Document: BRAZIL'S COMMENTS ON THE RESPONSES OF THE UNITED STATES TO THE PANEL'S SECOND SET OF QUESTIONS (24 April 2007) TABLE OF CONTENTS Page LIST OF ABBREVIATIONS 444
Date: 24 April 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

LIST OF ABBREVIATIONS

Arrangement OECD Arrangement on Offi cially Supported Export Credits
AWP Adjusted World Price
BSC Bond Street Capital
CCC U.S. Commodity Credit Corporation
CCPs Counter-Cyclical Payments
DSB Dispute Settlement Body
DSU Understanding on Rules and Procedures Governing the Settlement of Disputes
ECG Export Credit Guarantee
ERS USDA's Economic Research Service
FAPRI Food and Agricultural Policy Research Institute
FAS USDA's Foreign Agriculture Service
FCRA Federal Credit Reform Act
FSRI Act Farm Security and Rural Investment Act of 2002
FY Fiscal Year
GATT General Agreement on Tariffs and Trade
GAO Government Accountability Office
GSM 102 General Sales Manager 102
GSM 103 General Sales Manager 103
LCI ExIm Banks Letter of Credit Insurance
MBS Mortgage-backed securities
MPRs Minimum Premium Rates
MTI ExIm Bank's Medium-Term Export Credit Insurance
MY Marketing Year
NCC National Cotton Council of America
NPV Net Present Value
OECD Organization for Economic Co-operation and Development
SCGP Supplier Credit Guarantee Program
SCM Agreement Agreement on Subsidies and Countervailing Measures
SPS Agreement Agreement on Sanitary and Phytosanitary Measures
TBT Agreement Agreement on Technical Barriers to Trade
U.S. United States
USDA U.S. Department of Agriculture
WTO

TABLE OF CASES

Short Title Full Case Title and Citation
Australia – Salmon (21.5)
Panel Report, Australia – Measures Affecting Importation of Salmon ,
 and Corr.1, adopted 6 November 1998, modified by Appellate
Body Report, , DSR 1998:VIII, 3407
Canada – Aircraft Appellate Body Report, Canada – Measures Affecting the Export of Civilian
Aircraft, , adopted 20 August 1999, DSR 1999:III, 1377
Canada – Aircraft
(21.5)
Appellate Body Report, Canada – Measures Affecting the Export of
Civilian Aircraft – Recourse by Brazil to Article 21.5 of the DSU,
WT/DS70/AB/RW, adopted 4 August 2000, DSR 2000:IX, 4299
Canada – Aircraft Credits
and Guarantees
Panel Report, Canada – Export Credits and Loan Guarantees for Regional
Aircraft, WT/DS222/R and Corr.1, adopted 19 February 2002,
DSR 2002:III, 849
Canada – Dairy (21.5 II)
Appellate Body Report, Canada – Measures Affectin g the Importation of
Milk and the Exportation of Dairy Products – Second Recourse to
Article 21.5 of the DSU by New Zealand and the United States ,
WT/DS103/AB/RW2, WT/DS113/AB/ RW2, adopted 17 January 2003,
DSR 2003:I, 213
Chile – Alcoholic
Beverages
Award of the Arbitrator, Chile – Taxes on Alc oholic Beverages –
Arbitration under Article 21.3(c) of the DSU, WT/DS87/15, WT/DS110/14,
23 May 2000, DSR 2000:V, 2583
EC – Bed Linen
(21.5)
Panel Report, European Communities – Anti-Dumping Duties on Imports of
Cotton-Type Bed Linen from India – Recourse to Article 21.5 of the DSU by
India, WT/DS141/RW, adopted 24 April 2003, modified by Appellate Body
Report, WT/DS141/AB/RW, DSR 2003:IV, 1269
EC – CVDs on DRAMs
Panel Report, European Communities – Countervailing Measures on
Dynamic Random Access Memory Chips from Korea, WT/DS299/R,
adopted 3 August 2005
EC – Sugar
Appellate Body Report, European Communities – Export Subsidies on
Sugar, WT/DS265/AB/R, WT /DS266/AB/R, WT/D S283/AB/R, adopted
19 May 2005
Guatemala – Cement I
Appellate Body Report, Guatemala – Anti-Dumping Investigation
Regarding Portland Cement from Mexico , WT/DS60/AB/R, adopted
25 November 1998, DSR 1998:IX, 3767
Mexico – Corn Syrup
(21.5)
Appellate Body Report, Mexico – Anti-Dumping Investigation of High
Fructose Corn Syrup (HFCS) from the United States – Recourse to Article
21.5 of the DSU by the United States, WT/DS132/AB/RW, adopted
21 November 2001, DSR 2001:XIII, 6675
U.S. – 1916 Act
Award of the Arbitrator, United States – Anti-Dumping Act of 1916 –
Arbitration under Article 21.3(c) of the DSU , WT/DS136/11,
WT/DS162/14, 28 February 2001, DSR 2001:V, 2017
U.S. – Byrd Amendment
Award of the Arbitrator, United States – Continued Dumping and Subsidy
Offset Act of 2000 – Arbitration under Article 21.3(c) of the DSU ,
WT/DS217/14, WT/DS234/22, 13 June 2003, DSR 2003:III, 1163
U.S. – Export Restraints
Panel Report, United States – Measures Treating Exports Restraints as
Subsidies, WT/DS194/R and Corr.2, adopted 23 August 2001,
DSR 2001:XI, 5767

Short Title Full Case Title and Citation
U.S. – FSC (21.5 II)
Appellate Body Report, United States – Tax Treatment for "Foreign Sales
Corporations" – Second Recourse to Article 21.5 of the DSU by the
European Communities, WT/DS108/AB/RW2, adopted 14 March 2006
U.S. – Gambling (21.5)
Panel Report, United States – Measures Affecting the Cross-Border Supply
of Gambling and Betting Services , WT/DS285/R, adopted 20 April 2005,
modified by Appellate Body Report, WT/DS285/AB/R
U.S. – OCTG from
Argentina (21.5)
Appellate Body Report, United States – Sunset Reviews of Anti-Dumping
Measures on Oil Country Tubular Goods from Argentina - Recourse to
Article 21.5 of the DSU by Argentina , WT/DS268/AB/RW, adopted
12 April 2007
U.S. – OCTG Sunset
Reviews
Appellate Body Report, United States – Sunset Reviews of Anti-Dumping
Measures on Oil Country Tubular Goods from Argentina,
WT/DS268/AB/R, adopted 17 December 2004, DSR 2004:VII, 3257
U.S. – Softwood Lumber IV
Appellate Body Report, United States – Final Countervailing Duty
Determination with Respect to Certain Softwood Lumber from Canada,
WT/DS257/AB/R, adopted 17 February 2004, DSR 2004:II, 571
U.S. – Softwood Lumber IV
(21.5)
Appellate Body Report, United States – Final Countervailing Duty
Determination with Respect to Certain Softwood Lumber from Canada –
Recourse by Canada to Article 21.5 of the DSU, WT/DS257/AB/RW,
adopted 20 December 2005
U.S. – Softwood Lumber V
Appellate Body Report, United States – Final Dumping Determination on
Softwood Lumber from Canada, WT/DS264/AB/R, adopted 31 August
2004, DSR 2004:V, 1875
U.S. – Softwood Lumber VI
(21.5)
Appellate Body Report, United States – Investigation of the International
Trade Commission in Softwood Lumber from Canada – Recourse to
Article 21.5 of the DSU by Canada, WT/DS277/AB/RW, adopted
9 May 2006
U.S. – Upland Cotton Appellate Body Report, United States – Subsidies on Upland Cotton,
WT/DS267/AB/R, adopted 21 March 2005
U.S. – Upland Cotton
Panel Report, United States – Subsidies on Upland Cotton, WT/DS267/R,
and Corr.1, adopted 21 March 2005, modi fied by Appellate Body Report,
WT/DS/267/AB/R

TABLE OF EXHIBITS

Expected Upland Cotton Yields Exhibit Bra-688
Freedom of Information Act Rejection Letter Exhibit Bra-689
Crop Losses and Profits 2002-2005 Exhibit Bra-690
Average January to March Price of the December 2007 futures contract Exhibit Bra-691
LIBOR and Prime rates, 1997 to the present Exhibit Bra-692
GSM 102 fees as a percentage of ExIm LCI and MTI fees for GSM 102
transactions involving annual repayment of principal
Exhibit Bra-693
GSM 102 fees as a percentage of ExIm LCI and MTI fees for GSM 102
transactions involving semi-annual repayment of principal
Exhibit Bra-694

A. S
COPE OF THIS PROCEEDING

Questions to both parties

44. The European Communities argues in respect of the preliminary objection raised by the
United States regarding the claims of Brazil relating to export credit guarantees for pig meat and
poultry meat under the GSM 102 programme that "the important issue is the nexus or the degree of
interrelatedness or interdependence between different elements of the measure". (Oral Statement of
the European Communities, para. 6) The European Communities submits in this regard that:

"the Panel should examine the original meas ure at issue and the 'measures taken to
comply', and, with particular reference to the 'elements of the measure' that the
United States argues are outside the Panel's terms of reference, enquire into the extent
to which these are inter related or inter dependent with measures or 'elements of
measures' that the United States accepts are within the Panel's terms of reference".
(Oral Statement of the European Communities, para. 11)
 Do the parties agree with the approach suggested by the European Communities and with the
considerations in paragraph 13 of the Oral Statement of the European Communities?

1. The United States' response addresses whether Brazil's claims regarding the amended
GSM 102 pig meat and poultry meat are properly within the scope of these Article 21.5 proceedings.

2. The first issue for the compliance Panel in assessing the scope of these proceedings is to
identify the measure(s) taken to comply with respect to the DSB's recommendations on the
application of the GSM 102 program.1

3. By way of implementation, the United States modified the guarantee fee schedule of the
GSM 102 program. This is intended to eliminate th e "subsidy" component of the original program.
There is no dispute between the Parties that the am ended GSM 102 program, in particular the revised
guarantee fee schedule, is a "measure taken to comply". The amended GSM 102 program remains the
United States' declared "measure taken to comply" whether or not, as the United States suggests, the
original panel's findings related to specific guarantees issued under the original GSM 102 program for
specific products.2

4. Under Article 21.5, this Pane l is required to examine the declared compliance measure – the
amended GSM 102 program – " in its totality " for "consistency" with the United States' obligations
under the Agreement on Agriculture , because it is a measure taken to comply that is included in
Brazil's panel request.
3 In U.S. – OCTG from Argentina (21.5) , the Appellate Body emphasized that
there are important reasons of principle for requiri ng compliance panels to examine "fully" the WTO-
consistency of compliance measures. These include promoting the prompt settlement of disputes by
avoiding the delay resulting from new proceedings, and "making efficient use of the original panelists
and their relevant experience".
4 The fact that the United States objected to two members of the
original panel hearing this dispute cannot alter th e importance of this last factor in interpreting
Article 21.5 generally.

5. The United States relies on the rulings in EC – Bed Linen (21.5) to suggest that its voluntary
decision to amend the GSM 102 program with resp ect to pig meat and poultry meat is beyond the
scope of Article 21.5 proceedings. Howeve r, this dispute is very different from EC – Bed

1 Appellate Body Report, U.S. – OCTG from Argentina (21.5), para. 142.
2 U.S. 2 April response to question 44, para. 8.
3 Appellate Body Report, U.S. – OCTG from Argentina (21.5), para. 146 (emphasis in original).
4 Appellate Body Report, U.S. – OCTG from Argentina (21.5), para. 151.

Linen (21.5). In that dispute, the EC took a single measure to comply with its WTO obligations
(Regulation 1644/2001). Thereafter, it adopted tw o formally separate and unrelated measures
(Regulations 160/2002 and 696/2002) that, while addressing substantive issues similar to those raised
in the original proceedings in EC – Bed Linen , related to imports from other countries that were not
part of the WTO proceedings. The panel found that these two separate measures
(Regulations 160/2002 and 696/2002) were not measures taken to comply, because they dealt with
imports unconnected to the original WTO dispute.

6. In contrast, in this dispute, with respect to export credit guarantees, Brazil challenges the
application of a single measure – the amended GSM 102 program – which the Parties agree is a
measure taken to comply. The United States did not ta ke a measure to comply that relates solely to
GSM 102 ECGs for unscheduled products and rice, and separately adopt an unrelated measure
relating solely to GSM 102 ECGs for pig meat, pou ltry meat and other scheduled products other than
rice. Rather, the United States adopted a single measure taken to comply – the amended GSM 102
program – which has a single set of provisions that apply in exactly the same way to all eligible
products.

7. The United States appears to argue that the Panel should parse the single compliance measure
into components that relate to pig meat and pou ltry meat, and other components. The components
relating to pig meat and poultry meat would, unde r the United States' approach, be excluded from
these proceedings.

8. In U.S. – OCTG from Argentina (21.5) , the Appellate Body held that, where the challenged
components of a compliance measure are not "separable", but "integral parts" of that measure, the
measure must be examined "in its totality".
 5 In this dispute, there are no "separable" provisions of the
amended GSM 102 program that apply to pig meat and poultry meat, but not to other products.
Instead, the provisions of the program, in particul ar the revised fee schedule on the basis of which
"benefits" are conferred, constitute an integrated p ackage that applies to all eligible products in
exactly the same way. There is, therefore, no basi s for dividing the measure taken to comply into
different components.

9. Where the challenged components of a complian ce measure are integral parts of the measure,
the Appellate Body also found it "difficult to concei ve" how two different pane ls (the first composed
under Article 21.5, and the second in entirely new pro ceedings) could review inseparable elements of
a single measure.
6 As a result, the Appellate Body held that the compliance panel must examine the
integrated compliance measure "in its totality". In this dispute, Brazil challenges the revised
GSM 102 fee schedule, which is an integrated sche dule that does not distinguish between products.
In Brazil's view, institutional efficiency and consid erations of legal certainty require that a single
panel assess this schedule "in its totality".

10. The United States also argues that, in revisi ng the guarantee fee schedule, it was not taking
action with respect to DSB recommendations regarding pig meat and poultry meat.
7 The panel in U.S.
– Gambling (21.5) also recently ruled that measures cannot be excluded from the scope of compliance
proceedings "due to the purpose for which they have been taken". 8 In U.S. – Softwood Lumber IV
(21.5), the Appellate Body also found the "first assessment review" to be a "measure taken to comply"
even though the United States Department of Commerce did not adopt it "with the intention of
complying with the DSB's recommendations and rulings." 9 It is, therefore, irrelevant whether the
United States intended to implement the DSB's recommendations with respect to pig meat and poultry

5 Appellate Body Report, U.S. – OCTG from Argentina (21.5), paras. 146 and 148.
6 Appellate Body Report, U.S. – OCTG from Argentina (21.5), paras. 151.
7 U.S. 2 April response to question 44, para. 18.
8 Panel Report, U.S. – Gambling (21.5), para. 6.24 (emphasis in original).
9 Appellate Body Report, U.S. – Softwood Lumber IV (21.5), paras. 15, 67 and 92.

meat when it adopted the amended GSM 102 pr ogram. The issue is whether the amended
program "in its totality" is "fully" consistent with the covered agreements, including with respect to
the United States' export subsidy commitments for pig meat and poultry meat.

11. The United States also contends that this di spute may relate to specific guarantees issued for
specific products
10, and professes confusion whether Brazil is "challenging" the "GSM 102 program
as such", or "particular guarantees under the GSM 102 program".11

12. The United States' assertion that the measure at issue is only specific guarantees for specific
products, and its feigned confusion concerning Brazil's "challenge", is disingenuous. As the
United States is aware, Brazil's claims under Articles 10.1 of the Agreement on Agriculture involve a
number of elements. One such element is a s howing that the United States is providing "export
subsidies".

13. The original panel found that the original GSM 102 program, without reference to specific
guarantees or specific products, constituted an export s ubsidy under item (j) of the Illustrative List in
Annex I of the SCM Agreement.
12 In these Article 21.5 proceedings, Brazil similarly establishes, in a
number of ways, that the amended GSM 102 program is an export subsidy.

14. First, Brazil has demonstrated that the amended GSM 102 program constitutes an export
subsidy under item (j). Nothing about this showing is product-specific.

15. Second, Brazil has demonstrated that according to official, normative statements by the U.S.
government in the GSM 102 regulations, FAS publica tions and FAS' self-as sessment of the program,
the program always offers export-contingent fina ncial contributions that confer "benefits" on
recipients. Nothing about this showing is product-specific.

16. Third, Brazil has demonstrated that under the amended GSM 102 fee schedule, GSM 102
ECGs will necessarily constitute export-contingent fi nancial contributions that confer "benefits" on
recipients. With its ExIm Bank comparison exerci se, Brazil has provided exhaustive proof of this,
demonstrating methodically that on a country-by- country, tenor-by-tenor basis, GSM 102 ECGs
issued under the amended GSM 102 fee schedule are export subsidies.
13 As a practical matter, this
amounts to a showing that the amended GSM 102 progra m is an export subsidy itself. Nothing about
this showing is product-specific.

17. Turning to another element of Brazil's clai ms, Brazil has demonstrated, as in the original
proceedings, that the United States has "applied" the export subsidy in a manner that results in
circumvention of U.S. export subsidy commitment s, within the meaning of Article 10.1 of the
Agreement on Agriculture. The "application" of the GSM 102 program that results in circumvention
is, as it must be, established with respect to specific scheduled products (as well as with respect to the
category of unscheduled products). In assessing whet her the program is "applied" in a manner that
circumvents export subsidy commitments, the orig inal panel considered evidence relating to the
cumulative level of the guarantees is sued for the specific products that were the subject of claims.
However, the individual guarantees issued under the program did not thereby become the export
subsidies at issue; nor do they become the export subsidies at issue in these proceedings.

10 U.S. 2 April response to questions 44 and 46, paras. 12 and 52.
11 U.S. 2 April response to question 97, paras. 224-225.
12 Panel Report, U.S. – Upland Cotton, para. 7.869.
13 In comments on Question 98, Brazil shows that the amended GSM 102 program is an export subsidy
by comparison with ExIm Bank products, even taking account of the differi ng interest rate coverage of the
products. In its 2 April response to question 100, Braz il has also demonstrated that this same evidence proves
that GSM 102 ECGs lower the "total cost of funds" in GSM 102-supported transactions.

18. In any event, even if the individual GS M 102 guarantees issued for specific products are the
export subsidies at issue in these compliance proceedi ngs, all of those guarantees – for rice, pig meat
and poultry meat, and all unscheduled products – ha ve a sufficient nexus to the amended GSM 102
program, the declared compliance measure, that they are part of the compliance measures for
purposes of whether the program is "applied" consistently with Article 10.1.

19. In this regard, Brazil notes that it is the Unite d States that has suggested that the individual
guarantees are the challenged "measures taken to comply". 14 It appears to accept that these new
individual guarantees could, in theory, be "mea sures taken to comply" with DSB recommendations.
Yet, when it comes to marketing loan and counter-cyclical payments, the United States vehemently
objects that new payments cannot be "measures taken to comply" with DSB recommendations
concerning earlier payments under the same programs. Brazil argues below that the correct approach
is to recognize – as the United States does for in dividual guarantees – that the new payments are
sufficiently closely connected to the DSB's recommendations regarding the old payments to be
"measures taken to comply".15

20. Having identified the amende d GSM 102 program as a declared "measure taken to comply", a
second question arises for the compliance Panel with r espect to the scope of the claims that can be
made regarding that measure. Brazil's claims concern the application of the program to
three scheduled agricultural products (rice, pig me at and poultry meat) and unscheduled agricultural
products.

21. The United States' argument is that the DSB's recommendations did not impose any
implementation obligations with respect to pig m eat and poultry meat. As a result, it says, even
though its compliance measure applies to these products, no claims can be made regarding them. This
position incorrectly assumes that Article 21.5 proceedings are limited to examining whether the
implementing Member has eliminated the WT O-inconsistencies identified in the DSB's
recommendations.

22. According to the text of Article 21.5, a compliance panel is the appropriate forum for
resolving any " disagreement" relating to the general " consistency with a covered agreement " of a
"measure taken to comply". Thus, in Canada – Aircraft (21.5) , the Appellate Body expressly
"disagreed" with the panel's view that Article 21.5 proceedings are confined to examining whether the
implementing Member " has implemented the DSB recommendation ".
16 I n U.S. – OCTG from
Argentina (21.5) , citing Canada – Aircraft (21.5) , the Appellate Body reiterated that a compliance
panel must "examine fully the ' consistency with a covered agreement of the measures taken to
comply', as required by [Article 21.5]". 17 As noted, it also affirmed that a compliance panel must
examine the compliance measure "in its totality".18

23. As a result, the precise scope of the DSB's recommendations does not determine the scope of
Article 21.5 proceedings. Moreover, Article 21.5 proceedings can, therefore, involve claims and
arguments regarding the WTO-"consistency" of a measu re taken to comply, even though these claims
were not the subject of DSB's recommendations.
19

24. In effect, the United States asks the Panel, in essence, to reverse the Appellate Body's
interpretation because it asserts that this Panel can – indeed, must – examine exclusively whether the
measure taken to comply has eliminated the WTO-inconsistencies established in the DSB's

14 U.S. 2 April response to question 97, paras. 224-225.
15 See Brazil's comments on U.S. responses to questions 45, 47 and 48, below.
16 Appellate Body Report, Canada – Aircraft (21.5), para. 40.
17 Appellate Body Report, U.S. – OCTG from Argentina (21.5), paras. 151.
18 Appellate Body Report, U.S. – OCTG from Argentina (21.5), paras. 146.
19 Appellate Body Report, Canada – Aircraft (21.5), para. 41.

recommendations. The Panel should reject this argument, and follow the wording of Article 21.5.
The Panel may, therefore, examine whether the application of the amended GSM 102 program is
"consistent" with the United States' obligations under Article 10.1 of the Agreement on Agriculture.

25. There remain, of course, limitations on the clai ms that can be made regarding a measure taken
to comply. In particular, certain panels have ruled that no new claims can be made with respect to
unchanged elements of the original measure; equally, the same claim cannot be made with respect to
unchanged elements of the measure if that claim was rejected in the original proceedings. As Brazil
has previously explained, neith er of these limitations apply.
20 Brazil's claims regarding pig meat and
poultry meat concern a new element of the measure taken to comply , namely the revised guarantee fee
schedule in the amended GSM 102 program. There are no limits on the claims (much less the
arguments) that can be made with respect to a new element of the compliance measure.

45. Could the parties comment on the observati ons made by the Eu ropean Communities in
paras. 15-24 of its Oral Statement on the issue of whether the marketing loan and counter-cyclical
payment programmes are within the scope of the Panel's proceeding?

26. The United States' response to question 45 cl ouds the issue it raised in its preliminary
objection. Brazil's request for the establishment of a panel identifies two measures that it claims
cause adverse effects under Articles 5(c), 6.3(c) and 6.3(d) of the SCM Agreement. These measures
are: (1) the marketing loan and counter-cycli cal payment programs and (2) payments made under
these programs.21 The key issue is whether these two categories of measures are properly within the
scope of compliance proceedings. Brazil addresses these measures in turn below.

 (i) Subsidy Programs

27. In U.S. – OCTG from Argentina (21.5) , the Appellate Body recalled that determining the
scope of "measures taken to comply", or the ab sence thereof, involves an examination of the
recommendations and rulings contained in the original panel report, which is adopted by the Dispute
Settlement Body ("DSB").
22

28. With respect to the subsidy programs, the issue that divides the Parties is whether the original
panel's findings of "present" serious prejudice incl uded findings regarding the programs themselves.
Brazil has presented a straightforward reading of the or iginal panel report that logically ties together:
(1) the panel's identification of the measures at issu e in the "present" serious prejudice section; (2) its
reasoning regarding the "effect" of those measur es, which included a lengthy exposition of the
"effects" of the programs; (3) its reasoning for dec lining to examine Brazil's cl aims of threatened of
serious prejudice; (4) its reasoning for declining to examine Brazil's claims of "as such" violations;
and (5) its description of the implementation action that the United States was obliged to take.

29. Brazil has addressed these factors in detail in earlier submissions, and will not repeat its
arguments.
23 All of these factors point in one direction: the original panel's findings of "present"
serious prejudice included the subsidy programs, as well as the payments mandated by these
programs. In these circumstances, the EC's arguments on the nexus between the programs and the
payments, and the United States' criticism of those ar guments, are moot because they are premised on
the assumption that the original panel made no findings regarding the programs.

20 Brazil's 26 February response to question 6, paras. 32-60.
21 WT/DS267/30, paras. 13 and 17.
22 Appellate Body Report, U.S. – OCTG from Argentina (21.5), para. 142, circulated 12 April 2007, not
yet adopted.
23 See, in particular , Brazil's 26 February response to question 11 and its 2 April response to
question 45.

30. In rebutting Brazil's reading of the original panel report, the United States relies heavily on
fragments of Brazil's arguments in the original pr oceedings in an attempt to demonstrate that the
original panel's findings did not include the programs. However, as the Appellate Body held in U.S. –
OCTG from Argentina (21.5) , the DSB's recommendations and ruli ngs are framed in terms of the
findings made by the original panel and the Appellate Body, and not by the complainant's
arguments.24 The compliance Panel must, therefore, fo cus on the original panel's findings, and the
reasoning explaining those findings.

31. The United States accuses Brazil of "grasp[ing] at isolated statements in the original panel
report".
25 However, it is the United States that relies on isolated phrases, and misreads the original
panel report. The United States attaches considerab le importance to the alle ged temporal limitation
on the scope of the measures. Yet, it asserts no basi s in the original panel report for its conclusion
that the original panel's findings were limited to payments made in MY 1999-MY 2002.

32. The original panel's general description of th e measures at issue included the statement that
"[t]he programmes and legislation identified [in Brazil's request for establishment of a panel] include
payments made before the date of es tablishment of the Panel, and those made subsequently ."
26 This
statement reveals that the panel saw a necessary link between the programs and payments because it
stated expressly that the programs " include payments". Further, the relevant "payments" were found
to be both those made before and those to be made after the date of establishment.

33. The United States also contends that a footnote in the Peace Clause section of the report
decisively addresses the scope of the measures addr essed in the separate "present" serious prejudice
section.27 This is absurd, because the original panel included a separate statement of the measures at
issue in each section of the report. The footnote in the Peace Clause section, by its own terms, does
not address the other sections of the report. It cannot, therefore, alter the scope of the measures
examined in the "present" serious prejudice section.

34. Instead, in that section, in paragraph 7.1107 of the report, the original panel stated that serious
prejudice measures included the "legislative and regulatory provisions", in addition to the payments.
28
The United States' explanation of this st atement is that the reference to the " legislative and regulatory
provisions" merely captures the " application" of those provisions.29 This is a distortion of the panel's
words. As Brazil has noted, the original panel re fers to the "provisions" as measures, without any
qualification or other hint that the "provisions" are not, in fact, measures – as the United States now
argues.
30 Further, it would have been utterly redu ndant for the original panel to identify the
"application" of the "provisions" separately fro m the listed payments, because the payments are the
"application" of the provisions.

35. The United States also suggests that it is not "s urprising" that the original panel considered
the operation of the subsidy programs in examining the effects of payments. 31 However, the
United States overlooks that, in examining the effe cts of the three programs, the panel referred to
them as the "three measures" and the "subsidies in question".32

24 Appellate Body Report, U.S. – OCTG from Argentina (21.5), para. 142, circulated 12 April 2007, not
yet adopted.
26 Panel Report, U.S. – Upland Cotton, para. 7.187.
28 Panel Report, U.S. – Upland Cotton, paras, 7.1107.
30 Brazil's 2 April response to question 44, para. 13.
32 Brazil's 2 April response to question 44, paras. 14 to 16.

36. Thus, once again, the original panel stated th at the programs themselves were the "measures";
and it examined "their effects" in a particular reference period, finding that these effects included
"present" serious prejudice to the interests of Br azil. It concluded that the United States was " obliged

to take action concerning its present statutory and regulatory framework as a result of our 'present'
serious prejudice finding."33

37. In its 2 April responses, the United States also suggests that, if the original panel's findings
included the programs, this would erode the distin ction between "as such" and "as applied" findings. 34
This is incorrect. The original panel found that an examination of the " effects" of the subsidies
(programs and payments) " cannot be conducted in the abstract ".35 The original panel, therefore,
examined the effects of the subsidies (pr ograms and payments), in the marketplace, in a defined
reference period developed by the panel. Accordingly, the original panel did not find that the
programs "as such" cause adverse effects at all times. Brazil has demonstrated, in these proceedings,
that subsequent to the implementation period, th e unchanged programs and new mandatory payments
continue to cause adverse effects, as shown by the analysis of their effects in a different reference
period.

38. Finally, the United States has failed to offe r any explanation whatsoever why the original
panel would have decided not to rule upon Brazil's threat claims, and its "as such" claims, if the
"present" serious prejudice claims were limited to payments last made in MY 2002 – more than a year
before the original panel issued its ruling. If the United States were correct, the original panel chose
to rule exclusively on past payments that it knew might no longer produce "effects" in the marketplace
because, by the time of its ruling, these payments had been superseded by payments made in
MY 2003 and MY 2004; and it simultaneously chose not to rule on subsidy programs and future
payments that it knew would still be producing "effects" during the implementation period.

39. It is simply not credible to believe that the original panel would have decided not to rule on
the threat and "as such" claims in these circumstances. Nothing suggests that the original panel
decided to undermine the utility of its own work in th is way. To the contrary, the original panel was
highly sensitive to the importance of implementation of its rulings, and decided not to rule on the
threat and "as such" claims because "the United States is obliged
 to take action concerning its present
statutory and regulatory framework as a result of our 'present' serious prejudice finding."36

40. In sum, the marketing loan and counter-cyclical subsidy programs, including payments
mandated under these programs, are properly within the compliance Panel's terms of reference
because the original panel's "present" serious prejudice findings included these programs.

 (ii) Payments in MY 2005 and Thereafter

41. The second category of measures that Brazil ch allenges in these proceedings covers payments
made under the marketing loan and counter-cyclical programs. Brazil's arguments have focused on
the adverse effects caused by these measures in MY 2005 and thereafter. Although the United States
disputes that the original panel made findings on the subsidy programs, it accepts that, at a minimum,
the panel made findings regarding payments made in MY 1999 to 2002. Even on the assumption that
the United States is correct (quod non), Brazil demonstrates in this section, as it did in its 26 February
responses
37, that the marketing loan and counter-cycli cal payments made in MY 2005 and thereafter
must be regarded as (WTO-inconsistent) "measures taken to comply" because of their extremely close
connection to the payments found to be causing serious prejudice in the original proceedings. These

33 Panel Report, U.S. – Upland Cotton, para. 7.1501.
34 U.S. 2 April response to question 45, paras. 27 ff.
35 Panel Report, U.S. – Upland Cotton, para. 7.1198.
36 Panel Report, U.S. – Upland Cotton, para. 7.1501.
37 Brazil's 26 February response to question 15, paras. 145-150.

arguments are, obviously, made without prejudice to Brazil's principal argument that the original
panel found that the subsidy programs, including the payments mandated by the programs, were
found to be WTO-inconsistent.

42. In U.S. – OCTG from Argentina (21.5) , the Appellate Body last week reiterated that it is for a
compliance panel to determine whether the measures listed in a panel request are "measures taken to
comply".
38 As noted above, citing the Appellate Body ruling in U.S. – Softwood Lumber IV (21.5) ,
the panel in U.S. – Gambling (21.5) also recently ruled that measures cannot be excluded from the
scope of compliance proceedings "due to the purpose for which they have been taken". 39 I t i s ,
therefore, irrelevant whether the United States gr anted the new marketing loan and counter-cyclical
payments for the specific purpose of complying with the DSB's recommendations.

43. Rather, as the United States accepts, the de termination whether the new payments are
"measures taken to comply" depends on the closene ss of their relationship (" interrelatedness") to the
DSB's recommendations.
40 Because the DSB's recommendations are "directed" at the measures
originally found to be WTO-inconsistent, the co mpliance Panel must assess the relationship between
the alleged measures taken to comply and the original measures.41

44. In U.S. – Softwood Lumber IV (21.5) , the Appellate Body also held that a compliance panel
must examine the alleged measures taken to comply "in their full context , including how such
measures are introduced into, and how they function within, the particular system of the
implementing Member."
42 Further, in its 2 April responses, the United States acknowledges that, in
U.S. – Softwood Lumber IV (21.5) , Australia – Leather (21.5) and EC – Bed Linen (21.5) , measures
that "undid" or " undermined" the implementing Member's compliance efforts were found to have a
sufficiently close connection to the DSB's recommendations to be "measures taken to comply".43

45. In view of these considerations, the new pa yments are (WTO-inconsistent) "measures taken
to comply" with the DSB's recommendations regard ing the original payments. These payments and
the new payments collectively constitute an unbroken stream of identical subsidies. As Brazil has
noted, the payments subject to the DSB's recomm endations and the payments subject to these
proceedings are mandated by the very same subsidy programs under the FSRI Act of 2002; they are
made to the same recipients; they support the same crop; and they are granted on the same terms and
conditions.
44 Thus, under U.S. domestic law, the or iginal and the new payments are all " introduced",
and "function", in precisely the same way.45

46. Significantly, the new payments "undermi ne" – indeed, eviscerate – the United States'
compliance efforts. Assuming that the original panel confined its findings to payments ( quod non),
the United States came under an obligation, on 21 March 2005, to take steps to remove the adverse
effects of, at a minimum, the marketing loan a nd counter-cyclical payments made in MY 1999 to
MY 2002, or to withdraw these payments.

38 Appellate Body Report, U.S. – OCTG from Argentina (21.5), para. 140.
39 Panel Report, U.S. – Gambling (21 .5), para. 6.24 (emphasis in original). Appellate Body Report,
U.S. – Softwood Lumber IV (21 .5), paras. 15, 67 and 92. The Appellate Body found the "first assessment
review" to be a "measure taken to co mply" even though the United States Department of Commerce did not
adopt it "with the intention of complying with the DSB's recommendations and rulings."
40 Appellate Body Report, U.S. – OCTG from Argentina (21 .5), para. 142 and Appellate Body Report,
U.S. – Softwood Lumber IV (21.5), para. 68. See United States 2 April response to question 44, paras. 8 and 9.
41 Appellate Body Report, U.S. – Softwood Lumber IV (21.5), para. 68.
42 Appellate Body Report, U.S. – Softwood Lumber IV (21.5), para. 67 (emphasis added).
43 U.S. 2 April response to question 44, footnotes 5 and 22, and para. 17.
44 Brazil's 26 February response to question 15, para. 147.
45 Appellate Body Report, U.S. – Softwood Lumber IV (21.5), para. 67 (emphasis added).

47. Yet, instead of taking any action of that natu re, the United States simply continued to provide
the very same marketing loan and counter-cyclical payments throughout MY 2005, and thereafter.
Thus, rather than taking appropriate implementa tion action, the United States simply substituted the
WTO-inconsistent payments with new payments th at, given the annual nature of both the payments
and the crops, superseded the adverse effects of the original payments. Thus, the effects of the
original payments have simply been replaced by adverse effects caused by the new payments. The
United States thereby makes effective implementation under Article 7.8 impossible. As the Appellate
Body held in U.S. – FSC (21.5 II) , a Member fails to implement when it "replaces" one WTO-
inconsistent subsidy with another.
46
48. The United States' sole defense to this line of argument is that Brazil attempts to "add" to the
original measures found to be WTO-inconsistent by challenging the new payments, which were not
found to be WTO-inconsistent.47 Brazil is not seeking to "add" anything to the original ruling. Brazil
accepts that the new payments were not part of the DSB's recommendations because the original
panel exercised judicial economy with respect to the threat claims that would have included the new
payments when they were still possible future payments. In U.S. – OCTG from Argentina (21.5) , the
Appellate Body held that complaining Members are not prevented from making claims in Article 21.5
proceedings that were the subject of judicial economy in the original proceedings.
48 I n s h o r t ,
complaining Members are not prejudiced in complian ce proceedings by the original panel's decision
to exercise judicial economy.

49. Thus, in the circumstances of this dispute, where possible future payments were challenged in
an original threat claim that was subject to judicial economy, nothing in the DSU prevents those
payments from being "measures taken to comply" after they are actually made , provided that they
have a sufficiently close connection to the DSB's recommendations.

50. Finally, the United States incorrectly rejects the view that WTO dispute settlement becomes a
"moving target", and is reduced to a "Groundh og Day", if the U.S. approach is accepted.
49 T h e
United States observes that the Parties are "bound" by the "outcome" of the original dispute. 50 Yet,
the United States believes that it can evade the "out come" of the original panel's "present" serious
prejudice findings regarding payments simply by making more payments. After every round of
payments, it says that the complaining Member could contest the new payments solely in new
proceedings. However, on this view, the compla ining Member could never take retaliatory action
under Article 22 of the DSU for an endless stream of identical recurring payments because there
would never be any compliance measures. As a r esult, the WTO disciplines regarding the "present"
effects of the most obvious form of subsidies – cash payments – would be reduced to inutility.

 (iii) Conclusion

51. In conclusion, Brazil argues that the marketing loan and counter-cyclical subsidy programs
are properly within the panel's terms of reference because the original panel's rulings, and the DSB's
recommendations, regarding "present" serious prejudice include these programs.

52. In addition, Brazil argues that subsidy pa yments made in MY 2005, and thereafter, are
"measures taken to comply" with the DSB's reco mmendations regarding payments made in MY 1999
to MY 2002 because of the extremely close connec tion between these new payments and the DSB's
recommendations. The new payments cause "present" serious prejudice.

46 Appellate Body Report, U.S. – FSC (21.5 II), para. 84.
47 U.S. 16 March comments, para. 100; and U.S. 2 April response to question 47, para. 53.
48 Appellate Body Report, U.S. – OCTG from Argentina (21.5), para. 148.
49 U.S. 2 April response to question 48, para. 54.
50 U.S. 16 March comments, para. 101; U.S. 2 April response to question 48, paras. 54 ff.

46. In its Oral Statement, the European Communities characterizes Brazil's and the
United States' respective approaches as the "measure m odel" and the "element of the measure model"
(Oral Statement of the European Communities, para. 7). Please discuss whether you agree with this
characterization and whether, in your view, the applic ation of a measure alleged to be a subsidy to
different agricultural products relates to a "measure" (or elements thereof) or if, rather it relates to a
"claim". Would it be permissible for a complia nce panel to examine a "claim" that relates to
subsidies (granted as part of measures taken to comply) provided to agricultural products to which
the "initial measure" did not apply?
53. Brazil's comments on the United States' answer to Question 44 also address relevant aspects
of the United States' answer to this question. Brazil also notes that the United States acknowledges
that the "group of agricultural products" eligible to receive ECGs has not been altered since the
original proceedings.51

54. The United States professes "difficult[y]" in seeing why a Member would comply with the
DSB's recommendations relating to subsidies provi ded to one product by providing subsidies in
respect of other products.
52 There are very straightforward reasons why a Member may wish to adopt
precisely this course of action. Subsidies are, generally, provided to benefit producers, not products.
A Member may very well attempt to maintain the leve l of prior support afforded to a particular group
of producers by altering the group of products eligib le to receive subsidies. In that event, a
"disagreement" may arise as to whether the subs idies granted to different products under the
compliance measure are consistent with the WTO covered agreements. The implementing Member
could argue that the DSB's recommendations did not require it to take action with respect to the newly
eligible products and, in consequen ce, this element of the measure is not a measure taken to comply.
Yet, this is a good example of why the Appellate Body confirmed in U.S. – OCTG from
Argentina (21.5) that Article 21.5 disputes extend to assessi ng "fully" the "consistency with a covered
agreement" of a measure taken to comply " in its totality ", and are not limited by the terms of the
DSB's recommendations.53

Questions to the United States

47. The United States has raised a preliminary objection regarding Brazil's claims of (threat of)
serious prejudice in respect of the marketing loan and counter-cyclical payment programmes. Is the
Panel's understanding correct that, apart from this preliminary objection regarding programmes, the
United States also considers that the issue of whether payments made under the marketing loan and
counter-cyclical payment programme after 21 September 2005 cause serious prejudice to the interests
of Brazil is not properly within the scope of this proceeding?

55. Brazil refers the compliance Panel to its comments on the U.S. response to question 45,
above.

48. How does the United States address the argument of Brazil that "[i]f the United States were
to prevail on its view that subsequent mandat ory and price-contingent marketing loan and CCP
payments are not properly before this Panel, the grant of annual recurring subsidies becomes
'a moving target that escape from [the WTO subsid y] disciplines' "? (Closing Statement of Brazil,
para. 4)

56. Brazil refers the compliance Panel to its comments on the U.S. response to question 45,
above.

51 U.S. 2 April response to question 46, para. 52.
52 U.S. 2 April response to question 46, para. 51.
53 Appellate Body Report, U.S. – OCTG from Argentina (21 .5), paras. 146 and 151 (emphasis in
original).

49. Could the United States comment on the argument of the European Communities that the text
of Article 21.5 of the DSU does not limit the temporal scope of that provision in the manner suggested
by the United States? (para. 29 of the Oral Statement of the European Communities)

57. Brazil makes claims regarding the non- existence of compliance measures between
21 September 2005, the end of the implem entation period under Article 7.9 of the SCM Agreement,
and 1 August 2006, when the United States adopted certain compliance measur es with respect to the
Step 2 program. The United States response is that "Brazil has not identified any textual basis that
requires the Panel to make findings regarding compliance as of the end of the six-month period set out
in Article 7.9 of the SCM Agreement rather than as of the date of panel establishment pursuant to
Article 21.5 of the DSU."
54

58. This argument is absurd. Article 7.9 of the SCM Agreement provides a clear textual basis for
Brazil's claim. The provision states:

In the event the Member has not taken appropriate steps to remove the adverse effects
of the subsidy or withdraw the subsidy within six months from the date when the DSB
adopts the panel report or the Appellate Body report, and in the absence of agreement
on compensation, the DSB shall grant authorization to the complaining Member to
take countermeasures , commensurate with the degree and nature of the adverse
effects determined to exist, unless the DSB decides by consensus to reject the request.
59. The provision sets forth that the DSB "s hall", by negative consensus, authorize
"countermeasures" when ("in the event") the implementing Member fails to implement "within
six months" of the date of adoption. Thus, accord ing to the treaty text, a right to "countermeasures"
arises on that date, subject only to negative con sensus. By pursuing its claim regarding the non-
existence of measures on 21 September 2005, Brazil 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.

60. Brazil also notes that additional textual suppor t for its position is found in the DSU. Although
Articles 7.8 and 7.9 are "special or additional ru les and procedures" under Article 1.2 of the DSU,
they do not supplant the DSU. Instead, the DSU conti nues to apply to the extent that the rules in the
DSU do not conflict with the special or additional rules.
55

61. Articles 3.7 and 21.3 of the DSU indicate that "prompt compliance" with the DSB's
recommendation, in principle, implies "immediate" compliance.
56 If "immediate" compliance is not
"practicable", Article 21.3 envisages, as an exceptional matter, a grace period for implementation.
Accordingly, under these provisions, the implementin g Member must have complied with the DSB's
recommendations, at the latest, by the end of the im plementation period. None of these rules in the
DSU conflicts with Article 7.9 of the SCM Agreement.

62. Under Article XVI:4 of the WTO Agreement, the United States was bound to comply with its
WTO obligations in the SCM Agreement and the DSU by the end of the six month implementation
period. Under Article 21.5 of the DSU, as part of the " continuum of events "
57 from the original

54 U.S. 2 April response to question 49, para. 59.
55 Appellate Body Report, Guatemala – Cement I, para. 65.
56 See Award of the Arbitrator, Chile. – Alcoholic Beverages, para. 38; Award of the Arbitrator, U.S. –
Byrd Amendment, para. 40; Award of the Arbitrator, U.S. – 1916 Act, para. 30.
57 Appellate Body Report, U.S. – Softwood Lumber IV (21 .5), para. 103 (emphasis added) citing
Appellate Body Report, Mexico – Corn Syrup (21 .5), para. 121. See Brazil's First Written Submission,
para. 28.

proceedings, a complaining Member is entitled to obtain a ruling, for purposes of its compensation
rights in the dispute, that the implementing Member failed to implement by the required date.

63. Besides being supported by the text of th e covered agreements, Brazil's position is fully
supported by the ruling of the compliance panel in Australia – Salmon (21.5) , which ruled that
Australia had failed to take appropriate complia nce measures with effect from the end of the
implementation period.
58 It stated that "Australia was under an obligation to comply with DSB
recommendations and rulings by the end of the reasonable period of time. If it did not do so,
Australia could face suspension of concessions or other obligations under Article 22.6 of the DSU."59
64. Brazil's argument does not preclude a Member from coming into compliance with its WTO
obligations after the end of the implementation period. Nor does it exclude measures from the scope
of compliance proceedings simply because they we re not adopted during the implementation period.
However, if the implementing Member chooses to implement later than required by the
SCM Agreement and the DSU, the complaining Member is entitled to a finding by a compliance panel
to that effect, and to seek "countermeasures" for the delay.

65. The United States relies on two panel reports in which the panel ruled that the appropriate
date for declaring the non-existence of compliance measures is the date of the compliance panel's
establishment. However, these panels failed to consider the significance of this date for the
implementing Member's compensation rights. The United States also refers to the fact that the parties
in those disputes entered into sequencing agreemen ts, like the agreement in this dispute, which
address procedures under Articles 21 and 22 of the DSU. However, these agreements do not diminish
the substance of complaining Member's rights under the covered agreements. In particular, the
sequencing agreement in this dispute does not, in any way, diminish Brazil's right to seek
authorization for countermeasures under Article 7.9 of the SCM Agreement for the United States'
failure to implement by 21 September 2005.
60

B. C LAIMS OF BRAZIL REGARDING PRESENT SERIOUS PREJUDICE

1. Significant price suppression - Article 6.3(c) of the SCM Agreement

Questions to both parties

51. The parties disagree on whether or not th e marketing loan and counter-cyclical payments
have more than minimal effects on production of upland cotton. Could each party explain how its
approach to the analysis of the impact of these pay ments on production of upl and cotton is supported
by the provisions of Articles 5 and 6 of the SCM Agreement and by any other relevant WTO
provisions?

66. At the outset, Brazil notes that, in response to a strictly legal question, the United States
embarks on a lengthy summary of its various factua l arguments regarding a lleged "expectations" of
U.S. farmers and the alleged absence of anything more than minimal effects from the billions of
dollars of marketing loans and counter-cyclical subs idies provided to U.S. upland cotton producers.
These U.S. arguments would certainly come as a su rprise to the National Cotton Council, one of
whose primary functions is to lobby the U.S. C ongress for huge marketing loan and counter-cyclical
subsidies in order to maintain the commerc ial viability of U.S. upland cotton production.
61 These

58 Brazil's 26 February response to question 21, paras. 154 ff.
59 Panel Report, Australia – Salmon (21.5), para. 7.30. See, also, para. 8.1(i) of the panel's findings and
conclusions (underlining added).
60 WT/DS267/29.
61 Panel Report, U.S. – Upland Cotton, footnote 1471 referring to Exhibit Bra-109 (Testimony (Full) of
Robert McLendon, Chairman, NCC Exec utive Committee, Before the Hous e Agricultural Committee. National

arguments would also surprise the typical U.S. co tton farmer, embodied by Mr. Stephen Houston, Sr.
who was recently quoted as stating that "[market] prices don't have anything to do with what we're
doing … [w]e're just looking at the government payments."
62 And these arguments certainly would
have surprised the original panel which, when confronted with the same U.S. arguments, found that
there was "no doubt that marketing loan paymen ts stimulate production and exports and result in
lower world market prices." 63 Finally, these arguments would surprise the 58 U.S. Senators that
recently wrote to President Bush expressing concerns about reductions in U.S. agricultural subsidies.
The Senators states that a deal in the Doha Deve lopment Agenda would "reduce[] net farm income
through steep cuts in farm programs," indicating their belief that government subsidies play a
fundamental role in allowing U.S. farmers, in cluding U.S. upland cotton farmers, to generate
sufficient profits from growing crops.64

67. Brazil has responded to these argument s in numerous previous submissions.
65 Therefore,
Brazil will not repeat the overwhelming evidence dem onstrating that U.S. upland cotton farmers have
received, do receive, and expect to receive huge marketing loan and counter-cyclical subsidies
supporting the production of upland cotton. Brazil's arguments and evidence demonstrating that, but
for marketing loan and counter-cyclical subsidies, U.S. upland cotton acreage, production, exports and
stocks would be much lower and world market prices for upland cotton would be much higher are
summarized in Brazil's answer to question 6966 and found throughout Brazil's many submissions.

68. Brazil explained that the most basic facts concerning the U.S. subsidies at issue and the
conditions of competition in the world market for upland cotton suffice to establish a causal link
between the subsidies and significant price suppression in the world market.
67 These facts are as
follows: It is undisputed that U.S. upland co tton is "like" Brazilian upland cotton as well as the
upland cotton produced by many other countries. 68 It is undisputed that there is a closely integrated
world market for upland cotton and that heavily s ubsidized U.S. upland cotton competes directly in
that world market with upland cotton from Br azilian and other third country producers. 69 I t i s
undisputed that the price of U.S. upland cotton, like that of other upland cotton producers, is reflected
in a world market price, the A-Index.
70 Finally, it is undisputed that the United States maintains a 40
percent world export market share and accounts for 20 percent of total world production resulting in a
substantial proportionate influence on the world market price of upland cotton.71

69. These undisputed facts, combined with the fact that massive price-contingent U.S. marketing
loan and counter-cyclical subsidies represent a 40 percent ad valorem subsidization rate over the

Cotton Council (NCC)). See also Exhibit Bra-324 (NCC Chairman's Report by Kenneth Hood, 24 July 2002,
p. 2).
62 Exhibit Bra-563 ("Cotton bailout: How your tax dollars prop up big growers and squeeze the little
guy," Atlanta Journal-Constitution, 1 Oct ober 2006, p. 2, accessed December 2006 at
http://www.ajc.com/search/content/metro/stories/cotton1.html).
63 Panel Report, U.S. – Upland Cotton, para. 7.1291.
64 A letter to the President dated 12 April and signed by 58 U.S. Senators states "We cannot support a
deal that directly reduces net farm income through steep cuts in farm programs in return for minimal market
access gains whose effects on farm gate recei pts is speculative at best," available at
http://conrad.senate.gov/issues/statements/agriculture/070412_WTO_Ag_Letter.pdf.
65 Brazil's First Written Submission, paras 126-150; Brazil's Rebuttal Submission, paras. 101-113,
180-194, 209-231; Brazil's Oral Statement, paras. 63-78.
66 See Brazil's 2 April response to question 69, paras. 90-106.
67 Brazil's 2 April response to question 69, paras. 92-96.
68 Brazil's First Written Submission, Section 7.4.
69 Brazil's First Written Submission, Section 7.4.
70 Brazil's First Written Submission, Section 7.4; Brazil's Oral Statement, para. 148 and Declaration by
Andrew Macdonald, Brazil's First Written Submission, Annex II, para. 18.
71 Exhibit Bra-559 ("Potential Challenges to U.S. Fa rm Subsidies in the WTO: A Brief Overview,"
Congressional Research Service Report for Congress, 25 October 2006, p. 5).

lifetime of the FSRI Act of 2002, alone are sufficient for the complianc e Panel to find that these
subsidies cause significant price suppression in the wo rld market for upland cotton. This is all the
more true in light of the consistent inability of the average U.S. upland cotton producer to cover its
costs of production without these two subsidies.

70. In these comments, Brazil focuses on the general theme of the U.S. response, i.e.,
"expectations" allegedly held by U.S. upland cotton farmers at the time of planting. Brazil agrees that
an analysis of U.S. upland cotton producers' expectat ions, at the time of planting, about market prices
and subsidy revenue is a useful supplement
 to the basic facts identified above. Indeed, Brazil
conducted just such analyses in its First Written Submission 72, Rebuttal Submission 73 and Oral
Statement.74 However Brazil considers that an assessment of the basic facts noted above is sufficient
for the compliance Panel to find that the U.S. ma rketing loan and counter-c yclical subsidies cause
significant price suppression in the world market for upland cotton, in violation of Articles 5(c)
and 6.3(c) of the SCM Agreement.

71. The United States emphasizes that it is "important to look at the way that the marketing loan
and counter-cyclical payment programs actually operate and interact with production decisions."
75
Brazil agrees with this general proposition. U.S. upland cotton farmers, like any other businesses,
function to generate revenue and make a profit. On e of the questions before this compliance Panel is
from what source typical U.S. upland cotton farmers expect to receive revenue sufficient to cover
production costs and generate profits from their busin ess. Do market returns alone provide sufficient
revenue, or are U.S. marketing loan and counter-c yclical subsidies necessary to achieve the current
levels of U.S. upland cotton supply? Both an assessment of actual costs an d returns and expected
costs and returns are relevant in considering these questions.

72. Expectations of U.S. upland cotton farmers, almost all of whom grow on upland cotton base
acres benefiting from upland cotton counter-cyclical payments, are usefully summed up by Figure 8
of Brazil's First Written Submission, showing a consistent high stream of total revenue.
76

72 Brazil's First Written Submission, paras. 126-150.
73 Brazil's Rebuttal Submission, paras. 101-113, 180-194, 209-231.
74 Brazil's Opening Statement, paras. 63-78.
75 U.S. 2 April response to question 51, para. 69 (emphasis in original).
76 Brazil's First Written Submission, Table 8 at para. 133.

Figure 1 – Support to Upland Cotton
77

73. This figure demonstrates the critical impact of marketing loans and counter-cyclical subsidies.
U.S. upland cotton farmers can expect high total revenue even if prices turn out to be low, for instance
due to a collapse of Chinese dema nd or expanded Indian exports. I ndeed total revenue will be high
regardless of whether prices plunge for demand- or supply-related reasons. Every U.S. upland cotton
farmer knows that, year-in and year-out , no matter what happens, he or she will receive a guaranteed
revenue for the upland cotton he or she produces. During the lifetime of the FSRI Act of 2002,
marketing loan and counter-cyclical subsidi es accounted for an average of 40 percent
 of the market
value of upland cotton.

74. The United States now claims that it is "not remarkable" that marketing loans and counter-
cyclical payments have this revenue-stabilizing effect.
78 Yet, labelling these payments as "income
support" and suggesting that this is a normal and expected effect of price-contingent subsidies
disregards the critical role of these subsidies fo r U.S. upland cotton production. Indeed, the U.S.
arguments boil down to the following: the planting decisions of the typical U.S. upland cotton farmer
have no, or at most minimal connection, to the tw o price-contingent subsidies that provide revenue
worth an average of 40 percent of the market revenue of the crop produced. That argument is totally
inconsistent with, to quote the United States, "the way that the marketing loan and counter-cyclical
payment programs actually operate and interact with production decisions."
79

75. Contrary to the U.S. arguments, which attemp t to minimize the revenue-stabilizing effect of
these subsidies
80, Brazil's "expectation" arguments have alwa ys heavily relied on the fact that U.S.
upland cotton farmers know, at the time of planti ng, that they will receive guaranteed and profit-

77 Brazil's First Written Submission, Table 8 at para. 133.
78 U.S. 2 April response to question 53(c), para. 94.
79 U.S. 2 April response to question 51, para. 69.
80 U.S. 2 April response to question 51, para. 71.
cents per pound

0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00
80.00
90.00
MY1999 MY2000 MY2001 MY2002 MY2003 MY2004 MY2005
Market value of production Marketing loan payments MLA/CCP payments
Cottonseed payments PFC/DP payments Crop insurance payments
Market revenue and marketing loan
and counter-cyclical payments
Market revenue

making revenue by virtue of the price-contingent subsidies, no matter how market prices develop in
the months ahead. The Appellate Body recognized this when finding that " although farmers had
expected higher prices in making their planting decisi ons, they were also aware that if actual prices
were ultimately lower, they would be 'insulated' by … marketing loan program payments [and]also
counter-cyclical payments, which were based on a target upland cotton price of 72.4 cents
per pound."81

76. Brazil, of course, does not assert that marke ting loan and counter-cyclical subsidies are the
only consideration for U.S. upland cotton farmers. Ce rtain other factors, such as the current record
high corn prices, will influence the planting decisions of upland cotton farmers. This is because even
the generous U.S. marketing loan and counter-cyc lical subsidies for upland cotton are no match for
the returns that a farmer can expect from growing corn in MY 2007.
82 Against this background, the
remarkable fact is not, as the United States asserts 83, that U.S. upland cotton acreage for MY 2007 is
down. The remarkable fact is that despite vastly most attractive corn prices, the significant majority
of U.S. upland cotton acreage stays in the production of upland cotton.

77. The original panel and Appellate Body fo und that marketing loan and counter-cyclical
subsidies numb U.S. farmer's reactions to market forces – not totally deaden them.84 The considerable
weight of the evidence shows that, over the life-time of the FSRI Act of 2002, for many farmers, these
government subsidies made the difference between ea rning a long-term profit and having to leave the
business of growing upland cotton. 85 This is the background to the planting decisions made by
thousands of U.S. upland cotton farmers like Mr. Ho uston. The result of these guaranteed and price-
contingent subsidies is a U.S. upland cotton supply th at is much larger than it would otherwise be.
This is what USDA economists 86 and the original panel found 87, what the Appellate Body affirmed 88,
and what the evidence on record before this compliance Panel demonstrates.
78. In its response to the compliance Panel's narro w legal question, the United States also repeats
a number of arguments, at paragraph 72, that Brazil previously responded to in detail. Brazil briefly
recalls those responses and cross-references to its own argumentation refuting these points.

79. First, the United States claims that Braz il improperly focuses on actual prices and payments
received by U.S. farmers at the time of harvest.
89 Of course, actual prices in an isolated marketing
year cannot be relevant to planting decisions taken before their realization. However, the collective
knowledge of historic actual prices – and large s ubsidies resulting therefrom – constitute highly
relevant evidence showing that, year-in and yea r-out, U.S. upland cotton farmers know that their
revenue will be supported no matter wh at happens to prices. A typical U.S. farmer planting upland
cotton in the spring of 2006, knew that when pri ces collapsed in MY 2004 against expectations, he
received price-contingent subsidies accounting for 60 percent of market revenue. 90 This experience is
highly relevant to the farmer's planting decision in MY 2006. In any event, Brazil has also provided

81 Appellate Body Report, U.S. – Upland Cotton, para. 445.
82 Brazil's Oral Statement, paras. 70-71.
83 U.S. 2 April introduction to responses to questions, paras. 1-4.
84 Panel Report, U.S. – Upland Cotton , para. 7.1294. Appellate Body Report, U.S. – Upland Cotton ,
para. 445.
85 Brazil's Oral Statement, paras. 54-91.
86 Panel Report, U.S. – Upland Cotton, para. 7.1295.
87 Panel Report, U.S. – Upland Cotton, para. 8.1(g)(i).
88 Appellate Body Report, U.S. – Upland Cotton, para. 763.
89 U.S. 2 April response to question 51, para. 72, first bullet point.
90 Brazil's First Written Submission, Table 6 at para . 111, as amended by updated marketing loan
subsidy amounts ( see Brazil's 16 March Comments on U.S. Answer to Question 4, para. 14) and an updated
counter-cyclical subsidy amount in MY 2005 (see Brazil's Oral Statement, paras. 40, 107-119).

detailed evidence showing that the typi cal U.S. upland cotton farmer expected
 to receive marketing
loan and counter-cyclical subsidies every year under the FSRI Act of 2002.91
80. Brazil also notes Professor Sumner's explanation that farmers' price expectations are
fundamentally unobservable and that "it is impo ssible to know precisely what individual growers
expect."92 However, given past experience with the price volatility of upland cotton and the price-
contingent U.S. subsidies at issue in this dispute, it is appropriate to assume that farmers learn from
their experience. Thus, an examination of historical payments is important. The United States asserts
that "farmers cannot rewind time."
93 But farmers certainly can – and no doubt do – learn from
previous time periods. In trying to predict the futu re, farmers will rely on their past receipt of large
marketing loan and counter-cyclical subsidies.

81. Moreover, Brazil demonstrated, re lying on the Appellate Body's findings 94 and much other
evidence95, that farmers' expectations take account of their experience of past very high counter-
cyclical and marketing loan subsidies, and the kno wledge that, whatever happens to prices, their
revenue will be protected by U.S. subsidies at profitable levels. 96 The United States has not and
cannot explain how such subsidies today suddenly no longer affect planting decisions and how they
no longer have significant supply-enhancing and world market price-suppressing effect.

82. Second, the United States claims that Braz il has ignored net revenue and other conditions
regarding competing crops vis-à-vis upland cotton.
97 This is simply false. Among other evidence,
Brazil demonstrated in figures 1-12 of its Oral Statement 98 and its Comments on the U.S. Oral
Statements99 that it was upland cotton marketing loan and counter-cyclical subsidies that allowed U.S.
upland cotton farmers to expect higher profits fro m planting upland cotton than from switching to
substitute crops, such as soybeans or corn.100

83. Third, the United States claims that Braz il has focused on total production, as opposed to
plantings, and ignored other factors affecting production that are outside of a farmer's control.
101 That
is also false. Brazil has recognized that factors su ch as weather and yields do impact total production
and total exports. 102 Yet, Brazil has demonstrated that, in MY 2005, but for the two challenged
subsidies, U.S. production and exports would ac tually have been 18 and 25 percent lower,
respectively.103 The subsidy-induced extra acreage benefits from good weather or increased yields
and significantly contributes to higher U.S. production and higher U.S. exports. 104 Brazil also noted
that the original panel conducted its analysis at a time when a significant percentage of U.S. upland

91 Brazil's First Written Submission, paras. 126-150; Brazil's Rebuttal Submission, paras. 101-113;
180-194, 209-231; and Brazil's Opening Statement, paras. 63-78.
92 See Quantitative Simulation Analysis by Professor Da niel Sumner, Annex I to Brazil's Further
Submission before the original panel, 9 September 2003, para. 18, available at
http://www.mre.gov.br/portugues/ministerio/sitios_secretaria/cgc/analisequantitativa.pdf.
93 U.S. 2 April response to question 51, para. 71.
94 Appellate Body Report, U.S. – Upland Cotton, para. 445.
95 See, e.g., Brazil's Rebuttal Submission, Sections 7.7, 7.8, 7.9, 7.11, 7.12.
96 Brazil notes that even using the futures price analysis for the Decem ber contract, U.S. upland cotton
farmers expected to receive significant marketing loan and counter-cyclical payments in every year under the
FSRI Act of 2002.
97 U.S. 2 April response to question 51, para. 72, second bullet point.
98 Brazil's Opening Statement, paras. 63-77
99 Brazil's Comments on U.S. Oral Statements, paras. 13-34.
100 See also Brazil's comments on the U.S. responses to questions 53 and 59, below.
101 U.S. 2 April response to question 51, para 72, third and fourth bullet points.
102 Brazil's Rebuttal Submission, paras. 201-202.
103 "Analysis of Effects of U.S. Upland Cotton Su bsidies on Upland Cotton Prices and Quantities by
Daniel A. Sumner," Brazil's First Written Submission, Annex I, Table
104 Brazil's Rebuttal Submission, paras. 226-231.

cotton was already grown from biotech varieties 105, and that also during the reference period assessed
by the original panel yields had increased.106

84. Fourth, the United States claims that Brazil im properly focuses on total costs and not variable
costs. In fact, Brazil's evidence addresses both types of costs. Brazil refers the compliance Panel to
its comments on the U.S. response to question 59, below. Indeed, it is the United States that
improperly downplays the crucial importance of cove ring total costs in light of the enormous long-
term deficit of $12.4 billion in losses that U.S. upland cotton farmers would have accumulated over
the past seven marketing years based only on market revenue.
107

85. Fifth, the United States claims that Brazil fa ils to take into account demand from China in the
world market for upland cotton. 108 Brazil acknowledged that China plays an important role in the
discovery of the A-Index world market prices, primarily from the demand side. 109 But Brazil also
emphasized that the United States – with a command ing 40 percent world market share of exports –
plays a crucial role on the supply side of that price discovery process. 110 Indeed, Brazil demonstrated
that while Chinese demand skyrocketed in MY 2004 and MY 2005, prices actually fell due, in
significant part, to record high U.S. production and exports. 111 Thus, Brazil demonstrated that the
impact of Chinese demand on the world market prices does not break the genuine and substantial
relationship of cause and effect between the challe nged subsidies and significant price suppression in
the world market.

86. Finally, the United States' response to ques tion 51 summarizes a number of arguments that it
elaborates on in more detail in response to other que stions. Brazil refers the compliance Panel to its
comments on the U.S. response to question 53 with respect to additional planting decision and
expectations related arguments
112, questions 56/57 with respect to studies on the effects of counter-
cyclical payments113, and question 59, with respect to the U.S. cost of production. 114 Brazil also notes
that the United States again repeats its criticis m of Professor Sumner's simulation model that it
advanced in its First Written Submissions 115, but that the United States has not even attempted to
rebut any of the arguments, explanations and rebu ttals submitted by Brazil and Professor Sumner in
their many submissions since.

52. In its Third Party Submission New Zealand observes:

"Marketing loan payments are amber box measures, the category in which are
included the non-prohibited measures with the most trade distorting effect on
production and trade." (para. 5.19)
 Do the parties consider that the fact that under the Agreement on Agriculture a subsidy is
included in the " amber box" is relevant to the analysis of the subsidy's consistency with Articles 5
and 6 of the SCM Agreement?

105 Brazil's Comments on the U.S. Oral Statement, para. 31.
106 See Exhibit Bra-562 (Cotton and Wool Situation Outlook and Yearbook, USDA, November 2006,
Table 2, accessed November 2007 at http://usda.ma nnlib.cornell.edu/usda/current/CWS-yearbook/CWS-
yearbook-11-21-2006.pdf.
107 See, e.g., Brazil's comments on the U.S. response to question 59, below.
108 U.S. 2 April response to question 51, para. 72, fifth bullet point.
109 Brazil's Rebuttal Submission, paras. 335-336.
110 Brazil's Rebuttal Submission, paras. 324-345.
111 Brazil's Rebuttal Submission, paras. 337-339.
112 U.S. 2 April response to question 51, paras. 75-76.
113 U.S. 2 April response to question 51, para. 77.
114 U.S. 2 April response to question 51, para. 78.
115 U.S. 2 April response to question 51, para. 73.

87. Brazil refers the compliance Panel to its own response to this question.

Questions to the United States

53. The United States argues that Brazil has not provided evidence of "actual production
inducing" effects of marketing loan and counter- cyclical payments and that Brazil "purports to
demonstrate indirect production effects through its claim that the US planting, production, and
exports are not responsive to prices" . (Opening Statement of the United States at the meeting of the
Panel with the parties, paras. 62 and 69, emphasis in original)

a) Could the United States explain further the distinction between what it terms "actual
production inducing effects " and " indirect production effects"? Could the United
States also elaborate on how this distinction is legally relevant in the context of
Articles 5 and
 6 of the SCM Agreement?

88. Brazil agrees with the United States that th ere is no legally relevant distinction between
"actual" and "indirect" production effect s recognized in Articles 5 and 6 of the SCM Agreement.116
That should have been the extent of the U.S. answ er. Unfortunately, the United States went on to
provide an extensive and unresponsive recap of its factual arguments. Brazil briefly responds to these
unresponsive assertions and cross-references to Br azil's earlier submissions where these arguments
have been addressed.

89. Brazil's comments on the U.S. response to question 51 summarize a number of Brazil's
arguments concerning "expectations" of farmers an d how the marketing loan and counter-cyclical
subsidies "numb" those farmer s response to market forces.
117 In an attempt to counter this core
finding by the original panel, the United States now argues that "it is unrealistic to suggest that there
should be a one-to-one link between upland cotton pl anting, production, and export and upland cotton
prices."118 Yet, Brazil's claims never required such a "one-to-one" link and the original panel never
based its findings on such a precise link. Nor does Brazil claim that U.S. producers are incapable of
any response to market price signals. 119 Rather, Brazil's claim is that the updated evidence continues
to demonstrate the correctness of the original panel's finding concerning the " numbness" of U.S.
producers to market prices. That is, U.S. upland co tton producers do not react to market price signals
and/or do not react to the extent that would be expe cted absent the price-contingent U.S. subsidies at
issue in this dispute.

90. Brazil demonstrated that, as in the earlie r MY 1999-2002 referen ce period, Brazilian and
other non-subsidized low-cost producers continued during MY 2002-2006 to react to lower expected
world market prices by lowering their acreage and decreasing production.
120 In fact, in every year
between MY 2002-2006, total foreign harvested acreage moved in the same direction as futures

116 U.S. 2 April response to question 53(a), para. 83.
117 These Comments respond to many of the expectation-related arguments in the U.S. 2 April response
to question 53(a).
118 U.S. 2 April response to question 53(a), para. 85.
119 See, e.g., Brazil's Rebuttal Submission, para 188 (Braz il agrees that there are some factors that may
influence planting decisions for some upland cotton producers in addition to expected prices and expected
subsidy revenue . . . However, these exogenous factors do not reduce the importance or U.S. upland cotton
producers of the key economic factor based on what farmers decide to produce upland cotton: expected
revenue from selling upland cotton as topped up by massive U.S. marketing loan and counter-cyclical
payments.").
120 Brazil's Rebuttal Submission, para 221-222 discussing Figure 8 – Futures Prices and Planted
Acreage; see also U.S. Rebuttal Submission, Figure in para. 306 (showing that since 2002, foreign harvested
acreage has increased when prices were predicted to be higher, and decreased when prices were predicted to be
lower; by contrast, the U.S. harvested acreage did not show any correlation to price movements in MY 2003,
MY 2005, and MY 2006).

prices.121 By contrast, the planting decisions of subsidized, high-cost U.S. upland cotton producers, in
general, did not correlate with changes in cotton market prices. 122 For example, between MY 2002-
2006, U.S. harvested acreage moved in opposite directions to those expected based on price
movements in three out of five years – MY 2003, MY 2005, and MY 2006. The United States
attempts to explain this by claiming that, in MY 2003 and MY 2006, this is because "U.S. harvested
acreage reacts more conservatively than foreign acreage to increasing futures prices …." 123 Yet, it is
the lack of a correlation to prices that illustrates how U.S. producers are "numbed" from reacting to
market forces.

91. More importantly, the degree and magnitude to which U.S. producers respond to market
signals is also muted compared to their non-U.S. counterparts. In the past 5 years (MY 2002-2006),
the change in U.S. harvested acreage from the previ ous year averaged 7 percent. Annual changes in
Brazil, by contrast were 36 percent.
124 These facts constitute evidence sustaining Brazil's point and
that of Mr. Houston125 – that expected upland cotton market prices do not play an important role in the
planting decisions of many U.S. upland cotton farmers.126

92. The United States repeats several times the unsupported assertion that "[s]ince the [FSRI Act
of 2002] came into effect, U.S. export behavior has been entirely consistent with that of foreign
counterparts."127 This is incorrect. A recent USDA analys is of the cotton market found that "[o]n the
export side of the world trade equation, the United States has accounted for the lion's share of global
gains, with 11 million bales of in creased exports since 1999/2000." 128 Brazil recalls that record U.S.
export volumes were achieved in MY 2001, 2002, 2003, 2004 and 2005. The 40 percent U.S. share of
world exports is more than three times higher than the share of Uzbekistan, the second largest
exporter.129

93. The dramatic 55 percent increase in abso lute U.S. export volumes between MY 2002 and
2005
130 inevitably came at the expense of producers in non-subsidizing countries. Australia's average
export market share of 12 percent between MY 1999-2001 was cut in half to 6 percent by

121 U.S. Rebuttal Submission, Figure in para. 306 (showing that since 2002, foreign harvested acreage
has increased when prices were predicted to be higher, and decreased when prices were predicted to be lower;
by contrast, the U.S. harvested acreage did not show any correlation to price movements in MY 2003, MY 2005,
and MY 2006).
122 Brazil's Rebuttal Submission, para. 224 discussing Figure 9 – Changes in Acreage and Percentage
Changes in Futures Prices; Brazil's First Written S ubmission, paras 141-143 discussing Figure 9 – Futures
Prices and Planted Acreage; Brazil's Oral Statement, para. 61-62.
123 U.S. 2 April response to question, para. 89.
124 Exhibit Bra-629 (Brazilian Harvested Acreage, Producer, Supply & Distribution Database, FAS,
USDA, accessed Fe bruary 2007 at http://www.fas.u sda.gov/psdonline/psdquery.aspx). See also
Exhibit Bra-570 (Producer, Suppl y & Distribution Database, FAS, USDA, accessed January 2007 at
http://www.fas.usda.gov/psdonline/psdquery.aspx).
125 Citations by Stephen Houston Sr., a cotton farmer from Georgia, can be found in Exhibit Bra-563
("Cotton bailout: How your tax dolla rs prop up big growers and squ eeze the little guy," Atlanta Journal-
Constitution, 1 October 2006, p. 2, accessed December 2006 at
http://www.ajc.com/search/content/metro/stories/cotton1.html).
126 See also Professor Sumner's analysis regarding the magnitude of the reaction of U.S. upland cotton
producers to an elimination of marketing loan and coun ter-cyclical subsidies, Brazil's First Written Submission,
Annex I.
127 U.S. 2 April response to question 53, paras. 88 and 90 ("the data show … that U.S. production and
exports shift consistently with production and exports elsewhere in the world.").
128See "Cotton Backgrounder," USDA, Marc h 2007, accessed April 2007 at
http://www.ers.usda.gov/Publications/CWS/2007/03Mar/CWS07B01/).
129 Producer, Supply and Distri bution Database, Foreign Agricu lture Service, USDA, accessed
April 2007 at http://www.fas.usda.gov/psdonline/psdQuery.aspx.
130 Exhibit Bra-447 (Upland Cotton Supply and Use).

MY 2005.
131 Similarly, West and Central Africa's share of the world market declined to a ten-year
low in MY 2005. The UN Food and Agricultural Organization recently summed up what has been
occurring:

Subsidies maintain cotton production at otherwise unprofitable levels in industrialized
countries, reducing the opportunities for developing countries to export to subsidizing
country markets and displacing their exports to third countries.
132
94. Of course, exports of upland cotton are th e consequence of planting decisions and other
factors, including subsidies, yields, domestic demand, etc. The relevant question is, therefore, what
would U.S. exports be but for marketing loan a nd counter-cyclical subsidies. As discussed above,
U.S. upland cotton planting are higher than they would be but for the U.S. subsidies at issue. Brazil
has demonstrated that but for the two U.S. subsidies at issue, U.S. exports would have been 25 percent
lower in MY 2005.
133

95. But even accepting, arguendo, the U.S. argument that U.S. and foreign exports did react in
roughly the same manner as non-subsidized forei gn exports, the United States ignores the reason why
this may have occurred. Many of these non-subsid ized foreign producers have far lower costs of
production than U.S. producers.
134 Brazil recalls ICAC's finding that it costs U.S. upland cotton
producers $0.67 to grow a pound of upland cotton, while it costs producers in West and Central Africa
$0.45 and producers in Brazil just $0.38. 135 Such lower costs are essentia l to the survival of Brazilian
and African producers, because they do not have the benefit of 40 percent ad valorem subsidies for
the same basic commodity product as U.S. producers. These lower costs allow them to withstand
certain levels of lower prices and still cover their to tal costs. U.S. producers are only able to compete
with foreign producers in MY 2005 because marketi ng loan and counter-cyclical subsidies allowed
them to sustain high levels of planted acreage. Brazil has demonstrated that but for these
two subsidies, U.S. producers would have reacte d to lower expected prices in MY 2005 (combined
with higher costs) by reducing acreage, reducing production, and reducing exports.136 And with lower
U.S. exports available to meet world demand, world market prices would be higher.

96. Finally, against this backdrop, the United St ates claims that the elimination of Step 2
payments caused a major shift in U.S. exports.
137 While complete data for MY 2006 is, of course, not
available, USDA projects that U.S. exports in MY 2006 will be at their second highest level in
history. USDA further projects that the U.S. world market share of exports will be 36 percent in
MY 2006. While this does constitute a decline in th e U.S. world market share of exports, the United
States still holds a commanding market share. As Br azil explained at the Panel meeting, the decline
in the U.S. share of world exports in MY 2006 is largely due to the rise of Indian exports to China and
the surge of U.S. exports just prior to the termination of the Step 2 program at the end of MY 2005. 138
Further, with over 9 million bales of U.S. upland cotton sitting in U.S. warehouses, USDA and FAPRI
project that the United States will increase its exports in MY 2007. In fact, FAPRI's 2007 baseline

131 Producer, Supply and Distri bution Database, Foreign Agricu lture Service, USDA, accessed
April 2007 at http://www.fas.usda.gov/psdonline/psdQuery.aspx.
132 Exhibit Bra-579 ("Cotton: Impact of Support Policies on Developing Countries – Why Do the
Numbers Vary?" FAO Trade Policy Brie f, p. 1, accessed December 2006 at
ftp://ftp.fao.org/docrep/fao/007/y5533e/y5533e00.pdf).
133 "Analysis of Effects of U.S. Upland Cotton Su bsidies on Upland Cotton Prices and Quantities by
Daniel A. Sumner," Brazil's First Written Submission, Annex I, Tables 2.A.1-2.A.3.
134 See Brazil's First Written Submission, para. 162. See also Exhibit Bra-480 (Survey of the Cost of
Production of Raw Cotton, ICAC, November 2004, p. 13).
135 See Brazil's First Written Submission, para. 162. See also Exhibit Bra-480 (Survey of the Cost of
Production of Raw Cotton, ICAC, November 2004, p. 13).
136 See Brazil's First Written Submission, paras. 167-180.
137 U.S. 16 March comments on Brazil's answer to question 28(a), para. 121.
138 See Brazil's Closing Statement, para. 11.

projects the U.S. share of the world export market to rise to 43 percent in MY 2007 and remain above
40 percent through MY 2011.139

b) What is the response of the United States to the argument that the fact that
"U.S. upland cotton producers know that their overall revenue will always be
protected by marketing loans and counter-cyclical payments ... plays a major role in
their planting decisions"? (Rebuttal of Brazil, para. 185; see also Third Party
Submission of New Zealand, paras 5.20-5.21)

97. The United States asserts that the "mere" fact that income support programs support the
income of agricultural producers "does not, however, mean that the payments have 'major' effects on
planting or cause any of the adverse effects listed in Articles 5 and 6 of the SCM Agreement."140
Brazil agrees that different forms of income support may have different effects on production and that
Articles 5 and 6 do not contain a presumption of adverse effects from income support. As the
complaining Member, Brazil must demonstrate that the particular price-contingent subsidies at issue
in this dispute cause serious prejudice to its inter ests. Contrary to the U.S. assertion, all of the
evidence submitted by Brazil in this proceeding is sufficient to more than discharge this burden.

98. In commenting on the U.S. response, Brazil recalls its 2 April response to question 69, its
comments on the U.S. response to questions 51 an d 53(a), above, and 53(c), below, and the many
arguments and evidence provided in its earlier submissions.

99. Brazil does not consider it "mere" or unimpor tant facts that, during the lifetime of the FSRI
Act of 2002, marketing loan and count er-cyclical subsidies represented an average 40 percent
ad valorem subsidization rate, covered an average 29 percent of total costs of production
141, and were
received by 96 percent of U.S. upland cotton producers holding upland cotton base acres. 142 Nor is it
"mere" fact that, but for these subsidies, U.S. production would be 15 to 16 percent lower 143 and U.S.
exports 21 to 22 percent lower. 144 Nor is it "mere" fact that the original panel found that the subsidy
payments are mandatory, i.e., they must be made by the U.S. Secretary of Agriculture without
exceptions, and that they are contingent upon world and U.S. prices, i.e., they function to guarantee
U.S. producers revenue regardless of how low pr ices fall. As both the Appellate Body and the
original panel found 145, the knowledge of U.S. upland cotton pr oducers that these subsidies will be
received at times of low prices is an important factor affecting their planting decisions and,
consequently, affecting U.S. supply of upland cotton to the world market.

100. While it is possible that some forms and low levels of income support may not cause serious
prejudice under particular conditions of competition, this is certainly not the case with respect to the
two subsidies at issue: U.S. marketing loan a nd counter-cyclical subsidies for upland cotton. These
particular mandatory, price-contingent subsidies cau se serious prejudice in view of their nature and

139 See "World Cotton," 2007 FAPRI Ba seline, accessed April 2007 at
http://www.fapri.iastate.edu/brfbk07/CottonTables2007.xls.
140 U.S. 2 April response to question 53, para. 92.
141 Exhibit Bra-477 (Upland Cotton Costs and Returns).
142 Brazil's Rebuttal Submission, Table 3 at para. 157. Results are from U.S. First Written Submission,
table at para. 224.
143 Average effects from MY 2002-2005, see "Analysis of Effects of U.S. Upland Cotton Subsidies on
Upland Cotton Prices and Quantities by Daniel A. Su mner," Brazil's First Written Submission, Annex I,
Tables 2.A.1-2.A.3.
144 Average effects from MY 2002-2005, see "Analysis of Effects of U.S. Upland Cotton Subsidies on
Upland Cotton Prices and Quantities by Daniel A. Su mner," Brazil's First Written Submission, Annex I,
Tables 2.A.1-2.A.3.
145 Appellate Body Report, U.S.–Upland Cotton¸ para. 445; Panel Report, U.S. – Upland Cotton ,
paras. 7.1290-7.1303.

magnitude, and in view of the product they suppor t and the particular conditions of competition in
which that product is traded in international markets.
146

c) In its Opening Statement at the meeting of the Panel with the Parties, Brazil observed:

"...we have demonstrated that these subs idies stabilized cotton producers' revenue
despite wildly fluctuating market pri ces, thereby insulating and numbing acreage
response to market price signals. These s ubsidies also cover the huge long-term gaps
between market returns and total costs of production. Both effects are closely
interrelated." (para.55)
Is the United States only arguing that Brazil has not empirically substantiated that these
two "effects" have actually occurred or is it also the position of the United States that these

effects are in any event legally irrelevant to an analysis of whether a subsidy causes
significant price suppression within the meaning of Article 6.3 (c) of the SCM Agreement?

101. The passage cited by the compliance Panel ties together two important themes in Brazil's
causation arguments and two important effects of the U.S. marketing loan and counter-cyclical
subsidies. The planting decisions analysis presente d in the paragraphs that follow this portion of
Brazil's Oral Statement shows how marketing loan and counter-cyclical subsidies (i) numb farmers'
planting decisions and (ii) cover their total costs of production, resulting in higher levels of planting
and supply than would exist but for the subsidies.

102. In its response, the United States accepts that marketing loan and counter-cyclical subsidies
stabilize upland cotton producers' revenue, i.e., constitute price-contingent subsidies, but submits that
Brazil's demonstration to that effect is not "remarkable". 147 Yet, the conciseness of this fact and the
simplicity of its demonstration does not make it any less important. It is crucial that every U.S.
producer growing upland cotton on upland cotton base knows that he or she will receive a profitable
return regardless of market prices at th e time of harvest. This knowledge is the key aspect of revenue
"expectations" at the time of planting.148

103. While the United States presents a number of arguments concerning the alleged absence of
any effects on production of marketing loan subs idies (responses to which are largely set out in
Brazil's comments to U.S. response to question 51), the United States fails to demonstrate any

fundamental change in the conditions of compe tition in the U.S. or world upland cotton market
between the reference year of MY 2002 and the reference year of MY 2005 (or MY 2006). The same
basic facts continue to exist. Therefore, and b ecause the U.S. arguments raised are without merit,
there is no basis for the compliance Panel to deviat e from the findings of the original panel, as upheld
by the Appellate Body. The FSRI Act of 2002 mandat es the payment of marketing loan subsidies for
every pound of upland cotton grown in the United States, without limitation, if the adjusted world
price falls below $0.52 per pound. 149 Farmers know that the more upland cotton they produce, the
more they will receive in marketing loan subsidies. Perversely, the operation of this subsidy means
that when U.S. supply surges and world prices fall as a result, more marketing loan subsidies are
made, perpetuating the cycle of high levels of production.150 In view of this fact, there is little wonder
that the original panel found that "[w]e have no doubt that the payments stimulate production and

146 See, e.g., Brazil's 2 April response to question 69.
147 U.S. 2 April response to question 53(c), paras. 94-95 citing Brazil's Oral Statement, para. 55.
148 Brazil's comments on the U.S. response to question 51, above, address the arguments in
paragraphs 95-96 in the Answer to Question 53(c).
149 For more details on the functioning of the marketing loan program, see Section 7.3.1 of Brazil's
First Written Submission or see 7 U.S.C. §7931(a) in Exhibit Bra-442 (7 U.S.C. §§ 7901-7939, Legal
Information Institute, Cornell Law School, accessed July 2006 at http://www.law.cornell.edu/uscode/).
150 Panel Report, U.S. – Upland Cotton, paras. 7.1294-7.1295.

exports and result in lower world market prices than would prevail in their absence."151 Moreover, the
original panel found that "the text of the measure indicates that the payments are mandatory, where
certain market conditions prevail." 152 Brazil notes that marketing loan subsidies in MY 2005 were
41 percent larger than in MY 2002.153

104. The United States repeats its argument that th e actual payment of marketing loan and counter-
cyclical subsidies is irrelevant and that only expectations matter. 154 As Brazil has repeatedly
demonstrated155, actual payments of these subsidies provi de U.S. producers with payments worth
40 percent of the market value of a highly price-sensitive commodity. 156 The experience of U.S.
upland cotton farmers, who received very large subsidies over the years due to actual prices below the
trigger prices, is a crucial fact that forms part of the background against which U.S. farmers' build
their expectations about future revenue from the market and the subsidy programs. 157 This remains
unchanged from the facts before and the findings of the original panel and the Appellate Body.158 The
U.S. expectation analysis narrowly and incorrectly assumes that farmers expect to receive subsidies
only on the basis of a firmly expected price and di sregard the possibility (i) that actual prices might
deviate from this projection and (ii) that U.S. pr ice-contingent subsidies provide a revenue guarantee
against such changes in volatile upland cotton prices.159

105. With respect to the U.S. arguments regard ing the absence of effects from counter-cyclical
subsidies
160, Brazil refers the compliance Panel to its re buttal of similar arguments made in response
to questions 56/57 below.

106. Next, the United States raises several new argu ments (or new variations on older arguments)
and presents new evidence in its response to questio n 53(c). In particular, it argues that "in every
single marketing year since the FSRI Act came into effect, it would have been economically rational
for upland cotton farmers to plant upland cotton rather than allowing their land to sit idle because the
farmers expected that, even without any paymen t from the government, market revenue for upland
cotton was more than sufficient to cover variable costs."161

107. This assertion is fundamentally flawed for a number of reasons. First, Brazil has never
suggested that all or even most upland cotton acreag e would be left idle without marketing loan and
counter-cyclical subsidies. The counter-factual be fore this compliance Panel concerns the question
whether, in the absence of marketing loan and counter-cyclical subsidies, upland cotton acreage
would decline. Whether that land would be left idle or would be switc hed to the production of
alternative crops that continue to benefit from U.S. subsidies, such as corn, soybeans, wheat, and rice,
is not relevant for this assessment.

108. Further, contrary to the U.S. assertion, it is not economically rational to plant upland cotton
year after year unless producers are able to cover their total costs, not merely variable costs. The

151 Panel Report, U.S. – Upland Cotton, para. 7.1291.
152 Panel Report, U.S. – Upland Cotton, para. 7.1291.
153 Brazil's First Written Submission, Table 6 at para. 111, as amended by updated marketing loan
subsidy amounts ( see Brazil's 16 March Comments on U.S. Answer to Question 4, para. 14) and an updated
counter-cyclical subsidy amount in MY 2005 ( see Brazil's Oral Statement, para. 40). See also Brazil's 2 April
Answer to question 69, para. 99.
154 See also Brazil's comment on the U.S. response to question 51, above.
155 See also Brazil's comment on the U.S. response to question 51, above.
156 Brazil's First Written Submission, paras. 111-113 and Table 6.
157 See Brazil's comment on the U.S. response to question 51, above.
158 Appellate Body Report, U.S. – Upland Cotton , para. 445; Panel Report, U.S. – Upland Cotton ,
paras. 7.1290-7.1303.
159 See Brazil's comment on the U.S. response to question 51, above.
160 U.S. 2 April response to question 53, para. 97.
161 U.S. 2 April response to question 53, para. 98.

original panel recognized this fact when it found th at "[w]e believe that the existence of this gap
between upland cotton producers' total production co sts 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 Un ited States subsidies at issue."
162 Brazil refers the compliance Panel
to its 2 April response to question 71 for a discussion of why total costs, in addition to variable costs,
are highly relevant to planting decisions.163

109. Moreover, a significant portion of upland cotton farmers are not able to cover their variable
production costs with market revenue alone, nor do ma ny upland cotton farmers expect to be able to
do so at the time of planting.
164 The portion of upland cotton farmer s that are not able to cover their
variable costs of production depend on which costs are considered variable. 165 As explained in
Brazil's Oral Statement, whether or not a cost is variable depends on the time period being
considered.166

110. However, in addition to the time period under consideration, the categorization of cost items
depends on the nature of the counte rfactual examination. In this dispute, the compliance Panel is
tasked to examine the effect of permanently removing a major source of upland cotton producers'
income.
167 This question is fundamentally different fro m examining the effects of annual fluctuations
in market price levels. The counterfactual involv ing a permanent removal of the subsidies calls for
the inclusion of costs in a plan ting decisions analysis that might not always be included when
assessing planting decisions based solely on limited a nnual price fluctuations. For instance, if a drop
in prices is expected to be isolated ( i.e., only lasting a single year), a farmer would be more willing to
continue producing even if he or she is unable to cover fully the opportunity cost of labor and land
and special machineries. However, if the farmer knows that, due to the termination of a government
program, a source of revenue representing an average 40 percent ad valorem subsidization rate will
permanently be lost, no rational farmer would cont inue planting upland cott on unless he or she can
cover operating, land and labor costs. Instead, th e farmer would shift production to other crops or
potentially lease his or her land to other farm operato rs. In other words, a producer's supply response
would be greater if the reduction in subsidies was fully anticipated and permanent.168

111. Next, the United States claims that "in each of the years under FSRI Act, shifts in U.S.
planted acreage were consistent with what one would expect if there were no marketing loan
payments or counter-cyclical payments and U.S. fa rmers were basing their planting decisions solely
on market prices signals and other considera tions relevant to planting and production."
169 T h i s
assertion is based on a flawed U.S. analysis of upland cotton planting decisions. The new U.S.
analysis appears to have been engineered to ma ke upland cotton appear more attractive relative to
corn and soybeans than it actually was.
170

162 Panel Report, U.S. – Upland Cotton, para. 7.1354.
163 See also Brazil's comments on the U.S. response to question 59, below.
164 Brazil's Rebuttal Submission, paras. 254-283.
165 The United States does not consider unpaid labor, land or capital recovery costs to be variable, see
U.S. Rebuttal Submission, paras. 324-332. Brazil considers these costs to be fully, or in part, variable, see
166 Brazil's Oral Statement, paras. 87-88
167 See Brazil's 2 April response to question 73; Brazil's First Written Submission, Annex I.
168 See Brazil's Rebuttal Submission, Annex I, para. 11. Brazil also notes that it addresses the other
U.S. cost of production related arguments in its comments on the U.S. response to question 59, below.
169 U.S. 2 April response to question 53(c), para. 99.
170 Brazil notes that it is impossible to verify much of the new information presented by the
United States. Exhibit U.S.-139, which contains the U.S. analysis, was not provided electronically and much of
the information does not appear to be publicly available. Brazil's analysis, by contrast, was based on publicly
available information and provided to the Panel and the United States in electronic format.

112. The first major flaw in the United States anal ysis is the manner in which the United States
calculates expected market prices ( i.e., the farm price). It derives that price by applying a "basis" (or
discount) to the January-March average closing price of the harvest period futures contract. For
example, the United States discounts the futures pr ice for soybeans and corn by $0.14 and futures
prices for upland cotton by $0.05 a pound. 171 The United States cites a USDA website in support of
its "basis" for corn, soybeans and upland cotton. 172 However, the website applies only to soybeans,
corn and wheat, but not upland cotton. 173 Thus, the United States provides no explanation or any data
to justify why its basis of $0.05 per pound is appropriate.

113. While trumpeting FAPRI's analysis in its rep eated critique of Professor Sumner's model, the
United States rejects Brazil's use of projected prices published in FAPRI's baseline projections.
However, the United States does not explain why FA PRI's projected prices should not be used. Nor
does the United States explain why the compliance Pa nel should find that prices calculated by the
United States for purposes of this litigation – a nd not supported by the source cited by the
United States – should be adopted by the complia nce Panel as superior to FAPRI's published price
projections. (Brazil notes that USDA is prohi bited by U.S. law from publishing its own price
projections for upland cotton.)

114. As noted, Brazil's alternative crop expectations exercise relies on prices projected by FAPRI
and published in its baseline during the planting period.
174 The differences between these FAPRI-
projected prices and the prices constructed by the United States are very significant for most
marketing years, and especially for those crucial to the compliance Panel's assessment. The table
below shows the expected prices for upland cotton under the two approaches:

Table 2 – Expected Upland Cotton Prices175

 2002 2003 2004 2005 2006 2007
New U.S. Expected Prices 0.38 0.54 0.62 0.48 0.54 0.54
FAPRI Expected Prices 0.39 0.47 0.57 0.44 0.48 0.53

115. The bias of the new U.S. analysis becomes a pparent when applying these two sets of prices.
When the FAPRI-projected prices are inputted into the U.S. planting decisions analysis, upland cotton
is no longer the most attractive crop to plant in any year other than MY 2004. 176 In other words,
correcting solely for this single flaw in the U.S. analysis leads to the collapse of the U.S. assertion that
"shifts in U.S. planted acreage were c onsistent with what one would expect." 177 Given the absence of
any evidence supporting the U.S. "basis" for upla nd cotton of $0.05 per pound, there is no basis for
the compliance Panel to accept its use.

116. Another significant flaw in the U.S. planting decisions analysis concerns the manner in which
the United States derives expected yields. The firs t error in the U.S. yield analysis is that the

171 U.S. Comments on Brazil's Oral Presentation, Annex I, Section 1 "Expected Market Prices."
172 U.S. Comments on Brazil's Oral Presentation, Annex I, Section 1 "Expected Market Prices."
173 See http://www.ers.usda.gov/Data/PriceForecast/, accessed April 2007.
174 Brazil used CBO's projection of MY 2007 prices because the corresponding FAPRI projection was
not yet available. See Exhibit Bra-634 (Analysis of Planting Decisions Based on Expected Returns).
175 See expected prices for upland cotton in Exhibit Bra-634 (Analysis of Planting Decisions Based on
Expected Returns) and Exhibit US- 139 (Data Supporting Expected Mark et Returns Above Variable Costs
Chart)
176 Compare expected net outlays in Exhibit US-139 (Data Supporting Expected Market Returns Above
Variable Costs Chart, p. 1).
177 U.S. 2 April response to question 53(c), para. 99.

United States erroneously ove rstates expected yields by relying on yields per harvested acres
178,
whereas the planting decision analysis s hould be based on expected yields by planted acre. 179
Correcting this error would reduce expected yields (and expected market returns) by an average
12 percent each year.180

117. The United States also improperly constructs yield projections based on a linear regression
analysis of actual yields per harvested acre for MY 1995-2006. 181 In other words, the United States
derives projected yields for, e.g., MY 2003 taking into account information of actual yields in
MY 2004-2005 and assuming that farmers fully anticipat ed the record high yields achieved in the
MY 2004 and MY 2005. 182 An examination of the annual USDA baselines released prior to the
planting periods from MY 2002 through MY 2007 confir ms that USDA did not project yields to
increase to the extent that they di d. Much less could U.S. upland cotton producers have made that
projection.

Table 3 – USDA Yield Projections183

 2002 2003 2004 2005 2006 2007
 Yield per planted acre
2002 USDA Baseline Projection 572 577 578 579 579 581
2003 USDA Baseline Projection 574 579 581 581 582
2004 USDA Baseline Projection 587 589 590 591
2005 USDA Baseline Projection 612 612 616
2006 USDA Baseline Projection 699 706
2007 USDA Baseline Projection 725
Actual Yield 579 643 806 799 668 NA
Percent greater than USDA projection 1% 12% 37% 31% -4% NA
Yield used by U.S. in their analysis 723 745 766 788 809 831
Percent greater than USDA projection 26% 30% 31% 29% 16% 15%

118. Table 3 shows that USDA projections of upland cotton yields in the upcoming marketing year
were significantly less than actual yields achieved every year. Of course, it is impossible for farmers

178 See US-139 (Data Supporting Expect ed Market Returns Above Variab le Costs Chart, p. 20). For
convenience, Brazil's replicates and provides citations to the United States yield calculations in Exhibit Bra-688
(Expected Upland Cotton Yields).
179 USDA cost of production of data clearly specifies that yields ar e in terms of planted acres, not
harvested acres. See, e.g. Exhibit Bra-475 (U.S. Cotton Producers Costs and Returns Per Planted Acre,
Excluding Government Payments, Economic Resear ch Service, USDA, accessed October 2006 at
http://www.ers.usda.gov/data/costsandreturns/testpick.htm).
180 The United States provided very little documentation as to how it constructed its "linear trend
equation" of expected yields in US-139 ( see U.S. Comments on Brazil's Oral Statement, Annex I). Brazil has
reconstructed the U.S. calculation for the panel's convenience, using both yields per harvested acre and yields
per planted acre in Exhibit Bra-688 (Expected Upland Cotton Yields).
181 See US-139 (Data Supporting Expect ed Market Returns Above Variab le Costs Chart, p. 20). For
convenience, Brazil's replicates and provides citations to the United States yield calculations in Exhibit Bra-688
(Expected Upland Cotton Yields).
182 By contrast, Brazil used a three year rolling average of yields per planted acre actually achieved on
farms in USDA's cost survey. See Exhibit Bra-634 (Analysis of Planting Decisions Based on Expected
Returns).
183 USDA baseline projections are from Exhib it Bra-635 (2002-2007 USDA Agricultural Baseline
Projections). Actual yields are from Exhibit Bra-562 (Cotton and Wool Situation Outlook and Yearbook,
USDA, November 2006, Table 2, available at http://usda.mannlib.cornell.edu/usda/current/CWS-
yearbook/CWS-yearbook-11-21-2006.pdf). Yields used by the U.S. in thei r planting decisions analysis is from
Exhibit US-139.

to predict both the weather and their yields. And it is unreasonable for the United States to now
suppose that U.S. farmers, but not USDA, anticipated the dramatic increases in yield in MY 2004 and
MY 2005. Table 3 also shows that the yields used by the United States in their planting decisions
analysis significantly overstated the expectations of upland cotton farmers. The yields used by the
United States in its analysis are, on average, 24 percent greater than USDA baseline projections.
Correcting this flaw in the U.S. analysis, once agai n, invalidates the U.S. conclusions that "shifts in
U.S. planted acreage were consistent with what one would expect."184

119. In sum, the new U.S. planting decision analys is is based on unsupported assertions that result
in a biased and result-orientated conclusion to atte mpt to argue that mandatory and price-contingent
subsidies constituting 40 percent of the market value of a basic commodity product have no effect on
production. This analysis should be rejected by the compliance Panel.

120. As Brazil demonstrated in its own analys is, a proper assessment of U.S. upland cotton
producers' plantings decisions demonstrates that , but for marketing loan and counter-cyclical
subsidies, it would have been economically rational for them to switch to the production of alternative
crops nearly every year.
185

121. Finally, even assuming, arguendo, that the flawed U.S. analysis demonstrates that upland
cotton farmers planting decisions move generally in the same direction
 as might be expected from
market signals, the U.S. analysis fails to refute the original panel's basic finding that these subsidies
"numb" U.S. producers reactions. The United States analysis does not demonstrate that the extent to
which U.S. producers have changed upland cotton plan tings is consistent with the extent to which
U.S. upland cotton producers would have changed their plantings but for the subsidies.

122. The original panel found, and Brazil demonstr ates with updated evidence, that upland cotton
producers are numbed from market signals, not comple tely deadened. The elimination of subsidies
that account for an average of 40 percent of the market value of upland cotton and cover an average of
29 percent of total costs over the life-time of the FSRI Act of 2002 would cause a significant shift of
acreage to alternative uses now providing higher net re turns. Brazil again recalls that the issue before
the compliance Panel is not whether the general direction of U.S. planted acreage correlates with
expected revenue from upland cotton and other crops . The issue before the compliance Panel is
whether U.S. upland cotton acreage would be lower and world market price higher but for marketing
loan and counter-cyclical subsidies. One relevant piece of evidence of the effects of these subsidies is
the fact that their revenue-stabilizing effect numbs U.S. upland cotton producer s' reactions to market
price signals.

54. Could the United States explain whether, and, if so, why, it is of the view that this Panel
should not rely on the findings and analysis by the original Panel regarding the effects of marketing
loan and counter-cyclical payments on production a nd exports? Please comment in particular on
paras. 7.1291, 7.1295, 7.1302, 7.1349, 7.1353 of the Panel Report.

123. In its response, the United States asks the co mpliance Panel to revisit the original panel's
findings regarding marketing loan and counter-cycli cal subsidies. These adopted findings should be
followed by the compliance Panel. Prior adopted pa nel and Appellate Body reports create "legitimate
expectations" among WTO Members, and should be taken into account by panels when they are
relevant to the resolution of a dispute.
186

184 U.S. 2 April response to question 53(c), para. 99.
185 See Brazil's Oral Statement, paras. 63-78 and Brazil's Comments on the U.S Oral Statements,
paras. 13-27. As Brazil explained in its Comments on the U.S. Oral Statements, using total costs or variable
costs does not change the relative attractiveness of producing upland cotton versus corn or soybeans.
186 Appellate Body Report, U.S. – Softwood Lumber V, para. 111.

124. This is particularly the case where particular issues and questions of fact before a panel are
the same as those previously examined by the Appe llate Body. In such a situation, it is "not only
appropriate," but to "be expected," that the panel would follow the Appellate Body's earlier
conclusions.
187 With respect to compliance proceedings, in particular, the Appellate Body has stated
that "Article 21.5 proceedings do not occur in isolation but are part of a 'continuum of events.'"188 The
Appellate Body 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 the reasoning in the original panel
report in the absence of any cha nge in the underlying evidence." 189 The compliance panel in U.S. –
Gambling (21.5) noted that "[a] re-assessment in a compliance proceeding of an issue that had already
been ruled upon in an original proceeding in an ad opted report, even with better arguments by the
respondent but without a change relevant to the unde rlying facts in the intervening period, would run
counter to the prompt settlement of disputes." 190 The United States is not entitled to re-litigate an
issue that has been definitively resolved for purposes of this dispute.
125. As a factual matter, Brazil recalls that the evidence regarding the nature of marketing loan
and counter-cyclical payments remains unchanged, th at their magnitude in MY 2005 is even larger
than the magnitude assessed by the original panel for MY 2002 and that the conditions of competition
in the world market for upland cotton have not ch anged in any fundamental way since the original
panel's assessment. Therefore, there is no basis of the United States to argue that the compliance
Panel should disregard and/or overturn the findings of the original panel, as upheld by the Appellate
Body. Brazil addresses the specific U.S. arguments ra ised in response to this question in the context
of its comments on other U.S. responses. Specifically:

• With respect to the U.S. arguments con cerning the production effects of marketing
loan subsidies191, Brazil refers to the compliance Pa nel to its comments on the U.S.
response to question 53, above.

• With respect to the issue of production effects from counter-cyclical payments
supporting the production of upland cotton, Brazil refers the compliance Panel to its
comments on the U.S. response to questions 53, above, and 56/57, below.
192

• With respect to the cost of production rela ted issues raised by the United States in
response to this question193, Brazil refers the compliance Panel to its comments on the
U.S. response to question 59, below.

56. The United States has cited new empirical research on the production effects of counter-
cyclical payments. How does the United States ad dress Brazil's criticism that none of this research
has dealt specifically with the effects of c ountercyclical payments under the FSRI Act of 2002 on
upland cotton? (Rebuttal Submission of Brazil, para. 120)

57. The United States has offered the Lin and Dismukes (Exhibit US-34) and Westcott (US-35)
studies as examples of new empirical research on the production effects of countercyclical payments.
a) Is it not more accurate to characterize the Lin and Dismukes study as a simulation of
the possible effect of countercyclical payments on production rather than a study on

187 Appellate Body Report, U.S. – OCTG Sunset Reviews, para. 188.
188 Appellate Body Report, U.S. – Softwood Lumber IV (21.5), para. 103 (emphasis added) citing
Appellate Body Report, Mexico – Corn Syrup (21.5), para. 121. See Brazil's First Written Submission, para. 28.
189 Appellate Body Report, U.S. – Softwood Lumber VI (21.5), para. 103 (emphasis added).
190 Panel Report, United States – Gambling (Article 21.5), para. 6.53.
191 U.S. 2 April response to question 54, paras. 108-110.
192 U.S. 2 April response to question 54, paras. 111-115.
193 U.S. 2 April response to question 54, paras. 117-120.

the actual impact of the payments since it does not statistically estimate the effect of
the actual payments (which began only in 2002) on crop production? (Please refer to
pages 9-12 of the paper which describe the data, covering the period 1991-2001,
used for the study).

b) How does the United States deal with Brazil's characterization of the Westcott study
as offering no new empirical evidence, and instead, being a qualitative discussion,
much like that presented to the original panel (see para 128 of Brazil's rebuttal)?

126. Brazil provides below consolidated comments on the U.S. responses to questions 56 and 57.

127. The United States argues that since the orig inal proceeding there "have been a number of
studies conducted regarding the effects of the [counter-cyclical] program." 194 This statement is not
correct with respect to counter-cyclical payments for upland cotton. No empirical study has
specifically examined the effect of counter-cycli cal payments on upland cotton production and the
United States has cited one empirical study on the effect of counter-cyclical payments generally.
195
As noted by the compliance Panel in question 57(a), this study, by Lin and Dismukes, is a simulation
of the possible effect of counter-cyclical payments on production, rather than a study on the actual
impact of the subsidies. The dearth of studies, as implied by the compliance Panel's question, is due
to the fact that the program is relatively new. However, the absence of specific studies does not
constitute a basis for the United States to argue th at Brazil has not met its burden of demonstrating
that there remains a the strong positive link, found by the original panel, between counter-cyclical
payments and the production of U.S. upland cotton.

128. The original panel found that counter-cyclical contributed to serious prejudice based on an
examination of the structure, design and operation of the program.
196 As Brazil explained, the few
studies that have been conducted since then s upport the finding that counter-cyclical subsidies
contribute to serious prejudice.197

129. As explained by Professor Sumner, there are at least five major mechanisms through which
counter-cyclical payments have the potential to affect production.
198 The study by Lin and Dismukes
examined only two of these mechanisms. 199 Beyond that, the study solely examined counter-cyclical
subsidies for corn, wheat and soybeans in the Midwest. In its 2 April response to questions 64 and 65,
Brazil provided a number of reasons why counte r-cyclical subsidies for upland cotton would be
expected to have significantly greater effects on production that counter-cycli cal subsidies for these
field crops in the Midwest. 200 For convenience, Brazil lists thes e factors in the following chart,
comparing counter-cyclical subsidies for upland cotton to counter-cyclical subsidies for the
commonly studied field crops in the Midwest.

194 U.S. 2 April response to question 56, para. 123.
195 Brazil also cited one study by McIntosh, Shrogren and Dohlman on the effect of counter-cyclical
payments that found significant production impacts from counter-cyclical subsidies. See Brazil's 2 April
response to question 64.
196 Panel Report, U.S. – Upland Cotton, paras. 7.1301-7.1302.
197 Brazil's First Written Submission, paras. 167-185; Brazil's Rebuttal Submission, paras. 69-70,
119-123 or Exhibit Bra-659 (Statement of Professor Sumner Concerning Various U.S. Arguments), paras 42-47.
198 These include reducing risk associated with price variability, increasing investment through wealth
effects, reducing risk aversion th rough wealth effects, constraining pr oduction choices because of planting
restrictions, and increasing incentives to plant because of base acre updating. See "Analysis of Effects of U.S.
Upland Cotton Subsidies on Upland Cotton Prices and Quantities by Daniel A. Sumner," Brazil's First Written
Submission, Annex I, paras. 59-64.
199 These include reducing risk associated with price variability and reducing risk through wealth
effects. See Exhibit Bra-659 (Statement of Professor Sumner Concerning Various U.S. Arguments, para. )
200 Brazil's 2 April response to questions 64 and 65.

Table 4 – Comparison of CCPs for Cotton and CCPs for Soybeans,
Corn and Wheat in the Midwest

 Upland Cotton Soybeans, Corn and Wheat in the Midwest
Frequency of
CCP Subsidies201
• Every year under the FSRI
Act
• Maximum CCPs in three
out of four years
• No CCPs for wheat
• No CCPs for soybeans
• CCPs for corn in two out of four years; subsidies
below their maximum in both years
Maximum Size of
Payments202
• CCP of $75 per acre
(19 percent of target price)
• Corn CCP of $39 per acre (15 percent of target price)
• Wheat CCP of $20 per acre (17 percent of target
price)
• Soybean CCP of $10 per acre (6 percent of target
price)
Maximum CCPs
and Production
Costs
203
• 14 percent of production
costs
• Corn: 10 percent of cost of production
• Wheat: 10 percent of production costs
• Soybean: 4 percent of production costs
Substitute Crops • Peanuts, rice, corn,
soybeans, hay, sorghum,
fruits, vegetables, melons
and wild rice
• Very few substitute crops
• Many regions plant corn and soybeans exclusively
Supply
Elasticities
• High supply elasticities • Low supply elasticities

130. As demonstrated in Table 4, upland cotton c ounter-cyclical subsidies are larger and paid out
far more frequently than counter-cyclical subsidies fo r major field crops in the Midwest. In addition,
counter-cyclical subsidies cover a greater portion of upland cotton producers' costs of production then
they do for soybeans, corn and wheat. It follows from these basic differences that the effect of
counter-cyclical subsidies for upland cotton is greater than that for major field crops in the Midwest.
The availability of substitute crops is another si gnificant reason why counter-cyclical payments for
upland cotton have a larger effect on acreage and production that they do for corn, wheat and
soybeans. Upland cotton acreage can more readily switch to the production of other crops and, thus,
has a higher elasticity of supply than soybeans, co rn and wheat. The collective effect of these
differences is to dramatically increase the ability of upland cotton counter-cyclical payments to reduce
risks associated with price variability and ultim ately, increase supply as compared with counter-
cyclical payments for soybeans, corn and wheat.

131. For all these reasons, upland cotton counter-cyc lical subsidies greatly reduce the risk of
producing upland cotton. They do so, however, only when upland cotton is grown on upland cotton
base, as only under this scenario is there the revenue stabilizing effect resulting from the combination
of upland cotton market revenue and upland cotton price-contingent counter-cyclical subsidies. This
is the reason that the vast majority of U.S. upland cotton is grown on upland cotton base.

132. The studies cited by the United States do not and can not address this crucial issue because
the data on upland cotton base and upland cotton plan tings is not available in the public domain.
204
Yet, this information was available to the origin al panel, and the same data is available to the

201 Exhibit Bra-675 (Updated Program Crop Comparison, March 2007).
202 Exhibit Bra-675 (Updated Program Crop Comparison, March 2007).
203 Compare Exhibit Bra-675 (Updated Program Crop Comparison, March 2007) to U.S. 2 response to
question 53, para. 101.
204 See, e.g., Brazil's attempt to obtain this data thr ough a Freedom of Information Act request was
rejected. See Exhibit Bra-689 (Freedom of Information Act Rejection Letter).

compliance Panel. Based on the data available to the original panel, it correctly rejected the
United States attempt to argue that counter-c yclical payments were "decoupled" from production. 205
Instead, it found a "strongly positive relationship" 206 between historic upland cotton producers
receiving upland cotton counter-cyclical subsidies and current upland cotton producers. It also found
that these subsidies allowed U.S. producers to re main farming upland cotton because they were an
important contributor to the total cost of production. 207 None of the studies of counter-cyclical
subsidies discuss such crucial data.

133. In response to this finding, the United States now claims that the fact that 96 percent of U.S.
upland cotton is produced on fa rms with upland cotton base acres
208 should not be surprising because
upland cotton was grown historically, and continues to be grown today, on land particularly suited for
upland cotton.209 Yet, this is precisely the basis for the or iginal panel's finding that the high per-acre
upland cotton counter-cyclical paym ents were connected with the current production of upland
cotton.210 By this admission, the United States confirms that when Congress set very high per-acre
payments for upland cotton base acres, it did so inte nding that the payments would be used to allow
producers of upland cotton to cover their high costs of production. That is exactly what the National
Cotton Council asked for prior to the FSRI Act of 2002. 211 Congress would not provide counter-
cyclical subsidies to historic cotton producers that are seven times higher per-acre than those for
historic soybean producers if it thought that the upland cotton producers would grow soybeans.212

134. Thus, the structure, design and operation of the counter-cyclical subsidies is to specifically
enable farmers that historically had planted high-cost upland cotton to continue to plant upland cotton.
This is exactly what has happened. Almost all ( 96 percent) of U.S. upland cotton continues to be
grown on farms with upland cotton base acres.
213 These farmers know that the counter-cyclical
subsidy will be paid if the pri ce received by the U.S. producer falls below the target price of
$0.724 per pound. And the average U.S. upland cotton farmer covered 10 percent of its total cost of
production with counter-cyclical payments over the life-time of the FSRI Act of 2002. 214 T h i s
evidence, not studies of counter-cyclical subsidies for other crops, demonstrates the linkage between
U.S. counter-cyclical subsidies, upland cotton plantings, supply and world market prices.

58. The Unites States stated that the key consid eration in assessing a farmer's decision to grow
upland cotton is whether the farmer has been coveri ng his variable costs of production. In this
connection, it presented upland cotton costs and returns estimates for marketing years 1999-2005
(Exhibit US-47). Brazil has disputed the absence of certain items – land, labour and capital recovery
costs - in the US calculations of variable costs. In response, the United States has referred to the
Commodity Costs and Returns Estimation Handbook (Exhibit US-88) prepared by a Task Force of the
American Agricultural Economics Association as the basis for leaving out these items in its

205 Panel Report, U.S. – Upland Cotton, paras. 7.634-7.647.
206 See, e.g., Panel Report, U.S. – Upland Cotton, paras. 7.6377.1362.
207 The original panel stated 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 n ecessary to cover their total costs." Panel Report, U.S. –
Upland Cotton, para. 7.1353.
208 Brazil's Rebuttal Submission, Table 3 at para.157. Results are from U.S. First Written Submission,
table at para. 224.
209 U.S. 2 April response to question 54, para. 115.
210 Panel Report, U.S. – Upland Cotton, para. 7.1362.
211 Exhibit Bra-109 (Testimony (Full) of Robert McLendon, Chairman, NCC Executive Committee,
Before the House Agricultural Committee. National Cotton Council (NCC)).
212 Exhibit Bra-675 (Updated Program Crop Comparison, March 2007).
213 Brazil's Rebuttal Submission, Table 3 at para.157. Results are from U.S. First Written Submission,
table at para. 224.
214 See Exhibit Bra-477 (U.S. Upland Cotton Costs and Returns).

calculations. However, the Task Force which authored the Hand book does not use the categories
"fixed" or "variable" costs and in fact recommends that the microeconomic concepts of fixed and
variable costs not be used in preparing and reporting cost and return estimates. Page 2-67 of the
Handbook states:

The Task Force therefore recommends that costs should be categorized only as to
whether they are associated with expendable factors or the services of capital assets.
The division of costs into categories such as fixed and variable should generally be
avoided in preparing CAR estimates. For the purpose of preparing CAR estimates for
specific enterprises, the Task Force recommends that all the costs of all expendables
be allocated to the generic group OPER ATING COSTS and that all other costs be
allocated to the group ALLOCATED OVERHEAD.
 Would the United States clarify whether the categories " operating costs" and " allocated
overhead" correspond to the economic concepts of fixed and variable costs? In particular, are
"operating costs" variable costs or not? Would the United States please indicate whether, and if
 so,
where, the Handbook makes these clarifications or distinctions.

135. Brazil welcomes the United States' acknowledge ment that operating costs are distinct from
variable costs. 215 However, having done so, the United St ates continues to blur the distinction
between the two. For example, the United States claims that "Brazil has attempted to include as
'variable' or 'operating'
 costs, costs that are not in fact 'expendable in a single defined period' including
land, unpaid labor, and capital recovery costs."216

136. This statement is not consistent with the earlier U.S. acknowledgment
217 that "operating
costs" and "variable costs" are distinct economic c oncepts. Nor is it correct. To clarify, Brazil does
not consider land, unpaid labor and capital recovery costs to be "operating costs". Brazil does,
however, consider these costs to be wholly, or in part, "variable costs".218 Brazil's approach is entirely
consistent with the approach detailed in the Am erican Agricultural Economics Association ("AAEA")
Handbook.

137. Brazil also welcomes the United States acknow ledgment that "allocated overhead" differs
from "fixed costs".
219 The United States then criticizes Brazil's inclusion of fixed costs and/or
imputed (or non-cash) cost as part total costs in its cost of production and planting decision
analyses.220 Brazil responds to these arguments in its comments on the U.S. response to question 59,
below, in which Brazil address comprehensively issues related cost of production and plantings
decisions that the United States raised in its 2 April responses to questions.

59. In discussing the impact of long-term costs of production (and hence long-term profitability)
of upland cotton production on farmers' decisions to exit cotton farming, the United States argues that
income from other crops and off-farm income must be into account. Why does the United States
consider these issues relevant given the original Panel's decision that "off farm income" is not a
legally relevant consideration. (Panel Report, para. 7.1354, footnote 1470) Please respond to
Brazil's arguments on this matter in paragraphs 249-253 of its Rebuttal Submission.

215 U.S. 2 April response to question 58, para. 132.
216 U.S. 2 April response to question 58, para. 134 (emphasis added).
217 U.S. 2 April response to question 58, para. 133.
218 Brazil's Rebuttal Submission, paras. 254-283.
219 U.S. 2 April response to question 58, para. 136.
220 U.S. 2 April response to question 58, paras. 135-136.

138. In response to a limited question by the compliance Panel concer ning income from other
crops and off-farm income, the United States launches into a lengthy discussion of farm
bankruptcy.221 The United States response misses the point of the compliance Panel's question.

139. Contrary to the U.S. response, Brazil do es not assert that the major issue before this
compliance Panel is whether upland cotton farmers would exit farming altogether but for marketing
loan and counter-cyclical subsidies. Rather, the rele vant question, as stated in question 59, is whether
farmers would exit "cotton farming," that is, woul d they discontinue planting upland cotton. The
evidence presented by Brazil demonstrates that a signi ficant percentage of U.S. upland cotton farmers
would exit the production of upland cotton.
 222

140. Throughout this proceeding, the United St ates, understandably, has sidestepped the $12.4
billion gap between upland cotton producers' total costs of production and market returns over the
past seven years. U.S. arguments have shifte d from highlighting the importance of whole-farm
costs223, to relying on cost and return data in the high price year of MY 2003 224, and finally, to
attacking USDA's own cost of production data itself. 225 Yet, none of these arguments individually or
collectively explains how an industry that would have lost $12.4 billion w ithout subsidies over the
past seven years226 is economically viable.

 (a) Whole Farm Costs Are Irrelevant

141. The U.S. argument that whole-farm costs are relevant to upland cotton production decisions
227
is simply not logical. Why would a farmer cross- subsidize the production of upland cotton – in effect
subsidizing foreign purchasers of low-priced/high-co st U.S. upland cotton – with income from other
crops or from off-farm income? The United States does not answer that question. Instead, it
highlights studies which find that farmers increas ingly supplement their income with off-farm
work.228 Brazil does not dispute these studies or this trend. Yet, the fact that U.S. upland cotton
farms earn income from growing other crops or in other sectors of the economy is not relevant to
these proceedings. As the original panel found, "[ w]e are considering costs and market revenues in
respect of upland cotton. Our examination is one of the upland cotton industry … We are not looking
into the possibility of cross-subsidization or cr oss-financing of insufficient market revenues for
upland cotton that may have come from other United States industries."
229 Moreover, as the studies
submitted by the United States point out, the issue of off-farm income is of particular importance for
small farms. 230 And as these studies also point out, most U.S. upland cotton production occurs on

221 U.S. 2 April response to question 59, paras. 137-142.
222 See Brazil's First Written Submission, Section 7.11; Brazil's Rebuttal Submission, Section 2.3.6;
Brazil's Opening Statement, Section 2.4; and Brazil's Comments on U.S. Oral Statements, Section 4.
223 U.S. First Written Submission, paras. 293-297; U.S. Rebuttal Submission, paras. 344-348; and
U.S. 2 April response to question 59, paras. 155-157.
224 U.S. Rebuttal Submission, para. 337; U.S. Opening Statement, paras. 11-13; and U.S. 2 April
response to question 59, paras. 144-145.
225 U.S. 2 April response to question 59, paras. 147-154.
227 U.S. 2 April response to question 59, paras. 155-157.
228 The United States repeatedly quotes a portion of one of these studies whic h finds that "[o[ff-farm
work could hypothetically effect exits in two ways" (U.S. Answers to Second Set of Questions, para. 156). As
explained above, the question before this compliance Panel is not whether farmers would go bankrupt. It is
whether a farmer would stop producing upland cotton. Furthermore, the "hypothe tical" effects of off-farm
income on farm-exits is no more than a theory. See Exhibit US-46 (Hoppe, Robert A. and Korb, Penni.
"Understanding U.S. Farm Exits." Economic Research Service Report 21. June 2006, p. 20).
229 Panel Report, U.S. – Upland Cotton, para. 1354, footnote 1470.
230 U.S. 6 March response to question 31, para. 30.

farms that have very big commercial operations.
231 The U.S. argument is, therefore, not even relevant
to the vast majority U.S. upland cotton production.

 (b) MY 2003 Cost Data Is Atypical

142. Much of the distorted U.S. analysis of "costs" rests on its reliance on an unusual year –
MY 2003.
232 This year was unusual because it was the first – and only time – in the history of the
FSRI Act of 2002 (and the first time in eight years) that U.S. farmers actually earned a profit ($65 per
acre) based solely on market revenue. The Un ited States understandably focuses its arguments on
MY 2003 cost of production data in its Rebu ttal Submission and subsequent submissions.233 In doing
so, however, it fails to acknowledge several important points.234

143. First, the U.S. MY 2003 cost data is not ma terially different from what Brazil has used during
this entire proceeding. The only difference is that it is broken down into three arbitrary cost groups –
low, medium and high.
235 When all cost groups are aggregat ed, the average acre planted to upland
cotton made a profit of $65. Brazil's assertions regarding the seven-year $837 loss on each acre
planted to upland cotton is based exclusively on USDA cost data and includes the average profit of
$65 per acre achieved in MY 2003. 236 Therefore, the United States assertion that "Brazil ask[ed] the
Panel to simply ignore this data" 237 is incorrect. Far from ignoring the data, Brazil used the same
USDA data in its First Written Submission, Rebuttal Submission and Oral Statement.238

144. Second, the United States failed to acknowledge that MY 2003 is the only year in the past
eight in which the U.S. producers covered their total costs of production only with market revenue. In
its response to this question, the United States has finally acknowledged that "prices in MY 2003 were
high."239 However, the United States now argues that that most producers nevertheless would have
covered their total costs in MY 2004 and 2005 because of, inter alia, increasing yields. 240 USDA
data squarely contradicts this statement: the data clearly show that the average acre planted to upland
cotton lost $18 in MY 2004 and $88 dollars in MY 2005.241

145. Third, U.S. producers' costs are increasing si gnificantly in MY 2006. National average yields
are estimated to be 668 pounds per planted acre in MY 2006, far lower than yields of 806 pounds per

231 U.S. 6 March response to question 31, para. 30.
232 U.S. 2 April response to question 59, paras. 144-146.
233 U.S. Rebuttal Submission, para. 337; U.S. Opening Statement, paras. 11-13; and U.S. 2 April
response to question 59, paras. 144-145.
234 U.S. Opening Statement, paras. 11-12; U.S. 6 March Response to Question 29, para. 20; and U.S.
2 April response to question 59, paras. 144-146.
235 Brazil notes that the U.S. also adjusts the data to exclude costs and returns associated with
cottonseed.
236 See Exhibit Bra-477 (U.S. Upland Cotton Costs and Returns); see also Exhibit Bra-475 (U.S.
Cotton Producers Costs and Returns Per Planted Acre, Excluding Government Payments, Economic Research
Service, USDA, accessed October 2006 at http://www.ers.usda.gov/data/costsandreturns/testpick.htm).
237 U.S. 2 April response to question 59, para. 145.
238 See, e.g., Brazil's First Written Submission, paras. 156-164.
239 U.S. 2 April response to question 59, para. 145.
240 U.S. 2 April response to question 59, para. 145.
241 Exhibit Bra-477 (U.S. Upland Cotton Costs and Returns); see also Exhibit Bra-475 (U.S. Cotton
Producers Costs and Returns Per Planted Acre, Excluding Government Payments, Economic Research Service,
USDA, accessed October 2006 at http://www.ers.usda.gov/data/costsandreturns/testpick.htm). Brazil notes that
USDA's use of harvest period prices underestimates lo sses in MY 2004. The harvest period (Oct-Nov) farm
price of upland cotton was 51 cents per pound (Exhibit Bra-477), while the marketi ng year average farm price
was just 42 cents per pound (Exhibit Bra-448 (Cotton and Wool Situation Outlook and Yearbook, USDA,
November 2005, p. 38, accessed October 2006 at http://usda.mannlib.cornell.edu/usda/current/CWS-
yearbook/CWS-yearbook-11-25-2005.pdf)).

planted acre in MY 2004 and 799 pounds per acre in MY 2005. 242 Further, U.S. producers are faced
with significantly higher seed, fertilizer, a nd fuel costs in MY 2006 than in MY 2003-2005. 243 Total
costs in MY 2006 are forecasted to be 10 percent higher than their MY 2003-2005 average. 244 With
market prices remaining low throughout the first eight months of MY 2006 245, the loss based on
market revenue is expected to significantly widen in MY 2006 compared to MY 2003-2005.246

146. Fourth, the United States makes the remarkable a ssertion that "there is no basis to assume that
the [MY 2003] results would have been s ubstantially different in later years" 247 However, unlike
MY 2003, when the average U.S. farm price was $0.62 per pound 248, the average farm price was
$0.416 per pound in MY 2004 and $0.477 per pound in MY 2005. 249 The current average farm price
for MY 2006, as of April 2007, is $0.472 per pound. 250 Thus, there is no way that the average
"mid-cost" producer, with total costs of $0.57 per pound, covered his or her total costs of production
in those years. Nor will those costs be covered in MY 2007.251

147. In any event, breaking upland cotton farms into arbitrary cost groups is neither necessary nor
particularly relevant. It is far more appropriate fo r this compliance Panel, like the original panel, to
examine national average cost of production data to get a complete picture of the U.S. upland cotton
industry. Indeed, the Appellate Body in Canada Dairy (21.5 II) found that

[i]t, therefore, seems to us that the benchmark should be a single, industry-wide cost
of production figure, rather than an indefi nite number of cost of production figures
for each individual producer. The industry -wide figure enables cost of production
data for producers, as a whole, to be aggreg ated into a single, national standard that
can be used to assess Canada's compliance with its international obligations.
252
148. Using national average data certainly does not "obscure" cost of production data as the
United States suggests. 253 Brazil, the United States and the compliance Panel are all aware that
upland cotton farmers have different cost structures. In any given year, about half of the acres planted
to upland cotton have costs that are higher than th e national average, while the other half has costs
that are less than the national average. This is nothing more than basic statistics. It follows, therefore,
that in years when the average acre planted to upland cotton lost mone y (six of the past seven years)
more than half of the acreage planted to upland cotton suffered a loss. In this context, it is import to
recall that Professor Sumner's analysis suggests that 17-19 percent of U.S. production of upland

242 For yields in MY 2004 and 2005, see Exhibit Bra-562 (Cotton and Wool Situation Outlook and
Yearbook, USDA, November 2006, Table 2, available at http://usda.mannlib.cornell.edu/usda/current/CWS-
yearbook/CWS-yearbook-11-21-2006.pdf). For yields in MY 2006, see Table 1 from the April 2007 Cotton and
Wool Outlook, accessed April 2007 at http://www.ers.usda.gov/Briefing/Cotton/Data/COTTONTABLE1.xls.
243 Compare seed, fertilizer and fuel costs in Exhibit Bra-475 (U.S. Cotton Producers Costs and Returns
Per Planted Acre, Excluding Government Payments , Economic Research Service, USDA, accessed
October 2006 at http://www.ers.usda.gov/data/costsandreturns/testpick.htm ) and Exhibit Bra-575 ("Cost-of-
production forecasts fo r U.S. major field crops, 2 006-2008F," Economic Research Service, USDA, accessed
January 2007 at http://www.ers.usda.gov/data/costsandreturns/data/Forecast/cop_forecast.xls).
244 Exhibit Bra-634 (Analysis of Planting Decisions Based on Expected Returns).
245 See Brazil's Comments to Question 82 below.
246 Based on partial year USDA and FAPRI data, the loss is expected to be $116 per acre, see Exhibit
Bra-648 (Actual Costs and Returns Analysis).
247 U.S. 2 April response to question 59, para. 145.
248 U.S. 2 April response to question 59, para. 145.
249 Exhibit Bra-562 (Cotton and Wool Situation Outlook and Yearbook, USDA, November 2006, p. 36,
available at http://usda.mannlib.cornell.edu/usda/current/CWS-yearbook/CWS-yearbook-11-21-2006.pdf)
250 See Table 1 from the April 2007 Co tton and Wool Outlook, accessed at
http://www.ers.usda.gov/Briefing/Cotton/Data/COTTONTABLE1.xls.
251 See Brazil's comments on the U.S. response to question 82, below.
252 Appellate Body Report, Canada – Dairy (21.5 II), para. 96.
253 U.S. 2 April response to question 59, para. 144.

cotton would cease without marketing loan and counter-cyclical subsidies.
254 This is consistent with
the notion that only higher-cost U.S. producers would exit upland cotton production without these
subsidies.

149. Thus, the various U.S. cost-related arguments based on MY 2003 data are entirely misplaced.
The reference period of MY 2005 demonstrates significant losses by the average acre of upland cotton
of $88 per acre. These losses are set to increase to an estimated $116 per acre in MY 2006.
 255 These
are significant losses and above the average $65 per acre loss per year over the lifetime of the FSRI
Act of 2002.256

 (c) USDA's Total Cost of Production Data is Relevant and Appropriate

150. For the first time in this proceeding, the United States attacks the total cost of production data
itself, arguing that it "provides a stylized, abstract view"
257 and is used by Brazil in a way in which "it
was never intended." 258 These criticisms echo similar arguments made by the United States in the
original proceeding.259 These old U.S. arguments attacking its own USDA cost data were properly
rejected by the original panel.260 The renewed arguments should again be rejected by this compliance
Panel.

151. The United States criticism of USDA's own total cost data is two-fold.
261 First, the U.S.
criticizes the method by which USDA values non-cash costs, such as imputed farm labor and land
ownership costs.262 Second, the United States argues that USDA's total cost data is not an appropriate
indicator of the financial viability of upland cotton farming because it includes non-cash costs. 263
Both criticisms of USDA's cost data are without merit.

152. The United States challenge to USDA's analysis of non-cash costs squarely contradict basic
economic and accounting principles. Non-cash costs, such as ownership costs and opportunity costs,
are real, not imaginary, costs, as the U.S. suggests. Indeed, USDA explains that:

[c]ommodity costs and retu rns 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 factors are owned. For example, if a
farmer fully owns the land used to produ ce 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 ope rating loans, the farmer still incurs an
economic cost because the savings could have earned a return in another use.
Likewise, the farmer has an opportunity cost of his/her labor used in the production of

254 Brazil's First Written Submission, para. 167.
255 Market returns minus total costs was reduced by the product of 5 percent and total costs, see Exhibit
Bra-648 (Actual Costs and Returns Analysis).
256 Exhibit Bra-477 (U.S Upland Cotton Costs and Returns).
257 U.S. 2 April response to question 59, para. 147.
258 U.S. 2 April response to question 59, para. 143.
259 See e .g., Section F of U.S. Further Rebuttal Submission from the original proceeding,
18 November 2003.
260 Panel Report, U.S. – Upland Cotton, paras. 7.1353-7.1354.
261 U.S. 2 April answer to question 54, para. 119.
262 U.S. 2 April answer to question 54 and 59, paras. 119, 147-151.
263 U.S. 2 April answer to question 54 and 59, paras. 119, 152-154.

the commodity because it could have been used on another farm or in off-farm
employment.
264
153. The need to cover total costs of production, including both cash and non-cash costs, is an
economic reality facing all farmers. No farmer wo uld or could repeatedly plant his fields with a
chronically loss-making crop. There is no basis for the U.S. assumption that farmers do not take into
account non-cash "opportunity" costs when making produc tion decisions. This assumption is directly
contradicted by USDA economists who include both cash and non-cash costs in their cost and returns
estimates.

154. The need for producers to cover total cost s of production was recently highlighted by the
Appellate Body in EC – Sugar. The Appellate Body found that

in the ordinary course of business, an ec onomic operator makes a decision to produce
and sell a product expecting to recover the total cost of production
 and to make
profits. Clearly, sales below total cost of production cannot be sustained in the long
term, unless they are financed from some other sources.265
155. The "some other sources" in this case that c over total costs of production are marketing loan
and counter-cyclical subsidies. Without such s ubsidies, average seven-year losses totalled $837 per
acre. With these two subsidies, the average acre showed a seven-year profit of $104 per acre.266

156. As noted by the Appellate Body, not only is an economic operator expected to cover his or
her total costs of production, but he or she is also expected to make a profit. Brazil notes that USDA
also recognizes the need for farmers to make a prof it. USDA defines "residual return to management
and risk" as follows:

[r]esidual returns to management and risk is the difference between the gross value
of production and total economic costs. The return to management and risk indicates
the extent to which longrun production co sts are covered by production valued at
average harvest-month prices.
267
157. The Appellate Body's findings in EC – Sugar and USDA's definition of residual returns to
management and risk demonstrate the importance of not only covering costs, but also of generating
profits from farming. The ability of upland cotton farm ers to cover their variable costs, let alone total
costs, is not sufficient to show that marketing loan and counter-cyclical subsidies do not impact
production.

158. Brazil's cost of production analysis has not previously factored in the obvious need to make
profits on the farmers' investments. This is because the huge losses based only on market revenue
readily demonstrate the decisive role played by marketing loans and counter-cyclical subsidies in
sustaining revenue and large amounts of upland cotton production. But if the compliance Panel were
to consider the need for farmers to generate some reasonable profit, the gap between market returns
and such a profit margin obviously would be even greater. For example, assuming even a fairly low
profit margin of only 5 percent, the average gap between market revenue and the five percent profit
would increase to $1,017 per acre in the seven y ear period of MY 1999-2005 . For MY 2005 alone,

264 See Commodity Costs and Returns: Methods, Economic Res earch Service, USDA, accessed
April 2007 available at http://www.ers.usda.gov/Data/CostsAndReturns/methods.htm (emphasis added).
265 Appellate Body Report, EC – Sugar, para. 266 (emphasis added).
266 Exhibit Bra-477 (Upland Cotton Costs and Returns).
267 See Definition of Residual Returns to Management and Risk, Economic Re search Service, USDA,
accessed April 2007 available at http://www.ers.usda.gov/data/CostsAndReturns/Glossary/def_resr.htm).

the gap would be $115 per acre – not the $88 per acre based on a break-even methodology.
268 The
projected gap in MY 2006 would be $144 per acre, based on a five percent profit margin.269

159. Next, the new U.S. criticism of USDA's valu ation methodologies ignores the fact that they
were conceived by the American Agricultural Economics Association and implemented by USDA.
270
The data are based off of surveys that are ge nerated in the ordinary course of USDA business. 271 The
methods and data used to generate cost of pr oduction data are objective and appropriate. USDA
explains that four approaches are used to estimat e commodity costs, including (1) direct costing,
(2) valuing input quantities, (3) indirect co sting and (4) allocating whole-farm expenses. 272 T h e
United States singles out only the fourth element for its criticism – not the other three.

160. Brazil notes that "allocat ing whole-farm expenses" 273 is only used by USDA to determine
"general farm overhead" and "taxes and insurance." 274 These costs account for about 5 percent of
upland cotton producers' total costs of production. 275 The other valuation methodologies used by the
USDA cost survey are also properly used to addr ess the question before this compliance Panel.
USDA explains that "[u]npaid labor hours are valued using an estimate of the wages earned off-farm
by farm operators" 276 and that "[l]and is valued according to the average cash rental rate for land
producing the commodity in the particular area." 277 These relatively straightforward methodologies
in no way distort or undermine an assessment of the financially viability of upland cotton farming
using total costs of production.

161. Finally, the United States criticizes Brazil' s use of USDA total costs of production data by
highlighting the fact that the total cost of producti on was greater than market returns for nearly all
U.S. field crops in MY 2005. Based on this fact , the U.S. argues that Brazil's planting decision
analysis is "absurd"
278 and "fundamentally erroneous." 279 Neither Brazil nor the U.S. Congressional
Research Service ("CRS"), an agency of the U.S. Government, would agree with this latest U.S.
assertion. In fact, CRS confirms that "it is only with the aid of subsidies that a substantial portion of

268 Annual market returns minus total costs were reduced by the product of 5 percent and total costs,
see Exhibit Bra-477 (Upland Cotton Costs and Returns).
269 Market returns minus total costs was reduced by the product of 5 percent and total costs, see Exhibit
Bra-648 (Actual Costs and Returns Analysis).
270 See Commodity Costs and Returns: Methods, Economic Res earch Service, USDA, accessed
April 2007, available at http://www.ers.usda.gov/Data/CostsAndReturns/methods.htm.
271 The data are collected in Agricultu ral Resource Management Surveys, s ee Commodity Costs and
Returns: Methods, Economic Research Serv ice, USDA, accessed Ap ril 2007 available at
http://www.ers.usda.gov/Data/CostsAndReturns/methods.htm.
272 See Commodity Costs and Returns: Methods, Economic Res earch Service, USDA, accessed
April 2007, available at http://www.ers.usda.gov/Data/CostsAndReturns/methods.htm.
273 U.S. 2 April answer to question 59, paras. 148-150.
274 See Commodity Costs and Returns: Methods, Economic Res earch Service, USDA, accessed
April 2007, available at http://www.ers.usda.gov/Data/CostsAndReturns/methods.htm.
275 Exhibit Bra-475 (U.S. Cotton Producers Costs and Returns Per Planted Acre, Excluding
Government Payments, Economic Research Se rvice, USDA, accessed October 2006 at
http://www.ers.usda.gov/data/costsandreturns/testpick.htm). In any event, it is appropriate to allocate costs to
different crops based on their contribution to a farm's operating margin. It is the most reliable method of
allocating costs that must be accounted for.
276 See Commodity Costs and Returns: Methods, Economic Res earch Service, USDA, accessed
April 2007, available at http://www.ers.usda.gov/Data/CostsAndReturns/methods.htm.
277 See Commodity Costs and Returns: Methods, Economic Res earch Service, USDA, accessed
April 2007, available at http://www.ers.usda.gov/Data/CostsAndReturns/methods.htm.
278 U.S. 2 April response to question 59, para. 143.
279 U.S. 2 April response to question 53(c), para. 102.

U.S. production [of all crops] is made economically viable." 280 CRS's analysis relied upon a graph of
total costs versus market returns in selected periods281 with and without subsidies as set out below:

Figure 5 – Excerpt from CRS Report to Congress282
162. Based on this chart calculated from USDA da ta, CRS concluded that "the substantial
contribution of subsidies toward covering otherw ise unmet production costs implies a high chance for
adverse rulings for any of the major covered commodities."283

163. Indeed, data on farm income from USDA's Economic Research Service ("ERS") shows that,
in MY 2005 as well as in previous years, the U.S. farm sector as a whole, i.e., including crop and
livestock production, has been viable based on an assessment of costs, farm-related revenues and

government subsidies.284 As the ERS Agricultural Income and Finance Outlook of November 2006

280 Exhibit Bra-577 (Schnepf, Randy, Potential Cha llenges to U.S. Farm Subsidies in the WTO,
Congressional Research Service Report for Congress, 25 October 2006, p. 23).
281 The periods vary across commodities based on the consistency of program operations and the
availability of data. Corn and sorghum are for the period 1996-2004, soybeans and cotton are for the period
1997-2004, wheat is for the period 1998-2004, rice is for the period 2000-2004, and peanuts are for the period
2002-2004. See Exhibit Bra-577 (Schnepf, Randy, Potential Ch allenges to U.S. Farm Subsidies in the WTO,
Congressional Research Service Report for Congress, 25 October 2006, p. 25).
282 Exhibit Bra-577 (Schnepf, Randy, Potential Cha llenges to U.S. Farm Subsidies in the WTO,
Congressional Research Service Report for Congress, 25 October 2006, p. 23).
283 Exhibit Bra-577 (Schnepf, Randy, Potential Cha llenges to U.S. Farm Subsidies in the WTO,
Congressional Research Service Report for Congress, 25 October 2006, p. 23). Brazil notes that consistent with
the analysis conducted by CRS, bo th sorghum and wheat acreage has d eclined. Sorghum planted acreage
declined by about 50 percent from MY 1996 to MY 2005. See USDA's Feedgrains database, available at
www.ers.usda.gov/data/feedgrains.
284 For detailed income data for 2003-2007, see www.ers.usda.gov/briefing/farmincome/data/nf_t2.htm,
accessed April 2007.
Figure 1. U.S. Revenue Components as Share of Total Costs, Selected Program
Commodities
Subsidy Component
Market Returns
Source: Calculated by CRS from USDA data.
Soybeans Corn Sorghum Peanuts Wheat Cotton Rice
Percent of Total Costs

points out, this is the case primarily due to record subsidy payments of $24.3 billion in MY 2005, with
a significant portion of these payments received from "ad hoc and emergency programs".
285
164. USDA data shows a profit of $222 milli on in MY 2005 from the production of soybeans,
corn, sorghum, peanuts, wheat, upland cotton and rice – taking into account total costs, market returns
and revenue from the marketing loan, counter-cyclical and direct payment program as well as crop
insurance subsidies.286 Production of certain crops in MY 2005, including upland cotton, resulted in
losses based on market revenue alone. 287 Citing low prices in MY 2005, the United States
government provided additional very high em ergency payments amounting to $3.2 billion. 288 These
additional subsidies are not accounted for in the abov e assessment of the overall financial viability of
these seven crops.

165. Thus, the United States is incorrect when asser ting that "U.S. farmers would have lost money
across the board from producing any of these crops".289

166. To allow a more comprehensive assessment of the role of U.S. subsidies in ensuring the
financial viability of U.S. program crop production, Brazil also provides the compliance Panel with
data for the other years under the FSRI Act of 2002. Between MY 2002 and 2005, the gap between
total costs and market returns for soybeans, co rn, sorghum, peanuts, wheat, upland cotton and rice
was $43 billion.
290 Marketing loan, counter-cyclical, direct and crop insurance subsidies to the same
crops amounted to $53 billion, providing a $10 billion offset to shortfalls in revenue. 291 In addition,
U.S. farmers received large emergency and disast er payments in totaled $8.5 billion over the
MY 2002-2005 period. 292 This evidence demonstrates that large portions of U.S. program crop
production, including upland cotton, are profitable only due to large U.S. subsidies.

167. In sum, in view of tens of billions in va rious forms of subsidies provided to program crops
under the FSRI Act of 2002, CRS's and Brazil's conclusion reached based on USDA's cost and returns
data are neither absurd nor unexpected. The United States' claim that Brazil's and CRS's methodology
of assessing USDA's cost and return data would lead to the conclusion that all of U.S. agriculture is
not viable even with subsidies is simply wrong. The USDA data discussed above shows that certain
sectors of U.S. agriculture are not viable but for
 U.S. government subsidies. It also confirms Brazil's
analysis293 and the findings of the original panel 294 with respect to the profitability of growing upland
cotton in the United States.

60. In its Rebuttal Submission, the United States argues that Prof. Sumner's description of the
model that appeared in a recent CATO publication is not "appropriate" for use in a WTO dispute
involving claims of serious prejudice. Professo r Sumner has since introduced "more empirical and
institutional detail" to the model used in th is dispute. These changes are described in
paragraphs 111-117 of Br azil's Opening Statement. Does th e United States view these changes as
being sufficient to make the model appropriate for u se in a WTO dispute involving claims of serious

285 See ERS Agricultural Income and Finance Outlook of November 2006, p. 4-5 accessible at
http://usda.mannlib.cornell.edu/usda/current/AIS/AIS-11-30-2006.pdf, accessed April 2007.
286 Exhibit Bra-690 (Crop Losses and Profits 2002-2005).
287 See Exhibit Bra-690 (Crop Losses and Profits 2002-2005).
288 See ERS Data on Direct Government Payments 2002-2007 at
www.ers.usda.gov/Briefing/FarmIncome/Data/Government%20payments0207.xls, accessed April 2007.
289 U.S. 2 April response to question 53, para. 101.
290 See Exhibit Bra-690 (Crop Losses and Profits 2002-2005).
291 See Exhibit Bra-690 (Crop Losses and Profits 2002-2005).
292 See ERS Data on Direct Government Payments 2002-2007 at
www.ers.usda.gov/Briefing/FarmIncome/Data/Government%20payments0207.xls, accessed April 2007.
293 See Brazil's First Written Submission, Section 7.11; Brazil's Rebuttal Submission, Section 2.3.6;
Brazil's Opening Statement, Section 2.4; and Brazil's Comments on U.S. Oral Statements, Section 4.
294 Panel Report, U.S. – Upland Cotton, para. 7.1353.

prejudice? If not, what modifications does the United States think should have been made to the
model?

168. Brazil also notes that, in response to this question, the United States once again repeats its
summary and general criticism of Professor Sumner's simulation model. However, the United States
does not even attempt to rebut any of the specific arguments, explanations and rebuttals submitted by
Brazil and Professor Sumner in the many submissions since the beginning of this proceeding.295

2. Increase in world market share - Article 6.3(d) of the SCM Agreement

Questions to the United States

75. Could the United States explain further the textual basis of its argument that "Article 6.3(d) is
not concerned with absolute market share and wheth er or not in any given year a member's market
share would have been lower if subsidies were remo ved"? (Rebuttal Submission of the United States,
para. 401)

169. The U.S. response provides no clear guidance with respect to the textual basis for its
argument regarding the first element of Article 6.3(d), i.e., whether there has been an increase in the
world market share for the year in question compared to the previous three-year average. Nor does
the United States elaborate, either in this respon se or in any of its other submissions, on what it
believes to be the required proof with respect to the first element of Article 6.3(d). Rather, the United
States vaguely asserts that "what is at issue is move ment, not something static like the absolute level
of market share in a particular year."
296 The United States then concludes that "the upward movement
[] itself [must be] proven to be 'the effect' of a challenged subsidy." 297

170. It is difficult to respond to such vague argu ments. Yet, using the terminology in the U.S.
response, Brazil has demonstrated that the "movement" ( i.e., the increase in MY 2005 compared to
the previous three year average of MY 2002-MY 200 4) was the effect of marketing loan and counter-
cyclical subsidies. Brazil proved this by showing that but for the marketing loan and counter-cyclical
subsidies, the U.S. world market share in MY 2005 would not have increased, but would have
decreased compared to the MY 2002-MY 2004 three-year average. 298 This is not a "static" analysis,
as asserted by the United States. 299 Rather, this assessment co nstitutes a dynamic comparison
between two time periods demonstrating that it was the effect of the two challenged subsidies that led
to the increase in the U.S. world market share in MY 2005 compared to its previous three-year
average.300

171. Finally, Brazil refers the compliance Panel to its response to question 76, in which it
addresses in detail the absence of any textual basis for the U.S. argument regarding the second
element of Article 6.3(d) – the consistent tre nd. The U.S. response to question 75 provides no
additional textual basis or argument to support its ne w and erroneous interpreta tion of the "consistent
trend."

295 See, e.g., Brazil's Comments on U.S. Oral Statements, paras. 35-56.
296 U.S. 2 April response to question 75, para. 175.
297 U.S. 2 April response to question 75, para. 175.
298 Brazil's Rebuttal Submission, paras 348-349; Br azil's First Written Submission, paras. 214-226;
230-236.
299 U.S. 2 April response to question 75, para. 175.
300 Brazil's Rebuttal Submission, paras 348-349; Br azil's First Written Submission, paras. 214-226;
230-236.

C. C
LAIM OF BRAZIL REGARDING THREAT OF SERIOUS PREJUDICE

Questions to both parties

78. Could both parties comment on the statements of Canada that "(a)t issue is whether these
programmes....threaten to cause serious prejudice si mply by virtue of their existence" and that
"(c)ertain subsidy programs, by their very nature, gi ve rise to a constant likelihood of support that
results in a permanent threat of serious prejudice"? (Third Party Submission of Canada, paras. 9-10)

172. As set out in Brazil's answer to this question, Brazil is not asserting that the existence of the
marketing loan and counter-cyclical subsidy programs, in and of themselves, causes a threat of serious
prejudice.

173. Brazil notes the U.S. assertion in its response that a challenge to the very "existence" of such
programs would be "extraordinary" and "remarkable." In effect, what the United States asserts is that
"per se" challenges – i.e., challenges to the very existence – of subsidy programs under Articles 5
and 6.3 of the SCM Agreement are, as a practical matter, simply not viable. Yet, the United States'
preliminary ruling arguments in this case seek to require the categorization of Article 6.3 claims in
strict "per se" and "as applied" terms. According to the United States, "as applied" claims could only
be asserted against the application of subsidies, i.e., the payment of subsidies for a specified period of
time.
301 And the only implementation obligation regardi ng such subsidies that cause adverse effects,
according to the United States for such subsidies, is to remove the effects of such historical subsidy
payments (i.e., the "application"). 302 On the United States view, a Member can take no action when
recurring payments are found to cause adverse effect s because the "effects" of past payments are
wiped away by new payments that, it contends, ca nnot be regarded as "measures taken to comply",
even though they have an extremely close connection to the DSB's recommendations and rulings
regarding past payments. Brazil addresses this i ssue further in its comments on the United States'
response to question 45, above.

174. In its response to question 78, the United States has now confirmed its views of the practical
impossibility ("extraordinary" and "remarkable") of establishing a "per se" violation of Articles 5
and 6.3 of the SCM Agreement. Yet, in doing so, the United States has also confirmed that its
arguments reduce the obligation in Article 7.8 of the SCM Agreement to inutility where a Member
grants annual recurring payments to support the pr oduction of an annual crop. Under its strict
segmentation of serious prejudice claims into "per se" and "as applied" categories, this remedy
becomes meaningless. Indeed, acceptance of such a strict categorization would prevent Members
suffering serious prejudice from securing any prospectiv e relief for the future application/payment of
recurring subsidies under such programs. This is because, as the United States has argued, only "per
se" challenges can result in any obligation to cha nge the statutory or regulatory provisions mandating
subsidies.
303 Members seeking relief by challenging, "as applied", the application of those statutory
and regulatory provisions would, in the case of recurring annual payments, have to continually
institute new WTO proceedings, but would never ha ve any right to take "countermeasures" because
there would never be any compliance measures.304 As Brazil has demonstrated, such an interpretation
is neither justified nor mandated by the text, context, and object and purpose of Articles 5 and 6 of the
SCM Agreement.305

301 U.S. Rebuttal Submission, paras. 20-28.
302 See U.S. 2 April response to questions 47 and 48, paras. 53-57; U.S. 27 February response to
question 17(b), para. 32.
303 See e.g., U.S. Rebuttal Submission, paras. 20-28.
304 See Brazil's comments on the U.S. 2 April answer to question 45, above.
305 Brazil's 27 February response to questions 11 and 12, para. 83-116; Brazil's comments on U.S.
27 February response to question 17, paras. 27-31.

79. Could the parties state their views on th e analysis of the ordinary meaning of the term
"threat" in paras. 15-28 of the Third Party Submission of Canada?
175. The United States' response reaffirms its attempt to import the "imminent and clearly
foreseen" standard of threat in Article 15.7 into Part III of the SCM Agreement.306 Brazil has
explained in its response to this question and in its First Written Subm ission why this is contrary to
the text, context, and object and purpose of Articles 5 and 6 of the SCM Agreement. In this comment,
Brazil addresses briefly a number of points raised by the U.S. response.

176. The United States is incorrect in asserting that footnote 5/Article 6 and Article 15.7 of the
SCM Agreement, together with Article 4.1 of the Safeguards Agreement "serve a similar function."
307
Brazil explained in detail in its response to this question 308 that the "imminent and clearly foreseen"
threat standards in Article 15.7 and Ar ticle 4.1 serve a distinct function, i.e., regulating unilateral
action by investigating authorities of imminent surges of imports.309 By contrast, Part III of the
SCM Agreement deals with the far broader object of protecting against the effects of subsidies in a
multilateral dispute settlement context. Such effects may or may not involve the imminent shipment
of goods. Thus, as Brazil has argued, a threat standa rd such as "significant likelihood" is consistent
with both the slower pace of WTO dispute settlement procedures and its the associated remedies, as
well as the time it takes for the effects of certain types of subsidies to materialize.

177. The United States' response distinguishes between a temporal ("imminent") and a probability
of occurrence ("clearly foreseen") component of threat under Article 15.7. The United States asserts
that Canada's (and Brazil's) approach ignores the temporal element altogether.
310 This is not correct.
Rather, Brazil asserts that the notion of "imminent" is appropriate given the ability of investigating
authorities (under Article 17 of the SCM Agreement) to take rapid action against subsidized imports.
Yet, such a standard is not appropriate in a multila teral proceeding. In effect, the United States is
requesting the compliance Panel to adopt a "temporal " standard that will force WTO Members to wait
just until subsidies are about to cause serious pr ejudice before asserting their multilateral rights.
Brazil has explained why application of the particular "temporal" element ("imminent") of Part V into
Part III of the SCM Agreement is inconsistent with rules of treaty interpretation.

178. However, Brazil emphasizes again th at it does not suggest that there be no temporal element
to a threat standard in Part III of the SCM Agreement. Rather, Brazil's "significant likelihood"
standard incorporates the notion that the threat must be real, not be based on allegation, conjecture or
remote possibility. In sum, the temporal element should be tailored to the particular object and
purpose and remedies and procedures applicable to multilateral disputes settlement proceedings
applicable to Part III of the SCM Agreement, not blindly imported from the different context in Part V
of the SCM Agreement.

Questions to the United States

80. How does the United States address the argument of Japan that in view of the different
purposes of Parts III and V of the SCM Agreement th e standard for determining threat of material

306 See U.S. Rebuttal Submission, para. 410 ("There is no reason why the elaboration of the term
"threat" in Article 15.7 of he SCM Agreement and Article 4.1(b) should not be used as contextual guidance in
interpreting the same term in footnote 13 of the SCM Agreement."). The "elaboration" advanced by the
United States is the "imminent and clearly foreseen" standard.
307 U.S. 2 April response to question 79, para. 184.
308 Brazil's 2 April response to question 86, paras. 172-177.
309 See Article 15.7 ("No one of these factors by itsel f can necessarily give d ecisive guidance but the
totality of the factors considered must lead to the conclusion that further subsidized exports are imminent and
that, unless protective action is taken, material injury would occur. ").
310 U.S. 2 April response to question 79, para. 181.

injury in Article 15.7 of the SCM Agreement is an inappropriate standard for determining the
existence of a threat of serious prejudice under Pa rt III of the SCM Agreement? (Third Party
Submission of Japan, paras. 8-12.) '
179. Brazil believes that Japan has correctly identified significan t differences between Parts III
and V of the SCM Agreement that demonstrate the inappropriateness of importing the "imminent and
clearly foreseen" standard of Article 15.7 into Part III of the SCM Agreement. Brazil therefore
disagrees with the primary point made by the United States in this response, i.e., that there is no
difference between the function, object, and pu rpose of Article 15.7 and Part III of the
SCM Agreement.

180. The United States suggests that "there is no basis for understanding the same terms in
[Article 5/footnote 13 and Article 15.7] to have different meanings based on the an assumption that
national authorities are necessarily prone to 'misusing' their discretion whereas WTO panels are
not."
311 This is a false argument. Neither Brazil nor Japan "assumes" that investigating authorities
will misuse their discretion. Instead, Brazil em phasizes that there are c onsiderably different
"temporal" considerations for such authorities compared to a WTO panel.

181. While the United States champions the "temporal" element of "imminent", the U.S. argument
ignores the vastly different temporal periods involved in a rapid un ilateral provisional remedy based
on Part V and years of WTO dispute settlement proceeding under Part III of the SCM Agreement.

182. It is entirely appropriate that investigating authorities armed with rapid provisional remedies
to control imports be compelled to make a finding th at such imports are "imminent." The purpose of
the rapid provisional remedies under Articles 17 and 15.7 of the SCM Agreement ensure that the
domestic industry need not suffer material injury while waiting for remedies to take effect. Those
rapid remedies available in the unilateral trade re medy context explain why the drafters used an
"imminent" temporal standard of threat.

183. But the situation in a challenge under Part III of the SCM Agreement is totally different.
Part III is not focused on controlling subsidized imports but rather on the adverse effects of any
subsidy. Even the expedited di spute settlement procedures potentially available (but seldom used)
under Article 7 of the SCM Agreement require at least 18 months of litigation time before a ruling and
implementation can take place. No provisional "sel f-help" remedies are available under these rules.
If "imminent" threat were the standard, then a WTO panel could be confronted with facts
demonstrating that the threat was "clearly foreseen " but was not "imminent" because the effect of the
subsidies would not take place for another year or two.
312 (By contrast, a domestic industry could
petition investigating authorities only months before major shipments of subsidized goods were
scheduled to be shipped and obtain relief under pr ocedures sanctioned by Articles 15.7 and 17 of the
SCM Agreement.) The complaining WTO Member would, in effect, be left without a remedy for
future serious prejudice that was real, but not "imminent."

184. The United States asserts that both Article 15. 7 and footnote 13/Article 5 strike a balance
between disciplining and permitting subsidization.
313 Yet, if the real balance between disciplining
subsidies and permitting their use is to be maintained, the concept of threat must be flexible enough to
allow the disciplining of the effects of subsides – in practical terms – well before subsidized products
are about to hit the market. Avoiding real and foreseen future adverse effects in the form of material

311 U.S. 2 April response to question 80, para. 192.
312 By contrast, a domestic industry could petition investigating authorities only months before major
shipments of subsidized goods were scheduled to be shipped and obtain relief under procedures sanctioned by
Articles 15.7 and 17 of the SCM Agreement.
313 U.S. 2 April response to question 81, para 192 (c laiming that both Article 15.7 and Part III function
to establish a balance between the right to subsidized and the right to discipline subsidies).

injury and serious prejudice is the object of both Article 15.7 and Part III of the SCM Agreement.
However, the entirely different temporal aspects of these two different remedies and procedures
compel the use of different threat standards to maintain that balance. Otherwise, the U.S.
interpretation creates far greater an opportunity for subsidizing Members to cause serious prejudice
without any effective multilateral relief. This ap pears to be the main objective of the Japanese
arguments and is one that Brazil supports.

81. How does the United States respond to the argument of Australia that "it is beside the point
for the United States to argue that the programm es under consideration are due to expire in late
2007"? (Third Participant Oral Statement of Australia, para. 13)

185. The United States' response repeats its erroneous assertions that there is no threat of serious
prejudice because the FSRI Act of 2002 will allegedl y expire by the end of marketing year 2007, i.e.,
31 July 2008.
314

186. Brazil disagrees that the alleged expiration of th e FSRI Act of 2002 in th e end of July 2008 is
a relevant fact before the compliance Panel.315 The "matter" before the compliance Panel with respect
to Brazil's threat of serious prejudice claim is wh ether marketing loan and counter-cyclical subsidies
for MY 2006 and MY 2007 cause a threat of serious prejudice. MY 2006 is the relevant year to
consider whether threat of serious prejudice presen tly exists. It will not end until 31 July 2007, i.e.,
after the compliance Panel issues its determination. MY 2007 will not end for another 16 months, i.e.,
on 31 July 2008. The FSRI Act of 2002 re mains in effect until the end of MY 2007. 316 Brazil's threat
of serious prejudice claims in this proceeding involve the determination of whether there is a threat of
serious prejudice today, not at the end of MY 2007 or beyond.

187. Yet, having asserted (incorrectly) that the expi ration of the FSRI Act of 2002 is a relevant fact
by suggesting that marketing loans and counter-cycli cal subsidies may also completely expire, the
United States is in no position to then assert that it is entirely irrelevant for the compliance Panel to
consider whether the marketing loan and counter-cyc lical subsidies will continue, in some form or
another, in the next U.S. Farm Bill.
317 It is undisputed that there will be some new Farm Bill that will
be enacted at some time in the future after these proceedings have finished. 318 The marketing loan
program for upland cotton has been in existence si nce 1986 and, since, has been a key component of
U.S. farm legislation. The current USDA proposal calls for a continuation of both the marketing loan
and the counter-cyclical payment programs with certain changes. 319 Thus, Australia is certainly
correct when it states that "there is no guarantee that [the marketing loan and counter-cyclical
programs] will not be rolled over or maintain ed in another form with adverse effect." 320 T h e
compliance Panel cannot, of course, determine the exact scope of the marketing loan and counter-
cyclical provisions that will exist in the next U.S. farm bill.

314 U.S. 2 April response to question 81, para. 195.
316 For counter-cyclical payment provisions , see Section 1108 of the 2002 FSRI Act ("This subtitle
shall be effective beginning with the 2002 crop year of each covered commodity through the 2007 crop year.").
Exhibit Bra-29 ( 2002 Farm Security and Rural Investment Act ). For marketing loan provisions , see
Section 1207(a)(1) of the 2002 FSRI Act ("During the period beginning on the date of the enactement of this
Act through July 31, 2008, the Secretary shall issu e marketing certificates or cash payments …").
Exhibit Bra-29 (2002 Farm Security and Rural Investment Act).
317 U.S. 2 April response to question 81, para. 197.
318 See, e .g., CRS Report for Congress, "Farm Bill Proposals and Legislative Action in the
110th Congress," available at http://www.nationalaglawcenter.org/assets/crs/RL33934.pdf, accessed April 2007.
319 USDA's Farm Bill proposal is available at http://www.usda.gov/documents/07finalfbp.pdf, accessed
April 2007.

188. Finally, whether the provisions of any ne w Farm Bill fully remove the serious prejudice
caused by the FSRI Act of 2002, or the ongoing threat thereof, cannot be determined at this time.
However, the United States is incorrect to suggest th at the mere expiration of the FSRI Act of 2002 in
the future would represent a "withdrawal" of the subsidy.
321 If the marketing loan program and the
counter-cyclical payment programs remain in some form in the new Farm Bill – or are replaced by
programs with similar effects – then these subsidies will not have been withdrawn, within the
meaning of Article 7.8 of the SCM Agreement.322

82. Could the United States comment on the proj ections of marketing loan and counter-cyclical
payments in Table 26 of Brazil's First Writte n Submission and on the projections of prices and
subsidy payments in Table 27 of Brazil's First Wr itten Submission? Could the United States explain
how the data in these Tables support its argument that producers are likely to expect low or no
marketing loan payments in MY 2007? (Rebuttal Submission of the United States, para. 418)

189. In its answer to this question, th e United States focuses on projections of prices
323 to derive
projected subsidies and downplays projections of subsidy outlays itself (what it terms "aggregate
figures"324), arguing that it is "difficult to fit these projections" 325 with the projections of prices. This
is highly misleading and contrary to basic accounting principals used and espoused by USDA. 326
Projections of prices and subsidy outlays are, in fact, entirely consistent, as explained below.

190. Consider the following simplified example, as articulated by Professor Sumner in Exhibit
Bra-659.

But, let us take the case of a farmer with the following view of the future AWP. He
considers that there is a 40% chance of an AWP of 42 cents, a 20% chance of an
AWP of 52 cents and a 40% chance of an AWP of 62 cents. The expected value is
exactly 52 cents. He expects no marketing lo an payout, but the value of the program
is 4 cents per pound to him. That is 0.4(52-42) = 4 cents. Only if the farmer was
absolutely sure the AWP could not be below the loan rate would the program be of no
value.
327
191. Even if the Adjusted World Price ("AWP") is expected to be $0.52 per pound, or higher, it
does not mean that the marketing loan program provi des no benefit. As noted by the Appellate Body,
even if U.S. upland cotton farmers expected prices to be above the adjusted world price at the time of
planting, they "were also aware that if actual prices were ultimately lower, they would be 'insulated'
by government support, including not only market ing loan program payments but also counter-
cyclical payments, which were based on a target price of $0.724 per pound."328

192. The distinction between the prices farmers e xpect and the marketing loan subsidies they
expect is akin to the difference between determinis tic and stochastic projections of marketing loan
subsidy outlays.329 Like farmers, USDA also ascribes value to the marketing loan program even when
prices are expected to be at or above the loan rate. For example, USDA's deterministic projection of

321 U.S. 2 April response to question 81, para. 196.
322 See Appellate Body Report, U.S. – Softwood Lumber IV (21.5), para 77.
323 U.S. 2 April response to question 82, para. 202.
324 U.S. 2 April response to question 82, para. 202.
325 U.S. 2 April response to question 82, para. 202.
326 See Brazil's 2 April response to question 89, para. 189 ( "deterministic projections, by their nature,
tend to underestimate outlays").
327 Exhibit Bra-569 (Statement of Professor Sumner Concerning Various U.S. Argument, para. 55).
328 Appellate Body Report, U.S.-Upland Cotton¸ para. 445 (addressing similar arguments raised by the
United States in paras 226-235 of its First Written Submission).
329 For a detailed explanation of the difference be tween deterministic and stochastic estimates, see
Brazil's Opening Statement, para. 82 and Brazil's 2 April answer to question 89, paras. 189-190.

marketing loan subsidies, which is based on pr ice projections, is $0 in MY 2009, while its stochastic
projection is $468 million.330

193. USDA's deterministic projection of marke ting loan subsidies in MY 2007 is $238 million,
indicating that USDA expects the AWP to be below the loan rate.
331 However, based on the probably
that prices will be even lower, USDA's stochas tic projection of marketing loan subsidies is
$798 million. USDA's latest projection that upla nd cotton production will be 20.7 million bales in
MY 2007332 suggest per-unit expected marketing loan subsidies of 8 cents per pound 333, not 2 cents
per pound, as put forward by the United States.334

194. In sum, by relying on expected prices, instead of expected subsidies, the United States is
repeating a mistake it has made throughout this procee ding. Only stochastic estimations of marketing
loan subsidies capture the likelihood that prices w ill be lower and payments higher. Relying on the
difference between the expected AWP and the loan rate does not capture this effect. As explained by
USDA, "deterministic projections, by their nature, tend to underestimate outlays."335

195. Brazil notes that the United States does cite to FAPRI's July 2006 stochastic projections of
marketing loan subsidies. However, this projec tion of marketing loan payments of 1.9 cents per
pound
336 is significantly below USDA's own projections of 8 cents per pound. There is a very good
reason why USDA estimates are more reliable than th e July 2006 FAPRI projections – they are more
recent. USDA estimates are found in USDA's Commodity Estimates Book for the FY 2008
President's Budget, which was released in Febr uary 2007 – eight months later than the FAPRI
baseline that the United States relies on.337

196. Furthermore, while the complete 2007 FAPRI baseline has not been released
338, the parts that
have been released confirm that FAPRI's projecti ons of upland cotton prices in July 2006 were too
high. For example, FAPRI now projects the MY 2007 U.S. farm price for upland cotton to be
$0.518 per pound.339 Last July, it predicted the same price to be $0.534 per pound.340

197. Current futures prices also indicate that larg e marketing loan and counter-cyclical payments
can be expected due to expected low prices in MY 2007. The following chart details daily closing
prices of the December 2007 contract for upland cotton.

330 Brazil's 2 April response to question 89, Table 4 at para. 189.
331 See U.S. 2 April response to question 82, para. 203.
332 Exhibit Bra-635 (2002-2007 USDA Agricultural Baseline Projections).
333 $798 million / (20.7 million bales * 480 pounds per bale) = $0.0803 per pound.
334 See U.S. 2 April response to question 82, para. 203.
335 Exhibit Bra-460 (Explanatory Notes for Stochastic Budget Outlay Estimates, Farm Service Agency,
accessed October 2006 at http://www.fsa.usda.gov/Internet/FSA_File/msrexplain.doc).
336 Exhibit Bra-479 (2006 Baseline Update for U.S. Agricultural Markets,
FAPRI-UMC Report 12-06, July 2006, p. 6, accessed October 2006 at
http://www.fapri.missouri.edu/outreach/publications/2006/FAPRI_UMC_Report_12_06.pdf).
337 Exhibit Bra-639 (Commodity Estimates Book for FY 2008 President's Budget)
338 Unfortunately, relevant portions of the latest 2007 FAPRI Agricultural Outlook" has not yet been
released, but the FAPRI "World Agricultural Briefing Book" has been released, see
http://www.fapri.iastate.edu/brfbk07/.
339 FAPRI World Agricultural Outlook Briefing Book, World Cotton, available at
http://www.fapri.iastate.edu/brfbk07/CottonTables2007.pdf.
340 Exhibit Bra-479 (2006 Baseline Update for U.S. Agricultural Markets,
FAPRI-UMC Report 12-06, July 2006, p. 6, accessed October 2006 at
http://www.fapri.missouri.edu/outreach/publications/2006/FAPRI_UMC_Report_12_06.pdf).

Figure 6 – Prices for the December 2007 Upland Cotton Futures Contract
341

198. The average January to March closing pri ce of the December 2007 futures contract was
$0.588 per pound. 342 The price of the December 2007 futures contract has since fallen to less than
$0.57 per pound. Brazil recalls that marketing loan subsidies are based off of the adjusted world
price, which is, on average, 17.3 cents below the average January to March futures price. 343 A simple
linear regression of futures prices and actual market ing loan payments indicates that, based on the
current futures price of $0.588 per pound for MY 20 07, farmers can expect a marketing loan subsidy
of 12.3 cents per pound 344, or about $1.2 billion. 345 This would represent 17 percent of the total
projected cost of producing a pound of cotton in MY 2007.346

199. In the end, it is impossible to know how larg e marketing loan subsidies will be in MY 2007.
Brazil notes that the average futures price of $0.588 per pound during the planting period of MY 2007
is similar to futures prices in the pl anting period of MY 2001, 2003 and 2006. 347 Actual marketing
loan subsidies in these years varied widely, ra nging from $2.6 billion in MY 2001, to $757 million
(projected) in MY 2006 and to just $184 million in MY 2003. 348 The inability of futures prices to

341 See http://www2.barchart.com/dfutpage.asp?sym=CT&code=BSTK.
342 This figures includes complete data through the end of March ( See Exhibit Bra-691 (Average
January to March Price of th e December 2007 futures contract)). Despite being asked to provide complete data
by the Panel, the United States only provides data through 9 March in Exhibit US-147.
344 See Exhibit Bra-621 (Upland Cotton Expected Marketing Loan Program Payments Based on
Futures Prices).
345 USDA's 2007 baseline projects 20.7 million bales of production in MY 2007. See Exhibit Bra-635
(2002-2007 USDA Agricultural Baseline Projections).
346 Marketing loan payments (12.3 cents per pound) * expected yield per planted acre (806 pounds per
acre) / Total costs per acr e (593.5 dollars per acr e) = 16.7 percent. See Exhibit Bra-634 (Analysis of Planting
Decisions Based on Expected Returns).
347 The average January to March closing price of th e December contract was 58.07 cents per pound in
MY 2001, 59.12 cents per pound in MY 2003 and 59.28 cents per pound in MY 2006. See Exhibit Bra-621
(Upland Cotton Expected Marketing Loan Payments Based on Futures Prices.
348 See Brazil's First Written Submission, Table 6 at para. 111. For MY 2006, see Brazil's 2 April
response to question 89, Table 4 at para. 189.

predict actual subsidies was even more apparent in MY 2004 and 2005. The average futures price in
MY 2004 was $0.674 per pound, while in MY 2005 it was $0.529 per pound. Yet, in MY 2004,
marketing loan subsidies amounted to $1.8 billion and were 50 percent greater than marketing loan
subsidies of $1.2 billion in MY 2005. 349 The following chart shows th e progression of nearby futures
prices over the past four years:

Figure 7 – Nearby Futures Prices350

200. In sum, every farmer knows that expectations based on futures prices, just like USDA and
FAPRI projections are just that – projections – and that actual prices and actual subsidies vary
widely. Despite the U.S. focus on "expectations," the underlying reality throughout the life-time of
the FSRI Act of 2002 has been self-sustaini ng low upland cotton prices and enormous price-
contingent marketing loan and count er-cyclical subsidies. The evidence in the record fully supports
the conclusion that such subsidies and their pri ce suppressing effects will continue throughout the
lifetime of the FSRI Act of 2002.

D. E
XPORT CREDIT GUARANTEES

1. Outstanding export credit guarantees

Questions to the United States

91. In paragraph 342 of its First Written Submissi on, Brazil indicates that the total amount of
guarantees under the GSM 102, GSM 103 and SCGP programs outstanding on 1 July 2005 amounted
to $8.5 billion.

349 See Brazil's First Written Submission, Table 6 at para. 111, as amended by updated marketing loan
subsidy amounts ( see Brazil's 16 March Comments on U.S. Answer to Question 4, para. 14) and an updated
counter-cyclical subsidy amount in MY 2005 ( see Brazil's Oral Statement, para. 40). See also Exhibit Bra-621
(Upland Cotton Expected Marketing Loan Payments Based on Futures Prices.
350 See http://www.agweb.com/, accessed April 2007.

(c) Please indicate what proportion of that amount concerns exports of scheduled
products, and in particular rice (please distinguish, in each case, between principal
and interest).

201. Although the United States asserts that it does not maintain data concerning outstanding
ECGs on a commodity-specific basis, FAS' mont hly summaries of GSM 102 program activity is
recorded on a commodity-specific basis (at least with respect to select commodities, such as rice).
351
202. However, if the United States does not maintain data regarding ECGs issued and outstanding
on a commodity-specific basis, this fact is telling, and confirms that there is no factual basis for the
United States to characterize the measure subject to Brazil's claims of inconsistency with Articles 10.1
and 8 of the Agreement on Agriculture as "the pig meat and poultry meat GSM 102 guarantees". 352
Neither the amended GSM 102 program in its totality, nor the individual amendments, set out terms
or conditions that differ as betw een different eligible products. 353 In its response to the compliance
Panel's question, the United States insists that it does not even maintain data on GSM 102 ECGs
issued and outstanding on a product-specific basis.

3. "Benefit" under Articles 1.1 and 3.1(a) of the SCM Agreement

Questions to both parties

95. Brazil has taken the position that "different parties to a transaction involving a GSM 102
ECG derive different benefits from the GSM 102 ECG, each of which is potentially subject to
assessment under Article 1.1(b) of the SCM Agreem ent" and has indicated that it is, in this
proceeding, "primarily concerned" with the benefit received by the US exporter in the form of below-
market fees (para. 404, Brazil's Rebuttal). The United States has challenged Brazil's approach of
focusing on fees to the exclusion of other elements of the total cost of the loan. Please explain,
referring to the provisions of the SCM Agreement and WTO jurisprudence (if any applicable), your
position as to whether: (1) export credit guarantees and other types of subsidies may involve more
than one type of benefit and/or recipient; (2) whet her it is up to the complaining Member to decide
which benefit it chooses to challenge.

203. Contrary to the United States' assertion in its response, Brazil does not ask the compliance
Panel to "ignore" Article 14(c) of the SCM Agreement in its assessment of the "benefit" flowing from
GSM 102 ECGs under the amended GSM 102 fee schedule.
354

204. Based on Appellate Body jurisprudence, Braz il has noted the Appellate Body's ruling that
Article 14 must not be applied "rigidly", even in disputes under Part V of the SCM Agreement , to
which the provision explicitly applies.
355 The Appellate Body has held that even in disputes under
Part V of the Agreement, the provision must be applied flexibly, to account for the "factual
circumstances" at hand.
356

351 See http://www.fas.usda.gov/excredits/Monthly/ecg.html . This is unfortunately not so for some
other commodities, which are grouped into categories ( e.g., feed grains) that do not match the commodity
categories included in the U.S. Schedule of reduction commitments, making an assessment of circumvention
under Article 10.1 of the SCM Agreement impossible in some instances. It is for this reason that Brazil asked
the Panel to pose question 7 of the list of questions to th e United States. Question 7 asks the United States for a
correspondence table tying the categories of commodities included in FAS' monthly summaries to the categories
of commodities included in the U.S. Schedule.
353 See Brazil's 26 February answers to questions, para. 29.
354 U.S. 2 April answer to question 95, para. 211.
355 Appellate Body Report, U.S. – Softwood Lumber IV, para. 92.
356 Appellate Body Report, U.S. – Softwood Lumber IV, para. 92.

205. Preserving this flexibility is even more important in disputes under Part II of the
SCM Agreement. In a dispute under Part II, only the existence of some "benefit" under Article 1.1(b)
must be established, and not the quantity of that be nefit. In a passage cited by the United States in
these proceedings, the original panel considered that imposing the "quantitative focus and more
detailed methodological obligations of Part V" of the SCM Agreement on disputes preceding under
Part III of the Agreement was not appropriate, even where assessing the "magnitude" of the subsidy
was required. 357 For a dispute under Part II of the Agreement, where no assessment of the
"magnitude" of the subsidy is required, much less the calculation of a countervailing duty rate, there is
no basis whatsoever to impose th e "quantitative focus and more de tailed methodological obligations
of Part V …. " 358

206. In its 2 April response to question 100, Braz il demonstrated the proper role for Article 14(c)
in these proceedings. The "factual circumstances" 359 in these proceedings under Part II of the
SCM Agreement are such that a "particularized showing"360, utilizing data concerning "individual loan
costs and fees" or "comparable commercial loans and their terms" 361, is not necessary. Proof of some
"benefit" can be established without the type of evidence on which the United States insists.

207. Indeed, in proceedings involving claims ag ainst government guarantees under Parts II and V
of the SCM Agreement, panels have already twice ruled that evidence of the type insisted on by the
United States is not necessary to show that a benefit exists.
362 Rather, evidence far short of that
produced by Brazil in these proceedings (describ ed in Brazil's 2 April response to question 100 363)
was accepted by these two panels as sufficient to satisfy Article 1.1(b) of the SCM Agreement , as
informed by Article 14(c). Each of these two pane ls effectively accepted that, in principle, below-
market fees for government guarantees translate into lower costs for commercial credit, and thus a
lower total cost of funds – a conclusion rooted in the basic principles of financial economics
addressed by Brazil in its 2 April response to question 100.364

208. This does not amount to "ignoring" Article 14(c), as the United States asserts. 365 Rather, it
amounts to putting Article 14(c), and the evidence require d to satisfy it, into the particular context of
these proceedings.

96. The parties differ as to whether different types of loans can be compared as long as they have
the same "average life." What support (economic literature, etc. ) exists for your position on this
issue?

209. The United States' position is that two-year bullet loans and three-year amortizing loans are
equivalent, as long as one averages out the lives of the two loans.

210. Brazil's position is that two-year bullet loans and three-year non-amortizing loans are not
equivalent, and that averaging out the lives of the two loans does not make them so, in light of the
varying risks of default.

357 U.S. 16 March comments, para. 70. Panel Report, U.S. – Upland Cotton, para. 7.1177. See also Id.,
para. 7.1167.
358 Panel Report, U.S. – Upland Cotton, para. 1177. See also Id., para. 1167.
359 Appellate Body Report, U.S. – Softwood Lumber IV, para. 92.
360 U.S. 6 March Response to Question 41, para. 80.
362 Panel Report, EC – CVDs on DRAMs, para. 7.189; Panel Report, Canada – Aircraft Credits and
Guarantees, para. 7.345.
363 Brazil's 2 April answer to question 100, paras. 232-262.
364 Brazil's 2 April answer to question 100, paras. 245-253.
365 U.S. 2 April answer to question 95, para. 211.

211. In its response to question 96, Brazil provided support for its position. Instead of providing
support for the U.S. position, the United States inst ead ascribes to Brazil positions that Brazil has not
taken, and argues against those imaginary positions. The United States' response is nothing more than
an effort to mislead the compliance Panel, and to deflect attention from the evidence Brazil has
offered to prove that bullet and amortizing loans do no t have equivalent spreads even if they have the
same average lives.

212. With reference to a simplified example addr essed at paragraphs 220-222 of Brazil's Oral
Statement, the United States argues that Brazil's position requires the compliance Panel to assume that
risk "increases over time", such that there is "much higher risk in year 3 of the GSM 102 transaction."
The United States admonishes Brazil for providing no basis for this "assumption", which it argues is
"not even sound as a theoretical matter."
366

213. This characterization of Brazil's position is so misleading as to be absurd. Brazil has not
asked the compliance Panel to assume this scenario as a matter of fact, but merely to consider it as
one hypothetical example. Other examples, involvi ng alternative patterns of default risk, are also
considered in paragraphs 31-32 of a statement by Professor Sundaram included as Exhibit Bra-686 to
Brazil's 2 April responses. Each of these paragra phs includes two examples; in one example in each
paragraph, default risk increases
 over time, while in the other exampl e in each paragraph, default risk
decreases over time. As the examples show, the spread on amortizing loans could be greater or lesser
than the spread on bullet loans, depending on the pattern of default risk. That is Brazil's position, and
it is mathematically proven by Professor Sundaram in Exhibit Bra-686.

214. In paragraphs 221-222 of its 2 April response, the United States provides a reference that in
fact supports Brazil's position. The United States c ites a paper finding that for seven-year loans, the
likelihood of default "in general" increases over time, rather than decreases.
367 This substantiates
Brazil's argument that since default risk is not constant from year to year, bullet and amortizing loans
will, in general, have different spreads.368

215. Brazil also addresses three other issues raised in the United St ates' response to question 96:
(i) the use of the average life concep t in the context of mortgage-backe d securities; (ii) the use of the
average life concept in pricing swaps in terms of U. S. Treasuries with the same average lives; and,
(iii) the use of the average life concept in pricing for an amortizing loan obtained by adding a fixed
spread to an index.

Average life in the context of mortgage-backed securities

216. In paragraph 219, the United States suggests that "the concept of average life is commonly
used for price comparability of investments and de bt-instruments of various terms." The first
example in paragraph 219 refers to mortgage -backed securities ("MBS"). Brazil makes two
observations about this example.

217. First, and most importantly, the referen ce does not address, much less establish, the
comparability of bullet and amortizing loans with the same average lives, which is the question raised
by the Panel. Indeed, in discussing the relevanc e of the average life concept to MBS, the United
States makes no reference at all to pricing. The Un ited States does not, for example, suggest that the
price of an MBS is the price of a similar bullet security with the same average life.

366 See U.S. 2 April answer to question 96, paras. 218, 221, 222.
367 Exhibit US-152 (Dennis Glennon and Peter Nigro, "Measuring the Default Risk of Small Business
Loans: A Survival Analysis Approach," Journal of Money, Credit, and Banking, Vol. 37, No. 5 (October 2005),
p. 935, 945).
368 Brazil's 2 April answer to question 96, para. 223. See also Exhibit Bra-686 (Statement of
Professor Sundaram).

218. Second, the reference to MBS relies on an in correct understanding of why average life is used
for MBS. The biggest risk faced by the holder of an MBS is pre-payment risk, or in other words, the
risk that some of the individual mortgages underl ying the MBS will be pre-paid by the borrowers.
369
Thus, the maturity of the MBS is not, in itself, adequate to describe the instrument. Two MBS may
have the same maturity, but if one has higher pr e-payment risk than the other (say, because the
mortgage coupons underlying it are higher), then the cash flows will last for a shorter period of time.
To restore some kind of comparability between differe nt MBS, investors use models that attempt to
predict the volume of pre-payments, and calculate an average life accordingly.370 Such an average life
calculation is unnecessary if there is no prepayment risk.

Average life in pricing swaps

219. In paragraph 219 of its response, the United St ates quotes an article stating that swap dealers
"'routinely price the fixed rate side of an interest rate swap as a spread over United States Treasuries
of a similar average life.'"371 This statement does not provide support for (or even address) the United
States' assertion that two-year bullet loans and th ree-year amortizing loans with the same credit
quality have identical credit risk whenever they have the same "average lives".

220. The article cited by the United States describ es a situation in which an institution holding
fixed-rate amortizing mortgage debt funded with the issue of floati ng rate short-term debt seeks to
hedge interest rate risk by using a "swap". A sw ap is an exchange of cash flows computed at a
floating rate of interest, for cash flows computed at a fixed rate of interest. The institution in question
looks to receive the floating-rate payment from the swap seller and make the fixed-rate payment to the
swap seller so that, taken together with the mortgage that it holds and the floating-rate debt issued to
fund that mortgage, the institution's interest-rate exposure is only fixed rate.

221. To identify the fixed rate in a swap, dealers generally add a spread to the Treasury yield on a
bond with the same maturity as the swap. However, where the notional principal is amortizing, as in
the example offered in the article quoted by the Un ited States, a problem arises – while the notional
principal on the mortgage is amortizing, Treasu ry bonds are bullet bonds. Some adjustment is
required to equate the differing maturities of amortiz ing and non-amortizing debt. This adjustment is
addressed in endnote 4 to the article: "[a]verage life is used by swap dealers to equate the maturities

of nonamortizing Treasury debt and amortizing mortgage debt."372

222. The compliance Panel, however, has asked fo r support in the literature for the U.S. assertion
that non-amortizing and amortizing debt with the same credit quality
 have identical credit risk
whenever they have the same "average lives" . This proposition is not even addressed by the example
offered in the article quoted by the United States, because the mortgage debt and the Treasury bond in
the example have different credit qualities , despite the fact that they have the same "average life" .

369 See http://www.riskglossary.com/link/mortgage_backed_security.htm ("Prepayments intr oduce uncertainty
into the cash flows of a mortgage pass-through. The rate at which fixed-rate mortgagors prepay is influenced by
many factors. A significant factor is the level of interest rates. Mortgagors tend to prepay mortgages so they
can refinance when mortgage rates drop. By acting in their own best interest, mortgagors act to the detriment of
the investors holding the mortgage pass-through. They tend to return principal to investors when reinvestment
rates are unattractive, and they tend to not do so when reinvestment rates are attractive"). See also
http://personal.fidelity.com/products/fixedincome/pombs.shtml. In any event, the vast majority of MBS in the
United States have no default risk, since they are guaranteed by federally-sponsored institutions such as Freddie
Mac, Fannie Mae, and Ginnie Mae. See http://www.sec.gov/answers/mortgagesecurities.htm
. See also
http://www.riskglossary.com/link/mortgage_backed_security.htm.
 370 See http://www.riskglossary.com/link/mortgage_backed_security.htm . See also
http://personal.fidelity.com/products/fixedincome/pombs.shtml.
371 U.S. 2 April answer to question 96, para. 219, quoting Exhibit US-150.
372 Exhibit US-150, p. 21 (note 4) (emphasis added).

The article cited by the United States does not, as a result, provide support for the U.S. assertion that
two-year bullet loans and three-year amortizing loans with the same credit quality
 have identical
credit risk whenever they have the same "average lives".
Average life in pricing an amortizing loan
obtained by adding a fixed spread to an index

223. In paragraph 220 of its response, the United St ates offers another example of the "average
life" concept, in this instance suggesting pricing for an amortizing loan obtained by adding a fixed
spread to the appropriate index.

224. The example cited by the United States in paragraph 220 and th e website cited at
Exhibit US-151 do not, as requested by the Panel, offer support for the U.S. position that two-year
bullet loans and three-year amortizing loans are e quivalent, as long as one averages out the lives of
the two loans. Indeed, Exhibit US-151 and the example included in paragraph 220 of the U.S.
response do not address
 the correctness of the U.S. position at all.
225. The U.S. example demonstrates how a single firm in the industry, Bond Street Capital
("BSC"), approaches the pricing of its amortized loans. The example does not involve the use of
"average lives" to put bullet loans of a particular maturity and amortizing loans of a different maturity
on equivalent footing, therefore enabling a compar ison of the prices for the two instruments. The
example shows that BSC indexes its loans to average lives of U.S. Treasuries or swaps. It does not
suggest that BSC considers an amortizing loan with an average life of m years to be equivalent in
spread to a bullet loan with a life of m years. Indeed, the example does not even mention how BSC
would price a bullet loan . Neither the example, nor the materi al included in Exhibit US-151, exclude
that BSC would add different spreads to the index for bullet and amortizing loans.

226. Brazil also notes that the "average lives" of the loans included in the example do not comport
to the common understanding of that concept. In paragraph 220 of the U.S. response and
Exhibit US-151, BSC asserts that a "15/15" loan has an average life of 9 years. That is simply not
accurate. A "15/15" loan has an average life of 8 year s. One-fifteenth of the capital is repaid in each
of the fifteen years, so the average life is (1/15) * (1+2+ . . . +15), or 8 years. Similarly, BSC asserts
that the average life of a "20/20" loan is 12 years, but it is actually 10.5 years
((1/20) * (1+2+ . . . +20) = 10.5). Even if the example served to support the position for which it is
offered, it is not reliable, as the average life computation is incorrect.

Questions to the United States

97. Assuming that the Panel accepts the United St ates' argument that "benefit" is to be assessed
on the basis of the "total costs of funds", what do you consider Brazil must establish in order to meet
its burden of proof in that respect? Must Brazil prove that a benefit is conferred in all instances (all
transactions and all recipients)? In most instances?

227. In its comment on the U.S. response to qu estion 44, Brazil has addressed the United States'
professed confusion over whether Brazil is "challengi ng" the GSM 102 program "as such", or instead
"particular guarantees" under the GSM 102 program.
373 As noted in that comment, Brazil has shown
that the amended GSM 102 program is an export subs idy. Separately, Brazil has also shown that the
GSM 102 program is "applied", via individual GSM 102 ECGs for pa rticular products, in a manner
that results in circumvention of U.S. export subsidy commitments.

373 U.S. 2 April answer to question 97, paras. 224-225.

228. In any event, it is not necessary in WTO dis pute settlement to prove that a measure violates
WTO law in "all" instances. As the panel in U.S. – Export Restraints held, it suffices that a measure
violates WTO laws in some instances.374

98. Does the United States dispute the accura cy of Brazil's comparison of GSM 102 fees with
Exim Bank fees? Does the United States agree that ExIm Bank and GSM 102 guarantees are (at least
in certain circumstances) similar or comparable?

229. In its First Written Submission, Brazil dem onstrated that GSM 102 fees are below the fees
charged by the United States' Export-Import Bank ("Ex Im Bank") for financial instruments that are in
key respects similar to GSM 102 ECGs – ExIm Bank' s Letter of Credit Insu rance ("LCI") (which
serves as a reference point for GSM 102 ECGs issued for tenors of up to 360 days), and ExIm Bank's
Medium-Term Export Credit Insura nce ("MTI") (which serves as a reference point for GSM 102
ECGs issued for tenors exceeding 360 days).375 The results of this comparison between GSM 102 and
ExIm Bank fees are tracked in Exhibits Bra- 536 (for transactions involving annual repayment of
principal) and Bra-537 (for transactions involving semi-annual repayment of principal).

230. The United States argues that GSM 102 ECGs are not similar to ExIm Bank LCI and MTI
products, and are therefore not suitable for comparison, for five reasons.

231. Before addressing each of these five reasons, Br azil notes the irony of this situation. Brazil
has demonstrated that there is no credit protection product available in the marketplace that is
comparable to a GSM 102 ECG.
376 Nonetheless, in addition to that showing, Brazil undertook a
comparison between GSM 102 fees and fees for comparable non-market products offered by ExIm
Bank. In rebuttal, the United States has not offered a single example of a credit protection product
available in the marketplace . Brazil's fundamental position – that GSM 102 ECGs confer "benefits"
per se because they have no parallel at market – remains unrebutted by the United States with
anything that resembles evidence, and indeed echoes the position the United States has taken in other
disputes.
377

232. With that important qualification, Brazil a ddresses each of the five reasons offered by the
United States in support of its argument that Ex Im Bank LCI and MTI products are not suitable for
comparison with GSM 102 ECGs.

First U.S. criticism:
No ExIm Bank MTI cover for agricultural product transactions

233. First, the United States observes that ExIm Bank' s MTI is not available for agricultural
products, and that it is not therefore comparable to GSM 102.
378

234. Brazil has already alerted the Panel to this di stinction. As Brazil noted in its First Written
Submission
379, ExIm Bank cover is indeed not, in normal circumstances, available for agricultural

374 Panel Report, U.S. – Export Restraints, para. 8.78.
375 Brazil's First Written Submission, paras. 381-406 and Annex IV (Methodology for Comparison of
GSM 102 Fees with Fees for ExIm Bank Products).
376 Brazil's First Written Submission, paras. 377-378. See also Id ., Annex III (Statement of
Professor Rangarajan Sundaram), paras. 8-9.
377 Panel Report, Canada – Aircraft Credits and Guarantees , Annex C-2 (para. 7) ("If the commercial
market does not offer a particular borrower the exact terms offered by a government, then the government is
providing a benefit to the recipient whenever those terms are more favorable than the terms that are available at
market. A government entity 'operating on commercial principles' is still a government entity. It is not the
commercial market.").
378 U.S. 2 April answer to question 98, para. 227.
379 Brazil's First Written Submission, paras. 389-393.

export transactions with tenors exceeding 180 days or, exceptionally, 360 days.
380 T h e minimum
tenor for a transaction to qualify for MTI cover is 360 days. Thus, MTI cover is not available for
agricultural products.

235. Brazil fails to see how this criticism aids the United States' defense. All the U.S. observation
establishes is that it is not even possible to identify a non-market instrument distorted by government
intervention to serve as a benchmark for GSM 102 ECGs issued for tenors exceeding, at most,
360 days, let alone a market instrument. The compliance Panel will recall that in Congressional
testimony, the Chairman of CoBank stated that GSM 102's three-year tenor "is critical to the
program's success," and that the program "provides for tenors that are typically unavailable in the
market and this is a crucial strength of the program."
381

236. In any event, as Brazil has already explained a nd the United States has ignored, the fact that a
financial instrument does not apply to agricultura l products does not undermine the comparability of
its fees to GSM 102 fees, and in fact reveals that the ExIm Bank comparison is overly generous to the
United States.
382

237. There is no reason why guarantees for agricultu ral products should be less risky than credit
protection for transactions involving capital goods a nd products. If anything, making agricultural
products subject to ExIm Bank's MTI cover would increase MTI fees. In an agricultural export
transaction, the value of the product sold holds little value for the guarantor as a security against
default by the foreign obligor. Shortly after sale, an agricultural commodity is likely to be (and short
of preservation may indeed have to be) consumed; the value of any security interest in the commodity
will be short-lived, and usually far less than 360 days . In contrast, an industrial product is generally
more durable and lasting, and as such is more susc eptible to use as security for performance by the
foreign obligor, should the guarantor wish to do so. The availability of this option may lower the risk
associated with default faced by the guarantor a nd, as a consequence, lower the fees necessary to
offset that risk. Where this option is not viable, th e loss in the event of default is greater, as will be
the fees necessary to offset the corresponding risk.

Second U.S. criticism:
No ExIm Bank MTI cover for repayment terms between 360 days and 2 years

238. Second, the United States appears to suggest that unlike GSM 102, which applies for
repayment terms of up to three years and in "hund reds of … transactions" for less than two years,
ExIm Bank's MTI is only availa ble for repayment terms of more than two years. 383 While not
expressed clearly, the U.S. allegation appears to be that Brazil has not offered a valid comparison for
GSM 102 fees for transactions involving repayment terms of between 360 days and two years.

239. To isolate with precision the U.S. criticism, Brazil notes that the criticism does not affect the
comparability of GSM 102 fees and ExIm LCI fees for transactions involving repayment terms of
360 days or less. Nor does it affect the comparability of GSM 102 fees and ExIm MTI fees for
transactions involving repayment terms of between two and three years.

380 See Exhibit Bra-532 (ExIm Bank, "Standard Repayment Terms," Chart II, accessed October 2006 at
www.exim.gov/tools/exposure/ebd-m-26.html). See also Exhibit Bra-533 (ExIm Bank export credit insurance
product description, accessed October 2006 at http://www.exim.gov/products/insurance/index.cfm).
381 See Exhibit Bra-528 ("GSM Programs Benefit U.S. Agriculture and the Rural Economy",
Testimony of Otis Molz, Chairman of the Board of CoBank, to the U.S. Senate Committee on Agriculture,
Nutrition and Forestry, 18 July 2000, accessed November 2006 at
http://agriculture.senate.gov/Hearings/Hearings_2000/Untitled/00718mol.htm).
382 Brazil's First Written Submission, para. 443.
383 U.S. 2 April answer to question 98, para. 227.

240. The United States assertion that MTI cover is not available for repayment terms of between
360 days and two years is, to put it bluntly, untru thful. ExIm Bank documents expressly state that
MTI coverage is available for repayment terms of 1-5 years. 384 The ExIm Bank calculator with which
Brazil generated the MTI fees track ed in Exhibits Bra-536 and Bra-537 also specifically permits the
user to control for repayment periods of between 360 days and two years (and beyond).385

241. In any event, the vast majority of GSM 102 EC Gs are indeed issued for transactions involving
repayment terms in excess of two years – to wh ich the United States acknowledges ExIm Bank's MTI
policies apply. The United States notes that "hundreds of GSM-102 transactions, totalling hundreds
of millions of dollars are in fact for terms of less than 2 years."
386 When the figures offered by the
United States are compared to total GSM 102 ECGs issued in FY 2003-2006 (as well as part-year
totals for FY 2007), however, the compliance Pa nel will note that they compose approximately
8 percent of the nearly $10 billion in GSM 102 ECGs issued in that period. 387 Thus, the vast majority
of GSM 102 ECGs – 92 percent – are issued for repa yment terms of over two years, which even the
United States acknowledges matches the repayment terms for ExIm Bank MTI cover.

242. The United States deliberately withheld its comments on Brazil's ExIm Bank comparison
until this late stage of the proceedings, having foregone the opportunity to do so in the 7 submissions
it made prior to its 2 April answers and subsequent to Brazil's proffer of the comparison in Brazil's
First Written Submission. When it finally offers comment, it misleads the compliance Panel with
inaccurate factual statements contradicted by the very U.S. government documents and data on which
the United States relies. As well as being tardy, th e United States' criticisms of Brazil's ExIm Bank
comparison are not credible.

Third U.S. criticism:
Differing interest coverage as between GSM 102 and ExIm Bank products

243. Third, the United States argues that Brazil's comp arison fails to account for differing levels
of interest coverage by GSM 102, on the one ha nd, and ExIm Bank's LCI and MTI policies, on the
other.388

244. Once again, had the United States taken th e opportunity to raise this concern in the
7 submissions it made prior to its 2 April answers, it could have been resolved in a timely manner.
Nonetheless, to answer the United States' concer n, Brazil has re-run its ExIm Bank comparison to
account for differing levels of interest covera ge under GSM 102 and ExIm Bank's LCI and MTI
policies. The results show that given the mass ive gap between GSM 102 fees and ExIm Bank fees,
differing interest cover has no material impact on the results of the ExIm Bank comparison tracked in
Exhibits Bra-536 and Bra-537.

245. The benchmarking exercise tracked in Exhi bits Bra-536 and Bra-537 yields a total of 1071
comparison points between GSM 102 and ExIm Bank fees; in 97.76 percent of those comparisons
(1047 of 1071 comparison points), GSM 102 fees fall below ExIm Bank fees.
389 Taking account of
the differing interest cover noted by the United States means that GSM 102 fees fall below ExIm

384 See Exhibit Bra-534 ("ExIm Bank Repetitive Sales Ba nk-to-Bank Export Credit Insurance Policy",
Form EIB 99-10, p. 1, accessed November 2006 at http://www.exim.gov/pub/ins/pdf/eib99-10.pdf) ("The policy
covers credit sales in which payment terms range between one and five years (exceptionally 7 years).").
385 See http://www.exim.gov/tools/fee_calc.html.
386 U.S. 2 April answer to question 98, para. 227 (and note 236).
387 Compare figures provided in footnote 236 of U.S. 2 April answer to question 98 with GSM 102
totals recorded in end-of -fiscal-year Monthly Summaries of Export Credit Guarantee Program Activity for
FY 2003-FY 2006, provided, respectively, in Exhibits Bra-518, Bra-510, Bra-511 and Bra-523. The March
2007 monthly summary is available at http://www.fas.usda.gov/excredits/Monthly/ecg.html

388 U.S. 2 April answer to question 98, paras. 229-235.
389 Brazil's First Written Submission, para. 395.

Bank fees in 97.2 percent of the 1071 comparis on points (or 1041 of 1071 comparison points).
390 In
other words, what the United States characterizes as "[t]he most significant" difference between
GSM 102 ECG cover and ExIm Bank LCI and MTI cove r that "Brazil has failed to address" changes
the result of Brazil's comparison for a grand total of six out of 1071 comparison points.391

246. Brazil now describes how it has factored the diffe ring interest coverage into the comparison,
and explains why even the meagre impact just de scribed is likely exaggerated in the United States'
favour.

247. As noted by the United States, in the event of default, GSM 102, on the one hand, and ExIm
Bank LCI or MTI coverage, on the other, foresee payment of a share of principal
, and a share of
interest.

248. As far as principal
 is concerned, under both GSM 102 a nd ExIm Bank LCI cover, default
results in the guarantor having to pay out 98% of the principal amount that is still outstanding; the
ExIm Bank fee calculator allows the user to calculate the applicable MTI fee for 98 percent cover.392
249. With respect to interest , there are two questions to assess:

• What is the upper limit for interest cove rage under GSM 102, on the one hand, and
for ExIm Bank LCI and MTI, on the other?

• Where do the actual interest rates on loans secured with GSM 102 or ExIm Bank
LCI/MTI cover fall relative to these caps?

250. These questions are important in determining wh at level of interest coverage must be taken
into account in comparing the GSM 102 and ExIm Ba nk products. In sum, for the reasons explained
below, Brazil has relied on the maximum
 possible difference in interest rate coverage between
GSM 102 and ExIm Bank LCI, to assess the significance of differential interest rate coverage.

251. Concerning the first question, the United States asserts, with supporting data, that GSM 102
interest coverage is capped at approximately 2.8%
393, meaning that in the event of default by a foreign
obligor, the CCC will pay the U.S. bank no more than 2.8% for unpaid interest, even if the interest
rate on the loan to the foreign obligor exceeds 2.8%.

252. ExIm Bank LCI interest covera ge is capped at the prime rate (the interest rate charged by
major banks to their most creditworthy customers) minus 50 basis points ("bps"). Data provided by
the United States shows that the prime rate less 50 bps is, today, equal to approximately 7.8%.
394
Again, this means that in the event of default, Ex Im Bank will pay no more th an 7.8% interest cover
in case of default, even if the interest rate on the loan subject to LCI cover exceeds 7.8%. ExIm Bank
MTI interest coverage is not subject to a cap.395

390 The few instances in which GSM 102 fees exceed ExIm Bank LCI or MTI fees does not mean that
GSM 102 fees do not confer "benefits" relative to the market. See Brazil's First Written Submission,
paras. 403-406, and Annex III (Statement of Professor Rangarajan Sundaram), paras. 17-24.
391 U.S. 2 April answer to question 98, paras. 230, 229, 235.
392 For GSM 102, see Exhibit Bra-520 ("Export Credit Guar antee Program," USDA FAS Fact Sheet,
March 2006). For ExIm Bank LCI, see Exhibit Bra-531 (ExIm Bank Letter of Credit Insurance for Banks,
ExIm Bank online). For ExIm Bank MTI, the fee calculator is available at
http://www.exim.gov/tools/fee_calc.html.
393 U.S. 2 April answer to question 98, paras. 231, 233 (and note 243) and Exhibit US-156.
394 U.S. 2 April answer to question 98, paras. 230, 232 (and note 242) and Exhibit US-154.
395 U.S. 2 April answer to question 98, para. 230.

253. As noted by the United States, maximum inter est coverage is, therefore, higher for the ExIm
Bank products than for GSM 102 ECGs. To answer the United States' concern with Brazil's ExIm
Bank comparison, Brazil re-ran that comparison to acc ount for differing levels of interest coverage
under GSM 102 and ExIm Bank's LCI and MTI polici es. In so doing, Brazil applied the maximum
interest coverage available under the ExIm Bank LCI cap, and applied the ExIm Bank LCI cap for the
purposes of MTI cover – or in other words 7.8%. On the other side of the equation, Brazil similarly
applied the maximum interest coverage under the GSM 102 cap – or in other words 2.8%. The details
of this comparison, including interest coverage, are explained below.

254. The answer to the second question explains why application of the LCI cap, like Brazil's
ExIm Bank comparison overall
396, is extremely conservative and favourable to the United States. In
short, under both current and historical economi c conditions, actual interest rates by borrowers
benefiting from LCI or MTI cover fall significantly below the LCI cap.

255. The United States has provided data in these pr oceedings concerning the interest rates secured
by foreign obligors on GSM 102-guaranteed loans. The highest interest rate tracked by the U.S. data
is [[ ]]
397, which at current levels corresponds to approximately [[ ]]. 398 A USDA
FAS publication confirms the U.S. data: "Typica lly interest rates between U.S. banks and the
importer's banks are negotiated at Libor, the Lond on Interbank Offered Rate , plus a fraction of a
percent."399 GSM 102, ExIm Bank LCI and ExIm Bank MTI products all contribute the same U.S.
government credit rating to a transaction. Therefor e, the rates offered on loans secured with ExIm
Bank LCI/MTI cover will be the same as the rates offered on loans secured with GSM 102 cover –
LIBOR plus a fraction of a percent or, today, approximately [[ ]].400

256. This evidence demonstrates th at the rates secured with ExIm Bank LCI or ExIm Bank MTI
cover do not reach the ExIm Bank LCI cap of 7.8%. Interest rates on loans subject to ExIm Bank
LCI/MTI coverage are considerably lower than th e LCI cap. While the United States argues that the
absence of an interest cap for ExIm Bank MTI cove r means that "one can only infer the disparity
between CCC interest cover and [MTI cover] is even greater" than the disparity between CCC interest
cover and LCI cover
401, this is not a logical or reasonable infere nce at all, in light of the fact that
actual interest rates fall well below even the LCI cap.

257. Nor have rates secured with ExIm Bank LC I or ExIm Bank MTI cover reached the ExIm
Bank LCI cap as an historical matter.

258. Over the 10-year period of 1997-present, the prime rate has ranged between a low of 4.0%
from July 2003-June 2004, to a high of 9.5% from June 2000-January 2001.
402 The compliance Panel
will recall that according to the United States, the LCI cap is set at the prime rate minus 50 bps.403

396 Brazil's First Written Submission, Annex IV (Met hodology for Comparison of GSM 102 Fees with
Fees for ExIm Bank Products), para. 6.
397 U.S. First Written Submission, paras. 122, 125, 129. See also Exhibit US-22 (Letter from

398 See LIBOR USD rates for the first week of April 2007, available at
http://www.bba.org.uk/content/1/c4/86/12/Apr07.xls. Averaging the data for th e first week of April across
maturities yields approximately 5.3%. This data is pos ted on the website of the British Bankers' Association
("BBA"), which itself determines the LIBOR rate every day by polling international banks. See
http://www.bba.org.uk/bba/jsp/polopoly.jsp?d=225&a=1416.
399 Exhibit Bra-589 (Foreign Agriculture Service Online, Keys to Successful Trade , p. 5) (emphasis
added).
400 See Brazil's 2 April answer to question 100, para. 251.
401 U.S. 2 April answer to question 98, para. 234.
402 See http://www.moneycafe.co m/library/prime.htm, reproduced in Exhibit Bra-692 (LIBOR and
Prime rates, 1997 to the present).

259. As discussed above, actual interest rates secured with LCI or MTI cover are pegged to
LIBOR, with the addition of "a fraction of a percent,"
404 or as the United States has shown, around
[[ ]] bps.405 Over the 10-year period of 1997-present, LIBOR has ranged between a low of 1.09%
in March 2004 and a high of 6.83% in November 2000.406

260. As both current economic cond itions and historical conditions demonstrate, whether rates are
high or low, LIBOR and the prime rate move roughly in tandem. 407 At no point has the LCI cap of
prime minus 50 bps come any where close to falling belo w LIBOR plus [[ ]], or even LIBOR
plus 1 percent (100 bps). The gap between the lo wer interest rates accessible by borrowers benefiting
from LCI or MTI cover, on the one hand, and the higher LCI interest coverage cap, on the other,
always exists.

261. Even though actual interest rates accessible by borrowers benefiting from LCI or MTI cover
have never reached the LCI interest coverage ca p and at present economic conditions fall below the
cap by [[ ]] bps (7.8% less [[ ]]) 408, Brazil has applied the LCI cap as the amount of interest cover
available with LCI and MTI cover. Thus, Brazil's asse ssment of the impact of interest coverage is
extremely conservative and favourable to the United States.

262. Thus, in its revised ExIm Bank comparison, Brazil assumes GSM 102 interest coverage at the
cap of 2.8%, and ExIm Bank LCI and MTI interest coverage at the LCI cap of 7.8%.
409

263. Under these conditions, if default occurs on a GSM 102-guaranteed loan, the CCC will pay
100.8% of the remaining principal – 98% towards pr incipal, and 2.8% towards interest. If default
occurs on a loan secured with LCI or MTI cover, ExIm Bank will pay 105.8% of the remaining
principal – 98% towards principal, and 7.8% towards interest.

403 U.S. 2 April answer to question 98, para. 230.
404 Exhibit Bra-589 (Foreign Agriculture Service Online, Keys to Successful Trade, p. 5).
405 U.S. First Written Submission, paras. 122, 125, 129. See also Exhibit US-22 (Letter from

406 See http://www.moneycafe.com/library/1mlibor.htm, reproduced in Exhibit Bra-692 (LIBOR and
Prime rates, 1997 to the present).
407 Compare the 1997-present chart tracking evolution of the LIBOR rate, at
http://www.moneycafe.com/library/1mlibor.htm, with the 1997-present chart tracking evolution of the prime
rate, at http://www.moneycafe.com/library/prime.htm. These charts are reproduced in Exhibit Bra-692 (LIBOR
and Prime rates, 1997 to the present).
408 Over the 10-year period of 1997-present, actual interest rates on ExIm Bank LCI/MTI cover have
fallen below the LCI interest coverage cap by between 113 bps (the low, in November 1999) and 326 bps (the
high, in January 2001). Compare the 1997-present chart tracking evolution of the LIBOR rate, at
http://www.moneycafe.com/library/1mlibor.htm (plus the [[ ]] bps noted by the United States as the spread
for loans backed by U.S. government credit protection instruments, with the 1997-present chart tracking
evolution of the prime rate, at h ttp://www.moneycafe.com/library/prime.htm (less the 50 bps noted by the
United States to generate the LCI cap). These charts are reproduced in Exhibit Bra-692 (LIBOR and Prime
rates, 1997 to the present). The third and final chart in Exhibit Bra-692 represents the difference, in each month,
between the LIBOR and prime rates in force.
409 This is conservative and favorable to the United States for at least two additional reasons. First, the
5% gap between the 2.8% GSM 102 cap used by Brazil and the 7.8% LCI cap used by Brazil is greater than the
4.91% figure cited by the United States as the average size of the gap between GSM 102 and ExIm Bank LCI
interest coverage for the period 2005-2007. U.S. 2 April answer to question 98, para. 233. Second, Brazil
assumes that interest payments by the borrower on the loan are due annually. How much interest is owed by the
CCC or ExIm Bank at the time of default depends on the contractual frequency of interest payments. If interest
is paid annually, then at the time of default, the CCC or ExIm Bank are liable for a fully year's interest. If
interest is paid quarterly and default occurs after, for example, the close of the second quarter, then at the time of
default, the CCC or ExIm Bank are liable for interest on the third and fourth quarters only. Because a longer
interval between interest payments increases the dolla r magnitude of the differences in interest coverage
highlighted by the United States, Brazil's analysis assumes that interest payments are due annually.

264. Let p gsm be the premium charged per dollar of principal for GSM 102 cover, and let p exim be
the premium charged per dollar of principal for Ex Im Bank LCI or MTI cover. As noted above, a
GSM 102 premium pays 100.8% of the remaining principal in the event of default, while an LCI or
MTI premium pays 105.8% of the remaining principal in the event of default. This means that per
dollar of coverage, CCC charges p
gsm/100.8, while ExIm Bank charges pexim/105.8.

265. If p gsm < [p exim x (100.8/105.8)], then GSM 102 fees are cheaper than LCI or MTI fees even
after accounting for the differentials in interest coverage. Since (100.8/105.8) is approximately
95.3%, wherever GSM 102 fees are less than 95.3% of LCI or MTI fees, GSM 102 fees are below
LCI or MTI fees, even accounting for differing interest coverage.

266. On the basis of the GSM 102 and ExIm Bank LCI and MTI fees listed in Exhibits Bra-536
and Bra-537
410, Exhibits Bra-693 (for GSM 102 transactions involving annual repayment of principal)
and Bra-694 (for GSM 102 transactions involving sem i-annual repayment of principal) list GSM 102
fees as a percentage of ExIm LCI and MTI fees. In every instance in which GSM 102 fees are less
than 95.3% of LCI or MTI fees, GSM 102 fees ar e below ExIm Bank fees, even accounting for
differences in interest cover. As Exhibits Bra- 693 and Bra-694 show, this is the case in 97.2 percent
of the 1071 comparison points (or 1041 of 1071 comparison points).411

267. In conclusion, differing interest cover be tween GSM 102 and ExIm Bank products does not
undermine the validity of Brazil's comparison; no r does adjusting for those differences materially
influence the results of that comparison.

Fourth U.S. criticism:
Differing principal coverage as between GSM 102 and ExIm Bank MTI cover

268. Fourth, the United States notes that while GSM 102 offers coverage for 98% of principal,
ExIm Bank's MTI is available for coverage of up to 100% of principal.
412 In paragraph 390 of its First
Written Submission, however, Brazil noted that the f ee calculator available at ExIm Bank's website
allows a user to reduce the amount of coverage, and to calculate the applicable MTI fee for 98 percent
principal cover, or in other words, equivalent pr incipal cover to GSM 102. Brazil did so for the
purposes of calculating the ExIm Bank MTI fees tracked in Exhibits Bra-536 and Bra-537. Brazil has
fully controlled for the possible di fference in principal coverage noted by the United States. Not only
has the United States waited nearly 5 months to comment on Brazil's ExIm Bank comparison until
this late stage of the proceedings, having foregone the opportunity to do so in the 7 submissions it
made prior to its 2 April answers, but it misleads the compliance Panel by raising an element that was
controlled for by Brazil, expressly, in that comparison.

410 The Panel will recall that wherev er a choice was presented with re spect to variables in the ExIm
Bank calculator used to generate MTI fees, Brazil adopte d the most conservative optio n available, or in other
words the option that would result in a lower ExIm Bank fee. See Brazil's First Written Submission, Annex IV
(Methodology for Comparison of GSM 102 Fees with Fees for ExIm Bank Products), paras. 7-12.
411 Instead of in 97.76 percent of those comparisons (1047 of 1071 comparison points), without
accounting for differences in interest cover, as was the case in Exhibits Bra-536 and Bra-537. See Brazil's First
Written Submission, para. 395. The few instances in wh ich GSM 102 fees exceed ExIm Bank LCI or MTI fees
does not mean that GSM 102 fees do not co nfer "benefits" relative to the market. See Brazil's First Written
Submission, paras. 403-406, and Annex III (Statement of Professor Rangarajan Sundaram), paras. 17-24.
412 U.S. 2 April answer to question 98, para. 236.

Fifth U.S. criticism:
Differing principal coverage as between GSM 102 and ExIm Bank LCI cover

269. Fifth, although not disputing that ExIm Bank's LCI product, like GSM 102, covers 98% of
principal for transactions involving agricultural products 413, the United States appears to assert that
another feature of the LCI product effectively rai ses principal coverage to 100%. Specifically, the
United States alleges that under an ExIm Bank LCI policy, "'the insured may arrange recourse or 'pass
back' to a third party of all or any part of any uninsured amount.'" 414 The United States asserts that
"[t]his is not permitted under GSM 102," and that th erefore, unlike in the case of a holder of an LCI
policy, a GSM 102 holder is, under the GSM 102 regula tions, not able to insulate itself from exposure
to default on the 2% of principal, and any percentage of interest, not covered by the GSM 102 ECG.415

270. The United States' characteri zation of the GSM 102 regulations is misleading and incorrect.
The regulations do not support the U.S. contention that the holder of a GSM 102 ECG "is not
permitted" to insure the remaining 2% of principa l not covered by the GSM 102 ECG. In fact, the
regulations establish exactly the opposite – that a holder of a GSM 102 ECG can insulate itself from
exposure to default on the 2% of principal, and any percentage of interest, not covered by the
GSM 102 ECG.

271. The United States asserts that under Section 1493.110(b)(4) of the GSM 102 regulations,
included as Exhibit US-142, "[u]pon default the claimant must subrogate to CCC the claim to the
entire amount in default, not just the guaranteed portion."
416 As noted by the United States,
Section 1493.110(b)(4)(iv) states that the holder of a GSM 102 ECG must sign an agreement
"subrogating to CCC the respective rights of the exporter and the exporter's assignee, if applicable, to
the amount of payment in default under the applicable export sale."
417 The United States further
asserts that under Section 1493.130(a) of the GS M 102 regulations, "CCC then has the right to
recover from the obligor all moneys in default."418

272. In other words, 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 claim on 100% of any monies recovered from the foreign obligor.

273. The United States has not been fully forthc oming with the compliance Panel. As the
United States is surely aware, Sections 1493.110(b)(4)(iv) and 1493.130(a) are not the end of the
story. Indeed, Section 1493.130(c) directly contra dicts the United States' argument, and show that a
GSM 102 ECG holder, as in the case of an ExIm Bank LCI policyholder, is indeed able to insulate
itself from exposure to default on the 2% of principal not covered by the GSM 102 ECG.

274. Section 1493.130(c) provides as follows:

Recoveries made by CCC from the importer or the foreign bank, and recoveries
received by CCC from the exporter, the exporter's assignee, or any other source
whatsoever, will be allocated by CCC to the exporter or the exporter's assignee and to
CCC on a pro rata basis determined by their r espective interests in such recoveries.
The respective interest of each party will be determined on a pro rata basis, based on
the combined amount of principal and inter est in default. Once CCC has paid out a

413 See Exhibit Bra-531 ("ExIm Bank Letter of Credit Insurance for Banks," accessed October 2006 at
http://www.exim.gov/products/insurance/loc.html).
414 U.S. 2 April answer to question 98, para. 236.
415 U.S. 2 April answer to question 98, para. 236.
416 U.S. 2 April answer to question 98, para. 236.
417 7 CFR Section 1493.110(b)(4)(iv). See Exhibit US-142.
418 U.S. 2 April answer to question 98, para. 236.

particular claim under a GSM-102 or GSM-103 payment guarantee, CCC prorates
any collections it receives and shares these collections proportionately with the holder
of the guarantee until both CCC and the holder of the guarantee have been
reimbursed in full.419
275. The underscored sentence is particularly signi ficant. Following default by a foreign obligor
on a GSM 102-guaranteed loan from a U.S. bank, th e U.S. bank files a claim with the CCC. Upon
receipt of the claim, the CCC pays the U.S. bank 98% of principal and any interest up to the GSM 102
cap. Subsequently – "[o]nce CCC has paid out a particular claim" 420 – CCC seeks to collect from
anyone it can. If the CCC succeeds in securing collecti ons, the regulations state that it "shares these
collections proportionately with the holder of the guarantee until both CCC and the holder of the
guarantee have been reimbursed in full."421

276. If the United States were correct that the CCC is entitled to 100% of any recoveries it secures
from the foreign obligor, why would the U.S. exporter, or more likely the U.S. bank, as the exporter's
assignee and the holder of the guarantee, be entitle d to a prorated, proportionate share of any
collections secured by the CCC? If the United Stat es were correct, once the U.S. bank, as the holder
of the guarantee, was paid its claim – 98% of principal and any interest up to the GSM 102 cap – it
would be entitled to nothing more. The U.S. bank would at that point "have been reimbursed in full",
and any subsequent monies secured by the CCC as part of its collection efforts would be for the CCC
to retain.

277. But the United States is not correct. Section 1493.130(c) clarifies that if the CCC's collection
efforts are successful, the holder of the guarantee is indeed entitled to more than its claim to 98% of
principal and any interest up to the GSM 102 cap. Out of any collections secured by the CCC
subsequent to payment of the U.S. bank's claim, th e U.S. bank is entitled to its "proportionate[]" share
– presumably, up to the remaining 2% of principal, and the portion of interest, not covered by the
GSM 102 ECG. The U.S. bank need not wait until C CC has been made whole; rather, CCC's claim
on recoveries is ranked pari passu with the U.S. bank's claim on recoveries.

278. In other words, the United States has misch aracterized the GSM 102 regulations, asserting a
difference between GSM 102 and ExIm Bank's LCI cove r that does not exist. As with ExIm Bank's
LCI policy, GSM 102 cover allows the holder of a GSM 102 guarantee to recover amounts in excess
of 98% of principal and any interest up to the cap.

279. In fact, GSM 102 may well be superior
 to ExIm Bank's LCI cover in this regard.
Section 1493.130(c) of the GSM 102 regulations, quot ed at length above, provides that after CCC has
paid a claim, it shares recoveries on a pro rata basis with the U.S. bank. This means that CCC's claim
on recoveries is ranked pari passu with the U.S. bank's claim, rath er than senior to the U.S. bank's
claim.

280. In contrast, under ExIm Bank's LCI, were the exporter or the U.S. bank to arrange cover with
a third party for 2% of the principal and any porti on of interest not covered by the ExIm Bank LCI
policy, that third party's claim may well rank junior
 to ExIm Bank's claim. In that case,
Section 1493.130(c) of the GSM 102 regulations would mean that GSM 102 provides a superior
product from the exporter or the U.S. bank's standpoint. With a GSM 102 ECG, the exporter or the
U.S. bank does not stand in line behind the CCC to recover the 2% of principal and any portion of
interest not covered by the GSM 102 ECG; rather, out of the first and last dollar of recoveries secured
by the CCC, the exporter or the U.S. bank gets its pro rata share. If anything, this means that

419 7 CFR Section 1493.130(c) (emphasis added). See Exhibit US-142.
420 7 CFR Section 1493.130(c). See Exhibit US-142.
421 7 CFR Section 1493.130(c). See Exhibit US-142.

GSM 102 fees should be even higher than ExIm Ba nk LCI fees, rather than the reverse, as the
United States asserts.

281. Even if this is not the case, however, as Brazil has explained above, Section 1493.130(c) of
the GSM 102 regulations means, at the very least , that the difference between GSM 102 and ExIm
Bank's LCI cover alleged by the United States does not exist. Having foregone the opportunity to
comment on Brazil's ExIm Bank comparison in the 7 submissions it made prior to its 2 April answers
and subsequent to Brazil's profer of the comparison, the United States' misleading and inaccurate
characterization of its own regulations at this late stage of the proceedings is disappointing and not
credible.

99. Please comment on Brazil's argument that th e GSM 102 fees are not sufficiently scaled to
take into account country risk (i.e. they vary only mi nimally according with country risk) (see, inter
alia, paras. 410-412 Brazil's First Written Submission).

282. The United States argues that there is "no basis in the text" of the SCM Agreement for Brazil's
assertion that GSM 102 fees are insufficiently scaled to account for risk.
422 The United States notes
that it "is not aware of any provision of the SCM Agreement that establishes what constitutes
'sufficient' scaling."423

283. The United States may be unaware of Article 1.1(b) of the SCM Agreement, which has been
interpreted by the Appellate Body to require a co mparison between the terms offered a recipient for a
government financial contribution, and the terms available to the recipient for a comparable
instrument secured at market.
424 Brazil has demonstrated that there is no credit protection product
available in the marketplace that is comparable to a GSM 102 ECG. 425 Nonetheless, Brazil has
additionally undertaken a comparison between GSM 102 fees and fees for comparable non-market
products offered by ExIm Bank.

284. That comparison exercise, undertaken methodically on a country-by-country, tenor-by-tenor
basis, demonstrates that GSM 102 fees are consistent ly below ExIm Bank fees. At paragraph 400 of
its First Written Submission, Brazil also demonstr ated graphically that ExIm Bank fees rise much
more sharply than GSM 102 fees in response to incr eased transaction risks, even if ExIm Bank fees
do not represent the market. Consistent with fundamental tenets of corporate finance, as maturity and,
in particular, country risk, increases, the rate at which ExIm Bank fees rise increases significantly.
The same cannot be said of GSM 102 fees, which are barely responsive to increased risks arising from
longer maturities and/or increased country risk.

285. In other words, by comparison to other si milar instruments, GSM 102 fees are insufficiently
scaled to account for transaction risks that ev en non-market entities take into account. The
comparison exercise undertaken by Brazil enjoys a basis in the relevant provisions of the
SCM Agreement – specifically, Article 1.1(b) of the Agreement, as interpreted by the Appellate Body.

4. Item (j) of the Illustrative List

Questions to both parties

102. What, in your view, explains the different results achieved by the two methods advocated, on
the one side, by the United States in paragraphs 87-89 of its First Written Submission and by Brazil in

422 U.S. 2 April answer to question 99, paras. 237, 238.
423 U.S. 2 April answer to question 99, para. 237.
424 Appellate Body Report, Canada – Aircraft, para. 157.
425 Brazil's First Written Submission, paras. 377-378. See also Id ., Annex III (Statement of
Professor Rangarajan Sundaram), paras. 8-9.

Exhibit Bra-613 (other than the United States' cr iticism that Brazil has not taken recoveries
corresponding to pre-1992 guarantees into account in its "cash basis" accoun ting calculations, of
which the Panel is already aware)?
286. The United States suggests that Brazil is back ing away from net present value accounting as a
reliable way to measure the long-term costs of the GSM 102 program. 426 If it is not already
abundantly clear to the United States 427, Brazil agrees that net present value accounting is a reliable
way to account for the costs of contingent liabilities.

287. Using a net present value methodology, the CCC has, in every year since the inception of
credit reform in 1992 (including in budgets for FY 2006, 2007 and 2008
428, under the amended
GSM 102 fee schedule), projected that costs and losses for the "cohort" of ECGs issued in the coming
fiscal year would, at closing, exceed projected fe es, penalties and recoveries. Using the same net
present value methodology, CCC's 2006 audited fina ncial statements state that the CCC does not
anticipate covering the costs and losses of the ECG programs across all outstanding cohorts of ECGs
issued since 1992.
429

288. As noted in Brazil's 2 April response to questio n 105 (at paragraphs 283-307), it is the United
States that is backing away from the net presen t value methodology, while trying to give the
impression that it embraces that methodology.

289. First, in these proceedings, the United St ates consistently derides the net present value
methodology required by U.S. law as "unreliable", because it allegedly does not reflect the CCC's
particular experience
430 – a proposition with which USDA and FAS disagree, outside the context of
WTO litigation.431

290. Second, although the projections of long-t erm losses included in the 2006 CCC financials,
and in the U.S. budgets for GSM 102 ECGs issued in fiscal years 2006, 2007 and 2008, are calculated
using the net present value methodology mandated by U.S. law, the United States derides these
projections as not reflective of "actual" results.
432 The United States' objection that this evidence does
not reflect "actual" results most clearly dem onstrates its abandonment of the net present value
approach. By definition, net present value calculations are projections of future results, discounted
back to present value terms. The only wa y the United States will accept a net present value

426 U.S. 2 April answer to question 102, paras. 240-242.
427 Brazil's First Written Submission, paras. 433-437; Brazil's Rebuttal Submission, paras. 483-484,
501-511; Brazil's Oral Statement, paras. 252-254, 257-260.
428 Exhibit US-71.
429 Exhibit Bra-585 (Audit Report, Commodity Credit Corporation's Financial Statements for Fiscal
Years 2005 and 2006, Report No. 06401-21-FM, November 2006, p. 11, 26 of Notes to the Financial
Statements) (identifying a USD 220 million "credit guar antee liability", defined as representing "the estimated
net cash outflows (loss) of the guarantees on a net present value basis.").
430 U.S. Rebuttal Submission, paras. 111-125.
431 Exhibit Bra-588 (Agricultural Export Credit Guarantee Program s Assessment, ExpectMore.gov,
Section 3.CR2, accesse d January 2007 at
http://www.whitehouse.gov/OMB/expectmore/detail.10002020.2005.html) (the "credit models used to calculate
the subsidy for the guaranteed credits were revised in FY2001 and FY2003 and currently provides reliable
estimates", and identifies the model applied specifically as "[t]he USDA model ") (emphasis added); Exhibit
Bra-616 (U.S. Department of Agriculture, Office of the Chief Financial Officer, Credit, Travel, and Accounting
Division, Agriculture Financial Standards Manual (May 2004), p. 121, accessed December 2006 at
http://www.ocfo.usda.gov/reports/index.htm) ("In estimating default costs, the following risk factors are
considered: (1) loan performance experience ….").
432 See U.S. Rebuttal Submission, para. 88; U.S. 2 April answer to question 108, paras. 276-277.

methodology is if it is converted into a retros pective, cash-basis accounting methodology, by taking
account of re-estimates.
433 This amounts to a rejection of the net present value approach.

104. Must a risk-based fee necessarily take into account foreign obligor risk? Please discuss and
provide any relevant support for your position. Can foreign obligor risk be treated differently than
country risk in this respect, and if so, why?

291. The United States argues that there is "no basis in the text for the obligation" to taken into
account foreign obligor risk in setting an ECG fee.
434

292. The United States may be unaware of item (j) of the Illustrative List, which requires an
assessment of "premium rates" for an ECG program, and "long-term operating costs and losses" of the
program. As noted by the original panel, item (j ), "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-te rm operating costs and losses have to be borne, in
total or in part, by the government." 435 The United States may also be unaware that Article 1.1(b) of
the SCM Agreement defines a subsidy as a government financia l contribution provided on terms that
are better-than-market. Market-based institutions do not provide credit protection instruments without
taking account of foreign obligor risk.

293. Brazil has submitted evidence demonstrating that to be "fully reflective of the risks of a
particular transaction"
436, ECG fees must be set to take account of foreign obligor risk. 437 The
United States has offered no evidence to rebut Brazil's showing that market-based financial
institutions (let alone other U.S. government entities providing credit protection instruments similar to
GSM 102 ECGs438) do not rely on exposure limits alone to adequately manage risk.
106. The parties disagree as to whether Brazil should include recoveries for pre- 1992 guarantees
in its cash basis accounting formula (Exhibit Bra- 613). Is the Panel correct in understanding that
Brazil's formula does not includes amounts for (1) claims paid after 1992 under pre-1992 guarantees;
(2) fees paid on pre-1992 guarantees? If so, pl ease explain the relevance or non-relevance of
including recoveries under pre-1992 guarantees in light of the non-inclusion of costs and other
revenues related to the same guarantees.

294. In paragraph 266 of its 2 April response, the United States addresses CCC's recent, massive
write-offs of uncollectible amounts attributed to pre-1992 ECGs, as recorded in the United States'
"liquidating account". In Brazil's view, these write -offs offer an additional reason why the liquidating
account does not turn a cash-basis assessment of program losses into program profits, as the
United States has asserted.
439 Writing off billions of dollars worth of losses does not make a program
profitable.440

433 See, e.g., U.S. First Written Submission, para. 87; U.S. 2 April answer to question 102, para. 244.
434 U.S. 2 April answer to question 104, para. 251.
435 Panel Report, U.S. – Upland Cotton, para. 7.805.
436 Panel Report, U.S. – Upland Cotton, para. 7.805.
437 See Brazil's Rebuttal Submission, para. 498 and Exhibit Bra-615.
438 See "transaction risk increment" field in the U.S. Export-Import Bank fee calculator, defined at
http://www.exim.gov/tools/calchelp.cfm.
439 U.S. Rebuttal Submission, paras. 97-99.
440 See Brazil's Oral Statement, paras. 261-263.

Questions to the United States

107. What can explain the discrepancy between th e "credit guarantee liability" recorded in the
CCC's financial statements (which suggest that the program is provided at a net cost to the US
government) and the evidence presented by the US in para. 87 of its First Written Submission?

295. Please see Brazil's comment on the U.S. response to question 108.

108. Please explain why the "liability" figure in the CCC's financial statements should not be
considered by the panel to provide, if not the amount of actual losses, at least a reliable estimate of
the CCC's own perception of the cost to the government of the programmes since their inception. Is
the Panel wrong in understanding that a "credit guarantee liability
" in this context means that the
CCC considers that the programmes will not cover their costs and losses in the long term?

296. The United States misrepresents the significance of the "credit guarantee liability" figure in
the 2006 CCC financial statements.

297. The United States' response ignores altogether the definition of "credit guarantee liability"
included in the financial statements itself. The definition reads as follows:

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.
441
298. The bold, underlined word "net" belies the U.S. assertion that the credit guarantee liability
figure in the CCC financial statements includes only a "liability for which there is an offsetting
balance sheet entry of an asset." 442 By the express terms of this definition, the credit guarantee
liability figure in CCC's financials represents "net" cash outflows or losses – meaning that having
netted expected cash inflows against expected cash outflows on a net present value basis, the CCC
expects that the latter will exceed the former, and that it will therefore experience a "loss" (another
term expressly used in the definition).

299. As acknowledged by the United States, the orig inal panel, in its adopted findings, agreed.
The United States notes the original panel's findi ng that "the credit guarantee liability represented a
prospective estimate of anticipated experience under the program".
443 This is somewhat of an
understatement. Citing the credit guarantee liab ility figures from the 2002 and 2003 CCC financial
statements, the original panel stated as follows:

[W]e note that the CCC financial statements for the years 2002 and 2003 indicate a
"credit guarantee liability" of $411 million and $22 million, respectively. The CCC
defines the term "credit guarantee liability" as the estimated cash outflows of the
guarantees on a net present value basis. "Lia bility" is defined as "...a probable future

441 See Exhibit Bra-585 (Audit Report, Commodity Credit Corporation's Financial Statements for Fiscal
Years 2006 and 2005, Report No. 06401-21-FM, November 2006, p. 11, 26 of Notes to the Financial
Statements) (emphasis added). This is virtually identical to the net present value formula called for by the U.S.
Federal Credit Reform Act. Exhibit Bra-656 (2 U.S.C. 661 a(5)(C)) ("The cost of a lo an guarantee shall be the
net present value, at the time when the guaranteed loan is disbursed, of the following estimated cash flows:
(i) payments by the Government to cover defaults and delinquencies, interest subsidies, or other payments; and
(ii) payments to the Government including origination and other fees, penalties and recoveries . . .").
442 U.S. 2 April answer to question 108, para. 268.
443 U.S. 2 April answer to question 108, para. 277, citing Panel Report, U.S. – Upland Cotton ,
para. 7.855.

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 l ong term, be able to operate the export
credit guarantee programmes without some net cost to government.
444
300. In its response, the United States not only ask s the compliance Panel to revisit the original
panel's adopted findings regarding what the credit guarantee liability figure represents, but further
challenges the reliability of the credit guarantee liability figure as a basis on which to make an item (j)
assessment of long-term costs and losses, because it is a future-oriented assessment of long-term
losses on a net present value basis rather than an "actual" or "retrospective" loss.445 The United States
made the same arguments during the original proceedings. 446 The original panel and the Appellate
Body rejected the U.S. arguments, and accepted a forward-looking approach to the assessment of the
ECG programs under item (j).447

301. These adopted findings should be followed by th e compliance Panel. Prior adopted panel and
Appellate Body reports create "legitimate expect ations" among WTO Members, and should be taken
into account by panels when they are relevant to the resolution of a dispute. 448 Further, where the
issues before a panel are the same as those previous ly examined by the Appellate Body, it is "not only
appropriate," but to "be expected," that the panel would follow the Appellate Body's earlier
conclusions.449

302. With respect to compliance proceedings, in particular, the Appellate Body has stated that
"Article 21.5 proceedings do not occur in isolation but are part of a ' continuum of events .'"
450 The
Appellate Body 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 the reasoning in the original panel
report in the absence of any change in the underlying evidence."451

303. Nothing about the way in which the credit gua rantee liability figure is defined in the CCC
financial statements, or calculated, has changed from the original proceedings.
452 To find now that the

444 Panel Report, U.S. – Upland Cotton, para. 7.855 (footnotes omitted).
445 U.S. 2 April answer to question 108, paras. 275-276.
446 The United States appealed this specific element of the original panel's analysis. U.S. Appellant's
Submission in U.S. – Upland Cotton, paras. 407 and 410-413 (and note 419), available at
http://www.ustr.gov/assets/Trade_Agreements/Monitoring_Enforcement/Dispute_Settlement/WTO/Dispute_Set
tlement_Listings/asset_upload_file938_5598.pdf. For U.S. arguments before the original panel, see U.S.
11 July 2003 First Written Submission, paras. 176-178 ; U.S. 11 August 2003 Answers to Panel Questions,
paras. 157, 159, 170 and 173; U.S. 22 August 2003 Rebuttal Submission, paras. 161-162, 167, 171; U.S.
30 September 2003 Further Submission, para. 151; U.S. 18 November 2003 Further Rebuttal Submission,
paras. 196-199; U.S. 22 December 2003 Answers to Panel Questions, paras. 86, 90, 91-95, 96-99, 100-101,
103, 117-121 and U.S. 11 February 2004 Answers to Further Panel Questions, para. 21.
447 Appellate Body Report, U.S. – Upland Cotton, paras. 763-764 and Panel Report, U.S. – Upland
Cotton, paras. 7.842-7.843. See also Id., para. 7.835 ("[T]he item (j) analysis need not be a purely retrospective
one ….").
448 Appellate Body Report, U.S. – Softwood Lumber V, para. 111.
449 Appellate Body Report, U.S. – OCTG Sunset Reviews, para. 188.
450 Appellate Body Report, U.S. – Softwood Lumber IV (21.5), para. 103 (emphasis added) citing
Appellate Body Report, Mexico – Corn Syrup (21.5), para. 121. See Brazil's First Written Submission,
para. 28.
451 Appellate Body Report, U.S. – Softwood Lumber VI (21.5), para. 103 (emphasis added).
452 The United States' argument that the credit guarantee liability figure in the CCC financial statements
includes only a "liability for which there is an offsetting balance sheet en try of an asset" does not represent a
change to the definition or calculation of the credit guarantee liability figure since the original proceedings.

figure is unreliable would involve a significant departure from the findings in the original
proceedings, with no valid basis for that change. It would also involve a violation of the principle of
res judicata, because the reliability of the estimates has been definitively resolved for purposes of this
dispute. As noted by the panel in U.S. – Gambling (21.5) , "[a] re-assessment in a compliance
proceeding of an issue that had already been ru led upon in an original proceeding in an adopted
report, even with better arguments by the respondent but without a change relevant to the underlying
facts in the intervening period, would run c ounter to the prompt settlement of disputes."
453 T h e
United States is not entitled to re- litigate an issue that has been de finitively resolved for purposes of
this dispute.

Rather, it is simply a new argument by the United States, and one that, as addressed above, is belied by the very
definition of "credit guarantee liability" included in CCC's financial statements and relied on by the original
panel.
453 Panel Report, U.S. – Gambling (21.5), para. 6.53.

B. C LAIMS OF BRAZIL REGARDING PRESENT SERIOUS PREJUDICE 537

1. Significant price suppression - Article 6.3(c) of the SCM Agreement 537

2. Increase in world market share - Article 6.3(d) of the SCM Agreement 558

C. C LAIM OF BRAZIL REGARDING THREAT OF SERIOUS PREJUDICE 560

D. E XPORT CREDIT GUARANTEES 565

1. Outstanding export credit guarantees 565

2. Legal Bases for Brazil's export subsidies claims 566

3. "Benefit" under Articles 1.1 and 3.1(a) of the SCM Agreement 567

4. Item (j) of the Illustrative List
570

TABLE OF EXHIBITS

Exhibit
US-
Title
165 "China: Cotton import quotas of 1.5mn tons to be issued," available at
www.fibre2fashion.com (April 24, 2007).
166 U.S. Export Sales for Week Ending 4.12.2007, available at
www.fas.usda.gov/export-sales/cottfax.htm
167 U.S. Export Sales Weekly Export Performance Indicator for Week Ending
4.12.2007, available at http://www.fas.usda.gov/esrquery/esrpi.aspx.
168 NASS March 2007 Cotton Ginnings Report
169 N.Y. Futures After Issuance of Planting Intentions Report

1. In its answers to the second set of questions fro m the Panel, Brazil has reasserted many of the
same unfounded arguments presented in its earlier submissions, which the United States has already
addressed and rebutted. Many of Brazil's answers to questions also repeat the same information. The
United States does not intend to resubmit all of the se U.S. arguments in response. Rather, for the
convenience of the Panel, the United States first offers one general comment regarding Brazil's
answers to each major section of the Panel's questi ons. The United States then proceeds to address
those aspects of Brazil's answers that are either ne w or call for further comment. Where possible, the
United States refers the Panel to its prior submissions where Brazil's arguments have been addressed.

2. To the extent the United States does not address a particular answer or a particular aspect of
an answer, this is not intended as – and should not be understood to be – agreement with Brazil's
position.

I. GENERAL
 COMMENTS REGARDING BRAZIL'S ANSWERS

A. B RAZIL HAS NO BASIS TO CHALLENGE MEASURES THAT WERE NEITHER ORIGINAL MEASURES
SUBJECT TO ANY FINDING OF WTO-INCONSISTENCY OR DSB RECOMMENDATIONS AND
RULINGS NOR MEASURES TAKEN TO COMPLY WITH ANY RECOMMENDATIONS AND RULINGS1

3. Brazil repeats in its answers to Questions 44 to 46 the incorrect argument that it is entitled to
renew in this "compliance" proceeding under Article 21.5 of the Understanding on Rules and
Procedures Governing the Settlement of Disputes ("DSU") claims against measures (a) that were
never found to be WTO-inconsis tent and were never subject to any DSB recommendations and
rulings; and (b) that are not measures taken to comply with any recommendations and rulings. 2
These measures include the GSM 102 export credit guarantees in respect of exports of pig meat and
poultry meat. They also include the marketing loan and counter-cyclical payment programs and
payments made under the program in years beyond MY 1999-2002. Brazil's arguments continue to be
unavailing.

1. Neither GSM 102 guarantees in respect of exports of pig meat and poultry meat
nor Brazil's claims with respect to them are within the scope of this proceeding

4. Brazil's assertion of an "entitlement" to ma ke a claim against GSM 102 guarantees in respect
of exports of pig meat and poultry meat rests on two untenable grounds. First, Brazil asserts
erroneously that any changed measure may be challenged in a compliance proceeding regardless of
whether it was "taken to comply" with an y recommendations and rulings of the DSB. 3 And, second,
Brazil asserts that a complaining party may renew in a compliance proceeding any claims that were
not "definitively resolved" in the original proceeding.4 Neither proposition finds support in the DSU.

5. Contrary to Brazil's assertions, the test of wh ether a measure is properly within the scope of
an Article 21.5 compliance proceeding is not simp ly whether it has changed since the original
proceeding. That would effectively write out of Article 21.5 the requirement that the measure be
"taken to comply" with the DSB's recommendations and rulings. Rather, under the express terms of
Article 21.5, the touchstone of what is and is not a "measure taken to comply with the

1 The United States does not submit comments regard ing Brazil's claims in respect of compliance in
past periods as none of Brazil's answ ers to the second set of questions relate to that issue. For the U.S.
arguments in respect of those claims, the United States respectfully refers the Panel to the U.S. First Written
Submission, paras. 49-56, U.S. Rebuttal Submission, paras. 64-71, U.S. Answers to Parts A-C of First Set of
Panel Questions, paras. 45-46, U.S. Comments on Br azil's Answers to First Set of Panel Questions,
paras. 104-111, and U.S. Answers to Second Set of Panel Questions, paras. 54-61.
2 See Brazil Answers to Second Set of Questions, paras. 1-35.
3 See e.g., Brazil Answers to Second Set of Questions, para. 6, 34.
4 See e.g., Brazil Answers to Second Set of Questions, para. 7.

recommendations and rulings" of the DSB is – necessar ily – the DSB's recommendations and rulings.
Where the DSB's recommendations and rulings di stinguish between different components of a
measure or different measures, that distinction is determinative for purposes of the compliance
proceeding as well.

6. Here, the DSB's recommendations and rulings clearly distinguish "export credit guarantees
under the GSM 102, GSM 103 and SCGP e xport credit guarantee programmes . . . in respect of
exports of upland cotton and other unschedul ed agricultural products supported under the
programmes, and in respect of one scheduled product (rice) "5 from other export credit guarantees
under those programs. As Brazil's response to Ques tion 44 confirms, this distinction goes to which
measures were found to be WTO-inconsistent (i.e., which measures the United States was obligated to
bring into compliance with its obligations under Articles 10.1 and 8 of the Agreement on Agriculture
and Articles 3.1(a) and 3.2 of the SCM Agreement). The question for this compliance Panel, then, is
whether Brazil has demonstrated either that th e United States has (a) not brought those measures
(export credit guarantees in respect of rice and unsche duled products) into conformity with the DSB's
recommendations and rulings or (b) that those meas ures – as modified – are inconsistent with the
provisions of the WTO Agreement cited by Brazil.6

7. Brazil has attempted to obscure this distincti on by insisting variously that (a) the original
panel's findings were made with resp ect to the GSM program as a whole 7 and that guarantees
thereunder are not even "measures" for purposes of WTO dispute settlement 8, (b) that it is Brazil's
claims and not the measures challenged that are "product specific;" 9 (c) that the United States has
made changes across the entire GSM 102 program incl uding with respect to export credit guarantees
in respect of exports of pig meat and poultry meat 10, and (d) and that the GSM 102 program applies in

5 Upland Cotton (Panel), para. 8.1(d) (emphasis added). This is because the original panel found that
Brazil had only made its case under Articles 10.1 and 8 of the Agreement on Agriculture and Articles 3.1(a)
and 3.2 of the SCM Agreement with respect to export credit guarantees provided in respect of exports of rice and
unscheduled products.
6 There can be no presumption that the U.S. measur es taken to comply are inconsistent with its WTO
obligations; the burden is on Brazil to prove inconsistency.
7 As the United States has explained, this argument is inconsistent with Brazil's prior arguments and the
original panel's resolution of Brazil's claims. See U.S. Comments on Brazil's Answ ers to First Set of Panel
Questions, paras. 12-15. This even contradicts Brazil's own clarification in its rebuttal submission that " Brazil
does not assert that the GSM 102 program itself circumvents the United States' export subsidy commitments,
within the meaning of Article 10.1 of the Agreement on Agriculture ." Brazil Rebuttal Submission, para. 378
(emphasis added).
8 See, e.g., Brazil Responses to Panel Section A-C Questions, para. 29. This argument is at odds with
Brazil's arguments elsewhere that an a contrario reading of item (j) would prevent a Member from challenging
specific export credit guarantees ( i.e., as opposed to the export credit guarantee programs generally). See U.S.
Comments on Brazil's Answers to First Set of Panel Questions, paras. 10-11. If specific guarantees cannot even
constitute "measures," as Brazil now asserts, Brazil's co mplaints about being able to make claims against
specific guarantees would be entirely m oot. Brazil's argument is also inconsistent with the clarification by the
Appellate Body that a "measure" for purposes of WTO dispute settlement may encompass "[i]n principle, any
act or omission attributable to a WTO Member. . . ." United States – Corrosion-Resistant Steel (AB), para. 81.
9 Calling Brazil's claims "product-sp ecific" does not change the fact that only particular guarantees –
those provided in respect to the particular "product" at issue – are the subject of the claims. Where those
guarantees were not the subject of any DSB recommendations and rulings and are not measures taken to comply
with any DSB recommendations and rulings – as in the case of the GSM 102 export credit guarantees in respect
of exports of pig meat and poultry meat – there is no basis for a claim to be considered with respect to them in a
DSU Article 21.5 proceeding. See U.S. Comments on Brazil's Answers to First Set of Panel Questions,
paras. 16.
10 See e.g., Brazil Answers to Second Set of Panel Questions, para. 6. As the panel in EC – Bed
Linen (21.5) recognized the mere fact that improvements have been made to more than just the original
measures subject to findings of WTO-inconsistency and DSB recommendations and rulings does not render all
changed measures "measures taken to comply." See U.S. U.S. Answers to Second Set of Panel Questions,
paras. 1-16 (discussing EC – Bed Linen (21.5) (Panel), paras. 6.9-6.22)).

the same way regardless of what products are involved. 11 As the United States has explained 12,
however, not only are certain of these assertions wrong, they do not alter the conclusion that GSM
102 export credit guarantees in respect of exports of pig meat and poultry meat are not within the
scope of this proceeding.

2. The marketing loan and counter-cyclical payment programs, payments made
thereunder after MY 2002, and Brazil's claims in respect of those measures are
outside the scope of this proceeding

8. In its response to Question 45, Brazil conti nues to press the Panel impermissibly to expand
the scope of this compliance proceeding to includ e claims against the marketing loan and counter-
cyclical payment programs and payments made thereunder in periods after MY 2002. Brazil's
arguments turn on its own pronouncements that the original panel did in fact find the Step 2,
marketing loan, and counter-cyclical payment progr ams to be causing "present" serious prejudice and
that it similarly found payments a llegedly "mandated" to be made thereunder in MY 2003-2007 to be
causing "present" serious prejudice (though, of course, such payments had not even been made as of
the time the matter was referred to the original panel). These pronouncements are flatly contradicted
by the facts and the express language of the original panel report.

9. Brazil's approach in Question 45 – as it has been throughout this proceeding – consists of
cherry-picking individual sentences of the panel report and imposing upon them a strained reading
that is neither supported by the context nor consiste nt with the most basic principles of WTO dispute
settlement (e.g., that a panel cannot make the claim for a complaining party, let alone make claims
never presented by a complaining party). As the Un ited States has explained, there is no merit to
these arguments.
13

10. In fact, it is remarkable that, in its resp onse to Question 45 from the Panel, Brazil accuses the
United States of "mischaracteriz[ing] the or iginal panel's findings from beginning to end." 14 Not only
is this untrue, but the ir ony of the accusation is that Brazil has never even attempted to reconcile its
arguments with the "original panel's findings from beginning to end." So, for example, Brazil has
never explained what legal basis this Pa nel has for ignoring the original panel's actual conclusion on
present serious prejudice:

In conclusion, in light of all of these cons iderations, we find that the effect of the
mandatory, price contingent United States subsidies at issue – 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.15
This conclusion on its face contradicts Brazil's assertion that "the United States . . . wrongly
assumes that 'U.S. subsidies' does not include the le gislative and regulatory pr ovisions – the subsidy

11 See e.g., Brazil Answers to Second Set of Panel Questions, para. 4. Contrary to Brazil's assertions,
the U.S. argument is not premised on the assumption "that different ECG measures apply to different products."
Brazil Answers to Second Set of Panel Questions, para. 4. As the United States has explained, this is irrelevant
to the U.S. arguments.
12 U.S. First Written Submission, paras.24-30, U.S. Rebuttal Submission, paras. 10-15, U.S. Answers to
Parts A-C of First Set of Panel Questions, paras. 17-2 6, U.S. Comments on Brazil's Answers to First Set of
Panel Questions, paras. 8-44, and U.S. Answers to Second Set of Panel Questions, paras. 1-16 and 42-48.
13 U.S. First Written Submission, paras. 31-48, U.S. Rebuttal Submission, paras. 16-63, U.S. Answers
to Parts A-C of First Set of Panel Questions, paras. 27 -44, U.S. Comments on Brazil' s Answers to First Set of
Panel Questions, paras. 45-103, and U.S. Answers to Second Set of Panel Questions, paras. 17-41.
14 Brazil Answers to Second Set of Panel Questions, para. 12.
15 Upland Cotton (Panel), para. 7.1416.

programs – mandating the subsidy payments."
16 The language confirms that the United States has not
assumed – let alone wrongly assumed – what the "U.S. subsidies" are, as Brazil charges.

11. To the contrary, as the original panel clearly st ates, the "United States subsidies at issue" . . .
[are] marketing loan programme payments, user marketing (Step 2) payments, MLA payments, and. . .
CCP payments." There is no other way to understand th e language in between the dashes in the
conclusion or the fact that the original panel u ses the introductory phrase "that is" – a phrase used for
clarification of what a term means – to explain that the "subsidies at issue" are marketing loan
programme payments, user marketing (Step 2) payments, MLA payments, and counter-cyclical
payments. Brazil has never reconciled its theory – that the "subsidies at issue" include the programs
providing for these payments – with this language or with the scores of other clear indications by the
original panel that the subsidies subject to its "p resent" serious prejudice examination were payments
made in MY 1999-2002 under, inter alia, the Step 2, marketing loan, and counter-cyclical payment
program.

12. Nor has Brazil offered any credible explanation for:

• How the original panel could have made a finding of present serious prejudice against
either the Step 2, marketing loan, and counter-cyclical payment programs or payments
allegedly "mandated" to be made th ereunder in MY 2003-2007 when it did not
recognize Brazil as even presenting a claim of "present" serious prejudice with respect
to either group of measures.
17

• Why the original panel identified only "user marketing (Step 2) payments to domestic
users and exporters; marketing loan programme payments; PFC payments;
MLA payments; DP payments; CCP payments; crop insurance payments; and
cottonseed payments"18 as the "challenged measures" that were alleged to be the
"subsidies" for purposes of Brazil's "present" serious prejudice claim. The panel only
found that those measures constituted subs idies within the meaning of Articles 1
and 2 of the SCM Agreement.
19 The panel did not conduct any assessment as to
whether the statutory/regulatory provisions authorizing these payments were also
"subsidies."

• How the original panel could have made findings of WTO-inconsistency with respect
to the Step 2, marketing loan, and count er-cyclical payment programs or future
payments allegedly "mandated" to be made under the programs without addressing
the extensive arguments that the parties ma de, and without making any of the factual

16 Brazil Answers to Second Set of Panel Questions, para. 13.
17 The United States recalls that the panel set out th e claims presented by Brazil as follows: (a) claims
of "present" serious prejudice with respect to "U.S. subsidies provided during MY 1999-2002"; (b) claims of
threat of serious prejudice with respect to "U.S. subsidies mandated to be provided in MY 2003-2007;" and (c)
per se claims of threat of serious prejudice against "sel ected provisions of the FSRI Act of 2002 and the ARP
Act of 2000" providing for these subsidies, to the extent relevant to upland cotton, and their implementing
regulations. Upland Cotton (Panel) , para. 3.1(vi) – 3.1(viii). The original panel did not identify a "present"
serious prejudice claim under Article 5(c) and 6.3(c) of the SCM Agreement as one of the claims "concerning
selected provisions of the FSRI Act of 2002 and the ARP Act of 2000." Nor did the original panel identify
"selected provisions of the FSRI Act of 2002 and the ARP Act of 2000" as part of the measures subject to
Brazil's claims of "present" serious prejudice under Articles 5(c) and 6.3(c) of the SCM Agreement.
18 Upland Cotton (Panel) , para. 7.1120. The original panel ultimately found that these constituted
"subsidies" within the meaning of Article 1 of the SCM Agreement because they were "financial contributions"
(mostly in the form of "grants") conferring a "benefit." Upland Cotton (Panel), paras. 7.1112-7.1120.
19 Upland Cotton (Panel), para. 7.1112-7.1120.

findings that Brazil conceded would be necessary to support an affirmative finding of
WTO-inconsistency in respect of those measures.20

13. And Brazil has not addressed the other clear text ual signals that – consistent with the claims
presented to it – the original panel's findings of "p resent" serious prejudice were made with respect to
payments made in MY 1999-2002. This includes:

• The fact that the original panel's prohibited subsidy-related conclusions and
recommendations regarding the Step 2 program, as such , expressly refer to
"section 1207(a) of the FSRI Act of 2002 pr oviding for user marketing (Step 2)
payments to exporters of upland cotton" 21 and "section 1207(a) of the FSRI Act of
2002 providing for user marketing (Step 2) payments to domestic users of upland
cotton."22 If the conclusions regarding "present" serious prejudice in
paragraphs 8.3(d) and 8.1(g)(i) of the original panel report also pertained to the Step 2
program, as such , together with the marketing loan program and counter-cyclical
payment program, the panel would certainly have included the same specific kind of
reference, rather than a reference to "user marketing (Step 2) payments.."

• The fact that in Section VII:D of the Pa nel Report, dealing with the evaluation of
domestic support measures under Article 13 of the Agreement on Agriculture , the
original panel expressly stated that, "[i]n this Section of our report, the Panel will
consider the current programmes 'as applie d' and 'as such' together. Therefore,
references to marketing loan programme, u ser marketing (step 2), direct, counter-
cyclical and crop insurance 'payments' include the legislative and regulatory
provisions authorizing those payments unless otherwise indicated." 23 N o s i m i l a r
statement can be found in Section VII:G, which is the section including the original
panel's analysis of the effects of the subsid ies alleged to be causing serious prejudice.
In fact, the original panel in Section VII:G clearly distinguishes payments from
provisions providing for those payments. Nor is there any similar statement made in
connection with the recommendation in para graph 8.3(d) of the panel report (or
paragraph 8.1(g)(i), which contains the conclusion on actionable subsidies to which
the recommendation relates).

• The panel's clarification that it was not precluded from considering whether
production flexibility contract and market loss assistance payments were causing
"present" serious prejudice even though th e legislative and re gulatory provisions
authorizing those payments had expired ev en before Brazil made its request for

20 For example, Brazil conceded in the original proceeding that "[i]t is established under WTO law that
a Member can only challenge measures of another Member per se if such measures mandate a violation of the
WTO Agreement." Brazil First Submission in Original Panel Proceeding, para. 244 (citing US – 1916 Act (AB),
para. 88). Thus, in the case of its claims against the challenged programs, per se, Brazil asked the Panel "to find
that the mandatory provisions of the 2002 FSRI Act and the 2000 ARP Act together with their implementing
regulations, as listed above, cannot be applied in a WTO consistent manner." Brazil's 9 September 2003 Further
Submission, para. 435-436. Explaining what this would mean in the context of this dispute, Brazil argued
"[f]irst, the Panel needs to evaluate whether the U.S. subsidies will necessarily threaten to cause serious
prejudice at price levels below the trigger prices of the U.S. subsidies. Second, the Panel needs to consider
whether the U.S. subsidies thr eaten to cause serious prejudice even at price levels at which only crop insurance
subsidies and direct payments are made ." Brazil's September 9, 2003 Furt her Submission, para. 426 (emphasis
added). The Panel neither conducted the requested evaluations, nor made any findings along the lines requested
by Brazil.
21 See Upland Cotton (Panel), paras. 8.3(b) and 8.1(e).
22 See Upland Cotton (Panel), paras. 8.3(c) and 8.1(f).
23 Upland Cotton (Panel), para. 7.337(ix), n. 466.

consultations.
24 If the original panel's findings w ith respect to "payments" – and the
DSB's recommendations and rulings on the b asis thereof – were to be understood to
automatically refer also to the programs au thorizing those payments, as Brazil urges,
the recommendation with respect to "MLA payments" in the panel's "present" serious
prejudice conclusion would necessarily be a recommendation also with respect to the
"MLA program" as such (an expired measure). This would be inconsistent with the
original panel's express clarification that it was not making any findings of WTO-
inconsistency or any recommendations and ru lings with respect to expired programs,
as such
25 as well as with the Appellate Body's subsequent clarification that "there [is]
an obvious inconsistency" between a findi ng that a measure has expired and a
"subsequent recommendation that the . . . DS B request the United States to bring the
[expired measure] into conformity with its WTO obligations."26

14. In short, Brazil has not – and cannot – reconcile its own arguments to the "the original panel's
findings from beginning to end."
27 Brazil's does not offer any cohere nt interpretation of the original
panel report that addresses and takes into account all of the facts discussed above and in the prior U.S.
submissions. Simply ignoring the facts or making accusations that the United States is
"mischaracteriz[ing] them" does not allow Brazil to overcome that fatal deficiency. It remains,
therefore, that Brazil's claims against the marketing loan and counter-cyclical payment programs and
any payments made under the programs post-MY 2002 are outside the scope of this proceeding.

B. M
ARKETING LOAN AND COUNTER -CYCLICAL PAYMENT PROGRAMS ARE NOT CAUSING ANY
PRESENT "SIGNIFICANT" PRICE SUPPRESSION WITHIN THE MEANING OF ARTICLES 5(C)
AND 6.3(C) OF THE SCM AGREEMENT

15. For the reasons set out above and in the prio r U.S. submissions, Brazil's claims of "present"
serious prejudice under Articles 5(c) and 6.3(c) of the SCM Agreement against the marketing loan and
counter-cyclical payment programs and/or any presen t payments thereunder are not within the scope
of this proceeding. Were they to have been w ithin the scope, they would nonetheless fail because
they are bereft of a basis in the facts.

16. Indeed, a substantial part of Brazil's res ponses to the Panel's Questions 51 and 62-74 are
devoted to attempts to explain away this failing. Brazil complains, on the one hand, that it should not
be required to provide "direct evidence of what would actually happen to U.S. acreage, production,
exports, and world prices"
28 without marketing loan and counter-cyclical payments and it complains,
on the other, that the United States has "ignore[d] the hundreds of exhibits and circumstantial
evidence presented by Brazil."
29 Both assertions are baseless.

17. Brazil – as the complaining party – bears the burden of proving its claims with evidence and
arguments that actually support the claim for which they are offered . It has not done so. Further, in
observing this, the United States has not "ignored" any argument or exhibit submitted by Brazil. To
the contrary, the United States has painstakingly ex amined and addressed – over the course of two
written submission, the presentation before the Panel, three set of responses to questions from the

24 Upland Cotton (Panel) , para. 7.108 ("The Panel notes that Brazil pursues claims only in respect of
the subsidies and domestic support provided under the expi red 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 on ly considers whether the payments are within its terms
of reference.") (italics added).
25 Upland Cotton (Panel), para. 7.111.
26 Upland Cotton (AB), para. 272 (citing U.S. – Certain EC Products (AB), paras. 81-82).
27 Brazil Answers to Second Set of Panel Questions, para. 12.
28 Brazil Answers to Second Set of Panel Questions, para. 91.
29 Brazil Answers to Second Set of Panel Questions, para. 90.

Panel, comments on Brazil's "oral" presentation to the Panel, and now two sets of comments on
answers – every argument made by Brazil and de monstrated that these do not, individually or
collectively, support Brazil's claims of "significant" price suppression.30

18. Brazil's assertions about the removal of the St ep 2 program are unsubstantiated, internally
contradictory, and inconsistent with arguments made by Brazil in the original proceeding: Brazil's
claims are premised on the assertion that removal of the Step 2 program has not removed the adverse
effects of the package of payments found by the original panel to be causing "present" serious
prejudice. However, Brazil's assertions about th e effects of removing the Step 2 program are
unsubstantiated, internally contradi ctory, inconsistent with arguments made by Brazil in the original
proceeding, and contradicted by the empirical evidence.
31

19. Thus, for example, having proclaimed to the or iginal panel that "it is difficult to imagine how
a subsidy could be more of an export subsidy than the Step 2 export provisions" and that "[the
program] plays an important role in stimulating and maintaining the present record high U.S. upland
cotton world export market share,"
32 Brazil has no basis now to allege that "removal of the Step 2
program does [not] result in any significan t or long-term reduction of U.S. exports." 33 The United
States notes the irony in Brazil's assertion here that a "long-term" assessment of the effects of the
removal of the Step 2 program is appropriate while in its analysis of the marketing loan and counter-
cyclical payment program it insists that "the assessment is necessarily of a short-term, not a long-term
nature."
34 This is yet further evidence that Brazil's positions on such fundamental questions as the
appropriate analysis under the SCM Agreement shift simply depending on its preferred outcome.
Moreover, the United States notes that Brazil's a sserted bases for this assertion do not withstand
scrutiny.

20. Indeed, while Brazil attempts to assert as ev idence a statement by a National Cotton Council
("NCC") representative that in MY 2007, "NCC sees U.S. exports recovering to 16.22 million bales as
foreign mill use increases," Brazil fails to quote for the Panel the statement immediately prior to this
one in which the same representative notes that:

the 2006 marketing year is the first of the post-Step 2 era, and the impact on exports
has been evident. Through mid-January, export commitments of upland cotton totaled
roughly 6 million bales. This time a year ago, total commitments had surpassed
10 million bales.
35

30 In fact, if the United States were in fact "igno r[ing]" Brazil's arguments, one can only wonder why
Brazil has repeatedly attempted over the course of this proceeding to attempt to cut U.S. opportunities for
response: for example, arguing at the start of the proceeding that the United States should be given no more
than two weeks to respond to Brazil's nearly 200-pa ge first written submission and; arguing that the
United States should not be permitted to address Brazil' s contingent "threat" claim in its rebuttal submission;
arguing that the United States should be given no oppor tunity to respond to Brazil's unsolicited third written
submission submitted under the guise of an "exhibit" to Brazil's "oral" presentation; and in its latest attempt to
obtain an unfair procedural advantage, arguing against the grant of any additional time for submission of these
comments.
31 The full U.S. arguments in this respect are set out at U.S. First Written Submission, paras. 149-195,
U.S. Rebuttal Submission, paras. 175-214, and U.S. Oral Statement, paras. 54-59.
32 Brazil's Rebuttal Submission to the Panel Re garding the "Peace Clause" and Non-Peace Clause
Related Claims," para. 128 (22 August 2003) (emphasis in original).
33 Brazil Answers to Second Set of Panel Questions, para. 90.
34 Brazil Answers to Second Set of Panel Questions, para. 131.
35 "US Cotton Industry To Face Challenges In Global Market," 2006 AgWeb.com (Exhibit BRA-679).

The United States recalls Brazil's assertion that in assessing the effects of payments "the
views of their recipients constitute particularly relevant evidence."
36 Brazil would presumably attach
similar importance to the NCC statement it neglected to cite.
21. In any event, the possibility of an increase in the export volume in MY 2007 in absolute terms
does not change the analysis regarding the effects of removing the Step 2 program. As the
United States explained in its rebuttal submission 37, such factors as China's import needs may have
contributed in part to the decline in the level of U.S. exports as of August, 2006. And as there are
changes in those factors, there may well be effect s in the level of U.S. exports. However, those
factors do not account for the entire decline. Thus, for example, primarily in connection with the
pending release of import quota by China
38, there have been recent purchases of some
795,800 running bales of U.S. cotton. 39 This represents a marketing-year high. Yet, even with these
purchases, total export commitments, both sales and sh ipments, are 31% and 15% below last year's
total and the 5-year average, respectively. 40 The fact that U.S. export volume may recover somewhat
in the future, thus, does not suggest that export leve ls would not have been even higher had the Step 2
program been in effect.

22. In the face of such empirical data at odds w ith its assertions (for purposes of this proceeding)
about the alleged effects of eliminating the Step 2 program, Brazil urges the Panel, in its response to
Question 74, to consider MY 2005 – a year in which Step 2 payments were still in effect – as the
relevant period for purposes of its analysis of th e effects of removal of the Step 2 program.
Presumably, the Panel would then have to accept Br azil's assertions (for purposes of this proceeding)
about what the effects of that program would or woul d not have been in that year rather than relying
on the actual evidence thereof. Neither this sugg estion by Brazil nor its unsubstantiated assertions
about the effects of removing the Step 2 program may be credited.

23. Brazil does not show that marketing loan and counter-cyclical payments cause "present"
serious prejudice: Citing the original panel, Brazil argues that "an examination of the 'effects'" of the
challenged measures "cannot be conducted in the abstract."
41 Yet, in support of its claims, Brazil
repeatedly suggests that, even without consideri ng the existing market c onditions (or conducting any
assessment of what these were lik ely to be) the original panel somehow found marketing loan and
counter-cyclical payments to be causing significant suppression of world market prices today. 42
Similarly, it makes generic assertions about impacts on wealth and risk aversion that – if credited –
would effectively preclude any payment to farmers no matter what their form and no matter how
minimal their impact on planting, production, exports, and prices.43

24. Brazil's claim cannot properly rest on these bases. For one, the original panel did not find that
marketing loan and counter-cyclical payment programs caused significant price suppression in
MY 1999-2002. Therefore, Brazil is incorrect to assert – in response to Question 69, for example –
that it could prove significant price suppression in this proceeding merely by asserting
44 that payments
were made under those programs over the course of the FSRI Act and that "[t]he world market for

36 Brazil Answers to Second Set of Panel Questions, para. 48.
37 U.S. Rebuttal Submission, paras. 206-213.
38 "China: Cotton import quotas of 1.5mn tons to be issued," available at www.fibre2fashion.com
(April 24, 2007) (Exhibit US-165).
39 U.S. Export Sales for Week Ending 4.12.2007, available at www.fas.usda.gov/export-sales/cottfax.htm
(Exhibit US-166).
40 U.S. Export Sales Weekly Export Performance Indicator for Week Ending 4.12.2007, available at
http://www.fas.usda.gov/esrquery/esrpi.aspx (Exhibit US-167).
41 Brazil Answers to Second Set of Panel Questions, para. 10 (citing Upland Cotton (Panel), para. 10).
42 See e.g., Brazil Answers to Second Set of Panel Questions, paras. 45, 53-55, 94, 99.
43 See e.g., Brazil Answers to Second Set of Panel Questions, paras. 49, 55, 94.
44 These are assertions by Brazil, not "undisputed facts," as it has stated. Brazil Answers to Second Set
of Panel Questions, para. 95.

upland cotton identified by the original panel still f unctions on the same basis as found by the original
panel."45 The original panel's finding of "present" serious prejudice related to the effects of an
entirely different set of measures ( payments not only under the marketi ng loan and counter-cyclical
payment programs but also under the Step 2 pr ogram) made in a different time period (MY 1999-
2002) and under substantially different market cond itions. There have been many changes since that
time. These include not only the removal of the Step 2 program but many other factors, for example
production-related technological changes that have had dramatic effects on the cost structure of U.S.
upland cotton farming (as well as farmers in other c ountries, such as India) and shifts in patterns of
world trade in upland cotton – shifts that are so significant that even the basis for Brazil's asserted
"world market price" (the A-Index) has had to be changed (from a Northern Europe basket of quotes
to a Far Eastern basket of quotes).

25. The original panel did not – and could not – have taken these factors into account in assessing
the "present" effects of the different package of meas ures at issue in the original proceeding. And, in
fact, it is precisely because the original panel could not predict what these changes might be (for
example, if the United States were to modify the statutory and regulatory provisions providing for
Step 2, marketing loan, or counter-cyclical payments in order to implement the Panel's findings), or
foresee what effect the challenged measures might have under such changed factual circumstances,
that it declined to make any "threat" finding against either future payments or the marketing loan and
counter-cyclical payment programs as such.

26. In addition, as explained in the U.S. comme nts regarding Question 62, Brazil's attempts to
indict support to agricultural producers simply on the basis it contributes to the "wealth" of producers
and may render them less "risk averse" in their produ ction decisions cannot be credited. If Members
had agreed that no domestic support could be provided to agricultural producers, the Agreement on
Agriculture could have been a great deal shorter. The drafters could simply either have inserted one
provision either in that agreement or the SCM Agreement stating that "no Member shall provide
payments to any producer of any commodity" as this, inevitably, contributes to the "wealth" of the
producer and, as such, may also render him less risk averse. No such provision exists in either
agreement because Members have not agreed to such a prohibition.46

27. What the United States finds instead is clear recognition in the Agreement on Agriculture and
SCM Agreement that domestic support to producers of a commodity may have effects that lie
anywhere in a range from "no or at most minimal, tr ade-distorting effects" to more substantial effects
that may implicate the reduction commitment obligations in the Agreement on Agriculture but are not
of the type to render the domestic s upport an "actionable subsidy" under the SCM Agreement, to the
kinds of serious effects on trade identified under Articles 5 and 6 of the SCM Agreement. It is only
the latter – "adverse effects" to the interests of another Member – that are disciplined under the
SCM Agreement. Whether or not a Member may challenge a measure under the SCM Agreement has
no bearing on whether it can establish a breach of Ar ticles 5(c) and 6.3(c). It can only do the latter
where it proves that "the effect" of a measure found to be a "subsidy" is " significant price
suppression" within the meaning of Article 5(c) and 6.3(c) of the SCM Agreement.

28. As the United States has demonstrated 47, none of the allegedly "abundant and diverse
evidence" that Brazil asserts in its answers to questions or any of its prior submissions proves that this

45 Brazil Answers to Second Set of Panel Questions, para. 94.
46 To the contrary, there is one agriculture-specific actionable subsidy provision in the SCM Agreement
– Article 6.3(d) of the SCM Agreement – and that falls far short of a blanket prohibition on any subsidy that
increases producer wealth and renders them less risk averse.
47 U.S. First Written Submission, paras. 203-331 and Annex I; U.S. Rebuttal Submission, paras. 215-
404 and Annex I; U.S. Answers to Parts A-C of First Set of Panel Questions, paras. 27-44; U.S. Oral
Statement, paras. 50-85 and Statement of Dr. Joseph W. Glauber; U.S. Answers to Parts D-E of First Set of
Panel Questions, paras. 14-42; U.S. Comments on Brazil's "Oral" Presentation, paras. 34-91 and Annex I, and
U.S. Answers to Second Set of Panel Questions, paras. 1-4, and 62-170.

is "the effect" of the marketing loan and counter-c yclical payments. What the substantial evidence
shows, instead, is that any effects of marketing loan and counter-cyclical payments on U.S. planting,
production, exports or world market prices of upla nd cotton are minimal and not subject to discipline
under Articles 5 and 6 of the SCM Agreement.

C. T
HE EFFECT OF THE MARKETING LOAN AND COUNTER-CYCLICAL PAYMENT PROGRAMS IS NOT
ANY "PRESENT" INCREASE IN THE U.S. SHARE OF THE WORLD MARKET FOR UPLAND COTTON
WITHIN THE MEANING OF ARTICLES 5(C) AND 6.3(D) OF THE SCM AGREEMENT

29. Even though Brazil has admitted that "U.S. share of world production . . . stayed relatively
stable" over the entire period that th e FSRI Act has been in effect ( i.e., MY 2002-2005), Brazil has
attempted in this proceeding to assert a breach of Articles 5(c) and 6.3(d) of the SCM Agreement on
the basis of a slight (0.46 percent) up-tick in the U.S. share of the world market in MY 2005 over the
average for MY 2002-2004. 48 The evidence on the record show s clearly that this increase in
MY 2005 is part of the ordinary fluctuations in U.S. share of world supply 49 and is directly
attributable to such factors as a sudden shift in acreage from soybeans in certain regions of the United
States due to concerns about an outbreak of Asian soybean rust at the end of MY 2004. 50 Thus,
Brazil's claim fails – at the outset – because Brazil cannot establish any causal connection between the
challenged measures and the slight increase in U.S. world market share in MY 2005 ( i.e., it cannot
prove the first of the two elements under Article 6.3( d), that "the effect" of the U.S. marketing loan
and counter-cyclical payment programs "is an increase in the world market share" of the United States
"as compared to the average share it had during the previous period of three years.")

30. But Brazil's claim also fails on a second basis – namely, Brazil's failure to establish that "this
increase" – i.e., the "increase in the world market share of the subsidizing Member . . . as compared to
the average share it had during the previous period of three years" – "follows a consistent trend over a
period when subsidies have been granted." Th is safeguard precludes complaining parties from
establishing a breach under precisely the kind of factual circumstances before this Panel – where an
increase in one year is clearly part of the normal fluctuation of world market share and attributable to
any number of factors other than subsidies. As the United States showed in its first written
submission and again in its rebuttal submission
51, the slight increase in U.S. market share above the
previous three-year average has not followed a "consistent trend over a period when subsidies have
been granted." To the contrary, over the entire pe riod that the FSRI Act of 2002 has been in effect
there were only one year in which this happened – MY 2005.52

31. To try to escape this key flaw in its claim, Brazil urges the Panel to adopt an end-point to
end-point comparison using, as the starting point, MY 1998, a year before the entry into force of the

48 Brazil First Written Submission, paras. 222 and 224. Th is is the figure if one looks at U.S. share of
world production plus beginning stocks. If one looks at U.S. share of world production, there was a similarly
small increase (of 1.53 percent) over the average for MY 2002-2004.
49 See U.S. First Written Submission, paras 332-343.
50 See U.S. Comments on Brazil's "Oral" Presentation, paras. 70-72.
51 The United States notes in this regard that Brazil devotes much effort in its answers to
Questions 76-77 to attempting to characterize the U.S. in terpretation of Article 6.3(d) as a "new" interpretation
not previously presented. This is inexplicable given th at in the U.S. first written submission, the United States
clearly examined whether the U.S. world market share was higher than the average share of the previous 3-year
period for each year in the periods MY 1996-2006, MY 1980-2006, and 1960-1996. This is the exact same
examination conducted by the United States in its rebuttal submission. Indeed, Brazil appears to be confusing
two separate issues – (a) the question of normal fluctuatio ns in market share, which relates to the question of
causation and whether in any particular year it is the challenged measures that are "causing" an increase over the
previous three-year average and (b) the question of a "consistent trend" under the second element of
Article 6.3(d).
52 This is true if one looks at world production. If one looks at world production plus beginning stocks,
U.S. share of world supply would have been higher than the previous three-year average also in MY 2002.

FSRI Act of 2002 and one in which counter-cyclical payments were not even in existence. The
reasons for Brazil approach are patently obvi ous – MY 1998 was a disastrous year for U.S.
production, in which, as a result of severe drought U.S. abandonment rates skyrocketed and harvested
area fell more than 2,000,000 acres compared to the previous year. U.S. production that marketing
year was the lowest in almost a decade, by more than 1,500,000 bales, and lower than any marketing
year since by more than 3,000,000 bales. By contrast, growers in the rest of the world, unaffected by
the drought, increased harvested area about 100,000 acres. As a result, U.S. share of the world market
was at an extremely low point in MY 1998. By selecting this year as the starting point of its
"representative period,"
53 and drawing a line from this to the U.S. share of production in MY 2005 –
one which would inevitably slant upwards – Brazil asserts that it has met its burden of showing that
"this increase follows a consistent trend over a period when subsidies have been granted" under
Article 6.3(d) of the SCM Agreement. Brazil is wrong. As the United States explains in its comments
regarding Question 76, Brazil's argument is prem ised on a fundamentally flawed interpretation of
Article 6.3(d) of the SCM Agreement. That interpretation would – if adopted – effectively write out
of Article 6.3(d) of the SCM Agreement both the reference to "this" increase and to a "consistent"
trend. As Brazil fails to establish either of the two elements required under Article 6.3(d), it fails to
make any prima facie of breach of that provision.

D. N
EITHER THE MARKETING LOAN AND COUNTER -CYCLICAL PAYMENT PROGRAMS – NOR ANY
PAYMENTS THEREUNDER – ARE CAUSING A "THREAT" SIGNIFICANT PRICE SUPPRESSION
UNDER ARTICLES 5(C) AND 6.3(C) OF THE SCM AGREEMENT

32. There are two fundamental flaws in Brazil's claims of "threat of" significant price suppression
under Articles 5(c) and 6.3(c) of the SCM Agreement. The first is that Brazil's claim is premised upon
a legally incorrect interpretation of "threat of" signi ficant price suppression. The second is that Brazil
has not established as a factual matter that there is a "threat of" significant price suppression as a
result of either the marketing loan and counter-cyclical payments programs or any payments under the
programs. Brazil's answers to the Panel's questions regarding "threat" focus mostly on the first issue.

33. In its response to Questions 86-88, Brazil ur ges the Panel to replace the term "threat" in
footnote 13 of the SCM Agreement with "significant likelihood," a standard that Brazil admits is "not
found in the SCM Agreement or any other WTO Agreement."
54 Indeed, the only basis that Brazil has
ever asserted for grafting a "significant likelihood" standard that drafters did not agree upon into
footnote 13 is that "the precedent interpreting the terms 'threat' and 'threaten' suggests that the
appropriate standard of threat in Part III [of the SCM Agreement] is one in which there is a significant
likelihood, based on the nature of subsidies and pa rticular conditions of competition, that serious
prejudice will occur in the future." 55 As the United States pointed out in its rebuttal submission,
however, even leaving aside that there is no basis to attempt to interpret a treaty in accordance with
"precedent" rather than "in accordan ce with customary rules of interpretation of public international
law,"56 Brazil cannot even identify any "precedent" that "suggests" that the appropriate standard for
"threat" of serious prejudice is "a significant likelihood."57

34. Brazil's proposed "significant likelihood" standa rd injects an entirely new term into the text
that (a) is not used by the drafte rs either in Article 5(c) of the SCM Agreement or elsewhere to define
"threat," (b) ignores entirely a critical aspect of the ordinary meaning of the "threat," (proximity in
time) and (c) itself requires interpretation (e.g., what is a "significant" likelihood of serious prejudice).
Brazil has provided no basis whatsoever for writing "significant likelihood" into footnote 13 of the
SCM Agreement. And, indeed, to do so would contravene the express provisions of Article 3.2 of the

54 Brazil Answers to Second Set of Panel Questions, para. 182.
55 Brazil First Submission, para. 253.
56 DSU Article 3.2.

DSU, which provides that "[the dispute settlement system of the WTO] serves . . . to clarify the
existing provisions of those agreements in accordance with customary rules of interpretation of public
international law."

35. Brazil has also failed to establish an empiri cal basis for a finding of "threat" of serious
prejudice. To the contrary, Brazil is asking the Pane l to find that there is such a "threat" even though
the evidence shows:

• an expected decline in U.S. planted acreage of more than 20 percent in MY 200758;

• an expected decline of 11 percent in U.S. production 59 in MY 2006 from year-before
levels that is expected to continue on into MY 200760

• an expected decline in U.S. share of world production in MY 200761;

• a 31 percent decline in U.S. exports goi ng into the end of MY 2006 (compared to
MY 2005 levels)62;

• that U.S. producers are likely to cover thei r variable, or operating, costs as well as a
large share of their total cost s in MY 2007 (even looking at the inflated "total costs"
that Brazil has attempted to use repeatedly in this proceeding).63

• that marketing loan payments are likely to be small (at most 2 cents/lb) in MY 2007
and counter-cyclical payments – which are pa id regardless of what is planted – are
likely to remain at effectively "fixed" levels64; and

• the FSRI Act of 2002 is scheduled to expire in October of 2007 meaning that there
will be no further payments thereunder as of MY 2008.

There is no basis for a finding of "threat" of serious prejudice under these circumstances.

E. T
HE UNITED STATES IS PROVIDING GSM 102 GUARANTEES IN RESPECT OF EXPORTS OF RICE
AND UNSCHEDULED PRODUCTS CONSISTENTLY WITH ARTICLES 10.1 AND 8 OF THE
AGREEMENT ON AGRICULTURE AND 3.1 AND 3.2 OF THE SCM AGREEMENT

36. In its responses to the Panel's questions – in cluding Questions 92, 95, 100 – Brazil continues
to urge the Panel to ignore the provisions of the SCM Agreement expressly setting out the conditions
under which export credit guarantees may be found to be export subsidi es and to make a finding that
the provision of GSM 102 guarantees is prohibited simply because the fees under that program are
allegedly lower than those charged by Ex-Im Bank for it Letter of Credit Insurance for Banks ("LCI")

58 See U.S. Answers to Second Set of Panel Questions, paras. 1-4 (discussing NASS Prospective
Plantings Report (March 30, 2007) (Exhibit US-140)).
59 Indeed, just last month, USDA lowered expected production levels for MY 2007 even further.
According to NASS, the MY 2007 U.S. upland cotton crop is now forecast at 20.8 million bales – down from
the 21.3 million bales forecast in December 2006 – and approximately 11 percent below MY 2005 levels.
NASS March 2007 Cotton Ginnings Report (Exhibit US-168).
60 U.S. Export Sales Weekly Export Performance Indicator for Week Ending 4.12.2007, available at
http://www.fas.usda.gov/esrquery/esrpi.aspx (Exhibit US-167).
61 Cotton This Month, ICAC, p. 4 (February 1, 2007) (Exhibit US-107).
62 U.S. Export Sales Weekly Export Performance Indicator for Week Ending 4.12.2007, available at
http://www.fas.usda.gov/esrquery/esrpi.aspx (Exhibit US-167).
63 U.S. Rebuttal Submission, paras. 422-425.
64 See U.S. Answers to Second Set of Panel Questions, paras. 196-199 (showing that both FAPRI and
CBO project at most a 2 cents/lb marketing loan payment for MY 2007.

and Medium-Term Export Credit Insurance ("MTI") products. There is no support in the text or in
logic for such a conclusion.

37. As the United States has explained, the drafters expressly set out in item (j) of the Illustrative
List the conditions under which e xport credit guarantees may be found to be export subsidies. Brazil
has not shown – and cannot show – that GSM 102 guarantees are provided "at premium rates which
are inadequate to cover the long-te rm operating costs and losses of the" program. The data show that
– to the contrary – for cohorts 1992-2002, examined by the original panel, the negative subsidy net of
reestimates (i.e., profit) is now $926,331,216. For all cohor ts 1992-2006, the negative subsidy net of
reestimates (i.e., profit) is $403,714,701.
65 These are the figures under th e U.S. government's credit
reform accounting, which Brazil championed in the original proceeding as:

an ideal basis on which to determine whet her the CCC's export credit loan guarantee
programs are offered at premium rates that are inadequate to cover the long-term
operating costs and losses of the programs, within the meaning of item (j) of the
Illustrative List of Export Subsidies. It functions as a more sophisticated alternative
to constructed cost formulas, and thoroughly accounts for all of the premium and
operating cost and loss elements required by item (j). Moreover, it has the virtue of
serving as the actual, real-world calculation used by the U.S. Congress, the President
of the United States, and federal agencies like the CCC to "measure more accurately
the costs of Federal credit programs."
66
38. Brazil has no basis for its arguments now – including in response to Question 114 – that the
Panel should disregard this actual data and should use instead, Brazil constructed cost formula. The
"the actual, real-world calculation used by the U. S. Congress, the President of the United States, and
federal agencies like the CCC to 'measure more accurately the costs of Federal credit programs'" 67
confirms that export credit guarantees under the GSM 102 program are being provided at premiums
that are well above those that would be required simply to "cover" long-term operating costs and
losses. Under the text of the SCM Agreement, the analysis begins and ends there. There is no
"separate" standard under Articles 1.1 and 3.1(a) for when export cred it guarantees constitute an
"export subsidy."

39. But even if item (j) did not exist, asserting that Ex-Im Bank charges higher fees for export
credit guarantees than CCC does under the GSM 102 program would not establish any breach of
Articles 1.1 and 3.1(a) of the SCM Agreement. As Article 14(c) of the SCM Agreement makes clear
68,
a loan guarantee provides a "benefit" recognized under Article 1.1 of the SCM Agreement only where
it affects the underlying transaction – i.e., where it results in there being a "difference between the
amount that the firm receiving the guarantee pays on a loan guaranteed by the government and the
amount that the firm would pay on a comparable commercial loan absent the government guarantee."
This makes perfect sense. Export credit guarantees have no value in and of themselves; they simply
modify and relate to the underlying loan transaction. It is only when they cause the underlying loan to
be more attractive than loans otherwise available on the market that there is a possibility of trade
distortion (i.e., making a particular purchase of U.S. goods more attractive than it would have been
absent the guarantee). The fee charged for a guarant ee is passed through by the U.S. exporter to the
foreign purchaser and becomes part of the overall co st of the financing. And it is only through the
comparison of the total cost of loans guaranteed by GSM 102 guarantees and comparable commercial

65 See U.S. Answers to Second Set of Panel Questions, paras. 277-278.
66 Statement of Brazil - First (Original) Panel Meeting, para. 129 (22 July 2003).
67 Statement of Brazil - First (Original) Panel Meeting, para. 129 (22 July 2003).
68 Because it interprets and applies the definition of "b enefit" set out in Article 1.1, Article 14 has been
relied upon by the Appellate Body as important contextual guidance in interpreting "benefit." Canada –
Aircraft (AB), para. 155.

loans not guaranteed by GSM 102 guarantees that one can assess whether the GSM 102 guarantee
actually rendered particular transactions more attractive than they otherwise would have been.

40. Brazil has not even attempted to make the ki nd of particularized showing contemplated under
Article 14(c) of the SCM Agreement; it has not shown that the overall cost, including fees, of each of
the loans guaranteed by the government is less than overall cost of a comparable commercial loan that
could be obtained without a government guarantee. Instead, Brazil relies on sweeping and erroneous
assertions that obligors on loans guaranteed under the GSM-102 program can never obtain any other
financing of any kind and that the United States could never provide an export credit guarantee
without also providing an export subsidy. These ar guments simply do not s quare with the evidence
submitted by the United States showing that such obli gors are in fact able to obtain financing even
without GSM 102 guarantees and on terms better than those available with GSM 102 guarantees. The
declining level of use of the GSM 102 program in recent years is even further evidence of this.

41. Brazil's attempts to declare GSM 102 guarant ees export subsidies merely on a comparison to
fees charged by Ex-Im Bank are contrary to the text and logic of Articles 1.1(a), 14(c), and item (j) of
the SCM Agreement. As the United States has explained, Br azil has not established that the LCI and
MTI products are even comparable to the GSM 102 guarantees provided by CCC.
69 But, regardless of
this, the reasoning underlying Brazil's comparison of these products is unavailing.

42. Brazil is effectively asking the Panel to assume that the LCI and MTI products are themselves
provided at "below market" rates even though Brazil has conducted no actual comparison vis-a-vis
any other comparable product available on the mark et. Following from this assumption, Brazil would
have the Panel accept that, if the CCC charges lo wer fees than Ex-Im Bank, the fees for the GSM 102
guarantees must also be "below market." Br azil's approach is based on unfounded factual
assumptions and on logic that is not found anywhere in the SCM Agreement. Member did not agree
that export credit guarantees could be found to be export subsidies simply if one government entity
charges fees that are different or lower than anothe r government entity. Brazil's efforts to establish a
breach of Articles 1.1(a) and 3.1(a) of the SCM Agreement on that basis are unavailing.

II. SPECIFIC COMMENTS REGARDING BRAZIL'S ANSWERS

A. S
COPE OF THIS PROCEEDING

Questions to both parties

44. The European Communities argues in resp ect of the preliminary objection raised
by the United States regarding the claims of Brazil relating to export credit
guarantees for pig meat and poultry meat under the GSM 102 programme that "the
important issue is the nexus or the degree of interrelatedness or interdependence
between different elements of the measure." (Oral Statement of the European
Communities, para. 6) The European Communities submits in this regard that:

"the Panel should examine the original measure at issue and the
'measures taken to comply,' and, with particular reference to the
'elements of the measure' that the United States argues are outside
the Panel's terms of reference, en quire into the extent to which
these are interrelated or interdependent with measures or 'elements
of measures' that the United States accepts are within the Panel's
terms of reference." (Oral Statement of the European
Communities, para. 11)

Do the parties agree with the approach suggested by the European
Communities and with the considerations in paragraph 13 of the Oral
Statement of the European Communities?
43. The United States respectfully refers the Panel to its general comments above regarding
Brazil's claims in respect of exports of pig meat and poultry meat as well as to its own response to this
question.
70

45. Could the parties comment on the observations made by the European
Communities in paras. 15-24 of its Oral Statement on the issue of whether the
marketing loan and counter-cyclical payme nt programmes are within the scope of
the Panel's proceeding?

44. The United States respectfully refers the Panel to its general comments above regarding
Brazil's claims in respect of the marketing loan and counter-cyclical payment programs as well as to
its own response to this question.
71 The United States also submits one additional brief observation
regarding Brazil's answer to this question.

45. The United States disagrees with Brazil's asserti on that a claim about a measure "as such" is
"typically understood to involve an examination of a general rule or norm in the abstract."
72 An "as
such" claim relates to whether the application of a measure in all present and future circumstances
results in a breach of a covered agreement. This is not an inquiry "in the abstract" but the exact
opposite, an inquiry across all of the possible factual circumstances that have and are expected to
arise. Indeed, the Appellate Body underscored exactly this aspect of "as such" claims in United States
– Sunset Reviews on OCTG from Argentina, where it explained that:

By 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 instance that has occurred, but in future situations
as well – will necessarily be inconsistent with that Member's WTO obligations.73
The Appellate Body explained that "as such" clai ms were to be considered to be "serious
challenges" because "[i]n essence, co mplaining parties bringing 'as such' challenges seek to prevent
Members ex ante from engaging in certain conduct."74

46. Despite this clarification from the Appellate Body about the caution to be exercised with "as
such" challenges – and Brazil's own acknowledgment, in response to this question, that a finding
regarding the effects of a subsidy under Articles 5 and 6 of the SCM Agreement requires an
examination of market conditions and the operation of the alleged subsidy within those conditions –
Brazil would have the Panel believe that the origin al panel made a serious prejudice finding against
the statutory and regulatory provisions authorizin g Step 2, marketing loan, and counter-cyclical
payment programs without so much as addressing the market conditions likely to prevail in the future.
Rather, Brazil urges the Panel to ignore Brazil's own express explanation to the original panel that the
MY 1999-2002 period was " both the period of time covering the measures challenged by Brazil as
well as the period of investigation to examine pres ent serious prejudice caused by the U.S. subsidies
under Articles 5(c) and 6.3 of the SCM Agreement" and its arguments in this proceeding that the
MY 1999-2002 period presented an unus ually "dynamic" situation for world market prices and U.S.

70 See U.S. Answers to Second Set of Panel Questions, paras. 1-16.
71 See U.S. Answers to Second Set of Panel Questions, paras. 17-41.
72 Brazil Answers to Second Set of Questions, para. 10.
73 United States – Argentina OCTG Sunset Reviews (AB), paras. 172.
74 United States – Argentina OCTG Sunset Reviews (AB), paras. 172.

exports.
75 Instead, Brazil would now have the Panel be lieve that the original panel simply used
MY 1999-2002 as a reference period for the entire peri od of effectiveness of the FSRI Act of 2002.
The facts simply do not support Brazil's argument.

46. In its Oral Statement, the European Communities characteri zes Brazil's and the
United States' respective approaches as the "measure model" and the "element of
the measure model" (Oral Statement of the European Communities, para. 7).
Please discuss whether you agree with this characterization and whether, in your
view, the application of a measure alleged to be a subsidy to different agricultural
products relates to a "measure" (or elements thereof) or if, rather it relates to a
"claim". Would it be permissible for a compliance panel to examine a "claim"
that relates to subsidies (granted as part of measures taken to comply) provided to
agricultural products to which the "initial measure" did not apply?

47. The United States respectfully refers the Panel to its general comments above regarding
Brazil's claims in respect of exports of pig meat and poultry meat, its comments regarding Brazil's
answer to Question 44 above, as well as to its own response to this question.
76

Questions to the United States

47. The United States has raised a preliminary objection regarding Brazil's claims of
(threat of) serious prejudice in respect of the marketing loan and counter-cyclical
payment programmes. Is the Panel's understanding correct that, apart from this
preliminary objection regarding programmes, the United States also considers that
the issue of whether payments made under the marketing loan and counter-cyclical
payment programme after 21 September 2005 cause serious prejudice to the
interests of Brazil is not properly within the scope of this proceeding?

48. How does the United States address the argument of Brazil that "[i]f the United
States were to prevail on its view that su bsequent mandatory and price-contingent
marketing loan and CCP payments are not properly before this Panel, the grant of
annual recurring subsidies becomes 'a moving target that escape from [the WTO
subsidy] disciplines'"? (Closing Statement of Brazil, para. 4)

49. Could the United States comment on the argument of the European Communities
that the text of Article 21.5 of the DSU does not limit the temporal scope of that
provision in the manner suggested by the United States? (para. 29 of the Oral
Statement of the European Communities)

Question to Brazil

50. 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)

48. 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 U.S.
agricultural export subsidy commitments under that agreement. 77 In its request for establishment of a

75 Brazil Rebuttal Submission, para. 236.
76 See U.S. Answers to Second Set of Panel Questions, paras. 1-16.
77 U.S. Rebuttal Submission, paras. 81-83

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."78 As there can be no "violation of Article 10. 1 (and, as a consequence, Article 8) of the
Agreement on Agriculture ,"79 there can be no claim under the SCM Agreement with respect to the
GSM 102 export credit guarantees in respect of ly ocell, 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.

B. C
LAIMS OF BRAZIL REGARDING PRESENT SERIOUS PREJUDICE

1. Significant price suppression - Article 6.3(c) of the SCM Agreement

Questions to both parties

51. The parties disagree on whether or no t the marketing loan and counter-cyclical
payments have more than minimal effects on production of upland cotton. Could
each party explain how its approach to the analysis of the impact of these payments
on production of upland cotton is supported by the provisions of Articles 5 and 6 of
the SCM Agreement and by any other relevant WTO provisions?

49. The United States notes that, although the Panel's question asks each party to "explain how its
approach to the analysis of the impact of [m arketing loan and counter-cyclical] payments on
production of upland cotton is supported by th e provisions of Articles 5 and 6 of the SCM Agreement
and by any other relevant WTO provisions," Brazil does not appear to actually answer this question.
Rather, Brazil devotes almost all of its response to explaining why even green box measures can be
subject to challenge under the SCM Agreement. This is inexplicable because Brazil then asserts that
(a) the marketing loan and counter-cyclical payment programs are properly viewed as so-called
"amber box" measures and (b) in the very next qu estion, concedes that the fact that measures are
classified in the "amber box" does not mean that they cause adverse effects within the meaning of
Articles 5 and 6 of the SCM Agreement. It is difficult to understand, therefore, what – if anything –
Brazil's answer has to do with explaining whether Brazil's approach is consistent with Articles 5 and 6
of the SCM Agreement.

50. Instead, Brazil's discussion seems to be aime d at suggesting that U.S. marketing loan and
counter-cyclical payments should be found in breach of Articles 5 and 6 of the SCM Agreement no
matter how minimal the effects ther eof. Any such suggestion would be flatly wrong under the terms
of those provisions. Only "subsidies" the effect of which is "significant" price suppression are subject
to discipline by virtue of Articles 5(c) and 6.3(c) of the SCM Agreement. Whether any measures –
whether green, blue, amber, or something else – may be challenged does not change the fact that the
complaining party bears the burden of proving through evidence and argument that the challenged
measures are causing adverse effects within the meaning of Articles 5 and 6 of the SCM Agreement
(in the present case, "significant" price suppression under Article 6.3(c)). Where – as here – a
complaining party fails to do so, its claim cannot succeed.

52. In its Third Party Submission New Zealand observes:

"Marketing loan payments are am ber box measures, the category
in which are included the non-prohibited measures with the most
trade distorting effect on production and trade." (para. 5.19)

78 Brazil Request for Panel Establishment, para. 28.
79 Brazil Request for Panel Establishment, para. 28.

Do the parties consider that the fact th at under the Agreement on Agriculture a
subsidy is included in the 'amber box' is relevant to the analysis of the subsidy's
consistency with Articles 5 and 6 of the SCM Agreement?

51. The United States respectfully refers the Panel to the U.S. comments regarding Brazil's
response to Question 51 above.

Questions to the United States

53. The United States argues that Brazil has not provided evidence of 'actual
production inducing' effects of marketin g loan and counter-cyclical payments and
that Brazil 'purports to demonstrate indi rect production effects through its claim
that the US planting, production, and exports are not responsive to prices.'
(Opening Statement of the United States at the meeting of the Panel with the
parties, paras. 62 and 69, emphasis in original)

(a) Could the United States explain further the distinction between what it
terms "actual production inducing effects "and "indirect production
effects"? Could the United States also elaborate on how this distinction is
legally relevant in the context of Articles 5 and 6 of the SCM Agreement?

(b) What is the response of the United States to the argument that the fact that
"U.S. upland cotton producers know th at their overall revenue will always
be protected by marketing loans an d counter-cyclical payments ... plays a
major role in their planting decisions"? (Rebuttal of Brazil, para. 185; see
also Third Party Submission of New Zealand, paras 5.20-5.21)

(c) In its Opening Statement at the meeting of the Panel with the Parties,
Brazil observed:

"...we have demonstrated that these subsidies stabilized
cotton producers' revenue despite wildly fluctuating market
prices, thereby insulating and numbing acreage response to
market price signals. These subsidies also cover the huge
long-term gaps between market returns and total costs of
production. Both effects are closely interrelated."
(para.55)
Is the United States only arguing that Brazil has not empirically substantiated that
these two "effects" have actually occurred or is it also the position of the United
States that these effects are in any event legally irrelevant to an analysis of whether
a subsidy causes significant price suppression within the meaning of Article 6.3 (c)
of the SCM Agreement?

54. Could the United States explain whether, and, if so, why, it is of the view that this
Panel should not rely on the findings and analysis by the original Panel regarding
the effects of marketing loan and counter-cyclical payments on production and
exports? Please comment in particular on paras. 7.1291, 7.1295, 7.1302, 7.1349,
7.1353 of the Panel Report.

55. Can the United States confirm that the figures "$868 million" and "$838 million"
Brazil cited in para. 40 of its Opening Statement are correct figures if one uses the
"Brazil's methodology" and the "Cotton-to-Cotton methodology"? (Please note
that the Panel is not asking whether the US agrees with these methodologies.)

56. The United States has cited new empirical research on the production effects of
counter-cyclical payments. How does th e United States address Brazil's criticism
that none of this research has dealt specifi cally with the effects of countercyclical
payments under the FSRI Act of 2002 on up land cotton? (Rebuttal Submission of
Brazil, para. 120)

57. The United States has offered the Lin and Dismukes (Exhibit US-34) and Westcott
(US-35) studies as examples of new empirical research on the production effects of
counter-cyclical payments.

(a) Is it not more accurate to charact erize the Lin and Dismukes study as a
simulation of the possible effect of countercyclical payments on production
rather than a study on the actual impact of the payments since it does not
statistically estimate the effect of the actual payments (which began only in
2002) on crop production? (Please refer to pages 9-12 of the paper which
describe the data, covering the period 1991-2001, used for the study).

(b) How does the United States deal with Brazil's characterization of the
Westcott study as offering no new empirical evidence, and instead, being a
qualitative discussion, much like that presented to the original panel (see

58. The Unites States stated that the key co nsideration in assessing a farmer's decision
to grow upland cotton is whether the farmer has been covering his variable costs of
production. In this connection, it presen ted upland cotton costs and returns
estimates for marketing years 1999-2005 (Exhibit US-47). Brazil has disputed the
absence of certain items – land, labour and capital recovery costs - in the US
calculations of variable costs. In res ponse, the United States has referred to the
Commodity Costs and Returns Estimation Handbook (Exhibit US-88) prepared by
a Task Force of the American Agricultural Economics Association as the basis for
leaving out these items in its calcula tions. However, the Task Force which
authored the Handbook does not use the categories "fixed" or "variable" costs and
in fact recommends that the microeconomi c concepts of fixed and variable costs
not be used in preparing and reporting cost and return estimates. Page 2-67 of the
Handbook states:

The Task Force therefore recomm ends that costs should be
categorized only as to whether they are associated with expendable
factors or the services of capital a ssets. The division of costs into
categories such as fixed and vari able should generally be avoided
in preparing CAR estimates. For the purpose of preparing CAR
estimates for specific enterprises, the Task Force recommends that
all the costs of all expendables be allocated to the generic group
OPERATING COSTS and that all other costs be allocated to the
group ALLOCATED OVERHEAD.
Would the United States clarify whether the categories "operating costs" and
"allocated overhead" correspond to the eco nomic concepts of fixed and variable
costs? In particular, are "operating cost s" variable costs or not? Would the
United States please indicate whether, an d if so, where, the Handbook makes these
clarifications or distinctions.

59. In discussing the impact of long-term costs of production (and hence long-term
profitability) of upland cotton production on farmers' decisions to exit cotton

farming, the United States argues that income from other crops and off-farm
income must be into account. Why do es the United States consider these issues
relevant given the original Panel's decision that "off farm income" is not a legally
relevant consideration. (Panel Report, para. 7.1354, footnote 1470) Please
respond to Brazil's arguments on this ma tter in paragraphs 249-253 of its Rebuttal
Submission.

60. In its Rebuttal Submission, the United States argues that Prof. Sumner's
description of the model that appeared in a recent CATO publication is not
"appropriate" for use in a WTO dispute involving claims of serious prejudice.
Professor Sumner has since introduced "more empirical and institutional detail" to
the model used in this dispute. These changes are described in paragraphs 111-117
of Brazil's Opening Statement. Does the United States view these changes as being
sufficient to make the model appropriate for use in a WTO dispute involving claims
of serious prejudice? If not, what modifications does the United States think
should have been made to the model?

61. With respect to marketing year 2006, the United States has provided some data on
upland cotton exports (Exhibit US-113), planted and harvested area and cotton
production (Exhibit US-114), as well as a copy of the National Cotton Council's
survey of planting intensions (Exhibit US-115). The data, all of which have been
collected through the first half of mark eting year 2006, are variously qualified as
"estimates" or "projections" or "projected."

(a) Please clarify, as completely as possible, what these various terms mean as they
apply to US upland cotton exports, acreage and production.

(b) Would the United States be able to provid e the Panel with some information, based
on the average of the past six marketing years or so, of how final marketing year
data on these variables, would differ from preliminary estimates, projections and
the like, taken at the end of February of the relevant marketing year?

(c) Finally, would the United States be able to update that part of Exhibit US-83
dealing with futures prices so as to provide the panel with as complete as possible
average January to March 2007 New York futures prices for upland cotton?

Questions to Brazil

62. How does Brazil rebut the argument of the United States that the fact that
marketing loan and counter-cyclical pay ment programmes provide income support
when prices are low is not the key question before this Panel and that while, like
any other payments to producers, marketing loan and counter-cyclical payments
could affect production, Brazil has not pr ovided any evidence of actual production-
inducing effects? (Rebuttal Submission of the United States, paras. 222, 287-291;
Opening Statement of the United States at the meeting of the Panel with the parties,
paras. 62-75; Comments of the United Stat es on Brazil's 'Oral' Presentation in the
meeting with the Panel, paras. 42-57)

52. Brazil's response to the first part of this ques tion highlights that fact that Brazil is attempting
to have the Panel find income support to agricultura l producers to effectively be a prohibited measure
under the SCM Agreement.

53. Indeed, Brazil asserts as "one of the fundamental facts supporting Brazil's adverse effects
claims"
80 the mere fact that marketing loan and counter-cyc lical payment programs provide income
support to U.S. producers at times of low prices. Si milarly, Brazil argues that it is evidence of price
suppression under Articles 5(c) and 6.3(c) of the SCM Agreement that U.S. farmers "know" that if
prices fall below certain levels, they may receive payments under the marketing loan and counter-
cyclical payment programs. As the United Stat es explained in its response to Question 53(b),
however, any eligible recipient of income support "knows" that he or she will receive some income
protection due to those payments. That is the very nature and intent of income support programs – to
ensure that producers receive some income that they would not otherwise get on the market.

54. In fact, U.S. farmers are even more secure in their "knowledge" that they will receive such
payments where payments are fixed, as in the case of direct payments ( i.e., as compared to payments
under the marketing loan and counter-cyclical pa yment program, which depend on U.S. and world
market prices that are not within the control of individual farmers and cannot even be known until
many months after the decision is made whether or not to plant cotton). Yet, as the original panel
recognized in the case of direct payments 81, the fact that farmers have such "knowledge" does not
necessarily result in any "adverse effects" with in the meaning of Articles 5 and 6 of the
SCM Agreement.
55. As the United States has noted before, most economists agree that direct payments, like
marketing loan payments, counter-cyclical paymen ts, payments supporting elderly or low-income
recipients or, for that matter, any type of payment to a producer of agricultural products will have
some effect on risk and wealth and that this may, in turn, have some effect on production. The
question under Articles 5(c) and 6.3(c) is whethe r Brazil has shown that – taking into account the
particular structure and design of the programs a nd the way they operate under the market conditions
prevailing at present – payments under the programs are having actual effects on production that are
so substantial that they are resulting in "present" significant price suppression. It is significant price
suppression that is precluded under the SCM Agreement, not any possible effect on production or any
actual effect on production that does not ultimately result in significant price suppression in the
market identified by the complaining party.

56. Brazil's response to the second part of the Pa nel's question – asking Brazil to respond the U.S.
observation about the lack of an empirical basis fo r Brazil's claims of "present" serious prejudice –
confirms that Brazil has not established such actual "p resent" effects. Thus, for example, Brazil cites
as "evidence" findings made by the original panel and the Appellate body about the collective effects
of a different set of measures (Step 2, marketing loan and market loss assistance or counter-cyclical
payments) in a different period of time (MY 1999-2002) and under different market conditions.
82
These findings are not directly relevant here. Moreover, as the United States explained in its response

80 Brazil Answers to Second Set of Questions, para. 44.
81 Brazil's assertions about the alleged "key role" that direct payments allegedly play in "allowing many
upland cotton farmers to achieve a hea lthy 'profit' from growing upland cotton" – even though direct payments
are not at issue in the pres ent proceeding – is further evidence of Brazil's efforts to render income support a
prohibited measure under the SCM Agreement . Brazil Answers to Second Set of Questions, para. 56.
According to Brazil, "such profits play an important role in maintaining upland cotton production over the
longer term by increasing the 'wealth' of producers." Brazil Answers to Second Set of Questions, para. 56.
What Brazil asserts is true of any payment to any agri cultural producer; any such payment would "increas[e]
the 'wealth' of producers." This does not mean that all payments to producers are causing "significant" price
suppression.
82 As Brazil confirmed in the first (resumed) meeting w ith the original Panel, "[t]he four-year period in
which these subsidies [the "subsidies provided for the production, export and use of U.S. upland cotton during
the period MY 1999-2002"] were provided is both the period of time covering the measures challenged by
Brazil as well as the period of investigation to examine present serious prejudice cau sed by the U.S. subsidies
under Articles 5(c) and 6.3 of the SCM Agreement." Brazil's 7 October 2003 Second Statement at First Panel
Meeting, para. 3 (emphasis added)

to Question 54
83, the factual observations that the original panel made regarding marketing loan and
counter-cyclical payments in reaching its conclusi on about the collective effects of the Step 2,
marketing loan and counter-cyclical payments made in MY 1999-2002 do not support a finding that
marketing loan and counter-cyclical payments ar e causing "significant" price suppression at present
under the existing market conditions.

57. Brazil then asserts that a "strong link" "has been recognized" by various entities between the
programs and payments challenged by Brazil in this proceeding and upland cotton acreage,
production, exports, and prices.84 However, not a single one of the sources Brazil cites actually looks
to the collective effects of the marketing loan a nd counter-cyclical payments on world market prices,
let alone looks at whether these effects amount to significant price suppression under the market
conditions existing in the "present" ( i.e., MY 2006). Indeed, Brazil even goes as far as to cite as
"evidence" a U.N. Food and Agricultural Organizati on ("FAO") report that observes that "all of the
recent studies unambiguously demonstrate that the removal of domestic subsidies in industrialized
countries reduces cotton production in and exports from these countries." 85 There is no basis
whatsoever to find that U.S. marketing loan an d counter-cyclical payments are causing "present"
significant price suppression within the meaning of Articles 5(c) and 6.3(c) of the SCM Agreement
simply on the basis that they are "domestic subsidies in [an] industrialized countr[y]."

58. Moreover, contrary to Brazil' s assertions, the FAO report does not suggest that there is a
"strong link" between the marketing loan and count er-cyclical payments a nd upland cotton acreage,
production, exports or prices.
86 The FAO report simply reviews a number of different studies
examining the removal of various domestic support measures and/or tariffs from the cotton sector in a
number of countries (some even looking at removal of such measures world-wide). As Brazil has
acknowledged, the original panel reviewed simila r studies during the course of its analysis and
"recognized that many of the parameters includi ng magnitude, and time period of the subsidies,
elasticities, measures, and selection of baselines did not address exactly the time period or legal issues
before the original panel." 87 Accordingly, the only conclusion that the original panel considered
appropriate to draw from these widely divergent, inapposite studies – according to Brazil – was that
"subsidies bestowed by Member governments have the potential to distort production and trade." 88
This does not equate to the recognition of any "strong link."

59. Brazil also points to statements by a U.S. trade association made before enactment of
the 2002 farm bill purporting to show that U.S. farm ers would be "bankrupt" without marketing loan
and counter-cyclical payments. Again, not one of these statements pertain to marketing loan or
counter-cyclical payments. Rather, they were ma de about emergency relief provided under the FAIR
Act of 1996 in the period MY 1999-2001. These st atements – quoted out of context – about an
entirely different set of measures (including disaster pa yments), offers no insight regarding the role of
marketing loan and counter-cyclical payments in production decisions or about U.S. farmers' costs
and revenues today. Certainly it does nothing to detract from the actual data regarding "present" costs
and revenue, which, as discussed in the prior U.S. s ubmissions, flatly contradict Brazil's claims that

83 U.S. Answers to Second Set of Panel Questions, paras. 101-106.
84 Brazil Answers to Second Set of Questions, para. 45.
85 Brazil Answers to Second Set of Questions, para. 45.
86 Brazil Answers to Second Set of Questions, para. 45.
87 Brazil Rebuttal Submission, para. 309.
88 Brazil Rebuttal Submission, para. 309. Indeed, the FAO itself concludes that any potential distortion
may be minimal. The FAO estimates price effects of only 3.1 to 5 percent and it does so for " complete
elimination of domestic subsidies as notified to the WTO and tariffs;" in other words, every domestic support
and every tariff for every country in the world that notifies e ither to the WTO. Poonyth, Daneswar, et al., "The
Impact of Domestic and Trade Policies on the World Cotton Market," FAO Commodity and Trade Policy
Research Working Paper No. 8, April 2004, p. i (Exhibit US-55). Any possible effect of U.S. domestic supports
– let payments under only two of the U.S. programs – would necessarily be substantially less. This is hardly
evidence of a "strong link."

U.S. upland cotton farmers would be bankrupt wi thout the marketing loan and counter-cyclical
payment programs.

60. What is conspicuous in its almost complete absence from Brazil's listing of the evidentiary
basis for its claims is evidence of any present produc tion-inducing effects of the marketing loan and
counter-cyclical payments under the market conditi ons prevailing at present and without the Step 2
program in place. Indeed, the only argument that Brazil makes about the effects of marketing loan
and counter-cyclical payments under the current ma rket conditions is that, according to a U.S.
"market expert," current U.S. stoc ks will allegedly "keep a heavy lid on the market" and, in term of
prospective plantings, that "any total acreage numb er below 12.5 million acres will be bullish. The
lower the intended plantings, the higher the price rally."
89

61. Brazil's assertion that this is "evidence" of significant price suppression is misleading. The
question under Articles 5(c) and 6.3(c) is whether U.S. marketing loan and counter-cyclical payments
significantly suppress world market prices for upland co tton. Whether or not increased U.S. stocks
may have some effects on prices does not answer that question. Any effects on prices could only be
attributed to U.S. marketing loan and counter-cyclical payments to the extent that Brazil proves that it
was marketing loan and counter-cyclical payments that caused all of the production that is placed in
inventory. Brazil clearly has not done so.
90

62. Absent specific evidence rega rding the effects that marketing loan and counter-cyclical
payments are having at present under the prevailing market conditions, Brazil has no basis for its
claims of "present" serious prejudice under Articles 5(c) and 6.3(c).

63. Could Brazil explain whether or not it considers that whether marketing loan and
counter-cyclical payments increase acreage is not relevant to the inquiry of whether
these payments cause significant price suppression within the meaning of
Article 6.3 (c) of the SCM Agreement? (para. 56 of the Opening Statement of
Brazil) Could Brazil comment on the points made by the United States in
footnote 72 of the Comments of the United States on Brazil's "Oral" Presentation
in the meeting with the Panel?

63. The United States notes that the bulk of Brazi l's answer to this question addresses arguments
that have never been made by the United Stat es. The United States has never suggested that
"Article 6.3 of the SCM Agreement . . . compel[s] a complaining Member to produce evidence that the
challenged subsidies result in a steady increase in production or acreage."
91 Therefore, it is
inexplicable why Brazil devotes nearly four pages of argument in an attempt to rebut such an
assertion.

89 Brazil Answers to Second Set of Questions, para. 51.
90 The market analysis submitted by Brazil actually confirms that – contrary to Brazil's assertions –
U.S. production and exports/stocks are not primarily responsible for the upland cotton market trends that are
currently being observed. Specifically , the actual planting intentions figures for MY 2007 were far lower than
those predicted by the "market expert" cited by Brazil – the report forecasted U.S. upland plantings to be only
11.86 million acres. NASS Prospective Plantings Repo rt (March 30, 2007) (Exhibit US-140). This is
20.7 percent lower than MY2006 acr eage and over 600,000 acres below the point at which the "market expert"
predicted there would be a "bullish" impact on prices . Yet, both the May and December futures contracts for
upland cotton, as quoted by the New York Board of Trade, declined, on average, since the report was issued.
N.Y. Futures After Issuance of Planting Intentions Repo rt (Exhibit US-169). This is hardly the "bullish"
response predicted and confirms that other factors – such as China's upland cotton trade balance – are very much
responsible for the world market price phenomenon that experts are trying to understand. As discussed in
response to Question 74 below, Brazil has never properl y accounted for these other factors in its assessment of
"present" serious prejudice.
91 Brazil Answers to Second Set of Questions, para. 59.

64. Rather, as the Panel's question itself reflects in its reference to footnote 72 of the Comments
of the United States on Brazil's "Oral" Presentation in the meeting with the Panel, the United States
has taken issue with Brazil's inexplicable argum ents in its unsolicited third written submission –
BRA-659 – that the Panel should disregard a number of the studies submitted by the United States
because they do "not examine whether CCPs are dec oupled from production. Rather, [they] examine
whether CCPs increase acreage."
92

65. The United States appreciates Brazil's acknowledgm ent now, in response to this question, that
its focus on "coupling" in the la nguage cited by the United States was misplaced: "the notion of
"coupled" and "decoupled" support in the Agreement on Agriculture . . . is not relevant for the
assessment of the effects of subsidies under Articles 5 and 6 of the SCM Agreement."
93 Rather, as
Brazil now concedes the salient question is whethe r marketing loan and counter-cyclical payments
cause such substantial shifts in planted acreage that oversupply, export, and ultimately "significant"
price suppression within the meaning of Articles 5(c) and 6.3(c) of the SCM Agreement result.94 As
discussed in the prior U.S. submissions 95 and above in the general comments of the United States
regarding Brazil's claims under Articles 5(c) and 6.3(d) of the SCM Agreement, the evidence before
the Panel does not support Brazil's arguments that the marketing loan and counter-cyclical payments
are causing any such significantly suppressed world market prices.

64. Given that Brazil has criticized th e new empirical research cited by the
United States because it does not deal specifically with the effects of countercyclical
payments on upland cotton production, why does Brazil consider that the
McIntosh, Shogren & Dohlam study (Rebuttal Submission of Brazil, para. 140) is
particularly relevant to this case? Coul d Brazil comment on the arguments of the
United States in paragraphs 248-249 of the Rebuttal Submission of the
United States?

66. Brazil fails to establish why the McIntosh, S hogren & Dohlam study – a study that does not
address upland cotton specifically and that is prem ised on highly restrictive assumptions about the
operation of the counter-cyclical program – is "more applicable to the assessment that the compliance
Panel is tasked with"
96 than the many studies submitted by the United States.

67. Indeed, it is important to note that – becau se the McIntosh, Shogren & Dohlman study is not
limited to upland cotton production – its results are presumably supposed to be valid even for
predicting effects on wheat, corn, and soybean acreage. However, it comes to directly inconsistent
conclusions about the effects of counter-cyclical payments on wheat, corn, and soybean acreage than
the studies submitted by the United States (for example, the Lin & Dismukes study finding that "[t]he
effect of CCPs on producers' planting decisions . . . appears to be very negligible – an increase in the
acreage of major field crops of less than 1% . . . .") 97 Although Brazil has argued that the Panel should
ignore those other studies because they are not speci fic to upland cotton, Brazil has never explained

92 Supplementary Statement of Daniel Sumner, para. 21.
93 Brazil Answers to Second Set of Questions, para. 65 . Brazil's attempts to attribute the focus on
"coupling" to the United States in its response is, how ever, patently unfounded, as the U.S. discussion in
footnote 72 (reflected above) clearly shows.
94 Brazil Answers to Second Set of Questions, para. 66.
95 U.S. First Written Submission, paras. 203-331 and Annex I; U.S. Rebuttal Submission, paras. 215-
404 and Annex I; U.S. Answers to Parts A-C of First Set of Panel Questions, paras. 27-44; U.S. Oral
Statement, paras. 50-85 and Statement of Dr. Joseph W. Glauber; U.S. Answers to Parts D-E of First Set of
Panel Questions, paras. 14-42; U.S. Comments on Brazil's "Oral" Presentation, paras. 34-91 and Annex I, and
U.S. Answers to Second Set of Panel Questions, paras. 1-4, and 62-170.
96 Brazil Answers to Second Set of Questions, para. 67.
97 Lin, William and Dismukes, Robert. "Supply Response Under Risk: Implications for
Counter-cyclical Paymen ts' Production Impacts ," Review of Agricultural Ec onomics–Volume 29, Number 1–
Pages 64-86, forthcoming, p. 83 (Exhibit US-85) (emphasis added).

why the McIntosh, Shogren & Dohlman study should be viewed as reliable when it comes to such
different conclusions about the eff ects of counter-cyclical payments even with respect to the other
crops. Indeed, the divergence in the results for wheat, corn, and soybean acreage simply confirm
what the United States has argued and the author s of the McIntosh, Shogren & Dohlman study
themselves acknowledge 98 – that this study overstates any effects of counter-cyclical payments on
acreage.

68. The authors themselves identify some of the r easons why that particular study overstates any
effects of counter-cyclical payments on acreage. Namely:

Our design did not address two features of the 2002 Act which could affect the
interpretation of our results. First, ther e are no adjustments made in our bonuses for
the fact that direct and counter-cyclical payments are made only on a percentage
(85 percent) of base acres. If these adjust ments were incorporated, the lump sum
bonuses would have been lower, implying our results could overstate the effects of
CCPs. Second, we excluded the marketi ng loan program to focus on the basic CCP
structure—target price, market price, and direct rate. Adding the marketing loan
program into our design would temper the basic effects of CCPs by providing an
additional price support mechanism.
99
69. There are other reasons as well that have to do with the kind of laboratory experiments upon
which the McIntosh, Shogren & Dohlman study is pr emised. The use of a laboratory experiment may
allow the researchers to focus on a particular set of problems or issues but necessarily abstracts away
from other highly relevant factors that also affect a producer's planting decision. Thus, for example,
Brazil cites the authors of the McIntosh, Shogren & Dohlman study as noting that "farmers have other
risk management tools at their disposal; large and less risk-averse farms tend to dominate production
of program crops; and other programs such as marketing loan provisions already offer price
protection."100 The McIntosh, Shogren & Dohlman st udy excludes these factors in assessing the
effects of counter-cyclical payments. Yet, as Paul Westcott et. al. explained101, it is precisely these
kinds of factors that mitigate and temper any actual effects of counter-cyclical payments. 102 T o

98 McIntosh, Christopher R, Jason F. Shogren and Erik Dohlman,"Supply Response to Counter-
Cyclical Payments and Base Updating under Uncertainty: An Experimental Study,: forthcoming paper in the
American Journal of Agricultural Economics, November 2006, page 18 (Exhibit BRA-565). The United States
notes that this citation is in error since the article did not appear in the November 2006 issue of the American
Journal of Agricultural Economics.
99 McIntosh, Christopher R, Jason F. Shogren and Erik Dohlman,"Supply Response to Counter-
Cyclical Payments and Base Updating under Uncertainty: An Experimental Study,: forthcoming paper in the
American Journal of Agricultural Economics, November 2006, page 18 (Exhibit BRA-565). The United States
notes that this citation is in error since the article did not appear in the November 2006 issue of the American
Journal of Agricultural Economics.
100 See Brazil Answers to Second Set of Questions, para . 68, n. 63 (citing McIntosh, Christopher R.,
Jason F. Shogren and Erik Dohlman, "Supply Response to Counter-Cyclical Payments and Base Acre Updating
under Uncertainty: An Experimental Study," Forthcoming paper in the American Journal of Agricultural
Economics, November 2006, p. 16-17 (See Exhibit BRA-565)).
101 The original panel found an earlier version of Westco tt's analysis to be persuasive as to the effects
of counter-cyclical payments.
102 Paul A. Westcott, "Counter-Cyclical Payments Under the 2002 Farm Act: Production Effects
Likely to be Limited" at 203-205 (Exhibit US-35). West cott notes in this regard that: (a) where prices are
expected to be above maximum threshold – counter-cyclical payments behave just like the fixed direct
payments; (b) "cross-commodity effect[s] suggest[] that CCPs may provide a general reduction in revenue risks
rather than a crop-specific effect. Net returns among a lternative crops would remain the primary consideration
underlying production choices;" (c) "while a number of studies indicate that farmers are risk averse (Chavas and
Holt, 1990, 1996, for example), other risk reduction instruments already exist to manage risks. Thus, with
revenue risk reduction now provided by CCPs as part of farm programs, farmers may adjust their use of these
other farm and nonfarm risk management strategies;" and (d) "a large portion of output in the U.S. agricultural

ignore these factors is to improperly attribute to co unter-cyclical payments effects that they do not
actually have in the real world but only have in so me artificial vacuum created for purposes of a
laboratory experiment. It says little about whether counter-cyclical payments are actually having the
kind of production effects alleged by Brazil and whether those effects are actually lead to the kind of
price suppressive effects with which Article 6.3(c) is concerned.

70. What Brazil presents – in short – is a hi ghly abstract study with limited conclusions.
103 The
laboratory experiment upon which the study is b ased does not reflect the economic conditions of
actual upland cotton producers. 104 Rather, the experiment "mimicked" certain stylized scenarios to
attempt to isolate and measure the impact risk aversion and uncertainty might have on production
decisions.105 In doing so, however, the authors removed from consideration some of the most critical
factors that affect the degree to which farmers are, in fact, risk averse, such as the size of the
enterprise and the availability of other price hedgi ng mechanisms. Moreover, they exclude important
factors other than risk that affect a farmer's planting decisions. When all factors are taken into
account – as reflected in the empirical data used by some of the other studies submitted by the United
States – a much more realistic picture emerges of the effects of counter-cyclical payments.

71. Brazil also claims that the McIntosh, Shogren & Dohlman study is more relevant because it is
not confined to the geographic regions of other studies.
106 That is a curious argument given that
Brazil at once asserts that geographical factors may have some effect on the effects of counter-cyclical
payments and asserts that a study that takes none of these factors into account is somehow the most
reliable measure of the effects of counter-cyclical pa yments. In any event, Brazil's criticism that the
Lin & Dismukes and Goodwin & Mishra studies on co rn, soybeans, and wheat are less relevant to
upland cotton because supply elasticities for these crops are much smaller than for upland cotton is
only valid if one ascribes to the inflated supply elas ticity used by Brazil in its Sumner II (CATO)
model. For the reasons explained in the prior U.S. submissions, it is not appropriate to do so.
107

72. Finally, the United States notes that Brazil mi sstates the U.S. arguments. The United States
has not criticized the field of behavioral or experimental economics, nor has the United States

sector is produced by a small share of large producers. . . . Evidence that risk aversion decreases as income rises
(Chavas and Holt, 1990, 1996) suggests that risk aversi on may also tend to decline as the size of farms
increases. Thus, with larger farms that account for most production being less averse to facing risk, this lowers
potential production effects of CCPs due to risk reduction. And while smaller farms may be more risk averse in
their farm enterprise, off-farm income may reduce the overall level of household income risk." Paul A.
Westcott, "Counter-Cyclical Payments Under the 2002 Farm Act: Production Effects Likely to be Limited" at
203-205 (Exhibit US-35). On the basis of these and other factors, Westcott concludes that "there are several
mitigating factors which suggest that overall production effects of CCPs through revenue risk reduction are
likely to be limited." Paul A. Westcott, "Counter-Cyclical Payments Under the 2002 Farm Act: Production
Effects Likely to be Limited" at 205 (Exhibit US-35). The other studies submitted by the United States
examining the empirical evidence of production effects – for example, including the Lin & Dismukes study
finding that "[t]he effect of CCPs on producers' planting decisions . . . appears to be very negligible – an
increase in the acreage of major field cr ops of less than 1% . . . ." – conf irm that the effect s of the counter-
cyclical payments are, in fact, very limited. Lin, William and Dismukes, Robert. "Supply Response Under
Risk: Implications for Counter- cyclical Payments' Production Impacts ," Review of Agricultural Economics–
Volume 29, Number 1–Pages 64-86, forthcoming, p. 83 (Exhibit US-85) (emphasis added).
103 Brazil Answers to Second Set of Questions, para. 68.
104 Brazil Answers to Second Set of Questions, para. 69.
105 McIntosh, Christopher R., Jason F. Shogren and Erik Dohlman, "Supply Response to Counter-
Cyclical Payments and Base Acre Updating under Uncertainty: An Experimental Study," Forthcoming paper in
the American Journal of Agricultural Economics, November 2006, p. 5) (Exhibit Bra-565).
106 Brazil Answers to Second Set of Questions, para. 69.
107 See e.g., U.S. First Written Submission, paras. 319-328 and Annex I; U.S. Rebuttal Submission,
paras. 349-386 and Annex I; U.S. Oral Statement, paras. 76-81 and Statement of Dr. Joseph W. Glauber; U.S.
Comments on Answers to Parts D-E of First Set of Panel Questions, paras. 30-42; and U.S. Comments on
Brazil's "Oral" Presentation, paras. 79-91.

suggested that the McIntosh, Shogren & Dohlman is invalid merely because it is based on controlled
experiments, as Brazil claims. 108 Rather, the United States has identified the numerous factors that
limit the utility of the McIntosh, Shogren & D ohlman study in assessing the question at hand,
including those expressly acknowledged by its aut hors. Moreover, the United States has noted the
irony in Brazil's criticisms leveled at the studies submitted by the United States ( i.e., that they are not
unique to upland cotton production), when Brazil itsel f submits studies that do not even examine the
behavior of actual farmers but, rather, the responses of University of Wisconsin economics students to
some highly stylized scenarios. To claim that this highly abstract experimental study "analyzes more
closely the effects of counter-cyclical payments on the production decisions of U.S. upland cotton
farmers than results of empirical studies"
109 – as Brazil does – is simply not supported by a review of
the study and its conclusions.

65. The United States has cited new empirical research on the production effects of
counter-cyclical payments. Could Brazil explain why the fact that these studies do
not deal specifically with upland cotton should preclude the Panel from considering
the studies as being highly probative?

73. Brazil's answer to this question fundamentally contradicts its answer to Panel question 64.
Brazil asserts that the studies submitted by the United States are not probative "due to their failure to
address the specific effect of upland cotton counter-cyclical subsidies on upland cotton production."
110
Yet, as Brazil admits in Question 64 there are no studies that "address the specific effect of upland
cotton counter-cyclical subsidies on upland cotton production." 111 and in fact that studies upon which
it relies itself – including the McIntosh, Shogren & Dohlman study – do not even do so. Brazil's
complaint on this basis is, thus, patently absurd.

74. Equally unavailing are the four bases that Brazil asserts for why the effects of counter-
cyclical payments made to a holder of upland cotton base acreage that produces upland cotton should
be understood to be fundamentally different fro m those observed by Lin & Dismukes for counter-
cyclical payments made in respect of corn , wheat, and soybeans and Goodwin & Mishra for
marketing loss assistance payments in respect of the same crops. For example, Brazil does not
explain what its assertions about "maximum per-ac re counter-cyclical payments" have to do with
effects on production. In fact, if it were true – as Brazil alleges – that the costs of production for
upland cotton are higher than for other crops, one would expect rational farmers to produce other
crops while still collecting the allegedly very high maximum upland cotton counter-cyclical payment.
Thus, Brazil's reasoning actually supports exactly the opposite conclusion than the one it asserts.
75. Brazil's assertions about the "frequency of paymen t" similarly lack merit. Differences in what
Brazil calls the "fill rate" did not preclude Brazil's preferred study – the McIntosh, Shogren & Dohlam
study – from presenting one single assessment across all counter-cyclical payments. This supports the
conclusion that any alleged differences in the "frequency of payment" do not preclude the Lin &
Dismukes and Goodwin & Mishra from being highl y probative of the likely effects of counter-
cyclical payments made in respect of upland cotton base acres.

76. Brazil's third asserted basis – its allegation th at "one would expect low supply elasticities in
these regions for these crops"
112 – is similarly without merit. As noted in response to Question 64,
this appears to be premised on Brazil's own assertions of grossly inflated supply elasticities for upland
cotton.

108 Brazil Answers to Second Set of Questions, para. 71.
109 Brazil Answers to Second Set of Questions, para. 73.
110 Brazil Answers to Second Set of Questions, 75.
111 Brazil Answers to Second Set of Questions, 75.
112 Brazil Answers to Second Set of Questions, para. 80.

77. Finally, as noted above, there is no basis for Brazil's attempts to invoke certain statements by
the NCC carefully selected to give the impression that U.S. upland cotton farmers would simply be
"bankrupt" without counter-cyclical payments. As Brazil admits, these statements were not even
made with respect to counter-cyclical payments under the FSRI Act of 2002 but rather were made in
February 2001 – before the FSRI Act of 2002 even ca me into effect – about certain emergency relief
that had been provided under the FAIR Act of 1996 including production flexibility contract
payments, marketing loss assistance payments, and disaster payments. These statements offer no
insight regarding the role of counter-cyclical paymen ts in production decisions or about U.S. farmers'
costs and revenues today. And they certainly do nothing to detract from the actual data regarding
"present" costs and revenue, which flatly contradict Brazil's claims that U.S. upland cotton farmers
would be bankrupt without counter-cyclical payments.

78. In sum, Brazil has offered no valid reason why the Panel should not consider the studies
submitted by the United States to be highly probativ e on the question of the effects of the counter-
cyclical payments on acreage and production decisi ons. The United States submits that these studies
continue to provide important insight into the effects of those payments and confirm the U.S.
arguments that these effects are not the "significan t" production and price effects that Brazil has
alleged.

66. Can Brazil explain the differences between the figures for the amount of counter-
cyclical payments allocated to upland cotto n provided by Brazil at the meeting of
the Panel with the parties (Opening Statement of Brazil, para. 40 and Exhibit
Bra 625) and the figures in Table 5 of Brazil's Rebuttal Submission?

67. Please confirm whether or not the Panel's understanding is correct:
"Table 6" in Brazil's First Written Submi ssion was produced using the so-called
"Brazil's method" using USDA data.
"Table 5" in Brazil's Rebuttal Submission was produced using the so-called
"cotton-to-cotton" methodology using USDA data.
The figures cited in para. 40 of Brazil's opening statement (i.e. "$868 million and
$838 million) are produced with the "Brazil's method" as well as the
"cotton-to-cotton" methodology, using the data provided by the United States in
exhibit US-64.

68. Please comment on the following statement by the US:

"The United States understands that Brazil intends the counter-
cyclical payment figures shown in 'Table 5' of Brazil's rebuttal
submission to supersede the counter-cyclical payment figures
shown in 'Table 6' of its first written submission." (US response to
question 4 at para. 15)
69. How does Brazil address the argument of the United States that "the only evidence
that Brazil has submitted purporting to exam ine the price effects of marketing loan
and counter-cyclical payments specifically are the results of the modelling exercise
that it has conducted for purposes of this proceeding"? (Opening Statement of the
United States, para. 76)

79. In the cited portion of the U.S. oral presentation, the United States observed that:

regarding the degree of any possible effects on world market prices, the United States
notes that the only evidence that Brazil has submitted purporting to examine the price

effects of marketing loan and counter-cyclical payments specifically are the results of
the modeling exercise that it has conducted for purposes of this proceeding.
113
80. Brazil accuses the United States of "ignor[ing ] the hundreds of exhibit and the circumstantial
evidence presented by Brazil in the original proceeding and in this compliance proceeding," 114 and
then expounds for 10 pages about the "abundant and diverse evidence" it has allegedly presented. 115
However, not a single piece of the allegedly "ab undant and diverse evidence" does what the United
States noted – examines the degree of any possible effects on world market prices of the marketing
loan and counter-cyclical payment programs. The United States therefore understands Brazil's
response to confirm the U.S. observation.

81. As to Brazil's assertion that its allegedl y "abundant and diverse evidence" nonetheless
supports a finding that "the effect" of marketing loan and counter-cyclical payments is "present"
significant price suppression, Brazil is wrong. The United States has addressed each of Brazil's
arguments in its prior submissions
116, in the general U.S. comment above regarding Brazil's claims
under Articles 5(c) and 6.3(c), and in the U.S. comments regarding Brazil's responses to
Questions 62-65 and 70. As shown therein, none of the "evidence" asserted by Brazil withstands
scrutiny.

70. How does Brazil respond to the United States' rebuttal that Brazil has not even
established a temporal correlation between payment of subsidies and significantly
suppressed prices during the life of the FSRI, that is from marketing year 2002
to 2005? More specifically, please address th e United States' claim of the stability
of US plantings, US share of world production, US share of world exports and the
world price of cotton during this period.

82. The United States notes that Brazil chooses not to respond to the Panel's question. The Panel
asks Brazil to "respond to the United States' rebuttal that Brazil has not even established a temporal
correlation between payment of subsidies and significantly suppressed prices during the life of the
FSRI, that is from marketing year 2002 to 2005 ." Instead of responding, however, Brazil attempts to
sidestep the issue by attributing to the United States – inexplicably – the "assertion" that "there were
not 'coincidences' between (a) increased U.S. production and exports and (b) large U.S. marketing
loan and counter-cyclical subsidies" and then proceeding to attempt to rebut that alleged
"assertion."
117 The United States has never suggested that this is the appropriate analysis, let alone
made the kind of "assertions" that Brazil attempts to attribute to the United States. Nor did the
original panel conclude that an increase in absolute levels of production and exports would equate to a
"temporal coincidence" between allegedly significantly suppressed world market prices
 and payments
under the marketing loan and counter-cyclical payment program.

83. Rather, the original panel considered a number of factors every single one of which the
United States examined in its first wr itten submission and its rebuttal submission. 118 A s t h e
United States showed therein, none of the factors considered by the panel in the original proceeding in
reaching its conclusion of a "discernible temporal coincidence" between U.S. subsidies and significant

114 Brazil Answers to Second Set of Questions, para. 90.
115 Brazil Answers to Second Set of Questions, para. 101.
116 U.S. First Written Submission, paras. 203-331 and Annex I; U.S. Rebuttal Submission, paras. 215-
404 and Annex I; U.S. Answers to Parts A-C of First Set of Panel Questions, paras. 27-44; U.S. Oral
Statement, paras. 50-85 and Statement of Dr. Joseph W. Glauber; U.S. Answers to Parts D-E of First Set of
Panel Questions, paras. 14-42; U.S. Comments on Brazil's "Oral" Presentation, paras. 34-91 and Annex I, and
U.S. Answers to Second Set of Panel Questions, paras. 1-4, and 62-170.
117 Brazil Answers to Second Set of Questions, para. 108.
118 U.S. First Written Submission, paras. 277-291; U.S. Rebuttal Submission. paras. 314-320.

price suppression support such a finding with resp ect to the marketing loan and counter-cyclical
payments now. Brazil has never rebutted the U.S. ar guments in this regard; and does not do so now
even despite the direct request by the Panel to do so. This confirms that Brazil has not – and cannot –
prove any "discernible temporal coincidence" betw een significantly suppressed world market prices
and marketing loan and counter-cyclical payments. Indeed, as discussed below, Brazil has not even
proven the factual predicates therefor, including significantly suppressed prices.

84. Rather than offering any proof of "discerni ble temporal coincidence" between significantly
suppressed world market prices and marketing loan and counter-cyclical payments, Brazil relies on
reasoning that is entirely untenable. Consider, fo r example, Brazil assertion that the increase in the
absolute level of U.S. production and exports al one over the life of the FSRI Act of 2002 should be
understood "in isolation" to "suggest a relationshi p" between the marketing loan and counter-cyclical
subsidies and allegedly suppressed world market prices.
119 As evidenced by the fact that U.S. share of
world production and exports has remained relativel y stable over the course of the entire FSRI Act,
however, it is a fact that there is precisely the same "temporal coincidence" between increased foreign
production and exports and the U.S. marketing loan and counter-cyclical payments. Does this – "in
isolation" – support the same conclusion in respect of foreign production and exports? Should the
U.S. marketing loan and counter-cycli cal payments be understood to have caused the increase in the
absolute level of foreign production and exports? Surely not. Surely any rational analysis would look
more closely at how the marketing loan and coun ter-cyclical payments interact with the production
decisions (i.e., the decision on what to plant).

85. When one looks at planted acreage, one finds that the increase of absolute levels of U.S.
production is solely attributable to an increase in yields. In fact, in MY 2005, U.S. producers actually
planted fewer acres than in either MY 2001 or MY 1999 (13.9 compared to 15.4 and 14.5 million
acres, respectively), the years that Brazil has urged the Panel to look at as comparison years before the
FSRI Act came into effect. Moreover, had the yiel ds in MY 2005 been what they were in those
earlier years, U.S. production in MY 2005 would have been far lower. 120 Thus, contrary to Brazil's
assertions, the increased production in these years is not evidence of any causal link between the
marketing loan and counter-cyclical payments a nd production. It is evidence of dramatic
improvements in yields.

86. In an apparent effort to avoid this flaw in its argument, Brazil then argues that "but for" the
U.S. marketing loan and counter-cyclical payments, U.S. planted acreage would have been lower over
the life of the FSRI Act.
121 As the United States has shown – ex amining the planting decisions made
by U.S. farmers in MY 2006, MY 2005 and, in fact, every year under the FSRI Act of 2002 – the facts
do not support Brazil's assertion. 122 Thus, Brazil's answer only confirms that, notwithstanding its
assertions, Brazil does not – and, in fact, cannot – "reinforce the original panel's finding, at
paragraph 7.1351 of its report, of a discernable temporal coincidence of suppressed world market
prices and the price-contingent U.S. subsidies."123

87. Nor does Brazil respond fully to the second of th e Panel's questions. As the Panel's question
reflects, the United States identified a key flaw in Brazil theory at the very start of this proceeding.
124

119 Brazil Answers to Second Set of Questions, para. 109.
120 If yields were at the levels that prevailed in MY 2001, U.S. production would have been almost
30 percent lower in MY 2005. If yields were at MY 1999 levels, U.S. production would have been almost
40 percent lower. See U.S. First Written Submission, paras. 279-282.
121 Brazil Answers to Second Set of Questions, para. 108.
122 See e.g., U.S. Comments on Brazil's "Oral" Presentation, paras. 58-78.
123 Brazil First Written Submission, para. 152. The United States notes that, while Brazil asserts in its
first written submission that it will isolate the effects of the marketing loan and counter-cyclical payment
programs, it does not do in its assessment of "temporal coincidence."
124 U.S. First Written Submission, paras. 243-252.

Namely, if, as Brazil alleges, U.S. producers we re cut off from market signals, why does U.S.
production response mirror foreign production respon se (see chart below)? Why does one not find
U.S. share of world production and exports increasi ng over the life of the FSRI Act as U.S. producers
allegedly ignore the same market signals received by their foreign counterparts?

US Production Response Mirrors
Foreign Production Response
-20.00%
-10.00%
0.00%
10.00%
20.00%
30.00%
2000 2001 2002 2003 2004 2005 2006f
Marketing Year
1,000 480 lb bales
Foreign % Change US % Change

88. Brazil has never been able to rebut this evid ence; its only response has been to assert that the
stable share of world production and exports is somehow itself evidence that U.S. producers are
insulated from market signals. However, as the United States explained in its first written submission,
in making this assertion, Brazil is improperly assuming its own conclusion – i.e., "stable U.S. share of
world production and export proves that U.S. support payments cause price suppression because
without the price suppression caused by U.S. support payments U.S. share of world production and
exports would not be stable." 125 Brazil's circular reasoning is not improved by its reassertion in
Brazil's response to this question.

89. In its response, Brazil also argues at length about the alleged "United States [ sic] claims that
the stability of U.S. acreage de monstrates the lack of any 'temporal coincidence' (and hence
causation)."
126 Brazil's arguments in this regard are baffling because the United States has not
"claimed" any such thing. What the United States h as noted is (a) the original panel's analysis that
"United States production of upland cotton in creased 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;"127 and (b) Brazil's arguments that in its discussion of production and "temporal
coincidence" in the panel report, "[t]he [original] Panel simply referred to "production" as shorthand
for planting decisions by producers, which even in agricultural economics literature is not
uncommon."128 According to Brazil's argument, then, th e original panel found an "overall increase"
in the U.S. upland cotton planted acreage in MY 1999-2002 and considered this as one factor in its
finding of a "discernible temporal coincidence". Th e United States has shown that there is no similar
"overall increase" in the U.S. upland cotton plante d acreage over the life of the FSRI Act. To the
contrary, planted acreage declined from MY 2002 levels in MY 2003 and MY 2004, picked up

125 U.S. First Written Submission, para. 251.
126 Brazil Answers to Second Set of Panel Questions, paras. 112-115.
127 Upland Cotton (Panel), para. 7.1351.
128 Brazil Appellee Submission, para. 686. Brazil argued that "ultimate production" is not an
appropriate basis for assessing production decisions as "producers do not decide on production, but on plantings.
Ultimate production is affected by weather and other factors affecting yields." Brazil Appellee Submission,
para. 706, n. 995. As a result, Brazil asserted that the original panel's discussion of an "overall increase in
production" was actually a discussion regarding planting, not actually production.

slightly in MY 2005 and more so in MY 2006 but is projected to fall dramatically in MY 2007 to
levels lower than they have been in almost a decade.
129

90. There is similarly no merit to the other ar guments made by Brazil regarding U.S. planted
acreage.
130 Brazil continues to make arguments on the fundamentally flawed assumption that U.S.
planted acreage should change year-to-year based on changes in the futures price for upland cotton
alone. Thus, for example, Brazil even claims as "one of the most important 'temporal coincidences' in
the record" – the fact that U.S. planted acreage increased slightly in MY 2005 even though futures
prices for cotton in that year were lower than the year before.131 But Brazil's own assertions about the
proper analysis of planted acreage in another year – MY 2007 – demonstrate the fallacy in Brazil's
arguments about planted acreage shifts in MY 2005. If U.S. planted acreage must move in synch
solely with upland cotton prices, why does Brazil argue that U.S. upland cotton acreage should be
decline dramatically in MY 2007 132 even though the expected harves t time price for upland cotton in
this year (i.e., the average January-March 2007 New York fu tures price for the December contract) is
59 cents/lb, more than 6 cents/lb higher than for MY 2005 and almost the same level as in MY 2006.
The reason why Brazil argues that there shoul d be a decline is because the prices for corn – a
competing crop – make that a more attractive option in MY 2007. 133 The same kind of considerations
of competing crops, weather, pests and other such factors – not some narrow assessment of changes in
the futures price for upland cotton price alone – explain the acreage shifts also in MY 2005 (and
indeed in each of the other years that the FSRI Act has been in effect).
134

91. Finally, the United States notes that althoug h the Panel asks Brazil specifically to respond to
the U.S. arguments regarding world market pric es, Brazil does not do so. Rather, Brazil simply
asserts that prices over the life of the FSRI Act are below those that prevailed in MY 1980-1998. 135
As the United States explained in its first writte n submission, however, Brazil's claim in this
proceeding is of significant price suppression, not price depression. A decline in prices does not
demonstrate price suppression.136 The question is whether prices are being prevented from rising by

129 See U.S. First Written Submission, para. 280 and U. S. Answers to Second Set of Panel Questions,
paras. 1-4.
130 As the United States explained in its rebuttal s ubmission, Brazil's attempts to compare changes in
U.S. planted acreage, changes in foreign harvested acreage, and changes in the futures prices is fundamentally
flawed both because of its apples-to-oranges comparison and also because it seeks to explain changes in U.S.
upland cotton acreage solely by reference to upland cotton futures, in disregard of the basic fact that acreage
decisions are made in consideration of prices and other factors not only for cotton but for competing crops. U.S.
Rebuttal Submission, paras. 305-306. In fact, what Brazil's flawed analysis shows – when conducted on the
same harvested-acreage basis for both the United States and the rest of the world – is that neither U.S. nor
foreign harvested acreage moves closely in line with futures prices of cotton alone. U.S. Rebuttal Submission,
para. 305-307. Nonetheless, even if the comparison were valid (and it is not), it would show that, where
changes in U.S. and foreign area diverge, U.S. harvested acreage tends to react more conservatively than foreign
acreage to increasing prices (as in MY 2003 and 2006). U.S. Rebuttal Submission, paras. 305-307. This would
undermine – rather than support – Brazil's assertions of alleged "subsidy-fueled overproduction."
131 See U.S. Comments on Brazil's "Oral" Presentation, para. 70.
133 See Brazil Oral Statement of Brazil, para. 73 (arguing that "[i]f marketing loan and CCP subsidies
did not exist, and if U.S. cotton farmers would have to re act to market price signals, far more than 14 percent of
cotton acreage predicted by the NCC [for MY 2007] would switch to substitute crops."); see also U.S.
Comments on Brazil's "Oral" Presentation, paras. 1-4 (rebutting Brazil's argument).
134 See U.S. Comments on Brazil's "Oral" Presentation, para. 70. For example, the data show a perfect
correlation between a shift away from soybean acreage in MY 2005 due to concerns about an outbreak of Asian
soybean rust in the Delta and Southeast regions of the United States and an increase in the competing crop –
cotton – in the exact same areas.
135 Brazil Answers to Second Set of Questions, para. 113.
136 Interpreting "suppression" in accordance with its ordinary meaning of "[p]revent or inhibit (an
action or phenomenon)," the panel in the original proceeding defined "price suppression" as "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

something (in this case, the marketing loan and c ounter-cyclical payment programs). Brazil provides
no empirical evidence showing such "suppression" as a result of marketing loan and counter-cyclical
payments.

92. Rather, the fact that the A-Index has trende d downwards for more than 25 years now – well
before the FSRI Act came into effect – and the fact that the A-Index has gone up from the levels that
prevailed before the FSRI Act came into effect as of MY 2002 would tend to suggest that, to the
extent there is any price suppression, it is not "the effect" of the marketing loan and counter-cyclical
payment programs.

 Source: USDA, Agriculture Marketing Service Reports 137

93. Brazil has never rebutted this evidence nor est ablished that there is a "discernible temporal
coincidence" of U.S. marketing loan and counte r-cyclical payments and allegedly suppressed world
market prices.

71. In the original case, the Panel conclude d that the analysis covering "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"
(see para. 7.1354 of the original panel report). Thus, total costs of production were
the costs considered appropriate by the Pa nel. Would total costs of production
continue to be relevant should the complia nce Panel decide to use only marketing
year 2005 as the reference period for analysis? Or would variable costs of upland
cotton farming in marketing year 2005 now be the relevant information to
consider?

94. The United States offers a number of observations regarding Brazil's answer to this question.
First, Brazil asserts that there have been no fundame ntal changes in the conditions of competition or
any other relevant factors that would compel th e compliance Panel to reject the findings of the
original panel's causation analysis relating to "total cost of production."
138 Brazil is incorrect.

– either are prevented or inhibited from rising ( i.e. they do not increase when th ey otherwise would have) or
they do actually increase, but the increase is less than it otherwise would have been." Upland Cotton (Panel) ,
paras. 7.1276-7.1277. The Appellate Body agreed that this was an appropriate interpretation of "price
137 Compiled Statistics – Prices (Exhibit US-25).
138 Brazil Answers to Second Set of Questions, paras. 117 and 118.
The A-Index Has Been Trending Down for More Than 25 Years
0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00
80.00
90.00
100.00
1980
198
2
1984
1986 1988
1990
199
2
1994
1996 1998
2000 200
2
2004
Marketing Year
cents/lb

95. As the United States explained as early as September 2003, the 1997 ERS/USDA survey data
on cost of production used by both Brazil and the Un ited States in the original panel proceeding likely
overstated certain costs because of technological and other changes.
139 The U.S. arguments were
borne out when ERS released new cost of produc tion data based on a 2003 survey. As a result of
changes in technology – widespread adoption of biotech cottonseed, and other improvements in
production practices, such as boll weevil eradication programs – upland cotton yields have exhibited a
structural increase and per unit input costs have fallen. 140 This dramatic shift in the cost and yield
structure for upland cotton certainly represents a f undamental shift in the conditions of competition,
contrary to Brazil's assertions. As the United Stat es explained in earlier submissions, the data show
clearly that upland cotton producers covered not onl y their operating (variable) costs but also a
substantial portion of their total costs between 2002-2005.141

96. Second, Brazil continues to assert that tota l costs of production, including non-cash or
economic costs, are determinative of a producer's planting decision, without offering any basis in the
economic literature or even in fact to support that assertion. The United States has reviewed this issue
thoroughly in its prior submissions and, rather than repeating this here, refers to the Panel to the
earlier discussion.
142 For the reasons explained by the United States, if the Panel were to examine
effects on planting/production in a single year – MY 2005 – the relevant consideration is operating
costs, not "total" costs.143

97. Third, while Brazil is correct in its observation that a farmer has two different cost concerns –
one a year-to-year planting decision and another lo ng-term decisions about the economic viability of
his farm – Brazil analysis of these decisions is flaw ed. As the United States has explained the "total
costs" that Brazil uses is not an appropriate consideration with respect to either decision.
144 To the
extent a producer has planting options for vari ous crops, based on agronomic conditions, the first
decision is an assessment of net returns per crop; that is, what is relative market revenue minus
operating costs (net revenue per crop). 145 In addition, over time, a producer must also cover all cash
costs, including such items as mortgage costs and equipment. The United States agrees with Brazil
that "without generating sufficient funds to meet th is second set of costs, there would be no facilities
or equipment to grow upland cotton in the first place." 146 However, as the United States has shown,
U.S. farmers assess the economic viability of a farm based on the total costs and revenue for the
farm.147 It is on the basis of those considerations – not some artificially segmented crop-by-crop
"total cost" analysis – that the farmer makes decisions such as whether to declare bankruptcy.

98. It is a significant flaw in Brazil's analysis, therefore, that Brazil disregards off-farm income
and income from other crops, both of which are an impor tant part of the total re venue of a farm. It is
similarly incorrect for Brazil to attempt to include in its "total cost" analysis such factors as imputed
opportunity costs that have been calculated by US DA to attribute some value to unpaid labor and
owned land but that are not necessarily costs that must be paid off in order for farmers to avoid having
to "close down [their] business[es]."
148 As a result of these flaws, the picture that emerges of the

139 U.S. Further Submission in the original panel proceeding, paras. 46-54 (September 30, 2003). U.S.
Further Rebuttal Submission in the original panel proceeding, para. 123-133 ( November 18, 2003).
140 U.S. First Written Submission, December 15, 2006, para. 302.
141 U.S. First Written Submission, December 15, 2006, para. 300.
142 For the most recent review, see U.S. Comments on Brazil's "Oral" Presentation, paras. 62-65.
143 Any such analysis would also have to look at the other factors besides expected operating costs
affect the planting decision – MY 2005 being a good example of other confounding factors. In that year, a
major unanticipated factor was the emergence of soybean rust in key cotton producing states, which encouraged
producers to switch from soybeans to cotton. U.S. Comments on Brazil's "Oral" Presentation, para. 70.
144 See U.S. Answers to Second Set of Panel Questions, paras. 96-100, 113-116, 133-154.
145 See e.g., U.S. Comments on Brazil's "Oral" Presentation, paras. 66-67.
147 See e.g., U.S. Answers to Second Set of Panel Questions, paras. 133-154.
148 Upland Cotton (Panel), para. 7.1353.

financial viability of U.S. farmers is completely and thoroughly distorted. It results in the attribution
to marketing loan and counter-cyclical payment "effects" that they are not in fact having.

99. When one considers instead, the total cash costs that most farmers do in fact have to meet
over the long term, the data show th at U.S. farmers have in fact ge nerated sufficient funds to cover
their total cash costs over the long term. The cost data for the period 2000-2005 show that, instead of
the cumulative $663 deficit per acre erroneously asserted by Brazil, the cumulative returns over the
same period were a positive return of $161 per acre. Moreover, for MY 2000-2006, instead of the
$837 deficit per acre alleged by Brazil, the cumulative net returns were a positive $133 per acre.
149

100. The FAPRI baseline projections from July 2006, which Brazil used in an earlier submission,
confirm the same facts. Comparing gross market revenue for upland cotton per acre to variable
expenses per acre shows that upland cotton revenue would more than cover variable expenses and
would cover a large share of other cash expen ses. For the period 2004/05-2010/11, cumulative net
returns per acre were projected to be $620.34.150

101. It is important to remember that these results look only to total costs and revenue for upland
cotton production. When whole-fa rm costs and revenue from all sour ces is taken into consideration
an even more robust picture of economic viability would likely emerge.

72. Brazil has argued that the adjustment in co tton stocks should not be included in the
simulation of a large and permanent reduc tion in subsidies to cotton. Please
respond to the following argument:

If the simulation were a comparative static analysis in which a
baseline is compared to a counterfactual outcome in some long-run
state, modelling such adjustments would be unnecessary. But such
adjustments should be taken into account given that the model is
used to simulate the average impact on the world price of cotton
(among other variables) on specific periods of time (MY 2002-05 or
MY 2006-08) and not in the long run.
102. In its response to this question, Brazil conti nues to suggest incorrectly that stock responses are
incorporated into the demand elasticities used in Brazil's new model. This is simply untrue.

103. Brazil also attempts to minimize the importa nce of stock adjustments to overall market price
movements. However, stock-holding activity is an important component of any storable commodity
market. Market participants hold stocks for a variety of reasons to accommodate a number of possible
factors. The adjustment of stocks is an important determinant in overall price movement. The United
States has shown that by ignoring the importance of stocks in a short-run analysis, Brazil's analysis
overstates the price impacts.
151

104. The United States agrees that stock adjustment s are not necessary to an analysis of long-term
demand and price adjustments. However, in a long-te rm analysis, the elasticities that are used must
fully reflect long-term adjustments in supply and demand. Based on such elasticities documented by
FAO, the United States demonstrated that – ev en using Brazil's own econometric model, which
suffers from certain fundamental stru ctural flaws that tend to overstate the results – any price impacts
due to the removal of U.S. programs are only in the range of 1 to 1.5 percent, not the grossly
exaggerated results that Brazil attempts to show.

149 U.S. Comments on Brazil's "Oral" Presentation, paras. 76-77.
150 Brazil's First Written Submission, para. 286. See also Exhibit Bra-479, page 6.
151 See e.g., U.S. Comments on Brazil's "Oral" Presentation, para. 86.

73. How does Brazil respond to the argument made by the United States in
paragraph 79 of its Opening Statement that:

"to the extent a counterfactual assessment is undertaken, it is only
to assess what the price equilibrium would be at present if
marketing loan and counter-cyclic al payments had been lower,
different or did not exist. Article 6.3(c) does not ask what prices
will look like in the short-run adjustment period if the marketing
loan and counter-cyclical payments are suddenly eliminated...
Brazil's argument that it is n ecessary to look at the short-run
effects of total elimination of the programs cannot be accurate as a
textual matter."
More specifically:

(a) Why did Brazil not consider it appropr iate to include simulations that
involve reductions rather than elimination of the subsidy programmes?

105. The United States offers two observations in respect of Brazil's answer. First, Brazil's
response to this question appears to make little sense. Brazil asserts that it has not modeled reductions
of the U.S. marketing loan and counter-cyclical payment programs because the United States has not
made changes to reduce payments under those prog rams. However, the United States has also not
eliminated the marketing loan and counter-cyclical paym ents. Under its own reasoning, Brazil would
have no basis for purporting to model the total elimination of those payments either.

106. Second, the United States notes that Brazil reas serts its arguments about the appropriateness
of assessing the "short-run" response of "shocking" the system with elimination of marketing loan and
counter-cyclical payments. As the United States has explained, Brazil confuses the question under
Articles 5(c) and 6.3(c) of the SCM Agreement . The question under those provisions is what the
present effects of the challenged measures are (and whether these effects comprise "significant" price
suppression). The question is not what the effects are of eliminating anything. To the extent a
counterfactual analysis is conducte d to attempt to tease this out, the question is simply where the
equilibrium would have been today had the challenged measures not been in existence. The question
is not what will happen in the short run if a Member were to eliminate the challenged measures today.
Brazil's citation of Korea – Ships confirms this precisely:

price suppression is the situation where prices have been restrained by something, and
price depression is the situation where pri ces 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.
152
107. Indeed, in other disputes, Brazil has conf irmed that in assessing trade effects using a
counterfactual analysis, "elasticity values should be taken from long-run estimates and not short run
estimates."153 Brazil has provided no valid reason for why the analysis is different here.

(b) If simulations of such scenarios a re performed, would the current values of
the elasticities chosen (particularly the supply elasticities) to simulate the
elimination of marketing loan and counter-cyclical programmes continue

152 Korea – Ships (Panel), para. 7.612.
153 U.S. – Continued Dumping and Subsidy Offset Act (22.6), para 3.101.

to be appropriate? Please kindly provide an explanation for the chosen
answer.

108. The United States is surprised by Brazil's asserti on now that its inflated U.S. supply elasticity
is actually appropriate even for assessing a partial reduction of payments under U.S. programs. Brazil
itself has argued that different elasticities are nece ssary for reduction of payments versus "permanent"
removal of payments and has attempted to have th e Panel dismiss the FAPRI parameters on the basis
that they are not applied to "p ermanent" removal of payments. 154 Now – however – the Panel is to
believe that the inflated Sumner elasticities are nonetheless appropria te for use in every context.
Brazil's assertions about the these elasticities simply lack credibility. The United States has shown
that the modeling parameters and assumptions that Brazil uses are grossly exaggerated. 155 This is true
regardless of whether they put to an analysis of partial or full reduction of payments.

74. Brazil's view is that the data that th e Panel must consider for its claim of present
serious prejudice should be that covering the latest marketing year for which
complete information is available, MY 2005, and where credible, evidence after
31 July 2006. Since in MY 2005, payments under Step 2 continued to be made by
the United States (payments which the original Panel found to have contributed to
adverse effects) how shall the Panel ascertai n that any adverse effects observed in
marketing year 2005 are due solely to th e two subsidy measures which are the
subject of the present serious prejudice claim – marketing loan and
counter-cyclical payments?

109. The United States offers three observations about Brazil's answer to this question. First,
Brazil's response to this question provides an interesting contrast to its response to Question 69 above.
In that response, Brazil attempts to excuse its fa ilure to provide empirical evidence regarding the
effects of the marketing loan and counter-cyclical payment programs on the basis that "Brazil cannot
unilaterally remove the U.S. subsidies to present direct evidence of what would actually happen to
U.S. acreage, production, exports, and world prices w ithout those subsidies. Only the United States
can do so."
156 In its response to this question, however, Brazil argues that where the United States has
removed a domestic support program, the Panel should not rely primarily on the "direct evidence of
what would actually happen to U.S. acreage, produc tion, exports, and world prices without" payments
under that program but rather on Brazil's own "count erfactual" assertions about the effects of the
removal of the Step 2 program (which are, in a ny event, heavily contradicted by the arguments
presented by Brazil itself in the original panel proceeding and undermined by the empirical
evidence).
157 In effect, Brazil suggests that – regardless of what the facts actually are and regardless
of whether payments are being made under the cha llenged programs or not – the Panel must rely on
whatever Brazil alleges about the effects of the payments. There is no basis for such a suggestion.

154 Brazil's assertions about the FAPRI parameters are patently untrue. FAPRI has used their modeling
system to analyze the removal of domestic subsidies under trade liberalization scenarios and the reduction of
farm subsidies under various farm bill scenarios, includi ng the "permanent" removal of payments. Indeed, in
attempting to argue that elimination of the Step 2 program has had no effects on exports or prices, Brazil itself
submitted and repeatedly cites to a FAPRI assessment of the effects of eliminating that program. See Brazil
First Written Submission, para. 203 (addressing FAPRI, "Impacts of Commodity and Conservation Reserve
Program Provisions in House and Senate Reco nciliation Bills," FAPRI-UMC Report #15-05,
December 2005(Exhibit Bra-484).)
155 See e.g., U.S. First Written Submission, paras. 319-328 and Annex I; U.S. Rebuttal Submission,
paras. 349-386 and Annex I; U.S. Oral Statement, paras. 76-81 and Statement of Dr. Joseph W. Glauber; U.S.
Comments on Answers to Parts D-E of First Set of Panel Questions, paras. 30-42; and U.S. Comments on
Brazil's "Oral" Presentation, paras. 79-91.
156 Brazil Answers to Second Set of Questions, para. 91.
157 See U.S. First Written Submission, paras. 149-195; U.S. Rebuttal Submission, paras. 175-214; U.S.
Oral Statement, paras. 54-59.

110. Second, the facts relating to the period after the removal of the Step 2 program – which Brazil
attempts to have the Panel ignore – show U.S. plantings declining and U.S. exports declining
dramatically even as the cost structure of U.S. upland cotton farms improves due to such factors as the
use of genetically modified cottonseed. Brazil ha s not established that, despite these facts, U.S.
marketing loan and counter-cyclical payments ar e somehow "significantly" suppressing world market
prices. The decline in exports and the decline in predicted plantings are occurring even though both
the marketing loan program and the counter-cycli cal payment program remain in place and even
though – according to Brazil – these programs are al legedly "designed" to provide consistently high
payments to U.S. farmers. These facts are not cons istent with the theories that Brazil has put forward
purporting to establish the alleged "numbing" of U.S. production response a nd alleged substantial
levels of overproduction and export of U.S. upland cotton.

111. Third, Brazil asserts that the removal of the Step 2 program should be assessed as part of a
"non-attribution" analysis and suggests that the original panel's analysis somehow supports this
approach. Brazil is wrong. The original panel neve r assessed the effects of St ep 2 payments as part
of any "non-attribution" analysis; Step 2 payments were, instead, part of the package of payments
whose effects were directly at issue in the "present" serious prejudice analysis under Articles 5(c)
and 6.3(c) of the SCM Agreement.

112. Nor does it make sense that removal of the Step 2 program would be part of a "non-
attribution" analysis. As the Appellate Body has explained, a "non-attribution" analysis focuses on
"ensur[ing] that the effects of other factors on pri ces are not improperly attributed to the challenged
subsidies."
158 This requires separating out the effects of other factors suppressing world market prices
and ensuring that they are not attributed to ma rketing loan and counter-cyclical payments. As
removal of the Step 2 program is not suppressing any prices, it is not logical to speak of including that
factor in any "non-attribution" analysis.

2. Increase in world market share - Article 6.3(d) of the SCM Agreement

Questions to the United States

75. Could the United States explain further the textual basis of its argument that
"Article 6.3(d) is not concerned with absolute market share and whether or not in
any given year a member's market share wo uld have been lower if subsidies were
removed"? (Rebuttal Submission of the United States, para. 401)

Questions to Brazil

76. What is the view of Brazil on the argument of the United States that an inquiry
under Article 6.3(d) of the SCM Agreement requires two distinct elements: first, a
demonstration of an increase in the world market share of a Member as compared
to the average share it had during the previous period of three years, and, second, a
demonstration that this increase in world market share compa red to the average
share the Member had during the previous period of three years is part of a

158 Upland Cotton (AB), para. 437. As the United States has noted in its prior submissions, Brazil has
not made any meaningful attempt to "ensure that the effects of other factors on prices are not improperly
attributed to the challenged subsidies." Upland Cotton (AB) , para. 437. Brazil's "analysis" consists of
unsupported assertions that nothing "attenuates" the link th at it asserts between the marketing loan and counter-
cyclical payments and allegedly significantly suppressed wo rld market prices. This is entirely insufficient to
meet Brazil's burden, especially in light of substantial evidence submitted by the United States (and even,
unwittingly, by Brazil itself) showing the key importance of other factors (such as China's trade in upland
cotton) affecting world market prices. See e.g., U.S. First Written Submission, paras. 308-318; U.S. Rebuttal
Submission, paras. 387-396.

consistent trend over a period when subsidies have been granted? (Rebuttal
Submission of the United States, para. 399)

113. The United States respectfully refers the Panel to its general comments above regarding
Brazil's claims under Articles 5(c) and 6.3(d) of the SCM Agreement as well to the U.S. arguments on
this issue in its prior submissions.159

114. In its response to this question Brazil asserts that the second element of Article 6.3(d) – "this
increase follows a consistent trend over a period wh en subsidies have been granted" – can be met
simply by showing an increase in U.S. world market share from MY 1998 to MY 2005. Brazil's
approach – if adopted – effectively write out of Article 6.3(d) both the reference to "this" increase and
to a "consistent" trend.

115. As the United States explained in its answer to Question 75, Article 6.3(d) of the
SCM Agreement is concerned with increase in world market share.
160 An increase is – by definition –
"the action, process, or fact of making or becoming greater."161 Thus, what is at issue in Article 6.3(d)
is movement ("becoming greater"), not something static. The key question, then, is what movement is
relevant for purposes of that provision The text provides the answer. The movement that is relevant
is that in getting from point A – "the average shar e [the allegedly subsidizing Member] had during the
previous period of three years," – to point B, the leve l in the year that is the subject of the claim. If
upward movement – i.e., "increase" or "growth" – is involved in getting from the former to the latter,
and the upward movement is shown to be "the effect" of a challenge d subsidy – the first element of
Article 6.3(d) is satisfied.

116. An "increase" is also at issue in the second element of Article 6.3(d) – the requirement that
"this increase" be shown to "follow[] a consistent trend over a period when subsidies have been
granted." Again, the text makes clear which partic ular increase is at issue – it is "this increase" -
i.e., the same increase that was relevant for purposes of the first element. Thus, under the second
element, the complaining party must show that "t his increase" – the "increase in the world market
share it had during the previous period of three y ears" – "follows a consistent trend over a period
when subsidies have been granted."

117. Brazil's argues that "the United States attempts to read the separate element of a three-year
average into the element of a 'consistent trend,'" but ignores the fact that Article 6.3(d) specifically
refers to "this" increase, relating back to the re ference to the increase over the previous three-year
average. Brazil offers no reason why the drafters w ould have referred back to "this increase" if they
had intended that a completely different increase – one defined by the complaining party – was to be
the relevant increase for purposes of the second element of Article 6.3(d).

118. Instead, Brazil confuses two entirely separate questions. One question – just discussed – is
what the relevant comparison is in assessi ng whether there has been an "increase" ( i.e., whether the
proper points of comparison are the share of world production in a particular year versus the average
share over the previous three-year period, as the te xt suggests, or rather two years selected by the
complaining party, as Brazil urges). A second, and separate, question is whether an increase must be
shown in every year in order to show that "this increase follows a consistent trend over a period when
subsidies have been granted" (e mphasis added). These are distinct issues. Contrary to Brazil's
assertions, the United States has never suggested that fo r a "consistent trend" to be shown there must
be an increase in every single year that subsidie s have been granted. Nor is this a necessary
implication of the U.S. interpretation of Article 6.3(d).

159 See e.g., U.S. First Written Submission, paras. 323-343; U.S. Rebuttal Submission, paras. 399-404;
U.S. Answers to Second Set of Panel Questions, paras. 171-172.
160 U.S. Answers to Second Set of Panel Questions, paras. 171-172.
161 The New Shorter Oxford English Dictionary at 1350, Volume 1, (2002 Edition) (Exhibit US-148).

119. While there may not be a need to show an increase in every year, where – as here – a
complaining party can only point to one
162 isolated year in which ther e has been an increase over the
previous three-year average (and even that slight increase is shown to be both part of the ordinary
fluctuation of world market share and caused by f actors other than the challe nged measures) there is
clearly no basis whatsoever for an assertion of a "consistent trend."

120. Indeed, it is Brazil's interpretation that is inc onsistent with the "consis tent trend" language in
Article 6.3(d). Brazil has argued that a complaining party should be able to satisfy the second element
of Article 6.3(d) by simply selecting two end-points in the period that subsidies have been granted and
drawing an upward-slanting line between the two poi nts. However, this would simply show an
increase. It would not necessarily show a "trend," and it would most certainly not show a "consistent"
trend. To the contrary, it would render the te rm "consistent" entirely meaningless because – under
Brazil's theory – there would only ever be two end-points and one line connecting them. This line
could never be "consistent" with anything else becau se there would simply never be anything else
with which to be "consistent." Brazil would – in effect – simply write "consistent" out of
Article 6.3(d) altogether. This is not an permissible interpretation of Article 6.3(d).

77. In this connection, could Brazil respond to the argument of the United States that
Brazil has not shown that either of these elements are met with respect to the
marketing loan and counter-cyclical payment programs"? (Rebuttal Submission of
the United States, paras. 399-403)

121. The United States respectfully refers the Panel to its general comments above regarding
Brazil's claims under Articles 5(c) and 6.3(d) of the SCM Agreement, to the U.S. comments regarding
Brazil's answer to Question 76, as well to the U.S. arguments on this issue in its prior submissions.
163

C. C LAIM OF BRAZIL REGARDING THREAT OF SERIOUS PREJUDICE

Questions to both parties

78. Could both parties comment on the statements of Canada that "(a)t issue is
whether these programmes....threaten to cause serious prejudice simply by virtue of
their existence" and that "(c)ertain subsidy programs, by their very nature, give
rise to a constant likelihood of support th at results in a permanent threat of serious
prejudice"? (Third Party Submission of Canada, paras. 9-10)

122. The United States respectfully refers the Panel to its general comments above regarding
Brazil's "threat of" serious prejudice claims under Articles 5(c) and 6.3(c) of the SCM Agreement as
well to the U.S. arguments on this issue in its prior submissions.164

79. Could the parties state their views on the analysis of the ordinary meaning of the
term "threat" in paras. 15-28 of the Third Party Submission of Canada?

123. The United States respectfully refers the Panel to its general comments above regarding
Brazil's "threat of" serious prejudice claims under Articles 5(c) and 6.3(c) of the SCM Agreement as
well to the U.S. arguments on this issue in its prior submissions.165

162 Or, at most two, if one considers world production plus beginning stocks.
163 See e.g., U.S. First Written Submission, paras. 323-343; U.S. Rebuttal Submission, paras. 399-404;
U.S. Answers to Second Set of Panel Questions, paras. 171-172.
164 See e.g., U.S. Rebuttal Submission, paras. 405-425; U.S. Answers to Second Set of Panel
Questions, paras. 173-199.

Questions to the United States

80. How does the United States address the argument of Japan that in view of the
different purposes of Parts III and V of the SCM Agreement the standard for
determining threat of material injury in Article 15.7 of the SCM Agreement is an
inappropriate standard for determining the existence of a threat of serious
prejudice under Part III of the SCM Agreem ent? (Third Party Submission of
Japan, paras. 8-12.)

81. How does the United States respond to the argument of Australia that "it is beside
the point for the United States to argue that the programmes under consideration
are due to expire in late 2007"? (Third Participant Oral Statement of Australia,
para. 13)

82. Could the United States comment on the projections of marketing loan and
counter-cyclical payments in Table 26 of Brazil's First Written Submission and on
the projections of prices and subsidy paymen ts in Table 27 of Brazil's First Written
Submission? Could the United States explain how the data in these Tables support
its argument that producers are likely to expect low or no marketing loan payments
in MY 2007? (Rebuttal Submission of the United States, para. 418)

Questions to Brazil

83. How does Brazil address the argument of the United States that footnote 13 of the
SCM Agreement "does not indicate that where a panel finds that a Member is
causing present serious prejudice through the use of a subsidy, the panel
automatically also finds that the Member is threatening to cause serious prejudice
in the future through the use of the same subsidy"? (Rebuttal Submission of the
United States, footnote 624)

84. Could Brazil confirm that its claim of threat of serious prejudice is submitted on a
contingent basis i.e., that it does not request the Panel to make a finding on this
claim if the Panel make a finding of present serious prejudice? How is the
contingent character of this "threat of serious prejudice" claim reflected in Brazil's
request for the establishment of a panel?

85. Could Brazil explain its request that the Panel "make factual findings with respect
to its 'threat of serious prejudice' claim to allow the Appellate Body to complete the
analysis, in case it were to disagree with the compliance panel's interpretation"?
(First Written Submission of Brazil, para. 241) What are the precise "factual
findings" which Brazil requests the Panel to make in this regard?

86. How does Brazil address the argument of the United States that the definition of
"threat" of injurious effects in Article 15.7 of the SCM Agreement and Article
4.1(b) of the Agreement on Safeguards "in terms of their close proximity in time
and their high probability of occurring" reflects the ordinary meaning of the word
"threat" and that, as such, Article 15.7 of the SCM Agreement and Article 4.1(b) of
the Agreement on Safeguards provide "useful contextual guidance" for the
interpretation of "threat" of serious prejudice?

165 See e.g., U.S. Rebuttal Submission, paras. 405-425; U.S. Answers to Second Set of Panel
Questions, paras. 173-199.

124. The United States respectfully refers the Panel to its general comments above regarding
Brazil's "threat of" serious prejudice claims under Articles 5(c) and 6.3(c) of the SCM Agreement as
well to the U.S. arguments on this issue in its prior submissions.
166 In addition, the United States
submits the following observations regarding Brazil's answer to this question.

125. Article 3.2 of the DSU provides that "the dispute settlement system of the WTO . . . serves to
. . . clarify the existing provisions of those agre ements in accordance with customary rules of
interpretation of public international law." One of these "customary rules" is that treaty terms are to
be interpreted "in accordance with the ordinary meani ng to be given to the terms of the treaty in their
context and in the light of its object and purpose." 167 In its response to this question and Question 88,
Brazil urges the Panel to ignore the U.S. application of this rule in interpreting the term "threat" in
footnote 13. Brazil provides no basis for why Article 3.2 of the DSU should not be applied here.

126. As United States has explained, the ordi nary meaning of the term "threat" includes both
concepts of probability of occurrence and close proximity in time.
168 This is reflected in Articles 15.7
of the SCM Agreement, Article 3.7 of the Agreement on Implem entation of Article VI of the General
Agreement on Tariffs and Trade (" AD Agreement "), and Article 4.1(b) of the Agreement on
Safeguards in describing the meaning of the term "threat." By application of customary rules of treaty
interpretation under Article 3.2 of the DSU, the or dinary meaning of "threat" of certain injurious
effects as reflected in these other provisions provi des important contextual guidance in interpreting
"threat" of serious prejudice in Article 5(c)/footnote 13 of the SCM Agreement.

127. There is no merit to Brazil's arguments that the Panel should artificially strip out the concept
of close proximity in time from the ordinary meaning of "threat" in footnote 13 and should disregard
the important contextual confirmation provided in the definition of "threat" in Articles 15.7 of the
SCM Agreement, Article 3.7 of the AD Agreement , and Article 4.1(b) of the Agreement on
Safeguards.

128. Brazil alleges, for example, that "Article 4.1(b) and 2 of the Agreement on Safeguards as well
as Article 15.7 of the SCM Agreement deal primarily with the threat posed by a potential surge of
imports" but that "[b]y contrast, Articles 5(c) and 6.3as well as footnote 13 of the SCM Agreement
deal with the likelihood of adverse effects – not subsidized imports – occurring sometime in
future."
169 Brazil suggests that this is one reason why the concept of close proximity in time should
be artificially stripped out of the ordinary mean ing of "threat" for purposes of footnote 13. This
argument is flawed.

129. First, it is wrong in its characterization of Article 15.7 of the SCM Agreement. Neither that
provision – nor, for that matter its counterpart in Article 3.7 of the AD Agreement – "deal primarily
with the threat posed by a potential surge of im ports," as Brazil suggests. To the contrary,
Article 15.7 expressly states that it is concerned with the "threat of material injury," not a "surge in
imports." A "surge in imports" is not even required for a showing of material injury. To the contrary,
Article 15.7 identifies as only one of five factors that administering authorities "should" consider
("inter alia ") in making a "threat of material injury " determination whether there has been "a

166 See e.g., U.S. Rebuttal Submission, paras. 405-425; U.S. Answers to Second Set of Panel
Questions, paras. 173-199.
167 See United States – Gasoline (AB) , p. 17 (noting that "[this] general rule of interpretation [codified
in Article 31 of the Vienna Convention on the Law of Treatie s] has attained the status of a rule of customary or
general international law. As such, it forms part of the 'customary rules of interpretation of public international
law' which the Appellate Body has been directed, by Articl e 3(2) of the DSU, to apply in seeking to clarify the
provisions of the General Agreement and the other 'covered agreements' of the Marrakesh Agreement
Establishing the World Trade Organization. . . .)
168 See U.S. Rebuttal Submission, para. 409.
169 Brazil Answers to Second Set of Panel Questions, para. 172.

significant rate of increase of subsidized imports in to the domestic market indicating the likelihood of
substantially increased importation." The chausette to Article 15.7 even makes clear that "no one of
[the five] factors by itself can necessarily give decisi ve guidance." In other words, Article 15.7 of the
SCM Agreement could hardly be more clear that it does not "deal primarily with the threat posed by a
potential surge of imports." Brazil's arguments premised on that assertion are, thus, irrelevant.

130. Second, Brazil ignores the fact that "injury" is itself classified as an "adverse effect" under
Article 5 of the SCM Agreement. Indeed, Article 5 of the SCM Agreement makes clear in footnote 11
that "injury to the domestic industry" therein is "used here in the same sense as it is used in Part V."
Thus, it is illogical for Brazil to assert that the focus in Article 5 on adverse effects somehow places a
"threat of serious prejudice" inquiry into a fundament ally different category than a "threat of material
injury" inquiry; one that precludes the Panel from c onsulting the ordinary meaning of "threat" in the
latter context as important contextual guidance in interpreting the same word in footnote 13.

131. An inquiry into whether subsidized imports in to the domestic market of a Member threaten to
cause material injury is no less an inquiry into effects than an inquiry as to whether subsidies threaten
to cause serious prejudice to the interests of another Me mber. The fact that one looks to the effects of
subsidized imports while the other looks to the effect s of subsidies is not material; the United States
has never suggested that footnote 13 and Article 15.7 are identical provisions. And there is certainly
no requirement that two provisions be identical in order for one to provide contextual guidance as to
another.

132. Brazil also alleges that the Panel should r ead the concept of close proximity in time or
"imminence" out of the ordinary meaning of the term "threat" in footnote 13 because the multilateral
remedy available under Article 5 is somehow a "s low" remedy while the remedy available under
Part V of the SCM Agreement is a "quick" remedy. Once again, the factual predicate of Brazil's
argument is flawed. A remedy in WTO dispute se ttlement is not necessarily any more "slow" or
"fast" than the process of applying duties under the SCM Agreement , AD Agreement , or
Safeguards Agreement. Indeed, the pace of a particular WTO, CVD, AD, or safeguard proceeding
necessarily depends on the particular circumstances of each proceeding.

133. Investigations by different Members' aut horities require differing periods of time. And
different Members may have different appeal mechan isms that affect the amount of time to obtain a
remedy. In short, any number of factors could aff ect whether or not the domestic remedy available
under the SCM Agreement, AD Agreement, and Safeguards Agreements is a slow or fast remedy. The
same is true for the multilateral remedy availa ble through WTO dispute settlement (e.g., the amount
of time required for a remedy could depend on th e complexity of the dispute brought by the
complaining party, whether any appeals are made , the reasonable period of time for implementation
of any adverse findings and other such factors). Brazil's generic assertions about the "slowness" or
"quickness" of the different remedies is, thus, speculative at best.

134. In any event, Brazil neglects one simple fact – the drafters chose to use the same term
("threat") in all four contexts. If the remedies available thereunder were so different that same word
could not even have the same ordinary meaning in th e four contexts, the drafters could very well have
chosen to use different words. They could very easily have inserted, for example, Brazil's preferred
"significant likelihood" standard in footnote 13 to diff erentiate it from "threat" in Articles 15.7 of the
SCM Agreement
, Article 3.7 of the AD Agreement , and Article 4.1(b) of the Agreement on
Safeguards. But they did not do so. They chose to use "t hreat" in all four contexts and – for clarity –
even expressly reflected the ordinary meaning of that term in certain of the provisions. Brazil has no
basis unilaterally to change the text now.

87. Could Brazil comment on the argument of the United States that the standard of
"significant likelihood" is without support in the text of the SCM Agreement or in
the GATT/WTO dispute settlement reports cited by Brazil? (Rebuttal Submission of
the United States, paras. 406, 410,413)

135. The United States respectfully refers the Panel to its general comments above regarding
Brazil's "threat of" serious prejudice claims under Articles 5(c) and 6.3(c) of the SCM Agreement as
well to the U.S. arguments on this issue in its prior submissions.
170

88. Does Brazil agree or disagree with the proposition advanced by the United States
that "[a] panel may consider the ordinary meaning of a term as reflected in a
particular provision to interpret the same term in another provision (especially of
the same agreement) without the need fo r an express cross-reference." (Rebuttal
Submission of the United States, para. 411, footnote 635)

136. The United States respectfully refers the Panel to its general comments above regarding
Brazil's "threat of" serious prejudice claims under Articles 5(c) and 6.3(c) of the SCM Agreement, to
the U.S. comments regarding Brazil's answer to Qu estion 86, as well to the U.S. arguments on this
issue in its prior submissions.
171

89. Brazil argues that marketing loan and counter-cyclical payments for upland cotton
are designed "in such a manner that paymen ts would be made in consistently large
amounts". (First Written Submission of Brazil, para. 270)

(a) Could Brazil in this regard discuss the data in Table 27 of Brazil's
First Written Submission that show an increase in the projected farm price
and AWP over the period MY 2006 - 2010 and a decline in projected
marketing loan payments?

(b) How does Brazil respond to the argument of the United States that "by
MY 2008, the projection is of no marketing loan payment at all"?
(Rebuttal Submission of the United States, para. 419).

137. The United States respectfully refers the Panel to its general comments above regarding
Brazil's "threat of" serious prejudice claims under Articles 5(c) and 6.3(c) of the SCM Agreement as
well to the U.S. arguments on this issue in its prior submissions.
172

138. In addition, the United States notes that, in its response to this question, Brazil attempts to
explain away the evidence – submitted by Brazil itself – undermining its assertions that marketing
loan payments are "designed 'in such a manner that payments would be made in consistently large
amounts.'" Table 27 submitted by Brazil in its own first written shows the AWP increasing over the
period MY 2006-2010 and projected marketing loan payments declining over the same period.
Brazil's response is, however, inexplicable.

139. Brazil delves into a discussion of "determi nistic" versus "stochastic" projections of
government outlays in its response to the Panel' s question. However, according to Brazil's own
notations, Table 27 presents, inter alia, the AWP and payments under the marketing loan and counter-

170 See e.g., U.S. Rebuttal Submission, paras. 405-425; U.S. Answers to Second Set of Panel
Questions, paras. 173-199.
171 See e.g., U.S. Rebuttal Submission, paras. 405-425; U.S. Answers to Second Set of Panel
Questions, paras. 173-199.
172 See e.g., U.S. Rebuttal Submission, paras. 405-425; U.S. Answers to Second Set of Panel
Questions, paras. 173-199.

cyclical payments projected by FAPRI. The to tal amount of government outlays shown in Table 27
were not projected by FAPRI; to the contrary, the government outlays were estimated by Brazil.173 In
any event, as USDA points out in the very document Brazil cites for the proposition that
"deterministic projections, by their nature, tend to underestimate outlays":

The Congressional Budget Office (CBO) and the Food and Agricultural Policy
Research Institute (FAPRI) have used a stochastic approach to estimate outlays and
cost legislative proposals for some time. CBO adopted a stochastic approach for crop
sector analysis in September 1995 while working on the 1995/96 budget
reconciliation/farm bill debate. FAPRI adopted a stochastic approach just prior to
the 2002 farm bill debate.
174
140. Indeed, the July 2006 FAPRI baseline from which the data in Table 27 is taken is simply an
update of the "full" 2006 baseline published earlier. The earlier baseline clarifies that "[i]n recent
years, we have reported average values from the st ochastic analysis for government costs and farm
income and traditional point estimates for all other variables." 175 Thus, the simple answer that Brazil
fails to provide is that – at the time FAPRI issu ed its July 2006 baseline update FAPRI projected that
in MY 2007 the marketing loan payment would be less than one-half of a cent and thereafter would
amount to nothing at all . The very fact that the projection was made – projections that were
considered sufficiently reliable fo r Brazil to include in its written submission and use in its modeling
exercise – confirm that marketing loan program wa s not set up pursuant to some master "design" to
result in large payments.

141. What the marketing loan program under the FSRI Act of 2002 was designed to do, moreover,
was expire after MY 2007. Thus, regardless of whether projections are "deterministic" or
"stochastic," whether they are of $1 or $1 billion, the fact is none of them take into account the fact
that, as currently scheduled, no marketing loan payme nts will be made under the FSRI Act of 2002 in
MY 2008 . That fact alone renders Brazil's claims m oot to the extent that they extend to any
hypothetical measures in that year.

D. EXPORT CREDIT GUARANTEES

1. Outstanding export credit guarantees

Questions to the United States

90. The United States states, in para. 50 of its Opening Statement, that:

... nothing in the SCM Agreement provides that "withdrawing" a
"subsidy" allegedly "taking the form of a program" "includes an
obligation to abstain from performing on commitments outstanding
under that program as of the deadline for implementation." 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.

173 See Brazil First Written Submission, Table 17, n. 454.
174 Explanatory Notes for Stochastic Budget Outlays, (Exhibit BRA-460)
175 FAPRI 2006 U.S. Baseline Briefing Book, p. 1 (available at
http://www.fapri.missouri.edu/outreach/publications/2006/FAPRI_UMC_Report_01_06.pdf).

Would the United States please clarify what it meant in the underlined sentence?

91. In paragraph 342 of its First Written Submission, Brazil indicates that the total
amount of guarantees under the GSM 102, GSM 103 and SCGP programs
outstanding on 1 July 2005 amounted to $8.5 billion.

(a) Does the United States agree with the figure provided by Brazil?

(b) Please indicate what proportion of that amount concerns exports of
unscheduled products? (please distinguish between principal and interests)
(c) Please indicate what proportion of that amount concerns exports of
scheduled products, and in particular rice (please distinguish, in each case,
between principal and interest).

Questions to Brazil

92. Is it of any relevance to the Panel's a ssessment of Brazil's claims concerning
"outstanding" export credit guarantees that what was at issue in Brazil – Aircraft
(21.5) was the issuance, after the implementation date, of new bonds, and that
bonds which had been issued prior to the implementation date could be redeemed
for a number of years thereafter (see para. 46 of the US' Opening Statement at the
panel meeting).

142. Contrary to Brazil's assertions, the situation in the present proceeding with respect to export
credit guarantees issued prior to July 1, 2005 is not analogous to Brazil's continued provision of
WTO-inconsistent bonds in Brazil – Aircraft (21.5). Brazil's bonds continued to be prohibited export
subsidies both before and after the date of implemen tation. By contrast, since July 1, 2005 (and,
indeed, even before that time), U.S. export credit gua rantees ceased being part of any program that is
being operated at a "net cost to the government."
176 Thus, unlike Brazil, the United States has not
attempted to continue providing prohibited export subsidies past the date of implementation.

93. The Panel notes that Exhibit Bra-516 in dicates outstanding amounts for GSM 5 as
of 30 June 2006 rather than as of 30 June 2005 as indicated in footnote 523 of
Brazil's First Written Submission. Please explain.

2. Legal Bases for Brazil's export subsidies claims

Question to the United States

94. The United States has noted that the original Panel's findings (that the export
credit guarantees at issue constituted prohibited export subsidies) were based on
item (j). The United States has also asserted that it has based itself on item (j) in
implementing the DSB recommendations with respect to export credit guarantees.
Please clarify whether the Panel should understand the United States' argument in
this respect as an argument concerning the scope of the present proceeding.

176 Upland Cotton (Panel), para. 7.804.

3. "Benefit" under Articles 1.1 and 3.1(a) of the SCM Agreement

Questions to both parties

95. Brazil has taken the position that "diff erent parties to a transaction involving a
GSM 102 ECG derive different benefits from the GSM 102 ECG, each of which is
potentially subject to assessment under Artic le 1.1(b) of the SCM Agreement" and
has indicated that it is, in this proceedin g, "primarily concerned" with the benefit
received by the US exporter in the form of below-market fees (para. 404, Brazil's
Rebuttal). The United States has challenged Brazil's approach of focusing on fees
to the exclusion of other elements of the total cost of the loan. Please explain,
referring to the provisions of the SCM Agreement and WTO jurisprudence (if any
applicable), your position as to whether: (1) export credit guarantees and other
types of subsidies may involve more than one type of benefit and/or recipient;
(2) whether it is up to the complaining Member to decide which benefit it chooses to
challenge.

143. The United States respectfully refers the Panel to the U.S. response to this question.
177 I n
addition, the United States offers the following observation regarding Brazil's response.

144. Brazil's response assumes that the United States "argues that Brazil must prove that [an export
credit] guarantee also resulted in a benefit to a fo reign bank by lowering the 'total cost of funds'
involved in the transaction."
178 This is a mischaracterization of the U.S. position. The United States
has made no argument concerning the necessity to prove a benefit to any particular participant in a
transaction or group of participants. Inst ead, consistent with Article 14(c) of the SCM Agreement, the
United States has argued that the proper focus is on the guaranteed loan transaction itself, and whether
the there is a "difference between the amount that the firm receiving the guarantee pays on a loan
guaranteed by the government and the amount that the firm would pay on a comparable commercial
loan absent the government guarantee."

145. The express focus under the text is on a comparison of two transactions to determine whether
a benefit exists at all, not on whether a particular entity does or does not receive a benefit. Brazil has
made no attempt to provide such specific informati on on individual loan costs and fees or to identify
comparable commercial loans and their terms.

96. The parties differ as to whether different types of loans can be compared as long as
they have the same "average life." What support (economic literature, etc.) exists
for your position on this issue?

146. Brazil's response to this question appears to be irrelevant to the question posed by the Panel.
Brazil offers an exhibit (BRA-686) in which the co nsultant retained by Brazil for purposes of this
dispute expounds on "why at any point in time, th e principal exposures between the two-year bullet
loan and the three-year amortizing loan can be different."
179 However, the United States has never
argued that a loan with principal payable over 3 y ears has the same principal exposure as a loan with
principal payable over 2 years. To the contrary, th e United States has simply demonstrated that the
prosaic arithmetic concept of average life provides a common and straightforward basis for comparing
the costs and fees derived for loans of differing principal repayment terms.180

177 U.S. Answers to Second Set of Panel Questions, paras. 206-211.
178 Brazil Answers to Second Set of Questions, para. 203.
179 Brazil Answers to Second Set of Questions, para. 225.
180 U.S. First Written Submission, paras. 123-124; U.S. Rebuttal Submission, para. 153; U.S. Answers
to Second Set of Panel Questions, paras. 212-218.

147. Brazil has previously argued that such a difference necessarily renders the two types of loans
not comparable because "the patterns of credit risk to which the lender is exposed are very different in
these two cases."
181 Brazil now appears to retreat from this unequivocal argument, when it states that
the difference in principal repayment terms "pose potentially differing risks of default."182
148. Brazil's consultant states "the likelihood of default in the two periods may be different." 183
Presumably, therefore, they may also not be different. As the United States has previously observed,
Brazil's analysis simply assumes, without a factual basis, "that the borrowing bank's credit outlook is
sufficiently positive in the short term that there is a very low default likelihood perceived in the first
two years . . . and a greater likelihood of default in the third year."184

149. Brazil's consultant expressly acknowledges that if the chance of default in each of the years is
the same then there is no difference in spread be tween the two-year bullet loan and the three-year
amortized loan.185 However, he argues that if one assumes the risk of default is higher after the first
year then "the amortizing loan commands a higher spread."186 And, conversely, if one assumes higher
risk of default in the first year, "the amortizing loan now has a lower spread." 187 While this may be
true, in the absence of any factual basis in the ex amples before the Panel for an assumption that the
risk is greater in the out years, then Brazil's th eoretical disquisition is of no significance. Far from
there being any such factual basis, however, the United States has actually submitted evidence that in
a study of medium-term U.S. government-guaranteed loans, the authors found that "as the medium-
maturity loans season the likelihood of default in creases initially, peaks in the second year after
origination, and declines thereafter."188

150. In any event, in the absen ce of any specific basis for assigning, in particular transactions,
differing default risks in particular years, Brazil's analysis simply confirms the basic utility of average
life for comparing pricing of loans of different principal repayment terms.

Questions to the United States

97. Assuming that the Panel accepts the United States' argument that "benefit" is to be
assessed on the basis of the "total costs of funds," what do you consider Brazil
must establish in order to meet its burden of proof in that respect? Must Brazil
prove that a benefit is conferred in all instances (all transactions and all
recipients)? In most instances?

98. Does the United States dispute the accu racy of Brazil's comparison of GSM 102
fees with Exim Bank fees? Does the United States agree that ExIm Bank and GSM
102 guarantees are (at least in certain circumstances) similar or comparable?

99. Please comment on Brazil's argument that the GSM 102 fees are not sufficiently
scaled to take into account country risk (i.e. they vary only minimally according
with country risk) (see, inter alia, paras. 410-412 Brazil's First Written
Submission).

181 Rebuttal Submission of Brazil, para. 429; see also, Oral Statement of Brazil, para. 219; Brazil's
Comments on U.S. Answers, para. 140.
182 Brazil Answers to Second Set of Questions, para. 225.
183 Brazil Answers to Second Set of Questions, Exhibit Bra-686, para. 11.
185 Brazil Answers to Second Set of Questions, Exhibit Bra-686, para. 30.
186 Brazil Answers to Second Set of Questions, Exhibit Bra-686, para. 31.
187 Brazil Answers to Second Set of Questions, Exhibit Bra-686, para. 31.
188 Glennon, Dennis and Nigro, Peter; "Measuring the Default Risk of Small Business Loans: A
Survival Analysis Approach," Journal of Money, Credit, and Banking , Vol. 37, No. 5 (October 2005), pp. 945
(Exhibit US-152).

Questions to Brazil

100. Assuming the Panel were to agree with the United States that the proper
benchmark to determine "benefit" is the "tot al cost of funds" of the transactions,
what elements of evidence has Brazil provided the Panel in this respect (other than
evidence from the Regulations that the programme targets situations where no
credit would be available on the market)? In answering, please address the United
States' argument at para. 133 of its First Written Submission that "Brazil has made
no attempt to provide such specific information on individual loan costs and fees or
to identify comparable commercial loans and their terms".

151. Effectively conceding that it has not provided the requisite specific information on loan costs
and fees or identified comparable commercial loans and their terms, Brazil protests that it is "not in
the position of an investigating authority" and theref ore cannot be expected to produce "this type of
data."
189 This does not excuse Brazil from making a prima facie case of breach. If it does not have
evidence that the United States is breaching its WTO obligations – as the United States has argued is
in fact the case – Brazil has no basis to make claims to that effect before a WTO panel. Brazil finds
itself in no different position than domestic industries, who must submit sufficient evidence of
subsidization (including financial contribution, benefit, and specificity within the meaning of
Articles 1 and 2 of the SCM Agreement) and injury in order to warrant an investigation under Part V
of the SCM Agreement.

152. Brazil next implies that the commercial bank that has provided specific transactional
information submitted by the United States may be motiv ated to falsify such information because of a
specific interest in maintaining the GSM 102 program.
190 These assertions are completely baseless
and do not merit a response.

153. Brazil also mischaracterizes the arguments of the United States. Brazil asserts that "the
United States argues, in essence, that the interest that the lender ch arges on a loan guaranteed by the
U.S. government could be higher than the interest it charges on a loan guaranteed by a commercial
enterprise."191 Consistent with Article 14(c) of the SCM Agreement, however, the arguments of the
United States have not been restricted to comparisons of interest alone, nor to a comparison of
two transactions in which a guarantee is necessarily involved. Rather, the United States has noted that
private sector commercial products comparable to the GSM-102 program are available in the
marketplace and commercial lenders have provide d unsecured financing to foreign banks who are
CCC-approved obligors on terms the annualized cost of which was less than that available under the
GSM-102 program.
192 This contradicts Brazil's sweeping assertions that GSM 102 guarantees are
only provided where credit would not otherwise not have been available to foreign obligors.
154. Finally, Brazil asserts that "as a factual matter, [] Article 14(c) is not directly applicable to
GSM 102."193 The United States has never asserted that Article 14(c) is directly applicable. Rather,
the United States – like the Appellate Body – has noted that Article 14 provides key contextual
guidance in assessing "benefit." In the case of loan guarantees, it is Article 14(c) that is relevant.

189 Brazil Answer to Question 100, para. 226. Brazil later asserts that it has discharged its burden by
virtue its "ExIm Bank fee comparison." Id., para. 244. This comparison of fees is not an appropriate analysis.
Moreover, the United States has demonstrated, however, the elements of the Ex-Im Bank products render them
not comparable to the GSM-102 guarantee. U.S. Answer to Question 98 (2 April 2007).
190 Brazil Answers to Second Set of Questions, para. 226 and fn. 297.
191 Brazil Answers to Second Set of Questions, para. 246.
192 See, e.g., U.S. First Written Submission, paras. 111-131
193 Brazil Answers to Second Set of Questions, para. 234.

155. Article 14(c) recognizes that a loan guarant ee is made for the sole purpose of supporting a
loan transaction; the guarantee b ecomes an integral part of that transaction and has no value beyond
it. The particular fee assessed for a guarantee is affected by the terms of the underlying loan
transaction, who the parties are to the underlying loan transaction, the nature of the goods being
purchased and sold, and any number of other factors. In turn, the terms of the underlying loan
transaction and the costs and fees associated with that financing may be affected by the fees assessed.

156. Therefore, the drafters expressly provided that "a loan guarantee by a government shall not be
considered as conferring a benefit, unless there is a difference between the amount that the firm
receiving the guarantee pays on a loan guaranteed by the government and the amount that the firm
would pay on a comparable commercial loan abse nt the government guarantee. In this case the
benefit shall be the difference between these two am ounts adjusted for any differences in fees." In
other words, they expressly recognized that an ass essment of the total costs of the transaction is
necessary to assess whether a "benefit" is actually conferred by the guarantee. Brazil has provided no
basis to depart from this logic.

101. Brazil argues that "[w]here guarantees are reserved for circumstances in which
credit would not otherwise be available, there is no "comparable commercial loan
absent the government guarantee," within the meaning of Article 14(c) of the
SCM Agreement." (Brazil First Written Submission, para. 375). The Panel
understands this argument of Brazil to focus on the foreign obligor. Brazil
elsewhere indicates that it is principally concerned, in this proceeding, with the
benefit to the US exporter (fees). Are these two arguments at tension?

4. Item (j) of the Illustrative List

Questions to both parties

102. What, in your view, explains the di fferent results achieved by the two methods
advocated, on the one side, by the United States in paragraphs 87-89 of its First
Written Submission and by Brazil in Exhibit Bra-613 (other than the United States'
criticism that Brazil has not taken recoveries corresponding to pre-1992 guarantees
into account in its "cash basis" accountin g calculations, of which the Panel is
already aware)?

157. The United States appreciates the observation by Brazil that under the Federal credit reform
accounting methodology, "applicati on of re-estimates effectively converts the process to a
retrospective, cash-basis accounting methodology."
194 It is precisely because of such re-estimates that
the profitability of the export credit guarantee programs is evident. 195 As Brazil elsewhere notes in its
answers to the Panel's questions, the required accounting methodology under the Credit Reform Act
of 1990, "'measure[s] more accurately the costs of Federal credit programs' than does cash-basis
accounting."196

158. In addition to this observation, the United Stat es respectfully refers the Panel to its extensive
arguments regarding the profitability of the export credit guarantee programs in its prior
submissions.197

194 Brazil Answers to Second Set of Questions, para. 266.
195 See, e.g., U.S. First Written Submission, paras. 81-99.
196 Brazil Answers to Second Set of Questions, paras. 273, 285.
197 See e.g., U.S. First Written Submission, paras. 73-104; U.S. Rebuttal Submission, paras. 84-100.

103. To what extent is evidence pertaini ng to guarantees issued under the three
programmes (GSM 102, GSM 103 and SCGP) under the prior fee schedule relevant
to the Panel's analysis of the revised GSM 102 programme under item (j)?

159. The United States has already addressed all of Brazil's arguments in response to this question
in its prior submissions. Brazil is simply incorr ect to assert that CCC "predicts" that "'cohorts' of
GSM 102 ECGs issued in FY 2006 and FY 200 7 (and thus under the amended GSM 102 fee
schedule) will suffer losses over the long term."
198 In this respect, the United States respectfully refers
the Panel to the U.S. comments on Brazil's answer to Question 105 below as well as the U.S. Rebuttal
Submission at paragraphs 108-126. With resp ect to the "cash results" that Brazil advances 199, the
United States respectfully refers the Panel to the U.S. comments herein in response to Brazil's answers
to Question 102 and 106.

104. Must a risk-based fee necessarily take into account foreign obligor risk? Please
discuss and provide any relevant support for your position. Can foreign obligor risk
be treated differently than country risk in this respect, and if so, why?

160. The United States respectfully refers th e Panel to its own response to Question 104 200 and
simply notes again that it establishes internal bank limits to govern exposure to potential defaults by
foreign obligor banks in individual transactions.201 Brazil does not dispute the fact of such limits but
indicates that the United States has offered "no ev idence" of the way in which it establishes such
limits. In particular, Brazil suggests that " CCC does not account for differing ratings between
individual non-sovereign foreign obligors in a country, [but] rather, it applies a single rating . . . for all
non-sovereign foreign obligors within that country."202 Brazil is incorrect.

161. As the United States has explained, CCC conducts an independent analysis of each foreign
bank to establish the risk rating for such bank and the resulting bank limit.
203 The Office of
Management and Budget ("OMB") establishes 11 sove reign and 9 non-sovereign risk categories for
use by government agencies and programs subj ect to the Federal Credit Reform Act of 1990. 204 CCC
uses the same risk category methodology to cl assify foreign banks it approves for the GSM-102
program. Generally, if a bank is itself considered to be sovereign, then it will not be rated better than
the sovereign country rating. Similarly, if a bank is considered non-soverei gn, then it generally will
not be rated better than the OMB non-sovereign rating for its country. CCC's independent analysis of
each bank applies a standard CAMEL appro ach, evaluating capital adequacy, asset quality,
management, earnings, and liquidity of the foreign bank.205

105. What considerations must guide the Pa nel's decision to accept or refuse new
evidence or arguments on issues that were add ressed by the original Panel? Please
discuss in light of the following:

(a) The original Panel found that original subsidy estimates, while not
reflecting 'actual' figures, nevertheless provide a reliable measure of the
United States government's own assessment of the profitability of the

198 Brazil Answers to Second Set of Questions, para. 272.
199 Brazil Answers to Second Set of Questions, paras. 276-278.
200 U.S. Answers to Second Set of Panel Questions, paras. 246-248.
201 U.S. First Written Submission, para. 78.
202 Brazil Answers to Second Set of Questions, para. 281.
203 U.S. First Written Submission, para. 78.
204 U.S. First Written Submission, para. 78, fn. 120; U.S. Rebuttal Submission, para.118; "Informal
consultation questions to the United States," question 19 (Exhibit BRA-517).
205 U.S. First Written Submission, para. 78, fn. 120; U.S. Answers to Second Set of Panel Questions,
para. 248, fn. 266 and 279-283.

export credit guarantee programmes. Is the United States asking the Panel
to revisit that conclusion (see paras 108 ff. of the United States' First
Written Submission).

(b) The United States presents evidence which, it argues, demonstrates that the
three programmes examined by the original panel were operated at no net
cost to the US government. Is there an y issue as to whether the Panel can
or should accept the United States' evidence in this respect?

162. First, Brazil is incorrect to assert that "the CCC predicts that costs and losses for the 'cohorts'
of GSM 102 ECGs newly issued in FY 2006, FY 2007 and FY 2008 will, over the long term, exceed
fees, penalties and recoveries."
206 As the United States has explained, initial subsidy estimates in the
U.S. budget are not derived from the specific experience of the CCC programs, nor do they in any
way constitute a prediction of loss.
207

163. Furthermore, the United States does not "ask the compliance Panel to ignore the original
panel and the Appellate Body's findings" nor aba ndon "the original panel and Appellate Body's
adoption of a forward-looking, future-oriented assessment under a methodology 'used and relied upon
by the United States government to assess the estimated long-term net cost to the United States
government of export credit guarantees,' in favor of a purely retrospective assessment of program
performance."208 To the contrary, the United States has expounded at length on the prospective
viability of the program 209 and – unlike Brazil – on its profitability under the credit reform
methodology "used and relied upon by the United States government."210

164. One additional factual assertion in Brazil's an swer to Question 105 merits response. Brazil
ascribes erroneous significance to "the USDA mode l" to which it refers in paragraph 302 of its
answers and in Exhibit Bra-588. This is not a re ference to a model specifi c to USDA of "expected
loss rates or estimated default costs" particular to the CCC export credit guarantee programs, as Brazil
asserts. Instead, it refers only to a cash flow model required of all U.S. government agencies
providing international credit, which cash flow mode l is only an initial step in the budgetary process
and which must, in any event, use risk ratings and assumed loss rates required by the OMB for all
such agencies, irrespective of the particular program experience.
211 The OMB then also requires such
agencies to use "a credit subsidy calculator . . . th at agencies use to convert agency-estimated cash

206 Brazil Answers to Second Set of Questions, para. 284.
207 U.S. Rebuttal Submission, paras. 108-126.
208 Brazil Answers to Second Set of Questions, para. 292.
209 See, e.g., U.S. First Written Submission, paras. 73-80; U.S. Rebuttal Submission, paras. 101-107,
127-128.
210 See, e.g., U.S. First Written Submission, paras.81-99;U.S. Rebuttal Submission, paras. 84-100.
211 United States Government Accountability Office Report to Congressional Committees
(GAO-04-531) September 2004: Export Import Bank - OMB's Method for Estimating Bank's Loss Rates
Involves Challenges and Lacks Transparency, p. 7 (Exh ibit US-73) ("To estimate their subsidy costs, credit
agencies estimate the future performance of direct and guaranteed loans. Agency management is responsible for
accumulating relevant, sufficient, and reliable data on whic h to base these estimates. To estimate future loan
performance, agencies generally have cash flow mo dels, or computer-based spreadsheets, that include
assumptions about defaults, prepayments, recoveries, and the timing of these events and are based on the nature
of their own credit program. Agencies that provide credit to domestic borrowers generally develop these cash
flow assumptions, which OMB reviews, ba sed on their historical experience. For U.S. international credits,
OMB provides the expected loss rates, which are composed of default and recovery assumptions, that agencies
should use to estimate their subsidy costs.") (Emphasis added)

flows into present values." 212 These figures can in no way be characterized to reflect that "CCC
anticipates losses."213

106. The parties disagree as to whether Br azil should include recoveries for pre-1992
guarantees in its cash basis accounting formula (Exhibit Bra-613). Is the Panel
correct in understanding that Brazil's fo rmula does not includes amounts for (1)
claims paid after 1992 under pre-1992 guarantees; (2) fees paid on pre-1992
guarantees? If so, please explain the relevance or non-relevance of including
recoveries under pre-1992 guarantees in light of the non-inclusion of costs and
other revenues related to the same guarantees.

165. The United States respectfully refers the Panel to its own response to this question
214 as well
as to the comments of the United States below in response to Brazil's answer to Question 114.

Questions to the United States

107. What can explain the discrepancy between the "credit guarantee liability" recorded
in the CCC's financial statements (which suggest that the program is provided at a
net cost to the US government) and the evidence presented by the US in para. 87 of
its First Written Submission?

108. Please explain why the "liability" figure in the CCC's financial statements should
not be considered by the panel to provide, if not the amount of actual losses, at least
a reliable estimate of the CCC's own perception of the cost to the government of the
programmes since their inception. Is the Panel wrong in understanding that a
"credit guarantee liability" in this context means that the CCC considers that the
programmes will not cover their costs and losses in the long term?

109. Please indicate to the Panel whether th ere have been occurrences of reschedulings
prior to the occurrence of defaults and the payment of claims by the CCC.

110. Is it possible to calculate the "subsidy estimate net of reestimates" for GSM 102
alone (similar to what the US has done fo r all three programmes in para. 87)? If
so, please provide a table recording the results of this exercise.

111. In paragraph 7.853, the original Panel st ated that it "disagree(d) with the United
States that we should 'eliminate' the data for certain, more recent, cohorts in our
analysis." Is the United States asking that this Panel eliminate such data for the
most recent cohorts (the table at para. 87 of the United States' First Written
Submission includes data up to 2005 only). Why should this Panel do what the
original refused to do? What would be the result of the United States "re-
estimates" exercise if the original subsid y estimate for the 2006 and 2007 cohorts
were included?

212 United States Government Accountability Office Report to Congressional Committees
(GAO-04-531) September 2004: Export Import Bank - OMB's Method for Estimating Bank's Loss Rates
Involves Challenges and Lacks Transparency, p. 10 (Exhibit US-73).
213 Brazil Answers to Second Set of Questions, para. 302.
214 The United States notes a typographical error in its response, however. In paragraph 261, the
fourth sentence should read: "Therefore, it is inexplicab le - and entirely disingenuous - that Brazil criticizes the
United States for including recoveries recei ved before 1992 (indeed as far back as 1980)." The United States
inadvertently included "not" before "including" in its response.

112. Please explain whether and how the CCC limits risks or control costs of the GSM
102 programme as regards foreign banks' individual credit ratings.

113. Please explain whether and how CCC co untry risk categories correspond to ICRAS
ratings.

Question to Brazil

114. Brazil argues that "(t)hat the United States has, on one view of the data, beaten the
odds and met its costs and losses over a series of years does not mean that ECG
programs are structured and designed to do so" (para. 503, Brazil's Rebuttal). Is
Brazil arguing that evidence regarding the actual operation and "profitability" of
the programme (i.e. retrospective evidence) is irrelevant to the Panel's analysis
under item (j)?

166. The United States notes that Brazil now app ears to be advocating exclusively for "cash
results" in respect of an analysis under item (j).
215 This appears to be a wholesale abandonment of
Brazil's position in the or iginal panel proceeding regarding the credit reform accounting
methodology, a shift that can only be explained by the fact that the methodology now confirms the
robust profitability of the programs, directly underm ining Brazil's theory in the present proceeding.
The United States recalls that Brazil had previously stated that "it does not intend for this revised
constructed formula to replace the formula used by the U.S. government itself to track the costs of the
CCC guarantee programs pursuant to the U.S. Federal Credit Reform Act."
216 Brazil's response to the
compliance panel's Question 114 reflects a complete reversal of that position.

167. While Brazil's positions on the issue may shif t to accommodate the results Brazil prefers, the
overwhelming evidence confirms the profitability of the export credit guarantee programs. This
evidence directly contradicts Brazil's claims that premiums charged under these programs are
insufficient to cover the long-term costs and losses of the programs.

215 Brazil Answers to Second Set of Questions, para. 314.
216 Brazil's Answers to Questions Posed by the Panel Following the First Substantive Meeting of the
Panel, para. 164 (Question 77) (11 August 2003) (emphasis in original).