Document: WT/DS267/R/Add.1 Page E-55 ANNEX E-5 CANADA'S FURTHER THIRD PARTY SUBMISSION
Date: 3 October 2003
Document codes: WT/DS267/R/Add.1
Complainant: Brazil
Respondent: U.S.
Third parties: Argentina, Australia, Benin, Canada, Chad, China, Taiwan, EU, India, New Zealand, Pakistan, Paraguay, Venezuela, Japan, Thailand
Dispute stage: Mutually Agreed Solution
Agreements cited: Art. 3, 5, 6  Subsidies and Countervailing Measures (SCM)Art. 3.3, 7.1, 8, 9.1, 10.1  AgricultureArt. III:4, XVI  GATT 1994

ANNEX E-5

CANADA'S FURTHER THIRD PARTY SUBMISSION

 Canada’s systemic interest in this case lies in the interpretation of the provisions of Article 13
and Annex 2 of the Agreement on Agriculture , as they related to certain US domestic support
measures. It also lies in the interpretation of the export subsidy provisions of both the Agreement on
Agriculture and the SCM Agreement, as they related to US export credit guarantee programmes.

 Regarding US domestic support measures, were the Panel to accept the evidence presented by
Brazil, it would find that US PFC payments and di rect payments do not satisfy the policy-specific
criteria in paragraph 6 of Annex 2 of the Agreement on Agriculture. The Panel should also count US
counter-cyclical payments going to US producers of upland cotton as “support to a specific
commodity” under Article 13(b)(ii) of the Agreement.

 Regarding US export credit guarantees, were the Panel to find that the programs provide
export subsidies within the meaning of Article 1(e) of the Agreement on Agriculture , then it would
also find that the United States has violated Articles 8 and 10.1 at the very least in respect of exports
of upland cotton. In this respect, the Panel should confirm that neither the Agreement on Agriculture
nor the SCM Agreement contain an exemption for any US export credit guarantee subsidy found to
exist in this case.

 Canada has no further views to provide to the Panel at this point in the proceedings.

1. Introduction

1. The European Communities (the “EC”) makes this submission because of its systemic interest
in the correct interpretation of the Agreement on Subsidies and Countervailing Measures (the “SCM
Agreement”), the Agreement on Agriculture (the “AA”) and the General Agreement on Tariffs and
Trade 1994 (the “GATT”).

2. This submission provides the views of the EC with respect to Brazil’s further submission of
9 September 2003. Due to the short deadline imparted to third parties, this submission does not
address the further submission made by United St ates on 30 September 2003. The EC intends to
provide its comments on the US submission at the meeting with the Panel.

3. Many of the issues raised in Brazil’s furt her submission concern factual matters on which the
EC is not in a position to comment. Accordingly, the EC will limit itself to provide its views with
respect to a number of issues of legal interpretation to which it attaches particular importance. More
specifically, the EC will argue in this submission that:

 in assessing the “significance” of price depression or suppression for the purposes of
Article 6.3 (c) of the SCM Agreement, only their impact on the producers concerned
is relevant;

 Brazil cannot complain about the continui ng effects of recurring subsidies while
expensing the full amount of such subsidies to the year in which they were granted;

 the phrase “world market share” in Article 6.3(d) of the SCM Agreement includes
also the market of the subsidising Member;

 the mere fact that a subsidy is not subject to “pre-established limitations” is not
sufficient for a finding of “threat of serious prejudice”;

 Articles 5 and 6 of the SCM Agreement do not prohibit per se legislation that
mandates subsidies that threaten serious prejudice “in certain circumstances”.

4. The EC reserves the right to address other issu es raised by Brazil’s further submission at the
meeting with the Panel.

2. The meaning of “significant” in Article 6.3 (c) of the SCM Agreement

5. Brazil argues that, in assessing the “significance” of price depression or suppression for the
purposes of Article 6.3 (c), it is relevant to consid er not only their impact on the producers concerned,
but also on the Government of the complaining Member. Specifically, Brazil contends that

A developing country Government facing foreign reserve or fiscal problems may find
the loss of foreign exchange or tax revenue from its producers to be significant even
if the level of price suppression is relatively small. In this regard, the amount of actual
and potential revenue losses suffered by a complaining Member as a result of price
suppression may be evidence of the significance of the price suppression.
1

1 Brazil’s submission, para. 96.

6. The EC takes issue with this interpretation. As rightly argued by Brazil elsewhere in its
submission
2, the existence of serious prejudice must be presumed whenever it is established that the
effect of the subsidy is to cause inter alia significant price depression or suppression, without it being
necessary to show, as an additional and separat e requirement, that such price depression or
suppression causes a serious prejudice to the inte rest of the Member concerned. Brazil’s
interpretation, however, amounts to reading such a separate requirement into the term “significant”.

7. In Indonesia – Autos, which is cited with approval by Brazil, the panel held that

Although the term ‘significant’ is not defi ned, the inclusion of this qualifier in
Article 6.3(c) presumably was intended to ensure that margins of undercutting so
small that they could not meaningfully affect suppliers of the imported product whose
price was undercut are not considered to rise to serious prejudice …
3
8. The above interpretation takes into account only the effects of price undercutting on the
performance of the domestic producers of the complaining party, to the exclusion of any indirect
effects on Government revenue. By the same token, where serious prejudice takes the form of price
suppression or price depression, its significance should be evaluated only with respect to the
producers concerned.

9. In any event, the EC rejects Brazil’s sugg estion that the threshold for establishing the
existence of serious prejudice should be lower when the complaining party is a developing country
Member. Article 6.3 (c) is not a provision on Special and Differential Treatment. There is no basis for
giving different meanings to the term “significant” depending on the identity of the parties to a
dispute.

3. Continuing effects of recurring subsidies

10. Brazil alleges that the effects of the s ubsidies paid during Marketing Years (“MY”) 1999-
2002 continue after they have been provided. Mo re precisely, according to Brazil, by providing
farmers with a significant source of income, these payments result in increased investment and
production.

11. The EC finds it difficult to understand what point , if any, Brazil is trying to make. Brazil does
not seem to be arguing that part of the benefit conferred by the subsidies granted during MY 1999-
2002 should be allocated to subsequent years. Th at position would depart from the usual practice of
most countervailing duty authorities, which is to consider that recurring subsidies must, in principle,
be deemed “expensed” during the time period in whic h they are made. Similarly, the report of the
Informal Group of Experts concerning Article 6.1(a) of the SCM Agreement recommended that
subsidies should be expensed rather than allocated unless: (1) the purpose of the subsidy is linked to
the purchase of fixed assets; (2) the subsidy is non- recurring or large; (3) the subsidy is oriented
towards future production; (4) the subsidy consists of equity; or (5) is carried forward in the
recipient’s accounting records.
4

12. Elsewhere in its submission Brazil appears to have expensed the full amount of the subsidies
paid during each marketing year to that marketi ng year, rather than allocate it over a number of
marketing years. Brazil cannot have it both ways. If it considers that part of the benefit should be
allocated to subsequent marketing years, it should ju stify that position in light of the criteria outlined

2 Ibid., paras 437-443.
3 Panel report, Indonesia – Automobiles, WT/DS54/R, para. 14.254.
4 Report by the Informal Group of Experts to the Committee on Subsidies and Countervailing
Measures, 25 July 1997, G/SCM/W/415, paras. 5-12.

above and provide the Panel with a detailed allocation. Moreove r, Brazil should deduct the amounts
allocated to subsequent years from the yearly am ounts for the period 1999-2001, so as to avoid any
“double counting” of benefits. Needless to say, th is could make more difficult for Brazil to establish
that the subsidies paid during MY 1999 – 2001 have caused serious prejudice during that period.

13. In any event, while Brazil cl aims that the subsidies continue to have effects after MY 1999-
2001, the alleged continuing effects (increased i nvestments and production) do not of themselves
amount to “serious prejudice” within the meaning of Article 5. Brazil has not explained, let alone
proved, how those effects translated into one of the categories of ”serious prejudice” described under
Article 6.3 after 2001.

4. World Market Share in Article 6.3(d)

14. Brazil contends that the phrase “world market share” in Article 6.3(d) of the SCM Agreement
means the “share of world market for exports”. 5 The EC sees no basis for this proposition. The
ordinary meaning of “world market” is the su m of all the geographical markets for the product
concerned, including also the domestic market of the subsidising Member.

15. This reading is supported by the context. As evidenced by paragraph (a) of Article 6.3, the
notion of “serious prejudice” may include also the prejudice suffered in the market of the subsidising
Member. There is no reason, therefore, why the effects of a subsidy in that market should be
excluded from the analysis under paragraph (d).

16. The phrase “world market share” may be c ontrasted with the phrase “share of world export
trade”, which is used in Article XVI:3 of the GATT. Surely, if the drafters of Article 6.3(d) had meant
the “share of world market for exports”, as argued by Brazil, they would have used the same terms as
in Article XVI:3. Moreover, in the context of Article XVI:3, it makes perfect sense to use as a
benchmark the “share of the world market fo r exports” because that provision is concerned
exclusively with export subsidies, which have no direct effect on the domestic market of the
subsidising Member. In contrast, the disciplines on “serious prejudice” contained in Articles 5 and 6
of the SCM Agreement apply equally to both export and domestic subsidies and, in practice, are meant
to address primarily the effects of the latter, since export subsides are prohibited by Article 3 (except
where provided in conformity with the Agreement on Agriculture or Article 27 of the SCM
Agreement).

5. Threat of injury

17. Brazil sets forth two legal standards in order to analyse the existence of threat of serious
prejudice. According to the first standard, ther e is threat of serious prejudice whenever “the
legislation and practice of granting subsidies has no e ffective limits in terms of the volume of exports
or domestic subsidies production eligible to receive subsidies”.
6 Brazil contends that this standard can
be “distilled” from the two GATT panel reports in EC – Sugar and from the Appellate Body report in
US – FSC.7

18. For the reasons explained below, the EC consid ers that, while the fact that a subsidy is not
subject to any “pre-established limitations” is certain ly a relevant factor in considering the existence
of threat of serious prejudice, it is not necessarily dispositive.

5 Brazil’s submission, para. 265.
6 Brazil’s submission, para. 301.
7 Ibid.

19. The two GATT reports in EC – Sugar are of questionable authority on this point. Neither of
the panels made any attempt to provide a generally applicable interpretation of the notion of “threat of
serious prejudice”. The findings cited by Brazil are just bare assertions, without any supporting
reasoning. Furthermore, other passages of the report s indicate that both panels took the view that the
unlimited availability of subsidies could not be, of it self, a cause of serious prejudice. Thus, the panel
in EC – Sugar (Australia) noted that

The Panel felt that since the Community sugar exporters were leading the world
market for white sugar, traditionally covering more than half of the world market for
refined sugar, the availability of exportab le Community surpluses of sugar combined
with the possibility of non-limited amounts available to cover export refunds, may
well have had a depressing effect on world market prices for both white and raw
sugar.
8
 Similarly, the panel in EC – Sugar (Brazil) observed that

The Panel concluded that in view of the Community sugar made available for export
with maximum refunds and the non-limited f unds available to finance export refunds,
the Community system of granting export refunds on sugar had been applied in a
manner which in the particular situati on prevailing in 1978 and 1979contributed to
depress sugar prices in the world market, and that this constitutes a serious prejudice
to Brazilian interests, in terms of Article XVI:1.
9
20. The above passages suggest that both panels c onsidered that the unlimited availability of the
EC subsides was a cause of serious prejudice only because, in conjunction w ith the availability of
supplies of sugar in the EC and with the “partic ular situation” prevailing during the years 1978 and
1979, it had a depressing effect on prices. It follows that, unless the same or similar circumstances
were also present or imminent in this case, the mere availability of subsidies could not be considered
to pose, as such, a threat of serious prejudice.

21. Brazil’s arguments based on US – FSC are also without merit. Unlike Articles 5 and 6 of the
SCM Agreement, Article 10.1 of the Agreement on Agriculture is not subject to a “trade effects” test.
It prohibits any export subsidies not covered by Article 9, which exceed, or threaten to exceed, a
Member’s reduction commitments (in terms of budgetary outlays or exported volumes), regardless of
the trade effects of the subsidy. In contrast, Articles 5 and 6 do not stipulate any limitations on the
volume or value of subsidies. Rather, they prohibit the granting of subsidies in so far as they have
certain “adverse effects” for the interests of another Member. Whether or not a subsidy has such
effects will depend not only on the amount of the subsidy or the volume of subsided goods but also on
other circumstances. For that reason, the mere fact that a subsidy is not subject to “pre-established
limitations” is not a sufficient reason to conclude that it threatens to cause serious prejudice.

22. Brazil appears to agree with the view that the elements of a threat of serious prejudice injury
are the same as those of a serious prejudice case, th e only difference between the two being that “in a
serious prejudice case, all the elements already exist, whereas in a threat of serious prejudice case, all
of the elements need not have come to pass.”
10 Yet that view cannot be reconciled with Brazil’s first
standard. Article 6 of the SCM Agreement makes it clear that the existence of “serious prejudice”
cannot be established by looking only at the value of the subsidy (with the exception of the no-longer
operational presumption in Article 6.1 (a)) or to th e absolute volume of subsidised goods (as opposed

8 Panel report, European Communities – Refunds on Exports of Sugar (Australia) , BISD 26S/290,
para. 4.31
9 Panel report, European Communities –Refunds on Exports of Sugar (Brazil), BISD 27S/69, V(f).
10 Brazil’s submission, para. 304.

to their market share). Therefore, a determination of threat of serious prejudice cannot be based on
those factors alone either.

23. The EC considers that Article 15.7 of the SCM Agreement provides relevant context for the
interpretation of the notion of “threat of serious prejudice”. Both “injury to the domestic industry”
and “serious prejudice” are “adverse effects” within the meaning of Article 5. There is no good
reason why the threshold for establishing the existence of “threat of injury” should be higher than the
threshold for establishing the existence of “threat of serious prejudice”. The EC is of the view,
therefore, that the requirements set out in Article 15.7 of the SCM Agreement must be deemed implicit
in the notion of “threat of serious prejudice”. Accordingly, a determination of threat of serious
prejudice, like a determination of injury, must “be based on facts and not merely on allegation,
conjecture or remote possibility”. Also, the rele vant “changes in circumstances” must be “clearly
foreseen and imminent”.

24. As recalled by Brazil, Article 15.7(i) of the SCM Agreement provides that the “nature of the
subsidy or subsidies in question and the trade effect s likely to arise therefrom” is one of the factors
that should be considered for the purposes of a threat of injury determination.
11 The EC agrees that
this is also one of the factors that should be consid ered for the purposes of a determination of threat of
serious prejudice. But it is not the only relevant factor. Brazil glosses over the last sentence of
Article 15.7, which provides that no one of the fact ors listed in that provision “can necessarily give
guidance”. Rather, “the totality of the factors cons idered must lead to the conclusion that further
subsidised exports are imminent and that, unless pr otective action is taken, material injury would
occur”. This confirms that, while the absence of “pre-established limitations” is a relevant factor, it is
not necessarily dispositive.

25. Brazil further asserts that the other factors liste d in Article 15.7 “are not directly relevant to a
threat of serious prejudice case because they address the situation of imports that would harm the
domestic industry in the country of importation.”
12 This is, of course, correct. Nonetheless,
Article 15.7 suggests that analogous factors may be re levant for a determination of serious prejudice.
For example, the following factors could be relevant for establishing the existence of serious prejudice
in an export market:

 a significant rate of increase of subsidised exports to the export market;

 sufficiently freely disposable, or an immine nt, substantial increase in, capacity of the
exporter indicating the likelihood of substantially increased subsidised exports, taking
into account the availability of other export markets to absorb any additional exports;

 whether subsidised exports are entering into the export market at prices that will have
a significant depressing or suppressing effect in prices, and would likely increase
demand for further imports; and

 inventories of the product investigated.

26. In sum, the EC is of the view that, while the fact that a subsidy is not subject to any “pre-
established limitations” as regards the value of the subsidies or the volume of subsidised goods is a
relevant factor in order to establish the existence of threat of serious prejudice, it is not necessarily
dispositive. Other factors, including in particular factors analogous to those listed in Article 15.7 (ii)-
(v) of the SCM Agreement, may also be relevant and should be examined as well.

11 Ibid., para. 302.
12 Ibid., para. 303.

6. Per se claims

27. Brazil claims that the US legislation conf erring the subsidies at issue in this case is
inconsistent per se with Article 5(c) of the SCM Agreement and Article XVI:3 of the GATT because
it mandates the payment of subsidies that will necessarily threaten serious prejudice in certain
circumstances. This claim is based on the assumption that

It is established under WTO law that a Me mber can challenge measures of another
Member on a per se basis when those measures mandate, in certain circumstances, a
violation of its WTO obligations.
13
28. The above proposition, however, is nowhere stated in the WTO Agreement and, as noted
already in its first submission 14, the EC disputes its validity. True, some panels have asserted this
position on the basis of an erroneous in terpretation of the panel report in US - Superfund . Other
panels, however, have taken a contrary , or at least more qualified view. 15 In particular, the panel in
US – Section 301 observed that

we believe that resolving the dispute as to which type of legislation, in abstract, is
capable of violating WTO obligations is not germane to the resolution of the type of
claims before us. In our view the appropriate method in cases such as this is to
examine with care the nature of the WTO obligation at issue and to evaluate the
Measure in question in the light of such ex amination. The question is then whether,
on the correct interpretation of the specific WTO obligation at issue, only mandatory
or also discretionary national laws are pr ohibited. We do not accept the legal logic
that there has to be one fast and hard rule covering all domestic legislation. After all,
is it so implausible that the framers of the WTO Agreement, in their wisdom, would
have crafted some obligations which would render illegal even discretionary
legislation and crafted other obligations prohibiting only mandatory legislation?
Whether or not Section 304 violates Article 23 depends, thus, first and foremost on
the precise obligations contained in Article 23.16
29. The Appellate Body has not pronounced it self yet clearly on this issue. Thus, in US – 1916
Act, which is sometimes cited erroneously as an endor sement of the principle invoked by Brazil, the
Appellate Body noted that

… the 1916 Act is clearly not discretionary legislation, as that term has been
understood for purposes of distinguishing between mandatory and discretionary
legislation. Therefore, we do not find it necessary to consider, in these cases, whether

13 Brazil’s submission, para. 417.
14 EC’s First Third Party Submission, paras. 4-7.
15 See e.g. the Panel report on United States – Countervailing Measures Concerning Certain products
from the European Communities, WT/DS212/R, para. 7.123:
While only legislation that mandates a violation of WTO obligations can be WTO-
inconsistent, we are of the view that the existence of some fo rm of executive discretion alone
is not enough for a law to be prima facie WTO - consistent, what is important is whether the
government has an effective discretion to interpret and apply its legislation in a WTO-
inconsistent manner.
16 Panel report, United States – Sections 301-310 of the Trade Act of 1974 , WT/DS152/R, para. 7.53.
[footnotes omitted]

Article 18.4, or any other provision of the Anti-Dumping Agreement, has supplanted
or modified the distinction between mandatory and discretionary legislation.17
30. The Appellate Body was even more cautious in a subsequent case, US – Lead and Bismuth II,
where it noted that

We are not, by implication, precluding the possibility that a Member could violate its
WTO obligations by enacting legislation granting discretion to its authorities to act in
violation of its WTO obligation. We make no finding in this respect.
18
31. The EC agrees with the panel in US – Section 301 that whether or not discretionary
legislation may be subject to challenge depends on the specific obligations imposed by each provision
of the WTO Agreement. Thus, for example, it is arguable that Article XI:1 of the GATT prohibits not
only mandatory legislation, but also legislation wh ich authorises expressly the executive branch to
apply an import restriction under well specified circ umstances, because such authorisation, of itself,
may have a chilling effect on imports.

32. For the same reasons, it would be mistaken to assume, as Brazil does, that legislation which
mandates action that would result in a violation of a WTO provision in certain circumstances is
necessarily inconsistent with that provision. As illustrated by the present case, this notion would have
absurd and unacceptable results when applied to WTO provisions which, like Article 5(c) of the SCM
Agreement and Article XVI:3 of the GATT, incorporate a “trade effects” test. The EC considers that,
once again, whether or not legislation that mandates a violation in certain circumstances can be
challenged per se will depend on the specific obligations impose by the WTO provision at issue.

33. It is often overlooked that in US– Superfund the panel justified its finding that the tax
legislation at issue could be challenged, even tho ugh it had not entered into effect, by reasoning that
Article III of the GATT is not concerned with trade volumes, but rather with competitive
opportunities
19:

The Panel noted that the United States objected to an examination of this tax because
it did not go into effect before 1 January 1989, and - having no immediate effect on
trade and therefore not causing nullification or impairment – fell outside the
framework of Article XXIII. […]
[…] The general prohibition of quantitative restrictions under Article XI, which the
Panel on Japanese Measures on Imports of Leather examined, and the national
treatment obligation of Article III … have essentially the same rationale, namely to
protect expectations of the contracting parties as to the competitive relationship
between their products and those of the other contracting parties. Both articles are not
only to protect current trade but also to cerat e the predictability needed to plan future
trade. That objective could not be attained if contracting parties could not challenge
existing legislation mandating actions at variance with the General Agreement until
the administrative acts implementing it had actua lly been applied to their trade. Just
as the very existence if a regulation providing for a quota, without it restricting
particular imports, has been recognized to constitute a violation of Article XI;1, the

17 Appellate Body report, United States – Anti-Dumping Act of 1916 , WT/DS136/AB/R,
WT/DS162/AB/R, para. 99.
18 Appellate Body report, United States – Countervailing Measures Concerning Certain Products from
the European Communities, WT/DS212/AB/R, footnote 334.
19 Panel report, United States – Taxes on Petroleum and Certain Imported Products, BISD 34/136, 160,
paras.5.2.1-5.2.2.

very existence of mandatory legislation provi ding for an internal tax, without it being
applied to a particular imported product, should be regarded as falling within the
scope of Article III:2, first sentence. …
34. It is also a common mistake to assume that , like Articles III or IX of the GATT, all other
WTO provisions are concerned also with competitive opportunities. Some WTO provisions,
however, are not concerned with competitive opportuniti es, but instead with trade effects. Article 5(c)
of the SCM Agreement and Article XVI:3 of the GATT fall within that category. They prohibit the
granting of subsidies only to the extent that the subsidies cause “adverse effects” in the form of
“serious prejudice”. Such effects must be actual or threatened, not just theoretical.

35. The “mandatory” standard invoked upon by Brazil would result in the creation of third
category of prohibited adverse effects in addition to actual and threatened serious prejudice, which is
nowhere mentioned in Article 5(c): the mere possibility of threat of serious prejudice in certain
circumstances. Furthermore, as a result, Brazil’s inte rpretation would render redundant the two
categories of effects which are mentioned in Article 5(c). As explained above, threat of serious
prejudice must be imminent and foreseeable. Yet, on Brazil’s interpretation, it would be sufficient, in
order to establish a per se violation, to show that the legislation at issue mandates action that threatens
serious prejudice in certain circumstances , no matter how remote the likelihood that such
circumstances will ever materialise. For exampl e, on Brazil’s interpretation, it would be enough to
show that the legislation mandates the payment of s ubsidies that will threaten serious prejudice in a
purely hypothetical situation where world prices fall to an extremely low level, even if the chances
that prices may actually fall to such level are negligible in practice.

36. In sum, Brazil’s per se claim is an ingenious but misguide d attempt to avoid the requirements
of Article 5(c) of the SCM Agreement, which should be rejected by the Panel.

I. INTRODUCTION
1.01 Although New Zealand is not a producer or exporter of cotton, New Zealand has a systemic
interest in ensuring the continued integrity of im portant WTO disciplines applicable to agricultural
trade and has therefore joined this dispute as a th ird party. As outlined in New Zealand’s First
Submission to the Panel
1, New Zealand is concerned to ensure that Members are able to utilise their
rights under the Agreement on Subsidies and Countervailing Measures (the SCM Agreement ) and
GATT 1994 to take action in respect of domestic support measures and export subsidies where the
requirements of the “peace clause” have not been respected.

1.02 New Zealand believes that Brazil has demons trated that the “peace clause” has not been
respected in relation to domestic support and export subsidies provided by the United States to upland
cotton in the marketing years (“MY”) 1999, 2000, 2001 and 2002, and that accordingly Brazil is
entitled to bring actionable and prohibited subsid y claims against the United States under the GATT
1994 and the SCM Agreement.

1.03 In its Further Submission to the Panel,
2 Brazil has provided the legal and factual basis upon
which the Panel should conclude that the United Stat es subsidies cause or threaten to cause serious
prejudice to the interests of Brazil within the mean ing of Articles 5(c), 6.3(c) and 6.3(d) of the SCM
Agreement and violate GATT Article XVI. New Zealand therefore considers that the Panel should
make the findings and recommendations requested by Brazil.

1.04 This submission addresses issues raised in the Further Submissions of Brazil and the
United States
3 and should be read in conjunction with New Zealand’s First Submission. As
recognised by the Panel in its communication of 24 September 2003, New Zealand has had only
limited time to consider the Further Submission of the United States and therefore reserves the right
present arguments in addition to those set out in th is written submission in its oral statement to the
Panel on 8 October 2003.

II. PRESENT SERIOUS PREJUDICE

2.01 Brazil has demonstrated that the United States subsidies
4 cause serious prejudice to the
interests of Brazil within the meaning of Articles 5(c), 6.3(c) and 6.3(d) of the SCM Agreement and
violate GATT Article XVI.

2.02 Brazil has demonstrated that the United St ates subsidies during marketing year (MY) 1999-
2002:

 cause present significant price suppression
5 in the world and Brazilian markets, as well as in
markets where Brazilian producers export, within the meaning of Article 6.3(c) of the SCM
Agreement;

1 United States – Subsidies on Upland Cotton , Third Party Submission of New Zealand, 15 July 2003
(“New Zealand’s First Submission”).
2 United States – Subsidies on Upland Cotton, Brazil’s Further Submission to the Panel,
9 September 2003 (“Further Submission of Brazil”).
3 United States – Subsidies on Upland Cotton , Further Submission of the United States of America,
30 September 2003 (“Further Submission of the US”).
4 New Zealand uses that term as it is used by Brazil in its Further Submission (para 7). Details of these
programmes were provided by Brazil in its First Submission to th e Panel Regarding the “Peace Clause” and
Non-“Peace Clause” Related Claims, 24 June 2003 (“First Written Submission of Brazil”), paras 45 – 106.
5 New Zealand uses the term as it is used by Brazil in its Further Submission to also encompass
circumstances showing price depression characteristics.

 had the effect of increasing the United States shar e of the world upland cotton market within the
meaning of Article 6.3(d) of the SCM Agreement, and

 contributed significantly to the United States having more than an equitable share of world export
trade within the meaning of GATT Article XVI:3.

New Zealand will focus in particular on Brazil’ s claim that the United States subsidies cause
“significant price suppression”.

1. The effect of the United States subsidies is significant price suppression

2.03 Brazil has demonstrated that the United St ates subsidies during marketing year (MY) 1999-
2002 cause present significant price suppression in the Brazilian and world markets, including in
markets where Brazilian a nd United States producers export, within the meaning of Article 6.3(c) of
the SCM Agreement and thus cause serious prejudice. Brazil has demonstrated that the United States
subsidies suppressed A-index prices by an average of 12.6% over MY 1999-2002.
6 That translates
into a total amount of lost revenue for Brazilian producers of $478 million 7 and suppressed revenue
worldwide of $3.587 billion.8

2.04 With subsidisation at levels of 95 per cent on average
9, subsidies are the greater part of
farmers’ incomes and have a major impact on farm ers’ production decisions. Producers of upland
cotton in the United States are thereby largely insu lated from the effects of the market. Thus, when
prices for upland cotton were falling 10, and the value of the United States dollar 11 and costs of
production were rising 12, production of upland cotton and United States exports of upland cotton
significantly increased.13 United States farmers planted 13.5 per cent more acres with upland cotton.14
United States production hit a record high. 15 United States exports and the United States share of the
world market increased.16

2.05 Professor Sumner estimates that if all United States government support to upland cotton
were eliminated, United States exports would have been 41 per cent less in MY 1999-2002. 17 B y
contrast, with the subsidies the United States world market share in fact more than doubled over that
period.18

2.06 This subsidy-fuelled produ ction and export growth resulted in significant price suppression
within the meaning of Article 6.3(c). Prices were suppressed by the increased world supply of upland
cotton and increased competition from United States upl and cotton in world markets. Brazil has also
outlined the influence that the United St ates has on world prices for upland cotton 19 - the sheer size of

7 Ibid, para 446.
8 Ibid, para 256.
 9 Ibid, para 105.
 10 Ibid, part 3.3.4.2.
 11 Ibid, part 3.3.4.4.
 12 Ibid, Part 3.3.4.3. Brazil has demonstrated that by the end of MY 2001 the cost-revenue gap had
increased to 39 cents per pound (para 121).

13 See Ibid, para 105. Between 1998 and 2001 production increased by 45.5 per cent and exports by
161 per cent.
 14 Ibid, para 130.
 15 In MY 2001 United States production reached 19.603 million bales (Ibid, para 131).
 16 Ibid, para 132.
17 Ibid, para 288.
18 Ibid, para 283.
 19 Ibid, para 3.3.4.6.

the United States share of total world production
20 and of world exports magnifies the trade distorting
effects of the United States subsidies. Any doubt about the impact that United States subsidies have
on the world market for upland cotton should be quick ly dispelled by the graphic demonstration of
United States dominance of the world market illustrated by Brazil in Figure 26.

2.07 New Zealand agrees with Brazil that the absolu te size and average subsidisation level of the
United States subsidies creates a strong de facto presumption of production, export and price effects.21
However Brazil has not simply relied on such a presumption. Brazil has produced econometric
analysis demonstrating that the United States s ubsidies caused significant price suppression, as actual
market prices throughout MY 1999-2002 would have been higher but for the effects of the
United States subsidies.22

2.08 At no point in its submission does the United States dispute the accuracy of this econometric
analysis. Instead, in response to Brazil’s claims , the United States seeks to argue that Brazil’s case
“suffers from a failure of factual proof”
23 and that Brazil has failed to make a prima facie case of
serious prejudice or more than equitable market share because Brazil has done no more than assert
that causation is established because there were large United States outlays during marketing years
with low prevailing upland cotton prices. 24 According to the United States, factors other than
United States subsidies “were the causes of the dramatic plunge in cotton prices experienced in recent
years,”25 namely: competition from low price polyester; flat retail consumption of cotton outside of
the United States; slow world economic growth; bur geoning United States textile imports leading to
more United States cotton exports; a stronger Unite d States dollar leading to weakened commodity
prices and China’s trade position.

2.09 However Brazil’s argument is not that declini ng cotton prices were due solely to the impact of
the United States subsidies. Nor does Article 6.3(c) require that to be the case. It is Brazil’s
contention, backed up by sound econometric anal ysis, that the United States subsidies have a
significant price-suppressing effect. And that effect exists regardless of whether cotton prices are
rising or falling.
26 Nor did Brazil’s analysis fail to take into account the impact of other adverse
factors affecting upland cotton prices as alleged by the United States. 27 The econometric models used
by Brazil, in particular FAPRI, hold other relevant factors affecting the price of cotton constant while
cotton subsidies are removed, thereby isolating the effect of those subsidies. Therefore Brazil’s
analysis did not attribute to cotton subsidies the effects of other factors affecting cotton prices. As
noted above, at no point in its submission does th e United States question the integrity of the models
referred to by Brazil and upon which the estimated impacts of the removal of United States cotton
subsidies is based.

 (i) Interpretation of Article 6.3(c)

2.10 New Zealand disagrees with the United States interpretation of Article 6.3. Essentially the
United States reached the wrong conclusion from its comparison of the language of Article 6.1 with
that of Article 6.3. The United States concluded that because Article 6.3 used the phrase “may arise in

 20 19.5 per cent in MY 2002 (Ibid, para 135).
 21 Ibid, paras 106 and 107.
 22 Evidence adduced by Brazil, specifically the Quantitative Simulation Analysis by Professor Daniel
Sumner, shows that but for the United States subsidies A-Index prices between MY 1999-2002 would have
been, on average, 12.6 per cent higher.
23 Further Submission of the US, para 16.
24 Ibid, para 17.
25 Ibid.
27 Further Submission of the US, para 80.

any case where one or several of the following apply”, whereas Article 6.1 states “serious prejudice
shall be deemed to exist in the case of …”, that this means that serious prejudice “need not arise even
under Article 6.3 even where one of the listed effects is found”. 28 The United States goes on to infer
from this difference in language th at a complainant, in addition to demonstrating the existence of one
of the listed effects, must also meet a separate “serious prejudice” standard – the content of which is
undefined by the SCM Agreement. The United States states that a complainant must show that the
“prejudice” suffered is “serious”.29

2.11 First, the example given by the United Stat es in footnote 43 seems to be covered by the terms
of Article 6.4. Second, and more importantly, there is no basis for drawing from a comparison of
language used in Articles 6.1 and 6.3 the conclusion th at there is some other standard, independent of
Article 6, that must be demonstrated in order to show “serious prejudice”. In fact, as New Zealand
will show, a comparison of both the language and substance of Articles 6.1 and 6.3, in the context of
Articles 5 and 6 of the SCM Agreement, supports the contrary conclusion – that if a complainant has
demonstrated the existence of one or more of the effects enumerated in Article 6.3 there is “serious
prejudice” that is an adverse effect of the subsidy within the meaning of Article 5.

2.12 That is because the difference in language simply reflects the different way in which both
Article 6.1 and Article 6.3 give meaning to the term “serious prejudice”. Both must be seen in the
context of concern in this part of the SCM Agreement with the effects of subsidies on other Members.
In relation to Article 6.1, “serious prejudice” was given meaning by reference to specific types of
subsidies or qualities of a subsidy that were “deeme d” to have effects that were adverse to the
interests of other Members. However, it was ope n to a subsidising Member under Article 6.2 to
overturn that presumption by showing that in fact the subsidy did not cause serious prejudice – i.e.
that the subsidy had not resulted in any of the effects enumerated in Article 6.3.

2.13 The terms of Article 6.2 make it clear that the effects enumerated in Article 6.3 equate to
“serious prejudice” and that nothing more than demonstration that one of those effects exists is
necessary to find serious prejudice.

2.14 Further, by contrast with Article 6.1, Artic le 6.3 looks more broadly at the effects of the
subsidy, rather than its specific characteristics. Th ere is thus no need to “deem” certain effects to
arise from certain types or characteristics of a subsid y as there was in Article 6.1. Instead Article 6.3
is more broadly cast to take an effects-based a pproach – in essence it is d esigned to encompass any
kind of subsidy that has the adverse effects enumerated and is therefore “actionable”. However there
is no basis to draw from this difference in appro ach, and therefore in language, the conclusion that
more is required under Article 6.3 than simply de monstrating that one or more of the prescribed
effects exists in order show that there is serious prejudice. Such an interpretation undermines the
careful structure of Article 6 and the clear intent of Article 5 and must be rejected.

2.15 Nor does the use of the word “may” in Article 6.3 lead to any other conclusion. In that
respect it is important to note that Article 5(c) incorporates, as specified in Footnote 13 to the
Agreement, GATT Article XVI.1 which includes inter alia the threat of serious prejudice. Therefore
it was appropriate to state that serious prejudice in the sense of paragraph (c) of Article 5 may arise
where any of the listed effects ex ists because there may be other circumstances in which serious
prejudice can be demonstrated, including, for example, where there is a threat of serious prejudice. If
the word “shall” had been used this would have been taken to mean that Article 6.3 provides the
definitive set of circumstances in which serious prejudi ce can arise. By virtue of Footnote 13 that is
not the case.

28 Ibid, para 77.
29 Ibid, para 79.

2.16 Consideration of Article 6.3 in the context of the rest of Article 6 provides further support for
the interpretation outlined above. First, it makes little sense to have gone to such detail in Article 6.4
to describe what is required to meet the requirement s of Article 6.3(b) if there is another set of
undefined requirements that must also be demonstrated in order to find serious prejudice.

2.17 Second, in terms of Article 6.2, if there were other elements outside those in Article 6.3 that
had to be demonstrated to show serious prejudice, why would a subsidising Member not also have had
to show that those elements were not present in order to avoid the presumption in Article 6.1?

2.18 Third, Article 27.8 (although now defunct b ecause Article 6.1 is no longer in effect), also
provides that serious prejudice arising from subs idies by developing country Members “shall be
demonstrated by positive evidence, in accordance with the provisions of paragraphs 3 through 8 of
Article 6”. This makes it clear that serious pr ejudice need only be determined by reference to
Articles 6.3–6.8 of the SCM Agreement.

2.19 Finally, Article 6.8 provides that “in the absen ce of circumstances referred to in paragraph 7,
the existence of serious prejudice should be determined on the basi s of the information submitted in
accordance with the provisions of Annex V”. This confirms that paragraph 7 of Article 6 outlines the
only set of circumstances in which it is not possible to make a determination as to the existence of
serious prejudice when one of the situations in Article 6.3 is demonstrated to exist. The direction in
Article 6.8 to determine the “existence” of serious prejudice on the basis of the record would be
deprived of meaning if a determin ation of serious prejudice also had to be made by reference to
additional criteria not specified by the SCM Agreement that could lead to a materially different
outcome as a matter of fact and law.

2.20 Serious prejudice is not the abstract con cept the United States attempts to portray it as.
Serious prejudice refers to the c oncrete adverse effects of a subsidy on the interests of another
Member that are clearly elaborated in Article 6.3. However, even if the United States is right and a
complainant, having demonstrated the existence of significant price suppression within the meaning
of Article 6.3(c), must also meet a separate test of “serious prejudice” under Article 5(c), Brazil has
demonstrated that serious prejudice exists by providing the Panel with additional information
outlining the harm caused to its upland cotton producers as well as to the Brazilian economy.
30

(a) “Significant”

2.21 Article 6.3(c) of the SCM Agreement requires that the level of price suppression caused by the
United States subsidies must be “significant”, that is, it may not be so small as to have no meaningful
effect on other producers or suppliers of the same product.
31 Logically, price suppression that is so
small as to have no meaningful effect could not give rise to serious prejudice. However, such an
interpretation does not mean that a very small le vel of price suppression may not have a meaningful
effect, for example where large volumes of a product may be traded.
32 As Brazil demonstrates, even a
1 cent per pound price-suppressing effect can redu ce worldwide export revenue by $552 million.
Average price declines of 12.6 per cent for uplan d cotton clearly have a meaningful affect on

30 Further Submission of Brazil, Part 6.
 31 Panel Report, Indonesia – Certain Measures Affecting the Automobile Industry, WT/DS54/R,
WT/DS55/R, WT/DS59/R, WT/DS64/R, adopted 23 July 1998 (“ Indonesia – Automobiles ”). The Panel
considered (at para 254) the meaning of “significant” in the context of Article 6.3(c) and concluded:
Although the term “significant” is not defined, th e inclusion of this qualifier in Article 6.3(c)
presumably was intended to ensure that margins of undercutting so small that they could not
meaningfully effect suppliers of the imported product whose price was being undercut are not
considered to give rise to serious prejudice.

Brazilian producers of upland cotton. New Zeala nd fully agrees with Brazil that such price
suppression is thus “far beyond any legitimate threshold of ‘significance’”.33

2.22 The United States argues that Brazil’s interp retation of “significant” collapses the concept of
“significant price suppression or depression” with the concept of “serious prejudice” because Brazil’s
assessment of the significance of the price suppr ession has wrongly focussed on the effect of the
subsidy on producers rather than on prices. As outlined in paragr aphs 2.10–2.20 above, in
New Zealand’s view the construction of Articles 5 and 6 makes it clear that “significant price
suppression or depression” is simply a form or manifestation of “serious prejudice” and therefore it is
artificial to make into two separate inquiries what is clearly meant to be only one.

2.23 In any event the United States argument that the significance of the price suppressive effect of
the subsidy can only be determined by reference to the effect on ‘price’ should be rejected. Articles 5
and 6 are concerned with the adverse effects of a subsidy – Article 5 states that “no Member should
cause, through the use of any subsidy … adverse effects to the interests of other Members.” Therefore
it is entirely appropriate under Article 6.3(c) to consider whether price suppression is “significant” by
reference to the effect of the price suppression on the Member alleging adverse effects to its interests.
In other words, what renders price suppression signi ficant or insignificant is whether or not it causes
adverse effects to the Member concerned, not whether or not an arbitrary level of numeric
significance is achieved as implied by the United St ates. Under the United States approach, a
numerically small suppressive effect on prices coul d be disregarded, even though it may have
significant adverse effects on the complainant Member. Thus, using the example given by Brazil,
price suppression by only 1 cent per pound may not be “significant” enough under the United States
standard and therefore could not give rise to serious prejudice, even though that level of price
suppression would reduce worldwide export revenue by $552 million.
34

2.24 Nor does the United States explain how ‘signi ficance’ is to be determined under its proposed
approach. That is because such an approach would require Panels to apply some kind of arbitrary
standard of significance – would 5 per cent be signi ficant? Would 10 per cent or 20 per cent? Would
the level of required significance vary from case to case, and if so how is a Panel to determine what
that level should be?

2.25 By contrast, the approach taken by Brazil of interpreting “significant” as requiring the level of
price suppression to be “meaningful” in its e ffect, reflecting the Panel’s reasoning in Indonesia –
Automobiles, provides a more logical and consistent basis upon which to determine whether the price
suppression is “significant”. It is also consistent with the objective of Articles 5 and 6 which is to
address subsidies that have an adverse effect on the interests of other WTO members. Nor is such an
approach inconsistent with the United States assertion that the drafters of Article 6.3(c) used the term
“significant” to create a threshold to ensure that not just “any theoretical price effect”
35 would suffice.
In fact the Panel in Indonesia – Automobiles appears to have made th e same assessment of the
intention of the drafters when it stated that

the inclusion of this qualifier (ie “significant”) in Article 6.3(c) presumably was
intended to ensure that margins of unde rcutting so small that they could not

 33 Ibid, para 95.
34 This example is of course based on the effect of subsidies on “like products”, which, as Brazil has
demonstrated (Further Submission of Brazil, part 3.3.2), United States upland cotton and Brazilian upland
cotton are.
35 Further Submission of the US, para 84.

meaningfully affect suppliers of th e imported product whose price was being
undercut are not considered to give rise to serious prejudice.
36
2.26 Nor does the United States argument find support in the reference to the price suppression
being “in the same market” in Article 6.3(c). Th e United States argues this means that the price
suppression must be significant in “market terms” and th erefore the question is the effect of the price
suppression on the market and not on the Member concerned. 37 While New Zealand agrees that the
effect of the price suppression on the market may be relevant to considering whether that price
suppression is “significant”, New Zealand notes that the phrase “in the same market” simply serves to
locate the price suppressive effects rather than defi ne their substance. In fact the United States
acknowledges as much further on it in its submission. 38 Further, the United States has not attempted
to claim that its exports are not to the same market as exports from Brazil. And of course it cannot,
because, as Brazil has demonstrated, Brazilian upla nd cotton and United States upland cotton are like
products and are treated by upland cotton traders as interchangeable and substitutable.39

2.27 Finally, New Zealand notes that the United States arguments do not seek to suggest that the
level of price suppression found to exist in the pr esent case - 12.6 per cent - is not “significant” within
the meaning of Article 6.3(c). Therefore the Panel should find that “significant price suppression”
exists as a result of the United States subsidies a nd that therefore the United States subsidies cause
serious prejudice to the interests of Brazil.

(b) Time Period for Demonstrating Causal Effects

2.28 The United States argues that “a past subsidy no longer exists as of the time a new subsidy
payment in respect of current production is made”.
40 Therefore, argues the United States, subsidies
prior to the most recent period, MY 2002, can have no “effect” within the meaning of Article 6.3 and
the “effect of the subsidy must be demonstrated in each year and for each year that Brazil has
challenged”.41

2.29 By the United States reasoning a complainan t may only take a serious prejudice case in the
year in which the serious prejudice is caused. To say that a “past subsidy no longer exists” once a
further payment is made under the same subsidy sch eme is entirely artificial. Leaving aside the
practical difficulties the United States approach would pose given the nature of the evidence that is
required and the timelines for WTO dispute settle ment – which would effectively preclude any
Members from ever taking serious pr ejudice cases – this approach ignores that fact that the subsidy
programmes are in existence for a period of years and have effects on the decisions of producers
beyond simply the year in which they have been paid.
42 Producers expectations of continued
subsidies are integral to planting decisions and it is clear that United States producers expect ongoing
subsidies as these have been legislatively mandated until MY 2007.

2.30 Similarly the serious prejudice caused to a WTO Member over the lifetime of a subsidy
programme is not easily compartmentalised into a par ticular year and such an artificial constraint on
the appropriate time period for consideration by a Panel would seem to undermine the object and

37 Further Submission of the US, para 87.
38 Ibid, para 90.
40 Further Submission of the US, para 94.
41 Ibid, para 95.
42 Brazil has demonstrated that the effects of the United States subsidies continue after they have been
provided because, for example, they have “wealth” and “investment” effects (Further Submission of Brazil, part
3.3.4.7.7).

purpose of the disciplines on actionable subsidies in the Agreement. New Zealand therefore agrees
with Brazil that MY 1999-2002 is a reasonable peri od for the Panel to use for the present serious
prejudice claims.

2. The effect of the United States subsidies is an increase in the United States world market
share

2.31 Brazil has demonstrated that the United States subsidies resulted in an increase in the
United States world market share for upland cotton in MY 2001 within the meaning of Article 6.3(d).
The data provided by Brazil shows that the United States world market share in MY 2001 of 38.3 per
cent is considerably higher than the previous three-year average,
43 and that this was due to the effect
of the United States subsidies.44

2.32 The United States argues that the term “world market share” refers to “all consumption” of
upland cotton and thus would include “consumption by a country of its own cotton production”. The
United States appears to suggest that Article 6.3(d) is thus concerned with the effect of the subsidy on
world consumption of cotton.

2.33 It is true that GATT Article XVI:3 uses th e phrase “world export trade”. However it is quite a
leap of logic to then conclude that because Article 6.3(d) uses the term “world market share” then it
must refer to a Member’s share of world consumption. The United States makes this leap on the basis
that the relevant context for determining what “w orld market share” means is GATT Article XVI:3.
However the first point of reference should in fact be Article 6.3 itself, and Article 5 to which it is so
integrally related. Thus the appropriate context in which to give meaning to “world market share” is
the aim of Articles 5 and 6, ie to address the adverse effects of subsidies on the interests of other
Members.

2.34 Subsidies are the concern of WTO members to the extent that they distort trade – hence the
differentiation in treatment of trade-distorting and non-trade distorting subsidies. Therefore the
adverse effects with which Article 6.3 is concerned is the effect of subsidies on trade in the world
market. Specifically, it is concerned with adverse effects to other Members caused when one Member
uses subsidies in order to increase its share of the world market for a particular product. To construe
“world market share” as referring to a Member’s share of world consumption of a product would
therefore completely subvert the underlying rationale of Article 6.3(d).

3. The United States has a “more than equita ble share” of world export trade in upland
cotton

2.35 Brazil has demonstrated that the United States subsidies have operated to increase
United States exports of upland cotton resulting in the United States having a “more than equitable
share” of world export trade in upland cotton within the meaning of GATT Article XVI:3 and has thus
caused serious prejudice to the interests of Brazil within the meaning of GATT Article XVI:1.
45

2.36 The United States seeks to dismiss the releva nce of GATT Article XVI:3 by reference to pre-
Uruguay Round comment by the Panel on Wheat Flour 46, addressing the Tokyo Round Subsidies
Code, in an unadopted report, that there are “di fficulties inherent in the concept of ‘more than
equitable share’.”47 The United States also seeks to assert th at “Members are generally permitted to

43 Further Submission of Brazil, para 267 and Figure 24.
44 Ibid, paras 271 – 272.
45 Further Submission of Brazil, part 3.5.
46 GATT Panel Report, EEC – Subsidies on Export of Wheat Flour, SCM/42, (unadopted).
47 Further Submission of the US, paras 108 and 109.

provide subsidies.”
48 That is true up to the point at which those subsidies cause serious prejudice to
the interests of the other Members. And in this context the Panel should consider whether, as the
world’s largest exporter of upland cotton with aver age levels of subsidisation of 95 per cent, the
United States has a “more than equitable” share of world export trade. New Zealand submits that
Brazil has demonstrated that the United States does.

4. Issues relating to particular United States subsidies

2.37 Brazil sets out arguments relating to the fu ll complement of United States subsidies and the
serious prejudice they cause both individually and collectively. New Zealand will comment only on
marketing loan payments, Step 2 payments and market loss assistance/counter-cyclical payments.

 (i) Marketing Loan Payments

2.38 Brazil has highlighted that these payments are considered by the USDA and by other
economists as having the greatest production and e xport enhancing effects and thus the greatest A-
Index price suppressing effects of all the United States subsidies. 49 Brazil has described how the
effect of the marketing loan programme is to increase production, increase exports of upland cotton,
and suppress upland cotton prices (on average by 5.75% in MY 1999-2002). 50 The marketing loan
programme is thus responsible for almost half of the estimated average price suppressing effects of
the United States subsidies.

 (ii) Step 2 Payments

2.39 The availability of Step 2 payments in creases production in the United States, displaces
imports of lower priced foreign upland cotton and enables additional United States exports of upland
cotton. The Step 2 payment programme is speci fically designed to stimulate export demand for
United States upland cotton. Brazil has shown that th e trade distorting effect of the Step 2 payments
is widely acknowledged.
51 Professor Sumner estimates that Step 2 payments suppressed world prices
between MY 1999-2002 by 3.04 per cent.52

2.40 Brazil has demonstrated that Step 2 dom estic payments are a prohibited subsidy under
Article 3.1(b) of the SCM Agreement in that the payments are contingent on the use of domestic over
imported upland cotton and thus also violate Article III.4 of GATT 1994.

 (iii) Market loss assistance/Counter-cyclical payments

2.41 The United States continues to argue that market loss assistance payments and counter-
cyclical payments (CCP) are not linked to produc tion and accordingly cannot have “effects” for the
purposes of Article 6.3(c) nor operate to in crease exports as required by GATT Article XVI:3.
53 The
United States implies that their production effects are less than one percent. 54 However Professor
Sumner’s analysis shows that although their producti on effects were less than one percent in 1999,
since then they have been significantly higher and are projected to increase in the future. 55 He

48 Ibid, para 105.
50 Ibid, para 157.
51 Ibid, para 287.
52 Ibid, Table 12.
53 Further Submission of the US, para 74.
54 Ibid, paras 73 and 74.
55 Further Submission of Brazil, Annex 1, Table I.4.

concluded that these payments have a production impact because their effect is to keep land in the
production of upland cotton that would not be otherwise because of low prices.56

2.42 As outlined by New Zealand in its First Wr itten Submission to the Panel, the CCP payments
create incentives for farmers with upland cotton base acreage to maintain upland cotton production.
57
New Zealand pointed out that in fact under the CCP programme the only way a farmer can guarantee
a particular income is to continue to grow the same crop, otherwise the farmer runs the risk of missing
out. For example, if he or she chooses to prod uce wheat and cotton prices are high enough that no
CCP payment is made but wheat prices fall, the fa rmer will make a loss they would not have made
had they stayed with cotton production. This, combined with other factors set out by Brazil, 58 for
example the investment by farmers in cotton-speci fic machinery, virtually guarantees farmers will
continue to produce cotton. The CCP payments are thus far from “de-coupled” in effect.

2.43 In fact Professor Sumner concluded that the CCP payments (as the institutionalised
marketing loss assistance payments are now known under the Farm Security and Rural Investment
Act 2002
59) create more production incentive than the market lo ss payments, through base and yield
updating and the increased per pound amount of support. 60 Professor Sumner determined that the
market loss assistance payments and the CCP payments stimulated production by an average of 1.34%
during MY 1999-2002.61 And, as noted by Brazil, the full effects of the greater production incentives
inherent in the CCP programme will only be realised in MY 2003.

III. THREAT OF SERIOUS PREJUDICE

3.01 Brazil has brought evidence to show that the United States subsidies are not only causing
serious prejudice to Brazil’s interests today, but al so threaten to cause serious prejudice to Brazil’s
interests in the future. Brazil has demonstrated that the United States subsidies cause a threat of
serious prejudice to Brazil’s interests within the m eaning of Articles 5(c), 6.3(c) and 6.3(d) of the
SCM Agreement , as well as GATT Article XVI:3 in the period MY 2003-2007 because of the
continued operation of the Farm Security and Ru ral Investment Act 2002 and the Agricultural Risk
Protection Act 2000.

3.02 Brazil has demonstrated that the very same factors creating present serious prejudice also
create a threat of serious prejudice in the future . The United States subsidies are mandated to
continue until MY 2007. They are effectively unlim ited. Brazil has demonstrated that they have
already caused serious prejudice to Brazil’s interests. Their continued operation for a further four
years cannot but be considered to threaten further serious prejudice to Brazil’s interests.

3.03 The United States argues that the two standa rds proposed by Brazil are incorrect and that
Brazil has, in any event, met neither of them.

3.04 To take Brazil’s first proposed legal sta ndard, Brazil argues, drawing on the findings of the
GATT Panel in EC – Sugar Exports I
62 and EC – Sugar Exports II 63 and the Appellate Body in US –

56 Ibid, para 169.
57 New Zealand’s First Submission, para 2.20.
59 Ibid, para 62.
60 Ibid, para 171.
61 Ibid, para 172.
62 GATT Panel Report, European Communities – Refunds on Exports of Sugar (Complaint by
Australia), L4833 – 26S/290, adopted 6 November 1979.
63 GATT Panel Report, European Communities – Refunds on Exports of Sugar (Complaint by Brazil),
L5011 – 27S/69, adopted 10 November 1980.

FSC,
64 that where there is effectively no limit on the provision of a subsidy a permanent source of
uncertainty exists that threatens serious prejudice to other WTO Members. In such circumstances
there is no check on the provision of a subsidy th at would prevent it from causing adverse effects to
the interests of other Members.

3.05 That is the precise situation in the presen t case. United States legislation requires the
provision of the subsidies irrespective of whether or not those subsidies have adverse effects on other
Members. In that respect it is important to b ear in mind that the present case involves a level of
subsidisation of, on average, 95 per cent, with a do llar value of US$12.9 billion, being provided by a
country that currently has a 41.6 per cent share of the world market for upland cotton. The possibility
that United States subsidies will continue to cause se rious prejudice to the interests of Brazil in the
future, is a real one – it is well removed from the realm of “allegations, conjecture or remote
possibility” alluded to by the United States.
65

3.06 In that respect Brazil’s second proposed legal standard for determining whether such a threat
exists is highly relevant. As Braz il has demonstrated, all of the factors that currently exist that mean
that the United States subsidies cause serious prejudi ce to their interests will continue to exist in the
future. Furthermore, United States producers of upl and cotton will act in the expectation of future
subsidy payments and will make their planting deci sions accordingly. Therefore the fact that the
legislation creating those subsidies will conti nue until 2007, and United States producers know that
those subsidy programmes will continue until 2007, creates a very strong prima facie case that those
subsidies will continue to cause serious prejudice to Brazil for the full term of their existence.

3.07 Finally New Zealand supports Brazil’s request that if the Panel makes a finding of present
serious prejudice, it should not feel constrained in making a further finding that the subsidies also
create a threat of serious prejudice in the future.
66 Firstly, even though the present effects of the
subsidies are already being felt, their future effect s have not yet eventuated and therefore necessarily
remain a threat. Secondly, the purpose of dispute settlement is to assist Members in the resolution of
disputes – in this case a finding by the Panel on the threat of future serious prejudice is important to
resolve this dispute.

IV. EXPORT CREDIT GUARANTEE PROGRAMMES

4.01 New Zealand notes that the United States ra ises further arguments in relation to the
negotiating history and appropriate in terpretation of Article 10.2 of the Agreement on Agriculture in
order to support its claim that there are currently no export subsidy disciplines on the use of export
credit guarantee programmes.

4.02 However the United States does not address the applicability of Article 10.1. As outlined by
New Zealand in its First Submission, Article 10.2 does not in any way suggest that it provides an
exception from the disciplines of Article 10.1. While Article 10.1 currently provides the only
discipline on the use of export credits, it is expect ed that the work envisaged in Article 10.2 will
elaborate further and more specific disciplines that will presumably make identification of the extent
to which such export credit programmes constitute export subsidies more straightforward. However it
is incorrect to assume that there is a vacuum in th e meantime. Item j of the Illustrative List of the
SCM Agreement clearly already provides guidance on when export credit guarantee or insurance
programmes are to be considered to be ‘export s ubsidies’ and beyond this the general definition in
Articles 1.1 and 3.1(a) of the SCM Agreement also applies.

64 Appellate Body Report, United States – Tax Treatment for “Foreign Sales Corporation ”,
WT/DS108/AB/R, adopted 20 March 2000.
65 Further Submission of the US, para 115.

V. CONCLUSION

5.01 In conclusion, New Zealand considers that Brazil has provided the legal and factual basis
upon which the Panel should conclude that the United States subsidies cause or threaten to cause
serious prejudice to the interests of Brazil within the meaning of Articles 5(c), 6.3(c) and 6.3(d) of the
SCM Agreement and violate GATT Article XVI. New Zealand therefore requests the Panel to make
the findings and recommendations requested by Brazil.

ANNEX E-8

SECOND WRITTEN SUBMISSION OF PARAGUAY
(THIRD PARTY)

3 October 2003

1. Paraguay is grateful for the opportunity to express its views in this dispute.

2. As already stated, Paraguay maintains that the subsidies and support granted to cotton
production of the type at issue are inconsistent with the Agreement on Subsidies and Countervailing
Measures and other WTO rules.

3. The agricultural subsidies cause serious prejudice to the domestic industries of many WTO
Members, in violation of Articles 5 and 6 of the Agreement on Subsidies and Countervailing
Measures. Indeed, these measures involve a financia l contribution which, by conferring a benefit,
could adversely affect the determination of the world price of the product.

4. Article 5(c) stipulates that "no Member should cause, through the use of any subsidy
[-specific and not exempted under the Agreement –] adverse effects to the interests of other Members,
i.e.: … (c) serious prejudice to the interests of another Member."

5. The threat of serious prejudice takes the form of price undercutting and unfairness in
international trade, particularly as regards deve loping countries like Paraguay, which is highly
dependent on its cotton production.

6. Article 6, which concerns serious prejudice, states that serious prejudice in the sense of
paragraph (c) of Article 5 shall be deemed to exist in the case of subsidies to cover operating losses
sustained by an enterprise, other than one-tim e measures which are non-recurrent and cannot be
repeated for that enterprise and which are given merely to provide time for the development of
long-term solutions and to avoid acute social problems; and direct forgiveness of debt,
i.e. forgiveness of government-held debt, and grants to cover debt repayment.

7. Paraguay submits that the measures adopted by the United States do not fit these descriptions
and cause injury to its economy, Paraguay being a predominantly agricultural country.

8. Because of the amounts involved, the subsid ies granted to the cotton industry have a
significant impact on the world market as reflected in increased production and export and price
variations on the global market.

9. In the International Cotton Advisory Comm ittee (ICAC) as in other forums, governments
have remarked on the critical situation that the world cotton industry is going through and its link to
subsidies, stressing the need to submit complaints before the WTO for violation of the applicable
rules. The Committee considers that without the su bsidization, the average world cotton price would
undergo a reasonable increase.

10. Paraguay's cotton trade is affected by such measures because cotton production has a
considerable impact on its economy, and especially on its rural populations which depend on cotton
for their livelihood. In the sectors involved, such as transport and related industries, the impact is
considerable, with approximately 30 per cent of the population affected.

11. Thus, the impact on trade in countries like Paraguay is devastating and causes the migration
of rural populations to the urban areas, furthe r aggravating the economic situation of a country
dependent on its agriculture.

12. As shown in the attached table, cotton fibr e exports to the United States was 518 tons, for a
value of US$898,000.

13. The effect is clear: in 2001, the volume of exports to the same market practically doubled,
reaching 924 tons, and yet the price decreased in equal proportions, wi th exports generating
US$830,000. The world cotton trade figures reflect the same trend.

CONCLUSION

14. There is sufficient evidence to prove th at the subsidies are causing problems to the
international marketing of cotton and that the American subsidies are further aggravating the situation
of cotton exports from Paraguay.

15. We respectfully request the Panel to find th at the measure applied by the United States is
inconsistent with the obligations laid down by the WTO in various provisions of the GATT 1994 and
the Agreement on Subsidies on Countervailing Measures, and to take account of the arguments put
forward by Brazil.

 PARAGUAYAN COTTON EXPORTS BY DESTINATION
 (Tons / ThUS$)

 1997 1998 1999 2000 2001 2002
 VOLUME VALUE VOLUME VALUE VOLUME VALUE VO LUME VALUE VOLUME VALUE VOLUME VALUE
GERMANY 0 0 0 0 193 179 1,215 1,229 6,029 4,594 2,877 1,981
ARGENTINA 150 46 4,623 6,594 649 759 1,250 1,460 250 231 5,001 4,132
BANGLADESH 0 0 0 0 0 0 461 532 630 568 155 119
BELGIUM 0 0 0 0 0 0 0 0 266 215 149 128
BERMUDA 473 757 0 0 0 0 0 0 0 0 0 0
BOLIVIA 0 0 0 0 0 0 1,200 1,084 0 0 0 0
BRAZIL 39,898 64,492 47,267 64,914 47,115 55,93 3 56,726 61,113 31,063 29,465 29,599 22,877
COLOMBIA 0 0 0 0 0 0 1,660 1,556 200 224 0 0
SOUTH KOREA 0 0 79 102 0 0 0 0 98 92 0 0
NORTH KOREA 0 0 0 0 0 0 0 0 605 557 0 0
CHILE 845 1,509 624 938 1,107 1,208 1,183 1,309 424 404 1,675 1,262
NATIONALIST
CHINA (TAIWAN)
0 0 191 219 0 0 0 0 2,126 1,865 579 450
CHINA, PEOPLE'S
 REPUBLIC OF
0 0 0 0 0 0 698 769 1,310 1,230 0 0
DENMARK 0 0 0 0 0 0 0 0 0 0 128 102
SLOVAKIA 0 0 0 0 0 0 0 0 100 76 0 0
SPAIN 313 364 18 19 0 0
UNITED STATES 518 898 0 0 0 0 60 67 924 830 0 0
PHILIPPINES 0 0 0 0 102 119 33 39 569 616 155 132
FRANCE 0 0 0 0 0 0 0 0 231 187 104 83
HONG KONG 0 0 0 0 0 0 1,116 1,188 148 111 185 123
NETHERLANDS 0 0 0 0 500 606 0 0 62 41 0 0
INDIA 0 0 0 0 0 0 526 408 33,463 28,267 3,088 2,738
INDONESIA 0 0 0 0 0 0 120 116 2,461 2,295 582 453
ITALY 0 0 462 550 0 0 25 23 360 345 363 271
MALAYSIA 0 0 0 0 0 0 500 449 130 109 0 0
NIGERIA 0 0 0 0 0 0 0 0 241 229 0 0
PAKISTAN 0 0 0 0 0 0 68 65 1,006 790 0 0
PANAMA 0 0 0 0 0 0 0 0 0 0 48 29

 1997 1998 1999 2000 2001 2002
 VOLUME VALUE VOLUME VALUE VOLUME VALUE VO LUME VALUE VOLUME VALUE VOLUME VALUE
PORTUGAL 0 0 0 0 0 0 0 0 989 702 200 133
UNITED
KINGDOM
00 00 0 0 0 0 2 1 00
SWITZERLAND 0 0 0 0 0 0 200 216 592 551 251 169
THAILAND 0 0 0 0 0 0 397 403 2,298 1,959 294 198
TURKEY 0 0 0 0 0 0 819 886 2,244 2,431 0 0
URUGUAY 2,684 3,927 1,165 1,453 501 601 475 529 198 200 65 53
VENEZUELA 720 1,227 459 649 1,942 2,140 4,403 4,687 4,035 3,731 632 528
VIETNAM 0 0 0 0 0 0 0 0 602 533 0 0
TOTAL 45,288 72,856 54,870 75,419 52,109 61,545 73,448 78,492 93,674 83,468 46,130 35,961

Prepared by the Paraguayan Directorate of Foreign Trade.
Source: Central Bank of Paraguay.