Document: WT/DS267/R/Add.1 Page F-1 ANNEX F ORAL STATEMENTS OF PARTIES AND THIRD PARTIES AT THE RESUMED SESSION OF THE FIRST SUBSTANTIVE MEETING Contents Page Annex F-1 Executive Summary of the Opening Statement of Brazil F-2 Annex F-2 Executive Summary of the Closing Statement of Brazil F-7 Annex F-3 Executive Summary of the Openi ng Statement of the United States F-11 Annex F-4 Executive Summary of the Closing Statement of the United States F-16
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 F

ORAL STATEMENTS OF PARTIES AND THIRD PARTIES AT THE
RESUMED SESSION OF THE FIRST SUBSTANTIVE MEETING

Contents Page
Annex F-1 Executive Summary of the Opening Statement of Brazil F-2
Annex F-2 Executive Summary of the Closing Statement of Brazil F-7
Annex F-3 Executive Summary of the Openi ng Statement of the United States F-11
Annex F-4 Executive Summary of the Closing Statement of the United States F-16
Annex F-5 Third Party Oral Statement of Argentina F-19
Annex F-6 Third Party Oral Statement of Benin F-28
Annex F-7 Third Party Oral Statement of Chad F-33
Annex F-8 Third Party Oral Statemen t of the European Communities F-37
Annex F-9 Third Party Oral Statement of India F-40
Annex F-10 Third Party Oral Statement of New Zealand F-42

ANNEX F-1

EXECUTIVE SUMMARY
STATEMENT OF BRAZIL AT THE
RESUMED FIRST SUBSTANTIVE MEETING
OF THE PANEL WITH THE PARTIES

1. Brazil’s Claims of Present Serious Prejudice Relating to Subsidies Provided in MY
1999-2002

1. Brazil’s present serious prejudice claims relate to US subsidies provided for the production,
export and use of US upland cotton during the period MY 1999-2002. This period covers the
measures challenged by Brazil and represents th e relevant period of investigation to examine present
serious prejudice caused by the US subsidies under Articles 5(c) and 6.3 of the SCM Agreement.
This four-year period is long enough to allow the Pa nel to make a determination (in the words of the
Appellate Body in the recent EC – Pipe Fittings decision) “that is less likely to be subject to market
fluctuations or other vagaries that may distort a proper evaluation.”

2. Brazil Has Established That the US Subsidies between MY 1999-2002 Caused
Significant Price Suppression within the Meaning of Article 6.3(c) of the SCM
Agreement

2. Brazil has shown in its Further Submission the amount and the subsidization rate of the US
subsidies which cause serious prejudice to Brazil as we ll as demonstrated that all of the US subsidies
are specific within the meaning of Article 2 of the SCM Agreement. The United States asserts that
crop insurance subsidies provided to upland cotton producers by the 2000 Agricultural Risk
Protection (“ARP”) Act are not specific. In seeking to rebut Brazil’s evidence that more than 50 per
cent of the value of US agricultural commodities did not benefit from crop insurance benefits, the
United States now argues that livestock is covered in “pilot programmes”. Yet, a close examination
of the “pilot” programmes indicates that the great majority of livestock production was not covered by
the crop insurance programmes during the period of investigation. Therefore, the crop insurance
programme is specific.

3. Contrary to the US arguments, the Panel is required by Article 5 of the SCM Agreement to
examine the collective and interactive effects of all US subsidies. While different economists have
estimated varying degrees of acreage, production, export and price effects of the US subsidies, no
economist has ever found or suggested that rem oving all of the US subsidies would have only
minimal effects.

4. The conditions of competition in the upla nd cotton market that existed during MY 1999-2002
(and that exist today) explain why: First, upland cotton is a basic fungible commodity that is widely
traded throughout the world; Second, demand for upland cotton is relatively price-inelastic and
consumption increased steadily during MY 1999-2002 , whether upland cotton prices rose or fell;
Third, world market prices for upland cotton as reflect ed in the New York futures price and the A-
Index are sensitive to changes in supply – prices tend to rise when world supply decreases and fall
when world supply increases; Fourth, US producers in MY 2002 supplied 41.6 per cent of world
export market demand – the next largest exporter (Uzbekistan) had only 13 per cent of the world
market share. Fifth, US producers of upland cotton are among the world’s highest cost producers and
total average costs between MY 1999-2002 were 77 per cent higher than market revenue received for

upland cotton lint; and Sixth, US upland cotton subsidies cove red the cost-revenue gap with
subsidies averaging 95 per cent which are 19 times gr eater than the five per cent subsidization rate
formerly deemed to create a presumption of serious prejudice under Article 6.1(a) of the SCM
Agreement.

5. US subsidies are a key element of the conditions of competition in the world market for
upland cotton. The US subsidies create a s ituation in which USDA’s Chief Economist has
acknowledged that many US upland cotton producers ar e immune from market forces. This is readily
illustrated by the extensive record provided by Brazil.

6. The United States now argues that US upla nd cotton farmers are sensitive to changes in
market prices. Yet, US planted acreage increased as prices declined between MY 1999-2001. There
can be little doubt that without the US subsidies, many US upland cotton producers would have to
switch to crops providing a higher market return or take marginal land out of production. This means
that without subsidies, US acreage and production w ould fall considerably. In addition to falling US
production, the removal of US subsidies would also result in significant reductions in US exports
contributing to increased world prices. Professor Sumner found that, but for the US subsidies
between MY 1999-2002, US exports would fall from the annual actual average exports of
8.62 million bales by 41.2 per cent to 5.07 million bales. This reduction of 3.55 million bales
represents 13.4 per cent of the total average world export market between MY 1999-2002. Given the
relatively inelastic demand for upland cotton, it woul d be remarkable if world prices did not increase
with a 13.4 per cent decrease in the supply of upland cotton to the world export market.

7. Brazil has examined some of the non-subsidy ma rket factors that the United States apparently
now claims account for all of the fall in prices in MY 1998-2002. Even though some of these factors
may have contributed to lower and suppressed pr ices during MY 1999-2002, the US arguments and
evidence do not refute Brazil’s ev idence that the impact of $12.9 billion in US subsidies on US
acreage, production, exports and prices was significant. Moreover, Brazil does not dispute that there
were other factors causing world prices to fluc tuate throughout MY 1999- 2002. And these same
types of factors are causing prices to fluctuate t oday – and they will do so tomorrow. Changes in
weather, exchange rates, economic growth, and fi nancial conditions, among other factors, will always
play a role in price discovery in world commodity markets. But it is simply not credible for the
United States to argue now that $12.9 billion in su bsidies to US producers faced with an average
24.3 cents per pound cost-revenue gap, who nevertheless increased their world market share to
41.6 per cent at times of record low prices, had no impact on production or world prices.

8. Having established that US production and exports would fall significantly if US upland
cotton subsidies were eliminated, Brazil also demonstr ated that the effects of lower US exports would
result in world upland cotton prices being higher by an amount that is “significant”. Brazil presents
additional evidence on the price-suppressing effect of the US subsidies from the Report of the
Commission on the Application of Payment Limitati ons for Agriculture. At the request of the
Commission, USDA economists Westcott and Price ex amined the effects of eliminating marketing
loan benefits for MY 2000 and MY 2001 finding significant acreage and price effects representing
33.6 per cent of the average prices received by US farmers in MY 2001. The record contains the
results of a number of different simulations of pri ce suppression effects caused by all or some of the
US subsidies. All of these results reveal “si gnificant” price suppression within the meaning of
Article 6.3(c). They are “significant” because these results of price suppression are far from de
minimis.

9. Finally, Brazil has demonstrated the clo se link between world A-Index prices, Brazilian
internal prices and prices received by Brazilian producers in the export markets.

10. Andrew Macdonald has provided his expert testimony and described the importance of US
market factors in influencing the perception of trad ers in the New York futur es market and in shaping
the perceptions of price movements by traders in in ternational transactions as reflected in the A-Index
price development. Mr. Macdonald has also pr ovided evidence of the close relationship between
these two sets of prices and the determination of pr ices in the Brazilian market. This evidence fully
supports the pricing data reflecting the close c onnection between US domestic prices, US export
prices, A-Index prices, Brazilian prices, and the prices received by Brazilian and third country
exporters.

11. The United States has asserted that the term world market share in Article 6.3(d) “would
appear to encompass all consumption of upland cotton, including consumption by a country of its own
production”. This is incorrect. The ordinary m eaning of the term “world market share” in
Article 6.3(d) of the SCM Agreement is not “world production share” or “world consumption share”.
Rather, it is the share of the world market for expor ts. This interpretation is consistent with USDA’s
and the EC’s use of the term “world market share”. In addition, footnote 17 to Article 6.3(d) states:
“Unless other multilaterally agreed specific rules apply to the trade in the product or commodity in
question.” This provision refers explicitly to “t rade” referring to international commercial sales and
purchases in export markets, not global consumption or production.

3. Threat of Serious Prejudice

12. By guaranteeing a level of support of appr oximately 75 cents per pound, the US Subsidies
create a continuing threat of excess US acreage , production, and exports, and continued suppressed
world prices. This threat is a seamless continuation of the present serious prejudice that Brazil has
already demonstrated. The threat exists today a nd will exist throughout the lifetime of the 2002 US
Farm Act – until the end of MY 2007. A key initial issue for the Panel to decide is the time period for
assessing data regarding the existence of a threat of serious prejudice. The Appellate Body has noted
that a threat analysis requires examination of “f acts” not “conjecture” and requires the “use of facts
from the present and the past to justify the conclusion about the future”. The Appellate Body also has
held it is important to examine data for the entire period of investigation “to allow the investigating
authority to make a . . . determination that is less lik ely to be subject to market fluctuations or other
vagaries that may distort a proper evaluation”.

13. A threat of serious prejudice exists for the following reasons: The mandatory US subsidies in
the 2002 US Farm Act create a guaranteed revenue st ream for US producers of 75 cents per pound.
This revenue cannot be stopped betw een MY 2003-2007 regardless of how low US and world prices
may fall, regardless of how much US production of upland cotton increases¸ and regardless of the
amount of US exports. As found by the EC – Sugar Exports panels, and the Appellate Body in US –
FSC, the absence of any legal mechanism to limit the qua ntity of subsidies is a critical factor to assess
in determining the existence of threat.

14. Brazil has demonstrated the existence of present price suppression, increases in world market
share and an inequitable share of world export tr ade based on actual data and market conditions for
MY 1999-2002. This four-year period of serious prejudice is the best guide for the Panel to assess
whether during the remaining five years of the 2002 US Farm Act there is a significant threat that
serious prejudice will occur again. In making this assessment, the Pane l should also consider the fact
that the US National Cotton Council estimated that the 2002 US Farm Act increased the revenue
stream to US producers by 10 cents a pound over that provided in MY 1999-2001.

15. US planted acreage during MY 2003-2007 will remain at significant levels – around
14 million acres (slightly less than the average for MY 1999-2002). USDA and FAPRI both estimate
that there will be no
 significant reduction in US acreage or production between MY 2003-2007. The

guaranteed high US acreage between MY 2003-2007 m eans high levels of production and exports. It
also means suppressed world prices.

16. USDA estimates that US producers’ cost of production will increase during MY 2003-2007
and remain high relative to market revenue. The mo st recent data shows that US producers’ cost of
production in MY 2002 was 83.59 cen ts per pound. At these cost le vels, many US upland cotton
producers will not be able to meet total costs of production without receiving all of the US subsidies.
This fact demonstrates the clear causal connec tion between US subsidies and continuously high
acreage, production, and exports along with significantly suppressed prices throughout MY 2003-
2007.

17. With respect to Brazils threat claim under Ar ticle 6.3(d), Brazil notes that the threat of an
increased US world market share in MY 2002 has alr eady materialized, as the US world market share
continued to increase in MY 2002 to 41.6 per cen t, well above the MY 1999-2001 three-year average
of 29.1 per cent. Brazil also notes that there is a real and clear threat of an Article 6.3(d) violation for
MY 2003 as recent USDA projections for MY 2003 US exports indicate that the likely US share will
be 38.8 per cent in MY 2003 – an increase over the three-year (MY 2000-2002) average of 34.9 per
cent. This evidence further supports the finding of a threat that the US share of world export trade
will continue to be inequitable for MY 2003-2007.

18. Finally, Brazil has established that GATT Articl es XVI:1 and 3 allow for threat claims to be
based on this provision. Brazil has also demonstrated th at a threat of the United States to have a more
than equitable share of world export trade exists.

5. Export Credit Guarantees

19. Contrary to the US allegation, Brazil has de monstrated that the C CC export credit guarantee
programmes are “mandatory” programmes. More over, the CCC export credit guarantee programmes
are expressly exempt from the requirement that a programme receive new Congressional budget
authority before it undertakes new loan guarantee commi tments. The Appellate Body considered that
the unlimited nature of the FSC regime posed a significant threat, under Article 10.1 of the
Agriculture Agreement, that the United States w ould surpass its agricultura l export subsidy reduction
commitments. In addition, Brazil again notes th at for guarantees, the United States, through the
Federal Credit Reform Act, has concluded that costs and losses are best measured and recorded on a
net present value basis, rather than on a cash basis, at the time the guarantees are issued.

6. New US Requests for Preliminary Rulings

20. The United States’ “new” request for a pr eliminary ruling addresses Brazil’s failure to
provide a statement of available evidence with respect to export credit guarantees for commodities
other than upland cotton. This request is in fact not “new”.

21. The US request for a preliminary ruling that Brazil should have included more information in
its statement of available evidence has no merit. Brazil has already addressed this issue. Brazil was
required to file a statement of the evidence available to it at the time.

22. Second, the United States claims that cott onseed payments for 1999 and 2000, and 2002 are
not within the terms of reference of the Panel because the measures allegedly were not identified
within Brazil’s consultation or panel request, a nd because Brazil and the United States allegedly did
not consult regarding these measures. Both of these claims are false. Brazil and the United States did
consult about “any programme providing support to the US upland cotton industry for the production,
processing, use, sale, promotion or export of cottonseed or products derived from cottonseed.”

Similarly, Brazil’s Panel request specifically identified in four different places “measures” that would
encompass all forms of cottonseed payments from MY 1999-2007.

23. Finally, the United States argues that the “other payments” such as “storage payments” and
“interest subsidies” allegedly were not included in Brazil’s consultation or panel request, that Brazil
and the United States did not consult about such pa yments, and that these payments are not properly
within the Panel’s terms of reference. These assertions are also false. Both the consultation and panel
requests identify in four different paragraphs as “measures” payments which encompass “other
payments” and “storage” and “interest subsidy” paym ents. Further, Brazil understands that “storage
payment” and “interest subsidy” are part of th e operation of the marketing loan programme, which
Brazil specifically identified in both the consultation and panel requests, as well as in its questions to
the United States during the consultations. The record demonstrates that Brazil and the United States
consulted about all marketing loan and loan deficiency payments, as well as “any other support to or
government funding for the US upland cotton industry”. Therefore, it is properly before the Panel.

ANNEX F-2

EXECUTIVE SUMMARY
CLOSING STATEMENT OF BRAZIL AT THE
RESUMED FIRST SUBSTANTIVE MEETING
OF THE PANEL WITH THE PARTIES

1. Introduction

1. In its Closing Statement, Brazil reiterates that at the core of this case are $12.9 billion of US
subsidies for upland cotton for MY 1999-2002. These subsidies increase and maintain the production
of high-cost US upland cotton, increase US upl and cotton exports, suppress US, world and Brazilian
prices and lead to the United States having a more th an equitable share of world export trade. In
short, these US subsidies cause and will continue to cause serious prejudice to the interests of Brazil.

2. Direct, CCP, PFC, and Market Loss Assist ance payments were received by producers of
upland cotton

2. In its Oral Statement of 7 October, the Unite d States alleged that Brazil has not substantiated
the amount of PFC, market loss assistance, direct a nd counter-cyclical payments to US upland cotton
producers. Brazil requested this information from the United States more than a year ago in the
consultation phase of this dispute but never received any information. Yesterday, the United States
indicated to the Panel that it did not collect or have this information. In similar circumstances, WTO
panels have held that “[i]n situations where direct evidence is not available, relying on inferences
drawn from relevant facts . . . to determine whether applicable and unrebutted inferences are sufficient
for satisfying the burden of proof”. In lieu of this non-existent direct proof, Brazil presented
extensive circumstantial evidence that all or nearly all of these producers of upland cotton in
MY 1999-2002 received PFC, market loss assistance, direct and counter-cyclical payments.

3. Brazil previously set forth this circumstantial evidence in a number of different Submissions
between 24 June and 9 September 2003. To assist the Panel, Brazil has coll ected this evidence in
Annex I to its Closing Statement.

4. A summary of the evidence set out in the Anne x is the following: It demonstrates very high
production levels of cotton relative to total upland cotton base acreage throughout MY 1999-2002. It
shows near universal participation of eligible upland cotton producers in the 1996 PFC programme
and 95.7 per cent participation of upland cotton ba se acreage planted to programme crops in MY
2001. By June 2003, nearly all eligible farms producing , upland cotton in MY 1993-95 or MY 1998-
2001 signed up for the direct and counter-cyclical payments. USDA recognized that cotton farmers
benefited from PFC and market loss assistance paymen ts and even treated such payments as part of
“Government Payments by Crop Year” to upland cott on. Additional evidence shows relatively small
fluctuation of cotton planted acreage between MY 1999-2002 and the strong cotton equipment and
geographic forces maintaining historic cotton prod ucers in current cotton production. Numerous
statements by the National Cotton Council establish th at their members received PFC and market loss
assistance payments, and would (and do) receive direct and counter-cyclical payments.

5. In addition, the 2002 FSRI Act provides much higher per acre payments for upland cotton
than other programme crops (except rice and pea nuts). The 1996 FAIR Act similarly provided higher
per acre payments for upland cotton (except rice). The only possible rationale for the much higher

upland cotton per acre payments for PFC, market lo ss assistance, direct and counter-cyclical payment
base acreage than other programme crops was the expectation that historical producers of upland
cotton needed the higher per-acre income to con tinue to produce high-cost upland cotton on base
acreage. This conclusion is further supported by the fact that given their high costs of production, US
upland cotton producers would have lost 10 cents pe r pound in MY 2002 if they had planted on corn
(or six other programme crops) direct and count er-cyclical payment base acreage in MY 2002.
Similar losses would also have been experien ced in MY 1999-2001 if upland cotton were grown on
most other programme crop base acreage.

6. The evidence in Annex I supports Brazil’ s methodology to calculate the amount of PFC,
market loss assistance, direct and counter-cyclical payments by using the ratio of actual US upland
cotton production and the amount of upland cotton base acres for programme payments. For example,
total planted upland cotton acreage in MY 2002 w as 14.1 million acres. The total amount of upland
cotton base acreage in MY 2002 was 16.2 million acres. The ratio of these two amounts is 0.87.
Brazil used this ratio to adjust the amount of tota l upland cotton direct and counter-cyclical payments
for the marketing year to obtain the amount of subs idies received by upland cotton producers. Out of
the 16.2 million upland cotton base acres, 2.1 million acres were not planted to upland cotton in
MY 2002. Thus, holders of these 2.1 million cotton base acres either did not plant any crops or
planted other crops. Consequently, Brazil has not included direct and counter-cyclical payments on
these 2.1 million acres in its calculation of payments to upland cotton producers.

7. The total amount of upland cotton base acreage for direct payments in MY 2002 (which
include the portion of PFC payments that were deemed to be direct payments) was $558 million.
USDA paid out the maximum amount of upland co tton CCP payments in MY 2002 – $1.148 billion.
Multiplying those figures by 0.87 results in $485 million in direct payments and $998 million in
counter-cyclical payments to US upland cotton producers.

8. The United States refuses to offer a methodol ogy for calculating the amount of direct and
counter-cyclical (or PFC and market loss assistan ce) payments made to upland cotton farmers.
Brazil’s suggested methodology is based on the c onclusion that all upland cotton producers received
these payments. In particular, the evidence sugg ests that the amount of payments can be best
calculated by finding that US upland cotton produc ers received those payments using upland cotton
base acreage. This follows from the evidence listed in Annex I to Brazil’s Closing Statement.

9. The United States asserts that “Brazil has pres ented no evidence that the recipients of these
decoupled payments on upland cotton base acres are, in fact, upland cotton producers”. Apparently
what the United States had in mind in making this statement is that Brazil must produce data detailing
the amount of each direct payment received by every single upland cotton farmer between MY 1999-
2002. This is data the United States admits does not exist. But such a burden would require the Panel
to disregard all the circumstantial evidence provided by Brazil. DSU Article 11 requires the Panel to
“make an objective assessment of the facts of the case”. In the absence of any alternative
methodology proposed by the United States, the “facts of the case” are those presented by Brazil.

10. Therefore, what the United States suggests is that the Panel ignores $1.7 billion in PFC and
direct payments simply because the United States does not collect data that could ascertain the precise
figure – which will be very small – of upland cotto n farmers that did not receive those payments.
Such an approach would permit WTO Members to write off large amounts of subsidies by simply
refusing to collect data. The Panel must not allow this position to prevail.

3. Brazil’s Article 6.3(c) Price Suppression Claims and the Econometric Studies

11. Brazil has offered considerable evidence in the form of documents and witness statements
demonstrating the existence and payment of subsidies, as well as the causal link between the subsidies

and significant price suppression. In addition, Br azil presented the Panel with evidence of a number
of different studies that show significant price suppressing effects. Notably among these are the two
Westcott/Meyer USDA studies (referred to and commissioned by the Payment Limitation
Commission) showing 10 per cent price suppression for MY 2000 and an estimated 33.6 per cent
price suppression in MY 2001 from only the effects of removing the marketing loan subsidies. By
contrast, Professor Sumner found that US prices were suppressed by 32.7 per cent by the effects of all
US subsidies that applied during MY 2001. In li ght of the lower level of price effects found by
Professor Sumner, the United States claim that Prof essor Sumner’s analysis is not “conservative” is
curious. Other studies by the ICAC – of which the United States and Brazil are both Members – show
increases in world prices from the removal of some US subsidies of 10.5 per cent for MY 2000 and
26.3 per cent for MY 2001. Professor Sumner found that the effects of a removal of all US subsidies
that applied during MY 2000 and MY 2001 would ha ve resulted in world price increases of 7.74 per
cent and 17.7 per cent respectively. Brazil has presented many other studies as evidence. They all
show significant price suppression.

12. What has been the US reaction to every one of these studies? As they indicated over the past
two days, they have found many initial problems with all of them. But they reserved the broad scale
attack for Professor Sumner’s FAPRI model that h as been repeatedly relied on by the US Congress
and USDA. The United States even identified flaw s in the results of the Westcott/Meyer 2000 and
2001 marketing loan studies. And the United States pr omises they will be busy for the next six weeks
in critiquing all the studies cited by Brazil.

13. But the Panel must ask whether all these economists, including some of USDA’s own leading
economists, could be wrong although their results support USDA’s own Chief Economist’s views that
US producers are insulated from market forces by these subsidies? Could these economists be wrong
because they made the mistake of applying the f undamental notion that large production subsidies
create larger supplies, and larger supplies result in significantly lower prices?

14. In the final analysis, these econometric studies are useful tools to confirm what common
sense already tells us. That $12.9 billion in subsidies provided betw een MY 1999-2002 have
production effects. That the National Cotton Co uncil was correct when it argued that US upland
cotton farmers could not exist without all of the co tton-specific subsidies. That many US producers
needed subsidies to bridge the huge gap between their total costs and market revenue. That US
acreage did not decrease as prices plummeted to reco rd lows between MY 1999-2001 – rather planted
US acreage increased. That US producers plante d 14.1 million acres of upland cotton when prices
were at record lows in the spring of 2002. That US exports did not decrease as prices plunged and the
US dollar appreciated, rather they increased. And that the effects of US subsidies on suppressed
prices are transmitted to the world and individual country markets, including Brazil.

4. Brazil has established a claim under Article 6.3(d)

15. With respect to Brazil’s cl aim under Article 6.3(d), Brazil demonstrated that the ordinary
meaning of the term “world market share” is the world market share of exports. USDA, the EC and
Canada all use this term to refer to export market share, not share of world consumption. This
interpretation is consistent with the use of the term “trade” in footnote 17 of the SCM Agreement
which means the “sale and distribution of goods and services across international borders”. It is also
consistent with the object and purpose of Article 6. 3(d) which is to prevent a Member from using its
subsidies to increase its share of the world market for a particular product.

16. Undisputed facts show that the US shar e of world trade increased considerably from
MY 1998 to MY 2002, and is projected to remain at very high levels in MY 2003. This increase
follows a consistent trend from MY 1996. The “cons istent trend” need not be an unbroken line of
increases during the trend period examined, as the Un ited States appears to argue. Because of severe

weather problems, such as occurred in the Un ited States in MY 1998, export market share in
agricultural problems will always susceptible to some annual variations not caused by subsidies.
Rather the trend must reflect an overall increase and not reflect a number of wide swings within the
period examined. The trend for US world market share of upland cotton from MY 1996, and
particularly the period from MY 1998 onward, show s a sustained and signifi cant increase in the US
world market share. And the undisputed facts show that the record US world market share reached in
MY 2001 and 2002 occurred at the same time as record high levels of US subsidies.

5. Brazil has established that the US sha re of world export trade is not equitable

17. The notion of “equitable share of world expor t trade” necessarily depends on the facts of each
case. The fact-intensive nature of each case is refl ected in the text of Article XVI:3, which requires
the Panel to examine “special factors”. Brazil suggests that examining whether there were any
subsidy-induced increases in market share is one factor to consider. Another factor is the relative cost
of production of the Members competing for world ma rket share. The undisputed facts show (based
on September 2003 ICAC data) that the US shar e of world exports of cotton more than doubled
between MY 1998-2002 – from 18.7 to 39.3 per cent. At the same time, the African producers’
collective share of world exports decreased from 10.2 to 8.1 per cent of world trade. Figure 26 shows
these trends. If a picture is worth a thousand words, it is this one.

18. Brazil submits it is not equitable for a heavily subsidized WTO Member to more than double
its share of competitive world markets for upland cotton in only five years reflecting a significant
contribution of subsidies. And it is not equitable for that Member to do so when its costs of
production were double those of the poorest and needi est producers in the world. Yet, when faced
with these facts, the United States’ only response is that the definition of “inequitable” is hopelessly
vague. Brazil does not believe the inequity in this case is so difficult to determine.

ANNEX F-3

EXECUTIVE SUMMARY OF THE OPENING STATEMENT
OF THE UNITED STATES AT THE SECOND SESSION
OF THE FIRST MEETING OF THE PANEL WITH THE PARTIES

1. Brazil’s Analysis Fails to Establish to Whom Certain Payments Go and Whether
Certain Payments May Properly Be Attributed to Exported Upland Cotton . One of the
fundamental elements of Brazil’s claims is that Br azil needs to identify the “subsidized product” that
is causing the serious prejudice that Brazil claims its interests are suffering.
1 Brazil has not even
explained, however, what is the “subsidized product” for each of the types of subsidies from which it
claims serious prejudice. Brazil appears to assume that the “subsidized product” is upland cotton in
the form traded on the world market. Yet many of the subsidies at issue are paid to producers of
cotton. Cotton is processed and sold before bei ng traded. Brazil has made no showing of how the
subsidy to the producer can be assumed to pass through to the exporter.

2. Brazil’s panel request identifies the cha llenged measures as “subsidies provided to US
producers, users, and/or exporters of upland cotto n”. However, it is for Brazil as the complaining
party to establish who are the recipients of the subs idies and that the subsidies are properly attributed
to upland cotton. Brazil’s failure to do so means that it has not carried its burden in demonstrating
that cotton is subsidized for purposes of considering adverse effects.

3. In the Peace Clause portion of this dispute, the United States has discussed at length certain
decoupled payments that are not linked to production of upland cotton. With respect to these
decoupled payments, Brazil has failed to demonstrat e who the recipients of these payments are in
connection with any exported upland cotton. Br azil simply presumes that every upland cotton
producer is an upland cotton base acreage holder a nd receives a decoupled payment. Brazil has
brought forward no facts to demonstrate that this is the case.

4. Even if Brazil had brought forward evidence that the recipients of these payments were
upland cotton producers, that would not be eno ugh. Brazil would still need to allocate these
payments, which Brazil concedes are not linked to current production of upland cotton, over total
production on a recipient’s farm.
2

1 For example, for purposes of a claim under Article 6.3(c) of the Subsidies Agreement, the “effect of
the subsidy” must be “significant price undercutting” or “significant price suppression, price depression, or lost
sales” caused by “the subsidized product.” Similarly, under Article 6.3(d) “the effect of the subsidy” must be an
increase in world market share “in a particular subsidized primary product or commodity.”
2 Subsidies Agreement, Annex IV, paras. 1-3 (We note the context provided by Annex IV of the
Subsidies Agreement, which explained the calculation of the ad valorem subsidization of a product under the
now-defunct Article 6.1(a) of the Subsidies Agreement. This Annex provided that (among other conditions),
unless “the subsidy is tied to the production or sale of a given product,” the overall rate of subsidization of a
“product” is found by taking the amount of the subsidy over the “total value of the recipient firm’s sales in the
most recent 12-month period”.).

5. Thus, Brazil assumes that the subsidies
3 at issue are received by someone currently producing
cotton, based simply on the fact that the subsidy is based on past production of cotton. Brazil has not
explained how this makes upland cotton currently for sale on the export market the “subsidized
product” with respect to these payments. Brazil has failed to demonstrate that the recipients of the
subsidies are involved in current cotton production, no r has it demonstrated how much of the subsidy,
even under Brazil’s approach, should be allocated to other products produced by the recipient, such as
corn or soybeans.

6. Brazil Has Not Established that US Subsidi es Have Suppressed or Depressed Prices in
the Same Market. As noted above, Brazil has in fact not even demonstrated the subsidized product
for each of the subsidies it challenges or the size of the subsidies to exported upland cotton. However,
without relieving Brazil of its burden on these issues, we note that even Brazil’s overly simplified
approach does not suffice to demonstrate causation. US subsidies largely resulted from low market
prices, not the other way around.

7. This is nowhere more evident than in marketing year 2001, a year with historically low
market prices. Brazil has failed to explain that market signals (futures prices) at the time when
planting decisions were taken by US producers suggest ed prices would remain high. Thus, the large
marketing loan payments ultimately made in mark eting year 2001 do not demonstrate that marketing
year 2001 payments had the effect of increasing US production. Brazil’s expert acknowledges this
very point, but Brazil has not presented in its further submission any information on “the expectations
about production incentives that growers hold at the time they make their planting decisions”,
information on which its own expert has stated “cotton plantings depend”. Thus, Brazil’s simple
explanation of the conditions in marketing y ears 1999 through 2002 ignores “the basic economic
principles” its own expert says are relevant in this case.

8. The Sumner Model Presented by Brazil Is Inadequately Explained, Inappropriately
Applied for a Retrospective Analysis, a nd Apparently Uses Faulty Assumptions and
Estimations. In presenting this reaction to Brazil’s expert ’s analysis, the United States notes that the
use of a simulation model to explore the counter-fact ual of removal of US subsidies cannot be made
without answers to previous questions on the subsidized product and size of the subsidies. That is, the
use of a simulation model cannot relieve Brazil of its burden of arguing the elements necessary to
establish its claims. This critique of Dr. Sumner’s an alysis is made to show that Brazil’s approach is
fundamentally flawed in all aspects.

9. Since Brazil has not provided access to the m odel itself, one cannot say with certainty how
the modelling affects the results.
4 Nonetheless, based on what has been presented in Annex I, Brazil’s
analysis appears flawed in several respects and as a result, the conclusions drawn are biased and
misleading. While the modelling approach used is well accepted for forward-looking projections,
using a baseline model to simulate counterfactual out comes over the historical period 1999-2002 is

3 Brazil purports to include expo rt credit guarantees under th e GSM-102 programme within its
actionable subsidy claims. However, Brazil has mere ly alleged the quantities of export credit guarantees
benefitting cotton and the value of exports. Brazil has nowhere presented evidence on any alleged subsidy rate
resulting from this programme nor the amount of the subs idy. Therefore, Brazil ag ain has not provided any
evidence with respect to the amount of the subsidy alleged to be provided by US export credit guarantees.
4 The report provided by Brazil as Annex I to its further submission does not provide the model itself,
including detailed specifications of the equations used therein. As a result, Brazil is essentially asking the Panel
and the United States to accept Dr. Sumner’s results on faith alone. The United States points out why Brazil’s
expert’s approach is inappropriate for a retrospective analysis of the effe ct of US subsidies. Even were Brazil’s
expert’s approach appropriate, however, Brazil has failed to provide sufficient evidence to allow the Panel to
fully understand and evaluate that model. Thus, quite apart from flaws identified by the United States, Brazil’s
reliance on Dr. Sumner’s inadequately explained results, evident throughout Brazil’s latest submission, further
demonstrates that Brazil has not established a prima facie case that US subsidies have the effects complained of.

problematic because of the implicit assumption of pe rfect foresight by producers of actual conditions
in the historical year. This potentially overstates the effects of the programme because the model
assumes outcomes that were unanticipated by produ cers when they made their planting decisions.
Also, it is not clear to what extent actual observed da ta enter into the solution process. The difference
is not merely conceptual: the choice of values can potentially affect the reported results.

10. Brazil’s use of lagged prices as a proxy for expected prices is also problematic. Recent
studies have criticized the use of lagged variables as substitutes for expectations, and numerous papers
use the futures price for next year’s crop as the best proxy for expected price. The use of futures
prices in a multi-commodity modelling framework fo r extended time projection is cumbersome.
Nonetheless, the use of lagged prices as a modelling convenience does not preclude the possibility of
bias. In those years where there are large shocks, lagged prices are poor predictors of expected price.
Futures prices, by contrast, are more efficient because they are based on more current information.
5

11. Brazil’s expert’s estimates of US programme impacts after marketing year 2001 are further
inflated by his choice of a low-price baseline for the counter-factual comparison. 6 The low-price
baseline exaggerates the 2003-07 results and ensur es projections of significant marketing loan
payments throughout 2003-07.

12. The economic literature on decoupled pa yments acknowledges the programmes may have
some impact on production, and that those impact s depend in part on farm er’ s expectations.
However, the research concludes that the impact a ppears negligible. Brazil’s expert, on the other
hand, uses a stylized logic to come up with th e estimates for the impact of production flexibility
contract (PFC) payments that have neither empirical nor theoretical grounding. It is widely accepted
that these programmes have whole farm impacts rather than crop specific impacts. Furthermore, the
impact is much smaller than Braz il has estimated; the whole farm im pact is, at its upper estimate,
perhaps one-quarter to one-fifth the impact Brazil’s expert cites for cotton alone.

13. Brazil argues that market loss assistance (MLA) payments have a larger effect on area than do
PFC payments, despite the fact that MLA payments were paid on the identical payment base as the
PFC payments. Supplemental legislation authorizing each of these MLA payments was passed
several months after planting for the crop year in question had occurred. Brazil asserts that producers
had expectations about MLA payments at the time of planting. However, if producers had
expectations of payment, then they also knew that they would be eligible to receive such a payment
whether or not they planted cotton. Indeed, they could choose not to plant any crop at all and still be
eligible for the payment.

14. Brazil argues that counter-cyclical payments “clearly provide more production incentive than
the market loss or the direct payments,” yet offers no empirical evidence to justify such a claim. The
claim, as well as Brazil’s expert’s treatment of decoupled payments in general, is particularly puzzling

5 Consider as an example the 2002 crop year. In Br azil’s analysis, area response to the removal of the
cotton loan programme results in a 36-per cent reduction in US planted area–the larges t single effect for any of
the years considered in his analysis. Based on lagged prices, price expectations for 2002 were 29.8 cents per
pound, a 40 per cent reduction from 2001 levels. Yet, the futures market data suggests a far smaller reduction in
expected price. December futures prices taken as an av erage in February 2002 averaged 42.18 cents per pound,
a 28 per cent drop from year earlier levels. Based on Brazil’s range of supply response elasticities of 0.36 to
0.47, a decline of this magnitude would suggest a drop in acreage of 10 to 13 per cent from the preceding year.
In fact, actual US cotton acreage dropped 12 per cent (from 15.5 million acres in 2001 to 13.7 million acres in
2002) suggesting acreage levels entirely consistent with world market conditions and price expectations.
6 Brazil’s expert’s estimate for the 2002 A-Index is 51 cents, compared with 54 cents in FAPRI’ s
March 2003 baseline, and an actual pri ce of 56 cents. For 2003, Brazil’s expert’s A-Index is estimated again at
51 cents, whereas FAPRI’s baseline has a 58.4 cent fo recast; as of 15 September 2003, the A-Index is at
65.5 cents.

given a recent paper by Brazil’s expert in which he concludes that the 2002 farm bill would have a
minimal effect on cotton area and world prices. Brazil’s expert also remarked that: “The impacts of
the FSRIA will be hard to isolate amid the normal flux of world markets".
7 We agree with
Dr. Sumner’s previously published conclusions on these points.

15. Crop insurance subsidies are generally ava ilable for most crop producers and hence do not
give a specific advantage to one crop over another. Thus, their effects are not commodity specific,
and have no or minimal impacts on cotton markets. Moreover, crop insurance purchases by cotton
growers have generally been at lower coverage levels than for other row crops. Over 2002-03,
roughly 90 per cent of cotton acreage insured was at c overage levels at 70 per cent or less, consistent
with the criterion under paragraph 8(a) of Annex 2 of the Agreement on Agriculture. This suggests
that even if one were to consider cotton crop insu rance subsidies as crop specific, over 90 per cent of
insured cotton area would be exempt as having no or minimal trade-distorting effects.

16. Lastly, while some studies like the ones cited by Brazil have suggested crop insurance
subsidies may have a slight effect on acreage, the effects on production are less clear. Recent studies
suggest that farms with more insurance tend to u se less inputs like fertilizer and pesticides and vice
versa. This demonstrates a potential moral hazard problem with crop insurance: a negative effect on
yields, which may well offset any marginal effects on crop area.

17. The size of Step 2 payments under Brazil’s baseline appears to be biased upwards, in part,
due to the low-price baseline discussed earlier. Braz il’s results are inconsistent with other analyses of
Step 2.
8 Thus, contrary to the results of Brazil’s expe rt’s model, the benefits of Step 2 payments
would appear to largely accrue to the producer, with only negligible effects on world markets. While
Brazil’s model documentation is lacking, one expl anation for the difference may be a more price
responsive acreage equation by Brazil.

18. While Brazil has presented a modelling framework that is conventional, much of how Brazil’s
expert has modelled US farm payments can be co nsidered “unconventional”. Thus, the analysis
presented by Brazil in Annex I is not “conservative”, but rather produces results that are inconsistent
with a wider body of academic research.

19. Additional Legal Arguments . With respect to price suppression or depression under
Article 6.3(c) of the Subsidies Agreement, Brazil be lieves that it is the effect on the producers of the
complaining Member that must be “significant”. We find it implausible that the Subsidies Agreement
was intended to create multiple standards for panels to apply: that is, what may be “significant” to one
Member’s producers may be “insignificant” to another’s. Context for rejecting Brazil’s approach can
be found in Article 15.2 of the Subsidies Agreemen t, which sets out for countervailing duty purposes
the same effects found in Article 6.3. This text ma kes it even more clear that the analysis is whether
the level of price suppression or depression itself is "significant".
9 Brazil has not suggested that the
analysis under Articles 15.2 and 6.3(c) should be different.

7 Sumner, D.A. “Implications of the US Farm Bi ll of 2002 for Agricultural Trade Negotiations.”
Australian Journal of Agricultural and Resource Economics. 47(2003): 99-123, at 114. (See Exhibit US-56)
8 In Brazil’s baseline, Step 2 payments average 5.6 cents per pound over the 2003-07 period,
elimination of Step 2 payments raises world prices by an average of 1.6 cents, while farm prices fall by 2.5 cents
per pound. These alleged effects are higher than those f ound by others. For example, in 1999, when Congress
was debating whether to reauthorize Step 2 subsidies, th e FAPRI analyzed the effects of reauthorization for the
Senate Committee on Agriculture, Nutrition and Forestry. Their analysis estimated an average Step 2 payment
of 5.3 cents per pound, resulting in an increase of the US spot price by 4 cents and a fall in the world cotton
price of less than 0.5 cents.

9 Subsidies Agreement, Article 15.2 (“With regard to the effect of subsidized imports on prices, the
investigating authorities shall consider whether . . . the effect of such imports is otherwise to depress prices to a

20. With respect to GATT 1994 Article XVI:3, Br azil appears to assume that it may advance a
claim under this provision on all challenged US subsid ies. However, Article XVI:3 only applies to
export subsidies. Therefore, as Brazil has pred icated its claim under Ar ticle XVI:3 on evidence
relating to all challenged US subsidies and not only those subsidies it alleges are export subsidies,
Brazil has failed to establish a prima facie case on its claims.

21. Finally, with respect to Brazil’s claims of a threat of serious prejudice, the United States notes
Brazil’s failure to present recent market and futures price data, which belie the notion that there is a
clearly demonstrated and imminent likelihood of future serious prejudice. In fact, prices are currently
above the level at which the marketing loan pr ogramme confers any benefit on US upland cotton
producers and are expected to remain so. If ther e is not a “clearly demonstrated and imminent
likelihood” of serious prejudice in marketing year 2003, it follows that there cannot be a threat of
serious prejudice for marketing years 2004-07, either.

significant degree or to prevent price increases, which otherwise would have occurred, to a significant
degree.”).

ANNEX F-4

EXECUTIVE SUMMARY OF THE CLOSING STATEMENT
OF THE UNITED STATES AT THE SECOND SESSION OF THE
FIRST MEETING OF THE PANEL WITH THE PARTIES

1. The US comments speak briefly to Brazil’s allega tions regarding “the effect” of US subsidies.
Brazil has not shown causation between the US subs idies and the effects Brazil attributes to those
subsidies. The United States has pointed out the fa ilure of Brazil to separate and distinguish evidence
on the effect of other factors from the alleged effect of the challenged US subsidies. Ultimately, this
issue goes to the quality of the evidence before the Panel and whether Brazil has established a prima
facie case on its claims.

2. There are three main elements of Brazil’s argument. First is the “temporal proximity”
argument – that is, that low world prices correspond in time with high US subsidies.
1 Mr. Chairman,
there are subsidies and there are subsidies. For example, there is a difference if I give you a $10
subsidy to produce versus $10 whether you produce or not. Depending on the nature of the payment,
one would estimate different effects. Therefore, one cannot merely aggregate the value of all US
payments and claim that those subsidies have had “an effect” on production and prices.

3. In this part of its argument, Brazil misu ses the data on production by making comparisons
using marketing years 1998 and 2001. In 1998, production was driven downward by drought and
record crop abandonment. In 2001, production was driven upward by record yields. To use 1998 and
2001 as the beginning and end of a comparison therefore distorts a proper analysis.

4. Brazil stated yesterday that the increase in US production in marketing year 2001 was not
solely due to record yields but also to an increase in acreage. That is true – there was some increase
in acreage in 2001, but Brazil has failed to make the proper comparison to put that information in
context. Brazil should have compared the US acreage increase between marketing years 2000 and
2001 with that in the rest of the world. The Un ited States invites the Panel’s attention to Exhibit
US-63 circulated today. This exhibit reflects, for marketing years 1996-2002, the percentage change
in harvested acreage over the previous marketing year in the United States and the rest of the world.

5. In marketing year 1996, when the progra mmes challenged by Brazil were introduced, you see
a large decrease in US acreage comp ared to the rest of the world. The United States draws your
attention to marketing year 1998, in which there is a large decline in US harvested acreage due to
drought, followed by a large increase in marketing y ear 1999, which largely cancel each other out. In
marketing year 2001, we see that the increase in acreage in the United States corresponds to the
increase in acreage for the rest of the world. In marketing year 2002, the percent decline in harvested
acreage in the United States is greater than that observed in the rest of the world. Thus, the data do
not support Brazil’s contention that US producers are insulated from market forces. In fact, US
harvested acreage largely increases and decreases in line with the rest of the world.

6. (Yesterday Mr. Moulis asked about the data in the upland cotton fact sheet. The data in
Exhibit US-63 does not come from that fact sheet but from the most recent US Department of
Agriculture data base – the specific source is indicat ed on the second page of the exhibit. Brazil has
used this same source for numerous exhibits in its submissions.)

1 The United States has addressed the disconnect between low world prices and the level of subsidy in
Exhibit US-44.

7. The second element of Brazil’s arguments that the United States would like to address is its
reliance on Mr. Sumner’s model. We first woul d like to comment on something Mr. Sumner said
today in his statement to the effect that the Un ited States does not object to the use of the FAPRI
baseline model. In fact, as reflected in the po rtion of the US opening statement delivered by
Dr. Glauber, we do criticize as inappropriate the us e of a baseline simulation model for retrospective
analysis, a type of analysis for which it is not designed and is poorly suited.

8. Mr. Sumner’s analysis also uses an inappropr iately low baseline for hi s prospective analysis
of future years. I noted with interest Mr. Sumn er’s statement that he used the November 2002
preliminary FAPRI baseline because this was availabl e when he ran his model and that the results
would have been even more extreme had he used FAPRI’s published 2002 baseline “released the
previous winter”. The United States realizes it would have been inconvenient for Mr. Sumner to
re-run his model, but FAPRI released a more recent baseline in January 2003 (published in
March 2003
2), many months before Brazil submitted the results of its model to the Panel and the
United States. We believe this more recent FA PRI baseline would have been a more appropriate
baseline with which to do calculations, but Brazil ha s chosen not to do so, instead presenting to the
Panel results based on more out-of-date and inaccura te data. We wonder what would arise from a
prospective analysis using such more recent data.

9. The third issue concerns the allegations of hi gh US costs, an issue we have touched on only
briefly in this hearing and will return to in mo re detail in our submissi ons. Brazil asks: without
subsidies how could high-cost US producers have stayed in business? It is important first to point out
that all of the cost projections by the US Department of Agriculture cited by Brazil are merely updates
of a 1997 cost survey. In every year subsequent to 1997, the Department simply takes the results of
the 1997 cost survey and updates it to reflect the ge neral increase in prices according to the producer
price index.

10. This approach assumes that the mix of input s remains the same in 1997 as in subsequent
years. However, this causes a presentation of in accurate data on what costs are now. Brazil has
several times in this hearing stated that it is not denying that factors reducing costs have occurred –
for example, pest eradication bringing new, low-cost areas of the United States into production or the
adoption of biotech cotton which requires fewer p esticide applications. Brazil, however, has not
updated the cost information it presents to the Pa nel to account for such new developments and
information.

11. The United States also notes Brazil’s repeated re ferences to a so-called cost/revenue gap. In
fact, Brazil presents another such comparison for mark eting year 2002 at page 5 to the annex to its
Closing Statement. However, Brazil’s so-calle d “gap” is the difference between an inaccurate
average total cost per pound and the average marketing year farm price. Mr. Chairman, this is a faulty
comparison. Total costs are relevant over the long -term, but Brazil uses this (inaccurate) number to
compare to revenue in the short term – that is, the market price for one year. Such a comparison tells
you nothing and does not establish that it is only the effect of US subsidies to keep US cotton farmers
in business.

12. In fact, Brazil has apparently not listened to the testimony of its own farmer witness,
Mr. Christopher Ward. In his statement during the first day of this hearing, he said the following (and
I quote from paragraph 6 of his statement):

But even with these high yields and the excellent quality of our land, we were not
able to fully recover all of our variable costs of production during the 2000/01 and

2 Exhibit US-52.

2001/02 seasons . These variable costs included depreciation and maintenance of
equipment, seed and fertilizer, labor, insurance, and fuel. Nor were we able to meet
our total costs which include the additional fixed costs.3
That is, Mr. Ward says he has not been able to cover either his variable costs or his total costs for a
period of two marketing years, and yet he continu es producing. Under Brazil’s analysis, he should be
out of the business of producing cotton. He is not, and Brazil claims he is not subsidized, so how can
Brazil claim that it is “the effect of the subsidy” to keep US farmers in business when they allegedly
were not able to cover their total costs in marketi ng year 2002? What’s true for Brazil should also be
true for the United States.

13. Mr. Chairman, members of the Panel, on the basis of these argum ents and the evidence
presented to date, the United States does not believe that Brazil has established a prima facie case that
the challenged US subsidies have caused the effects complained of. We will continue to develop and
provide our response to the voluminous submissions of Brazil in our answers to your questions and in
our rebuttal submission. Thank you.

3 Statement of Mr. Christopher Ward at the Second Session of the First Panel Meeting, para. 6
(emphasis added). Mr. Ward goes on to state: “Based on my discussions with many producers relating to Mato
Grosso cotton production and revenue, I know that most other producers in State of Mato Grosso were in the
same situation as we were during the 1999-2002 period.” Id. (emphasis added).

4. The United States claims that Brazil has not been able to demonstrate the causal connection
between the US measures and their effects, nor has it considered other factors which affected and still
affect the world cotton economy.

5. Argentina believes that Brazil, in its First Written Submission, provided a precise and
comprehensive description of the world cotton market situation, backing the facts with considerable
evidence and documentation.
4 Similarly, in its Further Submission, Brazil took account of other
factors which also contributed to demonstrating the suppressing or depressing effect on prices of the
US subsidies.5

6. Argentina would further like to point out that despite the existence of factors other than the
US subsidies that could also have had a depr essing effect on international prices (such as the
development of synthetic fibres, Chinese trade poli ces and other factors raised by the United States in
its further submission6, some of which will be considered by Argentina further on), Article 6.3 of the
SCM Agreement7 clearly states that "serious prejudice … may arise in any case where … the effect of
the subsidy...".

7. In other words, Argentina considers that Brazil has demonstrated the causal relationship
between the subsidies that the United States has gran ted and continues to grant to its cotton sector and
the fall in international cotton prices.

8. That is, Argentina considers that under the SCM Agreement it is not necessary for a subsidy
to be the only factor in the decline in international prices in order to be able to establish a causal
relationship between that subsidy and the serious prejudice.
8 Rather, the subsidy must be a
determining factor or, according to the text of Article 6.3(c), its effect must be a " significant" price
suppression or price depression, and this was demonstrated by Brazil.

9. Argentina recalls that the United States, give n the size and global impact of its cotton market
– with a 41.6 per cent share of the world market – is the international market "price-setter" par
excellence.

10. Thus, without the US subsidies which generate a world market surplus, international cotton
prices would have been higher or w ould not have fallen as much. Similarly, if the US share in the
world market had not increased as a result of the su bsidies, the international price of cotton would
have been higher or would have not fallen as much , and as a result, third-country producers, including
Argentina, would not have suffered as much prejudice as a result of artificially depressed prices.
9

11. Argentina does not agree with the US statement that Brazil has not established a prima facie
case because it has failed to provide sufficient evidence of the causal relationship between the
enormous budgetary outlays and the low international cotton prices.
10

4 Brazil's First Submission to the Panel, 24 June 2003.
5 Brazil's Further Submission to the Panel, 9 September 2003, Section 3.3.4.4.
6 Further Submission of the United States, Section IV.B and C.
7 Agreement on Subsidies and Countervailing Measures.
8 "Further Third Party Submission of New Zealand" (3 October 2003), para. 2.09: "Brazil's argument
is not that declining 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 … ".
9 Second Written Third-Party Submission of Argentina, 3 October 2003, paragraphs 21, 26 and 27.
10 Further Submission of the United States, paragraphs 17 and 80.

12. Brazil has not based its claims on a mere assertion, but rather, as we have already stated 11, the
number and quality of the empirical and economet ric analyses presented by Brazil in its Further
Submission12, which were carried out both by internati onal organizations and by various prestigious
US institutions, not to mention the USDA it self, provide irrefutable evidence of the collective and
individual effects of each subsidy programme on the price of cotton.

13. It is therefore difficult for Argentina to unde rstand how the United States can claim that other
factors, and not its subsidies, were the cause of th e dramatic fall in cotton prices over the past few
years. Nor does Argentina understand how the United States can disregard the evidence provided by
Brazil13 to the effect that during the marketing y ears 1999 to 2002, the total value of US cotton
subsidies amounted to almost US$13 billion while th e average cotton subsidization rate was 95 per
cent.14

14. In the paragraphs that follow , Argentina will refute some of the arguments put forward by the
United States concerning other factors that may have influenced the fall in international cotton prices:

15. FIRST: the United States claims that the explosion in the production of synthetic fibres
played a considerable part in causing cotton prices to fall. Argentina submits that the contrary appears
to be true.

16. Indeed, the "Fibre Prices" Table in paragr aph 23 of the US Further Submission shows that
polyester prices have always been lower than cott on prices (see: "US mill" as compared to "US spot"
and "Asia poly") and, moreover, they appear to follow cotton prices (see 1995, when cotton prices
reached their record level for the series and polyester happened to follow the same trend).

17. The fact that polyester had to adapt to cott on prices, and not the reverse as the United States
claims, is confirmed by the very close correlation between cotton and polyester prices. On the other
hand, the last few years do not show any correlation between the price per barrel of oil and the price
of polyester fibres.

18. SECOND: Argentina does not understand how th e United States can claim that without the
increase in US retail consumption, international cotton prices would currently be lower
15 (which is not
being questioned), while disregarding the role that its enormous subsidies have played and still play in
the fall of international cotton prices.

19. As we have already pointed out
16, price movements of the US Cotlook "A" Index and third
country (e.g. Brazilian and Argentine) market pri ces are directly interconnected, and this is an
unquestioned and irrefutable fact. This being the cas e, the amount of the US subsidies granted to the
cotton sector added to the scale of US production and exports are decisive when it comes to
determining the extent to which the subsidies affect the fixing of both international and third market
prices.17

20. THIRD: The United States correctly points out that since the world's cotton trade is managed
in US dollars, an appreciation of the dollar will l ead to a fall in the price of cotton both in the

11 Second Written Third-Party Submission by Argentina, paragraphs 34-36.
12 Further Submission of Brazil, Section 3.3.4.8.1.
13 USDA's "Fact Sheet: Upland Cotton" (January 2003). (See Annex BRA-4).
14 Written Third-Party Submission by Argentina, 15 July 2003, paragraph 20.
15 Further Submission of the United States, paragraph 26.
16 Second Written Third-Party Submission by Argentina, paragraph 22.
17 Idem, paragraph 28.

United States and in third markets.
18 What the United States does not explain in connection with this
fact is why this appreciation of the dolla r by some 37 per cent between 1995 and 2002 19 did not also
result in a fall in production, and consequently, in US cotton exports. The National Cotton Council
(NCC) gives us the answer, pointing out that without its subsidies, the United States' share in the
world cotton market would have declined.

21. FOURTH: Regarding the United States argument that China is the giant of the world cotton
industry, and hence the impact of its trade polici es and stocks, we note that neither Brazil nor third
parties, such as Argentina, overlooked this fact. We repeat, Argentina has already pointed out
20 that
while there were a great many cotton producing count ries, four of them (China, the United States,
India and Pakistan, in descending order) alone account for two thirds of world cotton production.

22. However, Argentina also pointed out that most of the cotton was used in the producing
country itself, and that the great exception to that rule was the United States, which exported over a
half of the cotton it produced and was the world' s leading exporter. This was why the level of
subsidization in the United States w as the main factor in determining the world cotton market price.
In other words, while China may be the giant in the world cotton industry, the United States is the
giant in world cotton trade.

23. FIFTH: The United States claims that the d ecisions of farmers are based on expected cotton
prices for the upcoming crop year and not prices from the previous crop year as cited by Brazil, and
that US cotton producers are not insulated from international price movements.
21 We can only repeat
some of the questions that we addressed to the United States during the consultations22, namely:

24. If this is so, how does the United States explain the fact that in 2001 – the fifth year of falling
prices – US cotton producers achieved a record harvest of 20.3 million tons, an increase of 42 per cent
compared to 1998, and that the cotton planted area increased by 6 per cent during the same period?
Why does the USDA estimate a 10 per cent drop in the world production for 2002 – reflecting the
impact of world prices on investment – and at the same time estimate for this year another record
harvest in the US – the fourth biggest ever reco rded? How does the US explain the reasons for the
increase in the volume of its cotton exports from 946, 000 tons in 1998 to 1. 8 million tons in 2001,
while there was a drop in international prices?

25. Besides, the United States is not a low-cost producer
23 (despite its claim that pest eradication
programmes and the adoption of gene tically modified varieties of cotton have lowered its production
costs24), and its productivity levels are lower than t hose of other exporting countries. Nevertheless,
while international prices have fallen by some 54 per cent since the middle of the 1990s, the
United States has expanded the area under cotton and increased its production. How does the
United States explain the lack of correlation between the world cotton price and US cotton
production?

26. Brazil has given answers to all of these questions . Argentina has also pointed out that if the
United States did not grant subsidies to its co tton sector, the US cultivated acreage and production

18 Further Submission of the United States, paragraph 35.
19 Idem, paragraph 32.
20 Written Third-Party Submission by Argentina, 15 July 2003, paragraph 21.
21 Further Submission of the United States, paragraph 45.
22 Second Written Third-Party Submission by Argentina, 3 October 2003, paragraph 7.
23 International Cotton Advisory Committee, "Survey of the Cost of Production of Raw Cotton", 2001.
24 Further submission of the United States, paragraph 46.

would diminish. US exports would also diminish and, the US being the world's leading supplier of
cotton, international prices would be higher or would not have decreased as much.25

27. Argentina considers that the evidence submitte d with respect to the increase in US production
and exports which took place entirely independently or in isolation from the fall in the international
price clearly demonstrates that US cotton producer s are immune to changes in the market prices for
cotton.
26

28. SIXTH: The United States claims that the er adication of pests and the adoption of genetically
modified varieties of cotton have lowered production costs.
27 We stress that even so, there continues
to be a widening gap between those costs and market prices.

29. We repeat what has already been stated by Brazil and Argentina
28, namely that while
US cotton production costs are among the highest in the world, US producers' market prices have
fallen from US$0.60 to US$0.30 per pound.
29 The only possible explanation of how the United States
has been and continues to be able to bridge the widening gap between production costs and market
prices is subsidies, since without them many US producers would have been or would be compelled to
cease cotton production.

30. SEVENTH: Argentina does not understand how the United States can claim that US cotton
producers are highly sensitive to price changes when in spite of a 54 per cent fall in international
prices since the middle of 1990s, the area under cotton and the production of cotton in the
United States expanded considerably. In other words, contrary to what the United States has claimed,
the area under cotton has responded to the fall in in ternational prices by increasing steadily. The only
way to achieve such a result is to grant enormous subsidies, since without them the cultivated area,
and hence production, would have decreased.

31. EIGHTH: Argentina does not understand how the United States can state that its cotton
producers show greater sensitivity to price changes th an is demonstrated by third markets when, for
example in Argentina – which is basically a "price- taker" in the international cotton market – the
cultivated area shrank by 76 per cent during the ma rketing year 2001/2002, while production fell by
63 per cent compared to 1998.
30

II.2 Exclusion of measures

32. Regarding the US argument that some of its domestic support measures should not be
included in the analysis 31, Argentina considers that the Panel sh ould examine the collective effects of
all of the support measures that are not green box m easures. Argentina does not agree with the US
statement that direct payments and counter-cycli cal payments should be excluded from the analysis
simply because their individual effects may not be that significant.

25 Second Written Third-Party Submission by Argentina, 3 October 2003, paragraphs 11 and 12.
26 Idem, paragraph 5.
27 Further Submission of the United States, 30 September 2003, paragraph 46.
28 Written Third-Party Submission by Argentina, 15 July 2003, paragraphs 17 and 18.
29 According to a recent ICAC study, the cost of production in the United States was US$0.81 per
pound of cotton in the marketing year 1999. In contrast, as pointed out by Brazil in paragraph 32 of its
submission, Argentina's production costs averaged 59 cents per pound of cotton. "Cotton: World Statistics",
Bulletin of the International Cotton Advisory Committee, September 2002 (Annex BRA-9).
30 "Argentina: Economic Injury to the Cotton Sect or as a Result of Low Prices", Working Group on
government Measures of the International Cotton Advisory Committee, 2002. Written Third-Party Submission
by Argentina, 15 July 2003, paragraph 22.
31 Further submission of the United States, 30 September 2003, paragraphs 71 to 75.

33. It is the collective impact of all of the US subsidies that has effects on the cultivated area,
production, exports and prices.

II.3. Interpretation of Article 6.3(c)

II.3.1 Effect of the subsidy

34. Argentina considers that Brazil has made a proper prima facie case with respect to its claim of
inconsistency with Article 6.3(c) of the SCM Agre ement, conclusively demonstrating the significant
price suppression or depression effect.

35. Firstly, Argentina does not understand how the United States can simply brush aside the
Panel's findings in Indonesia-Automobiles
32, since this was the only dispute under the GATT-WTO
which dealt with the interpretation of the term "significant".

36. Secondly, Argentina fails to understand how the United States can claim that Brazil argued
that it is the effect on producers that must be si gnificant, and not on prices, when Brazil has submitted
copious evidence, based on numerous empirical and econometric analyses, of the effects of the
subsidies on prices.

37. It is remarkable that the United States shoul d completely disregard these analyses, especially
considering they were conducted by international organizations a nd by different prestigious US
institutions, not to mention the USDA itself
33, in an attempt to distort Brazil's evidence.

38. Argentina repeats that over and above any e ndorsement that may be given to the conclusions
of any one of these studies (and each study's estimate of the price effect of the subsidies), an increase
in the world price of cotton would be significant, ev en if international price suppression or depression
were to amount to only one per cent per pound, sin ce such an increase would enable countries such as
Brazil and Argentina to recover their competitive positions in the world cotton market.
34

39. Finally, at no time does the United States s eem to suggest that a suppression or depression
effect of 12.6 per cent on international cotton pr ices is not "significant" within the meaning of
Article 6.3(c). The Panel should therefore find that the subsidies in question have caused and still
cause significant depression of cotton prices in the world market resulting in serious prejudice to
Brazil's interests.

II.3.2 "In the same market"

40. Contrary to what the United States has claimed
35, Argentina considers that Brazil has
presented sufficient evidence with re spect to the significant effect of subsidies on prices for each
relevant geographical market, including the United States, Brazil, the African Countries, other
producer countries and Brazilian export markets.

41. The United States provides no legitimate reason why the Panel should not consider the world
market. As stated earlier
36, price movements of the United States, of the Cotlook "A" Index and third

32 Idem,paragraph 82.
33 Further Submission of Brazil, 9 September 2002, Section 3.3.4.8.1.
34 Second Written Third-Party Submission by Argentina, 3 October 2003, paragraph 34 to 36. See also
Further Third-Party Submission of New Zealand (3 October 2003), paragraph 2.21: " ...As Brazil demonstrates
even a 1 cent per pound price-suppressing effect can reduce world wide export revenue by 552 million dollars".
35 Further Submission of the United States, paragraphs 90 to 92.
36 See paragraph 17 above.

country (e.g. Brazilian and Argentine) market pri ces are directly interconnected, and this is an
unquestioned and irrefutable fact.

42. Moreover, US cotton forms part of Cotlook's "A" Index basket, so that the Panel cannot
ignore the fact that the US subsidies have a decisive impact on the price of cotton in the world market.

43. Indeed, this being the case, the amount of US subsidies granted to the cotton sector added to
the scale of US production and exports is decisive wh en it comes to determining the extent to which
the subsidies affect the fixing of both third market and world market prices.

II.3.3 Time period to be considered

44. Regarding the US argument that subsidies that have ceased to exist can have no "effect"
37,
Argentina would like to recall the Panel's remarks in the Indonesia-Automobiles concerning the
irrelevance of serious prejudice having been caused by programmes that are no longer in force. Upon
examining whether the subsidies caused serious prej udice to the interests of the complainants, the
Panel in the said case rejected the argument that the effects of an expired subsidy programme could
not be considered.38

45. Moreover, Argentina considers that it is neces sary to consider a sufficiently extensive period
to reflect market trends, and a period of one year as suggested by the United States is not sufficient.
39

II.4 Interpretation of article 6.3(d)

II.4.1 World market share

46. The United States errs in its interpretation of the expression "world market share" by trying to
identify it with "share in world consumption". 40 If, as the United States contends, the expression
"world market share" in Article 6.3(d) refers to the increase in consumption of the country granting
the subsidy, it would be contrary to the object and purpose of Articles 5 and 6 of the SCM Agreement,
namely to avoid adverse effects of subsidies to the interests of other Members.

47. Indeed, if there were an increase in the shar e in world consumption of the product subsidized
by the Member granting the subsidy, this would very probably lead to an increase in the international
price of the product in question, and hence, there w ould be no adverse effects for other Members. In
other words, to identify "world market share" with "share of world consum ption" would completely
subvert the underlying rationale of Article 6.3(d).
41

37 Further Submission of the United States, paragraph 94.
38 The Panel stated that: "[W]e must assess the 'effect of the subsidies' on the interests of another
Member to determine whether serious pr ejudice exists, not the effect of 's ubsidy programmes'. We note that at
any given moment in time some payments of subsidies have occurred in the past while others have yet to occur
in the future. If we were to consider that past subsid ies were not relevant to our serious prejudice analysis as
they were 'expired measures' while future measures coul d not yet have caused actual serious prejudice, it is
hard to imagine any situation where a panel would be able to determine the existence of actual serious
prejudice." Panel Report on Indonesia – Automobiles, paragraph 14.206.
39 See WT/DS219/AB/R, paragraph 80: " … we understand a POI to provide data collected over a
sustained period of time, which period can allow the investigating authority to make a dumping determination
that is less likely to be subject to market fluctuations or other vagaries that may distort a proper evaluation".
40 Further Submission of the United States, paragraph 97.
41 See also Further Third-Party Submission of New Zealand, paragraph 2.34.

48. Moreover, if we take account of the immediate context of Article 6.3(d), i.e. footnote 17,
which states "unless other … rules apply to trade … " , we have a clear indication that the expression
"world market share" can only refer to the share in world exports.

II.4.2 Time period to be considered

49. Contrary to the US claim that the trend in the period consider ed is not consistent because it
includes years in which the United States world market share decreased rather than increasing
42, the
fact is that there will always be peaks and troughs in agricultura l production and export for climatic
and other reasons. This does not mean that a trend over the years cannot be "consistent".

50. In other words, the word "consistent" cannot be interpreted in such a way as to allow a
decrease in world market share during a given year to invalidate a trend over several years. On the
contrary, the word "consistent" should be interpre ted in the context of the investigation period,
disregarding the market variations.

II.5 Threat of serious injury

51. Argentina considers that since Brazil has est ablished the existence of serious prejudice caused
by the US subsidies, the threat of serious prejudi ce is clearly foreseeable and imminent as a result of
the even higher subsidies planned under mandatory US legislation for the marketing years 2003-2007.
Consequently, Argentina maintains that Brazil has established a prima facie case that these subsidies
threaten to cause serious prejudice to Brazil.

52. Argentina contends that this guaranteed flow of subsidies will unquestionably lead to a higher
level of US cotton production a nd exports. This will inevitably result in price suppression and
depression as well as an increasing and inequitable US market share for cotton, thus creating a source
of permanent uncertainty that confirms the threat of serious prejudice generated by the subsidies.

53. Argentina further considers that the link be tween US cotton subsidies and the threat of
significant price suppression and depression and of an increase in the US world market share for
cotton stems from the fact that the future subsid ies will be as necessary as the current ones for US
producers to bridge the gap between market prices and their total production costs. This will enable
US producers to continue competing with more efficient third country producers, especially
considering that the USDA itself forecasts an increase in total production costs.
43

III. EXPORT CREDIT GUARANTEES

54. In its Further Submission, the United States reverts to its argument in connection with the
negotiating history for the interpretation of Article 10.2 of the Agreement on Agriculture, maintaining
that there are no disciplines regulating the use of export credit guarantees.

55. Argentina repeats what it stated in its oral submission of 24 July 2003, namely that
Article 10.2 in no way provides an exception to the general disciplines on export subsidies, and in
particular, to the applicability to Article 10.1. As Argentina has pointed out, "if that had been the
intention, then the negotiators would have expressly said so."
44

42 Idem, paragraph 101.
43 See Annexes BRA-7 (ERS Data: Commodity Co sts and Returns); BRA-257 ("Cost of Farm
Production Up in 2003", USDA, 6 May 2003) and BRA-82 (USDA Agricultural Baseline Projections until
2012, USDA, February 2003, p.48).
44 See Oral Third-Party Submission by Argentina, paragraphs 35 to 43.

IV. CONCLUSION

56. For the reasons set forth both in this stat ement and in previous submissions, Argentina
requests the Panel to issue the findings and r ecommendations requested by Brazil throughout these
proceedings.

ANNEX F-6

ORAL STATEMENT OF BENIN

8 October 2003

Mr. Chairman, members of the Panel,

1. My name is Eloi Laourou from the Mission of Benin. I am joined by Mr. Nicholas Minot of
the International Food Policy Research Institute in Washington, D.C., the co-author of the study that
has been annexed to our Third Party submission, “Effect of Falling Cotton Prices on Rural Poverty in
Benin”. I will ask Mr. Minot to speak to you in a moment. The other members of our delegation are
our legal advisers, Mr. Brendan McGivern and Mr. Stefan Ramel, both from White & Case.

2. As noted in our Third Party submission, this is the first time that Benin has participated in a
WTO dispute. We have not taken the decision to participate lightly. Indeed, it was only the serious
threat posed to the economic and social stability of our country by massive, WTO-inconsistent US
subsidies on cotton that has led us to take this unprecedented step.

3. The cotton farmers of Benin are efficient pr oducers. The World Bank has estimated that the
cost of producing cotton in West Africa is about 50 per cent of the cost of production in the
United States. Moreover, the cotton sectors of both countries have undergone considerable structural
reforms.

4. Yet the economic efficiencies of our producers, and the painful reforms they have accepted,
have in the end proved to be almost completely i rrelevant. US subsidies have had a ruinous effect on
the world price of cotton, which in turn has had devastating effects on the economies of West Africa.

5. US cotton subsidies do not just dwarf the co tton sectors of West Africa. They dwarf all
economic activity in the region. As noted in our su bmission, the subsidies paid by the United States
to its prosperous 25,000 cotton farmers exceed the gross national income of Benin, Chad, Burkina
Faso, Mali, Togo and the Central African Republic.

6. Oxfam estimates that for the period from 1999/2000 to 2001/2002, Benin suffered a total
cumulative loss of $61 million in export earnings. Mr. Chairman, this is not an abstract, anodyne
statistic. This translates into genuine suffering on the ground, as hundreds of thousands of people,
deprived of export earnings, are pushed from bare su bsistence to absolute poverty. Indeed, Dr. Minot
estimates that a 40 per cent reduction in farm-level prices of cotton has the effect of pushing an
additional 334,000 thousand people below the poverty line in Benin.

7. This is an important point, one that should be considered carefully by the panel as it assesses
the meaning of “serious prejudice” to one of the poorest countries in the world.

8. With your permission, I would now ask Mr. Minot to summarize briefly the results of his
study on how depressed world prices for cotton translate into poverty in Benin.

Dr Minot:

9. Thank you for the opportunity to present the resu lts of a study that I hope will be relevant to
the dispute. Before I begin, I would like to provide some background. I am a Research Fellow at the
International Food Policy Research Institute, a W ashington-based international organization whose
mandate is to generate information to addr ess problems of hunger and poverty in developing
countries. I received my Ph.D. in agricultural ec onomics from Michigan State University and have
worked on issues of agriculture in developing countri es for more than 15 years, including four years
living in sub-Saharan Africa.

10. From 1998 to 2000, I led a German-funded stud y of the impact of agricultural reforms on
farmers in Benin. In collaboration with a local research firm, we carried out four surveys in Benin:
surveys of farmers, traders, market managers, and village cooperatives. In 2002, I was contracted by
the World Bank to use these survey data to exam ine the impact of falling world cotton prices on
poverty in Benin. My co-author, Lisa Daniels, and I finished the report later that year and a version of
it was distributed as an IFPRI working paper in November.

11. Cotton prices are affected by competition with synthetic fibres, weather-related supply
shocks, the rate of growth in the global economy, and government policies, among other factors.
Cotton prices are pushed below what they otherw ise would be by government support to cotton
growers. The International Cotton Advisory Comm ittee estimates that worldwide direct assistance to
cotton growers was US$ 4.9 billion in 2001/02. Of this amount, the United States accounted for
US$2.3 billion, equivalent to 24 cents per pound of cotton produced. Other sources, using a broader
definition of assistance, estimate that the government provides US$ 3.9 billion to the cotton sector.

12. Until 2002, US cotton policy consisted of va rious programs, including two (the marketing
loan program and loan deficiency payments) that en sured that farmers receive at least 52 cents/pound.
This has the effect of insulating US farmers from fa lling world prices. In 2001, in spite of low world
prices, the US posted record cotton production and near-record export volumes. Furthermore, US
subsidies to cotton have increased since these studies were carried out. The 2002 Farm Bill
introduced target prices for the major commodities and programs that effectively pay US farmers
most of the difference between market prices and the target price. For upland cotton, the target price
is 72 cents/pound. In addition, by allowing farmers to update their “base acreage”, the new policy
provides incentives for farmers to expand production.

13. Several recent studies have attempted to assess the impact of subsidies on world prices. The
Centre for International Economics in Canberra uses a five-region world model of fibre, textile, and
garment markets in 2000-01 to simulate the im pact of US and European subsidies on cotton
production and export. They find that removing US and European subsidies to cotton growers would
raise the world cotton price by 6 cents/pound or 11 per cent. Another study, carried out by ICAC,
estimates that removing US production subsidies would have increased the world price by
11 cents/pound in 2001/02. And most recently, Sumner estimates that, in the absence of US
subsidies, the world cotton price would have been 12.6 per cent higher over 1999-2002.

14. The adverse impact of lower cotton prices on export revenue and GDP in cotton exporting
ations is clear, but does this translate into higher incidence of rural poverty? If cotton is grown mainly
by larger farmers with relatively high incomes, th en the effect of changes in cotton prices on rural
poverty may be modest. Even if cotton is grown pr imarily by small farmers, the magnitude of the
effect on rural poverty will be small if few farmer s grow cotton or if it accounts for a small share of
rural income. Assessing the direct impact of changes in cotton prices on rural poverty requires
detailed household-survey data on incomes and expenditures.

15. The paper examined the impact of changes in cotton prices on rural poverty in Benin. In
particular, it had two objectives:

 to describe the living conditions and level of poverty for cotton growers and other farmers in
Benin; and

 to estimate the short and long-run impact of lower cotton prices on the income of cotton growers
and on the incidence of poverty in rural Benin.

16. The Republic of Benin has a population of about six million, 59 per cent of whom live in rural
areas. Its rural economy is based on maize, sor ghum, millet, yams, cotton, and livestock production.
The per capita gross national product is US$380, placing Benin among the poorest countries in the
world. Indeed, the per capita income of Benin is lower than the average for sub-Saharan Africa.

17. In 1989, Benin entered a period of economic and political reform. It made a peaceful
transition from a military government to a constituti onal multi-party democracy. It also began to
move from a quasi-socialist economy to a free-market economy. In the agricultural sector, state farms
and cooperatives were disbanded, food crop prices a nd marketing were liberalized, and many state-
owned enterprises were privatized or closed. In January 1994, the CFA franc was devalued by 50 per
cent, effectively doubling the price of imports a nd the returns to exports. Although this imposed
hardship on manufacturing firms and urban consumer s, it stimulated the local production of cotton,
rice, and other tradable goods.

18. In the past two years, Benin has greatly redu ced the role of the state cotton marketing board,
introducing competition in the distribution of inputs a nd the marketing of cotton. The fall in world
cotton prices has led to political pressure for the govern ment to support the domestic price or even to
re-assume control of the sector to protect farmer interests. Cotton represents 90 per cent of
agricultural exports and around 70 per cent of its total exports (excluding re-exports).

19. Because the reliability of the results depends heavily on the quality of the survey data, it is
worth briefly describing the survey methods. The survey, called the Enquête des Petits Agriculteurs
(EPP) or Small Farmer Survey, was carried out in 1998 by the IFPRI and a local research firm, the
Laboratoire d’Analyse Régionale et d’Expertise Sociale (LARES). The survey used a 24-page
questionnaire covering 16 topics. The households were selected using a two-stage stratified random
sample procedure based on the 1997 Pre-Census of Agriculture. In total, one hundred villages were
selected. In each village, nine households were ra ndomly selected using household lists prepared for
the pre-Census of Agriculture. Due to some va riation in the number of households interviewed in
each village, the final sample was 899 rural households. The interviews were carried out in local
languages by two teams of Benin interviewers, supervised by staff from LARES and IFPRI.

20. In order to study poverty, we need to define it. In this analysis, the poor are defined as those
living in households whose per cap ita expenditure is below the 40
th percentile in rural areas.
Expenditure is used instead of income because it is more reliably measured and is a better measure of
household well-being. It includes cash spending on consumption goods, the value of home-produced
food, and the rental equivalent of owner-occupied housing. The resulting poverty line is equivalent to
US$123 per person per year. It is worth noting that this is a low poverty line, far below the US$1 per
day frequently used by the World Bank.

21. We simulated the impact of various percenta ge reductions in cotton prices on the incomes of
rural households using the concept of producer surplu s. The details of the calculation are shown in
the paper, but these are standard formulas used in economic analysis. In the short run (before
households respond to lower prices), the change in income of each household is simply the percentage

change in the value of cotton production multiplied by the quantity produced. In the long run, lower
cotton prices will cause farmers to substitute away from cotton, so the impact is smaller. We
simulated the impact of these cotton price changes in the short and long run on each of the 899
household in the sample to generate estimates of the impact on rural income and poverty.

22. Before turning to the simulation results, I w ill describe the role of cotton in the rural economy
and the characteristics of cotton growers. According to the IFPRI-LARES survey, cotton is grown by
roughly one-third of the farm households. Cotton accounts for about 18 per cent of the area planted
by farm households and 22 per cent of the gross va lue of crop production. In value terms, cotton is
the second most important crop, after maize. Am ong cotton farmers, the average area planted with
cotton is 2.3 hectares, producing 2.7 tons of seed cotton. The value of this output is US$ 901 per
cotton farm. Cotton accounts for about one-third of the value of crop sales (these figures are shown in
Table 2 of our paper).

23. Cotton growers tend to have farms that are larger than other farmers, but they are similar to
other farmers in terms of the poverty rate and average per capita expenditure. The larger farms do not
translate into a higher standard of living because cotton production is concentrated in the north, which
is more arid and has fewer opportunities for non-farm employment. It is not that cotton farmers are
poorer than average, but rather that almost all fa rmers in Benin, including cotton farmers, are quite
poor.

24. Turning to the simulations, the short-term im pact of a 40 per cent reduction in the farm-gate
price of cotton reduces the income of cotton growers 21 per cent. Taking into account the incomes of
non-growers, which do not change in this simulati on, the average income of rural households falls
7 per cent. Smaller reductions in the cotton pr ice cause roughly proportional changes in income, as
shown in Table 3 of our paper.

25. With a 40 per cent fall in the cotton price, the average incidence of poverty, including both
cotton growers and other farmers rises 8 percentage points, from 40 per cent to 48 per cent. In
absolute terms, this implies that about 334 thou sand people would fall below the poverty line. A
40 per cent decrease in the price of cotton results in a 40 per cent increase in the depth of poverty (P
1)
and a 61 per cent increase in the severity of poverty (P2).

26. Does it matter what poverty line we use? By looking at the cumulative distribution of income
with and without the price change, we can evaluate the sensitivity of the results to alternative poverty
lines. As shown in Figure 2 in our paper, similar results would have been obtained for higher and
lower poverty lines. The results are not very sensitive to the elasticity assumption.

27. In summary, our paper analyzed the impact of changes in world cotton prices on farmers in
Benin. Both quantitative measures of per capita expenditure from household surveys and qualitative
responses to our 1998 survey suggest that ru ral living conditions im proved over the 1990s.
Furthermore, farmers tended to attribute this improvement in rural living conditions to economic
factors such as crop prices, availability of food , and access to non-farm employment. Although the
causal link is difficult to establish with certainty , it appears the economic reforms of the 1990s
(including the 1994 devaluation) and the growth of cotton production during this period contributed to
a noticeable improvement in rural standards of living.

28. The link between world cotton markets and rura l living conditions can, however, work gainst
farmers as well. The analysis in this paper is based on the 39 per cent decline in the world price of
cotton between January 2001 and May 2002. We combined farm survey data from 1998 with
assumptions about the decline in farm-level prices to estimate the short- and long-term direct effects
of cotton price reductions on rural inco me and various measures of poverty.

29. The results indicated that there is a str ong link between cotton prices and rural welfare in
Benin. A 40 per cent reduction in farm-level prices of cotton is likely to result in a reduction in rural
per capita income of 7 per cent in the short-run and 5-6 per cent in the long-run. Furthermore, poverty
rises 8 percentage points in the short-run, equivalent to an increase of 334 thousand in the number of
people below the poverty line. In the long run, as ho usehold adjust to the new prices, the poverty rate
settles down somewhat, remaining 6-7 percentage points higher than it was originally.

30. Furthermore, these estimates may well underestim ate the actual effect of lower cotton prices
on rural poverty in Benin. First, in an econom y with unemployed resources and excess capacity, an
external shock affecting income (s uch as a change in cotton prices) has a multiplier effect. Changes
in cotton farmer income result in changes in demand for goods and services produced by their non-
cotton-growing neighbours, which in turn influe nces their income and their demand for goods and
services. Estimates for four countries in sub-Sahara n Africa suggest that the multiplier is in the range
of 1.7 to 2.2, meaning that the total effect on inco me (positive or negative) is 1.7 to 2.2 times greater
than the direct impact.

31. Second, we assume that farm prices change by the same proportion as world prices. In
competitive markets with a fixed marketing margin, the percentage change in farm prices will be
greater than the percentage change in world prices. Until recently, the effect of changes in world
prices on farm-level prices in Benin was muted by government regulation of the market which
stabilized prices. Under market reforms being carried out in Benin and elsewhere in West Africa,
markets are becoming more competitive and chang es in farm prices will closely match changes in
world prices.

32. Third, our estimates do not take into account other indirect effects associated with declining
cotton production. An earlier analysis of the Sm all Farmer Survey data from Benin indicated that
cotton farmers are three ti mes more likely to apply fertilizer to their maize crops compared to non-
cotton farmers. This is because growing cotton gi ves farmers access to fertilizer on credit, some of
which they “divert” to their maize fields. The im plication is that lower cotton prices will indirectly
reduce the yields of food crops.

33. Overall, the results in this paper challenge the stereotype of the rural poor in developing
countries as consisting of subsistence farmers that are relatively unconnected to, and thus unaffected,
by swings in world commodity markets. At least in the case of Benin, to the extent that fluctuations
in world cotton prices are transmitted to farmers, th ey will have a significant effect on rural incomes
and poverty. The broader implication is that policies that subsidize cotton production in the
United States and elsewhere, dampening world prices, have an adverse impact on rural poverty in
Benin and (by extension) other poor cotton-exporting countries. Thank you, Mr. Chairman and
members of the Panel.

Mr. Laourou:

34. Thank you for allowing Dr. Minot to present his paper, and for allow Benin to present its
views.

35. This concludes our oral statement. We r espectfully ask this Panel to find that the
United States is in breach of its WTO obligations, including by causing serious prejudice to the
interests of Benin and other Members. We woul d be pleased to answer any questions that you may
have.

ANNEX F-7

ORAL STATEMENT OF CHAD

8 October 2003

Mr. Chairman, members of the Panel,

 I am Abderahim Yacoub N’Diaye, the Ambassador of Chad to the WTO. The other members
of my delegation are Mr. Mouata Nanrabaye, as we ll as our legal advisers, Mr. Brendan McGivern
and Mr. Stefan Ramel, both from White & Case.

 Chad stands by its written Third Party submissi on of 3 October 2003. In addition, I wanted to
supplement this by reading to the Panel a recent statement by Mr. Ibrahim Malloum, who is both the
President of the Société Cotonnière du Tchad, as well as the President of the African Cotton
Association. Given his unique qualifications, I asked him to prepare a statement for this third party
session. Unfortunately, however, he could not attend the hearing, since he had to be in Chad this
week. However, his statement is of direct relevanc e to the issues facing the Panel, and so with your
permission, Mr. Chairman, I would like to read it to you.

“Statement by Mr Ibrahim Malloum

Introduction

1. My name is Ibrahim Malloum. I am the President of the Société Cotonnière du Tchad,
commonly known as Cotontchad. Cotontchad is a public/private organizati on that controls the
production and marketing of cotton in Chad. Cotont chad is responsible for supplying farmers with
inputs on credit, purchasing and collecting the harvested seed-cotton, ginning the crop into upland
cotton lint, as traded internationally, and finally se lling the finished product. Cotontchad is required
to purchase all cotton produced by Ch ad cotton farmers. In addition, Cotontchad is responsible for
selling and marketing the cotton produced by more than 2.5 million people in Chad involved in the
production of cotton.

2. I am also currently President of the A frican Cotton Association (ACA). The ACA was
formally created during a summit meeting of Af rican cotton producers in Cotonou, Benin, in
September 2002. It includes all the West, Central an d East African producers, ginners and merchants.
Many international merchants, shipping companies, a nd banks are also members of this Association.
The ACA’s goals are to defend and promote Africa n cotton in the world market and to encourage
knowledge sharing among African cotton producers.

3. I have been involved with selling and marketing cotton for more than 18 years for
Cotontchad, during which time I have been involved in all the cotton activities:

 I was in Memphis Cotton School in 1985.

 From the end of 1997 to 1999 I was the General Manager of Cotontchad.

 When I was General Manager I was in charge of supplying the farmers with fertilizers, and
pesticides; we buy all the production from farmers, we gin the cotton, we classify and export the
cotton.

 Today I am in charge of marketing all Chad co tton production around the world. I am thus selling
in more than 30 countries (Europe, Far East, Africa and South America.).

 Our selling prices are based on the international prices driven by the New York Cotton Futures
Market and the Liverpool “A” Index.

Cotton in Chad

4. Cotton is essential to the livelihood of more than 2.5 million people in Chad. It has been the
major cash crop and driver of Chad’s economy dating back to the 1920s and continues to be today.
Cotton represents 25 per cent of Chad’s export earnings and 5.1 per cent of its GDP.

5. Chad has about 8.1 million inhabitants of whic h over 2.5 million are in one way or the other
involved in the production of cotton. Cotton is typi cally produced on small family farms that lack
mechanization and modern equipment, and electricity . Irrigation is completely reliant on rain and all
harvesting is done by hand. Many farms are not even accessible by road. Despite these handicaps,
production costs are approximately between 54 and 58 cents per pound. This is approximately one-
half of the costs of producing cotton in the United States.

6. In order to streamline the production of co tton, farmers are organized into roughly 5,000
Village Associations (Associations Villageoises), each comprising about 100 households of both
cotton and non-cotton producers. These Associati ons Villageoises also provide some basic social
structure for about 80 per cent of Chad’s eight m illion people who live in rural areas and that depend
on subsistence farming. Normally cotton production in each Association Villageoise is a group effort
with everyone in the community contributing to the production process. The cotton harvest and the
amount produced is a source of both pride and prestige in each Association Villageoise.

The Role of Prices for Chadian Cotton

7. As already mentioned, Cotontchad plays a cen tral role in the production of cotton in Chad.
The production cycle of cotton in Chad starts when each Association Villageoise requests input
supplies from Cotontchad’s field agents or “int erface”, based on their planned land cultivation.
Cotontchad then allocates inputs to each Association Villageoise on credit using future cotton harvests
as collateral. The amount of inputs acquired and distributed is influenced directly by the prices that
are able to be obtained by Cotontchad in its intern ational sales. When prices are low, as they were
during 2001-2002, Cotontchad cannot afford to provide all of the imports demanded by the
Associations Villageoises. This in turn reduces the amount of cotton produced by each Association
Villageoise and in Chad in general. When pri ces increase, more inputs are purchased which are then
provided to each of the Association Villageoi se and causes cotton production – and incomes
generated by those Associations – to increase. T hus, higher prices obtained in international markets
directly impacts the amount of present and future income received by cotton producers in Chad.

8. Cotontchad purchases upland cotton from each Association Villageoise at its 2,500 nation-
wide weigh stations. The price received by the prod ucers is a countrywide uniform price that is set
each year by a committee representing both farmers a nd Cotontchad. The price determined by the
committee is a function of the price received by Co tontchad in its physical sales of cotton.
Cotontchad can only offer a price to the farmers that is consistent with the international market price.

9. Cotontchad then transports the upland cotton to its nine ginning stations to be sorted, ginned
and commercialized. Finally Cotontchad sells the fi nished cotton in physical markets on the spot and
forward market. Cotontchad markets its cotton on bo th an immediate (spot) and on a forward contract

basis. I am the principal negotiator for sales of Chad cotton. In marketing cotton, I provide
information to a number of purchasers concerning the availability of Chad cotton. In some countries
(Europe, Japan, and partially India) Cotontchad uses th e agent channels to sell directly to the spinning
mills. In other countries, we sell directly to the inte rnational merchants. We fix prices in relation with
New York Future prices, Liverpool “A” index and also in relation to the competition prices offered in
the market. Everyday we inform our agents and me rchants of the available quantities and the prices
of the different qualities we are offering.

10. In negotiations for the spot market or imme diate shipment of cotton, the price negotiation
involves reference to the current N.Y. futures cont ract price as well as the A and B-index prices. I
will always make reference to the N.Y. futures price if prices are increasing and the N.Y. futures price
is higher than the A-index price.

11. The New York Cotton futures market is the ma in cotton market place in the world. It goes
without saying that the cotton price is dictated by New York. All the business men can forecast the
index “A” by looking to what New York did the night before.

12. The vast majority of cotton produced in Chad is exported (about 95 per cent). Cotton
produced in Chad is in direct competition with ot her regional and foreign exporters of cotton. The
extremely small world market share of Chadian cotton exports (about 1 per cent) invariably makes
Chad a price taker.

The United States and Its Influence on World Cotton Prices

13. The United States’ production of upland cott on has a large influence on the world market
price for cotton. All traders of upland cotton keep a close watch on developments in the
United States. As the largest exporter of cotton, the United States supplies more than 40 per cent of
cotton sold in international sales. The United States is by far the largest exporter of upland cotton.
Because of the large size of the US production and exports, when stocks of US cotton for sale
decrease because of weather problems in the Unite d States, then the world price of upland cotton
invariably increases. This is normally first reflecte d in increased N.Y. futures prices and then later by
increases in prices in the A-Index. On the other hand, when US production of upland cotton increases
because of increased land planted to cotton or because of favourable weather conditions, then the
increased stocks of US upland cotton in the world ma rkets press world prices lower. I have seen this
process repeatedly over the years that I have been trading upland cotton on world markets. In my
view, it is obvious that if the US producers did not have access to very large subsidies, they would
plant less cotton and world upland cotton prices would increase. There is no doubt in my mind that
the large US subsidies keep world prices lower. This includes prices received by Chad cotton.

14. To give the Panel some idea of the impact of the large US exports, I frequently encounter
during negotiations purchasers who indicate that they can purchase US cotton at a price lower than
what I am seeking to obtain in negotiations. These purchasers frequently tell me that US upland
cotton is available to them at a lower price becau se of the US Step 2 payments. These payments are
well known in the industry and are reported in trad e publications. The Step 2 payments for US cotton
allows exporters selling US cotton to underbid my bi ds when I am in direct competition for sales.
This has happened to me on a number of occasions. Again, the result is lower prices for cotton that I
am able to negotiate for Cotontchad.

Suppressed Cotton Prices and Their Effect on Chad

15. I would tell you that the low prices receive d by Chad producers contributes to poverty in
Chad. The description of what happened in Benin is the same as what has been happening in Chad.
Cotton for most Associations Villageoises in Chad is the only source of outside income. Therefore
Chadian schools, hospitals and local governments rely directly on money received from cotton sales.
The cotton industry in Chad is still trying to r ecover from record low prices from 2001-2002. While
prices are now increasing, prices will have to increase considerably more to make up for the
unprecedented crisis caused by extremely low prices l ast year. In my view, the continuing high levels
of US production are still depressing world prices. I look forward to the day when I do not have to
compete with US upland cotton for every sale. In creased prices will allow Chad producers and Chad
communities to obtain additional income and improve the life of our very poor people”.

 Thank you for your attention. I would be ha ppy to answer any questions you may have.

ANNEX F-8

ORAL STATEMENT
OF THE EUROPEAN COMMUNITIES

8 October 2003

1. Introduction

1. The European Communities (the “EC”) welcomes this opportunity to submit orally its views
to the Panel.

2. The EC has already submitted in writing its view s with respect to Brazil’s further submission
of 9 September 2003. Today, the EC will provide its comments on the further submission of the
United States of 30 September 2003. Many of the i ssues raised in the US submission concern factual
matters. The EC will limit itself to address three of questions of legal interpretation. Specifically, the
EC will argue in this Statement that:

III. the crop insurance payments made by the United States would be “specific” in so far
as it can be established that different insura nce policies result in different benefits
being conferred with respect to different products;

IV. the issue of whether green box payments can cause “serious prejudice” within the
meaning of Article 5(c) of the Agreement on Subsidies and Countervailing Measures
(the “SCM Agreement”) does not arise in this dispute;

V. the term same market in Article 6.3 (c) may refer to any geographical market,
including also the world market, provided th at there is such a world market for the
product under consideration.

3. Before addressing these issues, the EC would like to put on record its agreement with the
United States with respect to a number of ques tions on which it does not consider it necessary to
submit additional arguments:

VI. the EC agrees with the US interpretation of the term “world market share” in
Article 6.3(d) of the SCM Agreement;

VII. the EC endorses the U.S. interpretation of the term “more than equitable share” in
Article XVI:3 of the GATT;

VIII. the EC also agrees with the US position th at Brazil’s first standard to establish the
existence of “threat of serious prejudice” for the purposes of Article 5(c) of the SCM
Agreement is incorrect;

IX. finally, the EC agrees with the United States that the Agreement on Agriculture (the
“AA”) excludes the application of Article III:4 of the GATT and of Article 3.1 (b) of
the SCM Agreement to subsidies “in favour of agricultural producers” which are paid
to the processors.

4. On the other hand, the EC would like to r estate its disagreement with the US position that
Article 10.1 of the AA does not apply to export credits and guarantees.

2. Specificity of crop insurance payments

5. The United States contests Brazil’s claim that th e subsidies allegedly provided in the form of
crop insurance payments are specific. The United States argues that crop insurance is not “specific”
because it is available, in one way or another, with respect to all agricultural products.
1

6. The EC understands, however, that different crop insurance policies apply to different
agricultural products.
2 If such differences had the consequence that some agricultural products will
receive a benefit in circumstances where other pr oducts will receive no benefit, or only a smaller
benefit, the difference would be clearly “specific”.

3. Green Box subsidies

7. The United States argues that Brazil has failed to make a prima facie case that the payments
for which it claims green box status cause seri ous prejudice. The United States recalls that
paragraph 1 of Annex 2 of the AA makes clear that green box payments have no, or at most minimal,
trade-distorting effects and that, under Article 21.1 of the AA, the SCM Agreement applies “subject
to” the AA.
3

8. This is correct. But this argument does not appear to be relevant in the context of this dispute.
If the payments at issue meet all the criteria of Annex 2, they would be exempted from action under
the SCM Agreement in accordance with Article 13 (a)(i) AA. If not, the United States could not
invoke their conformity with Annex 2 and Article 21.1 in order to argue that they have no or minimal
trade-distorting effects. Logically, the issue raised by the United States could arise only in the absence
of the peace clause, or if the peace clause had expired at the initiation of this dispute.

4. The meaning of “same market” in Article 6.3 (c)

9. The United States contends that the term “same market” in Article 6.3 (c) cannot be
interpreted to include the world market, becau se that would render redundant the word “same”. 4 The
EC disagrees. In accordance with its ordinary meaning, the term “market” may refer to any
geographical market, including not only national or regional markets but also the world market,
provided that there is such a world market for the product under consideration.

10. The US argument is based on the assumption that there will always be a world market for any
given product. That assumption is incorrect. In order to characterise a certain geographical area,
whether it is the territory of one or more Members or the entire world, as a “market” it must be shown
that the conditions of competition prevailing w ithin that geographical area are sufficiently
homogenous. If there are significant trade barriers between Members, or between groups of
Members, with the consequence that conditions of competition are significantly different within each
Member or group of Members, it will not be possible to consider that there is a world market for the
purposes of Article 6.3(c), but only national or regional markets.

1 US further submission, para. 14.
2 Ibid., para. 15.
3 Ibid., para. 72.
4 Ibid., paras. 90-92.

ANNEX F-9

ORAL STATEMENT OF INDIA

8 October 2003

1. We thank you for givi ng us the opportunity to present India’s views in this third party session.
India is the third largest producer of cotton in the world and has the highest area under cotton
cultivation in the world. India has a substantial trad e interest as well as systemic interest in this
dispute. In the first part of this session on 24 July 2003, we had presented some views on the three US
subsidy programmes that we consider as violative of the Agreement on Subs idies and Countervailing
Measures (SCM Agreement). Today we wish to present our views on the term ‘serious prejudice’
used in Article 6.3 of the Agreement.

2. The measures challenged by Brazil in its claims of present serious prejudice include the
payment of subsidies through various programmes wh ich include marketing loan payments, counter-
cyclical payments, direct payments, production flex ibility contract payments, market loss assistance
payments, crop insurance subsidies, Step 2 paym ents, and GSM 102 export credit guarantees. The
legal instruments providing these subsidies incl ude the 1996 FAIR Act, the 2002 FSRI Act and the
2000 ARP Act as well as various appropriations bills for Marketing Years (MY) 1999-2002.

3. The subsidies given by US at issue are explic itly limited to certain enterprises or industries.
None of the subsidies at issue are widely available throughout the US economy across industries.
Eligibility for the domestic support and export subsidies at issue in this dispute is either “explicitly”
limited to the subset of the US industry producing agricultural crops , to subgroups of industries
producing certain agricultural crops, or to only upland cotton. None of the subsidies are available for
any non-agricultural product. Thus the subsidies given by US to cotton are “specific” as understood
under the SCM Agreement.

Mr. Chairman, Members of the Panel,

4. For establishing serious prejudice caused by the subsidies given by the US to cotton, Brazil
has provided numerous facts that independently as well as collectively demonstrate the causal link
between these subsidies and significant price suppression in upland cotton markets in MY 1999-2002.

5. It has been demonstrated, inter-alia through the analysis of Professor Daniel Sumner, details
of which are available in Section 3.3.4.8.2 of Braz il’s Further Submission to the Panel, that in terms
of significant price suppression, removal of the subsidies given by the US would increase the A-index
prices by an average of 12.6 per cetn or 6. 5 cents per pound between MY 1999 and 2002. Brazil has
demonstrated that the subsidies given by the US during MY 1999-2002 cause present significant price
suppression within the meaning of Article 6.3(c) of the SCM Agreement in the Brazilian and world
markets, including in markets where both Braz ilian and United States producers export, and thus
cause serious prejudice.

6. The average rate of subsidisation of cotton in the US during MY 1999-2002 as revealed in the
Table at page 4 of Brazil’s Further Submission was as high as 95 per cent. These subsidies, therefore,
almost entirely constitute the farmers’ incomes and have a major impact on farmers’ production
decisions. Producers of upland cotton in the Un ited States are thereby largely insulated from the
effects of the market. Thus, even when prices fo r upland cotton were falling, and the value of the
United States dollar and costs of production were rising, production and exports of upland cotton by

the United States increased significantly. Similarl y, the acreage under upland cotton in the US
increased by 13.5 per cent between MY 1998 and MY 2001. Thus, in our view, Brazil has made a
prima facie case of having suffered “serious prejudice” on account of the subsidies given by the US to
cotton.

7. In its Further Submission, the United States has argued that after Brazil demonstrates that one
or more of the effects of the subsidy mentioned in Article 6.3 is applicable, Brazil must then further
demonstrate that the “prejudice” caused by the ef fects of the subsidy were “serious” enough to
constitute “serious prejudice” within the meaning of the term in that Article. The argument of the
United States appears to be based on the use of the words “may arise” in Article 6.3 as against the use
of the words “shall be deemed to exist” in Article 6.1. The US seems to conclude that serious
prejudice need not arise even if one or more of the e ffects of the subsidy listed in Article 6.3 is found.
The United States goes on to infer from this difference in language that 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.

8. In India’s view nothing more than the demons tration that one of the effects enumerated in
Article 6.3 exists is necessary to arrive at a finding of “serious prejudice”. Subsidies listed under
Article 6.1 are deemed to cause serious prejudice, hence su ch a presumption is rebuttable under
Article 6.2 if the subsidy does not result in any of the effects enumerated in Article 6.3. No such
rebuttal is envisaged under Article 6.3. There is, thus, no obligation under the SCM Agreement to
demonstrate serious prejudice separately after establishing that one of the effects of a subsidy listed
under Article 6.3 applies, as the effects listed in Ar ticle 6.3 themselves equate to serious prejudice.
This interpretation is also confirmed by a reading of Article 6.2, which equates serious prejudice to
effects listed under Article 6.3. India disagrees with the US interpretation of Article 6.3.

9. In conclusion, Mr. Chairman and Members of the Panel, India holds the view that the
subsidies given by the US on upland cotton are specific, causal link exists between these subsidies and
the significant price depression, and these subsidies given by the US have caused serious prejudice
within the meaning of the term in Article 6.3 of the SCM Agreement.

ANNEX F-10

NEW ZEALAND’S ORAL STATEMENT

8 October 2003

1. Mr Chairman, Members of the Panel, New Zealand’s Further Submis sion to the Panel of
3 October outlines New Zealand’s support for the cl aims made by Brazil and its views on the issues
raised in the Further Submission of the United States. The evidence brought by Brazil in support of
its claims is overwhelming and conclusive.

2. New Zealand’s submission, and our statement today, focuses in particular on Brazil’s
demonstration that the United States subsidies cau se significant price suppression within the meaning
of Article 6.3(c) of the Agreement on Subsidies and Countervailing Measures (or the SCM
Agreement). Evidence brought by Brazil shows that the United States subsidies suppressed A-index
prices by an average of 12.6 per cent over MY 1999-2002 . That means a total amount of lost revenue
for Brazilian producers of $478 million and suppressed revenue worldwide of $3.587 billion.

3. The United States has produced no evidence or argument to rebut this claim. Instead the
United States points to a number of factors that it says caused prices for upland cotton to fall.
However, those factors are entirely irrelevant to the issue of whether the United States subsidies cause
significant price suppression. Nothing in the SCM Agreement requires a complainant to show that the
subsidies at issue are the sole or major cause of prices falling in order to demonstrate serious
prejudice.

4. In fact, the SCM Agreement does not even require prices to fall for there to be price
suppression. As demonstrated by Brazil, price suppression can occur even when prices are rising. All
a complainant is required to show to satisfy Artic le 6.3(c) is that significant price suppression is
caused by the subsidies at issue. Brazil has done that, and the econometric models Brazil has used
have not been challenged by the United States. Fu rthermore, those models isolate the effects of the
subsidy from other factors, and thereby ensure that the effects of other factors affecting cotton prices
are not attributed to cotton subsidies.

5. By contrast, the United States advocates an interpretation of Articles 5 and 6 that would
completely undermine their objective, which is of course to allow WTO Members to act when
adversely affected by other Members’ use of subsidies.

6. In particular the United States draws the wrong conclusion from a comparison of Article 6.1
and Article 6.3, namely that it is not sufficient for a complainant to show that one of the effects set out
in Article 6.3 exists for there to be serious prejudi ce. A closer look at the substance and nature of
those provisions in the broader context of Article s 5 and 6 makes it clear that once a Member has
demonstrated the existence of significant price suppr ession within the meaning of Article 6.3, there is
serious prejudice. We note that the EC agrees w ith this interpretation in its Further Third Party
Submission. New Zealand has described in detail in its Further Submission why the United States
interpretation of Article 6 should be rejected.

7. The United States takes a similar approach to interpretation of the phrase “significant” in
Article 6.3(c). The United States approach would require “significant price suppression” to be
demonstrable solely by reference to some arbitrary level of numeric significance. Yet the
United States does not suggest what level of significance would be appropriate in the present case, nor

does the United States go so far as to suggest that 12.6 per cent is not “significant”. The United States
offers no explanation at all of how “significance” is to be determined under its proposed approach.
This is perhaps because such an approach is unworkable in practice.

8. Whether or not price suppression is significan t within the meaning of Article 6.3(c) will
depend on the circumstances of the case. And such a determination must be anchored in the overall
context of consideration of the adverse effects of the subsidy if the Agreement is to operate as
Members intended it to. Thus Brazil’s approach of considering whether the level of price suppression
is “meaningful” in its effect is entirely appropria te and workable, and offers the best means of
ensuring that Article 6.3(c) is effectively and consistently applied.

9. These are but two examples of attempts by the United States to read into the SCM Agreement
additional requirements that are simply not there and distort the requirements that are there. If
accepted, such interpretations would make it virtua lly impossible for Members to show the existence
of serious prejudice. Such an erosion of the rights negotiated by Members under the SCM Agreement
cannot be permitted.

Threat of Serious Prejudice

10. New Zealand’s Further Third Party Submissi on also outlines why the Panel should find that
the United States subsidies create a threat of serious prejudice to the interests of Brazil in the future.
The fact that Brazil’s interests are already sufferi ng serious prejudice as a result of the United States
subsidies leads to a strong presumption that they will continue to do so. United States legislation
requires the continued provision of the subsidies ir respective of whether or not they have adverse
effects on other Members. The present case involves a level of subsidisation of, on average, 95 per
cent, with a dollar 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 threat of future serious prejudice is therefore a
real one.

11. In addition to the points addressed in New Z ealand’s Further Submission, New Zealand takes
this opportunity to record its views on two further issues raised by the United States.

Crop Insurance

12. The first is the United States argument that crop insurance payments fail to meet the
requirement for specificity in Article 2 of the SCM Agreement. As demonstrated by Brazil, the crop
insurance subsidies to upland cotton producers enhanced United States upland cotton production. The
payments act as a direct production stimulant by k eeping marginal upland cotton land in production.
Professor Sumner’s analysis concludes that in the period MY 1999-2002 United States crop insurance
subsidies resulted in suppression of world prices by 1.2 per cent.

13. Brazil has demonstrated that the crop insuran ce programme is limited to certain enterprises
and thus is not generally availabl e but is effectively available only in respect of crops. The crop
insurance programme is therefore specific within the meaning of Article 2 of the SCM Agreement.

Step 2 domestic payments

14. Second, New Zealand wishes to elaborate its vi ew in support of Brazil’s claim that the Step 2
domestic payments are prohibited subs idies under Article 3.1(b) of the SCM Agreement and GATT
Article III.4. There is no basis upon which to claim that the Agreement on Agriculture gives Members
a right to use whatever domestic support they wi sh with complete impunity from action under other
WTO Agreements. The Agreement on Agriculture is silent on the issue of local content subsidies.
Such silence cannot be taken as creating an “entitlement”.

15. Nor does New Zealand accept that Members c ould have so encroached on the fundamental
GATT principle of national treatment any way other than explicitly and expressly. The United States
has been unable to demonstrate th at Members intended, through the Agreement on Agriculture , to
effectively waive their rights under GATT Article III in respect of agricultural products. Nor is there
any evidence that Members traded those rights in return for reduction commitments on domestic
support. Where there was a trade-off was between the application of Articles 5 and 6 of the SCM
Agreement (for a limited period of time) and reduction co mmitments, as set out explicitly in the peace
clause. There is no such trade-off in the peace clause for Article 3.1(b) of the SCM Agreement.

16. Paragraph 7 of Annex 3 of the Agreement on Agriculture , relied upon by the United States
and EC as evidence that the Agreement authorises the use of local content subsidies, provides no basis
for such a conclusion. All paragraph 7 does is r ecognise that it is possible for measures directed at
agricultural processors to benefit the producers of basic agricultural products. For example, a
government may pay a subsidy to a processor whic h it is required to pass on to the domestic
producers. This can occur without affecting the competitive relationship between imports and
domestic production. The measure would be consistent with Article 3.1(b) of the SCM Agreement
and GATT Article III, and the support rightly count ed against the Member’s AMS. Nothing in
paragraph 7 suggests that it should be interpreted as referring to domestic content subsidies, let alone
that it authorises them in contravention of Article 3.1(b) of the SCM Agreement or GATT Article III.

Conclusion

17. In conclusion, New Zealand considers that Brazil has presented the factual evidence
necessary to substantiate its claims under the SCM Agreement. Brazil has also demonstrated that the
United States cannot avail itself of protection under the peace clause. The interpretation advanced by
the United States of the provisions of the SCM Agreement would render actionable subsidies
inactionable, thereby undermining the carefully ne gotiated balance of rights and obligations in the
SCM Agreement and the Agreement on Agriculture . New Zealand therefore requests the Panel to
make the findings and recommendations requested by Brazil.

ANNEX G

FURTHER REBUTTAL SUBMISSIONS OF PARTIES

Contents Page
Annex G-1 Executive Summary of Brazil's Further Rebuttal Submission G-2
Annex G-2 Executive Summary of th e United States' Further Rebuttal
 Submission
G-8

ANNEX G-1

EXECUTIVE SUMMARY OF BRAZIL'S
FURTHER REBUTTAL SUBMISSION

1. Brazil responds in its Further Rebuttal Submissi on to various arguments raised and evidence
presented by the United States in earlier stages of this proceeding.

2. Brazil presents new evidence in rebuttal of US ass ertions that it has failed to demonstrate that
contact payments were paid to current producers of upland cotton in MY 1999-2002. This evidence is
in the form of USDA payment data obtained and analyzed by the Environmental Working Group
(EWG) concerning, inter alia , upland cotton and other crop base contract payments between MY
2000-2002, as well as upland cotton marketing loan payments. The EWG database matches the
upland cotton recipients and farms receiving each type of payment. It shows that the great majority of
upland cotton producers grew upland cotton on upland cotton base acreage. It also shows that upland
cotton producers received approximately three-quart ers of all upland cotton contract payments
between MY 2000-2002. Additional contract payments supporting upland cotton are found by
attributing contract payments on non-cotton base ac reage. While the EWG data underestimates the
amount of contract payments in support of up land cotton, it nevertheless corroborates and supports
Brazil’s “14/16” methodology. Moreover, this data is also consistent with the large body of evidence
demonstrating that upland cotton producers recei ve, rely on, and need upland cotton contract
payments to make “ends meet.”

3. Better evidence of the amount of contract paym ents in support of upland cotton would come
from an examination of the amount of upland co tton currently planted on upland cotton (or other)
contract acreage. This evidence is collected and ex clusively in the control of the United States.
Brazil rebuts the US assertions that it does not collect or maintain information permitting it to respond
to the Panel’s Question 67bis or to Brazil’s repeated requests for information regarding the amount of
contract payments received by current producers of upland cotton. In fact, the United States has
access to all of the farm-specific and commodity specific commodity acreage and payment data from
both current upland cotton producers as well as holders of crop base under contract payment
programmes that would permit it to (1) provide a close approximation of the PFC and market loss
assistance payments to current upland cotton producer s in MY 1999-2001, and (2) provide the precise
amount of direct and counter-cyclical payments to current upland cotton producers in MY 2002.
Brazil requests the Panel to ask the United States, for the third time, to produce this information.

4. In the absence of information within the ex clusive control of the United States, the
information on marketing loan and contract paym ents in the EWG database, together with the
considerable other evidence presented by Brazil, is the best information available to assist the Panel in
making the determination concerning the amount of “support to upland cotton” for the purposes of the
peace clause.

5. Regarding Brazil’s price suppression and increase in world market share claims under
Articles 6.3(c) and 6.3(d) of the SCM Agreement, Brazil first responds to US arguments that only
variable costs are relevant to any cost of production analysis. This is the wrong legal as well as
economic benchmark. Brazil notes the A ppellate Body’s decisions in the Canada – Dairy (21.5)
disputes held that a cost of production analysis should focus on total, not variable, costs. That is, only
an analysis of the total cost of production takes account of the economic resources the producer

invests in the product. The Appellate Body’s jurisp rudence on this issue refl ects the economic reality
that, over the long term, producers have to recover all their costs and make profits to stay in business.
To the extent that the producer ch arges prices that do not recoup the total cost of production, over
time, it sustains a loss which must be financed from some other source.

6. USDA cost data shows that US producers would have lost $871 per acre if they had grown
upland cotton without subsidies between MY 1997- 2002. With subsidies, these upland cotton
producers made a per-acre “profit” of $120 over the si x-year period. Further, most of the fixed costs
of US producers must be covered over a long-term six-year period, or upland cotton producers would
be forced to halt production. This evidence supports the close causal link between US subsidies and
continued high levels of US upland cotton production and exports, as well as suppressed prices. These
facts demonstrate the veracity of the National Co tton Council’s Chairman’s statement that US upland
cotton producers “can’t exist without subsidies”.

7. The United States’ argument that a cost of pr oduction analysis may be limited to variable
costs defies all economic logic. This is particularly true in light of the items that the United States
counts towards fixed costs, including hired labour, opportunity cost of unpaid labour, capital recovery
of machinery and equipment, opportunity cost of land, taxes and insura nce, and general farm
overhead. These facts confirm the common sense noti on that without the US subsidies, a significant
portion of the US upland cotton production would not be economically viable and would not be
produced.

8. Brazil rebuts US arguments that US subsidies had no price-suppressing effects by
demonstrating the close relationship between increases or decreases in world cotton stocks and A-
Index prices. USDA’s own economists estimate that US subsidies increased US upland cotton world
supply by 1.9 million bales in MY 2000 and 4.3 million bales in MY 2001. Because the United States
has admitted that the injection of 11.6 million bal es of Chinese government stocks into world supply
between MY 1999-2001 depressed prices, it is not surprising that USDA economists, as well as
Professor Sumner, found that the addition of simila r quantities of US subsidy-generated upland cotton
had similar price-suppressing effects. Moreover, if Chinese Government sales of stocks significantly
depressed prices, as the US claims, then withdrawing a similar amount of US upland cotton during the
same period certainly would significantly increase prices.

9. In addition, market experts predict that a 14 million bale US crop in MY 2004 (resulting from
a potential crop failure) would have a significant impact in MY 2004 on increasing the New York
futures price – and the world (and Brazilian) price of cotton. Brazil demonstr ated the interconnected
nature of world upland cotton market and the dir ect relationship between large US subsidies in
sustaining US production and in lowering world and Brazilian prices.

10. Brazil rebuts US arguments that the appreciation of the US dollar does not demonstrate any
causal link between US subsidies and increased US world market share and suppressed prices. Using
data from Exhibit US-69, Brazil demonstrates that there has been a dramatic increase in the
appreciation of the US dollar against a cotton-trad e weighted basket of currencies of other world
cotton producers by 154 per cent between the period 1996-2003. US exports – instead of falling as
predicted by USDA economists – almost doubled.

11. The impact of the subsidies on international cotton trade is best assessed by analyzing the
cotton trade-weighted exchange rate for cotton-ex porting countries in general. This where the
competition exists and where the impact of exch ange rate movements on the competitiveness of
countries should be found. With their currencies de preciating dramatically against the US dollar, US
competitors should have been able to increase their market share and their exports compared to high-
priced and high-cost US exports of the same commo dity product. But since these competitors do not

have access to subsidies averaging 95 per cent of the value of their production, as a result, these
competitors saw their exports and world market share reduced.

12. Brazil responds to US arguments that US pr oducers are responsive to changes in futures
prices at the time of planting. Brazil demonstrates that average January-March futures prices declined
between MY 1998-2002, while US planted acreage increased. This is exactly opposite of what would
be expected without the effect of US subsidies (that increased significantly during the same period).
All of the analysis presented by Brazil is consis tent with Congressional testimony by USDA’s Chief
Economist Keith Collins that there is little supply (i.e., planted acreage) response from US upland
cotton farmers because of the subsidies they receive.

13. Further, the 72.4 cents target price support le vel available to US upland cotton producers in
MY 2002 meant that US producers could not expect to receive higher revenue even if prices increased
throughout MY 2002. In fact, US planted acreage declined in MY 2002 because some US upland
cotton producers had suffered significant losses even with US subsidies, as they could not recover
their cost of production.

14. Brazil responds to US legal arguments seeki ng to impose countervailing duty concepts in
adverse effects claims by demonstrating that there is no textual basis in either Article 1 or Part III
(adverse effects) of the SCM Agreement for th e imposition of “pass-through,” “value of subsidy ”,
“subsidized product” or “tied-untied” methodologies. Unlike a countervailing duty investigation, it is
the cumulative effects of the US subsidies that are the focus of price suppression and increase in
world market share claims under Articles 6.3(c ) an d (d) of the SCM Agreement. The current US
position is directly contrary to its arguments in Indonesia – Automobiles, where the United States
rejected Indonesian efforts to have the Panel ex amine each subsidy of the National Car Programme”
individually.

15. The focus of Articles 5 and 6 of the SCM Agreement is on the effect of the subsidies in
suppressing prices or increasing world market share. These cumulative effects of a variety of US
subsidies caused price suppression and an increase in the US world market share between MY 1999-
2002, and will continue to do so through the end of MY 2007.

16. Contrary to the US argument to sustain its serious prejudice claims, Brazil does not have to
prove “that the ‘prejudice’ caused by the effects of the subsidies were ‘serious’”. Brazil’s
interpretation of the chapeau of Article 6.3 of the SCM Agreement does not read “may” to mean
“shall”. Rather, the term “may” refers to various situations in which the four enumerated types of
serious prejudice exist but are not actionable.

17. Brazil highlights the collective effects of the US subsidies by noting that numerous
econometric studies that Brazil has presented to the Pa nel, all conclude that US subsidies significantly
increase US production and suppress US and world prices. Moreover, no study has ever found that the
US subsidies to upland cotton would not have a significant production and export-enhancing as well
as a price-suppressing effect.

18. Furthermore, Brazil rebuts US arguments that Professor Sumner’s results, using the
November 2002 FAPRI baseline misrepresent the real effects. Brazil demonstrates that using the most
recent January 2003 FAPRI baseline, Professor Sumner’s results also show significant production and
export-enhancing and price-suppressing effects. Br azil further argues that a USDA study and an IMF
study that the United States claims show that Professo r Sumner’s analysis was inflated are, in fact,
consistent with Professor Sumner’s findings.

19. Therefore, the US assertion that Professor Sumn er’s results are grossly overstated due to the
use of a baseline projecting artificially low upland cotton prices is false. Whether the results of the
modified or the original model and whether th e November 2002 or the January 2003 baseline are
used, continue to fully support that the US s ubsidies cause significant price suppression and an
increase in the US world market share, as well as that those subsidies caused the United States to have
more than an equitable share of world export trade.

20. Brazil further demonstrates the causal link be tween US subsidies and price suppression and
increased exports by showing that the individual effects of the various US subsidies increase US
production and exports, and result in suppressed prices. USDA and other economists are unanimous
in finding that marketing loan payments to upland cotton created significant production- and export-
enhancing and price-suppressing effects during the period of investigation. The effect of this subsidy
alone caused serious prejudice to the interests of Brazil in MY 1999-2002.

21. Furthermore, USDA economists also found that crop insurance subsidies for upland cotton
have far more production-enhancing effects than for other crops.

22. The National Cotton Council and cotton market experts have repeatedly emphasized the
importance of the Step 2 subsidy in stimulati ng US production and exports. Brazil has provided
compelling evidence that the Step 2 subsidies are trade- distorting and have caused increased US
upland cotton exports and suppressed world prices.

23. Lastly, Brazil rebuts the United States so-called “literature review” for contract payment
subsidies by pointing out that none of the studi es addresses the specific situ ation of upland cotton
during the period of investigation, none focuses on the impact of the restrictions on planting fruits and
vegetables, none examine the impact of the updatin g of the base acreage and yield in 2002, and none
focuses on the production effects caused when CCP paym ents are triggered by lower prices, or the
production effects of more than $1 billion paid to producers of upland cotton in MY 2002. Finally,
the studies do not explain the much higher per acre cotton payments than other base acres or the fact
that US average upland cotton producers could not have covered their total costs without contract
payments during MY 2000-2002.

24. Therefore, the evidence submitted to the Pane l demonstrates that the decoupled payments
have production-enhancing effects. While these eff ects are smaller than the effects of the marketing
loan payments, they are an important part of the collective effects of the US subsidies in creating price
suppression and increased and inequitable world market share.

25. Brazil demonstrates that crop insurance subsidies are specific within the meaning of Article 2
of the SCM Agreement. There are different crop in surance policies that are available for only limited
products, as well as groups of policies available for certain crops. Therefore, the US crop insurance
system is simply not the “one size fits all” progr amme as argued by the United States. Furthermore,
Brazil rebuts US arguments concerning the specificity of crop insurance subsidies by showing that
there are no crop insurance policies available fo r livestock, with the exception of four pilot
programmes. Even these pilot programmes are very limited in terms of recipients, and have only a
total budget of $20 million, a tiny fraction of the crop insurance subsidies paid for crops.

26. Additionally, the US – Softwood Lumber CVD panel report endorsed a finding by USDOC
that subsidies paid to only a handful of industri es in an economically diverse economy are “limited”
(and therefore “specific”) within the meaning of Ar ticle 2.1 of the SCM Agreement. The record
continues to demonstrate that agricultural produc ts representing approximately 50 per cent of the
value of US agricultural commodities are not covered by crop insurance subsidies. This, together
with the evidence submitted of specific policies and groups of coverage that are provided to only

selected crops such as upland cotton, highlight th e fact that only certain enterprises receive the
benefits of these subsidies.

27. Regarding Brazil’s Article 6.3(d) claim, the United States is incorrect in claiming that Brazil’s
claims relate only to MY 2001. As discussed in S ection 3.9, those claims also include claims for MY
2002, 2003 and the period from 2004-2007.

28. Furthermore, the United States argues that the term “world market share” in Article 6.3(d) of
the SCM Agreement means “world consumption share”. Contrary to the US arguments, the “world
market share” does not refer to “all the markets in the entire ‘world’, including the market of the
subsidizing Member. Brazil has demonstrated that the ordinary meaning of “world market share”
refers to the share of a Member in the world export trade.

29. This interpretation is further supported by the context of Article 6.3(d), which includes the
reference to the word “trade” in footnote 17. Additional context can also be found in the close
similarity between the concepts used in Article 6.3(d) and Article XVI:3, second sentence (both
involve primary products, increase in exports, represen tative periods, effects of any subsidy). Given
the similarities between these provisions, the use of the terms “world market share” and “share of
world export trade” does not state that both prov isions deal with separate situations, as the
United States argues. Instead, both terms refer to a share of export transactions in the world market.
Therefore, the phrase “world market share” me ans the world market share of exports, not
consumption.

30. In sum, Brazil has demonstrated that the US subsidies caused serious prejudice and threat
thereof to the interests of Braz il, because for each marketing year between 2001-2003 the US world
market share in upland cotton increased over its previous three-year average. These increases
followed a consistent trend, within the meaning of Article 6.3(d) of the SCM Agreement.

31. Brazil rebuts US arguments that GATT Article XVI:3 only applies to export subsidies and,
thus, has been superseded by Article 3.1(a) of the SCM Agreement. GATT Article XVI:3 is an
actionable subsidy provision that applies to all subs idies having the effect of increasing exports. The
phrase “which operates to increase the export” is quite different from the phrase “subsidy on the
export”. Furthermore, the phrase “operates to in crease the export” does not contain any export
contingency requirement. Therefore, read in the context of the SCM Agreement and GATT 1994,
Article XVI:3, second sentence refers to export-related subsidies, wh ich is a far broader notion than
subsidies that are “contingent upon export performance”.

32. In sum, GATT Article XVI:3 is not supersed ed by the export subsidy provisions of the
Agreement of Agriculture and the SCM Agreement. Instead, it provides obligations concerning any
form of subsidy, independent of the obligations set forth in Article 3 of the SCM Agreement.

33. Brazil also conclusively demonstrates that US upland cotton subsidies violate GATT
Article XVI:3 by causing the United States to have a more than equitable share of world export trade
in upland cotton.

34. With respect to Brazil’s threat serious prej udice claims, Brazil argues that the appropriate
standard for serious prejudice claims is not the “imminent threat” standard argued by the
United States, but rather whether the unlimited and mandatory US subsidies create a structural and
permanent source of uncertainty in suppressing prices, increasing world market share, and securing an
inequitable share of world trade.

35. Brazil has demonstrated that it is appropriate for the Panel to rely on the standard proposed by
the GATT EC-Sugar Exports panels to determine whether the mandatory and unlimited US subsidies
on upland cotton create a permanent source of uncerta inty in the world upland cotton market. The
facts of this dispute meet that standard. The Un ited States has admitted that the US subsidies are both
mandatory and unlimited. Given the large US world market share and share of total world
production, the US subsidies will have the effect of locking in large amounts of US production, of
creating an ongoing significant threat of suppressed prices, and of securing an increasing and
inequitable US world market share throughout MY 2003-2007.

36. The “imminent threat” standard is not found in the text of Part III of the SCM Agreement, and
is only applicable to investigations by investig ating authorities in countervailing duty, anti-dumping,
or safeguard contexts. It is inconsistent with the remedies provided for in Article 7.8 of the SCM
Agreement, which are imposed well after the period of investigation examined by a Panel.

37. Therefore, the collective effects of the ma ndated and unlimited US subsidies in MY 2003-
2007 threaten to maintain a large US upland cotton production, to increase and maintain US exports,
and to significantly suppress world upland cotton prices during MY 2003-2007, in violation of
Articles 5(c), 6.3(c), and (d), and GATT Articles XVI:1 and 3.

38. In sum, the mandatory and unlimited US upla nd cotton subsidies cause threat of serious
prejudice to the interests of Brazil. They constitut e a structural and permanent source of uncertainty
in the world upland cotton market, in which the United States enjoys a dominant position. This
conclusion is further supported by the trade-distorti ng nature of the US subsidies, their effects in
causing present serious prejudice in MY 1999-2002.

39. Finally, with respect to export credit guarantees, Brazil offers the Panel a recounting of its
evidence and argument in support of its claims ag ainst the CCC export credit guarantee programmes,
along with footnote citations to all of the places in its various submissions in which it makes those
arguments and offers that eviden ce. Brazil also responds to particular points raised by the
United States that Brazil has not yet addressed. The GSM 102, GSM 103 and SCGP export credit
guarantee programmes constitute export subsidies that circumvent, or threaten to circumvent, the US
export subsidy reduction commitment, within the meaning of Articles 10.1 and 8 of the Agreement on
Agriculture. They also constitute prohibited export subsidies within the meaning of Articles 3.1(a)
and 3.2 of the SCM Agreement and item (j) of the Illustrative List of Export Subsidies.

ANNEX G-2

EXECUTIVE SUMMARY OF THE UNITED STATES
FURTHER REBUTTAL SUBMISSION

1. Brazil has failed to establish all of the elem ents necessary to establish its subsidies claims

1. For the Panel to make the findings Braz il requests, Brazil must adduce evidence and
arguments sufficient for the Panel to identify the produc t(s) that a particular subsidy benefits. This
requirement of identification can come up in a variety of ways, but the two most frequently
encountered questions are: Which product(s) benef its from the subsidy? and Should the benefits of a
subsidy be allocated to future production and sales of the product in question, or should such benefits
be "expensed" – that is, allocated only to current production and sales during the time period in which
the subsidy is received? Brazil has not provided a basis for a clear and unambiguous explanation on
its conclusions for each of these points in order for the Panel to fulfil
its obligations under Article 12.7 of the DSU.

2. With respect to the first question – which produc t(s) benefits from the subsidy? – Annex IV to
the Subsidies Agreement provides guidance. A nnex IV provides guidelines for calculating total
ad valorem subsidization for purposes of the now-expired Article 6.1(a). A subsidy not "tied to the
production or sale of" cotton ("a given product") ca nnot be regarded as subsidizing merely "that
product"; rather, the subsidy benefits all of the "recipient firm’s sales". In the Negotiating Group on
Rules, Brazil has proposed that Members adopt a "guideline" on calculating the amount of the subsidy
precisely along these lines.

3. Implicit in both paragraphs 2 and 3 of Annex IV is the principle that a subsidy provides a
benefit with respect to products that the recipient produces. A corollary of this principle is that a
subsidy does not provide a benefit with respect to products that the recipient does not produce. Thus,
a subsidy provided to a recipient who does not produce upland cotton cannot be said to provide a
benefit to upland cotton. Such a subsidy cannot be regarded as having one of the effects described in
Article 6.3 insofar as upland cotton is concerned.

4. The foregoing analysis suggests that, for each challenged subsidy, Brazil must identify (as
would the Panel in its report) the product that bene fits. In the case of product-specific support – that
is, a payment that is linked to production of a sp ecific product – such as the marketing loan payments
and Step 2 payments, the issue is not difficult. In the case of a payment in which the subsidy is not
"tied to the production or sale of a given product", the product subsidized by that payment is all the
products produced by the recipient. To determin e the portion of a payment not tied to the production
or sale of a given product that benefits upland cotto n, the value of the payment must be allocated over
the "total value of the recipient firm’ s sales".

5. With respect to the second question – how should subsidies be allocated over time? –
Annex IV also provides guidance. Paragraph 7 provid es that: "Subsidies granted prior to the date of
entry into force of the WTO Agreement, the benefits of which are allocated to future production, shall
be included in the overall rate of subsidization" (emp hasis added). A corollary of this principle – that
the benefits of certain subsidies should be allocated to future production – is that if subsidy benefits
are not allocated to future production, they must be e xpensed – that is, allocated to production in the
time period during which the subsidy is received. Thus , in the context of this dispute, a subsidy the
benefits of which are expensed to production/sal es in 2001 cannot be said to be causing serious
prejudice in 2002 because the subsidy has ceased to exist. The "benefit" – one of the constituent

elements of a "subsidy" under Article 1 – was used up in 2001. Once the benefit was exhausted, the
subsidy ceased to exist.

6. The Subsidies Agreement does not expressly iden tify those subsidies "the benefits of which
are allocated to future production". However, gui dance is available on this question, and it suggests
that subsidies that are "non-recurring" should be allocated over time, while subsidies that are
"recurring" should be expensed to the year of receipt.
1 For example, the Informal Group of Experts
recommended to the Subsidies Committee that, as a general proposition, recurring subsidies be
expensed and non-recurring subsidies be allocated . The Group also specifically recommended that
price support payments generally be expensed. In making these recommendations, the Group follows
the logic noted above: where there are not reasons to allocate subsidy benefits to future production,
the subsidy must be expensed, and once the benefit was exhausted in the time period during which the
subsidy is received, the subsidy ceased to exist. The analysis presented above and the conclusions
and recommendations of the Group are not cont roversial. The domestic countervailing duty
regulations of various Members, including those of Brazil and the European Communities, reflect this
very approach.

7. Thus, it is appropriate for th e Panel to expense the value of these payments – that is, allocate
them to production in the time period during which th e subsidy is received. No payment at issue is
made for the acquisition of fixed assets. Rather, th e challenged payments are recurring. Brazil’s own
arguments endorse the notion of expensing these paymen ts. That is, for purposes of its Peace Clause
arguments, Brazil expenses these payments by allocating the total value of each of these payments to
the marketing year for which the payment is received. For purposes of Brazil’s actionable subsidies
claims, Brazil adopts the identical approach and expenses these payments to the marketing year for
which the payment is received . Thus, despite Brazil’s silence on the issue of expensing recurring
subsidies, its actions and arguments reveal that it accepts and applies the concept to the challenged US
subsidies.

8. The United States has explained, and Brazil t acitly accepts, that the payments challenged in
this dispute are recurring subsidies that 0are expens ed – that is, allocated to production in the time
period during which the subsidy is received. It fo llows that a recurring subsidy provided in marketing
years 1999, 2000, or 2001, respectively, cannot be said to be causing serious prejudice in marketing
year 2002. Because the payments in each of tho se prior years was allocated to production in those
years, no "benefit" exists after each of those years – a benefit could only exist in a subsequent year if
the payment had been allocated to future production and not expensed.

9. Because the recurring subsidies provided in each of marketing years 1999, 2000, and 2001
ceased to exist when the benefit was used up for production in those years, the effect of those
subsidies cannot be the subject of subsidies claims in marketing year 2002. Under Article 5(c) and
6.3, Brazil must demonstrate what "the effect of the subsidy is". Similarly, under GATT 1994
Article XVI:3, Brazil must demonstrate that the Un ited States grants or maintains export subsidies
"which operate[] to increase the export of any prim ary product," resulting in a more than equitable

1 First, Article 2.2.1.1 of the Agreement on Implementation of Article VI of the General Agreement on
Tariffs and Trade 1994 ("Anti-Dumping Agreement"), which deals w ith the calculation of cost of production,
singles out " non-recurring items of cost which benefit future and/or current production" (emphasis added).
Second, the Appellate Body has acknowledged that non-recurring subsidies may be allocated over time. In US -
Lead Bar II, the Appellate Body found that it was permissible for an investigating authority in a countervailing
duty proceeding to rely on a rebuttable presumption "tha t a ‘benefit’ continues to flow from an untied,
non-recurring ‘financial contribution’" (emphasis added). Third, the Report by the Informal Group of Experts
to the Committee on Subsidies and Countervailing Measures , G/SCM/W/415/Rev.2 (15 May 1998),
recommends that certain subsidies be ex pensed to the year of receipt and th at the benefits from other subsidies
be allocated over time.

share of world export trade. Subsidies that were expensed and benefited historical production in
marketing years 1999, 2000, and 2001cannot also benefit current production. Thus, these past
payments would not form part of Brazil’s subsidies claims nor the Panel’s analysis. Serious prejudice
has to be based on findings for the 2002 marketing year.

2. Brazil's legal interpretive errors also de monstrate that it has failed to make a
prima facie case on its subsidies claims

10. As complainant Brazil must identify properl y the measures within the Panel’s terms of
reference – that is, "subsidies provided to US produ cers, users and/or exporters of upland cotton" in
respect of upland cotton, the subsidized product. The challenged measures are subsidies, or
payments, and in order to assess their effect, one needs to know, inter alia, how large the subsidy is.
Brazil has not properly identified the size of each challenged subsidy.
2

11. Brazil Misinterprets Article 6.3(c) on Price Suppression or Depression . Brazil has not
alleged any facts to establish that US and Brazilia n cotton are found "in the same market" pursuant to
Article 6.3(c) – that is, in each of the markets id entified by Brazil (at various times, the United States,
Brazil, Argentina, Bolivia, India, Indonesia, Ital y, Paraguay, Philippines, and Portugal). Brazil has
not identified the extent of subsidization of the US cotton in each market (the subsidized volume) –
that is, which exports benefit from which cha llenged subsidy. Brazil has also not shown a
price-suppressing effect by those US imports in each market. Brazil simply asserts that prices in those
markets are correlated to the NY futures and A-index prices. This allegation of a generalized price
effect cannot satisfy Brazil’s burden of showing a price effect by the subsidized product of a like
product of another Member "in the same market".

12. Brazilian price quotes in fact consistently u ndercut US price quotes for delivery CIF Northern
Europe. It is also the case that in most of the ma rkets identified by Brazil (A rgentina, Bolivia, India,
Indonesia, Italy, Paraguay, Philippines, and Portuga l), Brazilian prices have been consistently lower
than US prices. Thus, rather than US upland cotton suppressing Brazilian prices, the data suggests
that it is Brazilian cotton that is undercutting US prices.

13. Article 6.3(c) does not establish that serious prejudice may arise if the effect of the subsidy is
any price suppression or depression. Indeed, were th e term "significant" omitted from Article 6.3(c),
it would be the case that any production subsidy that was granted on a per-unit basis could be deemed
to result in serious prejudice: any increase in production resulting from the subsidy would
theoretically lead to some price effect. The use of the term "significant" prevents such theoretical or
minor effects from rising to the level of serious prejudice.

14. Because "significant" modifies "price suppression" or "depression", it is the level of price
suppression or depression itself that must be significant. One way of examining whether any alleged
price suppression is significant would be to examine th at degree or level in light of the price of the
product itself. Another analytical tool that suggest s itself is to look at the nature of the product’s
price. Strong or frequent fluctuations in price w ould themselves tend to cut against a finding that any
alleged suppression or depression is "significant", esp ecially if the variability frequently brings the

2 For example, Brazil includes payments made to recipients that do not produce upland cotton and fails
to allocate non-product-specific payments across the total value of the recipient firm’s sales. Brazil has not
reduced the value of decoupled inco me support payments to account for the capture by landowners of those
payments made to farms on which cotton cropland is rent ed (65 per cent of total cotton cropland). Further,
Brazil has Brazil has not identified the value of th e cotton export credit guara ntees under the GSM-102
programme, conceding that it "is not in a position to quan tify the benefit to the recipients that has arisen from
the application of the GSM 102 export credit guarantee programme to exports of US upland cotton between MY
1999-2002".

price of the product to a level at which the alle ged suppression or depression (judged in light of that
price) would not be significant. The United States notes that the price of upland cotton is highly
variable, with frequent swings of substantial degree. Thus, this evidence relating to the price
variability of upland cotton must be taken into ac count in any analysis of whether alleged price
suppression or depression is "significant".

15. Brazil Misinterprets Article 6.3(d) on an Increase in World Market Share . Brazil
misinterprets the phrase "world market share" in Article 6.3(d) as the share of world export trade. The
plain meaning of the phrase "world market share" is not limited to export trade in products but
includes all worldwide consumption – that is, the aggregate of all markets that make up the world.
The United States is a "market" for upland cotton and part of the "world"; therefore, its domestic
consumption forms part of the "world market" for upland cotton.

16. Context supports this reading of "world market share". For example, Article 6.3(a) identifies
the "market of the subsidizing Member" as a rele vant market from which a complaining Member’s
exports can be displaced or impeded. Logically, then, the market of the subsidizing Member should
also be relevant for determining the "world market share". Various provisions also provide context
for not reading "world market share" as relating to "world export trade".
3 Given repeated examples of
the use of the terms "trade," "world trade," and "w orld export trade" in the covered agreements, the
choice of the phrase "world market share" must be given meaning in accordance with the plain
meaning of those terms.

17. The challenged US payments were only introdu ced in marketing year 2002; therefore, there
can be no "trend" in US world market share with respect to those payments. Nonetheless, were the
Panel to examine US world market share using data under the 1996 Act (consumption data, not the
export data presented by Brazil), the criteria of Article 6.3(d) are not met.
4

18. Brazil Has Not Demonstrated a Clear and Imminent Likelihood of Future Serious
Prejudice. Although Brazil has presented evidence afte r the date of panel establishment (indeed,
after conclusion of its three-year period of inv estigation), it advises the Panel to consider more
probative, for purposes of explaining price developm ents in marketing year 2003, the conditions in
marketing year 1999 than the actual price developments in marketing year 2003 . Brazil’s approach
carries with it a high potential for erroneous findings by the Panel. Given current high market prices
and the expectations embodied in futures prices that such high prices will remain through the course
of the 2003 marketing year, it would appear that US price-related payments (marketing loan payments
and counter-cyclical payments) will decline dramati cally, contrary to Brazil’s assertions. In such a
circumstance, it is difficult to see how challenge d US payments would pose a clearly foreseen and
imminent likelihood of future serious prejudice.

3 First, footnote 17 to Article 6.3(d) provides an exception to the provision where "[o]ther multilaterally
agreed specific rules apply to the trade in the product or commodity in question". This exception applies only to
"trade" because "multilaterally agreed specific rules" would be unlikely to apply exclusively to domestic
consumption; however, the use of the world "trade" in the footnote to Article 6.3(d) but not in the text of the
Article itself suggests that "world market share" does not merely encompass shares in world "trade". Second,
Article 27.6 speaks of a developing country Member reac hing export competitiveness when its "share . . . in
world trade of that product" reaches a certain level. This use of "world trade" stands in contrast to the phrase
"world market share" in Article 6.3(d). Third, GATT 199 4 Article XVI:3 uses the phra se "world export trade",
which also stands in contrast to the phrase "world market share".
4 While US share of world consumption in MY2002 was projected to be higher than the preceding
three-year average, that increase has not followed "a consistent trend over a period when subsidies have been
granted" – in this case, for purposes of argument, since the 1996 Act came into effect. Reversing direction
every year since marketing year 1996 cannot constitute "a consistent trend".

19. Brazil Has Misinterpreted GATT 1994 Article XVI:3 . Contrary to Brazil’s arguments in
this dispute, Brazil has previously agreed in a GATT plurilateral setting that GATT 1994
Article XVI:3 is limited in scope to export subsidies. Both the United States and Brazil were
signatories to the Tokyo Round Agreement on Interpretation and Application of Articles VI, XVI, and
XXIII of the General Agreement on Tariffs and Trade , commonly known as the Subsidies Code.
Article 10 of the Subsidies Code is entitled "Export subsidies on certain primary products" and states
(in paragraph 1): " In accordance with the provisions of Article XVI:3 of the General Agreement,
signatories agree not to grant directly or indirectly any export subsidy on certain primary products in
a manner which results in the signatory granting such subsidy having more than an equitable share of
world export trade in such product . . . ." Thus, Article 10.1 of the Subsidies Code makes clear the
understanding of both the United States and Braz il that GATT 1994 Article XVI:3 applies only to
"export subsid[ies] on certain primary products ". Therefore, Brazil has not made a prima facie case
under Article XVI:3 on the basis of its arguments relating to all challenged US payments.

20. Brazil Errs in Asserting that Threat of Serious Prejudice Includes "More than an
Equitable Share" under GATT 1994 Article XVI:3 . There is no textual basis to assert that a claim
of "threat of serious prejudice" under GATT 1994 Ar ticle XVI:1 may be founded on the "more than
equitable share" language of GATT 1994 Ar ticle XVI:3. Neither Brazil nor the EC – Sugar Exports
GATT panel report on which it relies cites any and th at panel report does not appear to explain the
basis for its decision to read the standard of Artic le XVI:3 into Article XVI:1. By way of contrast,
footnote 13 to Article 5(c) of the Subsidies Agreemen t states that "[t]he term serious prejudice to the
interests of another Member" is used in this Agreem ent in the same sense as it is used in paragraph 1
of Article XVI:1 of GATT 1994, and includes threat of serious prejudice". This footnote does not
reference Article XVI:3, and as there is no "more th an equitable share" prong to Article 6.3, there
would not appear to be any basis to advance a thr eat of serious prejudice claim using that standard
under Article 5(c) of the Subsidies Agreement. Footnote 13 states that "serious prejudice" in the
Subsidies Agreement and GATT 1994 Ar ticle XVI:1 should be read "in the same sense". Therefore,
footnote 13 provides a further textual basis for finding that a threat of serious prejudice claim under
GATT 1994 Article XVI:1 may not be based on th e "more than equitable share" language of
Article XVI:3.

3. Brazil has failed to demonstrate the cha llenged US subsidies caused the effects
complained of

21. The "Temporal Proximity" of US Payments and Low Cotton Prices Fails to
Demonstrate that US Subsidies Caused Low Prices . Brazil has failed to make a prima facie case
based on the assertion that large US outlays during marketing years with low prevailing upland cotton
prices necessarily establishes causation. Brazil makes selective use of data to present a number of
erroneous claims about US producti on or exports during a period of lo w and declining cotton prices.
Brazil repeatedly begins the period of comparison with marketing year 1998 or ends it with marketing
year 2001. Such comparisons are inappropriate for several reasons and can produce misleading
results.
5 The fact that high US payments were made when cotton prices were low does not establish
causation.

5 First, to use either marketing years 1998 or 2001 as one end of a period for comparison contradicts
Brazil’s own argument that the "period of investiga tion" should be marketing years 1999-2002. Second,
marketing year 1998 was a year in which US harves ted acreage and production were severely impacted by
weather conditions, in particular, drough t. The record shows record abandon ment during that year (that is, the
difference between planted acres and harvested acres). Thus, to begin a comparison of harvested acreage or
production with marketing year 1998 will overstate any resulting increase. Third, marketing year 2001 was a
year in which US produ ction increased, primarily because of record yields (a s Brazil has acknowledged). That
is, while planted acreage increased over marketing year 20 00 in large part due to the decline in expected returns
from competing crops, production increased by a much greater percentage because of uncom monly favourable

22. Brazil Erroneously Alleges Production Effect s from Decoupled Payments, Contrary to
the Economic Literature . A fundamental error made by Brazil throughout its submissions and
statements is to assert that decoupled payments are production-distorting. Brazil’s conclusion that
decoupled payments have had a large effect on cotto n prices appears to be a direct consequence of
Dr. Sumner’s faulty analysis – one that is inconsis tent with the empirical and theoretical literature on
such payments. Economic theory suggests that, if producers are seeking to maximize profits, the
decision of which crop to plant is based on expect ed returns offered by the market or government
payments above operating (variable) costs. Decoupl ed income support payments do not figure in this
decision because such payments will be paid to the producer regardless of the programme crop that is
planted or whether any crop is planted at all.6

23. The main impact of decoupled payments is likely on land values. In well-functioning
markets, asset prices reflect expectations about the future returns from their ownership. The direct
link between base acres for decoupled payments and the known programme benefits allowed the
future stream of payments to be efficiently capitali zed into land values. Thus, much of the increase in
wealth from farm payments accrues to non-operator landlords (Burfisher a nd Hopkins, 2003). Thus,
the effects of increased wealth la rgely accrue to non-operators, an d any theoretical production effects
are further minimized. In fact, land values set by sales and rental markets have diverged from
commodity prices, suggesting that land markets have additionally capitalized the present and expected
future value of government payments.

24. Data also indicate that decoupled payments , by increasing income and wealth, have allowed
households to increase their leisure and reduce thei r work hours. If the downturn in labour comes
from agricultural activities, the effect of such payments could be to decrease the household’s
agricultural production, which would support world commodity prices. Data indicate that farm
households that received decoupled payments in 2001 consumed more than farm households with
similar incomes not participating in the progra mme. Thus, these data suggest that decoupled
payments allow recipients to consume more out of income and may allow them to draw down savings
that they typically carry as a precaution against income shortfalls.

25. Empirical studies have generally concluded that the effects of decoupled payments are
minimal. For example, using an intertemporal Co mputable General Equilibrium model, Burfisher et
al. (2003) estimate that production flexibility cont ract payments had "no effects on agricultural
production in either the short run or the long run". These and other results are fully consistent with
the fundamental requirement of Annex 2 of the Agreement on Agriculture that green box decoupled
income support have no or at most minimal trade or production effects.

26. The available data also show large shifts in cotton acreage. Based on a preliminary review of
a sampling of marketing year 2002 acreage reports, the United States estimates that nearly half (47 per
cent) of farms receiving direct and counter-cycli cal payments in 2002 for upland cotton base acreage
in fact planted no cotton at all. Preliminary estim ates from the Farm Services Agency indicates that
cotton producers enrolled upwards of 2 million acres for the 2002 Direct and Counter-Cyclical
Programme that had not been enrolled under the 2002 Production Flexibility Contract programme.
Marketing year 1999 planted acreage deviated substa ntially from base acreage, both by region and by

weather conditions. Thus, to end any comparison of pr oduction with marketing year 2001 will overstate any
resulting increase.
6 Brazil has alleged that increased income can induc e producers to take riskier choices, thus potentially
increasing production and distorting markets. The economic literature suggests any such effects are empirically
trivial. Recipients of decoupled payments use many market mechanisms to reduce their risk exposure in their
farm operation. These strategies to manage risk reduce the extent to which changes in risk attitude due to
decoupled payments, if any, will be evidenced in their production levels or demand for inputs.

State.
7 Thus, the data indicate that recipients of " upland cotton base acreage" decoupled payments
plant alternative crops or no crops at all, and other farmers who do not hold upland cotton base acres
choose to produce upland cotton.

27. Third-Party Economic Studies Have No t Properly Modeled Cotton Production
Decisions and Therefore Cannot Assist in Determining the Effect of US Subsidies on Cotton
Production. Brazil has pointed to various third-party economic studies which find price effects from
US payments. Upon review, the United States conc ludes that they do not present relevant results
because they generally suffer from two conceptual flaws. These fundamental flaws establish that
these papers do not provide a basis to find a causa l link between US payments and the effects of
which Brazil complains.

28. First, several of these studies do not mode l the marketing loan programme appropriately.
8
Simply put, if Dr. Sumner and FAPRI’s understanding of producer decisions is correct, then Brazil
would have to agree that these pa pers do not prope rly model farmers’ production decisions and any
potential impact of marketing loans on those deci sions. As a result, th ese models do not provide
insight into the question this Panel has been asked to examine.

29. Second, most of these studies do not distingui sh between payments linked to production and
payments decoupled from any requirement to produ ce, instead treating them as having equal impacts
on production. Again, Brazil’s own expert recognizes that decoupled payments do not have the same
impact as, for example, product-specific market ing loan payments. Thus, Dr. Sumner’s own
modelling of the impact of decoupled payments (with which the United States disagrees as contrary to
the economic literature in ascribing any impact on production to these payments) indicates that these
papers treat decoupled payments inappropriately.

30. Brazil’s "Total Costs of Production / Re venue Gap" is Meaningless and Cannot
Establish Causation . Brazil’s so-called "gap" between the average total cost of production per
pound of cotton for US cotton producers and the reve nue such producers received from the market is
an economically meaningless measure and is based on a simplistic calculation that misstates both the
revenue and cost sides of the calculation. Braz il’s revenue calculation is based on an erroneous
representation of government support, especially cr op insurance, decoupled payments, and Step 2
payments, and of market revenue.
9 More fundamentally, the existen ce of a "gap" does not establish

7 Comparing marketing year 1999 planted acreage to base acreage, th e ratio of planted to enrolled
acreage, by region, in 1999 ranged from only 51% in the West to 141.25% in the Southeast. In the Southeastern
United States (Alabama, Florida, Georgia, North Carolina, South Carolina and Virginia), for example, upland
cotton planted acreage exceeded base acreage by over 1 million acres . In each of the other three regions,
planted acreage was between 879,000 and 1 million acres less than base acreage. The variations by State are
even more extreme.
8 (a) Specifically, several of these papers simply remove the full outlay of the marketing loan
program. This implies that farmers at the time of plantin g knew what actual prices would be at harvest time.
Brazil’s own expert recognizes that it is producers’ expectations of harvest season prices that drive planting
decisions. Thus, using the full outlays will overstate the influence of the marketing loan programme on the
planting/production decision when actual prices turn out to be below the expected prices at the time of the
planting/production decision.
9 In three different submissions, Brazil presents three different per pound revenue figures derived from
market revenue and US support progra mmes, and purports to represent this figure as averag e revenue received
by upland cotton farmers in that year for every pound of cotton produced. This combined per pound figure in no
way represents what a cotton farmer would have received – or even could have expected to receive – in the
specific year in the way of government support. In addition, Brazil’s measure of revenue for upland cotton
producers – revenue from sales of cotton lint and cottonseed – is incomplete. Revenue from all sources –
commodity sales, contracts in futures markets, off-farm employment, investment income – are needed to put the
costs into perspective.

that US production would necessarily decline wit hout the US payments Brazil has decided to
challenge. For example, Brazil concedes that a s ubstantial amount of US upland cotton in recent
years was grown on non-upland cotton base acreage, at the same time that government payments were
allegedly "necessary" for US producers to remain in business. Brazil fails to explain how it accounts
for these inconvenient facts that do not support its cost-revenue gap theory.

31. On the cost side, Brazil’s use of average to tal cost of production for US cotton to make its
revenue gap argument is the wrong figure to measure co sts – it is operating costs, not total costs, that
figure in production decisions. Brazil also has made no effort to update cost data that is based on a
1997 survey and so does not take into account any technological or structural changes that have
occurred in the interim. Since 1997, significant technological changes have occurred in US cotton
production, changes which are not reflected in the estimated costs of production, such as increased
production in low-cost regions and the introduction a nd adoption of genetically modified varieties of
cotton with significantly increased yields while reducing pest control costs.

32. Finally, Brazil has used data from the In ternational Cotton Advisory Committee (ICAC) to
compare costs of production across countries arguing that the United States is a higher-cost producer
than many other countries. Even when good survey data are available for one country, using cost of
production data to draw valid econom ic conclusions is fraught with difficulties. The comparison of
costs across countries poses greater difficulties, rende ring such comparisons invalid. The ICAC itself
notes that the cost data it presents is not appr opriate for making these kinds of cross-country
comparisons.

33. Brazil Has Failed to Make A Proper Analys is of Conditions Actually Faced by
Producers in Making Production Decisions Using Futures Prices, Which Reveals No Expected
Impact from Marketing Loans Except for MY2002 . An analysis of the effect of marketing loan
payments must begin with an understanding of farm ers’ planting decisions. The United States agrees
with Mr. MacDonald, Brazil’s expert on cotton markets, that the New York futures price provides the
principal indicator of how market participants expect cotton prices to develop in the future.
Unfortunately, Brazil’s other expert, Dr. Sumner , has ignored Mr. MacDonald’s testimony in
modelling producers’ expectations of harvest season market prices by using "lagged prices" instead of
futures prices. Had Dr. Sumner conferred with Mr . MacDonald, Dr. Sumner would have learned that
"[t]he ‘ New York futures price’ is a key mechanism used by cotton growers . . . in determining the
current market values as well as the contract prices for forward deliveries."

34. Comparing the planting-time (February) New York futures price for the following harvest
season (December delivery) to the marketing loan rate for upland cotton for each marketing year
reveals that in every year but marketing year 2002, the planting time futures price was above the
marketing loan rate . That is, New York futures prices indicat ed to producers that in every year but
marketing year 2002 the return from the market would exceed the marketing loan rate. Thus, the
marketing loan programme in marketing years 1999-2001 would not be expected to have had an effect
on the decision to plant.

35. Only in marketing year 1999 does Dr. Sumner’s "lagged price" approach result in a value for
producers’ expectations that equals or exceeds the futures price. In every other marketing year, the
"lagged price" method significantly understates th e harvest season price expected by producers and
thus would distort an analys is of the effect of US subsidies. In fact, the use of "lagged prices" would
lead to the erroneous conclusion that expected pr ices in every year but marketing year 1999 were
below the applicable marketing loan rate. Howeve r, market price expectations actually were above
the loan rate in every year but marketing year 2002. Thus, the use of "lagged prices" instead of
futures prices to gauge producers’ price expectations at the time of planting in the specific years in
which Brazil has alleged effects from US subsidies w ould seriously overstate the expected impact of

US marketing loans. To the extent Brazil relies on Dr. Sumner’s analysis, which uses lagged prices
rather than futures prices, Brazil’s analysis is fundamentally flawed.

36. The futures price data and "lagged price" data above also reveal that, despite declining market
prices over the course of marketing years 1999-2002, market participants persisted in expecting
prices to recover.
10 Thus, Brazil’s reliance on actual market year prices to claim that US cotton
plantings should have been declining ignores the fa ct that harvest season cotton futures prices at the
time of planting were fairly stable from marketi ng year 1999 through marketing year 2001, even as
futures for other competing crops fell in value.

37. In marketing year 2002, harvest season futur es prices at the time of planting had fallen below
the loan rate. In this marketing year, there is a least the possibility that producers were planting for
the loan rate and not for the harvest season expected price. However, the decline in US planted cotton
acreage was within the range of expected values gi ven the decline in the harvest season futures price
from the previous year. Had US producers been planting for the 52 cents per pound marketing loan
rate, one would have expected to see only one-tenth of the decline in plan ted acreage that actually
occurred from marketing year 2001 to 2002.

38. Moreover, the per cent decline from marketi ng year 2001 to 2002 in US harvested acreage
was very similar to (but larger than) the change in harvested acreage in the rest of the world. Despite
the theoretical possibility that the marketing loan rate could have had some impact on planting
decisions in marketing year 2002, the actual decline in US planted and harvested acreage suggests
that US acreage levels were entirely consistent w ith price expectations and world market conditions.
Thus, even in marketing year 2002, there is no evid ence on this record that the marketing loan rate
serves to insulate US producers’ planting decisions from market price movements. To the contrary,
the evidence suggests that US producers do respond to changes in expected prices (for cotton and for
other competing crops) and are as responsive if not more so than producers in other countries.

10 The marketing year 2000 harves t season futures price at planting time was 61.31 cents per pound,
suggesting that the market ex pected prices in marketing year 2000 to recover from the previous year’s levels.
For marketing year 2001, the harvest season futures price at planting time was 58.63 cents per pound (nearly the
same as futures in marketing years 1999 and 2000), once again indicting that market participants expected prices
in marketing year 2001 to recover from their marketing year 2000 levels. It is only in marketing year 2002 that
persistent lower-than-expected farm pri ces translated into a lower harvest s eason futures price at planting. For
marketing year 2002, the February av erage futures price for December deliv ery fell to 42.18 cents per pound.
However, even in marketing year 2002, market participan ts expected prices to rec over and run higher than the
"lagged price" of 29.80 cents per pound suggested.

ANNEX H

ORAL STATEMENTS OF PARTIES AT THE
SECOND SUBSTANTIVE MEETING

Contents Page
Annex H-1 Executive Summary of the Opening Statement of Brazil H-2
Annex H-2 Executive Summary of the Closing Statement of Brazil H-7
Annex H-3 Executive Summary of the Openi ng Statement of the United States H-12
Annex H-4 Executive Summary of the Closing Statement of the United States H-17

ANNEX H-1

EXECUTIVE SUMMARY
STATEMENT OF BRAZIL AT THE SECOND SUBSTANTIVE
MEETING OF THE PANEL WITH THE PARTIES

The United States Has Invented Threshold Burden s for Serious Prejudice Challenges that Do
Not Exist in the Text of Articles 5 and 6.3 of the SCM Agreement

1. The United States’ has raised a number of thr eshold burdens that an Article 6.3 complainant
allegedly must meet to establish a claim which ar e not based in the text of the serious prejudice
provisions of the SCM Agreement.

2. First, the United States incorrectly asserts that under Article 6.3, Brazil must show an
ad valorem subsidy rate and the amount for each of the challenged US subsidies. The only textual
basis the United States provides is Annex IV of th e SCM Agreement, which has expired with the text
of Article 6.1(a) that contained the now-expire d presumption of serious prejudice from a 5 per cent
ad valorem subsidization. The United States further relies on countervailing duty measure procedures
and interpretations of Brazil and the EC. Bu t these allocation methodologies are irrelevant to
Article 6.3 claims because unlike the expired Article 6.1(a) or Part V of the SCM Agreement, the
focus of Articles 5(c) and 6.3 is on an examination of the effects of subsidies that are provided either
directly or indirectly to producers of a product, such as cotton. In any event, Brazil has demonstrated
a collective subsidization rate averaging 95 per cent and subsidies in the amount of $12.9 billion.

3. Second, the United States makes the sweeping argument that there is a legal prohibition on
bringing adverse effects claims against subsidies th at it alleges cannot be “expensed” or allocated to
future years. The United States argues that all s ubsidies to cotton are “recurring” and therefore, as a
matter of law, “cannot be said to be causing serious prejudice” except in the year in which they are
provided. In fact, there is no textual basis in Part III or Article 6.3 of the SCM Agreement (or
Article XVI:3 of GATT 1994) for distinguishing between the adverse effects of “recurring or non-
recurring” subsidies. Nor is there any basis for “expe nsing” subsidies in one year or another year, as
is often done in a countervaili ng duty investigation. Because Article 5 requires Members to prevent
effects, a breach of Article 5 does not necessarily ari se when a subsidy is granted, but only when
actionable adverse effects occur.

4. The US argument is also inconsistent w ith the object and purpose of the SCM Agreement
which is to protect Members from any subsidy causing serious prejudice. Under the US
interpretation, a Member can permanently avoid an y liability under Article 6.3 simply by carefully
constructing the form of the payment as a recu rring annual subsidy. Brazil has also presented
evidence of continuing effects from subsidies provided in MY 1999-2002.

Brazil Has Established the Existence of Price Suppression in the US, World, Brazilian, and
Other Markets Where Brazilian Producers Export

5. The United States now asserts that even thoug h there may be evidence that New York futures
market and A-Index prices as well as prices in ot her countries are suppressed by a “generalized
effect,” the “in the same market” language in Article 6.3(c) requires that US exports be present in the
same geographical markets in which Brazilian cotton is present.

6. Brazil has established, consiste nt with the requirements of Article 6.3(c), that the effects of
the US subsidies were to suppress prices in the “s ame market” in which Brazilian producers marketed
their “like” cotton – i.e., in the worl d’s, Brazil and in third countries. First, Brazil demonstrated the
impact of US overproduction on the US and the “world market” prices (A-Index and New York
futures market prices). Brazil then demonstrated that prices in Brazil and the countries to which
Brazilian exporters shipped their cotton betw een MY 1999-2002 were suppressed and heavily
influenced by US subsidies. The effects of those subsidies are communicated world-wide via a global
price discovery mechanism. The pa rties agree that US, Brazilian and other countries’ cotton are “like
products”. Throughout the world, prices for this fungible, price-sensitive commodity are determined
by reference to the New York futures market and A-Index prices. Thus, Brazil established that the
effect of the US subsidies is significant price suppression in the United States and Brazil, and in
countries to which Brazilian producers exported their cotton. Further, the evidence shows that US
subsidized cotton was present and contributed to th e suppression of prices in 37 of the countries in
which Brazilian producers marketed their cotton.

Brazil Has Established the Causal Link between the US Subsidies and Significant Price
Suppression, Increased US World Market Shares, and the Inequitable US Share of World
Trade

7. Brazil has properly analyzed both US re venues and costs using USDA’s own data and
conclusively demonstrated that the US industry producing cotton is heavily dependent on all US
subsidies to cover total costs over the short a nd long run. This finding provides a key economic
rationale for the large production-enhancing effect s from the US cotton subsidies found by USDA, as
well as by US and international economists.

8. Over the long term, even the United States ag rees that producers must recover all of their
costs and make a profit to stay in business. USDA’s own cost and planted acreage data shows that US
producers’ long-term costs from MY 1997-2002 were $12.5 billion greater than their market revenue
received. The United States argues that off-farm income should have been included in Brazil’s
revenue calculations. This US approach is con ceptually as well as legally wrong. The relevant
question is whether the “US cotton industry” is profitable from market revenue, not whether this
industry is kept alive by cross-financing from ot her (non-subsidy) sources, such as social security
payments.

9. US cotton producers would have suffered a cu mulative loss of $332.79 per acre of cotton
during MY 1997-2002 if they did not receive cont ract payments. But USDA’s own data in the
Environmental Working Group database demonstrates that almost all US producers of cotton did
receive contract payments. And as a result, they made cumulative 6-year “profit” of $106 per acre by
MY 2002, allowing them to plant significant acreage to cotton in MY 2002 and 2003.

10. Finally, the United States criticizes Brazil’ s comparison of costs of production among various
countries. While Brazil agrees that the ICAC “dat a must be used carefully”, the problems with
ICAC’s data do not render them unusable. Comp aring ICAC “Variable Cash Costs” – which the
United States does not challenge – demonstrates that it is much cheaper to produce a kilogram of
cotton in Brazil than the United States.

11. The United States has argued that “in no year from marketing year 1999-2001 would the
marketing loan rate be expected to have much of an impact, if any, on producer planting decisions,”
and that it did not affect producer decisions in MY 2002. This new US argument contradicts
numerous USDA studies. In assessing the credibility of the new US argument that marketing loans
provided no production incentives, the Panel should consider that USDA’s own economists Westcott
and Price found considerable effects of the marke ting loan programme on US cotton production. The
results of the Westcott and Price study are ne ither unique nor unexpected. Numerous other

economists have found similar results . Looking at futures prices also reveals that US producers are
unresponsive to price changes at planting time.

12. Moreover, the basic US assumption is that if the futures price (minus five cents) is above the
marketing loan rate of 52 cents per pound, then “economic logic” de mands that the marketing loan
can have no impact on planting decisions.

13. The United States’ analysis of the marke ting loan programme is based on a completely
irrelevant comparison between the “expected cash price” and the marketing loan rate. Cotton
marketing loan payments are based on the difference between the loan rate (52 cents) and the adjusted
world price (“AWP”) not the price received by US fa rmers. The AWP is typically far lower than the
price received by U.S. farmers. The average spre ad between the December contract futures price
during the period January-March and the adjusted world price of the following marketing year was
18.5 cents per pound. Thus, even using the US “futures price” methodology at planting time, for
every year between MY 1999-2002, there was the expectation at planting time that significant
marketing loan payments would be made.

14. Even if the expected AWP is above the loan rate, this does not mean that farmers expect a
zero marketing loan payment. If the expected AWP lies above the loan rate, farmers would still
expect, with a certain likelihood, that the actual AWP could be below the loan rate because the
expectations about the AWP is a probability distri bution. Thus, they would still expect a positive
marketing loan payment.

15. Brazil emphasizes that the US futures pr ice approach suffers from several significant
shortcomings. Both farmers’ decisions about plan ting and marketing of cotton are more complex.
Planting decisions take place between January-March and the marketing of cotton takes place during
the whole marketing year. Thus, just the February quote of the December futures contract does not
properly address the complexity of farmers decisions.

16. The evidence is that the US cotton industry is sceptical of relying too heavily on present
futures market prices as an accurate guide to future prices. Farmers have seen such volatility in the
past as well as today. Therefore, any cotton farmer planting in the MY 1996-2002 period who
actually relied on futures prices would know that th e futures market is far from constituting a perfect
predictor of future prices. Thus, as Professor Sumner correctly stated, “it is impossible to know what
precisely individual farmers expect;” price expectations are “fundamentally unobservable”.

17. The record supports a finding by the Panel th at more than $4 billion in contract payments
were provided to current producers of cotton in MY 1999-2002. Brazil has demonstrated that the
publications listed in the US review literature we re largely irrelevant because they are not cotton-
specific, as they do not address the re-coupling of production due to the base acreage updating for
direct and CCP payments, or the huge target price CCP payments provided to cotton producers.
Brazil has also shown that the US subsidies do not m eet the criteria of paragraph 6 of Annex 2 of the
Agreement on Agriculture, and are therefore not “decoupled”.

18. The record supports a finding by the Panel that the “other effects” apart from increased rental
costs include significant production effects tied to upland cotton. First, the large majority of current
cotton producers receive much higher per-acre paymen ts for cotton than for other programme crops.
The Panel must ask why much higher per acre dire ct and CCP payments are made to cotton base
acreage if these payments are totally de-connected fro m current production? If that were the
intention, as the United States argues and USDA presume s, then all contract payments in the same
state or county would provide the same per acre be nefit. The reason for the higher payments, of
course, is that cotton is a high-cost crop and that cotton farmers insisted they were not receiving
enough payments during MY 1999-2001 “to make ends meet”.

19. Second, the United States has now admitted th at two million additional cotton base acres were
added to the total contract “base” acreage. This means that in MY 2002, an additional $227 million in
payments were made to farmer s producing cotton during MY 1998-200 1. This is not “decoupling”
payments from production, but re-cou pling to reward farmers for increasing their recent production.
And the prospect of future updates will keep many farmers planting cotton in order to protect and
even increase future bases. Even USDA economists agree that this creates a link to current
production.

20. Third, the 72.4 cent target pr ice triggers CCP payments when cotton prices are lower – not
corn, or soybeans prices – but cotton. Why is that? Because the NCC argued and Congress agreed
that given the high costs of producing cotton in the United States, current and future cotton farmers
will need high payments when prices decline. Th ere would be no reason to set a “target price” to
protect against low cotton prices if Congress expect ed that most farmers with upland cotton base
acreage would start planting apple trees.

21. Fourth, Brazil presented the Panel with information from USDA’s own electronic payment
data showing that during MY 2000-2002 at least 71.3 to 76.9 per cent of tota l so-called “de-coupled”
cotton base acreage payments were paid to producer s of cotton. The data further shows that, in
MY 2002, these producers of cotton received 85 per cent of their contract payments from cotton base
acreage.

The US Subsidies Increase Exports, in Violation of Article 6.3(d) of the SCM Agreement

22. Brazil has demonstrated that, in violation of Article 6.3(d) of the SCM Agreement, the effect
of the US subsidies played a significant role in the increase of the US world market share in
MY 2001-2003 over its previous three-year average, following a consistent trend since MY 1996.

23. The US argues that “[u]nder Brazil’s reading, a Member would be free to provide subsidies
that increased the share of its own domestic c onsumption that its producers supplied without any
disciplines under Article 6.3(d)”. But this argument ignores the fact that Arti cle 6.3(a) disciplines
subsidies that increase domestic production in the market of the subsidizing Member. Further,
Article 6.3(b) addresses any export displacement or impedance effects of subsidies in third country
markets.

24. Second, the United States now argues exp licitly that Article 6.3 has superseded
Article XVI:3, second sentence. Assuming arguendo that the United States is correct, the effect of the
US interpretation of “world market share” as meaning “world market share of consumption” would be
to eliminate any WTO disciplines on production-enhancing subsidies that increase a Member’s world
market share of exports. As Brazil has pointed out , this would be contrary to the fact that the
language and scope of both Article XVI:3, second sente nce and the text of Article 6.3(d) are very
closely related.

25. Finally, the entire concept of a “world mark et share of consumption” is flawed for the
purposes of Article 6.3(d) as it results in double co unting. The United States argues that “the US
share of the world market for upland cotton should be defined as US consumption plus US exports
over world consumption”. However, the ordinary meaning in a trade remedy context of “domestic
consumption” is total domestic “shipments” (i.e., net use from production or stocks) plus imports
minus exports. Total “world consumption” is the sum of each country’s domestic shipments plus
imports minus exports. But the US methodolo gy addresses as “consumption” both imports and
exports and thus, double counts.

CCC Export Credit Guarantee Programmes

26. The United States considers that Article 10.2 exempts export credit guarantees from the
disciplines included in Article 10.1. In Article 10.2, the negotiators reached a good faith agreement to
work toward specific disciplines on export credits . That need for a good faith commitment to
negotiate explains the difference between the Draft Final Act and the final version of Article 10.2.
Given the “magnitude” of those programmes, the United States argues that no Member could possibly
have intended for its agricultural export credit progra mmes to be subject to Article 10.1. But, among
others, the EC and Canada, both massive users of export credits, have told the Panel that they consider
export credits to be subject to Article 10.1 if they meet the definition of an “export subsidy”. The
United States did not think it needed to acc ount for the CCC programmes in its reduction
commitments, since it did not consider them to be export subsidies.

27. The United States says that it has offered “uncontroverted evidence” that for 12 of 13
scheduled products, US exports under the CCC e xport credit guarantee programmes did not exceed
the United States’ reduction commitment levels. The correct question, however, is whether total US
exports of a scheduled product exceed the quantit ative reduction commitments, which Brazil has
demonstrated. It is for the United States, under Article 10.3, to prove that those excess quantities did
not receive export subsidies.

28. Whomever bears the burden, Brazil has dem onstrated that the CCC export credit guarantee
programmes confer “benefits” per se, and also constitute export subsidies within the meaning of item
(j). The United States argues that even if th e CCC programmes constitute export subsidies, because
“the quantities were within the applicable US export subsidy reduction commitments[,] they would
conform fully to the provisions of Part V of the Agreement on Agriculture”. The United States is in
error.

29. With respect to unscheduled products, Brazil has establishe d both actual circumvention and
the threat of circumvention. Brazil’s Exhibits 73 and 299 and Exhibit US-41list the billions of dollars
of CCC guarantee support that have been provided fo r exports of unscheduled products during fiscal
years 1992-2003, thereby circumventing the US commitment not to provide export subsidies. The
mere availability of CCC guarantees for unschedul ed products threatens circumvention, since
Article 10.1 prohibits any export subsidy for such products.

30. With respect to s cheduled products, Brazil has demonstrated actual circumvention for US rice
exports benefiting from CCC guarantees that have exceeded the US quantitative export subsidy
reduction commitment. In its 18 November submi ssion, the United States argues that because CCC
has not disbursed the minimum amounts (at least $5.5 billion in guarantees each year, plus an
additional annual amount of at least $1 billion in di rect credits or guarantees for exports to “emerging
markets”) there is no threat of circumvention. Th e United States misunderstands the test set out by
the Appellate Body in US – FSC. The lack of a le gal mechanism that stems, or otherwise controls,
the flow of CCC guarantees threatens circumvention. There is no limit on the amount of CCC
guarantees and CCC’s is exempt from the standa rd requirement of new Congressional budget
authority for new guarantees.

ANNEX H-2

EXECUTIVE SUMMARY
CLOSING STATEMENT OF BRAZIL AT THE
SECOND SUBSTANTIVE MEETING OF THE PANEL
WITH THE PARTIES

1. The United States enjoys No Peace Clause Protection

1. The record demonstrates that the United States enjoys no peace clause immunity for its
upland cotton subsidies. Under any of three me thodologies – a “budgetary outlay/expenditure”, an
“aggregate measure of support”, or a “rate of support” methodology – the level of support provided in
MY 1999-2002 exceeds the level of support deci ded in MY 1992. The United States has
acknowledged that all challenged US subsidies, ex cept PFC and direct payments, are non-green box
(trade and production-distorting) subsidies. Brazil and all third parties agree that direct payments
under the 2002 FSRI Act are non-green box because of the updating of a fixed base period contrary to
Annex 2, paragraphs 6(a) and (b) of the Agreement on Agriculture. Further, PFC and direct payments
are non-green box support because of the prohibition on fruits and vegetables contrary to Annex 2,
paragraph 6(b). Moreover, payments for cotton base acreage are higher than those for other crop base
acreage. The weight of evidence shows that all the challenged US subsidies are “support to” upland
cotton within the meaning of Article 13(b)(ii) becau se they were received by current producers or by
users and exporters of US upland cotton. Braz il’s “14/16ths” methodology for estimating the amount
of the four contract payments is reasonable a nd supported by the EWG database and considerable
circumstantial evidence.

2. Brazil has established the Elements to Suppo rt its Significant Price Suppression Claims
under Article 6.3(c)

2. Upland cotton is a basic, widely-traded comm odity. Both Brazil and the United States agree
that Brazilian upland cotton and other upland cott ons are “like” subsidized US upland cotton.
Because of this widespread interchangeability among world cottons, increases in world cotton supply
by major cotton-producing countries have a major impact on discovery or establishment of world
prices reflected in the A-Index and the New York cotton futures exchange.

3. The United States has made a great deal about what it terms some “fundamental” issues about
the nature and amount of subsidies. Brazil has de monstrated the absence of any textual basis for
incorporating various countervailing duty principles from Part V of the SCM Agreement into Part III
and resurrecting Annex IV from the dead. However, Brazil used USDA’s own data to show both the
amount and rate of subsidization for each of the subsidies. To make up for US acreage and yield
information the US has hidden from Brazil and the Panel for 16 months, Brazil has demonstrated
through the EWG database and other circumstanti al evidence that its “14/16th” methodology is
reasonable. This methodology allocates payments only to current producers of upland cotton and
does not “double count” payments provided to other producers of crops. And since the peace clause
phase of this proceeding, Brazil has demonstrated that all the US subsidies are “tied” to the production
of upland cotton and are “support to” upland cotton.

4. The US government has poured $12.9 billion over the past four years into a number of
subsidy programmes specifically targ eted at US upland cotton. No other US commodity has a Step 2
programme and no other US commodity r eceived subsidies as high as 136 per cent ad valorem. Even

the so-called decoupled contract payments for “h istorical” cotton base acreage are much higher than
for any other crop except rice. The subsidies provide a specific “target price support” of 72.4 cents
per pound for upland cotton – no t for other crops. And Congress insisted that USDA has no
discretion to limit any of the required payments, all of which are mandatory and place no limit on the
amount of upland cotton that could be produced with the support of these subsidy programmes.

5. The United States has agreed that all of th e challenged US subsidies are “specific” except
crop insurance. But USDA’s own evidence showed th at this programme is also specific since it is
targeted at the industry growing crops, not livestoc k and thus covers only half of the value of US
agricultural commodities and 38 per cent of farmland.

6. While Brazil continues to wait for farm-s pecific acreage and yield information from the
United States, the incomplete Environmental Work ing Group data based on USDA farm-specific data
show almost $3 billion in contract payments paid to upland cotton producers in MY 2000-2002 alone.
And the great bulk of the other evidence shows th at US upland cotton farmers are dependent upon,
need and, in fact, receive such payments to “make ends meet” and “to survive”.

7. Having established the fungible nature of the product and the existence and specificity of the
subsidies, Brazil must link the effects of the subsidies to significant price suppression. The first
important fact is that the United States is by fa r the world’s largest exporte r, with a world market
share of 41.6 per cent, and the second largest producer of upland cotton in the world, with a 20 per
cent share. The US subsidization rate of 95 per cent provided by the second largest producer and
largest exporter creates the potential of causing serio us prejudice to the interests of other Members,
including Brazil. It is useful to recall the size of these subsidies compared to the 5 per cent
ad valorem rate establishing a presumption of serious prejudice under Article 6.1(a) and compared to
the amount, if any, of subsidies received by US competitors.

8. But what was the impact of the large US subsidies on production and world supplies of
cotton? One answer to this question is found in the difference between market revenue and the US
producers’ total costs. While claiming that only va riable costs are important in the short term, the
United States admits that in the long-term, US producers have to make a profit to stay in business.
Using only USDA’s data for the period MY 1997-2002, the average US upland cotton producer
received market revenue that was $872 dollars per acre less than its total costs. This means the
cost/revenue gap for all upland cotton farmers between MY 1997-2002 was $12.5 billion.

9. The United States has attempted to leave you with the impression that its upland cotton
producers do not rely or need any subsidies between MY 1997-2002 to make up this $12.5 billion
gap. In assessing the credibility of these claims, consider that during this same 6-year period, US
cotton producers received $16 billion in US subsidies and ended up with a 6-year “profit” of $127 per
acre. The US claims that the PFC, market loss as sistance, direct payment and CCP payments were
not support to cotton. But without those 4 paym ents, US cotton producers would have lost $333 per
acre between MY 1997-2002. The US further claims that the marketing loan payments in MY 1999-
2002 made no difference to producers’ planting deci sions. But this argument ignores the impact of
the subsidies in those producers’ costs. By MY 2002, the average US producer would have been
faced with a 3-year loss of $372 per acre if they had not received marketing loan payments during
MY 1999-2001. This evidence confirms the conclusion of the Chief USDA economist that by making
marketing loan payments “ you don’t get cutbacks in production ”. Clearly, the marketing loan
programme kept many producers from reducing their planted acreage between MY 1999-2002.

10. Indeed, US producers planted between 14.2 – 15.5 million acres of upland cotton between
MY 1999-2002 as prices fell to record lows. The combined revenue from all the US subsidies and
market prices allowed producers to earn a long-te rm “profit” of $17.67 per year over the 6-year
period. What is most amazing is that after having received record low prices for their cotton in MY

2001 and with futures prices at the time of planting suggesting market prices would remain at record
low levels, US producers still planted 14.2 million acres of upland cotton – a similar amount of
acreage that was planted when prices were much higher in MY 1996-1998. However, even 135 per
cent ad valorem subsidies in MY 2001 were not sufficient to provide a profit to the highest-cost and
lowest-yield US producers. This explains why US planted acreage declined to 1996-98 levels in
MY 2002.

11. Having established that the US subsidies pr evented production cutbacks, the Panel has to
estimate how much of a cutback would have been made without US subsidies. USDA economists
Westcott and Price estimate a 20 per cent cutb ack in MY 2001 from only the marketing loan
programme. Professor Sumner estimates an average production cutback of 28.7 per cent or a total of
19.8 million bales between MY 1999-2002 from eliminating all subsidies.

12. The Panel then must estimate the effect of these estimated US production cutbacks on world
prices. First, Brazil demonstrated the impact of US overproduction on the US and the “world market”
prices (A-Index and New York futures market prices). Brazil then demonstrated that prices in Brazil
and the countries to which Brazilian exporters shi pped their cotton between MY 1999-2002 were also
suppressed and heavily influenced by US subsidies. The effects of those subsidies are communicated
world-wide via a global price discovery mechanism. Throughout the world, prices for this fungible,
price-sensitive commodity are determined by refere nce to the New York futures market and A-Index
prices. There is a world market for upland co tton. Subsidized US cotton and Brazilian cotton
compete in this world market, i.e., “in the same market”, as used in Article 6.3(c) of the SCM
Agreement. Brazil established that the effect of the US subsidies is significant price suppression in
that world market.

13. There are numerous studies from a number of economists finding clear and identifiable
amounts of price suppression ranging from 10-33 per cent for the US price and 10-26 per cent of the
world A-Index price. Professor Sumner responded to the US critiques of these studies by showing
that they are not biased and correcting for some s hortcomings are consistent with his results. The
United States also claims these studies are useless fo r this dispute because they did not use “futures
prices”, but then admits that USDA and FAPRI m odels also use “lagged prices” because it is not
possible to use futures prices in models to judg e farmers’ revenue expectations. Brazil also
demonstrated that, using the US futures methodology, farmers expected significant revenue from
marketing loan programmes in MY 1999-2002.

14. Finally, the Panel should judge the “significan ce” of the price suppression by the extent of the
impact on Brazilian producers. But even judged in relation to objective levels, any of the price
suppression estimated in the various econometric studies is sufficient to establish “significance”.

3. Claims under Article 6.3(d) of the SCM Agreement

15. The facts strongly support Brazil’s claims that US subsidies contributed to an increased US
world market share of exports. USDA’s data show that US exports increased in MY 2001, MY 2002,
and are projected to increase in MY 2003 to leve ls well above the previous 3-year averages as
required by Article 6.3(d).

16. The US domestic subsidies played a major ro le in the increased US exports by maintaining
high-cost US production. Similarly, the Step 2 subsidy was paid in 188 out of 208 weeks and more
than $1.6 billion worth of US upland cotton exports received GSM 102 export credit guarantee
financing. The NCC confirmed that both subsidies played a major role in the significant expansion of
US exports, in particular against the backgr ound of a rapidly appreciating US dollar.
Professor Sumner’s analysis estimates that on av erage, US exports would be 41.2 per cent lower
without any of the US subsidies between MY 199 9-2002. US world export market share expanded

rapidly from MY 1999 even as prices plunged to reco rd lows. After reaching 41.6 per cent in MY
2002, the US market share is projected to remain very high at 39 per cent in MY 2003.

17. The United States response to this evidence is to argue that the term “world market share”
means “world market share of consumption”. Bu t USDA, Canada, and the EC agricultural experts,
among others, use and interpret the phrase as “world ma rket share of exports”. This is the correct
meaning as confirmed by the use of the word “trade ” in the footnote qualifying Article 6.3(d), and by
the close similarity between the scope and text of Article 6.3(d) and Article XVI:3, second sentence,
which also deals with world market share of exports . Further, as we demonstrated yesterday, the US
“consumption” interpretation is unworkable and illogical because US consumption is total domestic
“shipments” (i.e. net use from production or stocks) plus imports minus exports. To count US exports
as consumption means double counting other countries’ imports as consumption.

4. Claims under GATT Article XVI:1 and 3

18. The facts strongly support a finding that the US share of world export trade is inequitable.
While world market prices plunged and the US dolla r appreciated rapidly, the huge US subsidies
allowed US exporters to purchase a record high share of 41.6 per cent. At the same time, the share of
much lower cost and non-subsidized producers declined between MY 1999-2002. The text of
Article XVI:3, second sentence, covers any type of s ubsidy that “operates to increase the export” of a
primary product such as upland cotton. Contrary to the US arguments, nothing in the text of the WTO
or GATT 1994 suggests that Article XVI:3, second sentence, has been superseded by Article 6.3.

5. Claims of Threat of Serious Prejudice

19. Brazil has also established that there is a present threat of serious prejudice during the lifespan
of the 2002 FSRI Act. This threat covers the thr eat of significant price suppression, threat of a further
increased US world market share and the threat that the United States continues to have a more than
equitable share of world export trade. The ma ndatory and unlimited nature of the production and
trade-distorting US upland cotton subsidies and th e absence of a legal mechanism that stems, or
otherwise controls, the flow of these subsidies cons titutes the actionable threat of serious prejudice to
the interests of Brazil. The timing and nature of actionable subsidy cases, as well as the remedies
available under the SCM Agreement compel that such a threat need not be “imminent”, but instead
“present” to be actionable.

20. Brazil has demonstrated that there is a presen t threat of serious prejudice from the existence
of the US subsidies. There is no dispute between the United States and Brazil that the US marketing
loan, Step 2, crop insurance and contract payments are mandatory subsidies. There is no limit on the
amount of upland cotton that can be produced, used and exported from farmers receiving these
payments. Brazil has also demonstrated that all of these subsidies are production and trade-distorting
and have caused present serious prejudice between MY 1999-2002.

21. The most recent USDA and FAPRI baselines project continued high levels of US planting
and continued high costs that will not be covered by market revenue. Therefore, the US subsidies will
continue to have large production and export-enhancing a nd price-suppressing effects. In particular,
until MY 2007, the US subsidies threaten to cause significant price suppression in the US, world,
Brazilian and in third-country markets to which Brazil exports its upland cotton.

22. Finally, the US subsidies mandated until th e end of MY 2007 will cause serious prejudice
under any market conditions. Thus, the provisions mandating marketing loan, Step 2, crop insurance
and direct and counter-cyclical payments constitute per se violations of Artic les 5 and 6.3(c) and (d)
of the SCM Agreement.

6. Brazil’s Claims regarding Step 2 Export and Domestic Payments under Article 3.1(a)
and (b) of the SCM Agreement

23. The Step 2 export and Step 2 domestic subsid ies are prohibited subsidies under Article 3.1(a)
and (b) of the SCM Agreement. The Step 2 export subsidies violate Article 3.1(b) because they are
subsidies expressly contingent upon pr oof of export of US upland cott on and are paid only to eligible
exporters. The NCC describes the Step 2 programme as “export assistance” and the USDA
acknowledges it makes U.S. exports of upland cotton more “competitive”.

24. The United States acknowledges that Step 2 dom estic subsidies are local content subsidies
within the meaning of Article 3.1(b) of the SCM Agr eement. Local content subsidies to processors of
agricultural commodities are not expressly exempted from the disciplines in the SCM Agreement by
either Agreement on Agriculture or by the chapeau of Article 3.1. In particular, Annex 3, paragraph 7
and Article 6.3 of the Agreement on Agriculture do no t create rights and obligations that by necessity
conflict with Article 3.1(b). Brazil has demonstrated the absence of any inherent conflict because it is
possible to provide domestic support to processors of agricultural products without violating
Article 3.1(b). Further, Article 13(b)(ii) is properly read as meaning that even if a local content
domestic support measure may conform to Article 6.3 of the Agreement on Agriculture, it is not
exempted from claims under Article 3 of the SCM Agre ement. If the drafters had intended to exempt
agricultural local content subsidies from Article 3 claims, they would have included Article 3 in
Article 13(b)(ii), the same way that they included Ar ticle 3 of the SCM Agreement in Article 13(c)(ii)
for purposes of exempted export subsidies for scheduled products.

7. Brazil’s Claims regarding the CCC Export Credit Guarantees

25. Brazil has demonstrated that the GSM 102, GSM 103 and SCGP export credit guarantee
programmes administered by the CCC constitute export subsidies within the meaning of Articles 10.1,
1(e) and 8 of the Agreement on Agriculture, Artic les 1.1 and 3.1(a) of the SCM Agreement, and
item (j) of the Illustrative List of Export Subsidi es. Brazil has also demonstrated that those export
subsidies circumvent, or threaten to circum vent, the United States’ export subsidy reduction
commitments, in violation of Articles 10.1 and 8 of the Agreement on Agriculture. Additionally,
because they violate the Agreement on Agriculture, these programmes are not exempt from actions by
Article 13(c)(ii) of the Agreement on Agriculture, and constitute prohibited export subsidies within
the meaning of item (j) and Articles 1.1, 3.1(a) and 3.2 of the SCM Agreement.

8. Brazil’s Claims regarding the ETI Act Subsidies

26. With respect to the ETI Act, Brazil and th e United States agree that the Panel should follow
the precedent of the panel in India – Patents (EC). Indeed, the United States has effectively admitted
the inconsistency of the ETI Act by repeatedly str essing to the Panel that it intends to implement the
rulings and recommendations of the Dispute Settlement Body to bring the ETI Act into conformity
with the Articles 10.1 and 8 of the Agreement on Ag riculture and Articles 3.1(a) and 3.2 of the SCM
Agreement.

ANNEX H-3

EXECUTIVE SUMMARY
OPENING STATEMENT OF THE UNITED STATES AT THE
SECOND MEETING OF THE PANEL WITH THE PARTIES

I. THE EFFECT OF US SUBSIDIES IS NOT SIGNIFICANT PRICE SUPPRESSION

1. Brazil’s theory of its case is that subsidi es result in greater production, increased exports, and
suppressed world prices for upland cotton. Brazil do es not, because it cannot, refute the fact that US
producers have increased and decreased acreage commens urately with producers in the rest of the
world. Thus, there is no evidence that US pr oducers are insulated from market forces in making
production decisions.

2. In every year but one in which Brazil has a lleged price suppression, and in marketing year
2003 in which it alleges a threat of price suppressi on, expected harvest season prices at the time of
planting have been above the US marketing loan rate. In marketing year 2002, the only year in which
expected harvest season price was below that rate, US harvested acres fell by a slightly larger
percentage than the rest of the world. In fact , US planted acres fell by th e amount expected from the
decline in expected harvest season prices from marketing year 2001 to 2002 and by far more than
would have been expected had produ cers been planting for the marketing loan rate. Therefore, rather
than supporting Brazil’s argument – that the eff ect of US payments is to make US producers
unresponsive to market price changes – the evidence contradicts it.
1

3. Brazil’s allegation that the effect of US subs idies is price suppression is dispelled by the fact
that Brazilian cotton undercuts the US price in various third-country markets. 2 Aggregated data on
average US and Brazilian upland cotton prices to various markets identified by Brazil unambiguously
show that Brazilian cotton undercuts the US price in these third-country markets. Thus, these data
demonstrate that it is not US upland cotton that has suppressed Brazilian upland cotton prices, but
Brazilian cotton prices that have undercut US prices.

II. THE EFFECT OF US SUBSIDIES IS NOT AN INCREASE IN WORLD MARKET
SHARE

4. The facts do not demonstrate any increase in US world market share. While US world market
share in marketing year 2002 was projected to be hi gher than the average of the preceding three-year
period, the 2002 subsidies are different from the subsidies for prior marketing years, and 2002
payments were only introduced with the 2002 Act. It is the effect of the 2002 subsidies that Brazil
must demonstrate under Article 6.3(d) of the SC M Agreement establishes an increase that follows a

1 We also recall that Brazil failed to properly an alyze marketing loan payments through its use of
"lagged prices" instead of futures prices. During marketing years 2000-2003, lagged prices significantly
understate the harvest season prices expected by pr oducers, thereby inflating th e expected effect of the
marketing loan rate.
2 Brazil’s evidence under Article 6.3(c) must establish the volume of subsidized US upland cotton that
is "in the same market" as Brazilian upland cotton, the extent of subsidization, and the prices of those respective
products sufficient to establish its claim of "significant price suppression". Brazil has not even shown that for
each foreign market, there have been any US exports of upland cotton.

"consistent trend." One year does not make a "consistent trend". Thus, there can be no "consistent
trend over a period when subsidies have been granted".3

III. THE EFFECT OF US SUBSIDIES IS NOT A THREAT OF SERIOUS PREJUDICE

5. The facts do not support a finding of threat of serious prejudice. We submit that Brazil seeks
to have the Panel reject the "imminent threat " standard, even though it was Brazil itself that
previously suggested this standard to the Panel, because market prices have recovered to the point that
no marketing loan payments have been made since 18 September 2003 , and counter-cyclical
payments are expected to be well below their statutory maximum for marketing year 2003.
4

6. Brazil concedes that "market prices [may] increase to the point where the present effects of
the subsidies are minimal". Given current and e xpected prices for marketing year 2003, even Brazil
might have to concede that the present effects of US subsidies could be "minimal". However, Brazil
seeks to prevent the Panel from basing its threat of serious prejudice analysis on that same marketing
year 2003 data. If Brazil cannot demonstrate an imminent threat of serious prejudice in marketing
year 2003, logically, neither can it demonstrate a threat of serious prejudice in farther off years, given
that (in Brazil’s words) "market[] prices move up and down," and "[n]o Member . . . can predict the
course of future prices".

IV. BRAZIL HAS FAILED TO SHOW THE ELEMENTS NECESSARY TO ESTABLISH
ITS SUBSIDIES CLAIMS

7. Brazil has argued that no concepts or analys is drawn from other parts of the SCM Agreement
or provisions from other agreements may be app lied to claims under Part III of the Subsidies
Agreement. This position is untenable. The United States is not suggesting some radical
methodology dreamt up for purposes of this dispute but instead is proposing methods based on
principles set forth in the SCM Agreement and accepted and applied by other WTO Members,
including Brazil, for purposes of their countervailing duty practice.

8. Brazil says there is no need for it to quantify the subsidy benefit attributable to the product at
issue nor the rate of subsidization but does not ex plain how to evaluate the effect of the subsidy
without identifying the amount or rate of support. Further, Brazil has repeatedly alleged a subsidy
amount and subsidization rate for the marketing y ear 1999-2002 period. Presumably, then, the value
of the subsidy and the subsidization rate of exported US upland cotton would be highly relevant to the
Panel’s analysis of the effect of the challenged subsidies; Brazil’s position would deprive the Panel of
that crucial element.

3 Even if one were to look to th e period since the 1996 Act when different subsidies were in place,
there is no consistent trend over a period when those subsidies have been granted. The facts demonstrate that
since marketing year 1996, US world market share has increased and decreas ed in alternating years, and US
world market share in marketing year 2002 is lower than in marketing years 1996-1997. These data cannot
support a finding of a consistent tren d. Brazil seeks to evade these facts by ignoring the change in subsidies
over the years and by interpreting "world market share" contrary to the ordinary meaning of those terms.
4 The effect of such higher market prices is vividly suggested by Brazil’s use of the January 2003
FAPRI baseline versus the November 2002 preliminary FA PRI baseline in Dr. Sumner’s new model. We, of
course, strongly disagree with what we understand to have been the way in which Dr. Sumner has most recently
modeled all of the US payments at issue, but we note that a mere change in baselines that increased the baseline
A-index price by an average of 4.24 cents per pound per year over MY 2003-2007 reduced the estimated impact
of removal of all US subsidies on A-index prices by nearly one-third. Price movements since January 2003
would suggest that Dr. Sumner’s estimated impacts us ing more current data would be smaller still. For
example, the January 2003 FAPRI baseline projected a 2003 marketing year A-index price of 58.40 cents per
pound while the year-to-date A-index price has been 68.73 cents per pound , an increase of more than 10 cents
per pound over the January baseline.

9. Brazil errs in asserting that it need not identify the "subsidized product", ignoring or
selectively quoting various provisions – Subsidies Agre ement Articles 6.1(a), 6.3(c), 6.3(d), 6.4, and
6.5 – that expressly mention the "subsidized product". Subsidies to products other than upland cotton
would not be within the Panel’s terms of reference nor relevant to the Panel’s analysis of the effect of
the challenged subsidies. Again, Brazil’s position would deprive the Panel of a crucial element in
determining, for example, whether and to what extent the US product in the same market as the
Brazilian product was a subsidized product.

10. Brazil also errs in arguing that it need not attribute payments not tied to production across the
recipient’s total value of production. The methodology of attributing subsidies not tied to production
across the value of a recipient ’s production is spel led out in Annex IV to Part III of the Subsidies
Agreement. Attributing such non-tied payments acro ss the total value of the recipient’s production is
necessary to avoid double-counting of the subsidy.

11. The United States does not see how decoupled pa yments made with respect to non-upland
cotton base acres would be within the scope of this dispute. Given Brazil’s own explanation of the
measures it has challenged
5, it cannot be possible that one set of measures was within the scope of the
dispute at one point but that Brazil has the sole di scretion to change the scope of that dispute by
changing its legal position as to what it is challenging as support to upland cotton.

12. Finally, Brazil says effects of subsidies can linge r, even if allocated to a particular year for
countervailing duty purposes. It is clear in Annex IV, paragraph 7, that Members took it for granted
that some subsidies are allocated to future pr oduction and others are not . Brazil, however, does
violence to this principle by essentially asserting that all subsidies – including so-called "recurring"
subsidies that most experts and national authoritie s (including its own) would expense to current
production – should be allocated to future production. Brazil has now conceded that the subsidies at
issue in this dispute are "recurring". 6 Brazil cannot have it both ways: it cannot expense the entire
value of a payment to a particular crop year but also claim that the subsidy continues to exist in a later
year in which new recurring subsidies are made.

III. BRAZIL’S HAS FAILED TO SHOW THE EFFECT OF THE CHALLENGED
SUBSIDIES

13. Decoupled Payments . Brazil has fundamentally erred in its explanation and modelling of
decoupled payments by ascribing a production effect to them that is based on little more than
conjecture. This assertion contradicts basic ec onomic theory, the economic literature on such
payments, and the available data showing large shif ts in cotton acreage as recipients of decoupled
payments plant alternative crops or no crops at all and other farmers who do not hold upland cotton
base acres choose to produce upland cotton.
7 Thus, there is no basis to ascribe production-distorting

5 For example, Brazil has repeatedly argued that the challenged US subsidies provided $12.9 billion in
support over marketing years 1999-2002; this figure was based on payments made under specific programmes,
including decoupled income support with respect to upland cotton base acres only. Brazil also has argued that
decoupled payments for upland cotton ba se acres (net of base acres not "planted to cotton") are all support to
upland cotton irrespective of what is planted on the land now.
6 See Brazil’s Further Rebuttal Submission, para. 208 n. 344 ("Brazil agrees that the recurring subsidies
at issue would be allocated to the year in which they are paid for purposes of a CVD analysis . . . .").
7 For example, the marketing year 2002 base acreage increase means that, on average over marketing
years 1998-2001, 2.6 million acres of upland cotton were planted on farms without upland cotton base acreage
or in excess of those farms’ upland cotton base acreage, suggesting that Brazil’s theory that upland cotton must
be planted on upland cotton base acreage is not supported by the facts.

effects to decoupled payments. In fact, most empirical studies have concluded that the effects of
decoupled payments are minimal.8

14. Third-Party Papers . Brazil cannot cite to results fro m papers that employ an approach
fundamentally at odds with its own. These thir d-party economic studies do not provide insight into
the question this Panel has been asked to exam ine because they generally suffer from two crucial
conceptual flaws. First, most of the cited st udies do not distinguish between payments linked to
production of upland cotton and payments decouple d from any requirement to produce, instead
treating them as having equal production impacts. Second, most of the third party studies do not
model the marketing loan programme appropriate ly, simply removing revenue from the producer
without focusing on the producer’s expected harvest season price at the time of planting. Thus, Brazil
would have to agree that these third party pa pers do not properly model farmers’ production
decisions.

IV. BRAZIL HAS ADVANCED ERRONEOUS LEGAL STANDARDS UNDER ITS
CLAIM IN THIS DISPUTE

15. Threat of Serious Prejudice/Article XVI:3 . Brazil may not advance a claim of threat of
serious prejudice using the "more than equitable share of world export trade" standard from GATT
1994 Article XVI:3. Nothing in the text of GATT 1994 Article XVI indicates that a threat claim
under paragraph 1 may utilize the more than equitabl e share standard under paragraph 3. Neither is
there any analysis in the EC – Sugar Exports GATT panel report that provides a textual basis to
import that standard. Further, Brazil’s interpre tation would also introduce a contradiction between
GATT 1994 Article XVI:1 and SCM Ag reement Articles 5 and 6 even though the term "serious
prejudice" is used "in the same sense" in these provisions.
9

16. Threat of Serious Prejudice and Per Se Serious Prejudice Standard. Brazil’s argument is
that "[c]onsistent with prior precedent [the GATT EC – Sugar Export Subsidies panel report], the
threat of serious prejudice is caused by the absence of any legal mechanism that stems or otherwise
controls the flow of mandatory and unlimited US subsidies". The GATT Sugar Export Subsidies
panel report, however, provided no basis for selectin g that standard, and neither we nor Brazil find
any basis for that standard in the text of the Subsidies Agreement or GATT 1994 Article XVI:1.

17. Brazil is simply wrong that US paym ents are "mandatory" and "unlimited". 10 M o r e
fundamentally, however, Brazil’s argument that "the availability of a mandatory subsidy for an
unlimited amount of production and exports will inev itably create a threat and support a finding of a
per se violation" proves too much. Brazil’s standard means that only way a Member could act
consistently with its WTO obligations would be to have a cap on expenditures with respect to a

8 A recent study concluded that production flexibility payments had "no effects on agricultural
production in either the short run or the long run". USDA, ERS, Decoupled Payments: Household Income
Transfers in Contemporary US Agriculture, M.E. Burfisher and J. Hopkins, Eds. (February 2003), at 23. (See
Exhibit US-53). Other studies cited in Exhibit US-23 and discussed in the US rebuttal and further rebuttal
submissions suggest that the effects of decoupled payments on planted area are less than 0.5 per cent.
9 Under Articles 5 and 6 a Member cannot claim thr eat of serious prejudi ce using the "more than
equitable share" standard because that standard is not enumerated in SCM Agreement Article 6.3(c). Therefore,
under Brazil’s interpretation, a Member could show a th reat of "serious prejudice" (under GATT 1994 Article
XVI:1) by showing a threat of something that is not "serious prejudice" within the meaning of Articles 5 and 6.
10 The payments Brazil identifies as "mandatory" are "m andatory" only if price conditions are fulfilled.
Thus, the likelihood that price conditions will be satisfied must be taken into account. The payments Brazil
identifies are also not "unlimited". For decoupled paym ents, the payments are set by multiplying fixed base
acres times fixed base yields times the fixed or statutory maximum payment rate. The challenged payments are
also not unlimited because a "circuit breaker" in the 20 02 Act could result in these "mandatory" payments not
being made.

particular product. It is not at all clear at what level such a cap would have to be set. But Members
rejected product-specific expenditure caps in th e Uruguay Round, instead agreeing on a commitment
across all commodities (the Total and Final Aggregate Measurement of Support).

V. BRAZIL'S SUBSIDIES AND PEACE CLAUSE ARGUMENTS MUST BE
CONSISTENT

18. Brazil’s arguments in this dispute must be c onsistent. First, it is evident that Brazil has
conceded that various payments it previously claimed were product-specific – namely, decoupled
income support and crop insurance – are, in fact , non-product-specific support. That is, these
subsidies are provided to "agricultural producers in general", either because th ey do not specify any
production that must occur for receipt of payment or because they are provided to producers of a wide
range of products.
11 As non-product-specific support, they should not be included in the comparison
under Article 13(b)(ii) of the Agreement on Agricultur e. This contradicts the Brazilian approach, and
is consistent with the US approach, to the Peace Clause.

19. Second, Brazil not only recogni zes that support to upland cotton may be measured in terms of
a rate but also that this is the only way to gauge the support decided by the United States for future
years; therefore, Brazil relies on the rate of support concept for its threat and per se claims.
12 By
advancing such arguments, Brazil has effectively conceded the basis for the US Peace Clause analysis
– that is, that the only way for Members to know whether US measures for any given year will
comply with Peace Clause requirements is to examine the way in which they "decide" support: that is,
the rate of support. If Brazil makes arguments under its subsidy claims based on the rate of support, it
cannot credibly assert that the rate of support is inapt in the context of the Peace Clause. As
demonstrated during the Peace Clause phase, the Un ited States disciplined itself to remain within
those limits by deliberately moving away from produc tion-linked deficiency payments with a high
target price to decoupled income support.

11 For example, if a recipient of decoupled income support can choose to produce cotton, something
else, or nothing at all, the payment is not tied to produc tion of a particular product. There is nothing in the
Agreement on Agriculture to suggest th at support may be at one and the same time "product-specific support"
and "non-product-specific support". Thus, in attributing part of the decoupled payments on upland cotton base
acres to producers and part to non- producers, Brazil concedes that such payments are non-product-specific
support.
12 Brazil’s Further Submission, para. 432 ("When US upland cotton farmers plant their crop in spring,
farmers expect a certain price level. But, by no means is it ensured that th is price level will be accomplished.
However, given the US subsidies, that is irrelevant. . . . . The single fact that these programmes exist ensures a
guaranteed revenue amount from the production of upland cotton.") (italics added).

ANNEX H-4

EXECUTIVE SUMMARY
CLOSING STATEMENT OF THE UNITED STATES AT THE
SECOND MEETING OF THE PANEL WITH THE PARTIES

I. CCC EXPORT CREDIT GUARANTEE PROGRAMMES ISSUES

A. BRAZIL WRONGLY MINIMIZES THE SIGNIFICANCE OF ARTICLE 10.2 OF THE
AGREEMENT ON AGRICULTURE

1. Brazil’s assertions in its opening oral st atement regarding the CCC export credit guarantee
programmes invite a brief response.

2. First, as discussed with the Panel during this meeting, Brazil asserts that Article 10.2 of the
Agreement on Agriculture reflects merely a bana l compromise to accommodate potential "additional
obligations regarding notification, consultation, and information exchange ". Brazil implausibly
asserts that the obvious transition between the langua ge of the Draft Final Act that would have
imposed significant substantive disciplines on e xport credit guarantees and the absence of such
language in the Article 10.2 ultimately adopted can be fully explained as reflecting merely an
agreement to work on such pedestrian disciplines as information exchange.

3. Brazil asserts that the Members had agreed on the applicability of export subsidy disciplines
to export credit guarantees and that Article 10.2 was an apparently insignificant "good faith
agreement". However, Article 10.2 did not arise onl y because "other participants were not willing to
offer more than general disciplines included in Artic le 10.1". It arose because part of the grand
compromise of the Agreement on Agriculture was that export credit guarantees were excluded from
the export subsidy disciplines.

4. Ironically, however, Br azil’s statement further serves to illustrate that export credit guarantees
were not considered export subsidies under the Agreem ent on Agriculture. In December 1994, the
Preparatory Committee for the World Trade Organization issued Notification Requirements and
Formats Under the WTO Agreement on Agriculture .
1 These notification requirements remain in
effect. Elaborate reporting requirements are set forth for Members with respect to numerous aspects
of the disciplines of the agreement, in cluding with respect to export subsidies. 2 However, no
reporting requirement is indicated for export credit gua rantees. This is consistent with treatment of
such programmes as outside export subsidy disciplines . Had the parties agreed that all were "willing
to offer" at least "the general disciplines incl uded in Article 10.1", as Brazil asserts, then it would
have been logical to include reporting requirements fo r such purposes. It is hard to imagine parties
willing to make such an offer in the absence of the United States, among the largest providers of
export credit guarantees. In fact, the United States never offered to include export credit guarantees in
Article 10.1, and the Members never so agreed. In deed, the agreement reflected in Article 10.2 is
expressly to the contrary.

5. Article 10.2, furthermore, would be unnecessary for mere "notification, consultation, and
information exchange". Had export credit guarant ees been subject to export subsidy disciplines,

1 PC/IPL/12, circulated 2 December 1994 (exhibit US-99).
2 See, e.g., Exhibit US-99, paras. 1(c), 1(e), 1(i), 2; Table ES:1 and Supporting Tables ES:1 and ES:2.

Article 18 of the Agreement on Agriculture, to review the progress in the implementation of
commitments negotiated under the Uruguay Rou nd reform programme, and the Notification
Requirements, which are still in effect, could amply accommodate any "notification, consultation, and
information exchange".
3

B. BRAZIL INVENTS A STANDARD NOT REQUIRED UNDER ARTICLE 10.3 OF THE
AGREEMENT ON AGRICULTURE

6. Second, with respect to Article 10.3 of the Agreement on Agriculture, Brazil asserts that the
only way for the United States to satisfy any burden applicable under that provision is "to demonstrate
the absence of subsidization on a transaction-by-tra nsaction basis". Such a standard would obviously
be impossible to satisfy. Perhaps more importantly , Article 10.3 requires no such demonstration.
Brazil simply invents this. The only authority it offers for this novel proposition is a Third Party
Submission of Canada, which itself offers no authority for the assertion.

7. Article 10.3 applies only to export subsidy reduction commitments. We believe that Brazil
agrees at least with that. Brazil has alleged that the United States has exceeded only its quantitative
export subsidy reduction commitments and only dur ing the period July 2001-June 2002. The
United States has demonstrated that with resp ect to 12 of the 13 commodities for which the
United States has reduction commitments the respec tive exports during that period under the export
credit guarantee programme did not exceed applic able quantitative reduction commitments. Other
than the Dairy Export Incentive Progr amme applicable to cheese and skim milk powder, with respect
to which the United States previously noted in a pr ior submission the issuance of export subsidies, the
United States provided no export subsidies for the other scheduled commodities. To avoid any further
ambiguity the United States submits a copy of its notification concerning export subsidy commitments
for fiscal year 2001, which reflects no export subsidies provided by the United States other than for
cheese and skim milk powder.4

C. BRAZIL’S RECENT STATEMENTS CONC ERNING THE CORRECT ANALYSIS UNDER
ITEM(J) ARE INCONSISTENT AND INCORRECT

8. Third, with respect to item (j) Brazil directly acknowledges its view that the relevant period of
time for examination is 10 years. 5 Yet Brazil disingenuously urges the Panel to examine allegedly
"uncollectible amounts" on pre-1992 guarantees, a nd defaults of Iraq and Poland, which commenced
in 1990 and the 1980’s, respectively.6

9. Brazil also mysteriously alleges that "acc ording to CCC’s 2002 financial statements, CCC has
been relieved of what the United States argues ar e onerous government-wide accounting rules that
‘compel’ projection of enormous losses". CCC, howev er, has never been so "relieved". It remains
compelled to adhere to the requirements of the federal Credit Reform Ac t of 1990, and relevant
provisions of the Office of Management and Budget Circular A-11, implementing that legislation.
CCC remains subject to government-wide requirement s for subsidy estimates and the risk categories
mandated by OMB with respect to exposure to debt from different countries. The government-wide
rules continue to dictate the methodology for cal culation of estimates, and reestimates, and as the
United States has previously noted, a principal r eason for overly high initial estimates is continuously
overly optimistic projections of programme use. Al so, as the United States has previously noted, the
result of the estimate (and reestimate) process is simply carried forward to the CCC financial
statements; Brazil continues to misrepresent th e $411 million figure in the 2002 financial statement

3 See, e.g., Article 18.5, 18.6, and 18.7.
4 Notification, G/AG/N/USA/47, circulated 6 June 2003 (exhibit US-100).
5 Statement of Brazil - Second Panel Meeting (2 December 2003), para. 81.
6 Statement of Brazil - Second Panel Meeting (2 December 2003), para. 84.

as well as to mistakenly assert the inclusion of "e normous uncollectible amou nts . . . on post-1991
guarantees".

D. BRAZIL CONTINUES TO WRONGLY ASSERT THAT TH E ISSUANCE OF CCC EXPORT
CREDIT GUARANTEES IS UNBOUNDED

10. Fourth, with respect to Brazil’s circumven tion arguments, Brazil continues to insist that
notwithstanding the myriad programmatic impedi ments to issuance of guarantees the export credit
guarantee programmes are a runaway train, beyond the ability of CCC to "stem or otherwise control
the flow of" CCC export credit guarantees. With respect, this is simply not so.

11. Similarly, in its oral statement, Brazil ha s increased the supposed annual mandatory minimum
dollar amount of guarantees to $6.5 billion from $5.5 billion.
7 As the United States has previously
observed, CCC has never remotely approached issu ing any such fancifully large amount of export
credit guarantees.8

II. ACTIONABLE SUBSIDY ISSUES

12. The United States has reviewed Brazil’ s evidence and arguments underlying Brazil’s
actionable subsidy claims and found them lacking. We will not repeat our criticisms of fundamental
errors in Brazil’s legal interpretations. We do note that the evidence on the record does not
demonstrate that US producers are unresponsive to market price signals, does not demonstrate
significant price suppression in any "same market", do es not demonstrate an increase in world market
share, and does not demonstrate a threat of serious prejudice. Our comments today go principally to
the consistency, or lack thereof, in Brazil’s arguments.

A. BRAZIL HAS FAILED TO ESTABLISH ALL OF THE ELEMENTS NECESSARY TO
ESTABLISH ITS SUBSIDIES CLAIMS

13. Consider the fundamental issue of identif ying the subsidized product and the subsidy.

1. Brazil has not identified which products benefit from the subsidy

14. If Brazil cannot distinguish the benefit to cotton provided by a subsidy from the benefit to
other products – that is, attribute the subsidy to the recipient’s production – then it will lead to
double-counting of the subsidy benefit. Recall the example the United States provided in the opening
statement with respect to soybeans and cotton. If a producer grows both soybeans and cotton and
receives a $1 payment not tied to the production of any crop, according to Brazil’s approach, the
entire $1 payment is attributed to and support for up land cotton. However, were Brazil to bring a
dispute settlement proceeding against US support for soybeans (as was reported almost occurred
roughly two years ago), under Brazil’s approach, the entire $1 payment would also be support for
soybeans. The same $1 payment cannot provide bot h $1 in benefit to cotton and $1 in benefit to
soybeans – that’s double-counting. Therefore, the pa yment must be attributed across the value of the
recipient’s production. As noted in the US further rebuttal submission, Brazil would attribute the
value of the payment across all of a recipient’s production for countervailing duty purposes.

7 Compare Statement of Brazil - Second Panel Meeting (2 December 2003), para. 91, with Answer of
Brazil to Panel Question 142 (October 27, 1993) paras. 95, 100.
8 US Further Rebuttal Submission (18 November 2003), para. 201.

2. Brazil has not quantified the subsidy benefit attributable to upland cotton

15. If Brazil cannot properly quantify the amount of subsidy benefit to upland cotton producers,
how can the Panel analyze the effe ct of the subsidy? Brazil cannot both claim that it need not
quantify the benefit and at the same time argue that the subsidies provide $1 2.9 billion in aggregate
support.

16. Similarly, if Brazil cannot properly identify th e level of subsidization of the exported product,
the Panel’s analysis will be impacted. Again, Brazil cannot claim that it need not identify the
subsidization rate and at the sa me time claim a 95 per cent subs idization rate over the 1999-2002
marketing year period.

3. Brazil has not expensed the recurring paymen ts at issue, contrary to its countervailing
duty practice and inconsistent with its arguments in this dispute

17. Finally, Brazil cannot both expense the entire amount of these subsidies it admits are
"recurring" to the year for which the payment w as received (for example, marketing year 1999) and
also claim that the subsidy continues to exist in a later year in which new recurring subsidies are made
(for example, marketing year 2002). That is, if the subsidy continues to exist in a later year, it must
have been allocated to future production. Ind eed, Brazil would expense these recurring payments for
purposes of countervailing duties.

18. The Panel must demand consistency from Brazil. It is not enough for Brazil to say that those
concepts are for countervailing duty purposes, not for serious prejudice purposes. We were not aware
that the concept and definition of "subsidy" as used in Part III and Part V of the Subsidies Agreement
were intended to have different meanings. In f act, there is nothing in the Subsidies Agreement to
suggest that they should mean different things.

19. Brazil not only rejects the Subsidies Agreemen t Annex IV methodology with respect to these
issues, and not only rejects its own countervailing duty methodology, but does not provide any
rational method of approaching these issues. Braz il’s approach results in dramatically inflated
quantities of support and dramatically inflated leve ls of subsidization. The Panel should reject
Brazil’s unprincipled approach to subsidy identification issues.

B. BRAZIL’S APPROACH TO ITS SERIOUS PREJUDICE CLAIMS AND THE PEACE CLAUSE
MUST BE CONSISTENT

20. Similarly, as indicated in the US opening st atement, the Panel must demand consistency from
Brazil between its arguments for purposes of serious prejudice and the Peace Clause. First, Brazil
cannot rely on the rate of support in US. law and regulations for purposes of its threat and per se
claims and deny their relevancy to the Panel’s Peace Clause analysis.

21. Second, with respect to decoupled payments (s uch as direct payments), Brazil cannot attribute
part of a decoupled payment to upland cotto n producers and part to non-producers, and
simultaneously claim that such decoupled payments are not non-product-specific support. They are
non-product-specific support because they are (in the la nguage of Article 1(a) of the Agreement on
Agriculture) "support provided to agricultural produ cers in general" and because they are not (in the
language of Article 1(a)) "support provided for an agricultural product in favour of the producers of
an agricultural product". That is, Brazil has acknowledged that some recipients of, for example, direct
payments are not producers of upland cotton; they are, rather, "producers in general". Under the
Agreement on Agriculture, support (such as direct payments) cannot at the same time be both
product-specific support and non-product-specific support. Thus, these payments would not form part
of the Peace Clause (Article 13(b)(ii)) analysis.

22. Finally, it is clear that, under Brazil’s approach, there can be no non-product-specific support
for purposes of the Peace Clause. Th is results because a subsidy payment can always be traced to a
final recipient and then can always be attributed to whatever products he or she produces. One
problem with this result is that a Member can then have no certainty that it will be in compliance with
the Peace Clause in any given year.

23. Consider a hypothetical: under Brazil’s outlay approach to the Peace Clause, if a Member
gave only decoupled support to producers, but in a given year all the recipients of the payment
decided only to produce one commodity, the support (outlays) attributed to that commodity in that
year could exceed the 1992 support level. But that would purely be a function of the recipients’
decisions, not the decision of the United States. Brazil’s approach therefore would rob Members of
the ability to decide their support in a way to ensu re conformity with Peace Clause requirements, and
it must be rejected.