prices to soybeans futures prices rebuts Brazil's argument
that US cotton producers are insulated from market price signals. 397 Brazil contests that this
comparison supports the argument of the United States.398

 393 US First Written Submission, Section VI.C.3, page 87. See also US Rebuttal Submission,
Section IV.C.2, page 108.

394 Brazil's Rebuttal Submission, paras. 229-231.
395 Brazil's First Written Submission, para. 137.
396 Figure 9 in Brazil's First Written Submission co mpares the average price of the December cotton
futures contract in February (a proxy for farmers' pre-planting expectations of market prices during the
beginning of the marketing year) with US upland cotton planted acreage. Brazil argues that this figure shows
that US planted acreage does not move with futures prices in at least three of the last four planting seasons.
Brazil argues that the graph demonstrates that, in 2003, US planted acreage declined even though futures prices
indicated much higher prices for the December 2003 harvest. Similarly, in February 2004, planted acreage only
increased slightly (108,000 acres) despite the highest Fe bruary futures prices for th e December contract in the
previous five years. And with futures prices falling significantly in February 2005, US upland cotton farmers
planted 566,000 more acres than the previous year. Brazil's First Written Submission, para. 143.
397 Thus, during January, February and March, US growers would be looking at the levels of the
upcoming December futures contract on cotton, September futures contract for corn, and November futures
contract for soybeans. To demonstrate this, the United States presents another figure providing a comparison of
US planted acreage to the ratio of cotton futures and soyb ean futures prices. The United States claims that the
figure shows that, when the expected cotton futures price is high relative to the expected soybean futures price,
planted acreage tends to increase. Wh en the opposite is true – and the ratio is small – cotton planted acreage
tends to decrease. US First Written Submission, paras. 257-259.
398 Brazil's Rebuttal Submission, para. 215. Brazil a sserts that a close examination of the figure
presented by the United States demonstrates that US acr eage and the cotton to soybean futures price ratio move

10.124 The Panel finds that the data presented by Brazil supports the argument of Brazil that the
cotton futures prices does not seem to explain US co tton planted acreage. The Panel also agrees with
Brazil that the evidence provided by the United Stat es regarding the relationship between, on the one
hand, the ratio of cotton futures prices to soybeans future prices and, on the other hand, US planted
acreage does not provide an adequate explanation for the observed changes, particularly for the period
MY 2003 to 2006. The Panel notes, in this regard, th at the ratio of cotton futures prices to soybean
futures prices and US cotton planted acreage only move d in the same direction in MY 2006. In MY
2003, the ratio of cotton futures prices to soybean s futures prices increased sharply while cotton
planted acreage declined. The ratio decreased in both MY 2004 and MY 2005, while planted acreage
increased in both years. Thus, even if we agree w ith the argument of the United States that futures
prices of alternative crops to cotton need to be taken into account, the data does not support an
important role for this ratio of cotton futures prices to soybeans futures prices.
10.125 The major argument raised by the United Stat es to rebut Brazil's argument that US upland
cotton producers do not react to market price signals concerns the relative stability of the US share of
world production and exports over the entire period of the FSRI Act of 2002. In the view of the
United States, the stable US share of world production reflects the fact that US production has
increased and decreased in much the same way as production elsewhere in the world, undermining
Brazil's claims that the marketing loan and count er-cyclical payment programmes have "insulated"
US producers from world market price signals.
399 As the United States puts it, whatever signal the
"world market" is sending, US producers are receiving it clearly and responding to it in much the
same way as their foreign counterparts.
 400 Similarly, increases in the volume of US exports during
MY 2002-2005 were not disproportionately greater th an the increase in the volume of exports from
foreign suppliers. In the view of the United States, this indicates that, contrary to Brazil's allegations,
US exports were affected by the changes in th e marketplace in much the same way as exports of
foreign producers.401
10.126 Brazil has responded to this by arguing that the relevant economic decision of cotton
producers to consider is not production nor exports but planted acreage. However, neither Brazil nor
the United States appear to have access to recent da ta on foreign planted acreage. Brazil presents a
figure which compares US planted acreage and fore ign harvested acreage to movements in futures
prices of cotton.402 Referring to this figure, Brazil contends that changes in foreign harvested acreage
and futures prices moved in the same direction in sev en out of eight years. By contrast, changes in
US planted acreage and futures prices move in the same direction in only three out of eight years. In
the remaining five years, they move in different directions. 403 The United States objects to the
comparison because Brazil compares foreign harvested acreage (instead of foreign planted acreage)
with US planted acreage.
10.127 The fact that the US share of world cotton production and exports has remained relatively
constant in MY 2002-2005 suggests to us that US producers have increased production and exports in
proportionately the same way as foreign cotton producers. In our view, Brazil's claim of insulation of
US producers from market price signals applies in particular when expected prices are below their
intervention levels (the market loan rate or the target price under the count er-cyclical programme).

in parallel in only 3 of the 8 years identified. In the ot her five years, the development is either in the opposite
direction (3 years) or in the same direction, but to very different degrees (2 years). In Brazil's view, this is
hardly evidence of US upland cotton acreage being "generally" responsive to the cotton to soybean futures price
ratio.
400 US Rebuttal Submission, para. 285.
402 Brazil's Rebuttal Submission, Figure 9.

However, the degree of insulation is less when e xpected cotton prices are above their intervention
levels. In such a situation, US cotton producers should respond to higher expected cotton prices much
in the same way as foreign cotton producers. Thus, the Panel is of the view that the stable US share of
world production and exports does not mean an ab sence of insulation of US producers from market
price signals. What it means is that the degree of pr ice insulation that the original panel found is now
weaker possibly because prices are not as depressed as during the period examined by the original
panel.
8. Alleged "discernible temporal coincidence" of suppressed world market prices and
large marketing loans and counter-cyclical payments
(a) Main arguments of the parties
10.128 Brazil argues that the existence of a "discernible temporal coincidence" of suppressed world
market prices and large marketing loan payments and counter-cyclical payments is one of many
factors that cumulatively support a finding of a causal relationship between marketing loan and
counter-cyclical payments and significant price su ppression in the world market for upland cotton.
Brazil refers to the finding of the original panel of a "discernible temporal coincidence of suppressed
world market prices and the price-contingent United States subsidies" and submits that developments
in MY 2001-2005 regarding the same factors relie d upon by the original panel show that there
remains such a discernible temporal coincidence between suppressed world market prices and large
marketing loan and counter-cyclical payments. Brazil refers, in this respect, to the increase in US
production of upland cotton; the high US share in world production for upland cotton; the historically
low level of upland cotton prices; the increase in US exports and the record US share in world exports
of upland cotton. Brazil also asserts that dur ing MY 2002-2005, lower world and US prices for
upland cotton are matched with higher levels of ma rketing loan and counter-cyclical payments and
that the original panel's finding regarding the influence of the New York futures price and the A-Index
price continues to be valid.
404
10.129 The United States submits that Brazil fails to show any discernable temporal coincidence
between the marketing loan and counter-cyclical payment programmes and any alleged significant
price suppression. None of the factors considered by the original panel in reaching its conclusion
regarding the discernible temporal coinciden ce between US subsidies and significant price
suppression supports such a finding with respect to the marketing loan and counter-cyclical
programmes now. First, US planted acreage has been stable fo r the entire period that the FSRI Act
has been in effect and is now substantially lowe r than during the period examined by the original
panel. The fact that production in MY 2005 was larger than in MY 1999 and MY 2001, even though
producers actually planted fewer acres in MY 2005, re flects the dramatic improvements in yields.
Second, over the period of the FSRI Act the US share of world production has remained stable. Third,
prices received by US upland cotton producers have not decreased since the FSRI Act came into
effect. Fourth, the fact that the A-Index in MY 2002-MY 2005 was an average of 16 per cent lower
than the 1980-2001 average says nothing about whether the marketing loan and counter-cyclical
payments programmes are causing present significant price suppression as a decline in prices does not
establish price suppression. Moreover, the fact the A-Index has trended downward for more than 25
years and has gone up from the levels prevailing befo re the entry into effect of the FSRI Act suggests
that if there is price suppression, it is not the effect of the marketing loan and counter-cyclical
payment programmes. Fifth, the share of the United States in world exports has not increased over
the period of the FSRI Act and has even declined in MY 2002. Finally, the low level of imports of
upland cotton has little to do with the marketing loan and counter-cyclical payments as US imports of

404 Brazil's First Written Submission, paras. 153-154; Brazil's Rebuttal Submission, para. 233.

upland cotton have been at low levels for many decades and as US demand for cotton generally has
declined as the textile industry shrunk.
405
(b) Evaluation by the Panel
10.130 In support of its finding of a causal link between certain of the challenged US subsidies and
the significant price suppression in the world market for upland cotton, the original panel relied upon
the existence of "a discernible temporal coincidence" of suppressed world market prices and the price-
contingent US subsidies.
10.131 The original panel explained its finding as to the existence of this discernible temporal
coincidence as follows:
"Third, there is a discernable temporal coinci dence of suppressed world market prices and the
price-contingent United States subsidies. Looking at the period, we see the following:
• United States production of upland cotton increased from MY 1998 to MY 2001 and,
while production dropped in MY 2002, there was still an overall increase in MY 2002
compared to MY 1998;

• the United States' share of world upland co tton production increased to and remained
at a level of approximately 20 per cent;

• United States prices received by United States upland cotton producers decreased by
34 per cent between MY 1998 and MY 2001;

• the A-Index in MY 1999 – MY 2002 was, on average, 29.5 per cent below its 1980-
1998 average;

• United States exports increased by approximately 160 per cent from MY 1998 to
MY 2001 and by an even greater percentage from MY 1998-MY 2002;

• United States share of world exports of upland cotton increased; and

• United States imports of upland cotton remained at comparatively low levels.

These data reveal that, over the same period that the subsidies in question were being granted,
the United States market generated large suppli es of upland cotton. Over this same time
period, market revenue of United States upla nd cotton producers decreased. So did world
market prices. There was also a marked incr ease in United States exports, both absolute and
in terms of relative share of world exports. Ev en taking into account that in 1998, production
may have been driven downward by drought and high levels of crop abandonment and that, in
2001, production may have been driven upward by high yields, we see a strong temporal
coincidence between the United States subsidies and the drop in United States prices, the drop
in – and suppression of – world market prices, the increase in United States exports." 406
(footnotes omitted)
10.132 The Appellate Body addressed this finding of the original panel as follows:

405 US First Written Submission, paras. 288-290; US Rebuttal Submission, para. 316.
406 Panel Report, US – Upland Cotton, paras. 7.1351-7.1352.

"The third reason the Panel provided for findi ng a 'causal link' was that 'there is a
discern[i]ble temporal coincidence of suppr essed world market prices' and the price-
contingent subsidies. The United States describes this as 'an exercise in spurious
correlation'. However, in our view, one would normally expect a discernible
correlation between significantly suppressed prices and the challenged subsidies if the
effect of these subsidies is significant pr ice suppression. Accordingly, this is an
important factor in any analysis of whether the effect of a subsidy is significant price
suppression within the meaning of Article 6.3(c). However, we recognize that mere
correlation between payment of subsidies and significantly suppressed prices would
be insufficient, without more, to prove that the effect of the subsidies is significant
price suppression."
407
10.133 In light of these comments of the Appellate Body , the Panel considers that the existence of a
correlation between a subsidy and a particular level of prices is not in and of itself sufficient to
establish that the subsidy causes significant price suppression. 408 Moreover, the data before the Panel
indicates that with respect to several key factors relied upon by the original panel in finding "a
discernible temporal coincidence" of suppressed wo rld market prices and the price-contingent US
subsidies, the current situation is significantly diffe rent from the situation considered by the original
panel.
10.134 Regarding the evolution of prices of upland co tton, the original panel found that there had
been a 34 per cent decrease in prices received by US upland cotton producers between MY 1998 and
MY 2001. With respect to exports, the original pane l found that there had been "a marked increase in
United States exports, both absolute and in terms of relative share of world exports". From MY 1998
to MY 2002, US exports had increased by more than 160 per cent and the share of the United States in
world exports had increased from 23.5 per cent in MY 1999 to 39.9 per cent in MY 2002.
10.135 For the period MY 2002 to MY 2005, we are unable to detect a similar "strong discernable
coincidence" between the US subsidies, the incr ease in US cotton exports and the drop in world
market prices. Instead, what could be discerned is the continuing and sharp rise in volumes of US
production and exports. However, these increases in volumes did not translate into a higher share of
US cotton in world production or world exports. Nor have the absolute increases in US cotton
production and exports been associated with a "broad decline" in cotton prices.
10.136 We shall first examine the pattern of US subs idy payments using data from Tables 1 and 2A
above409, relating them to the behaviour of the world market price of cotton. Except for MY 2003,
when cotton prices saw a sharp increase, the sum of marketing loan and counter-cyclical payments
averaged more than US$2 billion dollars annually. Over this four-year period, marketing loan
payments made up more than 60 per cent of total payments to cotton producers. The amount of
subsidy payments varied inversely with cotton pri ces. When cotton prices were low, as in MY 2002,
2004 and 2005, significant marketing loan and count er-cyclical payments were triggered. When
cotton prices were high, as in MY 2003, both mark eting loan and counter-cyclical payments were
substantially reduced. This patte rn of subsidy payments results in a stabilization of US cotton
producers' revenues. Figure 1 below illustrates this inverse relationship of subsidy payments and the
A-index for MY 2002-2005.

407 Appellate Body Report, US – Upland Cotton, para. 451.
408 We also recall our observations ( supra, paras. 10.45-10.49) on the concept of price suppression and
on the need for a counterfactual analysis in determining whether price suppression is the effect of a subsidy.
409 Supra, paras. 10.24 and 10.32.

Figure 1: Subsidy (Marketing Loan and Counter-Cyclical) Payments and
World Cotton Prices, MY 2002-2005
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2002 2003 2004 2005
Marketing Year
Millions of dollars
0
10
20
30
40
50
60
70
80
Cents per pound
Marketing Loan CCP A-Index

Sources: The A-Index is from Exhibit US-25. To tal marketing loan payments are taken from rows 2
and 3 of Table 1 above. Counter-cyclical payments are taken from row 3 of Table 2A above.
10.137 During the period MY 2002-2005, when these la rge marketing loan and counter-cyclical
payments continued to be made by the United St ates, the absolute level of US cotton production
increased by 38.8 per cent with a much bigger increase in the absolute level of US cotton exports of
51.6 per cent. Cotton production and exports in MY 2005 were at the highest levels ever achieved by
the United States. However, these increases in US production and exports did not translate into an
increase in the US share of the world cotton market . As can be observed in Table 3 above, the US
shares of world exports and world production have stayed at about 40 per cent and 20 per cent,
respectively, during the period analyzed. This means that cotton producers and exporters in the rest of
the world were increasing their levels of production and exports at the same time. The increases were
to such an extent that, collectively, the foreign producers and exporters maintained their share of the
world market.
10.138 Also, unlike the situation found by the original pa nel, these increases in th e absolute levels of
US production and exports did not take place during a period when the market price of US upland
cotton producers was declining. The original pa nel noted that prices received by US upland cotton
producers decreased by 34 per cent between MY 1 998 and MY 2001. The implication was that US
subsidy payments could explain why US cotton production was increasing despite declining market
revenues. Our examination of the prices received by US cotton producers in the more recent period
does not show an equally dramatic decline. Inst ead, the average US farm price during the period MY
2002-2005 was 14.3 per cent higher than the average US farm price during the period MY 1999-
2002.
410 In the case of upland cotton spot market pr ices, the average for MY 2002-2005 was 9.6 per
cent higher than the average for MY 1999-2002. No doubt this higher average price of cotton in MY
2002-2005 has been driven by the spike in MY 2003.

410 This is based on the unweighted marketing year averages of US farm and spot market prices
compiled by Brazil in Exhibit Bra-452.

10.139 Nevertheless, these two factors – first, that other major cotton producers were increasing their
production and exports at the same time as US pr oducers and second, that prices received by US
cotton producers were not declining dramatically during this period – make it more difficult to discern
a pronounced temporal coincidence between the US subsidies, the increase in US cotton exports and
the drop in world market prices.
10.140 With respect to the trend in world cotton prices, the original panel found "a broad decline in
the overall level of these price trends from 1996 through the beginning of calendar year 2002, with
intermittent peaks and valleys". 411 The original panel qualified this observation of price trends by
noting that this is not, in and of itself, conclusive for a determination of price suppression. However,
in the panel's causality analysis, the decline in world cotton prices was one of the elements it relied on
in finding a temporal coincidence of suppressed world market prices and the price-contingent US
subsidies.
10.141 An examination of recent world price trends do es not show a similar broad decline. Instead,
over the period MY 2002-2005, there have been inte rmittent peaks and troughs. Prices rose strongly
from MY 2002 onwards with the A-index reaching a peak of 76.7 cents per lb in November 2003. 412
Prices started a sharp decline thereafter with the A-index falling to a low of 48.6 cents per lb. in
December 2004. Prices have since climbed with th e A-index reaching about 60 cents per lb. at the
start of MY 2006. The absence of a broad decline in prices persists even if one takes a slightly longer
period of analysis – from MY 1999-2005 – as Brazil does in its Submission (see Figure 2).
Figure 2: Monthly US and World Upland Cotton Prices
0
10
20
30
40
50
60
70
80
90
Au
g-99
Dec-99Apr-00
Aug-00Dec-00Ap
r-01
Aug-01Dec-01
Apr-02Aug-0
2
Dec-02Apr-03Au
g-03
Dec-03Apr-04
Aug-04Dec-04Ap
r-05
Aug-05Dec-05
Apr-06Aug-0
6
cents per pound
Adjusted World Price A (NE) Index NY Nearby Futures
Brazil ESALQ U.S. Upland Spot Market Farm Price

Source: Brazil's First Written Submission, Figure 4.

411 Panel Report, US – Upland Cotton, para. 7.1288.
412 The price data is from Exhibit Bra-452.

10.142 In its analysis of price trends, the original panel noted that the world price (the A-Index)
during MY 1999-2002 was, on average, 29.5 per cent below its 1980-1998 average. In the current
dispute, Brazil extends the price comparison to the MY 2002-2005 period and notes that the A-index
remains well below historic price levels. The average A-Index price during MY 1980-1998 was 73.36
cents per pound, while the average during MY 2002-2005 was 58.92 cents per pound.
413 However,
this historical comparison is subject to an importa nt objection. The United States has argued that the
A-Index has trended downwards for more than a qua rter of a century, well before the FSRI Act came
into effect. 414 The long-term decline in non-oil commodity prices is in fact one of the recurring
themes of development and international economics. Thus, it is not clear to us that the comparison
between the average price during the 1980-1998 pe riod and the average price afterwards is as
important as Brazil makes it out to be.
10.143 Therefore, while the original panel appears to have attached particular significance to the
coincidence of a substantial increase in the US share of world exports and the decline in world market
price of upland cotton415, such a coincidence is not clearly discernible from the data for the years since
the period considered by the panel.
10.144 Brazil attempts to discount some of these facts by arguing that the very fact that the level of
planted acreage is stable and that the United Stat es has a consistently high share of world production
and of world exports is evidence of a coincidence of subsidies and price suppression because, but for
those subsidies, these shares of world production and exports would be significantly lower. Similarly,
Brazil argues that the increase in absolute volume of production and exports is evidence of a
coincidence between subsidies and price suppressi on because, absent the subsidies, this increase
would not have occurred.416
10.145 The question before the Panel is whether, as argued by Brazil, "a discernible temporal
coincidence" of subsidies and significantly suppressed prices exists that supports a finding of a causal
relationship between subsidies and significant price suppression. To posit that where prices and US
shares of production and exports have not increased but remained relatively stable this is the result of
the effect of subsidies is to assume the very conc lusion that must be demonstrated. The fact that
stable shares of world production and exports coinci de with the payment of subsidies cannot in and of
itself establish the existence of a causal relations hip between the subsidies and significant price
suppression.
10.146 The Panel concludes from its analysis of developments during the period MY 2002-2006
concerning the factors relied upon by the original panel in reaching its conclusion regarding the
existence of a temporal coincidence between s ubsidies and significantly suppressed world market
prices for upland cotton, that it is more difficult to find support in these factors for a finding that the
effect of the subsidies is significant price suppressi on under current conditions than at the time of the

413 Brazil's First Written Submission, para. 101.
415 Panel Report, US – Upland Cotton, para. 7.1352:

"Even taking into account that in 1998, production may have been driven downward by drought
and high levels of crop abandonment and that, in 2001, production may have been driven upward
by high yields, we see a strong temporal coincidence between the United States subsidies and the
drop in United States prices, the drop in – and suppression of – world market prices, the increase
in United States exports." (emphasis added)

We also note the panel's statement in paragraph 7.1303 of its report that "[t]he effects of these three price-
contingent subsidies are, in our view manifest in th e movements in upland cotton prices in the same world
market during the reference period."
416 Brazil's Rebuttal Submission, paras. 202-203.

original panel's analysis. At the same time, the Panel recalls that the purpose of its inquiry under
Article 6.3(c) of the SCM Agreement is to determine whether, but for the subsidies at issue, the world
market price for upland cotton "would have increas ed [significantly], or would have increased by
[significantly] more than was in fact the case". 417 The fact that recent years have not witnessed the
sharp decline in the world market price for upla nd cotton that occurred during the period considered
by the original panel does not necessarily mean that there is currently no price suppression within the
meaning of Article 6.3(c) of the SCM Agreement.
9. Alleged gap between long-term costs of pro duction and market revenues of US upland
cotton producers
(a) Main arguments of the parties
10.147 Brazil submits that the widening gap between the total long-term costs of production and the
market revenue of US upland cotton producers de monstrates that much of US upland cotton
production would not be economically viable wit hout the marketing loan and counter-cyclical
payments. During the period MY 2000-2005 US upl and cotton producers would have lost US$663
per planted acre, or US$9.84 billion in aggregate, without the marketing loan and counter-cyclical
payments.418 Brazil also argues that a survey conduc ted by the International Cotton Advisory
Committee (ICAC) shows that the United States is a high-cost producer relative to other countries
producing upland cotton. Brazil considers that the data on costs of production of US upland cotton
producers shows that, in the absence of the marke ting loan and counter-cyclical payments, many US
upland cotton producers would have had to disc ontinue growing upland cotton and switch to
alternative crops. US supply would have been, on average, 15-16 per cent lower in the absence of
marketing loan and counter-cyclical payments over the period MY 2000-2005.419
10.148 Brazil submits that the United States cannot si destep the gap between upland cotton revenue
and total costs of production by re ference to whole-farm or off-farm revenues. Brazil recalls that the
United States made a similar argument in the orig inal proceeding and submits that, like the original
panel, this Panel should reject the argument of th e United States that whole-farm costs and income,
including off-farm income, are relevant to an ass essment of the effects of the marketing loan and
counter-cyclical payments.420 The United States has not answered the question why a farmer would
cross-subsidize the production of upland cotton. The fact that US upland cotton producers
supplement their income with off-farm work is irrele vant to an examination of costs and returns in
respect of upland cotton.
421
10.149 Brazil also submits that while variable costs of production may play a role in the short-term,
US upland cotton producers must meet both short-te rm variable costs of production and long-term

417 Supra, para. 10.49. The Panel also r ecalls the observation of the original panel that "[t]he fact that
prices dropped from 1996 through the beginning of 2002 is relevant. However, it is not, in and of itself,
conclusive for a determination of price suppression . Nor is the increase from 2002 conclusive that a
determination that any price suppre ssion necessarily ceased at that point . We must examine whether these
prices were suppressed, that is, lower than they would have been without the United States subsidies in respect
of upland cotton". Panel Report, US – Upland Cotton, para. 7.1288.
418 The data and calculations provided by Brazil in support of this assertion are contained in Exhibit
Bra-477. Brazil illustrates this widening gap in a grap h in Figure 13 of its First Written Submission. Brazil
argues that without the Step 2 progra mme, the effect of which was to raise the domestic price of upland cotton,
this gap between costs and revenues would have been even larger. Brazil's First Written Submission, para. 161.
419 Brazil's First Written Submission, paras. 156-164.
420 Brazil's Rebuttal Submission, paras. 249-253; Brazil's Oral Statement, para. 83.
421 Brazil's Comments on US Response to Panel Question 59, para. 141.

total costs of production to be economically viable and continue upland cotton farming.
422 Therefore
the evidence provided by Brazil, which shows that US upland cotton producers do not cover their
long-term costs of production, is sufficient to estab lish a causal relationship between the subsidies at
issue in this proceeding and significant price suppressi on. Brazil also submits that the United States
mischaracterizes certain co st items – land, labour and capital recovery costs – as fixed costs when
these costs, which vary with the amount of production in any given year, are in fact variable costs. If
these items are correctly treated as variable costs, a significant number of US upland cotton producers
are not able to cover their variable costs of produc tion, nor do they expect to be able to cover their
variable costs of production.
423 424
10.150 Based on a comparison of expected returns and total costs of growing cotton, corn or
soybeans on a base acre of cotton in MY 2005, Br azil submits that without marketing loan and
counter-cyclical payments US upland cotton produc ers would have had every incentive to switch to
production of the other two crops. Similarly, a co mparison of expected returns and total costs of
growing cotton, corn or soybeans on a base acre of cotton in MY 2007 shows that the effect of the
marketing loan and counter-cyclical payments is to mute significantly the incentives that would
otherwise exist for upland cotton producers to switch to production of soybeans and corn. A
comparison of average returns and total costs associated with planti ng cotton, corn or soybeans on a
cotton base acre in MY 2002-2006 indicates that onl y US subsidies made growing cotton during MY
2002-2006 economically rational and very profitable and that in the absence of cotton marketing loan
and counter-cyclical payments, cotton farmers w ould have sustained significant losses whereas
growing corn or soybeans would have been profitable.
425 Brazil argues that the conclusion that in the
absence of the marketing loan and counter-cyclical payments it would be far more profitable for US
upland cotton farmers to switch to production of corn and soybeans holds even if one makes a
comparison of expected and actual returns with cash costs or with variable costs.426
10.151 Brazil submits that the cost data relied upon by the United States in support of the proposition
that most US cotton producers are able to cover both variable and total costs of production is based on
MY 2003 when prices were at their highest level in th e past ten years. The fa ct that even with these
high prices eight per cent of US production did no t cover variable and total costs of production
suggests that in MY 2004 and MY 2005, when pri ces were much lower, a far greater percentage of
US producers were unable to cover variable and total costs of production. Brazil refers in this regard
to data on losses made by US upland cotton producer s in MY 2004-2005 and to projections of lower
yields and increased costs for MY 2006. In any event, instead of breaking cotton farms into arbitrary

422 Brazil considers that long-term total costs are highly relevant to an assessment of the effects of the
marketing loan and counter-cyclical payments even if the Panel uses only MY 2005 as a reference period.
Brazil's Response to Panel Question 71.
423 Brazil's Rebuttal Submission, paras. 257-277 and Figu re 10. Brazil submits in this respect that US
variable costs of production are expected to be significantly higher in MY 2006-2008 than in MY 2003-2005
and that expected variable costs are projected to exceed expected market revenue in MY 2006-2008. Brazil's
Rebuttal Submission, paras. 276-277. See also Brazil's Oral Statement, paras. 87-89.
424 In addition, Brazil considers that the United Stat es has provided a misleading presentation of costs
of production data insofar as certain data offered by the United States excludes the costs of ginning and the
revenues associated with cottonseed. USDA costs of pr oduction shows that the costs associated with ginning
are far higher than the market value of cottonseed. The USDA data also does not make a distinction between
costs associated with produci ng upland cotton lint and costs associated with cottonseed.
 Nor did the original
panel make such a distinction. Brazil's Rebuttal Submission, paras. 279-281.
425 Brazil's Oral Statement, paras. 63-78, Figures 1-6 and Exhibits Bra-634 and Bra-648.
426 Brazil's Comments on US Oral Statement, paras 15-17, Figures 7-12, Exhibit Bra-667 and Exhibit
Bra-668.

cost groups, the Panel should adopt the same appro ach as the original panel and rely upon national
average cost of production data.427
10.152 Brazil considers that in criticizing the use made by Brazil of the total cost of production data
published by USDA the United States makes an argumen t that was already rejected by the original
panel. The argument that total cost data is not an appropriate indicator of the financial viability of
upland cotton farmers because of the inclusion of non-cash costs is in contradiction with basic
economic and accounting principles. As explained by USDA, non-cash costs are real economic costs
and are part of the total costs that are taken into account by farmers when making their production
decisions. The criticism by the United States also ignores the fact that the USDA total cost data
reflects valuation methodologies that were con ceived by the American Agricultural Economics
Association and implemented by USDA.428
10.153 Brazil also submits that the evidence does not support the US argument that low-cost
producers would expand production and thus offset the decline of production caused by the exit of
high-cost producers.
429
10.154 The United States argues that Brazil does not demonstrate that US producers would switch to
alternative crops in the absence of payments under the marketing lo an and counter-cyclical payment
programmes. The gap between total costs and revenues of growing cotton does not support the
argument that cotton plantings and production would have been lower but for the marketing loan and
counter-cyclical payments. First, total costs and returns of growi ng cotton do not explain short-term
planting decisions and do not alone explain long-term farming decisions. Short-term decisions on
whether to plant cotton or an alternative crop ar e not made by reference to long-term costs of
production but by reference to variable costs of prod uction. While in the long run total costs may be
relevant to decisions on whether to continue cott on farming, such decisions are made taking into
consideration whole-farm costs and revenues, in cluding off-farm revenues, and are not based only on
the costs of producing cotton. 430 Second, US cotton producers have not only covered their variable
costs of production but also a substantial portion of their total costs from cotton revenues in MY
2002-2005.431 The evidence also shows that over the period of the FSRI Act of 2002, costs per pound
of cotton have declined steadily.432
10.155 The United States submits that Brazil has not shown that US upland cotton producers are
unable to meet their variable costs of productio n without marketing loan and counter-cyclical

427 Brazil's Oral Statement, para. 84; Brazil's Comments on US Response to Panel Question 59, paras.
142-149.
428 Brazil's Comments on US Response to Panel Question 59, paras. 150-160.
430 The United States asserts that Brazil also fails to take into account the diversity of US cotton
producers and the possibility that any exit of high-cost producers would be offset by the expansion of more
efficient low-cost producers. US First Written Submission, para. 298.
431 US First Written Submission and Exhibit US-47. The United States explains that the graph in
paragraph 300 of its First Written Submission presents costs of production in two ways:

"For both variable and total costs, the upper line is the cost for both cotton and cottonseed (i.e.
for 'raw ' or seedcotton). The farm price sh own above, however, is the price for cotton lint,
which is the product at issue here. To calcula te costs for cotton lint only that can properly be
compared to the upland cotton farm price, the Un ited States has subtracted ginning costs from
variable costs of production. This is consis tent with the practice in the United States of
ginning costs being paid for out of the proceeds gained by the gin from sale of the cottonseed
that is separated out in the ginning process. The bottom line for both variable and total costs
shows costs net of ginning." US First Written Submission, para. 301 (original emphasis)
432 US First Written Submission, paras. 302.

payments programmes. First, the economic literature does not s upport Brazil's argument that the
opportunity costs of unpaid labour, land costs and capita l recovery costs should be treated as variable
cash costs.
433 Second, prices were sufficiently high to cover variable costs of production and, in many
cases, total costs of production both on a national and a regional basis. A comparison of upland
cotton lint costs and returns shows that even classi fying paid labour as a variable cost, US upland
cotton producers have been able to more than cove r their operating costs and much of their overhead
costs over the period 1999-2005. 434 In addition, US producers are forecast to more than cover
operating costs as well as a large share of total costs. 435 Contrary to Brazil's argument, the fact that
the cost of production data represents averages understates the cost effectiveness of US producers
because, as shown by data for 2003, the overwhelming majority of US production took place on farms
that not only met their variable costs but also their total costs and only high-cost producers,
accounting for approximately 8 per cent of US production, did not cover their operating costs. 436
Third, ginning costs are appropriately excluded from the calculation of costs of production for US
upland cotton lint in light of the common practice in the United States of ginning costs being paid out
of the proceeds gained by the gin from the sale of the cotton seed separated out in the ginning
process.
437
10.156 The United States argues that Brazil has no basi s to contest the economic literature showing
that long-term decisions about upland cotton prod uction take total costs of producing upland cotton
into account as one of many other factors including off-farm income and income from other sources.
Brazil's argument that income from other sources is not legally or factually releva nt to an analysis of
US upland cotton production costs and returns misses the point because the question before the Panel
is not one regarding the balance of upland cotton costs of production and returns. The question before
the Panel is whether the marketing loan and count er-cyclical payments are causing significant price
suppression of the world market price for upland cotton. An analysis, such as Brazil's, that purports to
show that US producers would make different long -term production decisions affecting price in the
absence of marketing and counter-cyclical payments is not valid if it disregards how US producers
actually make these decisions.438
10.157 The United States also submits that Brazil has ye t to provide evidence that even if some US
upland cotton producers were to decide to exit co tton farming in the absence of marketing loan and
counter-cyclical payments, this would necessarily result in any significant decline in US cotton
plantings.439
10.158 With respect to the comparisons offered by Braz il of expected market revenue and total costs
of production of growing cotton, corn or soyb eans in MY 2005 and MY 2007 and of the average
market revenue and total costs of producti on in MY 2002-2006, the United States submits, first, that
variable costs, not total costs of production, are the relevant measure in assessing year-to-year

433 US Rebuttal Submission, paras. 326-332.
434 US Rebuttal Submission, paras. 334-335 and Exhibits US-89 and US-90.
435 US Rebuttal Submission para. 336 and Exhibits Bra-575 and Bra-479.
436 US Rebuttal Submission, para. 337. As part of its Opening Statement, the United States submitted a
table that contains figures slightly revised from the original table in paragraph 337 of the US Rebuttal
Submission due to a calculation error. US Opening Statement para. 72 and Exhibit US-119. The United States
submits in this respect that with respect to 92 per cent of US production of upland cotton Brazil's theory of a gap
between costs and revenues fails as a matter of fact.
437 US Rebuttal Submission, paras. 338-343.
438 US Rebuttal Submission, paras. 344-347. See also US Response to Panel Question 59, para. 136:
"The fact that US upland cotton farmers actually make their decisions about whet her or not to close their
operations based on the total costs and revenues for the farm as a whole – including revenue from all crops as
well as from off-farm sources – is necessarily a relevant and important consideration." (emphasis original)
439 US Rebuttal Submission, para. 348.

planting decisions. 440 Second, for the entire period MY 2002-2007 US cotton farmers expected to
meet or exceed their variable costs of planting cott on, corn or soybeans, and in terms of the expected
market revenues above variable costs, cotton was the most attractive option in at least three of these
years.441 Third, while total costs may be a relevant c onsideration in long-run decisions, Brazil's
analysis of total costs is flawed in that Braz il regards total costs of growing cotton as the only
consideration for a farmer in deciding whether to c ontinue or to exit farming altogether and in that
Brazil includes imputed opportunity costs in its assessme nt of total costs. In most years under the
FSRI Act of 2002 US farmers actually met and exceeded variable costs and even total cash costs.
Examining the cost data properly, the cumulativ e returns over the period 2000-2005 were a positive
return of US$161 per acre instead of the cumulative US$663 deficit alleged by Brazil. For the period
MY 2000-2006, the cumulative returns were a positive US$131 per acre instead of the US$837 deficit
per acre alleged by Brazil.442
10.159 The United States considers that the use of to tal cost data published by USDA is not an
appropriate means of assessing the financial viabilit y of farms, let alone of an entire agricultural
sector. First the total cost data is an average that obscu res the fact that the vast majority of US
production occurs on farms that are highly profitable. 443 Second, even with respect to the small
fraction of US production that is not profitable Braz il's argument is not conceptually sound. Crop-
specific data published by USDA cannot be used to reach conclusions on the financial viability of
cotton farmers who rely on many sources of income and incur various kinds of costs. 444 Moreover,
USDA data includes imputed opportunity costs, wh ich are not necessarily costs which farmers must
pay off in order to avoid having to close down their businesses.445
(b) Evaluation by the Panel
10.160 The question before the Panel is whether a comparison of costs of production of upland cotton
and market revenues of US cotton producers supports a finding that marketing loan and counter-
cyclical payments are causing significant price suppression within the meaning of Article 6.3(c) of the
SCM Agreement. Brazil argues, in this regard, that because of the widening gap between the costs of
production and the market revenues of US upland cotton producers much of US upland cotton
production would not be economically viable withou t marketing loan and counter-cyclical payments.
The United States considers that Brazil's cost of prod uction analysis is fundamentally flawed and that
a proper examination of the data supports the argume nt of the United States that marketing loan and
counter-cyclical payments are not having any significant price suppressing effect.
446
10.161 The Panel considers that the principal issues on which the parties disagree include the
following. First, whether variable costs or total costs shoul d be used to measure the gap between the

440 US Comments on Brazil's Oral Statement, paras. 60-65.
441 US Comments on Brazil's Oral Statement, paras. 66-72, Annex I and Exhibit US-139.
442 US Comments on Brazil's Oral Statement, paras. 73-77 and Exhibit US-124.
443 US Response to Panel Question 59, paras. 140-141. The United States refers in this respect to the
USDA survey data for MY 2003 which shows that 92 per cent of US production was on farms on which total
revenue exceeded total costs, including the items of economic opportunity cost published by USDA. The
United States asserts that, in view of the substantial spread between the total cost figures and the market revenue
figures for low- and mid-cost producers, the fact that pr ices were lower in MY 2004 and 2005 than in MY 2003
does not undermine the conclusion that 92 per cent of US upland cotton production occurs on farms that are
profitable.
444 US Response to Panel Question 59, paras. 143-146.
445 US Response to Panel Question 59, paras. 148-149.
446As noted above, Brazil submits that in the period MY2000-2005 US upland cotton producers would
have lost US$663 per acre without marketing loan and counter-cyclical payments. The United States argues that
the cumulative returns were a positive US$161 per acre instead of the cumulative US$663 deficit alleged by
Brazil.

market revenues of US cotton producers and their costs of production. Second, whether the
examination of total costs relevant to long term decisions, such as whether to exit cotton farming,
should be limited to cotton-specific costs or whether account should also be taken of whole-farm costs
and revenues. There are, in addition, disagreem ents between the parties about the composition of
variable costs, i.e. whether certain items (land, unpaid labour and capital recovery costs) should be
included as variable costs and whether total costs should include imputed values for opportunity costs
or whether they should be limited to cash costs. The United States also claims that US cotton
producers have not only covered their variable costs but also a substantial portion of their total costs
from cotton revenues in MY 2002-2005.
(i) Description of the data on commodity cost and returns
10.162 We begin our analysis with a description of the data that has been provided to the Panel. Data
on cotton production cost and returns on a per acr e basis covering MY 2002-2005 has been provided
by both Brazil and the United States. The data is from the Commodity Costs and Returns estimates of
the Economic Research Service (ERS) of USDA . The ERS describes these costs and returns
estimates as:
 447
"These cost and return accounts are 'his torical' accounts based on the actual costs
incurred by producers. The costs and re turns estimation program uses surveys
conducted about every 4-8 years for each commodity as part of the annual
Agricultural Resource Management Survey (ARMS), and methods that conform to
standards recommended by the American Agricultural Economics Association
(AAEA)."
These standards or recommendations are contained in the Commodity Costs and Returns Estimation
Handbook authored by the AAEA Task Force on Commodity Costs and Returns.
448
10.163 One difficulty with this data is that it decomposes costs of production into "allocated
overhead" and "operating" costs rather than into the economic concepts of fixed and variable costs.
This stems from the difficulty, which the AAEA Task Force recognizes, in labelling costs as fixed or
variable. Instead, the AAEA Task Force recommends that costs should be categorized according to
whether they are associated with expendable factors or the services of capital assets. The AAEA Task
Force also recommends that all the costs of expendabl es be allocated to "operating costs" and that all
other costs be included in "allocated overhead". 449 These recommendations appear to have been
followed in the ERS methodology for estimating commodity costs and returns.450
10.164 In their analysis of these Commodity Costs and Returns estimates of the ERS, both Brazil and
the United States use "operating" and "variable" cost s interchangeably. They also use "overhead" and
"fixed" costs interchangeably. While much of the de bate between the parties is about the relevance of
variable and total costs (the sum of variable and fi xed costs) to the planting decision by farmers, the
cost data that is relied upon by both parties is actually classified as "operating" and "overhead".

447 Description from the USDA's Economic Research Service website:
http://www.ers.usda.gov/Data/CostsAndReturns/.
448 Exhibit US-88.
449 Commodity Costs and Returns Estimation Handbook, pages 1-4 and 1-5.
450 US Response to Panel Question 58, para. 126. The United States explains that the US
categorization of "operating" (or "variable") costs differs in some ways from that used by ERS. First, the
United States, to be more conservative, incl udes hired labour as an operating cost. Second, the United States
adjusts both ginning costs and cottonseed revenue to isolate the costs and revenues for the "subsidized" product.
See US Response to Panel Question 58, para. 129.

(ii) Whether certain items (land, unpaid labour and c apital recovery costs) should be included as
variable costs
10.165 Brazil disputes the inclusion of land, labour a nd capital recovery costs in fixed costs and
argues that these costs are variable costs. 451 The United States argues that it is the long-standing
practice of USDA and agricultural economists to treat land, labour, and capital recovery costs as fixed
costs.452 The United States considers that there is no basis in the economics literature for Brazil's
assertion that an imputed value for the opportunity cost of unpaid labour should be treated as a
variable cash outlay.453 Following the AAEA Task Force guide lines, the United States maintains that
a determinative factor as to whether an input cost can be classified as a fixed or a variable cost is
whether the input is an expendable or a capital input. Since land is clearly a capital input, it should be
classified under fixed costs.454 The United States adopts a similar a pproach to the treatment of capital
recovery costs.455
10.166 The Panel notes the difficulty highlighted by th e AAEA Task Force in classifying the many
elements of commodity production costs into variable and fixed costs. While variable and fixed costs
are the economically relevant cost concepts in th is dispute, there appears to be no unambiguous way
of arriving at such a classification. The AAEA Ta sk Force has chosen to take a less difficult tack,
which is to classify costs according to whether they are associated with expendable factors or the
services of capital assets. While this classification of costs is unlikely to fully coincide with the
economic concepts of variable and fixed costs, it is the classification that the agricultural economics
profession has recommended. Accordingly, it is the method that has been used by the ERS in its
collection of commodity costs and returns data. We therefore consider the inclusion of land, labour
and capital recovery costs in fixed (overhead) co sts as appropriate, being in accordance with the
methodology recommended by the AAEA Task Force.
(iii) Cash or opportunity costs
10.167 The United States raises the issue of cash costs and their role in dete rmining whether farmers
have to "close down their businesses". Specifically, th e United States argues that in the long run, the
relevant comparison to make is between market return or revenue and total cash costs. The
opportunity cost of factors of production for which no cash payments are made, such as land that the
farmer owns, his own labour or his family's labour, ar e not like cash costs, which must be paid off in

451 Brazil submits that hired and unpaid labour vary with the amount of upland cotton planted and
produced. If an upland cotton farmer grows nothing at all, he or she will not hire labour. If the farmer decides
to plant upland cotton, he or she will hire labour. If he plants crops, he may well have less time to dedicate to
off-farm employment the more acreage he chooses to plant. Thus, both the cost of hired labour and the imputed
cost of unpaid labour vary with the amount of production. So does the cost of land, whether rented or owned by
a farm operator, vary with the amount of upland cotton produced. Finally, the rate of depreciation depends on
the intensity of use. Machinery and equipment that is used intensively will depreciate much more rapidly than
machinery and equipment that is used less intensively. Furthermore, certain equipment used in upland cotton
production, especially harvesting and ginning equipment, can be rented to other producers. Thus, the cost of
capital recovery of machinery and equipment is also not en tirely fixed; it can vary as a function of the farmer's
production decisions. A farmer will, th erefore, consider the variable cost s associated with capital recovery
when deciding whether or not to produce upland cotton. Brazil's Rebuttal Submission, paras. 262-266.
452 US Rebuttal Submission, para. 326.
453 US Rebuttal Submission, para. 327.
454 US Rebuttal Submission, para. 328.
455 Quoting directly from the Commodity Cost and Returns Handbook, the United States notes that
capital assets are factors of production that are not used up during a single production period, provide services
over time, and retain a unique identity. The term durable asset is often used to describe physical capital because
the word durable denotes not temporary or long-lived. It is common in preparing cost of production estimates to
assume that durables such as machinery and buildings provide a constant quality of service over their lifetime
with regular maintenance. US Rebuttal Submission, para. 331.

order for farmers to avoid having to "close dow n their businesses". It would appear that the
United States is arguing that only when total cash co st exceeds market returns would farmers "close
down their businesses".
456 In addition, the United States points to the inherent difficulties involved in
valuing items (such as land that the farmer owns, his own labour or his family's labour) for which
there is no market transaction or cash outlay.
10.168 Brazil has clarified that the clai m that it is making is that, in the long-term, if total costs
incurred in producing cotton exceed market revenues fro m the sales of cotton, then the cotton farmer
would exit cotton farming, not necessarily farming altogether. 457 Brazil considers that the argument
of the United States with respect to non-cash co sts squarely contradicts basic economic and
accounting principles. Brazil asserts that the opportunity cost of factors of production for which no
cash payments are made are nevertheless real costs.458
10.169 The Panel agrees with the United States that imputing values to resources for which there are
no market transactions is not as reliable as direct market valuation. It is also true, however, that the
methodology used by the USDA conforms to standards recommended by the AAEA, and the
application of that methodology probably produces the best estimates that can be achieved. Thus, it is
our view that such difficulties in imputation do not pose a problem in using the cost data from USDA
to determine whether US farmers were generati ng enough returns from the market to make it
economically worthwhile to continue planting cotton.
10.170 The Panel concurs with Brazil that the argument of the United States about total cash costs
guiding cotton production decisions is not consistent with basic economic principles. The principle
that resource allocation is guided by opportunity co st is a fundamental principle of economics. All
resources that a farmer uses to produce cotton have a cost – which is the value that they can obtain
when employed in the next best alternative. It do es not matter whether the factor must be paid for in
cash or not. Unless those resources used in cotton farming fetch a market return that matches their
next best use, the farmer is foregoing opportun ities to make better returns and would do better by
moving to the next best alternative ("exiting cotton fa rming"). If the next best alternative is another
agricultural crop like soybean or corn, exiting cott on farming will not involve moving away from
farming altogether. The Panel therefore considers that opportunity costs should be included in the
calculation of total costs of production.

456 See, e.g. US Comments on Brazil's Oral Statement, para. 75.
457 Brazil's Comments on US Response to Panel Question 59, para. 139.
458 Brazil quotes the following explanation from the Commodity Costs and Returns Estimation
Handbook:

"[c]ommodity costs and returns include estimates of both cash expenditures and noncash
costs. Cash expenditures are incurred when factors of production are purchased or rented.
Noncash costs occur when factor s are owned. For example, if a farmer fully owns the land
used to produce corn, he/she would have no expenditure for land rental or for loans to pay for
the purchase of land. Yet, an economic cost arises. By owning the land and using it to grow
corn, the farmer foregoes income from other uses of the land, such as renting it to another
producer. These costs come about because production resources are limited and have
alternative uses. If a farmer uses savings to pay for operating inputs, such as seed, fertilizer,
chemicals, and fuel, and thus pays no interest on operating loans, the farmer still incurs an
economic cost because the savings could have ear ned a return in another use. Likewise, the
farmer has an opportunity cost of his/her labour used in the production of the commodity
because it could have been used on another farm or in off-farm employment."

Brazil's Comments on US Response to Panel Question 59, para. 152.

(iv) Total or variable costs of production
10.171 Brazil submits that the widening gap between United States upland cotton producers' total
long-term costs of production and market reve nue over the period MY 2002-2005 demonstrates that
much of US production would not be economically viable without the marketing loan and counter-
cyclical payments. 459 The United States argues that total co sts do not explain short-term planting
decisions. Short-term decisions on whether to pl ant cotton or an alternative crop are not made by
reference to long-term costs of production but by reference to variable costs of production.460
10.172 We note that both parties agree that in the shor t-term variable costs play a role in cotton
producers' decision whether to plant cotton or not. 461 Both parties also agree that in the long-term,
market revenues should be able to cover total costs of production if farmers ar e to continue to plant
cotton.462 It should be noted that the relevance of vari able costs to production decisions in the short-
term and of total costs to production decisions in the long-run is consistent with the economic
literature. Given these points of agreement, the dis pute between the parties is whether the question of
a causal relationship between US subsidies and significant price suppression is best answered on the
basis of long-run production decisions by cotton farmers or on the basis of short-run (year-to-year)
planting decisions.
10.173 On this question, we recall that the original panel considered that "a medium- to longer-
term examination of developments in the Unite d States upland cotton industry" was appropriate.
463 It
therefore relied upon "the divergence between Unite d States producers' total costs of production and
revenue from sales of upland cotton since 1997" as one factor supporting a finding of a causal
relationship between certain price-contingent subsidies and significant price suppression:
"Fourth, we find credible evidence on the record concerning the divergence between
United States producers' total costs of production and revenue from sales of upland
cotton since 1997. This supports the pr oposition that United States upland cotton
producers would not have been economically capable of remaining in the production
of upland cotton had it not been for the Unite d States subsidies at issue and that the
effect of the subsidies was to allow United States producers to sell upland cotton at a
price lower than would otherwise have been necessary to cover their total costs.
If market revenue alone is compared to United States upland cotton producers' total
costs of production, the information before us reveals that United States upland cotton
producers would on average have lost mone y for each planted acre in every year
since MY 1998, and made a small profit in MY 1997. We do not believe the utility
of the record data is fundamentally undermined by any of the criticisms levied by the
United States for the purposes of this dispute, particularly as the data are calculated in
accordance with a methodology which the USDA itself has deemed to be a
sufficiently reliable reflection of United States upland cotton producers' costs and
revenues. That the figures before us are cu mulated to show a result over the six-year
period from 1997-2002 also lends itself to an assessment of the medium- to longer-
term examination of developments in th e United States upland cotton industry. We
believe that the existence of this ga p between upland cotton producers' total
production costs and market revenue, on the one hand, and the effect of the subsidies,

459 Brazil's First Written Submission, paras. 156-161.
460 US First Written Submission, paras. 293-294.
461 US First Written Submission, paras 293-294, and Brazil's Rebuttal Submission, para. 255.
462 US First Written Submission, para. 295, and Brazil's Rebuttal Submission, para. 255.
463 Panel Report, US – Upland Cotton, para. 7.1354.

on the other hand, was to sustain a higher level of output than would have occurred in
the absence of the United States subsidies at issue."
464 (footnotes omitted)
10.174 The original panel relied on total costs of production, notwithstanding that the United States
had argued that the use of an average total co st of production figure was not appropriate for
constructing an annual revenue gap.465 The panel explained its approach as follows:
"We believe that not only coverage of variable costs, but also of fixed costs, would be
necessary, at least over the medium to longer term, in order for United States upland
cotton producers rationally to opt to remain United States upland cotton producers.
We find support for this propositio n in Appellate Body Report, Canada – Dairy
(Article 21.5 – New Zealand and US), paras. 87, 88. Only an analysis of the total cost
of production takes account of the economic resources the producer invests in the
product. Fixed and variable costs are the total amount which the producer incurs in
order to produce the product and the total am ount it must recoup, in the long-term, to
avoid making losses. To the extent that the producer charges prices that do not
recoup the total cost of production, over time, it sustains a loss which must be
financed from some other source, or else the producer simply has to close down his
business."
466
10.175 The United States appealed the panel's decision to use total costs rather than variable costs
of production. 467 The Appellate Body discussed the panel's approach to the consideration of total
costs of production as follows:
"We agree with the general proposition of th e United States that variable costs may
play a role in farmers' decision-making as to whether to plant upland cotton or some
alternative crop, and how much of each crop to plant. From a short-term perspective,
variable costs may be particularly important. However, from a longer-term
perspective, total costs may be relevant. Based on the evidence before it regarding
upland cotton production in the United States, the Panel concluded that 'the six-year
period from 1997-2002 ... lends itself to an assessment of the medium- to longer-term
examination of developments in the United States upland cotton industry'. The Panel
found that 'the effect of the subsidies was to allow United States producers to sell
upland cotton at a price lower than would otherwise have been necessary to cover
their total costs'. In the circumstances of this dispute, we do not consider that the
Panel's reliance on total rather than variable costs of production amounts to an error
vitiating the Panel's analysis under Article 6.3(c)."
468 (footnotes omitted)
10.176 In comparing cotton costs and returns, the origin al panel considered it essential that this be
done on the basis of the medium- to longer- term deve lopments in the US upland cotton industry. We
concur with this approach. Under the FSRI Act of 2002, the price-contingent marketing loan and
counter-cyclical payments will be available over the lifetime of the legislation, which only lapses in
MY 2007. Thus, it appears to us that the effect of the marketing loan and counter-cyclical payments
on cotton farmers' production decisions could be b est assessed on the basis of data covering the
lifetime of the Act. Where this is not possibl e because a claim of "present" serious prejudice was
brought before the end of the Act, the assessment of cost and return will have to be made on the basis
of data covering as much of the lifetime of the FSRI Act as possible, in this instance MY 2002-2005

464 Panel Report, US – Upland Cotton, paras. 7.1353-7.1354.
465 See e.g. Further Rebuttal Submission of the United States, (18 November 2003), paras. 116-135.
466 Panel Report, US – Upland Cotton, footnote 1465.
467 Appellate Body Report, US – Upland Cotton, paras. 40 and 452.
468 Appellate Body Report, US – Upland Cotton, para. 453.

including projections for MY 2006. This period of tim e is of sufficient length to require a medium to
long-term analysis. Thus, a comparison of market re turns with total costs, rather than only with
variable costs, is the appropriate benchmark for assessing the effects of the subsidies.
(v) The role of off-farm income
10.177 While the United States accepts that total costs may be relevant to the long-term decision as
to whether to continue or to exit cotton farming, it argues that this decision is not made on the basis of
a cotton-only analysis of costs and returns. Rath er, whole-farm decisions will be made taking into
consideration whole-farm costs and returns, including off-farm revenues. 469 The United States
considers that the question of "off-farm income" is important because it bears on Brazil's ability to
prove that without marketing loan and counter-c yclical payments, US producers would exit the
business of upland cotton farming altogether.
10.178 The United States points to two studies that note the increased prevalence of off-farm
employment and off-farm income for farm households in the United States. 470 Brazil does not dispute
these studies or this trend for US agriculture as a w hole. However, Brazil points out that the studies
submitted by the United States suggest that off-farm income is of particular importance for small
farms. Moreover, according to some studies, la rger farms account for most US agricultural
production.471 Finally, Brazil refers to the original pane l's conclusion that off-farm income or income
from growing other crops is not relevant to the dispute.
10.179 In addressing the argument of the United States concerning the relevance of what it termed
"off farm income", the original panel stated:
"We disagree with the United States that an examination of United States upland
cotton producers' 'off farm income' may be a legally relevant consideration in the
examination before us. We are considering costs and market revenues in respect of
upland cotton. Our examination is one of the upland cotton industry. We find
support for this proposition in the references to 'subsidized product' and 'like product'
in Article 6.3(c) of the SCM Agreement, and contextual support in such references in
Article 15 of the SCM Agreement . We are inquiring into whether, in respect of
upland cotton production, United States producers' revenues in respect of upland
cotton were insufficient to sustain their total costs incurred. We are not looking into
the possibility of cross-subsidization or cross-financing of insufficient market
revenues for upland cotton that may have come from other United States industries.
Indeed, the very fact that the United Stat es relies on such cross-subsidization as a
possible source of revenue would tend to support the proposition that upland cotton
producers would have lost money over the longer term if they were involved in
upland cotton production alone. If the infrastructure of United States upland cotton
production supports the 'off farm income' th en the subsidies are supportive of that
income as well. If the infrastructure of United States upland cotton production does
not support 'off farm income', the producer need not produce upland cotton.
However, we have seen, as a factual matter, that United States producers continue to
produce upland cotton, and still receive subsidies in relation to production."
472

470 Dimitri, Carolyn et. al., "The 20th Century Transformation of US Agriculture" and Hoppe, Robert
A. and Korb, Penni, "Understanding US Farm Exits. Economic Research Report 21" June 2006, p. 20 (Exhibit
US-46).
471 Brazil's Comments on US Response to Panel Question 59, para. 141.
472 Panel Report, US – Upland Cotton, footnote 1470.

10.180 For our part, we have turned to the two studies cited by the United States. The
United States describes one of the studies (Dimitri, et al.) as an analysis of changes in US farm
structure over the 20th century, and quotes a specific section of it:
473
"[A]bout a third of farm operators worked o ff the farm for at least 100 days in 1930.
... By 1970, more than half of farms had off-farm income, and by 2000, 93 per cent of
farms earned off-farm income. Off-farm work has played a key role in increased farm
household income; while farm household income was once below the national
average, in 2002 it exceeded the national average by nearly US$8,000."
The United States uses this quotation to substantia te its argument about the growing importance of
off-farm income in US farm operators' income.
10.181 The second study cited by the United States (H oppe and Korb) looks at the link between
off-farm income and the decision to exit from farming. The United States quotes the following
passage from the study (to be found on page 20) and underscores the last sentence:
474
"Off-farm work has become important to fa rm operators. About one-third of farmers
have worked off the farm at least 200 da ys per year—essentially fulltime— since
1978. Off-farm work could hypothetically aff ect exits in two ways. First, off-farm
work may be the first step in an exit from farming, which would be reflected in higher
exits for farms the operators of which wo rk off-farm. Second, off-farm work might
lower the probability of exit by providing farm operator households with another
source of income."
10.182 In the Panel's assessment, the study cited by th e United States appears ambivalent about the
role of off-farm income in farm exit. On the one hand, having a source of off-farm income could be a
factor that reduces the likelihood of exit from farming. Alternatively, finding off-farm work may be
the first step to exit from farming. In other word s, the increasing importance of off-farm income in
the US agricultural sector may just be reflecting the long-term exit of workers from that sector.
10.183 The Panel finds stronger evidence of this ambi valence in the very next paragraph of the
study in which the authors explain that the econometric model they used to estimate the impact of off-
farm income on the likelihood of farm exit supports both hypotheses.
475
"The days-of-work model supports both hypotheses (table 8). On the one hand,
working full-time off-farm is associated w ith a slightly higher exit probability than
either of the alternatives (hypothesis 1). On the other hand, combining some off-farm
work (1-199 days) with farm work leads to lower exits than working full-time on or
off the farm (hypothesis 2). Note, however , that the range in exit probabilities is
fairly narrow, about 2 percentage points, for any sales-age category." (footnote
omitted)
10.184 Thus, while the Panel is convinced that off-fa rm income has grown in importance in farm
operators' income, there is ample room for debate as to the implications of this for the likelihood to
exit from farming. The United States emphasizes one possible implication – off-farm work might
lower the probability of exit by providing farm ope rator households with another source of income –
for which the study finds some empirical support. But to our mind, a fair reading of the study also
requires us not to neglect the alternative interpreta tion – off-farm work may be the first step in exiting

475 Exhibit US-46, p. 21.

from farming – for which the study finds equally convincing empirical support. Taking this
ambivalence of the results into account, the Panel does not think that the issue of off-farm income
bears as negatively as the United States believes ag ainst Brazil's ability to prove that without
marketing loan and counter-cyclical payments, US producers would exit the business of upland cotton
farming.
(vi) US upland cotton producers' long-term costs of production and market revenues
10.185 The Panel has relied on USDA cost of production surveys which combine total costs and total
returns from upland cotton lint and cottonseed. This was the type of cost data relied upon by the
original panel in making its findings about the US co st of production, "as the data are calculated in
accordance with a methodology which the USDA itsel f has deemed to be a sufficiently reliable
reflection of United States upland cotton producers' costs and revenues." 476 In this cost of production
data, ginning costs were included as part of operating costs.477
10.186 In the present dispute, the United States asser ts that market revenues should only include
revenues from cotton lint and exclude returns from the sale of cottonseed. The reason for this,
according to the United States, is that cotton lint is the product at issue in this dispute. 478 A s a
consequence of this focus on cotton lint, the United States argues that ginning costs should be
excluded from the calculation of the costs of production. It claims that "this is consistent with the
practice in the United States of ginning costs being paid for out of the proceeds gained by the gin from
sale of the cottonseed that is separated out in the ginning process."479
10.187 Brazil disputes this statement, arguing that the United States has not presented any basis for
this assertion that ginning costs are paid for out of the proceeds gained by the gin from sale of the
cottonseed.480 In response to Brazil's criticism, the United States submits an exhibit containing an
annual survey of eight gins in the mid-south re gion conducted by a certified accounting firm which
includes data on revenue from cottonseed sales, wa rehouse rebates, gain/loss on the sale of assets,
mote sales, interest and other income but no category for producer fees. 481 In the view of the United
States, this shows that ginning costs are not paid separately by cotton producers.482
10.188 While the Panel is of the view that the cost data relied upon by the original panel is a
sufficiently reliable reflection of US upland cotton producers' costs and revenues, the Panel has
chosen to consider the cost and revenue data in both forms. Firstly, in the form proposed by Brazil
and considered sufficiently reliable by the origin al panel, where revenue from cottonseed and costs
from ginning are both included (see Table 6A). Secondly, in the form which the United States
proposes, where only revenues from cotton lint are included and the costs of ginning are excluded (see
Table 6B).
10.189 Table 6A shows market revenue and total costs in the form analyzed by the original panel.
Over the MY 2002-2006 period, US cotton produ cers' market revenue exceeded total costs of
production only once, in MY 2003, when cotton prices were at their highest since MY 1997. In all
other marketing years, total costs of production exceeded market revenue, sometimes by very
significant margins. In MY 2002, for example, tota l costs exceeded market re venue by 72 per cent.
Data provided by Brazil for MY 2006 suggests that total costs will continue to exceed market

476 Panel Report, US – Upland Cotton, para. 7.1354.
477 Panel Report, US – Upland Cotton, footnote 1468.
481 Exhibit US-94.
482 US Rebuttal Submission, para. 340.

revenue. The gap is expected to be about 115.76 dol lar per acre, which would be equivalent to more
than a quarter of US cotton producers' market revenue.
Table 6A: Cotton Production Costs and Returns, MY2002-2006

(US$ per acre)
Item MY 2002 MY 2003 MY 2004 MY 2005 MY 2006
1. Market
Revenue 307.83 561.72 483.49 456.69

450.29
2. Total Costs 529.02 496.74 501.51 544.23 566.05
a. Operating
Costs
278.00 304.29 315.35 349.26 362.18
b. Overhead
Costs
251.02 192.45 186.16 194.97 203.87
3. Revenue
less Total
Costs
-221.19 64.98 -18.02 -87.54 -115.76
Gap between
revenue and
total costs as
share of
market
revenue
-71.9% 11.6% -3.7% -19.2% -25.7%
Source: Exhibits Bra-648 and US-47.

10.190 Table 6B shows market revenue from cotton lint, total costs ( less ginning costs) and the
difference between market revenue and total costs on a per acre basis in MY 2002-2006. Over the
period examined, US cotton producers' market reve nue exceeded total costs of production twice, in
MY 2003, when cotton prices were at their highest since MY 1997, and also in the year immediately
following that. In other marketing years, total co sts of production exceeded market revenue, at times
by very huge margins. In MY 2002, for example, to tal costs exceeded market revenue by 84 per cent.
Data provided by Brazil for MY 2006 suggests that total costs will continue to exceed market
revenue. The gap is expected to be about 56.25 dol lar per acre, which would be equivalent to about
14.7 percent of US cotton producers' market revenue in that marketing year. Cumulated over the five
marketing years 2002-2006, US cotton farmers' co sts of production have exceeded market revenues
by an average of 227.49 dollars per acre.

Table 6B: Cotton Production Costs And Returns
(US$ per acre)
Item MY 2002 MY 2003 MY 2004 MY 2005 MY 2006
1. Market
Revenue
(Cotton Lint) 257.88 489.72 414.12 392.16

381.65
2. Total Costs 473.41 408.41 403.08 440.22 437.90
a. Operating
Costs
(W/out
ginning costs) 222.39 215.96 216.92 245.25 234.03 483
b. Overhead
Costs 251.02 192.45 186.16 194.97 203.87
3. Revenue
less Total
Costs -215.53 81.31 11.04 -48.06

-56.25
Gap between
revenue and
total costs as
share of
market
revenue -83.6% 16.6% 2.7% -12.3% -14.7%
Source: Exhibits Bra-648 and US-47.
10.191 Thus, in both tables a significant gap exists between market revenues and total costs of
production. The Panel believes that the existence of this gap between upland cotton producers' total
production costs and market revenue is telling. The Panel concurs with Brazil that this data provides
further evidence of the essential ro le played by marketing loan and counter-cyclical payments in
covering US upland cotton producers' long-term total costs of production and that this data provides
support for Brazil's argument that, but for these subsidies, many upland cotton producers would not
have been able to continue gr owing upland cotton and would have had to switch to alternative
crops.484
(vii) Other arguments
10.192 The United States makes several other arguments w ith respect to costs and revenue in cotton.
First, the United States argues that US cotton produ cers have covered their variable costs in MY
2002-2005. Second, the United States submits that in almost all years they have covered most if not
all of their total costs of growing cotton. 485 Third, the United States contends that the overwhelming
majority of US production took place on farms that not only met their variable (operating) costs but
also their total costs.
486

483 Exhibit Bra-648 does not provid e an estimate of ginning costs. Two alternative estimates were
calculated for this purpose: (i) the average ginning costs during MY 2002-2005 and (ii) the result of applying
the compound growth rate of ginning costs over the MY 2002-2005 period. The second method yielded a
higher estimate of ginning costs for MY 2006 ($128.15 per acre) compared to the first approach ($86.60 per
acre). But whichever estimate is used still yields the same result that total costs (without ginning costs) exceed
market revenues (cotton lint only) in MY 2006. The operating costs of $234.03 per acre shown in Table 6B are
the result of removing the higher estimate of ginning costs from variable costs.
484 Brazil's First Written Submission, para. 163.
486 US Rebuttal Submission, para. 337.

10.193 The first argument of the United States is certainly borne out by the data in Tables 6A and 6B.
Market revenue exceeded variable costs in all fi ve marketing years. The second argument of the
United States is somewhat imprecise because the United States offers no benchmark for judging what
it means by "most". What must be clear from the outset is that, on average, cotton farming operated at
a loss in four of the five marketing years shown in Table 6A and three of the five marketing years
shown in Table 6B. Thus, we interpret the second argument of the United States as an attempt to
describe how large these losses were in those years. Table 7 attempts to be more precise about the
import of this second argument of the United States . It is based on the information in Table 6A
above.
487 The second row gives market revenue less operati ng costs, i.e. whatever is left over after
paying variable costs. The third row is overhead costs. The last row gives the percentage of overhead
costs that could be covered by market revenue after deducting variable costs. The second argument of
the United States accurately describes what oc curred in MY 2003 and MY 2004 but not what
transpired in MY 2002. In MY 2005, market revenu e net of operating costs is able to cover a little
over half of overhead costs.
Table 7: US Overhead Costs Covered By Market Revenue, MY 2002-2006

(US$ per acre)
Item MY 2002 MY 2003 MY 2004 MY 2005 MY 2006
Market
Revenue (less
operating
costs) 29.83 257.43 168.14 107.43

88.11
Overhead
Costs
251.02 192.45 186.16 194.97 203.87
Part of
overhead
costs covered
11.9% 133.8% 90.3% 55.1% 43.2%
Source: Exhibits Bra-648 and US-47.

10.194 To support its third argument, the United States points to data on the costs of cotton
production, by cost group, which shows that only high-cost producers, accounting for approximately
8 per cent of US production, did not cover their total costs in MY 2003. Unfortunately, the
United States does not have a similar breakdown by cost group for other marketing years. MY 2003
was the last year in which the USDA conducted a co mplete cost survey for upland cotton production.
It is not clear how representative the results obtained for MY 2003 are since cotton prices were at
their highest that year since MY 1997. To provide some perspective on how high cotton prices were
in MY 2003, Figure 3 shows average farm and spot prices (taken from Exhibit US-83) from MY 2002
to MY 2005. The farm price in MY 2003 was 39 pe r cent, 49 per cent and 32 per cent higher than in
MY 2002, MY 2004 and MY 2005 respectively. The spot price in MY 2003 was 27 per cent, 32 per
cent and 28 per cent higher than in MY 2002, MY 2004 and MY 2005 respectively. Thus, it is
reasonable to expect that the proportion of farm ers who did not cover their total costs would be
significantly higher in those years.

487 If we use Table 6B, the portion of overhead costs covered by market revenues (less operating costs)
are 14.1%, 142.2%, 105.9%, 75.4% and 72.4% for MY 2002, 2003, 2004, 2005 and 2006 respectively. The
second argument of the United States accurately describe s what occurred in all mark eting years except in MY
2002 where only 14.1% of overhead costs were covered. In other marketing years, overhead costs were either
fully covered (as in MY 2003 and MY 2004) or about three-fourths were covered (as in MY 2005 and MY
2006).

Figure 3: Average Farm and Spot Prices, MY 2002-2005
0
10
20
30
40
50
60
70
2002 2003 2004 2005
Marketing Year
Cents per Lb
Farm price
Spot price
Source: Exhibit US-83.
10.195 The Panel considers, however, that these additi onal arguments skirt around the main issue.
The Panel is making an assessment involving the me dium to long-term developments in the upland
cotton industry. This requires the Panel to compare market revenue not only with variable costs but
with total costs. And the picture that emerges fro m this medium- to long-term analysis is of total
costs exceeding market revenue in three of the four marketing years for which we have final data if
we use Table 6A and in two of the four marketing years for which we have final data if we use Table
6B. In the Panel's view, it is likely that the tota l costs of production will co ntinue to exceed market
revenue in MY 2006, irrespective of whether ginning costs are excluded or not.
10.196 In conclusion, the Panel finds that there exists a significant gap between the total costs of
production of US upland cotton producers and their market revenue. The Panel considers that this gap
between costs and revenue, when analyzed in conj unction with the magnitude of the marketing loan
and counter-cyclical subsidies and their importa nce as a share of the revenue of US cotton
producers488, supports the proposition that the marketing lo an and counter-cyclical payments are an
important factor affecting the economic viability of US upland cotton farming. The Panel therefore
also considers that without these subsidies th e level of US upland cotton acreage and production
would be considerably lower.489

488 Supra, para. 10.111.
489 Thus, based on the evidence before us, we arrive at the same conclusion as the original panel, which
found that "United States upland cotton producers would not have been economically capable of remaining in
the production of upland cotton had it not been for the United States subsidies at issue" and that the subsidies at
issue sustained a higher level of output than would have occurred in the absence of the subsidies. US – Upland
Cotton, paras. 7.1353 and 7.1355.

10. The economic simulation model submitted by Brazil in this proceeding
(a) Introduction
10.197 Brazil submits an economic model to simulate the effects of US subsidies on the world
market for upland cotton. Brazil includes the mode l as part of a set of economic studies which it
claims support a finding that marketing loan an d counter-cyclical payments continue to cause
significant price suppression. The Panel understands that the model is intended to quantify the price
suppression that Brazil claims is caused by US subsidy payments. In the original dispute, an
economic model was also presented by Brazil. With respect to that model, the original panel stated
that:
"we have taken [Professor Sumner's] analys is … into account where relevant to our
analysis of the existence and nature of th e subsidies in question, and their effects,
under the relevant provision of the SCM Agreement, and have attributed to them the
evidentiary weight we deemed appropriate."
490
10.198 In this case, we have taken the analysis of th e model one step further by considering in some
detail the arguments made by the parties a bout the model, its assumptions and results. 491 T o t h e
extent possible, we have provided our assessment of these arguments, and based on that arrived at an
overall conclusion about the simulation results.
10.199 Brazil's model is a demand and supply model in log (natural logarithm) difference form which
calculates changes from an initial eq uilibrium where US subsidy payments are in place. The model
has just two regions, the US and the rest of the worl d. The model simulates a counterfactual scenario:
how much would be the changes to the world price, cotton production in the US and rest of the world,
and cotton exports/imports of the US and the rest of the world if US subsidy payments – principally
the marketing loan and counter-cyclical payments – were eliminated?
10.200 The model is simulated over the period MY 1 999-2008. In order to run this simulation,
assumptions have to be made about a number of pa rameters: the US and foreign elasticities of supply
and demand and the coupling factor for marketing loan and counter-cyclical payments. Further, given
that expectations about prices drive production deci sions, the expected prices have to be determined
as well. Three alternative assumptions are made ab out how farmers form price expectations: (i) the
expected price is a one-year lag of actual prices and subsidy amounts, (ii) the expected price is the
harvest period futures prices at the time of planting, and (iii) the expected price is equal to the FAPRI
commodity outlook that is developed at the same time that growers are forming their expectations and
projections.
(b) Main arguments of the parties
10.201 Using the results of the simulation model, Brazil asserts that were it not for the marketing
loan and counter-cyclical payments, the world pri ce of cotton would have been higher and US upland
cotton production and exports would have been subs tantially lower. For the period MY 2002-2005,
the world price would have been higher on average by 8.2 to 8.9 per cent and US cotton production
and exports would have been lower on average by 15 to 16.2 per cent and 20.8 to 22.5 per cent

490 Panel Report, US – Upland Cotton, para. 7.1209 (footnote omitted).
491 The Panel notes the transparency of the model. The full set of equations is explicitly written out and
an electronic version of the simulation model, in the form of an Excel spreadsheet, has been provided to the
United States and to the Panel. This gives all parties to the dispute and the Panel full access to the model, its
assumptions and the results. In fact, the United States has used the Excel spreadsheet provided by Brazil to
conduct alternative simulations using a different set of parameter assumptions.

respectively, depending on the assumption made about price expectations.492 For marketing year 2005
alone, Brazil estimates that the removal of marketi ng loan and counter-cyclical payments increases
the world price of cotton by 9.3 to 10.7 per cent, decreases US cotton production by 16.9 to 19.4 per
cent and decreases US exports by 23.5 to 26.9 pe r cent, depending on the proxy used for deriving
revenue expectations.
493 For MY 2006-2008, Brazil projects a price increase of between 4.44 per cent
and 6.05 per cent if both marketing loan and counter-cyclical payments were to be eliminated.494
10.202 The United States strongly contests these results. Utilizing the same model provided by
Brazil, the United States has carried out its own simu lations using a different set of parameter values
derived from the US and world cotton models de veloped by the FAPRI as well as another set of
parameter values taken from the UNCTAD-FAO Agricultural Trade Policy Simulation Model
(ATPSM). Using parameter values from the FAPRI cotton model, and assuming that the expected
price is a one-year lag of actual prices, the rem oval of marketing loan and counter-cyclical payment
programmes is projected to increase the world price by only 1.41 per cent over the period MY 2002-
2005 and 0.96 per cent over the period MY 2006-2 008. Using the supply and demand elasticities
from the ATPSM model, and assuming that the expect ed price is a one-year lag of actual prices,
removal of marketing loan and counter-cyclical pa yment programmes is projected to lead to an
increase in the world price of 2.26 per cent over the period MY 2002-2005 and 1.52 per cent over the
period MY2006-2008.
495 The United States argues that the r esults for the other price expectation
models are similar to that obtained from the lagged price model.
10.203 A comparison of the impact on world prices of the simulations performed by Brazil and the
United States, using the one-year price lag assumption, is shown in Figure 4 below. Brazil's
simulation results are shown by the top curve. The results of two US simulations are shown: the
bottom curve is the outcome from using FAPRI elasticities while the middle curve shows the
projected increase in the world price using the ATPSM elasticities.

492 Brazil's First Written Submission, Annex I, para. 82.
493 Brazil's First Written Submission, Annex I, para. 81.
494 These are the simple averages derived from Tables 2.A.1 and 2.A.3 of Brazil's First Written
Submission, Annex I.
495 US First Written Submission, Annex 1, paras. 3-4.

Figure 4: Simulation Results Using Different Parameter Assumptions
0%
2%
4%
6%
8%
10%
12%
14%
16%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Marketing Year
Change in World Price
Brazil US FAPRI US ATPSM

10.204 The disagreement between the parties relates to two issues. The first issue has to do with
adequacy of the model itself. The second issue has to do with the appropriate choice of parameter
values – primarily demand and supply elasticities. Although we have tried to treat each issue
separately, it is important to note that the two issues are closely related.
(i) Structure of the model
10.205 There appear to be several criticisms by th e United States against the model submitted by
Brazil. First, the model is based on a simpler and more reduced formulation than the FAPRI model
and abandons critical FAPRI parameters. 496 The United States notes, in this respect, that in the
original proceeding, in which Brazil also submitted a model, Brazil emphasized the similarity of its
model with the FAPRI model. Second, as a consequence of this more simple and reduced
formulation, the model is unable to take cross-commodity impacts and cross-price elasticities into
account, potentially leading to biased price effects.
497 Third, Brazil's model does not allow for
changes in cotton stock levels and has no stock eq uation, which is another problem with the model
that will tend to accentuate price changes. 498 Fourth, the United States also objects to the way in

496 US Rebuttal Submission, Annex I, para. 4.
497 US Rebuttal Submission, Annex I, para. 4. See also Statement of Dr. Joseph W. Glauber, paras. 3-
4.
498 US Rebuttal Submission, Annex I, para. 4.

which different types of government payments are modelled differently, although they operate in the
same way, or are directly incorporated in the revenues of the producers.499
10.206 Brazil's defence is that the far more straightfo rward model it has used can be readily focused
specifically on effects in cotton markets and the removal of cotton subsidies alone. 500 Brazil explains
that this approach would make the analysis more accessible to other parties and to the Panel. This
single purpose use of the model – to address the question of significant price suppression of US
subsidies – also explains its use of parameters th at were more applicable to the case at hand rather
than "all-purpose—one size fits all" parameters that are imbedded in the FAPRI system. 501
(ii) Parameters of the model
10.207 The United States argues that many of the parameter values chosen by Brazil are
"inappropriate" and "bias" the effects of the removal of US cotton subsidies on world market prices.502
The United States contends that the parameter valu es chosen by Brazil differ substantially from the
parameter values used in the model ("Sumner I") submitted in the original dispute and with the
parameters used in the FAPRI cotton models. Further, it criticizes Brazil for not providing any
statistical evidence or validation for its choice of elasticities.503
10.208 Brazil argues that the parameters it has chosen ar e more applicable to the case at hand rather
than the "all-purpose—one size fits all" parameters th at are imbedded in the FAPRI system. It claims
that the "cumbersome nature" of the FAPRI modeling system means that it is difficult to recognize in
the parameterization that different degrees of r esponse would be expected under different policy
circumstances.504
US Supply Elasticity
10.209 The parties disagree about the size of the US supply elasticity with Brazil claiming a larger
value (0.8) than the United States (0.21).
10.210 Brazil explains that the use of a higher supply elas ticity is justified by the nature of the policy
experiment being contemplated, a large and permanent reduction in per unit revenue, entailed by the
elimination of the marketing loan and counter-cyclical programmes. 505 Brazil cites empirical studies
which suggest that by eliminating the constrai nts which exist under US subsidy programmes, US
farmers' supply response will b ecome substantially larger. 506 Brazil claims that what it uses is a
general equilibrium supply elasticity reflecting the endogenous changes in the prices of other crops. 507
Brazil also expresses doubts about the accuracy and a pplicability of the estimates of regional supply
elasticities that the United States uses to come up with a national estimate of the US supply
elasticity.508
10.211 The United States has used the FAPRI regional acreage equations to calculate a weighted
average cotton supply elasticity for the country as a whole. This produced a considerably lower

499 US Rebuttal Submission, Annex I, para. 4.
500 Brazil's Rebuttal Submission, Annex I, para. 4.
501 Brazil's Rebuttal Submission, Annex I, para. 6.
502 US First Written Submission, Annex 1, para. 1.
503 US Rebuttal Submission, Annex I, para. 12.
504 Brazil's Rebuttal Submission, Annex I, para. 6.
505 Brazil's Rebuttal Submission, Annex I, para. 8.
506 Brazil's Rebuttal Submission, Annex I, para. 10.
507 Brazil's Rebuttal Submission, Annex I, para. 14.
508 Brazil's Rebuttal Submission, Annex I, para. 18.

estimate than that obtained by Brazil.
509 The United States counters Brazil's explanation about the
high US supply elasticity by pointing to equally am bitious policy scenarios that have been simulated
by the FAPRI cotton model which were conducte d without modifying the size of the supply
elasticity.510 The United States questions the relevance of the empirical literature cited by Brazil since
this literature analyzed the acreage response of producers during the early 1990s when cotton
producers were allowed only limited planting flexibility under the 1990 farm bill. 511 T h e
United States also alleges that the magnitude of the elasticity chosen by Brazil suggests a neglect of
cross-commodity price impacts.512
Foreign Supply Elasticity
10.212 Brazil's model assumes a foreign supply elasticity of 0.2. The United States criticizes this
choice as being too low and gives an alternative value of 0.33.
10.213 Brazil gives several reasons for why the forei gn supply elasticity should be small. The
incentive to change production faced by foreign producers is indirect, relatively small compared to the
revenue loss faced by US producers, and in the oppo site direction from that faced by US producers. 513
Further, the transmission of world price changes to local prices occurs with a lag and, for some
countries, only partially, due to trade barriers, institu tional constraints, transportation costs, and costly
information, among others factors.514
10.214 The United States obtains its value of the foreign supply elasticity from the FAPRI
international cotton model. 515 It objects to Brazil's explanation about the incentive to change
production faced by foreign producers being indirect and relatively small since the foreign supply
elasticity measures the responsiveness of foreign suppl y to changes in foreign producer revenue (not
US producer revenue).516 While the United States agrees that the factors mentioned by Brazil, such as
trade barriers, institutional constraints, transportation costs, and costly information can have an impact
on local cash prices, it believes that these impacts are captured in the FAPRI's international cotton
model's estimation of detailed supply-response equations for the major cotton-producing countries.517
US and Foreign Demand Elasticities
10.215 Brazil assumes identical US and foreign demand elasticities of -0.2. The United States
assumes a US demand elasticity of -0.822 and a foreign demand elasticity of -0.39.
10.216 The United States criticizes the absence of a stock or inventory adjustment in Brazil's model.
Shocks to supply and demand have to be absorbed only through price changes as there is no scope for
absorption through stockholding behaviour. 518 To account for stocks in their analysis, the
United States considers a total demand elasticity for mill use and ending stocks based on MY 2003-
2005 mill use and ending stock levels and the estimated mill use and stock demand equations from the
FAPRI model.519

509 US First Written Submission, Annex I, para. 19.
510 US First Written Submission, Annex I, para. 13.
511 US Rebuttal Submission, Annex I, para. 14.
512 US First Written Submission, Annex I, para. 15.
513 Brazil's Rebuttal Submission, Annex I, para. 21.
514 Brazil's Rebuttal Submission, Annex I, para. 23.
515 US First Written Submission, Annex I, para. 23.
516 US Rebuttal Submission, Annex I, para. 20.
517 US Rebuttal Submission, Annex I, para. 21.
518 US First Writtten Submission, Annex 1, para. 25.
519 US First Written Submission, Annex 1, para. 27.

10.217 Brazil explains that the lack of stock adjust ment in its model is a consequence of the
counterfactual scenario that is being simulated. The counterfactual involves an expected and
permanent change in the overall market price leve l of cotton. In Brazil's view, such temporary
increases or decreases in stocks in response to fluctuations in mark et prices are irrelevant to the
demand response to the anticipated and perman ent policy changes being examined in this
proceeding.520
CCP Coupling Factor
10.218 Finally, Brazil and the United States disagree on the appropriate value to assign to the
"coupling factor" linking counter-cyclical payments to market price. This coupling factor provides
some measure of the production-enhancing effect of subsidies. Brazil uses a coupling factor of 0.4 for
counter-cyclical payments while the United States ar gues that the correct coupling factor is 0.25,
which is that assumed in the FAPRI model.
(c) Evaluation by the Panel
10.219 The Panel notes the advantage of the modeling a pproach that Brazil has chosen to adopt. A
simpler and more accessible model can be readily focused on the specific issue at hand. It should
include only the relevant economic features that ar e crucial to a determina tion whether certain US
Government payments led to significant price suppression.
10.220 However, the Panel is also mindful of the cr iticism by the United States that Brazil's model
"has no foundation within economic circles". 521 The model has been submitted for the first time to
this dispute. This means that the model needs to earn the confidence of this Panel.
10.221 Furthermore, the magnitude of the impact of US subsidies on the world price depends on the
parameter values assumed for Brazil's model. Each party has presented us with arguments why the
parameter values it has chosen in the simulation are better than those used by the other party. The
Panel does not take a position on whether the FAPRI or ATPSM parameters are better than those
chosen by Brazil. Thus, the Panel is not in a position to judge the claims of the parties about the exact
magnitude by which the world price would rise were marketing loan and counter-cyclical payments to
cease entirely.
10.222 While the Panel has refrained from making a determination about the magnitude of the impact
of the US subsidies on the world price, the Panel ne vertheless finds that all the simulations conducted
by the parties support the view that US marketing lo an and counter-cyclical payments have led to an
increase in US production and exports of cotton that have then suppressed world prices. The Panel
takes note of the fact that price suppression has been the outcome of all the simulation results whether
one uses the parameter values proposed by Braz il or the FAPRI and ATPSM parameter values
proposed by the United States.
11. Impact of the elimination of Step 2 payments
(a) Introduction
10.223 The United States eliminated the Step 2 progr amme effective as of 1 August 2006. The
Step 2 programme was a special marketing loan prov ision for upland cotton that had been authorized
since 1990 under successive legislation, including the FAIR Act of 1996 and the FSRI Act of 2002. It
provided for the issuance of marketing certificates or cash payments to eligible domestic users and

520 Brazil's Rebuttal Submission, Annex I, para. 29.
521 US Rebuttal Submission, Annex I, para. 7.

exporters of eligible upland cotton when certain market conditions existed such that US cotton pricing
benchmarks were exceeded.
522 As such, the programme combined elements of export subsidization,
when payments were made to US exporters of eligible cotton, and import substitution, when payments
were made to eligible domestic users of US upland cotton.
10.224 The parties disagree on the effect of the elimination of the Step 2 programme on US
production and exports of cotton.
(b) Main arguments of the parties
10.225 Brazil submits that the Step 2 programme caused price suppression independent from and in
addition to the significant price suppression caused by the marketing loan and counter-cyclical
payments programmes.
523 Although modest in comparison with the much larger effects of marketing
loan and counter-cyclical payments, the world market price effects of Step 2 payments, in isolation,
are clearly recognizable. Brazil submits, in this conn ection, that the removal of Step 2 payments will
enhance the adverse effects of the counter-cyclical payments because it will result in lower US
domestic prices and thereby lead to higher counter-cyclical payments. 524 Brazil refers to studies by
the US Congressional Budget Office and by researchers of the University of Missouri that predict that
the repeal of the Step 2 programme will only have a modest downward impact on the revenues of US
upland cotton producers because of the increase in counter-cyclical payments caused by the decline in
domestic prices.525 Brazil also cites to studies that predict that repeal of the Step 2 programme will
have no significant impact on US production a nd exports of upland cotton and on world market
prices.526 The relatively modest effects of the rem oval of Step 2 payments on US production and
exports mean that marketing loan payments and c ounter-cyclical payments continue to be the main
drivers of price suppression in the world market for upland cotton. That the Step 2 programme did
not affect the causal link between the marketing loan and counter-cyclical payment programmes and
significant price suppression is evidenced by th e fact that the planted acreage for MY 2006 is

522 Panel Report, US – Upland Cotton, para. 7.209.
523 Brazil's First Written Submission, paras. 191-208.
524 Brazil argues that the degree to which counter-cy clical payments will offset the loss of Step 2
payments depends on the level of the average farm pr ice in a particular marketing year. Counter-cyclical
payments are made if the average farm price is below a "trigger price" of 65.73 cents per pound. In the rare
instances when the average farm price is above the counter-cyclical trigger price, the loss of Step 2 payments
will negatively impact upland cotton pr oducers' revenue. This is becau se any downward movement in the
average farm price that is caused by the elimination of Step 2 payments, and yet does not lower prices below
65.73 cents per pound, will not be compensated by increa sed counter-cyclical payments. However, Brazil notes
that in each of the last nine marketing year s, the average US farm price has been below the counter-cyclical
payment trigger price. It is theref ore unlikely that domestic prices will rise to the level where counter-cyclical
payments will not compensate US producers for a fall in do mestic prices following the withdrawal of the Step 2
programme. Brazil notes that if the average farm pri ce is below 52 cents per pound, a further decline in the
price level will also not be compensated by counter-cyclical paym ents because the maximum counter-cyclical
payment will have already been made. Thus, counter-cyclical payments will offset the loss of Step 2 payments
where the average farm price is between the marketing loan rate of 52 cents per pound and the trigger price of
65.73 cents per pound for counter-cyclical payments. Brazil's First Written Submission, paras. 198-200.
525 Brazil's First Written Submission, paras. 201-203.
526 According to Brazil, the study co nducted by the University of Mi ssouri researchers found that the
removal of the Step 2 payments would reduce US production by about 1 per cent, US exports by 2 per cent and
increase world market prices by 0.39 cents per pound, or less than 1 per cent. Brazil also refers to an ICAC
study that concluded that elimination of the Step 2 programme would have no significant effect on US exports
of upland cotton. As support for its argument concerning the limited impact of the removal of Step 2 payments,
Brazil also relies on the simulation model in Annex I to its First Written Submission and the expert testimony in
Annex II to its First Written Submission. Brazil's First Written Submission, paras. 203-204.

estimated to be 7 per cent higher than in MY 2005, notwithstanding that US cotton producers knew
that the Step 2 payments would be eliminated as of August 2006.527
10.226 Brazil asserts that, contrary to what the United States appears to argue, the Step 2 programme
and the mandatory payments made thereunder were no t the sole cause of the serious prejudice found
by the original panel, and that the arguments of the United States in this regard are inconsistent with
the findings of the original panel and the Appe llate Body concerning the nature, magnitude and
effects of the price contingent basket of measures found to cause serious prejudice. 528 Brazil
emphasizes that its argument that the relative effects of the Step 2 subsidy are modest compared to the
combined effects of the marketing loan and counter-cyc lical payments is consistent with the reality of
the operation of the three subsidies. The remova l of the Step 2 programme will have a relatively
insignificant impact on the amount of marketing lo an payments. The incr ease in counter-cyclical
payments following the repeal of the Step 2 progra mme far outweighs the decrease in marketing loan
payments. 529 Brazil further submits that US upland cott on producers' revenue is critically dependent
upon marketing loan and counter-cyclical payments but not on Step 2 payments. Thus, the repeal of
the Step 2 programme has a very limited impact on US upland cotton producers' expected or actual
revenues.
530 Finally, partial MY 2006 data regarding US exports does not support the argument of the
United States that there are no significant producti on, export and world market price effects from the
marketing loan and counter-cyclical subsidies. The primary cause of the decline in US exports is the
world demand and supply situation. Moreover, the drop in exports in MY 2006 is not remarkable in
light of the surge in exports that occurred immediately prior to the repeal of the Step 2 programme.
USDA projections for MY 2006 indicate that the decline in exports will be temporary.
10.227 The United States submits that Brazil's arguments about the "relatively modest" impact of
removal of the Step 2 programme are without merit. First, eliminating the Step 2 programme likely
does not result in an increase in the counter-cyclical payment rate but does result in lower marketing
loan payments. At the season average farm price th at is projected for MY 2006, there cannot be any
appreciable increase in the counter-cyclical pa yment rate in this current marketing year. 531 A t t h e
same time, the evidence suggests that elimination of the Step 2 programme will likely lead to lower
marketing loan payments as a result of the increase in world market prices. 532 Rather than enhancing
the adverse effects of counter-cyclical payments, as alleged by Brazil, the elimination of the Step 2
programme is likely to minimize the ef fect of marketing loan payments. Second, Brazil's efforts to

527 In the section of Brazil's First Written Submission on the magnitude of the subsidies at issue, Brazil
argues that elimination of the Step 2 subsidy from the analysis does not significantly reduce the overall
magnitude of the price-contingent subsidies. According to Brazil, during MY 1999-2002 Step 2 payments
represented only 13.7 per cent of the magnitude of the three price-contingent subsidies that the original panel
found to stimulate production and exports and to result in lower world market prices than would prevail in their
absence. Brazil's First Written Submission, para. 112.
529 Brazil points out that a FAPRI study referred to by the United States estimates that without the Step
2 payments the AWP would increase by an average of 0.4 cents per pound in MY 2006-2012 and that a study by
the US Congressional Budget Office (CBO ) estimated the reduction in marketing loan payments as a result of
the elimination of the Step 2 subsidy to be US$17 million over a period of ten years. According to the CBO,
counter-cyclical payments will increase over the same period by US$484 million. Brazil's Rebuttal Submission,
paras. 59-61.
530 Brazil's Rebuttal Submission, paras. 66-75.
531 US First Written Submission, paras. 159-170. Th e United States submits that the projected average
farm price for MY 2006 is only a fraction of a cent higher than the marketing loan rate . When the farm price is
at or below the marketing loan rate the counter-cyclical payment rate remains fixed at its maximum level. The
United States notes that none of studies cited by Br azil as support for its argument that counter-cyclical
payments are likely to increase predict such an increase for the current marketing year.
532 US First Written Submission, paras. 171-178. The United States submits that the US Congressional
Budget Office, FAPRI and ICAC have also found that elimination of the Step 2 programme will likely have the
effect of reducing the amount of marketing loan payments.

demonstrate the "modest" effects on the market of eliminating the Step 2 programme are undermined
by its own arguments in the original panel proceeding.
533 Third, data from August-October 2006 do
not support Brazil's claim that elimination of the Step 2 programme has had "modest" effects. In this
respect, the United States submits, in particular, that the current level of US exports of upland cotton
is far below recent levels.534
(c) Evaluation by the Panel
(i) Assessing the effects on US cotton exports
10.228 Brazil argues that the elimination of Step 2 payments has not diminished the significant price-
suppression from marketing loan and counter-cycli cal payments. While Step 2 payments by
themselves have an independent price suppression effect, Brazil believes that these effects are
relatively "modest" and that other US subsidies, principally counter-cyclical and marketing loan
payments, will be sufficient to ensure that US cotton producers continue to produce and export cotton.
The United States disputes that the effect of eliminating Step 2 payments will be "modest".
10.229 In this connection, the United States refers to certain trends which it argues do not support
Brazil's argument regarding the modest effects of the elimination of Step 2 payments, particularly the
decline in US exports and the US share of world exports in MY 2006. 535 Brazil argues that the
"temporal coincidence" between the removal of Step 2 payments and a decline in US exports is not
remarkable.
10.230 The Panel concurs with the United States that the available evidence as of February 2007
suggests significant reductions in the volume of production and exports of US upland cotton in
MY 2006. The absolute volumes of US cotton production and exports in MY 2006 are projected to
fall by 9 per cent and 19.6 per cent, respectively, from MY 2005 levels. More importantly, the US
share of world production is projected to fall to 18.6 per cent in MY 2006 from 20.9 per cent in MY
2005; the US share of world exports is projected to decline to 36.3 in MY 2006 per cent from 40.1 per
cent in MY 2005. This means that decreases in the absolute levels of US production and exports are
far sharper than for the rest of the world. Th e Panel also notes a document submitted by the United
States that contains the results of the annual survey of planting intentions conducted by the National
Cotton Council, which indicates that US upland cott on plantings are likely to be down an average of
14 per cent in MY 2007 from 2006 levels.
536

533The United States submits that Brazil's argument on the relative size of the Step 2 payments as
compared to the size of marketing loan and counter-cycli cal payments is inconsistent with the position taken by
Brazil in the original proceeding that the focus of a serious prejudice analysis should be on the effects and not
on the magnitude, value or amount of the subsidy. Similarly, Brazil's argument that Step 2 payments have no
impact on the level of production and exports of US upland cotton cannot be reconciled with the argument of
Brazil in the original proceeding that the Step 2 programme had a significant effect on the level of US exports of
upland cotton. The statement by Brazil's expert that elimination of the Step 2 programme will have little impact
on the world price for cotton in the long-term is inconsistent with the statement by the same expert in the
original proceeding that Step 2 was on e of three factors that enabled the Un ited States to act as the driver of
world prices. US First Written Submission, paras. 181-189.
535 According to the United States, among these trends for MY 2006 are: (i) US exports in MY 2006
are projected to be lower than in the previous marketing year; (ii) the US share of wo rld exports is projected to
fall to 36 per cent in MY 2006, (iii) world market prices are higher now (early in calendar year 2007) than year-
ago levels, while US prices – as reflected by the Ne w York futures market – are running well below those
levels.
536 Exhibit US-115.

10.231 The Panel considers that the data before it is cer tainly consistent with the argument that the
elimination of Step 2 payments is having an eff ect on US export performance. The Panel believes
that some part of the decline in the US share of th e export market reflects the effect of the elimination
of Step 2 payments. This is only consistent w ith the idea that the removal of payments which
subsidize exports and which subs idize domestic users to substitute domestic production for imports
will eliminate incentives to increase sales in the export market and to add to domestic production.
Our view is also consistent with the results of the economic simulation model submitted by Brazil,
which predicts a reduction in US production and e xports. However, given that we are not yet one
calendar year removed from the elimination of St ep 2 payments, and that the amount of Step 2
payments was much smaller than the amounts of pa yments made under either the marketing loan or
counter-cyclical programmes 537, it is not possible for the Panel to determine with any great deal of
precision or confidence just how much of the project ed decline in US exports of upland cotton is due
to the elimination of the Step 2 payments.
(ii) Indirect effect on marketing loan and counter-cyclical payments
10.232 The parties have also advanced arguments to su ggest that the elimination of Step 2 payments
has indirect effects, through consequential changes in the amount of counter-cyclical or marketing
loan payments, which either negate or accentuate the direct impact of the elimination of the Step 2
payments.
10.233 In the Panel's view, all things being equal, an export subsidy will increase the domestic price
in the exporting country because a larger part of dome stic production is diverted to the export market.
Assuming that the exporting country is a large country, i.e. that it can affect world prices, the
increased exports will also tend to depress the world price. 538 The export subsidy creates a wedge
between the domestic price in the exporting country and the world price. A measure that subsidizes
substitution of domestic production for imports will have a similar effect as export subsidies on
domestic and world prices. The additional de mand for domestic production puts upward pressure on
the domestic price; if the country is a large c ountry, the reduction in its imports puts downward
pressure on the world price. Thus, eliminating a programme which has both elements of export
subsidization and import substitution will reverse th e process, lowering the domestic price even as the
world price is increased.
10.234 Brazil argues that the decline in the domestic price of cotton in the United States, which
comes about from the elimination of Step 2 pa yments, will trigger additional counter-cyclical
payments.539 The United States disagrees with Brazil that the elimination of Step 2 payments will

537 In MY 2005, payments under the marketing loan and counter-cyclical programmes were about
US$1.257 billion and US$838 million respectively. Table 8 below gives the amounts of payments under the
Step 2 programme from MY 1999 until MY 2005. During its last marketing year, total payments under the
programme amounted to US$350 million.
Table 8: Step 2 Payments, MY 1999-2005
 (million US$)
 ITEM MY1999 MY2000 MY2001 MY2002 MY2003 MY2004 MY2005
Step 2 payments $422 $236 $196 $429 $350 $544 $350
Source: Brazil's First Written Submission, Table 6.
538 We find support for this view from the analysis of export subsidies in standard international
economics textbooks such as that from Paul R. Krugman and Maurice Obstfeld (2003) International Economics:
Theory and Policy (6th edition) Boston, San Francisco: Addison-Wesley, 2003.
539 Supra, para. 10.225.

lead to a decline in domestic cotton prices th at will result in compensating increases in counter-
cyclical payments.
540
10.235 Further, the United States argues that the elim ination of the Step 2 programme is likely to
result in lower marketing loan payments. 541 Thus, for the United States, the elimination of Step 2
payments will have spill-over effects on marketi ng loan payments, which accentuate rather than
negate the direct impact of eliminating the export subsidy programme. Brazil does not seem to
dispute this claim although it argues that the decr ease in marketing loan payments is likely to be
small.542
10.236 Brazil and the United States emphasize different aspects of the likely adjustment in domestic
(US) and world prices resulting from the elimination of the Step 2 programme. Brazil emphasizes the
reduction in the domestic price, which it argues, would tend to trigger additional counter-cyclical
payments. The United States emphasizes the increase in the world price, which it argues, would tend
to reduce marketing loan payments. Both parties are correct in their assessment of how domestic
(US) and world cotton prices are likely to evolve, al l things being the same, with the elimination of
Step 2 payments. In our view the scenarios clai med by the parties – increases in counter-cyclical
payments and decreases in marketing loan payments – will be played out simultaneously.
10.237 There are two questions remaining. First, wh at are the likely magnit udes of the changes in
counter-cyclical payments and marketing loan paymen ts that will be caused by the elimination of the
Step 2 programme? The second and more important question is what are the likely impacts on US
cotton production and exports?
10.238 On the first question, we find credible the US CBO projections, which both parties have
referred to, of the likely changes in marketing loan and counter-cyclical payments that will result from
the elimination of the Step 2 programme. Over the US fiscal year period 2006-2015, the CBO
projects that the elimination of the Step 2 pr ogramme will reduce marketing loan payments by
US$17 million and increase counter-cyclical payments by US$484 million. In this respect, one
should take note of the clarification made by th e United States that the projected reductions in
marketing loan payments will apply only to MY 2006-2007, since no payments are expected beyond
that.543
10.239 In answering the second question, the Panel obser ves that it will not suffice to just compare
the magnitude of these payments. This is because a dollar of mark eting loan payments provides a
greater incentive to increase production than does a dollar of counter-cyclical payments. These
projected changes are also rather modest, if one takes into account the scale of the annual payments
made under the marketing loan and counter-cyclical programmes, and the ten-year horizon involved.
The Panel is led to conclude that the indirect im pacts on US production and exports are likely to be
small, given the relatively modest changes project ed in the amounts of marketing loan and counter-
cyclical payments, and the fact that these changes run counter to one another.

540 Supra, para. 10.227.
541 Supra, para. 10.227.
542 Brazil refers to the CBO report which projects a reduction of US$17 million in marketing loan
payments arising from the elimination of the Step 2 programme. Brazil's Rebuttal Submission, paras. 58-60.
543 US Rebuttal Submission, para. 184.

12. Other factors impacting the world market price for upland cotton
(a) Main arguments of the parties
10.240 The United States submits that by failing to undertake any meaningful analysis of world
market prices and the factors that influence them Braz il fails to ensure that the effects of other factors
on prices are not improperly attributed to the marketing loan and counter-cyclical subsidies at issue in
this proceeding. In this regard, the United States emphasizes that Brazil does not take into account the
role of China's trade in cotton. Brazil ignores th e fact that there exists a high correlation between
China's net trade in cotton and the A-Index, that the A-Index itself has been changed to reflect the
impact of China on the world cotton market, and th at, as indicated by market reports submitted by
Brazil, the uncertainty regarding China's trade in cotton results in downward pressures on prices.544
10.241 Brazil argues that any impact of China's purchases of upland cotton on the world market price
does not diminish the significant price-suppressing e ffects of the US subsidies at issue. Brazil
emphasizes that its claim is a claim of price suppression and not of price depression and that this
claim does not depend upon the actual level of world prices for upland cotton, which is influenced by
numerous factors, including the purchasing behaviou r of China. While China's supply and demand
may explain certain price movements in the world market for upland cotton, this does not alter the
fact that removal of US subsidies would result in a significant increase in the US supply to the world
market, which in turn would lead to significantl y higher prices. In any case, while Brazil does not
disagree that China exerts a strong influence on the world market price for upland cotton, China's role
is not as dominant as argued by the United States. Thus, Brazil contests that there is a significant
correlation between China's exports and the A-Index and asserts that the change in the A-Index is of
little importance for the overall determination of worl d market prices. Finally, Brazil considers that
uncertainty about China's demand and supply can lead to short-term price fluctuations, but that in the
long-term prices are determined by market fundamentals of demand and supply.
545
(b) Evaluation by the Panel
10.242 As observed by the Appellate Body and the pane l in the original proceeding, in order to
determine that the effect of a subsidy is significant price suppression within the meaning of
Article 6.3(b) it is necessary "to ensure that the effects of other factors on prices are not improperly
attributed to the challenged subsidies".
546 However, the SCM Agreement prescribes no precise
methodology for such an analysis of the role of other factors in the context of Article 6.3.
10.243 As discussed above, the Panel has adopted a "but for" approach to the question of whether the
effect of US marketing loan and counter-cyclical subsidies to upland cotton producers is significant
price suppression within the meaning of Article 6.3(c) of the SCM Agreement. The Panel considers
that it is not necessary in this respect to undertake a comprehensive evaluation of factors affecting the
world market price for upland cotton. Rather the question is whether the evidence before the Panel
supports the conclusion that in the absence of the US marketing loan and c ounter-cyclical subsidies
the world market price would increase significantly . The Panel considers, based on the evidence
before it, that while China may play a significant ro le in the market for upland cotton, this does not
diminish the significance of the impact of US subsidies on the world price for upland cotton as a
result of their effect on US supply to the world mark et. Developments concerning the role of China's

544 US First Written Submission, paras. 308-318; US Rebuttal Submission, paras. 387-396.
545 Brazil's Rebuttal Submission, paras. 324-345.
546 Appellate Body Report, US – Upland Cotton , para. 437; Panel Report, US – Upland Cotton ,
para. 7.1344.

demand and supply do not change the fact that, w ith a share of world exports of around 40 per cent,
the United States is capable of exerting a substantial proportionate influence on the world market.
547
13. Summary and conclusion of the Panel's analysis of Brazil's claim of serious prejudice
within the meaning of Articles 5(c) and 6.3(c) of the SCM Agreement
10.244 The Panel recalls that the original panel found that the effect of certain price-contingent
subsidies provided by the Unite d States in respect of upland cotton – marketing loan programme
payments, user marketing (Step 2) payments, mark et loss assistance payments and counter-cyclical
payments – was significant price suppression in the same world market for upland cotton in the period
MY 1999-2002 within the meaning of Article 6.3(c) of the SCM Agreement constituting serious
prejudice within the meaning of Article 5(c) of the SCM Agreement.
548 In respect of this finding, the
original panel recalled that under Article 7.8 of the SCM Agreement the adoption of a panel or
Appellate Body Report in which it is determined th at a Member has caused adverse effects within the
meaning of Article 5 of the SCM Agreement requires the Member granting or maintaining the subsidy
to take appropriate steps to remove the adverse effects or to withdraw the subsidy.549 550
10.245 In this proceeding under Article 21.5 of the DS U, Brazil claims that the United States has
failed to comply with its obligations under Article 7.8 of the SCM Agreement because two of the
subsidies to US upland cotton producers that were the subject of the original panel's finding of
"present" serious prejudice – marketing loan and counter-cyclical payments – cause "present" serious
prejudice to the interests of Brazil within the meaning of Articles 5(c) and 6.3(c) of the SCM
Agreement.
10.246 The Panel has considered the arguments and ev idence presented by the parties in support of
their positions on the issues raised by Brazil. The Panel's evaluation can be summarized as follows.
10.247 First, in view of the magnitude of the US shares of world production and exports, the Panel
considers that the United States exerts a substantia l proportionate influence on the world market for
upland cotton, even if account is taken of the pr ojected declines in these shares in MY 2006. This
substantial proportionate influence of the United States, analyzed in light of the totality of the
evidence before us, is an element that supports a fi nding that the marketing loan and counter-cyclical
payments to US upland cotton producers cause sign ificant price suppression in the world market for
upland cotton.
10.248 Second, the Panel has found that marketing loan and counter-cyclical payments affect the
level of US upland cotton acreage and production as a result of their mandatory and price-contingent
nature and their revenue-stabilizing effect. In this respect, the Pane l has concurred with the view of
the original panel that these subsidies protect or "insulate" revenues of US upland cotton producers
when prices are low. We have emphasized, however , that in determining whether the structure,
design and operation of these subsidies support a finding of significant price suppression under
current factual conditions, we need to consider this factor in conjunction with other factors.

547 The Panel notes that Brazil has not ignored the role of China in the world market for upland cotton.
The analysis of the world cotton market prepared by Brazil' s experts specifically refers to the fact that China is
the largest producer and consumer of cotton and is now also the largest importer of cotton. Brazil's First Written
Submission, Annex II (Declaration by Andrew Macdonald).
548 Panel Report, US – Upland Cotton, paras. 7.1416 and 8.1(g)(i).
549 Panel Report, US – Upland Cotton, para. 8.3(d).
550 Brazil emphasizes that in explaining its decision not to address certain claims of Brazil, the original
panel observed that as a result of the panel's finding of present serious prejudice "the United States is obliged to
take action concerning its present statutory and regulatory framework." Panel Report, US – Upland Cotton ,
para. 7.1501. The United States argues that this statement is not a "reco mmendation" and that in any event the
United States has amended its statutory and regulatory framework by repealing the Step 2 programme.

10.249 Third, the Panel considers that the order of ma gnitude of the marketing loan and counter-
cyclical subsidies is such that in conjunction with other factors, this element supports a finding that
significant price suppression is the effect of the subs idy, even when account is taken of the projected
decline of marketing loan payments in MY 2006.
10.250 Fourth, the Panel has found that there exists a significant gap between the total costs of
production of US upland cotton producers and their ma rket revenue, suggesting that the subsidies at
issue are a key factor affecting the economic viability of US cotton farming.
10.251 Fifth, the Panel considers that certain arguments of Brazil are less persuasive. Thus, in
arguing that there exists a temporal coincidence of subsidies and suppressed prices, Brazil in our view
fails to take sufficient account of the fact that the recent trends in world market prices and US world
export shares differ considerably from the trends in world market prices and US world export share in
the period considered by the original panel. The Pa nel is also not convinced that Brazil has been able
to substantiate adequately its assertion that US upland cotton acreage, production and exports do not
respond to market price signals. The Panel recalls, however, its conclusion that the fact that recent
years have not witnessed the sharp decline in the world market pri ce for upland cotton that occurred
during the period considered by the original panel do es not necessarily mean that there is currently no
price suppression within the meaning of Article 6.3(c) of the SCM Agreement. The Panel also recalls
its observation that the stable US share of wo rld production and exports does not mean that US
producers are not insulated from market price signals, but that the degree of price insulation found by
the original panel is now weaker, possibly because prices are not depressed as during the period
examined by the original panel. Finally, the Pane l recalls that all the simulations conducted by the
parties support the view that US marketing loan and counter-cyclical payments have led to an increase
in US production and exports of cotton that have then suppressed world prices.
10.252 Sixth, the Panel has examined the role of other f actors that may have an effect on the world
market price for upland cotton, notably the role of China's trade in cotton. The Panel concludes that
this other factor does not attenuate the link betw een significant price suppression and the subsidies at
issue in this proceeding.
10.253 Finally, with respect to the elimination by the United States of Step 2 subsidies – one of the
subsidies that was the subject of the original pane l's finding of "present" serious prejudice – the Panel
considers that the evidence before it on the effect of the elimina tion of this subsidy on US exports and
on the amounts of marketing loan payments and counter-cyclical payments suggests that the
elimination of this subsidy does not affect th e price suppressing effects of the marketing loan
payments and counter-cyclical payments in the world market for upland cotton.
10.254 The Panel finds, on the basis of the above summarized evaluations, that without the marketing
loan and counter-cyclical payments to US upla nd cotton producers the level of US upland cotton
acreage and production would be significantly lower and that, as a consequence, the world market
price for upland cotton would be hi gher. The Panel recalls that to determine whether there is
significant price suppression within the meaning of Article 6.3(c) as the effect of the subsidies at
issue, the Panel must ascertain whether, but for th e subsidies at issue, the world market price for
upland cotton would have increased significantly, or would have increased by significantly more than
was in fact the case. The Panel concludes that the effect of the subsidies at issue is significant price
suppression in this sense.551
10.255 Article 6.3(c) of the SCM Agreement provides that "serious prejudice in the sense of
paragraph (c) of Article 5 may arise in any case where one or several of the following apply".
(emphasis added). The Panel considers that this phrase must be interpreted to mean that "the

551 See supra, paras. 10.50 for the Panel's view on the interpretation of the term "significant".

situations listed in Article 6.3(a)-(d) in themselves constitute serious prejudice".
552 As a consequence,
a finding of significant price suppression under Article 6.3(c) of the SCM Agreement is a sufficient
basis for a finding of serious prejudice within the meaning of Article 5(c) of the SCM Agreement.553
10.256 In light of the foregoing considerations, the Panel finds that the United States acts
inconsistently with its obligations under Articles 5(c) and 6.3(c) of the SCM Agreement in that the
effect of marketing loan payments and counte r-cyclical payments provided to US upland cotton
producers pursuant to the FSRI Act of 2002 is si gnificant price suppression within the meaning of
Article 6.3(c) of the SCM Agreement in the world market for upland cotton constituting "present"
serious prejudice to the interests of Brazil within the meaning of Article 5(c) of the SCM Agreement.
10.257 The Panel also finds, as a consequence, that by acting in consistently with Articles 5(c) and
6.3(c) of the SCM Agreement the United States has failed to comply with the DSB recommendations
and rulings. Specifically, the United States has faile d to comply with its obligation under Article 7.8
of the SCM Agreement "to take appropriate steps to remove the adverse effects or ... withdraw the
subsidy".
C. CLAIM OF BRAZIL OF "PRESENT" SERIOUS PREJUDICE WITHIN THE MEANING OF ARTICLES 5(C)
AND 6.3(D) OF THE SCM AGREEMENT
1. Main arguments of the parties
10.258 Brazil submits that the effects of the marketing loan and counter-cyclical payment subsidies
in MY 2005 cause the United States to hold an increased share of the world market for upland cotton.
In this respect, Brazil argues that the US share of the world market for upland cotton in MY 2005 was
greater than the average US world market share during MY 2002-2004, that this increase reflects a
consistent trend over the period MY 1998-2005, wh ich Brazil considers the most representative
period for purposes of Article 6.3(d), and that the evidence presented by Brazil in the context of its
price suppression argument regarding the effects of the nature and magnitude of the subsidies,
coupled with the commanding US production and export market share, on production, export and
world market price also supports a causal link betw een these subsidies and the increase in the world
market share of the United States.
10.259 The United States argues that Brazil fails to make a prima facie case of WTO-inconsistency
under Articles 5(c) and 6.3(d) of the SCM Agreement . Brazil fails to demonstrate that all of the
elements of Articles 5(c) and 6.3(d) of the SCM Agreement are satisfied.
554 Brazil has not
demonstrated that the slight increase in MY 2005 of the US share of world production (1.53 per cent)
and of the US share of world prod uction plus beginning stocks (0.46 per cent) was not caused by the
Step 2 programme. Brazil has also failed to demonstr ate that this increase "follows a consistent trend
over a period when subsidies have been granted". In the later regard, the United States points out that
US share of world production or production plus beginni ng stocks is stable if one looks back to MY
1980 and has actually declined significantly if one looks back to 1960.

552 Panel Report, Korea – Commercial Vessels, para. 7.587.
553 Panel Report, US – Upland Cotton, para. 7.1390.
554 The United States also submits that not only are Brazil's claims against the marketing loan and
counter-cyclical payment programmes not within the scope of this proceeding, but Brazil also fails to provide a
legal basis for a finding against these programmes b ecause it fails to demonstrate that these programmes
mandate a breach of Articles 5(c) and 6.3(d). Since the legal provisions or "programmes" pursuant to which
marketing loan and counter-cyclical payments are made by the US Government to US upland cotton farmers are
not, as such, the subject of Brazil's claims of serious prejudice, we do not need to address these arguments of the
United States.

2. Evaluation by the Panel
10.260 Articles 5(c) and 6.3(d) of the SCM Agreement provide:
"Serious prejudice in the sense of paragraph (c) of Article 5 may arise in any case
where one or several of the following apply ...
(d) the effect of the subsidy is an in crease in the world market share of the
subsidizing Member in a particular s ubsidized primary product or commodity 17 as
compared to the average share it had during the previous period of three years and
this increase follows a consistent trend over a period when subsidies have been
granted."
17Unless other multilaterally agreed specific ru les apply to the trade in the product or
commodity in question.
10.261 Thus, Article 6.3(d) requires, first, a showing that there has been an increase in the world
market share of the subsidizing Member in a partic ular primary product or commodity as compared to
the average market share of that Member in the previous period of three years. Second, it must be
shown that this increase follows a consistent trend over a period when subsidies have been granted.
10.262 With respect to the first element that must be satisfied for a finding under Article 6.3(d), we
note that the original panel interpreted the term "wor ld market share" in Article 6.3(d) to mean the
"share of the world market s upplied by the subsidizing Member". 555 Brazil has used this definition
and has noted that this definition suggests two poten tial measures of "supply". First, supply can be
limited to the annual level of a Member's ne w production of a primary product or commodity.
Alternatively, supply can additionally include resi dual produce from previous years, which, in the
context of upland cotton, is known as "beginning stocks". In this present dispute, Brazil has presented
data on the US world market share using both measures of supply.
10.263 Brazil argues that the world market share of th e United States has increased in MY 2005, as
compared to the average US share of world s upply in MY 2002-2004. Brazil provides data showing
that the US share of world production plus be ginning stocks increased by 0.46 per cent over the
average for MY 2002-2004 and the US share of wo rld production increased by 1.53 per cent over the
average for MY 2002-2004. 556 The Panel notes that while the United States does not dispute these
figures, the United States considers these "slight" increases to be part of ordinary fluctuations in US
market share, not the effect of the marketing loan and counter-cyclical payment programmes.
557
10.264 The Panel agrees with the United States that Brazi l has not been able to demonstrate that the
small increase in the US world market share is the effect of marketing loan and counter-cyclical
payments. It is not unreasonable to interpret su ch a small increase to be part of the ordinary
fluctuations in the US market share. The sensitiv ity of the result, an increase in US market share
compared to the average of the p ast three years, also becomes apparent if we change the terminal
marketing year from MY 2005 to MY 2006. Brazil has been willing to admit the inclusion of
MY 2006 projections provided that they are reliable. We have judged MY 2006 projections provided

555 Panel Report, US – Upland Cotton , para. 7.1454. While Brazil raised this issue in its appeal, the
Appellate Body found that an interpretation of the phra se "world market share" in Article 6.3(d) was not
necessary to resolve the dispute. Appellate Body Report, US – Upland Cotton, para. 511.
556 Brazil's First Written Submission, paras. 222-226.
557 US Rebuttal Submission, para. 402.

by the United States to this panel to be reliable. If one uses these projections for US and world cotton
production in MY 2006, the US world market share will actually be lower in MY 2006 compared to
the average of the three previous marketing years:
Table 9: US World Market Share, MY 2002-2006

Marketing Year US Share of World
Production
US Share of World
Production plus Stocks
2002 19.5% 17.4%
2003 19.2% 17.0%
2004 19.3% 16.3%
2005 20.9% 17.5%
2006 18.6% 16.3%
Source: Exhibits US-27 and US-114.
10.265 We note in this connection that Brazil argues th at the Panel should not take into account this
data for MY 2006 because Brazil's claim is a clai m of "present" serious prejudice, based upon data
from MY 2005, the last year for which complete data is available. 558 The Panel disagrees with this
argument of Brazil. The Panel must determine whethe r the effect of the subsidy "is" an increase in
the world market share of the United States. As di scussed above, the Panel considers that the use of
the present tense in Article 6.3 suggests that the rele vant period to consider is the present period and
that where reliable data is available for MY 2006, that data must be taken into account. The Panel
recalls that an important additional consideration for not limiting its analysis to MY 2005 is that the
elimination of the Step 2 programme became effective on 1 August 2006.
10.266 The Panel therefore finds that the evidence does not support Brazil's argument that there is an
increase in the world market share of the United States in upland cotton as compared to the average
US world market share during the previous period of three years. Thus, the Panel cannot find that the
effect of the subsidies at issue in this proceedi ng is an increase in the world market share of the
United States within the meaning of Article 6.3(d).
559
10.267 In light of this finding, the question of whethe r the second condition of Article 6.3(d) of the
SCM Agreement has been met in this case, i.e. whether th e increase in world market share follows a
consistent trend over a period when subsidies have been granted, does not arise. The Panel notes that
the parties disagree on how to interpret and apply the requirement of Article 6.3(d) that the increase in
the subsidizing Member's world market share, as comp ared to the average share of the Member in the
previous period of three years, be shown to follo w a consistent trend over a period when subsidies
have been granted.560 The Panel does not consider it necessar y to address the arguments made by the
parties in this regard.
10.268 In light of the foregoing considerations, the Panel finds that Brazil has not made a prima facie
case that the effect of marketing loan and count er-cyclical payments provided to US upland cotton
producers pursuant to the FSRI Act of 2002 is an in crease in the US world market share in upland
cotton as compared to the average US world market share during the previous period of three years

559 Brazil argues that, the model submitted by its economic consultant shows that, but for the marketing
loan and counter-cyclical payments, th e US world market share would have been significantly lower in MY
2005. The Panel considers that the terms of Article 6.3(d) require that it be demonstrated that there is an actual
increase in market share of the subsidizing Member.
560 Thus, for example, the United States argues that it must be shown under Article 6.3(d) that a
Member's market share is consistently increasing over the previous three- year average. Brazil rejects this
interpretation. US Rebuttal Submission, paras. 403-404; Brazil's Response to Panel Question 76.

and that this increase follows a consistent trend ov er a period when subsidies have been granted.
Therefore, it has not been established that the Unite d States acts inconsistently with Articles 5(c) and
6.3(d) of the SCM Agreement.
XI. BRAZIL'S CLAIM OF THREAT OF SERIOUS PREJUDICE UNDER
ARTICLES 5(C) AND 6.3 OF THE SCM AGREEMENT
11.1 Brazil requests the Panel to find that the United States has failed to comply with the DSB
recommendations and rulings in the original proceed ing in that marketing loan and counter-cyclical
payments to US upland cotton producers threaten to cause serious prejudice in the form of significant
price suppression in the world market for upland cotton.
11.2 The United States submits that Brazil has failed to make a prima facie case of threat of
serious prejudice caused by the marketing loan and counter-cyclical payments.
11.3 The Panel has found that marketing loan and counter-cyclical payments under the FSRI Act
of 2002 to US upland cotton producers cause "prese nt" serious prejudice to the interests of Brazil
within the meaning of Articles 5(c) and 6.3(c) of the SCM Agreement and that in this regard the
United States has failed to comply with the DSB recommendations and rulings in the original
proceeding. In light of these findings of "presen t" serious prejudice and of non-compliance by the
United States with the DSB recommendations and ru lings, the Panel does not consider it necessary or
appropriate to make an additional finding as to whether marketing loan and counter-cyclical payments
to US upland cotton producers threaten to cause serious prejudice to the interests of Brazil in the form
of significant price suppression in the world market for upland cotton. 561 The Panel also notes that
Brazil has made clear that its claim of threat of serious prejudice is conditional. Specifically, Brazil
has stated that the Panel "need only decide this claim if it is unable to find that there is present serious
prejudice from marketing loan and counter-cyclical payments programmes of the FSRI Act of
2002".
562
11.4 The Panel therefore decides not to make a finding on Brazil's claim of threat of serious
prejudice under Articles 5(c) and 6.3(c) of the SCM Agreement.
XII. BRAZIL'S CLAIM OF "PRESENT" SERIOUS PREJUDICE UNDER
ARTICLES 5(C), 6.3(C) AND 6.3(D) OF THE SCM AGREEMENT AS A RESULT OF
THE FAILURE OF THE UNITED STATES TO TAKE ANY ACTION BETWEEN
22 SEPTEMBER 2005 AND 31 JULY 2006
12.1 Brazil requests the Panel to find that the failure of the United States to take any measure to
remove the adverse effects or to withdraw th e three price-contingent upland cotton subsidy
programmes between 22 September 2005 and 31 Ju ly 2006 cause present serious prejudice to the
interests of Brazil in the form of significant pri ce suppression in the world market for upland cotton
and an increase in the US world market share, in vi olation of Articles 5(c), 6.3(c) and 6.3(d) of the
SCM Agreement.

561 The original panel also did not consider it necessa ry or appropriate to ad dress Brazil's claims of
threat of serious prejudice under Articles 5(c) and 6.3(c) of the SCM Agreement in light of its findings of present
serious prejudice and of the existence of prohibited subsidies. Panel Report, US – Upland Cotton, para. 7.1503.
562 Brazil's First Written Submission, para. 461; see al so Brazil's Response to Panel Question 84. The
Panel concurs with the argument in paragraph 240 of Br azil's First Written Submission that "a finding by the
compliance Panel of either present serious prejudice or a threat thereof will suffice for the compliance Panel to
find that the U.S. measures taken to comply are inconsistent with the covered agreements, within the meaning of
Article 21.5 of the DSU".

12.2 In light of the Panel's ruling in paragra ph 9.68 on the preliminary objection of the
United States and in light of its findings above of "present" serious prejudice and of non-compliance
by the United States with the DSB recommendations and rulings, the Panel does not consider it
necessary or appropriate to make a finding on this claim of Brazil of "present" serious prejudice
resulting from the failure of the United Stat es to take certain action during the period
22 September 2005-31 July 2006. The Panel also notes that Brazil has presented this claim on a
contingent basis.
563 The Panel therefore decides not to make a finding on this claim of Brazil of
"present" serious prejudice under Articles 5(c), 6.3(c) and 6.3(d) of the SCM Agreement.
XIII. ATTACHMENT 1: OVERVIEW OF NEW ECONOMIC LITERATURE ON
COUNTER-CYCLICAL PAYMENTS
A. IMPACT OF COUNTER-CYCLICAL PAYMENTS
1. Studies cited by the United States
13.1 The United States submits a study "Risk Consider ations in Supply Response: Implications for
Counter-Cyclical Payments' Production Imp act" by William Lin and Robert Dismukes. 564 This study
attempts to simulate the acreage effects of counte r-cyclical payments for three crops – corn, soybeans
and wheat. The simulation is based on an acreage mo del, which was estimated using state-level data
during 1991-2001, drawn from farms in the Northcentral region 565 of the United States. The study
acknowledges the many ways in which programmes like the counter-cyclical payment programme can
affect the acreage decision of farmers – through a re duction in risk, wealth effects, the increase in
farm revenue, etc. Its primary focus, however, is how counter-cyclical payments reduce the price risk
faced by farmers and how much this translates into increases in planting area. Essentially, counter-
cyclical payments improve the probability distri bution of prices faced by farmers by guaranteeing
them the target price less the direct payment for th at crop. The study finds that of the three crops
examined (corn, soybeans and wheat), price risk redu ction from counter-cyclical payments is likely to
be important only in the case of soybeans. The si mulation predicts that counter-cyclical payments
will lead to a 3 per cent increase in soybean acreage.
13.2 A second study cited by the United States, "C ounter-Cyclical Payments Under the 2002 Farm
Act: Production Effects Likely to be Limited" by Paul Westcott 566, analyses the likely production
effects of counter-cyclical payments. The author considers the case of a hypothetical corn farmer who
plants all of his hundred acres of corn base with co rn. He then examines how the farmer's revenues
are affected by counter-cyclical payments (among other subsidies) depending on realizations of the
market price. He comes to the conclusion that the impact of counter-cyclical payments differs
depending upon the level of the market price. If fa rmers expect prices to be below loan rates, then
counter-cyclical payments are at their maximum leve ls and become more like "fixed" payments. If
farmers expect the market price to lie between the loan rate and the "effective target price", counter-
cyclical payments will vary with market price and th eir effects may vary as well. It is in this price
range that Westcott believes that, assuming the base acreage crop is planted, counter-cyclical
payments have potential avenues to affect producti on. They do so by stabilizing farm revenues,
offsetting changes in market prices with counter-c yclical payments. At the same time, Westcott
points to several mitigating factors which may redu ce these effects. Since commodity prices tend to
move together, counter-cyclical payments on base acreage provide revenue stabilization for
alternative crops. Thus this implies that the prod uction effect need not be on cotton even though the

563 Brazil's First Written Submission, para. 461.
564 Exhibit US-34.
565 The region includes the states of Ohio, Indiana, Illinois, Missouri, Iowa, Minnesota, Wisconsin, and
Michigan.
566 Exhibit US-35.

counter-cyclical payments are made on cotton base. Further, there are other farm programmes which
mitigate the revenue risk faced by farmers so that counter-cyclical payments may not have much to
contribute. Finally, a large portion of output in US agriculture is produced by large producers, and to
the extent that risk aversion decr eases as income rises, the revenu e stabilization benefits of counter-
cyclical payments may be lower. Taking these mitigating factors into account, Westcott concludes
that the overall production effects of counter-cycli cal payments through revenue risk reduction are
likely to be limited, although the study is unable to provide an estimate of this magnitude.
13.3 The United States also submits a study "US Agricultural Policy: Overview and Recent
Analyses" by Edwin Young, Anne Effl and, Paul Westcott and Demcey Johnson.
567 This paper
presents an overview of recent US agricultural po licies as embodied in the 1996 and 2002 Farm Acts.
It also provides a survey of recent analyses regardi ng the effects of those policies. With respect to
counter-cyclical payments under the 2002 Farm Act, it suggests that recent studies have concluded
that these payments "create small but positive production incentives".
13.4 Finally, the United States submits a paper en titled "Another Look at Decoupling: Additional
Evidence on the Production Effects of Direct Payments" by B. Goodwin and A. Mishra in the
American Journal of Agricultural Economics. 568 The Goodwin and Mishra study, published in 2005,
examines the extent to which production flexibility contract or Agricultural Market Transition Act
(AMTA) payments under the FAIR Act affected the acreage decisions of a set of farms in the US
Corn Belt who grew corn, wheat, and soybeans. In pa rticular, the authors use farm-level data for the
years 2002 and 2003 to examine the acreage decisions of Corn Belt producers. They also examine
responses to a number of survey questions regarding factors affecting acreage decisions and the
disposition of funds received in the form of direct payments. Farmers' responses to the survey
questions suggest that direct payments, counter-c yclical payments, and the potential for base acreage
updates were all relatively minor factors. Finall y, their empirical results find no statistically
significant relationship between direct payments and acreage decisions for corn, wheat, and soybeans.
2. Studies cited by Brazil
13.5 Brazil submits a paper "Farm-Level Production E ffect From Participation in Government
Commodity Programs: Did the 1996 Federal Agri cultural Improvement a nd Reform Act Make a
Difference" by Nigel Key, Ruben Lubowski and Michael Roberts. 569 The paper, published in the
American Journal of Agricultural Economics, look s at the production impact of participation in
government commodity programmes. As such, it does not single out the influence of counter-cyclical
payments from other elements of these commodity progr ammes. The results indicate that participants
increased plantings of programme crops considerably (38-59 percentage points) more than non-
participants. Estimated effects of participation on farm-size growth and total sales growth were also
consistent across time, increasing 14-16 percentage points and 22-24 percentage points, respectively.
Although the estimated effects do not isolate the imp act of countercyclical payments, the study goes
on to conjecture "that the results suggest decoupled payments affect production at the farm level".
13.6 Another study submitted by Brazil, "How distorting are direct payments?" by
Erik J. O'Donoghue and James Whitaker 570, investigates the effects of direct payments on total
harvested acres for farms growing programme crops (including upland cotton), non-programme crops
and livestock. The study's main innovation is to control for the possible endogeneity of direct
payments. Endogeneity can occur because, while dir ect payments could alter acreage changes (if the
payments had wealth effects, caused expectations to change, etc.), acreage changes could also alter

567 Exhibit US-40.
568 Exhibit US-41.
569 Exhibit BRA-566.
570 Exhibit BRA-568.

the receipt of direct payments (if base was bought or sold). The authors use the updating of base acres
allowed under the 2002 Farm Act to impute causation.
13.7 The authors divide farms into four categories by size of revenues. Their econometric
estimates suggest that direct payments (which are "p roxied" by average base acre changes for farms)
affect farms differently. The smallest farms appear not to have changed their harvested acres. The
next set of farms in terms of revenues increased their total cropland harvested by almost 25 per cent
on average, while the third set of farms increased thei r total cropland harvested by nearly ten per cent.
However, the largest farms decreased their total cropland harvested by approximately 20 per cent.
The authors judge that altogether these magnitudes represent "substantial changes". They do not seem
to have explicitly tested how direct payments a ffect harvested acreage for farms growing programme
crops, non-programme crops or livestock. But in in terpreting their econometric results, they offer the
explanation that farms might be redistributin g the acres from non-programme crop and livestock
specialties to programme crop farms (which include upland cotton).
13.8 Another paper submitted by Brazil is entitled "Are decoupled payments really decoupled?" by
B. K. Goodwin and A. Mishra
571; published in the American Jour nal of Agricultural Economics in
2006.572 This study examines the production effect of Agricultural Market Transition Act (AMTA)
and market loss assistance payments. It finds mo dest evidence that AMTA payments may lead to
increased production of corn, soybeans, and wheat. However, the acreage effects are very small.
Acreage elasticities for the major crops, corn and soybeans, are about 0.025 to 0.035. These estimates
suggest that even a very large increase in thes e decoupled payments would not be expected to
significantly increase acreage. However, market loss assistance payments appeared to have a more
significant effect on acreage. The estimated elasticity of corn acreage with re spect to the payments
was 0.10, suggesting that such payments may indeed lead to more corn production.
13.9 Brazil also submits a study, "Supply Response to Counter-Cyclical Payments and Base Acre
Updating under Uncertainty: An Experimental Study" by Christopher R. McIntosh, Jason F. Shogren
and Erik Dohlman. 573 The study, which is to be published in the American Journal of Agricultural
Economics, reports on a laboratory experiment which attempts to mimic the price risks faced by
farmers and the incentives provided by direct a nd counter-cyclical payments under the 2002 Farm
Act. Four scenarios are considered. The base line scenario is where only direct payments are
provided. The second scenario includes both dir ect and counter-cyclical payments. The third
scenario allows for some uncertainty about the policy regime. The fourth scenario requires mandatory
updating of base acreage. Eighty-five students recruited from Economics and Finance undergraduate
classes at the University of Wyoming were the s ubjects of the laboratory experiment. Based on the
results of the experiments, the authors conclude that counter-cyclical payments influence crop
allocation decisions in the laboratory — the average subject allocated more acres toward the base crop
in the presence of counter-cyclical payments. Th ey estimate that the presence of counter-cyclical
payments will increase base crop acreage by 5.43 pe r cent. Larger estimates (7.92 per cent increase)
are obtained if apart from price risk, the subjects face uncertainty about the policy regime.

571 Exhibit BRA-618.
572 This article appears to be based on the same st udy cited by the United States in Exhibit US-41.
Both studies cover the same crops (corn, soybeans, wheat) and the same geographical region (Corn Belt) of the
United States. However, there appears to be some di fference in the programmes covered. Exhibit US-41
includes AMTA payments only while BRA-618 covers both AMTA and MLA payments.
573 Exhibit BRA-565.

B. ARE COUNTER-CYCLICAL PAYMENTS CAPITALIZED INTO HIGHER LAND
VALUES?
1. Studies cited by the United States
13.10 The studies by Hoppe and Banker 574 and Young, Effland, Westcott and Johnson 575 examine
the extent of land rental in US agriculture. The third study by Abler and Blandford 576 provides a
survey of empirical studies on direct paymen ts under the United States 1996 FAIR Act and
subsequent Marketing Loss Assistance (MLA) payments.
13.11 The USDA study by Hoppe and Banker shows that an estimated 44 per cent of all farmland
operated in 2003 was rented.577 The study by Young, Effland, Westcott and Johnson gives even higher
estimates for larger farms. They state that crop farms in which total sales exceeded US$250,000, also
known as commercial crop farms, rented close to 60 per cent of their total acres operated. 578
Unfortunately, neither study refers specifically to upland cotton, so it is not possible to know to what
extent upland cotton farmers conformed or differed with respect to these nationwide statistics.
13.12 The Abler and Blandford study was written for th e OECD. The paper is a literature review of
empirical studies on land allocation and produc tion response to direct payments under the
United States 1996 FAIR Act and subsequent MLA paym ents. Thus, it is again important to note that
the study does not examine the experience with count er-cyclical payments. The main conclusion of
this study on the link between such payments a nd land values is that PFC and MLA payments had a
significant effect on land values and rental rates. Gi ven the importance of the rental market for land
in the United States, it appears that there was a relatively high "pass-through" of the additional income
generated by the payments to landowners, many of whom are not the actual operators of the land. It
appears that the payments primarily had the effect of increasing the value of the principal fixed asset
in agriculture – land.579
13.13 However, the authors also point out that the empirical studies reviewed lend support to the
view that PFC and MLA payments had some impact on production relative to the counterfactual case
with no PFC or MLA payments. Empirical studies i ndicate that the payments may have influenced
planted area and possibly the use of variable inputs, particularly farm house hold labour. In general,
the estimated impacts are modest. In the econometric studies reviewed, PFC and MLA payment
variables are sometimes statistically insignificant, and when they are statistically significant they
imply in most cases that each type of payment incr eased planted area and on-farm work hours by less
than 5 per cent. In no instance do the econometri c results imply an increase in planted area or on-
farm work hours due to PFC or MLA payments of more than 15 per cent. Some of the synthetic
studies suggest larger impacts on production, but thei r results are sensitive to assumptions about the
degree and nature of farmers' aversion to risk . The synthetic studies also do not consider the
possibility that assets owned by farmers who would exit the industry in the absence of PFC or MLA
payments, could be sold or rented to other farmers, which would diminish the impact of the payments
on production.
580

574 Exhibit US-67.
575 Exhibit US-40.
576 Exhibit US-32.
578 See Exhibit US-40, p. 7.
579 Exibit US-32, para. 71.
580 Exhibit US-32, para. 69.

XIV. FINDINGS ON BRAZIL'S CLAIMS UNDER ARTICLES 10.1 AND 8 OF THE
AGREEMENT ON AGRICULTURE AND ARTICLES 3.1(A), 3.2 AND 4.7 OF THE
SCM AGREEMENT WITH RESPECT TO EXPORT CREDIT GUARANTEES
A. I
NTRODUCTION
14.1 In this section of our Report, we address Brazil's claims concerning US export credit
guarantees. Brazil requests the Panel to find th at US measures "taken to comply" with the
recommendations and rulings of the DSB with respect to export credit guarantees either do not exist,
or to the extent they exist, are not c onsistent with Articles 10.1 and 8 of the Agreement on Agriculture
and Articles 3.1(a) and 3.2 of the SCM Agreement.
14.2 Specifically, Brazil makes the following claims:
(i) First, Brazil claims that the United States has taken no action to "withdraw the
subsidy" with respect to GSM 102, GSM 103, and SCGP guarantees 581 outstanding
on 1 July 2005.
(ii) Second, Brazil claims that the measures taken by the United States to comply with the
DSB recommendations and rulings are incons istent with Articles 10.1 and 8 of the
Agreement on Agriculture and, to the extent of that inconsistency, with Articles 3.1(a)
and 3.2 of the SCM Agreement . More specifically, Brazil claims that the
United States continues to provide prohibited export subsidies in the form of GSM
102 export credit guarantees, and has applied those export subsidies subsequent to
1 July 2005 in a manner that results in circumvention of the US export subsidy
commitments under the Agreement on Agriculture.
582 583
14.3 Brazil requests the Panel to find that the Unite d States has failed to comply fully with its
obligation, under Article 4.7 of the SCM Agreement, to "withdraw the subsidy" and that the original
Article 4.7 recommendation adopted by the DSB therefor e remains in effect. Brazil also requests that
the Panel find that the United States has failed to br ing itself into conformity with its obligations
under the Agreement on Agriculture, and that the original recommendation adopted by the DSB in this
respect therefore also remains in effect.
1. Description of the export credit guarantees at issue in this dispute
14.4 We recall the main characteristics of the th ree CCC export credit guarantee programmes at
issue in this dispute.584
14.5 The GSM 102 programme guarantees credit extended by a US private bank (or, less
commonly, a US exporter) to approved foreign bank s using dollar-denominated, irrevocable letters of
credit for purchases of US agricultural exports by foreign buyers. In practice, the foreign bank
extends credit to the foreign importer and the US exporter – or more freque ntly, its bank (the US
bank) – extends credit to the foreign bank. Of all the parties involved, only the foreign importer need

581 See above paras. 3.13 ff.
582 The Panel notes that Brazil's claims are "as applied" claims. See infra. para. 14.41.
583 The Panel also notes that Brazil claims that GS M 102 export credit guarantees provided to exports
of three products not falling within the scope of the Agreement on Agriculture , lysine, lyocell and wood
products, are inconsistent with Articles 3.1(a) and 3.2 of the SCM Agreement.
584 While Brazil's claim with respect to outstanding guarantees concerns guarantees issued under the
three export credit guarantee programmes that were the subject of the original panel's findings (GSM 102, GSM
103 and SCGP), Brazil's claims with respect to guarantees issued after 1 July 2005 concern guarantees issued
under the GSM 102 programme, as amended.

not be CCC-approved. The guarantee, which the US exporter obtains from the CCC, is triggered by a
default on the part of the foreign bank. The US ex porter then submits a noti ce of default to the CCC
and the CCC pays the claim consistent with th e terms of the guarantee. GSM 102 guarantees
generally cover 98 per cent of the principal and a portion of the interest. The GSM 103 programme,
which has now been discontinued, was similar to the GSM 102 programme. The main difference
between guarantees issued under the two programmes relates to the terms of the underlying credit.
GSM 102 guarantees cover credit terms between 90 days and three years, GSM 103 guarantees
covered credit terms between 3 years and 10 years.
14.6 The SCGP programme guarantees the repayment of credit secured by promissory notes for
periods not exceeding 180 days by a United States e xporter to a foreign purchaser. SCGP guarantees
typically cover a portion (65 per cent) of the value of principal only, the guarantee does not cover
interest. The US exporter may negotiate an arrangement to be paid, in full or in part, by assigning the
right to proceeds that may become payable under the CCC's guarantee to a US financial institution.585
2. Summary of the original panel and Appellate Body's findings concerning export credit
guarantees
14.7 We first recall, as an introduction to this secti on of our Report, the main findings of the panel
and Appellate Body concerning export credit guarantees in the original proceeding.
14.8 As in this compliance proceeding, Brazil had, before the original panel, made claims under
both the Agreement on Agriculture and, to the extent of the inconsistency with the Agreement on
Agriculture, the SCM Agreement . The original panel relied on item (j) of the Illustrative List of
Export Subsidies in Annex I to the SCM Agreement (hereafter "Illustrative List") as "contextual
guidance" in determining that the export cred it programmes at issue (GSM 102, GSM 103, SCGP)
constituted export subsidies unde r Articles 10.1 and 8 of the Agreement on Agriculture.586 The panel
declined to make additional factual findings on what it considered to be an alternative argument of
Brazil that the same programmes constituted export subsidies under the general definition of "export
subsidies" contained in Articles 1 and 3.1(a) of the SCM Agreement (also as context under
Articles 10.1 and 8 of the Agreement on Agriculture). In the Interim Review section of its Report, the
panel indicated that "Brazil's allegation invoking the elements of Articles 1 and 3.1(a) of the SCM
Agreement [was] not a separate claim, but merely anothe r argument, on a different factual basis, as to
how the United States export credit guarantee progr ammes would meet the definition of an export
subsidy in Article 3.1(a) of the SCM Agreement".587
14.9 Having determined that the export credit gua rantees at issue constituted export subsidies
within the meaning of Article 10.1 of the Agreement on Agriculture 588, the panel found that the
United States had applied such subsidies in a manne r which resulted in circumvention of its export
subsidy reduction commitments in respect of cott on and other unscheduled products supported under
the export credit guarantee programmes, as well as in respect of one scheduled product 589, rice.590 To

585 See Panel Report, US – Upland Cotton, paras. 7.242-7.244 (quoted, supra, para. 3.14), Brazil's First
Written Submission, paras. 351-355, Exhibit Bra-519.
586 Panel Report, US – Upland Cotton, paras. 7.763, 7.804-7.869.
587 Panel Report, US – Upland Cotton, para. 6.31.
588 The panel rejected US arguments that Article 10.2 of the Agreement on Agriculture reflects the fact
that export credit guarantee programmes are not subject to the export subsidy disciplines of the SCM Agreement.
See Panel Report, US – Upland Cotton, paras. 7.897-7.944. The Appellate Body upheld the panel's findings in
this respect, with one member of the Appellate Body Division hearing the dispute dissenting. See Appellate
Body Report, US – Upland Cotton, paras. 585-627 and 631-641.
589 I.e. a product for which the United States has unde rtaken export subsidy reduction commitments
under the Agreement on Agriculture.
590 Panel Report, US – Upland Cotton, paras. 7.875, 7.881 and 8.1(d)(i).

the extent that the programmes did not fully conform to the Agreement on Agriculture , the panel
considered that they did not benefit from the exemption in Article 13 of the Agreement on Agriculture
and found that they were prohibited expor t subsidies under Article 3.1(a) of the SCM Agreement and
were also inconsistent with Ar ticle 3.2 of the same Agreement .
591 The panel considered that Brazil
had failed to prove its claims with respect to e xports of scheduled agricultural products other than
rice, including pig meat and poultry meat, and with respect to exports of unscheduled agricultural
products not supported under the programmes.592
14.10 The Appellate Body upheld the panel's findings with respect to unscheduled products and rice
but reversed the original panel's finding that Brazil had failed to establish a violation of Article 10.1 of
the Agreement on Agriculture with respect to exports of pig meat and poultry meat. 593 It did not,
however, "complete the analysis" in this respect. Further, the Appellate Body rejected claims by
Brazil that the panel had improperly exercised judi cial economy with respect to Brazil's arguments
under Articles 1.1 and 3.1(a) of the SCM Agreement.594
B. BRAZIL'S CLAIMS WITH RESPECT TO EX PORT CREDIT GUARANTEES OUTSTANDING ON
1 JULY 2005
1. Introduction
14.11 The original panel recommended that the United States bring its export credit guarantees
under the GSM 102, GSM 103 and SCGP programmes in respect of upland cotton and other
"supported" unscheduled agricultural pr oducts into conformity with the Agreement on Agriculture ; it
also recommended, pursuant to Article 4.7 of the SCM Agreement, that the United States "withdraw"
the prohibited subsidies without delay, at the latest within six months of the date of adoption of the
panel report by the DSB or 1 July 2005 (whichever was earlier).
595
14.12 The panel's recommendations, which were upheld by the Appellate Body, were adopted by
the DSB at its 21 March 2005 meeting. 596 As a consequence, the Un ited States had until 1 July 2005
to "withdraw" the prohibited export subsidies identified by the original panel.
14.13 Brazil claims that the United States has taken no measures to comply with the DSB's
recommendations to "withdraw the s ubsidy" under Article 4.7 of the SCM Agreement and otherwise
bring itself into conformity with its ob ligations under Articles 10.1 and 8 of the Agreement on
Agriculture with respect to "outstanding" guarant ees, i.e. GSM 102, GSM 103 and SCGP export
credit guarantees for unscheduled prod ucts and for rice issued prior to 1 July 2005 that were still
outstanding on that date.597

591 Panel Report, US – Upland Cotton, paras. 7.946-7.948 and 8.1(d)(i).
592 Panel Report, US – Upland Cotton, paras. 7.882-7.896 and 8.1(d)(ii).
593 Appellate Body Report, US – Upland Cotton, paras. 763(e) and 763(f).
594 Appellate Body Report, US – Upland Cotton, paras. 763(e)(v).
595 Panel Report, US – Upland Cotton, para. 8(3)(b). Article 4.7 of the SCM Agreement provides that:
"If the measure in question is found to be a prohibited subsidy, the panel shall recommend that
the subsidizing Member withdraw the subsidy without delay. In this regard, the panel shall
specify in its recommendation the time-period w ithin which the measure must be withdrawn."
(underline added)
596 WT/DSB/M/186.
597 Brazil's First Written Submission, para. 341. Br azil's claims cover any guarantees that were
outstanding on 1 July 2005, whether or not they subsequently expired. See paras. 390-393 of Brazil's Rebuttal
Submission.

2. Main arguments of the parties
14.14 Brazil argues that the United States has done nothing to bring outstanding GSM 102,
GSM 103 and SCGP export credit guarantees into conformity with Articles 10.1 and 8 of the
Agreement on Agriculture , or to withdraw them under Article 4.7 of the SCM Agreement . Brazil
considers that the obligation to "withdraw the subs idy" applies not only to the three programmes at
issue in the original dispute, but also to outstanding guarantees. 598 Brazil relies on the panel and
Appellate Body reports in Brazil – Aircraft (Article 21.5 – Canada) , in support of its argument that
the United States may not, after the "implementation deadline" of 1 July 2005 (i.e. the date by which
the United States had to comply with the recomme ndations and rulings of the DSB), continue to
perform on guarantees issued before that date and still outstanding599, either by making "payments" on
claims following defaults or by rescheduling or restructuring debt covered by outstanding guarantees.
14.15 Brazil also argues that the obligation to abstain from performing on financial commitments
outstanding under a programme as of the deadline for implementation follows from the text of the
SCM Agreement : the obligation to withdraw the subsidy under Article 4.7 of the SCM Agreement
applies to both the "granting" of new subsidi es and the "maintenance" of existing subsidies under
Article 3.2 of the SCM Agreement .600 The United States has left the entirety of the outstanding
prohibited export credit guarantees in place after th e implementation date and, by continuing to
perform on its commitments under the prohibited subs idies, "maintains" them unchanged. Further,
continuing to perform on outsta nding export credit guarantees does not satisfy the definition of
"withdraw" offered by the Appellate Body in Brazil – Aircraft (Article 21.5 – Canada) , in which the
Appellate Body defined the term "withdraw" as to "remove" or "take away" the subsidy".601
14.16 The United States considers that it has "withdrawn the subsidy" with respect to outstanding
guarantees by lowering the long-term operating costs and losses of the programmes. 602 To comply,
the United States was required to "withdraw" the prohi bited subsidies identified in paragraph 8.1(d)(i)
of the original panel report, which concerned th e provision of guarantees at a net cost to the
government; this is what the United States had to "withdraw". 603 The United States considers that the
issue of rescheduling is irrelevant to Brazil's clai ms: any already rescheduled debt is a receivable,
pursuant to which the CCC would receive money, not pa y any. In response to Brazil's argument that
rescheduling is a means for the United States to avoi d default and the need to make a "payment" on
the CCC obligation, the United States notes that the CCC does not reschedule debt prior to default,
and that no obligation is owed to the CCC until it pa ys a claim and is subrogated to the original
obligee.604
14.17 Moreover, nothing in the SCM Agreement provides that withdrawing a subsidy taking the
form of a programme includes an obligation to abstain from performing on commitments outstanding

598 Brazil's Rebuttal Submission, paras. 394-395 and 399; Brazil's Closing Statement, para. 30.
599Brazil's Rebuttal Submission, paras. 396-398, citing Appellate Body Report, Brazil – Aircraft
(Article 21.5 – Canada), para. 45 and Panel Report, Brazil – Aircraft (Article 21.5 – Canada) , para. 6.17. See
also Brazil's Response to Panel Question 37. Brazil also notes that the Appellate Body, in US – FSC
(Article 21.5 – EC), paras. 2 and 223-231, held that a recommendation to withdraw a subsidy in the form of an
overarching measure, the FSC, included the obligation to stop making pre-committed payments to existing FSCs
("foreign sales corporations"). Brazil's Closing Statement, footnote 38.
600 Brazil's Response to Panel Question 92.
601 Brazil's Response to Panel Question 37, para. 46.
602 US First Written Submission, paras. 143-145. In the case of GSM 103 and SCGP, the United States
indicates that it has completely ceased providing guarantees. Further, the Un ited States considers that there are
no "outstanding" SCGP guarantees as it is exposed to no further liability under the programme. See US
603 US Opening Statement, para. 43.
604 US Rebuttal Submission, paras. 131-133 and US Response to Panel Question 109.

under that programme as of the deadline for implementation.
605 That argument improperly equates
"performing on commitments under the program" with the subsidy itself. Such an equation was
appropriate in Brazil – Aircraft (21.5) , where Brazil continued to issue new WTO-inconsistent bonds
even after the period of implementation on the basis that it had pre-existing contractual obligations to
do so. However, it is not accurate here, where the guarantees are not themselves prohibited subsidies.
3. Main arguments of third parties
14.18 Argentina submits that the obligation of the Unite d States to withdraw the subsidy implies
the termination of the export credit guarantee progra mmes at issue in the first proceeding, and not
merely the suspension of payments or the refusal of new applications for export credit guarantees.606
4. Evaluation by the Panel
(a) Introduction
14.19 Brazil's arguments in support of its claims that the United States has failed to "withdraw"
outstanding export credit guarantees rely primarily on the reasoning of the panel and Appellate Body
in the Brazil – Aircraft (Article 21.5 – Canada) dispute. According to Brazil, the panel and Appellate
Body reports in that case stand for the propositio n that a Member's obligation to "withdraw the
subsidy" pursuant to recommendations from the DSB adopted in accordance with Article 4.7 of the
SCM Agreement includes an obligation to abstain fro m performing on financial commitments
outstanding under a programme as of the implementati on deadline (i.e. the date by which the Member
in question had to comply with the DSB's reco mmendations). Brazil draws an analogy between
Brazil – Aircraft (Article 21.5 – Canada) and the present dispute: it considers that the panel and
Appellate Body's findings in that dispute (according to which Brazil was precluded from issuing, after
the implementation deadline, PROEX bonds pursuant to letters of commitments issued before the
implementation deadline) can be transposed to the factual circumstances of this case, and that as a
result, the Panel should find that the United States is precluded from making "payments" in the form
of the payment of claims or of debt restructuring or rescheduling.
607
14.20 Brazil also finds support for its position in the definition of "withdraw the subsidy" provided
by the Appellate Body in Brazil – Aircraft (Article 21.5 – Canada) , in which the Appellate Body
defined the term "withdraw" as to "remove" or "take away" the subsidy.
14.21 Given the emphasis that Brazil has put on the reasoning and the findings of the panel and
Appellate Body in Brazil – Aircraft (Article 21.5 – Canada) , we first proceed to examine whether, as
alleged by Brazil, the Appellate B ody (and panel) held in that case that the obligation to "withdraw a
subsidy" under Article 4.7 of the SCM Agreement means that a Member is in all cases precluded from
performing on commitments outstanding under a progra mme as of the deadline for implementation.
In doing so, we also examine whether the analogy th at Brazil seeks to draw between the two disputes
is justified. We then proceed to examine whether, as Brazil argues, the Appellate Body's statement as
to the meaning of "withdraw the subsidy" in that case should lead us to a finding that the
United States has failed to implement the recommendation of the DSB.

605 US Opening Statement, para. 46.
606 Argentina's Third Party Submission, paras. 9-19.
607 In other words, from "perform[ing] on ECG's issued before adoption of the DSB's
recommendation". Brazil's Response to Panel Question 37, para. 45.

(b) Panel and Appellate Body reports in Brazil – Aircraft (Article 21.5 – Canada)
14.22 The Brazil – Aircraft (Article 21.5 – Canada) dispute concerned the PROEX programme,
under which the Brazilian Government granted inter est rate equalization payments, notably on the
export of regional aircraft. The original panel had concluded that the PROEX payments constituted
prohibited export subsidies under the SCM Agreement.
14.23 One of the issues before the compliance panel was whether Brazil had failed to "withdraw the
subsidy" because it continued to issue bonds under the PROEX programme ("NTN-I" bonds) after the
implementation deadline, pursuant to letters of commitment issued before that date. 608 The Brazil –
Aircraft (Article 21.5 – Canada) panel considered that it was sufficien t, in order to resolve that issue,
to conclude that "a Member cannot be deemed to have withdrawn prohibited subsidies if it has not
ceased to act in a manner inconsistent with the WTO Agreement in respect of those subsidies". 609 The
panel noted that Article 3.2 of the SCM Agreement provides that a Member shall "neither grant nor
maintain" export subsidies and theref ore concluded that to continue to grant or to maintain prohibited
export subsidies after the implemen tation date would be inconsiste nt with Brazil's obligation to
withdraw these subsidies. 610 The panel therefore considered that it had to determine whether the
continued issuance of bonds by Brazil pursuant to letters of commitments issued under the PROEX
programme before it was amended c onstituted the "grant" of export subs idies under Article 3.2 of the
SCM Agreement. Before the panel, Brazil argued that PROEX subsidies existed under Article 1 of the
SCM Agreement, (and therefore, were "granted") at the time the Brazilian Government issued a letter
of commitment, not at the time the bonds were issued. 611 The panel rejected Brazil's argument,
recalling that in the original dispute it had found, and the Appellate Body had agreed, that for the
purposes of Article 27.4 of the SCM Agreement, the export subsidies at issue were "granted" at the
time of the issuance of the bonds 612, and considered that a simila r reasoning was appropriate under
Article 3.2. The panel therefore concluded that by continuing to issue NTN-I bonds pursuant to
commitments made prior to 18 November 1999, Brazil had failed to withdraw the export subsidies for
regional aircraft under the PROEX programme.613

608 Commitments under the programme at issue, PR OEX, were made in the form of letters of
commitment issued to Brazilian manufacturers, by wh ich the Brazilian Government undertook to provide
support as specified for the transaction provided that th e contract was entered into in accordance with the terms
and conditions specified in the request for approval with in a specified period of time (usually 90 days), and
provided the aircraft was exported. Panel Report, Brazil – Aircraft (Article 21.5 – Canada), para. 2.5.
609 Panel Report, Brazil – Aircraft (Article 21.5 – Canada), para. 6.8.
610 Panel Report, Brazil – Aircraft (Article 21.5 – Canada), para. 6.9.
611 See Panel Report, Brazil – Aircraft (Article 21.5 – Canada), para. 6.12.
612 Panel Report, Brazil – Aircraft (Article 21.5 – Canada) , paras. 6.10-6.11. In the original dispute,
the Appellate Body had affirmed the panel's finding on this issue, though on a different reasoning. The panel
and Appellate Body both found that the export subsidies at issue were not yet "granted" when the letter of
commitment was issued, because at that point, the export sales contract had not yet been concluded and the
export shipments had not yet occurred: "For the purposes of Article 27.4, we conclude that export subsidies
...are 'granted' when all the legal conditions have be en fulfilled to entitle the beneficiary to receive the
subsidies." Appellate Body Report, Brazil – Aircraft , para. 158, quoted by the 21.5 panel at para. 6.10. The
Appellate Body however rejected the original panel's approach of focusing on the language of Article 1 of the
SCM Agreement in order to determine when payments should be considered to have been granted for the
purposes of Article 27.4 of the SCM Agreement. The panel had, notably, sought to determine whether PROEX
payments constituted "direct transfers of funds" or "potential direct transfer of funds" under Article 1. The
Appellate Body noted that the issue was not when or wh ether subsidies "existed" (Brazil had already conceded
that subsidies did exist) but when the subsidies should be considered to have been "granted" for the purposes of
Article 27.4. Appellate Body Report, Brazil – Aircraft, paras. 156 ff., cited in Panel Report, Brazil – Aircraft
(Article 21.5 – Canada), para. 6.13.
613 Panel Report, Brazil – Aircraft (Article 21.5 – Canada), para. 6.17. Brazil had also argued that it had
a contractual obligation to issue PROEX bonds pursuant to commitments already entered into and would be

14.24 The Appellate Body affirmed the panel's findi ngs, but considered that Brazil's arguments
about when a subsidy is deemed to "exist" under Article 1.1 of the SCM Agreement, and when it is
"granted" under Article 3.2 of that Agreement were not relevant to th e analysis of Canada's allegation
that Brazil has failed to "withdraw the subsidy".
614
14.25 The Appellate Body noted that Brazil did not c ontest that the measures in question conferred
a prohibited export subsidy. 615 It considered that in its ordinary meaning, the "withdrawal" of a
subsidy under Article 4.7 of the SCM Agreement refers to the "removal" or "taking away" of that
subsidy:
Turning to the ordinary meaning of "withdraw ", we observe first that this word has
been defined as "remove" or "take away" , and as "to take away what has been
enjoyed; to take from." This definition suggests that "withdrawal" of a subsidy,
under Article 4.7 of the SCM Agreement, refers to the "removal" or "taking away" of
that subsidy. 616 (footnotes omitted)
14.26 The Appellate Body then observed that Brazil conceded that it con tinued to issue bonds
pursuant to letters of commitments issued prior to the implementation deadline, meaning that such
bonds continued to be issued on "precisely the sa me terms and conditions as they were before". 617
The Appellate Body considered that the issuance of the bonds essentially represented "disbursements"
made under PROEX, given that the financing institu tion could choose to either sell the bonds in the
market or receive payments when they became due and that Brazil was thus continuing, after the
implementation deadline, to make payments under a subsidy programme found to involve prohibited
export subsidies. It concluded that:
… to continue to make payments under an export subsidy measure found to be
prohibited is not consistent with the obligation to "withdraw" prohibited export
subsidies, in the sense of "removing" or "taking away".618
(c) Whether the obligation to "withdraw the subsid y" includes an obligation to abstain from
performing on outstanding financial commitments
14.27 As is clear from the brief summary above, the issue of "prior commitments" arose, in Brazil –
Aircraft (Article 21.5 – Canada ), because of Brazil's arguments regarding the timing of the granting
of the subsidy. The fact that the bonds were i ssued "pursuant to" letters of commitments that pre-
dated the implementation deadline was not, in our view, an important consideration in this respect and
there is no indication that either the panel or th e Appellate Body would have reached a different
conclusion had the bonds been issued independently of any prior commitment. In fact, it seems safe
to assume that the issue of prior or outstanding "c ommitments" would not have been discussed at all
had it not been for Brazil's arguments regarding the timing of the granting of the subsidy.

liable for breach of damages if it failed to do so. The panel rejected Brazil's arguments that such considerations
should affect its conclusion: "[a]ssuming that Brazil is correct in this regard, the implication of this view would
be that Members could contract to grant prohibited subsidies for years into the future and be insulated from any
meaningful remedy under the WTO dispute settlement syst em." The panel also noted that under Article 21 of
the Vienna Convention, a party to a treaty may not invoke the provisions of its internal law as justification for
its failure to perform a treaty. Panel Report, Brazil – Aircraft (Article 21.5 – Canada) , para. 6.16 and note 23.
The Appellate Body endorsed the latter part of the panel's reasoning. Appellate Body Report, Brazil – Aircraft
(Article 21.5 – Canada), para. 46.
614 Appellate Body Report, Brazil – Aircraft (Article 21.5 – Canada), para. 44.
615 Appellate Body Report, Brazil – Aircraft (Article 21.5 – Canada), para. 44.
616 Appellate Body Report, Brazil – Aircraft (Article 21.5 – Canada), para. 45.
617 Appellate Body Report, Brazil – Aircraft (Article 21.5 – Canada), para. 45.
618 Appellate Body Report, Brazil – Aircraft (Article 21.5 – Canada), para. 45.

14.28 This reading of the reports of the panel and the Appellate Body is confirmed by the absence
of any reference to prior "commitments" in the Appellate Body statement quoted above, and on which
Brazil puts so much emphasis. 619 The Appellate Body, unsurprisingly, found that by continuing to
issue PROEX bonds as it had before – and which had been found, in the original dispute, to amount to
the granting of an export subsidy – Brazil was cont inuing to grant the subsidies in question and had
therefore not "withdrawn" them.
14.29 Further, in our view, Brazil ascribes a broader meaning to the Appellate Body's use of the
term "payment" than is warranted: Brazil reads that term as encompassing any disbursements made
under a measure found to be a prohibited subsidy. In our view, the Appellate Body's reference to
"mak[ing] payments" was clearly meant as a reference to the granting of a PROEX subsidy as the
Appellate Body was not discussing the issue of "payment s" in an abstract or general sense, but rather
was referring to PROEX "payments" (in the form of NTN-I bonds) made on the export of regional
aircraft.
620 In any case, the term "payment" appears in neither of Article 4.7 or Article 3.2 of the SCM
Agreement. Both provisions concern subsidies.
14.30 We thus find no support, in either of the pane l or the Appellate Body report in that dispute,
for Brazil's contention that a Member is necessarily precluded, under Article 4.7 of the SCM
Agreement, from making "payments" or otherwise performing on "commitments" pursuant to
measures pre-dating the implementation deadline. Rather, as can be deducted from our analysis
above, the panel and the Appellate Body's findings in that case rest on the simpler proposition that a
Member has not "withdraw[n] the subsidy" where it continues to provide pr ohibited export subsidies
after the deadline set by the DSB for implemen ting its recommendation. Making "payments" is
inconsistent with the Member's obligation to "with draw a subsidy" when the "payments" themselves
amount to the granting of a subsidy. The fact th at a subsidy is granted pursuant to a prior or
outstanding commitment is, in our view, simply of no relevance.621
14.31 Brazil also relies on the Appellate Body Report in US – FSC (Article 21.5 – EC) . Brazil
submits that the Appellate Body held in that case that a recommendation to withdraw a subsidy in the
form of an overarching measure, the FSC, include d the obligation to stop making "pre-committed"
payments to existing FSCs (Foreign Sales Corporations). 622 Again, Brazil ascribes a broader meaning
to certain statements or findings of the Appellate Body than is warranted. The US – FSC (Article 21.5
– EC) dispute concerned transitional provisions whic h allowed legislative measures that had been
found, in the original dispute, to confer prohibited export subsidies, to continue to apply with respect
to certain transactions. The "payments" in ques tion were therefore not "pre-committed", as Brazil
alleges. Rather, the legislative measure that allowe d for subsidies to be provided simply continued to
apply, albeit to a limited number of transactions. 623 Again, we read the Appellate Body's findings in

619 That "… to continue to make payments under an export subsidy measure found to be prohibited is
not consistent with the obligation to 'withdraw' prohibited export subsidies, in the sense of 'removing' or 'taking
away'", Appellate Body Report, Brazil – Aircraft (Article 21.5 – Canada), para. 45.
620 See Appellate Body Report, Brazil – Aircraft (Article 21.5 – Canada), paras. 42 and 45.
621 We also note that the panel and Appellate Body did not have to address, in Brazil – Aircraft
(Article 21.5 – Canada), the question of whether Brazil had failed to "withdraw the subsidy" because Brazil was
continuing to honour its obligations under bonds issued prior to the implementation deadline. That aspect of the
dispute only concerned the issuance, by Brazil, of new bonds pursuant to letters of commitment entered into
before the date of implementation. The United States not es that, in that case, Braz il presumably continued to
make payments under outstanding bonds for more than a decade after the implementation date. See US
Opening Statement, para. 47.
622 Brazil refers to the Appellate Body Report, US – FSC (Article 21.5 – EC) , paras. 223-231. See
Brazil's Response to Panel Question 37, footnote 28 to para. 46, and Brazil's Closing Statement, footnote 38.
623 Appellate Body Report, US – FSC (Article 21.5 – EC), para. 224. For the sake of completeness, we
note that in the Brazil – Aircraft (Article 21.5 – Canada) case, the panel and the Appellate Body rejected
arguments by Brazil that it should be allowed to continue to grant prohibited export subsidies after the end of the

that dispute as a reaffirmation of the principle that a Member has not "withdraw[n] the subsidy" where
it continues to grant it after the end of the implementation period or where it "maintains" in place the
legislative measure under which the subsidies are granted.
14.32 Thus in our view, the relevant question is not whether the United States, after the end of the
implementation period, makes any "payment" in a general sense under programmes that were found,
in the original proceeding, to constitute prohibited export subsidies, pursuant to prior commitments.
The relevant question is whether the United States continues or continued, after the end of the
implementation period, to provide export subsidies.
624
14.33 The equivalent, in the present dispute, of the issuance of bonds in Brazil – Aircraft
(Article 21.5 – Canada) is, we believe, the issuance of CCC export credit guarantees, not the payment,
by the US Government, of claims under such guarant ees, or the rescheduling or restructuring of debt
following the payment of claims. We recall that th e subsidies at issue in this dispute are not the
payment of claims by the US Government (or resche duling or restructuring of debt) but the issuance
of export credit guarantees through the CCC. Brazil did not claim in the original proceeding that the
United States provided export subsidies in the form of payments pursuant to existing export credit
guarantees. On the contrary, Brazil challenged the very issuance of guarantees as part of programmes
meeting the conditions of item (j) of the Illustra tive List. The panel's recommendation to "withdraw
the subsidy" concerned subsidies in the form of gua rantees, not in the form of payments (of claims)
under guarantees. Even before this Panel, in seeking to demonstrate that the United States
circumvented its export subsidy commitments, Brazi l does not refer the Panel to the volume of US
agricultural exports for which claims were paid, but rather to the volume of US agricultural products
covered by guarantees, whether or not claims were ultimately paid under such guarantees. Further,
Brazil has not, in our view, sought to establish that the payment of a claim under a guarantee or the
rescheduling/restructuring of debt are, in themsel ves, prohibited export subs idies, independently of
the subsidy that is conferred in the form of an export credit guarantee.
14.34 In sum, Brazil has not convinced us that the obligation to "withdraw the subsidy" pursuant to
a recommendation adopted in accordance Article 4.7 of the SCM Agreement includes a general
obligation to cease making payments or otherw ise performing under outstanding or prior

implementation period because it had assumed contractual obligations to do so under municipal law (see supra,
note 613) and that the Appellate Body rejected si milar arguments made by the United States in US – FSC
(Article 21.5 – EC) . In the latter case, the United States had argued that it should be allowed to continue
granting prohibited export subsidies to protect the contractual interests of private parties and to ensure an
orderly transition to the new legislative regime. Appellate Body Report, US – FSC (Article 21.5 – EC), paras.
223-239. The rejection of the arguments made, respect ively, by Brazil and the United States in these two
disputes does not assist Brazil's argument in the present dispute. The panel and Appellate Body, in these
disputes, rejected arguments by a responding Member that it should be allowed to continue granting prohibited
export subsidies because it had committed to do so or b ecause of other municipal law considerations (e.g.
because of private parties' expectations ). The rejection of these arguments is not equivalent to a finding that a
Member is, in all cases, precluded from granting subsidies because they were pre-committed.
624 While the Appellate Body indicated in Brazil – Aircraft (Article 21.5 – Canada) that Brazil's
arguments regarding the timing of the existence of the granting of subsidies was not relevant to its analysis, we
recall that in the original Brazil – Aircraft proceeding, both the panel and the Appellate Body reached the
conclusion that PROEX subsidies were "granted" at the time of the issuance of the bonds. Were we, like the
Brazil – Aircraft (Article 21.5 – Canada) panel, to consider that the "timing" of the granting of the subsidy is of
relevance, we would conclude that export subsidies in the form of export credit guarantees are not "granted" at
the time when the issuing agency ma kes a payment pursuant to a claim of default or when it reschedules or
restructures debt covered by a guarantee. In our view, the recipient's "unconditional legal right" to receive the
subsidy in question (i.e. export credit guarantee) arises at an earlier point in time, at the time of the issuance of
the guarantee. A conclusion that the subsidies in question are granted at the time the United States makes a
payment (on default) or upon the rescheduling or restructur ing of debt would lead to the logically flawed result
that many, if not most, of export subsidies in the form of export credit guarantees would never be granted.

commitments under a measure found to constitute a pr ohibited export subsidy. As a consequence,
Brazil has not established, on that basis, that the Un ited States has failed to "withdraw the subsidy"
because it continues to pay claims pursuant to out standing guarantees or because it reschedules or
restructures debt covered by such guarantees.
(d) Meaning of the term "withdraw"
14.35 Brazil also relies on the definition of the term "withdraw" provided by the Appellate Body in
Brazil – Aircraft (Article 21.5 – Canada) . As mentioned above, in that case, the Appellate Body
interpreted that term in Article 4.7 of the SCM Agreement as requiring that a Member "remove" or
"take away" the subsidy. For Brazil, "[p]aying a claim on default of a GSM 102 credit subject to the
DSB's recommendation to 'withdraw the subsidy' does not 'remove' or 'take away' that subsidy".625
14.36 Further, Brazil argues that the obligation to "withdraw" the subsidy in Article 4.7 of the
Agreement, interpreted in the sense of "removing" or "t aking away", extends to both elements of
Article 3.2, the "granting" and the "maintenance" of a subsidy. 626 Brazil argues that the Appellate
Body, in US – FSC (Article 21.5 – EC II) held that "the obligation to 'fully' withdraw a prohibited
subsidy is not achieved if the Member ' leaves the entirety or part of the original prohibited subsidy in
place'".627 Thus, Brazil submits that "[b]y continui ng to perform on its commitments under the
prohibited subsidies, the United States 'maintains' them unchanged".628
14.37 Neither of the two Appellate Body Reports cited by Brazil support its argument that the
obligation to "withdraw the subsidy" includes an obligation to remove or take away individual
subsidies that were granted in the past . Again, the Brazil – Aircraft (Article 21.5 – Canada) dispute
concerned a situation where a Member continued to grant, after the end of the implementation period,
new (individual) subsidies. The second Appellate Body Report cited by Brazil, US – FSC
(Article 21.5 – EC II) , addressed a situation where a Member maintained the legislative provisions
that allowed the (future) granting of subsidies. In neither case did the Appellate Body indicate that
the Member concerned was required to "withdraw" (in the sense of "removing" or "taking away")
individual subsidies that had already been granted. T hus, Brazil has pointed to no precedent for the
proposition that the obligation to "withdraw" in th e sense of "removing" or "taking away", whether
viewed in terms of the granting of a subsidy or in terms of its maintenance, extends to individual
subsidies that were granted under a programme found to confer prohibited export subsidies, prior to
the end of the implementation period.
14.38 We need not, in this dispute, develop a compre hensive analysis of the extent of a Member's
obligation to "withdraw the subsidy" pursuant to a recommendation adopted under Article 4.7 of the
SCM Agreement. In particular, we need not decide whet her the obligation to "withdraw the subsidy"
pursuant to a panel recommendation adopted under Article 4.7 of the SCM Agreement imposes an
obligation on a Member to "remove" or "take away", retrospectively, individual subsidies that were
provided in the past. Brazil has emphasized that th e remedy it is seeking is not a retroactive remedy
and that its claims are entirely prospective in nature. 629 It is therefore the Panel's understanding that
Brazil considers that the WTO Agreements (in particular, the SCM Agreement ) do not provide for
retroactive remedies. Brazil has not explained how its interpretation of the obligation set out under
Article 4.7 would not amount to a retroactive remedy, even though it would re quire the United States

625 Brazil's Response to Panel Question 37, para. 46.
626 Article 3.2 of the SCM Agreement provides that "A Member shall neither grant nor maintain"
prohibited subsidies.
627 Brazil's Response to Panel Question 92, para. 199, referring to Appellate Body Report, US – FSC
(Article 21.5 – EC II), para. 84 (emphasis added by Brazil).
628 Brazil's Response to Panel Question 92, para. 200.
629 Brazil's Response to Panel Question 92, para. 201.

to, in effect, eliminate subsidies previously grante d and therefore take action with respect to acts
which took place before the end of the time-peri od within which the United States had to "withdraw
the subsidy". A finding on our part that the Un ited States is precluded from making payments (or
rescheduling or restructuring debt) pursuant to gu arantees issued before 1 July 2005 would, in our
view, amount to a retroactive remedy, similar to a finding that a Member must demand repayment,
from the recipient, of a subsidy in the form of a direct transfer of funds.
14.39 In light of the foregoing considerations, the Panel finds that Brazil has not established that the
United States has failed to comply with the panel recommendations, adopted by the DSB, to
"withdraw the subsidy" with respect to export credit guarantees issued prior to the end of the
implementation period on 1 July 2005
630, and to bring its measures into conformity with the
Agreement on Agriculture.
C. BRAZIL'S CLAIMS CONCERNING GSM 102 EXPORT CREDIT GUARANTEES ISSUED AFTER
1 JULY 2005
1. Introduction
14.40 Brazil claims that the US measures taken to comply with the DSB recommendations and
rulings are inconsistent with Articles 10.1 and 8 of the Agreement on Agriculture and, to the extent of
that inconsistency, with Articles 3.1(a) and 3.2 of the SCM Agreement . This claim concerns GSM
102 export credit guarantees provided to exports of unscheduled products and exports of three
scheduled products – rice, pig meat and poultry meat 631 – since the end of the implementation period,
i.e. 1 July 2005. In addition, Brazil claims that GSM 102 export credit guarantees provided to exports
of three products not falling within the scope of the Agreement on Agriculture , lysine, lyocell and
wood products, are inconsistent with Articles 3.1(a) and 3.2 of the SCM Agreement.
14.41 Brazil indicates that its claims of inconsistency under the Agreement on Agriculture and the
SCM Agreement are "product-specific": Brazil claims that the United States has applied the GSM 102
programme in a manner that circumvents its export subsidy commitments with respect to unscheduled
products and three scheduled products. Thus, we understand Brazil to be challenging GSM 102
export credit guarantees "as applied".

14.42 We examine each of these claims in turn, star ting with Brazil's claims under Articles 10.1 and
8 of the Agreement on Agriculture.
2. Brazil's claims under Articles 8 and 10.1 of the Agreement on Agriculture
14.43 Article 8 and 10.1 of the Agreement on Agriculture read as follows:
Article 8: Export Competition Commitments
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.

630 Given this conclusion, we need not determine whether the fact that the original panel's findings were
reached on the basis of item (j) means, as the United States submits, that only the export credit programmes, and
not individual export credit guarantees, needed to be withdrawn.
631 The Panel has rejected the US request for a pre liminary ruling concerning Brazil's claims relating to
exports of pig meat and poultry meat. See supra, para. 9.27.

Article 10: Prevention of Circumvention of Export Subsidy Commitments
1. 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 noncommercia l transactions be used to circumvent
such commitments.
14.44 A violation of Article 10.1 requires a demonstr ation of two elements: first, that "export
subsidies not listed" in Article 9.1 are "applie d", and second, "in a manner which results in ...
circumvention of export subsidy commitments." Brazil argues that GSM 102 are export subsidies
under the terms of Article 10.1. It was not in di spute before the original panel that export credit
guarantees are not included in the list of export subsidies contained in Article 9.1 of the Agreement on
Agriculture, and that Article 10.1 was therefore the applicable provision. 632 Neither of the parties in
this compliance proceeding suggests otherwise.
14.45 The Agreement on Agriculture does not generally define the meaning of the term "export
subsidies". Article 1(e) of the Agreement provid es that export subsidies are "subsidies contingent
upon export performance, including the export subsidi es listed in Article 9 of this Agreement".
Panels and the Appellate Body have, in interpreting the meaning of "export subsidies" in Article 10.1,
relied, inter alia, on the relevant provisions of the SCM Agreement (including Articles 1 and 3 and
items of the Illustrative List) as "context". 633 These provisions define what measures constitute,
respectively, "subsidies", and "export subsidies", for the purposes of the SCM Agreement.
14.46 Regarding the "circumvention of export subsidy commitments" in Article 10.1 of the
Agreement on Agriculture , the disciplines to which Members are subject differ as between products
for which a Member has entered "export subsidy reduction commitments" in its Schedule of
commitments (so called "scheduled" products) and t hose for which it has made no such commitments
("unscheduled" products). For the latter, Memb ers are subject to a general prohibition on the
provision of export subsidies. This results from the language of the ending clause of Article 3.3 of the
Agreement on Agriculture ("... shall not provide such subsidi es [i.e. export subsidies under Article
9.1] in respect of any agricultural product not specified in [Section II of Part IV ] of its Schedule") and
Article 10.1, which precludes a Member from "applyi ng" subsidies not listed in Article 9.1 in a
manner that results (or threatens to result) in circumvention of its export subsidy commitments. 634
With respect to scheduled products, a Member is a llowed to grant export subsidies up to the level of
its reduction commitments in its Schedule. Re duction commitments are expressed on a budgetary
outlay (total amount of subsidy provided) basis as well as on a quantity (volume) basis for each
agricultural product concerned. Any export su bsidy provided beyond the specific reduction
commitments applicable to the agricultural product in question is prohibited.
14.47 Given that only some of Brazil's claims of circumvention under Article 10.1 of the Agreement
on Agriculture are subject to the special burden of proof rules of Article 10.3 of the Agreement 635 –

632 Panel Report, US – Upland Cotton, para. 7.788.
633 See Appellate Body Report, US – FSC, paras. 136-141; Panel Report, US – FSC (Article 21.5 - EC),
para. 8.116; Appellate Body Report, US – FSC (Article 21.5 – EC) , paras. 187-196; Panel Report, US – Upland
Cotton, paras. 7.797-7.803; Panel Report, Canada – Dairy (Article 21.5 – New Zealand and US) , paras. 5.152-
5.162, Panel Report, Canada – Dairy , paras. 7.125 ff. This last panel considered that Article 9.1 of the
Agreement on Agriculture can also serve as "context" to interpret the meaning of "export subsidy" under
Article 10.1 of the Agreement.
634 The term "export subsidy commitments" includes both reduction commitments undertaken with
respect to scheduled products, and the commitment not to provide any subsidy on exports of unscheduled
products. See Appellate Body Report, US – FSC, paras. 145-147.
635 Under the usual rules on the burden of proof, the complaining Member would bear the burden of
proving both aspects of its claim: that (1) export subsidies are provided; (2) the total amount of subsidies

the partial reversal of the burden of proof operated by Article 10.3 applies only to claims under the
Agreement on Agriculture , and only with respect to scheduled products
636 – we first conduct our
analysis as if Brazil bore the burden of proof with respect to both the quantitative and the
subsidization elements of its claims, i.e. as if Article 10.3 did not apply. Thus, we first proceed to
determine whether GSM 102 export credit guarantees are "export subsidies" for the purpose of
Article 10.1 of the Agreement on Agriculture. We conduct that analysis by relying on the provisions
of the SCM Agreement as contextual guidance. Only if Br azil fails to demonstrate that GSM 102
export credit guarantees are export subsidies will we proceed – for those claims of Brazil that are
subject to Article 10.3 of the Agreement on Agriculture (scheduled products) – with the analysis
mandated under Article 10.3, first determining wh ether Brazil establishes that the United States
exported the products concerned in quantities exceeding its commitments and then shifting the burden
on the United States to prove that no subsidies were provided with respect to the quantities exported
in excess of its commitments.
3. Are GSM 102 export credit guarantees "export subsidies" – legal bases for Brazil's
arguments
14.48 We proceed to the first step of our analysis, whether GSM 102 export credit guarantees
constitute "export subsidies" under Article 10.1 of the Agreement on Agriculture . As suggested
above, given that the Agreement on Agriculture does not contain a comprehensive definition of the
term and that the Agreement does not provide other guidance as to whether and under what conditions
export credit guarantees may constitute export subsidies, we consider that it is appropriate to refer to
the SCM Agreement as contextual guidance to determine whether GSM 102 guarantees are "export
subsidies" under Article 10.1 of the Agreement on Agriculture . The parties have not suggested that
we proceed otherwise.

14.49 Brazil relies on two legal bases to demonstr ate that GSM 102 export credit guarantees are
"export subsidies" in the sense of Article 3.1(a) of the SCM Agreement. First, Brazil asks the Panel to
find that GSM 102 export credit guarantees meet the de finition of an export subsidy under the terms
of Articles 1.1 and 3.1(a) of the SCM Agreement , i.e. that they are "financial contributions", that
confer a "benefit" and that are contingent upon export performance. Alternatively, Brazil asks the
Panel to conclude that GSM 102 export credit guar antees fall within the scope of item (j) of the

provided exceeds the Member 's commitments (expressed in terms of budgetary outlays) for the product in
question or the total quantity of e xports supported by the subsidy(ies) in questio n exceeds the Member's
commitments (expressed in volume of exports) for the product in question. Article 10.3 of the Agreement on
Agriculture operates a partial reversal of the burden of proof in certain disputes under Articles 3, 8, 9 and 10 of
the Agreement on Agriculture where the complaining Member alleges that volume commitments were exceeded.
See, for a discussion of the effects of Article 10.3, Appellate Body Report, US – Upland Cotton , paras. 642 ff.,
Appellate Body Report, Canada – Dairy (Article 21.5 – New Zealand and US II) , paras. 67 ff. Article 10.3
"'cleaves the complaining Member's claim' into two part s: a quantitative aspect, and an export subsididization
aspect, 'allocating to different parties the burden of proof with respect to the two parts." Appellate Body Report,
US – Upland Cotton , para. 644, quoting from Appellate Body Report, Canada – Dairy (Article 21.5 –
New Zealand and US II) , para. 69. For those claims subject to Article 10.3, consistent with the usual rules of
burden of proof, it is for the complaining Member (in this dispute, Brazil) to prove that the responding Member
(here the United States) has exported an agricultural product in quantities exceeding its commitment level. If
the complaining Member succeeds in establishing this quantitative part of the claim, then under Article 10.3, the
burden of proof shifts to the responding Member to prove that the quantities exported in excess of its
commitments are not subsidi zed. Appellate Body Report, Canada – Dairy (Article 21.5 – New Zealand and
US II), para. 74, quoted in part in Appellate Body Report, US – Upland Cotton , para. 645. The reversal of the
burden of proof is total and complete – the complaining Member does not have to make a prima facie case that
subsidisation exists. See Appellate Body Report, Canada – Dairy (Article 21.5 – New Zealand and US II) ,
para. 75.
636 Appellate Body Report, US – Upland Cotton, paras. 649, 652.

Illustrative List of Export Subsidies. Item (j) (in conjunction with Article 3.1(a)) indicates that the
following are prohibited export subsidies:637
(j) The provision by governments (or special institutions controlled by
governments) of export credit guarantee or insurance programmes, of insurance or
guarantee programmes against increases in th e 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.
14.50 Brazil regards these two alternative "bases" as separate claims, rather than arguments in
support of a single claim. 638 As we have already mentioned, Braz il first asks the Panel to consider its
"claim" that GSM 102 guarantees meet the defin itional elements of an "export subsidy" under
Articles 1 and 3 of the SCM Agreement. Only if the Panel rejects Brazil's "claim" in this respect does
Brazil ask the Panel to also consider its "claim" under item (j) of the Illustrative List of Export
Subsidies.639
14.51 In our view, the two legal bases on which Brazil relies in support of its argument that
GSM 102 export credit guarantees are export subsidies under the terms of the SCM Agreement and the
Agreement on Agriculture are not separate claims, but are rather alternative arguments as to why these
guarantees are export subsidies under Articles 3.1(a) and 3.2 of the SCM Agreement .640 A Panel
finding under either of the legal bases relied upon by Brazil would, in both cases, be that the
United States is providing export subsidies under the terms of Article 3.1(a) of the SCM Agreement
and under Article 10.1 of the Agreement on Agriculture . Item (j) of the Illustrative List does not, in
itself, provide that certain measures are prohibited, it merely indicates that certain measures are export
subsidies under Article 3.1(a). In any case, we r ecall that we are, at this point, only relying on
Article 3.1(a) of the SCM Agreement as contextual guidance to determine whether GSM 102 export
credit guarantees are export subsidies under Article 10.1 of the Agreement on Agriculture. There can
be no doubt that, in this context, the two legal bases relied upon by Brazil are indeed mere alternative
arguments, and not separate claims.
14.52 We first proceed to examine Brazil's arguments that GSM 102 export credit guarantees are
export subsidies because they fall under the scope of item (j) of the Illustrative List.
641 Our decision
first to proceed with Brazil's arguments under item (j) is motivated by the fact that there is no dispute
between the parties that measures that fall within the scope of item (j) are, under Article 3.1(a) of the
SCM Agreement, per se export subsidies.642

637 This is by virtue of Article 3.1(a) of the SCM Agreement, which provides that:
"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;" (footnotes
omitted, emphasis added).
638 Brazil's Comments on US Response to Panel Question 38, para. 112.
639 Brazil indicates that its request for review of its item (j) claim solely in the alternative stands even if
the Panel considers item (j) to be the source of an altern ative argument, rather than an alternative claim. See
Brazil's First Written Submission, footnote 593.
640 The original panel reached the same conclusion. See Panel Report, US – Upland Cotton, para. 6.31.
641 This is similar to the approach followed by the original panel. See Panel Report, US – Cotton, para.
7.803.
642 The United States considers that item (j) of the I llustrative List provides the only test to determine
whether export credit guarantees are export subsidies. See, inter alia, US First Written Submission, paras. 62-
70. Brazil considers that export cred it guarantees may be found to constitute export subsidies within the
meaning of Article 3.1(a) of the SCM Agreement either because they meet the te rms of item (j) or because they

14.53 As a result of our conclusion that the two legal bases invoked by Brazil are alternative
"arguments", not "claims", were we to concl ude that GSM 102 export credit guarantees are export
subsidies by virtue of the fact that they fall within the scope of item (j), we do not consider that we
would necessarily need to determine whether they al so, independently, meet the definitional elements
of an export subsidy under Articles 1 and 3 of the SCM Agreement.
4. Brazil's arguments under item (j) of the Illustrative List of Export Subsidies
(a) Original panel's analysis under item (j) of the Illustrative List of Export Subsidies
14.54 Before proceeding with our analysis, we recall th e main findings of the original panel in its
analysis under item (j) of the Illustrative List, as context to determine wh ether the programmes at
issue conferred export subsidies under Article 10.1 of the Agreement on Agriculture.
14.55 The original panel considered that item (j ) does not require the us e of any particular
methodological approach or accounting philosophy to determine whether a programme is run at a net
cost to the government.
643 The panel considered that it was reasonable, on the basis of the evidence
and arguments submitted to it, to take into account the period since 1992. 644 But it also considered
that the analysis under item (j) needed not be purely retrospective and could take into account
elements of the structure, design and operation of the measure which may affect the long-term
operating costs and losses of the GSM 102, GSM 103 and SCGP programmes.645
(i) Past performance of the programmes
14.56 The panel reviewed data submitted by the parties concerning the profitability of the
programmes. Data under different methodologies w as presented by the parties and relied upon by the
panel. The first approach concerned the "net present value " approach to budget accounting used by
the US Government with respect to export credit gu arantees. The US Government projects, in each
year's budget, the "net present value" of the costs associated with its export credit guarantees issued in
that year. 646 The United States budget data for 1992 to 2002 (and estimates for 2003 and 2004)
showed a positive "guaranteed loan subsidy" (i.e. a loss). Although the panel recognized that these
amounts were only initial estimates of the long-term costs of the programme, representing neither
"random guesses nor historically verifiable real am ounts", it considered that the consistently positive
subsidy numbers indicated that the US Government "believes, based upon its own assessment, that it
may not, even over the long term, be able to ope rate the export credit guarantee programmes without

meet the definitional elements of an expo rt subsidy under Article 3.1(a) of the SCM Agreement (and, by
reference, Article 1 of the SCM Agreement), i.e. that they are "f inancial contributions", that confer a "benefit"
(thereby constituting a "subsidy" under Article 1), which is contingent upon export contingency under
Article 3.1(a). See Brazil's Rebuttal, paras. 454-481. A number of third parties (Australia, Canada, Chad, and
China) consider, like Brazil, that ex port credit guarantees can be prohib ited export subsidies under either
Articles 1.1 and 3.1(a) of the SCM Agreement or item (j) of the Illustrative List. The Panel understands the
European Communities to agree with the United States ' position. See Australia's Third Party Submission,
para. 24, Canada's Oral Statement Submission, paras. 8-13, Chad's Third Party Submission, paras. 50-56,
China's Third Party Submission, paras. 4-8 and China's Oral Statement, EC Oral Statement, para. 33.
643 Panel Report, US – Upland Cotton, para. 7.804.
644 Panel Report, US – Upland Cotton, para. 7.831.
645 Panel Report, US – Upland Cotton, para. 7.835.
646 A positive net present value means the US Government is granting a "subsidy" to borrowers and
therefore expecting a loss, a negative present value mean s that the programme is generating a "profit." This
value does not include administra tive costs. See Panel Report, US – Upland Cotton , para. 7.842.
Administrative costs are usually relatively modest in comparison to the value itself (US$5 million in the most
recent years).

some net cost to government". 647 The panel also took into account the fact that "actual historical
experience was a primary factor" on which the estimates are based.648
14.57 These initial estimates are subject to annual re-estimations over the lifetime of the guarantees
involved. The United States argued in this respect that the re-estimates, over time, erased the initial
positive "estimate" figure, in other words, that taking the re-estimates into account, the programmes
would not give rise to a net cost to the US Government. The United States provided the panel with
cumulative re-estimates on a cohort-specific basis (a cohort is comprised of all guarantees issued in a
given year). These figures showed a positive subsid y of US$230 million. The United States noted an
overall downward re-estimate of US$1.9 billion (i.e. overall, re-estimates brought the subsidy down),
that, with the exception of 2002 (for which only very recent data was available), the trend for all
cohorts was favourable as compared to the origin al subsidy amount, and that the data for the 1992-
1996 and 1999 cohorts indicated profitability. Accord ing to the United States, when data for the – as
yet uncompleted – 2001 and 2002 cohorts were remove d, the US$230 million was almost entirely
eliminated. While the panel took into account the fact that the process of estimates and re-estimates
by cohort is necessarily a fluid one that cannot be definitively analyzed until a cohort is "closed", it
disagreed with the United States that data for certain of the more recent cohorts should be
disregarded; the panel was also not persuaded th at cohort re-estimates over time, would necessarily
not give rise to a net cost to the US Governme nt. It therefore rejected the arguments of the
United States in this respect.649
14.58 The second "methodology" under which the original panel examined the US programmes was
a constructed cost formula submitted by Brazil, based on data from the US budget. 650 Brazil
submitted a table which showed a net cost to government of US$1.08 billion from FY 1993 to
FY 2002 (using data taken in the "prior year" column in the US budget). 651 The panel considered it an
"an additional informed appraisal, based on informa tion generated by the US Government itself, of
the performance of export credit guarantee programm es" which, the panel noted, takes into account
the actual level of guarantees issued by the CCC in a given year, as opposed to an estimate of this
level.652 The panel compared the result of this form ula with evidence submitted by the United States,
which it asserted, reflected a profit of US$630 million to the US Government. The difference between
the results of Brazil's and the United States' calcu lations corresponded to the amount of rescheduled
claims (US$1.6 billion), which the United States did not treat as "outstanding claims": rather, the
standard accounting treatment of reschedulings by the CCC was to treat them as new direct loans;
this, in the panel's view, represented an instant re duction of the amount in outstanding claims in the
year in which the rescheduling was finalized. The panel thus shared Brazil's concerns that the
United States' treatment of rescheduled debt understated the net cost to the US Government.
653
14.59 The panel also took into account the fact that the CCC financial statements for the years 2002
and 2003 indicated a "credit guarantee liability" of US$411 million and US$22 million, respectively.
The panel observed that these "credit guarantee liability" amounts "are not actual losses. They are but
another indicator, used and relied upon by the US government, to assess the estimated long-term cost

647 Panel Report, US – Upland Cotton, para. 7.843.
648 Panel Report, US – Upland Cotton, para. 7.843.
649 Panel Report, US – Upland Cotton, paras. 7.852-7.854.
650 The formula calculated the fo llowing: (Premiums collected + Recovered principal and interest (line
88.40 of the US budget) + Interest revenue (line 88.25) ) – (Administrative expenses (line 00.09) + Default
claims (line 00.01) + Interest expense (line 00.02)). See Panel Report, US – Upland Cotton, para. 7.844.
651 See the table at para. 7.845 of the Panel Report, US – Upland Cotton.
652 Panel Report, US – Upland Cotton, para. 7.846.
653 Panel Report, US – Upland Cotton, para. 7.851.

to the United States government of export credit guarantees", and that these amounts were
consistently positive.
654
14.60 Overall, the panel found that these considerati ons relating to the past performance of the
programmes supported a view that the programmes were run at a net cost to the government.655
(ii) Structure, design and operation of the programme
14.61 The panel also took into consideration the structure, design and operation of the export credit
guarantee programmes. Several elements in this r espect led the panel to be lieve that the programmes
were "not designed to avoid a net cost to government". 656 The panel took into consideration the fact
that the CCC borrows from the US Treasury and th at access to Treasury borrowings facilitates the
functioning of the programmes and that, for a cred itor, the guarantees provide the backing of the full
faith and credit of the US Government. Further, the panel was of the view that the premiums were not
geared toward ensuring adequacy to cover long- term operating costs and losses for the purposes of
item (j) of the Illustrative List. First, it noted in this respect the 1 per cent fee cap imposed by US
legislation on the fees. 657 Second, it considered that the premiums were not risk-based, either with
respect to country risk or the creditworthiness of the borrower in an individual transaction. Country
risk and foreign obligor risk only impacted the US Government subsidy estimates and re-estimates,
and not the fees charged. 658 Moreover, the statute imposed no limitation on the amount of guarantees
that could be provided annually to a high-risk country or to high risks transactions. The CCC was,
therefore, able to provide large amounts of guarant ees to high-risk countries with a resulting high rate
of default. The panel also noted the lack of substa ntial or regular review of the premiums by the US
Government to ensure that they were adequate to cover long-term operating costs and losses. Finally,
the panel noted evidence (an annual review of fees by the USDA) that indicated that the US
Government did not consider that the fees were ri sk-based and that they did not cover the "subsidy
cost of the programme"; the document also stated that the 1 per cent fee cap likely prevented the
adoption of risk-based fees. 659 Thus, for the panel, the evidence i ndicated that the premiums were not
proportionate to, reflective of, nor geared towards, covering long-term operating costs and losses.660
(iii) Overall conclusion by the original panel
14.62 Thus, on the basis of the totality of the evid ence, the panel found that Brazil had established
that the three export credit guarantee programme s were provided "at premium rates which are
inadequate to cover the long-term operating costs and losses of the programmes" within the meaning
of item (j) of the Illustrative List. This view was "based on a careful consideration of the evidence,
taken as a whole, and no one element, in isolation, is determinative". 661 The panel therefore found
that the GSM 102, GSM 103 and SCGP expor t credit guarantee programmes constituted a per se
export subsidy within the meaning of item (j) of the Illustrative List and were therefore export
subsidies under Article 10.1 of the Agreement on Agriculture.

654 Panel Report, US – Upland Cotton, para. 7.855.
655 Panel Report, US – Upland Cotton, para. 7.856.
656 Panel Report, US – Upland Cotton, para. 7.857.
657 Panel Report, US – Upland Cotton, para. 7.860.
658 Country risk is the risk – represented by a cr edit rating – associated with a given country, and
usually relates to the risk of political or economic crises , etc; foreign obligor risk is the risk specific to an
individual foreign obligor.
659 Panel Report, US – Upland Cotton, para. 7.865.
660 Panel Report, US – Upland Cotton, para. 7.867.
661 Panel Report, US – Upland Cotton, para. 7.867.

(iv) Appellate Body
14.63 The Appellate Body agreed with the panel's approach to assessing whether the programmes at
issue met the conditions set forth in item (j) of the Illustrative List 662 and that "[t]he text of item (j)
does not suggest that this provision requires a Panel to choose one particular basis for the calculation
and then to make a precise quantification of the difference between pr emiums and long-term
operating costs and losses on that basis".663
14.64 Like the original panel, we conduct a two-step analysis. First, we review the evidence of a
quantitative nature submitted by the parties to determine whether th e GSM 102 programme is
provided at premium rates that are inadequate to cover its long term operating costs and losses;
second, we examine the evidence pertaining to elements of the "structure, design and operation" of the
GSM 102 programme submitted by Brazil.
(b) "Quantitative" analysis under item (j)
(i) Main arguments of the parties
14.65 Brazil submits that the US Government continues to predict that GSM 102 export credit
guarantees will be provided at a loss, even under the new fee schedule. Brazil relies on the "subsidy"
estimates for FY 2006, 2007 and 2008, which continue to be positive. Brazil refers to the findings of
the original panel, which took similar projections as an indication that the US Government considers
that the programmes would be provided at a net cost.664
14.66 The United States submits that current budget financial data shows that the fee structure in
place during the original panel proceeding provided premia more than adequate to cover the long term
costs and losses of the programmes at issue in that proceeding. The data – which concerns subsequent
reestimates of initial subsidy estimates – became available as more cohorts of export credit guarantees
closed. The data demonstrates that the programmes were profitable even before the suspension of the
GSM 103 and SCGP programmes and the significant modi fications of the fee st ructure and eligibility
under the programmes. Further, the United States ar gues that the initial subsidy estimates in the US
budget are not derived from the actual experience of the CCC. The original estimates are calculated
before any use is made of the export credit guarant ee programme in the year for which the estimate is
made and are based on an historically overly-optimistic projection of the actual use of the programme.
In addition, the CCC is, in establishing these estim ates, required to use government-wide estimation
rules, without regard to the actual experi ence specific to the CCC export credit guarantee
programmes.665
14.67 Brazil counters that the result of the US Governme nt "re-estimates" is elsewhere tracked in
the CCC's Financial Statements. The Financial Statements report a positive "credit guarantee
liability" of US$220 million for guarantees outstanding as of 30 September 2006. Brazil also submits
"cash basis" calculations which, in its view, conf irm that the programmes have not been profitable
since 1992.
666
14.68 The United States rejects Brazil's reading of the "credit guarantee liability" figure in the
CCC's Financial Statements. In addition, the Unite d States questions the significance of Brazil's cash

662 Appellate Body Report, US – Upland Cotton, paras. 665 ff.
663 Appellate Body Report, US – Upland Cotton, para. 665.
664 Brazil's First Written Submission, paras. 433-437; Brazil's Opening Statement, paras. 252-253.
665 US First Written Submission, paras. 100-104; US Rebuttal Submission, paras. 108-126
666 Brazil's Rebuttal Submission, paras. 482 ff.

basis accounting methodology and submits that Brazil omits to include recoveries in respect of
guarantees issued before 1992 in its calculation.
667
(ii) Evaluation by the Panel
14.69 Before this Panel, Brazil again relies on the initia l or original "subsidy estimates" reported in
the US Budget. The 2007 US budget projected a "positive subsidy" (or loss) of US$125 million for
the 2006 cohort and US$114 million for the 2007 cohort. 668 The 2008 budget revised these numbers
to, respectively, US$71 and US$60 million, and in addition, projected a US$53 million subsidy
estimate for the guarantees issued in the 2008 year.
669 None of these figures include administrative
costs (which amount to US$5 million a year).670
14.70 We recall that the original panel found that the initial estimates were one of the
"considerations relating to the past performance of the programmes" that supported its conclusion that
the programmes were provided "at premium rates which are inade quate to cover the long-term
operating costs and losses of the programmes" within the meaning of item (j) of the Illustrative List.671
The original panel found as follows with respect to these initial estimates:
"We realize that these amounts are initial estimates of the long-term costs to the
United States government. They are not , however, mere random guesses as to the
amount of possible, but highly unlikely, costs to the government. Nor, at the other
extreme, are they historically verifiable real amounts that have been, or actually will
be, disbursed by the United States government. Rather, this is a methodology used
and relied upon by the United States govern ment to assess the estimated long-term
net cost to the United States government of export credit guarantees.
 Actual historical
experience is a "primary factor" on which estimates are based. 672 The consistently
positive numbers in the United States budget guaranteed loan subsidy line indicate to
us that the United States government belie ves, based upon its own assessment, that it
may not, even over the long term, be able to operate the export credit guarantee
programmes without some net cost to government." 673 (emphasis original)
14.71 We agree with the original panel that consistently positive initial subsidy estimates provide an
indication by the US Government that it expect s the export credit guarantee programmes in question
to be run at a net cost. It is in our view highly significant that the US Government continues to

667 US Rebuttal Submission, paras. 84 ff.
668 The CCC is required to make annual subsidy estimates as a result of the Federal Credit Reform Act
of 1990 (the "FCRA"). The purpose of the reform im plemented by the FCRA is to "measure more accurately
the costs of Federal credit programs". See 2 U.S.C. § 661(a), Exhibit Bra-545. The net present value analysis
attempts to calculate the value today of a future stream of income or co st; under its budget accounting, the US
Government identifies an annual "cost" in terms of the "net present value" associat ed with its export credit
guarantee programmes. See Panel Report, US – Upland Cotton, para. 7.842.
669 See line 233001 of the 2007 (for years 2006 and 2007) and 2008 budgets (respectively, Exhibits
Bra-544 and US-71). The revision occurs because the subsidy estimate that first appears is based on an estimate
of the use of the programme. Budgets for the two subsequent years following that budget progressively take
into account the actual use of the programme. See discussion, infra, para. 14.76.
670 See line 00.09 for each of the 2006, 2007, and 2008 budgets (respectively, Exhibits Bra-544 and
US-71).
671 Panel Report, US – Upland Cotton, paras. 7.856, 7.867.
672[original footnote] Federal Accounting Standards Advisory Board, 'Statement of Federal Financial
Accounting Standards, No. 19, Technical Amendments to accounting Standards for Direct Loans and Loan
Guarantees' in Statement of Federal Financial Accounting Standards No. 2" (March 2001), p. 16, para. 36,
reproduced in Exhibit BRA-118 states: "Actual historical experience of the performance of a risk category is a
primary factor upon which an estimation of default cost is based".
673 Panel Report, US – Upland Cotton, para. 7.843.

project, at the time of their issuance, that ne w GSM 102 guarantees issued under the revised
programme will be provided at a net cost.
14.72 We now address the arguments the United States makes against the use of the initial estimates
to assess the long term net cost of the GSM 102 programme to the US Government. The United States
raises two arguments in this respect.674 First, the United States argues that the initial subsidy estimates
are inflated because they are issu ed before any use is made of the programme and therefore do not
reflect the actual use of the programme. Second, the United States argues that the initial subsidy
estimate is unreliable because the CCC is required, in preparing the estimates, to use government-
wide estimation rules, including mandated risk assessment country grades, without regard to CCC's
actual default experience. The United States su bmits in support of this second argument a Report
from the General Accounting Office which explains th at the principal factors used in the calculation
of the original subsidy rate are provided by the Office of Management and Budget (OMB). 675 For the
United States, this "one-size-fits-all approach ... largely explains the continuing presence of an
original subsidy estimate for CCC export credit gu arantee programmes in fiscal years 2006 and
2007".676
14.73 In both cases, however, the United States is reasserting arguments that it made in the original
proceeding and that were, at least implicitly, rejected by the original panel.677

674 We address below, in paras. 14.78 ff. the evidence submitted by the United States with respect to
subsequent reestimates of the initial subsidy estimates.
675 US Rebuttal, paras. 108 ff. and Exhibit US-73. The document indicates that the OMB provides
such agencies with "expected loss rates", a key compon ent of their subsidy costs. OMB also provides the
discount rates that are used to calculate subsidy estimate s. The United States also e xplains that, starting with
fiscal year 2003, OMB changed its method for determining expected loss rates because emerging finance
literature indicated its former approach might overstate losses to the Government. OMB's methodology,
however, continues to make certain assumptions that are not consistent with CCC's experience nor with its
programme. More specifically, the United States indicates that the OMB uses "the market price of credits with
the lowest ICRAS rating (category 11) [as] the predominan t basis for recovery rates." OMB's use of the market
price of the "lowest-rated credits is based on the a ssumption that this value represents the most the US
government would recover in the event of default." Each sovereign borrower or guarantor is rated on an 11-
category scale, ranging from A through F– (or their numerical counterparts, categories 1-11). For CCC,
however, no country below a certain ICRAS rating is e ligible for the programme at all. Consequently, OMB's
imposed assumption about recovery rates as part of the calculation of expected loss rates is much more
conservative than would be warranted w ith respect to the CCC". The United Stat es also argues that, to date, the
OMB has not incorporated any data specific to CCC experience in its calculations of expected loss rates that it
requires CCC to employ in the preparation of its budget at the beginning of each fiscal year.
676 US Rebuttal, para 116.
677 For instance, the United States made the following statements in the original proceeding:

"The original subsidy estimate, in contrast [to the "actual" estimate figure two years
thereafter] begins with what is an historically overly optimistic projection of actual use of the
program and then is required to use the government-wide estimation rules, including
mandated risk-assessment country grades without regard to the actual experience specific to
the CCC export credit guarantee programs. Thes e two factors are the answer to Brazil's
question, 'why does [CCC] continue to offer orig inal estimates that are so high?' (footnotes
omitted).

"The United States has previously noted that the original subsidy estimate in the US budget
begins with an historically overly optimistic projection of the actual use of the programme and
then the use of government-wide estimation rules is required, including mandated risk
assessment country grades without regard to the actual experience specific to the CCC export
credit guarantee programmes. The original subsidy estimate for these cohorts, like the

14.74 Notwithstanding these arguments of the United Stat es, the original panel concluded that the
original subsidy estimate could be relied upon as an indicator of the long term net cost of the
programmes to the US Government – or at least of an indicator of the US Government's assessment of
such costs.
678
14.75 As Brazil points out "[t]he process by which th e CCC arrives at initial estimates of long-term
programme performance has not changed since the orig inal proceedings; nor have the criteria used by
the CCC to make this assessment". 679 There are, in sum, no chang es in the underlying circumstances
that would justify us revisiting the original panel's reasoning in this respect. 680
14.76 In any case, we would note that while the United States is factually correct that the initial
estimates are established before any use is made of the programme and that the initial estimates are
based on the projected use of the programme, these initial estimates are subsequently re-adjusted in
the US Budget two years after the budget year in which the initial estimate appears. 681 In no case has

original subsidy estimate for all cohorts, n ecessarily reflects no actual operating experience
with respect to that cohort." (footnotes omitted).
(US Response to original panel's Question 221(g), Panel Report, US – Upland Cotton ,
Annex I, page I-371)

"The United States has noted that such [original] estimates are compelled by government-wide
accounting rules for credit programs..."
 (US Further Rebuttal Submission, 18 November 2003,
para. 196)

"Brazil also mysteriously alleges that 'according to CCC's 2002 financial statements, CCC has
been relieved of what the United States argues are onerous government-wide accounting rules
that 'compel' projection of enormous losses.' CCC, however, has never been so 'relieved.' It
remains compelled to adhere to the requirements of the federal Credit Reform Act of 1990,
and relevant provisions of the Office of Management and Budget Circular A-11,
implementing that legislation. CCC remains subject to government-wide requirements for
subsidy estimates and the risk categories mandated by OMB with respect to exposure to debt
from different countries. The government-wide rules continue to dictate the methodology for
calculation of estimates, and reestimates..." (US Closing Statement at the Second Panel
Meeting, 3 December 2003, para. 10).

"We realize that these amounts are initial estimates of the long-term costs to the United States
government. They are not, however, mere random gues ses as to the amount of possible, but
highly unlikely, costs to the government. Nor, at the other extreme, are they historically
verifiable real amounts that have been, or actually will be, disbursed by the United States
government. Rather, this is a methodology used and relied upon by the United States
government to assess the estimated long-term ne t cost to the United States government of
export credit guarantees.
 Actual historical experience is a 'primary factor' on which estimates
are based. The consistently positive numbers in the United States budget guaranteed loan
subsidy line indicate to us that the United States government believes, based upon its own
assessment, that it may not, even over the long term, be able to operate the export credit
guarantee programmes without some net cost to government." (footnotes omitted, emphasis
added).
679 Brazil's Response to Panel Question 105, para. 300.
680 See Appellate Body Report, US – Softwood Lumber VI (Article 21.5 – Canada) , para. 103, citing
Appellate Body Report, Mexico – Corn Syrup (Article 21.5 – US), para. 121.
681 Each annual budget provides long-term subsid y estimates for three cohorts of export credit
guarantees: the cohort of guarantees to be issued in the fiscal year that has not yet begun (for instance, in the
2008 budget, the 2008 cohort), the cohort of guarantees i ssued in the fiscal year that has partly elapsed at the
time the budget is released (in the 2008 budget, the 2007 cohort), and the cohort of guarantees issued in the
fiscal year that has most recently ended (in the 2008 budget, the 2006 cohort). In subsequent years, re-estimates

such an adjustment turned a positive subsidy estimate into a negative one. 682 We recall that, in this
case, we are only interested in the presence of a ne t cost to the US Government resulting from the
provision of GSM 102 export credit guarantees. We need not quantify such a cost. Therefore, the
fact that the initial subsidy estimate may be overst ated does not, in our view, mean that it is not a
reliable predictor of a net cost to the US Government.
14.77 Nor do we see a reason to depart from the or iginal panel's conclusion that the subsidy
estimates are, at least in part, based on historical experience and can be read as the US Government's
own assessment of the long term costs of the progra mme(s). Brazil also directs us to the USDA's
"Agriculture Financial Standard s Manual", which states that "[i]n estimating default costs, the
following risk factors are considered: (1) loan performance experience...".
683 and to a "self-
assessment" of the programmes by the USDA Foreign Agricultural Service (FAS) in 2004. 684 The
self-assessment states that the credit models used to calculate the subsidy estimate were revised in
FY2001 and 2003 and "currently provide reliable estimates". 685 While we take note of the
United States' arguments that the OMB continues to impose expected loss rates or estimated default
costs, in our view, this does not bring into questio n the fact that this is the method which is relied
upon by the US Government itself to assess the long-term net cost of its export credit guarantee
programmes at the time of issuance of the guarantees.
14.78 The United States also submits that new US bud get data that became available after the
original panel conducted its analysis demonstrates that the programmes were in fact not provided at a
net cost to the US Government even before it took measures to comply with the DSB
recommendations. The data submitted by the United States concerns cumulative subsequent "re-
estimates" of the initial subsidy estimates on a cohort- specific basis: initial "subsidy" estimates in the
US budget are subject to re-estimates over the lifetime of the guarantees involved. 686 As mentioned
above, the United States had made similar arguments be fore the original panel, but the panel was not
convinced that the evidence presen ted by the United States showed that the cohort estimates (which
showed an overall positive subsidy estimate, i.e. a "loss") would eventually turn into a negative figure.
We understand the United States to argue that the Pa nel should take into consideration the reestimates
data in addition to the initial subsidy estimates. The United States is therefore also challenging the
fact that initial estimates may (by themselves, wit hout taking the re-estimates into account) be relied

are tracked in Table 8 of the Federal Credit Suppleme nt accompanying the budget. Thus, for each cohort,
subsequent budgets will provide three estimates: the estimate reported in the budget for the first fiscal year takes
no account of the actual use of the programme, the estimat e reported in the budget for the second fiscal year
partly takes into account the actual use of the programme, and the estimate reported in the budget for the third
fiscal year (and which is released after the cohort has cl osed) is based on the actual use of the programme. The
amounts reflecting the actual use of the programme usually decline in absolute amounts. See Brazil's Rebuttal
Submission, para. 508 and accompanying footnote. We do not believe there was any misunderstanding between
the parties and the Panel on this issue in the original dispute. See for instance, US Further Submission
(30 September 2003), para. 149:

"Actual guarantee issuance can first be reflecte d only in the budget two fiscal years after the
original subsidy estimate. Once the actual use of the program is determined all subsequent
reestimates are based on that figure, not on the original subsidy estimate. Other than with
respect to interest (because of independent market forces), a downward reestimate never
occurs based on the original subsidy estimate."
682 See Exhibits Bra-617 and US-8.
683 Exhibit Bra-616, US Department of Agriculture , Office of the Chief Financial Officer, Credit,
Travel, and Accounting Division, Agriculture Financial Standards Manual (May 2004), pages 120-121.
684 See Brazil's Opening Statement, para. 253.
685 Exhibit Bra-588 (Agricultural Export Credit Guarantee Program s Assessment, ExpectMore.gov,
Section 3.CR2).
686 US First Written Submission, para. 83, also referring to the original panel report, para. 7.843.

upon as a reliable indicator of the long-term net co st of the programmes or, at least, as representing
the US Government's assessment of the projected long-term net cost of the programme.
14.79 We note that the new data submitted by the United States concerns the three programmes
examined by the original panel (GSM 102, GSM 103 and SCGP). The issue before us is whether the
GSM 102 programme, as revised, is provided at prem ium rates inadequate to cover its long term
operating costs and losses. The original pane l found that the United States provided the three
programmes at a net cost to its government. That issue has been definitivel y disposed of in the
original proceeding and is not before us. Howeve r, we must consider the arguments and evidence
submitted by the United States to the extent that they are relevant to determine whether the revised
GSM 102 programme is run at a net cost to the US Government or, as we understand the
United States' argument, that we should rely on the reestimates rather than the initial subsidy
estimates as an indicator of the long-term cost of the programme. The United States submits to the
Panel a table
687 that includes reestimates for the 1992 to 2006 cohorts. The table shows, for all three
programmes, an aggregate overall negative "subsidy estimate net of reestimates" (i.e. anticipated
"profit") of US$926 million for the 1992-2002 cohorts (i.e. the cohorts examined by the original
panel) and of US$403 million for the 1992-2006 cohorts.
14.80 The original panel was not persuaded that cohort reestimates, over time, would necessarily
not give rise to a net cost to the United States Government. 688 Similarly, we are not convinced that
the re-estimates data submitted by the United States establishes that all positive subsidy estimates –
and in particular, those for cohorts 2006-2008 – will eventually turn into negative ones. We note in
this respect that the US Government continues to project, for the new cohorts of GSM 102 guarantees
issued after 1 July 2005 (i.e. after the CCC revised the programme's fee structure and discontinued its
use of the GSM 103 and SCGP programmes), that the guarantees will be provi ded at a long-term net
cost.
14.81 Nor are we convinced that the subsidy reestimates data demonstrates that the GSM 102, GSM
103 and SCGP programmes were provi ded at no net cost to the US Government in the concerned
periods. The reestimates data provided by the United States (except those related to the 1994 and
1995 cohorts, which have closed) are revised estimat es. They indicate that the US Government now
projects the cohorts of guarantees at issue to be profitable. But, because they are revised estimates,
they do not establish that the programmes were provided at no net cost to the US Government. 689 We
further recall that the original panel's conclusion that the three programmes at issue fell within the
scope of item (j) was based on a number of indicator s of the past performance of the programmes, in
addition to the subsidy estimates. 690 The original panel took into consideration "cash accounting"
evidence submitted by Brazil and the "credit gua rantee liability" figure reported in the CCC's
Financial Statements. 691 The evidence considered by the Panel under both of these methodologies
pointed to the programmes being provided at a net cost to the US Government. The CCC continues to
report, in its Financial statements, a "credit guarantee liability": the CCC's 2005-2006's Financial

687 The table was submitted by the United States as part of its Response to Panel Question 111. It
includes data contained in the 2008 budget. The United States had initially submitted a table containing re-
estimates data contained in up to the 2007 budget. See paras. 87-89 of the US First Written Submission.
688 Panel Report, US – Upland Cotton, para. 7.853.
689 The Panel notes that, according to the re-estim ates data submitted by the United States, certain
cohorts (the 1997, 1998 and 2002-2006 cohorts) continue to present a positive "subsidy estimate net of re-
estimates".
690 The United States recognizes this. See US Respon se to Panel Question 105: "... in the original
panel's conclusions, the original subsidy estimates were not dispositive on the question of whether the three
export credit guarantee programs met the test of item (j). It was but one factor in the original panel's analysis."
691 The panel's conclusion also rested on its findings that a number of elements of the structure, design
and operation of the programme indicated that the programme was not designed to cover its long term operating
costs and losses. See supra, para. 14.61.

Statement692 report a "credit guarantee liability" of US$220 million. 693 The original Panel noted the
following with respect to the "credit guarantee liability" figure reported in the CCC's Financial
Statements:
"The CCC defines the term "credit guarant ee liability" as the estimated cash outflows
of the guarantees on a net present value basis. "Liability" is defined as "...a probable
future outflow or other sacrifice of resources as a result of past transactions or
events." We observe that these amounts are not actual losses. They are but another
indicator, used and relied upon by the United States government, to assess the
estimated long-term cost to the United States government of export credit guarantees.
They are consistently positive, indicating to us that the CCC believes, based upon its
own assessment, that it may not, even over the long term, be able to operate the
export credit guarantee programmes without some net cost to government."
 694
(footnotes omitted)
14.82 Notwithstanding that the original panel relied in part on the "credit guarantee liability" figure
reported in the CCC's Financial Statements, the pa rties disagree as to the meaning of this figure. 695
The United States argues that the credit guarant ee liability is merely a balance sheet entry
(corresponding to a future disbursement under the programme) of a liability for which an offsetting
entry of an asset exists and that the CCC has an expectation of a recovery associated with the payment
for default on the guaranteed loan , such that such receivables ma y not properly be considered
"losses".696 Brazil rejects the United States' reading as be ing inconsistent with the definition of the
term "credit guarantee liability" provided in th e Financial Statements themselves. Brazil draws
attention to the use of the word "net": this, in Brazil's view, belies the US assertion that the credit
guarantee liability figure in the CCC financial stat ements includes only a liability for which an
offsetting entry of an asset exists:697
"Credit guarantee liabilities represent the estimated net cash outflows (loss) of the
guarantees on a net present value basis. To this effect, CCC records a liability and an
expense to the extent, in management's estimate, CCC will be unable to recover claim
payments under the Credit Reform Export Credit Guarantee programs." (emphasis by
Brazil).
 698
14.83 We see no reason to depart from the line of reas oning adopted by the original panel. It is
clear, in our view, that the "estimated net cash outflow" of outstanding guarantees means that with
respect to guarantees that were outstanding as of 30 September 2006, the US Government estimates

692 Brazil's Rebuttal Submission, paras. 484-486.
693 See Exhibit Bra-585 (Audit Report, Commodity Credit Corporation's Financial Statements for
Fiscal Years 2006 and 2005, November 2006, p. 11 of Notes to the Financial Statements). The financial
statements define the term "credit guarantee liability" in the following terms:
"Credit guarantee liabilities represent the estimate d net cash outflows (loss) of the guarantees
on a net present value basis. To this effect, CCC records a liability and an expense to the
extent, in management's estimate, CCC will be unable to recover claim payments under the
Credit Reform Export Credit Guarantee programs."
694 Panel Report, US – Upland Cotton, para. 7.855.
695 The parties have, in their Responses to Panel Questions 107-108 and Comments thereon, provided
an extensive discussion of their arguments on this point.
696 US Responses to Panel Questions 107 and 108. See also the US Rebuttal Submission, paras. 87-88.
697 Brazil's Comments on US Response to Panel Questions 107 and 108, para. 298.
698 See Brazil's Comments on US Response to Panel Questions 107 and 108, paras. 297-298 and
Exhibit Bra-585, p. 11.

future disbursements of US$220 million.
699 Thus, in our view, the "credit guarantee liability" reported
in the CCC's financial statements provides another indication of the US Government's view that
further costs will be incurred with respect to guarantees outstanding as of 30 September 2006.
14.84 As mentioned above, Brazil also submits ev idence concerning the cumulative receipts and
disbursements for the three progr ammes pursuant to a "cash basi s accounting" methodology. The
chart submitted by Brazil in this respect is similar to the results of the constructed "cost" formula it
submitted to the original panel 700, but covers the period from FY 1993 to FY2005 (the table submitted
to the original panel covered the period up to 2002). The table (Exhibit Bra-613) is as follows:
 US$
FY
Premiums
collected
(88.40)
Recovered
principle and
interest
(88.40)
Interest
revenue
(88.25) Sub Total
Administrative
expenses
(00.09)
Default
claims
(Line 00.01)
Interest
expense
(Line 00.02) Sub-Total
1993 27,608,000 12,793,000 15,672,000 56,073,000 3,320,000 570,000,000 0 573,320,000
1994 20,893,000 458,954,000 0 479,847,000 3,381,000 422,363,000 0 425,744,000
1995 18,000,000 62,000,000 0 80,000,000 3,000,000 551,000,000 10,000,000 564,000,000
1996 20,000,000 68,000,000 26,000,000 114,000,000 3,000,000 202,000,000 61,000,000 266,000,000
1997 14,000,000 104,000,000 26,000,000 144,000,000 4,000,000 11,000,000 62,000,000 77,000,000
1998 17,000,000 81,000,000 54,000,000 152,000,000 4,000,000 72,000,000 62,000,000 138,000,000
1999 14,000,000 58,000,000 0 72,000,000 4,000,000 244,000,000 62,000,000 310,000,000
2000 16,000,000 100,000,000 99,000,000 215,000,000 4,000,000 208,000,000 62,000,000 274,000,000
2001 18,000,000 149,000,000 125,000,000 292,000,000 4,000,000 52,000,000 104,000,000 160,000,000
2002 21,000,000 155,000,000 61,000,000 237,000,000 4,000,000 40,000,000 93,000,000 137,000,000
2003 20,000,000 187,000,000 56,000,000 263,000,000 4,000,000 102,000,000 84,000,000 190,000,000
2004 22,000,000 219,000,000 61,000,000 302,000,000 4,000,000 130,000,000 81,000,000 215,000,000
2005 508,000,000 0 0 508,000,000 4,000,000 190,000,000 80,000,000 274,000,000
 2,914,920,000 3,604,064,000

14.85 Over the period FY 1993-2005, the table show s programme receipts of US$2.9 billion,
against programme disbursements of US$3.6 billion, for a net loss of over US$689 million.701

699 We do not understand the United States to fundamentally disagree with the original panel's
interpretation of the meaning of the "credit guarantee lia bility" reported in the CCC's Financial Statements. See
US Response to Panel Questions 107 and 108, para. 271:

"Turning to the Panel’s question as to whether the liability figure may be considered a loss,
the United States notes the original panel’s explanation that a 'liability' is defined as "... a
probable future outflow or other sacrifice of resources as a result of past transactions or
events." The United States considers that this is an accurate and proper definition of liability.
The original panel specifically noted that such a 'probable future outflow' does not equate with
'loss.' Citing the Federal Accounting Standards Advisory Board Statements of Federal
Financial Accounting Concepts and Standards, the panel noted that the definition of 'loss,' in
contrast, is 'any expense or irrecoverable cost, often referred to as a nonrecurring charge, an
expenditure from which no present or future benefit may be expected.' CCC clearly has an
expectation of recovery on the receivable it ha s obtained in exchange for its payment for a
default on a guaranteed loan. Therefore, the r eceivables are not properly considered to be
'losses.'" (footnotes omitted)
700 Exhibit Bra-613. See Panel Report, US – Upland Cotton, paras. 7.844-7.845 for a discussion of the
data presented to the original panel.
701 Exhibit Bra-613 (CCC Cost Formula). See also Exhibit Bra-614 (Budgets of the United States
Government, Fiscal Year 1993-2006). The United States notes two minor omissions with respect to the 2005

14.86 The United States considers that Brazil's table is deficient because it does not include amounts
recovered under guarantees issued prior to 1992 (the United States indicates that such recoveries, in
1993-2005, total over US$5.6 billion). 702 We disagree. The Panel does not believe that it would be
appropriate to include recoveries for pre-1992 gu arantees unless all costs and all other revenues
associated with the same guarantees are also included. In addition, the Panel considers that including
these amounts would not allow a comparison with the re-estimates data submitted by the
United States, which only covers guarantees issued after 1992.
14.87 This "cash basis accounting" data leads to r esults which stand in sharp contrast to the
"reestimates" data submitted by the United States. This is not surprising. The difference between the
two methods primarily has to do with the fact that the data submitted by the United States includes not
only amounts for a past period, but also projected disbursements and receipts. Brazil's cash basis
formula however only captures receipts and disburseme nts to date. It does not, therefore, record
projected receipts and disbursements, including (as th e United States indicates) projected recoveries
under rescheduled amounts.703
14.88 The "credit guarantee liability" figure reported in the CCC's Financial Statements and the cash
accounting basis data submitted by Brazil at the very least raise questions as to whether subsequent
subsidy reestimates indeed establish that the progra mmes at issue in the original proceeding were not
provided at a net cost to the US Government.
14.89 In conclusion, notwithstanding the reestimates da ta submitted by the United States, we find it
highly significant that the US Government continues, at the time of their issuance, to project that new
GSM 102 export credit guarantees will, in the long-term, be provided at a net cost to the Government.
In light of this, we consider that the initial subsidy estimates provide a strong indication that GSM 102
export credit guarantees are provided against premia which are inadequate to cover the long-term
operating costs and losses of the GSM 102 programme.
14.90 Brazil also adduces other evidence which further convinces us that the GSM 102 programmes
fall within the scope of item (j) of the Illustrative List. We analyze this evidence below.
(c) Comparison with MPRs under the OECD Arrangement
(i) Main arguments of the parties
14.91 Brazil asks us to take into consideration the minimum premium rates ("MPRs") provided in
the OECD Arrangement on Officially Supported Export Credits (hereafter "the Arrangement"). 704

fiscal year: First, Brazil overlooked US$60 million in additional revenue in line 88.25 ("interest on univested
funds"), second, Brazil (understandably) reproduced a printing error in the US budget: premiums collected in
that year amounted to just above US$21 million; the balance of US$487 million for FY 2005 should have been
printed in the recovery line 88.40 for the financing account. This does not affect the sub-total of revenues for
the 2005 year. US Rebuttal Submission, footnote. 145.
702 The United States refers to Exhibit US-68, budget line 88.40 of the "liquidating account" (relative to
pre-1992 guarantees); Brazil only uses line 88.40, which pertains to the "financing account" (relative to post-
1991 guarantees). See US Rebuttal Submission, para. 95: the US otherwise agrees , that with the two small
exceptions noted in the preceding footnote, Brazil reports the correct figures.
703 US Response to Panel Question 102.
704 See Brazil's First Written Submission, paras. 43 8-443, Exhibits Bra-546 (OECD Arrangement –
2005 revision) and Bra-547 OECD document TD/PG(2004)10/FINAL, 6 July 2004, Premium and Related
Conditions: Explanation of the Premium Rules of the Arrangement on Officially Supported Export Credits (the
Knaepen Package). The Panel notes that Brazil, in its Rebuttal Submission, includes its arguments with respect
to the OECD MPRs in its discussion of the design, structure and operation of the GSM 102 programme. See
Brazil's Rebuttal Submission, paras. 499-500.

Brazil argues that the MPRs represent the assessment by the Participants in the OECD Arrangement –
including the United States – of the fees that prudent ly should be charged in order to meet long-term
costs and losses. Brazil recognizes that the Arrangeme nt – and therefore, the MPRs – does not apply
to export credits in the agricultural field. Yet, Brazil asks us to take into consideration its comparison
of GSM 102 fees with the MPRs as a "qualitative" demonstration that GSM 102 fees are well below
the level at which they should be to be consistent with item (j) of the Illustrative List.
705
14.92 The United States rejects the relevance of Brazil's arguments based on the OECD MPRs. 706
The United States submits that item (j) of the Illust rative List provides that the proper comparison is
between the premium rates charged under the progra mme at issue and the long-term operating costs
and losses of that programme. Item (j) of the Illustrative List does not refer to the Arrangement as the
standard under which to assess whether a programme covers its long term operating costs and losses
under item (j) of the Illustrative List.
(ii) Main arguments of third parties
14.93 Japan707 argues that Brazil's reliance on the OECD Arrangement in this proceeding is
inappropriate. Japan notes that the Arrangement does not cover agricultural products and that the
risks of financing arrangements for bulk agricultural commodity products, such as cotton, are not only
substantial, but also unique. Moreover, the scope of the Arrangement is limited to export credits with
terms of two years or more.
(iii) Evaluation by the Panel
14.94 It is clear to the Panel that the MPRs do not directly apply in determining whether an export
credit guarantee programme falls within the sc ope of item (j) of the Illustrative List. While the MPRs
were developed at least in part to ensure that Pa rticipants would comply with item (j), item (j) itself
does not refer to the OECD Arrangement or to an y other international agre ement or benchmark in
determining whether the premia are inadequate to cover the long term operating costs and losses of
export credit guarantee programmes and other programmes covered by item (j) of the Illustrative List.
As the United States points out, this contrasts with the second paragraph of item (k) of the Illustrative
List, where such a reference is made. In consequenc e, there is in our view no basis to treat the OECD
MPRs as providing a legally binding benchmark to determine whether an export credit guarantee
programme falls within the scope of item (j) of the Illustrative List. In any event, GSM 102 fees are
not subject to the Arrangement – and therefore to the MPRs – because the Arrangement does not
apply to exports of agricultural commodities. Moreover, the Arrange ment only applies to official
support for terms of two years or more, while GSM 102 guarantees, which are provided for tenors up
to three years, are also provided for tenors of less than two years.
708
14.95 That being said, in our view, while the MPRs have no legal status in the context of an analysis
under item (j) of the Illustrative List, they may, from an evidentiary point of view, provide an
indication as to whether GSM 102 fees are sufficient to cover the long-term operating costs and losses
of the programme. Indeed, recognizing that the MPRs do not directly apply to the GSM 102
programme, Brazil asks us to take into considera tion its comparison of GSM 102 fees with the MPRs
as a "qualitative" demonstration that GSM 102 fees ar e well below the level at which they should be
to be consistent with item (j) of the Illustrative List.
709 We note that the OECD explains that the
Arrangement's benchmark rates, including MPRs, are set "to ensure that Participants to the

705 Brazil's Response to Panel Question 43, para. 69.
706 US Response to Panel Question 42.
707 Japan's Third Party Submission, paras. 24-26.
708 Arrangement, para. 5(c).
709 Brazil's Response to Panel Question 43, para. 69.

Arrangement charge premium rates in addition to interest charges that ... are not inadequate to cover
long-term operating costs and losses associated with the provision of export credits". Thus, the MPRs
were developed, within the context of the OECD, with a view to ensure that Participants would
respect the disciplines of item (j):
"The objectives of the Knaepen Package, as reflected in Article 22 of the
Arrangement on Officially Supported Expor t Credits (the "Arrangement"), are to
ensure that Participants to the Arrangem ent charge premium rates in addition to
interest charges that:
i. cover the risk of non-repayment of export credits (i.e. credit risk); and
ii. are not inadequate to cover long-term operating costs and losses
2 associated with
the provision of export credits."
Annex I of the WTO Agreement on Subsidies and Countervailing Measures (ASCM), which
prohibits the provision by governments (or special institutions controlled by governments) of
export credit guarantee or insurance programmes, 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.
 710

14.96 The MPRs may thus be regarded as representi ng an assessment, developed by and agreed
upon by the export credit experts of the Participants to the Arrangement, of the premia levels that are
necessary to ensure that export credit guarantee programmes cover their long-term operating costs and
losses. We note, in this respect, that the Unite d States itself, as a Member of the OECD and a
Participant to the Arrangement, participated in the elaboration of the MPRs.
14.97 We consider that, in this particular case, because of the magnitude of the difference between
the MPRs and GSM 102 fees, the MPRs may provide an indication, on an informed basis, of the fact
that GSM 102 fees are set at a level which is insuff icient to cover the long term operating costs and
losses of the programme. We emphasise that we take into account Brazil's comparison of GSM 102
fees with the MPRs because of the importance of th e difference between them; we do not suggest that
any difference in this respect could be relied upon as an indication that an export credit guarantee
programme meets the criteria of item (j) of the Illustrative List.
14.98 Using the formula for the calculation of MPRs contained in Annex VI to the Arrangement,
Brazil finds that, for 1063 of 1064 comparison point s, GSM 102 fees fall below the Arrangement's
MPRs.
711 On average, the MPRs are 106 per cent above GSM 102 fees.712

710 Exhibit Bra-547, Introduction, para. 1.
711 Exhibit Bra-548 compares GSM 102 fees for transactions involving annual repayment of principal
to MPRs, Exhibit Bra-549 performs the same comparison for GSM 102 fees involving semi-annual repayment
of principal. The charts submitted by Brazil include both country and tenor-specific comparisons for any
country (i) for which GSM 102 provides a risk rating of 1-6; and, (ii) for which any GSM 102 allocation has
been made available in any year during the period FY 2001 through FY 2006 (even if those allocations were not
used). Brazil uses the list of countries assigned a GSM 102 risk rating published on 28 July 2006.
Confirmation of GSM 102 allocations is drawn from the fiscal year-end editions of "Monthly Summaries of
Export Credit Guarantee Program Activity" See Brazil's First Written Submission, paras. 439-440. The sole
"comparison point" for which GSM 102 fees are below th e MPRs relates to China. Brazil notes that the CCC
ranks China in category 6, while the OECD ranks China in category 2. Brazil also notes that Standard & Poor's
ranks China as A/Stable/A1, making China's sovereign ri sk comparable to that of Botswana, Chile, Estonia,
Lithuania and South Korea, all countries that are ranked by both the OECD and the CCC in risk category 2. See
Brazil's First Written Submission, para. 441, footnote 615.
712 Brazil's First Written Submission, para. 440 and Exhibits Bra-548 and Bra-549.

14.99 In addition, Brazil highlights the fact that, for longer tenors and higher country risk, GSM 102
fees are well below the OECD MPRs and that the difference between the two increases significantly
as country risk increases and tenors lengthen.
713
14.100 The fact that GSM 102 fees are not subject to the Arrangement does not, in our view,
fundamentally undermine the value of Brazil's comparison of GSM 102 fees with the MPRs as a
qualitative indication that the fees are inadequate to cover the long term operating costs and losses of
the programme.
14.101 With respect to product coverage, Brazil submits that, if anything, the MPRs would increase
if agricultural products were made subject to it. Th at is because, in Brazil's view, in an agricultural
transaction, the value of the product sold holds little value to the guarantor (agricultural products are
normally consumed shortly after sale or may not preser ve). In contrast, industrial products are more
durable and offer a better security to the guarantor, should he wish to obtain one. 714 We agree. The
fact that agricultural products are perishable in our view suggests that agricultural transactions, if
anything, contain an added element of risk to th e guarantor, as the products sold would hold little
value on which security may be taken. As a cons equence, there is in our view no reason why the
MPRs should be lowered were agricultural products to fall under its product coverage.
14.102 With respect to the fact that the Arrangemen t only applies to transactions of two years or
more, we note Brazil's indication that the MPR formula allows the determination of fees for a shorter
period of time, which has allowed Brazil to calculate the MPRs for tenors of less than two years. But
in any case, we note that Brazil has included in its comparison the fees for tenors that would be
covered by the Arrangement (tenors of 24, 30 and 36 months). Our conclusion above that GSM 102
fees are well below the MPRs holds true even wi th respect to only these three tenors, as does our
conclusion that the difference between the two incr eases significantly as risk in the form of higher
country risk and longer tenors increases.
14.103 Thus, in our view, the factual differences between the product coverage and the coverage in
term of tenors of GSM 102 guarantees and the OE CD MPRs do not fundamentally undermine the
value of the comparison performed by Brazil. We recall that we consider that the MPRs provide an
indication – on an informed basis – that GSM 102 fees are insufficient to cover the long term costs
and losses of the programme because of the signi ficant difference between the GSM 102 fees and the
MPRs. Any adjustment to take into considerati on the differences pointed out by the United States
would not, in our view, lead to a markedly different result.

713 See the following table submitted by Brazil in Exhibit Bra-547, p. 15 (the table concerns guarantees
with annual repayment of principal, Brazil submits a simi lar table with respect to guarantees with semi-annual
repayment of principal in Exhibit Bra-548):

Average Percentage by which MPR Fees Exceed GSM-102 Rates (Annual Repayment of Principal)
USDA Risk
Level
 9
Months
 12
Months
 15
Months
 18
Months
 24
Months
30
Months
36
Months
All
Tenors
0 19% 23% 22% 23% 27% 27% 30% 24%
1 20% 26% 25% 27% 33% 35% 40% 29%
2 24% 32% 31% 34% 43% 46% 54% 38%
3 65% 68% 69% 76% 99% 110% 130% 88%
4 79% 93% 95% 104% 135% 150% 177% 119%
5 101% 122% 124% 136% 173% 192% 225% 153%
6 138% 175% 179% 194% 240% 264% 306% 216%
All risk levels 81% 98% 100% 109% 138% 152% 178% 122%

714 Brazil's First Written Submission, paras. 442-443.

(d) Structure, design and operation of the GSM 102 programme
(i) Main arguments of the parties
14.104 Brazil recalls that the original panel took into c onsideration elements of the structure, design
and operation of the three programmes at issue in th e original proceeding to conclude that they fell
within the scope of item (j) of the Illustrative Li st. For Brazil, a programme that breaks even by
chance would still not be structured or designed to do so in the long-term. Brazil considers that the
GSM 102 programme is not designed to cover its long-term operating costs and losses. Brazil
identifies five elements in this respect. First, the original panel found it relevant that the CCC
borrows from the US Treasury and that access to US Treasury borrowings facilitate the functioning of
the CCC programmes. This still holds true. Second, Brazil considers that the United States has not
adopted a truly risk-based fee schedule. It recalls that the original panel relied on a USDA statement
acknowledging that moving to a truly risk-based syst em would require raising fees to a level that
"would most likely exceed" the one per cent fee cap imposed by US law on GSM 102 fees. The
United States has not removed the cap. Third, although the CCC establishes individual risk ratings
for each approved foreign obli gor, those risk ratings do not affect the GSM 102 fee that is charged.
Brazil considers that prudent fiscal management co mpels commercial banks to take varying borrower
risk into account not only via exposure limits, but also through fees. Fourth, Brazil recalls that GSM
102 fees are well below the OECD MPRs. Fifth, the US Government continues to predict, year after
year, that the programmes will be loss making – that , on one view of the data, the programmes have
beaten the odds and met their costs and losses does not mean that they are structured and designed to
do so.
715
14.105 The United States submits that the GSM 102 programme is structured and designed to cover
its long term operating costs and losses. 716 The United States notes that higher premia are now
assessed in respect of obligors in higher-risk countri es. Fees increase with e ach of the 6 eligible
country risk categories, and all countries outside those 6 categories are wholly ineligible. The
United States reclassified into an ineligible risk category a number of countries previously eligible
under the programmes. Fees also increase with te nor. Also, the United States increased fees, on
average, by 46 per cent across all programmes and 23 per cent, on a trade-weighted basis, for the
GSM 102 programme alone over fiscal year 2004, the last year in which the prior fee schedule
exclusively applied. In addition, the CCC ce ased issuing guarantees under the GSM 103 and SCGP
programmes.
717 Of the three programmes originally examined, the GSM 102 programme exhibited the
lowest risk profile. These changes made to impl ement the DSB recommendations and ruling bolster
other disciplines already in place. The United Stat es notes among those the need for foreign banks to
be approved before a guarantee can be issued in respect of a transaction (this means in effect, that
some countries that are listed as potentially eligible for GSM 102 export credit guarantees are de facto
ineligible because no banking institution in the c ountry is CCC-approved). Also, the CCC establishes
internal bank limits to govern exposure to poten tial defaults by obligor banks in individual
transactions.
718 In any case, the budget data reflects the profitability of the programme over the last
14 years, even before the adoption of the recent changes in 2005. The profitability of the programmes
is neither "against the odds", nor "avoiding losses by good fortune", as Brazil argues.719

715 For Brazil's arguments, see Brazil's First Writte n Submission, paras. 444-446; Brazil's Rebuttal
Submission, paras. 487-512; Brazil's Opening Statement, paras. 240-255.
716 See US First Written Submission, paras. 73-80; US Rebuttal Submission, paras 101-107, US
Opening Statement, paras. 9.
717 US First Written Submission, paras. 73-80.
718 US First Written Submission, paras. 77-78.
719 US Rebuttal Submission, paras. 101 ff.

14.106 The United States considers that Brazil's ar gument that the CCC is part of the US
Government and can borrow from the US Treasury woul d lead to the result that a government agency
could never satisfy the item (j) test.
720 With respect to the one per cent statutory fee cap, the
United States submits that the operating assumption of the USDA statement on which Brazil relies
was that all of the then-eligible countries would remain eligible. Instead, in light of the fact that the
fee cap has not been repealed, th e CCC eliminated from eligibility 22 countries with respect to which
participation in the programme might require fees in excess of the statutory maximum.
721 As to
foreign obligor risk, the United States submits that no WTO rule governs how a government
programme shall ensure that its premia are adequate to cover its long-term operating costs and losses.
(ii) Evaluation by the Panel
14.107 This dispute concerns a new fee structure for wh ich, by definition, no past performance data
exists and therefore for which only projections of th e long term net cost of the programme to the US
Government are available. Given this, evidence concerning the "structure, operation and design" of
the programme would seem to be part icularly relevant. This is cons istent with the approach of the
original panel, which also took into consideration such prospective elements to determine that the
programmes at issue in the original dispute were not designed to meet their long term costs and
losses.722
14.108 The original panel considered that:
"In this dispute, in order objectively to assess premiums in relation to long-term
operating costs and losses, we believe it is also appropriate for us to take into account
aspects of the structure, design and operation of the measure before us. We are
entitled to inquire whether the programme, including in terms of the premiums
charged, was set up in such a way that the total of all premiums would be likely to
cover the total of all operating costs a nd losses under the programme. For example,
where a programme does not provide for premium rates that are fully reflective of the
risks of a particular transaction, this might be one indicator that the programme was
set up in such a way that its long-term operating costs and losses have to be borne, in
total or in part, by the government."
723 (footnote omitted)
14.109 We therefore proceed to examine whether, as Brazil argues, there are elements of the
structure, design and operation of the GSM 102 progr amme that indicate that it is not designed to
cover its long term costs and losses.
14.110 First, we recall that the original panel noted that the CCC has access to funds from the US
Treasury and benefits from the full faith and credit of the US Government. 724 This is still the case,
and were the GSM 102 programme to incur massive losses, it would have access to additional funds
from the US Treasury.
14.111 Second, the original panel found that the fees ch arged by the CCC were not "risk based".
This was one of the elements that led to the panel's conclusion that the programmes were not designed

720 US Rebuttal Submission, para. 104.
721 US Rebuttal Submission, para. 106.
722 The panel considered that "[i]n terms of the structure, design and operation of the export credit
guarantee programmes before us, there are several elements which lead us to believe that the programmes are
not designed to avoid a net cost to government." Panel Report, US – Upland Cotton, para. 7.857.
723 Panel Report, US – Upland Cotton, para. 7.805.
724 Panel Report, US – Upland Cotton, para. 7.858.

to cover their long term costs and losses. 725 The original panel noted the following with respect to the
fees not being affected by either country risk or foreign obligor risk:
"... the premiums are not risk-based 726, either with respect to country risk or the
creditworthiness of the borrower in an individual transaction.727 All countries eligible
for any of the CCC export credit guarantee pr ogrammes are categorized according to
risk. CCC categorization of countries is based on a United States government
internal risk classification system, wh ich, according to the United States, 'is
administratively controlled and may not be released outside of the US
Government'.
728 However, the United States has c onfirmed that "a country's risk
classification has no impact on the premiums payable under the United States export
credit guarantee programmes". 729 Rather than the premiums, it is the United States
government subsidy estimates and re-est imates for the export credit guarantee
programmes that are determined in large part by the obligor's sovereign or non-
sovereign country risk grade."730 731
14.112 The panel also took into consideration the fact that the statute governing the CCC export
credit guarantee programmes did not impose any limitati on on the amount of guarantees that could be
provided annually to any high risk country (in the aggregate or individually) or to high risks
transactions. It concluded that the "CCC is, theref ore, able to provide large amounts of guarantees to
high-risk countries with a resulting high rate of default".
732
14.113 Brazil notes that GSM 102 fees still do not take in to consideration foreign obligor risk at
all.733 Although the CCC establishes individual risk ratings for each foreign obligor approved for
participation in the GSM 102 programme, those risk ratings do not affect the GSM 102 fees. Brazil
notes that none of the CCC-approved foreign obligors banks enjoy a credit rating superior to that of its
sovereign.734 In addition, Brazil argues that prudent fi scal management compels commercial banks to
take varying borrower risk into account not only via exposure limits, but also through fees, and that

725 See Panel Report, US – Upland Cotton, paras 7.861-7.866.
726 [Original footnote:] The US Government acknowledges this. See Exhibit US-150 and
United States' Response to Panel Question No. 86.
727 [Original footnote:] e.g. United States' response to Panel Question No. 85. The United States has
confirmed to us that under the SCGP "CCC does no t determine the creditworth iness of participating
importers[...]". Rather, according to the United States, the risk sharing between the CCC and the exporter is
intended to ensure that due diligence is performed.
728 [Original footnote:] United States' response to Panel Question No. 86. According to 7 USC 5622,
the CCC shall not make credit guarantees available in connection with sales of agricultural commodities to any
country that the Secretary determines cannot adequately service the debt associated with such sale.
729 [Original footnote:] See e.g. Exhibit US-150 and United States ' response to Panel Question No. 86.
See also, "US General Accounting Office, Report to the Ranking Minority Member, Committee on Agriculture,
Nutrition and Forestry, US Senate, Former Soviet Union, Creditworthiness of Successor States and US Export
Credit Guarantees , GAO/GGD-95-60", February 1995, pp. 135-136, reproduced in Exhibit BRA-181:
"Although GSM 102 recipient countries vary significantly fr om one another in terms of their risk of defaulting
on GSM 102 loans, CCC does not adjust the fee that it ch arges for credit guarantees to take account of country
risk. [...] CCC fees that included a risk-based component might not cover all of the country risk, but they could
help to offset the cost of loan defaults." In Exhibit BRA-153 , Audit Report of CCC for FY 2000 , June 2001,
USDA's Office of the Inspector Gene ral stated that fees for the GSM 102 and GSM 103 programmes had not
been changed in 7 years, and as a result "may not be reflecting current costs." Without accounting for country
risk in the fees charged, the CCC foregoes an opportunity to cover the cost of loan defaults.
730 [Original footnote:] e.g. Exhibit US-150.
731 Panel Report, US – Upland Cotton, para. 7.861.
732 Panel Report, US – Upland Cotton, paras. 7.862-7.863.
733 Brazil's Rebuttal Submission, paras. 496-498.
734 Brazil's First Written Submission, para. 416.

the GSM 102 programme's failure to adjust its guara ntee fees to take account of material risks is not
cured by diversifying its portfolio of inaccurately-priced guarantees.
735
14.114 The United States argues that the new fee struct ure is risk-based. With respect to foreign
obligor risk, the United States considers that th e changes made to the GSM 102 programme bolster
other disciplines already in place. The CCC conducts an independent analysis of each foreign bank in
order to establish the risk rating of each foreign ba nk obligor. The United States argues that Brazil's
assertion that because GSM 102 fees do not vary accordi ng to the particular foreign bank obligor, the
CCC "ignores" foreign obligor risk is inaccurate and th at it is similarly inaccurate to assert that the
CCC assumes that foreign banks have a credit rating that is identical to that of the sovereign: to the
contrary, the CCC establishes an exposure limit with respect to each bank. Once such limit is attained,
no further guarantees of obligatio ns of that bank are issued. 736 The United States submits that a
Member may choose to control exposure to defaults by foreign banks (and therefore, costs) by either
establishing fees that vary with foreign obligor risk or, as the CCC does, by establishing internal bank
limits.
14.115 We see no reason to depart from the reasoning a dopted by the original panel, and find that
GSM 102 fees are not risk-based insofar as they do not take into account one of the main elements of
risk associated with the guarantees, the risk of defau lt that is specific to an individual foreign obligor.
The impact of this is not insignificant – Brazil points out that over 90 per cent of GSM 102 guarantees
are issued with respect to non-sovereign foreign obligors. 737 The fact that the United States sets bank
limits with respect to each foreign bank obligor do es not, in our view, alter the fact that foreign
obligor risk is not reflected in GSM 102 fees.
14.116 Third, Brazil notes that the one per cent fee cap has not been repealed. Brazil refers the
Panel to a statement of the USDA, in which th e latter acknowledged that moving to a risk-based
system would raise fees to a level that "would most likely exceed 1 per cent...". 738 The statement was
taken into consideration by the original panel. The one per cent fee cap applied to GSM 102 and
SCGP fees.
14.117 The United States refutes Brazil's argument by noting that the USDA statement in question
was made before measures were taken to implem ent the DSB recommendations and rulings. Under
the new fee structure, fees increas e with country risk and with tenor (length of the loan), and all
countries outside the eligible risk categories are w holly ineligible under the programme, a step aimed
at reducing the risk exposure of the programmes. 739 740 The United States also brings to our attention

737 Brazil's First Written Submission, para. 416, Exhibits Bra-541 and Bra-542.
738 Brazil's First Written Submission, para. 418, quoting Panel Report, US – Upland Cotton, para. 7.865
and Exhibit Bra-543 (Annual Review of Fees for USDA Credit Programs, 25 March 2003, p. 4 (Exhibit US-150
in the original proceeding)).
739 Fees continue to vary according to the duration of the underlying loan (30 days to 3 years) and the
frequency of the repayment of principal (annual or semi-annual) as they did under the previous fee structure.
740 The Panel notes that, in their comments on the interim report of the panel, both parties indicated that
there are 6, rather than 7 eligible country risk categories under the GSM 102 programme. The parties have, in
their submissions, been inconsistent in their designation of the number of eligible country risk categories.
Compare, for instance, US First Written Submission, para. 74 to US Response to Panel Question 113; see also
Brazil's First Written Submission, para. 334. The Panel co nducts its analysis of GSM 102 fees on the basis of
its understanding, supported by the evidence submitted by the parties, that countries in categories 0-6 are
eligible under the GSM 102 programme.

the fact that a number of high-risk countries have been reclassified into an ineligible category (in
addition, some countries are de facto ineligible as no bank in the country is approved).741
14.118 Brazil argues in response that the changes th e United States made had no significant impact
on the profitability of the programme. First, Brazil argues that discontinuing applications for GSM
103 and SCGP could not have had a significant im pact on the riskiness of the CCC's guarantees
portfolio as GSM 102 export credit guarantees ma de up 93 per cent of the CCC guarantees
portfolio;742 second, the fact that 19 countries are now ine ligible does not significantly impact the
riskiness of the portfolio. Brazil points out that, as of the implementation deadline, no GSM 102
guarantees were outstanding for 14 of those 19 countries,
743 and that, for 4 of the 5 remaining
countries, GSM 102 guarantees outstanding on the same date amounted to less than one half of one
per cent of total outstanding GSM 102 guarantees. Of the countries that had GSM 102 guarantees
outstanding, only Algeria accounted for outstanding guarantees of any significance.744 745
14.119 We note that, of relevance to this issue, th e United States has indicated that the fees were
increased, on average, by 46 per cent for all export guarantee programmes, and by 23 per cent for
GSM 102 export credit guarantees (on a weighted-average basis) compared to the last year under the
prior fee schedule. Further, the United States e xplains that the GSM 102 programme was the most
profitable of the three programmes examined by the original panel.
14.120 The original panel did not quan tify the margin by which the fees for the programmes at issue
fell below the level that would have been suffici ent to cover the long term operating costs and losses
of the programmes. We are therefore unable to assess whether a 46 per cent average fee increase
(23 per cent trade-weighted increase) is sufficient to ensure that the GSM 102 programme is not
provided at a net cost to the US Government. 746 We cannot rule out that changes made by the US
Government to the programmes may affect the USDA's evaluation of whether the one per cent fee cap
still remains a constraint on the adoption of risk-b ased fees. Yet, we consider that the evidence
submitted by Brazil concerning outst anding guarantees with respect to countries that have now been
made ineligible suggests that the factual context in which the USDA's statement was made has not
been altered fundamentally. In this context, we regard the non-repeal of the one per cent fee cap as an
indication that the fees charged for GSM 102 export credit guarantees are still not "risk-based".

741 US First Written Submission, paras. 75, 77.
742 Brazil's Rebuttal Submission, para. 15, Exhibit Bra-586 (Commodity Credit Corporation, Guarantee
Loan Program Summary for FAS as of 30 June 2005).
743 See Brazil's Opening Statement, para. 171 and Exhibit Bra-586 (Commodity Credit Corporation,
Guarantee Loan Program Summary for FAS as of 30 June 2005). See also Brazil's Rebuttal Submission,
para 17.
744 See Brazil's Opening Statement, para. 17. Exhibit Bra-586 indicates outstanding guarantees for
Algeria totalling US$584 million over a total of US$7.9 billion in outstanding guarantees (7.38 per cent of that
amount).
745 The Panel notes that, of the countries that were ineligible on 1 July 2005, only Algeria (7.4 per cent)
and Pakistan (3.9 per cent) had significant shares of GSM 102 guarantees outstanding on 1 July 2005; all others
had less than 0.3 per cent of the total outstanding GSM 102 guarantees and together amounted to just over
0.8 per cent of total outstanding guarantees. Exhibit Bra-58 6. Pakistan was later returned to eligibility. See US
First Written Submission, footnote 15. The divergence in the number of countr ies referred to by the parties is
explained by the fact that some c ountries became ineligible after 1 July 2005 and others were returned to
eligibility after that date.
746 We note however that Brazil submits that multiplying the figures in the "premiums collected"
column in Exhibit Bra-613 by 1.46 per cent to reflect the average fee increase for all programmes would still
result in a net loss of US$574 million (US$632 million if multiplied by 1.23 per cent to reflect the 23 per cent
trade-weighted increase in GSM 102 fees calculated by the United States ). Brazil's exercise of course assumes
that the Panel would consider that the cash-basis accoun ting provides the relevant assessment of the long-term
cost of the programme to the US Gove rnment in the 1992-2005 period. In any case our analysis only concerns
GSM 102 fees, and not the fees applicable under the three programmes at issue in the original proceeding.

14.121 Our assessment of the effects of the remaining presence of the one per cent fee cap is
confirmed by the evidence presented by Brazil with respect to the insufficient "scaling" of GSM 102
fees with the risks that it does take into consideration – country risk and tenor.
14.122 Brazil argues that the one per cent fee cap has prevented the United States from implementing
a fee structure that is truly risk-based: for Brazil, "where no fee cap stands in the way of taking
relevant risks more fully into account, the upward sl ope of the fee curve varies dramatically from the
insignificant scaling that can be observed with respect to GSM 102 fees".
747 Brazil refers the Panel to
the rate of increase, with risk, of fees charged by the ExIm Bank (the US export credit agency) for two
of its products, the Letter of Credit Insurance (LCI) and the Medium-Term Export Credit Insurance
(MTI).748
14.123 The United States rejects Brazil's arguments in this respect. 749 It considers that the fees are
sufficiently scaled to take account of country risk, that the SCM Agreement imposes no standards in
this respect, and that, in any case, the only issue unde r item (j) of the Illustrative List is whether the
programme's "structure, design and operation" – including any scaling – when taken as a whole
indicate that the premia are inadequate to cover the long-term costs and losses of the program".750
14.124 In addition, the United States objects to Brazil's comparison of GSM 102 fees with those
charged by the ExIm Bank. The United States not es that the MTI is not available for agricultural

747 Brazil's First Written Submission, paras. 419 and 446 and Brazil's Rebuttal Submission, para. 495:

"...despite all the pomp attached by the United States to the adoption of 'a risk-based fee
schedule,' calling something 'risk-based' does not make it truly reflective of the risks involved.
Brazil recalls that the statutorily-imposed one-per cent fee cap imposed on GSM 102 does not
permit the program to set fees that take acco unt of all the risks faced by the CCC in issuing
GSM 102 ECGs. USDA has acknowledged that moving to a truly risk-based system would
require raising fees to a level that 'would mo st likely exceed 1 per cent ….' Despite the
original panel's conclusion that the fee cap was significant in preventing the United States
from respecting its WTO obligations, the United States has not removed the cap..."

In the footnotes of this paragraph of its Rebuttal Submission, Brazil refers to its argument that the
scaling of GSM 102 fees in terms of country risk and tenor is insufficient when compared to the rate of increase
of ExIm Bank fees under the LCI and MTI. See also Brazil's Response to Panel Question 43, para. 73, where
Brazil makes a similar argument in the context of its di scussion of the OECD MPRs. We therefore examine the
parties' arguments concerning Brazil's comparison of GSM 102 and ExIm Bank LCI and MTI fees in this
section of our findings, but note that they were made primarily in the context of addressing Brazil's arguments
that GSM 102 fees confer a benefit because they are provided for a below-market fee.
748 Brazil compares GSM 102 fees to those of the LCI fo r tenors of up to 360 days and to those of the
MTI for tenors exceeding 360 days. Unlike GSM 102, ExIm Bank has no single product with tenors from
30 days to three years. See Brazil's First Written Subm ission, para. 384 and Exhibits Bra-530, pp. 54 and 59.
The LCI provides protection against default on irrevocable letters of credit issued by foreign financial
institutions. For agricultural commodities, cover is normally limited to 180 days but may be extended to
360 days on a case-by-case basis. 98 per cent of the principal and a portion of the interest are covered by the
insurance for exports of agricultural commodities. The MT I covers transactions involving obligations from a
foreign bank, and protects the insured against nonpayment due to the foreig n bank’s failure to pay because of
unforeseen commercial or political reasons. The MTI does not cover transactions for exports of agricultural
products. It provides cover for 100 per cent of the transaction amount. Brazil indicates that MTI cover is
available for repayment terms between 1 and 5 years, exceptionally 7 years. See Brazil's Comments on US
Reponses to Panel Question 98 and Exhibit Bra-534.
749 Again, the United States makes these specific arguments in the context of answering Brazil's
arguments that GSM 102 export credit guarantees confer a benefit because they are provided for a below-market
fee; but it is clear from th e US Response to Panel Question 99 that th e United States considers these arguments
to be relevant to Brazil's item (j) arguments.
750 US Response to Panel Question 99, para. 234.

products and that MTI fees are subject to the OE CD Arrangement's MPRs, which cover transactions
of two years or more, whereas hundreds of GSM 10 2 transactions totalling hundreds of millions of
dollars are for terms of less than 2 years. 751 The United States also identifies a number of other
differences between GSM 102 guarantees and the ExIm Bank products, notably in terms of interest
cover752 and principal coverage. Pr incipal coverage is 100 per cent under the MTI, compared to
98 per cent for a GSM 102 guarantee. Further, th e ExIm Bank allows, under the LCI product, the
insured to arrange recourse or "pass back" to a third party of all or any part of any uninsured amount.
The United States submits that this is not permitted under the GSM 102 programme:
"Upon default the claimant must subrogate to CCC the claim to the entire amount in
default, not just the guaranteed portion. CCC then has the right to recover from the
obligor all moneys in default. Unlike the LCI product, the holder of the GSM-102
guarantee is therefore unable to sell the unguaranteed portion of the obligation to
another party to insulate himself from any exposure to principal default. Under the
MTI product, the holder is similarly insula ted from any risk because of the full 100
percent coverage. Inferior coverage of principal relative to the Ex-Im products
renders the GSM-102 guarantee less desirable, which is reflected in the price parties
are willing to pay. Brazil has also not accounted for the difference in 'pass back'
policies of the programs in its comparisons."
753
14.125 We agree with Brazil that a significant difference in the rate of increase of fees between ExIm
Bank's products and the CCC's GSM 102 may indicate that the latter do not sufficiently increase with
risk and, as a consequence, are not truly "risk-based". The fact that ExIm Bank's MTI is not available
for agricultural products does not, in our view, fundamentally undermine the value of the comparison,
nor does the fact that the financial products are not identical, provided that adjustments are made to
render them comparable. Taking into account the c oncerns of the United States that the interest
coverage of the products differs, Brazil estimat es that GSM 102 fees should be adjusted by
approximately 5 per cent to take this difference into account.
754 We consider that Brazil's adjustment
is appropriate.755 With respect to principal coverage, we not e that Brazil was able to use a variable on

751 US Response to Panel Question 98, para. 223.
752 Under ExIm Bank's MTI product, the obligor is required to use a form of promissory note
promulgated by the Bank. The MTI covers "100 per cent of the rate provided in the note". See Exhibit Bra-
535. Under the LCI product, "the insured interest rate is generally prime rate minus 0.5 per cent or the rate
stated in the credit agreemen t, whichever is less". The "prime rate" refers to the prime rate published in the
Wall Street Journal, under the table "Money Rates". Se e Exhibit Bra-531. In contrast, GSM 102 guarantees
cover "eligible interest", which is the lesser of the intere st rate specified between the US bank (or exporter) and
the foreign bank or 55 per cent of th e average investment rate of the most recent Treasury 26-week bill auction.
Exhibit US-153. According to the United States, the interest cover of both LCI and MTI greatly exceeds that of
the GSM 102 guarantee. The United States provides a comparison of the GSM 102 interest cover (55 per cent
of the applicable 26-week T-bill rate with the LCI interest cover (Wall Street prime rate minus 0.5 per cent), and
concludes that LCI interest cover was, on 1 March 2007, 491 basis points higher than CCC interest coverage
(7.75 per cent vs. 2.839 per cent) (the difference varied between 374 and 499 basis points since 1 July 2005).
The United States also notes that interest cover for the LCI is less than under the MTI). US Response to Panel
Question 98, paras. 226-231 and Exhibit US-155.
753 US Response to Panel Question 98, para. 232.
754 See Brazil's Comments on the US Response to Panel Question 98, paras. 243-267.
755 Brazil relies on the maximum possible difference in interest coverage between GSM 102 and ExIm
Bank guarantees – i.e. as alleged by the United States, a difference of 5 per cent (7.8 per cent minus 2.8 per
cent). Brazil however submits evidence which satisfies us that proceeding on this basis is conservative and
favourable to the United States as the 7.8 per cent – whic h represents the LCI interest coverage cap, and which
Brazil applies for both LCI and MTI fees – in fact overest imates the actual interest coverage in recent years.
Brazil assumes that in case of default, the CCC would pay 100.8 per cent of the remaining principal (98 per cent
towards principal and 2.8 per cent towards interest) and that the ExIm Bank would, in case of default, pay
105.8 per cent of the remaining principal (98 per cent towards principal, and 7.8 per cent towards interest).

the ExIm Bank's website fee calculator to calculate MTI fees on the basis of a principal coverage of
98 per cent. With respect to the possibility to arrange recourse, or "pass-back" under the ExIm Bank
LCI product, Brazil submits that the United States' contention that the holder of a GSM 102 export
credit guarantee is not "permitted" to insure the rema ining 2 per cent of principal not covered by the
guarantee is misleading and incorrect insofar as "the United States implies that although a GSM 102
ECG only covers 98% of principal, in the event of default and payment by CCC to the holder of the
ECG of 98% of principal, the CCC enjoys a clai m on 100 per cent of any monies recovered from the
foreign obligor".
756 Brazil submits that, under section 1493.130(c) of the GSM 102 Regulations, the
guarantee holder's claim to the 2 per cent of debt not covered by the guarantee ranks pari passu with
the CCC's own claim to recover the 98 per cent when the CCC pursues recovery. In light of this fact,
the Panel does not consider that the difference in principal coverage between GSM 102 export credit
guarantees and the LCI would materially affect the fee comparison performed by Brazil.
14.126 In any case, the Panel recalls that it is not comparing the fees charged, on the one hand, by the
CCC for the issuance of GSM 102 guarantees and, on the other hand, by the ExIm Bank for the
issuance of LCIs and MTIs. Rather, the Panel is cons idering the rate of increase (or scaling) of fees
with increased risk, as an element to assess whether the one per cent fee cap constrains the adoption of
a risk-based fee schedule. The fa ct that the financial products bei ng compared are not identical (for
instance, in terms of product coverage) does no t fundamentally undermine the comparison of the
"scaling" of their fees. 757
14.127 Brazil has in our view convincingly demonstr ated that GSM 102 fees only minimally respond
to increased country risk and increased risk in the form of longer tenors, as compared to the fees
charged by the ExIm Bank for its LCI and MTI products. 758 The Panel notes, in particular, that while
the fees for the lowest country risk categories are relatively si milar between GSM 102 and the LCI

Brazil notes that this assumes that interest payments by the borrower on the lo an are due annually – an
assumption that is favourable to the United States, sinc e if interest is due on a shorter interval, the dollar
magnitude of the difference in interest coverage will decrease (less interest will be due at the time of default).
See Brazil's Comments on the US Response to Panel Ques tion 98, in particular footnote 409 thereof. The
amended results of Brazil's fee comparison are reported in Exhibits Bra-693 and Bra-694.
756 Brazil's Comments on US Response to Panel Question 98, para. 272.
757 Further, we recall our finding above (see the Panel's discussion of Brazil's arguments concerning the
OECD MPRs, supra, para. 14.101) that, if anything, fees should increase where risk in respect of agricultural
products is covered. Likewise, the Panel does not regard differences in terms of the tenors of the financial
products compared as material. Brazil has established that the "scaling" of GSM 102 fees is greatly inferior to
that under either LCI or MTI fees.
758 Tables in Figure 32, para. 400 of Brazil's First Written Submission. With respect to the rate of
increase with country risk, see also the following ta ble submitted by Brazil and which reports the average
percentage by which ExIm Bank fees exceed GSM 102 fees:

 GSM 102 annual
repayment of the principal
GSM 102 semi-annual
repayment of the principal
Risk Level 6 206% 175%
Risk Level 5 145% 125%
Risk Level 4 109% 94%
Risk Level 3 76% 67%
Risk Level 2 30% 29%
Risk Level 1 28% 27%
Risk Level 0 19% 20%
Table 31 of Brazil's First Written Submission, para. 396. The table does not adjust GSM 102 fees for
the difference in interest coverage but, as indicated above, we do not consider that an adjustment of
approximately 5 per cent would materially affect the comparison of the rates of increase of the fees.

and MTI, there is a sharp difference between the f ees charged by the ExIm Bank and the CCC for the
highest risk categories.759
14.128 The significant difference between the rates of increase for, on the one hand, GSM 102 fees
and, on the other hand, the ExIm Bank's LCI and MTI products suggests that the 1 per cent fee cap
imposed by US law on GSM 102 fees does indeed pr event the adoption of a truly risk-based fee
structure by the CCC.760
14.129 Further, we note that, in all cases, GSM 102 fees vary by, at most, 100 per cent between the
lowest and highest country risk category, fo r identical tenors and repayment frequencies. 761 In ou r
view, an increase in fees of, at most, 100 per cent s uggests that fees insufficiently take account of this
factor. We recall that the countries placed in risk category 0 will by definition present a very low
(even virtually inexistent) risk of default and that countries in the highest risk categories present a
high risk of default. Finally, we recall our finding above concerning the increasing difference
between GSM 102 fees and the OECD MPRs as risk increases. 762 These additional elements lend
further support to our c onclusion that the rate of increase of GSM 102 fees is insufficient to
meaningfully account for increased risks in the form of higher country risk and longer tenors and that
the one per cent fee cap prevents the adoption, by the CCC, of risk-based fees for the GSM 102
programme.

759 For instance, according to Exhi bit Bra-548, the respective fees for GSM 102 and for ExIm Bank's
LCI (with annual repayment of principal) for a country falling within each agency's risk category 6 are, for a
tenor of 12 months: respectively, 0.612 per cent (GSM 102) and 2.410 per cent (ExIm Bank LCI); for a tenor of
36 months: 1.0 per cent (GSM 102), 4.325 per cent (ExIm Bank MTI). In contrast, the fees for a country falling
under each agency's risk category 2 are: 12 months tenor: 0.373 per cent (GSM 102), 0.570 per cent (ExIm Bank
LCI); for 36 months: 0.637 per cent (GSM 102), 1.060 per cent (ExIm Bank MTI). The Panel notes that the
ExIm Bank and the CCC's risk categories do not perfectly correspond. See Brazil's First Written Submission,
footnote 508:
"GSM 102 risk categories correspond with ExIm Bank risk categories as follows:
- Countries rated by CCC in GSM 102 risk category 6 have an average ExIm Bank risk
category of 5.64;
- Countries rated by CCC in GSM 102 risk category 5 have an average ExIm Bank risk
category of 4.78;
- Countries rated by CCC in GSM 102 risk category 4 have an average ExIm Bank risk
category of 4.13;
- Countries rated by CCC in GSM 102 risk category 3 have an average ExIm Bank risk
category of 3.33;
- Countries rated by CCC in GSM 102 risk category 2 have an average ExIm Bank risk
category of 2.00;
- Countries rated by CCC in GSM 102 risk category 1 have an average ExIm Bank risk
category of 1.83;
- Countries rated by CCC in GSM 102 risk category 0 have an average ExIm Bank risk
category of 1.33.
Thus, GSM 102 fees for GSM 102 risk categories 2, 3, 4, 5 and 6 are compared, respectively,
to ExIm Bank fees for ExIm Bank risk categories 2, 3, 4, 5 and 6. GSM 102 fees for
GSM 102 risk categories 0 and 1 are compared, respectively, to ExIm Bank fees for ExIm
Bank risk categories 1 and 2."
760 Again, applying an adjustment of approximately 5 per cent to account for the differences between
the two products would not, in our view, affect meanin gfully the overwhelming diff erence in the manner in
which the increased riskiness of guarant ees associated with higher country ri sk and longer tenors is taken into
consideration by LCI/MTI and GSM 102 fees.
761 US Response to Panel Question 99, para. 235: "under the current fee schedule, the difference in
premia for the same tenor between the least risky countries and the most risky countries is in all cases between
81.5 per cent and 100.6 per cent"; see also the GSM 102 Fee Rate Schedule, Exhibit Bra-505.
762 See supra, para. 14.99.

14.130 Brazil also relies, in support of its arguments that the GSM 102 programme is not designed to
cover its long term operating costs and losses, on the fact that the CCC continues to project that the
programme will be run at a net cost to the US Gove rnment in the long term and on the fact that GSM
102 fees are well below the OECD MPRs. The Panel notes that it has already found these elements to
provide an indication that GSM 102 export credit guar antees are provided at premium rates which are
inadequate to cover the long-term operating costs and losses of the GSM 102 programme.
14.131 In light of these considerations – the CCC's access to funds from th e US Treasury, which
facilitates the functioning of the programme, the fact that GSM 102 fees do not vary with foreign
obligor risk, the fact that the one per cent fee cap has not been repealed and in our view prevents the
adoption of risk-based fees (notably due to the insufficient "scaling" of GSM 102 fees) – we conclude
that the GSM 102 programme is not designed to cover its long term operating costs and losses.
(e) Overall conclusion of the Panel's analysis under item (j) of the Illustrative List
14.132 We recall that we have conducte d our analysis under the general rules of the burden of proof,
i.e. we have assumed that it was for Brazil to establish that GSM 102 export credit guarantees
constitute export subsidies because they fall within the terms of item (j) of the Illustrative List.
763
14.133 We find that Brazil has met its burden of proof in this respect and that it has established that
the GSM 102 export credit guarantee programme constitutes an "export subsidy" because it is
provided against premiums which are inadequate to cover its long term operating costs and losses
under the terms of item (j) of the Illustrative List. We reach this conclusion on the basis of the totality
of the evidence submitted by Brazil in this respect. We recall that we have taken into consideration
the following elements:
(a) The US Government continues to project that new GSM 102 export
credit guarantees issued under the new fee schedule will be provided
at a net cost to the Government;
(b) GSM 102 fees are well below the OECD MPRs, which we consider
to provide an informed appraisal of the level of fees necessary to
cover the long-term operating costs and losses of an export credit
guarantee programme;
(c) Elements of the structure, design and operation of the GSM 102
programme indicate that the programme is not designed to cover the
long term operating costs and losses of that programme.
14.134 On the basis of this evidence, taken as a whol e, we find that Brazil has established that GSM
102 export credit guarantees constitute per se export subsidies within the meaning of Article 3.1(a) of
the SCM Agreement because they are provided as part of a programme that falls within the scope of
item (j) of the Illustrative List. Relying on the defin ition of "export subsidy" in Article 3.1(a) of the
SCM Agreement as context, we conclude that GSM 102 export credit guarantees are "export
subsidies" within the meaning of Article 10.1 of the Agreement on Agriculture.
14.135 We recall that we consider that the two le gal bases relied upon by Brazil in support of its
argument that GSM 102 export credit guarantees are "export subsidies" under the terms of
Article 3.1(a) of the SCM Agreement are not separate claims, but me re separate arguments in support
of that contention. We do not consider it necess ary to examine whether, in addition to constituting
export subsidies because they fall within the scope of item (j) of the Illustrative List, these guarantees

763 See supra, para. 14.47.

also meet the definitional elements of an e xport subsidy under Articles 1.1 and 3.1(a) of the SCM
Agreement. In any case, we consider that our findings w ith respect to item (j) of the Illustrative List
suffice to resolve the matter between the parties.764
5. Whether the United States has applied GSM 102 guarantees in a manner that results in
circumvention of its export subsidy commitments under the Agreement on Agriculture
(a) Introduction
14.136 Having concluded that GSM 102 export credit guarantees provide export subsidies under the
terms of Article 10.1 of the Agreement on Agriculture , we must now determine whether the United
States has, subsequent to 1 July 2005, applied such export subsidies in a manner which has resulted in
circumvention of its export subsidy commitments.765
14.137 The elements necessary to establis h that the export subsidies resulted in the circumvention of
the United States' export subsidy commitments vary depending on whether scheduled or unscheduled
products are at issue. For unscheduled products, "c ircumvention" of the United States' export subsidy
commitments will occur if any export subsidies (in the form of GSM 102 export credit guarantees) are
provided in respect of any quantity of exports of the product in question. 766 For scheduled products,
"circumvention" will occur if the United States provides export subsidies to volumes of exports of the
product at issue in excess of its "quantity" reduction commitm ents or of its "budgetary outlay"
reduction commitments.767
14.138 Brazil submits evidence concerning the quantity of exports of certain products that benefited
from export subsidies in the form of GSM 102 export credit guarantees since 1 July 2005. We
examine whether this evidence suffices to establish Brazil's claims of circumvention below, first with
respect to unscheduled products, and in a second time, with respect to scheduled products.
(b) Unscheduled products
14.139 Brazil submits evidence to the effect that the CCC has, subsequent to 1 July 2005, provided
GSM 102 guarantees to support the export of the following unscheduled products:
768
(i) between 1 July and 30 September 2005: 769 cotton, oilseeds (including
soybeans/soybean meal), protein meals, fresh vegetables, hides/skins and tallow.770

764 We note that in the original proceeding the Appellate Body rej ected a claim by Brazil that the
original panel had improperly exercised judicial economy in refusing to make additional factual findings under
Articles 1 and 3 of the SCM Agreement. See Appellate Body Report, US – Upland Cotton, paras. 726-733.
765 Given our finding that Brazil has established that GSM 102 export credit guarantees constitute
export subsidies under Article 10.1 of the Agreement on Agriculture , we need not conduct the analysis that
would normally follow from the partial reversal of the burden of proof under Article 10.3 of the Agreement on
Agriculture. See supra, para. 14.47.
766 See Appellate Body Report, US – FSC, para. 150. See also the ending clause of Article 3.3 of the
Agreement on Agriculture : "... a Member shall not provide export su bsidies ... in respect of any agricultural
product not specified in [Section II of Part IV] of its Schedule."
767 This follows from the fact that a Member's export subsidy reduction commitments include both a
volume ("quantity") and a financial ("budgetary outlay") component. See Appellate Body Report, EC – Export
Subsidies on Sugar , para. 200 and the text of Article 3.3, which provides that "... a Member shall not provide
export subsidies ... 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."
768 See Brazil's First Written Submission, paras. 450 ff.

(ii) in FY 2006 (1 October 2005-30 September 2006): cotton, oilseeds,
soybeans/soybean meal, protein meals, hides/skins, tallow and corn products.
771
14.140 Given that the United has made no specific export subsidy reduction commitments for these
products, the United States has committed itself to providing no export subsidies on the export of
these products (Article 3.3. of the Agreement on Agriculture ). Thus, we find, on the basis of the
evidence submitted by Brazil, that the United States h as after 1 July 2005, appl ied export subsidies in
the form of GSM 102 export credit guarantees in a manner which resulted in circumvention of its
export subsidy commitments under the Agreement on Agriculture.
(c) Scheduled products
14.141 With respect to scheduled products, Braz il's claims under Article 10.1 of the Agreement on
Agriculture concern exports of three products – rice, pig meat and poultry meat. The subsidy
reduction commitments of the United States for these products are as follows:
Agricultural product Final Commitments
 Outlays (US$) Quantity (MT)
Rice 2,368,925 38,544
Pig meat 497,055 395
Poultry meat 14,554,827 27,994
(Source: United States Schedule XX, Part IV, Section II)
14.142 We recall that we have rejected the US arguments that Brazil's claims in respect of pig meat
and poultry meat are not properly before us.772
14.143 Brazil determines the quantity of export of each of these three products as follows: it takes the
value of GSM 102 exporter applications received for each product in the period concerned (July-
September 2005 and FY 2006). It then divides that amount by the average US export price for the
commodity in question for FY 2006 (US$/metric ton)
773 and thereby obtains the volume, in metric
tons, of exports of the product in question in the period concerned.

769 I.e. the portion of FY 2005 running from 1 July 2005 – GSM 102 export credit guarantee activity is
tracked on the basis of a fiscal year running from 1 October to 30 September (FY 2005 ran from 1 October 2004
to 30 September 2005; FY 2006 ran from 1 October 2005 to 30 September 2006).
770 Compare the summaries of export credit activity as of July 2005 (Exhibit Bra-551) and for the
whole of FY 2005 (Exhibit Bra-511). We note that Brazil also submitted eviden ce to the effect that the
United States also provided GSM 102 export credit guarantees to exports of lysine and wood products in the
same period. We address Brazil's claim under the SCM Agreement in respect of these products below in
Section XIV.D.
771 Exhibit Bra-513. Exports of lyocell and wood products (wood pulp) also benefited from GSM 102
export credit guarantees in the same period. We address Brazil's claims under the SCM Agreement in respect of
these products below in Section XIV.D.
772 See supra, section IX.B.2.
773 Brazil obtains the US export price from the following sources: FY 2006, rice: October to September
average of monthly prices of US long grain rough rice, bulk, FOB, New Orleans from the 13 October 2006
ERS/USDA "Rice Outlook." See Exhi bit Bra-552. July-September 200 5, rice: average of July to
September 2005 monthly prices of US long grain rough rice, bulk, FOB, New Orleans from the

Agricultural
product
Quantity
commitment
Exports under
GSM 102 (July-
September 2005)
(MT)
Exports under
GSM 102 (FY
2006) (MT)
Rice 38,544 54,430 774 197,030775
Pig meat 395 - 22,562 776
Poultry meat 27,994 86,572 777 381,906778

14.144 The United States does not challenge Brazil's calculations, nor the manner in which Brazil
estimates the relevant price for each agricultural pro duct. We would, on the basis of the evidence
provided by Brazil, be ready to conclude that Brazil has made a prima facie case that the
United States has applied export subsidies in the form of GSM 102 in a manner which has resulted in
the circumvention of the US export subsidy reduction commitments for these three products.
14.145 Before doing so, however, we address one issue which has not been discussed by the parties
in this dispute, but which the Panel must nevertheless resolve. This issue ar ises from the fact that the
US Schedule of commitments indicates, with respect to the quantitative aspect of the US
commitments, that "[a]ll quantity commitments ar e for the period 1 July 2002 through 30 June 2003
while budgetary outlay commitments are implemented on a fiscal year basis beginning
1 October 2002".
779
14.146 Thus, while the evidence submitted by Brazil in support of its claims concerns the periods
from 1 July to 30 September 2005 (the part of FY 2005 subsequent to the end of the implementation
period) and from 1 October 2005 to 30 Septem ber 2006 (FY2006), the United States' subsidy
commitments, expressed in quantity terms, run from the period 1 July to 30 June of each year.780
14.147 The evidence presented by Brazil concerning the period from 1 July to 30 September 2005
does not, in our view, raise any specific difficulty: the totality of the period covered by the evidence
presented by Brazil falls within only one of the US "quantity commitment year" (Brazil's evidence

13 October 2006 ERS/USDA "Rice Outlook." Exhibit Bra-552. For pig meat, FY 2006: average of
October 2005 to August 2006 monthly unit values (total value/total quantity) of US pigmeat (HS 0203) from the
"USITC Interactive Tariff and Trade DataWeb). Exhibit Bra-553. For poultry meat, July-September 2005:
average of October 2004 to September 2005 monthly unit values (total value/total quantity) of US poultry meat
(HS 0207), FOB, from the "USITC Interactive Tariff and Trade DataWeb". Exhibit Bra-554. FY 2006, poultry
meat: average of October 2005 to August 2006 monthly unit values (total value/total quantity) of US poultry
meat (HS 0207), FOB, from the "USITC Interactive Tariff and Trade DataWeb". Exhibit Bra-554.
774 Exhibit Bra-552.
775 Exhibit Bra-552.
776 Exhibit Bra-553.
777 Exhibit Bra-554.
778 Exhibit Bra-554.
779 United States Schedule XX, note 1.
780 A somewhat similar issue arose in the original pr oceedings: before the original panel, Brazil made
claims with respect to the period 30 June-1 July 2002 (the period corresponding to the United States' quantity
reduction commitments), whereas US export credit guarantees activity was reported on the basis of the period
running from 1 October to 30 September. See Panel Report, US – Upland Cotton , para. 7.878. The Panel did
not address the issue of the partial overlap of the time periods, but the Appellate Body commented on the issue
and indicated that the Panel should have sought to address it. See Appellate Body Report, US – Upland Cotton,
para. 691.

covers the first three months of the US "quantity commitment year" running from 1 July 2005 to
30 June 2006)". But the evidence presented by Br azil with respect to FY 2006 (i.e. 1 October 2005 to
30 September 2006) only partially overlaps with th e US "quantity commitment year", which runs
from 1 July 2005 to 30 June 2006.
781 Explained differently, US exports of scheduled products during
the period running from 1 July 2006 to 1 October 2006 should be computed as part of a different year
for the purpose of determining whether the United States has respected its export subsidy reduction
commitments (expressed in quantity terms).782
14.148 That being said, in the present case, we are satisfi ed that Brazil has, at the very least, made a
prima facie case that the United States has circumvented its quantitative export subsidy commitments.
This is because, for all three products, the quantit y of exports having benefited from GSM 102 export
credit guarantees exceeds the US quantity commitment s by a large margin. The quantity of exports
exceeds the United States' quantitative commitments by a factor of 5 in the case of rice, 57 in the case
of pig meat and 14 in the case of poultry meat. 783 We could only conclude that Brazil has not proved
(or at least made a prima facie case) that the United States has exceeded its quantity commitments if it
were assumed, in the "best" case (rice), that 80 per cent of the exported qu antity having benefited
from subsidies was exported in the last three mont hs of the year (from 1 July to 1 October 2006).
Such an assumption would not be reasonable, nor has the United States presented any arguments that
Brazil's demonstration with respect to "actual circumvention" under the Agreement on Agriculture is
incorrect. We therefore conclude that Brazil has – at the very least – made a prima facie case that the
United States exceeded its export subsidy reduction commitments for each of rice, poultry meat, and
pig meat, during FY 2006.
14.149 As a result, the Panel finds that the United States has applie d export subsidies in the form of
GSM 102 export credit guarantees in a manner which has resulted in the circumvention of the US
export subsidy reduction commitments for rice, poultry meat and pig meat during FY 2006
(1 October 2005 to 30 September 2006), and for rice and poultry meat in the period from 1 July to
30 September 2005.
14.150 The Panel also finds, as a consequence, that by acting in consistently with Articles 10.1 and 8
of the Agreement on Agriculture the United States has failed to comply with the DSB
recommendations and rulings. Specifically, the United States has failed to bring its measures into
conformity with the Agreement on Agriculture.

781 We note in passing that the two periods for which Brazil submits evidence fall within the same US
"quantity commitment year".
782 We also note that the issue doe s not arise with respect to unsche duled products: this is because
Article 3.3 of the Agreement on Agriculture prohibits the United States from granting any subsidy whatsoever to
exports of unscheduled products. Even if the United St ates' compliance with its obligation not to provide any
export subsidies to these products was computed on the basis of the "period" for which it makes commitments in
its Schedule, there would be "circumvention." This is because the period within which the United States'
"budgetary outlay commitments" are to be assessed matches the period for which Brazil provides evidence (in
both cases, the "year" runs fro m 1 October to 30 September). Because any quantity of exports benefiting from
export subsidies necessarily corresponds to a budgetary outlay, no additional enquiry would be necessary to
conclude that the United States has "circumvented" its export subsidy commitments with respect to unscheduled
products.
783 Expressed differently, the quantities of exports ha ving benefited from expor ts subsidies exceed the
United States' commitments by, respectively, 511 per ce nt, 5712 per cent, and 1379 per cent (compare the
second and fourth columns of the table in para. 14.143, supra).

6. Claims that GSM 102 export credit guarantees are inconsistent with Articles 3.1(a) and
3.2 of the SCM Agreement
14.151 Brazil claims that to the extent that export subsidies in the form of GSM 102 export credit
guarantees are provided in a manner inconsistent with the Agreement on Agriculture , they are not
shielded from challenge under Articles 3.1(a) and 3.2 of the SCM Agreement.784 Brazil notes that the
opening clause of Article 3.1 of the SCM Agreement provides that "subsidies contingent... upon export
performance" are prohibited, "[e]xcept as provided in the Agreement on Agriculture...," meaning that
Members are prohibited from granting or maintain ing export subsidies to products covered by the
Agreement on Agriculture except where the Agreement on Agriculture allows such subsidies. Brazil
argues that for unscheduled produc ts, the United States is not due the "safe harbor" afforded by the
opening clause of Article 3.1 of the SCM Agreement at all, and that as a result, the prohibition on
export subsidies in Articles 3.1(a) and 3.2 appli es fully to the "GSM 102 export subsidy". With
respect to rice, pig meat and poultry meat, Brazil argues that the United States' entitlement to the "safe
harbor" is limited and that Articles 3.1(a) and 3.2 of the SCM Agreement apply to the extent that the
quantities of products having benefited from GSM 1 02 export subsidies ex ceed the United States'
quantitative export subsidy reduction commitments for these three products.
14.152 The United States has not specifically responded to Brazil's arguments in this respect.
14.153 Article 3.1 of the SCM Agreement reads as follows:
"Except as provided in th e 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, incl uding those illustrated in Annex I;"
(footnotes omitted; emphasis added)
14.154 There is, in our view, no question that, to the extent that the GSM 102 export credit
guarantees do not conform fully to the provisions of the Agreement on Agriculture, they are subject to
the prohibition on export subsidies under Articles 3.1(a) of the SCM Agreement.785 We have already
concluded that GSM 102 export credit guarantees conf er export subsidies under Article 10.1 of the
Agreement on Agriculture , relying on item (j) of the Illustrative List as "context" to reach that
conclusion. We see no reason to reach a different conclusion when consid ering whether GSM 102
export credit guarantees constitute export subsidies unde r the terms of Article 3.1(a) in itself, and not
as "context" in an analysis under Article 10.1 of the Agreement on Agriculture.
14.155 As indicated in our findings in paras. 14.140 and 14.149, above, the United States has, since
1 July 2005, provided export subsidies with resp ect to unscheduled products (between 1 July and
30 September 2005, on exports of cotton, oilseeds – including soybeans/soybean meal, protein meals,
fresh vegetables, hides/skins and tallow and in FY 2006, to exports of cotton, oilseeds,
soybeans/soybean meal, protein meals, hides/skin s, tallow and corn products) and has provided
export subsidies in excess of its export subsidy reduction commitments to exports of scheduled
products – rice, poultry meat and pig meat during FY 2006, and rice and poultry meat in the period
from 1 July to 30 September 2005.

784 Brazil's First Written Submission, paras. 457-460.
785 We need not, in this case, address the qu estion of whether, now that Article 13 of the Agreement on
Agriculture (the Peace Clause) has lapsed, there may be a violation of Articles 3. 1(a) and 3.2 of the SCM
Agreement in respect of all exports (i.e. even those that co nform to the disciplines of the Agreement on
Agriculture). Brazil makes no claims to that effect.

14.156 The Panel therefore finds that the United States has acted in consistently with Articles 3.1(a)
and 3.2 of the SCM Agreement by providing export subsidies to unscheduled products since
1 July 2005 and by providing export subsidies to scheduled products in excess of its commitments
under the Agreement of Agriculture since 1 July 2005.
14.157 The Panel also finds, as a consequence, that by acting inc onsistently with Articles 3.1(a) and
3.2 of the SCM Agreement the United States has failed to comply with the DSB recommendations and
rulings. Specifically, the United States has failed to comply with the DSB recommendation, adopted
pursuant to Article 4.7 of the SCM Agreement, to "withdraw the prohibited subsidies" identified in
paragraph 8.1(d)(i) of the report of the original panel.
D. C
LAIMS WITH RESPECT TO LYSINE, LYOCELL AND WOOD PRODUCTS
14.158 As indicated above, Brazil initially included three products – lysine, lyocell and wood
products – in the list of products concerned by its claims under Article 10.1 and 8 of the Agreement on
Agriculture, and to the extent of the inconsistency with the Agreement on Agriculture , under
Articles 3.1(a) and 3.2 of the SCM Agreement. After the United States pointed out that the products
are not covered by the scope of the Agreement on Agriculture, Brazil indicated that it is not pursuing
its claims under the Agreement on Agriculture with respect to these products. 786 We therefore need
not decide whether these three products in fact fall outside the scope of the Agreement on Agriculture.
14.159 The United States contends that Brazil's cl aims under Articles 3.1 and 3.2 of the SCM
Agreement are not properly before us. The United St ates submits that in its request for the
establishment of a panel, Brazil presented claims under Articles 3.1 and 3.2 of the SCM Agreement
"as a result and to the extent of the violation of Ar ticle 10.1 (and, as a consequence, Article 8) of the
Agreement on Agriculture".787 We therefore need to decide whether Brazil's claims concerning these
three products under the SCM Agreement are properly before us.

786 See Panel Question 50 and Brazil's Response thereon:

"Does Brazil maintain its claims with respect to the three unscheduled products (lyocell,
lysine, wood products) identified by the United States as falling outside the scope of the
Agreement on Agriculture? (see paragraph 83 of the United States' Rebuttal)
Brazil maintains its claims under Articles 3.1(a) and 3.2 of the SCM Agreement with respect
to GSM 102 ECGs for lyocell, lysine and wood products. To the exte nt that these products
fall outside the scope of the Agreement on Agriculture, the compliance Panel need not, before
addressing Brazil's prohibited subsidy claims under the SCM Agreement, address whether the
provision of GSM 102 ECGs for these products circumvents US agricultural export subsidy
commitments."
787 US Comments on Brazil's Response to Panel Question 50:
"In its response, Brazil appears to acknowledge that lyocell, lysine, and wood products fall
outside the scope of the Agreement on Agriculture. By definition, therefore, the provision of
GSM 102 export credit guarantees in respect of lyocell, lysine, and wood products cannot
circumvent US agricultural export subsidy commitm ents under that agreement. In its request
for establishment of a panel, Brazil presented claims under Articles 3.1 and 3.2 of the SCM
Agreement "as a result and to the extent of [the alleged] violation of Article 10.1 (and, as a
consequence, Article 8) of the Agreement on Agriculture ." As there can be no "violation of
Article 10.1 (and, as a consequence, Article 8) of the Agreement on Agriculture," there can be
no claim under the SCM Agreement with respect to the GSM 102 export credit guarantees in
respect of lyocell, lysine, and wood products under the express terms of Brazil's request for
panel establishment. Where a claim is not set out in the request for panel establishment – as
here – it is not part of the matter referred to the panel and falls outside the scope of a panel
proceeding." (footnotes omitted)

14.160 The relevant parts of Brazil's request for the establishment of a panel read as follows:
"(b) Inconsistency of measures taken to comply with the covered agreements
25. Brazil believes that the United States provides export subsidies (under
Articles 1, 3.1(a) and 3.2 of the SCM Agreement , as well as under item (j) to the
Illustrative List of Export subsidies included as Annex I to the SCM Agreement (the
"Illustrative List")) through the GSM 102 and SCGP programs, and ECGs provided
under these programs, and has applied th ose export subsidies subsequent to
1 July 2005 in a manner that results in circumvention of the United States' export
subsidy commitments. In this respect, the United States' measures taken to comply
are not consistent with Articles 10.1 and 8 of the Agreement on Agriculture and
Articles 3.1(a) and 3.2 of the SCM Agreement.
26. Specifically, and notwithstanding the US measures taken to comply cited as
items (ii) and (iii) in Section B above, the GSM 102 and SCGP programs, and ECGs
provided thereunder, are export subsidies under the Agreement on Agriculture and the
SCM Agreement, based on the following two grounds:
• The programs and ECGs provided th ereunder provide and constitute
financial contributions (loan guara ntees) that confer benefits on
recipients, within the meaning of Article 1 of the SCM Agreement ,
and that are contingent upon export performance, within the meaning
of Article 3.1(a) of the SCM Agreement ; and, separately and
independently,
• The programs do not levy premium rates adequate to cover the long-
term operating costs and losses of the GSM 102 and SCGP programs,
within the meaning of item (j) of the Illustrative List.
27. Further, subsequent to 1 July 2005, ECGs under the GSM 102 and SCGP
programs have been applied to circumvent US export subsidy commitments, within
the meaning of Article 10.1 of the Agreement on Agriculture . Brazil is concerned
that ECGs under the GSM 102 and SCGP pr ograms have been pr ovided subsequent
to 1 July 2005 to support the export of: upland cotton and other unscheduled
products; and, rice, pigmeat and poultry meat, in excess of US reduction commitment
levels for those products.
788
28. As a result and to the extent of this violation of Article 10.1 (and, as a
consequence, Article 8) of the Agreement on Agriculture , the GSM 102 and SCGP
programs, and ECGs provided thereunder, are subject to the prohibition against
export subsidies included in Articles 3.1 and 3.2 of the SCM Agreement. On the
grounds cited in paragra ph 26 above, Brazil believes th at the GSM 102 and SCGP
programs, and ECGs provided thereunder, ar e prohibited export subsidies, within the
meaning of Articles 3.1(a) and 3.2 of the SCM Agreement."789

788 Exports that benefited from GSM 102 and SCGP ECGs subsequent to 1 July 2005 are currently
reflected in the July 2005 and Sept ember 2005 (fiscal year end), as we ll as July 2006 "Monthly Summary of
Export Credit Guarantee Activity," USDA FAS Online, available at
http://www.fas.usda.gov/excredits/Monthly/ecg.html.
789 WT/DS267/30, paras. 25-28.

14.161 The Panel agrees with the United States that Br azil's claims under Articles 3.1(a) and 3.2 of
the SCM Agreement are contingent upon a finding by the Panel that the United States has applied
export subsidies inconsistently with its obligations under the Agreement on Agriculture , and only to
the extent of that inconsistency.
14.162 We note in particular that Brazil's request fo r the establishment of a panel uses the expression
"in this respect" in the introductory paragraph of the section concerning Brazil's export credit
guarantees claims. Read in conjunction with the immediately preceding sentence ("and has applied
those export subsidies ... in a manner that results in circumvention of the United States' export subsidy
commitments") and taking into consideration th e fact that Brazil uses "circumvention of the
United States' export subsidy commitments" to refer to a violation, by the United States, of its
obligation under Article 10.1 of the Agreement on Agriculture
790, it is clear to the Panel that Brazil's
claims of inconsistency with 3.1(a) and 3.2 of the SCM Agreement depend on a finding by the Panel
that the export subsidies in question have resulted in the circumvention of the United States' export
subsidy commitments.
14.163 In addition, paragraph 28 of Br azil's panel request, which explai ns in more details Brazil's
claims, indicates that it is "[a]s a result" and "to the extent" of the violation of Articles 10.1 and 8 of
the Agreement on Agriculture that the US export credit guarantee programmes in question are subject
to the prohibition against export subsidies included in Articles 3.1 and 3.2 of the SCM Agreement.
14.164 As a result, the Panel considers that Brazil's claims under Articles 3.1(a) and 3.2 of the
SCM Agreement with respect to lyocell, lysine and wood products are not covered by Brazil's request
for the establishment of a panel and are therefore not part of its terms of reference.
XV. CONCLUSIONS AND RECOMMENDATION
15.1 In accordance with its mandate under Article 21. 5 of the DSU, the Panel has examined the
"existence or consistency with a covered agreement of measures taken" by the United States "to
comply with the recommendations and rulings" adopte d by the DSB in the original proceeding. The
Panel concludes that:
With respect to the measure taken by the United St ates to comply with the DSB recommendations and
rulings relating to the original panel's finding of inconsistency with Articles 5 and 6 of the
SCM Agreement:

(a) The United States acts inconsistently with its obligations under Articles 5(c)
and 6.3(c) of the SCM Agreement in that the effect of marketing loan and counter-
cyclical payments provided to US upland cotton producers pursuant to the FSRI Act
of 2002 is significant price suppression within the meaning of Article 6.3(c) of the
SCM Agreement in the world market for upland co tton constituting "present" serious
prejudice to the interests of Brazil within the meaning of Article 5(c) of the
SCM Agreement. By acting inconsistently with Artic les 5(c) and 6.3(c) of the
SCM Agreement the United States has failed to comply with the DSB
recommendations and rulings. Specifically, the United States has failed to comply
with its obligation under Article 7.8 of the SCM Agreement "to take appropriate steps
to remove the adverse effects or. ..withdraw the subsidy".

790 See the first sentence of para. 27 of Brazil's request:
"Further, subsequent to 1 July 2005, ECGs under the GSM 102 and SCGP programs have
been applied to circumvent US export subsidy commitments, within the meaning of
Article 10.1 of the Agreement on Agriculture."

(b) Brazil has not made a prima facie case that the effect of marketing loan and counter-
cyclical payments provided to US upland cotton producers pursuant to the FSRI Act
of 2002 is an increase in the US world mark et share in upland cotton as compared to
the average US world market share during the previous period of three years and that
this increase follows a consistent trend over a period when subsidies have been
granted. Therefore, it has not been established that the United States acts
inconsistently with Articles 5(c) and 6.3(d) of the SCM Agreement.
With respect to the measure taken by the United St ates to comply with the DSB recommendations and
rulings relating to the original panel's findings of inconsistency with Articles 10.1 and 8 of the
Agreement on Agriculture and Articles 3.1(a) and 3.2 of the SCM Agreement:
(c) Regarding GSM 102 export credit guarantees issued after 1 July 2005 the
United States acts inconsistently with Article 10.1 of the Agreement on Agriculture
by applying export subsidies in a manner which results in the circumvention of US
export subsidy commitments with resp ect to certain unscheduled products
791 and
certain scheduled products 792, and as a result acts inconsistently with Article 8 of the
Agreement on Agriculture. Regarding GSM 102 export credit guarantees issued after
1 July 2005 the United States also acts incons istently with Articles 3.1(a) and 3.2 of
the SCM Agreement by providing export subsidies to unscheduled products 793 and by
providing export subsidies to scheduled products 794 in excess of the commitments of
the United States under the Agreement on Agriculture. By acting inconsistently with
Articles 10.1 and 8 of the Agreement on Agriculture and Articles 3.1(a) and 3.2 of the
SCM Agreement the United States has failed to comply with the DSB
recommendations and rulings. Specifically, the United States has failed to bring its
measures into conformity with the Agreement on Agriculture and has failed "to
withdraw the subsidy without delay".
(d) With respect to certain ex port credit guarantees issued prior to 1 July 2005, Brazil has
not established that the United States has failed to "withdraw the subsidy without
delay".
15.2 The Panel considers that to the extent that th e measures taken by the United States to comply
with the recommendations and rulings adopted by the DSB in the original proceeding are inconsistent
with the obligations of the United States under th e covered agreements, th ese recommendations and
rulings remain operative. In this regard, the Pane l recalls that the recommendations and rulings that
were adopted by the DSB in the original proceeding were as follows:
"(a) we recommend pursuant to Article 19.1 of the DSU that the United States bring its
measures listed in paragraphs 8.1(d)(i) a nd 8.1(e) above into conformity with the
Agreement on Agriculture;
(b) as required by Article 4.7 of the SCM Agreement, we recommend that the
United States withdraw the prohibited subsid ies in paragraphs 8.1(d)(i) and 8.1(e)
above without delay. The time-period we specify must be consistent with the

791 The unscheduled products at issue are (i) in the period 1 July-30 September 2005: cotton, oilseeds
(including soybeans/soybean meal), protein meals, fresh vegetables, hides/skins and tallow; and (ii) in the period
1 October 2005–30 September 2006: cotton, oilseeds, soybeans/soybean meal, protein meals, hides/skins, tallow
and corn products.
792 The scheduled products at issue are: (i) in the period 1 July-30 September 2005: rice and poultry
meat; and (ii) in the period 1 October 2005-30 September 2006: rice, poultry meat and pig meat.
793 Supra, footnote 791.
794 Supra, footnote 792.

requirement that the subsidy be withdrawn 'w ithout delay'. In any event, this is at
the latest within six months of the date of adoption of the Panel report by the
Dispute Settlement Body or 1 July 2005 (whichever is earlier);
(c) pursuant to Article 4.7 of the SCM Agreement, we recommend that the United States
withdraw the prohibited subsidy in paragraph 8.1(f) above without delay and, in any
event, at the latest within six months of the date of adoption of the Panel report by
the Dispute Settlement Body or 1 July 2005 (whichever is earlier); and
(d) we recall that, in respect of the s ubsidies subject to our conclusion in
paragraph 8.1(g)(i) above, pursuant to Article 7.8 of the SCM Agreement:

 '7.8 Where a panel report or an Appellate Body report is
adopted in which it is determined that any subsidy has
resulted in adverse effects to the interests of another Member
within the meaning of Article 5, the Member granting or
maintaining such subsidy sha ll take appropriate steps to
remove the adverse effects or shall withdraw the subsidy'.

Accordingly, upon adoption of this report, the United States is under an obligation to
'take appropriate steps to remove the adverse effects or ... withdraw the subsidy'".
795
15.3 The Panel has set out above in para. 9.79 its views on the interpretation of the obligation
under Article 7.8 of the SCM Agreement to "take appropriate steps to remove the adverse effects or ...
withdraw the subsidy".

II), "once the DSB adopts a dispute settlement report, the findings and recommendations in that report become
collective, operative DSB rulings and recommendations." US – FSC (Article 21.5 – EC II), para. 7.35.